TITLE IX LOAN

CHAPTER1 - COMMODATUM

EN BANC
[G.R. No. L-17474. October 25, 1962.]
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs. JOSE
V.
BAGTAS, defendant. FELICIDAD
M.
BAGTAS,
Administratrix of the Intestate Estate left by the late Jose V.
Bagtas, petitioner-appellant.

D. T. Reyes, Luison & Associates for petitioner-appellant.

Solicitor General for plaintiff-appellee.

Director of Animal Industry advised him that the book value of the three bulls could
not be reduced and that they either be returned or their book value paid not later than
31 October 1950. Jose V. Bagtas failed to pay the book value of the three bulls or to
return them. So, on 20 December 1950 in the Court of First Instance of Manila the
Republic of the Philippines commenced an action against him praying that he be
ordered to return the three bulls loaned to him or to pay their book value in the total
sum of P3,241.45 and the unpaid breeding fee in the sum of P499.62, both with
interests, and costs; and that other just and equitable relief be granted it (civil No.
12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo,
answered that because of the bad peace and order situation in Cagayan Valley,
particularly in the barrio of Baggao, and of the pending appeal he had taken to the
Secretary of Agriculture and Natural Resources and the President of the Philippines
from the refusal by the Director of Animal Industry to deduct from the book value of
the bulls corresponding yearly depreciation of 8% from the date of acquisition, to
which depreciation the Auditor General did not object, he could not return the animals
nor pay their value and prayed for the dismissal of the complaint.
After hearing, on 30 July 1956 the trial court rendered judgment

DECISION

PADILLA, J p:
The Court of Appeals certified this case to this Court because only questions of law
are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines through
the Bureau of Animal Industry three bulls: a Red Sindhi with a book value of
P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period of one
year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a government
charge of breeding fee of 10% of the book value of the bulls. Upon the expiration on 7
May 1949 of the contract, the borrower asked for a renewal for another period of one
year. However, the Secretary of Agriculture and Natural Resources approved a
renewal thereof of only one bull for another year from 8 May 1949 to 7 May 1950 and
requested the return of the other two. On 25 March 1950 Jose V. Bagtas wrote to the
Director of Animal Industry that he would pay the value of the three bulls. On 17
October 1950 he reiterated his desire to buy them at a value with a deduction of
yearly depreciation to be approved by the Auditor General. On 19 October 1950 the

. . . sentencing the latter (defendant) to pay the sum of P3,625.09

the total value of the three bulls plus the breeding fees in the
amount of P626.17 with interest on both sums of (at) the legal
rate from the filing of this complaint and costs.
On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the
court granted on 18 October and issued on 11 November 1958. On 2 December
1958 it granted an ex-parte motion filed by the plaintiff on 28 November 1958 for
the appointment of a special sheriff to serve the writ outside Manila. Of this order
appointing a special sheriff, on 6 December 1958 Felicidad M. Bagtas, the
surviving spouse of the defendant Jose V. Bagtas who died on 23 October 1951
and as administratrix of his estate, was notified. On 7 January 1959 she filed a
motion alleging that on 26 June 1952 the two bulls, Sindhi and Bhagnari, were
returned to the Bureau of Animal Industry and that sometime in November 1953
the third bull, the Sahiniwal, died from gunshot wounds inflicted during a Huks
raid on Hacienda Felicidad Intal, and praying that the writ of execution be
quashed and that a writ of preliminary injunction be issued. On 31 January 1959
the plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto.
On the same day, 6 February, the Court denied her motion. Hence, this appeal
Page 1 of 505

certified by the Court of Appeals to this Court, as stated at the beginning of this
opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the late
defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin, Superintendent
of the NVB Station, Bureau of Animal Industry, Bayombong, Nueva Vizcaya, as
evidenced by a memorandum receipt signed by the latter (Exhibit 2). That is why in its
objection of 31 January 1959 to the appellant's motion to quash the writ of execution
the appellee prays "that another writ of execution in the sum of P859.5.3 be issued
against the estate of defendant deceased Jos V. Bagtas." She cannot be held liable
for the two bulls which already had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a raid by
the Huks in November 1953 upon the surrounding barrios of Hacienda Felicidad Intal,
Baggao, Cagayan, where the animal was kept, and that as such death was due
to force majeure she is relieved from the duty of the returning the bull or paying its
value to the appellee. The contention is without merit. The loan by the appellee to the
late defendant Jos V. Bagtas of the three bulls for breeding purposes for a period of
one year from 8 May 1948 to 7 May 1949, later on renewed for another year as
regards one bull, was subject to the payment by the borrower of breeding fee of 10%
of the book value of the bulls. The appellant contends that the contract
was commodatum and that, for that reason, as the appellee retained ownership or title
to the bull it should suffer its loss due to force majeure A contract of commodatum is
essentially gratuitous.1 If the breeding fee be considered a compensation, then the
contract would be a lease of the bull. Under article 1671 of the Civil Code the lessee
would be subject to the responsibilities of a possessor in bad faith, because she had
continued possession of the bull after the expiry of the contract. And even if the
contract be commodatum, still the appellant is liable, because article 1942 of the Civil
Code provides that a bailee in a contract of commodatum
. . . is liable for loss of the thing, even if it should be through a
fortuitous event:
(2) If he keeps it longer than the period stipulated. . . .
(3) If the thing loaned has been delivered with appraisal of its
value, unless there is a stipulation exempting the bailee from
responsibility in case of a fortuitous event:
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of
one bull was renewed for another period of one year to end on 8 May 1950. But
the appellant kept and used the bull until November 1953 when during a Huk raid

it was killed by stray bullets. Furthermore, when lent and delivered to the
deceased husband of the appellant the bulls had each an appraised book value,
to wit: the Sindhi, at P1,176.46; the Bhagnari, at P1,320.56 and the Sahiniwal; at
P744.46. It was not stipulated that in case of loss of the bull due to fortuitous
event the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the return of
the bull or the payment of its value being a money claim should be presented or filed
in the intestate proceedings of the defendant who died on 23 October 1951, is not
altogether without merit. However, the claim that his civil personality having ceased to
exist the trial court lost jurisdiction over the case against him, is untenable, because
section 17 of Rule 3 of the Rules of Court provides that
After a party dies and the claim is not thereby extinguished, the
court shall order, upon proper notice, the legal representative of
the deceased to appear and to be substituted for the deceased,
within a period of thirty (30) days, or within such time as may be
granted . . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply
with section 16 of Rule 3 which provides that
Whenever a party to a pending case dies . . . it shall be the duty
of his attorney to inform the court promptly of such death . . . and
to give the name and residence of the executor or administrator,
guardian, or other legal representative of the deceased . . .
The notice by the probate court and its publication in the Voz de Manila that
Felicidad M. Bagtas had been issued letters of administration of the estate of the
late Jos V. Bagtas and that "all persons having claims for money against the
deceased Jos V. Bagtas, arising from contract, express or implied, whether the
same be due, not due, or contingent, for funeral expenses and expenses of the
last sickness of the said decedent, and judgment for money against him, to file
said claims with the Clerk of this Court at the City Hall Bldg., Highway 54,
Quezon City, within six (6) months from the date of the first publication of this
order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the
appointed administratrix of the estate of the said deceased," is not a notice to the
court and the appellee who were to be notified of the defendant's death in
accordance with the abovequoted rule, and there was no reason for such failure
to notify, because the attorney who appeared for the defendant was the same
who represented the administratrix in the special proceedings instituted for the
administration and settlement of his estate. The appellee or its attorney or
Page 2 of 505

representative could not be expected to know of the death of the defendant or of

the administration proceedings of his estate instituted in another court, if the
attorney for the deceased defendant did not notify the plaintiff or its attorney of
such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the estate of the
late defendant is only liable for the sum of P859.63, the value of the bull which has not
been returned to the appellee, because it was killed while in the custody of the
administratrix of his estate. This is the amount prayed for by the appellee in its
objection on 31 January 1959 to the motion filed on 7 January 1959 by the appellant
for the quashing of the writ of execution.
Special proceedings for the administration and settlement of the estate of the
deceased Jos V. Bagtas having been instituted in the Court of First Instance of Rizal
(Q-200), the money judgment rendered in favor of the appellee cannot be enforced by
means of a writ of execution but must be presented to the probate court for payment
by the appellant, the administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without
pronouncement as to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes,
Dizon, Regala and Makalintal, JJ., concur.
Barrera, J., concurs in the result.
||| (Republic v. Bagtas, G.R. No. L-17474, [October 25, 1962], 116 PHIL 570-576)

FIRST DIVISION
[G.R. Nos. 80294-95. September 21, 1988.]

CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN

PROVINCE, petitioner, vs. COURT OF APPEALS, HEIRS OF
EGMIDIO OCTAVIANO AND JUAN VALDEZ,respondents.

Valdez Ereso Polido & Associates for petitioner.

Claustro, Claustro Claustro Law Office collaborating counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cabato Law Office for the Heirs of Juan Valdez.

DECISION

GANCAYCO, J p:
The principal issue in this case is whether or not a decision of the Court of Appeals
promulgated a long time ago can properly be considered res judicata by respondent
Court of Appeals in the present two cases between petitioner and two private
respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the
Ninth Division of Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case
No. 3607 (419)] and CA-G.R. No. 05149 [Civil Case No. 3655 (429)], both for
Recovery of Possession, which affirmed the Decision of the Honorable Nicodemo T.
Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case No.
3607 (419) and Civil Case No. 3655 (429), with the dispositive portion as follows:
"WHEREFORE, Judgment is hereby rendered ordering the
defendant, Catholic Vicar Apostolic of the Mountain Province to
return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs.
Heirs of Juan Valdez, and Lot 3 of the same Plan to the other set
of plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez, et
al.). For lack or insufficiency of evidence, the plaintiffs' claim or
damages is hereby denied. Said defendant is ordered to pay
costs." (p 36, Rollo)

Page 3 of 505

Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial
court's conclusions that the Decision of the Court of Appeals, dated May 4, 1977 in
CA-G.R. No. 38830-R, in the two cases affirmed by the Supreme Court, touched on
the ownership of lots 2 and 3 in question; that the two lots were possessed by the
predecessors-in-interest of private respondents under claim of ownership in good faith
from 1906 to 1951; that petitioner had been in possession of the same lots as bailee
in commodatum up to 1951, when petitioner repudiated the trust and when it applied
for registration in 1962; that petitioner had just been in possession as owner for
eleven years, hence there is no possibility of acquisitive prescription which requires 10
years possession with just title and 30 years of possession without; that the principle
of res judicata on these findings by the Court of Appeals will bar a reopening of these
questions of fact; and that those facts may no longer be altered.cdll
Petitioner's motion for reconsideration of the respondent appellate court's Decision in
the two aforementioned cases (CA-G.R. No. CV-05418 and 05419) was denied.
The facts and background of the cases as narrated by the trial court are as follows
". . . The documents and records presented reveal that the whole
controversy started when the defendant Catholic Vicar Apostolic
of the Mountain Province (VICAR for brevity) filed with the Court
of First Instance of Baguio-Benguet, on September 5, 1962 an
application for registration of title over Lots 1, 2, 3, and 4 in Psu194357, situated at Poblacion Central, La Trinidad, Benguet,
docketed as LRC N-91, said Lots being the sites of the Catholic
Church building, convents, high school building, school
gymnasium, school dormitories, social hall, stonewalls, etc. On
March 22, 1963 the Heirs of Juan Valdez and the Heirs of
Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2
and 3, respectively, asserting ownership and title thereto. After
trial on the merits, the land registration court promulgated its
Decision, dated November 17, 1965, confirming the registrable
title of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No.
3655) and the Heirs of Egmidio Octaviano (plaintiffs in the herein
Civil Case No. 3607) appealed the decision of the land
registration court to the then Court of Appeals, docketed as CAG.R. No. 38830-R. The Court of Appeals rendered its decision,
dated May 9, 1977, reversing the decision of the land registration
court and dismissing the VICAR's application as to Lots 2 and 3,

the lots claimed by the two sets of oppositors in the land

registration case (and two sets of plaintiffs in the two cases now
at bar), the first lot being presently occupied by the convent and
the second by the women's dormitory and the sisters' convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for
reconsideration praying the Court of Appeals to order the
registration of Lot 3 in the names of the Heirs of Egmidio
Octaviano, and on May 17, 1977, the Heirs of Juan Valdez and
Pacita Valdez filed their motion for reconsideration praying that
both Lots 2 and 3 be ordered registered in the names of the Heirs
of Juan Valdez and Pacita Valdez. On August 12, 1977, the Court
of Appeals denied the motion for reconsideration filed by the
Heirs of Juan Valdez on the ground that there was "no sufficient
merit to justify reconsideration one way or the other . . .," and
likewise denied that of the Heirs of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for
review on certiorari of the decision of the Court of Appeals
dismissing his (its) application for registration of Lots 2 and 3,
docketed as G.R. No. L-46832, entitled, 'Catholic Vicar Apostolic
of the Mountain Province vs. Court of Appeals and Heirs of
Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for
reconsideration, the Heirs of Juan Valdez and Pacita Valdez, on
September 8, 1977, filed with the Supreme Court a petition for
review, docketed as G.R. No. L-46872, entitled, 'Heirs of Juan
Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of
Egmidio Octaviano and Amable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute
resolution both petitions (of VICAR on the one hand and the Heirs
of Juan Valdez and Pacita Valdez on the other) for lack of merit.
Upon the finality of both Supreme Court resolutions in G.R. No. L46832 and G.R. No. L-46872, the Heirs of Octaviano filed with the
then Court of First Instance of Baguio, Branch 11, a Motion For
Execution of Judgment praying that the Heirs of Octaviano be
placed in possession of Lot 3. The Court, presided over by Hon.
Salvador J. Valdez, on December 7, 1978, denied the motion on
Page 4 of 505

the ground that the Court of Appeals decision in CA-G.R. No.

38870 did not grant the Heirs of Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court
of Appeals a petition for certiorari and mandamus, docketed as
CA-G.R. No. 08890-R, entitled 'Heirs of Egmidio Octaviano vs.
Hon. Salvador J. Valdez, Jr. and Vicar.' In its decision dated May
16, 1979, the Court of Appeals dismissed the petition.
It was at that stage that the instant cases were filed. The Heirs of
Egmidio Octaviano filed Civil Case No. 3607 (419) on July 24,
1979, for recovery of possession of Lot 3; and the Heirs of Juan
Valdez filed Civil Case No. 3655 (429) on September 24, 1979,
likewise for recovery of possession of Lot 2 (Decision, pp. 199201, Orig. Rec.).
"In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of
Egmidio Octaviano presented one (1) witness, Fructuoso Valdez,
who testified on the alleged ownership of the land in question (Lot
3) by their predecessor-in-interest, Egmidio Octaviano (Exh. C);
his written demand (Exh. B - B-4) to defendant Vicar for the
return of the land to them; and the reasonable rentals for the use
of the land at P10,000.00 per month. On the other hand,
defendant Vicar presented the Register of Deeds for the Province
of Benguet, Atty. Nicanor Sison, who testified that the land in
question is not covered by any title in the name of Egmidio
Octaviano or any of the plaintiffs (Exh. 8). The defendant
dispensed with the testimony of Mons. William Brasseur when the
plaintiffs admitted that the witness if called to the witness stand,
would testify that defendant Vicar has been in possession of Lot
3, for seventy-five (75) years continuously and peacefully and has
constructed permanent structures thereon.
"In Civil Case No. 3655, the parties admitting that the material
facts are not in dispute, submitted the case on the sole issue of
whether or not the decisions of the Court of Appeals and the
Supreme Court touching on the ownership of Lot 2, which in
effect declared the plaintiffs the owners of the land constitute res
judicata.

"In these two cases, the plaintiffs argue that the defendant Vicar
is barred from setting up the defense of ownership and or long
and continuous possession of the two lots in question since this
is barred by prior judgment of the Court of Appeals in CA-G.R.
No. 038830-R under the principle of res judicata. Plaintiffs
contend that the question of possession and ownership have
already been determined by the Court of Appeals (Exh. C,
Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme
Court (Exh. 1, Minute Resolution of the Supreme Court). On his
part, defendant Vicar maintains that the principle of res
judicata would not prevent them from litigating the issues of long
possession and ownership. Because the dispositive portion of the
prior judgment in CA-G.R. No. 038830-R merely dismissed their
application for registration and titling of lots 2 and 3. Defendant
Vicar contends that only the dispositive portion of the decision,
and not its body, is the controlling pronouncement of the Court of
Appeals." 2
The alleged errors committed by respondent Court of Appeals according to petitioner
are as follows:

1. ERROR IN APPLYING LAW OF THE CASE AND RES

JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT
LOTS 2 AND 3 WERE ACQUIRED BY PURCHASE
BUT
WITHOUT
DOCUMENTARY
EVIDENCE
PRESENTED;
3. ERROR IN FINDING THAT PETITIONER'S CLAIM IT
PURCHASED LOTS 2 AND 3 FROM VALDEZ AND
OCTAVIANO WAS AN IMPLIED ADMISSION THAT
THE FORMER OWNERS WERE VALDEZ AND
OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF
PRIVATE
RESPONDENTS
WHO
WERE
IN
POSSESSION OF LOTS 2 AND 3 AT LEAST FROM
1906, AND NOT PETITIONER;
Page 5 of 505

5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD

FREE
PATENT
APPLICATIONS
AND
THE
PREDECESSORS OF PRIVATE RESPONDENTS
ALREADY HAD FREE PATENT APPLICATIONS SINCE
1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2
AND 3 ONLY IN 1951 AND JUST TITLE IS A PRIME
NECESSITY UNDER ARTICLE 1134 IN RELATION TO
ART. 1129 OF THE CIVIL CODE FOR ORDINARY
ACQUISITIVE PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT
OF APPEALS IN CA G.R. NO. 038830 WAS
AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO.
038830 TOUCHED ON OWNERSHIP OF LOTS 2 AND
3 AND THAT PRIVATE RESPONDENTS AND THEIR
PREDECESSORS WERE IN POSSESSION OF LOTS
2 AND 3 UNDER A CLAIM OF OWNERSHIP IN GOOD
FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN
POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE
(BORROWER) IN COMMODATUM, A GRATUITOUS
LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR
AND BUILDER IN GOOD FAITH WITHOUT RIGHTS
OF RETENTION AND REIMBURSEMENT AND IS
BARRED BY THE FINALITY AND CONCLUSIVENESS
OF THE DECISION IN CA G.R. NO. 033830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148
and 05149, when it clearly held that it was in agreement with the findings of the trial
court that the Decision of the Court of Appeals dated May 4, 1977 in CA-G.R. No.
38830-R, on the question of ownership of Lots 2 and 3, declared that the said Court of
Appeals Decision (CA-G.R. No. 38830-R) did not positively declare private
respondents as owners of the land, neither was it declared that they were not owners

of the land, but it held that the predecessors of private respondents were possessors
of Lots 2 and 3, with claim of ownership in good faith from 1906 to 1951. Petitioner
was in possession as borrower in commodatum up to 1951, when it repudiated the
trust by declaring the properties in its name for taxation purposes. When petitioner
applied for registration of Lots 2 and 3 in 1962, it had been in possession in concept
of owner only for eleven years. Ordinary acquisitive prescription requires possession
for ten years, but always with just title. Extraordinary acquisitive prescription requires
30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of
Appeals in CA-G.R. No. 38830-R, affirmed by this Court, We see no error in
respondent appellate court's ruling that said findings are res judicata between the
parties. They can no longer be altered by presentation of evidence because those
issues were resolved with finality a long time ago. To ignore the principle of res
judicata would be to open the door to endless litigations by continuous determination
of issues without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First
Division 5 in CA-G.R. No. 38830-R, shows that it reversed the trial court's
Decision 6 finding petitioner to be entitled to register the lands in question under its
ownership, on its evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years
possession for acquisitive prescription over Lots 2 and 3. Neither did it satisfy the
requirement of 10 years possession for ordinary acquisitive prescription because of
the absence of just title. The appellate court did not believe the findings of the trial
court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired
also by purchase from Egmidio Octaviano by petitioner Vicar because there was
absolutely no documentary evidence to support the same and the alleged purchases
were never mentioned in the application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and
Octaviano. Both Valdez and Octaviano had Free Patent Application for those lots
since 1906. The predecessors of private respondents, not petitioner Vicar, were in
possession of the questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in
question, but not Lots 2 and 3, because the buildings standing thereon were only
constructed after liberation in 1945. Petitioner Vicar only declared Lots 2 and 3 for
taxation purposes in 1951. The improvements on Lots 1, 2, 3, 4 were paid for by the

Page 6 of 505

Bishop but said Bishop was appointed only in 1947, the church was constructed only
in 1951 and the new convent only 2 years before the trial in 1963. prLL
When petitioner Vicar was notified of the oppositor's claims, the parish priest offered
to buy the lot from Fructuoso Valdez. Lots 2 and 3 were surveyed by request of
petitioner Vicar only in 1962.
Private respondents were able to prove that their predecessors' house was borrowed
by petitioner Vicar after the church and the convent were destroyed. They never asked
for the return of the house, but when they allowed its free use, they became bailors
in commodatum and the petitioner the bailee. The bailees' failure to return the subject
matter of commodatum to the bailor did not mean adverse possession on the part of
the borrower. The bailee held in trust the property subject matter ofcommodatum. The
adverse claim of petitioner came only in 1951 when it declared the lots for taxation
purposes. The action of petitioner Vicar by such adverse claim could not ripen into
title by way of ordinary acquisitive prescription because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents
were possessors under claim of ownership in good faith from 1906; that petitioner
Vicar was only a bailee in commodatum; and that the adverse claim and repudiation
of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CAG.R. No. 38830-R. Its findings of fact have become incontestible. This Court declined
to review said decision, thereby in effect, affirming it. It has become final and
executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave
abuse of discretion, when it held that the Decision of the Court of Appeals in CA-G.R.
No. 38830-R is governing, under the principle of res judicata, hence the rule, in the
present cases CA-G.R. No. 05148 and CA-G.R. No. 05149. The facts as supported
by evidence established in that decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for
lack of merit, the Decision dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by
respondent Court of Appeals is AFFIRMED, with costs against petitioner. LibLex

SECOND DIVISION
[G.R. No. L-46145. November 26, 1986.]
REPUBLIC
OF
THE
PHILIPPINES
(BUREAU
OF
LANDS), petitioner, vs. THE HON. COURT OF APPEALS,
HEIRS OF DOMINGO P. BALOY, represented by RICARDO
BALOY, ET AL., respondents.

Pelaez, Jalandoni, Adriano, and Associates for respondents.

SO ORDERED.

DECISION

Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.

||| (Catholic Vicar Apostolic of the Mountain Province v. Court of Appeals, G.R. Nos.
80294-95, [September 21, 1988], 262 PHIL 698-702)

PARAS, J p:
Page 7 of 505

This case originally emanated from a decision of the then Court of First Instance of
Zambales in LRC Case No. 11-0, LRC Record No. N-29355, denying respondents'
application for registration. From said order of denial the applicants, heirs of Domingo
Baloy, represented by Ricardo P. Baloy, (herein private respondents) interposed on
appeal to the Court of Appeals which was docketed as CA-G.R. No. 52039-R. The
appellate court, thru its Fifth Division with the Hon. Justice Magno Gatmaitan as
ponente, rendered a decision dated February 3, 1977 reversing the decision appealed
from and thus approving the application for registration. Oppositors (petitioners
herein) filed their Motion for Reconsideration alleging among other things that
applicants' possessory information title can no longer be invoked and that they were
not able to prove a registerable title over the land. Said Motion for Reconsideration
was denied, hence this petition for review on certiorari.
Applicants' claim is anchored on their possessory information title (Exhibit F which
had been translated in Exhibit F-1) coupled with their continuous, adverse and public
possession over the land in question. An examination of the possessory information
title shows that the description and the area of the land stated therein substantially
coincides with the land applied for and that said possessory information title had been
regularly issued having been acquired by applicants' predecessor, Domingo Baloy,
under the provisions of the Spanish Mortgage Law. Applicants presented their tax
declaration on said lands on April 8, 1965.
The Director of Lands opposed the registration alleging that this land had become
public land thru the operation of Act 627 of the Philippine Commission. On November
26, 1902 pursuant to the executive order of the President of the U.S., the area was
declared within the U.S. Naval Reservation. Under Act 627 as amended by Act 1138,
a period was fixed within which persons affected thereby could file their application,
(that is within 6 months from July 8, 1905) otherwise "the said lands or interests
therein will be conclusively adjudged to be public lands and all claims on the part of
private individuals for such lands or interests therein not to presented will be forever
barred." Petitioner argues that since Domingo Baloy failed to file his claim within the
prescribed period, the land had become irrevocably public and could not be the
subject of a valid registration for private ownership.
Considering the foregoing facts respondent Court of Appeals ruled as follows:
". . . perhaps, the consequence was that upon failure of Domingo
Baloy to have filed his application within that period the land had
become irrevocably public; but perhaps also, for the reason that
warning was from the Clerk of the Court of Land Registration,
named J.R. Wilson and there has not been presented a formal

order or decision of the said Court of Land Registration so

declaring the land public because of that failure, it can with
plausibility be said that after all, there was no judicial declaration
to that effect, it is true that the U.S. Navy did occupy it apparentlyfor some time, as a recreation area, as this Court understands
from the communication of the Department of Foreign Affairs to
the U.S. Embassy exhibited in the record, but the very tenor of
the communication apparently seeks to justify the title of herein
applicants, in other words, what this Court has taken from the
occupation by the U.S. Navy is that during the interim, the title of
applicants was in a state of suspended animation so to speak but
it had not died either; and the fact being that this land was really
originally private from and after the issuance and inscription of
the possessory information Exh. F during the Spanish times, it
would be most difficult to sustain position of Director of Lands that
it was land of no private owner; open to public imposition, and
over which he has control; and since immediately after U.S. Navy
had abandoned the area, applicant came in and asserted title
once again, only to be troubled by first Crispiniano Blanco who
however in due time, quitclaimed in favor of applicants, and then
by private oppositors now, apparently originally tenants of Blanco,
but that entry of private oppositors sought to be given color of
ownership when they sought to and did file tax declaration in
1965, should not prejudice the original rights of applicants thru
their possessory information secured regularly so long ago, the
conclusion must have to be that after all, applicants had
succeeded in bringing themselves within the provisions of Sec.
19 of Act 496, the land should be registered in their favor;
IN VIEW WHEREOF, this Court is constrained to reverse, as it
now reverses, judgment appealed from the application is
approved, and once this decision shall have become final, if ever
it would be, let decree issue in favor of applicants with the
personal circumstances outlined in the application, costs against
private oppositors."
Petitioner now comes to Us with the following:
"ASSIGNMENT OF ERRORS"

Page 8 of 505

1 Respondent court erred in holding that to bar private

respondents from asserting any right under their possessory
information title there is need for a court order to that effect.
2. Respondent court erred in not holding that private respondents'
rights by virtue of their possessory information title was lost by
prescription.
3. Respondent court erred in concluding that applicants have
registerable title.
A cursory reading of Sec. 3, Act 627 reveals that several steps are to be followed
before any affected land can "be conclusively adjudged to be public land." Sec. 3, Act
627 reads as follows:
"SEC. 3. Immediately upon receipt of the notice from the Civil
Governor in the preceeding section mentioned it shall be the duty
of the judge of the Court of Land Registration to issue a notice,
stating that the lands within the limits aforesaid have been
reserved for military purposes, and announced and declared to
be military reservations, and that claims for all private lands,
buildings, and interests therein, within the limits aforesaid, must
be presented for registration under the Land Registration Act
within six calendar months from the date of issuing the notice,
and that all lands, buildings, and interests therein within the limits
aforesaid not so presented within the time therein limited will be
conclusively adjudged to be public lands, and all claims on the
part of private individuals for such lands, buildings, or an interest
therein not so presented will be forever barred. The clerk of the
Court of Land Registration shall immediately upon the issuing of
such notice by the judge cause the same to be published once a
week for three successive weeks in two newspapers, one of
which newspapers shall be in the English language, and one in
the Spanish language in the city or province where the land lies,
if there be no such Spanish or English newspapers having a
general circulation in the city or province wherein the land lies,
then it shall be a sufficient compliance with this section if the
notice be published as herein provided, in a daily newspaper in
the Spanish language and one in the English language, in the
City of Manila, having a general circulation. The clerk shall also
cause a duly attested copy of the notice in the Spanish language

to be posted in conspicuous place at each angle formed by the

lines of the limits of the land reserved. The clerk shall also issue
and cause to be personally served the notice in the Spanish
language upon every person living upon or in visible possession
of any part of the military reservation. If the person in possession
is the head of the family bring upon the land, it shall be sufficient
to serve the notice upon him, and if he is absent it shall be
sufficient to leave a copy at his usual place of residence. The
clerk shall certify the manner in which the notices have been
published, posted, and served, and his certificate shall be
conclusive proof of such publication, posting, and service, but the
court shall have power to cause such further notice to be given as
in its opinion may be necessary."
Clearly under said provision, private land could be deemed to have become
public land only by virtue of a judicial declaration after due notice and hearing. It
runs contrary therefore to the contention of petitioners that failure to present
claims set forth under Sec. 2 of Act 627 made the land ipso facto public without
any need of judicial pronouncement. Petitioner in making such declaration relied
on Sec. 4 of Act 627 alone. But in construing a statute the entire provisions of the
law must be considered in order to establish the correct interpretation as intended
by the law-making body. Act 627 by its terms is not self-executory and requires
implementation by the Court of Land Registration. Act 627, to the extent that it
creates a forfeiture, is a penal statute in derogation of private rights, so it must be
strictly construed so as to safeguard private respondents' rights. Significantly,
petitioner does not even allege the existence of any judgment of the Land
Registration court with respect to the land in question. Without a judgment or
order declaring the land to be public, its private character and the possessory
information title over it must be respected. Since no such order has been
rendered by the Land Registration Court it necessarily follows that it never
became public land thru the operation of Act 627. To assume otherwise is to
deprive private respondents of their property without due process of law. In fact it
can be presumed that the notice required by law to be given by publication and
by personal service did not include the name of Domingo Baloy and the subject
land, and hence he and his land were never brought within the operation of Act
627 as amended. The procedure laid down in Sec. 3 is a requirement of due
process. "Due process requires that the statutes under which it is attempted to
deprive a citizen of private property without or against his consent must, as in
expropriation cases, be strictly complied with, because such statutes are in
Page 9 of 505

derogation of general rights." (Arriete vs. Director of Public Works, 58 Phil. 507,
508, 511).

We also find with favor private respondents' views that court judgments are not to be
presumed. It would be absurd to speak of a judgment by presumption. If it could be
contended that such a judgment may be presumed, it could equally be contended that
applicants' predecessor Domingo Baloy presumably seasonably filed a claim, in
accordance with the legal presumption that a person takes ordinary care of his
concerns, and that a judgment in his favor was rendered.

Fernan, J ., no part.
Gutierrez, Jr., J ., I concur pro hoc vice in the results.
||| (Republic v. Court of Appeals, G.R. No. L-46145, [November 26, 1986], 230 PHIL
118-125)

The finding of respondent court that during the interim of 57 years from November 26,
1902 to December 17, 1959 (when the U.S. Navy possessed the area) the
possessory rights of Baloy or heirs were merely suspended and not lost by
prescription, is supported by Exhibit "U," a communication or letter No. 1108-63,
dated June 24, 1963, which contains an official statement of the position of the
Republic of the Philippines with regard to the status of the land in question. Said letter
recognizes the fact that Domingo Baloy and/or his heirs have been in continuous
possession of said land since 1894 as attested by an "Informacion Possessoria" Title,
which was granted by the Spanish Government. Hence, the disputed property is
private land and this possession was interrupted only by the occupation of the land by
the U.S. Navy in 1945 for recreational purposes. The U.S. Navy eventually abandoned
the premises. The heirs of the late Domingo P. Baloy, are now in actual possession,
and this has been so since the abandonment by the U.S. Navy. A new recreation area
is now being used by the U.S. Navy personnel and this place is remote from the land
in question.
Clearly, the occupancy of the U.S. Navy was not in the concept of owner. It partakes
of the character of a commodatum. It cannot therefore militate against the title of
Domingo Baloy and his successors-in-interest. One's ownership of a thing may be lost
by prescription by reason of another's possession if such possession be under claim
of ownership, not where the possession is only intended to be transient, as in the
case of the U.S. Navy's occupation of the land concerned, in which case the owner is
not divested of his title, although it cannot be exercised in the meantime.
WHEREFORE, premises considered, finding no merit in the petition the appealed
decision is hereby AFFIRMED. prLL
SO ORDERED.

EN BANC
[G.R. No. 46240. November 3, 1939.]
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffsappellants, vs. BECK, defendant-appellee.

Mauricio Carlos; for appellants.

Felipe Buencamino, Jr.; for appellee.
.

Feria, Alampay and Feliciano, ** JJ ., concur.

Page 10 of 505

DECISION

IMPERIAL, J p:
The plaintiff brought this action to compel the defendant to return to her
certain furniture which she lent him for his use. She appealed from the judgment
of the Court of First Instance of Manila which ordered that the defendant return to
her the three gas heaters and the four electric lamps found in the possession of
the Sheriff of said city, that she call for the other furniture from the said Sheriff of
Manila at her own expense, and that the fees which the sheriff may charge for the
deposit of the furniture be paid pro rata by both parties, without pronouncement
as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the
latter's house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the
novation of the contract of lease between the plaintiff and the defendant, the
former gratuitously granted to the latter the use of the furniture described in the
third paragraph of the stipulation of facts, subject to the condition that the
defendant would return them to the plaintiff upon the latter's demand. The plaintiff
sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936,
these three notified the defendant of the conveyance, giving him sixty days to
vacate the premises under one of the clauses of the contract of lease. There after
the plaintiff required the defendant to return all the furniture transferred to him for
his use. The defendant answered that she may call for them in the house where
they are found. On November 5, 1936, the defendant, through another person,
wrote to the plaintiff reiterating that she may call for the furniture in the ground
floor of the house. On the 7th of the same month, the defendant wrote another
letter to the plaintiff informing her that he could not give up the three gas heaters
and the four electric lamps because he would use them until the 15th of the same
month when the lease is due to expire. The plaintiff refused to get the furniture in
view of the fact that the defendant had declined to make delivers of all of them.
On November 15th, before vacating the house, the defendant deposited with the
Sheriff all the furniture belonging to the plaintiff and they are now on deposit in
the warehouse situated at No. 1521, Rizal Avenue. in the custody of the said
sheriff.
In their seven assigned errors the plaintiffs contend that the trial court
incorrectly applied the law: in holding that they violated the contract by not calling
for all the furniture on November 5, 1936, when the defendant placed them at

their disposal; in not ordering the defendant to pay them the value of the furniture
in case they are not delivered; in holding that they should get all the furniture from
the sheriff at their expenses; in ordering them to pay one-half of the expenses
claimed by the Sheriff for the deposit of the furniture; in ruling that both parties
should pay their respective legal expenses or the costs; and in denying the
motions for reconsideration and new trial. To dispose of the case, it is only
necessary to decide whether the defendant complied with his obligation to return
the furniture upon the plaintiff's demand; whether the latter is bound to bear the
deposit fees thereof, and whether she is entitled to the costs of litigation.
The contract entered into between the parties is one of commodatum,
because under it the plaintiff gratuitously granted the use of the furniture to the
defendant, reserving for herself the ownership thereof; by this contract the
defendant bound himself to return the furniture to the plaintiff, upon the latter's
demand (clause 7 of the contract, Exhibit A; articles 1740, paragraph 1, and 1741
of the Civil Code) The obligation voluntarily assumed by the defendant to return
the furniture upon the plaintiff's demand, means that he should return all of them
to the plaintiff at the latter's residence or house. The defendant did not comply
with this obligation when he merely placed them at the disposal of the plaintiff,
retaining for his benefit the three gas heaters and the four electric lamps. The
provisions of article 1169 of the Civil Code cited by counsel for the parties are not
squarely applicable. The trial court, therefore, erred when it came to the legal
conclusion that the plaintiff failed to comply with her obligation to get the furniture
when they were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to
the plaintiff, upon the latter's demand, the Court could not legally compel her to
bear the expenses occasioned by the deposit of the furniture at the defendant's
behest. The latter, as bailee, was not entitled to place the furniture on deposit; nor
was the plaintiff under a duty to accept the offer to return the furniture, because
the defendant wanted to retain the three gas heaters and the four electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is
entitled to the payment thereof by the defendant in case of his inability to return
some of the furniture, because under paragraph 6 of the stipulation of facts, the
defendant has neither agreed to nor admitted the correctness of the said value.
Should the defendant fail to deliver some of the furniture, the value thereof should
be later determined by the trial Court through evidence which the parties may
desire to present.
The costs in both instances should be borne by the defendant because
the plaintiff is the prevailing party (section 487 of the Code of Civil Procedure).
Page 11 of 505

The defendant was the one who breached the contract of commodatum, and
without any reason he refused to return and deliver all the furniture upon the
plaintiff's demand. In these circumstances, it is just and equitable that he pay the
legal expenses and other judicial costs which the plaintiff would not have
otherwise defrayed.
The appealed judgment is modified and the defendant is ordered to
return and deliver to the plaintiff, in the residence or house of the latter, all the
furniture described in paragraph 3 of the stipulation of facts Exhibit A. The
expenses which may be occasioned by the delivery to and deposit of the furniture
with the Sheriff shall be for the account of the defendant. The defendant shall pay
the costs in both instances. So ordered.
Avancea, C.J., Villa-Real, Diaz, Laurel, Concepcionand Moran,
JJ., concur.

FIRST DIVISION
[G.R. No. 4150. February 10, 1910.]
FELIX DE LOS SANTOS, plaintiff-appellee, vs. AGUSTINA
JARRA, administratrix of the estate of Magdaleno Jimenea,
deceased, defendant-appellant.

||| (Quintos v. Beck, G.R. No. 46240, [November 3, 1939], 69 PHIL 108-112)
Matias Hilado, for appellant.
Jose Felix Martinez, for appellee.

DECISION

TORRES, J p:
On the 1st of September, 1906, Felix de los Santos brought suit against
Agustina Jarra, he administratrix of the estate of Magdaleno Jimenea, alleging
that in the latter part of 1901 Jimenea borrowed and obtained from the plaintiff
ten first-class carabaos, to be used at the animal-power mill of his hacienda
during the season of 1901-2, without recompense or remuneration whatever for
the use thereof, under the sole condition that they should be returned to the
owner as soon as the work at the mill was terminated; that Magdaleno Jimenea,
however, did not return the carabaos, notwithstanding the fact that the plaintiff
claimed their return after the work at the mill was finished; that Magdaleno
Jimenea died on the 28th of October, 1904, and the defendant herein was
appointed by the Court of First Instance of Occidental Negros administratrix of his
estate and she took over the administration of the same and is still performing her
duties as such administratrix; that the plaintiff presented his claim to the
commissioners of the estate of Jimenea, within the legal term, for the return of
Page 12 of 505

the said ten carabaos, but the said commissioners rejected his claim as appears
in their report; therefore, the plaintiff prayed that judgment be entered against the
defendant as administratrix of the estate of the deceased, ordering her to return
the ten first-class carabaos loaned to the late Jimenea or their present value, and
to pay the costs.
The defendant was duly summoned, and on the 25th of September,
1905, she demurred in writing to the complaint on the ground that it was vague
but on the 2d of October of the same year, in answer to the complaint, she said
that it was true that the late Magdaleno Jimenea asked the plaintiff to loan him
ten carabaos, but that he only obtained three second-class animals, which were
afterwards transferred by sale by the plaintiff to the said Jimenea; that she denied
the allegations contained in paragraph 3 of the complaint; for all of which she
asked the court to absolve her of the complaint with the costs against the plaintiff.
By a writing dated the 11th of December, 1906, Attorney Jose Felix
Martinez notified the defendant and her counsel, Matias Hilado, that he had
made an agreement with the plaintiff to the effect that the latter would not
compromise the controversy without his consent, and that as fees for his
professional services he was to receive one half of the amount allowed in the
judgment if the same were entered in favor of the plaintiff.
The case came up for trial, evidence was adduced by both parties, and
their exhibits were made of record. On the 10th of January, 1907, the court below
entered judgment sentencing Agustina Jarra, as administratrix of the estate of
Magdaleno Jimenea, to return to the plaintiff, Felix de los Santos, the remaining
six second and third class carabaos, or the value thereof at the rate of P120
each, or a total of P720 with the costs.
Counsel for the defendant excepted to the foregoing judgment, and, by a
writing dated January 19, moved for a new trial on the ground that the findings of
fact were openly and manifestly contrary to the weight of the evidence. The
motion was overruled, the defendant duly excepted, and in due course submitted
the corresponding bill of exceptions, which was approved and submitted to this
court.
The defendant has admitted that Magdaleno Jimenea asked the plaintiff
for the loan of ten carabaos which are now claimed by the latter, as shown by two
letters addressed by the said Jimenea to Felix de los Santos; but in her answer
the said defendant alleged that the late Jimenea only obtained three secondclass carabaos, which were subsequently sold to him by the owner, Santos;
therefore, in order to decide this litigation it is indispensable that proof be

forthcoming that Jimenea only received three carabaos from his son-in-law
Santos, and that they were sold by the latter to him.
The record discloses that it has been fully proven from the testimony of
a sufficient number of witnesses that the plaintiff, Santos, sent in charge of
various persons the ten carabaos requested by his father-in-law, Magdaleno
Jimenea, in the two letters produced at the trial by the plaintiff, and that Jimenea
received them in the presence of some of said persons, one being a brother of
said Jimenea, who saw the animals arrived at the hacienda where it was
proposed to employ them. Four died of rinderpest, and it is for this reason that
the judgment appealed from only deals with six surviving carabaos.
The alleged purchase of three carabaos by Jimenea from his son-in-law
Santos is not evidenced by any trustworthy document such as those of transfer,
nor were the declarations of the witnesses presented by the defendant affirming it
satisfactory; for said reason it can not be considered that Jimenea only received
three carabaos on loan from his son-in-law, and that afterward kept them
definitely by virtue of the purchase.
By the laws in force the transfer of large cattle was and is still made by
means of official document issued by the local authorities; these document
constitute the title of ownership of the carabaos or horse so acquired. Further
more, not only should the purchaser be provided with a new certificate or
credential, a document which has not been produced in evidence by the
defendant, nor has the loss of the same been shown in the case, but the old
documents ought to be on file in the municipality, or they should have been
delivered to the new purchaser, and in the case at bar neither did the defendant
present the old credential on which should be stated the name of the previous
owner of each of the tree carabaos said to have been sold by the plaintiff.
From the foregoing it may be logically inferred that the carabaos loaned
or given on commodatum to the now deceased Magdaleno Jimenea were ten in
number; that they, or at any rate the six surviving ones, have not been returned to
the owner thereof, Felix de los Santos, and that it is not true that the latter sold to
the former three carabaos that the purchaser was already using; therefore, as the
said six carabaos were not the property of the deceased nor of any of his
descendants, it is the duty of the administratrix of the estate to return them or
indemnify the owner for their value.
The Civil Code, in dealing with loans in general, from which generic
denomination the specific one of commodatum is derived, establishes
prescriptions in relation to the last-mentioned contract by the following articles:
Page 13 of 505

"ART. 1740. By the contract of loan, one of the parties

delivers to the other, either anything not perishable, in order that
the latter may use it during a certain period and return it to the
former, in which case it is called commodatum, or money or any
other perishable thing, under the condition to return an equal
amount of the same kind and quality, in which case it is merely
called a loan.

return the thing itself to its owner, or to pay him damages if

through the fault of the bailee the thing should have been lost or
injured, it is clear that where public securities are involved, the
trial court, in deferring to the claim of the bailor that the amount
loaned be returned him by the bailee in bonds of the same class
as those which constituted the contract, thereby properly applies
law 9 of title 11 of partida 5."

"Commodatum is essentially gratuitous.

"A simple loan may be gratuitous, or made under a
stipulation to pay interest.
"ART. 1741. The bailor retains the ownership of the thing
loaned. The bailee acquires the use thereof, but not its fruits; if
any compensation is involved, to be paid by the person requiring
the use, the agreement ceases to be a commodatum.
"ART. 1742. The obligations and rights which arise from
the commodatum pass to the heirs of both contracting parties
unless the loan has been made in consideration for the person of
the bailee, in which case his heirs shall not have the right to
continue using the thing loaned."
The carabaos delivered to be used not being returned by the defendant
upon demand, there is no doubt that she is under obligation to indemnify the
owner thereof by paying him their value.
Article 1101 of said code reads:
"Those who in fulfilling their obligations are guilty of
fraud, negligence, or delay, and those who in any manner
whatsoever act in contravention of the stipulations of the same,
shall be subject to indemnify for the losses and damages caused
thereby."
The obligation of the bailee or of his successors to return either the thing
loaned or its value is sustained by the supreme tribunal of Spain. In its decision of
March 21, 1895, it sets out with precision the legal doctrine touching
commodatum as follows:
"Although it is true that in a contract of commodatum the
bailor retains the ownership of the thing loaned, and at the
expiration of the period, or after the use for which it was loaned
has been accomplished, it is the imperative duty of the bailee to

With regard to the third assignment of error, based on the fact that the
plaintiff Santos had not appealed from the decision of the commissioners
rejecting his claim for the recovery of his carabaos, it is sufficient to state that we
are not dealing with a claim for the payment of a certain sum, the collection of a
debt from the estate, or payment for losses and damages (sec. 119, Code of Civil
Procedure), but with the exclusion from the inventory of the property of the late
Jimenea, or from his capital, of six carabaos which did not belong to him, and
which formed no part of the inheritance.
The demand for the exclusion of the said carabaos belonging to a third
party and which did not form part of the property of the deceased, must be the
subject of a direct decision of the court in an ordinary action, wherein the right of
the third party to the property which he seeks to have excluded from the
inheritance and the right of the deceased has been discussed, and rendered in
view of the result of the evidence adduced by the administrator of the estate and
of the claimant, since it is so provided by the second part of section 699 and by
section 703 of the Code of Civil Procedure; the refusal of the commissioners
before whom the plaintiff unnecessarily appeared can not affect nor reduce the
unquestionable right of ownership of the latter, inasmuch as there is no law nor
principle of justice authorizing the successors of the late Jimenea to enrich
themselves at the cost and to prejudice of Felix de los Santos.
For the reasons above set forth, by which the errors assigned to the
judgment appealed from have been refuted, and considering that the same is in
accordance with the law and the merits of the case, it is our opinion that it is
should be affirmed and we do hereby affirm it with the costs against appellant. So
ordered.
Arellano, C. J., Johnson, Moreland, and Elliott, JJ., concur.
Carson, J., reversed his vote
||| (De Los Santos v. Jarra, G.R. No. 4150, [February 10, 1910], 15 PHIL 147-153)
Page 14 of 505

CHAPTER 2 - MUTUUM

SECOND DIVISION
[G.R. Nos. L-50550-52. October 31, 1979.]
CHEE KIONG YAM, AMPANG MAH, ANITA YAM JOSE Y.C. YAM
AND RICHARD YAM, petitioners, vs. HON. NABDAR J. MALIK,
Municipal Judge of Jolo, Sulu (Branch 1), THE PEOPLE OF THE
PHILIPPINES, ROSALINDA AMIN, TAN CHU KAO, and LT. COL.
AGOSTO SAJOR, respondents.

Tomas P. Matic, Jr. for petitioners.

Jose E. Fernandez for private respondent.
Office of the Solicitor General for respondent The People of the
Philippines.

DECISION

ABAD SANTOS, J p:
This is a petition for certiorari, prohibition, and mandamus with preliminary injunction.
Petitioners alleged that respondent Municipal Judge Nabdar J. Malik of Jolo, Sulu,
Page 15 of 505

acted without jurisdiction, in excess of jurisdiction and with grave abuse of discretion
when:
(a) he held in the preliminary investigation of the charges of estafa filed by
respondents Rosalinda Amin, Tan Chu Kao and Augusto Sajor against petitioners that
there was a prima facie case against the latter;
(b) he issued warrants of arrest against petitioners after making the above
determination; and
(c) he undertook to conduct trial on the merits of the charges which were docketed in
his court as Criminal Cases No. M-111, M-183 and M-208.
Respondent judge is said to have acted without jurisdiction, in excess of jurisdiction
and with grave abuse of discretion because the facts recited in the complaints did not
constitute the crime of estafa, and assuming they did, they were not within the
jurisdiction of the respondent judge.
In a resolution dated May 23, 1979, we required respondents to comment on the
petition and issued a temporary restraining order against the respondent judge from
further proceeding with Criminal Cases Nos. M-111, M-183 and M-208 or from
enforcing the warrants of arrest he had issued in connection with said cases.
Comments by the respondent judge and the private respondents pray for the
dismissal of the petition but the Solicitor General has manifested that the People of
the Philippines have no objection to the grant of the reliefs prayed for, except the
damages. We considered the comments as answers and gave due course to the
petition.
The position of the Solicitor General is well taken. We have to grant the petition in
order to prevent manifest injustice and the exercise of palpable excess of authority.
In Criminal Case No. M-111, respondent Rosalinda M. Amin charges petitioners Yam
Chee Kiong and Yam Yap Kieng with estafa through misappropriation of the amount
of P50,000.00. But the complaint states on its face that said petitioners received the
amount from respondent Rosalinda M. Amin "as a loan. " Moreover, the complaint in
Civil Case No. N-5, an independent action for the collection of the same amount filed
by respondent Rosalinda M. Amin with the Court of First Instance of Sulu on
September 11, 1975, likewise states that the P50,000.00 was a "simple business
loan" which earned interest and was originally demandable six (6) months from July
12, 1973. (Annex E of the petition.) prLL

In Criminal Case No. M-183, respondent Tan Chu Kao charges petitioners Yam Chee
Kiong, Jose Y.C. Yam, Ampang Mah, and Anita Yam, alias Yong Tay, with estafa
through misappropriation of the amount of P30,000.00. Likewise, the complaint states
on its face that the P30,000.00 was "a simple loan." So does the complaint in Civil
Case No. N-8 filed by respondent Tan Chu Kao on April 6, 1976 with the Court of First
Instance of Sulu for the collection of the same amount. (Annex D of the petition.)
In Criminal Case No. M-208, respondent Augusto Sajor charges petitioners Jose Y.C.
Yam, Anita Yam alias Yong Tai Mah, Chee Kiong Yam and Richard Yam, with estafa
through misappropriation of the amount of P20,000.00. Unlike the complaints in the
other two cases, the complaint in Criminal Case No. M-208 does not state that the
amount was received as loan. However, in a sworn statement dated September 29,
1976, submitted to respondent judge to support the complaint, respondent Augusto
Sajor states that the amount was a "loan." (Annex G of the petition.)
We agree with the petitioners that the facts alleged in the three criminal complaints do
not constitute estafa through misappropriation.
Estafa through misappropriation is committed according to Article 315, paragraph 1,
subparagraph (b), of the Revised Penal Code as follows:
"Art. 315. Swindling (Estafa). Any person who shall defraud
another by any of the means mentioned herein below shall be
punished by:
xxx xxx xxx
"1. With unfaithfulness or abuse of confidence, namely:
xxx xxx xxx
"b) By misappropriating or converting, to the prejudice of another,
money, goods, or any other personal property received by the
offender in trust or on commission, or for administration, or under
any other obligation involving the duty to make delivery of or to
return the same, even though such obligation be totally or
partially guaranteed by a bond; or by denying having received
such money, goods, or other property."
In order that a person can be convicted under the abovequoted provision, it must be
proven that he has the obligation to deliver or return the same money, goods or
personal property that he received. Petitioners had no such obligation to return the
same money, i.e., the bills or coins, which they received from private respondents.
This is so because as clearly stated in criminal complaints, the related civil complaints
Page 16 of 505

and the supporting sworn statements, the sums of money that petitioners received
were loans.

acquire ownership over the thing borrowed and has the duty to return the same thing
to the lender.

The nature of simple loan is defined in Articles 1933 and 1953 of the Civil Code.

Under Sec. 87 of the Judiciary Act, the municipal court of a provincial capital, which
the Municipal Court of Jolo is, has jurisdiction over criminal cases where the penalty
provided by law does not exceed prision correccional or imprisonment for not more
than six (6) years, or fine not exceeding P6,000.00 or both. The amounts allegedly
misappropriated by petitioners range from P20,000.00 to P50,000.00. The penalty for
misappropriation of this magnitude exceeds prision correccional or 6-year
imprisonment. (Article 315, Revised Penal Code). Assuming then that the acts recited
in the complaints constitute the crime of estafa, the Municipal Court of Jolo has no
jurisdiction to try them on the merits. The alleged offenses are under the jurisdiction of
the Court of First Instance. cdphil

"Art. 1933. By the contract of loan, one of the parties delivers

to another, either something not consumable so that the latter
may use the same for a certain time and return it, in which case
the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of
the same kind and quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum the bailor retains the ownership of the thing
loaned, while in simple loan, ownership passes to the borrower."
"Art. 1953. A person who receives a loan of money or any
other fungible thing acquires the ownership thereof, and is bound
to pay to the creditor an equal amount of the same kind and
quality."
It can be readily noted from the above-quoted provisions that in simple loan (mutuum),
as contrasted to commodatum, the borrower acquires ownership of the money, goods
or personal property borrowed. Being the owner, the borrower can dispose of the
thing borrowed (Article 248, Civil Code) and his act will not be considered
misappropriation thereof.
In U.S. vs. Ibaez, 19 Phil. 559, 560 (1911), this Court held that it is not estafa for a
person to refuse to pay his debt or to deny its existence.
"We are of the opinion and so decide that when the relation is
purely that of debtor and creditor, the debtor can not be held
liable for the crime of estafa, under said article, by merely
refusing to pay or by denying the indebtedness."
It appears that respondent judge failed to appreciate the distinction between the two
types of loan, mutuum and commodatum, when he performed the questioned acts.
He mistook the transaction between petitioners and respondents Rosalinda Amin, Tan
Chu Kao and Augusto Sajor to be commodatum wherein the borrower does not

Respondents People of the Philippines being the sovereign authority can not be sued
for damages. They are immune from such type of suit.
With respect to the other respondents, this Court is not the proper forum for the
consideration of the claim for damages against them.
WHEREFORE, the petition is hereby granted; the temporary restraining order
previously issued is hereby made permanent; the criminal complaints against
petitioners are hereby declared null and void; respondent judge is hereby ordered to
dismiss said criminal cases and to recall the warrants of arrest he had issued in
connection therewith. Moreover, respondent judge is hereby rebuked for manifest
ignorance of elementary law. Let a copy of this decision be included in his personal
life. Costs against private respondents.
SO ORDERED.
Barredo, Antonio and Santos, JJ., concur.
Concepcion Jr, J., is on leave.
Aquino, J., concur. The claim for damages in this certiorari, mandamus and
prohibition case is not warranted under section 3, Rule 65 of the Rules of Court.
||| (Chee Kiong Yam v. Malik, G.R. Nos. L-50550-52, [October 31, 1979], 182 PHIL
414-419)

Page 17 of 505

DECISION

SECOND DIVISION
[G.R. No. 115324. February 19, 2003.]
PRODUCERS BANK OF THE PHILIPPINES (now FIRST
INTERNATIONAL BANK), petitioner, vs. HON. COURT OF
APPEALS AND FRANKLIN VIVES,respondents.

Domingo & Dizon for petitioner.

Mauricio Law Office for private respondent.

SYNOPSIS
Upon request of a friend, Franklin Vives accommodated Arturo Doronilla by opening a
savings account for Sterela Marketing, in coordination with Producer's Bank assistant
branch manager, Rufo Atienza. The purpose was for incorporation, and the
agreement was that the money would not be removed from Sterela's savings account
and returned to Vives after thirty (30) days. Later, however, part of the money had
been withdrawn by Doronilla who also opened a current account and authorized the
bank to debit the savings account to cover overdrawing in the current account. Vives
filed a case for recovery of sum of money and both the trial court and the appellate
court ruled on the solidary liability of Producers Bank to Vives. Hence, this
appeal. IDSEAH
The Court affirmed the appealed decision. Under Art. 2180 of the Civil Code,
employers shall be held liable for damages caused by their employees acting within
the scope of their assigned tasks. The Bank, through its employee Atienza, was partly
responsible for the loss of Vives' money and is liable for its restitution. That despite
limitation on the savings account passbook issued to Mrs. Vives on behalf of Sterela,
Doronilla was allowed to withdraw several times without presentation of a passbook
as required.HI

CALLEJO, SR., J p:
This is a petition for review on certiorari of the Decision 1 of the Court of Appeals
dated June 25, 1991 in CA-G.R. CV No. 11791 and of its Resolution 2 dated May 5,
1994, denying the motion for reconsideration of said decision filed by petitioner
Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and
friend Angeles Sanchez to help her friend and townmate, Col. Arturo Doronilla, in
incorporating his business, the Sterela Marketing and Services ("Sterela" for brevity).
Specifically, Sanchez asked private respondent to deposit in a bank a certain amount
of money in the bank account of Sterela for purposes of its incorporation. She assured
private respondent that he could withdraw his money from said account within a
month's time. Private respondent asked Sanchez to bring Doronilla to their house so
that they could discuss Sanchez's request. 3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella
Dumagpi, Doronilla's private secretary, met and discussed the matter. Thereafter,
relying on the assurances and representations of Sanchez and Doronilla, private
respondent issued a check in the amount of Two Hundred Thousand Pesos
(P200,000.00) in favor of Sterela. Private respondent instructed his wife, Mrs.
Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings account
in the name of Sterela in the Buendia, Makati branch of Producers Bank of the
Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the bank to
deposit the check. They had with them an authorization letter from Doronilla
authorizing Sanchez and her companions, "in coordination with Mr. Rufo Atienza," to
open an account for Sterela Marketing Services in the amount of P200,000.00. In
opening the account, the authorized signatories were Inocencia Vives and/or Angeles
Sanchez. A passbook for Savings Account No. 10-1567 was thereafter issued to Mrs.
Vives. 4
Subsequently, private respondent learned that Sterela was no longer holding office in
the address previously given to him. Alarmed, he and his wife went to the Bank to
verify if their money was still intact. The bank manager referred them to Mr. Rufo
Atienza, the assistant manager, who informed them that part of the money in Savings
Account No. 10-1567 had been withdrawn by Doronilla, and that only P90,000.00
remained therein. He likewise told them that Mrs. Vives could not withdraw said
Page 18 of 505

remaining amount because it had to answer for some postdated checks issued by
Doronilla. According to Atienza, after Mrs. Vives and Sanchez opened Savings
Account No. 10-1567, Doronilla opened Current Account No. 10-0320 for Sterela and
authorized the Bank to debit Savings; Account No. 10-1567 for the amounts
necessary to cover overdrawings in Current Account No. 10-0320. In opening said
current account, Sterela, through Doronilla, obtained a loan of P175,000.00 from the
Bank. To cover payment thereof, Doronilla issued three postdated checks, all of which
were dishonored. Atienza also said that Doronilla could assign or withdraw the money
in Savings Account No. 10-1567 because he was the sole proprietor of Sterela. 5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29,
1979, he received a letter from Doronilla, assuring him that his money was intact and
would be returned to him. On August 13, 1979, Doronilla issued a postdated check for
Two Hundred Twelve Thousand Pesos (P212,000.00) in favor of private respondent.
However, upon presentment thereof by private respondent to the drawee bank, the
check was dishonored. Doronilla requested private respondent to present the same
check on September 15, 1979 but when the latter presented the check, it was again
dishonored. 6

Private respondent referred the matter to a lawyer, who made a written demand upon
Doronilla for the return of his client's money. Doronilla issued another check for
P212,000.00 in private respondent's favor but the check was again dishonored for
insufficiency of funds. 7
Private respondent instituted an action for recovery of sum of money in the Regional
Trial Court (RTC) in Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and
petitioner. The case was docketed as Civil Case No. 44485. He also filed criminal
actions against Doronilla, Sanchez and Dumagpi in the RTC. However, Sanchez
passed away on March 16, 1985 while the case was pending before the trial court. On
October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil
Case No. 44485, the dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered
sentencing defendants Arturo J. Doronila, Estrella Dumagpi and
Producers Bank of the Philippines to pay plaintiff Franklin Vives
jointly and severally
(a) the amount of P200,000.00, representing the money
deposited, with interest at the legal rate from the filing of the
complaint until the same is fully paid;

(b) the sum of P50,000.00 for moral damages and a similar

amount for exemplary damages;
(c) the amount of P40,000.00 for attorney's fees; and
(d) the costs of the suit.
SO ORDERED. 8
Petitioner appealed the trial court's decision to the Court of Appeals. In its Decision
dated June 25, 1991, the appellate court affirmed in toto the decision of the RTC 9 It
likewise denied with finality petitioner's motion for reconsideration in its Resolution
dated May 5, 1994. 10
On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THAT THE TRANSACTION BETWEEN THE
DEFENDANT DORONILLA AND RESPONDENT VIVES WAS
ONE OF SIMPLE LOAN AND NOT ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THAT PETITIONER'S BANK MANAGER, MR.
RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS
IN DEFRAUDING PETITIONER (Sic. Should be PRIVATE
RESPONDENT) AND AS A CONSEQUENCE,
THE
PETITIONER SHOULD BE HELD LIABLE UNDER THE
PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN
ADOPTING THE ENTIRE RECORDS OF THE REGIONAL
TRIAL COURT AND AFFIRMING THE JUDGMENT APPEALED
FROM, AS THE FINDINGS OF THE REGIONAL TRIAL COURT
WERE BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN
DECLARING THAT THE CITED DECISION IN SALUDARES VS.
Page 19 of 505

MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN

EMPLOYER FOR ACTS COMMITTED BY AN EMPLOYEE IS
APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN
UPHOLDING THE DECISION OF THE LOWER COURT THAT
HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY
LIABLE WITH THE OTHER DEFENDANTS FOR THE AMOUNT
OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT
DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00
FOR EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEY'S
FEES AND THE COSTS OF SUIT. 11
Private respondent filed his Comment on September 23, 1994. Petitioner filed its
Reply thereto on September 25, 1995. The Court then required private respondent to
submit a rejoinder to the reply. However, said rejoinder was filed only on April 21,
1997, due to petitioner's delay in furnishing private respondent with copy of the
reply12 and several substitutions of counsel on the part of private respondent. 13 On
January 17, 2001, the Court resolved to give due course to the petition and required
the parties to submit their respective memoranda. 14 Petitioner filed its memorandum
on April 16, 2001 while private respondent submitted his memorandum on March 22,
2001.
Petitioner contends that the transaction between private respondent and Doronilla is a
simple loan (mutuum) since all the elements of a mutuum are present: first, what was
delivered by private respondent to Doronilla was money, a consumable thing; and
second, the transaction was onerous as Doronilla was obliged to pay interest, as
evidenced by the check issued by Doronilla in the amount of P212,000.00, or P12,000
more than what private respondent deposited in Sterela's bank account. 15 Moreover,
the fact that private respondent sued his good friend Sanchez for his failure to recover
his money from Doronilla shows that the transaction was not merely gratuitous but
"had a business angle" to it. Hence, petitioner argues that it cannot be held liable for
the return of private respondent's P200,000.00 because it is not privy to the
transaction between the latter and Doronilla. 16
It argues further that petitioner's Assistant Manager, Mr. Rufo Atienza, could not be
faulted for allowing Doronilla to withdraw from the savings account of Sterela since the
latter was the sole proprietor of said company. Petitioner asserts that Doronilla's May
8, 1979 letter addressed to the bank, authorizing Mrs. Vives and Sanchez to open a

savings account for Sterela, did not contain any authorization for these two to
withdraw from said account. Hence, the authority to withdraw therefrom remained
exclusively with Doronilla, who was the sole proprietor of Sterela, and who alone had
legal title to the savings account. 17 Petitioner points out that no evidence other than
the testimonies of private respondent and Mrs. Vives was presented during trial to
prove that private respondent deposited his P200,000.00 in Sterela's account for
purposes of its incorporation. 18 Hence, petitioner should not be held liable for
allowing Doronilla to withdraw from Sterela's savings account.
Petitioner also asserts that the Court of Appeals erred in affirming the trial court's
decision since the findings of fact therein were not accord with the evidence presented
by petitioner during trial to prove that the transaction between private respondent and
Doronilla was a mutuum, and that it committed no wrong in allowing Doronilla to
withdraw from Sterela's savings account. 19
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is
not liable for the actual damages suffered by private respondent, and neither may it be
held liable for moral and exemplary damages as well as attorney's fees. 20
Private respondent, on the other hand, argues that the transaction between him and
Doronilla is not a mutuum but an accommodation, 21 since he did not actually part
with the ownership of his P200,000.00 and in fact asked his wife to deposit said
amount in the account of Sterela so that a certification can be issued to the effect that
Sterela had sufficient funds for purposes of its incorporation but at the same time, he
retained some degree of control over his money through his wife who was made a
signatory to the savings account and in whose possession the savings account
passbook was given. 22
He likewise asserts that the trial court did not err in finding that petitioner, Atienza's
employer, is liable for the return of his money. He insists that Atienza, petitioner's
assistant manager, connived with Doronilla in defrauding private respondent since it
was Atienza who facilitated the opening of Sterela's current account three days after
Mrs. Vives and Sanchez opened a savings account with petitioner for said company,
as well as the approval of the authority to debit Sterela's savings account to cover any
overdrawings in its current account. 23
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in a
petition for review filed with this Court. The Court has repeatedly held that it is not its
function to analyze and weigh all over again the evidence presented by the parties
during trial. 24 The Court's jurisdiction is in principle limited to reviewing errors of law
Page 20 of 505

that might have been committed by the Court of Appeals. 25 Moreover, factual
findings of courts, when adopted and confirmed by the Court of Appeals, are final and
conclusive on this Court unless these findings are not supported by the evidence on
record. 26 There is no showing of any misapprehension of facts on the part of the
Court of Appeals in the case at bar that would require this Court to review and
overturn the factual findings of that court, especially since the conclusions of fact of
the Court of Appeals and the trial court are not only consistent but are also amply
supported by the evidence on record.
No error was committed by
between private respondent
circumspect examination of
was a commodatum. Article
kinds of loans in this wise:

the Court of Appeals when it ruled that the transaction

and Doronilla was a commodatum and not a mutuum. A
the records reveals that the transaction between them
1933 of the Civil Code distinguishes between the two

By the contract of loan, one of the parties delivers to another,

either something not consumable so that the latter may use the
same for a certain time and return it, in which case the contract is
called a commodatum; or money or other consumable thing,
upon the condition that the same amount of the same kind and
quality shall be paid, in which case the contract is simply called a
loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing
loaned, while in simple loan, ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a
consumable thing, such as money, the contract would be a mutuum. However, there
are some instances where a commodatum may have for its object a consumable
thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the
purpose of the contract is not the consumption of the object, as
when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the
intention of the parties is to lend consumable goods and to have the very same goods
returned at the end of the period agreed upon, the loan is a commodatum and not
a mutuum.

The rule is that the intention of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract. 27 In case of doubt,
the contemporaneous and subsequent acts of the parties shall be considered in such
determination. 28
As correctly pointed out by both the Court of Appeals and the trial court, the evidence
shows that private respondent agreed to deposit his money in the savings account of
Sterela specifically for the purpose of making it appear "that said firm had sufficient
capitalization for incorporation, with the promise that the amount shall be returned
within thirty (30) days. 29 Private respondent merely "accommodated" Doronilla by
lending his money without consideration, as a favor to his good friend Sanchez. It was
however clear to the parties to the transaction that the money would not be removed
from Sterela's savings account and would be returned to private respondent after
thirty (30) days.
Doronilla's attempts to return to private respondent the amount of P200,000.00 which
the latter deposited in Sterela's account together with an additional P12,000.00,
allegedly representing interest on the mutuum, did not convert the transaction from
a commodatum into a mutuum because such was not the intent of the parties and
because the additional P12,000.00 corresponds to the fruits of the lending of the
P200,000.00. Article 1935 of the Civil Code expressly states that "[t]he bailee
incommodatum acquires the use of the thing loaned but not its fruits." Hence, it was
only proper for Doronilla to remit to private respondent the interest accruing to the
latter's money deposited with petitioner.
Neither does the Court agree with petitioner's contention that it is not solidarily liable
for the return of private respondent's money because it was not privy to the
transaction between Doronilla and private respondent. The nature of said transaction,
that is, whether it is a mutuum or a commodatum, has no bearing on the question of
petitioner's liability for the return of private respondent's money because the factual
circumstances of the case clearly show that petitioner, through its employee Mr.
Atienza, was partly responsible for the loss of private respondent's money and is
liable for its restitution.
Petitioner's rules for savings deposits written on the passbook it issued Mrs. Vives on
behalf of Sterela for Savings Account No. 10-1567 expressly states that
"2. Deposits and withdrawals must be made by the depositor
personally or upon his written authority duly authenticated,
and neither a deposit nor a withdrawal will be permitted except
Page 21 of 505

upon the production of the depositor savings bank book in which

will be entered by the Bank the amount deposited or
withdrawn." 30
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the
Assistant Branch Manager for the Buendia Branch of petitioner, to withdraw therefrom
even without presenting the passbook (which Atienza very well knew was in the
possession of Mrs. Vives), not just once, but several times. Both the Court of Appeals
and the trial court found that Atienza allowed said withdrawals because he was party
to Doronilla's "scheme" of defrauding private respondent:
xxx xxx xxx
But the scheme could not have been executed successfully
without the knowledge, help and cooperation of Rufo Atienza,
assistant manager and cashier of the Makati (Buendia) branch of
the defendant bank. Indeed, the evidence indicates that Atienza
had not only facilitated the commission of the fraud but he
likewise helped in devising the means by which it can be done in
such manner as to make it appear that the transaction was in
accordance with banking procedure.
To begin with, the deposit was made in defendant's Buendia
branch precisely because Atienza was a key officer therein. The
records show that plaintiff had suggested that the P200,000.00
be deposited in his bank, the Manila Banking Corporation, but
Doronilla and Dumagpi insisted that it must be in defendant's
branch Makati for "it will be easier for them to get a certification."
In fact before he was introduced to plaintiff, Doronilla had already
prepared a letter addressed to the Buendia branch manager
authorizing Angeles B. Sanchez and company to open a savings
account for Sterela in the amount of P200,000.00, as "per
coordination with Mr. Rufo Atienza, Assistant Manager of the
Bank . . ." (Exh. 1). This is a clear manifestation that the other
defendants had been in consultation with Atienza from the
inception of the scheme. Significantly, there were testimonies and
admission that Atienza is the brother-in-law of a certain Romeo
Mirasol, a friend and business associate of Doronilla.
Then there is the matter of the ownership of the fund. Because of
the "coordination" between Doronilla and Atienza, the latter knew

before hand that the money deposited did not belong to Doronilla
nor to Sterela. Aside from such foreknowledge, he was explicitly
told by Inocencia Vives that the money belonged to her and her
husband and the deposit was merely to accommodate Doronilla.
Atienza even declared that the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the
bank records disclose that the only ones empowered to withdraw
the same were Inocencia Vives and Angeles B. Sanchez. In the
signature card pertaining to this account (Exh. J), the authorized
signatories were Inocencia Vives &/or Angeles B. Sanchez.
Atienza stated that it is the usual banking procedure that
withdrawals of savings deposits could only be made by persons
whose authorized signatures are in the signature cards on file
with the bank. He, however, said that this procedure was not
followed here because Sterela was owned by Doronilla. He
explained that Doronilla had the full authority to withdraw by
virtue of such ownership. The Court is not inclined to agree with
Atienza. In the first place, he was all the time aware that the
money came from Vives and did not belong to Sterela.. He was
also told by Mrs. Vives that they were only accommodating
Doronilla so that a certification can be issued to the effect that
Sterela had a deposit of so much amount to be sued in the
incorporation of the firm. In the second place, the signature of
Doronilla was not authorized in so far as that account is
concerned inasmuch as he had not signed the signature card
provided by the bank whenever a deposit is opened. In the third
place, neither Mrs. Vives nor Sanchez had given Doronilla the
authority to withdraw.
Moreover, the transfer of fund was done without the passbook
having been presented. It is an accepted practice that whenever
a withdrawal is made in a savings deposit, the bank requires the
presentation of the passbook. In this case, such recognized
practice was dispensed with. The transfer from the savings
account to the current account was without the submission of the
passbook which Atienza had given to Mrs. Vives. Instead, it was
made to appear in a certification signed by Estrella Dumagpi that
a duplicate passbook was issued to Sterela because the original
passbook had been surrendered to the Makati Branch in view of
Page 22 of 505

a loan accommodation assigning the savings account (Exh. C).

Atienza, who undoubtedly had a hand in the execution of this
certification, was aware that the contents of the same are not
true. He knew that the passbook was in the hands of Mrs. Vives
for he was the one who gave it to her. Besides, as assistant
manager of the branch and the bank official servicing the savings
and current accounts in question, he also was aware that the
original passbook was never surrendered. He was also cognizant
that Estrella Dumagpi was not among those authorized to
withdraw so her certification had no effect whatsoever.
The circumstance surrounding the opening of the current account
also demonstrate that Atienza's active participation in the
perpetration of the fraud and deception that caused the loss. The
records indicate that this account was opened three days later
after the P200,000.00 was deposited. In spite of his disclaimer,
the Court believes that Atienza was mindful and posted regarding
the opening of the current account considering that Doronilla was
all the while in "coordination" with him. That it was he who
facilitated the approval of the authority to debit the savings
account to cover any overdrawings in the current account (Exh. 2)
is not hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to
the loss subject of this case . . . . 31
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily
liable for damages caused by their employees acting within the scope of their
assigned tasks. To hold the employer liable under this provision, it must be shown that
an employer-employee relationship exists, and that the employee was acting within
the scope of his assigned task when the act complained of was committed. 32 Case
law in the United States of America has it that a corporation that entrusts a general
duty to its employee is responsible to the injured party for damages flowing from the
employee's wrongful act done in the course of his general authority, even though in
doing such act, the employee may have failed in its duty to the employer and
disobeyed the latter's instructions. 33

was deposited, and in transferring the money withdrawn to Sterela's Current Account
with petitioner. Atienza's acts of helping Doronilla, a customer of the petitioner, were
obviously done in furtherance of petitioner's interests 34 even though in the process,
Atienza violated some of petitioner's rules such as those stipulated in its savings
account passbook. 35 It was established that the transfer of funds from Sterela's
savings account to its current account could not have been accomplished by Doronilla
without the invaluable assistance of Atienza, and that it was their connivance which
was the cause of private respondent's loss.

The foregoing shows that the Court of Appeals correctly held that under Article 2180
of the Civil Code, petitioner is liable for private respondent's loss and is solidarily
liable with Doronilla and Dumagpi for the return of the P200,000.00 since it is clear
that petitioner failed to prove that it exercised due diligence to prevent the
unauthorized withdrawals from Sterela's savings account, and that it was not negligent
in the selection and supervision of Atienza. Accordingly, no error was committed by
the appellate court in the award of actual, moral and exemplary damages, attorney's
fees and costs of suit to private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution
of the Court of Appeals are AFFIRMED.
SO ORDERED.
Bellosillo, Mendoza, Quisumbing and Austria-Martinez, JJ., concur.
||| (Producers Bank of the Phil. v. Court of Appeals, G.R. No. 115324, [February 19,
2003], 445 PHIL 702-717)

There is no dispute that Atienza was an employee of petitioner. Furthermore,

petitioner did not deny that Atienza was acting within the scope of his authority as
Assistant Branch Manager when he assisted Doronilla in withdrawing funds from
Sterela's Savings Account No. 10-1567, in which account private respondent's money
Page 23 of 505

FIRST DIVISION
[G.R. No. 26085. August 12, 1927.]
SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffsappellants, vs. BENITO GONZALEZ SY CHIAM, defendantappellee.

Araneta & Zaragoza for appellants.

Eusebio Orense for appellee.

DECISION

JOHNSON, J p:
PRINCIPAL QUESTIONS PRESENTED BY THE APPEAL
The principal questions presented by this appeal are:
(a) Is the contract in question a pacto de retro or a mortgage ?
(b) Under a pacto de retro, when the vendor becomes a tenant of the
purchaser and agrees to pay a certain amount per month as rent, may such rent
render such a contract usurious when the amount paid as rent, computed upon
the purchase price, amounts to a higher rate of interest upon said amount than
that allowed by law?
(c) May the contract in the present case be modified by parol evidence?
ANTECEDENT FACTS

Sometime prior to the 28th day of November, 1922, the appellants

purchased of the Luzon Rice Mills, Inc., a piece or parcel of land with
the camarin located thereon, situated in the municipality of Tarlac of the Province
of Tarlac for the price of P25,000, promising to pay therefor in three installments.
The first installment of P2,000 was due on or before the 2d day of May, 1921; the
second installment of P8,000 was due on or before the 31st day of May, 1921;
the balance of P15,000 at 12 per cent interest was due and payable on or about
the 30th day of November, 1922. One of the conditions of that contract of
purchase was that on failure of the purchasers (plaintiffs and appellants) to pay
the balance of said purchase price or any of the installments on the date agreed
upon, the property bought would revert to the original owner.
The payments due on the 2d and 31st of May, 1921, amounting to
P10,000 were paid so far as the record shows upon the due dates. The balance
of P15,000 due on said contract of purchase was paid on or about the 1st day of
December, 1922, in the manner which will be explained below. On the date when
the balance of P15,000 with interest was paid, the vendor of said property had
issued to the purchasers transfer certificate of title to said property, No. 528. Said
transfer certificate of title (No. 528) was transfer certificate of title from No. 40,
which shows that said land was originally registered in the name of the vendor on
the 7th day of November, 1913.
PRESENT FACTS
On the 7th day of November, 1922, the representative of the vendor of
the property in question wrote a letter to the appellant Potenciana Manio (Exhibit
A, p. 50), notifying the latter that if the balance of said indebtedness was not paid,
an action would be brought for the purpose of recovering the property, together
with damages for non compliance with the condition of the contract of purchase.
The pertinent parts of said letter read as follows:
"Sirvase notar que de no estar liquidada esta cuenta el
dia 30 del corriente, procederemos judicialmente contra Vd. para
reclamar la devolucion deI camarin y los danos y perjuicios
ocasionados a la compania por su incumplimiento al contrato.
"Somos de Vd. atentos y S. S.
"SMITH, BELL & CO., LTD.
"BY (Sgd.) F. I. HIGHAM
"Treasurer.
"General Managers
Page 24 of 505

"LUZON RICE MILLS INC. "

According to Exhibits B and D, which represent the account rendered by
the vendor, there was due and payable upon said contract of purchase on the
30th day of November, 1922, the sum P16,965.09. Upon receiving the letter of
the vendor of said property of November 7, 1922, the purchasers, the appellants
herein, realizing that they would be unable to pay the balance due, began to
make an effort to borrow money with which to pay the balance of their
indebtedness on the purchase price of the property involved. Finally an
application was made to the defendant for a loan for the purpose of satisfying
their indebtedness to the vendor of said property. After some negotiations the
defendant agreed to loan the plaintiffs the sum of P17,500 upon condition that the
plaintiffs execute and deliver to him apacto de retro of said property.
In accordance with that agreement the defendant paid to the plaintiffs by
means of a check the sum of P16,965.09. The defendant, in addition to said
amount paid by check, delivered to the plaintiffs the sum of P354.91 together with
the sum of P180 which the plaintiffs paid to the attorneys for drafting said contract
ofpacto de retro, making a total paid by the defendant to the plaintiffs and for the
plaintiffs of P17,500 upon the execution and delivery of said contract. Said
contract was dated the 28th day of November, 1922, and is in the words and
figures following:
"Sepan todos por la presente:
"Que
nosotros,
los
conyuges Severino
Tolentino y Potenciana Manio, ambos mayores de edad,
residentes en el Municipio de Calumpit, Provincia de Bulacan,
propietarios y transeuntes en esta Ciudad de Manila, de una
parte, y de otra, Benito Gonzalez Sy Chiam, mayor de edad,
casado con Maria Santiago, comerciante y vecinos de esta
Ciudad de Manila.
"MANIFESTAMOS Y HACEMOS CONSTAR:
"Primero. Que nosotros, Severino Tolentino y
Potenciana Manio, por y en consideracion a la cantidad de
diecisiete mil quinientos pesos (P17,500) moneda filipina, que en
este acto hemos recibido a nuestra entera satisfaccion de Don
Benito Gonzalez Sy Chiam, cedemos, vendemos y traspasamos
a favor de dicho Don Benito Gonzalez Sy Chiam, sus herederos
y causahabientes, una finca que, segun el Certificado de
Transferencia de Titulo No. 40 expedido por el Registrador de

Titulos de la Provincia de Tarlac a favor de 'Luzon Rice Mills

Company Limited' que al incorporarse se denomino y se
denomina 'Luzon Rice Mills Inc.,' y que esta corporacion nos ha
transferido en venta absoluta, se describe como sigue:

"Un terreno (lote No. 1) con las mejoras existentes en el

mismo, situado en el Municipio de Tarlac. Linda por el O. y N.
con propiedad de Manuel Urquico; por el E. con propiedad de la
Manila Railroad Co.; y por el S. con un camino. Partiendo de un
punto marcado 1 en el plano, cuyo punto se halla al N. 41 gds.
17' E. 859.42 m. del mojon de localizacion No. 2 de la Oficina de
Terrenos en Tarlac; y desde dicho punto 1 N. 81 gds. 31' O., 77
m. al punto 2; desde.este punto N. 4 gds. 22' E.; 54.70 m. al
punto 3; desde este punto S. 86 gds. 17' E.; 69.25 m. al punto 4;
desde este punto S. 2 gds. 42' E., 61.48 m. al punto de partida;
midiendo una extension superficial de cuatro mil doscientos diez
y seis metros cuadrados (4,216) mas o menos. Todos los puntos
nombrados se hallan marcados en el plano y sobre el terreno los
puntos 1 y 2 estan determinados por mojones de P. L. S. de 20 x
20 x 70 centimetros y los puntos 3 y 4 por mojones del P. L. S. B.
L.; la orientacion seguida es la verdadera, siendo la declinacion
magnetica de 0 gds. 45' E. y la fecha de la medicion, 1. de
febrero de 1913.
"Segundo. Que es condicion de esta venta la de que si
en el plazo de cinco (5) anos contados desde el dia l.o de
diciembre de 1922, devolvemos al expresado Don Benito
Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos
pesos (P17,500) queda obligado dicho Sr. Benito Gonzalez Sy
Chiam a retrovendernos la finca arriba descrita; pero si
transcurre dicho plazo de cinco aos sin ejercitar el derecho de
retracto que nos hemos reservado, entonces quedara esta venta
absoluta e irrevocable.
"Tercero. Que durante el expresado termino del retracto
tendremos en arrendamiento la finca arriba descrita, sujeto a
condiciones siguientes:
"(a) El alquiler que nos obligamos a pagar por
mensualidades vencidas a Don Benito Gonzalez Sy Chiam y en
Page 25 of 505

su domicilio, sera de trescientos setenta y cinco pesos (P375)

moneda filipina, cada mes.
"(b) El amillaramiento de la finca arrendada sera por
cuenta de dicho Don Benito Gonzalez Sy Chiam, asi como
tambien la prima del seguro contra incendios, si le conviniera al
referido Sr. Benito Gonzalez Sy Chiam asegurar dicha finca.
"(c) La falta de pago del alquiler aqui estipulado por dos
meses consecutivos dara lugar a la terminacion de este
arrendamiento y a la perdida del derecho de retracto que nos
hemos reservado, como si naturalmente hubiera expirado el
termino para ello, pudiendo en su virtud dicho Sr. Gonzalez Sy
Chiam tomar posesion de la finca y desahuciarnos de la misma.
"Cuarto. Que yo, Benito Gonzalez Sy Chiam, a mi vez
otorgo que acepto esta escritura en los precisos terminos en que
la dejan otorgada los conyuges Severino Tolentino y Potenciana
Manio.
"En testimonio de todo lo cual, firmamos la presente de
nuestra mano en Manila, por cuadruplicado en Manila, hoy a 28
de noviemhre 1922
(Fdo.) "SEVERINO TOLENTINO
(Fda.) "POTENCIANA MANIO
(Fdo.) "BENITO GONZALEZ SY CHIAM
"Firmado en presencia de:
(Fdos.) "MOISES M. BUHAIN
"B. S. BANAAG
An examination of said contract of sale with to the first question above,
shows clearly that it is a pacto de retro and not a mortgage. There is no
pretension on the part of the appellant that said contract, standing alone, is a
mortgage. The pertinent language of the contract is:
"Segundo. Que es condicion de esta venta la de que si
en el plazo de cinco (5) aiios contados desde el dia l.o de
diciembre de 1922, devolvemos al expresado Don Benito
Gonzalez Sy Chiam el referido precio de diecisiete mil quinientos
pesos (P17,500) queda obligado dicho Sr. Benito Gonzalez Sy
Chiam a retrovendernos la finca arriba descrita; pero si

transcurre dicho plazo de cinco (5) anos sin ejercitar el derecho

de retracto que nos hemos reservado, entonces quedara esta
venta absoluta e irrevocable."
Language cannot be clearer. The purpose of the contract is expressed
clearly in said quotation that there can certainly be no doubt as to the purpose of
the plaintiff to sell the property in question, reserving the right only to repurchase
the same. The intention to sell with the right to repurchase cannot be more clearly
expressed.
It will be noted from a reading of said sale of pacto de retro, that the
vendor, recognizing the absolute sale of the property, entered into a contract with
the purchaser by virtue of which she became the "tenant" of the purchaser. That
contract of rent appears in said quoted document above as follows:
"Tercero. Que durante el expresado termino del retracto
tendremos en arrendamiento la finca arriba descrita, sujeto a
condiciones siguientes:
"(a) El alquiler que nos obligamos a pagar por
mensualidades vencidas a Don Benito Gonzalez Sy Chiam y en
su domicilio, sera de trescientos setenta y cinco pesos (P375)
moneda filipina, cada mes.
"(b) El amillaramiento de la finca arrendada sera por
cuenta de dicho Don Benito Gonzalez Sy Chiam, asi como
tambien la prima del seguro contra incendios, si le conviniera al
referido ISr. Benito Gonzalez Sy Chiam asegurar dicha finca."
From the foregoing, we are driven to the following conclusions: First, that
the contract of pacto de retro is an absolute sale of the property with the right to
repurchase and not a mortgage; and, second, that by virtue of the said contract
the vendor became the tenant of the purchaser, under the conditions mentioned
in paragraph 3 of said contract quoted above.
It has been the uniform theory of this court, due to the severity of a
contract of pacto de retro, to declare the same to be a mortgage and not a sale
whenever the interpretation of such a contract justifies that conclusion. There
must be something, however, in the language of the contract or in the conduct of
the parties which shows clearly and beyond doubt that they intended the contract
to be a "mortgage" and not a pacto de retro. (International Banking Corporation
vs. Martinez, 10 Phil. 252; Padilla vs. Linsangan, 19 Phil., 65; Cumagun vs.
Allingay, 19 Phil., 415; Olino vs. Medina, 13 Phil., 379; Manalo vs. Gueco, 42
Phil., 925; Velazquez vs. Teodoro, 46 Phil., 757; Villa vs. Santiago, 38 Phil., 157.)
Page 26 of 505

We are not unmindful of the fact that sales with pacto de retro are not
favored, and that the court will not construe an instrument to be one of sale
with pacto de retro, with the stringent and onerous effect which follows, unless
the terms of the document and the surrounding circumstances require it. (Manalo
vs. Gueco,supra.)
While it is a general rule that parol evidence is not admissible for the
purpose of varying the terms of a contract, but when an issue is squarely
presented that a contract does not express the intention of the parties, courts will,
when a proper foundation is laid therefor, hear evidence for the purpose of
ascertaining the true intention of the parties. (Manalo vs. Gueco, supra.)
In the present case the plaintiffs allege in their complaint that the
contract in, question is a pacto de retro. They admit that they signed it. They
admit that they sold the property in question with the right to repurchase it. The
terms of the contract quoted above clearly show that the transfer of the land in
question by the plaintiffs to the defendant was a "sale" with pacto de retro, and
the plaintiffs have shown no circumstance whatever which would justify us in
construing said contract to be a mere "loan" with guaranty. In every case in which
this court has construed a contract to be a mortgage or a loan instead of a sale
with pacto de retro, it has done so, either because the terms of such contract are
ambiguous or because the circumstances surrounding the execution or the
performance of the contract were incompatible or inconsistent with the theory that
said contract was one of purchase and sale. (Olino vs. Medina, supra; Padilla vs.
Linsangan, supra; Manlagnit vs. Dy Puico, 34 Phil., 325; Rodriguez vs.
Pamintuan and De Jesus, 37 Phil., 876.)
In the case of Padilla vs. Linsangan the term employed in the contract to
indicate the nature of the conveyance of the land was "pledged" instead of "sold."
In the case of Manlagnit vs. Dy Puico, while the vendor used the terms "sale and
transfer with the right to repurchase," yet in said contract he described himself as
a "debtor," the purchaser as a "creditor" and the contract as a "mortgage." In the
case of Rodriguez vs. Pamintuan and De Jesus the person who executed the
instrument, purporting on its face to be a deed of sale of certain parcels of land,
had merely acted under a power of attorney from the owner of said land,
"authorizing him to 'borrow' money in such amount and upon such terms and
conditions as he might deem proper, and to secure payment of the loan by a
mortgage." In the case of Villa vs. Santiago (38 Phil., 157), although a contract
purporting to be a deed of sale was executed, the supposed vendor remained in
possession of the land and invested the money he had obtained from the
supposed vendee in making improvements thereon, which fact justified the court

in holding that the transaction was a mere loan and not a sale. In the case of
Cuyugan vs. Santos (39 Phil., 970), the purchaser accepted partial payments
from the vendor, and such acceptance of partial payments "is absolutely
incompatible with the idea of irrevocability of the title of ownership of the
purchaser at the expiration of the term stipulated in the original contract for the
exercise of the right of repurchase."
Referring again to the right of the parties to vary the terms of a written
contract, we quote from the dissenting opinion of Chief Justice Cayetano S.
Arellano in the case of Government of the Philippine Islands vs. Philippine Sugar
Estates Development Co. (30 Phil., 27, 38), which case was appealed to the
Supreme Court of the United States and the contention of the Chief Justice in his
dissenting opinion was affirmed and the decision of the Supreme Court of the
Philippine Islands was reversed. (See decision of the Supreme Court of the
United States, June 3, 1918.) 1 The Chief Justice said in discussing that
question:

"According to article 1282 of the Civil Code, in order to

judge of the intention of the contracting parties, consideration
must chiefly be paid to those acts executed by said parties which
are contemporary with and subsequent to the contract. And
according to article 1283, however general the terms of a contract
may be, they must not be held to include things and cases
different from those with regard to which the interested parties
agreed to contract." The Supreme Court of the Philippine Islands
held that parol evidence was admissible in that case to vary the
terms of the contract between the Government of the Philippine
Islands and the Philippine Sugar Estates Development Co. In the
course of the opinion of the Supreme Court of the United States
Mr. Justice Brandeis, speaking for the court, said:
"It is well settled that courts of equity will reform a written
contract where, owing to mutual mistake, the language used
therein did not fully or accurately express the agreement and
intention of the parties. The fact that interpretation or construction
of a contract presents a question of law and that, therefore, the
mistake was one of law is not a bar to granting relief. . . . This
court is always disposed to accept the construction which the
highest court of a territory or possession has placed upon a local
statute. But that disposition may not be yielded to where the
Page 27 of 505

lower court has clearly erred. Here the construction adopted was
rested upon a clearly erroneous assumption as to an established
rule of equity. . . . The burden of proof resting upon the appellant
cannot be satisfied by mere preponderance of the evidence. It is
settled that relief by way of reformation will not be granted unless
the proof of mutual mistake be 'of the clearest and most
satisfactory character."'
The evidence introduced by the appellant in the present case does not
meet with that stringent requirement. There is not a word, a phrase, a sentence
or a paragraph in the entire record, which justifies this court in holding that the
said contract of pacto de retro is a mortgage and not a sale with the right to
repurchase. Article 1281 of the Civil Code provides: "If the terms of a contract are
clear and leave no doubt as to the intention of the contracting parties, the literal
sense of its stipulations shall be followed." Article 1282 provides: "In order to
judge as to the intention of the contracting parties, attention must be paid
principally to their conduct at the time of making the contract and subsequently
thereto."
We cannot conclude this branch of our discussion of the question
involved, without quoting from that very well reasoned decision of the late Chief
Justice Arellano, one of the greatest jurists of his time. He said, in discussing the
question whether or not the contract, in the case of Lichauco vs. Berenguer (20
Phil., 12), was a pacto de retro or a mortgage:
"The public instrument, Exhibit C, in part reads as
follows: 'Don Macario Berenguer declares and states that he is
the proprietor in fee simple of two parcels of fallow
unappropriated crown land situated within the district of his
pueblo. The first has an area of 73 quiones, 8 balitas, and
8 loanes, located in the sitio of Batasan, and its boundaries are,
etc., etc. The second is in the sitio of Panantaglay, barrio of
Calumpang, has an area of 73 hectares, 22 ares, and 6 centares,
and is bounded on the north, etc., etc.'
"In the executory part of the said instrument, it is stated:
" 'That under condition of right to repurchase (pacto de
retro) he sells the said properties to the aforementioned Dona
Cornelia Laochangco for P4,000 and upon the following
conditions: First, the sale stipulated shall be for the period of two
years, counting from this date, within which time the deponent

shall be entitled to repurchase the land sold upon payment of its

price; second, the lands sold shall, during the term of the present
contract, be held in lease by the undersigned who shall pay, as
rental therefor, the sum of 400 pesos per annum, or the
equivalent in sugar at the option of the vendor; third, all the fruits
of the said lands shall be deposited in the sugar depository of the
vendee, situated in the district of Quiapo of this city, and the value
of which shall be applied on account of the price of this sale;
fourth, the deponent acknowledges that he has received from the
vendor the purchase price of P4,000 already paid, and in legal
tender currency of this country . . .; fifth, all the taxes which may
be assessed against the lands surveyed by competent authority,
shall be payable by and constitute a charge against the vendor;
sixth, if, through any unusual event, such as flood, tempest, etc.,
the properties hereinbefore enumerated should be destroyed,
wholly or in part, it shall be incumbent upon the vendor to repair
the damage thereto at his own expense and to put them into a
good state of cultivation, and should he fail to do so he binds
himself to give to the vendee other lands of the same area,
quality and value.'
xxx xxx xxx
"The opponent maintained, and his theory was accepted
by the trial court, that Berenguer's contract with Laochangco was
not one of sale with right of repurchase, but merely one of loan
secured by those properties, and, consequently, that the
ownership of the lands in question could not have been conveyed
to Laochangco, inasmuch as it continued to be held by
Berenguer, as well as their possession, which he had not ceased
to enjoy.
"Such a theory is, as argued by the appellants,
erroneous. The instrument executed by Macario Berenguer, the
text of which has been transcribed in this decision, is very clear.
Berenguer's heirs may not go counter to the literal tenor of the
obligation, the exact expression of the consent of the contracting
parties contained in the instrument, Exhibit C. Not because the
lands may have continued in possession of the vendor, not
because the latter may have assumed the payment of the taxes
on such properties, nor yet because the same party may have
Page 28 of 505

bound himself to substitute by another any one of the properties

which might be destroyed, does the contract cease to be what it
is, as set forth in detail in the public instrument. The vendor
continued in the possession of the lands, not at the owner thereof
as before their sale, but as the lessee which he became after its
consummation, by virtue of a contract executed in his favor by the
vendee in the deed itself, Exhibit C. Right of ownership is not
implied by the circumstance of the lessee's assuming the
responsibility of the payment of the taxes on the property leased,
for their payment is not peculiarly incumbent upon the owner, nor
is such right implied by the obligation to substitute the thing sold
for another while in his possession under lease, since that
obligation came from him and he continues under another
character in its possession a reason why he guarantees its
integrity and obligates himself to return the thing even in a case
of force majeure. Such liability, as a general rule, is foreign to
contracts of lease and, if required, is exorbitant, but possible and
lawful, if voluntarily agreed to, and such agreement does not on
this account involve any sign of ownership, nor other meaning
than the will to impose upon oneself scrupulous diligence in the
care of a thing belonging to another.
"The purchase and sale, once consummated, is a
contract which by its nature transfers the ownership and other
rights in the thing sold. A pacto de retro, or sale with right to
repurchase, is nothing but a personal right stipulated between the
vendee and the vendor, to the end that the latter may again
acquire the ownership of the thing alienated.
"'It is true, very true indeed, that the sale with right of
repurchase is employed as a method of loan; it is like wise true
that in practice many cases occur where the consummation of
a pacto de retro sale means the financial ruin of a person; it is
also, unquestionable that in pacto de retro sales very important
interests often intervene, in the form of the price of the lease of
the thing sold, which is stipulated as an additional covenant.'
(Manresa, Civil Code, p. 274.)
"But in the present case, unlike others heard by this
court, there is no proof that the sale with right of repurchase,

made by Berenguer in favor of Laochangco is rather a mortgage

to secure a loan."
We come now to a discussion of the second question presented above,
and that is, stating the same in another form: May a tenant charge his landlord
with a violation of the Usury Law upon the ground that the amount of rent he
pays, based upon the real value of the property, amounts to a usurious rate of
interest? When the vendor of property under a pacto de retro rents the property
and agrees to pay a rental value for the property during the period of his right to
repurchase, he thereby becomes a "tenant" and in all respects stands in the
same relation with the purchaser as a tenant under any other contract of lease.
The appellant contends that the rental price paid during the period of the
existence of the right to repurchase, or the sum of P375 per month, based upon
the value of the property, amounted to usury. Usury, generally speaking, may be
defined as contracting for or receiving something in excess of the amount allowed
by law for the loan or forbearance of money the taking of more interest for the
use of money than the law allows. It seems that the taking of interest for the loan
of money, at least the taking of excessive interest has been regarded with
abhorrence from the earliest times. (Dunham vs. Gould, 16 Johnson [N. Y.], 367.)
During the middle ages the people of England, and especially the English
Church, entertained' the opinion, then current in Europe, that the taking of any
interest for the loan of money was a detestable vice, hateful to man and contrary
to the laws of God. (3 Coke's Institute, 150; Tayler on Usury, 44.)

Chancellor Kent, in the case of Dunham vs. Gould, supra, said: "If we
look back upon history, we shall find that there is scarcely any people, ancient or
modern, that have not had usury laws. . . . The Romans, through the greater part
of their history, had the deepest abhorrence of usury. . . . It will be deemed a little
singular, that the same voice against usury should have been raised in the laws
of China, in the Hindu institutes of Menu, in the Koran of Mahomet, and perhaps,
we may say, in the laws of all nations that we know of, whether Greek or
Barbarian."
The collection of a rate of interest higher than that allowed by law is
condemned by the Philippine Legislature (Acts Nos. 2655, 2662 and 2992). But is
it unlawful for the owner of a property to enter into a contract with the tenant for
the payment of a specific amount of rent for the use and occupation of said
property, even though the amount paid as "rent," based upon the value of the
property, might exceed the rate of interest allowed by law? That question has
Page 29 of 505

never been decided in this jurisdiction. It is one of first impression. No cases have
been found in this jurisdiction answering that question. Act No. 2655 is "An Act
fixing rates of interest upon 'loans' and declaring the effect of receiving or taking
usurious rates."
It will be noted that said statute imposes a penalty upon a "loan" or
forbearance of any money, goods, chattels or credits, etc. The central idea of said
statute is to prohibit a rate of interest on "loans." A contract of "loan" is a very
different contract from that of "rent". A "loan," as that term is used in the statute,
signifies the giving of a sum of money, goods or credits to another, with a promise
to repay, but not a promise to return the same thing. To "loan," in general
parlance, is to deliver to another for temporary use, on condition that the thing or
its equivalent be returned; or to deliver for temporary use on condition that an
equivalent in kind shall be returned with a compensation for its use. The word
"loan," however, as used in the statute, has a technical meaning. It never means
the return of the same thing. It means the return of an equivalent only, but never
the same thing loaned. A "loan" has been properly defined as an advancement of
money, goods or credits upon a contract or stipulation to repay, not to return, the
thing loaned at some future day in accordance with the terms of the contract.
Under the contract of "loan," as used in said statute, the moment the contract is
completed the money, goods or chattels given cease to be the property of the
former owner and becomes the property of the obligor to be used according to
his own will, unless the contract itself expressly provides for a special or specific
use of the same. At all events, the money, goods or chattels, the moment the
contract is executed, cease to be the property of the former owner and becomes
the absolute property of the obligor.
A contract of "loan" differs materially from a contract of "rent." ln a
contract of "rent" the owner of the property does not lose his ownership. He
simply loses his control over the property rented during the period of the contract.
In a contract of "loan" the thing loaned becomes the property of the obligor. In a
contract of "rent" the thing still remains the property of the lessor. He simply loses
control of the same in a limited way during the period of the contract of "rent" or
lease. In a contract of "rent" the relation between the contractors is that of
landlord and tenant. In a contract of "loan" of money, goods, chattels or credits,
the relation between the parties is that of obligor and obligee. "Rent" may be
defined as the compensation either in money, provisions, chattels, or labor,
received by the owner of the soil from the occupant thereof. It is defined as the
return or compensation for the possession of some corporeal inheritance, and is
a profit issuing out of lands or tenements, in return for their use. It is that, which is
to be paid for the use of land, whether in money, labor or other thing agreed

upon. A contract of "rent" is a contract by which one of the parties delivers to the
other some nonconsumable thing, in order that the latter may use it during a
certain period and return it to the former; whereas a contract of "loan," as that
word is used in the statute, signifies the delivery of money or other consumable
things upon condition of returning an equivalent amount of the same kind or
quantity, in which cases it is called merely a "loan." In the case of a contract of
"rent," under the civil law, it is called a "commodatum."
From the foregoing it will be seen that there is a wide distinction
between a contract of "loan," as that word is used in the statute, and a contract of
"rent" even though those words are used in ordinary parlance as interchangeable
terms.
The value of money, goods or credits is easily ascertained while the
amount of rent to be paid for the use and occupation of the property may depend
upon a thousand different conditions; as for example, farm lands of exactly equal
productive capacity and of the same physical value may have a different rental
value, depending upon location, prices of commodities, proximity to the market,
etc. Houses may have a different rental value due to location, conditions of
business, general prosperity or depression, adaptability to particular purposes,
even though they have exactly the same original cost. A store on the Escolta, in
the center of business, constructed exactly like a store located outside of the
business center, will have a much higher rental value than the other. Two places
of business located in different sections of the city may be constructed exactly on
the same architectural plan and yet one, due to particular location or adaptability
to a particular business which the lessor desires to conduct, may have a very
much higher rental value than one not so located and not so well adapted to the
particular business. A very cheap building on the carnival ground may rent for
more money, due to the particular circumstances and surroundings, than a much
more valuable property located elsewhere. It will thus be seen that the rent to be
paid for the use and occupation of property is not necessarily fixed upon the
value of the property. The amount of rent is fixed, based upon a thousand
different conditions and may or may not have any direct reference to the value of
the property rented. To hold that "usury" can be based upon the comparative
actual rental value and the actual value of the property, is to subject every
landlord to an annoyance not contemplated by the law, and would create a very
great disturbance in every business or rural community. We cannot bring
ourselves to believe that the Legislature contemplated any such disturbance in
the equilibrium of the business of the country.

Page 30 of 505

In the present case the property in question was sold. It was an absolute
sale with the right only to repurchase. During the period of redemption the
purchaser was the absolute owner of the property. During the period of
redemption the vendor was not the owner of the property. During the period of
redemption the vendor was a tenant of the purchaser. During the period of
redemption the relation which existed between the vendor and the vendee was
that of landlord and tenant. That relation can only be terminated by a repurchase
of the property by the vendor in accordance with the terms of the said contract.
The contract was one of rent. The contract was not a loan, as that word is used in
Act No. 2655.
As obnoxious as contracts of pacto de retro are, yet nevertheless, the
courts have no right to make contracts for parties. They made their own contract
in the present case. There is not a word, a phrase, a sentence or para- graph,
which in the slightest way indicates that the parties to the contract in question did
not intend to sell the property in question absolutely, simply with the right to
repurchase. People who make their own beds must lie thereon.
What has been said above with reference to the right to modify contracts
by parol evidence, sufficiently answers the third question presented above. The
language of the contract is explicit, clear, unambiguous and beyond question. It
expresses the exact intention of the parties at the time it was made. There is not
a word, a phrase, a sentence or paragraph found in said contract which needs
explanation. The parties thereto entered into said contract with the full
understanding of its terms and should not now be permitted to change or modify
it by parol evidence.
With reference to the improvements made upon said property by the
plaintiffs during the life of the contract, Exhibit C, there is hereby reserved to the
plaintiffs the right to exercise in a separate action the right guaranteed to them
under article 361 of the Civil Code.
For all of the foregoing reasons, we are fully persuaded from the facts of
the record, in relation with the law applicable thereto, that the judgment appealed
from should be and is hereby affirmed, with costs. So ordered.
Avancea, C. J., Street, Villamor, Romualdez, and Villa-Real.
JJ.. concur.
||| (Tolentino v. Sy Chiam, G.R. No. 26085, [August 12, 1927], 50 PHIL 558-579)

THIRD DIVISION

[G.R. No. 114398. October 24, 1997.]

CARMEN LIWANAG, petitioner, vs. THE HON. COURT OF
APPEALS and THE PEOPLE OF THE PHILIPPINES,
represented by the Solicitor General,respondents.

Efren L. Liwanag for petitioner.

The Solicitor General for respondents.

SYNOPSIS
Petitioner was charged with the crime of Estafa before the Regional Trial Court of
Quezon City for defrauding one Isidora Rosales in the amount of P536,650.00. It
appears therein that petitioner received in trust from the private complainant the
aforesaid cash money with the express obligation involving the duty to act as
complainant's agent in purchasing local cigarettes, to resell them to several stores, to
give her commission corresponding to 40% of the profits and to return the aforesaid
amount of private complainant. Unfortunately, petitioner was remiss in her obligation.
After trial on the merits, the trial court rendered a decision finding herein petitioner
guilty as charged. On appeal to the Court of Appeals, said decision was affirmed with
modification by herein public respondent. Petitioner then filed her appeal before the
Court alleging that the appellate court erred in affirming the conviction of petitioner for
the crime of estafa, when clearly the contract that existed between them was either
that of a simple loan or that of a partnership or joint venture, hence purely civil in
nature and not criminal.
The Supreme Court ruled that the Court of Appeals acted correctly in affirming the
appealed decision. It is evident that herein petitioner could not dispose of the money
as she pleased because it was only delivered to her for a single purpose, namely, to
purchase cigarettes and if it was not possible, to return the money to private
complainant. Since there was no transfer of ownership of the money delivered,
petitioner is liable for conversion under Article 315, par. 1(b) of the Revised Penal
Code. Accordingly, the appealed decision is affirmed.

DECISION
Page 31 of 505

ROMERO, J p:
Petitioner was charged with the crime of estafa before the Regional Trial Court (RTC),
Branch 93, Quezon City, in an information which reads as follows:
"That on or between the month of May 19, 1988 and August,
1988 in Quezon City, Philippines and within the jurisdiction of this
Honorable Court, the said accused, with intent of gain, with
unfaithfulness, and abuse of confidence, did then and there,
willfully, unlawfully and feloniously defraud one ISIDORA
ROSALES, in the following manner, to wit: on the date and in the
place aforementioned, said accused received in trust from the
offended party cash money amounting to P536,650.00, Philippine
Currency, with the express obligation involving the duty to act as
complainant's agent in purchasing local cigarettes (Philip Morris
and Marlboro cigarettes), to resell them to several stores, to give
her commission corresponding to 40% of the profits; and to return
the aforesaid amount of offended party, but said accused, far
from complying her aforesaid obligation, and once in possession
thereof, misapplied, misappropriated and converted the same to
her personal use and benefit, despite repeated demands made
upon her, accused failed and refused and still fails and refuses to
deliver and/or return the same to the damage and prejudice of the
said ISIDORA ROSALES, in the aforementioned amount and in
such other amount as may be awarded under the provision of the
Civil Code.
CONTRARY TO LAW."
The antecedent facts are as follows:
Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went to the
house of complainant Isidora Rosales (Rosales) and asked her to join them in the
business of buying and selling cigarettes. Convinced of the feasibility of the venture,
Rosales readily agreed. Under their agreement, Rosales would give the money
needed to buy the cigarettes while Liwanag and Tabligan would act as her agents,
with a corresponding 40% commission to her if the goods are sold; otherwise the
money would be returned to Rosales. Consequently, Rosales gave several cash
advances to Liwanag and Tabligan amounting to P633,650.00. cda

During the first two months, Liwanag and Tabligan made periodic visits to Rosales to
report on the progress of the transactions. The visits, however, suddenly stopped, and
all efforts by Rosales to obtain information regarding their business proved futile.
Alarmed by this development and believing that the amounts she advanced were
being misappropriated, Rosales filed a case of estafa against Liwanag.
After trial on the merits, the trial court rendered a decision dated January 9, 1991,
finding Liwanag guilty as charged. The dispositive portion of the decision reads thus:
"WHEREFORE, the Court holds, that the prosecution has
established the guilt of the accused, beyond reasonable doubt,
and therefore, imposes upon the accused, Carmen Liwanag, an
Indeterminate Penalty of SIX (6) YEARS, EIGHT (8) MONTHS
AND TWENTY ONE (21) DAYS OF PRISION CORRECCIONAL
TO FOURTEEN (14) YEARS AND EIGHT (8) MONTHS OF
PRISION MAYOR AS MAXIMUM, AND TO PAY THE COSTS.
The accused is likewise ordered to reimburse complainant the
sum of P526,650.00, without subsidiary imprisonment, in case of
insolvency.
SO ORDERED."
Said decision was affirmed with modification by the Court of Appeals in a decision
dated November 29, 1993, the decretal portion of which reads:
"WHEREFORE, in view of the foregoing, the judgment appealed
from is hereby affirmed with the correction of the nomenclature of
the penalty which should be: SIX (6) YEARS, EIGHT (8)
MONTHS and TWENTY ONE (21) DAYS of prision mayor, as
minimum, to FOURTEEN (14) YEARS and EIGHT (8) MONTHS
of reclusion temporal, as maximum. In all other respects, the
decision is AFFIRMED.
SO ORDERED."
Her motion for reconsideration having been denied in the resolution of March 16,
1994, Liwanag filed the instant petition, submitting the following assignment of errors:
"1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN
AFFIRMING THE CONVICTION OF THE ACCUSEDPETITIONER FOR THE CRIME OF ESTAFA, WHEN CLEARLY
THE CONTRACT THAT EXIST (sic) BETWEEN THE ACCUSEDPage 32 of 505

PETITIONER AND COMPLAINANT IS EITHER THAT OF A

SIMPLE LOAN OR THAT OF A PARTNERSHIP OR JOINT
VENTURE HENCE THE NON RETURN OF THE MONEY OF
THE COMPLAINANT IS PURELY CIVIL IN NATURE AND NOT
CRIMINAL.
2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN
NOT
ACQUITTING
THE
ACCUSED-PETITIONER
ON
GROUNDS OF REASONABLE DOUBT BY APPLYING THE
'EQUIPOISE RULE'."

sale or the said products (shall) be returned to said Mrs. Isidora

P. Rosales the said amount of P526,650.00 or the said items on
or before August 30, 1988.

(SGD & Thumbedmarked) (sic)

CARMEN
LIWANAG

Liwanag advances the theory that the intention of the parties was to enter into a
contract of partnership, wherein Rosales would contribute the funds while she would
buy and sell the cigarettes, and later divide the profits between them. 1 She also
argues that the transaction can also be interpreted as a simple loan, with Rosales
lending to her the amount stated on an installment basis. 2

26 H. Kaliraya
St.
Quezon City
Signed in the
presence of:

The Court of Appeals correctly rejected these pretenses.

While factual findings of the Court of Appeals are conclusive on the parties and not
reviewable by the Supreme Court, and carry more weight when these affirm the
factual findings of the trial court, 3 we deem it more expedient to resolve the instant
petition on its merits.
Estafa is a crime committed by a person who defrauds another causing him to suffer
damages, by means of unfaithfulness or abuse of confidence, or of false pretenses or
fraudulent acts. 4
From the foregoing, the elements of estafa are present, as follows: (1) that the
accused defrauded another by abuse of confidence or deceit; and (2) that damage or
prejudice capable of pecuniary estimation is caused to the offended party or third
party, 5 and it is essential that there be a fiduciary relation between them either in the
form of a trust, commission or administration. 6
The receipt signed by Liwanag states thus:
"May 19, 1988 Quezon City
Received from Mrs. Isidora P. Rosales the sum of FIVE
HUNDRED TWENTY SIX THOUSAND AND SIX HUNDRED
FIFTY PESOS (P526,650.00) Philippine Currency, to purchase
cigarrets (sic) (Philip & Marlboro) to be sold to customers. In the
event the said cigarrets (sic) are not sold, the proceeds of the

(Sgd) Illegible (Sgd) Doming Z. Baligad"

The language of the receipt could not be any clearer. It indicates that the
money delivered to Liwanag was for a specific purpose, that is, for the purchase
of cigarettes, and in the event the cigarettes cannot be sold, the money must be
returned to Rosales.
Thus, even assuming that a contract of partnership was indeed entered into by and
between the parties, we have ruled that when money or property have been received
by a partner for a specific purpose (such as that obtaining in the instant case) and he
later misappropriated it, such partner is guilty of estafa. 7 cdll
Neither can the transaction be considered a loan, since in a contract of loan once the
money is received by the debtor, ownership over the same is transferred. 8 Being the
owner, the borrower can dispose of it for whatever purpose he may deem proper.
In the instant petition, however, it is evident that Liwanag could not dispose of the
money as she pleased because it was only delivered to her for a single purpose,
namely, for the purchase of cigarettes, and if this was not possible then to return the
money to Rosales. Since in this case there was no transfer of ownership of the money
delivered, Liwanag is liable for conversion under Art. 315, par. 1(b) of the Revised
Penal Code.
Page 33 of 505

WHEREFORE, in view of the foregoing, the appealed decision of the Court of

Appeals dated November 29, 1993, is AFFIRMED. Costs against petitioner.
SO ORDERED.
Melo, Francisco and Panganiban, JJ ., concur.
Narvasa, C .J ., on leave
||| (Liwanag v. Court of Appeals, G.R. No. 114398, [October 24, 1997], 346 PHIL 211217)

SAURA
IMPORT
&
EXPORT
CO.,
INC., plaintiffappellee, vs. DEVELOPMENT BANK OF THE PHILIPPINES, defendantappellant.

Mabanag, Eliger & Associates & Saura, Magno & Associates for plaintiff-appellee.
Jesus A. Avacea and Hilario G. Orsolino for defendant-appellant.

DECISION

MAKALINTAL, J p:
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was
rendered on June 28, 1965 sentencing defendant Development Bank of the
Philippines (DBP) to pay actual and consequential damages to plaintiff Saura
Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the legal
rate from the date the complaint was filed and attorney's fees in the amount of
P5,000.00. The present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the
Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an
industrial loan of P500,000.00, to be used as follows: P250,000.00 for the
construction of a factory building (for the manufacture of jute sacks); P240,900.00 to
pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been
purchased by Saura on the strength of a letter of credit extended by the Prudential
Bank and Trust Co., and arrived in Davao City in July 1953; and that to secure its
release without first paying the draft, Saura, Inc. executed a trust receipt in favor of the
said bank.
SECOND DIVISION
[G.R. No. L-24968. April 27, 1972.]

On January 7, 1954 RFC passed Resolution No. 145 approving the loan application
for P500,000.00, to be secured by a first mortgage on the factory buildings to be
constructed, the land site thereof, and the machinery and equipment to be installed.
Among the other terms spelled out in the resolution were the following:
Page 34 of 505

"1. That the proceeds of the loan shall be utilized exclusively for the
following purposes:
For construction of factory building P250,000.00
For
payment
of
the
balance
price of machinery & equipment 240,900.00

of

purchase

For working capital 9,100.00

prepared in accordance with the terms and conditions specified in Resolution No. 145
In connection with the re-examination of the project to be financed with the loan
applied for, as stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and undertake
the necessary studies, although in appointing its own committee Saura, Inc. made the
observation that the same "should not be taken as an acquiescence on (its) part to
novate, or accept new conditions to, the agreement already entered into," referring to
its acceptance of the terms and conditions mentioned in Resolution No. 145.

T O T A L P500,000.00

On April 13, 1954 the loan documents were executed: the promissory note, with F.R.
Halling, representing China Engineers, Ltd., as one of the co-signers; and the
corresponding deed of mortgage, which was duly registered on the following April 17.

4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto

Caolboy and Gregoria Estabillo and China Engineers, Ltd. shall sign
the promissory notes jointly with the borrower-corporation;

It appears, however, that despite the formal execution of the loan agreement the reexamination contemplated in Resolution No. 736 proceeded. In a meeting of the RFC
Board of Governors on June 10, 1954, at which Ramon Saura, President of Saura,
Inc., was present, it was decided to reduce the loan from P500,000.00 to
P300,000.00. Resolution No. 3989 was approved as follows:

5. That release shall be made at the discretion of the Rehabilitation

Finance Corporation, subject to availability of funds, and as the
construction of the factory buildings progresses, to be certified to by
an appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before,
however, evidently having otherwise been informed of its approval, Saura, Inc. wrote a
letter to RFC, requesting a modification of the terms laid down by it, namely: that in
lieu of having China Engineers, Ltd. (which was willing to assume liability only to the
extent of its stock subscription with Saura, Inc.) sign as co-maker on the
corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an
amount equivalent to such subscription; and that Maria S. Roca would be substituted
for Inocencia Arellano as one of the other co-makers, having acquired the latter's
shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954,
designating of the members of its Board of Governors, for certain reasons stated in
the resolution, "to reexamine all the aspects of this approved loan . . . with special
reference as to the advisability of financing this particular project based on present
conditions obtaining in the operations of jute mills, and to submit his findings thereon
at the next meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again
agreed to act as co-signer for the loan, and asked that the necessary documents be

"RESOLUTION No. 3989. Reducing the Loan Granted Saura Import

& Export Co., Inc. under Resolution No. 145, C.S., from P500,000.00
to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the
re-examination of all the various aspects of the loan granted the
Saura Import & Export Co. under Resolution No. 145, c.s., for the
purpose of financing the manufacture of jute sacks in Davao, with
special reference as to the advisability of financing this particular
project based on present conditions obtaining in the operation of jute
mills, and after having heard Ramon E. Saura and after extensive
discussion on the subject the Board, upon recommendation of the
Chairman, RESOLVED that the loan granted the Saura Import &
Export Co. be REDUCED from P500,000 to P300,000 and that
releases up to P100,000 may be authorized as may be necessary
from time to time to place the factory in actual operation: PROVIDED
that all terms and conditions of Resolution No. 145, c.s., not
inconsistent herewith, shall remain in full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the
promissory note for China Engineers Ltd. jointly and severally with the other cosigners, wrote RFC that his company no longer wished to avail of the loan and
therefore considered the same cancelled as far as it was concerned. A follow-up letter
dated July 2 requested RFC that the registration of the mortgage be withdrawn.
Page 35 of 505

In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00
be granted. The request was denied by RFC, which added in its letter-reply that it was
"constrained to consider as cancelled the loan of P300,000.00 . . . in view of a
notification . . . from the China Engineers, Ltd., expressing their desire to consider the
loan cancelled insofar as they are concerned."

On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and
informed RFC that China Engineers, Ltd. "will at any time reinstate their signature as
co-signer of the note if RFC releases to us the P500,000.00 originally approved by
you."
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the
original amount of P500,000.00, "it appearing that China Engineers, Ltd. is now willing
to sign the promissory notes jointly with the borrower-corporation," but with the
following proviso:
"That in view of observations made of the shortage and high cost of
imported raw materials, the Department of Agriculture and Natural
Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry
out its operation are available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide
adequately for the requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated
December 22, 1954, wherein it was explained that the certification by the Department
of Agriculture and Natural Resources was required "as the intention of the original
approval (of the loan) is to develop the manufacture of sacks on the basis of locally
available raw materials." This point is important, and sheds light on the subsequent
actuations of the parties. Saura, Inc. does not deny that the factory he was building in
Davao was for the manufacture of bags from local raw materials. The cover page of its
brochure (Exh. M) describes the project as a "Joint venture by and between the
Mindanao Industry Corporation and the Saura Import and Export Co., Inc. to finance,
manage and operate a Kenaf mill plant, to manufacture copra and corn bags, runners,
floor mattings, carpets, draperies, out of 100% local raw materials,
principal kenaf." The explanatory note on page 1 of the same brochure states that the
venture "is the first serious attempt in this country to use 100% locally grown raw

materials notably kenaf which is presently grown commercially in the Island of

Mindanao where the proposed jutemill is located . . ."
This fact, according to defendant DBP, is what moved RFC to approve the loan
application in the first place, and to require, in its Resolution No. 9083, a certification
from the Department of Agriculture and Natural Resources as to the availability of
local raw materials to provide adequately for the requirements of the factory. Saura,
Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955:
(1) stating that according to a special study made by the Bureau of Forestry "kenaf will
not be available in sufficient quantity this year or probably even next year;" (2)
requesting "assurances (from RFC) that my company and associates will be able to
bring in sufficient jute materials as may be necessary for the full operation of the jute
mill;" and (3) asking that releases of the loan be made as follows:
a) For
the
payment
of
the
machineries with the Prudential Bank &

receipt

for

jute

mill

Trust Company P250,000.00

(For immediate release)
b) For
the
purchase
per
attached
list
mill to operate P182,413.91

of
to

materials
and
equipment
enable
the
jute

c) For raw materials and labor 67,586.09

1) P25,000.00
to
of
the
letter
for $25,000 00.
2) P25,000.00
of raw jute.

be

to

3) P17,586.09
to
be
mill is ready to operate.

of
be

released
credit

on
for

released
released

as

the
opening
raw
jute
upon
soon

arrival
as

the

On January 25, 1955 RFC sent to Saura, Inc. the following reply:
"Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding the
release of your loan under consideration of P500,000. As stated in
our letter of December 22, 1954, the releases of the loan, if revived,
Page 36 of 505

are proposed to be made from time to time, subject to availability of

funds towards the end that the sack factory shall be placed in actual
operating status. We shall be able to act on your request for revised
purposes and manner of releases upon re-appraisal of the securities
offered for the loan.
With respect to our requirement that the Department of Agriculture
and Natural Resources certify that the raw materials needed are
available in the immediate vicinity and that there is prospect of
increased production thereof to provide adequately the requirements
of the factory, we wish to reiterate that the basis of the original
approval is to develop the manufacture of sacks on the basis of the
locally available raw materials. Your statement that you will have to
rely on the importation of jute and your request that we give you
assurance that your company will be able to bring in sufficient jute
materials as may be necessary for the operation of your factory,
would not be in line with our principle in approving the loan."
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not
pursue the matter further. Instead, it requested RFC to cancel the mortgage, and so,
on June 17, 1955 RFC executed the corresponding deed of cancellation and delivered
it to Ramon F. Saura himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a
mortgage contract, executed on August 6, 1954, over the same property in favor of
the Prudential Bank and Trust Co., under which contract Saura, Inc. had up to
December 31 of the same year within which to pay its obligation on the trust receipt
heretofore mentioned. It appears further that for failure to pay the said obligation the
Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, almost 9 years after the mortgage in favor of RFC was cancelled
at the request of Saura, Inc., the latter commenced the present suit for damages,
alleging failure of RFC (as predecessor of the defendant DBP) to comply with its
obligation to release the proceeds of the loan applied for and approved, thereby
preventing the plaintiff from completing or paying contractual commitments it had
entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected
contract between the parties and that the defendant was guilty of breach thereof. The
defendant pleaded below, and reiterates in this appeal: (1) that the plaintiff's cause of
action had prescribed, or that its claim had been waived or abandoned; (2) that there

was no perfected contract; and (3) that assuming there was, the plaintiff itself did not
comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in
Article 1934 of the Civil Code, which provides:
"ART. 1954. An accepted promise to deliver something by way of
commodatum or simple loan is binding upon the parties, but the
commodatum or simple loan itself shall not be perfected until the
delivery of the object of the contract."
There was undoubtedly offer and acceptance in this case: the application of Saura,
Inc. for a loan of P500,000.00 was approved by resolution of the defendant, and the
corresponding mortgage was executed and registered. But this fact alone falls short of
resolving the basic claim that the defendant failed to fulfill its obligation and that the
plaintiff is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the
assumption that the factory to be constructed would utilize locally grown raw
materials, principally kenaf. There is no serious dispute about this. It was in line with
such assumption that when RFC, by Resolution No. 9033 approved on December 17,
1954, restored the loan to the original amount of P500,000.00, it imposed two
conditions, to wit: "(1) that the raw materials needed by the borrower-corporation to
carry out its operation are available in the immediate vicinity; and (2) that there is
prospect of increased production thereof to provide adequately for the requirements of
the factory." The imposition of those conditions was by no means a deviation from the
terms of the agreement, but rather a step in its implementation. There was nothing in
said conditions that contradicted the terms laid down in RFC Resolution No. 145,
passed on January 7, 1954, namely "that the proceeds of the loan shall be
utilized exclusively for the following purposes: for construction of factory building
P250,000.00; for payment of the balance of purchase price of machinery and
equipment P240,900.00; for working capital P9,100.00." Evidently Saura, Inc.
realized that it could not meet the conditions required by RFC, and so wrote its letter
of January 21, 1955, stating that local jute "will not be available in sufficient quantity
this year or probably next year," and asking that out of the loan agreed upon the sum
of P67,586.09 be released "for raw materials and labor." This was a deviation from the
terms laid down in Resolution No. 145 and embodied in the mortgage contract,
implying as it did a diversion of part of the proceeds of the loan to purposes other than
those agreed upon.

Page 37 of 505

When RFC turned down the request in its letter of January 25, 1955 the negotiations
which had been going on for the implementation of the agreement reached an
impasse. Saura, Inc. obviously was in no position to comply with RFC's conditions. So
instead of doing so and insisting that the loan be released as agreed upon, Saura,
Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The
action thus taken by both parties was in the nature of mutual desistance what
Manresa terms "mutuo disenso" 1 which is a mode of extinguishing obligations. It
is a concept that derives from the principle that since mutual agreement can create a
contract, mutual disagreement by the parties can cause its extinguishment. 2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest
against any alleged breach of contract by RFC, or even point out that the latter's stand
was legally unjustified. Its request for cancellation of the mortgage carried no
reservation of whatever rights it believed it might have against RFC for the latter's
noncompliance. In 1962 it even applied with DBP for another loan to finance a rice
and corn project, which application was disapproved. It was only in 1964, nine years
after the loan agreement had been cancelled at its own request, that Saura, Inc.
brought this action for damages. All these circumstances demonstrate beyond doubt
that the said agreement had been extinguished by mutual desistance and that on
the initiative of the plaintiff-appellee itself.

SECOND DIVISION
[G.R. No. L-1927. May 31, 1949.]
CRISTOBAL ROO, petitioner, vs. JOSE L. GOMEZ ET AL., respondents.

Alfonso Farcon for petitioner.

Capistrano & Azores for respondents.

DECISION

With this view we take of the case, we find it unnecessary to consider and resolve the
other issues raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed,
with costs against the plaintiff-appellee.
Reyes,
J.B.L.,
Actg.
C.J.,
Barredo and Antonio, JJ., concur.

Zaldivar,

Castro,

Fernando,

Teehankee,

||| (Saura Import & Export Co., Inc. v. DBP, G.R. No. L-24968, [April 27, 1972], 150-A
PHIL 251-261)

BENGZON, J p:
This petition to review a decision of the Court of Appeals was admitted mainly
because it involves one phase of the vital contemporary question: the repayment of
loans given in Japanese fiat currency during the last war of the Pacific.
On October 5, 1944, Cristobal Roo received as a loan four thousand pesos in
Japanese fiat money from Jose L. Gomez. He informed the latter that he would use
the money to purchase a jitney; and he agreed to pay that debt one year after date
in the currency then prevailing. He signed a promissory note of the following tenor:
"For value received, I promise to pay one year after date the sum of four
thousand pesos (P4,000) to Jose L. Gomez. It is agreed that this will not
earn any interest and the payment will be made in currency that will be
prevailing by the end of the stipulated period of one year."
Page 38 of 505

"In consideration of this generous loan, I renounce any right that may come
to me by reason of any postwar arrangement, of privilege that may come to
me by legislation wherein this sum may be devalued. I renounce flatly and
absolutely any condition, term, right or privilege which in any way will
prejudice the right engendered by this agreement wherein Atty. Jose L.
Gomez will receive by right his money in the amount of P4,000. I affirm that
the legal tender, currency or any medium of exchange, or money in this sum
of P4,000 will be paid by me to Jose L. Gomez one year after this date,
October 5, 1944."
On October 15, 1945, i. e, after the liberation, Roo was sued for payment in the
Laguna Court of First Instance. His main defense was that his liability should not
exceed the equivalent of 4,000 pesos "mickey mouse" money and could not be
4,000 pesos Philippine currency, because the contract would be void as contrary to
law, public order and good morals.
After the corresponding hearing, the Honorable Felix Bautista Angelo, Judge,
ordered the defendant Roo to pay four thousand pesos in Philippine currency with
legal interest from the presentation of the complaint plus costs. On appeal the Court
of Appeals in a decision written by Mr. Justice Jugo, affirmed the judgment with
costs. It declared that Roo being a mechanic who knew English was not deceived
into signing the promissory note and that the contents of the same had not been
misrepresented to him. It pronounced the contract valid and enforceable according
to its terms and conditions.
One basic principle of the law on contracts of the Civil Code is that "the contracting
parties may establish any pacts, clauses and conditions they may deem advisable,
provided they are not contrary to law, morals or public order." (Article 1255.)
Another principle is that "obligations arising from contract shall have the force of law
between the contracting parties and must be performed in accordance with their
stipulations" (Article 1091).
Invoking the above proviso, Roo asserts this contract is contrary to the Usury Law,
because on the basis of calculations by Government experts he only received the
equivalent of one hundred Philippine pesos and now he is required to disgorge four
thousand pesos or interest greatly in excess of the lawful rates.
But he is not paying interest. Precisely the contract says that the money received
"will not earn any interest." Furthermore, he received four thousand pesos; and he
is required to pay four thousand pesos exactly. The increased intrinsic value and
purchasing power of the current money is consequence of an event (change of
currency) which at the time of the contract neither party knew would certainly

happen within the period of one year. They both elected to subject their rights and
obligations to that contingency. If within one year another kind of currency became
legal tender, Gomez would probably get more for his money. If the same Japanese
currency continued, he would get less, the value of Japanese money being then on
the downgrade.
Our legislation has a word for these contracts: aleatory. The Civil Code recognizes
their validity (see art. 1790 and Manresa's comment thereon) on a par with
insurance policies and life annuities.
The eventual gain of Gomez in this transaction is not interest within the meaning of
Usury Laws. Interest is some additional money to be paid in any event,which is not
the case here, because Gomez might have gotten less it the Japanese occupation
had extended to the end of 1945 or if the liberation forces had chosen to permit the
circulation of the Japanese notes.
Moreover, Roo argues, the deal was immoral because talking advantage of his
superior knowledge of war developments Gomez imposed on him this onerous
obligation. In the first place, the Court of Appeals found that he voluntarily agreed to
sign and signed the document without having been misled as to its contents and "in
so far as knowledge of war events was concerned" both parties were on "equal
footing." In the second place although on October 5, 1944 it was possible to
surmise the impending American invasion, the date of victory or liberation was
anybody's guess. In the third place there was the possibility that upon re-occupation
the Philippine Government would not invalidate the Japanese currency, which after
all had been forced upon the people in exchange for valuable goods and property.
The odds were about even when Borio and Gomez played their bargaining game.
There was no overreaching, nor unfair advantage.
Again Roo alleges it is immoral and against public order for a man to obtain four
thousand pesos in return for an investment of forty pesos (his estimate of the value
of the Japanese money he borrowed). According to his line of reasoning it would be
immoral for the homeowner to recover ten thousand pesos (P10,000), when his
house is burned, because he invested only about one hundred pesos for the
insurance policy. And when the holder of a sweepstakes ticket who paid only four
pesos luckily obtains the first prize of one hundred thousand pesos or over, the
whole business is immoral or against public order.
In this connection we should explain that this decision does not cover situations
where borrowers of Japanese fiat currency promised to repay "the same amount" or
promised to return the same number of pesos "in Philippines currency" or "in the
currency prevailing after the war." There may be room for argument when those
Page 39 of 505

litigations come up for adjudication. All we say here and now is that the contract in
question is legal and obligatory.
A minor point concerns the personality of the plaintiff, the wife of Jose L. Gomez.
We opine with the Court of Appeals that the matter may involve a defect in
procedure which does not amount to prejudicial error.

Higinio Gopez for appellants.

Fausto, Soliman & Gotiangco for appellees.

DECISION

Wherefore the appealed judgment will be affirmed with costs. So ordered.

Moran, C. J., Ozaeta, Tuason, Montemayor and Reyes, JJ., concur.
||| (Roo v. Gomez, G.R. No. L-1927, [May 31, 1949], 83 PHIL 890-901)

OZAETA, J p:
On November 14, 1938, appellant Mariano Nepomuceno executed a mortgage in
favor of the appellees on a parcel of land situated in the municipality of Angeles,
Province of Pampanga, to secure the payment within the period of seven years from
the date of the mortgage of the sum of P24,000 together with interest thereon at the
rate of 8 per cent per annum.
On September 30, 1943, that is to say, more than two years before the maturity of
said mortgage, the parties executed a notarial document entitled "Partial Novation
of Contract" whereby they modified the terms of said mortgage as follows:
"(1) From December 8, 1941, to January 1, 1944, the interest on the
mortgage shall be at 6 per cent per annum, unpaid interest also paying
interest at the same rate.
"(2) From January 1, 1944, up to the end of the war, the mortgage debt shall
likewise bear interest at 6 per cent. Unpaid interest during this period shall
however not bear any interest.
"(3) At the end of the war the interest shall again become 8 per cent in
accordance with the original contract of mortgage.

EN BANC
[G.R. No. L-1328. September 9, 1949.]
MARIANO
NEPOMUCENO
and
AGUEDA
G.
DE
NEPOMUCENO, plaintiffs-appellants, vs. EDILBERTO A. NARCISO and
MAURA SUAREZ, defendants-appellees.

"(4) While the war goes on, the mortgagor, his administrators or assigns,
cannot redeem the property mortgaged.
"(5) When the mortgage lapses on November 14, 1945, the mortgage may
continue for another ten years if the mortgagor so chooses, but during this
period he may pay only one half of the capital."
On July 21, 1944, the mortgagor Mariano Nepomuceno and his wife Agueda G. de
Nepomuceno filed their complaint in this case against the mortgagees, which
complaint, as amended on September 7, 1944, alleged the execution of the
contract of mortgage and its partial novation as above indicated, and
Page 40 of 505

"7. That as per Annex B, No. 4, it is provided that the mortgagor cannot
redeem the property mortgaged while the war goes on; and that
notwithstanding the said provision the herein plaintiffs-mortgagors are now
willing to pay the amount of the indebtedness together with the
corresponding interest due thereon;
"8. That on July 19, 1944, the mortgagors-plaintiffs went to the house of the
mortgagees-defendants to tender payment of the balance of the mortgage
debt with their corresponding interest, but said spouses defendants refused
and still refuse to accept payment;
"9. That because of this refusal of the defendants to accept tender of
payment on the mortgage consideration, the plaintiffs suffered and still suffer
damages in the amount of P5,000;
"10. That the plaintiffs are now and have deposited with the Clerk of Court of
First Instance of Pampanga the amount of P22,356 for the payment of the
mortgage debt and the interest due thereon;
"Wherefore, it is most respectfully prayed that this Honorable Court will issue
an order in the following tenor:
"(a) Ordering defendants to accept tender of payment from the plaintiffs;
"(b) Ordering defendants to execute the corresponding deed of release of
mortgage;
"(c) Ordering defendants to pay damages in the amount of P5,000; and
"(d) Ordering defendants to pay the amount of P3,000 as attorney's fees and
the costs of suit and any other remedy just and equitable in the premises."
After the trial the court sustained the defense that the complaint had been
prematurely presented and dismissed it with costs.
Appellants contend that the stipulation in the contract of September 30, 1943, that
"while the war goes on the mortgagor, his administrators or assigns cannot redeem
the property mortgaged," is against public policy and therefore null and void. They
cite and rely on article 1255 of the Civil Code, which provides:
"ART. 1255. The contracting parties may establish any pacts, clauses,
and conditions they may deem advisable, provided they are not contrary to
law, morals, or public order."

even if he wanted to by the payment of the indebtedness while the war goes on,
which was undoubtedly of a very uncertain duration."
The first two paragraphs of article 1125 of the Civil Code provide:
"ART. 1125. Obligations for the performance of which a day certain has
been fixed shall be demandable only when the day arrives.
"A day certain is understood to be one which must necessarily arrive, even
though its date be unknown."
Article 1127 says:
"ART. 1127. Whenever a term for the performance of an obligation is fixed, it
is presumed to have been established for the benefit of the creditor and that
of the debtor, unless from its tenor or from other circumstances it should
appear that the term was established for the benefit of one or the other."
It will be noted that the original contract of mortgage provided for interest at 8 per
cent per annum and that the principal together with the interest was payable within
the period of seven years from November 14, 1938. But by mutual agreement of the
parties that term was modified on September 30, 1943, by reducing the interest to 6
per cent per annum from December 8, 1941, until the end of the war and by
stipulating that the mortgagor shall not pay off the mortgage while the war went on.
We find nothing immoral or violative of public order in that stipulation. The
mortgagees apparently did not want to have their prewar credit paid with Japanese
military notes, and the mortgagor voluntarily agreed not to do so in consideration of
the reduction of the rate of interest.
It was a perfectly equitable and valid transaction, in conformity with the provisions
of the Civil Code hereinabove quoted.
Appellants were bound by said contract and appellees were not obligated to receive
the payment before it was due. Hence the latter had reason not to accept the tender
of payment made to them by the former.
The judgment is affirmed, with costs against the appellants.
Moran, C.J., Paras, Feria, Bengzon, Padilla, Tuason, Montemayor,
Reyes and Torres, JJ., concur.
||| (Nepomuceno v. Narciso, G.R. No. L-1328, [September 9, 1949], 84 PHIL 542-545)

They argue that "it would certainly be against public policy and a restraint on the
freedom of commerce to compel a debtor not to release his property from a lien
Page 41 of 505

and signed the bank's pre-printed promissory notes on various dates beginning 1996.
They, however, were unaware that the documents contained identical escalation
clauses granting Equitable authority to increase interest rates without their consent. 8
Equitable, in its answer, asserted that respondents knowingly accepted all the terms
and conditions contained in the promissory notes. 9 In fact, they continuously availed
of and benefited from Equitable's credit facilities for five years. 10

FIRST DIVISION
[G.R. No. 171545. December 19, 2007.]
EQUITABLE
PCI
BANK, * AIMEE
YU
and
BEJAN
LIONEL
**
APAS, petitioners, vs. NG SHEUNG NGOR doing business under the
name and style "KEN MARKETING," KEN APPLIANCE DIVISION, INC.
and BENJAMIN E. GO, respondents.

DECISION

After trial, the RTC upheld the validity of the promissory notes. It found that, in 2001
alone, Equitable restructured respondents' loans amounting to US$228,200 and
P1,000,000. 11 The trial court, however, invalidated the escalation clause contained
therein because it violated the principle of mutuality of contracts. 12 Nevertheless, it
took judicial notice of the steep depreciation of the peso during the intervening
period 13 and declared the existence of extraordinary deflation. 14 Consequently, the
RTC ordered the use of the 1996 dollar exchange rate in computing respondents'
dollar-denominated loans. 15 Lastly, because the business reputation of respondents
was (allegedly) severely damaged when Equitable froze their accounts, 16 the trial
court awarded moral and exemplary damages to them. 17
The dispositive portion of the February 5, 2004 RTC decision 18 provided:
WHEREFORE, premises considered, judgment is hereby rendered:
A) Ordering [Equitable] to reinstate and return the amount of [respondents']
deposit placed on hold status;
B) Ordering [Equitable] to pay [respondents] the sum of P12 [m]illion [p]esos
as moral damages;
C) Ordering [Equitable] to pay [respondents] the sum of P10 [m]illion [p]esos
as exemplary damages;

CORONA, J p:
This petition for review on certiorari 1 seeks to set aside the decision 2 of the Court of
Appeals (CA) in CA-G.R. SP No. 83112 and its resolution 3 denying reconsideration.
On October 7, 2001, respondents Ng Sheung Ngor, 4 Ken Appliance Division, Inc.
and Benjamin E. Go filed an action for annulment and/or reformation of documents
and contracts 5 against petitioner Equitable PCI Bank (Equitable) and its employees,
Aimee Yu and Bejan Lionel Apas, in the Regional Trial Court (RTC), Branch 16 of
Cebu City. 6 They claimed that Equitable induced them to avail of its peso and dollar
credit facilities by offering low interest rates 7 so they accepted Equitable's proposal

D) Ordering defendants Aimee Yu and Bejan [Lionel] Apas to pay

[respondents], jointly and severally, the sum of [t]wo [m]illion [p]esos as
moral and exemplary damages;
E) Ordering [Equitable, Aimee Yu and Bejan Lionel Apas], jointly and
severally, to pay [respondents'] attorney's fees in the sum of P300,000;
litigation expenses in the sum of P50,000 and the cost of suit;
F) Directing plaintiffs Ng Sheung Ngor and Ken Marketing to pay [Equitable]
the unpaid principal obligation for the peso loan as well as the unpaid
obligation for the dollar denominated loan;
Page 42 of 505

G) Directing plaintiff Ng Sheung Ngor and Ken Marketing to pay [Equitable]

interest as follows:

filed a petition for certiorari with an application for an injunction in the CA to enjoin the
implementation and execution of the March 24, 2004 omnibus order. 33

1) 12% per annum for the peso loans;

On June 16, 2004, the CA granted Equitable's application for injunction. A writ of
preliminary injunction was correspondingly issued. 34

2) 8% per annum for the dollar loans. The basis for the payment of the dollar
obligation is the conversion rate of P26.50 per dollar availed of at the time of
incurring of the obligation in accordance with Article 1250 of the Civil Code
of the Philippines;
H) Dismissing [Equitable's] counterclaim except the payment of the
aforestated unpaid principal loan obligations and interest.
SO ORDERED. 19
Equitable and respondents filed their respective notices of appeal. 20
In the March 1, 2004 order of the RTC, both notices were denied due course because
Equitable and respondents "failed to submit proof that they paid their respective
appeal fees." 21
WHEREFORE, premises considered, the appeal interposed by defendants
from the Decision in the above-entitled case is DENIED due course. As of
February 27, 2004, the Decision dated February 5, 2004, is considered
final and executory in so far as [Equitable, Aimee Yu and Bejan Lionel
Apas] are concerned. 22 (emphasis supplied)
Equitable moved for the reconsideration of the March 1, 2004 order of the RTC 23 on
the ground that it did in fact pay the appeal fees. Respondents, on the other hand,
prayed for the issuance of a writ of execution. 24
On March 24, 2004, the RTC issued an omnibus order denying Equitable's motion for
reconsideration for lack of merit 25 and ordered the issuance of a writ of execution in
favor of respondents. 26 According to the RTC, because respondents did not move for
the reconsideration of the previous order (denying due course to the parties' notices
of appeal), 27 the February 5, 2004 decision became final and executory as to both
parties and a writ of execution against Equitable was in order. 28
A writ of execution was thereafter issued 29 and three real properties of Equitable
were levied upon. 30
On March 26, 2004, Equitable filed a petition for relief in the RTC from the March 1,
2004 order. 31 It, however, withdrew that petition on March 30, 2004 32 and instead

Notwithstanding the writ of injunction, the properties of Equitable previously levied

upon were sold in a public auction on July 1, 2004. Respondents were the highest
bidders and certificates of sale were issued to them. 35
On August 10, 2004, Equitable moved to annul the July 1, 2004 auction sale and to
cite the sheriffs who conducted the sale in contempt for proceeding with the auction
despite the injunction order of the CA. 36
On October 28, 2005, the CA dismissed the petition for certiorari. 37 It found
Equitable guilty of forum shopping because the bank filed its petition for certiorari in
the CA several hours before withdrawing its petition for relief in the RTC. 38 Moreover,
Equitable failed to disclose, both in the statement of material dates and certificate of
non-forum shopping (attached to its petition for certiorari in the CA), that it had a
pending petition for relief in the RTC. 39
Equitable moved for reconsideration 40 but it was denied. 41 Thus, this petition.
Equitable asserts that it was not guilty of forum shopping because the petition for
relief was withdrawn on the same day the petition for certiorari was filed. 42 It likewise
avers that its petition for certiorari was meritorious because the RTC committed grave
abuse of discretion in issuing the March 24, 2004 omnibus order which was based on
an erroneous assumption. The March 1, 2004 order denying its notice of appeal for
non payment of appeal fees was erroneous because it had in fact paid the required
fees. 43 Thus, the RTC, by issuing its March 24, 2004 omnibus order, effectively
prevented Equitable from appealing the patently wrong February 5, 2004 decision. 44
This petition is meritorious.
EQUITABLE WAS NOT GUILTY
OF FORUM SHOPPING
Forum shopping exists when two or more actions involving the same transactions,
essential facts and circumstances are filed and those actions raise identical issues,
subject matter and causes of action. 45 The test is whether, in two or more pending
cases, there is identity of parties, rights or causes of actions and reliefs. 46
Equitable's petition for relief in the RTC and its petition for certiorari in the CA did not
have identical causes of action. The petition for relief from the denial of its notice of
Page 43 of 505

appeal was based on the RTC's judgment or final order preventing it from taking an
appeal by "fraud, accident, mistake or excusable negligence." 47 On the other hand,
its petition for certiorari in the CA, a special civil action, sought to correct the grave
abuse of discretion amounting to lack of jurisdiction committed by the RTC. 48
In a petition for relief, the judgment or final order is rendered by a court with
competent jurisdiction. In a petition for certiorari, the order is rendered by a court
without or in excess of its jurisdiction.
Moreover, Equitable substantially complied with the rule on non-forum shopping when
it moved to withdraw its petition for relief in the RTC on the same day (in fact just four
hours and forty minutes after) it filed the petition for certiorari in the CA. Even if
Equitable failed to disclose that it had a pending petition for relief in the RTC, it
rectified what was doubtlessly a careless oversight by withdrawing the petition for
relief just a few hours after it filed its petition for certiorari in the CA a clear
indication that it had no intention of maintaining the two actions at the same time.
THE TRIAL COURT
COMMITTED GRAVE ABUSE
OF DISCRETION IN ISSUING
ITS MARCH 1, 2004 AND
MARCH 24, 2004 ORDERS
Section 1, Rule 65 of the Rules of Court provides:
Section 1. Petition for Certiorari. When any tribunal, board or officer
exercising judicial or quasi-judicial function has acted without or in
excess of its or his jurisdiction, or with grave abuse of discretion
amounting to lack or excess of jurisdiction, and there is no appeal, nor
any plain, speedy or adequate remedy in the ordinary course of law, a
person aggrieved thereby may file a verified petition in the proper court,
alleging the facts with certainty and praying that judgment be rendered
annulling or modifying the proceedings of such tribunal, board or officer, and
granting such incidental reliefs as law and justice may require.
The petition shall be accompanied by a certified true copy of the judgment,
order or resolution subject thereof, copies of all pleadings and documents
relevant and pertinent thereto, and a sworn certificate of non-forum shopping
as provided in the third paragraph of Section 3, Rule 46.

1. that the tribunal, board or officer exercising judicial or quasi-judicial

functions acted without or in excess of his or its jurisdiction or with grave
abuse of discretion amounting to lack or excess of jurisdiction; and
2. that there is no appeal or any plain, speedy and adequate remedy in the
ordinary course of law.
For a petition for certiorari premised on grave abuse of discretion to prosper, petitioner
must show that the public respondent patently and grossly abused his discretion and
that abuse amounted to an evasion of positive duty or a virtual refusal to perform a
duty enjoined by law or to act at all in contemplation of law, as where the power was
exercised in an arbitrary and despotic manner by reason of passion or hostility. 49
The March 1, 2004 order denied due course to the notices of appeal of both Equitable
and respondents. However, it declared that the February 5, 2004 decision wasfinal
and executory only with respect to Equitable. 50 As expected, the March 24, 2004
omnibus order denied Equitable's motion for reconsideration and granted
respondents' motion for the issuance of a writ of execution. 51
The March 1, 2004 and March 24, 2004 orders of the RTC were obviously intended to
prevent Equitable, et al. from appealing the February 5, 2004 decision. Not only that.
The execution of the decision was undertaken with indecent haste, effectively
obviating or defeating Equitable's right to avail of possible legal remedies. No matter
how we look at it, the RTC committed grave abuse of discretion in rendering those
orders.
With regard to whether Equitable had a plain, speedy and adequate remedy in the
ordinary course of law, we hold that there was none. The RTC denied due course to
its notice of appeal in the March 1, 2004 order. It affirmed that denial in the March 24,
2004 omnibus order. Hence, there was no way Equitable could have possibly
appealed the February 5, 2004 decision. 52
Although Equitable filed a petition for relief from the March 24, 2004 order, that
petition was not a plain, speedy and adequate remedy in the ordinary course of
law. 53A petition for relief under Rule 38 is an equitable remedy allowed only in
exceptional circumstances or where there is no other available or adequate
remedy. 54
Thus, we grant Equitable's petition for certiorari and consequently give due course to
its appeal.

There are two substantial requirements in a petition for certiorari. These are:
Page 44 of 505

EQUITABLE RAISED PURE

QUESTIONS OF LAW IN ITS
PETITION FOR REVIEW

trier of facts and it shall pass upon them only for compelling reasons which
unfortunately are not present in this case. 64 Hence, we ordered the partial remand of
the case for the sole purpose of determining the amount of actual damages. 65

The jurisdiction of this Court in Rule 45 petitions is limited to questions of

law. 55 There is a question of law "when the doubt or controversy concerns the
correct application of law or jurisprudence to a certain set of facts; or when the issue
does not call for the probative value of the evidence presented, the truth or falsehood
of facts being admitted." 56

ESCALATION
VIOLATED
THE
MUTUALITY OF CONTRACTS

Equitable does not assail the factual findings of the trial court. Its arguments
essentially focus on the nullity of the RTC's February 5, 2004 decision. Equitable
points out that that decision was patently erroneous, specially the exorbitant award
of damages, as it was inconsistent with existing law and jurisprudence. 57
THE PROMISSORY NOTES
WERE VALID
The RTC upheld the validity of the promissory notes despite respondents' assertion
that those documents were contracts of adhesion.
A contract of adhesion is a contract whereby almost all of its provisions are drafted by
one party. 58 The participation of the other party is limited to affixing his signature or
his "adhesion" to the contract. 59 For this reason, contracts of adhesion are strictly
construed against the party who drafted it. 60
It is erroneous, however, to conclude that contracts of adhesion are invalid per se.
They are, on the contrary, as binding as ordinary contracts. A party is in reality free to
accept or reject it. A contract of adhesion becomes void only when the dominant party
takes advantage of the weakness of the other party, completely depriving the latter of
the opportunity to bargain on equal footing. 61
That was not the case here. As the trial court noted, if the terms and conditions
offered by Equitable had been truly prejudicial to respondents, they would have
walked out and negotiated with another bank at the first available instance. But they
did not. Instead, they continuously availed of Equitable's credit facilities for five long
years.
While the RTC categorically found that respondents had outstanding dollar- and pesodenominated loans with Equitable, it, however, failed to ascertain the total amount due
(principal, interest and penalties, if any) as of July 9, 2001. The trial court did not
explain how it arrived at the amounts of US$228,200 and P1,000,000. 62 InMetro
Manila Transit Corporation v. D.M. Consunji, 63 we reiterated that this Court is not a

PRINCIPLE

CLAUSE
OF

Escalation clauses are not void per se. However, one "which grants the creditor an
unbridled right to adjust the interest independently and upwardly, completely depriving
the debtor of the right to assent to an important modification in the agreement" is void.
Clauses of that nature violate the principle of mutuality of contracts.66 Article
1308 67 of the Civil Code holds that a contract must bind both contracting parties; its
validity or compliance cannot be left to the will of one of them. 68
For this reason, we have consistently held that a valid escalation clause provides:
1. that the rate of interest will only be increased if the applicable maximum
rate of interest is increased by law or by the Monetary Board; and
2. that the stipulated rate of interest will be reduced if the applicable
maximum rate of interest is reduced by law or by the Monetary Board (deescalation clause).69
The RTC found that Equitable's promissory notes uniformly stated:
If subject promissory note is extended, the interest for subsequent
extensions shall be at such rate as shall be determined by the bank. 70
Equitable dictated the interest rates if the term (or period for repayment) of the loan
was extended. Respondents had no choice but to accept them. This was a violation of
Article 1308 of the Civil Code. Furthermore, the assailed escalation clause did not
contain the necessary provisions for validity, that is, it neither provided that the rate of
interest would be increased only if allowed by law or the Monetary Board, nor allowed
de-escalation. For these reasons, the escalation clause was void.
With regard to the proper rate of interest, in New Sampaguita Builders v. Philippine
National Bank 71 we held that, because the escalation clause was annulled, the
principal amount of the loan was subject to the original or stipulated rate of interest.
Upon maturity, the amount due was subject to legal interest at the rate of 12% per
annum. 72
Consequently, respondents should pay Equitable the interest rates of 12.66% p.a. for
their dollar-denominated loans and 20% p.a. for their peso-denominated loans from
Page 45 of 505

January 10, 2001 to July 9, 2001. Thereafter, Equitable was entitled to legal interest of
12% p.a. on all amounts due.
THERE
EXTRAORDINARY DEFLATION

WAS

NO

Extraordinary inflation exists when there is an unusual decrease in the purchasing

power of currency (that is, beyond the common fluctuation in the value of currency)
and such decrease could not be reasonably foreseen or was manifestly beyond the
contemplation of the parties at the time of the obligation. Extraordinary deflation, on
the other hand, involves an inverse situation. 73
Article 1250 of the Civil Code provides:
Article 1250. In case an extraordinary inflation or deflation of the currency
stipulated should intervene, the value of the currency at the time of the
establishment of the obligation shall be the basis of payment, unless there is
an agreement to the contrary.
For extraordinary inflation (or deflation) to affect an obligation, the following requisites
must be proven:
1. that there was an official declaration of extraordinary inflation or deflation
from the Bangko Sentral ng Pilipinas (BSP); 74

Moral damages are in the category of an award designed to compensate the claimant
for actual injury suffered, not to impose a penalty to the wrongdoer. 79 To be entitled
to moral damages, a claimant must prove:
1. That he or she suffered besmirched reputation, or physical, mental or
psychological suffering sustained by the claimant;
2. That the defendant committed a wrongful act or omission;
3. That the wrongful act or omission was the proximate cause of the
damages the claimant sustained;
4. The case is predicated on any of the instances expressed or envisioned
by Article 2219 80 and 2220 81 . 82
In culpa contractual or breach of contract, moral damages are recoverable only if the
defendant acted fraudulently or in bad faith or in wanton disregard of his contractual
obligations. 83 The breach must be wanton, reckless, malicious or in bad faith, and
oppressive or abusive. 84
The RTC found that respondents did not pay Equitable the interest due on February 9,
2001 (or any month thereafter prior to the maturity of the loan) 85 or the amount due
(principal plus interest) due on July 9, 2001. 86 Consequently, Equitable applied
respondents' deposits to their loans upon maturity.

2. that the obligation was contractual in nature; 75 and

3. that the parties expressly agreed to consider the effects of the
extraordinary inflation or deflation. 76
Despite the devaluation of the peso, the BSP never declared a situation of
extraordinary inflation. Moreover, although the obligation in this instance arose out of
a contract, the parties did not agree to recognize the effects of extraordinary inflation
(or deflation). 77 The RTC never mentioned that there was a such stipulation either in
the promissory note or loan agreement. Therefore, respondents should pay their
dollar-denominated loans at the exchange rate fixed by the BSP on the date of
maturity. 78
THE AWARD OF MORAL AND
EXEMPLARY DAMAGES LACKED
BASIS

The relationship between a bank and its depositor is that of creditor and
debtor. 87 For this reason, a bank has the right to set-off the deposits in its hands for
the payment of a depositor's indebtedness. 88
Respondents indeed defaulted on their obligation. For this reason, Equitable had the
option to exercise its legal right to set-off or compensation. However, the RTC
mistakenly (or, as it now appears, deliberately) concluded that Equitable acted
"fraudulently or in bad faith or in wanton disregard" of its contractual obligations
despite the absence of proof. The undeniable fact was that, whatever damage
respondents sustained was purely the consequence of their failure to pay their
loans. There was therefore absolutely no basis for the award of moral damages to
them.
Neither was there reason to award exemplary damages. Since respondents were not
entitled to moral damages, neither should they be awarded exemplary

Page 46 of 505

damages.89 And if respondents were not entitled to moral and exemplary damages,
neither could they be awarded attorney's fees and litigation expenses. 90
ACCORDINGLY, the petition is hereby GRANTED.
The October 28, 2005 decision and February 3, 2006 resolution of the Court of
Appeals in CA-G.R. SP No. 83112 are hereby REVERSED and SET ASIDE.
The March 24, 2004 omnibus order of the Regional Trial Court, Branch 16, Cebu City
in Civil Case No. CEB-26983 is hereby ANNULLED for being rendered with grave
abuse of discretion amounting to lack or excess of jurisdiction. All proceedings
undertaken pursuant thereto are likewise declared null and void.

3. all other claims and counterclaims are dismissed.

As a starting point, the Regional Trial Court, Branch 16 of Cebu City shall compute
the exact amounts due on the respective dollar-denominated and peso-denominated
loans, as of July 9, 2001, of respondents Ng Sheung Ngor, doing business under the
name and style of "Ken Marketing," Ken Appliance Division and Benjamin E. Go.
SO ORDERED.
Puno, C.J., Sandoval-Gutierrez, Azcuna and Leonardo-de Castro, JJ., concur.
||| (Equitable PCI Bank v. Ng Sheung Ngor, G.R. No. 171545, [December 19, 2007],
565 PHIL 520-545)

The March 1, 2004 order of the Regional Trial Court, Branch 16 of Cebu City in Civil
Case No. CEB-26983 is hereby SET ASIDE. The appeal of petitioners Equitable PCI
Bank, Aimee Yu and Bejan Lionel Apas is therefore given due course.
The February 5, 2004 decision of the Regional Trial Court, Branch 16 of Cebu City in
Civil Case No. CEB-26983 is accordingly SET ASIDE. New judgment is hereby
entered:
1. ordering respondents Ng Sheung Ngor, doing business under the name
and style of "Ken Marketing," Ken Appliance Division, Inc. and Benjamin E.
Go to pay petitioner Equitable PCI Bank the principal amount of their dollarand peso-denominated loans;
2. ordering respondents Ng Sheung Ngor, doing business under the name
and style of "Ken Marketing," Ken Appliance Division, Inc. and Benjamin E.
Go to pay petitioner Equitable PCI Bank interest at:
a) 12.66% p.a. with respect to their dollar-denominated loans from January
10, 2001 to July 9, 2001;
b) 20% p.a. with respect to their peso-denominated loans from January 10,
2001 to July 9, 2001; 91
c) pursuant to our ruling in Eastern Shipping Lines v. Court of
Appeals, 92 the total amount due on July 9, 2001 shall earn legal interest at
12% p.a. from the time petitioner Equitable PCI Bank demanded payment,
whether judicially or extra-judicially; and
d) after this Decision becomes final and executory, the applicable rate shall
be 12% p.a. until full satisfaction;
Page 47 of 505

by ordering Equitable PCI Bank 5 (respondent) to pay petitioners P1,516,015.07 with

interest at the legal rate of 12% per annum starting 6 May 1994 until the amount is
fully paid.
The Facts
Pan Pacific Service Contractors, Inc. (Pan Pacific) is engaged in contracting
mechanical works on airconditioning system. On 24 November 1989, Pan Pacific,
through its President, Ricardo F. Del Rosario (Del Rosario), entered into a contract of
mechanical works (Contract) with respondent for P20,688,800. Pan Pacific and
respondent also agreed on nine change orders for P2,622,610.30. Thus, the total
consideration for the whole project was P23,311,410.30. 6 The Contract stipulated,
among others, that Pan Pacific shall be entitled to a price adjustment in case of
increase in labor costs and prices of materials under paragraphs 70.1 7 and 70.2 8 of
the "General Conditions for the Construction of PCIB Tower II Extension" (the
escalation clause). 9
SECOND DIVISION
[G.R. No. 169975. March 18, 2010.]
PAN PACIFIC SERVICE CONTRACTORS, INC. and RICARDO F. DEL
ROSARIO, petitioners, vs. EQUITABLE PCI BANK (formerly THE
PHILIPPINE COMMERCIAL INTERNATIONAL BANK), respondent.

DECISION

Pursuant to the contract, Pan Pacific commenced the mechanical works in the project
site, the PCIB Tower II extension building in Makati City. The project was completed in
June 1992. Respondent accepted the project on 9 July 1992. 10
In 1990, labor costs and prices of materials escalated. On 5 April 1991, in accordance
with the escalation clause, Pan Pacific claimed a price adjustment of P5,165,945.52.
Respondent's appointed project engineer, TCGI Engineers, asked for a reduction in
the price adjustment. To show goodwill, Pan Pacific reduced the price adjustment to
P4,858,548.67. 11
On 28 April 1992, TCGI Engineers recommended to respondent that the price
adjustment should be pegged at P3,730,957.07. TCGI Engineers based their
evaluation of the price adjustment on the following factors:
1.Labor Indices of the Department of Labor and Employment.
2.Price Index of the National Statistics Office.

CARPIO, J p:
The Case
Pan Pacific Service Contractors, Inc. and Ricardo F. Del Rosario (petitioners) filed this
Petition for Review 1 assailing the Court of Appeals' (CA) Decision 2 dated 30 June
2005 in CA-G.R. CV No. 63966 as well as the Resolution 3 dated 5 October 2005
denying the Motion for Reconsideration. In the assailed decision, the CA modified the
12 April 1999 Decision 4 of the Regional Trial Court of Makati City, Branch 59 (RTC)

3.PD 1594 and its Implementing Rules and Regulations as amended, 15

March 1991.
4.Shipping Documents submitted by PPSCI.
5.Sub-clause 70.1 of
Documents. 12 TADaCH

the

General

Conditions

of

the

Contract

Page 48 of 505

Pan Pacific contended that with this recommendation, respondent was already
estopped from disclaiming liability of at least P3,730,957.07 in accordance with the
escalation clause. 13
Due to the extraordinary increases in the costs of labor and materials, Pan Pacific's
operational capital was becoming inadequate for the project. However, respondent
withheld the payment of the price adjustment under the escalation clause despite Pan
Pacific's repeated demands. 14 Instead, respondent offered Pan Pacific a loan of P1.8
million. Against its will and on the strength of respondent's promise that the price
adjustment would be released soon, Pan Pacific, through Del Rosario, was
constrained to execute a promissory note in the amount of P1.8 million as a
requirement for the loan. Pan Pacific also posted a surety bond. The P1.8 million was
released directly to laborers and suppliers and not a single centavo was given to Pan
Pacific. 15
Pan Pacific made several demands for payment on the price adjustment but
respondent merely kept on promising to release the same. Meanwhile, the P1.8
million loan matured and respondent demanded payment plus interest and penalty.
Pan Pacific refused to pay the loan. Pan Pacific insisted that it would not have
incurred the loan if respondent released the price adjustment on time. Pan Pacific
alleged that the promissory note did not express the true agreement of the parties.
Pan Pacific maintained that the P1.8 million was to be considered as an advance
payment on the price adjustment. Therefore, there was really no consideration for the
promissory note; hence, it is null and void from the beginning. 16
Respondent stood firm that it would not release any amount of the price adjustment to
Pan Pacific but it would offset the price adjustment with Pan Pacific's outstanding
balance of P3,226,186.01, representing the loan, interests, penalties and collection
charges. 17
Pan Pacific refused the offsetting but agreed to receive the reduced amount of
P3,730,957.07 as recommended by the TCGI Engineers for the purpose of
extrajudicial settlement, less P1.8 million and P414,942 as advance payments. 18
On 6 May 1994, petitioners filed a complaint for declaration of nullity/annulment of the
promissory note, sum of money, and damages against the respondent with the RTC of
Makati City, Branch 59. On 12 April 1999, the RTC rendered its decision, the
dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor
of the plaintiffs and against the defendant as follows:

1.Declaring the promissory note (Exhibit "B") null and void;

2.Ordering the defendant to pay the plaintiffs the following amounts:
a.P1,389,111.10 representing unpaid balance of the adjustment price, with
interest thereon at the legal rate of twelve (12%) percent per annum starting
May 6, 1994, the date when the complaint was filed, until the amount is fully
paid;
b.P100,000.00 representing moral damages;
c.P50,000.00 representing exemplary damages; and
d.P50,000.00 as and for attorney's fees.
3.Dismissing defendant's counterclaim, for lack of merit; and
4.With costs against the defendant.
SO ORDERED. 19
On 23 May 1999, petitioners partially appealed the RTC Decision to the CA. On 26
May 1999, respondent appealed the entire RTC Decision for being contrary to law and
evidence. In sum, the appeals of the parties with the CA are as follows: ECaITc
1.With respect to the petitioners, whether the RTC erred in deductng * the
amount of P126,903.97 from the balance of the adjusted price and in
awarding only 12% annual interest on the amount due, instead of the bank
loan rate of 18% compounded annually beginning September 1992.
2.With respect to respondent, whether the RTC erred in declaring the
promissory note void and in awarding moral and exemplary damages and
attorney's fees in favor of petitioners and in dismissing its counterclaim.
In its decision dated 30 June 2005, the CA modified the RTC decision, with respect to
the principal amount due to petitioners. The CA removed the deduction of
P126,903.97 because it represented the final payment on the basic contract price.
Hence, the CA ordered respondent to pay P1,516,015.07 to petitioners, with interest
at the legal rate of 12% per annum starting 6 May 1994. 20
On 26 July 2005, petitioners filed a Motion for Partial Reconsideration seeking a
reconsideration of the CA's Decision imposing the legal rate of 12%. Petitioners
claimed that the interest rate applicable should be the 18% bank lending rate.
Respondent likewise filed a Motion for Reconsideration of the CA's decision. In a
Resolution dated 5 October 2005, the CA denied both motions.
Page 49 of 505

Aggrieved by the CA's Decision, petitioners elevated the case before this Court.
The Issue
Petitioners submit this sole issue for our consideration: Whether the CA, in awarding
the unpaid balance of the price adjustment, erred in fixing the interest rate at 12%
instead of the 18% bank lending rate.
Ruling of the Court

lending rate. 24 Specifically, petitioners invoke Section 2.5 of the Agreement and
Section 60.10 of the General Conditions as follows:
Agreement
2.5If any payment is delayed, the CONTRACTOR may charge interest
thereon at the current bank lending rates, without prejudice to OWNER'S
recourse to any other remedy available under existing law. 25

We grant the petition.

General Conditions

This Court notes that respondent did not appeal the decision of the CA. Hence, there
is no longer any issue as to the principal amount of the unpaid balance on the price
adjustment, which the CA correctly computed at P1,516,015.07. The only remaining
issue is the interest rate applicable for respondent's delay in the payment of the
balance of the price adjustment.

60.10Time for payment

The CA denied petitioners' claim for the application of the bank lending rate of 18%
compounded annually reasoning, to wit:
Anent the 18% interest rate compounded annually, while it is true that the
contract provides for an interest at the current bank lending rate in case of
delay in payment by the Owner, and the promissory note charged an interest
of 18%, the said proviso does not authorize plaintiffs to unilaterally raise the
interest rate without the other party's consent. Unlike their request for price
adjustment on the basic contract price, plaintiffs never informed nor sought
the approval of defendant for the imposition of 18% interest on the adjusted
price. To unilaterally increase the interest rate of the adjusted price would be
violative of the principle of mutuality of contracts. Thus, the Court maintains
the legal rate of twelve percent per annum starting from the date of judicial
demand. Although the contract provides for the period when the
recommendation of the TCGI Engineers as to the price adjustment would be
binding on the parties, it was established, however, that part of the adjusted
price demanded by plaintiffs was already disbursed as early as 28 February
1992 by defendant bank to their suppliers and laborers for their account. 21
In this appeal, petitioners allege that the contract between the parties consists of two
parts, the Agreement 22 and the General Conditions, 23 both of which provide for
interest at the bank lending rate on any unpaid amount due under the contract.
Petitioners further claim that there is nothing in the contract which requires the
consent of the respondent to be given in order that petitioners can charge the bank

The amount due to the Contractor under any interim certificate issued by the
Engineer pursuant to this Clause, or to any term of the Contract, shall,
subject to clause 47, be paid by the Owner to the Contractor within 28 days
after such interim certificate has been delivered to the Owner, or, in the case
of the Final Certificate referred to in Sub-Clause 60.8, within 56 days, after
such Final Certificate has been delivered to the Owner. In the event of the
failure of the Owner to make payment within the times stated, the Owner
shall pay to the Contractor interest at the rate based on banking loan rates
prevailing at the time of the signing of the contract upon all sums unpaid from
the date by which the same should have been paid. The provisions of this
Sub-Clause are without prejudice to the Contractor's entitlement under
Clause 69. 26 (Emphasis supplied)
Petitioners thus submit that it is automatically entitled to the bank lending rate of
interest from the time an amount is determined to be due thereto, which respondent
should have paid. Therefore, as petitioners have already proven their entitlement to
the price adjustment, it necessarily follows that the bank lending interest rate of 18%
shall be applied. 27
On the other hand, respondent insists that under the provisions of 70.1 and 70.2 of
the General Conditions, it is stipulated that any additional cost shall be determined by
the Engineer and shall be added to the contract price after due consultation with the
Owner, herein respondent. Hence, there being no prior consultation with the
respondent regarding the additional cost to the basic contract price, it naturally follows
that respondent was never consulted or informed of the imposition of 18% interest
rate compounded annually on the adjusted price. 28
A perusal of the assailed decision shows that the CA made a distinction between the
consent given by the owner of the project for the liability for the price adjustments, and
the consent for the imposition of the bank lending rate. Thus, while the CA held that
Page 50 of 505

petitioners consulted respondent for price adjustment on the basic contract price,
petitioners, nonetheless, are not entitled to the imposition of 18% interest on the
adjusted price, as petitioners never informed or sought the approval of respondent for
such imposition. 29
We disagree.
It is settled that the agreement or the contract between the parties is the formal
expression of the parties' rights, duties, and obligations. It is the best evidence of the
intention of the parties. Thus, when the terms of an agreement have been reduced to
writing, it is considered as containing all the terms agreed upon and there can be,
between the parties and their successors in interest, no evidence of such terms other
than the contents of the written agreement. 30 cSICHD
The escalation clause of the contract provides:
CHANGES IN COST AND LEGISLATION
70.1Increase or Decrease of Cost
There shall be added to or deducted from the Contract Price such sums in
respect of rise or fall in the cost of labor and/or materials or any other
matters affecting the cost of the execution of the Works as may be
determined.
70.2Subsequent Legislation
If, after the date 28 days prior to the latest date of submission of tenders for
the Contract there occur in the country in which the Works are being or are
to be executed changes to any National or State Statute, Ordinance, Decree
or other Law or any regulation or bye-law (sic) of any local or other duly
constituted authority, or the introduction of any such State Statute,
Ordinance, Decree, Law, regulation or bye-law (sic) which causes additional
or reduced cost to the contractor, other than under Sub-Clause 70.1, in the
execution of the Contract, such additional or reduced cost shall, after due
consultation with the Owner and Contractor, be determined by the Engineer
and shall be added to or deducted from the Contract Price and the Engineer
shall notify the Contractor accordingly, with a copy to the Owner. 31
In this case, the CA already settled that petitioners consulted respondent on the
imposition of the price adjustment, and held respondent liable for the balance of
P1,516,015.07. Respondent did not appeal from the decision of the CA; hence,
respondent is estopped from contesting such fact.

However, the CA went beyond the intent of the parties by requiring respondent to give
its consent to the imposition of interest before petitioners can hold respondent liable
for interest at the current bank lending rate. This is erroneous. A review of Section 2.6
of the Agreement and Section 60.10 of the General Conditions shows that the
consent of the respondent is not needed for the imposition of interest at the current
bank lending rate, which occurs upon any delay in payment.
When the terms of a contract are clear and leave no doubt as to the intention of the
contracting parties, the literal meaning of its stipulations governs. In these cases,
courts have no authority to alter a contract by construction or to make a new contract
for the parties. The Court's duty is confined to the interpretation of the contract which
the parties have made for themselves without regard to its wisdom or folly as the court
cannot supply material stipulations or read into the contract words which it does not
contain. It is only when the contract is vague and ambiguous that courts are permitted
to resort to construction of its terms and determine the intention of the parties. 32
The escalation clause must be read in conjunction with Section 2.5 of the Agreement
and Section 60.10 of the General Conditions which pertain to the time of payment.
Once the parties agree on the price adjustment after due consultation in compliance
with the provisions of the escalation clause, the agreement is in effect an amendment
to the original contract, and gives rise to the liability of respondent to pay the adjusted
costs. Under Section 60.10 of the General Conditions, the respondent shall pay such
liability to the petitioner within 28 days from issuance of the interim certificate. Upon
respondent's failure to pay within the time provided (28 days), then it shall be liable to
pay the stipulated interest.
This is the logical interpretation of the agreement of the parties on the imposition of
interest. To provide a contrary interpretation, as one requiring a separate consent for
the imposition of the stipulated interest, would render the intentions of the parties
nugatory.
Article 1956 of the Civil Code, which refers to monetary interest, specifically mandates
that no interest shall be due unless it has been expressly stipulated in writing.
Therefore, payment of monetary interest is allowed only if:
(1)there was an express stipulation for the payment of interest; and
(2)the agreement for the payment of interest was reduced in writing.
The concurrence of the two conditions is required for the payment of monetary
interest. 33

Page 51 of 505

We agree with petitioners' interpretation that in case of default, the consent of the
respondent is not needed in order to impose interest at the current bank lending rate.
Applicable Interest Rate
Under Article 2209 of the Civil Code, the appropriate measure for damages in case of
delay in discharging an obligation consisting of the payment of a sum of money is the
payment of penalty interest at the rate agreed upon in the contract of the parties. In
the absence of a stipulation of a particular rate of penalty interest, payment of
additional interest at a rate equal to the regular monetary interest becomes due and
payable. Finally, if no regular interest had been agreed upon by the contracting
parties, then the damages payable will consist of payment of legal interest which is
6%, or in the case of loans or forbearances of money, 12% per annum. 34 It is only
when the parties to a contract have failed to fix the rate of interest or when such
amount is unwarranted that the Court will apply the 12% interest per annum on a loan
or forbearance of money. 35
The written agreement entered into between petitioners and respondent provides for
an interest at the current bank lending rate in case of delay in payment and the
promissory note charged an interest of 18%.
To prove petitioners' entitlement to the 18% bank lending rate of interest, petitioners
presented the promissory note 36 prepared by respondent bank itself. This
promissory note, although declared void by the lower courts because it did not
express the real intention of the parties, is substantial proof that the bank lending rate
at the time of default was 18% per annum. Absent any evidence of fraud, undue
influence or any vice of consent exercised by petitioners against the respondent, the
interest rate agreed upon is binding on them. 37 aSEHDA
WHEREFORE, we GRANT the petition. We SET ASIDE the Decision and Resolution
of the Court of Appeals in CA-G.R. CV No. 63966. We ORDER respondent to pay
petitioners P1,516,015.07 with interest at the bank lending rate of 18% per annum
starting 6 May 1994 until the amount is fully paid.
SO ORDERED.
Brion, Del Castillo, Abad and Perez, JJ., concur.
||| (Pan Pacific Service Contractors, Inc. v. Equitable PCI Bank, G.R. No. 169975,
[March 18, 2010], 630 PHIL 94-107)

THIRD DIVISION
[G.R. No. 169617. April 3, 2007.]
Page 52 of 505

HEIRS OF ZOILO ESPIRITU AND PRIMITIVA ESPIRITU, petitioners, vs.

SPOUSES MAXIMO LANDRITO AND PAZ LANDRITO, Represented by
ZOILO LANDRITO, as their Attorney-in-Fact, respondents.

DECISION

CHICO-NAZARIO, J p:
This is a petition for Review on Certiorari under Rule 45 of the Rules of Court
assailing the Decision of the Court of Appeals, 1 dated 31 August 2005, reversing the
Decision rendered by the trial court on 13 December 1995. The Court of Appeals, in
its assailed Decision, fixed the interest rate of the loan between the parties at 12% per
annum, and ordered the Spouses Zoilo and Primitiva Espiritu (Spouses Espiritu) to
reconvey the subject property to the Spouses Landrito conditioned upon the payment
of the loan.
Petitioners DULCE, BENLINDA, EDWIN, CYNTHIA, AND MIRIAM ANDREA, all
surnamed ESPIRITU, are the only children and legal heirs of the Spouses Zoilo and
Primitiva Espiritu, who both died during the pendency of the case before the
Honorable Court of Appeals. 2
Respondents Spouses Maximo and Paz Landrito (Spouses Landrito) are herein
represented by their son and attorney-in-fact, Zoilo Landrito. 3 SACEca
On 5 September 1986, Spouses Landrito loaned from the Spouses Espiritu the
amount of P350,000.00 payable in three months. To secure the loan, the Spouses
Landrito executed a real estate mortgage over a five hundred forty (540) square meter
lot located in Alabang, Muntinlupa, covered by Transfer Certificate of Title No. S48948, in favor of the Spouses Espiritu. From the P350,000.00 that the Landritos were
supposed to receive, P17,500.00 was deducted as interest for the first month which
was equivalent to five percent of the principal debt, and P7,500.00 was further
deducted as service fee. Thus, they actually received a net amount of P325,000.00.
The agreement, however, provided that the principal indebtedness earns "interest at
the legal rate." 4
After three months, when the debt became due and demandable, the Spouses
Landrito were unable to pay the principal, and had not been able to make any interest
payments other than the amount initially deducted from the proceeds of the loan. On

29 December 1986, the loan agreement was extended to 4 January 1987 through an
Amendment of Real Estate Mortgage. The loan was restructured in such a way that
the unpaid interest became part of the principal, thus increasing the principal to
P385,000. The new loan agreement adopted all other terms and conditions contained
in first agreement. 5
Due to the continued inability of the Spouses Landrito to settle their obligations with
the Spouses Espiritu, the loan agreement was renewed three more times. In all these
subsequent renewals, the same terms and conditions found in the first agreement
were retained. On 29 July 1987, the principal was increased to P507,000.00 inclusive
of running interest. On 11 March 1988, it was increased to P647,000.00. And on 21
October 1988, the principal was increased to P874,125.00. 6 At the hearing before
the trial court, Zoilo Espiritu testified that the increase in the principal in each
amendment of the loan agreement did not correspond to the amount delivered to the
Spouses Landrito. Rather, the increase in the principal had been due to unpaid
interest and other charges. 7 HSATIC
The debt remained unpaid. As a consequence, the Spouses Espiritu foreclosed the
mortgaged property on 31 October 1990. During the auction sale, the property was
sold to the Spouses Espiritu as the lone bidder. On 9 January 1991, the Sheriff's
Certificate of Sale was annotated on the title of the mortgaged property, giving the
Spouses Landrito until 8 January 1992 to redeem the property. 8
The Spouses Landrito failed to redeem the subject property although they alleged that
they negotiated for the redemption of the property as early as 30 October 1991. While
the negotiated price for the land started at P1,595,392.79, it was allegedly increased
by the Spouses Espiritu from time to time. Spouses Landrito allegedly tendered two
manager's checks and some cash, totaling P1,800,000.00 to the Spouses Espiritu on
13 January 1992, but the latter refused to accept the same. They also alleged that the
Spouses Espiritu increased the amount demanded to P2.5 Million and gave them until
July 1992 to pay the said amount. However, upon inquiry, they found out that on 24
June 1992, the Spouses Espiritu had already executed an Affidavit of Consolidation of
Ownership and registered the mortgaged property in their name, and that the Register
of Deeds of Makati had already issued Transfer Certificate of Title No. 179802 in the
name of the Spouses Espiritu. On 9 October 1992, the Spouses Landrito, represented
by their son Zoilo Landrito, filed an action for annulment or reconveyance of title, with
damages against the Spouses Espiritu before Branch 146 of the Regional Trial Court
of Makati. 9 Among the allegations in their Complaint, they stated that the Spouses
Espiritu, as creditors and mortgagees, "imposed interest rates that are shocking to
one's moral senses." 10
Page 53 of 505

The trial court dismissed the complaint and upheld the validity of the foreclosure sale.
The trial court ordered in its Decision, dated 13 December 1995: 11
WHEREFORE, all the foregoing premises considered, the herein complaint
is hereby dismissed forthwith. ECaHSI
Without pronouncements to costs.
The Spouses Landrito appealed to the Court of Appeals pursuant to Rule 41 of the
1997 Rules of Court. In its Decision dated 31 August 2005, the Court of Appeals
reversed the trial court's decision, decreeing that the five percent (5%) interest
imposed by the Spouses Espiritu on the first month and the varying interest rates
imposed for the succeeding months contravened the provisions of the Real Estate
Mortgage contract which provided that interest at the legal rate, i.e., 12% per annum,
would be imposed. It also ruled that although the Usury Law had been rendered
ineffective by Central Bank Circular No. 905, which, in effect, removed the ceiling
rates prescribed for interests, thus, allowing parties to freely stipulate thereon, the
courts may render void any stipulation of interest rates which are found iniquitous or
unconscionable. As a result, the Court of Appeals set the interest rate of the loan at
the legal rate, or 12% per annum. 12
Furthermore, the Court of Appeals held that the action for reconveyance, filed by the
Spouses Landrito, is still a proper remedy. Even if the Spouses Landrito failed to
redeem the property within the one-year redemption period provided by law, the
action for reconveyance remained as a remedy available to a landowner whose
property was wrongfully registered in another's name since the subject property has
not yet passed to an innocent purchaser for value. 13
In the decretal portion of its Decision, the Court of Appeals ruled: 14
WHEREFORE, the instant appeal is hereby GRANTED. The assailed
Decision dated December 13, 1995 of the Regional Trial Court of Makati,
Branch 146 in Civil Case No. 92-2920 is hereby REVERSED and SET
ASIDE, and a new one is hereby entered as follows: (1) The legal rate of
12% per annum is hereby FIXED to be applied as the interest of the loan;
and (2) Conditioned upon the payment of the loan, defendants-appellees
spouses Zoilo and Primitiva Espiritu are hereby ordered to reconvey Transfer
Certificate of Title No. S-48948 to appellant spouses Maximo and Paz
Landrito. IESAac
The case is REMANDED to the Trial Court for the above determination.
Hence, the present petition. The following issues were raised: 15

I
THE HONORABLE COURT OF APPEALS ERRED IN REVERSING AND
SETTING ASIDE THE DECISION OF THE TRIAL COURT AND ORDERING
HEREIN PETITIONERS TO RECONVEY TRANSFER CERTIFICATE OF
TITLE NO. 18918 TO HEREIN RESPONDENTS, WITHOUT ANY FACTUAL
OR LEGAL BASIS THEREFOR.
II
THE HONORABLE COURT OF APPEALS ERRED IN FINDING THAT
HEREIN PETITIONERS UNILATERALLY IMPOSED ON HEREIN
RESPONDENTS THE ALLEGEDLY UNREASONABLE INTERESTS ON
THE MORTGAGE LOANS.
III
THE HONORABLE COURT OF APPEALS ERRED IN NOT CONSIDERING
THAT HEREIN RESPONDENTS' ATTORNEY-IN-FACT IS NOT ARMED
WITH AUTHORITY TO FILE AND PROSECUTE THIS CASE. SDHCac
The petition is without merit.
The Real Estate Mortgage executed between the parties specified that "the principal
indebtedness shall earn interest at the legal rate." The agreement contained no other
provision on interest or any fees or charges incident to the debt. In at least three
contracts, all designated as Amendment of Real Estate Mortgage, the interest rate
imposed was, likewise, unspecified. During his testimony, Zoilo Espiritu admitted that
the increase in the principal in each of the Amendments of the Real Estate Mortgage
consists of interest and charges. The Spouses Espiritu alleged that the parties had
agreed on the interest and charges imposed in connection with the loan, hereunder
enumerated:
1. P17,500.00 was the interest charged for the first month and P7,500.00
was imposed as service fee.
2. P35,000.00 interest and charges, or the difference between the
P350,000.00 principal in the Real Estate Mortgage dated 5 September 1986
and the P385,000.00 principal in the Amendment of the Real Estate
Mortgage dated 29 December 1986. DCAEcS
3. P132,000.00 interest and charges, or the difference between the
P385,000.00 principal in the Amendment of the Real Estate Mortgage dated
Page 54 of 505

29 December 1986 and the P507,000.00 principal in the Amendment of the

Real Estate Mortgage dated 29 July 1987.
4. P140,000.00 interest and charges, or the difference between the
P507,000.00 principal in the Amendment of the Real Estate Mortgage dated
29 July 1987 and the P647,000.00 principal in the Amendment of the Real
Estate Mortgage dated 11 March 1988.
5. P227,125.00 interest and charges, or the difference between the
P647,000.00 principal in the Amendment of the Real Estate Mortgage dated
11 March 1988 and the P874,125 principal in the Amendment of the Real
Estate Mortgage dated 21 October 1988.

The total interest and charges amounting to P559,125.00 on the original principal of
P350,000 was accumulated over only two years and one month. These charges are
not found in any written agreement between the parties. The records fail to show any
computation on how much interest was charged and what other fees were imposed.
Not only did lack of transparency characterize the aforementioned agreements, the
interest rates and the service charge imposed, at an average of 6.39% per month, are
excessive. IHaECA
In enacting Republic Act No. 3765, known as the "Truth in Lending Act," the State
seeks to protect its citizens from a lack of awareness of the true cost of credit by
assuring the full disclosure of such costs. Section 4, in connection with Section
3(3) 16 of the said law, gives a detailed enumeration of the specific information
required to be disclosed, among which are the interest and other charges incident to
the extension of credit. Section 6 17 of the same law imposes on anyone who willfully
violates these provisions, sanctions which include civil liability, and a fine and/or
imprisonment.
Although any action seeking to impose either civil or criminal liability had already
prescribed, this Court frowns upon the underhanded manner in which the Spouses
Espiritu imposed interest and charges, in connection with the loan. This is aggravated
by the fact that one of the creditors, Zoilo Espiritu, a lawyer, is hardly in a position to
plead ignorance of the requirements of the law in connection with the transparency of
credit transactions. In addition, the Civil Code clearly provides that:
Article 1956. No interest shall be due unless it has been stipulated in writing.
The omission of the Spouses Espiritu in specifying in the contract the interest rate
which was actually imposed, in contravention of the law, manifested bad faith.

In several cases, this Court has been known to declare null and void stipulations on
interest and charges that were found excessive, iniquitous, and unconscionable. In
the case of Medel v. Court of Appeals, 18 the Court declared an interest rate of 5.5%
per month on a P500,000.00 loan to be excessive, iniquitous, unconscionable and
exorbitant. Even if the parties themselves agreed on the interest rate and stipulated
the same in a written agreement, it nevertheless declared such stipulation as void and
ordered the imposition of a 12% yearly interest rate. In Spouses Solangon v.
Salazar, 19 6% monthly interest on a P60,000.00 loan was likewise equitably reduced
to a 1% monthly interest or 12% per annum. In Ruiz v. Court of Appeals, 20 the Court
found a 3% monthly interest imposed on four separate loans with a total of
P1,050,000.00 to be excessive and reduced the interest to a 1% monthly interest or
12% per annum. IETCAS
In declaring void the stipulations authorizing excessive interest and charges, the Court
declared that although the Usury Law was suspended by Central Bank Circular No.
905, s. 1982, effective on 1 January 1983, and consequently parties are given a wide
latitude to agree on any interest rate, nothing in the said Circular grants lenderscarte
blanche authority to raise interest rates to levels which will either enslave their
borrowers or lead to a hemorrhaging of their assets. 21
Stipulations authorizing iniquitous or unconscionable interests are contrary to morals,
if not against the law. Under Article 1409 of the Civil Code, these contracts are
inexistent and void from the beginning. They cannot be ratified nor the right to set up
their illegality as a defense be waived. 22 The nullity of the stipulation on the usurious
interest does not, however, affect the lender's right to recover the principal of the
loan. 23 Nor would it affect the terms of the real estate mortgage. The right to
foreclose the mortgage remains with the creditors, and said right can be exercised
upon the failure of the debtors to pay the debt due. The debt due is to be considered
without the stipulation of the excessive interest. A legal interest of 12% per annum will
be added in place of the excessive interest formerly imposed.
While the terms of the Real Estate Mortgage remain effective, the foreclosure
proceedings held on 31 October 1990 cannot be given effect. In the Notice of Sheriff's
Sale24 dated 5 October 1990, and in the Certificate of Sale 25 dated 31 October
1990, the amount designated as mortgage indebtedness amounted to P874,125.00.
Likewise, in the demand letter 26 dated 12 December 1989, Zoilo Espiritu demanded
from the Spouses Landrito the amount of P874,125.00 for the unpaid loan. Since the
debt due is limited to the principal of P350,000.00 with 12% per annum as legal
interest, the previous demand for payment of the amount of P874,125.00 cannot be
considered as a valid demand for payment. For an obligation to become due, there
Page 55 of 505

must be a valid demand. 27 Nor can the foreclosure proceedings be considered valid
since the total amount of the indebtedness during the foreclosure proceedings was
pegged at P874,125.00 which included interest and which this Court now nullifies for
being excessive, iniquitous and exorbitant. If the foreclosure proceedings were
considered valid, this would result in an inequitable situation wherein the Spouses
Landrito will have their land foreclosed for failure to pay an over-inflated loan only a
small part of which they were obligated to pay. acSECT
Moreover, it is evident from the facts of the case that despite considerable effort on
their part, the Spouses Landrito failed to redeem the mortgaged property because
they were unable to raise the total amount, which was grossly inflated by the
excessive interest imposed. Their attempt to redeem the mortgaged property at the
inflated amount of P1,595,392.79, as early as 30 October 1991, is reflected in a letter,
which creditor-mortgagee Zoilo Landrito acknowledged to have received by affixing
his signature herein. 28 They also attached in their Complaint copies of two checks in
the amounts of P770,000.00 and P995,087.00, both dated 13 January 1992, which
were allegedly refused by the Spouses Espiritu. 29 Lastly, the Spouses Espiritu even
attached in their exhibits a copy of a handwritten letter, dated 27 January 1994,
written by Paz Landrito, addressed to the Spouses Espiritu, wherein the former
offered to pay the latter the sum of P2,000,000.00. 30 In all these instances, the
Spouses Landrito had tried, but failed, to pay an amount way over the indebtedness
they were supposed to pay i.e., P350,000.00 and 12% interest per annum. Thus, it
is only proper that the Spouses Landrito be given the opportunity to repay the real
amount of their indebtedness.
Since the Spouses Landrito, the debtors in this case, were not given an opportunity to
settle their debt, at the correct amount and without the iniquitous interest imposed, no
foreclosure proceedings may be instituted. A judgment ordering a foreclosure sale is
conditioned upon a finding on the correct amount of the unpaid obligation and the
failure of the debtor to pay the said amount. 31 In this case, it has not yet been shown
that the Spouses Landrito had already failed to pay the correct amount of the debt
and, therefore, a foreclosure sale cannot be conducted in order to answer for the
unpaid debt. The foreclosure sale conducted upon their failure to pay P874,125 in
1990 should be nullified since the amount demanded as the outstanding loan was
overstated; consequently it has not been shown that the mortgagors the Spouses
Landrito, have failed to pay their outstanding obligation. Moreover, if the proceeds of
the sale together with its reasonable rates of interest were applied to the obligation,
only a small part of its original loans would actually remain outstanding, but because
of the unconscionable interest rates, the larger part corresponded to said excessive
and iniquitous interest. aESICD

As a result, the subsequent registration of the foreclosure sale cannot transfer any
rights over the mortgaged property to the Spouses Espiritu. The registration of the
foreclosure sale, herein declared invalid, cannot vest title over the mortgaged
property. The Torrens system does not create or vest title where one does not have a
rightful claim over a real property. It only confirms and records title already existing
and vested. It does not permit one to enrich oneself at the expense of
another. 32Thus, the decree of registration, even after the lapse of one (1) year,
cannot attain the status of indefeasibility.
Significantly, the records show that the property mortgaged was purchased by the
Spouses Espiritu and had not been transferred to an innocent purchaser for value.
This means that an action for reconveyance may still be availed of in this case. 33
Registration of property by one person in his or her name, whether by mistake or
fraud, the real owner being another person, impresses upon the title so acquired the
character of a constructive trust for the real owner, which would justify an action for
reconveyance. 34 This is based on Article 1465 of the Civil Code which states that:
Art. 1465. If property acquired through mistakes or fraud, the person
obtaining it is, by force of law, considered a trustee of an implied trust for
benefit of the person from whom the property comes. DTSIEc
The action for reconveyance does not prescribe until after a period of ten years from
the date of the registration of the certificate of sale since the action would be based on
implied trust. 35 Thus, the action for reconveyance filed on 31 October 1992, more
than one year after the Sheriff's Certificate of Sale was registered on 9 January 1991,
was filed within the prescription period.
It should, however, be reiterated that the provisions of the Real Estate Mortgage are
not annulled and the principal obligation stands. In addition, the interest is not
completely removed; rather, it is set by this Court at 12% per annum. Should the
Spouses Landrito fail to pay the principal, with its recomputed interest which runs from
the time the loan agreement was entered into on 5 September 1986 until the present,
there is nothing in this Decision which prevents the Spouses Espiritu from foreclosing
the mortgaged property.

The last issue raised by the petitioners is whether or not Zoilo Landrito was authorized
to file the action for reconveyance filed before the trial court or even to file the appeal
from the judgment of the trial court, by virtue of the Special Power of Attorney dated
Page 56 of 505

30 September 1992. They further noted that the trial court and the Court of Appeals
failed to rule on this issue. 36
The Special Power of Attorney 37 dated 30 September 1992 was executed by Maximo
Landrito, Jr., with the conformity of Paz Landrito, in connection with the mortgaged
property. It authorized Zoilo Landrito:
2. To make, sign, execute and deliver corresponding pertinent contracts,
documents, agreements and other writings of whatever nature or kind and to
sue or file legal action in any court of the Philippines, to collect, ask
demands, encash checks, and recover any and all sum of monies, proceeds,
interest and other due accruing, owning, payable or belonging to me as such
owner of the afore-mentioned property. (Emphasis provided.) AEIHaS
Zoilo Landrito's authority to file the case is clearly set forth in the Special Power of
Attorney. Furthermore, the records of the case unequivocally show that Zoilo Landrito
filed the reconveyance case with the full authority of his mother, Paz Landrito, who
attended the hearings of the case, filed in her behalf, without making any
protest. 38She even testified in the same case on 30 August 1995. From the acts of
Paz Landrito, there is no doubt that she had authorized her son to file the action for
reconveyance, in her behalf, before the trial court.
IN VIEW OF THE FOREGOING, the instant Petition is DENIED. This Court AFFIRMS
the assailed Decision of the Court of Appeals, promulgated on 31 August 2005, fixing
the interest rate of the loan between the parties at 12% per annum, and ordering the
Spouses Espiritu to reconvey the subject property to the Spouses Landrito
conditioned upon the payment of the loan together with herein fixed rate of interest.
Costs against the petitioners. EDATSC

EN BANC
[G.R. No. 189871. August 13, 2013.]

SO ORDERED.
Ynares-Santiago, Austria-Martinez, Callejo, Sr. and Nachura, JJ., concur.
||| (Heirs of Espiritu v. Spouses Landrito, G.R. No. 169617, [April 3, 2007], 549 PHIL
180-197)

DARIO NACAR, petitioner, vs.

BORDEY, JR., respondents.

GALLERY

FRAMES

and/or

FELIPE

DECISION

PERALTA, J p:

Page 57 of 505

This is a petition for review on certiorari assailing the Decision 1 dated September 23,
2008 of the Court of Appeals (CA) in CA-G.R. SP No. 98591, and the
Resolution 2dated October 9, 2009 denying petitioner's motion for reconsideration.

Rate per day

P196.00

Date of Decisions

Aug. 18, 1998

a)

P196.00/day x 12.36 mos.

The factual antecedents are undisputed.

Petitioner Dario Nacar filed a complaint for constructive dismissal before the
Arbitration Branch of the National Labor Relations Commission (NLRC) against
respondents Gallery Frames (GF) and/or Felipe Bordey, Jr., docketed as NLRC NCR
Case No. 01-00519-97.
On October 15, 1998, the Labor Arbiter rendered a Decision 3 in favor of petitioner
and found that he was dismissed from employment without a valid or just cause.
Thus, petitioner was awarded backwages and separation pay in lieu of reinstatement
in the amount of P158,919.92. The dispositive portion of the decision, reads:
With the foregoing, we find and so rule that respondents failed to discharge
the burden of showing that complainant was dismissed from employment for
a just or valid cause. All the more, it is clear from the records that
complainant was never afforded due process before he was terminated. As
such, we are perforce constrained to grant complainant's prayer for the
payments of separation pay in lieu of reinstatement to his former position,
considering the strained relationship between the parties, and his apparent
reluctance to be reinstated, computed only up to promulgation of this
decision as follows: CcSTHI

b)

P62,986.56

Prevailing Rate per day

P62,986.00

P198.00 x 26 days x 6.4 mos.

P32,947.20

TOTAL

2/6/98 to 8/18/98 = 6.4 months

P95,933.76
========

xxx xxx xxx

WHEREFORE, premises considered, judgment is hereby rendered finding
respondents guilty of constructive dismissal and are therefore, ordered:
1.To pay jointly and severally the complainant the amount of sixty-two
thousand nine hundred eighty-six pesos and 56/100 (P62,986.56) Pesos
representing his separation pay;
2.To pay jointly and severally the complainant the amount of nine (sic) five
thousand nine hundred thirty-three and 36/100 (P95,933.36) representing his
backwages; and
3.All other claims are hereby dismissed for lack of merit.

SEPARATION PAY

SO ORDERED. 4

Date Hired

August 1990

Rate

P198/day

Date of Decision

Aug. 18, 1998

Length of Service

8 yrs. & 1 month

P198.00 x 26 days x 8 months

P41,184.00

January 24, 1997

BACKWAGES
Date Dismissed

1/24/97 to 2/5/98 = 12.36 mos.

Respondents appealed to the NLRC, but it was dismissed for lack of merit in the
Resolution 5 dated February 29, 2000. Accordingly, the NLRC sustained the decision
of the Labor Arbiter. Respondents filed a motion for reconsideration, but it was
denied. 6
Dissatisfied, respondents filed a Petition for Review on Certiorari before the CA. On
August 24, 2000, the CA issued a Resolution dismissing the petition. Respondents
filed a Motion for Reconsideration, but it was likewise denied in a Resolution dated
May 8, 2001. 7

Page 58 of 505

Respondents then sought relief before the Supreme Court, docketed as G.R. No.
151332. Finding no reversible error on the part of the CA, this Court denied the
petition in the Resolution dated April 17, 2002. 8
An Entry of Judgment was later issued certifying that the resolution became final and
executory on May 27, 2002. 9 The case was, thereafter, referred back to the Labor
Arbiter. A pre-execution conference was consequently scheduled, but respondents
failed to appear. 10
On November 5, 2002, petitioner filed a Motion for Correct Computation, praying that
his backwages be computed from the date of his dismissal on January 24, 1997 up to
the finality of the Resolution of the Supreme Court on May 27, 2002. 11 Upon
recomputation, the Computation and Examination Unit of the NLRC arrived at an
updated amount in the sum of P471,320.31. 12 DSCIEa
On December 2, 2002, a Writ of Execution 13 was issued by the Labor Arbiter
ordering the Sheriff to collect from respondents the total amount of P471,320.31.
Respondents filed a Motion to Quash Writ of Execution, arguing, among other things,
that since the Labor Arbiter awarded separation pay of P62,986.56 and limited
backwages of P95,933.36, no more recomputation is required to be made of the said
awards. They claimed that after the decision becomes final and executory, the same
cannot be altered or amended anymore. 14 On January 13, 2003, the Labor Arbiter
issued an Order 15 denying the motion. Thus, an Alias Writ of Execution 16 was
issued on January 14, 2003.
Respondents again appealed before the NLRC, which on June 30, 2003 issued a
Resolution 17 granting the appeal in favor of the respondents and ordered the
recomputation of the judgment award.
On August 20, 2003, an Entry of Judgment was issued declaring the Resolution of the
NLRC to be final and executory. Consequently, another pre-execution conference was
held, but respondents failed to appear on time. Meanwhile, petitioner moved that an
Alias Writ of Execution be issued to enforce the earlier recomputed judgment award in
the sum of P471,320.31. 18
The records of the case were again forwarded to the Computation and Examination
Unit for recomputation, where the judgment award of petitioner was reassessed to be
in the total amount of only P147,560.19.
Petitioner then moved that a writ of execution be issued ordering respondents to pay
him the original amount as determined by the Labor Arbiter in his Decision dated

October 15, 1998, pending the final computation of his backwages and separation
pay.
On January 14, 2003, the Labor Arbiter issued an Alias Writ of Execution to satisfy the
judgment award that was due to petitioner in the amount of P147,560.19, which
petitioner eventually received.
Petitioner then filed a Manifestation and Motion praying for the re-computation of the
monetary award to include the appropriate interests. 19
On May 10, 2005, the Labor Arbiter issued an Order 20 granting the motion, but only
up to the amount of P11,459.73. The Labor Arbiter reasoned that it is the October 15,
1998 Decision that should be enforced considering that it was the one that became
final and executory. However, the Labor Arbiter reasoned that since the decision
states that the separation pay and backwages are computed only up to the
promulgation of the said decision, it is the amount of P158,919.92 that should be
executed. Thus, since petitioner already received P147,560.19, he is only entitled to
the balance of P11,459.73.
Petitioner then appealed before the NLRC, 21 which appeal was denied by the NLRC
in its Resolution 22 dated September 27, 2006. Petitioner filed a Motion for
Reconsideration, but it was likewise denied in the Resolution 23 dated January 31,
2007.
Aggrieved, petitioner then sought recourse before the CA, docketed as CA-G.R. SP
No. 98591.
On September 23, 2008, the CA rendered a Decision 24 denying the petition. The CA
opined that since petitioner no longer appealed the October 15, 1998 Decision of the
Labor Arbiter, which already became final and executory, a belated correction thereof
is no longer allowed. The CA stated that there is nothing left to be done except to
enforce the said judgment. Consequently, it can no longer be modified in any respect,
except to correct clerical errors or mistakes.
Petitioner filed a Motion for Reconsideration, but it was denied in the
Resolution 25 dated October 9, 2009.
Hence, the petition assigning the lone error: ScaATD
I
WITH DUE RESPECT, THE HONORABLE COURT OF APPEALS
SERIOUSLY ERRED, COMMITTED GRAVE ABUSE OF DISCRETION
Page 59 of 505

AND DECIDED CONTRARY TO LAW IN UPHOLDING THE

QUESTIONED RESOLUTIONS OF THE NLRC WHICH, IN TURN,
SUSTAINED THE MAY 10, 2005 ORDER OF LABOR ARBITER MAGAT
MAKING THE DISPOSITIVE PORTION OF THE OCTOBER 15, 1998
DECISION OF LABOR ARBITER LUSTRIA SUBSERVIENT TO AN
OPINION EXPRESSED IN THE BODY OF THE SAME DECISION. 26
Petitioner argues that notwithstanding the fact that there was a computation of
backwages in the Labor Arbiter's decision, the same is not final until reinstatement is
made or until finality of the decision, in case of an award of separation pay. Petitioner
maintains that considering that the October 15, 1998 decision of the Labor Arbiter did
not become final and executory until the April 17, 2002 Resolution of the Supreme
Court in G.R. No. 151332 was entered in the Book of Entries on May 27, 2002, the
reckoning point for the computation of the backwages and separation pay should be
on May 27, 2002 and not when the decision of the Labor Arbiter was rendered on
October 15, 1998. Further, petitioner posits that he is also entitled to the payment of
interest from the finality of the decision until full payment by the respondents.
On their part, respondents assert that since only separation pay and limited
backwages were awarded to petitioner by the October 15, 1998 decision of the Labor
Arbiter, no more recomputation is required to be made of said awards. Respondents
insist that since the decision clearly stated that the separation pay and backwages are
"computed only up to [the] promulgation of this decision," and considering that
petitioner no longer appealed the decision, petitioner is only entitled to the award as
computed by the Labor Arbiter in the total amount of P158,919.92. Respondents
added that it was only during the execution proceedings that the petitioner questioned
the award, long after the decision had become final and executory. Respondents
contend that to allow the further recomputation of the backwages to be awarded to
petitioner at this point of the proceedings would substantially vary the decision of the
Labor Arbiter as it violates the rule on immutability of judgments.
The petition is meritorious.
The instant case is similar to the case of Session Delights Ice Cream and Fast Foods
v. Court of Appeals (Sixth Division), 27 wherein the issue submitted to the Court for
resolution was the propriety of the computation of the awards made, and whether this
violated the principle of immutability of judgment. Like in the present case, it was a
distinct feature of the judgment of the Labor Arbiter in the above-cited case that the
decision already provided for the computation of the payable separation pay and
backwages due and did not further order the computation of the monetary awards up

to the time of the finality of the judgment. Also in Session Delights, the dismissed
employee failed to appeal the decision of the labor arbiter. The Court clarified, thus:
In concrete terms, the question is whether a re-computation in the course of
execution of the labor arbiter's original computation of the awards made,
pegged as of the time the decision was rendered and confirmed with
modification by a final CA decision, is legally proper. The question is posed,
given that the petitioner did not immediately pay the awards stated in the
original labor arbiter's decision; it delayed payment because it continued with
the litigation until final judgment at the CA level.
A source of misunderstanding in implementing the final decision in this case
proceeds from the way the original labor arbiter framed his decision. The
decision consists essentially of two parts.
The first is that part of the decision that cannot now be disputed because it
has been confirmed with finality. This is the finding of the illegality of the
dismissal and the awards of separation pay in lieu of reinstatement,
backwages, attorney's fees, and legal interests. TaISEH
The second part is the computation of the awards made. On its face, the
computation the labor arbiter made shows that it was time-bound as can be
seen from the figures used in the computation. This part, being merely a
computation of what the first part of the decision established and declared,
can, by its nature, be re-computed. This is the part, too, that the petitioner
now posits should no longer be re-computed because the computation is
already in the labor arbiter's decision that the CA had affirmed. The public
and private respondents, on the other hand, posit that a re-computation is
necessary because the relief in an illegal dismissal decision goes all the way
up to reinstatement if reinstatement is to be made, or up to the finality of the
decision, if separation pay is to be given in lieu reinstatement.
That the labor arbiter's decision, at the same time that it found that an illegal
dismissal had taken place, also made a computation of the award, is
understandable in light of Section 3, Rule VIII of the then NLRC Rules of
Procedure which requires that a computation be made. This Section in part
states:
[T]he Labor Arbiter of origin, in cases involving monetary awards and at all
events, as far as practicable, shall embody in any such decision or order the
detailed and full amount awarded.
Page 60 of 505

Clearly implied from this original computation is its currency up to the finality
of the labor arbiter's decision. As we noted above, this implication is
apparent from the terms of the computation itself, and no question would
have arisen had the parties terminated the case and implemented the
decision at that point.
However, the petitioner disagreed with the labor arbiter's findings on all
counts i.e., on the finding of illegality as well as on all the consequent
awards made. Hence, the petitioner appealed the case to the NLRC which,
in turn, affirmed the labor arbiter's decision. By law, the NLRC decision is
final, reviewable only by the CA on jurisdictional grounds.
The petitioner appropriately sought to nullify the NLRC decision on
jurisdictional grounds through a timely filed Rule 65 petition for certiorari. The
CA decision, finding that NLRC exceeded its authority in affirming the
payment of 13th month pay and indemnity, lapsed to finality and was
subsequently returned to the labor arbiter of origin for execution.
It was at this point that the present case arose. Focusing on the core illegal
dismissal portion of the original labor arbiter's decision, the implementing
labor arbiter ordered the award re-computed; he apparently read the figures
originally ordered to be paid to be the computation due had the case been
terminated and implemented at the labor arbiter's level. Thus, the labor
arbiter re-computed the award to include the separation pay and the
backwages due up to the finality of the CA decision that fully terminated the
case on the merits. Unfortunately, the labor arbiter's approved computation
went beyond the finality of the CA decision (July 29, 2003) and included as
well the payment for awards the final CA decision had deleted specifically,
the proportionate 13th month pay and the indemnity awards. Hence, the CA
issued the decision now questioned in the present petition.

recomputation as this step is a necessary consequence that flows from the nature of
the illegality of dismissal declared by the Labor Arbiter in that decision. 29 A
recomputation (or an original computation, if no previous computation has been
made) is a part of the law specifically, Article 279 of the Labor Code and the
established jurisprudence on this provision that is read into the decision. By the
nature of an illegal dismissal case, the reliefs continue to add up until full satisfaction,
as expressed under Article 279 of the Labor Code. The recomputation of the
consequences of illegal dismissal upon execution of the decision does not constitute
an alteration or amendment of the final decision being implemented. The illegal
dismissal ruling stands; only the computation of monetary consequences of this
dismissal is affected, and this is not a violation of the principle of immutability of final
judgments. 30
That the amount respondents shall now pay has greatly increased is a consequence
that it cannot avoid as it is the risk that it ran when it continued to seek recourses
against the Labor Arbiter's decision. Article 279 provides for the consequences of
illegal dismissal in no uncertain terms, qualified only by jurisprudence in its
interpretation of when separation pay in lieu of reinstatement is allowed. When that
happens, the finality of the illegal dismissal decision becomes the reckoning point
instead of the reinstatement that the law decrees. In allowing separation pay, the final
decision effectively declares that the employment relationship ended so that
separation pay and backwages are to be computed up to that point. 31
Finally, anent the payment of legal interest. In the landmark case of Eastern Shipping
Lines, Inc. v. Court of Appeals, 32 the Court laid down the guidelines regarding the
manner of computing legal interest, to wit:
II.With regard particularly to an award of interest in the concept of actual
and compensatory damages, the rate of interest, as well as the accrual
thereof, is imposed, as follows:

We see no error in the CA decision confirming that a re-computation is

necessary as it essentially considered the labor arbiter's original decision in
accordance with its basic component parts as we discussed above. To
reiterate, the first part contains the finding of illegality and its monetary
consequences; the second part is the computation of the awards or
monetary consequences of the illegal dismissal, computed as of the time of
the labor arbiter's original decision. 28 ESaITA

1.When the obligation is breached, and it consists in the payment of a sum of

money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.

Consequently, from the above disquisitions, under the terms of the decision which is
sought to be executed by the petitioner, no essential change is made by a

2.When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed
Page 61 of 505

at thediscretion of the court at the rate of 6% per annum. No interest,

however, shall be adjudged on unliquidated claims or damages except when
or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.
3.When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit. 33
Recently, however, the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB), in its
Resolution No. 796 dated May 16, 2013, approved the amendment of Section 2 34 of
Circular No. 905, Series of 1982 and, accordingly, issued Circular No. 799, 35 Series
of 2013, effective July 1, 2013, the pertinent portion of which reads: AHcaDC
The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved
the following revisions governing the rate of interest in the absence of
stipulation in loan contracts, thereby amending Section 2 of Circular No. 905,
Series of 1982:
Section 1.The rate of interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in the absence of an
express contract as to such rate of interest, shall be six percent (6%) per
annum.
Section 2.In view of the above, Subsection X305.1 36 of the Manual of
Regulations for Banks and Sections 4305Q.1, 37 4305S.3 38 and
4303P.1 39 of the Manual of Regulations for Non-Bank Financial Institutions
are hereby amended accordingly.
This Circular shall take effect on 1 July 2013.
Thus, from the foregoing, in the absence of an express stipulation as to the rate of
interest that would govern the parties, the rate of legal interest for loans or

forbearance of any money, goods or credits and the rate allowed in judgments shall
no longer be twelve percent (12%) per annum as reflected in the case of Eastern
Shipping Lines 40 and Subsection X305.1 of the Manual of Regulations for Banks and
Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank
Financial Institutions, before its amendment by BSP-MB Circular No. 799 but will
now be six percent (6%) per annum effective July 1, 2013. It should be noted,
nonetheless, that the new rate could only be applied prospectively and not
retroactively. Consequently, the twelve percent (12%) per annum legal interest shall
apply only until June 30, 2013. Come July 1, 2013 the new rate of six percent
(6%) per annum shall be the prevailing rate of interest when applicable.
Corollarily, in the recent case of Advocates for Truth in Lending, Inc. and Eduardo B.
Olaguer v. Bangko Sentral Monetary Board, 41 this Court affirmed the authority of the
BSP-MB to set interest rates and to issue and enforce Circulars when it ruled that "the
BSP-MB may prescribe the maximum rate or rates of interest for all loans or renewals
thereof or the forbearance of any money, goods or credits, including those for loans of
low priority such as consumer loans, as well as such loans made by pawnshops,
finance companies and similar credit institutions. It even authorizes the BSP-MB to
prescribe different maximum rate or rates for different types of borrowings, including
deposits and deposit substitutes, or loans of financial intermediaries."
Nonetheless, with regard to those judgments that have become final and executory
prior to July 1, 2013, said judgments shall not be disturbed and shall continue to be
implemented applying the rate of interest fixed therein.
To recapitulate and for future guidance, the guidelines laid down in the case
of Eastern Shipping Lines 42 are accordingly modified to embody BSP-MB
Circular No. 799, as follows:
I.When an obligation, regardless of its source, i.e., law, contracts, quasicontracts, delicts or quasi-delicts is breached, the contravenor can be held
liable for damages. The provisions under Title XVIII on "Damages" of
the Civil Code govern in determining the measure of recoverable damages.
II.With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows: HcSaTI
1.When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
Page 62 of 505

absence of stipulation, the rate of interest shall be 6% per annum to be

computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code.

(3)interest of twelve percent (12%) per annum of the total monetary awards,
computed from May 27, 2002 to June 30, 2013 and six percent (6%) per annum from
July 1, 2013 until their full satisfaction.

2.When an obligation, not constituting a loan or forbearance of money, is

breached, an interest on the amount of damages awarded may be imposed
at the discretion of the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or damages, except when
or until the demand can be established with reasonable certainty.
Accordingly, where the demand is established with reasonable certainty, the
interest shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code), but when such certainty cannot be so
reasonably established at the time the demand is made, the interest shall
begin to run only from the date the judgment of the court is made (at which
time the quantification of damages may be deemed to have been reasonably
ascertained). The actual base for the computation of legal interest shall, in
any case, be on the amount finally adjudged.

The Labor Arbiter is hereby ORDERED to make another recomputation of the total
monetary benefits awarded and due to petitioner in accordance with this Decision.
SO ORDERED. TSIaAc
Sereno, C.J., Carpio, Velasco, Jr., Leonardo-de Castro, Brion, Bersamin, Del Castillo,
Abad, Villarama, Jr., Perez, Mendoza, Reyes, Perlas-Bernabe and Leonen,
JJ., concur.
||| (Nacar v. Gallery Frames, G.R. No. 189871, [August 13, 2013])

3.When the judgment of the court awarding a sum of money becomes final
and executory, the rate of legal interest, whether the case falls under
paragraph 1 or paragraph 2, above, shall be 6% per annum from such finality
until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
And, in addition to the above, judgments that have become final and executory prior to
July 1, 2013, shall not be disturbed and shall continue to be implemented applying the
rate of interest fixed therein.
WHEREFORE, premises considered, the Decision dated September 23, 2008 of the
Court of Appeals in CA-G.R. SP No. 98591, and the Resolution dated October 9,
2009
are REVERSED and SET
ASIDE. Respondents
are ORDERED
to
PAY petitioner:
(1)backwages computed from the time petitioner was illegally dismissed on January
24, 1997 up to May 27, 2002, when the Resolution of this Court in G.R. No. 151332
became final and executory;
(2)separation pay computed from August 1990 up to May 27, 2002 at the rate of one
month pay per year of service; and

EN BANC
[G.R. No. 47878. July 24, 1942.]
GIL JARDENIL, plaintiff-appellant, vs. HEFTI SOLAS (alias HEPTI SOLAS,
JEPTI SOLAS), defendant-appellee.

Page 63 of 505

Eleuterio J. Gustilo, for appellant.

Jose C. Robles, for appellee.

DECISION

MORAN, J. p.
This is an action for foreclosure of mortgage. The only question raised in this
appeal is: Is defendant-appellee bound to pay the stipulated interest only up to the
date of maturity as fixed in the promissory note, or up to the date payment is
effected? This question is, in our opinion, controlled by the express stipulation of the
parties.
Paragraph 4 of the mortgage deed recites:
"Que en consideracion a dicha suma aun por pagar de DOS MIL
CUATROCIENTOS PESOS (P2,400.00), moneda filipina, que el Sr. Hepti
Solas se compromete a pagar al Sr. Jardenil en o antes del da treintaiuno
(31) de marzo de mil novecientos treintaicuatro (1934), con los intereses de
dicha suma al tipo de doce por ciento (12%) anual a partir desde esta fecha
hasta el da de su vencimiento, o sea el treintaiuno (31) de marzo de mil
novecientos treintaicuatro (1934), por la presente, el Sr. Hepti Solas cede y
traspasa, por va de primera hipoteca, a favor del Sr. Jardenil, sus
herederos y causahabientes, la parcela de terreno descrita en el prrafo
primero (1.) de esta escritura."
Defendant-appellee has, therefore, clearly agreed to pay interest only up to the date
of maturity, or until March 31, 1934. As the contract is silent as to whether after that
date, in the event of non- payment, the debtor would continue to pay interest, we
cannot, in law, indulge in any presumption as to such interest; otherwise, we would
be imposing upon the debtor an obligation that the parties have not chosen to agree
upon. Article 1755 of the Civil Code provides that "interest shall be due only when it
has been expressly stipulated." (Italic supplied.).

mortgage deed to show that the terms employed by the parties thereto are at war
with their evident intent. On the contrary, the act of the mortgagee of granting to the
mortgagor, on the same date of the execution of the deed of mortgage, an
extension of one year from the date of maturity within which to make
payment,without making any mention of any interest which the mortgagor should
pay during the additional period (see Exhibit B attached to the complaint), indicates
that the true intention of the parties was that no interest should be paid during the
period of grace. What reasons the parties may have therefor, we need not here
seek to explore.
Neither has either of the parties shown that, by mutual mistake, the deed of
mortgage fails to express their true agreement, for if such mistake existed, plaintiff
would have undoubtedly adduced evidence to establish it and asked that the deed
be reformed accordingly, under the parcel-evidence rule.
We hold, therefore, that as the contract is clear and unmistakable and the terms
employed therein have not been shown to belie or otherwise fail to express the true
intention of the parties, and that the deed has not been assailed on the ground of
mutual mistake which would require its reformation, same should be given its full
force and effect. When a party sues on a written contract and no attempt is made to
show any vice therein, he cannot be allowed to lay any claim more than what its
clear stipulations accord. His omission, to which the law attaches a definite
meaning as in the instant case, cannot by the courts be arbitrarily supplied by what
their own notions of justice or equity may dictate.
Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the
loan of P2,400 from November 8, 1932 to March 31, 1934. And it being a fact that
extrajudicial demands have been made which we may assume to have been so
made on the expiration of the year of grace, he shall be entitled to legal interest
upon the principal and the accrued interest from April 1, 1935, until full payment.
Thus modified, judgment is affirmed, with costs against appellant.
Yulo, C.J., Ozaeta and Bocobo, JJ., concur.
||| (Jardenil v. Solas, G.R. No. 47878, [July 24, 1942], 73 PHIL 626-627)

A writing must be interpreted according to the legal meaning of its language

(section 286, Act No. 190, now section 58, Rule 123), and only when the wording of
the written instrument appears to be contrary to the evident intention of the parties
that such intention must prevail. (Article 1281, Civil Code.) There is nothing in the
Page 64 of 505

On December 8, 1993, Pantaleon, the President and Chairman of the Board of

PRISMA, obtained a P1,000,000.00 4 loan from the respondent, with a monthly
interest of P40,000.00 payable for six months, or a total obligation of
P1,240,000.00 to be paid within six (6) months, 5 under the following schedule of
payments:

SECOND DIVISION
[G.R. No. 160545. March 9, 2010.]
PRISMA CONSTRUCTION & DEVELOPMENT CORPORATION and
ROGELIO
S.
PANTALEON, petitioners, vs.
ARTHUR
F.
MENCHAVEZ, respondent.

DECISION

BRION, J p:
We resolve in this Decision the petition for review on certiorari 1 filed by petitioners
Prisma Construction & Development Corporation (PRISMA) and Rogelio S.
Pantaleon(Pantaleon) (collectively, petitioners) who seek to reverse and set aside the
Decision 2 dated May 5, 2003 and the Resolution 3 dated October 22, 2003 of the
Former Ninth Division of the Court of Appeals (CA) in CA-G.R. CV No. 69627. The
assailed CA Decision affirmed the Decision of the Regional Trial Court (RTC), Branch
73, Antipolo City in Civil Case No. 97-4552 that held the petitioners liable for payment
of P3,526,117.00 to respondent Arthur F. Menchavez (respondent), but modified the
interest rate from 4% per month to 12% per annum, computed from the filing of the
complaint to full payment. The assailed CA Resolution denied the petitioners' Motion
for Reconsideration.
FACTUAL BACKGROUND
The facts of the case, gathered from the records, are briefly summarized below.

January 8, 1994
February 8, 1994
March 8, 1994
April 8, 1994
May 8, 1994
June 8, 1994

P40,000.00
P40,000.00
P40,000.00
P40,000.00
P40,000.00
P1,040,000.00 6

Total
P1,240.000.00
=============
To secure the payment of the loan, Pantaleon issued a promissory note 7 that states:
I, Rogelio S. Pantaleon, hereby acknowledge the receipt of ONE MILLION
TWO HUNDRED FORTY THOUSAND PESOS (P1,240,000), Philippine
Currency, from Mr. Arthur F. Menchavez, representing a six-month loan
payable according to the following schedule: cACEHI
January 8, 1994
February 8, 1994
March 8, 1994
April 8, 1994
May 8, 1994
June 8, 1994
The checks corresponding
acknowledged. 8

P40,000.00
P40,000.00
P40,000.00
P40,000.00
P40,000.00
P1,040,000.00
to the above

amounts

are

hereby

and six (6) postdated checks corresponding to the schedule of payments.

Pantaleon signed the promissory note in his personal capacity, 9 and as duly
authorized by the Board of Directors of PRISMA. 10 The petitioners failed to
completely pay the loan within the stipulated six (6)-month period.
From September 8, 1994 to January 4, 1997, the petitioners paid the following
amounts to the respondent:
September 8, 1994
October 8, 1995
November 8, 1995

P320,000.00
P600,000.00
P158,772.00
Page 65 of 505

January 4, 1997

P30,000.00 11

As of January 4, 1997, the petitioners had already paid a total of P1,108,772.00.

However, the respondent found that the petitioners still had an outstanding balance
of P1,364,151.00 as of January 4, 1997, to which it applied a 4% monthly
interest. 12 Thus, on August 28, 1997, the respondent filed a complaint for sum of
money with the RTC to enforce the unpaid balance, plus 4% monthly interest,
P30,000.00 in attorney's fees, P1,000.00 per court appearance and costs of suit. 13
In their Answer dated October 6, 1998, the petitioners admitted the loan of
P1,240,000.00, but denied the stipulation on the 4% monthly interest, arguing that the
interest was not provided in the promissory note. Pantaleon also denied that he made
himself personally liable and that he made representations that the loan would be
repaid within six (6) months. 14
THE RTC RULING
The RTC rendered a Decision on October 27, 2000 finding that the respondent issued
a check for P1,000,000.00 in favor of the petitioners for a loan that would earn an
interest of 4% or P40,000.00 per month, or a total of P240,000.00 for a 6-month
period. It noted that the petitioners made several payments amounting to
P1,228,772.00, but they were still indebted to the respondent for P3,526,117.00 as of
February 11, 15 1999 after considering the 4% monthly interest. The RTC observed
that PRISMA was a one-man corporation of Pantaleon and used this circumstance to
justify the piercing of the veil of corporate fiction. Thus, the RTC ordered the
petitioners to jointly and severally pay the respondent the amount of P3,526,117.00
plus 4% per month interest from February 11, 1999 until fully paid. 16
The petitioners elevated the case to the CA via an ordinary appeal under Rule 41 of
the Rules of Court, insisting that there was no express stipulation on the 4% monthly
interest. AEHTIC

After the CA's denial 18 of their motion for reconsideration, 19 the petitioners filed the
present petition for review on certiorari under Rule 45 of the Rules of Court.
THE PETITION
The petitioners submit that the CA mistakenly relied on their board resolution to
conclude that the parties agreed to a 4% monthly interest because the board
resolution was not an evidence of a loan or forbearance of money, but merely an
authorization for Pantaleon to perform certain acts, including the power to enter into a
contract of loan. The expressed mandate of Article 1956 of the Civil Code is that
interest due should be stipulated in writing, and no such stipulation exists. Even
assuming that the loan is subject to 4% monthly interest, the interest covers the six
(6)-month period only and cannot be interpreted to apply beyond it. The petitioners
also point out the glaring inconsistency in the CA Decision, which reduced the interest
from 4% per month or 48% per annum to 12% per annum, but failed to consider that
the amount of P3,526,117.00 that the RTC ordered them to pay includes the
compounded 4% monthly interest.
THE CASE FOR THE RESPONDENT
The respondent counters that the CA correctly ruled that the loan is subject to a 4%
monthly interest because the board resolution is attached to, and an integral part of,
the promissory note based on which the petitioners obtained the loan. The
respondent further contends that the petitioners are estopped from assailing the 4%
monthly interest, since they agreed to pay the 4% monthly interest on the principal
amount under the promissory note and the board resolution.
THE ISSUE
The core issue boils down to whether the parties agreed to the 4% monthly interest on
the loan. If so, does the rate of interest apply to the 6-month payment period only or
until full payment of the loan?

THE CA RULING
The CA decided the appeal on May 5, 2003. The CA found that the parties agreed to
a 4% monthly interest principally based on the board resolution that authorized
Pantaleon to transact a loan with an approved interest of not more than 4% per
month. The appellate court, however, noted that the interest of 4% per month, or 48%
per annum, was unreasonable and should be reduced to 12% per annum. The CA
affirmed the RTC's finding that PRISMA was a mere instrumentality of Pantaleon that
justified the piercing of the veil of corporate fiction. Thus, the CA modified the RTC
Decision by imposing a 12% per annum interest, computed from the filing of the
complaint until finality of judgment, and thereafter, 12% from finality until fully paid. 17

OUR RULING
We find the petition meritorious.
Interest
due
stipulated
otherwise, 12% per annum

should
in

be
writing;

Obligations arising from contracts have the force of law between the contracting
parties and should be complied with in good faith. 20 When the terms of a contract
are clear and leave no doubt as to the intention of the contracting parties, the literal
Page 66 of 505

meaning of its stipulations governs. 21 In such cases, courts have no authority to alter
the contract by construction or to make a new contract for the parties; a court's duty is
confined to the interpretation of the contract the parties made for themselves without
regard to its wisdom or folly, as the court cannot supply material stipulations or read
into the contract words the contract does not contain. 22 It is only when the contract is
vague and ambiguous that courts are permitted to resort to the interpretation of its
terms to determine the parties' intent. DISEaC
In the present case, the respondent issued a check for P1,000,000.00. 23 In turn,
Pantaleon, in his personal capacity and as authorized by the Board, executed the
promissory note quoted above. Thus, the P1,000,000.00 loan shall be payable within
six (6) months, or from January 8, 1994 up to June 8, 1994. During this period, the
loan shall earn an interest of P40,000.00 per month, for a total obligation of
P1,240,000.00 for the six-month period. We note that this agreed sum can be
computed at 4% interest per month, but no such rate of interest was stipulated
in the promissory note; rather a fixed sum equivalent to this rate was agreed
upon.
Article 1956 of the Civil Code specifically mandates that "no interest shall be due
unless it has been expressly stipulated in writing." Under this provision, the payment
of interest in loans or forbearance of money is allowed only if: (1) there was an
express stipulation for the payment of interest; and (2) the agreement for the payment
of interest was reduced in writing. The concurrence of the two conditions is required
for the payment of interest at a stipulated rate. Thus, we held in Tan v.
Valdehueza 24and Ching v. Nicdao 25 that collection of interest without any
stipulation in writing is prohibited by law.
Applying this provision, we find that the interest of P40,000.00 per month corresponds
only to the six (6)-month period of the loan, or from January 8, 1994 to June 8, 1994,
as agreed upon by the parties in the promissory note. Thereafter, the interest on the
loan should be at the legal interest rate of 12% per annum, consistent with our ruling
in Eastern Shipping Lines, Inc. v. Court of Appeals: 26 HcSaTI
When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to
be computed from default, i.e., from judicial or extrajudicial demand under
and subject to the provisions of Article 1169 of the Civil Code." (Emphasis
supplied)

We reiterated this ruling in Security Bank and Trust Co. v. RTC-Makati, Br. 61, 27 Sulit
v. Court of Appeals, 28 Crismina Garments, Inc. v. Court of Appeals, 29 Eastern
Assurance and Surety Corporation v. Court of Appeals, 30 Sps. Catungal v.
Hao, 31 Yong v. Tiu, 32 and Sps. Barrera v. Sps. Lorenzo. 33 Thus, the RTC and the
CA misappreciated the facts of the case; they erred in finding that the parties agreed
to a 4% interest, compounded by the application of this interest beyond the
promissory note's six (6)-month period. The facts show that the parties agreed to the
payment of a specific sum of money of P40,000.00 per month for six months, not to
a 4% rate of interest payable within a six (6)-month period.
Medel
applicable

v.

Court

of

Appeals

not

The CA misapplied Medel v. Court of Appeals 34 in finding that a 4% interest per

month was unconscionable. cDaEAS
In Medel, the debtors in a P500,000.00 loan were required to pay an interest of 5.5%
per month, a service charge of 2% per annum, and a penalty charge of 1% per
month, plus attorney's fee equivalent to 25% of the amount due, until the loan is fully
paid. Taken in conjunction with the stipulated service charge and penalty, we found
the interest rate of 5.5% to be excessive, iniquitous, unconscionable, exorbitant and
hence, contrary to morals, thereby rendering the stipulation null and void.
Applying Medel, we invalidated and reduced the stipulated interest in Spouses
Solangon v. Salazar 35 of 6% per month or 72% per annum interest on a P60,000.00
loan; in Ruiz v. Court of Appeals, 36 of 3% per month or 36% per annum interest on a
P3,000,000.00 loan; in Imperial v. Jaucian, 37 of 16% per month or 192% per annum
interest on a P320,000.00 loan; in Arrofo v. Quio, 38 of 7% interest per month or
84% per annum interest on a P15,000.00 loan; in Bulos, Jr. v. Yasuma, 39 of 4% per
month or 48% per annum interest on a P2,500,000.00 loan; and in Chua v.
Timan, 40 of 7% and 5% per month for loans totalling P964,000.00. We note that in all
these cases, the terms of the loans were open-ended; the stipulated interest rates
were applied for an indefinite period.
Medel finds no application in the present case where no other stipulation exists for the
payment of any extra amount except a specific sum of P40,000.00 per monthon the
principal of a loan payable within six months. Additionally, no issue on the
excessiveness of the stipulated amount of P40,000.00 per month was ever put in
issue by the petitioners; 41 they only assailed the application of a 4% interest rate,
since it was not agreed upon.

Page 67 of 505

It is a familiar doctrine in obligations and contracts that the parties are bound by the
stipulations, clauses, terms and conditions they have agreed to, which is the law
between them, the only limitation being that these stipulations, clauses, terms and
conditions are not contrary to law, morals, public order or public policy. 42 The
payment of the specific sum of money of P40,000.00 per month was voluntarily
agreed upon by the petitioners and the respondent. There is nothing from the records
and, in fact, there is no allegation showing that petitioners were victims of fraud when
they entered into the agreement with the respondent.
Therefore, as agreed by the parties, the loan of P1,000,000.00 shall earn P40,000.00
per month for a period of six (6) months, or from December 8, 1993 to June 8, 1994,
for a total principal and interest amount of P1,240,000.00. Thereafter, interest at the
rate of 12% per annum shall apply. The amounts already paid by the petitioners
during the pendency of the suit, amounting to P1,228,772.00 as of February 12,
1999, 43 should be deducted from the total amount due, computed as indicated
above. We remand the case to the trial court for the actual computation of the total
amount due.
Doctrine of Estoppel not applicable
The respondent submits that the petitioners are estopped from disputing the 4%
monthly interest beyond the six-month stipulated period, since they agreed to pay this
interest on the principal amount under the promissory note and the board
resolution. CacEIS
We disagree with the respondent's contention.
We cannot apply the doctrine of estoppel in the present case since the facts and
circumstances, as established by the record, negate its application. Under the
promissory note, 44 what the petitioners agreed to was the payment of a specific
sum of P40,000.00 per month for six months not a 4% rate of interest per
month for six (6) months on a loan whose principal is P1,000,000.00, for the
total amount of P1,240,000.00. Thus, no reason exists to place the petitioners in
estoppel, barring them from raising their present defenses against a 4% per month
interest after the six-month period of the agreement. The board resolution, 45 on the
other hand, simply authorizes Pantaleon to contract for a loan with a monthly interest
of not more than 4%. This resolution merely embodies the extent of Pantaleon's
authority to contract and does not create any right or obligation except as between
Pantaleon and the board. Again, no cause exists to place the petitioners in estoppel.
Piercing the corporate veil unfounded

We find it unfounded and unwarranted for the lower courts to pierce the corporate veil
of PRISMA.
The doctrine of piercing the corporate veil applies only in three (3) basic instances,
namely: a) when the separate and distinct corporate personality defeats public
convenience, as when the corporate fiction is used as a vehicle for the evasion of an
existing obligation; b) in fraud cases, or when the corporate entity is used to justify a
wrong, protect a fraud, or defend a crime; or c) is used in alter ego cases, i.e., where
a corporation is essentially a farce, since it is a mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation. 46 In the absence of malice, bad faith, or a specific provision of
law making a corporate officer liable, such corporate officer cannot be made
personally liable for corporate liabilities. 47
In the present case, we see no competent and convincing evidence of any wrongful,
fraudulent or unlawful act on the part of PRISMA to justify piercing its corporate veil.
While Pantaleon denied personal liability in his Answer, he made himself accountable
in the promissory note "in his personal capacity and as authorized by the Board
Resolution" of PRISMA. 48 With this statement of personal liability and in the absence
of any representation on the part of PRISMA that the obligation is all its own because
of its separate corporate identity, we see no occasion to consider piercing the
corporate veil as material to the case.
WHEREFORE, in light of all the foregoing, we hereby REVERSE and SET ASIDE the
Decision dated May 5, 2003 of the Court of Appeals in CA-G.R. CV No. 69627. The
petitioners' loan of P1,000,000.00 shall bear interest of P40,000.00 per month for six
(6) months from December 8, 1993 as indicated in the promissory note. Any portion of
this loan, unpaid as of the end of the six-month payment period, shall thereafter bear
interest at 12% per annum. The total amount due and unpaid, including accrued
interests, shall bear interest at 12% per annum from the finality of this Decision. Let
this case be REMANDED to the Regional Trial Court, Branch 73, Antipolo City for the
proper computation of the amount due as herein directed, with due regard to the
payments the petitioners have already remitted. Costs against the
respondent. HEcTAI
SO ORDERED.
Nachura, * Del Castillo, Abad and Perez, JJ., concur.
||| (Prisma Construction & Development Corporation v. Menchavez, G.R. No. 160545,
[March 9, 2010], 628 PHIL 495-508)
Page 68 of 505

CHICO-NAZARIO, J p:
Before Us is a Petition 1 for Review on Certiorari under Rule 45 of the Rules of Court
seeking to set aside the Decision, 2 dated 16 December 2005, and
Resolution, 3dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No. 71814,
which affirmed in toto the Decision, 4 dated 26 January 2001, of the Las Pias City
Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint 5 for sum of money
against petitioner Sebastian Siga-an before the Las Pias City Regional Trial Court
(RTC), Branch 255, docketed as Civil Case No. LP-98-0068. Respondent alleged that
she was a businesswoman engaged in supplying office materials and equipments to
the Philippine Navy Office (PNO) located at Fort Bonifacio, Taguig City, while
petitioner was a military officer and comptroller of the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the
PNO and offered to loan her the amount of P540,000.00. Since she needed capital for
her business transactions with the PNO, she accepted petitioner's proposal. The loan
agreement was not reduced in writing. Also, there was no stipulation as to the
payment of interest for the loan. 6 IaDTES

THIRD DIVISION
[G.R. No. 173227. January 20, 2009.]
SEBASTIAN SIGA-AN, petitioner, vs. ALICIA VILLANUEVA, respondent.

DECISION

On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner as

partial payment of the loan. On 31 October 1993, she issued another check in the
amount of P200,000.00 to petitioner as payment of the remaining balance of the loan.
Petitioner told her that since she paid a total amount of P700,000.00 for the
P540,000.00 worth of loan, the excess amount of P160,000.00 would be applied as
interest for the loan. Not satisfied with the amount applied as interest, petitioner
pestered her to pay additional interest. Petitioner threatened to block or disapprove
her transactions with the PNO if she would not comply with his demand. As all her
transactions with the PNO were subject to the approval of petitioner as comptroller of
the PNO, and fearing that petitioner might block or unduly influence the payment of
her vouchers in the PNO, she conceded. Thus, she paid additional amounts in cash
and checks as interests for the loan. She asked petitioner for receipt for the payments
but petitioner told her that it was not necessary as there was mutual trust and
confidence between them. According to her computation, the total amount she paid to
petitioner for the loan and interest accumulated to P1,200,000.00. 7
Thereafter, respondent consulted a lawyer regarding the propriety of paying interest
on the loan despite absence of agreement to that effect. Her lawyer told her that
Page 69 of 505

petitioner could not validly collect interest on the loan because there was no
agreement between her and petitioner regarding payment of interest. Since she paid
petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of loan, and
upon being advised by her lawyer that she made overpayment to petitioner, she sent
a demand letter to petitioner asking for the return of the excess amount of
P660,000.00. Petitioner, despite receipt of the demand letter, ignored her claim for
reimbursement. 8
Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent (1) P660,000.00 plus legal interest from the time of demand; (2)
P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4) an
amount equivalent to 25% of P660,000.00 as attorney's fees. 9
In his answer 10 to the complaint, petitioner denied that he offered a loan to
respondent. He averred that in 1992, respondent approached and asked him if he
could grant her a loan, as she needed money to finance her business venture with the
PNO. At first, he was reluctant to deal with respondent, because the latter had a
spotty record as a supplier of the PNO. However, since respondent was an
acquaintance of his officemate, he agreed to grant her a loan. Respondent paid the
loan in full. 11 jur2005
Subsequently, respondent again asked him to give her a loan. As respondent had
been able to pay the previous loan in full, he agreed to grant her another loan. Later,
respondent requested him to restructure the payment of the loan because she could
not give full payment on the due date. He acceded to her request. Thereafter,
respondent pleaded for another restructuring of the payment of the loan. This time he
rejected her plea. Thus, respondent proposed to execute a promissory note wherein
she would acknowledge her obligation to him, inclusive of interest, and that she would
issue several postdated checks to guarantee the payment of her obligation. Upon his
approval of respondent's request for restructuring of the loan, respondent executed a
promissory note dated 12 September 1994 wherein she admitted having borrowed an
amount of P1,240,000.00, inclusive of interest, from petitioner and that she would pay
said amount in March 1995. Respondent also issued to him six postdated checks
amounting to P1,240,000.00 as guarantee of compliance with her obligation.
Subsequently, he presented the six checks for encashment but only one check was
honored. He demanded that respondent settle her obligation, but the latter failed to do
so. Hence, he filed criminal cases for Violation of the Bouncing Checks Law (Batas
Pambansa Blg. 22) against respondent. The cases were assigned to the Metropolitan
Trial Court of Makati City, Branch 65 (MeTC). 12

Petitioner insisted that there was no overpayment because respondent admitted in the
latter's promissory note that her monetary obligation as of 12 September 1994
amounted to P1,240,000.00 inclusive of interests. He argued that respondent was
already estopped from complaining that she should not have paid any interest,
because she was given several times to settle her obligation but failed to do so. He
maintained that to rule in favor of respondent is tantamount to concluding that the loan
was given interest-free. Based on the foregoing averments, he asked the RTC to
dismiss respondent's complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that respondent
made an overpayment of her loan obligation to petitioner and that the latter should
refund the excess amount to the former. It ratiocinated that respondent's obligation
was only to pay the loaned amount of P540,000.00, and that the alleged interests due
should not be included in the computation of respondent's total monetary debt
because there was no agreement between them regarding payment of interest. It
concluded that since respondent made an excess payment to petitioner in the amount
of P660,000.00 through mistake, petitioner should return the said amount to
respondent pursuant to the principle of solutio indebiti. 13 HEIcDT
The RTC also ruled that petitioner should pay moral damages for the sleepless nights
and wounded feelings experienced by respondent. Further, petitioner should pay
exemplary damages by way of example or correction for the public good, plus
attorney's fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the
provisions of law and jurisprudence on the matter, judgment is hereby
rendered in favor of the plaintiff and against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal
interest of 12% per annum computed from 3 March 1998 until the amount is
paid in full;
(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral
damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as
exemplary damages; CcAESI
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of
P660,000.00 as attorney's fees; and
Page 70 of 505

(5) Ordering defendant to pay the costs of suit. 14

Petitioner appealed to the Court of Appeals. On 16 December 2005, the appellate
court promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby
DENIED and the assailed decision [is] AFFIRMED in toto. 15
Petitioner filed a motion for reconsideration of the appellate court's decision but this
was denied. 16 Hence, petitioner lodged the instant petition before us assigning the
following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO
INTEREST WAS DUE TO PETITIONER; aHcDEC
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE
PRINCIPLE OF SOLUTIO INDEBITI. 17
Interest is a compensation fixed by the parties for the use or forbearance of money.
This is referred to as monetary interest. Interest may also be imposed by law or by
courts as penalty or indemnity for damages. This is called compensatory
interest. 18 The right to interest arises only by virtue of a contract or by virtue of
damages for delay or failure to pay the principal loan on which interest is
demanded. 19
Article 1956 of the Civil Code, which refers to monetary interest, 20 specifically
mandates that no interest shall be due unless it has been expressly stipulated in
writing. As can be gleaned from the foregoing provision, payment of monetary interest
is allowed only if: (1) there was an express stipulation for the payment of interest; and
(2) the agreement for the payment of interest was reduced in writing. The concurrence
of the two conditions is required for the payment of monetary interest. Thus, we have
held that collection of interest without any stipulation therefor in writing is prohibited by
law. 21
It appears that petitioner and respondent did not agree on the payment of interest for
the loan. Neither was there convincing proof of written agreement between the two
regarding the payment of interest. Respondent testified that although she accepted
petitioner's offer of loan amounting to P540,000.00, there was, nonetheless, no verbal
or written agreement for her to pay interest on the loan. 22

Petitioner presented a handwritten promissory note dated 12 September

1994 23 wherein respondent purportedly admitted owing petitioner "capital and
interest". Respondent, however, explained that it was petitioner who made a
promissory note and she was told to copy it in her own handwriting; that all her
transactions with the PNO were subject to the approval of petitioner as comptroller of
the PNO; that petitioner threatened to disapprove her transactions with the PNO if she
would not pay interest; that being unaware of the law on interest and fearing that
petitioner would make good of his threats if she would not obey his instruction to copy
the promissory note, she copied the promissory note in her own handwriting; and that
such was the same promissory note presented by petitioner as alleged proof of their
written agreement on interest. 24 Petitioner did not rebut the foregoing testimony. It is
evident that respondent did not really consent to the payment of interest for the loan
and that she was merely tricked and coerced by petitioner to pay interest. Hence, it
cannot be gainfully said that such promissory note pertains to an express stipulation
of interest or written agreement of interest on the loan between petitioner and
respondent. cCTAIE
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals found that
he and respondent agreed on the payment of 7% rate of interest on the loan; that the
agreed 7% rate of interest was duly admitted by respondent in her testimony in
the Batas Pambansa Blg. 22 cases he filed against respondent; that despite such
judicial admission by respondent, the RTC and the Court of Appeals, citing Article
1956 of the Civil Code, still held that no interest was due him since the agreement on
interest was not reduced in writing; that the application of Article 1956 of the Civil
Code should not be absolute, and an exception to the application of such provision
should be made when the borrower admits that a specific rate of interest was agreed
upon as in the present case; and that it would be unfair to allow respondent to pay
only the loan when the latter very well knew and even admitted in the Batas
Pambansa Blg. 22 cases that there was an agreed 7% rate of interest on the loan. 25
We have carefully examined the RTC Decision and found that the RTC did not make a
ruling therein that petitioner and respondent agreed on the payment of interest at the
rate of 7% for the loan. The RTC clearly stated that although petitioner and
respondent entered into a valid oral contract of loan amounting to P540,000.00, they,
nonetheless, never intended the payment of interest thereon. 26 While the Court of
Appeals mentioned in its Decision that it concurred in the RTC's ruling that petitioner
and respondent agreed on a certain rate of interest as regards the loan, we consider
this as merely an inadvertence because, as earlier elucidated, both the RTC and the
Court of Appeals ruled that petitioner is not entitled to the payment of interest on the
Page 71 of 505

loan. The rule is that factual findings of the trial court deserve great weight and
respect especially when affirmed by the appellate court. 27 We found no compelling
reason to disturb the ruling of both courts.
Petitioner's reliance on respondent's alleged admission in the Batas Pambansa Blg.
22 cases that they had agreed on the payment of interest at the rate of 7% deserves
scant consideration. In the said case, respondent merely testified that after paying the
total amount of loan, petitioner ordered her to pay interest. 28 Respondent did not
categorically declare in the same case that she and respondent made
an express stipulation in writing as regards payment of interest at the rate of 7%. As
earlier discussed, monetary interest is due only if there was an express stipulation in
writing for the payment of interest. cSTCDA
There are instances in which an interest may be imposed even in the absence of
express stipulation, verbal or written, regarding payment of interest. Article 2209 of the
Civil Code states that if the obligation consists in the payment of a sum of money, and
the debtor incurs delay, a legal interest of 12% per annum may be imposed as
indemnity for damages if no stipulation on the payment of interest was agreed upon.
Likewise, Article 2212 of the Civil Code provides that interest due shall earn legal
interest from the time it is judicially demanded, although the obligation may be silent
on this point.
All the same, the interest under these two instances may be imposed only as a
penalty or damages for breach of contractual obligations. It cannot be charged as a
compensation for the use or forbearance of money. In other words, the two instances
apply only to compensatory interest and not to monetary interest. 29 The case at bar
involves petitioner's claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because it
was not duly proven that respondent defaulted in paying the loan. Also, as earlier
found, no interest was due on the loan because there was no written agreement as
regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio
indebiti does not apply to the instant case. Thus, he cannot be compelled to return the
alleged excess amount paid by respondent as interest. 30
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when there
has been no stipulation therefor, the provisions of the Civil Code concerningsolutio
indebiti shall be applied. Article 2154 of the Civil Code explains the principle of solutio
indebiti. Said provision provides that if something is received when there is no right to
demand it, and it was unduly delivered through mistake, the obligation to return it

arises. In such a case, a creditor-debtor relationship is created under a quasi-contract

whereby the payor becomes the creditor who then has the right to demand the return
of payment made by mistake, and the person who has no right to receive such
payment becomes obligated to return the same. The quasi-contract of solutio
indebiti harks back to the ancient principle that no one shall enrich himself unjustly at
the expense of another. 31 The principle of solutio indebiti applies where (1) a
payment is made when there exists no binding relation between the payor, who has
no duty to pay, and the person who received the payment; and (2) the payment is
made through mistake, and not through liberality or some other cause. 32 We have
held that the principle of solutio indebiti applies in case of erroneous payment of
undue interest. 33 IcCATD
It was duly established that respondent paid interest to petitioner. Respondent was
under no duty to make such payment because there was no express stipulation in
writing to that effect. There was no binding relation between petitioner and respondent
as regards the payment of interest. The payment was clearly a mistake. Since
petitioner received something when there was no right to demand it, he has an
obligation to return it.
We shall now determine the propriety of the monetary award and damages imposed
by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to P540,000.00 from
petitioner. 34 Respondent issued two checks with a total worth of P700,000.00 in
favor of petitioner as payment of the loan. 35 These checks were subsequently
encashed by petitioner. 36 Obviously, there was an excess of P160,000.00 in the
payment for the loan. Petitioner claims that the excess of P160,000.00 serves as
interest on the loan to which he was entitled. Aside from issuing the said two checks,
respondent also paid cash in the total amount of P175,000.00 to petitioner as
interest. 37 Although no receipts reflecting the same were presented because
petitioner refused to issue such to respondent, petitioner, nonetheless, admitted in his
Reply-Affidavit 38 in the Batas Pambansa Blg. 22 cases that respondent paid him a
total amount of P175,000.00 cash in addition to the two checks. Section 26, Rule 130
of the Rules of Evidence provides that the declaration of a party as to a relevant fact
may be given in evidence against him. Aside from the amounts of P160,000.00 and
P175,000.00 paid as interest, no other proof of additional payment as interest was
presented by respondent. Since we have previously found that petitioner is not entitled
to payment of interest and that the principle of solutio indebiti applies to the instant
case, petitioner should return to respondent the excess amount of P160,000.00 and
P175,000.00 or the total amount of P335,000.00. Accordingly, the reimbursable
Page 72 of 505

amount to respondent fixed by the RTC and the Court of Appeals should be reduced
from P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas
Pambansa Blg. 22 against respondent. In the said cases, the MeTC found respondent
guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored checks to
petitioner. Nonetheless, respondent's conviction therein does not affect our ruling in
the instant case. The two checks, subject matter of this case, totaling P700,000.00
which respondent claimed as payment of the P540,000.00 worth of loan, were not
among the five checks found to be dishonored or bounced in the five criminal cases.
Further, the MeTC found that respondent made an overpayment of the loan by reason
of the interest which the latter paid to petitioner. 39
Article 2217 of the Civil Code provides that moral damages may be recovered if the
party underwent physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation and similar
injury. Respondent testified that she experienced sleepless nights and wounded
feelings when petitioner refused to return the amount paid as interest despite her
repeated demands. Hence, the award of moral damages is justified. However, its
corresponding amount of P300,000.00, as fixed by the RTC and the Court of Appeals,
is exorbitant and should be equitably reduced. Article 2216 of the Civil Code instructs
that assessment of damages is left to the discretion of the court according to the
circumstances of each case. This discretion is limited by the principle that the amount
awarded should not be palpably excessive as to indicate that it was the result of
prejudice or corruption on the part of the trial court. 40 To our mind, the amount of
P150,000.00 as moral damages is fair, reasonable, and proportionate to the injury
suffered by respondent. SACHcD

Article 2232 of the Civil Code states that in a quasi-contract, such as solutio
indebiti, exemplary damages may be imposed if the defendant acted in an oppressive
manner. Petitioner acted oppressively when he pestered respondent to pay interest
and threatened to block her transactions with the PNO if she would not pay interest.
This forced respondent to pay interest despite lack of agreement thereto. Thus, the
award of exemplary damages is appropriate. The amount of P50,000.00 imposed as
exemplary damages by the RTC and the Court is fitting so as to deter petitioner and
other lenders from committing similar and other serious wrongdoings.41
Jurisprudence instructs that in awarding attorney's fees, the trial court must state the
factual, legal or equitable justification for awarding the same. 42 In the case under

consideration, the RTC stated in its Decision that the award of attorney's fees
equivalent to 25% of the amount paid as interest by respondent to petitioner is
reasonable and moderate considering the extent of work rendered by respondent's
lawyer in the instant case and the fact that it dragged on for several years. 43 Further,
respondent testified that she agreed to compensate her lawyer handling the instant
case such amount. 44 The award, therefore, of attorney's fees and its amount
equivalent to 25% of the amount paid as interest by respondent to petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on the
amount refundable to respondent computed from 3 March 1998 until its full payment.
This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals, 45 that when an
obligation, not constituting a loan or forbearance of money is breached, an interest on
the amount of damages awarded may be imposed at the rate of 6% per annum. We
further declared that when the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether it is a
loan/forbearance of money or not, shall be 12% per annum from such finality until its
satisfaction, this interim period being deemed equivalent to a forbearance of
credit. aCTcDS
In the present case, petitioner's obligation arose from a quasi-contract of solutio
indebiti and not from a loan or forbearance of money. Thus, an interest of 6% per
annum should be imposed on the amount to be refunded as well as on the damages
awarded and on the attorney's fees, to be computed from the time of the extra-judicial
demand on 3 March 1998, 46 up to the finality of this Decision. In addition, the interest
shall become 12% per annum from the finality of this Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814, dated
16 December 2005, is hereby AFFIRMED with the following MODIFICATIONS: (1) the
amount of P660,000.00 as refundable amount of interest is reduced to THREE
HUNDRED THIRTY FIVE THOUSAND PESOS (P335,000.00); (2) the amount of
P300,000.00 imposed as moral damages is reduced to ONE HUNDRED FIFTY
THOUSAND PESOS (P150,000.00); (3) an interest of 6% per annum is imposed on
the P335,000.00, on the damages awarded and on the attorney's fees to be computed
from the time of the extra-judicial demand on 3 March 1998 up to the finality of this
Decision; and (4) an interest of 12% per annum is also imposed from the finality of
this Decision up to its satisfaction. Costs against petitioner.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Nachura and Leonardo-de Castro, * JJ., concur.
Page 73 of 505

||| (Siga-an v. Villanueva, G.R. No. 173227, [January 20, 2009], 596 PHIL 760-777)

deficiency expanded withholding tax in the amount of P4,897.79, inclusive of

surcharges and interest, both for the taxable year 1986.
The deficiency income tax of P333,196.86, arose from:
(1) The BIR's disallowance of ICC's claimed expense deductions
for professional and security services billed to and paid by ICC in
1986, to wit:
(a) Expenses for the auditing services of SGV &
Co., 3 for the year ending December 31, 1985; 4

THIRD DIVISION
[G.R. No. 172231. February 12, 2007.]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.
ISABELA CULTURAL CORPORATION, respondent.

(b) Expenses for the legal services [inclusive of retainer

fees] of the law firm Bengzon Zarraga Narciso Cudala
Pecson Azcuna & Bengson for the years 1984 and
1985. 5
(c) Expense for security services of El Tigre Security &
Investigation Agency for the months of April and May
1986. 6
(2) The alleged understatement of ICC's interest income on the
three promissory notes due from Realty Investment, Inc.

DECISION

The deficiency expanded withholding tax of P4,897.79 (inclusive of interest and

surcharge) was allegedly due to the failure of ICC to withhold 1% expanded
withholding tax on its claimed P244,890.00 deduction for security services. 7

Petitioner Commissioner of Internal Revenue (CIR) assails the September 30, 2005
Decision 1 of the Court of Appeals in CA-G.R. SP No. 78426 affirming the February
26, 2003 Decision 2 of the Court of Tax Appeals (CTA) in CTA Case No. 5211, which
cancelled and set aside the Assessment Notices for deficiency income tax and
expanded withholding tax issued by the Bureau of Internal Revenue (BIR) against
respondent Isabela Cultural Corporation (ICC).

On March 23, 1990, ICC sought a reconsideration of the subject assessments. On

February 9, 1995, however, it received a final notice before seizure demanding
payment of the amounts stated in the said notices. Hence, it brought the case to the
CTA which held that the petition is premature because the final notice of assessment
cannot be considered as a final decision appealable to the tax court. This was
reversed by the Court of Appeals holding that a demand letter of the BIR reiterating
the payment of deficiency tax, amounts to a final decision on the protested
assessment and may therefore be questioned before the CTA. This conclusion was
sustained by this Court on July 1, 2001, in G.R. No. 135210. 8 The case was thus
remanded to the CTA for further proceedings. aEHASI

YNARES-SANTIAGO, J p:

The facts show that on February 23, 1990, ICC, a domestic corporation, received from
the BIR Assessment Notice No. FAS-1-86-90-000680 for deficiency income tax in the
amount of P333,196.86, and Assessment Notice No. FAS-1-86-90-000681 for

On February 26, 2003, the CTA rendered a decision canceling and setting aside the
assessment notices issued against ICC. It held that the claimed deductions for
professional and security services were properly claimed by ICC in 1986 because it
was only in the said year when the bills demanding payment were sent to ICC. Hence,
Page 74 of 505

even if some of these professional services were rendered to ICC in 1984 or 1985, it
could not declare the same as deduction for the said years as the amount thereof
could not be determined at that time.
The CTA also held that ICC did not understate its interest income on the subject
promissory notes. It found that it was the BIR which made an overstatement of said
income when it compounded the interest income receivable by ICC from the
promissory notes of Realty Investment, Inc., despite the absence of a stipulation in
the contract providing for a compounded interest; nor of a circumstance, like delay in
payment or breach of contract, that would justify the application of compounded
interest.
Likewise, the CTA found that ICC in fact withheld 1% expanded withholding tax on its
claimed deduction for security services as shown by the various payment orders and
confirmation receipts it presented as evidence. The dispositive portion of the CTA's
Decision, reads:
WHEREFORE, in view of all the foregoing, Assessment Notice
No. FAS-1-86-90-000680 for deficiency income tax in the amount
of P333,196.86, and Assessment Notice No. FAS-1-86-90000681 for deficiency expanded withholding tax in the amount of
P4,897.79, inclusive of surcharges and interest, both for the
taxable year 1986, are hereby CANCELLED and SET ASIDE.
SO ORDERED. 9
Petitioner filed a petition for review with the Court of Appeals, which affirmed the CTA
decision, 10 holding that although the professional services (legal and auditing
services) were rendered to ICC in 1984 and 1985, the cost of the services was not yet
determinable at that time, hence, it could be considered as deductible expenses only
in 1986 when ICC received the billing statements for said services. It further ruled that
ICC did not understate its interest income from the promissory notes of Realty
Investment, Inc., and that ICC properly withheld and remitted taxes on the payments
for security services for the taxable year 1986.
Hence, petitioner, through the Office of the Solicitor General, filed the instant petition
contending that since ICC is using the accrual method of accounting, the expenses for
the professional services that accrued in 1984 and 1985, should have been declared
as deductions from income during the said years and the failure of ICC to do so bars it
from claiming said expenses as deduction for the taxable year 1986. As to the alleged
deficiency interest income and failure to withhold expanded withholding tax

assessment, petitioner invoked the presumption that the assessment notices issued
by the BIR are valid.
The issue for resolution is whether the Court of Appeals correctly: (1) sustained the
deduction of the expenses for professional and security services from ICC's gross
income; and (2) held that ICC did not understate its interest income from the
promissory notes of Realty Investment, Inc; and that ICC withheld the required 1%
withholding tax from the deductions for security services. DICSaH
The requisites for the deductibility of ordinary and necessary trade, business, or
professional expenses, like expenses paid for legal and auditing services, are: (a) the
expense must be ordinary and necessary; (b) it must have been paid or incurred
during the taxable year; (c) it must have been paid or incurred in carrying on the
trade or business of the taxpayer; and (d) it must be supported by receipts, records or
other pertinent papers. 11
The requisite that it must have been paid or incurred during the taxable year is
further qualified by Section 45 of the National Internal Revenue Code (NIRC) which
states that: "[t]he deduction provided for in this Title shall be taken for the taxable year
in which 'paid or accrued' or 'paid or incurred', dependent upon the method of
accounting upon the basis of which the net income is computed . . .".
Accounting methods for tax purposes comprise a set of rules for determining when
and how to report income and deductions. 12 In the instant case, the accounting
method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual
method of accounting, expenses not being claimed as deductions by a taxpayer in the
current year when they are incurred cannot be claimed as deduction from income for
the succeeding year. Thus, a taxpayer who is authorized to deduct certain expenses
and other allowable deductions for the current year but failed to do so cannot deduct
the same for the next year. 13
The accrual method relies upon the taxpayer's right to receive amounts or its
obligation to pay them, in opposition to actual receipt or payment, which characterizes
the cash method of accounting. Amounts of income accrue where the right to receive
them become fixed, where there is created an enforceable liability. Similarly, liabilities
are accrued when fixed and determinable in amount, without regard to indeterminacy
merely of time of payment. 14
For a taxpayer using the accrual method, the determinative question is, when do the
facts present themselves in such a manner that the taxpayer must recognize income
Page 75 of 505

or expense? The accrual of income and expense is permitted when the all-events test
has been met. This test requires: (1) fixing of a right to income or liability to pay; and
(2) the availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of
such income or liability be determined with reasonable accuracy. However, the test
does not demand that the amount of income or liability be known absolutely, only that
a taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains
uncertain, if its basis is unchangeable; the test is satisfied where a computation may
be unknown, but is not as much as unknowable, within the taxable year. The amount
of liability does not have to be determined exactly; it must be determined with
"reasonable accuracy." Accordingly, the term "reasonable accuracy" implies
something less than an exact or completely accurate amount. 15
The propriety of an accrual must be judged by the facts that a taxpayer knew, or
could reasonably be expected to have known, at the closing of its books for the
taxable year. 16 Accrual method of accounting presents largely a question of
fact; such that the taxpayer bears the burden of proof of establishing the
accrual of an item of income or deduction. 17
Corollarily, it is a governing principle in taxation that tax exemptions must be
construed in strictissimi juris against the taxpayer and liberally in favor of the taxing
authority; and one who claims an exemption must be able to justify the same by the
clearest grant of organic or statute law. An exemption from the common burden
cannot be permitted to exist upon vague implications. And since a deduction for
income tax purposes partakes of the nature of a tax exemption, then it must also be
strictly construed. 18

In the instant case, the expenses for professional fees consist of expenses for legal
and auditing services. The expenses for legal services pertain to the 1984 and 1985
legal and retainer fees of the law firm Bengzon Zarraga Narciso Cudala Pecson
Azcuna & Bengson, and for reimbursement of the expenses of said firm in connection
with ICC's tax problems for the year 1984. As testified by the Treasurer of ICC, the
firm has been its counsel since the 1960's. 19 From the nature of the claimed
deductions and the span of time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees charged by the firm as well as
the compensation for its legal services. The failure to determine the exact amount of
the expense during the taxable year when they could have been claimed as

deductions cannot thus be attributed solely to the delayed billing of these liabilities by
the firm. For one, ICC, in the exercise of due diligence could have inquired into the
amount of their obligation to the firm, especially so that it is using the accrual method
of accounting. For another, it could have reasonably determined the amount of legal
and retainer fees owing to its familiarity with the rates charged by their long time legal
consultant. aASEcH
As previously stated, the accrual method presents largely a question of fact and that
the taxpayer bears the burden of establishing the accrual of an expense or income.
However, ICC failed to discharge this burden. As to when the firm's performance of its
services in connection with the 1984 tax problems were completed, or whether ICC
exercised reasonable diligence to inquire about the amount of its liability, or whether it
does or does not possess the information necessary to compute the amount of said
liability with reasonable accuracy, are questions of fact which ICC never established.
It simply relied on the defense of delayed billing by the firm and the company, which
under the circumstances, is not sufficient to exempt it from being charged with
knowledge of the reasonable amount of the expenses for legal and auditing services.
In the same vein, the professional fees of SGV & Co. for auditing the financial
statements of ICC for the year 1985 cannot be validly claimed as expense deductions
in 1986. This is so because ICC failed to present evidence showing that even with
only "reasonable accuracy," as the standard to ascertain its liability to SGV & Co. in
the year 1985, it cannot determine the professional fees which said company would
charge for its services.
ICC thus failed to discharge the burden of proving that the claimed expense
deductions for the professional services were allowable deductions for the taxable
year 1986. Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot
be validly deducted from its gross income for the said year and were therefore
properly disallowed by the BIR.
As to the expenses for security services, the records show that these expenses were
incurred by ICC in 1986 20 and could therefore be properly claimed as deductions for
the said year.
Anent the purported understatement of interest income from the promissory notes of
Realty Investment, Inc., we sustain the findings of the CTA and the Court of Appeals
that no such understatement exists and that only simple interest computation and not
a compounded one should have been applied by the BIR. There is indeed no
stipulation between the latter and ICC on the application of compounded

Page 76 of 505

interest. 21 Under Article 1959 of the Civil Code, unless there is a stipulation to the
contrary, interest due should not further earn interest.
Likewise, the findings of the CTA and the Court of Appeals that ICC truly withheld the
required withholding tax from its claimed deductions for security services and remitted
the same to the BIR is supported by payment order and confirmation
receipts. 22 Hence, the Assessment Notice for deficiency expanded withholding tax
was properly cancelled and set aside.
In sum, Assessment Notice No. FAS-1-86-90-000680 in the amount of P333,196.86
for deficiency income tax should be cancelled and set aside but only insofar as the
claimed deductions of ICC for security services. Said Assessment is valid as to the
BIR's disallowance of ICC's expenses for professional services. The Court of Appeal's
cancellation of Assessment Notice No. FAS-1-86-90-000681 in the amount of
P4,897.79 for deficiency expanded withholding tax, is sustained.
WHEREFORE, the petition is PARTIALLY GRANTED. The September 30, 2005
Decision of the Court of Appeals in CA-G.R. SP No. 78426, is AFFIRMED with the
MODIFICATION that Assessment Notice No. FAS-1-86-90-000680, which disallowed
the expense deduction of Isabela Cultural Corporation for professional and security
services, is declared valid only insofar as the expenses for the professional fees of
SGV & Co. and of the law firm, Bengzon Zarraga Narciso Cudala Pecson Azcuna &
Bengson, are concerned. The decision is affirmed in all other respects.
The case is remanded to the BIR for the computation of Isabela Cultural Corporation's
liability under Assessment Notice No. FAS-1-86-90-000680. SAHIDc
SO ORDERED.

SECOND DIVISION

Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.

[G.R. Nos. 150773 & 153599. September 30, 2005.]

Nachura, J., is on leave.

||| (Commissioner of Internal Revenue v. Isabela Cultural Corp., G.R. No. 172231,
[February 12, 2007], 544 PHIL 488-499)

SPOUSES DAVID B. CARPO and RECHILDA S.

CARPO, petitioners, vs. ELEANOR CHUA and ELMA DY
NG, respondents.

DECISION

TINGA, J p:
Page 77 of 505

Before this Court are two consolidated petitions for review. The first, docketed as G.R.
No. 150773, assails the Decision 1 of the Regional Trial Court (RTC), Branch 26 of
Naga City dated 26 October 2001 in Civil Case No. 99-4376. RTC Judge Filemon B.
Montenegro dismissed the complaint 2 for annulment of real estate mortgage and
consequent foreclosure proceedings filed by the spouses David B. Carpo and
Rechilda S. Carpo (petitioners).
The second, docketed as G.R. No. 153599, seeks to annul the Court of
Appeals' Decision 3 dated 30 April 2002 in CA-G.R. SP No. 57297. The Court of
Appeals Third Division annulled and set aside the orders of Judge Corazon A. Tordilla
to suspend the sheriff's enforcement of the writ of possession.
The cases stemmed from a loan contracted by petitioners. On 18 July 1995, they
borrowed from Eleanor Chua and Elma Dy Ng (respondents) the amount of One
Hundred Seventy-Five Thousand Pesos (P175,000.00), payable within six (6) months
with an interest rate of six percent (6%) per month. To secure the payment of the loan,
petitioners mortgaged their residential house and lot situated at San Francisco,
Magarao, Camarines Sur, which lot is covered by Transfer Certificate of Title (TCT)
No. 23180. Petitioners failed to pay the loan upon demand. Consequently, the real
estate mortgage was extrajudicially foreclosed and the mortgaged property sold at a
public auction on 8 July 1996. The house and lot was awarded to respondents, who
were the only bidders, for the amount of Three Hundred Sixty-Seven Thousand Four
Hundred Fifty-Seven Pesos and Eighty Centavos (P367,457.80).
Upon failure of petitioners to exercise their right of redemption, a certificate of sale
was issued on 5 September 1997 by Sheriff Rolando A. Borja. TCT No. 23180 was
cancelled and in its stead, TCT No. 29338 was issued in the name of respondents.
Despite the issuance of the TCT, petitioners continued to occupy the said house and
lot, prompting respondents to file a petition for writ of possession with the RTC
docketed as Special Proceedings (SP) No. 98-1665. On 23 March 1999, RTC Judge
Ernesto A. Miguel issued an Order 4 for the issuance of a writ of possession.
On 23 July 1999, petitioners filed a complaint for annulment of real estate mortgage
and the consequent foreclosure proceedings, docketed as Civil Case No. 99-4376 of
the RTC. Petitioners consigned the amount of Two Hundred Fifty-Seven Thousand
One Hundred Ninety-Seven Pesos and Twenty-Six Centavos (P257,197.26) with the
RTC.
Meanwhile, in SP No. 98-1665, a temporary restraining order was issued upon motion
on 3 August 1999, enjoining the enforcement of the writ of possession. In
anOrder 5 dated 6 January 2000, the RTC suspended the enforcement of the writ of

possession pending the final disposition of Civil Case No. 99-4376. Against
this Order, respondents filed a petition for certiorari and mandamus before the Court
of Appeals, docketed as CA-G.R. SP No. 57297.
During the pendency of the case before the Court of Appeals, RTC Judge Filemon B.
Montenegro dismissed the complaint in Civil Case No. 99-4376 on the ground that it
was filed out of time and barred by laches. The RTC proceeded from the premise that
the complaint was one for annulment of a voidable contract and thus barred by the
four-year prescriptive period. Hence, the first petition for review now under
consideration was filed with this Court, assailing the dismissal of the complaint.
The second petition for review was filed with the Court after the Court of Appeals on
30 April 2002 annulled and set aside the RTC orders in SP No. 98-1665 on the
ground that it was the ministerial duty of the lower court to issue the writ of possession
when title over the mortgaged property had been consolidated in the mortgagee.
This Court ordered the consolidation of the two cases, on motion of petitioners.
In G.R. No. 150773, petitioners claim that following the Court's ruling in Medel v.
Court of Appeals 6 the rate of interest stipulated in the principal loan agreement is
clearly null and void. Consequently, they also argue that the nullity of the agreed
interest rate affects the validity of the real estate mortgage. Notably, while petitioners
were silent in their petition on the issues of prescription and laches on which the RTC
grounded the dismissal of the complaint, they belatedly raised the matters in
theirMemorandum. Nonetheless, these points warrant brief comment.
On the other hand, petitioners argue in G.R. No. 153599 that the RTC did not commit
any grave abuse of discretion when it issued the orders dated 3 August 1999 and 6
January 2000, and that these orders could not have been "the proper subjects of a
petition for certiorari and mandamus". More accurately, the justiciable issues before
us are whether the Court of Appeals could properly entertain the petition
for certiorari from the timeliness aspect, and whether the appellate court correctly
concluded that the writ of possession could no longer be stayed.
We first resolve the petition in G.R. No. 150773.
Petitioners contend that the agreed rate of interest of 6% per month or 72% per
annum is so excessive, iniquitous, unconscionable and exorbitant that it should have
been declared null and void. Instead of dismissing their complaint, they aver that the
lower court should have declared them liable to respondents for the original amount of
the loan plus 12% interest per annum and 1% monthly penalty charge as liquidated
damages, 7 in view of the ruling in Medel v. Court of Appeals. 8
Page 78 of 505

In Medel, the Court found that the interest stipulated at 5.5% per month or 66% per
annum was so iniquitous or unconscionable as to render the stipulation void.
Nevertheless, we find the interest at 5.5% per month, or 66% per
annum, stipulated upon by the parties in the promissory note
iniquitous or unconscionable, and, hence, contrary to morals
("contra bonos mores"), if not against the law. The stipulation is
void. The Court shall reduce equitably liquidated damages,
whether intended as an indemnity or a penalty if they are
iniquitous or unconscionable. 9
In a long line of cases, this Court has invalidated similar stipulations on interest rates
for being excessive, iniquitous, unconscionable and exorbitant. In Solangon v.
Salazar, 10 we annulled the stipulation of 6% per month or 72% per annum interest
on a P60,000.00 loan. In Imperial v. Jaucian, 11 we reduced the interest rate from
16% to 1.167% per month or 14% per annum. In Ruiz v. Court of Appeals, 12 we
equitably reduced the agreed 3% per month or 36% per annum interest to 1% per
month or 12% per annum interest. The 10% and 8% interest rates per month on a
P1,000,000.00 loan were reduced to 12% per annum in Cuaton v. Salud. 13 Recently,
this Court, in Arrofo v. Quino, 14 reduced the 7% interest per month on a P15,000.00
loan amounting to 84% interest per annum to 18% per annum.
There is no need to unsettle the principle affirmed in Medel and like cases. From that
perspective, it is apparent that the stipulated interest in the subject loan is excessive,
iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract
principle embodied in Article 1306 of the Civil Code, contracting parties may establish
such stipulations, clauses, terms and conditions as they may deem convenient,
provided they are not contrary to law, morals, good customs, public order, or public
policy. In the ordinary course, the codal provision may be invoked to annul the
excessive stipulated interest.
In the case at bar, the stipulated interest rate is 6% per month, or 72% per annum. By
the standards set in the above-cited cases, this stipulation is similarly invalid.
However, the RTC refused to apply the principle cited and employed in Medel on the
ground that Medel did not pertain to the annulment of a real estate mortgage, 15 as it
was a case for annulment of the loan contract itself. The question thus sensibly arises
whether the invalidity of the stipulation on interest carries with it the invalidity of the
principal obligation.
The question is crucial to the present petition even if the subject thereof is not the
annulment of the loan contract but that of the mortgage contract. The consideration of

the mortgage contract is the same as that of the principal contract from which it
receives life, and without which it cannot exist as an independent contract. Being a
mere accessory contract, the validity of the mortgage contract would depend on the
validity of the loan secured by it. 16
Notably in Medel, the Court did not invalidate the entire loan obligation despite the
inequitability of the stipulated interest, but instead reduced the rate of interest to the
more reasonable rate of 12% per annum. The same remedial approach to the
wrongful interest rates involved was employed or affirmed by the Court in Solangon,
Imperial, Ruiz, Cuaton, and Arrofo.
The Court's ultimate affirmation in the cases cited of the validity of the principal loan
obligation side by side with the invalidation of the interest rates thereupon is
congruent with the rule that a usurious loan transaction is not a complete nullity but
defective only with respect to the agreed interest.
We are aware that the Court of Appeals, on certain occasions, had ruled that a
usurious loan is wholly null and void both as to the loan and as to the usurious
interest.17 However, this Court adopted the contrary rule, as comprehensively
discussed in Briones v. Cammayo: 18
In Gui Jong & Co. vs. Rivera, et al., 45 Phil. 778, this Court
likewise declared that, in any event, the debtor in a usurious
contract of loan should pay the creditor the amount which he
justly owes him, citing in support of this ruling its previous
decisions in Go Chioco, Supra, Aguilar vs. Rubiato, et al., 40 Phil.
570, and Delgado vs. Duque Valgona, 44 Phil. 739.

xxx xxx xxx

Then in Lopez and Javelona vs. El Hogar Filipino, 47 Phil. 249,
We also held that the standing jurisprudence of this Court on the
question under consideration was clearly to the effect that
the Usury Law, by its letter and spirit, did not deprive the lender of
his right to recover from the borrower the money actually loaned
to and enjoyed by the latter. This Court went further to say that
the Usury Law did not provide for the forfeiture of the capital in
favor of the debtor in usurious contracts, and that while the
forfeiture might appear to be convenient as a drastic measure to
Page 79 of 505

eradicate the evil of usury, the legal question involved should not
be resolved on the basis of convenience.
Other cases upholding the same principle are Palileo vs. Cosio,
97 Phil. 919 and Pascua vs. Perez, L-19554, January 31, 1964,
10 SCRA 199, 200-202. In the latter We expressly held that when
a contract is found to be tainted with usury "the only right of the
respondent (creditor) . . . was merely to collect the amount of the
loan, plus interest due thereon."
The view has been expressed, however, that the ruling thus
consistently adhered to should now be abandoned because
Article 1957 of the new Civil Code a subsequent law
provides that contracts and stipulations, under any cloak or
device whatever, intended to circumvent the laws against usury,
shall be void, and that in such cases "the borrower may recover
in accordance with the laws on usury." From this the conclusion is
drawn that the whole contract is void and that, therefore, the
creditor has no right to recover not even his capital.
The meaning and scope of our ruling in the cases mentioned
heretofore is clearly stated, and the view referred to in the
preceding paragraph is adequately answered, in Angel Jose, etc.
vs. Chelda Enterprises, et al. (L-25704, April 24, 1968). On the
question of whether a creditor in a usurious contract may or may
not recover the principal of the loan, and, in the affirmative,
whether or not he may also recover interest thereon at the legal
rate, We said the following:
"xxx xxx xxx
Appealing directly to Us, defendants raise two questions
of law: (1) In a loan with usurious interest, may the
creditor recover the principal of the loan? (2) Should
attorney's fees be awarded in plaintiff's favor?"
Great reliance is made by appellants on Art. 1411 of the
New Civil Code . . . .
Since, according to the appellants, a usurious loan is
void due to illegality of cause or object, the rule of pari
delicto expressed in Article 1411, supra, applies, so that

neither party can bring action against each other. Said

rule, however, appellants add, is modified as to the
borrower, by express provision of the law (Art. 1413,
New Civil Code), allowing the borrower to recover
interest paid in excess of the interest allowed by
the Usury Law. As to the lender, no exception is made to
the rule; hence, he cannot recover on the contract. So
they continue the New Civil Code provisions must
be upheld as against the Usury Law, under which a loan
with usurious interest is not totally void, because of
Article 1961 of the New Civil Code, that: "Usurious
contracts shall be governed by the Usury Law and other
special laws, so far as they are not inconsistent with this
Code." HEcSDa
We do not agree with such reasoning. Article 1411 of
the New Civil Code is not new; it is the same as Article
1305 of the Old Civil Code. Therefore, said provision is
no warrant for departing from previous interpretation
that, as provided in the Usury Law (Act No. 2655, as
amended), a loan with usurious interest is not totally
void only as to the interest.
. . . [a]ppellants fail to consider that a contract of
loan with usurious interest consists of principal and
accessory stipulations; the principal one is to pay
the debt; the accessory stipulation is to pay interest
thereon.
And said two stipulations are divisible in the sense
that the former can still stand without the latter.
Article 1273, Civil Code, attests to this: "The
renunciation of the principal debt shall extinguish
the accessory obligations; but the waiver of the
latter shall leave the former in force."
The question therefore to resolve is whether the
illegal terms as to payment of interest likewise
renders a nullity the legal terms as to payments of
the principal debt. Article 1420 of the New Civil
Code provides in this regard: "In case of a divisible
Page 80 of 505

contract, if the illegal terms can be separated from

the legal ones, the latter may be enforced."
In simple loan with stipulation of usurious interest,
the prestation of the debtor to pay the principal
debt, which is the cause of the contract (Article
1350, Civil Code), is not illegal. The illegality lies
only as to the prestation to pay the stipulated
interest; hence, being separable, the latter only
should be deemed void, since it is the only one that
is illegal.
xxx xxx xxx
The principal debt remaining without stipulation for
payment of interest can thus be recovered by judicial
action. And in case of such demand, and the debtor
incurs in delay, the debt earns interest from the date of
the demand (in this case from the filing of the
complaint). Such interest is not due to stipulation, for
there was none, the same being void. Rather, it is due to
the general provision of law that in obligations to pay
money, where the debtor incurs in delay, he has to pay
interest by way of damages (Art. 2209, Civil Code). The
court a quo therefore, did not err in ordering defendants
to pay the principal debt with interest thereon at the legal
rate, from the date of filing of the complaint." 19
The Court's wholehearted affirmation of the rule that the principal obligation subsists
despite the nullity of the stipulated interest is evinced by its subsequent rulings, cited
above, in all of which the main obligation was upheld and the offending interest rate
merely corrected. Hence, it is clear and settled that the principal loan obligation still
stands and remains valid. By the same token, since the mortgage contract derives its
vitality from the validity of the principal obligation, the invalid stipulation on interest
rate is similarly insufficient to render void the ancillary mortgage contract. cTaDHS
It should be noted that had the Court declared the loan and mortgage agreements
void for being contrary to public policy, no prescriptive period could have run. 20 Such
benefit is obviously not available to petitioners.
Yet the RTC pronounced that the complaint was barred by the four-year prescriptive
period provided in Article 1391 of the Civil Code, which governs voidable contracts.

This conclusion was derived from the allegation in the complaint that the consent of
petitioners was vitiated through undue influence. While the RTC correctly
acknowledged the rule of prescription for voidable contracts, it erred in applying the
rule in this case. We are hard put to conclude in this case that there was any undue
influence in the first place.
There is ultimately no showing that petitioners' consent to the loan and mortgage
agreements was vitiated by undue influence. The financial condition of petitioners
may have motivated them to contract with respondents, but undue influence cannot
be attributed to respondents simply because they had lent money. Article 1391, in
relation to Article 1390 of the Civil Code, grants the aggrieved party the right to obtain
the annulment of contract on account of factors which vitiate consent. Article 1337
defines the concept of undue influence, as follows:
There is undue influence when a person takes improper
advantage of his power over the will of another, depriving the
latter of a reasonable freedom of choice. The following
circumstances shall be considered: the confidential, family,
spiritual and other relations between the parties or the fact that
the person alleged to have been unduly influenced was suffering
from mental weakness, or was ignorant or in financial distress.
While petitioners were allegedly financially distressed, it must be proven that there is
deprivation of their free agency. In other words, for undue influence to be present, the
influence exerted must have so overpowered or subjugated the mind of a contracting
party as to destroy his free agency, making him express the will of another rather than
his own. 21 The alleged lingering financial woes of petitioners per se cannot be
equated with the presence of undue influence.
The RTC had likewise concluded that petitioners were barred by laches from assailing
the validity of the real estate mortgage. We wholeheartedly agree. If indeed
petitioners unwillingly gave their consent to the agreement, they should have raised
this issue as early as in the foreclosure proceedings. It was only when the writ of
possession was issued did petitioners challenge the stipulations in the loan contract in
their action for annulment of mortgage. Evidently, petitioners slept on their rights. The
Court of Appeals succinctly made the following observations:
In all these proceedings starting from the foreclosure, followed by
the issuance of a provisional certificate of sale; then the definite
certificate of sale; then the issuance of TCT No. 29338 in favor of
the defendants and finally the petition for the issuance of the writ
Page 81 of 505

of possession in favor of the defendants, there is no showing that

plaintiffs questioned the validity of these proceedings. It was only
after the issuance of the writ of possession in favor of the
defendants, that plaintiffs allegedly tendered to the defendants
the amount of P260,000.00 which the defendants refused. In all
these proceedings, why did plaintiffs sleep on their rights? 22
Clearly then, with the absence of undue influence, petitioners have no cause of
action. Even assuming undue influence vitiated their consent to the loan contract,
their action would already be barred by prescription when they filed it. Moreover,
petitioners had clearly slept on their rights as they failed to timely assail the validity of
the mortgage agreement. The denial of the petition in G.R. No. 150773 is warranted.

We now resolve the petition in G.R. No. 153599.

Petitioners claim that the assailed RTC orders dated 3 August 1999 and 6 January
2000 could no longer be questioned in a special civil action
for certiorari andmandamus as the reglementary period for such action had already
elapsed.
It must be noted that the Order dated 3 August 1999 suspending the enforcement of
the writ of possession had a period of effectivity of only twenty (20) days from 3
August 1999, or until 23 August 1999. Thus, upon the expiration of the twenty (20)day period, the said Order became functus officio. Thus, there is really no sense in
assailing the validity of this Order, mooted as it was. For the same reason, the validity
of the order need not have been assailed by respondents in their special civil action
before the Court of Appeals.
On the other hand, the Order dated 6 January 2000 is in the nature of a writ of
injunction whose period of efficacy is indefinite. It may be properly assailed by way of
the special civil action for certiorari, as it is interlocutory in nature. ICAcHE
As a rule, the special civil action for certiorari under Rule 65 must be filed not later
than sixty (60) days from notice of the judgment or order. 23 Petitioners argue that the
3 August 1999 Order could no longer be assailed by respondents in a special civil
action for certiorari before the Court of Appeals, as the petition was filed beyond sixty
(60) days following respondents' receipt of the Order. Considering that the 3 August
1999 Order had become functus officio in the first place, this argument deserves
scant consideration.

Petitioners further claim that the 6 January 2000 Order could not have likewise been
the subject of a special civil action for certiorari, as it is according to them a final
order, as opposed to an interlocutory order. That the 6 January 2000 Order is
interlocutory in nature should be beyond doubt. An order is interlocutory if its effects
would only be provisional in character and would still leave substantial proceedings to
be further had by the issuing court in order to put the controversy to rest. 24 The
injunctive relief granted by the order is definitely final, but merely provisional, its
effectivity hinging on the ultimate outcome of the then pending action for annulment of
real estate mortgage. Indeed, an interlocutory order hardly puts to a close, or
disposes of, a case or a disputed issue leaving nothing else to be done by the court in
respect thereto, as is characteristic of a final order.
Since the 6 January 2000 Order is not a final order, but rather interlocutory in nature,
we cannot agree with petitioners who insist that it may be assailed only through an
appeal perfected within fifteen (15) days from receipt thereof by respondents. It is
axiomatic that an interlocutory order cannot be challenged by an appeal, but is
susceptible to review only through the special civil action of certiorari. 25 The sixty
(60)-day reglementary period for special civil actions under Rule 65 applies, and
respondents' petition was filed with the Court of Appeals well within the period.
Accordingly, no error can be attributed to the Court of Appeals in granting the petition
for certiorari and mandamus. As pointed out by respondents, the remedy
ofmandamus lies to compel the performance of a ministerial duty. The issuance of a
writ of possession to a purchaser in an extrajudicial foreclosure is merely a ministerial
function. 26
Thus, we also affirm the Court of Appeals' ruling to set aside the RTC orders enjoining
the enforcement of the writ of possession. 27 The purchaser in a foreclosure sale is
entitled as a matter of right to a writ of possession, regardless of whether or not there
is a pending suit for annulment of the mortgage or the foreclosure proceedings. An
injunction to prohibit the issuance or enforcement of the writ is entirely out of place. 28
One final note. The issue on the validity of the stipulated interest rates, regrettably for
petitioners, was not raised at the earliest possible opportunity. It should be pointed out
though that since an excessive stipulated interest rate may be void for being contrary
to public policy, an action to annul said interest rate does not prescribe. Such indeed
is the remedy; it is not the action for annulment of the ancillary real estate mortgage.
Despite the nullity of the stipulated interest rate, the principal loan obligation subsists,
and along with it the mortgage that serves as collateral security for it. IEcDCa

Page 82 of 505

WHEREFORE, in view of all the foregoing, the petitions are DENIED. Costs against
petitioners.
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.
||| (Spouses Carpo v. Chua, G.R. Nos. 150773 & 153599, [September 30, 2005], 508
PHIL 462-478)

DECISION

REGALADO, J p:
Before us is a petition seeking the amendment and modification of the dispositive
portion of respondent court's decision in CA-G.R. No. SP-09331, 1 allegedly to make
it conform with the findings, arguments and observations embodied in said decision,
which relief was denied by respondent court in its resolution, dated January 15,
1980, 2 rejecting petitioner's ex parte motion filed for that purpose. 3
While not involving the main issues in the case threshed out in the court a quo, the
judgment in which had already become final and executory, the factual backdrop of
the present petition is summarized by respondent court as follows:

SECOND DIVISION
[G.R. No. L-52482. February 23, 1990.]
SENTINEL INSURANCE CO., INC., petitioner, vs. THE HONORABLE
COURT OF APPEALS, HON. FLORELIANA CASTRO-BARTOLOME,
Presiding Judge, Court of First Instance of Rizal, Seventh Judicial
District, Branch XV, THE PROVINCIAL SHERIFF OF RIZAL, and
ROSE INDUSTRIES, INC., respondents.

Jesus I. Santos Law Office for petitioner.

Quasha, Asperilla, Ancheta, Valmonte, Pea & Marcos for private
respondent.

"Petitioner Sentinel Insurance Co., Inc., was the surety in a

contract of suretyship entered into on November 15, 1974 with
Nemesio Azcueta, Sr., who is doing business under the name
and style of 'Malayan Trading' as reflected in SICO Bond No.
G(16)00278 where both of them bound themselves, 'jointly and
severally, to fully and religiously guarantee the compliance with
the terms and stipulations of the credit line granted by private
respondent Rose Industries, Inc., in favor of Nemesio Azcueta,
Sr., in the amount of P180,00.00.' Between November 23 to
December 23, 1974, Azcueta made various purchases of tires,
batteries and tire tubes from the private respondent but failed to
pay therefor, prompting the latter to demand payment but
because Azcueta failed to settle his accounts, the case was
referred to the Insurance Commissioner who invited the attention
of the petitioner on the matter and the latter cancelled the
Suretyship Agreement on May 13, 1975 with due notice to the
private respondent. Meanwhile, private respondent filed with the
respondent court of Makati a complaint for collection of sum of
money against herein petitioner and Azcueta, docketed as Civil
Case No. 21248 alleging the foregoing antecedents end praying
that said defendants be ordered to pay jointly and severally unto
the plaintiff:

Page 83 of 505

a) The amount of P198,602.41 as its

principal obligation, including interest and damage
dues as of April 29, 1975;
b) To pay interest at 14% per annum and
damage dues at the rate of 2% every 45 days
commencing from April 30, 1976 up to the time the
full amount is fully paid:
xxx xxx xxx
"After petitioner filed its answer with counterclaim, the case, upon
agreement of the parties, was submitted for summary judgment
and on December 29, 1975, respondent court rendered its
decision with the following dispositive portion:
'xxx xxx xxx
a) To pay interest on the principal obligation at the rate of 14%
per annum at the rate of 2% every 45 days commencing from
April 30, 1975 until the amount is fully paid.'
"The decision having become final and executory, the prevailing
party moved for its execution which respondent judge granted
and pursuant thereto, a notice of attachment and levy was served
by respondent Provincial Sheriff upon the petitioner. On the same
day, however, the latter filed a motion for 'clarification of the
judgment as to its real and true import because on its face, it
would appear that aside from the 14% interest imposed on the
principal obligation, an additional 2% every 45 days
corresponding to the additional penalty has been imposed
against the petitioner which imposition would be usurious and
could not have been the intention of respondent Judge.' But the
move did nor prosper because on May 22, 1971, the judge
denied the motion on the theory that the judgment, having
become final and executory, it can no longer be amended or
corrected." 4
Contending that the order was issued with grave abuse of discretion, petitioner went
to respondent court on a petition for certiorari and mandamus to compel the court
below to clarify its decision, particularly Paragraph 1(a) of the dispositive portion
thereof.

Respondent court granted the petition in its decision dated December 3, 1979, the
disquisition and dispositive portion whereof read:
"While it is an elementary rule of procedure that after a decision,
order or ruling has become final, the court loses its jurisdiction
over the same and can no longer be subjected to any
modification or alteration, it is likewise well-settled that courts are
empowered even after such finality, to correct clerical errors or
mistakes in the decisions (Potenciano vs. CA, L-11569, 55 O.G.
2895). A clerical error is 'one that is visible to the eyes or obvious
to the understanding' (Black vs. Republic, 104 Phil. 849).
"That there was a mistake in the dispositive portion of the
decision cannot be denied considering that in the complaint filed
against the petitioner, the prayer as specifically stated in
paragraph (b) was to 'order the latter to pay interest at 14% per
annum and damage dues at the rate of 2% every 45 days
commencing from April 30, 1975 up to the time the amount is
fully paid.' But this notwithstanding the respondent court in its
questioned decision decreed the petitioner 'to pay the interest on
the principal obligation at the rate of 14% per annum and 2%
every 45 days commencing from April 30, 1975 until the amount
is fully paid,' so that, as petitioner correctly observes, it would
appear that on top of the 14% per annum on the principal
obligation, another 2% interest every 45 days commencing from
April 30, 1975 until the amount is fully paid has been imposed
against him (petitioner). In other words, 365 days in one year
divided by 45 days equals 8-1/9 which, multiplied by 2% as
ordered by respondent judge would amount to a little more than
16%. Adding 16% per annum to the 14% interest imposed on the
principal obligation would be 30% which is veritably usurious and
this cannot be countenanced, much less sanctioned by any court
of justice.
"We agree with this observation and what is more, it is likewise a
settled rule that although a court may grant any relief allowed by
law, such prerogative is delimited by the cardinal principle that it
cannot grant anything more than what is prayed for, for certainly,
the relief to be dispensed cannot rise above its source.
(Potenciano vs. CA, supra.)
Page 84 of 505

"WHEREFORE, the writ of certiorari is hereby granted and the

respondent judge is ordered to clarify its judgment complained of
in the following manner:

decision) would be usurious is a sound observation. It should, however, be stressed

that such observation was on the theoretical assumption that the rate of 2% is being
imposed as interest, not as damage dues which was the intendment of the trial court.

xxx xxx xxx

a) to pay interest at 14% per annum on the
principal obligation and damage dues at the rate of
2% every 45 days commencing from April 30, 1975
up to the time the full amount is fully paid;" 5
xxx xxx xxx
As earlier stated, petitioner filed an ex parte motion seeking to amend the abovequoted decretal portion which respondent court denied, hence the petition at bar.
The amendment sought, ostensibly in order that the dispositive portion of said
decision would conform with the body thereof, is the sole issue for resolution by the
Court. Petitioner itself cites authorities in support of its contention that it is entitled to a
correct and clear expression of a judgment to avoid substantial injustice. 6 In
amplification of its plaint, petitioner further asseverates that respondent court should
not have made an award for "damage dues" at such late stage of the proceeding
since said dues were not the subject of the award made by the trial court. 7
We disagree with petitioner.
To clarify an ambiguity or correct a clerical error in the judgment, the court may resort
to the pleadings filed by the parties, the findings of fact and the conclusions of law
expressed in the text or body of the decision. 8
Indeed, this was what respondent court did in resolving the original petition. It
examined the complaint filed against the petitioner and noted that the prayer as stated
in Paragraph (b) thereof was to "order defendant to pay interest at 14 per centum and
damage dues at the rate of 2% every 45 days commencing from April 30, 1975 up to
the time the full amount is fully paid." 9
Insofar as the findings and the dispositive portion set forth in respondent court's
decision are concerned, there is really no inconsistency as wittingly or unwittingly
asserted by petitioner.
The findings made by respondent court did not actually nullify the judgment of the trial
court. More specifically, the statement that the imposition of 2% interest every 45 days
commencing from April 30, 1975 on top of the 14% per annum (as would be the
impression from a superficial reading of the dispositive portion of the trial court's

Certainly, the damage dues in this case do not include and are not included in the
computation of interest as the two are of different categories and are distinct claims
which may be demanded separately, in the same manner that commissions, fines and
penalties are excluded in the computation of interest where the loan or forbearance is
not secured in whole or in part by real estate or an interest therein. 10
While interest forms part of the consideration of the contract itself, damage dues
(penalties, and so forth) are usually made payable only in case of default or nonperformance of the contract. 11 Also, although interest is subject to the provisions of
the Usury Law, 12 there is no policy or provision in such law preventing the
enforcement of damage dues although the effect may be to increase the sum payable
beyond the prescribed ceiling rates.
Petitioner's assertion that respondent court acted without authority in appending the
award of damage dues to the judgment of the trial court should be rejected. As
correctly pointed out by private respondent, the opening sentence of Paragraph 1(a)
of the dispositive portion of the lower court's decision explicitly ordered petitioner to
pay private respondent "the amount of P198,602.41 as principal obligation including
interest and damage dues," which is a clear and unequivocal indication of the lower
court's intent to award both interest and damage dues. 13
Significantly, it bears mention that on several occasions before petitioner moved for a
clarificatory judgment, it offered to settle its account with private respondent without
assailing the imposition of the aforementioned damage dues. 14 As ramified by
private respondent:
"2. . . . the then counsel of record for the petitioner, Atty. Porfirio
Bautista, and Atty. Teodulfo L. Reyes, petitioner's Assistant VicePresident for Operations, had a conference with the undersigned
attorneys as to how petitioner will settle its account to avoid
execution. During the conference, both parties arrived at almost
the same computation and the amount due from petitioner, which
includes 2% damage dues every 45 days from 30 April 1975 until
the amount is fully paid, under the judgment. No question was
ever raised as regards same.
Page 85 of 505

xxx xxx xxx

"5. The very face of Annex 'D' shows that the '2%' damage dues
being questioned by the present counsel of petitioner had been
mentioned no less than TEN (10) TIMES and was clearly and
distinctly defined by petitioner and included in the computation of
its obligation to herein petitioner as '2% penalty for every 45
days.'
xxx xxx xxx
"Petitioner's pretense that it was not the intent of the court to
award the damage dues of 2% every 45 days commencing 30
April 1975 is belied by the fact (and this is admitted by petitioner)
that upon agreement of the parties, the case before the lower
court was submitted for summary judgment; in other words, the
case was submitted upon the facts as appear in the pleadings
with no other evidence presented and a fact that appears clearly
in the pleadings is that the defendants in the case before the
lower court were under contract to pay private respondent,
among others, the damage dues of 2% every 45 days
commencing on 30 April 1975 until the obligation is fully
paid; . . ." 15
Respondent court demonstrably did not err in ordering the clarification of the decision
of the trial court by amending the questioned part of its dispositive portion to include
therein the phrase "damage dues" to modify the stated rate of 2%, and thereby
obviate any misconception that it is being imposed as interest. LLpr
ACCORDINGLY, certiorari is hereby DENIED and the decision of respondent Court of
Appeals is hereby AFFIRMED.
SO ORDERED.
Melencio-Herrera, Paras, Padilla and Sarmiento, JJ., concur.
||| (Sentinel Insurance Co., Inc. v. Court of Appeals, G.R. No. L-52482, [February 23,
1990], 261 PHIL 640-648)

FIRST DIVISION
[G.R. Nos. 43697 & 44200. March 31, 1938.]
In re Liquidation of the Mercantile Bank of China. GOPOCO
GROCERY
(GOPOCO)
ET
AL., claimantsappellants, vs. PACIFIC
COAST
BISCUIT
CO.
ET
AL.,oppositors-appellees.

Page 86 of 505

A. M. Zarate for appellants Gopoco Grocery et al.

Laurel, Del Rosario & Sabido for appellant Tiong Chui Gion.
Ross, Lawrence & Selph for appellees Pacific Coast Biscuit Co. et al.
Eusebio Orense and Carmelino G. Alvendia for appellees Chinese
Grocers Asso. et al.
Marcelo Nubla for appellees Ang Cheng Lian et al.

II. The claim of Gopoco Grocery (Gopoco) is for the sum of P4,932.48
plus P460. It describe its claim as follows:
Balance
check P4,927.95

due

on

open

account

subject

to

Interest on c/a .4.53

_________
4,932.48
Surety deposit 460.00

DECISION

DIAZ, J p:
On petition of the Bank Commissioner who alleged to have found, after
an investigation, that the Mercantile Bank of China could not continue operating
as such without running the risk of suffering losses and prejudicing its depositors
and customers; and that with the requisite approval of the corresponding
authorities, he had taken charge of all the assets thereof; the Court of First
Instance of Manila declared the said bank in liquidation; approved all the acts
theretofore executed by the commissioner; prohibited the officers and agents of
the bank from interfering with said commissioner in the possession of the assets
thereof, its documents, deeds, vouchers, books of account, papers,
memorandums, notes, bonds, bonds and accounts, obligations or securities and
its real and personal properties; required its creditors and all those who had any
claim against it, to present the same in writing before the commissioner within
ninety days; and ordered the publication, as was in fact done, of the order
containing all these provisions, for two consecutive weeks in two newspapers of
general circulation in the City of Manila, at the expense of the aforesaid bank.
After these publications, and within the period of ninety days, the following
creditors, among others, presented their claims:
Tiong Chui Gion, Gopoco Grocery, Tan Locko, Woo & Lo & Co., Sy
Guan Huat, and La Bella Tondea.
I. The claim of Tiong Chui Gion is for the sum of P10,285.27. He alleged
that he deposited said sum in the bank under liquidation on current account.

III. The claim of Tan Locko is for the sum of P7,624.20, and he
describes it in turn as follows:
Balance due on open account subject to check L759 P7,610.44
Savings account No. 156 (foreign) with Mercantile Bank
of China L-1611 Amoy $16,000.00
Interest on said Savings Account No. 156 3.22
Interest on checking a/c 10.54
_________
7,624.20
IV. The claim of Woo & Lo & Co. is for the sum of P6,972.88 and is set
out in its written claim appearing in the record of appeal as follows:
Balance due on open account subject to check L845 P6,961.01
Interest on checking a/c 11.87
_________
6,972.88
V. The claim of Sy Guan Huat is for the sum of P6,232.88 and he
describes it as follows:
Balance due on open account subject to check L718 P6,224.34
Page 87 of 505

Interest on checking a/c 8.54

$565.40 including interest and other expenses, the amount of two drafts drawn
upon and accepted by it.

_________
6,232.88
VI. The claim of La Bella Tondea is for the sum of P1,912.79, also
described as follows;
Balance
check P1,910.59

due

on

open

account

subject

to

Interest on account 2.20

_________
1,912.79
To better resolve not only these claims but also the many others which
were presented against the bank, the lower court, on July 15, 1932, appointed
Fulgencio Borromeo as commissioner and referee to receive the evidence which
the interested parties may desire to present; and the commissioner and referee
thus named, after qualifying for the office and receiving the evidence presented to
him, resolved the aforesaid six claims by recommending that the same be
considered as an ordinary credit only, and not as a preferred credit as the
interested parties wanted, because they were at the same time debtors of the
bank.
The evidence adduced and the very admissions of the said interested
parties in fact show that (a) the claimant Tiong Chui Gion, while he was a creditor
of the Mercantile Bank of China in the sum of P10,285.27 which he deposited on
current account, was also a debtor not only in the sum of P633.76 but also in the
sum of P664.77, the amount of a draft which he accepted, plus interest thereon
and the protest fees paid therefor; (b) the claimant Gopoco Grocery (Gopoco)
had a current account in the bank n the sum of P5,392.48, but it is indebted to it,
in turn the sum of $2,334.80, the amount of certain drafts which it had accepted;
(c) the claimant Tan Locko had a deposit of P7,624.20, but he owed $1,378.90,
the amount of a draft which he also accepted; (d) the claimant Woo & Lo & Co.
had a deposit of P6,972.88, but it was indebted in the sum of $3,464.84, the
amount also of certain drafts accepted by it; (e) the claimants Sy Guan Huat and
Siy Kia had a deposit of P6,232.88, but they owed the sum of $3,107.37, for two
drafts accepted by them and already due; and (f) the claimant La Bella Tondea
had, in turn, a deposit of P1,912.79, but it was, in turn, indebted in the sum of

The lower court approved all the recommendations of the commissioner

and referee as to the claims of the six appellants-as follows: (1) To approve the
claim of Tiong Chui Gion (P10,285.27) but only as an ordinary credit, minus the
amount of the draft for P664.77; (2) to approve the claim of Gopoco Grocery
(Gopoco) but also as an ordinary credit only (P5,387.95 according to the referee),
minus its obligation amounting to $2,334.80 or P4,669.60; (3) to approve the
claim of Tan Locko but as an ordinary credit only P7,610.44 according to the
referee), deducting therefrom his obligation amounting to $1,378.90 or
P2,757.80; (4) to approve the claim of Woo & Lo & Co. but only as an ordinary
credit (P6,961.01 according to the referee), after deducting its obligation to the
bank, amounting to $3,464.84 or P6,929.68; (5) to approve the claim of Sy Guan
Huat but only as an ordinary credit (P6,224.34 according to the referee), after
deducting his obligation amounting to $3,107.37 or P6,214.74; and, finally, (6) to
approve the claim of La Bella Tondea but also as an ordinary credit only
(P1,917.50 according to the referee), after deducting its obligation amounting to
$565.40 or P1,130.80; but he expressly refused to authorize the payment of
interest by reason of impossibility upon the grounds set out in the decision. Not
agreeable to the decision of the lower court, each of the interested parties
appealed therefrom and thereafter filed their respective briefs.
Tiong Chui Gion argues in his brief filed in case G. R. No. 44200, that
the lower court erred:
"1. In holding that his deposit of P10,285.27 in the
Mercantile Bank of China, constitutes an ordinary credit only and
not a preferred credit.
"2. In holding as preferred credits the drafts and checks
issued by the bank under liquidation in payment of the drafts
remitted to it for collection from merchants residing in the country,
by foreign entities or banks; and in not holding that the deposits
on current account in said bank should enjoy preference over
said drafts and checks; and

"3. In holding that the amount of P633.76 (which should

be understood as P664.77), which the claimant owes to the bank
under liquidation, be deducted from his current account deposit
therein, amounting to P10,285.27, upon the distribution of the
Page 88 of 505

assets of the bank among its various creditors, instead of holding

that, after deducting the aforesaid sum of P633.76 (should be
P664.77) from his aforesaid deposit, there be turned over to him
the balance together with the dividends or shares then
corresponding to him, on the basis of said amount."
The other five claimants, that is, Gopoco Grocery Tan Locko, Woo & Lo
& Co., Sy Guan Huat and La Bella Tondea, in turn, argue in the brief they jointly
filed in case G. R. No. 43697, that the lower court erred:
"1. In not first deducting from their respective deposits in
the bank under liquidation, whose payment they claim, their
respective obligations thereto.
"2. In not holding that their claims constitute a preferred
credit.
"3. In holding that the drafts and checks issued by the
bank under liquidation in payment of the drafts remitted to it by
foreign entities and banks for collection from the certain
merchants residing in the country, are preferred credits; and in
not holding that the deposits made by each of them enjoy
preference over said drafts and checks, and
"4. In denying their motion for a new trial based on the
proposition that the appealed decision is not in accordance with
law and is contrary to the evidence adduced at the trial."
The questions raised by the appellant in case G. R. No. 44200 and by
the appellants in case G. R. No. 43697 being identical in nature, we believe it
practical and proper to resolve said questions jointly in one decision. Before
proceeding, however, it is convenient to note that the commissioner and referee,
classifying the various claims presented against the bank, placed under one
group those partaking of the same nature, the classification having resulted in six
groups.
In the first group he included all the claims for current account, savings
and fixed deposits.
In the second group he included the claims for checks or drafts sold by
the bank under liquidation and not paid by the agents or banks in whose favor
they had been issued.
In the third group he included the claims for checks or drafts issued by
the bank under liquidation in payment or reimbursement of the drafts or goods

remitted to it for collection, from resident merchants and entities, by foreign banks
and entities.
In the fourth group he included the claims for drafts or securities to be
collected from resident merchants and entities which were pending collection on
the date payments were suspended.
In the fifth group he included the claims of certain depositors or creditors
of the bank who were at the same time debtors thereof; and he considered of this
class the claims of the appellants in these two cases, and.
In the sixth group he included the other claims different in nature from
that of the aforesaid five claims.
I. Now, then, should the appellants' deposits on current account in the
bank now under liquidation be considered preferred credits, and not otherwise, or
should they be considered ordinary credits only? The appellants contend that
they are preferred credits because they are deposits in contemplation of law, and
as such should be returned with the corresponding interest thereon. In support
thereof they cite Manresa (11 Manresa, Civil Code, page 663), and what has
been insinuated in the case of Rogers vs. Smith, Bell & Co. (10 Phil., 319), citing
the said commentator who maintains that, notwithstanding the provisions of
articles 1767 and 1768 and others of the aforesaid Code, from which it is inferred
that the so-called irregular deposits no longer exist, the fact is that said deposits
still exist. And they contend and argue that what they had in the bank should be
considered as of this character. But it happens that they themselves admit that
the bank had been paying them interest and that even now the bank owes them
interest which should have been paid to them before it was declared in a state of
liquidation. This fact undoubtedly destroys the character which they would
impress upon their deposits on current account, and nullifies their contention that
the same be considered as irregular deposits, because the payment of interest
only takes place in the case of loans. On the other hand, as we stated with
respect to the claim of Tan Tiong Tick (In re Liquidation of Mercantile Bank of
China, G. R. No. 43682), the provisions of the Code of Commerce, and not those
of the Civil Code, are, applicable to cases of the nature of those at bar, which
have to do with parties who are both merchants. (Articles 303 and 309, Code of
Commerce.) We there said, and it is not amiss to repeat now, that the so-called
current account and savings deposits have lost their character of deposits,
properly so-called, and are converted into simple commercial loans because, in
cases of such deposits, the bank has made use thereof in the ordinary course of
its transactions as an institution engaged in the banking business, not because it
so wishes, but precisely because of the authority deemed to have been granted
Page 89 of 505

to it by the appellants to enable them to collect the interest which they had been
and they are now collecting, and by virtue further of the authority granted to it by
section 125 of the Corporation Law (Act No. 1459), as amended by Acts Nos.
2003 and 3610 and section 9 of the Banking Law (Act No. 3154), without
considering of course the provisions of article 1768 of the Civil Code. Wherefore,
it is held that the deposits on current account of the appellants in the bank under
liquidation, with the right on their part to collect interest, have not created and
could not create a juridical relation between them except that of creditors and
debtor, they being the creditors and the bank the debtor.
What has so far been said resolves adversely the contention of the
appellants, the question raised in the first and second assigned errors of Tiong
Chui Gion in case G. R. No. 44200, and the appellants' second and third
assigned errors in case G. R. No. 43697.
II. As to the third and first errors attributed to the lower court by Tiong
Chui Gion in his case, and by the other appellants in theirs, respectively, it should
be stated that the question of set-off raised by them cannot be resolved except in
the same way that we resolved a like question in the said case, G. R. No. 436&2,
entitled "In re Liquidation of Mercantile Bank of China. Tan Tiong Tick, claimant."
It is proper that set-offs be made, inasmuch as the appellants and the bank being
reciprocally debtors and creditors, the same is only just and according to law (art.
1195, Civil Code), particularly as none of the appellants falls within the
exceptions mentioned in section 58 of the Insolvency Law (Act No. 1956),
reading:
"SEC. 58. In all cases of mutual debts and mutual
credits between the parties, the account between them shall be
stated, and one debt set off against the other, and the balance
only shall be allowed and paid. But no set-off or counterclaim
shall be allowed of a claim in its nature not provable against the
estate: Provided, That no set-off or counterclaim shall be allowed
in favor of any debtor to the insolvent of a claim purchased by or
transferred to such debtor within thirty days immediately
preceding the filing, or after the filing of the petition by or against
the insolvent."
It has been said with much basis by Morse, in his work on Bank &
Banking (6th ed., vol. 1, pages 776 and 784) that:

"The rules of law as to the right of set-off between the

bank and its depositors are not different from those applicable to
other parties." (Page 776.)
"Where the bank itself stops payment and becomes
insolvent, the customer may avail himself in set-off against his
indebtedness to the bank of any indebtedness of the bank to
himself, as, for example, the balance due him on his deposit
account." (Page 784.)
But if set-offs are proper in these cases, when and how should they be
made, considering that the appellants ask for the payment of interest? Are they
by any chance entitled to interest? If they are, when and until what time should
they be paid the same?
The question of whether they are entitled to interest should be resolved
in the same way that we resolved the case of the claimant Tan Tiong Tick in the
said case, G. R. No. 43682. The circumstances in these two cases are certainly
the same as those in the said case with reference to the said question. the
Mercantile Bank of China owes to each of the appellants the interest claimed by
them, corresponding to the year ending December 4, 1931, the date it was
declared in a state of liquidation, but not those which the appellants claim should
be earned by their deposits after said date and until the full amounts thereof are
paid to them. And with respect to the question of set-off, this should be deemed
made, of course, as of the date when the Mercantile Bank of China was declared
in a state of liquidation, that is, on December 4, 1931, for then there was already
a reciprocal concurrence of debts, with respect to said bank and the appellants.
(Arts. 1195 and 1196 of the Civil Code; 8 Manresa, 4th ed., p. 361.)
III. With respect to the fourth assigned error of the appellants in case G.
R. No. 43697, we hold, in view of the considerations set out in resolving the other
assignments of error, that the lower court properly denied the motion for new trial
of said appellants.
In view of the foregoing, we modify the appealed judgments by holding
that the deposits, claimed by the appellants, and declared by the lower court to
be ordinary credits, are for the following amounts: P10,285.27 of Tiong Chui
Gion; P5,387.95 of Gopoco Grocery (Gopoco); P7,610.44 of Tan Locko;
P6,981.01 of Woo & Lo & Co.; P6,224.34 of Sy Guan Huat; and P1,917.50 of La
Bella Tondea, plus their corresponding interests up to December 4, 1931; that
their obligations to the bank under liquidation which should be set off against said
deposits, are respectively for the following amounts: P664.77 of Tiong Chui Gion;
Page 90 of 505

P4,669.60 of Gopoco Grocery (Gopoco); P2,757.80 of Tan Locko; P6,929.68 of

Woo & Lo & Co.; P6,214.74 of Sy Guan Huat; and P1,130.80 of La Bella
Tondea; and we order that the set-offs in question be made in the manner stated
in this decision, that is, as of the date already indicated, December 4, 1931. In all
other respects, we affirm the aforesaid judgments, without special
pronouncement as to costs. So ordered.

accordance with Article 2244 (14) (b) of the Civil Code was directed by the liquidation
court. From this order, the Central Bank appealed by certiorari.
The Supreme Court held that Art. 2244 (14) (b) of the Civil Code does not apply and
the judgments obtained by the respondents against the involvent savings bank do not
enjoy preference.
Orders of the lower court reversed and set aside.

Avancea, C. J., Villa-Real, Abad Santos, Imperial and Horrilleno,

JJ., concur.

DECISION

||| (In re: Gopoco Grocery v. Pacific Coast Biscuit Co., G.R. Nos. 43697 & 44200,
[March 31, 1938], 65 PHIL 443-454)

SECOND DIVISION
[G.R. No. L-38427. March 12, 1975.]
CENTRAL BANK OF THE PHILIPPINES as Liquidator of the
FIDELITY
SAVINGS
BANK, petitioner, vs. HONORABLE
JUDGE JESUS P. MORFE, as Presiding Judge of Branch XIII,
Court of First Instance of Manila, Spouses AUGUSTO and
ADELAIDA PADILLA and Spouses MARCELA and JOB
ELIZES,respondents.

F.E. Evangelista & Agapito S. Fajardo for petitioner.

Juan C. Nabong, Jr. for respondent Spouses Augusto and Adelaida Padilla.
Albert R. Palacio for respondent spouses Marcela and Job Elizes.

SYNOPSIS
Private respondents secured against Savings Bank, after the same had been
declared insolvent, final judgments for the recovery of the balance of their time
deposits. Payment of the same as preferred credits evidenced by final judgments in

AQUINO, J p:
This case involves the question of whether a final judgment for the payment of a time
deposit in a savings bank, which judgment was obtained after the bank was declared
insolvent, is a preferred claim against the bank. The question arises under the
following facts:
On February 18, 1969 the Monetary Board found the Fidelity Savings Bank to be
insolvent. The Board directed the Superintendent of Banks to take charge of its
assets, forbade it to do business, and instructed the Central Bank Legal Counsel to
take appropriate legal actions (Resolution No. 350).
On December 9, 1969 the Board resolved to seek the court's assistance and
supervision in the liquidation of the bank. The resolution was implemented only on
January 25, 1972 when the Central Bank of the Philippines filed the corresponding
petition for assistance and supervision in the Court of First Instance of Manila (Civil
Case No. 86005 assigned to Branch XIII).
Prior to the institution of the liquidation proceeding but after the declaration of
insolvency, or, specifically, sometime in March, 1971, the spouses Job Elizes and
Marcela P. Elizes filed a complaint in the Court of First Instance of Manila against the
Fidelity Savings Bank for the recovery of the sum of P50,584 as the balance of their
time deposits (Civil Case No. 82520 assigned to Branch I).
In the judgment rendered in that case on December 13, 1972 the Fidelity Savings
Bank was ordered to pay the Elizes spouses the sum of P50,584 plus accumulated
interest.
Page 91 of 505

In another case, assigned to Branch XXX of the Court of First Instance of Manila, the
spouses Augusto A. Padilla and Adelaida Padilla secured on April 14, 1972 a
judgment against the Fidelity Savings Bank for the sums of P80,000 as the balance of
their time deposits, plus interests, P70,000 as moral and exemplary damages and
P9,600 as attorney's fees (Civil Case No. 84200 where the action was filed on
September 6, 1971).
In its orders of August 20, 1973 and February 25, 1974, the lower court (Branch XIII
having cognizance of the liquidation proceeding), upon motions of the Elizes and
Padilla spouses and over the opposition of the Central Bank, directed the latter, as
liquidator, to pay their time deposits as preferred credits, evidenced by final
judgments, within the meaning of article 2244(14)(b) of the Civil Code, if there are
enough funds in the liquidator's custody in excess of the credits more preferred under
section 30 of the Central Bank Law in relation to articles 2244 and 2251 of the Civil
Code.
From the said order, the Central Bank appealed to this Court by certiorari. It contends
that the final judgments secured by the Elizes and Padilla spouses do not enjoy any
preference because (a) they were rendered after the Fidelity Savings Bank was
declared insolvent and (b) under the charter of the Central Bank and the General
Banking Law, no final judgment can be validly obtained against an insolvent bank.
Republic Act No. 265 provides:
"SEC. 29. Proceedings upon insolvency. Whenever, upon
examination by the Superintendent or his examiners or agents
into the condition of any banking institution, it shall be disclosed
that the condition of the same is one of insolvency, or that its
continuance in business would involve probable loss to its
depositors or creditors, it shall be the duty of the Superintendent
forthwith, in writing, to inform the Monetary Board of the facts,
and the Board, upon finding the statements of the Superintendent
to be true, shall forthwith forbid the institution to do business in
the Philippines and shall take charge of its assets and proceeds
according to law.
"The Monetary Board shall thereupon determine within thirty days
whether the institution may be reorganized or otherwise placed in
such a condition so that it may be permitted to resume business
with safety to its creditors and shall prescribe the conditions
under which such resumption of business shall take place. In

such case the expenses and fees in the administration of the

institution shall be determined by the Board and shall be paid to
the Central Bank out of the assets of such banking institution.
"At any time within ten days after the Monetary Board has taken
charge of the assets of any banking institution, such institution
may apply to the Court of First Instance for an order requiring the
Monetary Board to show cause why it should not be enjoined
from continuing such charge of its assets, and the court may
direct the Board to refrain from further proceedings and to
surrender charge of its assets.
"If the Monetary Board shall determine that the banking institution
cannot resume business with safety to its creditors, it shall, by the
Solicitor General, file a petition in the Court of First Instance
reciting the proceedings which have been taken and praying the
assistance and supervision of the court in the liquidation of the
affairs of the same. The Superintendent shall thereafter, upon
order of the Monetary Board and under the supervision of the
court and with all convenient speed, convert the assets of the
banking institution to money.
"SEC. 30. Distribution of assets. In case of liquidation of a
banking institution, after payment of the costs of the proceedings,
including reasonable expenses and fees of the Central Bank to
be allowed by the court, the Central Bank shall pay the debts of
such institution, under the order of the court, in accordance with
their legal priority."
The General Banking Act, Republic Act No. 337, provides:
"SEC. 85. Any director or officer of any banking institution who
receives or permits or causes to be received in said bank any
deposit, or who pays out or permits or causes to be paid out any
funds of said bank, or who transfers or permits or causes to be
transferred any securities or property of said bank, after said
bank becomes insolvent, shall be punished by fine of not less
than one thousand nor more than ten thousand pesos and by
imprisonment for not less than two nor more than ten years."
The Civil Code provides:
Page 92 of 505

"ART. 2237. Insolvency shall be governed by special laws insofar

as they are not inconsistent with this Code. (n)
"ART. 2244. With reference to other property, real and personal,
of the debtor, the following claims or credits shall be preferred in
the order named:
xxx xxx xxx
(14) Credits which, without special privilege, appear in (a) a
public instrument; or (b) in a final judgment, if they have been the
subject of litigation. These credits shall have preference among
themselves in the order of priority of the dates of the instruments
and of the judgments, respectively. ( 1924a)

"ART. 2251. Those credits which do not enjoy any preference

with respect to specific property, and those which enjoy
preference, as to the amount not paid, shall be satisfied
according to the following rules:
(1) In the order established in article 2244;(2) Common credits
referred to in article 2246 shall be paid pro rata regardless of
dates. (1929a)".
The trial court or, to be exact, the liquidation court noted that there is no provision in
the charter of the Central Bank and in the General Banking Law (Republic Acts Nos.
265 and 337, respectively) which suspends or abates civil actions against an insolvent
bank pending in courts other than the liquidation court. It reasoned out that, because
such actions are not suspended, judgments against insolvent banks could be
considered as preferred credits under article 2244(14)(b) of the Civil Code. It further
noted that, in contrast with the Central Bank Act, section 18 of the Insolvency
Law provides that upon the issuance by the court of an order declaring a person
insolvent, "all civil proceedings against the said insolvent shall be stayed".
The liquidation court directed the Central Bank to honor the writs of execution issued
by Branches I and XXX for the enforcement of the judgments obtained by the Elizes
and Padilla spouses. It suggested that, after satisfaction of the judgments, the Central
Bank, as liquidator, should include said judgments in the list of preferred credits
contained in the "Project of Distribution" "with the notation 'already paid'".

On the other hand, the Central Bank argues that after the Monetary Board has
declared that a bank is insolvent and has ordered it to cease operations, the Board
becomes the trustee of its assets "for the equal benefit of all the creditors, including
the depositors". The Central Bank cites the ruling that "the assets of an insolvent
banking institution are held in trust for the equal benefit of all creditors, and after its
insolvency, one cannot obtain an advantage or a preference over another by an
attachment, execution or otherwise" (Rohr vs. Stanton Trust & Savings Bank, 76
Mont. 248, 245 Pac. 947).
The stand of the Central Bank is that all depositors and creditors of the insolvent bank
should file their actions with the liquidation court. In support of that view it cites the
provision that the Insolvency Law does not apply to banks (last sentence, sec. 52
of Act No. 1956).
It also invokes the provision penalizing a director or officer of a hank who disburses,
or allows disbursement, of the funds of the bank after it becomes insolvent (Sec.
85, General Banking Act, Republic Act No. 337). It cites the ruling that "a creditor of
an insolvent state bank in the hands of a liquidator who recovered a judgment against
it is not entitled to a preference for (by) the mere fact that he is a judgment creditor"
(Thomas H. Briggs & Sons, Inc. vs. Allen, 207 N. Carolina 10, 175 S. E. 838, Braver,
Liquidation of Financial Institutions, p. 922).
It should be noted that fixed, savings, and current deposits of money in banks and
similar institutions are not true deposits. They are considered simple loans and, as
such, are not preferred credits (Art. 1980, Civil Code; In re Liquidation of Mercantile
Bank of China: Tan Tiong Tick vs. American Apothecaries Co., 65 Phil. 414; Pacific
Coast Biscuit Co. vs. Chinese Grocers Association, 65 Phil. 375; Fletcher American
National Bank vs. Ang Cheng Lian, 65 Phil. 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 Phil. 429; Gopoco Grocery vs. Pacific Coast Biscuit Co., 65 Phil.
443).
The aforequoted section 29 of the Central Bank's charter explicitly provides that when
a bank is found to be insolvent, the Monetary Board shall forbid it to do business and
shall take charge of its assets. The Board in its Resolution No. 350 dated February
18, 1969 banned the Fidelity Savings Bank from doing business. It took charge of the
bank's assets. Evidently, one purpose in prohibiting the insolvent bank from doing
business is to prevent some depositors from having an undue or fraudulent
preference over other creditors and depositors.
That purpose would be nullified if, as in this case, after the bank is declared insolvent,
suits by some depositors could be maintained and judgments would be rendered for
Page 93 of 505

the payment of their deposits and then such judgments would be considered preferred
credits under article 2244(14)(b) of the Civil Code.
We are of the opinion that such judgments cannot be considered preferred and that
article 2244(14)(b) does not apply to judgments for the payment of the deposits in an
insolvent savings bank which were obtained after the declaration of insolvency.
A contrary rule or practice would be productive of injustice, mischief and confusion. To
recognize such judgments as entitled to priority would mean that depositors in
insolvent banks, after learning that the bank is insolvent as shown by the fact that it
can no longer pay withdrawals or that it has closed its doors or has been enjoined by
the Monetary Board from doing business, would rush to the courts to secure
judgments for the payment of their deposits.
In such an eventuality, the courts would be swamped with suits of that character.
Some of the judgments would be default judgments. Depositors armed with such
judgments would pester the liquidation court with claims for preference on the basis of
article 2244(14)(b). Less alert depositors would be prejudiced. That inequitable
situation could not have been contemplated by the framers of section 29.
The Rohr case (supra) supplies some illumination on the disposition of the instant
case. It appears in that case that the Stanton Trust & Savings Bank of Great Falls
closed its doors to business on July 9, 1923. On November 7, 1924 the bank (then
already under liquidation) issued to William Rohr a certificate stating that he was
entitled to claim from the bank $1,191.72 and that he was entitled to dividends
thereon. Later, Rohr sued the bank for the payment of his claim. The bank demurred
to the complaint. The trial court sustained the demurrer. Rohr appealed. In affirming
the order sustaining the demurrer, the Supreme Court of Montana said:
"The general principle of equity that the assets of an insolvent are
to be distributed ratably among general creditors applies with full
force to the distribution of the assets of a bank. A general
depositor of a bank is merely a general creditor, and, as such, is
not entitled to any preference or priority over other general
creditors.
"The assets of a bank in process of liquidation are held in trust for
the equal benefit of all creditors. and one cannot be permitted to
obtain an advantage or preference over another by an
attachment, execution or otherwise. A disputed claim of a creditor
may be adjudicated, but those whose claims are recognized and
admitted may not successfully maintain action thereon. So to

permit would defeat the very purpose of the liquidation of a bank

whether being voluntarily accomplished or through the
intervention of a receiver.
xxx xxx xxx
"The available assets of such a bank are held in trust, and so
conserved that each depositor or other creditor shall receive
payment or dividend according to the amount of his debt, and
that none of equal class shall receive any advantage or
preference over another."
And with respect to a national bank under voluntary liquidation, the court noted in
the Rohr case that the assets of such a bank "become a trust fund, to be administered
for the benefit of all creditors pro rata, and, while the bank retains its corporate
existence, and may be sued, the effect of a judgment obtained against it by a creditor
is only to fix the amount of debt. He can acquire no lien which will give him any
preference or advantage over other general creditors." (245 Pac. 249) **
Considering that the deposits in question, in their inception, were not preferred
credits, it does not seem logical and just that they should be raised to the category of
preferred credits simply because the depositors, taking advantage of the long interval
between the declaration of insolvency and the filing of the petition for judicial
assistance and supervision, were able to secure judgments for the payment of their
time deposits.
The judicial declaration that the said deposits were payable to the depositors, as
indisputably they were due, could not have given the Elizes and Padilla spouses a
priority over the other depositors whose deposits were likewise indisputably due and
owing from the insolvent bank but who did not want to incur litigation expenses in
securing a judgment for the payment of the deposits.
The circumstance that the Fidelity Savings Bank, having stopped operations since
February 19, 1969, was forbidden to do business (and that ban would include the
payment of time deposits) implies that suits for the payment of such deposits were
prohibited. What was directly prohibited should not be encompassed indirectly. (See
Maurello vs. Broadway Bank & Trust Co. of Paterson, 176 Atl. 391, 114 N.J.L. 167).
It is noteworthy that in the trial court's order of October 3, 1972, which contains the
Bank Liquidation Rules and Regulations, it indicated in Step III the procedure for
processing the claims against the insolvent bank. In Step IV, the court directed the
Central Bank, as liquidator, to submit a Project of Distribution which should include "a
Page 94 of 505

list of the preferred credits to be paid in full in the order of priorities established in
Articles 2241, 2242, 2243, 2246 and 2247" of the Civil Code (note that article 2244
was not mentioned). There is no cogent reason why the Elizes and Padilla spouses
should not adhere to the procedure outlined in the said rules and regulations.
WHEREFORE, the lower court's orders of August 20, 1973 and February 25, 1974
are reversed and set aside. No costs.
SO ORDERED.
Makalintal, C.J., Fernando, Barredo and Fernandez, JJ., concur.
Antonio, J., did not take part.
||| (Central Bank of the Phil. v. Morfe, G.R. No. L-38427, [March 12, 1975], 159 PHIL
727-737)

[G.R. No. L-30511. February 14, 1980.]

MANUEL M. SERRANO, petitioner, vs. CENTRAL BANK OF THE
PHILIPPINES; OVERSEAS BANK OF MANILA; EMERITO M.
RAMOS, SUSANA B. RAMOS, EMERITO B. RAMOS, JR., JOSEFA
RAMOS DELA RAMA, HORACIO DELA RAMA, ANTONIO B.
RAMOS, FILOMENA RAMOS LEDESMA, RODOLFO LEDESMA,
VICTORIA
RAMOS
TANJUATCO,
and
TEOFILO
TANJUATCO, respondents.

Rene Diokno for petitioner.

F.E. Evangelista & Glecerio T. Orsolino for respondent Central Bank of
the Philippines.
Feliciano C. Tumale, Pacifico T. Torres and Antonio B. Periquet for
respondent Overseas Bank of Manila.
Josefina G. Salonga for all other respondents.

DECISION

CONCEPCION, JR., J p:

SECOND DIVISION

Petition for mandamus and prohibition, with preliminary injunction, that seeks the
establishment of joint and solidary liability to the amount of Three Hundred Fifty
Thousand Pesos, with interest, against respondent Central Bank of the Philippines
and Overseas Bank of Manila and its stockholders, on the alleged failure of the
Overseas Bank of Manila to return the time deposits made by petitioner and assigned
to him, on the ground that respondent Central Bank failed in its duty to exercise strict
supervision over respondent Overseas Bank of Manila to protect depositors and the
general public. 1 Petitioner also prays that both respondent banks be ordered to
execute the proper and necessary documents to constitute all properties listed in
Annex "7" of the Answer of respondent Central Bank of the Philippines in G.R. No. L29352, entitled "Emerito M. Ramos, et al. vs. Central Bank of the Philippines," into a
trust fund in favor of petitioner and all other depositors of respondent Overseas Bank
Page 95 of 505

of Manila. It is also prayed that the respondents be prohibited permanently from

honoring, implementing, or doing any act predicated upon the validity or efficacy of
the deeds of mortgage, assignment, and/or conveyance or transfer of whatever nature
of the properties listed in Annex "7" of the Answer of respondent Central Bank in G.R.
No. 29352. 2 cdtai

sound banking supervision requires respondent Central Bank to advertise or

represent to the public any remedial measures it may impose upon chronic delinquent
banks as such action may inevitably result to panic or bank "runs". In the years 19661967, there were no findings to declare the respondent Overseas Bank of Manila as
insolvent. 8

A sought for ex-parte preliminary injunction against both respondent banks was not
given by this Court.

Respondent Central Bank likewise denied that a constructive trust was created in
favor of petitioner and his predecessor in interest Concepcion Maneja when their time
deposits were made in 1966 and 1967 with the respondent Overseas Bank of Manila
as during that time the latter was not an insolvent bank and its operation as a banking
institution was being salvaged by the respondent Central Bank. 9

Undisputed pertinent facts are:

On October 13, 1966 and December 12, 1966, petitioner made a time deposit, for one
year with 6% interest, of One Hundred Fifty Thousand Pesos (P150,000.00) with the
respondent Overseas Bank of Manila. 3 Concepcion Maneja also made a time
deposit, for one year with 6-1/2% interest, on March 6, 1967, of Two Hundred
Thousand Pesos (P200,000.00) with the same respondent Overseas Bank of
Manila. 4
On August 31, 1968, Concepcion Maneja, married to Felixberto M. Serrano, assigned
and conveyed to petitioner Manuel M. Serrano, her time deposit of P200,000.00 with
respondent Overseas Bank of Manila. 5
Notwithstanding series of demands for encashment of the aforementioned time
deposits from the respondent Overseas Bank of Manila, dating from December 6,
1967 up to March 4, 1968, not a single one of the time deposit certificates was
honored by respondent Overseas Bank of Manila. 6
Respondent Central Bank admits that it is charged with the duty of administering the
banking system of the Republic and it exercises supervision over all doing business in
the Philippines, but denies the petitioner's allegation that the Central Bark has the
duty to exercise a most rigid and stringent supervision of banks, implying that
respondent Central Bank has to watch every move or activity of all banks, including
respondent Overseas Bank of Manila. Respondent Central Bank claims that as of
March 12, 1965, the Overseas Bank of Manila, while operating, was only on a limited
degree of banking operations since the Monetary Board decided in its Resolution No.
322, dated March 12, 1965, to prohibit the Overseas Bank of Manila from making new
loans and investments in view of its chronic reserve deficiencies against its deposit
liabilities. This limited operation of respondent Overseas Bank of Manila continued up
to 1968. 7
Respondent Central Bank also denied that it is guarantor of the permanent solvency
of any banking institution as claimed by petitioner. It claims that neither the law nor

Respondent Central Bank avers no knowledge of petitioner's claim that the properties
given by respondent Overseas Bank of Manila as additional collaterals to respondent
Central Bank of the Philippines for the former's overdrafts and emergency loans were
acquire through the use of depositors' money, including that of the petitioner and
Concepcion Maneja. 10
In G.R. No. L-29352, entitled "Emerito M. Ramos, et al. vs. Central Bank of the
Philippines," a case was filed by the petitioner Ramos, wherein respondent Overseas
Bank of Manila sought to prevent respondent Central Bank from closing, declaring the
former insolvent, and liquidating its assets. Petitioner Manuel Serrano in this case,
filed on September 6, 1968, a motion to intervene in G.R. No. L-29352, on the ground
that Serrano had a real and legal interest as depositor of the Overseas Bank of Manila
in the matter in litigation in that case. Respondent Central Bank in G.R. No. L-29352
opposed petitioner Manuel Serrano's motion to intervene in that case, on the ground
that his claim as depositor of the Overseas Bank of Manila should properly be
ventilated in the Court of First Instance, and if this Court were to allow Serrano to
intervene as depositor in G.R. No. L-29352, thousands of other depositors would
follow and thus cause an avalanche of cases in this Court. In the resolution dated
October 4, 1968, this Court denied Serrano's, motion to intervene. The contents of
said motion to intervene are substantially the same as those of the present petition.11
This Court rendered decision in G.R. No. L-29352 on October 4, 1971, which became
final and executory on March 3, 1972, favorable to the respondent Overseas Bank of
Manila, with the dispositive portion to wit: Cdpr
WHEREFORE, the writs prayed for in the petition are hereby
granted and respondent Central Bank's resolution Nos. 1263,
1290 and 1333 (that prohibit the Overseas Bank of Manila to
participate in clearing, direct the suspension of its operation, and
Page 96 of 505

ordering the liquidation of said bank) are hereby annulled and set
aside; and said respondent Central Bank of the Philippines is
directed to comply with its obligations under the Voting Trust
Agreement, and to desist from taking action in violation therefor.
Costs against respondent Central Bank of the Philippines." 12
Because of the above decision, petitioner in this case filed a motion for judgment in
this case, praying for a decision on the merits, adjudging respondent Central Bank
jointly and severally liable with respondent Overseas Bank of Manila to the petitioner
for the P350,000 time deposit made with the latter bank, with all interests due therein;
and declaring all assets assigned or mortgaged by the respondents Overseas Bank of
Manila and the Ramos groups in favor of the Central Bank as trust funds for the
benefit of petitioner and other depositors. 13
By the very nature of the claims and causes of action against respondents, they in
reality are recovery of time deposits plus interest from respondent Overseas Bank of
Manila, and recovery of damages against respondent Central Bank for its alleged
failure to strictly supervise the acts of the other respondent Bank and protect the
interests of its depositors by virtue of the constructive trust created when respondent
Central Bank required the other respondent to increase its collaterals for its overdrafts
and emergency loans, said collaterals allegedly acquired through the use of
depositors money. These claims should be ventilated in the Court of First Instance of
proper jurisdiction as We already pointed out when this Court denied petitioner's
motion to intervene in G.R. No. L-29352. Claims of these nature are not proper in
actions for mandamus and prohibition as there is no shown clear abuse of discretion
by the Central Bank in its exercise of supervision over the other respondent Overseas
Bank of Manila, and if there was, petitioner here is not the proper party to raise that
question, but rather the Overseas Bank of Manila, as it did in G.R. No. L-29352.
Neither is there anything to prohibit in this case, since the questioned acts of the
respondent Central Bank (the acts of dissolving and liquidating the Overseas Bank of
Manila), which petitioner here intends to use as his basis for claims of damages
against respondent Central Bank, had been accomplished a long time ago.
Furthermore, both parties overlooked one fundamental principle in the nature of bank
deposits when the petitioner claimed that there should be created a constructive trust
in his favor when the respondent Overseas Bank of Manila increased its collaterals in
favor of respondent Central Bank for the former's overdrafts and emergency loans,
since these collaterals were acquired by the use of depositors' money. LexLib
Bank deposits are in the nature of irregular deposits. They are really loans because
they earn interest. All kinds of bank deposits, whether fixed, savings, or current are to

be treated as loans and are to be covered by the law on loans. 14 Current and
savings deposits are loans to a bank because it can use the same. The petitioner
here in making time deposits that earn interests with respondent Overseas Bank of
Manila was in reality a creditor of the respondent Bank and not a depositor. The
respondent Bank was in turn a debtor of petitioner. Failure of the respondent Bank to
honor the time deposit is failure to pay its obligation as a debtor and not a breach of
trust arising from a depositary's failure to return the subject matter of the deposit.

WHEREFORE, the petition is dismissed for lack of merit, with costs against petitioner.
SO ORDERED.
Antonio, Abad Santos, JJ., concur.
||| (Serrano v. Central Bank of the Phil., G.R. No. L-30511, [February 14, 1980], 185
PHIL 54-62)

SECOND DIVISION
[G.R. No. 60033. April 4, 1984.]
TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and
TERESITA SANTOS, petitioners, vs. THE CITY FISCAL OF
Page 97 of 505

MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL

FELIZARDO N. LOTA and CLEMENT DAVID, respondents.

Feliciano C. Tumale for petitioners.

Asuncion, Gomez & de Leon for private respondents.
The Solicitor General for respondents.

DECISION

MAKASIAR, J p:
This is a petition for prohibition and injunction with a prayer for the immediate
issuance of restraining order and/or writ of preliminary injunction filed by petitioners
on March 26, 1982.
On March 31, 1982, by virtue of a court resolution issued by this Court on the same
date, a temporary restraining order was duly issued ordering the respondents, their
officers, agents, representatives and/or person or persons acting upon their
(respondents') orders or in their place or stead to refrain from proceeding with the
preliminary investigation in Case No. 81-31938 of the Office of the City Fiscal of
Manila (pp. 47-48, rec.). On January 24, 1983, private respondent Clement David filed
a motion to lift restraining order which was denied in the resolution of this Court dated
May 18, 1983.
As can be gleaned from the above, the instant petition seeks to prohibit public
respondents from proceeding with the preliminary investigation of I.S. No. 81-31938,
in which petitioners were charged by private respondent Clement David, with estafa
and violation of Central Bank Circular No. 364 and related regulations regarding
foreign exchange transactions principally, on the ground of lack of jurisdiction in that
the allegations of the charged, as well as the testimony of private respondent's
principal witness and the evidence through said witness, showed that petitioners'
obligation is civil in nature.
For purposes of brevity, We hereby adopt the antecedent facts narrated by the
Solicitor General in its Comment dated June 28, 1982, as follows:

"On December 23, 1981, private respondent David filed I.S. No.
81-31938 in the Office of the City Fiscal of Manila, which case
was assigned to respondent Lota for preliminary investigation
(Petition, p. 8).
"In I.S. No. 81-31938, David charged petitioners (together with
one Robert Marshall and the following directors of the Nation
Savings and Loan Association, Inc., namely Homero Gonzales,
Juan Merino, Flavio Macasaet, Victor Gomez, Jr., Perfecto
Maalac, Jaime V. Paz, Paulino B. Dionisio, and one John Doe)
with estafa and violation of Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange
transactions, allegedly committed as follows (Petition, Annex 'A'):
"'From March 20, 1979 to March, 1981, David invested
with the Nation Savings and Loan Association,
(hereinafter called NSLA) the sum of P1,145,546.20 on
time deposits, P13,531.94 on savings account deposits
(jointly with his sister, Denise Kuhne), US$10,000.00 on
time deposit, US$15,000.00 under a receipt and
guarantee of payment and US$50,000.00 under a
receipt dated June 8, 1980 (all jointly with Denise
Kuhne), that David was induced into making the
aforestated investments by Robert Marshall, an
Australian national who was allegedly a close associate
of petitioner Guingona Jr., then NSLA President,
petitioner Martin, then NSLA Executive Vice-President
and petitioner Santos, then NSLA General Manager;
that on March 21, 1981 NSLA was placed under
receivership by the Central Bank, so that David filed
claims therewith for his investments and those of his
sister; that on July 22, 1981 David received a report
from the Central Bank that only P305,821.92 of those
investments were entered in the records of NSLA; that,
therefore, the respondents in I.S. No. 81-31938
misappropriated the balance of the investments, at the
same time violating Central Bank Circular No. 364 and
related Central Bank regulations on foreign exchange
transactions; that after demands, petitioner Guingona Jr.
Page 98 of 505

paid only P200,000.00, thereby reducing the amounts

misappropriated to P959,078.14 and US$75,000.00.
"Petitioners, Martin and Santos, filed a joint counter-affidavit
(Petition, Annex 'B') in which they stated the following:
"'That Martin became President of NSLA in March 1978
(after the resignation of Guingona, Jr.) and served as
such until October 30, 1980, while Santos was General
Manager up to November 1980; that because NSLA was
urgently in need of funds and at David's insistence, his
investments were treated as special accounts with
interests above the legal rate, and recorded in separate
confidential documents only a portion of which were to
be reported because he did not want the Australian
government to tax his total earnings (nor) to know his
total investments; that all transactions with David were
recorded except the sum of US$15,000.00 which was a
personal loan of Santos; that David's check for
US$50,000.00 was cleared through Guingona, Jr.'s
dollar account because NSLA did not have one, that a
draft of US$30,000.00 was placed in the name of one
Paz Roces because of a pending transaction with her;
that the Philippine Deposit Insurance Corporation had
already reimbursed David within the legal limits; that
majority of the stockholders of NSLA had filed Special
Proceedings No. 82-1695 in the Court of First Instance
to contest its (NSLA's) closure; that after NSLA was
placed under receivership, Martin executed a
promissory note in David's favor and caused the transfer
to him of a nine and one half (9 1/2) carat diamond ring
with a net value of P510,000.00; and, that the liabilities
of NSLA to David were civil in nature.'
"Petitioner, Guingona, Jr., in his counter-affidavit (Petition, Annex
'C') stated the following:
"'That he had no hand whatsoever in the transactions
between David and NSLA since he (Guingona Jr.) had
resigned as NSLA president in March 1978, or prior to
those transactions; that he assumed a portion of the

liabilities of NSLA to David because of the latter's

insistence that he placed his investments with NSLA
because of his faith in Guingona, Jr.; that in a
Promissory Note dated June 17, 1981 (Petition, Annex
"D") he (Guingona, Jr.) bound himself to pay David the
sums of P668.307.01 and US$37,500.00 in stated
installments; that he (Guingona, Jr.) secured payment of
those amounts with second mortgages over two (2)
parcels of land under a deed of Second Real Estate
Mortgage (Petition, Annex" E") in which it was provided
that the mortgage over one (1) parcel shall be cancelled
upon payment of one half of the obligation to David; that
he (Guingona, Jr.) paid P200,000.00 and tendered
another P300,000.00 which David refused to accept,
hence, he (Guingona, Jr.) filed Civil Case No. Q-33865
in the Court of First Instance of Rizal at Quezon City, to
effect the release of the mortgage over one (1) of the
two parcels of land conveyed to David under second
mortgages.'

"At the inception of the preliminary investigation before

respondent Lota, petitioners moved to dismiss the charges
against them for lack of jurisdiction because David's claims
allegedly comprised a purely civil obligation which was itself
novated. Fiscal Lota denied the motion to dismiss (Petition, p. 8)
"But, after the presentation of David's principal witness,
petitioners filed the instant petition because: (a) the production of
the Promissory Notes, Banker's Acceptance, Certificates of Time
Deposits and Savings Account allegedly showed that the
transactions between David and NSLA were simple loans, i.e.,
civil obligations on the part of NSLA which were novated when
Guingona, Jr. and Martin assumed them; and (b) David's
principal witness allegedly testified that the duplicate originals of
the aforesaid instruments of indebtedness were all on file with
NSLA, contrary to David's claim that some of his investments
were not recorded (Petition, pp. 8-9).

Page 99 of 505

"Petitioners alleged that they did not exhaust available

administrative remedies because to do so would be futile
(Petition, p. 9)" [pp. 153-157, rec.]
As correctly pointed out by the Solicitor General, the sole issue for resolution is
whether public respondents acted without jurisdiction when they investigated the
charges (estafa and violation of CB Circular No. 364 and related regulations regarding
foreign exchange transactions) subject matter of I.S. No. 81-31938.
There is merit in the contention of the petitioners that their liability is civil in nature and
therefore, public respondents have no jurisdiction over the charge of estafa. prLL
A casual perusal of the December 23, 1981 affidavit-complaint filed in the Office of the
City Fiscal of Manila by private respondent David against petitioners Teofisto
Guingona, Jr., Antonio I. Martin and Teresita G. Santos, together with one Robert
Marshall and the other directors of the Nation Savings and Loan Association, will
show that from March 20, 1979 to March, 1981, private respondent David, together
with his sister, Denise Kuhne, invested with the Nation Savings and Loan Association
the sum of P1,145,546.20 on time deposits covered by Bankers Acceptances and
Certificates of Time Deposits and the sum of P13,531.94 on savings account deposits
covered by passbook nos. 6-632 and 29-742, or a total of P1,159,078.14 (pp. 15-16,
rec.). It appears further that private respondent David, together with his sister, made
investments in the aforesaid bank in the amount of US$75,000.00 (p. 17, rec.).
Moreover, the records reveal that when the aforesaid bank was placed under
receivership on March 21, 1981, petitioners Guingona and Martin, upon the request of
private respondent David, assumed the obligation of the bank to private respondent
David by executing on June 17, 1981 a joint promissory note in favor of private
respondent acknowledging an indebtedness of P1,336,614.02 and US$75,000.00 (p.
80, rec.). This promissory note was based on the statement of account as of June 30,
1981 prepared by the private respondent (p. 81, rec.). The amount of indebtedness
assumed appears to be bigger than the original claim because of the added interest
and the inclusion of other deposits of private respondent's sister in the amount of
P116,613.20.
Thereafter, or on July 17, 1981, petitioners Guingona and Martin agreed to divide the
said indebtedness, and petitioner Guingona executed another promissory note
antedated to June 17, 1981 whereby he personally acknowledged an indebtedness of
P668,307.01 (1/2 of P1,336,614.02) and US$37,500.00 (1/2 of US$75,000.00) in
favor of private respondent (p. 25, rec.). The aforesaid promissory notes were

executed as a result of deposits made by Clement David and Denise Kuhne with the
Nation Savings and Loan Association.
Furthermore, the various pleadings and documents filed by private respondent David
before this Court indisputably show that he has indeed invested his money on time
and savings deposits with the Nation Savings and Loan Association.
It must be pointed out that when private respondent David invested his money on time
and savings deposits with the aforesaid bank, the contract that was perfected was a
contract of simple loan or mutuum and not a contract of deposit. Thus, Article 1980 of
the New Civil Code provides that:
"Article 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the provisions
concerning simple loan."
In the case of Central Bank of the Philippines vs. Morfe (63 SCRA 114, 119 [1975],
We said:
"It should be noted that fixed, savings, and current deposits of
money in banks and similar institutions are not true deposits.
They are considered simple loans and, as such, are not preferred
credits (Art. 1980 Civil Code: In re Liquidation of Mercantile Bank
of China: Tan Tiong Tick vs. American Apothecaries Co., 65 Phil.
414; Pacific Coast Biscuit Co. vs. Chinese Grocers Association,
65 Phil. 375; Fletcher American National Bank vs. Ang Cheng
Lian, 65 Phil. 385; Pacific Commercial Co. vs. American
Apothecaries Co., 65 Phil. 429; Gopoco Grocery vs. Pacific
Coast Biscuit Co., 65 Phil. 443)."
This Court also declared in the recent case of Serrano vs. Central Bank of the
Philippines (96 SCRA 96, 102 [1980]) that: prLL
"Bank deposits are in the nature of irregular deposits. They are
really loans because they earn interest. All kinds of bank
deposits, whether fixed, savings, or current are to be treated as
loans and are to be covered by the law on loans (Art. 1980, Civil
Code; Gullas vs. Phil. National Bank, 62 Phil. 519). Current and
savings deposits are loans to a bank because it can use the
same. The petitioner here in making time deposits that earn
interests with respondent Overseas Bank of Manila was in reality
a creditor of the respondent Bank and not a depositor. The
Page 100 of 505

respondent Bank was in turn a debtor of petitioner. Failure of the

respondent Bank to honor the time deposit is failure to pay its
obligation as a debtor and not a breach of trust arising from a
depository's failure to return the subject matter of the deposit"
(emphasis supplied).
Hence, the relationship between the private respondent and the Nation Savings and
Loan Association is that of creditor and debtor; consequently, the ownership of the
amount deposited was transmitted to the Bank upon the perfection of the contract and
it can make use of the amount deposited for its banking operations, such as to pay
interests on deposits and to pay withdrawals. While the Bank has the obligation to
return the amount deposited, it has, however, no obligation to return or deliver
the same money that was deposited. And, the failure of the Bank to return the amount
deposited will not constitute estafa through misappropriation punishable under Article
315, par. 1(b) of the Revised Penal Code, but it will only give rise to civil liability over
which the public respondents have no jurisdiction.
WE have already laid down the rule that:
"In order that a person can be convicted under the above-quoted
provision, it must be proven that he has the obligation to deliver
or return the same money, goods or personal property that he
received. Petitioners had no such obligation to return the same
money, i.e., the bills or coins, which they received from private
respondents. This is so because as clearly stated in criminal
complaints, the related civil complaints and the supporting sworn
statements, the sums of money that petitioners received were
loans.
"The nature of simple loan is defined in Articles 1933 and 1953 of
the Civil Code.
"'Art. 1933. By the contract of loan, one of the parties
delivers to another, either something not consumable so
that the latter may use the same for a certain time and
return it, in which case the contract is called a
commodatum; or money or other consumable thing,
upon the condition that the same amount of the same
kind and quality shall be paid in which case the contract
is simply called a loan or mutuum.
"'Commodatum is essentially gratuitous.

"'Simple loan may be gratuitous or with a stipulation to

pay interest.
"'In commodatum the bailor retains the ownership of
the thing loaned, while in simple loan, ownership passes
to the borrower.
"'Art. 1953. A person who receives a loan of money
or any other fungible thing acquires the ownership
thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality.'
"It can be readily noted from the above quoted provisions that in
simple loan (mutuum), as contrasted to commodatum, the
borrower acquires ownership of the money, goods or personal
property borrowed. Being the owner, the borrower can dispose of
the thing borrowed (Article 248, Civil Code) and his act will not be
considered misappropriation thereof" (Yam vs. Malik, 94 SCRA
30, 34 [1979]; emphasis supplied).
But even granting that the failure of the bank to pay the time and savings deposits of
private respondent David would constitute a violation of paragraph 1(b) of Article 315
of the Revised Penal Code, nevertheless any incipient criminal liability was deemed
avoided, because when the aforesaid bank was placed under receivership by the
Central Bank, petitioners Guingona and Martin assumed the obligation of the bank to
private respondent David, thereby resulting in the novation of the original contractual
obligation arising from deposit into a contract of loan and converting the original trust
relation between the bank and private respondent David into an ordinary debtorcreditor relation between the petitioners and private respondent. Consequently, the
failure of the bank or petitioners Guingona and Martin to pay the deposits of private
respondent would not constitute a breach of trust but would merely be a failure to pay
the obligation as a debtor.
Moreover, while it is true that novation does not extinguish criminal liability, it may
however, prevent the rise of criminal liability as long as it occurs prior to the filing of
the criminal information in court. Thus, in Gonzales vs. Serrano ( 25 SCRA 64, 69
[1968]) We held that: LexLib

"As pointed out in People vs. Nery, novation prior to the filing of
the criminal information as in the case at bar may convert
Page 101 of 505

the relation between the parties into an ordinary creditor-debtor

relation, and place the complainant in estoppel to insist on the
original transaction or 'cast doubt on the true nature' thereof."
Again, in the latest case of Ong vs. Court of Appeals (L-58476, 124 SCRA 578, 580581 [1983]), this Court reiterated the ruling in People vs. Nery ( 10 SCRA 244 [1964]),
declaring that:
"The novation theory may perhaps apply prior to the filing of the
criminal information in court by the state prosecutors because up
to that time the original trust relation may be converted by the
parties into an ordinary creditor-debtor situation, thereby placing
the complainant in estoppel to insist on the original trust. But after
the justice authorities have taken cognizance of the crime and
instituted action in court, the offended party may no longer divest
the prosecution of its power to exact the criminal liability, as
distinguished from the civil. The crime being an offense against
the state, only the latter can renounce it (People vs. Gervacio, 54
Off. Gaz. 2898; People vs. Velasco, 42 Phil. 76; U.S. vs.
Montaes, 8 Phil. 620).
"It may be observed in this regard that novation is not one of the
means recognized by the Penal Code whereby criminal liability
can be extinguished; hence, the role of novation may only be to
either prevent the rise of criminal liability or to cast doubt on the
true nature of the original basic transaction, whether or not it was
such that its breach would not give rise to penal responsibility, as
when money loaned is made to appear as a deposit, or other
similar disguise is resorted to (cf. Abeto vs. People, 90 Phil. 581;
U.S. vs. Villareal, 27 Phil. 481)."
In the case at bar, there is no dispute that petitioners Guingona and Martin executed a
promissory note on June 17, 1981 assuming the obligation of the bank to private
respondent David; while the criminal complaint for estafa was filed on December 23,
1981 with the Office of the City Fiscal. Hence, it is clear that novation occurred long
before the filing of the criminal complaint with the Office of the City Fiscal.
Consequently, as aforestated, any incipient criminal liability would be avoided but
there will still be a civil liability on the part of petitioners Guingona and Martin to pay
the assumed obligation.

Petitioners herein were likewise charged with violation of Section 3 of Central Bank
Circular No. 364 and other related regulations regarding foreign exchange
transactions by accepting foreign currency deposit in the amount of US$75,000.00
without authority from the Central Bank. They contend however, that the US dollars
intended by respondent David for deposit were all converted into Philippine currency
before acceptance and deposit into Nation Savings and Loan Association. LLphil
Petitioners' contention is worthy of belief for the following reasons:
1. It appears from the records that when respondent David was about to make a
deposit of bank draft issued in his name in the amount of US$50,000.00 with the
Nation Savings and Loan Association, the same had to be cleared first and converted
into Philippine currency. Accordingly, the bank draft was endorsed by respondent
David to petitioner Guingona, who in turn deposited it to his dollar account with the
Security Bank and Trust Company. Petitioner Guingona merely accommodated the
request of the Nation Savings and Loan Association in order to clear the bank draft
through his dollar account because the bank did not have a dollar account.
Immediately after the bank draft was cleared, petitioner Guingona authorized Nation
Savings and Loan Association to withdraw the same in order to be utilized by the
bank for its operations.
2. It is safe to assume that the U.S. dollars were converted first into Philippine pesos
before they were accepted and deposited in Nation Savings and Loan Association,
because the bank is presumed to have followed the ordinary course of the business
which is to accept deposits in Philippine currency only, and that the transaction was
regular and fair, in the absence of a clear and convincing evidence to the contrary
(see paragraphs p and q, Sec. 5, Rule 131, Rules of Court).
3. Respondent David has not denied the aforesaid contention of herein petitioners
despite the fact that it was raised in petitioners' reply filed on May 7, 1982 to private
respondent's comment and in the July 27, 1982 reply to public respondents' comment
and reiterated in petitioners' memorandum filed on October 30, 1982, thereby adding
more support to the conclusion that the US$75,000.00 were really converted into
Philippine currency before they were accepted and deposited into Nation Savings and
Loan Association. Considering that this might adversely affect his case, respondent
David should have promptly denied petitioners' allegation.
In conclusion, considering that the liability of the petitioners is purely civil in nature
and that there is no clear showing that they engaged in foreign exchange
transactions, We hold that the public respondents acted without jurisdiction when they
investigated the charges against the petitioners. Consequently, public respondents
Page 102 of 505

should be restrained from further proceeding with the criminal case for to allow the
case to continue, even if the petitioners could have appealed to the Ministry of
Justice, would work great injustice to petitioners and would render meaningless the
proper administration of justice.
While as a rule, the prosecution in a criminal offense cannot be the subject of
prohibition and injunction, this court has recognized the resort to the extraordinary
writs of prohibition and injunction in extreme cases, thus:
"On the issue of whether a writ of injunction can restrain the
proceedings in Criminal Case No. 3140, the general rule is that
'ordinarily, criminal prosecution may not be blocked by court
prohibition or injunction.' Exceptions, however, are allowed in the
following instances:
"'1. for the orderly administration of justice;
"'2. to prevent the use of the strong arm of the law in an
oppressive and vindictive manner;

policy, In Dimayuga vs. Fajardo, 43 Phil. 304, We also admitted a

petition to restrain the prosecution of certain chiropractors
although, if convicted, they could have appealed. We gave due
course to their petition for the orderly administration of justice and
to avoid possible oppression by the strong arm of the law. And in
Arevalo vs. Nepomuceno, 63 Phil. 627, the petition for certiorari
challenging the trial court's action admitting an amended
information was sustained despite the availability of appeal at the
proper time."
WHEREFORE, THE PETITION IS HEREBY GRANTED; THE TEMPORARY
RESTRAINING ORDER PREVIOUSLY ISSUED IS MADE PERMANENT. COSTS
AGAINST THE PRIVATE RESPONDENT.
SO ORDERED.
Concepcion, Jr., Guerrero, De Castro and Escolin JJ ., concur.
Aquino, J ., took no part.

"'3. to avoid multiplicity of actions;

Abad Santos, J ., concurs in the result.

"'4. to afford adequate protection to constitutional rights;

||| (Guingona, Jr. v. City Fiscal of Manila, G.R. No. 60033, [April 4, 1984], 213 PHIL
516-529)

"'5. in proper cases, because the statute relied upon is

unconstitutional or was held invalid'" (Primicias vs.
Municipality of Urdaneta, Pangasinan, 93 SCRA 462,
469-470 [1979]; citing Ramos vs. Torres, 25 SCRA 557
[1968]; and Hernandez vs. Albano, 19 SCRA 95, 96
[1967]).
Likewise, in Lopez vs. The City Judge, et al. (18 SCRA 616, 621-622 [1966]), We held
that: cdll
"The writs of certiorari and prohibition, as extraordinary legal
remedies, are in the ultimate analysis, intended to annul void
proceedings; to prevent the unlawful and oppressive exercise of
legal authority and to provide for a fair and orderly administration
of justice. Thus, in Yu Kong Eng vs. Trinidad, 47 Phil. 385, We
took cognizance of a petition for certiorari and prohibition
although the accused in the case could have appealed in due
time from the order complained of, our action in the premises
being based on the public welfare and the advancement of public

Page 103 of 505

THIRD DIVISION
[G.R. Nos. 173654-765. August 28, 2008.]
PEOPLE OF THE PHILIPPINES, petitioners, vs. TERESITA
PUIG and ROMEO PORRAS, respondent.

DECISION

CHICO-NAZARIO, J p:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with
petitioner People of the Philippines, represented by the Office of the Solicitor General,
praying for the reversal of the Orders dated 30 January 2006 and 9 June 2006 of the
Regional Trial Court (RTC) of the 6th Judicial Region, Branch 68, Dumangas, Iloilo,
dismissing the 112 cases of Qualified Theft filed against respondents Teresita Puig
and Romeo Porras, and denying petitioner's Motion for Reconsideration, in Criminal
Cases No. 05-3054 to 05-3165. IDAaCc
The following are the factual antecedents:
On 7 November 2005, the Iloilo Provincial Prosecutor's Office filed before Branch 68
of the RTC in Dumangas, Iloilo, 112 cases of Qualified Theft against respondents
Teresita Puig (Puig) and Romeo Porras (Porras) who were the Cashier and
Bookkeeper, respectively, of private complainant Rural Bank of Pototan, Inc. The
cases were docketed as Criminal Cases No. 05-3054 to 05-3165.
The allegations in the Informations 1 filed before the RTC were uniform and proforma, except for the amounts, date and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality
of Pototan, Province of Iloilo, Philippines, and within the
jurisdiction of this Honorable Court, above-named [respondents],

conspiring, confederating, and helping one another, with grave

abuse of confidence, being the Cashier and Bookkeeper of the
Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge
and/or consent of the management of the Bank and with intent of
gain, did then and there willfully, unlawfully and feloniously take,
steal and carry away the sum of FIFTEEN THOUSAND PESOS
(P15,000.00), Philippine Currency, to the damage and prejudice
of the said bank in the aforesaid amount.
After perusing the Informations in these cases, the trial court did not find the existence
of probable cause that would have necessitated the issuance of a warrant of arrest
based on the following grounds:
(1) the element of 'taking without the consent of the owners'
was missing on the ground that it is the depositorsclients, and not the Bank, which filed the complaint in
these cases, who are the owners of the money allegedly
taken by respondents and hence, are the real parties-ininterest; and
(2) the

Informations are bereft of the phrase alleging

"dependence, guardianship or vigilance between the
respondents and the offended party that would have
created a high degree of confidence between them
which the respondents could have abused." ADECcI

It added that allowing the 112 cases for Qualified Theft filed against the
respondents to push through would be violative of the right of the respondents
under Section 14 (2), Article III of the 1987 Constitution which states that in all
criminal prosecutions, the accused shall enjoy the right to be informed of the
nature and cause of the accusation against him. Following Section 6, Rule 112 of
the Revised Rules of Criminal Procedure, the RTC dismissed the cases on 30
January 2006 and refused to issue a warrant of arrest against Puig and Porras.
A Motion for Reconsideration 2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order 3 denying petitioner's Motion for Reconsideration was
issued by the RTC, finding as follows:
Accordingly, the prosecution's Motion for Reconsideration should
be, as it hereby, DENIED. The Order dated January 30, 2006
STANDS in all respects.
Page 104 of 505

Petitioner went directly to this Court via Petition for Review on Certiorari under Rule
45, raising the sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR
QUALIFIED THEFT SUFFICIENTLY ALLEGE THE ELEMENT
OF TAKING WITHOUT THE CONSENT OF THE OWNER, AND
THE QUALIFYING CIRCUMSTANCE OF GRAVE ABUSE OF
CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the Orders
dated 30 January 2006 and 9 June 2006 issued by the trial court, and that it be
directed to proceed with Criminal Cases No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings, and
current deposits of money in banks and similar institutions shall be governed by the
provisions concerning simple loans." Corollary thereto, Article 1953 of the same Code
provides that "a person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal amount
of the same kind and quality." Thus, it posits that the depositors who place their
money with the bank are considered creditors of the bank. The bank acquires
ownership of the money deposited by its clients, making the money taken by
respondents as belonging to the bank. aSEHDA
Petitioner also insists that the Informations sufficiently allege all the elements of the
crime of qualified theft, citing that a perusal of the Informations will show that they
specifically allege that the respondents were the Cashier and Bookkeeper of the Rural
Bank of Pototan, Inc., respectively, and that they took various amounts of money with
grave abuse of confidence, and without the knowledge and consent of the bank, to
the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition on
the ground that a Petition for Review on Certiorari via Rule 45 is the wrong mode of
appeal because a finding of probable cause for the issuance of a warrant of arrest
presupposes evaluation of facts and circumstances, which is not proper under said
Rule.
Respondents further claim that the Department of Justice (DOJ), through the
Secretary of Justice, is the principal party to file a Petition for Review
on Certiorari,considering that the incident was indorsed by the DOJ. HECTaA
We find merit in the petition.

The dismissal by the RTC of the criminal cases was allegedly due to insufficiency of
the Informations and, therefore, because of this defect, there is no basis for the
existence of probable cause which will justify the issuance of the warrant of arrest.
Petitioner assails the dismissal contending that the Informations for Qualified Theft
sufficiently state facts which constitute (a) the qualifying circumstance of grave abuse
of confidence; and (b) the element of taking, with intent to gain and without the
consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the RTC
judge found the allegations in the Information inadequate. He ruled that the
Information failed to state facts constituting the qualifying circumstance of grave
abuse of confidence and the element of taking without the consent of the owner, since
the owner of the money is not the Bank, but the depositors therein. He also
cites People v. Koc Song, 4 in which this Court held:
There must be allegation in the information and proof of a
relation, by reason of dependence, guardianship or vigilance,
between the respondents and the offended party that has created
a high degree of confidence between them, which the
respondents abused.
At this point, it needs stressing that the RTC Judge based his conclusion that
there was no probable cause simply on the insufficiency of the allegations in the
Informations concerning the facts constitutive of the elements of the offense
charged. This, therefore, makes the issue of sufficiency of the allegations in the
Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal
Code, is committed as follows, viz.:
ART. 310. Qualified Theft. The crime of theft shall be punished
by the penalties next higher by two degrees than those
respectively specified in the next preceding article, if committed
by a domestic servant, or with grave abuse of confidence, or if
the property stolen is motor vehicle, mail matter or large cattle or
consists of coconuts taken from the premises of a plantation, fish
taken from a fishpond or fishery or if property is taken on the
occasion of fire, earthquake, typhoon, volcanic eruption, or any
other calamity, vehicular accident or civil disturbance. (Emphasis
supplied.) HcaDIA

Page 105 of 505

Theft, as defined in Article 308 of the Revised Penal Code, requires the physical
taking of another's property without violence or intimidation against persons or force
upon things. The elements of the crime under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force
upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owner's consent;
5. That it be accomplished without the use of violence or
intimidation against persons, nor of force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court
requires, inter alia, that the information must state the acts or omissions complained
of as constitutive of the offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of the
Rules of Court, is enlightening:
Section 9. Cause of the accusation. The acts or omissions
complained of as constituting the offense and the qualifying and
aggravating circumstances must be stated in ordinary and
concise language and not necessarily in the language used in the
statute but in terms sufficient to enable a person of common
understanding to know what offense is being charged as well as
its qualifying and aggravating circumstances and for the court to
pronounce judgment.
It is evident that the Information need not use the exact language of the statute in
alleging the acts or omissions complained of as constituting the offense. The test is

whether it enables a person of common understanding to know the charge against

him, and the court to render judgment properly. 5

The portion of the Information relevant to this discussion reads: HcTSDa

[A]bove-named [respondents], conspiring, confederating, and
helping one another, with grave abuse of confidence, being
the Cashier and Bookkeeper of the Rural Bank of Pototan, Inc.,
Pototan, Iloilo, without the knowledge and/or consent of the
management of the Bank . . . .
It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a Bank
who come into possession of the monies deposited therein enjoy the confidence
reposed in them by their employer. Banks, on the other hand, where monies are
deposited, are considered the owners thereof. This is very clear not only from the
express provisions of the law, but from established jurisprudence. The relationship
between banks and depositors has been held to be that of creditor and debtor.
Articles 1953 and 1980 of the New Civil Code, as appropriately pointed out by
petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to
pay to the creditor an equal amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed by the provisions
concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established the
nature of possession by the Bank of the money deposits therein, and the duties being
performed by its employees who have custody of the money or have come into
possession of it. The Court has consistently considered the allegations in the
Information that such employees acted with grave abuse of confidence, to the
damage and prejudice of the Bank, without particularly referring to it as owner of the
money deposits, as sufficient to make out a case of Qualified Theft. For a graphic
illustration, we cite Roque v. People, 6 where the accused teller was convicted for
Qualified Theft based on this Information:
That on or about the 16th day of November, 1989, in the
municipality of Floridablanca, province of Pampanga, Philippines
and within the jurisdiction of his Honorable Court, the abovePage 106 of 505

named accused ASUNCION GALANG ROQUE, being then

employed as teller of the Basa Air Base Savings and Loan
Association Inc. (BABSLA) with office address at Basa Air Base,
Floridablanca, Pampanga, and as such was authorized and
reposed with the responsibility to receive and collect capital
contributions from its member/contributors of said corporation,
and having collected and received in her capacity as teller of the
BABSLA the sum of TEN THOUSAND PESOS (P10,000.00),
said accused, with intent of gain, with grave abuse of
confidence and without the knowledge and consent of said
corporation, did then and there willfully, unlawfully and
feloniously take, steal and carry away the amount of P10,000.00,
Philippine currency, by making it appear that a certain depositor
by the name of Antonio Salazar withdrew from his Savings
Account No. 1359, when in truth and in fact said Antonio Salazar
did not withdr[a]w the said amount of P10,000.00 to the damage
and prejudice of BABSLA in the total amount of P10,000.00,
Philippine currency. aEcHCD
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank
places money in the teller's possession due to the confidence
reposed on the teller, the felony of qualified theft would be
committed. 7
Also in People v. Sison, 8 the Branch Operations Officer was convicted of the crime
of Qualified Theft based on the Information as herein cited:
That in or about and during the period compressed between
January 24, 1992 and February 13, 1992, both dates inclusive, in
the City of Manila, Philippines, the said accused did then and
there wilfully, unlawfully and feloniously, with intent of gain and
without the knowledge and consent of the owner thereof, take,
steal and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different
denominations belonging to the PHILIPPINE COMMERCIAL
INTERNATIONAL BANK (PCIBank for brevity), Luneta Branch,
Manila represented by its Branch Manager, HELEN U. FARGAS,

to the damage and prejudice of the said owner in the aforesaid

amount of P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted
with grave abuse of confidence and unfaithfulness, he being
the Branch Operation Officer of the said complainant and as
such he had free access to the place where the said amount of
money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the
Philippine Commercial and Industrial Bank (PCIB), is Qualified
Theft. Appellant could not have committed the crime had he not
been holding the position of Luneta Branch Operation Officer
which gave him not only sole access to the bank vault . . . . The
management of the PCIB reposed its trust and confidence in the
appellant as its Luneta Branch Operation Officer, and it was this
trust and confidence which he exploited to enrich himself to the
damage and prejudice of PCIB . . . . 9 cCTAIE
From another end, People v. Locson, 10 in addition to People v. Sison, described
the nature of possession by the Bank. The money in this case was in the possession
of the defendant as receiving teller of the bank, and the possession of the defendant
was the possession of the Bank. The Court held therein that when the defendant, with
grave abuse of confidence, removed the money and appropriated it to his own use
without the consent of the Bank, there was taking as contemplated in the crime of
Qualified Theft. 11
Conspicuously, in all of the foregoing cases, where the Informations merely alleged
the positions of the respondents; that the crime was committed with grave abuse of
confidence, with intent to gain and without the knowledge and consent of the Bank,
without necessarily stating the phrase being assiduously insisted upon by
respondents, "of a relation by reason of dependence, guardianship or vigilance,
between the respondents and the offended party that has created a high degree
of confidence between them, which respondents abused," 12 and without
employing the word "owner" in lieu of the "Bank" were considered to have satisfied the
test of sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of the
Bank in this case, there is even no reason to quibble on the allegation in the
Informations that they acted with grave abuse of confidence. In fact, the Information
Page 107 of 505

which alleged grave abuse of confidence by accused herein is even more precise, as
this is exactly the requirement of the law in qualifying the crime of Theft.
In summary, the Bank acquires ownership of the money deposited by its clients; and
the employees of the Bank, who are entrusted with the possession of money of the
Bank due to the confidence reposed in them, occupy positions of confidence. The
Informations, therefore, sufficiently allege all the essential elements constituting the
crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may file the
instant petition, the ruling in Mobilia Products, Inc. v. Hajime Umezawa 13 is
instructive. The Court thus enunciated: CacTIE
In a criminal case in which the offended party is the State, the
interest of the private complainant or the offended party is limited
to the civil liability arising therefrom. Hence, if a criminal case is
dismissed by the trial court or if there is an acquittal, a
reconsideration of the order of dismissal or acquittal may be
undertaken, whenever legally feasible, insofar as the criminal
aspect thereof is concerned and may be made only by the public
prosecutor; or in the case of an appeal, by the State only, through
the OSG. . . . .

a trial once it is ascertained that no probable cause exists to form a sufficient belief as
to the guilt of the respondents, conversely, it is also equally imperative upon the judge
to proceed with the case upon a showing that there is a prima facie case against the
respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is hereby
GRANTED. The Orders dated 30 January 2006 and 9 June 2006 of the RTC
dismissing Criminal Cases No. 05-3054 to 05-3165 are REVERSED and SET ASIDE.
Let the corresponding Warrants of Arrest issue against herein respondents TERESITA
PUIG and ROMEO PORRAS. The RTC Judge of Branch 68, in Dumangas, Iloilo, is
directed to proceed with the trial of Criminal Cases No. 05-3054 to 05-3165, inclusive,
with reasonable dispatch. No pronouncement as to costs. CDEaAI

SO ORDERED.
Ynares-Santiago, Austria-Martinez, Reyes and Leonardo-de Castro, * JJ., concur.
||| (People v. Puig, G.R. Nos. 173654-765, [August 28, 2008], 585 PHIL 555-568)

On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule is
well-settled that in appeals by certiorari under Rule 45 of the Rules of Court, only
errors of law may be raised, 14 and herein petitioner certainly raised a question of
law.
As an aside, even if we go beyond the allegations of the Informations in these cases,
a closer look at the records of the preliminary investigation conducted will show that,
indeed, probable cause exists for the indictment of herein respondents. Pursuant to
Section 6, Rule 112 of the Rules of Court, the judge shall issue a warrant of arrest
only upon a finding of probable cause after personally evaluating the resolution of the
prosecutor and its supporting evidence. Soliven v. Makasiar, 15 as reiterated
in Allado v. Driokno, 16 explained that probable cause for the issuance of a warrant
of arrest is the existence of such facts and circumstances that would lead a
reasonably discreet and prudent person to believe that an offense has been
committed by the person sought to be arrested. 17 The records reasonably indicate
that the respondents may have, indeed, committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or the
judge, as the case may be, to relieve the respondents from the pain of going through

TITLE XII DEPOSIT

CHAPTER 1

SECOND DIVISION
[G.R. No. 7593. March 27, 1914.]
Page 108 of 505

THE UNITED STATES, plaintiff-appellee, vs.

IGPUARA, defendant-appellant.

JOSE

M.

W. A. Kincaid, Thos. L. Hartigan and Jose Robles Lahesa for appellant.

Solicitor-General Harvey for appellee.

DECISION

ARELLANO, C. J p:
The defendant herein is charged with the crime of estafa, for having
swindled Juana Montilla and Eugenio Veraguth out of P2,498 Philippine currency,
which he had taken on deposit from the former to be at the latter's disposal. The
document setting forth the obligation reads:
"We hold at the disposal of Eugenio Veraguth the sum of two thousand
four hundred and ninety-eight pesos P2,498), the balance from Juana Montilla's
sugar. Iloilo, June 26, 1911. Jose Igpuara, for Ramirez & Co."
The Court of First Instance of Iloilo sentenced the defendant to two
years of presidio correccional, to pay Juana Montilla P2,498 Philippine currency,
and in case of insolvency to subsidiary imprisonment at P2.50 per day, not to
exceed one-third of the principal penalty, and the costs.
The defendant appealed, alleging as errors: (1) Holding that the
document executed by him was a certificate of deposit; (2) holding the existence
of a deposit, without precedent transfer or delivery of the P2,498; and (3)
classifying the facts in the case as the crime of estafa.
"A deposit is constituted from the time a person receives
a thing belonging to another with the obligation of keeping and
returning it." (Art. 1758, Civil Code.)
That the defendant received P2,498 is a fact proven. The defendant
drew up a document declaring that they remained in his possession, which he
could not have said had he not received them. They remained in his possession,
surely in no other sense than to take care of them, for they remained has no other
purpose. They remained in the defendant's possession at the disposal of

Veraguth; but on August 23 of the same year Veraguth demanded of him through
a notarial instrument restitution of them, and to date he has not restored them.
The appellant says: "Juana Montilla's agent voluntarily accepted the
sum of P2,498 in an instrument payable on demand, and as no attempt was
made to cash it until August 23, 1911, he could indorse and negotiate it like any
other commercial instrument. There is no doubt that if Veraguth accepted the
receipt for P2,498 it was because at that time he agreed with the defendant to
consider the operation of sale on commission closed, leaving the collection of
said sum until later, which sum remained as a loan payable upon presentation of
the receipt." (Brief, 3 and 4.)
Then, after averring the true facts: (1) That a sales commission was
precedent; (2) that this commission was settled with a balance of P2,498 in favor
of the principal, Juana Montilla; and (3) that this balance remained in the
possession of the defendant, who drew up an instrument payable on demand, he
has drawn two conclusions, both erroneous: One, that the instrument drawn up in
the form of a deposit certificate could be indorsed or negotiated like any other
commercial instrument; and the other, that the sum of P2,498 remained in
defendant's possession as a loan.
It is erroneous to assert that the certificate of deposit in question is
negotiable like any other commercial instrument; First, because every commercial
instruments payable to order are negotiable. Hence, this instrument not being to
order but to bearer, it is not negotiable.
It is also erroneous to assert that the sum of money set forth in said
certificate is, according to it, in the defendant's possession as a loan. In a loan
the lender transmits to the borrower the use of the thing lent, while in a deposit
the use of the thing is not transmitted, but merely possession for its custody or
safe-keeping.
In order that the depositary may use or dispose of the things deposited,
the depositor's consent is required, and then:
"The rights and obligations of the depositary and of the
depositor shall cease, and the rules and provisions applicable to
commercial loans, commission, or contract which took the place
of the deposit shall be observed." (Art. 309, Code of Commerce.)
The defendant has shown no authorization whatsoever or the consent of
the depositary for using or disposing of the P2,498, which the certificate
acknowledges, or any contract entered into with the depositor to convert the
deposit into a loan, commission, or other contract.
Page 109 of 505

That demand was not made for restitution of the sum deposited, which
could have been claimed on the same or the next day after the certificate was
signed, does not operate against the depositor, or signify anything except the
intention not to press it. Failure to claim at once or delay for some time in
demanding restitution of the thing deposited, which was immediately due, does
not imply such permission to use the thing deposited as would convert the
deposit into a loan.
Article 408 of the Code of Commerce of 1829, previous to the one now
in force, provided:
"The depositary of an amount of money cannot use the
amount, and if he makes use of it, he shall be responsible for all
damages that may accrue and shall respond to the depositor for
the legal interest on the amount."
Whereupon the commentators say:
"In this case the deposit becomes in fact a loan, as a
just punishment imposed upon him who abuses the sacred
nature of a deposit and as a means of preventing the desire of
gain from leading him into speculations that may be disastrous to
the depositor, who is much better secured while the deposit exists
that when he only has a personal action for recovery.
"Accordingly to article 548, No. 5, of the Penal Code,
those who to the prejudice of another appropriate or abstract for
their own use money, goods, or other personal property which
they may have received as a deposit, on commission, or for
administration, or for any other purpose which produces the
obligation of delivering it or returning it, and deny having received
it, shall suffer the penalty of the preceding article," which
punished such act as the crime of estafa. The corresponding
article of the Penal Code of the Philippine is 535, No. 5.
In a decision of an appeal, September 28, 1895, the principle was laid
down that: "Since he commits the crime of estafa under article 548 of the Penal
Code of Spain who to another's detriment appropriates to himself or abstracts
money or goods received on commission for delivery, the court rightly applied this
article to the appellant, who, to the manifest detriment of the owner or owners of
the securities, since he has not restored them, willfully and wrongfully disposed of
them by appropriating them to himself or at least diverting them from the purpose
to which he was charged to devote them."

It is unquestionable that in no sense did the P2,498 which he willfully

and wrongfully disposed of to the detriment of his principal, Juana Montilla, and
of the depositor, Eugenio Veraguth, belong to the defendant.
Likewise erroneous is the construction apparently attempted to be given
to two decisions of this Supreme Court (U. S. vs. Dominguez, 2 Phil. Rep., 580,
and U. S. vs. Morales and Morco, 15 Phil. Rep., 236) as implying that what
constitutes estafa is not the disposal of money deposited, but denial of having
received same. In the first of said cases there was no evidence that the
defendant had appropriated the grain deposited in his possession.
"On the contrary, it is entirely probable that, after the
departure of the defendant from Libmanan on September 20,
1898, two days after the uprising of the civil guard in Nueva
Caceres, the rice was seized by the revolutionists and
appropriated to their own uses."
In this connection it was held that failure to return the thing deposited
was not sufficient, but that it was necessary to prove that the depositary had
appropriated it to himself or diverted the deposit to his own or another's benefit.
He was accused of refusing to restore, and it was held that the code does not
penalize refusal to restore but denial of having received. So much for the crime of
omission; now with reference to the crime of commission, it was not held in that
decision that appropriation or diversion of the thing deposited would not
constitute the crime of estafa.
In the second of said decisions, the accused "kept none of the proceeds
of the sales. Those, such as they were, he turned over the owner;" and there
being no proof of the appropriation, the agent could not be found guilty of the
crime of estafa.
Being in accord with law and the merits of the case, the judgment
appealed from is affirmed, with costs.
Torres, Johnson and Trent, JJ., concur.
||| (United States v. Igpuara, G.R. No. 7593, [March 27, 1914], 27 PHIL 619-624)

Page 110 of 505

The original parties to this case were Rizaldy T. Zshornack and the Commercial Bank
and Trust Company of the Philippines [hereafter referred to as "COMTRUST."] In
1980, the Bank of the Philippine Islands (hereafter referred to as "BPI") absorbed
COMTRUST through a corporate merger, and was substituted as party to the
case. prLL
Rizaldy Zshornack initiated proceedings on June 28, 1976 by filing in the Court of
First Instance of Rizal Caloocan City a complaint against COMTRUST alleging four
causes of action. Except for the third cause of action, the CFI ruled in favor of
Zshornack. The bank appealed to the Intermediate Appellate Court which modified
the CFI decision absolving the bank from liability on the fourth cause of action. The
pertinent portions of the judgment, as modified, read:
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
1. Ordering the defendant COMTRUST to restore to the dollar
savings account of plaintiff (No. 25-4109) the amount of U.S
$1,000.00 as of October 27, 1975 to earn interest together with
the remaining balance of the said account at the rate fixed by the
bank for dollar deposits under Central Bank Circular 343;
THIRD DIVISION
[G.R. No. 66826. August 19, 1988.]
BANK OF THE PHILIPPINE ISLANDS, petitioner, vs. THE
INTERMEDIATE APPELLATE COURT and RIZALDY T.
ZSHORNACK respondents.

2. Ordering defendant COMTRUST to return to the plaintiff the

amount of U.S. $3,000.00 immediately upon the finality of this
decision, without interest for the reason that the said amount was
merely held in custody for safekeeping, but was not actually
deposited with the defendant COMTRUST because being cash
currency, it cannot by law be deposited with plaintiff's dollar
account and defendant's only obligation is to return the same to
plaintiff upon demand;
xxx xxx xxx

Pacis & Reyes Law Office for petitioner.

Ernesto T. Zshornack, Jr. for private respondent.

DECISION

5. Ordering defendant COMTRUST to pay plaintiff in the amount

of P8,000.00 as damages in the concept of litigation expenses
and attorney's fees suffered by plaintiff as a result of the failure of
the defendant bank to restore to his (plaintiff's) account the
amount of U.S. $1,000.00 and to return to him (plaintiff) the U.S.
$3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.

CORTES, J p:

SO ORDERED. [Rollo, pp. 47-48.]

Page 111 of 505

Undaunted, the bank comes to this Court praying that it be totally absolved from any
liability to Zshornack. The latter not having appealed the Court of Appeals decision,
the issues facing this Court are limited to the bank's liability with regard to the first and
second causes of action and its liability for damages.
1. We first consider the first cause of action.
On the dates material to this case, Rizaldy Zshornack and his wife, Shirley Gorospe,
maintained in COMTRUST, Quezon City Branch, a dollar savings account and a peso
current account.
On October 27, 1975, an application for a dollar draft was accomplished by Virgilio V.
Garcia, Assistant Branch Manager of COMTRUST Quezon City, payable to a certain
Leovigilda D. Dizon in the amount of $1,000.00. In the application, Garcia indicated
that the amount was to be charged to Dollar Savings Acct. No. 25-4109, the savings
account of the Zshornacks; the charges for commission, documentary stamp tax and
others totalling P17.46 were to be charged to Current Acct. No. 210-465-29, again,
the current account of the Zshornacks. There was no indication of the name of the
purchaser of the dollar draft.
On the same date, October 27, 1975, COMTRUST, under the signature of Virgilio V.
Garcia, issued a check payable to the order of Leovigilda D. Dizon in the sum of
US$1,000 drawn on the Chase Manhattan Bank, New York, with an indication that it
was to be charged to Dollar Savings Acct. No. 25-4109. prcd
When Zshornack noticed the withdrawal of US$1,000.00 from his account, he
demanded an explanation from the bank. In answer, COMTRUST claimed that the
peso value of the withdrawal was given to Atty. Ernesto Zshornack, Jr., brother of
Rizaldy, on October 27, 1975 when he (Ernesto) encashed with COMTRUST a
cashier's check for P8,450.00 issued by the Manila Banking Corporation payable to
Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to disturb the
ruling of both the trial court and the Appellate Court on the first cause of action.
Petitioner must be held liable for the unauthorized withdrawal of US$1,000.00 from
private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its depositor's savings
account, the bank has adopted inconsistent theories. First, it still maintains that the
peso value of the amount withdrawn was given to Atty. Ernesto Zshornack, Jr. when
the latter encashed the Manilabank Cashier's Check. At the same time, the bank
claims that the withdrawal was made pursuant to an agreement where Zshornack

allegedly authorized the bank to withdraw from his dollar savings account such
amount which, when converted to pesos, would be needed to fund his peso current
account. If indeed the peso equivalent of the amount withdrawn from the dollar
account was credited to the peso current account, why did the bank still have to pay
Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation,
petitioner bank has not shown how the transaction involving the cashier's check is
related to the transaction involving the dollar draft in favor of Dizon financed by the
withdrawal from Rizaldy's dollar account. The two transactions appear entirely
independent of each other. Moreover, Ernesto Zshornack, Jr., possesses a personality
distinct and separate from Rizaldy Zshornack. Payment made to Ernesto cannot be
considered payment to Rizaldy. prcd
As to the second explanation, even if we assume that there was such an agreement,
the evidence do not show that the withdrawal was made pursuant to it. Instead, the
record reveals that the amount withdrawn was used to finance a dollar draft in favor of
Leovigilda D. Dizon, and not to fund the current account of the Zshornacks. There is
no proof whatsoever that peso Current Account No. 210-465-29 was ever credited
with the peso equivalent of the US$1,000.00 withdrawn on October 27, 1975 from
Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed with the trial court alleged
that on December 8, 1975, Zshornack entrusted to COMTRUST, thru
Garcia,US$3,000.00 cash (popularly known as greenbacks) for safekeeping, and that
the agreement was embodied in a document, a copy of which was attached to and
made part of the complaint. The document reads:
Makati Cable
Philippines "COMTRUST"

Address:

COMMERCIAL BANK AND TRUST COMPANY

of the Philippines
Quezon City Branch
Dec
ember 8,
1975
MR.
RIZALDY
T.
&/OR MRS. SHIRLEY E. ZSHORNACK

ZSHORNACK

Sir/Madam:
Page 112 of 505

We acknowledged (sic) having received from you today the sum

of US DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for
safekeeping.
Received by:
(Sgd.)
VIRGILIO V.
GARCIA
It was also alleged in the complaint that despite demands, the bank refused to return
the money.
In its answer, COMTRUST averred that the US$3,000 was credited to Zshornack's
peso current account at prevailing conversion rates.

It must be emphasized that COMTRUST did not deny specifically under oath the
authenticity and due execution of the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed delivered
to the bank US$3,000 for safekeeping. When he requested the return of the money on
May 10, 1976, COMTRUST explained that the sum was disposed of in this manner:
US$2,000.00 was sold on December 29, 1975 and the peso proceeds amounting to
P14,920.00 were deposited to Zshornack's current account per deposit slip
accomplished by Garcia; the remaining US$1,000. 00 was sold on February 3, 1976
and the peso proceeds amounting to P8,350.00 were deposited to his current account
per deposit slip also accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's
current account at prevailing conversion rates, BPI now posits another ground to
defeat private respondent's claim. It now argues that the contract embodied in the
document is the contract of depositum (as defined in Article 1962, New Civil Code),
which banks do not enter into. The bank alleges that Garcia exceeded his powers
when he entered into the transaction. Hence, it is claimed, the bank cannot be liable
under the contract, and the obligation is purely personal to Garcia. LexLib
Before we go into the nature of the contract entered into, an important point which
arises on the pleadings, must be considered.
The second cause of action is based on a document purporting to be signed by
COMTRUST, a copy of which document was attached to the complaint. In short, the
second cause of action was based on an actionable document. It was therefore

incumbent upon the bank to specifically deny under oath the due execution of the
document, as prescribed under Rule 8, Section 8, if it desired: (1) to question the
authority of Garcia to bind the corporation; and (2) to deny its capacity to enter into
such contract. [See, E.B. Merchant v. International Banking Corporation, 6 Phil. 314
(1906).] No sworn answer denying the due execution of the document in question, or
questioning the authority of Garcia to bind the bank, or denying the bank's capacity to
enter into the contract, was ever filed. Hence, the bank is deemed to have admitted
not only Garcia's authority, but also the bank's power, to enter into the contract in
question.
In the past, this Court had occasion to explain the reason behind this procedural
requirement.
The reason for the rule enunciated in the foregoing authorities
will, we think, be readily appreciated. In dealing with corporations
the public at large is bound to rely to a large extent upon outward
appearances. If a man is found acting for a corporation with the
external indicia of authority, any person, not having notice of want
of authority, may usually rely upon those appearances; and if it be
found that the directors had permitted the agent to exercise that
authority and thereby held him out as a person competent to bind
the corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the corporation
will be bound notwithstanding the actual authority may never
have been granted . . . Whether a particular officer actually
possesses the authority which he assumes to exercise is
frequently known to very few, and the proof of it usually is not
readily accessible to the stranger who deals with the corporation
on the faith of the ostensible authority exercised by some of the
corporate officers. It is therefore reasonable in a case where an
officer of a corporation has made a contract in its name, that the
corporation should be required, if it denies his authority, to state
such defense in its answer. By this means the plaintiffs apprised
of the fact that the agent's authority is contested; and he is given
an opportunity to adduce evidence showing either that the
authority existed or that the contract was ratified and approved
[Ramirez v. Orientalist Co. and Fernandez, 38 Phil. 634, 645-646
(1918).]
Petitioner's argument must also be rejected for another reason. The practical effect of
absolving a corporation from liability every time an officer enters into a contract which
Page 113 of 505

is beyond corporate powers, even without the proper allegation or proof that the
corporation has not authorized nor ratified the officer's act, is to cast corporations in
so perfect a mold that transgressions and wrongs by such artificial beings become
impossible [Bissell v. Michigan Southern and N.I.R Cos, 22 N.Y 258 (1860).] "To say
that a corporation has no right to do unauthorized acts is only to put forth a very plain
truism; but to say that such bodies have no power or capacity to err is to impute to
them an excellence which does not belong to any created existence with which we are
acquainted. The distinction between power and right is no more to be lost sight of in
respect to artificial than in respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the
corporation, we now determine the correct nature of the contract, and its legal
consequences, including its enforceability. LibLex
The document which embodies the contract states that the US$3,000.00 was
received by the bank for safekeeping. The subsequent acts of the parties also show
that the intent of the parties was really for the bank to safely keep the dollars and to
return it to Zshornack at a later time. Thus, Zshornack demanded the return of the
money on May 10, 1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil Code,
which reads:
Art. 1962. A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of safely
keeping it and of returning the same. If the safekeeping of the
thing delivered is not the principal purpose of the contract, there
is no deposit but some other contract.
Note that the object of the contract between Zshornack and COMTRUST was foreign
exchange. Hence, the transaction was covered by Central Bank Circular No. 20,
Restrictions on Gold and Foreign Exchange Transactions, promulgated on December
9, 1949, which was in force at the time the parties entered into the transaction
involved in this case. The circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings in
them of whatever nature, including, where applicable their
exportation and importation, shall NOT be effected, except with
respect to deposit accounts included in sub-paragraphs (b) and

(c) of this paragraph, when such deposit accounts are owned by

and in the name of banks.
(a) Any and all assets, provided they are held
through, in, or with banks or banking institutions located
in the Philippines, including money, checks, drafts,
bullions, bank drafts deposit accounts (demand, time
and savings), all debts, indebtedness or obligations,
financial brokers and investment houses notes,
debentures, stocks, bonds, coupons, bank acceptances,
mortgages, pledges, liens or other rights in the nature of
security, expressed in foreign currencies, or if payable
abroad, irrespective of the currency in which they are
expressed, and belonging to any person, firm,
partnership, association, branch office, agency,
company or other unincorporated body or corporation
residing or located within the Philippines;
(b) Any and all assets of the kinds included and
or described in subparagraph (a) above, whether or not
held through, in, or with banks or banking institutions,
and existent within the Philippines, which belong to any
person, film, partnership, association, branch office,
agency, company or other unincorporated body or
corporation not residing or located within the Philippines;
(c) Any and all assets existent within the
Philippines including money, checks, drafts, bullions,
bank drafts, all debts, indebtedness or obligations,
financial securities commonly dealt in by bankers,
brokers and investment houses, notes, debentures,
stock, bonds, coupons, bank acceptances, mortgages,
pledges, liens or other rights in the nature of
security expressed in foreign currencies, or if payable
abroad, irrespective of the currency in which they are
expressed, and belonging to any person, firm,
partnership, association, branch office, agency,
company or other unincorporated body or corporation
residing or located within the Philippines.
xxx xxx xxx
Page 114 of 505

4. (a) All receipts of foreign exchange shall be sold daily to the

Central Bank by those authorized to deal in foreign exchange. All
receipts of foreign exchange by any person, firm, partnership,
association, branch office, agency, company or other
unincorporated body or corporation shall be sold to the
authorized agents of the Central Bank by the recipients within
one business day following the receipt of such foreign exchange.
Any person, firm, partnership, association, branch office, agency,
company or other unincorporated body or corporation, residing or
located within the Philippines, who acquires on and after the date
of this Circular foreign exchange shall not unless licensed by the
Central Bank, dispose of such foreign exchange in whole or in
part, nor receive less than its full value, nor delay taking
ownership thereof except as such delay is customary; Provided,
further, That within one day upon taking ownership, or receiving
payment, of foreign exchange the aforementioned persons and
entities shall sell such foreign exchange to designated agents of
the Central Bank.
xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined;
and any person, firm or corporation, foreign or domestic, who
being bound to the observance thereof, or of such other rules,
regulations or directives as may hereafter be issued in
implementation of this Circular, shall fail or refuse to comply with,
or abide by, or shall violate the same, shall be subject to the
penal sanctions provided in the Central Bank Act.

xxx xxx xxx

Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No. 281,
Regulations on Foreign Exchange, promulgated on November 26, 1969 by limiting its
coverage to Philippine residents only. Section 6 provides:
SEC. 6. All receipts of foreign exchange by any resident person,
firm, company or corporation shall be sold to authorized agents of
the Central Bank by the recipients within one business day
following
the
receipt
of
such
foreign
exchange.
Any resident person, firm, company or corporation residing or

located within the Philippines, who acquires foreign exchange

shall not, unless authorized by the Central Bank, dispose of such
foreign exchange in whole or in part, nor receive less than its full
value, nor delay taking ownership thereof except as such delay is
customary; Provided, That, within one business day upon taking
ownership or receiving payment of foreign exchange the
aforementioned persons and entities shall sell such foreign
exchange to the authorized agents of the Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that they
intended the bank to safekeep the foreign exchange, and return it later to Zshornack,
who alleged in his complaint that he is a Philippine resident. The parties did not
intended to sell the US dollars to the Central Bank within one business day from
receipt. Otherwise, the contract of depositum would never have been entered into at
all.
Since the mere safekeeping of the greenbacks, without selling them to the Central
Bank within one business day from receipt, is a transaction which is not authorized by
CB Circular No. 20, it must be considered as one which falls under the general class
of prohibited transactions. Hence, pursuant to Article 5 of the Civil Code, it is void,
having been executed against the provisions of a mandatory/prohibitory law. More
importantly, it affords neither of the parties a cause of action against the other. "When
the nullity proceeds from the illegality of the cause or object of the contract, and the
act constitutes a criminal offense, both parties being in pari delicto, they shall have no
cause of action against each other . . . " [Art. 1411, New Civil Code.] The only remedy
is one on behalf of the State to prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the
concept of litigation expenses and attorney's fees to be reasonable. The award is
sustained. LLpr
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is ordered
to restore to the dollar savings account of private respondent the amount of
US$1,000.00 as of October 27, 1975 to earn interest at the rate fixed by the bank for
dollar savings deposits. Petitioner is further ordered to pay private respondent the
amount of P8,000.00 as damages. The other causes of action of private respondent
are ordered dismissed.
SO ORDERED.
Page 115 of 505

Gutierrez, Jr. and Bidin, JJ., concur.

Fernan, C.J., took no part was counsel for Bank of P.I. (Cebu).
Feliciano, J., concurs in the result.
||| (Bank of the Philippine Islands v. Intermediate Appellate Court, G.R. No. 66826,
[August 19, 1988], 247 PHIL 599-611)

THIRD DIVISION
[G.R. No. 90027. March 3, 1993.]
CA
AGRO-INDUSTRIAL
CORP., petitioner, vs. THE
HONORABLE
APPEALS
and
SECURITY
BANK
COMPANY,respondents.

DEVELOPMENT
COURT
OF
AND
TRUST

Dolorfino & Dominguez Law Offices for petitioner.

Danilo B. Banares for private respondent.

amount, P75,725.00 was paid as downpayment while the balance was covered by
three (3) postdated checks. Among the terms and conditions of the agreement
embodied in a Memorandum of True and Actual Agreement of Sale of Land were that
the titles to the lots shall be transferred to the petitioner upon full payment of the
purchase price and that the owner's copies of the certificates of titles thereto, Transfer
Certificates of Title (TCT) Nos. 284655 and 292434, shall be deposited in a safety
deposit box of any bank. The same could be withdrawn only upon the joint signatures
of a representative of the petitioner and the Pugaos upon full payment of the purchase
price .Petitioner, through Sergio Aguirre, and the Pugaos then rented Safety Deposit
Box No. 1448 of private respondent Security Bank and Trust Company, a domestic
banking corporation hereinafter referred to as the respondent Bank. For this purpose,
both signed a contract of lease (Exhibit "2") which contains, inter alia, the following
conditions:
"13. The bank is not a depositary of the contents of the safe and
it has neither the possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except
herein expressly provided, and it assumes absolutely no liability
in connection therewith." 1
After the execution of the contract, two (2) renter's keys were given to the renters
one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key remained
in the possession of the respondent Bank. The safety deposit box has two (2)
keyholes, one for the guard key and the other for the renter's key, and can be opened
only with the use of both keys. Petitioner claims that the certificates of title were
placed inside the said box.

DECISION

DAVIDE, JR., J p:
Is the contractual relation between a commercial bank and another party in a contract
of rent of a safety deposit box with respect to its contents placed by the latter one of
bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy. LLjur
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the spouses
Ramon and Paula Pugao entered into an agreement whereby the former purchased
from the latter two (2) parcels of land for a consideration of P350,625.00. Of this

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the two
(2) lots at a price of P225.00 per square meter which, as petitioner alleged in its
complaint, translates to a profit of P100.00 per square meter or a total of P280,500.00
for the entire property. Mrs. Ramos demanded the execution of a deed of sale which
necessarily entailed the production of the certificates of title. In view thereof, Aguirre,
accompanied by the Pugaos, then proceeded to the respondent Bank on 4 October
1979 to open the safety deposit box and get the certificates of title. However, when
opened in the presence of the Bank's representative, the box yielded no such
certificates. Because of the delay in the reconstitution of the title, Mrs. Ramos
withdrew her earlier offer to purchase the lots; as a consequence thereof, the
petitioner allegedly failed to realize the expected profit of P280,500.00. Hence, the
Page 116 of 505

latter filed on 1 September 1980 a complaint 2 for damages against the respondent
Bank with the Court of First Instance (now Regional Trial Court) of Pasig, Metro
Manila which docketed the same as Civil Case No. 38382. Cdpr
In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has no
cause of action because of paragraphs 13 and 14 of the contract of lease (Exhibit
"2"); corollarily, loss of any of the items or articles contained in the box could not give
rise to an action against it. It then interposed a counterclaim for exemplary damages
as well as attorney's fees in the amount of P20,000.00. Petitioner subsequently filed
an answer to the counterclaim. 4
In due course, the trial court. now designated as Branch 161 of the Regional Trial
Court (RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the petitioner
on 8 December 1986, the dispositive portion of which reads:
"WHEREFORE, premises considered, judgment is hereby
rendered dismissing plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered
ordering plaintiff to pay defendant the amount of FIVE
THOUSAND (P5,000.00) PESOS as attorney's fees.
With costs against plaintiff." 6
The unfavorable verdict is based on the trial court's conclusion that under paragraphs
13 and 14 of the contract of lease, the Bank has no liability for the loss of the
certificates of title. The court declared that the said provisions are binding on the
parties.
Its motion for reconsideration 7 having been denied, petitioner appealed from the
adverse decision to the respondent Court of Appeals which docketed the appeal as
CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the
challenged decision because the trial court erred in (a) absolving the respondent
Bank from liability from the loss, (b) not declaring as null and void, for being contrary
to law, public order and public policy, the provisions in the contract for lease of the
safety deposit box absolving the Bank from any liability for loss, (c) not concluding
that in this jurisdiction, as well as under American jurisprudence, the liability of the
Bank is settled and (d) awarding attorney's fees to the Bank and denying the
petitioner's prayer for nominal and exemplary damages and attorney's fees. 8
In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the appealed
decision principally on the theory that the contract (Exhibit "2") executed by the
petitioner and respondent Bank is in the nature of a contract of lease by virtue of

which the petitioner and its co-renter were given control over the safety deposit box
and its contents while the Bank retained no right to open the said box because it had
neither the possession nor control over it and its contents. As such, the contract is
governed by Article 1643 of the Civil Code 10 which provides:
"ARTICLE 1643. In the lease of things, one of the parties binds
himself to give to another the enjoyment or use of a thing for a
price certain, and for a period which may be definite or indefinite.
However, no lease for more than ninety-nine years shall be valid."
It invoked Tolentino vs. Gonzales 11 which held that the owner of the property
loses his control over the property leased during the period of the contract and
Article 1975 of the Civil Code which provides:
"ARTICLE 1975. The depositary holding certificates, bonds,
securities or instruments which earn interest shall be bound to
collect the latter when it becomes due, and to take such steps as
may be necessary in order that the securities may preserve their
value and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of
safety deposit boxes."
and then concluded that "[c]learly, the defendant-appellee is not under any duty
to maintain the contents of the box. The stipulation absolving the defendantappellee from liability is in accordance with the nature of the contract of lease and
cannot be regarded as contrary to law, public order and public policy." 12 The
appellate court was quick to add, however, that under the contract of lease of the
safety deposit box, respondent Bank is not completely free from liability as it may
still be made answerable in case unauthorized persons enter into the vault area
or when the rented box is forced open. Thus, as expressly provided for in
stipulation number 8 of the contract in question:
"8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank
will not be responsible for the contents of any safe rented from
it." 13
Its motion for reconsideration 14 having been denied in the respondent Court's
Resolution of 28 August 1989, 15 petitioner took this recourse under Rule 45 of the
Rules of Court and urges Us to review and set aside the respondent Court's ruling.
Petitioner avers that both the respondent Court and the trial court (a) did not properly
and legally apply the correct law in this case, (b) acted with grave abuse of discretion
Page 117 of 505

or in excess of jurisdiction amounting to lack thereof and (c) set a precedent that is
contrary to, or is a departure from precedents adhered to and affirmed by decisions of
this Court and precepts in American jurisprudence adopted in the Philippines. It
reiterates the arguments it had raised in its motion to reconsider the trial court's
decision, the brief submitted to the respondent Court and the motion to reconsider the
latter's decision. In a nutshell, petitioner maintains that regardless of nomenclature,
the contract for the rent of the safety deposit box (Exhibit "2") is actually a contract of
deposit governed by Title XII, Book IV of the Civil Code of the
Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the loss
of the certificates of title pursuant to Article 1972 of the said Code which
provides: prLL
"ARTICLE 1972. The depositary is obliged to keep the thing
safely and to return it, when required, to the depositor, or to his
heirs and successors, or to the person who may have been
designated in the contract. His responsibility, with regard to the
safekeeping and the loss of the thing, shall be governed by the
provisions of Title I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in
determining the degree of care that the depositary must observe."
Petitioner then quotes a passage from American Jurisprudence 17 which is
supposed to expound on the prevailing rule in the United States, to wit:
"The prevailing rule appears to be that where a safe-deposit
company leases a safe-deposit box or safe and the lessee takes
possession of the box or safe and places therein his securities or
other valuables, the relation of bailee and bailor is created
between the parties to the transaction as to such securities or
other valuables; the fact that the safe-deposit company does not
know, and that it is not expected that it shall know, the character
or description of the property which is deposited in such safedeposit box or safe does not change that relation. That access to
the contents of the safe-deposit box can be had only by the use
of a key retained by the lessee (whether it is the sole key or one
to be used in connection with one retained by the lessor) does
not operate to alter the foregoing rule. The argument that there is
not, in such a case, a delivery of exclusive possession and
control to the deposit company, and that therefore the situation is
entirely different from that of ordinary bailment, has been

generally rejected by the courts, usually on the ground that as

possession must be either in the depositor or in the company, it
should reasonably be considered as in the latter rather than in the
former, since the company is, by the nature of the contract, given
absolute control of access to the property, and the depositor
cannot gain access thereto without the consent and active
participation of the company. . . ." (citations omitted).
and a segment from Words and Phrases 18 which states that a contract for the
rental of a bank safety deposit box in consideration of a fixed amount at stated
periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are
contrary to law and public policy and should be declared null and void. In support
thereof, it cites Article 1306 of the Civil Code which provides that parties to a contract
may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order
or public policy.
After the respondent Bank filed its comment, this Court gave due course to the
petition and required the parties to simultaneously submit their respective
Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the safety
deposit box is not an ordinary contract of lease as defined in Article 1643 of the Civil
Code. However, We do not fully subscribe to its view that the same is a contract of
deposit that is to be strictly governed by the provisions in the Civil Code on
deposit; 19the contract in the case at bar is a special kind of deposit. It cannot be
characterized as an ordinary contract of lease under Article 1643 because the full and
absolute possession and control of the safety deposit box was not given to the renters
the petitioner and the Pugaos. The guard key of the box remained with the
respondent Bank; without this key, neither of the renters could open the box. On the
other hand, the respondent Bank could not likewise open the box without the renter's
key. In this case, the said key had a duplicate which was made so that both renters
could have access to the box.

Hence, the authorities cited by the respondent Court 20 on this point do not apply.
Neither could Article 1975, also relied upon by the respondent Court, be invoked as
Page 118 of 505

an argument against the deposit theory. Obviously, the first paragraph of such
provision cannot apply to a depositary of certificates, bonds, securities or instruments
which earn interest if such documents are kept in a rented safety deposit box. It is
clear that the depositary cannot open the box without the renter being present. prcd
We observe, however, that the deposit theory itself does not altogether find
unanimous support even in American jurisprudence. We agree with the petitioner that
under the latter, the prevailing rule is that the relation between a bank renting out safedeposit boxes and its customer with respect to the contents of the box is that of a
bailor and bailee, the bailment being for hire and mutual benefit. 21 This is just the
prevailing view because:
"There is, however, some support for the view that the
relationship in question might be more properly characterized as
that of landlord and tenant, or lessor and lessee. It has also been
suggest that should be characterized as that of licensor and
licensee. The relation between a bank, safe-deposit company, or
storage company, and the renter of a safe-deposit box therein, is
often described as contractual, express or implied, oral or written,
in whole or in part. But there is apparently no jurisdiction in which
any rule other than that applicable to bailments governs
questions of the liability and rights of the parties in respect of loss
of the contents of safe-deposit boxes." 22 (citations omitted).
In the context of our laws which authorize banking institutions to rent out safety
deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United States
has been adopted. Section 72 of the General Banking Act 23 pertinently provides:
"SECTION 72. In addition to the operations specifically
authorized elsewhere in this Act, banking institutions other than
building and loan associations may perform the following
services:
(a) Receive in custody funds, documents, and
valuable objects, and rent safety deposit boxes for the
safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under
subsections (a), (b) and (c) of this section as depositories or as
agents. . . . " 24 (emphasis supplied).

Note that the primary function is still found within the parameters of a contract
of deposit, i.e., the receiving in custody of funds, documents and other valuable
objects for safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this principal function. A
contract of deposit may be entered into orally or in writing 25 and, pursuant to Article
1306 of the Civil Code, the parties thereto may establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided they are not contrary to
law, morals, good customs, public order or public policy. The depositary's
responsibility for the safekeeping of the objects deposited in the case at bar is
governed by Title I, Book IV of the Civil Code. Accordingly, the depositary would be
liable if, in performing its obligation, it is found guilty of fraud, negligence, delay or
contravention of the tenor of the agreement. 2 6 In the absence of any stipulation
prescribing the degree of diligence required, that of a good father of a family is to be
observed. 27 Hence, any stipulation exempting the depositary from any liability arising
from the loss of the thing deposited on account of fraud, negligence or delay would be
void for being contrary to law and public policy. In the instant case, petitioner
maintains that conditions 13 and 14 of the questioned contract of lease of the safety
deposit box, which read:
"13. The bank is not a depositary of the contents of the safe and
it has neither the possession nor control of the same. LLphil
14. The bank has no interest whatsoever in said contents, except
herein expressly provided, and it assumes absolutely no liability
in connection therewith." 28
are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent with
the respondent Bank's responsibility as a depositary under Section 72(a) of
the General Banking Act. Both exempt the latter from any liability except as
contemplated in condition 8 thereof which limits its duty to exercise reasonable
diligence only with respect to who shall be admitted to any rented safe, to wit:
"8. The Bank shall use due diligence that no unauthorized person
shall be admitted to any rented safe and beyond this, the Bank
will not be responsible for the contents of any safe rented from
it." 2 9
Furthermore, condition 13 stands on a wrong premise and is contrary to the
actual practice of the Bank. It is not correct to assert that the Bank has neither
the possession nor control of the contents of the box since in fact, the safety
deposit box itself is located in its premises and is under its absolute control;
Page 119 of 505

moreover, the respondent Bank keeps the guard key to the said box. As stated
earlier, renters cannot open their respective boxes unless the Bank cooperates by
presenting and using this guard key. Clearly then, to the extent above stated, the
foregoing conditions in the contract in question are void and ineffective. It has
been said:
"With respect to property deposited in a safe-deposit box by a
customer of a safe-deposit company, the parties, since the
relation is a contractual one may by special contract define their
respective duties or provide for increasing or limiting the liability
of the deposit company, provided such contract is not in violation
of law or public policy. It must clearly appear that there actually
was such a special contract, however, in order to vary the
ordinary obligations implied by law from the relationship of the
parties; liability of the deposit company will not be enlarged or
restricted by words of doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of
the contents by its own fraud or negligence or that of its agents or
servants, and if a provision of the contract may be construed as
an attempt to do so, it will be held ineffective for the purpose.
Although it has been held that the lessor of a safe-deposit box
cannot limit its liability for loss of the contents thereof through its
own negligence, the view has been taken that such a lessor may
limit its liability to some extent by agreement or
stipulation." 30 (citations omitted).
Thus, we reach the same conclusion which the Court of Appeals arrived at, that is,
that the petition should be dismissed, but on grounds quite different from those relied
upon by the Court of Appeals. In the instant case, the respondent Bank's exoneration
cannot, contrary to the holding of the Court of Appeals, be based on or proceed from
a characterization of the impugned contract as a contract of lease, but rather on the
fact that no competent proof was presented to show that respondent Bank was aware
of the agreement between the petitioner and the Pugaos to the effect that the
certificates of title were withdrawable from the safety deposit box only upon both
parties' joint signatures, and that no evidence was submitted to reveal that the loss of
the certificates of title was due to the fraud or negligence of the respondent Bank.
This in turn flows from this Court's determination that the contract involved was one of
deposit. Since both the petitioner and the Pugaos agreed that each should have one
(1) renter's key, it was obvious that either of them could ask the Bank for access to the

safety deposit box and, with the use of such key and the Bank's own guard key, could
open the said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint and no
bad faith on its part had been established, the trial court erred in condemning the
petitioner to pay the respondent Bank attorney's fees. To this extent, the Decision
(dispositive portion) of public respondent Court of Appeals must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the award
for attorney's fees from the 4 July 1989 Decision of the respondent Court of Appeals
in CA-G.R. CV No. 15150. As modified, and subject to the pronouncement We made
above on the nature of the relationship between the parties in a contract of lease of
safety deposit boxes, the dispositive portion of the said Decision is hereby AFFIRMED
and the instant Petition for Review is otherwise DENIED for lack of merit. LLpr
No pronouncement as to costs.
SO ORDERED.
Feliciano, Bidin, Romero and Melo, JJ ., concur.
Gutierrez, Jr., J ., is on terminal leave.
||| (CA Agro-Industrial Development Corp. v. Court of Appeals, G.R. No. 90027,
[March 3, 1993])

EN BANC
Page 120 of 505

[G.R. No. 4015. August 24, 1908.]

ANGEL JAVELLANA, plaintiff-appellee, vs. JOSE LIM, ET.
AL., defendants-appellants.

R. Zaldarriaga for appellants.

B. Montinola for appellee.

DECISION

TORRES, J p:
The attorney for the plaintiff, Angel Javellana, filed a complaint on the
30th of October, 1906, with the Court of First Instance of Iloilo, praying that the
defendants, Jose Lim and Ceferino Domingo Lim, be sentenced to jointly and
severally pay the sum of P2,686.58, with interest thereon at the rate of 15 per
cent per annum from the 20th of January, 1898, until full payment should be
made, deducting from the amount of interest due the sum of P1,102.16, and to
pay the costs of the proceedings.
Authority from the court having been previously obtained, the complaint
was amended on the 10th of January, 1907; it was then alleged, that on the 26th
of May, 1897, the defendants executed and subscribed a document in favor of the
plaintiff reading as follows:
"We have received from Angel Javellana, as a deposit
without interest, the sum of two thousand six hundred and eightysix pesos and fifty-eight cents of pesos fuentes, which we will
return to the said gentleman, jointly and severally, on the 20th of
January, 1898. Jaro, 26th of May, 1897. Signed: Jose Lim.
Signed: Ceferino Domingo Lim."
That, when the obligation became due, the defendants begged the
plaintiff for an extension of time for the payment thereof, binding themselves to
pay interest at the rate of 15 per cent on the amount of their indebtedness, to
which the plaintiff acceded; that on the 15th of May, 1902, the debtors paid on

account of interest due the sum of 1,000 pesos, with the exception of which they
had not paid any other sum on account of either capital or interest,
notwithstanding the requests made by the plaintiff, who had thereby been
subjected to loss and damages.
A demurrer to the original complaint was overruled, and on the 4th of
January, 1907, the defendants answered the original complaint before its
amendment, setting forth that they acknowledged the facts stated in Nos. 1 and 2
of the complaint; that they admitted the statements of the plaintiff relative to the
payment of 1,102.16 pesos made on the 15th of November, 1902, not, however,
as payment of interest on the amount stated in the foregoing document, but on
account of the principal, and denied that there had been any agreement as to an
extension of the time for payment and the payment of interest at the rate of 15 per
cent per annum as alleged in paragraph 3 of the complaint, and also denied all
the other statements contained therein.
As a counterclaim, the defendants alleged that they had paid to the
plaintiff sums which, together with the P1,102.16 acknowledged in the complaint,
aggregated the total sum of P5,602.16, and that, deducting therefrom the
P2,686.58 stated in the document transcribed in the complaint, the plaintiff still
owed the defendants P2,915.58; therefore, they asked that judgment be entered
absolving them, and sentencing the plaintiff to pay them the sum of P2,915.58
with the costs.
Evidence was adduced by both parties and, upon their exhibits, together
with an account book having been made of record, the court below rendered
judgment on the 15th of January, 1907, in favor of the plaintiff for the recovery of
the sum of P5,714.44 and costs.
The defendants excepted to the above decision and moved for a new
trial. This motion was overruled and was also excepted to by them; the bill of
exceptions presented by the appellants having been approved, the same was in
due course submitted to this court.
The document of indebtedness inserted in the complaint states that the
plaintiff left on deposit with the defendants a given sum of money which they were
jointly and severally obliged to return on a certain date fixed in the document; but
that, nevertheless, when the document appearing as Exhibit 2, written in the
Visayan dialect and followed by a translation into Spanish was executed, it was
acknowledged, at the date thereof, the 15th of November, 1902, that the amount
deposited had not yet been returned to the creditor, whereby he was subjected to
losses and damages amounting to 830 pesos since the 20th of January, 1898,
Page 121 of 505

when the return was again stipulated with the further agreement that the amount
deposited should bear interest at the rate of 15 per cent per annum from the
aforesaid date of January 20, and that the 1,000 pesos paid to the depositor on
the 15th of May, 1900, according to the receipt issued by him to the debtors,
would be included, and that the said rate of interest would obtain until the
debtors, paid the creditor the said amount in full. In this second document the
contract between the parties, which is a real loan of money with interest, appears
perfectly defined, notwithstanding the fact that in the original document executed
by the debtors, on the 26th of May, 1897, it is called a deposit; so that when they
bound themselves jointly and severally to refund the sum of 2,686.58 pesos to
the depositor, Javellana, they did not engage to return the same coins received
and of which the amount deposited consisted, and they could have accomplished
the return agreed upon by the delivery of a sum equal to the one received by
them. For this reason it must be understood that the debtors were lawfully
authorized to make use of the amount deposited, which they have done, as
subsequently shown when asking for an extension of the time for the return
thereof, inasmuch as, acknowledging that they have subjected the lender, their
creditor, to losses and damages for not complying with what had been stipulated,
and being conscious that they had used, for their own profit and gain, the money
that they received apparently as a deposit, they engaged to pay interest to the
creditor from the date named until the time when the refund should be made.
Such conduct on the part of the debtors is unquestionable evidence that the
transaction entered into between the interested parties was not a deposit, but a
real contract of loan.
Article 1767 of the Civil Code provides that
"The depositary can not make use of the thing deposited
without the express permission of the depositor.
"Otherwise he shall be liable for losses and damages."
Article 1768 also provides that
"When the depositary has permission to make use of
the thing deposited, the contract loses the character of a deposit
and becomes a loan or bailment.
"The permission shall not be presumed, and its
existence must be proven."
When on one of the latter days of January, 1898, Jose Lim went to the
office of the creditor asking for an extension of one year, in view of the fact that
money was scarce, and because neither himself nor the other defendant were

able to return the amount deposited, for which reason he agreed to pay interest at
the rate of 15 per cent per annum, it was because, as a matter of fact, he did not
have in his possession the amount deposited, he having made use of the same in
his business and for his own profit; and the creditor, by granting them the
extension, evidently confirmed the express permission previously given them to
use and dispose of the amount slated as having been deposited, which, in
accordance with the terms of the law, must be considered as given them on loan,
to all intents and purposes gratuitously, until the 20th of January, 1898, and from
that date with interest at 15 per cent per annum until its full payment, deducting
from the total amount of interest the sum of 1,000 pesos, in accordance with the
provisions of article 1173 of the Civil Code.
Notwithstanding the fact that it does not appear that Jose Lim signed the
document (Exhibit 2) executed in the presence of three witnesses on the 15th of
November, 1902, by Ceferino Domingo Lim on behalf of himself and the former,
nevertheless, the said document has not been contested as false, either by a
criminal or by a civil proceeding, nor has any doubt been cast upon the
authenticity of the signatures of the witnesses who attested the execution of the
same; and from the evidence in the case one is sufficiently convinced that the
said Jose Lim was perfectly aware of and had authorized his joint codebtor to
liquidate the interest, to pay the sum of 1,000 pesos, on account thereof, and to
execute the aforesaid document No. 2. A true ratification of the original document
of deposit was thus made, and not the least proof is shown in the record that
Jose Lim had ever paid the whole or any part of the capital stated in the original
document, Exhibit 1.
If the amount, together with interest claimed in the complaint, less 1,000
pesos appears as fully established, such is not the case with the defendants'
counterclaim for P5,602.16, because the existence and certainty of said
indebtedness imputed to the plaintiff has not been proven, and the defendants,
who call themselves creditors for the said amount, have not proven in a
satisfactory manner that the plaintiff had received partial payments on account of
the same; the latter alleges with good reason, that they should produce the
receipts which he may have issued, and which he did issue whenever they paid
him any money on account. The plaintiff's allegation that the two amounts of 400
and 1,200 pesos, referred to in documents marked "C" and "D" offered in
evidence by the defendants, had been received from Ceferino Domingo Lim on
account of other debts of his, has not been contradicted, and the fact that in the
original complaint the sum of 1,102.16 pesos, was expressed in lieu of 1,000
pesos, the only payment made on account of interest on the amount deposited
Page 122 of 505

according to documents No. 2 and letter "B" above referred to, was due to a
mistake.

PAULINO GULLAS, plaintiff-appellant, vs. THE PHILIPPINE

NATIONAL BANK, defendant-appellant.

Moreover, for the reasons above set forth it may, as a matter of course,
be inferred that there was no renewal of the contract of deposit converted into a
loan, because, as has already been stated, the defendants received said amount
by virtue of a real loan contract under the name of a deposit, since the so-called
bails were forthwith authorized to dispose of the amount deposited. This they
have done, as has been clearly shown.

Gullas, Lopez, Tuao & Leuterio for plaintiff-appellant.

The original joint obligation contracted by the defendant debtors still

exists, and it has not been shown or proven in the proceedings that the creditor
had released Jose Lim from complying with his obligation in order that he should
not be sued for or sentenced to pay the amount of capital and interest together
with his codebtor, Ceferino Domingo Lim, because the record offers satisfactory
evidence against the pretension of Jose Lim, and it further appears that
document No. 2 was executed by the other debtor, Ceferino Domingo Lim, for
himself and on behalf of Jose Lim; and it has also been proven that Jose Lim,
being fully aware that his debt had not yet been settled, took steps to secure an
extension of the time for payment, and consented to pay interest in return for the
concession requested from the creditor.
In view of the foregoing, and adopting the findings in the judgment
appealed from, it is our opinion that the same should be and is hereby affirmed
with the costs of this instance against the appellant, provided that the interest
agreed upon shall be paid until the complete liquidation of the debt. So ordered.

Jose Delgado for defendant-appellant.

SYLLABUS
1. BANKS AND BANKING; CIVIL CODE, ARTICLES 1195 et seq. AND
1758 et seq. CONSTRUED; RELATIONSHIP BETWEEN DEPOSITOR AND
BANK. The relation existing between a depositor and a bank is that of creditor
and debtor.
2. ID.; ID.; ID.; BANK'S RIGHT OF SET OFF. The general rule is
adopted for this jurisdiction that a bank has a right of set off of the deposit in its
hands for the payment of any indebtedness to it on the part of the depositor.
3. ID.; NEGOTIABLE INSTRUMENTS LAW CONSTRUED; LIABILITY
OF INDORSERS OF NEGOTIABLE INSTRUMENTS. Notice of dishonor is
necessary in order to charge an indorser, and the right of action against him does
not accrue until the notice is given.

DECISION

Arellano, C.J., Carson, Willard and Tracey, JJ., concur.

||| (Javellana v. Lim, G.R. No. 4015, [August 24, 1908], 11 PHIL 141-146)

CHAPTER 2

SECOND DIVISION
[G.R. No. 43191. November 13, 1935.]

MALCOLM, J p:
Both parties to this case appealed from a judgment of the Court of First
Instance of Cebu, which sentenced the defendant to return to the account of the
plaintiff the sum of P509, with legal interest and costs, the plaintiff to secure
damages in the amount of P10,000 more or less, and the defendant to be
absolved totally from the amended complaint. As it is conceded that the plaintiff.
As it is conceded that the plaintiff has already received the sum represented by
the United States treasury warrant, which is in question, the appeal will thus
determine the amount, if any, which should be paid to the plaintiff by the
defendant.
Page 123 of 505

The parties to the case are Paulino Gullas and the Philippine National
Bank. The first named is a member of the Philippine Bar, resident in the City of
Cebu. The second named is a banking corporation with a branch in the same
city. Attorney Gullas has had a current account with the bank.
It appears from the record that on August 2, 1933, the Treasurer of the
United States for the United States Veterans Bureau issued a warrant in the
amount of $361, payable to the order of Francisco Sabectoria Bacos. Paulino
Gullas and Pedro Lopez signed as indorsers of this check. Thereupon it was
cashed by the Philippine National Bank. Subsequently the treasury warrant was
dishonored by the Insular Treasurer.
At that time the outstanding balance of Attorney Gullas on the books of
the bank was P509. Against this balance he had issued certain checks which
could not be paid when the money was sequestered by the bank. On August 20,
1933, Attorney Gullas left his residence for Manila.
The bank on learning of the dishonor of the treasury warrant sent
notices by mail to Mr. Gullas which could not be delivered to him at that time
because he was in Manila. In the bank's letter of August 21, 1933, addressed to
Messrs. Paulino Gullas and Pedro Lopez, they were informed that the United
States Treasury warrant No. 20175 in the name of Francisco Sabectoria Bacos
for $361 or P722, the payment for which had been received has been returned by
our Manila office with the notation that the payment of his check has been
stopped by the Insular Treasurer. "In view of this therefore we have applied the
outstanding balances of your current accounts with us to the part payment of the
foregoing check", namely, Mr. Paulino Gullas P509. On the return of Attorney
Gullas to Cebu on August 31, 1933, notice of dishonor was received and the
unpaid balance of the United States Treasury warrant was immediately paid by
him.
As a consequence of these happenings, two occurrences transpired
which inconvenienced Attorney Gullas. In the first place, as above indicated,
checks including one for his insurance were not paid because of the lack of funds
standing to his credit in the bank. In the second place, periodicals in the vicinity
gave prominence to the news to the great mortification of Gullas.
A variety of incidental questions have been suggested on the record
which it can be taken for granted as having been adversely disposed of in this
opinion. The main issues are two, namely, (1) as to the right of the Philippine
National Bank to apply a deposit to the debt of a depositor to the bank, and (2) as
to the amount of damages, if any, which should be awarded Gullas.

The Civil Code contains provisions regarding compensation (set off) and
deposit. (Articles 1195 et seq., 1758 et seq.) These portions of Philippine law
provide that compensation shall take place when two persons are reciprocally
creditor and debtor of each other (Civil Code, article 1195). In this connection, it
has been held that the relation existing between a depositor and a bank is that of
creditor and debtor. (Fulton Iron Works Co. vs. China Banking Corporation [1930],
55 Phil., 208; San Carlos Milling Co. vs. Bank of the Philippine Islands and China
Banking Corporation [1933], 50 Phil., 59.)
The Negotiable Instruments Law contains provisions establishing the
liability of a general indorser and giving the procedure for notice of dishonor. The
general indorser of a negotiable instrument engages that if it be dishonored and
the necessary proceedings of dishonor be duly taken, he will pay the amount
thereof to the holder. (Negotiable Instruments Law, sec. 66.) In this connection, it
has been held by a long line of authorities that notice of dishonor is necessary in
order to charge an indorser and that the right of action against him does not
accrue until the notice is given. (Asia Banking Corporation vs. Javier [1923]. 44
Phil., 777; 5 Uniform Laws Annotated.)
As a general rule, a bank has a right of set off of the deposits in its
hands for the payment of any indebtedness to it on the part of a depositor. In
Louisiana, however, a civil law jurisdiction, the rule is denied, and it is held that a
bank has no right, without an order from or special assent of the depositor to
retain out of his deposit an amount sufficient to meet his indebtedness. The basis
of the Louisiana doctrine is the theory of confidential contracts arising from
irregular deposits, e. g., the deposit of money with a banker. With freedom of
selection and after full consideration, we have decided to adopt the general rule
in preference to the minority rule as more in harmony with modern banking
practice. (1 Morse on Banks and Banking, 5th ed., sec. 324; Garrison vs. Union
Trust Company, [1905], 111 A. S. R., 407; Louisiana Civil Code Annotated, arts.
2207 et seq.; Gordon & Gomila vs. Muchler [1882], 34 L. Ann., 604; 8
Manresa, Comentarios al Codigo Civil Espaol, 4th ed., 359 et seq.; 11 Manresa,
pp. 694 et seq.).
Starting, therefore, from the premise that the Philippine National Bank
had with respect to the deposit of Gullas a right of set off, we next consider if that
remedy was enforced properly. The fact we believe is undeniable that prior to the
mailing of notice of dishonor, and without waiting for any action by Gullas, the
bank made use of the money standing in his account to make good for the
treasury warrant. At his point recall that Gullas was merely an indorser and had
issued checks in good faith.
Page 124 of 505

As to a depositor who has funds sufficient to meet payment of a check

drawn by him in favor of a third party, it has been held that he has a right of action
against the bank for its refusal to pay such a check in the absence of notice to
him that the bank has applied the funds so deposited in extinguishment of past
due claims held against him. (Callahan vs. Bank of Anderson [1904], 2 Ann.
Cas., 203.) The decision cited represents the minority doctrine, for on principle it
would seem that notice is not necessary to a maker because the right is based
on the doctrine that the relationship is that of creditor and debtor. However this
may be, as to an indorser the situation is different, and notice should actually
have been given him in order that he might protect his interests.
We accordingly are of the opinion that the action of the bank was
prejudicial to Gullas. But to follow up that statement with others proving exact
damages is not so easy. For instance, for alleged libelous articles the bank would
not be primarily liable. The same remarks could be made relative to the loss of
business which Gullas claims but which could not be traced definitely to this
occurrence. Also Gullas having eventually been reimbursed lost little through the
actual levy by the bank on his funds. On the other hand, it was not agreeable for
one to draw checks in all good faith, then leave for Manila, and on return find that
those checks had not been cashed because of the action taken by the bank. That
caused a disturbance in Gullas' finances, especially with reference to his
insurance, which was injurious to him. All facts and circumstances considered,
we are of the opinion that Gullas should be awarded nominal damages because
of the premature action of the bank against which Gullas had no means of
protection, and have finally determined that the amount should be P250.
Agreeable to the foregoing, the errors assigned by the parties will in the
main be overruled, with the result that the judgment of the trial court will be
modified by sentencing the defendant to pay the plaintiff the sum of P250, and
the costs of both instances.

THIRD DIVISION
[G.R. No. 156940. December 14, 2004.]
ASSOCIATED BANK (Now WESTMONT BANK), petitioner, vs.
VICENTE HENRY TAN, respondent.

Villa-Real, Imperial, Butte, and Goddard., JJ., concur.

||| (Gullas v. PNB, G.R. No. 43191, [November 13, 1935], 62 PHIL 519-523)
DECISION

PANGANIBAN, J p:

Page 125 of 505

While banks are granted by law the right to debit the value of a dishonored check from
a depositor's account, they must do so with the highest degree of care, so as not to
prejudice the depositor unduly.
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, assailing the
January 27, 2003 Decision 2 of the Court of Appeals (CA) in CA-GR CV No. 56292.
The CA disposed as follows:
"WHEREFORE, premises considered, the Decision dated
December 3, 1996, of the Regional Trial Court of Cabanatuan
City, Third Judicial Region, Branch 26, in Civil Case No. 892-AF
is hereby AFFIRMED. Costs against the [petitioner]." 3
The Facts
The CA narrated the antecedents as follows:
"Vicente Henry Tan (hereafter TAN) is a businessman and a
regular depositor-creditor of the Associated Bank (hereinafter
referred to as the BANK). Sometime in September 1990, he
deposited a postdated UCPB check with the said BANK in the
amount of P101,000.00 issued to him by a certain Willy Cheng
from Tarlac. The check was duly entered in his bank record
thereby making his balance in the amount of P297,000.00, as of
October 1, 1990, from his original deposit of P196,000.00.
Allegedly, upon advice and instruction of the BANK that the
P101,000.00 check was already cleared and backed up by
sufficient funds, TAN, on the same date, withdrew the sum of
P240,000.00, leaving a balance of P57,793.45. A day after, TAN
deposited the amount of P50,000.00 making his existing balance
in the amount of P107,793.45, because he has issued several
checks to his business partners, to wit:
CHECK NUMBERS DATE AMOUNT
a. 138814 Sept. 29, 1990 P9,000.00
b. 138804 Oct. 8, 1990 9,350.00
c. 138787 Sept. 30, 1990 6,360.00
d. 138847 Sept. 29, 1990 21,850.00

e. 167054 Sept. 29, 1990 4,093.40

f. 138792 Sept. 29, 1990 3,546.00
g. 138774 Oct. 2, 1990 6,600.00
h. 167072 Oct. 10, 1990 9,908.00
i. 168802 Oct. 10, 1990 3,650.00
"However, his suppliers and business partners went back to him
alleging that the checks he issued bounced for insufficiency of
funds. Thereafter, TAN, thru his lawyer, informed the BANK to
take positive steps regarding the matter for he has adequate and
sufficient funds to pay the amount of the subject checks.
Nonetheless, the BANK did not bother nor offer any apology
regarding the incident. Consequently, TAN, as plaintiff, filed a
Complaint for Damages on December 19, 1990, with the
Regional Trial Court of Cabanatuan City, Third Judicial Region,
docketed as Civil Case No. 892-AF, against the BANK, as
defendant. SDITAC
"In his [C]omplaint, [respondent] maintained that he ha[d]
sufficient funds to pay the subject checks and alleged that his
suppliers decreased in number for lack of trust. As he has been
in the business community for quite a time and has established a
good record of reputation and probity, plaintiff claimed that he
suffered embarrassment, humiliation, besmirched reputation,
mental anxieties and sleepless nights because of the said
unfortunate incident. [Respondent] further averred that he
continuously lost profits in the amount of P250,000.00.
[Respondent] therefore prayed for exemplary damages and that
[petitioner] be ordered to pay him the sum of P1,000,000.00 by
way of moral damages, P250,000.00 as lost profits, P50,000.00
as attorney's fees plus 25% of the amount claimed including
P1,000.00 per court appearance. 2004cdasia
"Meanwhile, [petitioner] filed a Motion to Dismiss on February 7,
1991, but the same was denied for lack of merit in an Order
dated March 7, 1991. Thereafter, [petitioner] BANK on March 20,
1991 filed its Answer denying, among others, the allegations of
[respondent] and alleged that no banking institution would give an
Page 126 of 505

assurance to any of its client/depositor that the check deposited

by him had already been cleared and backed up by sufficient
funds but it could only presume that the same has been honored
by the drawee bank in view of the lapse of time that ordinarily
takes for a check to be cleared. For its part, [petitioner] alleged
that on October 2, 1990, it gave notice to the [respondent] as to
the return of his UCPB check deposit in the amount of
P101,000.00, hence, on even date, [respondent] deposited the
amount of P50,000.00 to cover the returned check.
"By way of affirmative defense, [petitioner] averred that
[respondent] had no cause of action against it and argued that it
has all the right to debit the account of the [respondent] by reason
of the dishonor of the check deposited by the [respondent] which
was withdrawn by him prior to its clearing. [Petitioner] further
averred that it has no liability with respect to the clearing of
deposited checks as the clearing is being undertaken by the
Central Bank and in accepting [the] check deposit, it merely
obligates itself as depositor's collecting agent subject to actual
payment by the drawee bank. [Petitioner] therefore prayed that
[respondent] be ordered to pay it the amount of P1,000,000.00 by
way of loss of goodwill, P7,000.00 as acceptance fee plus
P500.00 per appearance and by way of attorney's fees.
"Considering that Westmont Bank has taken over the
management of the affairs/properties of the BANK, [respondent]
on October 10, 1996, filed an Amended Complaint reiterating
substantially his allegations in the original complaint, except that
the name of the previous defendant ASSOCIATED BANK is now
WESTMONT BANK.
"Trial ensured and thereafter, the court rendered its Decision
dated December 3, 1996 in favor of the [respondent] and against
the [petitioner], ordering the latter to pay the [respondent] the sum
of P100,000.00 by way of moral damages, P75,000.00 as
exemplary damages, P25,000.00 as attorney's fees, plus the
costs of this suit. In making said ruling, it was shown that
[respondent] was not officially informed about the debiting of the
P101,000.00 [from] his existing balance and that the BANK
merely allowed the [respondent] to use the fund prior to clearing
merely for accommodation because the BANK considered him as

one of its valued clients. The trial court ruled that the bank
manager was negligent in handling the particular checking
account of the [respondent] stating that such lapses caused all
the inconveniences to the [respondent]. The trial court also took
into consideration that [respondent's] mother was originally
maintaining with the . . . BANK [a] current account as well as [a]
time deposit, but [o]n one occasion, although his mother made a
deposit, the same was not credited in her favor but in the name of
another." 4
Petitioner appealed to the CA on the issues of whether it was within its rights, as
collecting bank, to debit the account of its client for a dishonored check; and whether
it had informed respondent about the dishonor prior to debiting his account.
Ruling of the Court of Appeals
Affirming the trial court, the CA ruled that the bank should not have authorized the
withdrawal of the value of the deposited check prior to its clearing. Having done so,
contrary to its obligation to treat respondent's account with meticulous care, the bank
violated its own policy. It thereby took upon itself the obligation to officially inform
respondent of the status of his account before unilaterally debiting the amount of
P101,000. Without such notice, it is estopped from blaming him for failing to fund his
account.
The CA opined that, had the P101,000 not been debited, respondent would have had
sufficient funds for the postdated checks he had issued. Thus, the supposed
accommodation accorded by petitioner to him is the proximate cause of his business
woes and shame, for which it is liable for damages.
Because of the bank's negligence, the CA awarded respondent moral damages of
P100,000. It also granted him exemplary damages of P75,000 and attorney's fees of
P25,000.
Hence this Petition. 5
Issue
In its Memorandum, petitioner raises the sole issue of "whether or not the petitioner,
which is acting as a collecting bank, has the right to debit the account of its client for a
check deposit which was dishonored by the drawee bank." 6
The Court's Ruling
The Petition has no merit. ESaITA
Page 127 of 505

Sole Issue:
Debit of Depositor's Account
Petitioner-bank contends that its rights and obligations under the present set of facts
were misappreciated by the CA. It insists that its right to debit the amount of the
dishonored check from the account of respondent is clear and unmistakable. Even
assuming that it did not give him notice that the check had been dishonored, such
right remains immediately enforceable.
In particular, petitioner argues that the check deposit slip accomplished by respondent
on September 17, 1990, expressly stipulated that the bank was obligating itself merely
as the depositor's collecting agent and until such time as actual payment would be
made to it it was reserving the right to charge against the depositor's account any
amount previously credited. Respondent was allowed to withdraw the amount of the
check prior to clearing, merely as an act of accommodation, it added.
At the outset, we stress that the trial court's factual findings that were affirmed by the
CA are not subject to review by this Court. 7 As petitioner itself takes no issue with
those findings, we need only to determine the legal consequence, based on the
established facts.
Right of Setoff
A bank generally has a right of setoff over the deposits therein for the payment of any
withdrawals on the part of a depositor. 8 The right of a collecting bank to debit a
client's account for the value of a dishonored check that has previously been credited
has fairly been established by jurisprudence. To begin with, Article 1980 of the Civil
Code provides that "[f]ixed, savings, and current deposits of money in banks and
similar institutions shall be governed by the provisions concerning simple loan."

Hence, the relationship between banks and depositors has been held to be that of
creditor and debtor. 9 Thus, legal compensation under Article 1278 10 of the Civil
Code may take place "when all the requisites mentioned in Article 1279 are
present," 11 as follows:
"(1) That each one of the obligors be bound principally, and that
he be at the same time a principal creditor of the other;
(2) That both debts consist in a sum of money, or if the things due
are consumable, they be of the same kind, and also of the same
quality if the latter has been stated;

(3) That the two debts be due;

(4) That they be liquidated and demandable;
(5) That over neither of them there be any retention or
controversy, commenced by third persons and communicated in
due time to the debtor." 12
Nonetheless, the real issue here is not so much the right of petitioner to debit
respondent's account but, rather, the manner in which it exercised such right. The
Court has held that even while the right of setoff is conceded, separate is the question
of whether that remedy has properly been exercised. 13
The liability of petitioner in this case ultimately revolves around the issue of whether it
properly exercised its right of setoff. The determination thereof hinges, in turn, on the
bank's role and obligations, first, as respondent's depositary bank; and second, as
collecting agent for the check in question.
Obligation
Depositary Bank

as

In BPI v. Casa Montessori, 14 the Court has emphasized that the banking business is
impressed with public interest. "Consequently, the highest degree of diligence is
expected, and high standards of integrity and performance are even required of it. By
the nature of its functions, a bank is under obligation to treat the accounts of its
depositors with meticulous care." 15
Also affirming this long standing doctrine, Philippine Bank of Commerce v. Court of
Appeals 16 has held that "the degree of diligence required of banks is more than that
of a good father of a family where the fiduciary nature of their relationship with their
depositors is concerned." 17 Indeed, the banking business is vested with the trust and
confidence of the public; hence the "appropriate standard of diligence must be very
high, if not the highest, degree of diligence." 18 The standard applies, regardless of
whether the account consists of only a few hundred pesos or of millions. 19
The fiduciary nature of banking, previously imposed by case law, 20 is now enshrined
in Republic Act No. 8791 or the General Banking Law of 2000. Section 2 of the law
specifically says that the State recognizes the "fiduciary nature of banking that
requires high standards of integrity and performance."
Did petitioner treat respondent's account with the highest degree of care? From all
indications, it did not.
Page 128 of 505

It is undisputed nay, even admitted that purportedly as an act of accommodation

to a valued client, petitioner allowed the withdrawal of the face value of the deposited
check prior to its clearing. That act certainly disregarded the clearance requirement of
the banking system. Such a practice is unusual, because a check is not legal tender
or money; 21 and its value can properly be transferred to a depositor's account only
after the check has been cleared by the drawee bank. 22
Under ordinary banking practice, after receiving a check deposit, a
bank either immediately credit the amount to a depositor's account; or infuse value to
that account only after the drawee bank shall have paid such amount. 23 Before the
check shall have been cleared for deposit, the collecting bank can only "assume" at
its own risk as herein petitioner did that the check would be cleared and paid
out.
Reasonable business practice and prudence, moreover, dictated that petitioner should
not have authorized the withdrawal by respondent of P240,000 on October 1, 1990,
as this amount was over and above his outstanding cleared balance of
P196,793.45. 24 Hence, the lower courts correctly appreciated the evidence in his
favor.
Obligation
Collecting Agent

as

Indeed, the bank deposit slip expressed this reservation:

"In receiving items on deposit, this Bank obligates itself only as
the Depositor's Collecting agent, assuming no responsibility
beyond carefulness in selecting correspondents, and until such
time as actual payments shall have come to its possession, this
Bank reserves the right to charge back to the Depositor's account
any amounts previously credited whether or not the deposited
item is returned. . . ." 25
However, this reservation is not enough to insulate the bank from any liability. In the
past, we have expressed doubt about the binding force of such conditions unilaterally
imposed by a bank without the consent of the depositor. 26 It is indeed arguable that
"in signing the deposit slip, the depositor does so only to identify himself and not to
agree to the conditions set forth at the back of the deposit slip." 27
Further, by the express terms of the stipulation, petitioner took upon itself certain
obligations as respondent's agent, consonant with the well-settled rule that the
relationship between the payee or holder of a commercial paper and the collecting

bank is that of principal and agent. 28 Under Article 1909 29 of the Civil Code, such
bank could be held liable not only for fraud, but also for negligence.
As a general rule, a bank is liable for the wrongful or tortuous acts and declarations of
its officers or agents within the course and scope of their employment. 30 Due to the
very nature of their business, banks are expected to exercise the highest degree of
diligence in the selection and supervision of their employees. 31 Jurisprudence has
established that the lack of diligence of a servant is imputed to the negligence of the
employer, when the negligent or wrongful act of the former proximately results in an
injury to a third person; 32 in this case, the depositor.
The manager of the bank's Cabanatuan branch, Consorcia Santiago, categorically
admitted that she and the employees under her control had breached bank policies.
They admittedly breached those policies when, without clearance from the drawee
bank in Baguio, they allowed respondent to withdraw on October 1, 1990, the amount
of the check deposited. Santiago testified that respondent "was not officially informed
about the debiting of the P101,000 from his existing balance of P170,000 on October
2, 1990 . . . " 33
Being the branch manager, Santiago clearly acted within the scope of her authority in
authorizing the withdrawal and the subsequent debiting without notice. Accordingly,
what remains to be determined is whether her actions proximately caused
respondent's injury. Proximate cause is that which in a natural and continuous
sequence, unbroken by any efficient intervening cause produces the injury, and
without which the result would not have occurred. 34
Let us go back to the facts as they unfolded. It is undeniable that the bank's
premature authorization of the withdrawal by respondent on October 1, 1990,
triggered in rapid succession and in a natural sequence the debiting of his
account, the fall of his account balance to insufficient levels, and the subsequent
dishonor of his own checks for lack of funds. The CA correctly noted thus:
". . . [T]he depositor . . . withdrew his money upon the advice by
[petitioner] that his money was already cleared. Without such
advice, [respondent] would not have withdrawn the sum of
P240,000.00. Therefore, it cannot be denied that it was
[petitioner's] fault which allowed [respondent] to withdraw a huge
sum which he believed was already his. TaCEHA
"To emphasize, it is beyond cavil that [respondent] had sufficient
funds for the check. Had the P101,000.00 not [been] debited, the
subject checks would not have been dishonored. Hence, we can
Page 129 of 505

say that [respondent's] injury arose from the dishonor of his wellfunded checks. . . ." 35
Aggravating matters, petitioner failed to show that it had immediately and duly
informed respondent of the debiting of his account. Nonetheless, it argues that the
giving of notice was discernible from his act of depositing P50,000 on October 2,
1990, to augment his account and allow the debiting. This argument deserves short
shrift.
First, notice was proper and ought to be expected. By the bank manager's account,
respondent was considered a "valued client" whose checks had always been
sufficiently funded from 1987 to 1990, 36 until the October imbroglio. Thus, he
deserved nothing less than an official notice of the precarious condition of his
account.
Second, under the provisions of the Negotiable Instruments Law regarding the liability
of a general indorser 37 and the procedure for a notice of dishonor, 38 it was
incumbent on the bank to give proper notice to respondent. In Gullas v. National
Bank, 39 the Court emphasized:
". . . [A] general indorser of a negotiable instrument engages that
if the instrument the check in this case is dishonored and
the necessary proceedings for its dishonor are duly taken, he will
pay the amount thereof to the holder (Sec. 66) It has been held
by a long line of authorities that notice of dishonor is necessary to
charge an indorser and that the right of action against him does
not accrue until the notice is given.

different, and notice should actually have been given him in order
that he might protect his interests." 40

Third, regarding the deposit of P50,000 made by respondent on October 2, 1990, we

fully subscribe to the CA's observations that it was not unusual for a well-reputed
businessman like him, who "ordinarily takes note of the amount of money he takes
and releases," to immediately deposit money in his current account to answer for the
postdated checks he had issued. 41
Damages
Inasmuch as petitioner does not contest the basis for the award of damages and
attorney's fees, we will no longer address these matters.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.
Sandoval-Gutierrez, Carpio Morales and Garcia, JJ ., concur.
Corona, J ., is on leav
||| (Associated Bank (now Westmont Bank) v. Tan, G.R. No. 156940, [December 14,
2004], 487 PHIL 512-530)

". . . The fact we believe is undeniable that prior to the mailing of

notice of dishonor, and without waiting for any action by Gullas,
the bank made use of the money standing in his account to make
good for the treasury warrant. At this point recall that Gullas was
merely an indorser and had issued checks in good faith. As to a
depositor who has funds sufficient to meet payment of a check
drawn by him in favor of a third party, it has been held that he has
a right of action against the bank for its refusal to pay such a
check in the absence of notice to him that the bank has applied
the funds so deposited in extinguishment of past due claims held
against him. (Callahan vs. Bank of Anderson [1904], 2 Ann. Cas.,
203.) However this may be, as to an indorser the situation is

Page 130 of 505

Lorenzo Taada, Teofisto Guingona and Feliciano C. Tumale for

petitioners.
Vicente V. Asuncion Jr. for private respondent.

DECISION

AQUINO, J p:

SECOND DIVISION
[G.R. No. 60033. April 4, 1984.]

Respondent Clement David filed a motion for the reconsideration of this Court's
decision dated April 4, 1984, 128 SCRA 577. He contends that this Court failed to
consider that the petitioners entered in the records and books of the Nation Savings
and Loan Association only P305,821.92 out of his deposits in the amounts of
P1,145,546.20, P15,531.94 and $75,000 and that they admitted that they did not
deliver the difference when they assumed in their personal capacities the obligation to
pay him. He argues that the petitioners committed estafa through
misappropriation. LLphil

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and

TERESITA SANTOS, petitioners, vs. THE CITY FISCAL OF
MANILA, HON. JOSE B. FLAMINIANO, ASST. CITY FISCAL
FELIZARDO N. LOTA and CLEMENT DAVID, respondents.

On the other hand, the petitioners contend that the decision had already become final
because the Solicitor General did not file any motion for reconsideration; that David
cannot adopt a theory which is inconsistent with his original theory; that his claim is
clearly civil, not criminal; that his claim has been novated, and that prohibition is
proper to stop a void proceeding, to prevent the unlawful and oppressive exercise of
lawful authority and to provide a just and orderly administration of justice.

(REFER TO PAGE 82)

The petitioners filed this prohibition action because their obligation is allegedly civil in
character and because of the adverse publicity supposedly instigated by David.
The factual background may be restated as follows:
EN BANC

[G.R. No. L-60033. July 18, 1985.]

TEOFISTO GUINGONA, JR., ANTONIO I. MARTIN, and TERESITA
SANTOS, petitioners, vs. THE CITY FISCAL OF MANILA, HON. JOSE
B. FLAMINIANO, ASST. CITY FISCAL FELIZARDO N. LOTA and
CLEMENT DAVID, respondents.

1. Clement David and his sister Denise Kuhne during the period from March 20, 1979
to March, 1981 made placements with the Nation Savings and Loan Association, Inc.
in the total sum of P1,145,546.20 as evidenced by seven bankers acceptances and
five certificates of time deposits.
He and his sister Denise also had savings deposits in the Nation Savings in the sum
of P13,531.94 as shown in Passbooks Nos. 6-632 and 29-740.

Page 131 of 505

They also invested in Nation Savings US$75,000 in 1980 as evidenced by receipts, of

which $50,000 was deposited in the account of Teofisto Guingona, Jr. with the
Security Bank and Trust Company.
Aggregate investments of David and Kuhne in Nation Savings: P1,159,078.14 in local
currency and 75,000 in U.S. dollars. Nation Savings allegedly paid David from 1979 to
the early part of 1981 interests of P240,000 a year (p. 193, Rollo). llcd
At the time the deposits were made, Antonio I. Martin was the president of Nation
Savings, Teresita G. Santos was its general manager, and Guingona was a director.
2. On March 21, 1981, Nation Savings was placed under receivership by the Central
Bank because of serious fraud and irregularities committed by its key officers (Annex
12).
3. On June 17, 1981, Guingona and Martin executed a promissory note
acknowledging a debt of P1,336,614.02 and $75,000 to be paid in installments within
180 days from said date with interest at 16% per annum from July 1, 1981 until fully
paid.
4. The promissory note was novated by another note, antedated June 17, 1981,
whereby Guingona acknowledged one-half of the obligation as his debt or the sums of
P668,307.01 and $37,500 and secured the same by second mortgages on his
Quezon City properties (Annex D). Guingona paid P200,000 on that note.
5. Martin assumed the other half of the total debt. He secured it with the pledge of a
ring valued according to him at P560,000 but appraised by a jewel appraiser at
P280,000. Martin is also indebted to David in the sum of P60,000 which David paid to
Monte de Piedad to redeem the ring.
6. On July 22, 1981, David received a report from the Central Bank that only
P305,821.92 of the placements made by him and his sister were entered in the NSLA
records (Annex 4, p. 218, Rollo). The director of the CB Department of Rural Banks
and Savings and Loan Associations in a report dated June 23, 1981 recommended
that the irregularities be brought to the attention of the CB consultant on criminal
cases for appropriate investigation of Nation Savings' officials (p. 240, Rollo).
7. In view of the promissory note and the mortgages, David, on July 22, 1981,
executed an affidavit wherein he bound himself to desist from any prosecution of
Guingona without prejudice to the balance of his claim against Nation Savings (Annex
M, p. 46, Rollo).

8. On November 19, 1981, Guingona filed against David Civil Case No. Q-33865 in
the Quezon City Court of First Instance. He prayed for damages of P785,000 against
David for his failure to accept payment of a cashier's check for P300,000 (in addition
to the P200,000) and to release one of the mortgaged properties (Annex K, p. 37,
Rollo).
9. On December 22, 1981, David filed with the City Fiscal's Office, Manila I.S. No. 8131938, a complaint for estafa and violation of CB Circular No. 364 and related
regulations. He claimed that the difference between his placements of P1,159,078.14
and $75,000, on one hand, and the sum of P305,821.92, the amount entered in
Nation Savings' books, on the other hand, constitutes the defraudation against
him. Cdpr
10. He filed the complaint against Guingona, as board chairman, director and
principal stockholder of Nation Savings; Martin, as vice-president, director and
shareholder, and Santos, as general manager. David dealt directly with Guingona,
Martin and Santos in his transactions with Nation Savings. The three filed a countercharge of perjury against David and his lawyers (p. 59, Rollo).
11. On January 20, 1982, David sought to foreclose extrajudicially the two mortgages
(p. 58, Rollo). The foreclosure was restrained by the Quezon City Court of First
Instance.
12. On March 15, 1982, the Solicitor General, in behalf of the Central Bank, filed a
petition in the Court of First Instance of Manila for assistance in the liquidation of
Nation Savings as an insolvent firm (Spec. Proc. No. 82-7552, p. 111, Rollo). The
receivership was challenged by Nation Savings stockholders in Special Proceedings
No. 82-1655 (p. 125, Rollo). The Solicitor General answered that petition by alleging
that Nation Savings was plagued with irregularities (p. 225, Rollo).
With the foregoing background, the prohibition petition should be dismissed. The
petitioners have no cause of action for prohibition because the City Fiscal has
jurisdiction to conduct the preliminary investigation. It has not been finished. The filing
of this petition is premature. The case does not fall within any of the exceptions when
prohibition lies to stop the preliminary investigation (Hernandez vs. Albano, 125 Phil.
513).
"As a general rule, an injunction will not be granted to restrain a criminal prosecution"
(People vs. Mencias, 124 Phil. 1436, 1441). With more reason will injunction not lie
when the case is still at the preliminary investigation stage. This Court should not
usurp the primary function of the City Fiscal to conduct the preliminary investigation of
Page 132 of 505

the estafa charge and of the petitioners' countercharge for perjury, which was
consolidated with the estafa charge (p. 59, Rollo).
The City Fiscal's office should be allowed to finish its investigation and make its
factual findings. This Court should not conduct the preliminary investigation. It is not a
trier of facts. *
The instant case is primarily a litigation between David and the petitioners. The fact
that the Solicitor General, as counsel of the public respondents, did not file a motion
for reconsideration does not estop David from continuing with the prosecution of the
petitioners. In the present posture of the case, the City Fiscal occupies the analogous
position of judge. He has to maintain an attitude of neutrality, not that of partiality.
In view of the foregoing considerations, the decision is reconsidered, the petition is
dismissed and the City Fiscal of Manila is directed to finish the preliminary
investigation. No costs. LLphil
SO ORDERED.
Escolin, Gutierrez, Jr., De la Fuente and Cuevas, JJ., concur.
Fernando, C.J., took no part.
Abad Santos, J., I vote to deny the motion for reconsideration.
Plana, J., took no par
||| (Guingona, Jr. v. City Fiscal of Manila, G.R. No. L-60033, [July 18, 1985], 222 PHIL
119-151)
(REFER TO PAGE

SECOND DIVISION
[G.R. No. 128452. November 16, 1999.]
COMPANIA MARITIMA, INC., EL VARADERO DE MANILA,
MINDANAO TERMINAL AND BROKERAGE SERVICES,
CARLOS P. FERNANDEZ, VICENTE T. FERNANDEZ, LUIS T.
FERNANDEZ, and RAMON B. FERNANDEZ, petitioners, vs.
COURT
OF
APPEALS
and
EXEQUIEL
S.
CONSULTA, respondents.

Ceballos & Associates for petitioners.

Exequiel S. Consulta for private respondent.

SYNOPSIS
When properties of petitioner corporations worth P51,000,000.00 were levied upon
and sold at public auction for only P1,235,000.00, petitioners engaged the services of
Atty. Exequiel S. Consulta to represent them in three cases where they were billed
P100,000.00, P50,000.00 and P5,000,000.00 including subsequent appeals to the
Court of Appeals and the Supreme Court. Petitioners, however, paid Atty. Consulta
only a total of P40,000, prompting the latter to file suit for payment of the balance
thereof. The trial court modified the amount claimed and the Court of Appeals
affirmed the same. Here in issue is the reasonableness of the amount of the attorneys
fees awarded and the propriety of the inclusion of private petitioners.
Considering the factors in determining the amount of attorney's fees, both the Court of
Appeals and the trial court approved as reasonable the attorney's fees in three cases
Page 133 of 505

in the amounts of P50,000.00, P30,000.00 and P2,550,000.00 (5% of

P51,000,000.00). With respect to the liability of the individual petitioners, the mere fact
that they were stockholders and directors of corporate petitioners did not justify a
finding that they are liable for the obligations of the corporations. It is well-settled that
as a legal entity, a corporation has a personality separate and distinct from its
individual stockholders or members. They cannot be held guilty of fraud because they
refused to pay the attorneys fees demanded as the amount due was still in dispute at
the time.

DECISION

MENDOZA, J p:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals,
dated February 27, 1996, affirming the decision of the Regional Trial Court, Branch
94, Quezon City, dated March 16, 1993, which ordered petitioners to pay private
respondent, Atty. Exequiel S. Consulta, the total amount of P2,590,000.00, as
attorney's fees, and P21,856.40, as filing fees, in connection with three cases which
the latter, as attorney, handled for the former. LLphil
The facts are as follows:
Maritime Company of the Philippines was sued by Genstar Container Corporation
before the Regional Trial Court, Branch 31, Manila. On November 29, 1985, it was
ordered to pay Genstar Container Corporation the following amounts:
a. $469,860.35, or its equivalent in pesos at the current exchange
rate.
b. 25% of the total obligation, P2,000.00 as Acceptance Fee, and
P250.00 per appearance as Attorney's Fees. LexLib
c. Costs of suit.
As a result, properties of petitioners Compania Maritima, Inc., El Varadero de Manila,
and Mindanao Terminal and Brokerage Services at Sangley Point, Cavite, were levied
upon in execution. The properties, consisting of the tugboats Dadiangas, Marinero,
and Timonel, the floating crane Northwest Murphy Diesel Engine, and the motorized
launch Sea Otter, were worth P51,000,000.00 in sum. However, the same were sold

at public auction for only P1,235,000.00 to the highest bidder, a certain Rolando
Patriarca. 2
Petitioners Compania Maritima, Inc., El Varadero de Manila, and Mindanao Terminal
and Brokerage Services engaged the services of private respondent, Atty. Exequiel S.
Consulta, who represented them in the following cases: (1) Civil Case No. 85-30134,
entitled "Genstar Container Corporation v. Maritime Company of the Philippines,"
wherein petitioners' properties were levied upon although petitioners had not been
impleaded as defendants therein; (2) TBP Case No. 86-03662, entitled "Compania
Maritima, Inc., v. Ramon C. Enriquez," which was a criminal case for falsification and
for violation of R.A. No. 3019, otherwise known as the Anti-Graft and Corrupt
Practices Act, against Deputy Sheriff Enriquez before the Tanodbayan; and (3) Civil
Case No. 86-37196 entitled "Compania Maritima v. Genstar Container Corporation,"
an action for Injunction, Annulment of Execution Proceedings, and Damages. 3
The cases were eventually resolved in this wise: (1) in Civil Case No. 85-30134, the
trial court dismissed the third-party claim and motion for the issuance of a writ of
preliminary injunction filed by Atty. Consulta; (2) after Atty. Consulta filed the
complaint with the Tanodbayan in TBP Case No. 86-03662, petitioners transferred the
handling of the case to another lawyer; and (3) Civil Case No. 86-37196 was
eventually dismissed on motion of both parties, but only after the trial court's denial of
the motion to dismiss filed by Genstar Container Corporation was upheld on appeal
by both the Court of Appeals and the Supreme Court. 4
For his services in the three cases, Atty. Consulta billed petitioners as follows: (1)
P100,000.00 for Civil Case No. 85-30134; (2) P50,000.00 for TBP Case No. 8603662; and (3) P5,000,000.00 for Civil Case No. 86-37196, including the subsequent
appeals to the Court of Appeals and the Supreme Court. Petitioners did not pay the
amount demanded but only P30,000.00 for Civil Case No. 85-30134 and P10,000.00
for TBP Case No. 86-03662. 5
Because of the failure of corporate petitioners to pay the balance of his attorney's
fees, Atty. Consulta brought suit against petitioners in the Regional Trial Court, Branch
94, Quezon City. He sought the recovery of the following: (1) P70,000.00, as the
balance of the P100,000.00 attorney's fees billed for Civil Case No. 85-30134; (2)
P40,000.00, as the balance of the P50,000.00 attorney's fees for TBP Case No. 8603662, and (3) P5,000,000.00 as attorney's fees for Civil Case No. 86-37196,
including the subsequent appeals therefrom to the Court of Appeals and the Supreme
Court. He likewise asked for moral and exemplary damages, attorney's fees, and the
costs of suit. 6
Page 134 of 505

On March 16, 1993, the trial court rendered a decision which in part stated:
Considering all the circumstances as above set forth, this Court
believes that the amount equivalent to five percent (5%) of the
amount involved, or the amount of Two Million Five Hundred Fifty
Thousand Pesos (P2,550,000.00) would be reasonable attorney's
fees for the services rendered by the plaintiff in Civil Case No.
37196 and the two related proceedings in the Court of Appeals
and the Supreme Court.
As for the services rendered by the plaintiff in Civil Case No.
30134, for which he appears to have already been paid
P30,000.00, the Court believes that an additional amount of
P20,000.00 would be reasonable.
On plaintiff's demand of P40,000.00, in addition to the
P10,000.00 he had initially received for services rendered in the
Tanodbayan case No. 86-03662, the Court grants him an
additional P20,000.00.

On appeal, the Court of Appeals affirmed the decision of the trial court. Said the
appellate court:
In Civil Case No. 37196, where appellee rendered his legal
services, appellants' property worth Fifty One Million Pesos
(P51,000,000.00) was involved. Likewise, the aforementioned
case was not a simple action for collection of money, considering
that complex legal issues were raised therein which reached until
the Supreme Court. In the course of such protracted legal battle
to save the appellants' properties, the appellee prepared
numerous pleadings and motions, which were diligently and
effectively executed, as a result of which, the appellants'
properties were saved from execution and their oppositors were
forced to settle by way of a compromise agreement.
xxx xxx xxx

WHEREFORE, judgment is hereby rendered for the plaintiff and

orders the defendant to pay the plaintiff, jointly and severally,
damages as follows:

It is a well-settled rule that in the recovery of attorney's fees,

whether as a main action or as an incident of another action, the
determination of the reasonableness is within the prerogative of
the courts (Roldan vs. Court of Appeals, 218 SCRA
713; Radiowealth Finance Co., Inc. vs. International Corporate
Bank, 182 SCRA 862; Panay Electric vs. Court of Appeals, 119
SCRA 456). LibLex

a. For services rendered by plaintiff in Civil Case No. 37196 and

the related proceedings in the Court of Appeals and the Supreme
Court Two Million Five Hundred Fifty Thousand Pesos
(P2,550,000.00).

Based on the aforequoted ruling, We find that the court a quo did
not commit any reversible error in awarding attorney's fees
equivalent to five percent (5%) of the total value of properties
involved in Civil Case No. 37196.

b. For services rendered by plaintiff in Civil Case No. 30134

Twenty Thousand Pesos (P20,000.00).
c. For services rendered in the TBP Case No. 86-03662
Twenty Thousand Pesos (P20,000.00).
d. Filing fees in the amount of P21,856.40.
The defendants' counterclaim and plaintiff's counterclaim to
defendants counterclaim are both dismissed.
SO ORDERED.

Hence, this appeal. Petitioners raise the following issues:

a) Whether or not the amount of attorney's fees awarded to the
private respondent by the court a quo and affirmed by
the Honorable Court is reasonable.
b) Whether or not the doctrine of piercing the veil of corporate
fiction may be applied in the case at bar.
With respect to the first question, it is pertinent to note two concepts of attorney's fees
in this jurisdiction. In the ordinary sense, attorney's fees represent the reasonable
compensation paid to a lawyer by his client for the legal services he has rendered to
the latter. On the other hand, in its extraordinary concept, attorney's fees may be
Page 135 of 505

awarded by the court as indemnity for damages to be paid by the losing party to the
prevailing party. 7
The issue in this case concerns attorney's fees in the ordinary concept. Generally, the
amount of attorney's fees due is that stipulated in the retainer agreement which is
conclusive as to the amount of the lawyer's compensation. In the absence thereof, the
amount of attorney's fees is fixed on the basis of quantum meruit, i.e., the reasonable
worth of his services. 8 In determining the amount of attorney's fees, the following
factors are considered: (1) the time spent and extent of services rendered; (2) the
novelty and difficulty of the questions involved; (3) the importance of the subject
matter; (4) the skill demanded; (5) the probability of losing other employment as a
result of the acceptance of the proffered case; (6) the amount involved in the
controversy and the benefits resulting to the client; (7) the certainty of compensation;
(8) the character of employment; and (9) the professional standing of the lawyer. 9
Both the Court of Appeals and the trial court approved attorney's fees in the total
amounts of P50,000.00 and P30,000.00 for the services of Atty. Consulta in Civil
Case No. 85-30134 and TBP Case No. 86-03662, respectively. Based on the above
criteria, we think said amounts are reasonable, although the third-party claim and
motion for the issuance of a writ of preliminary injunction filed by Atty. Consulta in Civil
Case No. 85-30134 was dismissed by the trial court, while TBP Case No. 86-03662
was given by petitioners to another lawyer after Atty. Consulta had filed the complaint.
On the other hand, although the order of the trial court in Civil Case No. 86-37196
granting the motion to dismiss filed by both parties did not state the grounds therefor,
it is reasonable to infer that petitioners agreed thereto in consideration of some
advantage. Hence, the rulings of the Court of Appeals and the trial court that,
because of the complexity of the issues involved and the work done by counsel, the
amount of P2,550,000.00 was reasonable for Atty. Consulta's services.
In addition, the value of the properties involved was considerable. As already stated,
to satisfy the judgment in favor of Genstar Container Corporation in Civil Case No. 8530134, properties of petitioners worth P51,000,000.00 were sold at public auction.
Only P1,235,000.00 was realized from the sale and petitioners were in danger of
losing their properties. As the appellate court pointed out, Atty. Consulta rendered
professional services not only in the trial court but in the Court of Appeals and in this
Court. There is no question that through his efforts, properties owned by petitioners
were saved from execution.
It is settled that great weight, and even finality, is given to the factual conclusions of
the Court of Appeals which affirm those of the trial courts. 10 Only where it is shown
that such findings are whimsical, capricious, and arbitrary can they be overturned. In

the present case, the Court of Appeals affirmed the factual conclusions of the trial
court that: (1) the issues in Civil Case No. 86-03662, including the appeals taken
therefrom to the Court of Appeals and the Supreme Court, were quite complex; (2)
the pleadings filed by Atty. Consulta were well-researched; and (3) as a result of Atty.
Consulta's efforts, the adverse parties were induced to agree to the dismissal of the
case.
Petitioners contend, however, that: (1) the said cases merely involved simple issues;
(2) the pleadings filed by Atty. Consulta did not exhibit an extraordinary level of
competence, effort, and skill; and (3) they did not benefit from the efforts of Atty.
Consulta. These allegations have not been proven. Petitioners have not shown that
the factual findings of both the Court of Appeals and the trial court are contrary to the
evidence. Nor have they shown that they did not benefit from their representation by
Atty. Consulta.
With respect to the liability of individual petitioners Carlos P. Fernandez, Vicente T.
Fernandez, Luis T. Fernandez, and Ramon B. Fernandez, we hold that the mere fact
that they were stockholders and directors of corporate petitioners does not justify a
finding that they are liable for the obligations of the corporations.
It is well-settled that as a legal entity, a corporation has a personality separate and
distinct from its individual stockholders or members. The fiction of corporate entity will
be set aside and the individual stockholders will be held liable for its obligation only if
it is shown that it is being used for fraudulent, unfair, or illegal purposes. 11 In this
case, the Court of Appeals held that individual petitioners were guilty of fraud, based
on its finding that they refused to pay the attorney's fees demanded by Atty. Consulta.
It should be noted, however, that although petitioners Compania Maritima, Inc., El
Varadero de Manila, and Mindanao Terminal and Brokerage Services have an
obligation to pay Atty. Consulta for his attorney's fees, the amount thereof was still in
dispute. It was therefore improper for the Court of Appeals to conclude that individual
petitioners were guilty of fraud simply because corporate petitioners had refused to
make the payments demanded. The fact remains that at the time of demand, the
amount due to Atty. Consulta had not been finally determined.
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals, dated
February 27, 1996, is AFFIRMED with the modification that individual petitioners
Carlos P. Fernandez, Vicente T. Fernandez, Luis T. Fernandez, and Ramon B.
Fernandez are absolved from personal liability for attorney's fees to Atty. Exequiel S.
Consulta. LLjur
SO ORDERED.
Page 136 of 505

Bellosillo, Quisumbing, Buena and De Leon, Jr., JJ., concur.

||| (Compania Maritima, Inc. v. Court of Appeals, G.R. No. 128452, [November 16,
1999], 376 PHIL 278-287)

CHAPTER 3

SECOND DIVISION
[G.R. No. 126780. February 17, 2005.]
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA
PAYAM, petitioners, vs. THE COURT OF APPEALS and
MAURICE McLOUGHLIN,respondents.

DECISION

TINGA, J p:
Page 137 of 505

The primary question of interest before this Court is the only legal issue in the case: It
is whether a hotel may evade liability for the loss of items left with it for safekeeping by
its guests, by having these guests execute written waivers holding the establishment
or its employees free from blame for such loss in light of Article 2003 of the Civil Code
which voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision 1 dated 19 October
1995 of the Court of Appeals which affirmed the Decision 2 dated 16 December 1991
of the Regional Trial Court (RTC), Branch 13, of Manila, finding YHT Realty
Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and Anicia Payam
(Payam) jointly and solidarily liable for damages in an action filed by Maurice
McLoughlin (McLoughlin) for the loss of his American and Australian dollars deposited
in the safety deposit box of Tropicana Copacabana Apartment Hotel, owned and
operated by YHT Realty Corporation.
The factual backdrop of the case follow. IHcSCA
Private respondent McLoughlin, an Australian businessman-philanthropist, used to
stay at Sheraton Hotel during his trips to the Philippines prior to 1984 when he met
Tan. Tan befriended McLoughlin by showing him around, introducing him to important
people, accompanying him in visiting impoverished street children and assisting him
in buying gifts for the children and in distributing the same to charitable institutions for
poor children. Tan convinced McLoughlin to transfer from Sheraton Hotel to Tropicana
where Lainez, Payam and Danilo Lopez were employed. Lopez served as manager of
the hotel while Lainez and Payam had custody of the keys for the safety deposit boxes
of Tropicana. Tan took care of McLoughlin's booking at the Tropicana where he
started staying during his trips to the Philippines from December 1984 to September
1987. 3
On 30 October 1987, McLoughlin arrived from Australia and registered with
Tropicana. He rented a safety deposit box as it was his practice to rent a safety
deposit box every time he registered at Tropicana in previous trips. As a tourist,
McLoughlin was aware of the procedure observed by Tropicana relative to its safety
deposit boxes. The safety deposit box could only be opened through the use of two
keys, one of which is given to the registered guest, and the other remaining in the
possession of the management of the hotel. When a registered guest wished to open
his safety deposit box, he alone could personally request the management who then
would assign one of its employees to accompany the guest and assist him in opening
the safety deposit box with the two keys. 4

McLoughlin allegedly placed the following in his safety deposit box: Fifteen Thousand
US Dollars (US$15,000.00) which he placed in two envelopes, one envelope
containing Ten Thousand US Dollars (US$10,000.00) and the other envelope Five
Thousand US Dollars (US$5,000.00); Ten Thousand Australian Dollars
(AUS$10,000.00) which he also placed in another envelope; two (2) other envelopes
containing letters and credit cards; two (2) bankbooks; and a checkbook, arranged
side by side inside the safety deposit box. 5
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin
opened his safety deposit box with his key and with the key of the management and
took therefrom the envelope containing Five Thousand US Dollars (US$5,000.00), the
envelope containing Ten Thousand Australian Dollars (AUS$10,000.00), his
passports and his credit cards. 6 McLoughlin left the other items in the box as he did
not check out of his room at the Tropicana during his short visit to Hongkong. When
he arrived in Hongkong, he opened the envelope which contained Five Thousand US
Dollars (US$5,000.00) and discovered upon counting that only Three Thousand US
Dollars (US$3,000.00) were enclosed therein. 7 Since he had no idea whether
somebody else had tampered with his safety deposit box, he thought that it was just a
result of bad accounting since he did not spend anything from that envelope. 8
After returning to Manila, he checked out of Tropicana on 18 December 1987 and left
for Australia. When he arrived in Australia, he discovered that the envelope with Ten
Thousand US Dollars (US$10,000.00) was short of Five Thousand US Dollars
(US$5,000). He also noticed that the jewelry which he bought in Hongkong and stored
in the safety deposit box upon his return to Tropicana was likewise missing, except for
a diamond bracelet. 9
When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez if
some money and/or jewelry which he had lost were found and returned to her or to
the management. However, Lainez told him that no one in the hotel found such things
and none were turned over to the management. He again registered at Tropicana and
rented a safety deposit box. He placed therein one (1) envelope containing Fifteen
Thousand US Dollars (US$15,000.00), another envelope containing Ten Thousand
Australian Dollars (AUS$10,000.00) and other envelopes containing his traveling
papers/documents. On 16 April 1988, McLoughlin requested Lainez and Payam to
open his safety deposit box. He noticed that in the envelope containing Fifteen
Thousand US Dollars (US$15,000.00), Two Thousand US Dollars (US$2,000.00)
were missing and in the envelope previously containing Ten Thousand Australian
Dollars (AUS$10,000.00), Four Thousand Five Hundred Australian Dollars
(AUS$4,500.00) were missing. 10
Page 138 of 505

When McLoughlin discovered the loss, he immediately confronted Lainez and Payam
who admitted that Tan opened the safety deposit box with the key assigned to
him. 11 McLoughlin went up to his room where Tan was staying and confronted her.
Tan admitted that she had stolen McLoughlin's key and was able to open the safety
deposit box with the assistance of Lopez, Payam and Lainez. 12 Lopez also told
McLoughlin that Tan stole the key assigned to McLoughlin while the latter was
asleep. 13
McLoughlin requested the management for an investigation of the incident. Lopez got
in touch with Tan and arranged for a meeting with the police and McLoughlin. When
the police did not arrive, Lopez and Tan went to the room of McLoughlin at Tropicana
and thereat, Lopez wrote on a piece of paper a promissory note dated 21 April 1988.
The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of
AUS$4,000.00 and US$2,000.00 or its equivalent in Philippine
currency on or before May 5, 1988. 14
Lopez requested Tan to sign the promissory note which the latter did and Lopez also
signed as a witness. Despite the execution of promissory note by Tan, McLoughlin
insisted that it must be the hotel who must assume responsibility for the loss he
suffered. However, Lopez refused to accept the responsibility relying on the conditions
for renting the safety deposit box entitled "Undertaking For the Use Of Safety Deposit
Box," 15 specifically paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA
APARTMENT HOTEL from any liability arising from any loss in
the contents and/or use of the said deposit box for any cause
whatsoever, including but not limited to the presentation or use
thereof by any other person should the key be lost;
xxx xxx xxx
4. To return the key and execute the RELEASE in favor of
TROPICANA APARTMENT HOTEL upon giving up the use of the
box. 16
On 17 May 1988, McLoughlin went back to Australia and he consulted his lawyers as
to the validity of the abovementioned stipulations. They opined that the stipulations
are void for being violative of universal hotel practices and customs. His lawyers
prepared a letter dated 30 May 1988 which was signed by McLoughlin and sent to
President Corazon Aquino. 17 The Office of the President referred the letter to the

Department of Justice (DOJ) which forwarded the same to the Western Police District
(WPD). 18
After receiving a copy of the indorsement in Australia, McLoughlin came to the
Philippines and registered again as a hotel guest of Tropicana. McLoughlin went to
Malacaang to follow up on his letter but he was instructed to go to the DOJ. The DOJ
directed him to proceed to the WPD for documentation. But McLoughlin went back to
Australia as he had an urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to his business and came
back to the Philippines to follow up on his letter to the President but he failed to obtain
any concrete assistance. 19
McLoughlin left again for Australia and upon his return to the Philippines on 25 August
1989 to pursue his claims against petitioners, the WPD conducted an investigation
which resulted in the preparation of an affidavit which was forwarded to the Manila
City Fiscal's Office. Said affidavit became the basis of preliminary investigation.
However, McLoughlin left again for Australia without receiving the notice of the
hearing on 24 November 1989. Thus, the case at the Fiscal's Office was dismissed for
failure to prosecute. McLoughlin requested the reinstatement of the criminal charge
for theft. In the meantime, McLoughlin and his lawyers wrote letters of demand to
those having responsibility to pay the damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at Malate,
Manila. Meetings were held between McLoughlin and his lawyer which resulted to the
filing of a complaint for damages on 3 December 1990 against YHT Realty
Corporation, Lopez, Lainez, Payam and Tan (defendants) for the loss of McLoughlin's
money which was discovered on 16 April 1988. After filing the complaint, McLoughlin
left again for Australia to attend to an urgent business matter. Tan and Lopez,
however, were not served with summons, and trial proceeded with only Lainez,
Payam and YHT Realty Corporation as defendants. jur2005cd

After defendants had filed their Pre-Trial Brief admitting that they had previously
allowed and assisted Tan to open the safety deposit box, McLoughlin filed
anAmended/Supplemental Complaint 20 dated 10 June 1991 which included another
incident of loss of money and jewelry in the safety deposit box rented by McLoughlin
in the same hotel which took place prior to 16 April 1988. 21 The trial court admitted
the Amended/Supplemental Complaint. IcDESA

Page 139 of 505

During the trial of the case, McLoughlin had been in and out of the country to attend
to urgent business in Australia, and while staying in the Philippines to attend the
hearing, he incurred expenses for hotel bills, airfare and other transportation
expenses, long distance calls to Australia, Meralco power expenses, and expenses
for food and maintenance, among others. 22
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the
dispositive portion of which reads:
WHEREFORE, above premises considered, judgment is hereby
rendered by this Court in favor of plaintiff and against the
defendants, to wit:
1. Ordering defendants, jointly and severally, to
pay plaintiff the sum of US$11,400.00 or
its equivalent in Philippine Currency of
P342,000.00, more or less, and the sum
of AUS$4,500.00 or its equivalent in
Philippine Currency of P99,000.00, or a
total of P441,000.00, more or less, with
12% interest from April 16, 1988 until
said amount has been paid to plaintiff
(Item 1, Exhibit CC);
2. Ordering defendants, jointly and severally to
pay plaintiff the sum of P3,674,238.00
as actual and consequential damages
arising from the loss of his Australian
and American dollars and jewelries
complained against and in prosecuting
his claim and rights administratively and
judicially (Items II, III, IV, V, VI, VII, VIII,
and IX, Exh. "CC");
3. Ordering defendants, jointly and severally, to
pay plaintiff the sum of P500,000.00 as
moral damages (Item X, Exh. "CC");
4. Ordering defendants, jointly and severally, to
pay plaintiff the sum of P350,000.00 as

exemplary damages (Item XI, Exh.

"CC");
5. And ordering defendants, jointly and severally,
to pay litigation expenses in the sum of
P200,000.00 (Item XII, Exh. "CC");
6. Ordering defendants, jointly and severally, to
pay plaintiff the sum of P200,000.00 as
attorney's fees, and a fee of P3,000.00
for every appearance; and
7. Plus costs of suit.
SO ORDERED. 23
The trial court found that McLoughlin's allegations as to the fact of loss and as to the
amount of money he lost were sufficiently shown by his direct and straightforward
manner of testifying in court and found him to be credible and worthy of belief as it
was established that McLoughlin's money, kept in Tropicana's safety deposit box, was
taken by Tan without McLoughlin's consent. The taking was effected through the use
of the master key which was in the possession of the management. Payam and
Lainez allowed Tan to use the master key without authority from McLoughlin. The trial
court added that if McLoughlin had not lost his dollars, he would not have gone
through the trouble and personal inconvenience of seeking aid and assistance from
the Office of the President, DOJ, police authorities and the City Fiscal's Office in his
desire to recover his losses from the hotel management and Tan. 24
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry worth
approximately One Thousand Two Hundred US Dollars (US$1,200.00) which
allegedly occurred during his stay at Tropicana previous to 4 April 1988, no claim was
made by McLoughlin for such losses in his complaint dated 21 November 1990
because he was not sure how they were lost and who the responsible persons were.
But considering the admission of the defendants in their pre-trial brief that on three
previous occasions they allowed Tan to open the box, the trial court opined that it was
logical and reasonable to presume that his personal assets consisting of Seven
Thousand US Dollars (US$7,000.00) and jewelry were taken by Tan from the safety
deposit box without McLoughlin's consent through the cooperation of Payam and
Lainez. 25

Page 140 of 505

The trial court also found that defendants acted with gross negligence in the
performance and exercise of their duties and obligations as innkeepers and were
therefore liable to answer for the losses incurred by McLoughlin. 26
Moreover, the trial court ruled that paragraphs (2) and (4) of the "Undertaking For The
Use Of Safety Deposit Box" are not valid for being contrary to the express mandate of
Article 2003 of the New Civil Code and against public policy. 27 Thus, there being
fraud or wanton conduct on the part of defendants, they should be responsible for all
damages which may be attributed to the non-performance of their contractual
obligations. 28
The Court of Appeals affirmed the disquisitions made by the lower court except as to
the amount of damages awarded. The decretal text of the appellate court's decision
reads:
THE FOREGOING CONSIDERED, the appealed Decision is
hereby AFFIRMED but modified as follows:
The appellants are directed jointly and severally to pay the
plaintiff/appellee the following amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00
and AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares from
Sidney [sic] to Manila and back for a total of eleven (11)
trips;
3) One-half of P336,207.05 or P168,103.52
payment to Tropicana Apartment Hotel;

representing

4) One-half of P152,683.57 or P76,341.785

payment to Echelon Tower;

representing

5) One-half of P179,863.20 or P89,931.60 for the taxi . . .

transportation from the residence to Sidney [sic] Airport
and from MIA to the hotel here in Manila, for the eleven
(11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco
power expenses;
7) One-half of P356,400.00 or P178,000.00
expenses for food and maintenance;

representing

8) P50,000.00 for moral damages;

9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorney's fees.
With costs.
SO ORDERED. 29
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in this
appeal by certiorari. cACEHI
Petitioners submit for resolution by this Court the following issues: (a) whether the
appellate court's conclusion on the alleged prior existence and subsequent loss of the
subject money and jewelry is supported by the evidence on record; (b) whether the
finding of gross negligence on the part of petitioners in the performance of their duties
as innkeepers is supported by the evidence on record; (c) whether the "Undertaking
For The Use of Safety Deposit Box" admittedly executed by private respondent is null
and void; and (d) whether the damages awarded to private respondent, as well as the
amounts thereof, are proper under the circumstances. 30
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions of law
and any peripheral factual question addressed to this Court is beyond the bounds of
this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the fact of prior
existence of the dollars and the jewelry which had been lost while deposited in the
safety deposit boxes of Tropicana, the basis of the trial court and the appellate court
being the sole testimony of McLoughlin as to the contents thereof. Likewise,
petitioners dispute the finding of gross negligence on their part as not supported by
the evidence on record.
We are not persuaded. We adhere to the findings of the trial court as affirmed by the
appellate court that the fact of loss was established by the credible testimony in open
court by McLoughlin. Such findings are factual and therefore beyond the ambit of the
present petition.
The trial court had the occasion to observe the demeanor of McLoughlin while
testifying which reflected the veracity of the facts testified to by him. On this score, we
give full credence to the appreciation of testimonial evidence by the trial court
especially if what is at issue is the credibility of the witness. The oft-repeated principle
Page 141 of 505

is that where the credibility of a witness is an issue, the established rule is that great
respect is accorded to the evaluation of the credibility of witnesses by the trial
court.31 The trial court is in the best position to assess the credibility of witnesses and
their testimonies because of its unique opportunity to observe the witnesses firsthand
and note their demeanor, conduct and attitude under grilling examination. 32
We are also not impressed by petitioners' argument that the finding of gross
negligence by the lower court as affirmed by the appellate court is not supported by
evidence. The evidence reveals that two keys are required to open the safety deposit
boxes of Tropicana. One key is assigned to the guest while the other remains in the
possession of the management. If the guest desires to open his safety deposit box, he
must request the management for the other key to open the same. In other words, the
guest alone cannot open the safety deposit box without the assistance of the
management or its employees. With more reason that access to the safety deposit
box should be denied if the one requesting for the opening of the safety deposit box is
a stranger. Thus, in case of loss of any item deposited in the safety deposit box, it is
inevitable to conclude that the management had at least a hand in the consummation
of the taking, unless the reason for the loss is force majeure.
Noteworthy is the fact that Payam and Lainez, who were employees of Tropicana, had
custody of the master key of the management when the loss took place. In fact, they
even admitted that they assisted Tan on three separate occasions in opening
McLoughlin's safety deposit box. 33 This only proves that Tropicana had prior
knowledge that a person aside from the registered guest had access to the safety
deposit box. Yet the management failed to notify McLoughlin of the incident and
waited for him to discover the taking before it disclosed the matter to him. Therefore,
Tropicana should be held responsible for the damage suffered by McLoughlin by
reason of the negligence of its employees.

The management should have guarded against the occurrence of this incident
considering that Payam admitted in open court that she assisted Tan three times in
opening the safety deposit box of McLoughlin at around 6:30 A.M. to 7:30 A.M. while
the latter was still asleep. 34 In light of the circumstances surrounding this case, it is
undeniable that without the acquiescence of the employees of Tropicana to the
opening of the safety deposit box, the loss of McLoughlin's money could and should
have been avoided.
The management contends, however, that McLoughlin, by his act, made its
employees believe that Tan was his spouse for she was always with him most of the

time. The evidence on record, however, is bereft of any showing that McLoughlin
introduced Tan to the management as his wife. Such an inference from the act of
McLoughlin will not exculpate the petitioners from liability in the absence of any
showing that he made the management believe that Tan was his wife or was duly
authorized to have access to the safety deposit box. Mere close companionship and
intimacy are not enough to warrant such conclusion considering that what is involved
in the instant case is the very safety of McLoughlin's deposit. If only petitioners
exercised due diligence in taking care of McLoughlin's safety deposit box, they should
have confronted him as to his relationship with Tan considering that the latter had
been observed opening McLoughlin's safety deposit box a number of times at the
early hours of the morning. Tan's acts should have prompted the management to
investigate her relationship with McLoughlin. Then, petitioners would have exercised
due diligence required of them. Failure to do so warrants the conclusion that the
management had been remiss in complying with the obligations imposed upon hotelkeepers under the law. TEDHaA
Under Article 1170 of the New Civil Code, those who, in the performance of their
obligations, are guilty of negligence, are liable for damages. As to who shall bear the
burden of paying damages, Article 2180, paragraph (4) of the same Code provides
that the owners and managers of an establishment or enterprise are likewise
responsible for damages caused by their employees in the service of the branches in
which the latter are employed or on the occasion of their functions. Also, this Court
has ruled that if an employee is found negligent, it is presumed that the employer was
negligent in selecting and/or supervising him for it is hard for the victim to prove the
negligence of such employer. 35 Thus, given the fact that the loss of McLoughlin's
money was consummated through the negligence of Tropicana's employees in
allowing Tan to open the safety deposit box without the guest's consent, both the
assisting employees and YHT Realty Corporation itself, as owner and operator of
Tropicana, should be held solidarily liable pursuant to Article 2193. 36
The issue of whether the "Undertaking For The Use of Safety Deposit Box" executed
by McLoughlin is tainted with nullity presents a legal question appropriate for
resolution in this petition. Notably, both the trial court and the appellate court found the
same to be null and void. We find no reason to reverse their common conclusion.
Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from
responsibility by posting notices to the effect that he is not liable
for the articles brought by the guest. Any stipulation between the
hotel-keeper and the guest whereby the responsibility of the
Page 142 of 505

former as set forth in Articles 1998 to 2001 37 is suppressed or

diminished shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public policy
precisely to apply to situations such as that presented in this case. The hotel business
like the common carrier's business is imbued with public interest. Catering to the
public, hotelkeepers are bound to provide not only lodging for hotel guests and
security to their persons and belongings. The twin duty constitutes the essence of the
business. The law in turn does not allow such duty to the public to be negated or
diluted by any contrary stipulation in so-called "undertakings" that ordinarily appear in
prepared forms imposed by hotel keepers on guests for their signature.
In an early case, 38 the Court of Appeals through its then Presiding Justice (later
Associate Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers or
innkeeper liable for the effects of their guests, it is not necessary that they be actually
delivered to the innkeepers or their employees. It is enough that such effects are
within the hotel or inn. 39 With greater reason should the liability of the hotelkeeper be
enforced when the missing items are taken without the guest's knowledge and
consent from a safety deposit box provided by the hotel itself, as in this case.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of the
New Civil Code for they allow Tropicana to be released from liability arising from any
loss in the contents and/or use of the safety deposit box for any cause
whatsoever. 40 Evidently, the undertaking was intended to bar any claim against
Tropicana for any loss of the contents of the safety deposit box whether or not
negligence was incurred by Tropicana or its employees. The New Civil Code is explicit
that the responsibility of the hotel-keeper shall extend to loss of, or injury to, the
personal property of the guests even if caused by servants or employees of the
keepers of hotels or inns as well as by strangers, except as it may proceed from
any force majeure. 41 It is the loss through force majeure that may spare the hotelkeeper from liability. In the case at bar, there is no showing that the act of the thief or
robber was done with the use of arms or through an irresistible force to qualify the
same asforce majeure. 42
Petitioners likewise anchor their defense on Article 2002 43 which exempts the hotelkeeper from liability if the loss is due to the acts of his guest, his family, or visitors.
Even a cursory reading of the provision would lead us to reject petitioners' contention.
The justification they raise would render nugatory the public interest sought to be
protected by the provision. What if the negligence of the employer or its employees
facilitated the consummation of a crime committed by the registered guest's relatives
or visitor? Should the law exculpate the hotel from liability since the loss was due to

the act of the visitor of the registered guest of the hotel? Hence, this provision
presupposes that the hotel-keeper is not guilty of concurrent negligence or has not
contributed in any degree to the occurrence of the loss. A depositary is not
responsible for the loss of goods by theft, unless his actionable negligence
contributes to the loss. 44
In the case at bar, the responsibility of securing the safety deposit box was shared not
only by the guest himself but also by the management since two keys are necessary
to open the safety deposit box. Without the assistance of hotel employees, the loss
would not have occurred. Thus, Tropicana was guilty of concurrent negligence in
allowing Tan, who was not the registered guest, to open the safety deposit box of
McLoughlin, even assuming that the latter was also guilty of negligence in allowing
another person to use his key. To rule otherwise would result in undermining the
safety of the safety deposit boxes in hotels for the management will be given
imprimatur to allow any person, under the pretense of being a family member or a
visitor of the guest, to have access to the safety deposit box without fear of any liability
that will attach thereafter in case such person turns out to be a complete stranger.
This will allow the hotel to evade responsibility for any liability incurred by its
employees in conspiracy with the guest's relatives and visitors. DaECST
Petitioners contend that McLoughlin's case was mounted on the theory of contract,
but the trial court and the appellate court upheld the grant of the claims of the latter on
the basis of tort. 45 There is nothing anomalous in how the lower courts decided the
controversy for this Court has pronounced a jurisprudential rule that tort liability can
exist even if there are already contractual relations. The act that breaks the contract
may also be tort. 46
As to damages awarded to McLoughlin, we see no reason to modify the amounts
awarded by the appellate court for the same were based on facts and law. It is within
the province of lower courts to settle factual issues such as the proper amount of
damages awarded and such finding is binding upon this Court especially if sufficiently
proven by evidence and not unconscionable or excessive. Thus, the appellate court
correctly awarded McLoughlin Two Thousand US Dollars (US$2,000.00) and Four
Thousand Five Hundred Australian dollars (AUS$4,500.00) or their peso equivalent at
the time of payment, 47 being the amounts duly proven by evidence. 48 The alleged
loss that took place prior to 16 April 1988 was not considered since the amounts
alleged to have been taken were not sufficiently established by evidence. The
appellate court also correctly awarded the sum of P308,880.80, representing the peso
value for the air fares from Sydney to Manila and back for a total of eleven (11)
trips; 49 one-half of P336,207.05 or P168,103.52 representing payment to
Tropicana; 50 one-half of P152,683.57 or P76,341.785 representing payment to
Page 143 of 505

Echelon Tower; 51 one-half of P179,863.20 or P89,931.60 for the taxi or

transportation expenses from McLoughlin's residence to Sydney Airport and from MIA
to the hotel here in Manila, for the eleven (11) trips; 52 one-half of P7,801.94 or
P3,900.97 representing Meralco power expenses; 53 one-half of P356,400.00 or
P178,000.00 representing expenses for food and maintenance. 54

(7) One-half of P356,400.00 or P178,200.00

expenses for food and maintenance;

The amount of P50,000.00 for moral damages is reasonable. Although trial courts are
given discretion to determine the amount of moral damages, the appellate court may
modify or change the amount awarded when it is palpably and scandalously
excessive. Moral damages are not intended to enrich a complainant at the expense of
a defendant. They are awarded only to enable the injured party to obtain means,
diversion or amusements that will serve to alleviate the moral suffering he has
undergone, by reason of defendants' culpable action. 55

(10) P200,000 representing attorney's fees.

The awards of P10,000.00 as exemplary damages and P200,000.00 representing

attorney's fees are likewise sustained.

(8) P50,000.00 for moral damages;

(9) P10,000.00 as exemplary damages; and

With costs.
SO ORDERED.
Puno, Callejo, Sr. and Chico-Nazario, JJ., concur.
Austria-Martinez, J., took no part.
||| (YHT Realty Corp. v. Court of Appeals, G.R. No. 126780, [February 17, 2005], 492
PHIL 29-51)

WHEREFORE, foregoing premises considered, the Decision of the Court of Appeals

dated 19 October 1995 is hereby AFFIRMED. Petitioners are directed, jointly and
severally, to pay private respondent the following amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at
the time of payment;
(2) P308,880.80, representing the peso value for the air fares
from Sydney to Manila and back for a total of eleven
(11) trips;

SECOND DIVISION
[G.R. No. 179419. January 12, 2011.]
DURBAN APARTMENTS CORPORATION, doing business
under the name and style of City Garden Hotel, petitioner, vs.
PIONEER
INSURANCE
AND
SURETY
CORPORATION, respondent.

(3) One-half of P336,207.05 or P168,103.52 representing

payment to Tropicana Copacabana Apartment Hotel;
(4) One-half of P152,683.57 or P76,341.785
payment to Echelon Tower;

representing

DECISION

representing

(5) One-half of P179,863.20 or P89,931.60 for the taxi or

transportation expense from McLoughlin's residence to
Sydney Airport and from MIA to the hotel here in Manila,
for the eleven (11) trips;
(6) One-half of P7,801.94 or P3,900.97 representing Meralco
power expenses;

NACHURA, J p:
For review is the Decision 1 of the Court of Appeals (CA) in CA-G.R. CV No. 86869,
which affirmed the decision 2 of the Regional Trial Court (RTC), Branch 66, Makati
City, in Civil Case No. 03-857, holding petitioner Durban Apartments Corporation
solely liable to respondent Pioneer Insurance and Surety Corporation for the loss of
Jeffrey See's (See's) vehicle.
Page 144 of 505

The facts, as found by the CA, are simple.

On July 22, 2003, [respondent] Pioneer Insurance and Surety
Corporation . . ., by right of subrogation, filed [with the RTC of
Makati City] a Complaint for Recovery of Damages against
[petitioner] Durban Apartments Corporation, doing business
under the name and style of City Garden Hotel, and [defendant
before the RTC] Vicente Justimbaste . . . . [Respondent averred]
that: it is the insurer for loss and damage of Jeffrey S. See's [the
insured's] 2001 Suzuki Grand Vitara . . . with Plate No. XBH-510
under Policy No. MC-CV-HO-01-0003846-00-D in the amount of
P1,175,000.00; on April 30, 2002, See arrived and checked in at
the City Garden Hotel in Makati corner Kalayaan Avenues, Makati
City before midnight, and its parking attendant, defendant . . .
Justimbaste got the key to said Vitara from See to park it[. O]n
May 1, 2002, at about 1:00 o'clock in the morning, See was
awakened in his room by [a] telephone call from the Hotel Chief
Security Officer who informed him that his Vitara was carnapped
while it was parked unattended at the parking area of Equitable
PCI Bank along Makati Avenue between the hours of 12:00 [a.m.]
and 1:00 [a.m.]; See went to see the Hotel Chief Security Officer,
thereafter reported the incident to the Operations Division of the
Makati City Police Anti-Carnapping Unit, and a flash alarm was
issued; the Makati City Police Anti-Carnapping Unit investigated
Hotel Security Officer, Ernesto T. Horlador, Jr. . . . and defendant .
. . Justimbaste; See gave hisSinumpaang Salaysay to the police
investigator, and filed a Complaint Sheet with the PNP Traffic
Management Group in Camp Crame, Quezon City; the Vitara has
not yet been recovered since July 23, 2002 as evidenced by a
Certification of Non-Recovery issued by the PNP TMG; it paid the
P1,163,250.00 money claim of See and mortgagee ABN AMRO
Savings Bank, Inc. as indemnity for the loss of the Vitara; the
Vitara was lost due to the negligence of [petitioner] Durban
Apartments and [defendant] Justimbaste because it was
discovered during the investigation that this was the second time
that a similar incident of carnapping happened in the valet
parking service of [petitioner] Durban Apartments and no
necessary precautions were taken to prevent its repetition;
[petitioner] Durban Apartments was wanting in due diligence in
the selection and supervision of its employees particularly

defendant . . . Justimbaste; and defendant . . . Justimbaste and

[petitioner] Durban Apartments failed and refused to pay its valid,
just, and lawful claim despite written demands.
Upon service of Summons, [petitioner] Durban Apartments and
[defendant] Justimbaste filed their Answer with Compulsory
Counterclaim alleging that: See did not check in at its hotel, on
the contrary, he was a guest of a certain Ching Montero . . .;
defendant . . . Justimbaste did not get the ignition key of See's
Vitara, on the contrary, it was See who requested a parking
attendant to park the Vitara at any available parking space, and it
was parked at the Equitable Bank parking area, which was within
See's view, while he and Montero were waiting in front of the
hotel; they made a written denial of the demand of [respondent]
Pioneer Insurance for want of legal basis; valet parking services
are provided by the hotel for the convenience of its customers
looking for a parking space near the hotel premises; it is a special
privilege that it gave to Montero and See; it does not include
responsibility for any losses or damages to motor vehicles and its
accessories in the parking area; and the same holds true even if
it was See himself who parked his Vitara within the premises of
the hotel as evidenced by the valet parking customer's claim stub
issued to him; the carnapper was able to open the Vitara without
using the key given earlier to the parking attendant and
subsequently turned over to See after the Vitara was stolen;
defendant . . . Justimbaste saw the Vitara speeding away from
the place where it was parked; he tried to run after it, and blocked
its possible path but to no avail; and See was duly and
immediately informed of the carnapping of his Vitara; the matter
was reported to the nearest police precinct; and defendant . . .
Justimbaste, and Horlador submitted themselves to police
investigation. SATDHE
During the pre-trial conference on November 28, 2003, counsel
for [respondent] Pioneer Insurance was present. Atty. Monina Lee
. . ., counsel of record of [petitioner] Durban Apartments and
Justimbaste was absent, instead, a certain Atty. Nestor Mejia
appeared for [petitioner] Durban Apartments and Justimbaste,
but did not file their pre-trial brief.
Page 145 of 505

On November 5, 2004, the lower court granted the motion of

[respondent] Pioneer Insurance, despite the opposition of
[petitioner] Durban Apartments and Justimbaste, and allowed
[respondent] Pioneer Insurance to present its evidence ex
parte before the Branch Clerk of Court.
See testified that: on April 30, 2002, at about 11:30 in the
evening, he drove his Vitara and stopped in front of City Garden
Hotel in Makati Avenue, Makati City; a parking attendant, whom
he had later known to be defendant . . . Justimbaste, approached
and asked for his ignition key, told him that the latter would park
the Vitara for him in front of the hotel, and issued him a valet
parking customer's claim stub; he and Montero, thereafter,
checked in at the said hotel; on May 1, 2002, at around 1:00 in
the morning, the Hotel Security Officer whom he later knew to be
Horlador called his attention to the fact that his Vitara was
carnapped while it was parked at the parking lot of Equitable PCI
Bank which is in front of the hotel; his Vitara was insured with
[respondent] Pioneer Insurance; he together with Horlador and
defendant . . . Justimbaste went to Precinct 19 of the Makati City
Police to report the carnapping incident, and a police officer came
accompanied them to the Anti-Carnapping Unit of the said station
for investigation, taking of their sworn statements, and flashing of
a voice alarm; he likewise reported the said incident in PNP TMG
in Camp Crame where another alarm was issued; he filed his
claim with [respondent] Pioneer Insurance, and a representative
of the latter, who is also an adjuster of Vesper Insurance
Adjusters-Appraisers [Vesper], investigated the incident; and
[respondent] Pioneer Insurance required him to sign a Release of
Claim and Subrogation Receipt, and finally paid him the sum of
P1,163,250.00 for his claim.
Ricardo F. Red testified that: he is a claims evaluator of
[petitioner] Pioneer Insurance tasked, among others, with the
receipt of claims and documents from the insured, investigation of
the said claim, inspection of damages, taking of pictures of
insured unit, and monitoring of the processing of the claim until its
payment; he monitored the processing of See's claim when the
latter reported the incident to [respondent] Pioneer Insurance;
[respondent] Pioneer Insurance assigned the case to Vesper who

verified See's report, conducted an investigation, obtained the

necessary documents for the processing of the claim, and
tendered a settlement check to See; they evaluated the case
upon receipt of the subrogation documents and the adjuster's
report, and eventually recommended for its settlement for the
sum of P1,163,250.00 which was accepted by See; the matter
was referred and forwarded to their counsel, R.B. Sarajan &
Associates, who prepared and sent demand letters to [petitioner]
Durban Apartments and [defendant] Justimbaste, who did not
pay [respondent] Pioneer Insurance notwithstanding their receipt
of the demand letters; and the services of R.B. Sarajan &
Associates were engaged, for P100,000.00 as attorney's fees
plus P3,000.00 per court appearance, to prosecute the claims of
[respondent] Pioneer Insurance against [petitioner] Durban
Apartments and Justimbaste before the lower court.
Ferdinand Cacnio testified that: he is an adjuster of Vesper;
[respondent] Pioneer Insurance assigned to Vesper the
investigation of See's case, and he was the one actually assigned
to investigate it; he conducted his investigation of the matter by
interviewing See, going to the City Garden Hotel, required
subrogation documents from See, and verified the authenticity of
the same; he learned that it is the standard procedure of the said
hotel as regards its valet parking service to assist their guests as
soon as they get to the lobby entrance, park the cars for their
guests, and place the ignition keys in their safety key box;
considering that the hotel has only twelve (12) available parking
slots, it has an agreement with Equitable PCI Bank permitting the
hotel to use the parking space of the bank at night; he also
learned that a Hyundai Starex van was carnapped at the said
place barely a month before the occurrence of this incident
because Liberty Insurance assigned the said incident to Vespers,
and Horlador and defendant . . . Justimbaste admitted the
occurrence of the same in their sworn statements before the AntiCarnapping Unit of the Makati City Police; upon verification with
the PNP TMG [Unit] in Camp Crame, he learned that See's Vitara
has not yet been recovered; upon evaluation, Vesper
recommended to [respondent] Pioneer Insurance to settle See's
claim for P1,045,750.00; See contested the recommendation of
Vesper by reasoning out that the 10% depreciation should not be
Page 146 of 505

applied in this case considering the fact that the Vitara was used
for barely eight (8) months prior to its loss; and [respondent]
Pioneer Insurance acceded to See's contention, tendered the
sum of P1,163,250.00 as settlement, the former accepted it, and
signed a release of claim and subrogation receipt.
The lower court denied the Motion to Admit Pre-Trial Brief and
Motion for Reconsideration field by [petitioner] Durban
Apartments and Justimbaste in its Orders dated May 4, 2005 and
October 20, 2005, respectively, for being devoid of
merit. 3 HDTISa
Thereafter, on January 27, 2006, the RTC rendered a decision, disposing, as follows:
WHEREFORE, judgment is hereby rendered ordering [petitioner
Durban Apartments Corporation] to pay [respondent Pioneer
Insurance and Surety Corporation] the sum of P1,163,250.00
with legal interest thereon from July 22, 2003 until the obligation
is fully paid and attorney's fees and litigation expenses amounting
to P120,000.00.
SO ORDERED. 4
On appeal, the appellate court affirmed the decision of the trial court, viz.:
WHEREFORE, premises considered, the Decision dated January
27, 2006 of the RTC, Branch 66, Makati City in Civil Case No. 03857 is hereby AFFIRMED insofar as it holds [petitioner] Durban
Apartments Corporation solely liable to [respondent] Pioneer
Insurance and Surety Corporation for the loss of Jeffrey See's
Suzuki Grand Vitara.
SO ORDERED. 5
Hence, this recourse by petitioner.
The issues for our resolution are:
1.Whether the lower courts erred in declaring petitioner as in
default for failure to appear at the pre-trial conference
and to file a pre-trial brief;
2.Corollary thereto, whether the trial court correctly allowed
respondent to present evidence ex-parte;

3.Whether petitioner is liable to respondent for attorney's fees in

the amount of P120,000.00; and
4.Ultimately, whether petitioner is liable to respondent for the loss
of See's vehicle.
The petition must fail.
We are in complete accord with the common ruling of the lower courts that petitioner
was in default for failure to appear at the pre-trial conference and to file a pre-trial
brief, and thus, correctly allowed respondent to present evidence ex-parte. Likewise,
the lower courts did not err in holding petitioner liable for the loss of See's vehicle.
Well-entrenched in jurisprudence is the rule that factual findings of the trial court,
especially when affirmed by the appellate court, are accorded the highest degree of
respect and are considered conclusive between the parties. 6 A review of such
findings by this Court is not warranted except upon a showing of highly meritorious
circumstances, such as: (1) when the findings of a trial court are grounded entirely on
speculation, surmises, or conjectures; (2) when a lower court's inference from its
factual findings is manifestly mistaken, absurd, or impossible; (3) when there is grave
abuse of discretion in the appreciation of facts; (4) when the findings of the appellate
court go beyond the issues of the case, or fail to notice certain relevant facts which, if
properly considered, will justify a different conclusion; (5) when there is a
misappreciation of facts; (6) when the findings of fact are conclusions without mention
of the specific evidence on which they are based, are premised on the absence of
evidence, or are contradicted by evidence on record. 7 None of the foregoing
exceptions permitting a reversal of the assailed decision exists in this
instance. IDASHa
Petitioner urges us, however, that "strong [and] compelling reason[s]" such as the
prevention of miscarriage of justice warrant a suspension of the rules and excuse its
and its counsel's non-appearance during the pre-trial conference and their failure to
file a pre-trial brief.
We are not persuaded.
Rule 18 of the Rules of Court leaves no room for equivocation; appearance of parties
and their counsel at the pre-trial conference, along with the filing of a corresponding
pre-trial brief, is mandatory, nay, their duty. Thus, Section 4 and Section 6 thereof
provide:
SEC. 4.Appearance of parties. It shall be the duty of the
parties and their counsel to appear at the pre-trial. The nonPage 147 of 505

appearance of a party may be excused only if a valid cause is

shown therefor or if a representative shall appear in his behalf
fully authorized in writing to enter into an amicable settlement, to
submit to alternative modes of dispute resolution, and to enter
into stipulations or admissions of facts and documents.
SEC. 6.Pre-trial brief. The parties shall file with the court and
serve on the adverse party, in such manner as shall ensure their
receipt thereof at least three (3) days before the date of the pretrial, their respective pre-trial briefs which shall contain, among
others:
xxx xxx xxx
Failure to file the pre-trial brief shall have the same effect as
failure to appear at the pre-trial.
Contrary to the foregoing rules, petitioner and its counsel of record were not present
at the scheduled pre-trial conference. Worse, they did not file a pre-trial brief. Their
non-appearance cannot be excused as Section 4, in relation to Section 6, allows only
two exceptions: (1) a valid excuse; and (2) appearance of a representative on behalf
of a party who is fully authorized in writing to enter into an amicable settlement, to
submit to alternative modes of dispute resolution, and to enter into stipulations or
admissions of facts and documents.
Petitioner is adamant and harps on the fact that November 28, 2003 was merely the
first scheduled date for the pre-trial conference, and a certain Atty. Mejia appeared on
its behalf. However, its assertion is belied by its own admission that, on said date, this
Atty. Mejia "did not have in his possession the Special Power of Attorney issued by
petitioner's Board of Directors."
As pointed out by the CA, petitioner, through Atty. Lee, received the notice of pre-trial
on October 27, 2003, thirty-two (32) days prior to the scheduled conference. In that
span of time, Atty. Lee, who was charged with the duty of notifying petitioner of the
scheduled pre-trial conference, 8 petitioner, and Atty. Mejia should have discussed
which lawyer would appear at the pre-trial conference with petitioner, armed with the
appropriate authority therefor. Sadly, petitioner failed to comply with not just one rule;
it also did not proffer a reason why it likewise failed to file a pre-trial brief. In all,
petitioner has not shown any persuasive reason why it should be exempt from abiding
by the rules.

The appearance of Atty. Mejia at the pre-trial conference, without a pre-trial brief and
with only his bare allegation that he is counsel for petitioner, was correctly rejected by
the trial court. Accordingly, the trial court, as affirmed by the appellate court, did not
err in allowing respondent to present evidence ex-parte. SEDaAH
Former Chief Justice Andres R. Narvasa's words continue to resonate, thus:
Everyone knows that a pre-trial in civil actions is mandatory, and
has been so since January 1, 1964. Yet to this day its place in the
scheme of things is not fully appreciated, and it receives but
perfunctory treatment in many courts. Some courts consider it a
mere technicality, serving no useful purpose save perhaps,
occasionally to furnish ground for non-suiting the plaintiff, or
declaring a defendant in default, or, wistfully, to bring about a
compromise. The pre-trial device is not thus put to full use.
Hence, it has failed in the main to accomplish the chief objective
for it: the simplification, abbreviation and expedition of the trial, if
not indeed its dispensation. This is a great pity, because the
objective is attainable, and with not much difficulty, if the device
were more intelligently and extensively handled.
xxx xxx xxx
Consistently with the mandatory character of the pre-trial, the
Rules oblige not only the lawyers but the parties as well to appear
for this purpose before the Court, and when a party "fails to
appear at a pre-trial conference (he) may be non-suited or
considered as in default." The obligation "to appear" denotes not
simply the personal appearance, or the mere physical
presentation by a party of one's self, but connotes as importantly,
preparedness to go into the different subject assigned by law to a
pre-trial. And in those instances where a party may not himself be
present at the pre-trial, and another person substitutes for him, or
his lawyer undertakes to appear not only as an attorney but in
substitution of the client's person, it is imperative for that
representative of the lawyer to have "special authority" to make
such substantive agreements as only the client otherwise has
capacity to make. That "special authority" should ordinarily be in
writing or at the very least be "duly established by evidence other
than the self-serving assertion of counsel (or the proclaimed
representative) himself." Without that special authority, the lawyer
Page 148 of 505

or representative cannot be deemed capacitated to appear in

place of the party; hence, it will be considered that the latter has
failed to put in an appearance at all, and he [must] therefore "be
non-suited or considered as in default," notwithstanding his
lawyer's or delegate's presence. 9
We are not unmindful that defendant's (petitioner's) preclusion from presenting
evidence during trial does not automatically result in a judgment in favor of plaintiff
(respondent). The plaintiff must still substantiate the allegations in its
complaint. 10 Otherwise, it would be inutile to continue with the plaintiff's presentation
of evidence each time the defendant is declared in default.
In this case, respondent substantiated the allegations in its complaint, i.e., a contract
of necessary deposit existed between the insured See and petitioner. On this score,
we find no error in the following disquisition of the appellate court:
[The] records also reveal that upon arrival at the City Garden
Hotel, See gave notice to the doorman and parking attendant of
the said hotel, . . . Justimbaste, about his Vitara when he
entrusted its ignition key to the latter. . . . Justimbaste issued a
valet parking customer claim stub to See, parked the Vitara at the
Equitable PCI Bank parking area, and placed the ignition key
inside a safety key box while See proceeded to the hotel lobby to
check in. The Equitable PCI Bank parking area became an annex
of City Garden Hotel when the management of the said bank
allowed the parking of the vehicles of hotel guests thereat in the
evening after banking hours. 11
Article 1962, in relation to Article 1998, of the Civil Code defines a contract of deposit
and a necessary deposit made by persons in hotels or inns:
Art. 1962.A deposit is constituted from the moment a person
receives a thing belonging to another, with the obligation of safely
keeping it and returning the same. If the safekeeping of the thing
delivered is not the principal purpose of the contract, there is no
deposit but some other contract. aCSTDc
Art. 1998.The deposit of effects made by travelers in hotels or
inns shall also be regarded as necessary. The keepers of hotels
or inns shall be responsible for them as depositaries, provided
that notice was given to them, or to their employees, of the effects
brought by the guests and that, on the part of the latter, they take

the precautions which said hotel-keepers or their substitutes

advised relative to the care and vigilance of their effects.
Plainly, from the facts found by the lower courts, the insured See deposited his vehicle
for safekeeping with petitioner, through the latter's employee, Justimbaste. In turn,
Justimbaste issued a claim stub to See. Thus, the contract of deposit was perfected
from See's delivery, when he handed over to Justimbaste the keys to his vehicle,
which Justimbaste received with the obligation of safely keeping and returning it.
Ultimately, petitioner is liable for the loss of See's vehicle.
Lastly, petitioner assails the lower courts' award of attorney's fees to respondent in the
amount of P120,000.00. Petitioner claims that the award is not substantiated by the
evidence on record.
We disagree.
While it is a sound policy not to set a premium on the right to litigate, 12 we find that
respondent is entitled to reasonable attorney's fees. Attorney's fees may be awarded
when a party is compelled to litigate or incur expenses to protect its interest, 13 or
when the court deems it just and equitable. 14 In this case, petitioner refused to
answer for the loss of See's vehicle, which was deposited with it for safekeeping. This
refusal constrained respondent, the insurer of See, and subrogated to the latter's
right, to litigate and incur expenses. However, we reduce the award of P120,000.00 to
P60,000.00 in view of the simplicity of the issues involved in this case.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CAG.R. CV No. 86869 is AFFIRMED with the MODIFICATION that the award of
attorney's fees is reduced to P60,000.00. Costs against petitioner.
SO ORDERED.
Carpio, Peralta, Abad and Mendoza, JJ., concur.
||| (Durban Apartments Corp. v. Pioneer Insurance and Surety Corp., G.R. No.
179419, [January 12, 2011], 654 PHIL 413-427)

CONTRACTS OF SECURITY

FIRST DIVISION
Page 149 of 505

[G.R. No. 72275. November 13, 1991.]

DECISION

pay the Pacific Banking Corporation upon demand, any and all
indebtedness, obligations, charges or liabilities due and incurred
by said Celia Aurora Syjuco Regala with the use of the Pacificard,
or renewals thereof, issued in her favor by the Pacific Banking
Corporation'. It was also agreed that 'any changes of or novation
in the terms and conditions in connection with the issuance or
use of the Pacificard, or any extension of time to pay such
obligations, charges or liabilities shall not in any manner release
me/us from responsibility hereunder, it being understood that I
fully agree to such charges, novation or extension, and that this
understanding is a continuing one and shall subsist and bind me
until the liabilities of the said Celia Syjuco Regala have been fully
satisfied or paid.'

This is a petition for review on certiorari of the decision (pp. 21-31, Rollo) of the
Intermediate Appellate Court (now Court of Appeals) in AC-G.R. C.V. No.
02753, 1 which modified the decision of the trial court against herein private
respondent Roberto Regala, Jr., one of the defendants in the case for sum of money
filed by Pacific Banking Corporation.

"Plaintiff-appellee Pacific Banking Corporation has contracted

with accredited business establishments to honor purchases of
goods and or services by Pacificard holders and the cost thereof
to be advanced by the plaintiff-appellee for the account of the
defendant cardholder, and the latter undertook to pay any
statements of account rendered by the plaintiff-appellee for the
advances thus made within thirty (30) days from the date of the
statement, provided that any overdue account shall earn interest
at the rate of 14% per annum from date of default.

PACIFIC
BANKING
CORPORATION, petitioner, vs. HON.
INTERMEDIATE APPELLATE COURT AND ROBERTO
REGALA, JR., respondents.

Ocampo, Dizon & Domingo for petitioner.

Angara, Concepcion, Regala & Cruz for private respondent.

MEDIALDEA, J p:

The facts of the case as adopted by the respondent appellate court from herein
petitioner's brief before said court are as follows:
"On October 24, 1975, defendant Celia Syjuco Regala
(hereinafter referred to as Celia Regala for brevity), applied for
and obtained from the plaintiff the issuance and use of Pacificard
credit card (Exhs. 'A', 'A-1'), under the "Terms and Conditions
Governing the Issuance and Use of Pacificard (Exh. 'B' and
hereinafter referred to as Terms and Conditions), a copy of which
was issued to and received by the said defendant on the date of
the application and expressly agreed that the use of the
Pacificard is governed by said Terms and Conditions. On the
same date, the defendant-appellant Robert Regala, Jr., spouse of
defendant Celia Regala, executed a 'Guarantor's Undertaking'
(Exh. 'A-1-a') in favor of the appellee Bank, whereby the latter
agreed 'jointly and severally of Celia Aurora Syjuco Regala, to

"The defendant Celia Regala, as such Pacificard holder, had

purchased goods and/or services on credit (Exh. 'C', 'C-1' to 'C112') under her Pacificard, for which the plaintiff advanced the
cost amounting to P92,803.98 at the time of the filing of the
complaint.
'In view of defendant Celia Regala's failure to settle her account
for the purchases made thru the use of the Pacificard, a written
demand (Exh. 'D') was sent to the latter and also to the defendant
Roberto Regala, Jr. ('Exh.' ') under his 'Guarantor's Undertaking.'
"A complaint was subsequently filed in Court for defendant's (sic)
repeated failure to settle their obligation. Defendant Celia Regala
was declared in default for her failure to file her answer within the
reglementary period. Defendant-appellant Roberto Regala, Jr., on
the other hand, filed his Answer with Counterclaim admitting his
execution of the 'Guarantor's Understanding, but with the
Page 150 of 505

understanding that his liability would be limited to P2,000.00 per

month.'

The defendants appealed from the decision of the court a quo to the Intermediate
Appellate Court.

"In view of the solidary nature of the liability of the parties, the
presentation of evidence ex-parte as against the defendant Celia
Regala was jointly held with the trial of the case as against the
defendant Roberto Regala.

On August 12, 1985, respondent appellate court rendered judgment modifying the
decision of the trial court. Private respondent Roberto Regala, Jr. was made liable
only to the extent of the monthly credit limit granted to Celia Regala, i.e., at P2,000.00
a month and only for the advances made during the one year period of the card's
effectivity counted from October 29, 1975 up to October 29, 1976. The dispositive
portion of the decision states:

"After the presentation of plaintiff's testimonial and documentary

evidence, fire struck the City Hall of Manila, including the court
where the instant case was pending, as well as all its records.
"Upon plaintiff-appellee's petition for reconstitution, the records of
the instant case were duly reconstituted. Thereafter, the case was
set for pre-trial conference with respect to the defendantappellant Roberto Regala on plaintiff-appellee's motion, after
furnishing the latter a copy of the same. No opposition thereto
having been interposed by defendant-appellant, the trial court set
the case for pre-trial conference. Neither did said defendantappellant nor his counsel appear on the date scheduled by the
trial court for said conference despite due notice. Consequently,
plaintiff-appellee moved that the defendant-appellant Roberto
Regala be declared as in default and that it be allowed to present
its evidence ex-parte, which motion was granted. On July 21,
1983, plaintiff-appellee presented its evidence ex-parte. (pp. 2326, Rollo).
After trial, the court a quo rendered judgment on December 5, 1983, the dispositive
portion of which reads:
"WHEREFORE, the Court renders judgment for the plaintiff and
against the defendants condemning the latter, jointly and
severally, to pay said plaintiff the amount of P92,803.98, with
interest thereon at 14% per annum, compounded annually, from
the time of demand on November 17, 1978 until said principal
amount is fully paid; plus 15% of the principal obligation as and
for attorney's fees and expense of suit, and the costs.
"The counterclaim of defendant Roberto Regala, Jr. is dismissed
for lack of merit.
"SO ORDERED." (pp. 22-23, Rollo)

WHEREFORE, the judgment of the trial court dated December 5,

1983 is modified only as to appellant Roberto Regala, Jr., so as
to make him liable only for the purchases made by defendant
Celia Aurora Syjuco Regala with the use of the Pacificard from
October 29, 1975 up to October 29, 1976 up to the amount of
P2,000.00 per month only, with interest from the filing of the
complaint up to the payment at the rate of 14% per annum
without pronouncement as to costs." (p. 32, Rollo). Cdpr
A motion for reconsideration was filed by Pacific Banking Corporation which the
respondent appellate court denied for lack of merit on September 19, 1985 (p.
33,Rollo).

On November 8, 1985, Pacificard filed this petition. The petitioner contends that while
the appellate court correctly recognized Celia Regala's obligation to Pacific Banking
Corp. for the purchases of goods and services with the use of a Pacificard credit card
in the total amount of P92,803.98 with 14% interest per annum, it erred in limiting
private respondent Roberto Regala, Jr.'s liability only for purchases made by Celia
Regala with the use of the card from October 29, 1975 up to October 29, 1976 up to
the amount of P2,000.00 per month with 14% interest from the filing of the complaint.
There is merit in this petition.
The pertinent portion of the "Guarantor's Undertaking' which private respondent
Roberto Regala, Jr. signed in favor of Pacific Banking Corporation provides:
"I/We, the undersigned, hereby agree, jointly and severally with
Celia Syjuco Regala to pay the Pacific Banking Corporation upon
demand any and all indebtedness, obligations, charges or
liabilities due and incurred by said Celia Syjuco Regala with the
use of the Pacificard or renewals thereof issued in his favor by
Page 151 of 505

the Pacific Banking Corporation. Any changes of or Novation in

the terms and conditions in connection with the issuance or use
of said Pacificard, or any extension of time to pay such
obligations, charges or liabilities shall not in any manner release
me/us from the responsibility hereunder, it being understood that
the undertaking is a continuing one and shall subsist and bind
me/us until all the liabilities of the said Celia Syjuco Regala have
been fully satisfied or paid." ( p. 12, Rollo)
The undertaking signed by Roberto Regala, Jr. although denominated "Guarantor's
Undertaking," was in substance a contract of surety. As distinguished from a contract
of guaranty where the guarantor binds himself to the creditor to fulfill the obligation of
the principal debtor only in case the latter should fail to do so, in a contract of
suretyship, the surety binds himself solidarily with the principal debtor (Art. 2047, Civil
Code of the Philippines).
We need not look elsewhere to determine the nature and extent of private respondent
Roberto Regala, Jr.'s undertaking. As a surety he bound himself jointly and severally
with the debtor Celia Regala "to pay the Pacific Banking Corporation upon demand,
any and all indebtedness, obligations, charges or liabilities due and incurred by said
Celia Syjuco Regala with the use of Pacificard or renewals thereof issued in (her)
favor by Pacific Banking Corporation." This undertaking was also provided as a
condition in the issuance of the Pacificard to Celia Regala, thus:
"5. A Pacificard is issued to a Pacificard-holder against the joint
and several signature of a third party and as such, the Pacificard
holder and the guarantor assume joint and several liabilities for
any and all amount arising out of the use of the Pacificard." (p
14, Rollo).
The respondent appellate court held that "all the other rights of the guarantor are not
thereby lost by the guarantor becoming liable solidarily and therefore a surety." It
further ruled that although the surety's liability is like that of a joint and several debtor,
it does not make him the debtor but still the guarantor (or the surety), relying on the
case of Government of the Philippines v. Tizon, G.R. No. L-22108, August 30, 1967,
20 SCRA 1182. Consequently, Article 2054 of the Civil Code providing for a limited
liability on the part of the guarantor or debtor still applies. LexLib
It is true that under Article 2054 of the Civil Code, "(A) guarantor may bind himself for
less, but not for more than the principal debtor, both as regards the amount and the
onerous nature of the conditions. 2 It is likewise not disputed by the parties that the
credit limit granted to Celia Regala was P2,000.00 per month and that Celia Regala

succeeded in using the card beyond the original period of its effectivity, October 29,
1979. We do not agree however, that Roberto Jr.'s liability should be limited to that
extent. Private respondent Roberto Regala, Jr., as surety of his wife, expressly bound
himself up to the extent of the debtor's (Celia) indebtedness likewise expressly
waiving any "discharge in case of any change or novation of the terms and conditions
in connection with the issuance of the Pacificard credit card." Roberto, in fact, made
his commitment as a surety a continuing one, binding upon himself until all the
liabilities of Celia Regala have been fully paid. All these were clear under the
"Guarantor's Undertaking' Roberto signed, thus:
" . . . . Any changes of or novation in the terms and conditions in
connection with the issuance or use of said Pacificard, or any
extension of time to pay such obligations, charges or liabilities
shall not in any manner release me/us from the responsibility
hereunder, it being understood that the undertaking is a
continuing one and shall subsist and bind me/us until all the
liabilities of of the said Celia Syjuco Regala have been fully
satisfied or paid." (p. 12, supra; emphasis supplied).
Private respondent Roberto Regala, Jr. had been made aware by the terms of the
undertaking of future changes in the terms and conditions governing the issuance of
the credit card to his wife and that notwithstanding, he voluntarily agreed to be bound
as a surety. As in guaranty, a surety may secure additional and future debts of the
principal debtor the amount of which is not yet known (see Article 2053, supra).
The application by respondent court of the ruling in Government v. Tizon, supra is
misplaced. It was held in that case that:
" . . . , although the defendants bound themselves in solidum, the
liability of the Surety under its bond would arise only if its codefendants, the principal obligor, should fail to comply with the
contract. To paraphrase the ruling in the case of Municipality of
Orion vs. Concha, the liability of the Surety is 'consequent upon
the liability' of Tizon, or 'so dependent on that of the principal
debtor' that the Surety 'is considered in law as being the same
party as the debtor in relation to whatever is adjudged, touching
the obligation of the latter'; or the liabilities of the two defendants
herein 'are so interwoven and dependent as to be inseparable.'
Changing the expression, if the defendants are held liable, their
liability to pay the plaintiff would be solidary, but the nature of the
Page 152 of 505

Surety's undertaking is such that it does not incur liability unless

and until the principal debtor is held liable."
A guarantor or surety does not incur liability unless the principal debtor is held liable. It
is in this sense that a surety, although solidarily liable with the principal debtor, is
different from the debtor. It does not mean, however, that the surety cannot be held
liable to the same extent as the principal debtor. The nature and extent of the liabilities
of a guarantor or a surety is determined by the clauses in the contract of suretyship
(see PCIB v. CA, L-34959, March 18, 1988, 159 SCRA 24). prcd
ACCORDINGLY, the petition is GRANTED. The questioned decision of respondent
appellate court is SET ASIDE and the decision of the trial court is REINSTATED.
SO ORDERED.

SECOND DIVISION
[G.R. No. 113931. May 6, 1998.]
E. ZOBEL, INC., petitioner, vs. THE COURT OF APPEALS,
CONSOLIDATED BANK AND TRUST CORPORATION, and
SPOUSES RAUL AND ELEA R. CLAVERIA, respondents.

Herrera, Teehankee & Faylona for petitioner.

De los Reyes, Banaga, Briones & Associates for private respondents.

Narvasa, Cruz, Feliciano and Grio-Aquino, JJ., concur.

||| (Pacific Banking Corp. v. Intermediate Appellate Court, G.R. No. 72275, [November
13, 1991])

SYNOPSIS
A complaint for sum of money with prayer for a writ of preliminary attachment was
filed by respondent SOLIDBANK against respondent spouses Raul and Elea Claveria
who failed to pay their loan which was secured by a chattel mortgage and a
Continuing Guaranty of herein petitioner E. Zobel, Inc. which was also joined as partydefendant. The petitioner moved to dismiss the complaint contending that its liability
was extinguished pursuant to Article 2080 of the Civil Code considering that it has lost
its right to subrogate to the chattel mortgage in view of the failure of SOLIDBANK to
register the chattel mortgage with the appropriate government agency. The trial court
in an order denied the said motion on the ground that based on the provisions of the
document signed by the petitioner, it acted as a surety and not as a guarantor. On
petition for certiorari, the Court of Appeals affirmed the said order.
Hence, this petition for review.
The Court ruled that the contract executed by petitioner in favor of SOLIDBANK, albeit
denominated as a "Continuing Guaranty," is a contract of surety. The terms of the
contract categorically obligates petitioner as "surety" to induce SOLIDBANK to extend
credit to respondent spouses. Likewise, the contract clearly disclose that petitioner
assumed liability to SOLIDBANK, as a regular party to the undertaking and obligated
itself as an original promissor. It bound itself jointly and severally to the obligation with
the respondent spouses. In fact, SOLIDBANK need not resort to all other legal
remedies or exhaust respondent spouses' properties before it can hold petitioner
liable for the obligation. Thus, having established that petitioner is a surety, Article
2080 of the Civil Code, relied upon by petitioner, finds no application to the case at
Page 153 of 505

bar. In Bicol Savings and Loan Association vs. Guinhawa, the Court ruled that Article
2080 of the New Civil Code does not apply where the liability is as a surety, not as a
guarantor. aSEHDA

DECISION

MARTINEZ, J p:
This petition for review on certiorari seeks the reversal of the decision 1 of the Court
of Appeals dated July 13, 1993 which affirmed the Order of the Regional Trial Court of
Manila, Branch 51, denying petitioner's Motion to Dismiss the complaint, as well as
the Resolution 2 dated February 15, 1994 denying the motion for reconsideration
thereto. cdasia

SOLIDBANK opposed the motion contending that Article 2080 is not applicable
because petitioner is not a guarantor but a surety.
On February 18, 1993, the trial court issued an Order, portions of which reads:
"After a careful consideration of the matter on hand, the Court
finds the ground of the motion to dismiss without merit. The
document referred to as 'Continuing Guaranty' dated August 21,
1985 (Exh. 7) states as follows:
'For and in consideration of any existing indebtedness to
you of Agro Brokers, a single proprietorship owned by
Mr. Raul Claveria for the payment of which the
undersigned is now obligated to you as surety and in
order to induce you, in your discretion, at any other
manner, to, or at the request or for the account of the
borrower, . . . '

The facts are as follows:

"The provisions of the document are clear, plain and explicit.

Respondent spouses Raul and Elea Claveria, doing business under the name "Agro
Brokers," applied for a loan with respondent Consolidated Bank and Trust Corporation
(now SOLIDBANK) in the amount of Two Million Eight Hundred Seventy Five
Thousand Pesos (P2,875,000.00) to finance the purchase of two (2) maritime barges
and one tugboat 3 which would be used in their molasses business. The loan was
granted subject to the condition that respondent spouses execute a chattel mortgage
over the three (3) vessels to be acquired and that a continuing guarantee be executed
by Ayala International Philippines, Inc., now herein petitioner E. Zobel, Inc., in favor of
SOLIDBANK. The respondent spouses agreed to the arrangement. Consequently, a
chattel mortgage and a Continuing Guaranty 4 were executed.
Respondent spouses defaulted in the payment of the entire obligation upon maturity.
Hence, on January 31, 1991, SOLIDBANK filed a complaint for sum of money with a
prayer for a writ of preliminary attachment, against respondents spouses and
petitioner. The case was docketed as Civil Case No. 91-55909 in the Regional Trial
Court of Manila.

"Clearly therefore, defendant E. Zobel, Inc. signed as surety.

Even though the title of the document is 'Continuing Guaranty',
the Court's interpretation is not limited to the title alone but to the
contents and intention of the parties more specifically if the
language is clear and positive. The obligation of the defendant
Zobel being that of a surety, Art. 2080 New Civil Code will not
apply as it is only for those acting as guarantor. In fact, in the
letter of January 31, 1986 of the defendants (spouses and Zobel)
to the plaintiff it is requesting that the chattel mortgage on the
vessels and tugboat be waived and/or rescinded by the bank
inasmuch as the said loan is covered by the Continuing Guaranty
by Zobel in favor of the plaintiff thus thwarting the claim of the
defendant now that the chattel mortgage is an essential condition
of the guaranty. In its letter, it said that because of the Continuing
Guaranty in favor of the plaintiff the chattel mortgage is rendered
unnecessary and redundant.

Petitioner moved to dismiss the complaint on the ground that its liability as guarantor
of the loan was extinguished pursuant to Article 2080 of the Civil Code of the
Philippines. It argued that it has lost its right to be subrogated to the first chattel
mortgage in view of SOLIDBANK's failure to register the chattel mortgage with the
appropriate government agency.

"With regard to the claim that the failure of the plaintiff to register
the chattel mortgage with the proper government agency, i.e. with
the Office of the Collector of Customs or with the Register of
Page 154 of 505

Deeds makes the obligation a guaranty, the same merits a scant

consideration and could not be taken by this Court as the basis of
the extinguishment of the obligation of the defendant corporation
to the plaintiff as surety. The chattel mortgage is an additional
security and should not be considered as payment of the debt in
case of failure of payment. The same is true with the failure to
register, extinction of the liability would not lie.
"WHEREFORE, the Motion to Dismiss is hereby denied and
defendant E. Zobel, Inc., is ordered to file its answer to the
complaint within ten (10) days from receipt of a copy of this
Order." 5
Petitioner moved for reconsideration but was denied on April 26, 1993. 6
Thereafter, petitioner questioned said Orders before the respondent Court of Appeals,
through a petition for certiorari, alleging that the trial court committed grave abuse of
discretion in denying the motion to dismiss.
On July 13, 1993, the Court of Appeals rendered the assailed decision the dispositive
portion of which reads:
"WHEREFORE, finding that respondent Judge has not committed
any grave abuse of discretion in issuing the herein assailed
orders, We hereby DISMISS the petition."
A motion for reconsideration filed by petitioner was denied for lack of merit on
February 15, 1994.
Petitioner now comes to us via this petition arguing that the respondent Court of
Appeals erred in its finding: (1) that Article 2080 of the New Civil Code which
provides: "The guarantors, even though they be solidary, are released from their
obligation whenever by some act of the creditor they cannot be subrogated to the
rights, mortgages, and preferences of the latter," is not applicable to petitioner; (2) that
petitioner's obligation to respondent SOLIDBANK under the continuing guaranty is
that of a surety; and (3) that the failure of respondent SOLIDBANK to register the
chattel mortgage did not extinguish petitioner's liability to respondent SOLIDBANK.
We shall first resolve the issue of whether or not petitioner under the "Continuing
Guaranty" obligated itself to SOLIDBANK as a guarantor or a surety.
A contract of surety is an accessory promise by which a person binds himself for
another already bound, and agrees with the creditor to satisfy the obligation if the

debtor does not. 7 A contract of guaranty, on the other hand, is a collateral

undertaking to pay the debt of another in case the latter does not pay the debt. 8
Strictly speaking, guaranty and surety are nearly related, and many of the principles
are common to both. However, under our civil law, they may be distinguished thus: A
surety is usually bound with his principal by the same instrument, executed at the
same time, and on the same consideration. He is an original promissor and debtor
from the beginning, and is held, ordinarily, to know every default of his principal.
Usually, he will not be discharged, either by the mere indulgence of the creditor to the
principal, or by want of notice of the default of the principal, no matter how much he
may be injured thereby. On the other hand, the contract of guaranty is the guarantor's
own separate undertaking, in which the principal does not join. It is usually entered
into before or after that of the principal, and is often supported on a separate
consideration from that supporting the contract of the principal. The original contract
of his principal is not his contract, and he is not bound to take notice of its nonperformance. He is often discharged by the mere indulgence of the creditor to the
principal, and is usually not liable unless notified of the default of the principals. 9
Simply put, a surety is distinguished from a guaranty in that a guarantor is the insurer
of the solvency of the debtor and thus binds himself to pay if the principal isunable to
pay while a surety is the insurer of the debt, and he obligates himself to pay if the
principal does not pay. 10
Based on the aforementioned definitions, it appears that the contract executed by
petitioner in favor of SOLIDBANK, albeit denominated as a "Continuing Guaranty," is
a contract of surety. The terms of the contract categorically obligates petitioner as
"surety" to induce SOLIDBANK to extend credit to respondent spouses. This can be
seen in the following stipulations.
"For and in consideration of any existing indebtedness to you of
AGRO BROKERS, a single proprietorship owned by MR. RAUL
P. CLAVERIA, of legal age, married and with business address . .
. (hereinafter called the Borrower), for the payment of which
the undersigned is now obligated to you as surety and in order to
induce you, in your discretion, at any time or from time to time
hereafter, to make loans or advances or to extend credit in any
other manner to, or at the request or for the account of the
Borrower, either with or without purchase or discount, or to make
any loans or advances evidenced or secured by any notes, bills
receivable, drafts, acceptances, checks or other instruments or
evidences of indebtedness . . . upon which the Borrower is or
Page 155 of 505

may become liable as maker, endorser, acceptor, or

otherwise, the undersigned agrees to guarantee, and does
hereby guarantee, the punctual payment, at maturity or
upon demand, to you of any and all such instruments, loans,
advances, credits and/or other obligations herein before referred
to, and also any and all other indebtedness of every kind which is
now or may hereafter become due or owing to you by the
Borrower, together with any and all expenses which may be
incurred by you in collecting all or any such instruments or other
indebtedness or obligations hereinbefore referred to, and or in
enforcing any rights hereunder, and also to make or cause any
and all such payments to be made strictly in accordance with the
terms and provisions of any agreement (g), express or implied,
which has (have) been or may hereafter be made or entered into
by the Borrower in reference thereto, regardless of any law,
regulation or decree, now or hereafter in effect which might in any
manner affect any of the terms or provisions of any such
agreements(s) or your right with respect thereto as against the
Borrower, or cause or permit to be invoked any alteration in the
time, amount or manner of payment by the Borrower of any such
instruments, obligations or indebtedness; . . . " (Emphasis
Supplied) cdasia
One need not look too deeply at the contract to determine the nature of the
undertaking and the intention of the parties. The contract clearly disclose that
petitioner assumed liability to SOLIDBANK, as a regular party to the undertaking and
obligated itself as an original promissor. It bound itself jointly and severally to the
obligation with the respondent spouses. In fact, SOLIDBANK need not resort to all
other legal remedies or exhaust respondent spouses' properties before it can hold
petitioner liable for the obligation. This can be gleaned from a reading of the
stipulations in the contract, to wit:
' . . . If default be made in the payment of any of the instruments,
indebtedness or other obligation hereby guaranteed by the
undersigned, or if the Borrower, or the undersigned should die,
dissolve, fail in business, or become insolvent, . . , or if any funds
or other property of the Borrower, or of the undersigned which
may be or come into your possession or control or that of any
third party acting in your behalf as aforesaid should be attached
of distrained, or should be or become subject to any mandatory

order of court or other legal process, then, or any time after the
happening of any such event any or all of the instruments of
indebtedness or other obligations hereby guaranteed shall, at
your option become (for the purpose of this guaranty) due and
payable by the undersigned forthwith without demand of notice,
and full power and authority are hereby given you, in your
discretion, to sell, assign and deliver all or any part of the
property upon which you may then have a lien hereunder at any
broker's board, or at public or private sale at your option, either
for cash or for credit or for future delivery without assumption by
you of credit risk, and without either the demand, advertisement
or notice of any kind, all of which are hereby expressly waived. At
any sale hereunder, you may, at your option, purchase the whole
or any part of the property so sold, free from any right of
redemption on the part of the undersigned, all such rights being
also hereby waived and released. In case of any sale and other
disposition of any of the property aforesaid, after deducting all
costs and expenses of every kind for care, safekeeping,
collection, sale, delivery or otherwise, you may apply the residue
of the proceeds of the sale and other disposition thereof, to the
payment or reduction, either in whole or in part, of any one or
more of the obligations or liabilities hereunder of the undersigned
whether or not except for disagreement such liabilities or
obligations would then be due, making proper allowance or
interest on the obligations and liabilities not otherwise then due,
and returning the overplus, if any, to the undersigned; all without
prejudice to your rights as against the undersigned with respect
to any and all amounts which may be or remain unpaid on any of
the obligations or liabilities aforesaid at any time(s)"
xxx xxx xxx
'Should the Borrower at this or at any future time furnish, or
should be heretofore have furnished, another surety or sureties to
guarantee the payment of his obligations to you, the undersigned
hereby expressly waives all benefits to which the undersigned
might be entitled under the provisions of Article 1837 of the Civil
Code (beneficio division), the liability of the undersigned under
any and all circumstances being joint and several;" (Emphasis
Ours)
Page 156 of 505

The use of the term "guarantee" does not ipso facto mean that the contract is one of
guaranty. Authorities recognize that the word "guarantee" is frequently employed in
business transactions to describe not the security of the debt but an intention to be
bound by a primary or independent obligation. 11 As aptly observed by the trial court,
the interpretation of a contract is not limited to the title alone but to the contents and
intention of the parties.
Having thus established that petitioner is a surety, Article 2080 of the Civil Code,
relied upon by petitioner, finds no application to the case at bar. In Bicol Savings and
Loan Association vs. Guinhawa, 12 we have ruled that Article 2080 of the New Civil
Code does not apply where the liability is as a surety, not as a guarantor.
But even assuming that Article 2080 is applicable, SOLIDBANK's failure to register
the chattel mortgage did not release petitioner from the obligation. In the Continuing
Guaranty executed in favor of SOLIDBANK, petitioner bound itself to the contract
irrespective of the existence of any collateral. It even released SOLIDBANK from any
fault or negligence that may impair the contract. The pertinent portions of the contract
so provides:
" . . . the undersigned (petitioner) who hereby agrees to be and
remain bound upon this guaranty, irrespective of the existence,
value or condition of any collateral, and notwithstanding any such
change, exchange, settlement, compromise, surrender, release,
sale, application, renewal or extension, and notwithstanding also
that all obligations of the Borrower to you outstanding and unpaid
at any time(s) may exceed the aggregate principal sum herein
above prescribed.
'This is a Continuing Guaranty and shall remain in full force and
effect until written notice shall have been received by you that it
has been revoked by the undersigned, but any such notice shall
not be released the undersigned from any liability as to any
instruments, loans, advances or other obligations hereby
guaranteed, which may be held by you, or in which you may have
any interest, at the time of the receipt or such notice. No act or
omission of any kind on your part in the premises shall in any
event affect or impair this guaranty, nor shall same be affected by
any change which may arise by reason of the death of the
undersigned, of any partner(s) of the undersigned, or of the

Borrower, or of the accession to any such partnership of any one

or more new partners." (Emphasis supplied)
In fine, we find the petition to be without merit as no reversible error was committed by
respondent Court of Appeals in rendering the assailed decision.
WHEREFORE, the decision of the respondent Court of Appeals is hereby
AFFIRMED. Costs against the petitioner.
SO ORDERED. cdasia
Regalado, Melo and Puno, JJ ., concur.
Mendoza, J ., took no part, having concurred in the decision of the Court of Appeals
when I was a member of that Court.
||| (E. Zobel, Inc. v. Court of Appeals, G.R. No. 113931, [May 6, 1998], 352 PHIL 608619)

FIRST DIVISION
[G.R. No. L-16666. April 10, 1922.]
ROMULO MACHETTI, plaintiff-appellee, vs. HOSPICIO DE SAN
JOSE, defendant and appellee, and FIDELITY & SURETY
COMPANY OF THE PHILIPPINE ISLANDS, defendantappellant.

Ross & Lawrence and Wolfson, Wolfson & Schwarzkopf for appellant.
Gabriel La O for appellee Hospicio de San Jose.
No appearance for the other appellee.

DECISION

Page 157 of 505

OSTRAND, J p:
It appears from the evidence that on July 17, 1916, one Romulo
Machetti, by a written agreement, undertook to construct a building on Calle
Rosario in the city of Manila for the Hospicio de San Jose, the contract price
being P64,000. One of the conditions of the agreement was that the contractor
should obtain the "guarantee" of the Fidelity and Surety Company of the
Philippine Islands to the amount of P12,800 and the following endorsement in the
English language appears upon the contract:
"MANILA, July 15, 1916.
"For value received we hereby guarantee compliance
with the terms and conditions as outlined in the above contract.
"FIDELITY &
PHILIPPINE ISLANDS.

SURETY

COMPANY

OF

THE

(Sgd.) "OTTO VORSTER,

"Vice-President,"
Machetti constructed the building under the supervision of architects
representing the Hospicio de San Jose and, as the work progressed, payments
were made to him from time to time upon the recommendation of the architects,
until the entire contract price, with the exception of the sum of P4,978.08, was
paid. Subsequently it was found that the work had not been carried out in
accordance with the specifications which formed part of the contract and that the
workmanship was not of the standard required, and the Hospicio de San Jose
therefore refused to pay the balance of the contract price. Machetti thereupon
brought this action, the complaint being filed May 28, 1917. On January 28, 1918,
the Hospicio de San Jose answered the complaint and presented a counterclaim
for damages for the partial noncompliance with the terms of the agreement above
mentioned, in the total sum of P71,350. After issue was thus joined, Machetti, on
petition of his creditors, was, on February 27,1918, declared insolvent and on
March 4, 1918, an order was entered suspending the proceeding in the present
case in accordance with section 60 of the Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a motion asking
that the Fidelity and Surety Company be made cross-defendant to the exclusion
of Machetti and that the proceedings be continued as to said company, but still
remain suspended as to Machetti. This motion was granted and on February 7,
1920, the Hospicio filed a complaint against the Fidelity and Surety Company
asking for a judgment for P12,800 against the company upon its guaranty. After

trial, the Court of First Instance rendered judgment against the Fidelity and
Surety Company for P12,800 in accordance with the complaint. The case is now
before this court upon appeal by the Fidelity and Surety Company from said
judgment.
As will be seen, the original action in which Machetti was the plaintiff
and the Hospicio de San Jose defendant, has been converted into an action in
which the Hospicio de San Jose is plaintiff and the Fidelity and Surety Company,
the original plaintiff's guarantor, is the defendant, Machetti having been practically
eliminated from the case.
We think the court below erred in proceeding with the case against the
guarantor while the proceedings were suspended as to the principal. The
guaranty in the present case was for a future debt of unknown amount and even
regarding the guaranty as an ordinary fianza under the Civil Code, the surety
cannot be held responsible until the debt is liquidated. (Civil Code, art. 1825.)
But in this instance the guarantor's case is even stronger than that of an
ordinary surety. The contract of guaranty is written in the English language and
the terms employed must of course be given the signification which ordinarily
attaches to them in that language. In English the term "guarantor" implies an
undertaking of guaranty, as distinguished from suretyship. It is very true that
notwithstanding the use of the words "guarantee" or "guaranty" circumstances
may be shown which convert the contract into one of suretyship but such
circumstances do not exist in the present case: on the contrary it appears
affirmatively that the contract is the guarantor's separate undertaking in which the
principal does not join, that it rests on a separate consideration moving from the
principal and that although it is written in continuation of the contract for the
construction of the building, it is a collateral under taking separate and distinct
from the latter. All of these circumstances are distinguishing features of contracts
of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the
guarantor only binds himself to pay if the principal cannot pay. The one is the
insurer of the debt, the other an insurer of the solvency of the debtor. (Saint vs.
Wheeler & Wilson Mfg. Co., 95 Ala., 362; Campbell vs. Sherman, 151 Pa. St., 70;
Castellvi de Higgins and Higgins vs. Sellner, 41, Phil., 142; U.S. vs. Varadero de
la Quinta, 40 Phil., 48.) This latter liability is what the Fidelity and Surety
Company assumed in the present case. The undertaking is perhaps not exactly
that of a fianza under the Civil Code, but it is a perfectly valid contract and must
be given the legal effect it ordinarily carries. The Fidelity and Surety Company
having bound itself to pay only in the event its principal, Machetti, cannot pay it
Page 158 of 505

follows that it cannot be compelled to pay until it is shown that Machetti is unable
to pay. Such inability may be proven by the return of a writ of execution
unsatisfied or by other means, but is not sufficiently established by the mere fact
that he has been declared insolvent in insolvency proceedings under our
statutes, in which the extent of the insolvent's inability to pay is not determined
until the final liquidation of his estate.

GUARANTY
CHAPTER 1 NATURE AND EXTENT OF GUARANTY

The judgment appealed from is therefore reversed without costs and

without prejudice to such right of action as the cross-complainant, the Hospicio
de San Jose, may have after exhausting its remedy against the plaintiff Machetti.
So ordered.

SECOND DIVISION

Araullo, C.J., Malcolm, Villamor, Johns, and Romualdez, JJ., concur.

||| (Machetti v. Hospicio de San Jose, G.R. No. L-16666, [April 10, 1922], 43 PHIL
297-301)

[G.R. No. 160466. January 17, 2005.]

SPOUSES ALFREDO and SUSANA
PHILIPPINE
COMMERCIAL
BANK, respondent.

ONG, petitioners, vs.

INTERNATIONAL

DECISION

PUNO, J p:
This is a petition for review on certiorari under Rule 45 of the Rules of Court to set
aside the Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated February
17, 2003, affirming the decision of the trial court denying petitioners' motion to
dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation engaged
in the manufacture and export of finished wood products. Petitioners-spouses Alfredo
and Susana Ong are its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank (now
Equitable-Philippine Commercial International Bank or E-PCIB) filed a case for
collection of a sum of money 1 against petitioners-spouses. Respondent bank sought
to hold petitioners-spouses liable as sureties on the three (3) promissory notes they
issued to secure some of BMC's loans, totalling five million pesos (P5,000,000.00).

Page 159 of 505

The complaint alleged that in 1991, BMC needed additional capital for its business
and applied for various loans, amounting to a total of five million pesos, with the
respondent bank. Petitioners-spouses acted as sureties for these loans and issued
three (3) promissory notes for the purpose. Under the terms of the notes, it was
stipulated that respondent bank may consider debtor BMC in default and demand
payment of the remaining balance of the loan upon the levy, attachment or
garnishment of any of its properties, or upon BMC's insolvency, or if it is declared to
be in a state of suspension of payments. Respondent bank granted BMC's loan
applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of
payments with the Securities and Exchange Commission (SEC) after its properties
were attached by creditors. Respondent bank considered debtor BMC in default of its
obligations and sought to collect payment thereof from petitioners-spouses as
sureties. In due time, petitioners-spouses filed their Answer.
On October 13, 1992, a Memorandum of Agreement (MOA) 2 was executed by debtor
BMC, the petitioners-spouses as President and Treasurer of BMC, and the
consortium of creditor banks of BMC (of which respondent bank is included). The
MOA took effect upon its approval by the SEC on November 27, 1992. 3
Thereafter, petitioners-spouses moved to dismiss 4 the complaint. They argued that
as the SEC declared the principal debtor BMC in a state of suspension of payments
and, under the MOA, the creditor banks, including respondent bank, agreed to
temporarily suspend any pending civil action against the debtor BMC, the benefits of
the MOA should be extended to petitioners-spouses who acted as BMC's sureties in
their contracts of loan with respondent bank. Petitioners-spouses averred that
respondent bank is barred from pursuing its collection case filed against them.
The trial court denied the motion to dismiss. Petitioners-spouses appealed to the
Court of Appeals which affirmed the trial court's ruling that a creditor can proceed
against petitioners-spouses as surety independently of its right to proceed against the
principal debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by respondent
bank should be dismissed for three (3) reasons: First, the MOA provided that during
its effectivity, there shall be a suspension of filing or pursuing of collection cases
against the BMC and this provision should benefit petitioners as sureties. Second,
principal debtor BMC has been placed under suspension of payment of debts by the
SEC; petitioners contend that it would prejudice them if the principal debtor BMC

would enjoy the suspension of payment of its debts while petitioners, who acted only
as sureties for some of BMC's debts, would be compelled to make the payment;
petitioners add that compelling them to pay is contrary to Article 2063 of the Civil
Code which provides that a compromise between the creditor and principal debtor
benefits the guarantor and should not prejudice the latter. Lastly, petitioners rely
on Article 2081 of the Civil Code which provides that: "the guarantor may set up
against the creditor all the defenses which pertain to the principal debtor and are
inherent in the debt; but not those which are purely personal to the debtor." Petitioners
aver that if the principal debtor BMC can set up the defense of suspension of payment
of debts and filing of collection suits against respondent bank, petitioners as sureties
should likewise be allowed to avail of these defenses.
We find no merit in petitioners' contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code is
misplaced as these provisions refer to contracts of guaranty. They do not apply to
suretyship contracts. Petitioners-spouses are not guarantors but sureties of BMC's
debts. There is a sea of difference in the rights and liabilities of a guarantor and a
surety. A guarantor insures the solvency of the debtor while a surety is an insurer of
the debt itself. A contract of guaranty gives rise to a subsidiary obligation on the part
of the guarantor. It is only after the creditor has proceeded against the properties of
the principal debtor and the debt remains unsatisfied that a guarantor can be held
liable to answer for any unpaid amount. This is the principle of excussion. In a
suretyship contract, however, the benefit of excussion is not available to the surety as
he is principally liable for the payment of the debt. As the surety insures the debt itself,
he obligates himself to pay the debt if the principal debtor will not pay, regardless of
whether or not the latter is financially capable to fulfill his obligation. Thus, a creditor
can go directly against the surety although the principal debtor is solvent and is able
to pay or no prior demand is made on the principal debtor. A surety is directly, equally
and absolutely bound with the principal debtor for the payment of the debt and is
deemed as an original promissor and debtor from the beginning. 5
Under the suretyship contract entered into by petitioners-spouses with respondent
bank, the former obligated themselves to be solidarily bound with the principal debtor
BMC for the payment of its debts to respondent bank amounting to five million pesos
(P5,000,000.00). Under Article 1216 of the Civil Code, 6 respondent bank as creditor
may proceed against petitioners-spouses as sureties despite the execution of the
MOA which provided for the suspension of payment and filing of collection suits
against BMC. Respondent bank's right to collect payment from the surety exists
independently of its right to proceed directly against the principal debtor. In fact, the
Page 160 of 505

creditor bank may go against the surety alone without prior demand for payment on
the principal debtor. 7
The provisions of the MOA regarding the suspension of payments by BMC and the
non-filing of collection suits by the creditor banks pertain only to the property of the
principal debtor BMC. Firstly, in the rehabilitation receivership filed by BMC, only the
properties of BMC were mentioned in the petition with the SEC. 8 Secondly, there is
nothing in the MOA that involves the liabilities of the sureties whose properties are
separate and distinct from that of the debtor BMC. Lastly, it bears to stress that the
MOA executed by BMC and signed by the creditor-banks was approved by the SEC
whose jurisdiction is limited only to corporations and corporate assets. It has no
jurisdiction over the properties of BMC's officers or sureties. ADaEIH
Clearly, the collection suit filed by respondent bank against petitioners-spouses as
sureties can prosper. The trial court's denial of petitioners' motion to dismiss was
proper.

Wolfson, Wolfson and Schwarzkopf for appellants.

William and Ferrier for appellee.

MALCOLM, J.:
This is an action brought by plaintiffs to recover from defendant the sum of P10,000.
The brief decision of the trial court held that the suit was premature, and absolved the
defendant from the complaint, with the costs against the plaintiffs.
The basis of plaintiff's action is a letter written by defendant George C. Sellner to John
T. Macleod, agent for Mrs. Horace L. Higgins, on May 31, 1915, of the following
tenor:lawph!l.net

IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No pronouncement

as to costs.

DEAR SIR: I hereby obligate and bind myself, my heirs, successors and

SO ORDERED.

assigns that if the promissory note executed the 29th day of May, 1915 by

Austria-Martinez, Callejo, Sr., Tinga and Chico-Nazario, JJ., concur

||| (Spouses Ong v. Philippine Commercial International Bank, G.R. No. 160466,
[January 17, 2005], 489 PHIL 673-678)

the Keystone Mining Co., W.H. Clarke, and John Maye, jointly and severally,
in your favor and due six months after date for Pesos 10,000 is not fully paid
at maturity with interest, I will, within fifteen days after notice of such default,
pay you in cash the sum of P10,000 and interest upon your surrendering to
me the three thousand shares of stock of the Keystone Mining Co. held by

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-158025

November 5, 1920

CARMEN CASTELLVI DE HIGGINS and HORACE L. HIGGINS, plaintiffsappellants,

vs.
GEORGE C. SELLNER, defendant-appellee.

you as security for the payment of said note.

Respectfully,
(Sgd.) GEO. C. SELLNER.
Counsel for both parties agree that the only point at issue is the determination of
defendant's status in the transaction referred to. Plaintiffs contend that he is a surety;
defendant contends that he is a guarantor. Plaintiffs also admit that if defendant is a
guarantor, articles 1830, 1831, and 1834 of the Civil Code govern.
In the original Spanish of the Civil Code now in force in the Philippine Islands, Title
XIV of Book IV is entitled "De la Fianza." The Spanish word "fianza" is translated in
Page 161 of 505

the Washington and Walton editions of the Civil Code as "security." "Fianza" appears

civil law relationship existing between codebtors liable in solidum is similar to the

in the Fisher translation as "suretyship." The Spanish world "fiador" is found in all of

common law suretyship.

the English translations of the Civil Code as "surety." The law of guaranty is not
related of by that name in the Civil Code, although indirect reference to the same is

It is perfectly clear that the obligation assumed by defendant was simply that of a

made in the Code of Commerce. In terminology at least, no distinction is made in the

guarantor, or, to be more precise, of the fiador whose responsibility is fixed in the Civil

Civil Code between the obligation of a surety and that of a guarantor.

Code. The letter of Mr. Sellner recites that if the promissory note is not paid at
maturity, then, within fifteen days after notice of such default and upon surrender to

As has been done in the State of Louisiana, where, like in the Philippines, the

him of the three thousand shares of Keystone Mining Company stock, he will assume

substantive law has a civil law origin, we feel free to supplement the statutory law by a

responsibility. Sellner is not bound with the principals by the same instrument

reference to the precepts of the law merchant.

executed at the same time and on the same consideration, but his responsibility is a
secondary one found in an independent collateral agreement, Neither is Sellner jointly

The points of difference between a surety and a guarantor are familiar to American

and severally liable with the principal debtors.

authorities. A surety and a guarantor are alike in that each promises to answer for the
debt or default of another. A surety and a guarantor are unlike in that the surety

With particular reference, therefore, to appellants assignments of error, we hold that

assumes liability as a regular party to the undertaking, while the liability as a regular

defendant Sellner is a guarantor within the meaning of the provisions of the Civil

party to upon an independent agreement to pay the obligation if the primary pay or

Code.

fails to do so. A surety is charged as an original promissory; the engagement of the

guarantor is a collateral undertaking. The obligation of the surety is primary; the

There is also an equitable aspect to the case which reenforces this conclusion. The

obligation of the guarantor is secondary. (See U.S. vs. Varadero de la Quinta [1919],

note executed by the Keystone Mining Company matured on November 29, 1915.

40 Phil., 48; Lachman vs. Block [1894], 46 La. Ann., 649; Bedford vs. Kelley [1913],

Interest on the note was not accepted by the makers until September 30, 1916. When

173 Mich., 492; Brandt, on Suretyship and Guaranty, sec. 1, cited approvingly by

the note became due, it is admitted that the shares of stock used as collateral security

many authorities.)

were selling at par; that is, they were worth pesos 30,000. Notice that the note had not
been paid was not given to and when the Keyston Mining Company stock was

Turning back again to our Civil Code, we first note that according to article 1822

worthless. Defendant, consequently, through the laches of plaintiff, has lost possible

"By fianza (security or suretyship) one person binds himself to pay or perform for a

chance to recoup, through the sale of the stock, any amount which he might be

third person in case the latter should fail to do so." But "If the surety binds himself in

compelled to pay as a surety or guarantor. The "indulgence," as this word is used in

solidum with the principal debtor, the provisions of Section fourth, Chapter third, Title

the law of guaranty, of the creditors of the principal, as evidenced by the acceptance

first, shall be applicable." What the first portion of the cited article provides is,

of interest, and by failure promptly to notify the guarantor, may thus have served to

consequently, seen to be somewhat akin to the contract of guaranty, while what is last

discharge the guarantor.

provided is practically equivalent to the contract of suretyship. When in subsequent

articles found in section 1 of Chapter II of the title concerning fianza, the Code speaks

For quite different reasons, which, nevertheless, arrive at the same result, judgment is

of the effects of suretyship between surety and creditor, it has, in comparison with the

affirmed, with costs of this instance against the appellants. So ordered.

common law, the effect of guaranty between guarantor and creditor. The civil law
suretyship is, accordingly, nearly synonymous with the common law guaranty; and the

Johnson, Araullo, and Villamor, JJ., concur.

Mapa, C.J. and Avancea, J., concur in the result.
Page 162 of 505

question is whether this obligation to repay is solidary, as contended by respondent

and the lower courts, or merely joint as argued by petitioners. ITEcAD
On 28 April 1980, Private Development Corporation of the Philippines
(PDCP) 1 entered into a loan agreement with Falcon Minerals, Inc. (Falcon) whereby
PDCP agreed to make available and lend to Falcon the amount of US$320,000.00, for
specific purposes and subject to certain terms and conditions. 2 On the same day,
three stockholders-officers of Falcon, namely: respondent Rafael Ortigas, Jr.
(Ortigas), George A. Scholey and George T. Scholey executed an Assumption of
Solidary Liability whereby they agreed "to assume in [their] individual capacity,
solidary liability with [Falcon] for the due and punctual payment" of the loan contracted
by Falcon with PDCP. 3 In the meantime, two separate guaranties were executed to
guarantee the payment of the same loan by other stockholders and officers of Falcon,
acting in their personal and individual capacities. One Guaranty 4 was executed by
petitioner Salvador Escao (Escao), while the other 5 by petitioner Mario M. Silos
(Silos), Ricardo C. Silverio (Silverio), Carlos L. Inductivo (Inductivo) and Joaquin J.
Rodriguez (Rodriguez).

SECOND DIVISION
[G.R. No. 151953. June 29, 2007.]
SALVADOR P. ESCAO and MARIO M. SILOS, petitioners, vs.
RAFAEL ORTIGAS, JR., respondent.

DECISION

TINGA, J p:
The main contention raised in this petition is that petitioners are not under obligation
to reimburse respondent, a claim that can be easily debunked. The more perplexing

Two years later, an agreement developed to cede control of Falcon to Escao, Silos
and Joseph M. Matti (Matti). Thus, contracts were executed whereby Ortigas, George
A. Scholey, Inductivo and the heirs of then already deceased George T. Scholey
assigned their shares of stock in Falcon to Escao, Silos and Matti. 6 Part of the
consideration that induced the sale of stock was a desire by Ortigas, et al., to relieve
themselves of all liability arising from their previous joint and several undertakings
with Falcon, including those related to the loan with PDCP. Thus, an Undertaking
dated 11 June 1982 was executed by the concerned parties, 7 namely: with Escao,
Silos and Matti identified in the document as "SURETIES," on one hand, and Ortigas,
Inductivo and the Scholeys as "OBLIGORS," on the other. The Undertaking reads in
part:
3. That whether or not SURETIES are able to immediately cause
PDCP and PAIC to release OBLIGORS from their said
guarantees [sic], SURETIES hereby irrevocably agree and
undertake to assume all of OBLIGORs' said guarantees [sic]
to PDCP and PAIC under the following terms and conditions:
a. Upon receipt by any of [the] OBLIGORS of any
demand from PDCP and/or PAIC for the payment of
FALCON's obligations with it, any of [the] OBLIGORS
shall immediately inform SURETIES thereof so that the
latter can timely take appropriate measures;
Page 163 of 505

b. Should suit be impleaded by PDCP and/or PAIC

against any and/or all of OBLIGORS for collection of
said loans and/or credit facilities, SURETIES agree to
defend OBLIGORS at their own expense, without
prejudice to any and/or all of OBLIGORS impleading
SURETIES therein for contribution, indemnity,
subrogation or other relief in respect to any of the claims
of PDCP and/or PAIC; and
c. In the event that any of [the] OBLIGORS is for any
reason made to pay any amount to PDCP and/or PAIC,
SURETIES shall reimburse OBLIGORS for said
amount/s within seven (7) calendar days from such
payment; CSEHIa
4. OBLIGORS hereby waive in favor of SURETIES any and all
fees which may be due from FALCON arising out of, or in
connection with, their said guarantees [sic]. 8
Falcon eventually availed of the sum of US$178,655.59 from the credit line extended
by PDCP. It would also execute a Deed of Chattel Mortgage over its personal
properties to further secure the loan. However, Falcon subsequently defaulted in its
payments. After PDCP foreclosed on the chattel mortgage, there remained a
subsisting deficiency of P5,031,004.07, which Falcon did not satisfy despite
demand. 9
On 28 April 1989, in order to recover the indebtedness, PDCP filed a complaint for
sum of money with the Regional Trial Court of Makati (RTC) against Falcon, Ortigas,
Escao, Silos, Silverio and Inductivo. The case was docketed as Civil Case No. 895128. For his part, Ortigas filed together with his answer a cross-claim against his codefendants Falcon, Escao and Silos, and also manifested his intent to file a thirdparty complaint against the Scholeys and Matti. 10 The cross-claim lodged against
Escao and Silos was predicated on the 1982 Undertaking, wherein they agreed to
assume the liabilities of Ortigas with respect to the PDCP loan.
Escao, Ortigas and Silos each sought to seek a settlement with PDCP. The first to
come to terms with PDCP was Escao, who in December of 1993, entered into a
compromise agreement whereby he agreed to pay the bank P1,000,000.00. In
exchange, PDCP waived or assigned in favor of Escao one-third (1/3) of its entire
claim in the complaint against all of the other defendants in the case. 11 The

compromise agreement was approved by the RTC in a Judgment 12 dated 6 January

1994.
Then on 24 February 1994, Ortigas entered into his own compromise
agreement 13 with PDCP, allegedly without the knowledge of Escao, Matti and Silos.
Thereby, Ortigas agreed to pay PDCP P1,300,000.00 as "full satisfaction of the
PDCP's claim against Ortigas," 14 in exchange for PDCP's release of Ortigas from
any liability or claim arising from the Falcon loan agreement, and a renunciation of its
claims against Ortigas. ACETSa
In 1995, Silos and PDCP entered into a Partial Compromise Agreement whereby he
agreed to pay P500,000.00 in exchange for PDCP's waiver of its claims against
him. 15
In the meantime, after having settled with PDCP, Ortigas pursued his claims against
Escao, Silos and Matti, on the basis of the 1982 Undertaking. He initiated a thirdparty complaint against Matti and Silos, 16 while he maintained his cross-claim
against Escao. In 1995, Ortigas filed a motion for Summary Judgment in his favor
against Escao, Silos and Matti. On 5 October 1995, the RTC issued the Summary
Judgment, ordering Escao, Silos and Matti to pay Ortigas, jointly and severally, the
amount of P1,300,000.00, as well as P20,000.00 in attorney's fees. 17 The trial court
ratiocinated that none of the third-party defendants disputed the 1982 Undertaking,
and that "the mere denials of defendants with respect to non-compliance of Ortigas of
the terms and conditions of the Undertaking, unaccompanied by any substantial fact
which would be admissible in evidence at a hearing, are not sufficient to raise genuine
issues of fact necessary to defeat a motion for summary judgment, even if such facts
were raised in the pleadings." 18 In an Order dated 7 March 1996, the trial court
denied the motion for reconsideration of the Summary Judgment and awarded
Ortigas legal interest of 12% per annum to be computed from 28 February
1994. 19 SaICcT
From the Summary Judgment, recourse was had by way of appeal to the Court of
Appeals. Escao and Silos appealed jointly while Matti appealed by his lonesome. In
a Decision 20 dated 23 January 2002, the Court of Appeals dismissed the appeals
and affirmed the Summary Judgment. The appellate court found that the RTC did not
err in rendering the Summary Judgment since the three appellants did not effectively
deny their execution of the 1982 Undertaking. The special defenses that were raised,
"payment and excussion," were characterized by the Court of Appeals as "appear[ing]
to be merely sham in the light of the pleadings and supporting documents and
affidavits." 21 Thus, it was concluded that there was no genuine issue that would still
Page 164 of 505

require the rigors of trial, and that the appealed judgment was decided on the bases
of the undisputed and established facts of the case.
Hence, the present petition for review filed by Escao and Silos. 22 Two main issues
are raised. First, petitioners dispute that they are liable to Ortigas on the basis of the
1982 Undertaking, a document which they do not disavow and have in fact annexed to
their petition. Second, on the assumption that they are liable to Ortigas under the
1982 Undertaking, petitioners argue that they are jointly liable only, and not solidarily.
Further assuming that they are liable, petitioners also submit that they are not liable
for interest and if at all, the proper interest rate is 6% and not 12%.
Interestingly, petitioners do not challenge, whether in their petition or their
memorandum before the Court, the appropriateness of the summary judgment as a
relief favorable to Ortigas. Under Section 3, Rule 35 of the 1997 Rules of Civil
Procedure, summary judgment may avail if the pleadings, supporting affidavits,
depositions and admissions on file show that, except as to the amount of damages,
there is no genuine issue as to any material fact and that the moving party is entitled
to a judgment as a matter of law. Petitioner have not attempted to demonstrate before
us that there existed a genuine issue as to any material fact that would preclude
summary judgment. Thus, we affirm with ease the common rulings of the lower courts
that summary judgment is an appropriate recourse in this case.
The vital issue actually raised before us is whether petitioners were correctly held
liable to Ortigas on the basis of the 1982 Undertaking in this Summary Judgment. An
examination of the document reveals several clauses that make it clear that the
agreement was brought forth by the desire of Ortigas, Inductivo and the Scholeys to
be released from their liability under the loan agreement which release was, in turn,
part of the consideration for the assignment of their shares in Falcon to petitioners
and Matti. The whereas clauses manifest that Ortigas had bound himself with Falcon
for the payment of the loan with PDCP, and that "amongst the consideration for
OBLIGORS and/or their principals aforesaid selling is SURETIES' relieving
OBLIGORS of any and all liability arising from their said joint and several
undertakings with FALCON." 23 Most crucial is the clause in Paragraph 3 of the
Undertaking wherein petitioners "irrevocably agree and undertake to assume all of
OBLIGORs' said guarantees [sic] to PDCP . . . under the following terms and
conditions." 24

At the same time, it is clear that the assumption by petitioners of Ortigas's

"guarantees" [sic] to PDCP is governed by stipulated terms and conditions as set forth

in sub-paragraphs (a) to (c) of Paragraph 3. First, upon receipt by "any of OBLIGORS"

of any demand from PDCP for the payment of Falcon's obligations with it, "any of
OBLIGORS" was to immediately inform "SURETIES" thereof so that the latter can
timely take appropriate measures. Second, should "any and/or all of OBLIGORS" be
impleaded by PDCP in a suit for collection of its loan, "SURETIES agree[d] to defend
OBLIGORS at their own expense, without prejudice to any and/or all of OBLIGORS
impleading SURETIES therein for contribution, indemnity, subrogation or other
relief" 25 in respect to any of the claims of PDCP. Third, if any of the "OBLIGORS is
for any reason made to pay any amount to [PDCP], SURETIES [were to] reimburse
OBLIGORS for said amount/s within seven (7) calendar days from such payment." 26
Petitioners claim that, contrary to paragraph 3 (c) of the Undertaking, Ortigas was not
"made to pay" PDCP the amount now sought to be reimbursed, as Ortigas voluntarily
paid PDCP the amount of P1.3 Million as an amicable settlement of the claims posed
by the bank against him. However, the subject clause in paragraph 3 (c) actually
reads "[i]n the event that any of OBLIGORS is for any reason made to pay any
amount to PDCP . . . " 27 As pointed out by Ortigas, the phrase "for any reason"
reasonably includes any extra-judicial settlement of obligation such as what Ortigas
had undertaken to pay to PDCP, as it is indeed obvious that the phrase was
incorporated in the clause to render the eventual payment adverted to therein
unlimited and unqualified. ASHEca
The interpretation posed by petitioners would have held water had the Undertaking
made clear that the right of Ortigas to seek reimbursement accrued only after he had
delivered payment to PDCP as a consequence of a final and executory judgment. On
the contrary, the clear intent of the Undertaking was for petitioners and Matti to relieve
the burden on Ortigas and his fellow "OBLIGORS" as soon as possible, and not only
after Ortigas had been subjected to a final and executory adverse judgment.
Paragraph 1 of the Undertaking enjoins petitioners to "exert all efforts to cause
PDCP . . . to within a reasonable time release all the OBLIGORS . . . from their
guarantees [sic] to PDCP . . . " 28 In the event that Ortigas and his fellow
"OBLIGORS" could not be released from their guaranties, paragraph 2 commits
petitioners and Matti to cause the Board of Directors of Falcon to make a call on its
stockholders for the payment of their unpaid subscriptions and to pledge or assign
such payments to Ortigas, et al., as security for whatever amounts the latter may be
held liable under their guaranties. In addition, paragraph 1 also makes clear that
nothing in the Undertaking "shall prevent OBLIGORS, or any one of them, from
themselves negotiating with PDCP . . . for the release of their said guarantees
[sic]." 29
Page 165 of 505

There is no argument to support petitioners' position on the import of the phrase

"made to pay" in the Undertaking, other than an unduly literalist reading that is clearly
inconsistent with the thrust of the document. Under the Civil Code, the various
stipulations of a contract shall be interpreted together, attributing to the doubtful ones
that sense which may result from all of them taken jointly. 30 Likewise applicable is
the provision that if some stipulation of any contract should admit of several
meanings, it shall be understood as bearing that import which is most adequate to
render it effectual. 31 As a means to effect the general intent of the document to
relieve Ortigas from liability to PDCP, it is his interpretation, not that of petitioners, that
holds sway with this Court.
Neither do petitioners impress us of the non-fulfillment of any of the other conditions
set in paragraph 3, as they claim. Following the general assertion in the petition that
Ortigas violated the terms of the Undertaking, petitioners add that Ortigas "paid PDCP
BANK the amount of P1.3 million without petitioners ESCANO and SILOS's
knowledge and consent." 32 Paragraph 3 (a) of the Undertaking does impose a
requirement that any of the "OBLIGORS" shall immediately inform "SURETIES" if they
received any demand for payment of FALCON's obligations to PDCP, but that
requirement is reasoned "so that the [SURETIES] can timely take appropriate
measures" 33presumably to settle the obligation without having to burden the
"OBLIGORS." This notice requirement in paragraph 3 (a) is markedly way off from the
suggestion of petitioners that Ortigas, after already having been impleaded as a
defendant in the collection suit, was obliged under the 1982 Undertaking to notify
them before settling with PDCP. CHDAEc
The other arguments petitioners have offered to escape liability to Ortigas are similarly
weak.
Petitioners impugn Ortigas for having settled with PDCP in the first place. They note
that Ortigas had, in his answer, denied any liability to PDCP and had alleged that he
signed the Assumption of Solidary Liability not in his personal capacity, but as an
officer of Falcon. However, such position, according to petitioners, could not be
justified since Ortigas later voluntarily paid PDCP the amount of P1.3 Million. Such
circumstances, according to petitioners, amounted to estoppel on the part of Ortigas.
Even as we entertain this argument at depth, its premises are still erroneous. The
Partial Compromise Agreement between PDCP and Ortigas expressly stipulated that
Ortigas's offer to pay PDCP was conditioned "without [Ortigas's] admitting liability to
plaintiff PDCP Bank's complaint, and to terminate and dismiss the said case as
against Ortigas solely." 34 Petitioners profess it is "unthinkable" for Ortigas to have

voluntarily paid PDCP without admitting his liability, 35 yet such contention based on
assumption cannot supersede the literal terms of the Partial Compromise Agreement.
Petitioners further observe that Ortigas made the payment to PDCP after he had
already assigned his obligation to petitioners through the 1982 Undertaking. Yet the
fact is PDCP did pursue a judicial claim against Ortigas notwithstanding the
Undertaking he executed with petitioners. Not being a party to such Undertaking,
PDCP was not precluded by a contract from pursuing its claim against Ortigas based
on the original Assumption of Solidary Liability.
At the same time, the Undertaking did not preclude Ortigas from relieving his distress
through a settlement with the creditor bank. Indeed, paragraph 1 of the Undertaking
expressly states that "nothing herein shall prevent OBLIGORS, or any one of them,
from themselves negotiating with PDCP . . . for the release of their said guarantees
[sic]." 36 Simply put, the Undertaking did not bar Ortigas from pursuing his own
settlement with PDCP. Neither did the Undertaking bar Ortigas from recovering from
petitioners whatever amount he may have paid PDCP through his own settlement.
The stipulation that if Ortigas was "for any reason made to pay any amount to PDCP[,]
. . . SURETIES shall reimburse OBLIGORS for said amount/s within seven (7)
calendar days from such payment" 37 makes it clear that petitioners remain liable to
reimburse Ortigas for the sums he paid PDCP. ETDAaC
We now turn to the set of arguments posed by petitioners, in the alternative, that is, on
the assumption that they are indeed liable.
Petitioners submit that they could only be held jointly, not solidarily, liable to Ortigas,
claiming that the Undertaking did not provide for express solidarity. They cite Article
1207 of the New Civil Code, which states in part that "[t]here is a solidary liability only
when the obligation expressly so states, or when the law or the nature of the
obligation requires solidarity."
Ortigas in turn argues that petitioners, as well as Matti, are jointly and severally liable
for the Undertaking, as the language used in the agreement "clearly shows that it is a
surety agreement" 38 between the obligors (Ortigas group) and the sureties (Escao
group). Ortigas points out that the Undertaking uses the word "SURETIES"
althroughout the document, in describing the parties. It is further contended that the
principal objective of the parties in executing the Undertaking cannot be attained
unless petitioners are solidarily liable "because the total loan obligation can not be
paid or settled to free or release the OBLIGORS if one or any of the SURETIES
default from their obligation in the Undertaking." 39

Page 166 of 505

In case there is a concurrence of two or more creditors or of two or more debtors in

one and the same obligation, Article 1207 of the Civil Code states that among them,
"[t]here is a solidary liability only when the obligation expressly so states, or when the
law or the nature of the obligation requires solidarity." Article 1210 supplies further
caution against the broad interpretation of solidarity by providing: "The indivisibility of
an obligation does not necessarily give rise to solidarity. Nor does solidarity of itself
imply indivisibility."
These Civil Code provisions establish that in case of concurrence of two or more
creditors or of two or more debtors in one and the same obligation, and in the
absence of express and indubitable terms characterizing the obligation as solidary,
the presumption is that the obligation is only joint. It thus becomes incumbent upon
the party alleging that the obligation is indeed solidary in character to prove such fact
with a preponderance of evidence. AECcTS
The Undertaking does not contain any express stipulation that the petitioners agreed
"to bind themselves jointly and severally" in their obligations to the Ortigas group, or
any such terms to that effect. Hence, such obligation established in the Undertaking is
presumed only to be joint. Ortigas, as the party alleging that the obligation is in fact
solidary, bears the burden to overcome the presumption of jointness of obligations.
We rule and so hold that he failed to discharge such burden.

Ortigas places primary reliance on the fact that the petitioners and Matti identified
themselves in the Undertaking as "SURETIES", a term repeated no less than thirteen
(13) times in the document. Ortigas claims that such manner of identification
sufficiently establishes that the obligation of petitioners to him was solidary in nature.
The term "surety" has a specific meaning under our Civil Code. Article 2047 provides
the statutory definition of a surety agreement, thus:
Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal debtor
in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship.
[Emphasis supplied] 40
As provided in Article 2047, in a surety agreement the surety undertakes to be bound
solidarily with the principal debtor. Thus, a surety agreement is an ancillary contract

as it presupposes the existence of a principal contract. It appears that Ortigas's

argument rests solely on the solidary nature of the obligation of the surety under
Article 2047. In tandem with the nomenclature "SURETIES" accorded to petitioners
and Matti in the Undertaking, however, this argument can only be viable if the
obligations established in the Undertaking do partake of the nature of a suretyship as
defined under Article 2047 in the first place. That clearly is not the case here,
notwithstanding the use of the nomenclature "SURETIES" in the
Undertaking. AcEIHC
Again, as indicated by Article 2047, a suretyship requires a principal debtor to whom
the surety is solidarily bound by way of an ancillary obligation of segregate identity
from the obligation between the principal debtor and the creditor. The suretyship does
bind the surety to the creditor, inasmuch as the latter is vested with the right to
proceed against the former to collect the credit in lieu of proceeding against the
principal debtor for the same obligation. 41 At the same time, there is also a legal tie
created between the surety and the principal debtor to which the creditor is not privy
or party to. The moment the surety fully answers to the creditor for the obligation
created by the principal debtor, such obligation is extinguished. 42 At the same time,
the surety may seek reimbursement from the principal debtor for the amount paid, for
the surety does in fact "become subrogated to all the rights and remedies of the
creditor." 43
Note that Article 2047 itself specifically calls for the application of the provisions on
solidary obligations to suretyship contracts. 44 Article 1217 of the Civil Code thus
comes into play, recognizing the right of reimbursement from a co-debtor (the
principal debtor, in case of suretyship) in favor of the one who paid (i.e., the
surety). 45However, a significant distinction still lies between a joint and several
debtor, on one hand, and a surety on the other. Solidarity signifies that the creditor
can compel any one of the joint and several debtors or the surety alone to answer for
the entirety of the principal debt. The difference lies in the respective faculties of the
joint and several debtor and the surety to seek reimbursement for the sums they paid
out to the creditor.
Dr. Tolentino explains the differences between a solidary co-debtor and a surety:
A guarantor who binds himself in solidum with the principal
debtor under the provisions of the second paragraph does not
become a solidary co-debtor to all intents and purposes. There is
a difference between a solidary co-debtor and a fiador in
solidum (surety). The latter, outside of the liability he
assumes to pay the debt before the property of the principal
Page 167 of 505

debtor has been exhausted, retains all the other rights,

actions and benefits which pertain to him by reason of
thefiansa; while a solidary co-debtor has no other rights
than those bestowed upon him in Section 4, Chapter 3, Title
I, Book IV of the Civil Code.
The second paragraph of [Article 2047] is practically equivalent to
the contract of suretyship. The civil law suretyship is, accordingly,
nearly synonymous with the common law guaranty; and the civil
law relationship existing between the co-debtors liable in
solidum is similar to the common law suretyship. 46
In the case of joint and several debtors, Article 1217 makes plain that the solidary
debtor who effected the payment to the creditor "may claim from his co-debtors only
the share which corresponds to each, with the interest for the payment already
made." Such solidary debtor will not be able to recover from the co-debtors the full
amount already paid to the creditor, because the right to recovery extends only to the
proportional share of the other co-debtors, and not as to the particular proportional
share of the solidary debtor who already paid. In contrast, even as the surety is
solidarily bound with the principal debtor to the creditor, the surety who does pay the
creditor has the right to recover the full amount paid, and not just any proportional
share, from the principal debtor or debtors. Such right to full reimbursement falls
within the other rights, actions and benefits which pertain to the surety by reason of
the subsidiary obligation assumed by the surety. ISCaDH
What is the source of this right to full reimbursement by the surety? We find the right
under Article 2066 of the Civil Code, which assures that "[t]he guarantor who pays for
a debtor must be indemnified by the latter," such indemnity comprising of, among
others, "the total amount of the debt." 47 Further, Article 2067 of the Civil Code
likewise establishes that "[t]he guarantor who pays is subrogated by virtue thereof to
all the rights which the creditor had against the debtor." 48
Articles 2066 and 2067 explicitly pertain to guarantors, and one might argue that the
provisions should not extend to sureties, especially in light of the qualifier in Article
2047 that the provisions on joint and several obligations should apply to sureties. We
reject that argument, and instead adopt Dr. Tolentino's observation that "[t]he
reference in the second paragraph of [Article 2047] to the provisions of Section 4,
Chapter 3, Title I, Book IV, on solidary or several obligations, however, does not mean
that suretyship is withdrawn from the applicable provisions governing
guaranty." 49 For if that were not the implication, there would be no material difference
between the surety as defined under Article 2047 and the joint and several debtors,

for both classes of obligors would be governed by exactly the same rules and
limitations.
Accordingly, the rights to indemnification and subrogation as established and granted
to the guarantor by Articles 2066 and 2067 extend as well to sureties as defined
under Article 2047. These rights granted to the surety who pays materially differ from
those granted under Article 1217 to the solidary debtor who pays, since the
"indemnification" that pertains to the latter extends "only [to] the share which
corresponds to each [co-debtor]." It is for this reason that the Court cannot accord the
conclusion that because petitioners are identified in the Undertaking as "SURETIES,"
they are consequently joint and severally liable to Ortigas.
In order for the conclusion espoused by Ortigas to hold, in light of the general
presumption favoring joint liability, the Court would have to be satisfied that among the
petitioners and Matti, there is one or some of them who stand as the principal debtor
to Ortigas and another as surety who has the right to full reimbursement from the
principal debtor or debtors. No suggestion is made by the parties that such is the
case, and certainly the Undertaking is not revelatory of such intention. If the Court
were to give full fruition to the use of the term "SURETIES" as conclusive indication of
the existence of a surety agreement that in turn gives rise to a solidary obligation to
pay Ortigas, the necessary implication would be to lay down a corresponding set of
rights and obligations as between the "SURETIES" which petitioners and Matti did not
clearly intend. AaIDCS
It is not impossible that as between Escao, Silos and Matti, there was an agreement
whereby in the event that Ortigas were to seek reimbursement from them per the
terms of the Undertaking, one of them was to act as surety and to pay Ortigas in full,
subject to his right to full reimbursement from the other two obligors. In such case,
there would have been, in fact, a surety agreement which evinces a solidary
obligation in favor of Ortigas. Yet if there was indeed such an agreement, it does not
appear on the records. More consequentially, no such intention is reflected in the
Undertaking itself, the very document that creates the conditional obligation that
petitioners and Matti reimburse Ortigas should he be made to pay PDCP. The mere
utilization of the term "SURETIES" could not work to such effect, especially as it does
not appear who exactly is the principal debtor whose obligation is "assured" or
"guaranteed" by the surety.
Ortigas further argues that the nature of the Undertaking requires "solidary obligation
of the Sureties," since the Undertaking expressly seeks to "reliev[e] obligors of any
and all liability arising from their said joint and several undertaking with [F]alcon," and
for the "sureties" to "irrevocably agree and undertake to assume all of obligors said
Page 168 of 505

guarantees to PDCP." 50 We do not doubt that a finding of solidary liability among the
petitioners works to the benefit of Ortigas in the facilitation of these goals, yet the
Undertaking itself contains no stipulation or clause that establishes petitioners'
obligation to Ortigas as solidary. Moreover, the aims adverted to by Ortigas do not by
themselves establish that the nature of the obligation requires solidarity. Even if the
liability of petitioners and Matti were adjudged as merely joint, the full relief and
reimbursement of Ortigas arising from his payment to PDCP would still be
accomplished through the complete execution of such a judgment.

Petitioners further claim that they are not liable for attorney's fees since the
Undertaking contained no such stipulation for attorney's fees, and that the situation
did not fall under the instances under Article 2208 of the Civil Code where attorney's
fees are recoverable in the absence of stipulation.
We disagree. As Ortigas points out, the acts or omissions of the petitioners led to his
being impleaded in the suit filed by PDCP. The Undertaking was precisely executed
as a means to obtain the release of Ortigas and the Scholeys from their previous
obligations as sureties of Falcon, especially considering that they were already
divesting their shares in the corporation. Specific provisions in the Undertaking
obligate petitioners to work for the release of Ortigas from his surety agreements with
Falcon. Specific provisions likewise mandate the immediate repayment of Ortigas
should he still be made to pay PDCP by reason of the guaranty agreements from
which he was ostensibly to be released through the efforts of petitioners. None of
these provisions were complied with by petitioners, and Article 2208 (2) precisely
allows for the recovery of attorney's fees "[w]hen the defendant's act or omission has
compelled the plaintiff to litigate with third persons or to incur expenses to protect his
interest." TDCAHE
Finally, petitioners claim that they should not be liable for interest since the
Undertaking does not contain any stipulation for interest, and assuming that they are
liable, that the rate of interest should not be 12% per annum, as adjudged by the RTC.
The seminal ruling in Eastern Shipping Lines, Inc. v. Court of Appeals 51 set forth the
rules with respect to the manner of computing legal interest:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is breached,
the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept

of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should
be that which may have been stipulated in
writing. Furthermore, the interest due shall itself
earn legal interest from the time it is judicially
demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or
extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code.
2. When an obligation, not constituting a loan or
forbearance of money, is breached, an interest
on the amount of damages awarded may be
imposed at the discretion of the court at the
rate of 6% per annum. No interest, however,
shall be adjudged on unliquidated claims or
damages except when or until the demand can
be established with reasonable certainty.
Accordingly, where the demand is established
with reasonable certainty, the interest shall
begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so
reasonably established at the time the demand
is made, the interest shall begin to run only
from the date the judgment of the court is made
(at which time quantification of damages may
be deemed to have been reasonably
ascertained). The actual base for the
computation of legal interest shall, in any case,
be on the amount finally adjudged. DaTHAc
3. When the judgment of the court awarding a sum of
money becomes final and executory, the rate of
legal interest, whether the case falls under
Page 169 of 505

paragraph 1 or paragraph 2, above, shall be

12% per annum from such finality until its
satisfaction, this interim period being deemed
to be by then an equivalent to a forbearance of
credit. 52
Since what was the constituted in the Undertaking consisted of a
payment in a sum of money, the rate of interest thereon shall be 12% per
annum to be computed from default, i.e., from judicial or extrajudicial demand.
The interest rate imposed by the RTC is thus proper. However, the computation
should be reckoned from judicial or extrajudicial demand. Per records, there is no
indication that Ortigas made any extrajudicial demand to petitioners and Matti
after he paid PDCP, but on 14 March 1994, Ortigas made a judicial demand
when he filed a Third-Party Complaint praying that petitioners and Matti be made
to reimburse him for the payments made to PDCP. It is the filing of this ThirdParty Complaint on 14 March 1994 that should be considered as the date of
judicial demand from which the computation of interest should be
reckoned. 53 Since the RTC held that interest should be computed from 28
February 1994, the appropriate redefinition should be made.
WHEREFORE, the Petition is GRANTED in PART. The Order of the Regional Trial
Court dated 5 October 1995 is MODIFIED by declaring that petitioners and Joseph M.
Matti are only jointly liable, not jointly and severally, to respondent Rafael Ortigas, Jr.
in the amount of P1,300,000.00. The Order of the Regional Trial Court dated 7 March
1996 is MODIFIED in that the legal interest of 12% per annum on the amount of
P1,300,000.00 is to be computed from 14 March 1994, the date of judicial demand,
and not from 28 February 1994 as directed in the Order of the lower court. The
assailed rulings are affirmed in all other respects. Costs against petitioners.

SECOND DIVISION
[G.R. No. L-29139. November 15, 1974.]
CONSUELO P. PICZON, RUBEN O. PICZON and AIDA P.
ALCANTARA, plaintiffs-appellants, vs. ESTEBAN PICZON and
SOSING-LOBOS & CO., INC.,defendants-appellees.

Vicente C. Santos for plaintiff-appellants.

Jacinto R. Bohol for defendant-appellee Sosing-Lobos & Co., Inc.
Vicente M. Macabidang for defendant-appellee Esteban Piczon.

DECISION

SO ORDERED.
Carpio, Carpio-Morales and Velasco, Jr., JJ., concur.
Quisumbing, J., is on official leave.
||| (Escao v. Ortigas, Jr., G.R. No. 151953, [June 29, 2007], 553 PHIL 24-48)

BARREDO, J p:
Appeal from the decision of the Court of First Instance of Samar in its Civil Case No.
5156, entitled Consuelo P. Piczon, et. al. vs. Esteban Piczon, et al., sentencing
defendants-appellees, Sosing Lobos and Co., Inc., as principal, and Esteban Piczon,
as guarantor, to pay plaintiffs-appellants "the sum of P12,500.00 with 12% interest
from August 6, 1964 until said principal amount of P12,500.00 shall have been duly
paid, and the costs."
Page 170 of 505

After issues were joined and at the end of the pre-trial held on August 22, 1967, the
trial court issued the following order:
"When this case was called for pre-trial, plaintiffs and defendants
through their lawyers, appeared and entered into the following
agreement:
1. That defendants admit the due execution of Annexes 'A' and 'B'
of the complaint;
2. That consequently defendant Sosing-Lobos and Co., Inc. binds
itself to the plaintiffs for P12,600.00, the same to be paid on or
before October 31, 1967 together with the interest that this court
may determine.
That the issues in this case are legal ones namely:
(a) Will the payment of twelve per cent interest of P12,500.00
commence to run from August 6, 1964 when plaintiffs made the
first demand or from August 29, 1956 when the obligation
becomes due and demandable?
(b) Is defendant Esteban Piczon liable as a guarantor or a
surety?
That the parties are hereby required to file their respective
memorandum if they so desire on or before September 15, 1967
to discuss the legal issues and therewith the case will be
considered submitted for decision.
WHEREFORE, the instant case is hereby considered submitted
based on the aforesaid facts agreed upon and upon submission
of the parties of their respective memorandum on or before
September 15, 1967.
SO ORDERED." 1 (Record on Appeal pp. 28-30.)
Annex "A", the actionable document of appellants reads thus:
"AGREEMENT OF LOAN
KNOW YE ALL MEN BY THESE PRESENTS:
That I, ESTEBAN PICZON, of legal age, married, Filipino, and
resident of and with postal address in the municipality of

Catbalogan, Province of Samar, Philippines, in my capacity as

the President of the corporation known as the 'SOSING-LOBOS
and CO., INC.,' as controlling stockholder, and at the same time
as guarantor for the same, do by these presents contract a loan
of Twelve Thousand Five Hundred Pesos (P12,500.00),
Philippine Currency, the receipt of which is hereby acknowledged,
from the 'Piczon and Co., Inc.' another corporation, the main
offices of the two corporations being in Catbalogan, Samar, for
which I undertake, bind and agree to use the loan as surety cash
deposit for registration with the Securities and Exchange
Commission of the incorporation papers relative to the 'SosingLobos and Co., Inc.,' and to return or pay the same amount with
Twelve Per Cent (12%) interest per annum, commencing from the
date of execution hereof, to the 'Piczon and Co., Inc., as soon as
the said incorporation papers are duly registered and the
Certificate of Incorporation issued by the aforesaid Commission.
IN WITNESS WHEREOF, I hereunto signed my name in
Catbalogan, Samar, Philippines, this 28th day of September,
1956.
(Sgd.) ESTEBAN PICZON"
(Record on Appeal, pp. 6-7.)
The trial court having rendered judgment in the tenor aforequoted, appellants assign
the following alleged errors:
"I
THE TRIAL COURT ERRED IN ORDERING THE PAYMENT OF
12% INTEREST ON THE PRINCIPAL OF P12,500.00 FROM
AUGUST 6, 1964, ONLY, INSTEAD OF FROM SEPTEMBER 28,
1956, WHEN ANNEX 'A' WAS DULY EXECUTED.
"II
THE TRIAL COURT ERRED IN CONSIDERING DEFENDANT
ESTEBAN PICZON AS GUARANTOR ONLY AND NOT AS
SURETY.
"III
Page 171 of 505

THE TRIAL COURT ERRED IN NOT ADJUDICATING

DAMAGES IN FAVOR OF THE PLAINTIFFS-APPELLANTS."
(Appellants' Brief, pp. a to b.)
Appellants' first assignment of error is well taken. Instead of requiring appellees to pay
interest at 12% only from August 6, 1964, the trial court should have adhered to the
terms of the agreement which plainly provides that Esteban Piczon had obligated
Sosing-Lobos and Co., Inc. and himself to "return or pay (to Piczon and Co., Inc.) the
same amount (P12,500.00) with Twelve Per Cent (12%) interest per annum
commencing from the date of the execution hereof", Annex A, which was on
September 28, 1956. Under Article 2209 of the Civil Code "(i)f the obligation consists
in the payment of a sum of money, and the debtor incurs in delay, the indemnity for
damages, there being no stipulation to the contrary, shall be the payment of the
interest agreed upon, and in the absence of stipulation, the legal interest, which is six
per cent per annum." In the case at bar, the "interest agreed upon" by the parties in
Annex A was to commence from the execution of said document.
Appellees' contention that the reference in Article 2209 to delay incurred by the debtor
which can serve as the basis for liability for interest is to that defined in Article 1169 of
the Civil Code reading thus:
"Those obliged to deliver or to do something incur in delay from
the time the obligee judicially or extrajudicially demands from
them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in
order that delay may exist:
(1) When the obligation or the law expressly so declares; or
(2) When from the nature and the circumstances of the obligation
it appears that the designation of the time when the thing is to be
delivered or the service is to be rendered was a controlling motive
for the establishment of the contract; or
(3) When demand would be useless, as when the obligor has
rendered it beyond his power to perform.
In reciprocal obligations, neither party incurs in delay if the other
does not comply or is not ready to comply in a proper manner
with what is incumbent upon him. From the moment one of the
parties fulfills his obligation, delay by the other begins."

is untenable. In Quiroz vs. Tan Guinlay, 5 Phil. 675, it was held that the article
cited by appellees (which was Article 1100 of the Old Civil Code read in relation
to Art. 1101) is applicable only when the obligation is to do something other than
the payment of money. And in Firestone Tire & Rubber Co. (P.I.) vs. Delgado, 104
Phil. 920, the Court squarely ruled that if the contract stipulates from what time
interest will be counted, said stipulated time controls, and, therefore interest is
payable from such time, and not from the date of the filing of the complaint (at p.
925). Were that not the law, there would be no basis for the provision of Article
2212 of the Civil Code providing that "(I)nterest due shall earn legal interest from
the time it is judicially demanded, although the obligation may be silent upon this
point." Incidentally, appellants would have been entitled to the benefit of this
article, had they not failed to plead the same in their complaint. Their prayer for it
in their brief is much too late. Appellees had no opportunity to meet the issue
squarely at the pre-trial.
As regards the other two assignments of error, appellants' pose cannot be sustained.
Under the terms of the contract, Annex A, Esteban Piczon expressly bound himself
only as guarantor, and there are no circumstances in the record from which it can be
deduced that his liability could be that of a surety. A guaranty must be express,
(Article 2055, Civil Code) and it would be violative of the law to consider a party to be
bound as a surety when the very word used in the agreement is "guarantor."
Moreover, as well pointed out in appellees' brief, under the terms of the pre-trial order,
appellants accepted the express assumption of liability by Sosing-Lobos & Co., Inc.
for the payment of the obligation in question, thereby modifying their original posture
that inasmuch as that corporation did not exist yet at the time of the agreement,
Piczon necessarily must have bound himself as insurer.
As already explained earlier, appellants' prayer for payment of legal interest upon
interest due from the filing of the complaint can no longer be entertained, the same
not having been made an issue in the pleadings in the court below. We do not believe
that such a substantial matter can be deemed included in a general prayer for "any
other relief just and equitable in the premises", especially when, as in this case, the
pre-trial order does not mention it in the enumeration of the issues to be resolved by
the court.
PREMISES CONSIDERED, the judgment of the trial court is modified so as to make
appellees liable for the stipulated interest of 12% per annum from September 28,
1956, instead of August 6, 1964. In all other respects, said judgment is affirmed.
Costs against appellees.
Fernando (Chairman), Antonio, Fernandez and Aquino, JJ., concur.
Page 172 of 505

||| (Piczon v. Piczon, G.R. No. L-29139, [November 15, 1974], 158 PHIL 726-731)
SECOND DIVISION
[G.R. No. 126490. March 31, 1998.]
ESTRELLA PALMARES, petitioner, vs. COURT OF APPEALS and M.B. LENDING
CORPORATION, respondents.
Roco, Bunag, Kapunan & Magallos for petitioner.
Angelo E. Grasparail for private respondent.
SYNOPSIS
Petitioner signed as co-maker in a loan. A promissory note was executed whereby
she acknowledged her joint and several (solidary) liability with the principal, that the
creditor may demand payment in case of default, and that she fully understood the
contents thereof. Petitioner, when informed that the debtors defaulted, requested that
creditor try to collect from her principal first and offered to settle the obligation in case
the creditor fails to collect. She also offered a parcel of land to settle the obligation
which the creditor refused. Thereafter, a complaint was filed against petitioner to the
exclusion of the principal debtors. Again petitioner offered to pay but the amount
offered was way below the amount computed. The trial court dismissed the complaint
and ruled that the complaint against the petitioner amounted to a discharge of a prior
party, that the offer to pay made by petitioner who is secondarily liable to the
instrument discharged petitioner. The Court of Appeals, reversing the trial court, ruled
that petitioner is solidarily liable with the principal debtors and may be sued for the
entire obligation. Hence, this recourse. aTEScI
The Supreme Court held that it is a cardinal rule in interpretations of contracts that if
the terms of a contract are clear and leave no doubt upon the intention of the parties,
the literal meaning of its stipulation shall control. Hence, where petitioner expressly
binds herself to be jointly and severally or solidarily liable with the principal maker of
the note, her liability is that of a surety and is bound equally and absolutely with the
principal.
Having entered into a contract with full knowledge of its terms and conditions,
petitioner is estopped to assert that she did so in ignorance of their legal effect.
The obligee is entitled to demand fulfillment of the obligation or performance
stipulated, hence, an offer to pay obligation in an amount less or different from that
due does not discharge liability. SECIcT
REGALADO, J p:
Where a party signs a promissory note as a co-maker and binds herself to be jointly
and severally liable with the principal debtor in case the latter defaults in the payment

of the loan, is such undertaking of the former deemed to be that of a surety as an

insurer of the debt, or of a guarantor who warrants the solvency of the debtor? cdasia
Pursuant to a promissory note dated March 13, 1990, private respondent M.B.
Lending Corporation extended a loan to the spouses Osmea and Merlyn Azarraga,
together with petitioner Estrella Palmares, in the amount of P30,000.00 payable on or
before May 12, 1990, with compounded interest at the rate of 6% per annum to be
computed every 30 days from the date thereof. 1 On four occasions after the
execution of the promissory note and even after the loan matured, petitioner and the
Azarraga spouses were able to pay a total of P16,300.00, thereby leaving a balance
of P13,700.00. No payments were made after the last payment on September 26,
1991. 2
Consequently, on the basis of petitioner's solidary liability under the promissory note,
respondent corporation filed a complaint 3 against petitioner Palmares as the lone
party-defendant, to the exclusion of the principal debtors, allegedly by reason of the
insolvency of the latter.
In her Amended Answer with Counterclaim, 4 petitioner alleged that sometime in
August 1990, immediately after the loan matured, she offered to settle the obligation
with respondent corporation but the latter informed her that they would try to collect
from the spouses Azarraga and that she need not worry about it; that there has
already been a partial payment in the amount of P17,010.00; that the interest of 6%
per month compounded at the same rate per month, as well as the penalty charges of
3% per month, are usurious and unconscionable; and that while she agrees to be
liable on the note but only upon default of the principal debtor, respondent corporation
acted in bad faith in suing her alone without including the Azarragas when they were
the only ones who benefited from the proceeds of the loan.
During the pre-trial conference, the parties submitted the following issues for the
resolution of the trial court: (1) what the rate of interest, penalty and damages should
be; (2) whether the liability of the defendant (herein petitioner) is primary or
subsidiary; and (3) whether the defendant Estrella Palmares is only a guarantor with a
subsidiary liability and not a co-maker with primary liability. 5
Thereafter, the parties agreed to submit the case for decision based on the pleadings
filed and the memoranda to be submitted by them. On November 26, 1992, the
Regional Trial Court of Iloilo City, Branch 23, rendered judgment dismissing the
complaint without prejudice to the filing of a separate action for a sum of money
against the spouses Osmea and Merlyn Azarraga who are primarily liable on the
instrument. 6 This was based on the findings of the court a quo that the filing of the
complaint against herein petitioner Estrella Palmares, to the exclusion of the Azarraga
spouses, amounted to a discharge of a prior party; that the offer made by petitioner to
Page 173 of 505

pay the obligation is considered a valid tender of payment sufficient to discharge a

person's secondary liability on the instrument; that petitioner, as co-maker, is only
secondary liable on the instrument; and that the promissory note is a contract of
adhesion.
Respondent Court of Appeals, however, reversed the decision of the trial court, and
rendered judgment declaring herein petitioner Palmares liable to pay respondent
corporation:
1. The sum of P13,700.00 representing the outstanding balance still due and owing
with interest at six percent (6%) per month computed from the date the loan was
contracted until fully paid;
2. The sum equivalent to the stipulated penalty of three percent (3%) per month, of
the outstanding balance;
3. Attorney's fees at 25% of the total amount due per stipulations;
4. Plus costs of suit. 7
Contrary to the findings of the trial court, respondent appellate court declared that
petitioner Palmares is a surety since she bound herself to be jointly and severally or
solidarity liable with the principal debtors, the Azarraga spouses, when she signed as
a co-maker. As such, petitioner is primarily liable on the note and hence may be sued
by the creditor corporation for the entire obligation. It also adverted to the fact that
petitioner admitted her liability in her Answer although she claims that the Azarraga
spouses should have been impleaded. Respondent court ordered the imposition of
the stipulated 6% interest and 3% penalty charges on the ground that the Usury Law
is no longer enforceable pursuant to Central Bank Circular No. 905. Finally, it
rationalized that even if the promissory note were to be considered as a contract of
adhesion, the same is not entirely prohibited because the one who adheres to the
contract is free to reject it entirely; if he adheres, he gives his consent.
Hence this petition for review on certiorari wherein it is asserted that:
A. The Court of Appeals erred in ruling that Palmares acted as surety and is therefore
solidarily liable to pay the promissory note.
1. The terms of the promissory note are vague. Its conflicting provisions do not
establish Palmares' solidary liability.
2. The promissory note contains provisions which establish the co-maker's liability as
that of a guarantor.
3. There is no sufficient basis for concluding that Palmares' liability is solidary.
4. The promissory note is a contract of adhesion and should be construed against
M.B. Lending Corporation.
5. Palmares cannot be compelled to pay the loan at this point.

B. Assuming that Palmares' liability is solidary, the Court of Appeals erred in strictly
imposing the interests and penalty charges on the outstanding balance of the
promissory note.
The foregoing contentions of petitioner are denied and contradicted in their material
points by respondent corporation. They are further refuted by accepted doctrines in
the American jurisdiction after which we patterned our statutory law on suretyship and
guaranty. This case then affords us the opportunity to make an extended exposition
on the ramifications of these two specialized contracts, for such guidance as may be
taken therefrom in similar local controversies in the future.
The basis of petitioner Palmares' liability under the promissory note is expressed in
this wise:
ATTENTION TO CO-MAKERS: PLEASE READ WELL
I, Mrs. Estrella Palmares, as the Co-maker of the above-quoted loan, have fully
understood the contents of this Promissory Note for Short-Term Loan:
That as Co-maker, I am fully aware that I shall be jointly and severally or solidarily
liable with the above principal maker of this note;
That in fact, I hereby agree that M.B. LENDING CORPORATION may demand
payment of the above loan from me in case the principal maker, Mrs. Merlyn
Azarragadefaults in the payment of the note subject to the same conditions abovecontained. 8
Petitioner contends that the provisions of the second and third paragraph are
conflicting in that while the second paragraph seems to define her liability as that of a
surety which is joint and solidary with the principal maker, on the other hand, under
the third paragraph her liability is actually that of a mere guarantor because she
bound herself to fulfill the obligation only in case the principal debtor should fail to do
so, which is the essence of a contract of guaranty. More simply stated, although the
second paragraph says that she is liable as a surety, the third paragraph defines the
nature of her liability as that of a guarantor. According to petitioner, these are two
conflicting provisions in the promissory note and the rule is that clauses in the contract
should be interpreted in relation to one another and not by parts. In other words, the
second paragraph should not be taken in isolation, but should be read in relation to
the third paragraph.
In an attempt to reconcile the supposed conflict between the two provisions, petitioner
avers that she could be held liable only as a guarantor for several reasons. First, the
words "jointly and severally or solidarily liable" used in the second paragraph are
technical and legal terms which are not fully appreciated by an ordinary layman like
herein petitioner, a 65-year old housewife who is likely to enter into such transactions
without fully realizing the nature and extent of her liability. On the contrary, the
wordings used in the third paragraph are easier to comprehend. Second, the law
Page 174 of 505

looks upon the contract of suretyship with a jealous eye and the rule is that the
obligation of the surety cannot be extended by implication beyond specified limits,
taking into consideration the peculiar nature of a surety agreement which holds the
surety liable despite the absence of any direct consideration received from either the
principal obligor or the creditor. Third, the promissory note is a contract of adhesion
since it was prepared by respondent M.B. Lending Corporation. The note was brought
to petitioner partially filled up, the contents thereof were never explained to her, and
her only participation was to sign thereon. Thus, any apparent ambiguity in the
contract should be strictly construed against private respondent pursuant to Art. 1377
of the Civil Code. 9
Petitioner accordingly concludes that her liability should be deemed restricted by the
clause in the third paragraph of the promissory note to be that of a guarantor. cdasia
Moreover, petitioner submits that she cannot as yet be compelled to pay the loan
because the principal debtors cannot be considered in default in the absence of a
judicial or extrajudicial demand. It is true that the complaint alleges the fact of
demand, but the purported demand letters were never attached to the pleadings filed
by private respondent before the trial court. And, while petitioner may have admitted in
her Amended Answer that she received a demand letter from respondent corporation
sometime in 1990, the same did not effectively put her or the principal debtors in
default for the simple reason that the latter subsequently made a partial payment on
the loan in September, 1991, a fact which was never controverted by herein private
respondent.
Finally, it is argued that the Court of Appeals gravely erred in awarding the amount of
P2,745,483.39 in favor of private respondent when, in truth and in fact, the
outstanding balance of the loan is only P13,700.00. Where the interest charged on the
loan is exorbitant, iniquitous or unconscionable, and the obligation has been partially
complied with, the court may equitable reduce the penalty 10 on grounds of
substantial justice. More importantly, respondent corporation never refuted petitioner's
allegation that immediately after the loan matured, she informed said respondent of
her desire to settle the obligation. The court should, therefore, mitigate the damages
to be paid since petitioner has shown a sincere desire for a compromise. 11
After a judicious evaluation of the arguments of the parties, we are constrained to
dismiss the petition for lack of merit, but to except therefrom the issue anent the
propriety of the monetary award adjudged to herein respondent corporation.
At the outset, let it here be stressed that even assuming arguendo that the promissory
note executed between the parties is a contract of adhesion, it has been the
consistent holding of the Court that contracts of adhesion are not invalid per se and
that on numerous occasions the binding effects thereof have been upheld. The

peculiar nature of such contracts necessitate a close scrutiny of the factual milieu to
which the provisions are intended to apply. Hence, just as consistently and
unhesitatingly, but without categorically invalidating such contracts, the Court has
construed obscurities and ambiguities in the restrictive provisions of contracts of
adhesion strictly albeit not unreasonably against the drafter thereof when justified in
light of the operative facts and surrounding circumstances. 12 The factual scenario
obtaining in the case before us warrants a liberal application of the rule in favor of
respondent corporation.
The Civil Code pertinently provides:
Art. 2047. By guaranty, a person called the guarantor binds himself to the creditor to
fulfill the obligation of the principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Section
4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called
a suretyship.
It is a cardinal rule in the interpretation of contracts that if the terms of a contract are
clear and leave no doubt upon the intention of the contracting parties, the literal
meaning of its stipulation shall control. 13 In the case at bar, petitioner expressly
bound herself to be jointly and severally or solidarily liable with the principal maker of
the note. The terms of the contract are clear, explicit and unequivocal that petitioner's
liability is that of a surety.
Her pretension that the terms "jointly and severally or solidarity liable" contained in the
second paragraph of her contract are technical and legal terms which could not be
easily understood by an ordinary layman like her is diametrically opposed to her
manifestation in the contract that she "fully understood the contents" of the promissory
note and that she is "fully aware" of her solidary liability with the principal maker.
Petitioner admits that she voluntarily affixed her signature thereto; ergo, she cannot
now be heard to claim otherwise. Any reference to the existence of fraud is unavailing.
Fraud must be established by clear and convincing evidence, mere preponderance of
evidence not even being adequate. Petitioner's attempt to prove fraud must, therefore,
fail as it was evidenced only by her own uncorroborated and, expectedly, self-serving
allegations. 14
Having entered into the contract with full knowledge of its terms and conditions,
petitioner is estopped to assert that she did so under a misapprehension or in
ignorance of their legal effect, or as to the legal effect of the undertaking. 15 The rule
that ignorance of the contents of an instrument does not ordinarily affect the liability of
one who signs it also applies to contracts of suretyship. And the mistake of a surety
as to the legal effect of her obligation is ordinarily no reason for relieving her of
liability. 16

Page 175 of 505

Petitioner would like to make capital of the fact that although she obligated herself to
be jointly and severally liable with the principal maker, her liability is deemed restricted
by the provisions of the third paragraph of her contract wherein she agreed "that M.B.
Lending Corporation may demand payment of the above loan from me in case the
principal maker, Mrs. Merlyn Azarraga defaults in the payment of the note," which
makes her contract one of guaranty and not suretyship. The purported discordance is
more apparent than real.
A surety is an insurer of the debt, whereas a guarantor is an insurer of the solvency of
the debtor. 17 A suretyship is an undertaking that the debt shall be paid; a guaranty,
an undertaking that the debtor shall pay. 18 Stated differently, a surety promises to
pay the principal's debt if the principal will not pay, while a guarantor agrees that the
creditor, after proceeding against the principal, may proceed against the guarantor if
the principal is unable to pay. 19 A surety binds himself to perform if the principal does
not, without regard to his ability to do so. A guarantor, on the other hand, does not
contract that the principal will pay, but simply that he is able to do so. 20 In other
words, a surety undertakes directly for the payment and is so responsible at once if
the principal debtor makes default, while a guarantor contracts to pay if, by the use of
due diligence, the debt cannot be made out of the principal debtor. 21
Quintessentially, the undertaking to pay upon default of the principal debtor does not
automatically remove it from the ambit of a contract of suretyship. The second and
third paragraphs of the aforequoted portion of the promissory note do not contain any
other condition for the enforcement of respondent corporation's right against
petitioner. It has not been shown, either in the contract or the pleadings, that
respondent corporation agreed to proceed against herein petitioner only if and
when the defaulting principal has become insolvent. A contract of suretyship, to
repeat, is that wherein one lends his credit by joining in the principal debtor's
obligation, so as to render himself directly and primarily responsible with him, and
without reference to the solvency of the principal. 22
In a desperate effort to exonerate herself from liability, petitioner erroneously invokes
the rule on strictissimi juris, which holds that when the meaning of a contract of
indemnity or guaranty has once been judicially determined under the rule of
reasonable construction applicable to all written contracts, then the liability of the
surety, under his contract, as thus interpreted and construed, is not to be extended
beyond its strict meaning. 23 The rule, however, will apply only after it has been
definitely ascertained that the contract is one of suretyship and not a contract of
guaranty. It cannot be used as an aid in determining whether a party's undertaking is
that of a surety or a guarantor.
Prescinding from these jurisprudential authorities, there can be no doubt that the
stipulation contained in the third paragraph of the controverted suretyship contract

merely elucidated on and made more specific the obligation of petitioner as generally
defined in the second paragraph thereof. Resultantly, the theory advanced by
petitioner, that she is merely a guarantor because her liability attaches only upon
default of the principal debtor, must necessarily fail for being incongruent with the
judicial pronouncements adverted to above.
It is a well-entrenched rule that in order to judge the intention of the contracting
parties, their contemporaneous and subsequent acts shall also be principally
considered. 24 Several attendant factors in that genre lend support to our finding that
petitioner is a surety. For one, when petitioner was informed about the failure of the
principal debtor to pay the loan, she immediately offered to settle the account with
respondent corporation. Obviously, in her mind, she knew that she was directly and
primarily liable upon default of her principal. For another, and this is most revealing,
petitioner presented the receipts of the payments already made, from the time of initial
payment up to the last, which were all issued in her name and of the Azarraga
spouses. 25 This can only be construed to mean that the payments made by the
principal debtors were considered by respondent corporation as creditable directly
upon the account and inuring to the benefit of petitioner. The concomitant and
simultaneous compliance of petitioner's obligation with that of her principals only goes
to show that, from the very start, petitioner considered herself equally bound by the
contract of the principal makers. cdasia
In this regard, we need only to reiterate the rule that a surety is bound equally and
absolutely with the principal, 26 and as such is deemed an original promisor and
debtor from the beginning. 27 This is because in suretyship there is but one contract,
and the surety is bound by the same agreement which binds the principal. 28 In
essence, the contract of a surety starts with the agreement, 29 which is precisely the
situation obtaining in this case before the Court.
It will further be observed that petitioner's undertaking as co-maker immediately
follows the terms and conditions stipulated between respondent corporation, as
creditor, and the principal obligors. A surety is usually bound with his principal by the
same instrument, executed at the same time and upon the same consideration; he is
an original debtor, and his liability is immediate and direct. 30 Thus, it has been held
that where a written agreement on the same sheet of paper with and immediately
following the principal contract between the buyer and seller is executed
simultaneously therewith, providing that the signers of the agreement agreed to the
terms of the principal contract, the signers were "sureties" jointly liable with the
buyer. 31 A surety usually enters into the same obligation as that of his principal, and
the signatures of both usually appear upon the same instrument, and the same
consideration usually supports the obligation for both the principal and the surety.32
Page 176 of 505

There is no merit in petitioner's contention that the complaint was prematurely filed
because the principal debtors cannot as yet be considered in default, there having
been no judicial or extrajudicial demand made by respondent corporation. Petitioner
has agreed that respondent corporation may demand payment of the loan from her in
case the principal maker defaults, subject to the same conditions expressed in the
promissory note. Significantly, paragraph (G) of the note states that "should I fail to
pay in accordance with the above schedule of payment, I hereby waive my right to
notice and demand." Hence, demand by the creditor is no longer necessary in order
that delay may exist since the contract itself already expressly so declares. 33 As a
surety, petitioner is equally bound by such waiver.
Even if it were otherwise, demand on the sureties is not necessary before bringing
suit against them, since the commencement of the suit is a sufficient demand. 34 On
this point, it may be worth mentioning that a surety is not even entitled, as a matter of
right, to be given notice of the principal's default. Inasmuch as the creditor owes no
duty of active diligence to take care of the interest of the surety, his mere failure to
voluntarily give information to the surety of the default of the principal cannot have the
effect of discharging the surety. The surety is bound to take notice of the principal's
default and to perform the obligation. He cannot complain that the creditor has not
notified him in the absence of a special agreement to that effect in the contract of
suretyship. 35
The alleged failure of respondent corporation to prove the fact of demand on the
principal debtors, by not attaching copies thereof to its pleadings, is likewise
immaterial. In the absence of a statutory or contractual requirement, it is not
necessary that payment or performance of his obligation be first demanded of the
principal, especially where demand would have been useless; nor is it a requisite,
before proceeding against the sureties, that the principal be called on to
account. 36The underlying principle therefor is that a suretyship is a direct contract to
pay the debt of another. A surety is liable as much as his principal is liable, and
absolutely liable as soon as default is made, without any demand upon the principal
whatsoever or any notice of default. 37 As an original promisor and debtor from the
beginning, he is held ordinarily to know every default of his principal. 38
Petitioner questions the propriety of the filing of a complaint solely against her to the
exclusion of the principal debtors who allegedly were the only ones who benefited
from the proceeds of the loan. What petitioner is trying to imply is that the creditor,
herein respondent corporation, should have proceeded first against the principal
before suing on her obligation as surety. We disagree.
A creditor's right to proceed against the surety exists independently of his right to
proceed against the principal. 39 Under Article 1216 of the Civil Code, the creditor

may proceed against any one of the solidary debtors or some or all of them
simultaneously. The rule, therefore, is that if the obligation is joint and several, the
creditor has the right to proceed even against the surety alone. 40 Since, generally, it
is not necessary for a creditor to proceed against a principal in order to hold the surety
liable, where, by the terms of the contract, the obligation of the surety is the same as
that of the principal, then as soon as the principal is in default, the surety is likewise in
default, and may be sued immediately and before any proceedings are had against
the principal. 41 Perforce, in accordance with the rule that, in the absence of statute
or agreement otherwise, a surety is primarily liable, and with the rule that his proper
remedy is to pay the debt and pursue the principal for reimbursement, the surety
cannot at law, unless permitted by statute and in the absence of any agreement
limiting the application of the security, require the creditor or obligee, before
proceeding against the surety, to resort to and exhaust his remedies against the
principal, particularly where both principal and surety are equally bound. 42
We agree with respondent corporation that its mere failure to immediately sue
petitioner on her obligation does not release her from liability. Where a creditor
refrains from proceeding against the principal, the surety is not exonerated. In other
words, mere want of diligence or forbearance does not affect the creditor's rights visa-vis the surety, unless the surety requires him by appropriate notice to sue on the
obligation. Such gratuitous indulgence of the principal does not discharge the surety
whether given at the principal's request or without it, and whether it is yielded by the
creditor through sympathy or from an inclination to favor the principal, or is only the
result of passiveness. The neglect of the creditor to sue the principal at the time the
debt falls due does not discharge the surety, even if such delay continues until the
principal becomes insolvent. 43 And, in the absence of proof of resultant injury, a
surety is not discharged by the creditor's mere statement that the creditor will not look
to the surety, 44 or that he need not trouble himself. 45 The consequences of the
delay, such as the subsequent insolvency of the principal, 46 or the fact that the
remedies against the principal may be lost by lapse of time, are immaterial. 47
The raison d'trefor the rule is that there is nothing to prevent the creditor from
proceeding against the principal at any time. 48 At any rate, if the surety is dissatisfied
with the degree of activity displayed by the creditor in the pursuit of his principal, he
may pay the debt himself and become subrogated to all the rights and remedies of the
creditor. 49
It may not be amiss to add that leniency shown to a debtor in default, by delay
permitted by the creditor without change in the time when the debt might be
demanded, does not constitute an extension of the time of payment, which would
release the surety. 50 In order to constitute an extension discharging the surety, it
should appear that the extension was for a definite period , pursuant to an enforceable
Page 177 of 505

agreement between the principal and the creditor, and that it was made without the
consent of the surety or with a reservation of rights with respect to him. The contract
must be one which precludes the creditor from, or at least hinders him in, enforcing
the principal contract within the period during which he could otherwise have enforced
it, and which precludes the surety from paying the debt. 51
None of these elements are present in the instant case. Verily, the mere fact that
respondent corporation gave the principal debtors an extended period of time within
which to comply with their obligation did not effectively absolve herein petitioner from
the consequences of her undertaking. Besides, the burden is on the surety, herein
petitioner, to show that she has been discharged by some act of the
creditor, 52 herein respondent corporation, failing in which we cannot grant the relief
prayed for. LLjur
As a final issue, petitioner claims that assuming that her liability is solidary, the
interests and penalty chargers on the outstanding balance of the loan cannot be
imposed for being illegal and unconscionable. Petitioner additionally theorizes that
respondent corporation intentionally delayed the collection of the loan in order that the
interests and penalty charges would accumulate. The statement, likewise traversed by
said respondent, is misleading.
In an affidavit 53 executed by petitioner, which was attached to her petition, she
stated, among others, that:
8. During the latter part of 1990, I was surprised to learn that Merlyn Azarraga's loan
has been released and that she has not paid the same upon its maturity. I received a
telephone call from Mr. Augusto Banusing of MB Lending informing me of this fact and
of my liability arising from the promissory note which I signed.
9. I requested Mr. Banusing to try to collect first from Merlyn and Osmea Azarraga.
At the same time, I offered to pay MB Lending the outstanding balance of the principal
obligation should he fail to collect from Merlyn and Osmea Azarraga. Mr. Banusing
advised me not to worry because he will try to collect first from Merlyn and Osmea
Azarraga.
10. A year thereafter, I received a telephone call from the secretary of Mr. Banusing
who reminded that the loan of Merlyn and Osmea Azarraga, together with interest
and penalties thereon, has not been paid. Since I had no available funds at that time, I
offered to pay MB Lending by delivering to them a parcel of land which I own. Mr.
Banusing's secretary, however, refused my offer for the reason that they are not
interested in real estate.
11. In March 1992, I received a copy of the summons and of the complaint filed
against me by MB Lending before the RTC-Iloilo. After learning that a complaint was
filed against me, I instructed Sheila Gatia to go to MB Lending and reiterate my first

offer to pay the outstanding balance of the principal obligation of Merlyn Azarraga in
the amount of P30,000.00.
12. Ms. Gatia talked to the secretary of Mr. Banusing who referred her to Atty. Venus,
counsel of MB Lending.
13. Atty. Venus informed Ms. Gatia that he will consult Mr. Banusing if my offer to pay
the outstanding balance of the principal obligation loan (sic) of Merlyn and Osmea
Azarraga is acceptable. Later, Atty. Venus informed Ms. Gatia that my offer is not
acceptable to Mr. Banusing.
The purported offer to pay made by petitioner can not be deemed sufficient and
substantial in order to effectively discharge her from liability. There are a number of
circumstances which conjointly inveigh against her aforesaid theory.
1. Respondent corporation cannot be faulted for not immediately demanding payment
from petitioner. It was petitioner who initially requested that the creditor try to collect
from her principal first, and she offered to pay only in case the creditor fails to collect.
The delay, if any, was occasioned by the fact that respondent corporation merely
acquiesced to the request of petitioner. At any rate, there was here no actual offer of
payment to speak of but only a commitment to pay if the principal does not pay.
2. Petitioner made a second attempt to settle the obligation by offering a parcel of land
which she owned. Respondent corporation was acting well within its rights when it
refused to accept the offer. The debtor of a thing cannot compel the creditor to receive
a different one, although the latter may be of the same value, or more valuable than
that which is due. 54 The obligee is entitled to demand fulfillment of the obligation or
performance as stipulated. A change of the object of the obligation would constitute
novation requiring the express consent of the parties. 55
3. After the complaint was filed against her, petitioner reiterated her offer to pay the
outstanding balance of the obligation in the amount of P30,000.00 but the same was
likewise rejected. Again, respondent corporation cannot be blamed for refusing the
amount being offered because it fell way below the amount it had computed, based on
the stipulated interests and penalty charges, as owing and due from herein petitioner.
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. 56 In other words, the prestation must be fulfilled completely. A person entering
into a contract has a right to insist on its performance in all particulars. 57
Petitioner cannot compel respondent corporation to accept the amount she is willing
to pay because the moment the latter accepts the performance, knowing its
incompleteness or irregularity, and without expressing any protest or objection, then
the obligation shall be deemed fully complied with. 58 Precisely, this is what

Page 178 of 505

respondent corporation wanted to avoid when it continually refused to settle with

petitioner at less than what was actually due under their contract.
This notwithstanding, however, we find and so hold that the penalty charge of 3% per
month and attorney's fees equivalent to 25% of the total amount due are highly
inequitable and unreasonable.
It must be remembered that from the principal loan of P30,000.00, the amount of
P16,300.00 had already been paid even before the filing of the present case. Article
1229 of the Civil Code provides that the court shall equitably reduce the penalty when
the principal obligation has been partly or irregularly complied with by the debtor. And,
even if there has been no performance, the penalty may also be reduced if it is
iniquitous or leonine.
In a case previously decided by this Court which likewise involved private respondent
M.B. Lending Corporation, and which is substantially on all fours with the one at bar,
we decided to eliminate altogether the penalty interest for being excessive and
unwarranted under the following rationalization:
Upon the matter of penalty interest, we agree with the Court of Appeals that the
economic impact of the penalty interest of three percent (3%) per month on total
amount due but unpaid should be equitably reduced. The purpose for which the
penalty interest is intended that is, to punish the obligor will have been
sufficiently served by the effects of compounded interest. Under the exceptional
circumstances in the case at bar, e.g., the original amount loaned was only
P15,000.00; partial payment of P8,600.00 was made on due date; and the heavy
(albeit still lawful) regular compensatory interest, the penalty interest stipulated in the
parties' promissory note is iniquitous and unconscionable and may be equitably
reduced further by eliminating such penalty interest altogether. 59
Accordingly, the penalty interest of 3% per month being imposed on petitioner should
similarly be eliminated.
Finally, with respect to the award of attorney's fees, this Court has previously ruled
that even with an agreement thereon between the parties, the court may nevertheless
reduce such attorney's fees fixed in the contract when the amount thereof appears to
be unconscionable or unreasonable. 60 To that end, it is not even necessary to show,
as in other contracts, that it is contrary to morals or public policy. 61 The grant of
attorney's fees equivalent to 25% of the total amount due is, in our opinion,
unreasonable and immoderate, considering the minimal unpaid amount involved and
the extent of the work involved in this simple action for collection of a sum of money.
We, therefore, hold that the amount of P10,000.00 as and for attorney's fee would be
sufficient in this case. 62

WHEREFORE, the judgment appealed from is hereby AFFIRMED, subject to the

MODIFICATION that the penalty interest of 3% per month is hereby deleted and the
award of attorney's fees is reduced to P10,000.00.
SO ORDERED. LLjur
Melo, Puno, Mendoza and Martinez, JJ .,concur.
||| (Palmares v. Court of Appeals, G.R. No. 126490, [March 31, 1998], 351 PHIL 664691)

EN BANC

Page 179 of 505

[G.R. No. 34642. September 24, 1931.]

FABIOLA SEVERINO, accompanied by her husband
RICARDO VERGARA, plaintiffs-appellees, vs. GUILLERMO
SEVERINO ET AL., defendants. ENRIQUE ECHAUS, appellant.

R. Nepomuceno, for appellant.

Jacinto E. Evidente, for appellees.

SYLLABUS
1. CONTRACT; CONSIDERATION; SURETY OR GUARANTOR. It is
not necessary that a surety or guarantor should participate in the benefit which
constitutes the consideration as between the principal parties to the contract.

DECISION

STREET, J p:
This action was instituted in the Court of First Instance of the Province
of Iloilo by Fabiola Severino, with whom is joined her husband Ricardo Vergara,
for the purpose of recovering the sum of P20,000 from Guillermo Severino and
Enrique Echaus, the latter in the character of guarantor for the former. Upon
hearing the cause the trial court gave judgment in favor of the plaintiff's to recover
the sum of P20,000 with lawful interest from November 15, 1929, the date of the
filing of the complaint, with costs. But it was declared that execution of this
judgment should issue first against the property of Guillermo Severino, and if no
property should be found belonging to said defendant sufficient to satisfy the
judgment in whole or in part, execution for the remainder should be issued
against the property of Enrique Echaus as guarantor. From this judgment the
defendant Echaus appealed, but his principal, Guillermo Severino, did not.
The plaintiff Fabiola Severino is the recognized natural daughter of
Melecio Severino, deceased, former resident of Occidental Negros. Upon the

death of Melecio Severino a number of years ago, he left considerable property

and litigation ensued between his widow, Felicitas Villanueva, and Fabiola
Severino, on the one part, and other heirs of the deceased on the other part. In
order to make an end of this litigation a compromise was effected by which
Guillermo Severino, a son of Melecio Severino, took over the property pertaining
to the estate of his father at the same time agreeing to pay P100,000 to Felicitas
Villanueva and Fabiola Severino. This sum of money was made payable, first,
P40,000 in cash upon the execution of the document of compromise, and the
balance in three several payments of P20,000 at the end of one year, two years,
and three years respectively. To this contract the appellant Enrique Echaus
affixed his name as guarantor. The first payment of P40,000 was made on July
11, 1924, the date when the contract of compromise was executed; and of this
amount the plaintiff Fabiola Severino received the sum of P10,000. Of the
remaining P60,000, all as yet unpaid, Fabiola Severino is entitled to the sum of
P20,000.
It appears that at the time the compromise agreement above- mentioned
was executed Fabiola Severino had not yet been judicially recognized as the
natural daughter of Melecio Severino, and it was stipulated that the last P20,000
corresponding to Fabiola and the last P5,000 corresponding to Felicitas
Villanueva should be retained on deposit until the definite status of Fabiola
Severino as natural daughter of Melecio Severino should be established. The
judicial decree to this effect was entered in the Court of First Instance of
Occidental Negros on June 16, 1925, and as the money which was contemplated
to be held in suspense has never in fact been paid to the parties entitled thereto,
it results that the point respecting the deposit referred to has ceased to be of
moment.
The proof shows that the money claimed in this action has never been
paid and is still owing to the plaintiff; and the only defense worth noting in this
decision is the assertion on the part of Enrique Echaus that he received nothing
for affixing his signature as guarantor to the contract which is the subject of suit
and that in effect the contract was lacking in consideration as to him.
The point is not well taken. A guarantor or surety is bound by the same
consideration that makes the contract effective between the principal parties
thereto. (Pyle vs. Johnson, 9 Phil., 249.) The compromise and dismissal of a
lawsuit is recognized in law as a valuable consideration; and the dismissal of the
action which Felicitas Villanueva and Fabiola Severino had instituted against
Guillermo Severino was an adequate consideration to support the promise on the
part of Guillermo Severino to pay the sums of money stipulated in the contract
Page 180 of 505

which is the subject of this action. The promise of the appellant Echaus as
guarantor is therefore binding. It is never necessary that a guarantor or surety
should receive any part of the benefit, if such there be, accruing to his principal.
But the true consideration of this contract was the detriment suffered bythe
plaintiffs in the former action in dismissing that proceeding, andit is immaterial
that no benefit may have accrued either to the principal or his guarantor.
The judgment appealed from is in all respects correct, and the same will
be affirmed, with costs against the appellant. So ordered.
Avancea, C.J., Johnson, Malcolm, Villamor, Ostrand, Romualdez, VillaReal and Imperial, JJ., concur.
||| (Severino v. Echaus, G.R. No. 34642, [September 24, 1931], 56 PHIL 185-188)

FIRST DIVISION
[G.R. No. 45571. June 30, 1939.]
FLORENTINA DE GUZMAN, as administratrix of the intestate
estate of the deceased Santiago Lucero, plaintiff-appellee, vs.
ANASTACIO R. SANTOS,defendant-appellant.

E, V. Filamor for appellant.

Antonio G. Lucero for appellee.

Page 181 of 505

DECISION

IMPERIAL, J p:
This is an appeal taken by the defendant from the decision of the Court
of First Instance of Nueva Ecija which sentenced him to pay the plaintiff the sum
of P3,665.55, plus legal interest thereon from February 10, 1932, until fully paid,
and the costs.
On October 28, 1924, Jerry O. Toole, Antonio K. Abad and Anastacio R.
Santos, the defendant, formed a general mercantile partnership under the style
Philippine-American Construction Company, with a capital of P14,000, P10,000
of which were taken by way of loan from Paulino Candelaria. The partnership and
the copartners undertook and bound themselves to pay, jointly and severally, the
said indebtedness in or before June, 1925. Having violated the conditions of the
contract executed for the purpose, Paulino Candelaria brought civil case No.
3838 of the Court of First Instance of Nueva Ecija on May 15, 1925, against the
Philippine-American Construction Company and its copartners, for the recovery
of the loan, plus interest thereon and stipulated attorney's fees. On January 25,
1926, the said court rendered judgment therein sentencing all the defendants to
pay the plaintiff, jointly and severally, the sum of P9,317, with legal interest
thereon from the filing of the complaint, plus P500 as liquidated damages and
P1,000 as attorney's fees. On appeal this judgment was affirmed by this court on
December 17, 1926 (G. R. No. 26131). A writ of execution of the affirmed
judgment having been issued, the herein plaintiff, in her capacity as judicial
administratrix of the deceased Santiago Lucero, on February 10, 1932, paid to
the creditor Paulino Candelaria the sum of P5,665.55 on account of the
judgment.
Upon the filing of the complaint in civil case No. 3838, Paulino
Candelaria obtained a writ of attachment against the then defendants by virtue of
which the sheriff attached properties of Jerry O. Toole valued at P50; of Antonio
K. Abad valued at P12,150; and of Anastacio R. Santos valued at P2,733. No
property of the partnership Philippine-American Construction Company was
attached. In view of these attachments, the Philippine-American Construction
Company moved for the discharge of the attached properties and offered to post
a bond for P10,000. The court granted the motion and fixed the bond at the
amount offered. On May 29, 1925, the Philippine-American Construction
Company, as principal, then represented by the partner Antonio K. Abad, and

Santiago Lucero and Meliton Carlos, as guarantors, executed a bond for P10,000
in favor of Paulino Candelaria for the lifting of the attachment under section 440
of the Code of Civil Procedure. In the bond thus executed, the defendant
Anastacio R. Santos neither intervened nor signed individually, but Abad testified
that the former was the one who induced him to get the signature of Lucero by
taking advantage of his good relations with him. Upon the approval of the bond,
the attachment was discharged and the attached properties were returned to their
owners.
After the issuance of the writ for the execution of the judgment rendered
in civil case No. 3838, the sheriff returned the same with the statement that the
writ could not be executed as he found no property of the judgment debtors. In
view of this, Paulino Candelaria moved for the issuance of a writ of execution
against the guarantors of the defendants. The court granted the motion and
issued a writ of execution against the plaintiff, as judicial administratrix of the
deceased Santiago Lucero, and the other guarantor Meliton Carlos. The plaintiff
tenaciously refused to pay the judgment obtained by Paulino Candelaria, but after
all her efforts had failed, she was eventually compelled to pay to said creditor the
sum of P5,565.55; the co-guarantor Meliton Carlos also paid upon the bond
signed by him the sum of P5,135. The plaintiff and Carlos later recovered from
Antonio K. Abad, one of the defendants in the said civil case, the sum of P800
which they divided equally. It thus appears that the payment made by the plaintiff
to Candelaria was reduced to the sum of P3,665.55. The plaintiff, in her said
capacity, demanded of the defendant Anastacio R. Santos the return of the
aforesaid sum and, upon the latter's refusal, she brought the action which
culminated in the appealed judgment.
The four errors assigned by the appellant raise only one legal question,
namely, whether under the proven facts admitted by the parties, he is bound to
pay to the plaintiff what the latter had advanced to Paulino Candelaria upon the
bond which the deceased Santiago Lucero had executed. The appellant
vigorously insists that he is not so bound under the law, because he neither
applied for nor intervened in the bond in any capacity. It is beyond question that
the appellant neither intervened nor signed the bond which was filed to discharge
the attachment of the properties of the judgment debtors, but it is clear, and this
is admitted, that the bond was filed to release the attached properties, it was
approved by the court and it resulted in the discharge of the attachment and the
return of the attached properties to their respective owners. When the sheriff
attempted to execute the judgment and looked for the discharged properties, he
found that they had disappeared, for which reason the court subsequently issued
a writ of execution against the guarantors. As a result of this last execution, the
Page 182 of 505

plaintiff was forced to pay and in fact paid the said sum to the creditor Candelaria.
Now, then, under article 1822 of the Civil Code, by guaranty one person binds
himself to pay or perform for a third person in case the latter should fail to do so;
and article 1838 provides that any guarantor who pays for the debtor shall be
indemnified by the latter even should the guaranty have been undertaken without
the knowledge of the debtor. In the present case, the guarantor was the
deceased Santiago Lucero, now represented by the plaintiff in her capacity as
judicial administratrix, and the debtor is the defendant-appellant. Applying the
provision of the last cited article, it is obvious that the appellant is legally bound to
pay what the plaintiff had advanced to the creditor upon the judgment,
notwithstanding the fact that the bond had been given without his knowledge.
The obligation of the appellant to pay the plaintiff what he latter had
advanced is further sanctioned by the general provisions of the Civil Code
regarding obligations. Article 1158 provides that "payment may be made by any
person, whether he has an interest in the performance of the obligation or not,
and whether the payment is known and approved by the debtor or whether he is
unaware of it. Any person who makes a payment for the account of another may
recover from the debtor the amount of the payment, unless it was made against
the express will of the latter. In the latter case he can only recover from the debtor
in so far as the payment has been beneficial to the latter." According to this legal
provision, it is evident that the plaintiff-appellant is bound to pay to the plaintiff
what the latter had advanced to the creditor upon the judgment, and this is the
more so because it appears that although Lucero executed the bond without his
knowledge, nevertheless he did not object thereto or repudiate the same at any
time. From the proven facts it cannot logically be deduced that the appellant did
not have knowledge of the bond, first, because his properties were attached and
the attachment could not have been levied without his knowledge, and, secondly,
because the said properties were returned to him and in receiving them he was
necessarily apprized of the fact that a bond had been filed to discharge the
attachment.

The appellant questions the application by the court of article 127 of the
Code of Commerce, overlooking article 128. This assignment of error is of no
consequence and does not affect the result of the case. As already stated, the
rights of the parties must be governed by the aforesaid articles of the Civil Code.
Assuming the inapplicability of article 127 of the Code of Commerce, in view of
the fact that the action is not addressed to the appellant as general partner of the
Philippine-American Construction Company, it nevertheless appears that his

liability to the plaintiff, as debtor in solidum of Paulino Candelaria, is recognized

and countenanced by articles 1158 and 1838 of the Civil Code.
In view of the foregoing, the appealed judgment is affirmed, with the
costs of this instance to the defendant-appellant. So ordered.
Avancea, C. J., Villa-Real, Diaz, Laurel, Concepcion, and Moran,
JJ., concur.
||| (de Guzman v. Santos, G.R. No. 45571, [June 30, 1939], 68 PHIL 371-376)

MACHETTI SUPRA

FIRST DIVISION
[G.R. No. L-29587. November 28, 1975.]
PHILIPPINE
BANK, petitioner, vs. LUZON SURETY CO., INC.
HONORABLE COURT APPEALS, respondent.

NATIONAL
and
THE

Conrado S. Medina Esgardo M. Magtalas & Virgilio U. Gongon for petitioner.

Tolentino, Garcia, Cruz & Reyes for respondent.

SYNOPSIS
To guarantee the P32,400-crop loan obtained from the Philippine National Bank
(PNB) by Augusto R. Villarosa, the latter, as principal, and Luzon Surety, as surety,
executed a P10,000-bond in favor of said bank. Later Villarosa executed a chattel
mortgage in favor of PNB in consideration of periodical sums of money received by
him. The chattel mortgage stipulated that the "mortgagee may increase or decrease
the amount of the loan as well as the installments as it may deem convenient," and
that "in the event the loan is increased such increase shall likewise be secured by
Mortgage." The bond executed by Luzon Surety undertook to "comply with all the
terms and conditions stipulated in said crop loan contract," the same
being incorporated in the bond as essential part thereof. The credit line of P32,400
was later increased, so that as of September, 1953, there was a balance of
Page 183 of 505

P63,222.75. For failure of Villarosa to pay the obligation, PNB sued him and his
sureties, including theLuzon Surety.
The trial court adjudged in favor of the PNB, but the Court of Appeals reversed the
judgment, and absolved the surety on the ground that PNB's evidence did not
establish a cause of action, since the bond made references to a crop loan contract
executed in February, 1952, and therefore the chattel mortgage dated March 6, 1962
could not have been the obligation guaranteed by the surety bond; and that there had
been material alterations in the principal obligation, if any, guaranteed by it.
The Supreme Court reversed the appealed judgment and held that the Court of
Appeals erred in not considering the unrebutted testimony of PNB's witness that the
chattel mortgage was the only contract executed by Villarosa evidencing the crop loan
and upon which Luzon Surety agreed to assume liability up to the amount of P10,000.
And as to the alteration, the Court held that the defense is untenable because as
a surety, said bonding company is charged as an original promissor and is an insurer
of debt, and that the increases were made with the full consent of Luzon Surety.

DECISION

ESGUERRA, J p:
Petitioner Philippine National Bank seeks a review and reversal of the decision dated
June 26, 1968, of the Court of Appeals in its case CA-G.R. No. 30282-R,
absolvingLuzon Surety Co., Inc. of its liability to said, petitioner and thus reversing the
decision of the Court of First Instance of Negros Occidental, the dispositive portion of
which reads as follows:
"IN VIEW THEREOF, judgment is hereby rendered
ordering defendant Augusto R. Villarosa to pay plaintiff
PHILIPPINE NATIONAL BANK the sum of P81,200.00
plus accrued interest of 5% per annum on P63,222.78
from August 31, 1959; to pay 10% of said amount as
attorney's
fees
and
to
pay
the
costs.
Defendant LuzonSurety Co., Inc. is hereby ordered to pay
jointly and severally with defendant Villarosa to the plaintiff
the sum of P10,000.00; defendant Central Surety and
Insurance Company jointly and severally with defendant

Villarosa the sum of P20,000 to the plaintiff, and

Associated Surety And Insurance Co. jointly and severally
with defendant Villarosa the sum of P15,000.00 to the
plaintiff, with the understanding that should said bonding
companies pay the aforementioned amounts of their
respective bonds to the plaintiff, said amounts should be
deducted from the total outstanding obligation of
defendant Villarosa in favor of the plaintiff."
Above-quoted decision was modified in an order of the Court of First Instance dated
June 5, 1961, granting petitioner Philippine National Bank (PNB) the right to recover
accrued interest at the rate of 5% per annum from December 24, 1953 from the
defendants bonding companies.
The facts as found by the Court of Appeals are as follows:
". . . sometime prior to 27 November 1951,
defendant Augusto R. Villarosa, a sugar planter adhered
to the Lopez Sugar Central Milling Company, Inc. applied
for a crop loan with the plaintiff, Philippine National Bank,
Exhibit A; this application was approved on 6 March, 1952
in the amount of P32,400, according to the complaint; but
the document of approval has not been exhibited; at any
rate, the planter Villarosa executed a Chattel Mortgage on
standing crops to guarantee the crop loan, Exhibit B and
as shown in Exhibits C to C-30 on various dates from 28
January, 1952 to 9 January, 1953, in consideration of
periodical sums of money by him received from PNB,
planter Villarosa executed these promissory notes from
which will be seen that the credit line was that the original
amount of P32,400 and was thus maintained up to the
promissory note Exhibit C-9 dated 30 May, 1952 but
afterwards it was increased and promissory notes Exhibits
C-10 to C-30 were based on the increased credit line; and
as of 27 September, 1953 as shown in the accounts,
Exhibits D and D-1, there was a balance of P63,222.78
but as of the date when the complaint was filed on 8 June,
1960, because of the interest accrued, it had reached a
much higher sum; that was why due to its non-payment,
plaintiff filed this complaint, as has been said, on 8 June,
1960; now the complaint sought relief not only against the
Page 184 of 505

planter
but
also
against
the
three
(3)
bondsmen, Luzon Surety,
Central Surety and
Associated Surety because Luzon Surety had filed the
bond Exhibit E dated 18 February, 1952 in the sum of
P10,000; Central Surety Exhibit F dated 24 February,
1952 in the sum of P20,000 and Associated Surety the
bond Exhibit G dated 11 September, 1952 in the sum of
P15,000; in gist, the obligation of each of the bondsmen
being to guarantee the faithful performance of the
obligation of the planter with PNB; now each of the
defendants in their answers raised various defenses but
as far as principal defendant Augusto R. Villarosa and
other
defendants
Central Surety and
Associated Surety are concerned, their liability is no
longer material because they have not appealed; and in
the trial of the case, plaintiff submitted Exhibits A to J-1
and witness Romanito Brillantes; but the defense
of Luzon Surety thru its witness Jose Arroyo and Exhibits
1 to 3 being 1st that the evidence of the plaintiff did not
establish a cause of action to make Luzon Surety liable
and 2ndly, in any case that there had been material
alteration in the principal obligation, if any, guaranteed by
it; . . ."
Unable to obtain reconsideration of the decision of the Appellate Court, PNB came to
this Court and alleged the following errors.
1. The Court of Appeals erred in the application
of the law involved by invoking Article 2055 of the New
Civil Code, which properly should have been the law on
suretyship which are covered by Section 4, Chapter 3,
Title 1, Book IV of the New Civil Code;
2. Consequently, when the Court of Appeals
released the surety from liability, it committed a grave or
gross misappreciation of facts amounting to an error of
law;
3. The Court of Appeals erred when it held that
there must have been a principal crop loan contract,
guaranteed by the surety bonds;

4. The Court of Appeals erred when it released

the surety from liability.
The above assigned errors boil down to the single question of whether or not the
Court of Appeals was justified in absolving Luzon Surety Co., Inc. from liability to
petitioner Philippine National Bank. We have examined the record thoroughly and
found the appealed decision to be erroneous.
Excerpt of the Chattel Mortgage executed to guarantee the crop loan clearly provided
as follows:

xxx xxx xxx

1. That the Mortgagor does by these presents
grant, cede and convey unto the Mortgagee by way of
First Mortgage free from any encumbrances, all the crops
of the absolute property of the Mortgagor, corresponding
to the 1952-53 and subsequent yearly sugar crops
agricultural season at present growing in the Hda. known
as San Antonio, Washington (P) Audit 24-124 and 24-16
1a and Hda. Aliwanay (non-quota land); milling with LSMC
and CAD, Municipality of Sagay, and Escalante, Province
of Negros Occidental covered by cadastral lots no. Various
of the Cadastral Survey at the Municipality of Sagay,
Escalante particularly bounded and described in Transfer
Certificate of Title No. Various issued by the Register of
Deeds of said province. The said mortgage crops consist
of all the Mortgagor's first available entire net share of the
1952-53 and subsequent yearly sugar crops thereafter
conservatively estimated at but not less than Three
Thousand Four Hundred Twenty and 14/00 (3,420.14)
piculs of export and domestic sugar, including whatever
addition thereto, and such aids, subsidies, indemnity
payments and other benefits as maybe awarded to the
Mortgagor, coming from any source, governmental or
otherwise.
xxx xxx xxx

Page 185 of 505

"4. This Mortgage is executed to secure payment

by the Mortgagor to the Mortgagee at the latter's office of
a loan herein granted to the Mortgagor in the sum of Thirty
Two Thousand Four Hundred (P32,400.00) Pesos,
Philippine Currency, with interest at the rate of five per
cent per annum, which loan shall be given to the
Mortgagor either in lump sum or in installments as the
mortgagee may determine. The Mortgagee may increase
or decrease the amount of the loan as well as the
installments as it may deem convenient, and the
Mortgagor shall submit such periodical reports on the
crops mortgaged as the Mortgagee may require. In the
event that the loan is increased such increase shall
likewise be secured by Mortgage. This Mortgage shall
also secure any other loans or advances that the
Mortgagee may extend to the Mortgagor, including interest
and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or
secondary, as appears in the account books and records
of the Mortgagee.
xxx xxx xxx
Likewise an extract from the Surety Bond executed by and between the PNB on one
hand and Augusto Villarosa and respondent Luzon Surety Company, Inc. on the other,
is hereby reproduced, viz:
"That we Augusto Villarosa of Bacolod City, as
principal and Luzon Surety Company, Inc. a corporation
duly organized and existing under and by virtue of the
laws of the Philippines, as surety, are held and firmly
bound unto the Philippine National Bank, Bacolod City,
Philippines, in the sum of Ten Thousand Pesos
(P10,000.00), Philippine Currency, for the payment of
which sum, well and truly to be made, we bind ourselves,
our heirs, executors, administrators, successors, and
assigns jointly and severally, firmly by these presents:
The condition of the obligation are as follows:
"WHEREAS, the above bounden principal, on the
day of February, 1952, entered into a crop loan contract

with obligee Philippine National Bank, Bacolod Branch of

Bacolod City, Philippines to fully and faithfully
Comply with all the terms and conditions
stipulated in said crop loan contract which are
hereby incorporated as essential parts hereof, and
principally to meet and pay from the proceeds of the sugar
produced from his Hda. Antonio and Hda. Aliwanay,
Escalante, Occidental Negros credit advances made by
the Philippine National Bank Bacolod Branch not to
exceed P32,800 as stated in said contract. Provided
further that the liability under this bond shall not exceed
the amount of P10,000.00.
"WHEREAS, said Philippine National Bank
Bacolod Branch requires said principal to give a good and
sufficient bond in the above stated sum to secure the full
and faithful performance on his part of said crop loan
contract.
"NOW, THEREFORE, if the principal shall well
and truly perform and fulfill all the undertakings,
covenants, terms and conditions and agreement stipulated
in said crop loan contract then, this obligation shall be null
and void, otherwise it shall remain in full force and effect.
xxx xxx xxx
The foregoing evidences clearly the liability of Luzon Surety to petitioner Philippine
National Bank not merely as a guarantor but as surety-liable as a regular party to the
undertaking (Castelvi de Higgins vs. Sellner 41 Phil. 142). The Court of Appeals,
however, in absolving the bonding company ratiocinates that the Surety Bond
executed on February 18, 1952, made specific references to a crop loan contract
executed by Augusto Villarosa sometime in February 1952. And, therefore, the Chattel
Mortgage, Exhibit B dated March 6, 1952, could not have been the obligations
guaranteed by the surety bond. Thus the Court of Appeals stated:
". . . one is really at a loss to impose any liability
upon Luzon Surety in the absence of the principal
obligation which was a crop loan contract executed in
February, 1952, and to which there was made an express
reference in the surety bond, Exhibit E; let it not be
Page 186 of 505

overlooked further that one can secure a crop loan without

executing a Chattel Mortgage on his crops because the
crop loan is the principal obligation while the Chattel
Mortgage is only an ancillary and secondary contract to
guarantee fulfillment of a crop loan; stated otherwise and
as Luzon Surety never intervened in the execution of the
Chattel Mortgage, Exhibit B, there is no way under the
evidence from which it can be made to answer for liability
to Augusto Villarosa under Exhibit E; . . ."
The Court of Appeals, to Our mind did not give credence to an otherwise significant
and unrebutted testimony of petitioner's witness, Romanito Brillantes, that Exhibit B
was the only chattel mortgage executed by Augusto Villarosa evidencing the crop loan
contract and upon which Luzon Surety agreed to assume liability up to the amount of
P10,000 by posting the said surety bond. Moreover Article 1354 of our New Civil
Code which provides:
"Art. 1354. Although the cause is not stated in
the contract, it is presumed that it exists and is lawful,
unless the debtor proves the contrary."
bolsters petitioner's stand. Considering too that Luzon Surety Company is
engaged in the business of furnishing guarantees, for a consideration, there is no
reason that it should be entitled to a rule of strictissimi juris or a strained and
over-strict interpretation of its undertaking. The presumption indulged in by the
law in favor of guarantors was premised on the fact that guarantees were
originally gratuitous obligations, which is not true at present, at least in the great
majority of cases. (Aurelio Montinola vs. Alejo Gatila, et al. G.R. No. L-7558,
October 31, 1955)
We have likewise gone over the answer of Luzon Surety Company dated June 17,
1960 (p. 73 Record on Appeal) and noted the following:
xxx xxx xxx
"3. Defendant LUZON admits the portion of
paragraph 3 referring to the grant of P32,400 secured by a
Chattel Mortgage dated March 6, 1952, copy of which is
attached as Annex "A" of the complaint.
xxx xxx xxx
As special defenses:

"8. The terms and conditions of the surety bond

as well as the contract it guaranteed was materially altered
and or novated without the knowledge and consent of
the surety, thereby releasing the latter from liability.
"11. The maximum liability,
defendant LUZON is P10,000.00.

if

any,

of

The principal obligation, therefore, has never been put in issue by then defendant
now respondent Luzon Surety Co., Inc. On the other hand it raised as its defense
the alleged material alteration of the terms and conditions of the contract as the
basis of its prayer for release. Even this defense of
respondent Luzon Surety Co.,Inc. is untenable under the facts obtaining. As
a surety, said bonding company is charged as an original promissor and is an
insurer of the debt. While it is an accepted rule in our jurisdiction that an alteration
of the contract is a ground for release, this alteration, We stress must be material.
A cursory examination of the record shows that the alterations in the form of
increases were made with the full consent of Luzon Surety Co., Inc. Paragraph 4
of the Chattel Mortgage explicitly provided for this increase(s), viz:
". . . the Mortgagee may increase or decrease the
amount of the loan as well as the installment as it may
deem convenient . . ."
and this contract, Exhibit "B", was precisely referred to and mentioned in
the Surety Bond itself. In the case of Lim Julian vs. Tiburcio Lutero et al No.
25235, 49 Phil. 703, 717, 718, this Court held:
"It has been decided in many cases that the
consideration named in a mortgage for future
advancements does not limit the amount for which such
contract may stand as security, if from the four corners of
the document, the intent to secure future indebtedness is
apparent. Where, by the plain terms of the contract, such
an intent is evident, it will control. . . ."
The next question to take up is the liability of Luzon Surety Co. for interest which, it
contends, would increase its liability to more than P10,000 which is the maximum of
its bond. We cannot agree to this reasoning. In the cases of Tagawa vs. Aldanese, 43
Phil. 852, 859; Plaridel Surety Insurance Co. vs. P. L. Galang Machinery Co., 100
Phil. 679, 682, cited in Paras Civil Code of the Philippines, Vol. V, 7th Ed. 1972, p.
772, it was held:
Page 187 of 505

"If a surety upon demand fails to pay, he can be

held liable for interest, even if in thus paying, the liability
becomes more than that in the principal obligation. The
increased liability is not because of the contract but
because of the default and the necessity of judicial
collection. It should be noted, however, that the interest
runs from the time the complaint is filed, not from the time
the debt becomes due and demandable."

INTERNATIONAL FINANCE CORPORATION, Petitioner, vs.

IMPERIAL TEXTILE MILLS, INC., ** respondent.

DECISION

PANGANIBAN, J p:
PREMISES CONSIDERED, the judgment appealed from is reversed and set aside. In
lieu thereof another is rendered reinstating the judgment of the Court of First Instance
of Negros Occidental, 12th Judicial District, dated March 29, 1961,
holding Luzon Surety liable for the amount of P10,000.00 with the modification that
interest thereon shall be computed at the legal rate from June 8, 1960 when the
complaint was filed.
SO ORDERED.
Teehankee, Makasiar, Muoz Palma and Martin, JJ., concur.
Castro (Chairman), J., did not take part.
||| (PNB v. Luzon Surety Co., Inc., G.R. No. L-29587, [November 28, 1975], 160-A
PHIL 854-863)

The terms of a contract govern the rights and obligations of the contracting parties.
When the obligor undertakes to be "jointly and severally" liable, it means that the
obligation is solidary. If solidary liability was instituted to "guarantee" a principal
obligation, the law deems the contract to be one of suretyship.
The creditor in the present Petition was able to show convincingly that, although
denominated as a "Guarantee Agreement," the Contract was actually a surety.
Notwithstanding the use of the words "guarantee" and "guarantor," the subject
Contract was indeed a surety, because its terms were clear and left no doubt as to the
intention of the parties.
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, assailing the
February 28, 2002 Decision 2 and September 30, 2003 Resolution 3 of the Court of
Appeals (CA) in CA-GR CV No. 58471. The challenged Decision disposed as follows:
"WHEREFORE, the appeal is PARTIALLY GRANTED. The
decision of the trial court is MODIFIED to read as follows:

ONG SUPRA

"1. Philippine Polyamide Industrial Corporation is ORDERED to

pay [Petitioner] International Finance Corporation, the following
amounts:
'(a) US$2,833,967.00 with accrued interests as provided
in the Loan Agreement;
THIRD DIVISION
[G.R. No. 160324. November 15, 2005.]

'(b) Interest of 12% per annum on accrued interest,

which shall be counted from the date of filing of
the instant action up to the actual payment;
'(c) P73,340.00 as attorney's fees;
Page 188 of 505

'(d) Costs of suit.'

"2. The guarantor Imperial Textile Mills, Inc. together with
Grandtex is HELD secondarily liable to pay the amount herein
adjudged to [Petitioner] International Finance Corporation." 4
The assailed Resolution
Reconsideration. AHCTEa

denied

both

parties'

respective

Motions

The Facts
The facts are narrated by the appellate court as follows:
"On December 17, 1974, [Petitioner] International Finance
Corporation (IFC) and [Respondent] Philippine Polyamide
Industrial Corporation (PPIC) entered into a loan agreement
wherein IFC extended to PPIC a loan of US$7,000,000.00,
payable in sixteen (16) semi-annual installments of
US$437,500.00 each, beginning June 1, 1977 to December 1,
1984, with interest at the rate of 10% per annum on the principal
amount of the loan advanced and outstanding from time to time.
The interest shall be paid in US dollars semi-annually on June 1
and December 1 in each year and interest for any period less
than a year shall accrue and be pro-rated on the basis of a 360day year of twelve 30-day months.
"On December 17, 1974, a 'Guarantee Agreement' was executed
with . . . Imperial Textile Mills, Inc. (ITM), Grand Textile
Manufacturing Corporation (Grandtex) and IFC as parties thereto.
ITM and Grandtex agreed to guarantee PPIC's obligations under
the loan agreement.

for

buildings, machinery, equipment plant and all improvements

owned by PPIC, located at Calamba, Laguna, with the regional
sheriff of Calamba, Laguna. On July 30, 1985, the deputy sheriff
of Calamba, Laguna issued a notice of extrajudicial sale. IFC and
DBP were the only bidders during the auction sale. IFC's bid was
for P99,269,100.00 which was equivalent to US$5,250,000.00 (at
the prevailing exchange rate of P18.9084 = US$1.00). The
outstanding loan, however, amounted to US$8,083,967.00 thus
leaving a balance of US$2,833,967.00. PPIC failed to pay the
remaining balance.
"Consequently, IFC demanded ITM and Grandtex, as guarantors
of PPIC, to pay the outstanding balance. However, despite the
demand made by IFC, the outstanding balance remained unpaid.
"Thereafter, on May 20, 1988, IFC filed a complaint with the RTC
of Manila against PPIC and ITM for the payment of the
outstanding balance plus interests and attorney's fees.
"The trial court held PPIC liable for the payment of the
outstanding loan plus interests. It also ordered PPIC to pay IFC
its claimed attorney's fees. However, the trial court relieved ITM of
its obligation as guarantor. Hence, the trial court dismissed IFC's
complaint against ITM.
xxx xxx xxx
"Thus, apropos the decision dismissing the complaint against
ITM, IFC appealed [to the CA]." 5
Ruling of the Court of Appeals

"PPIC paid the installments due on June 1, 1977, December 1,

1977 and June 1, 1978. The payments due on December 1,
1978, June 1, 1979 and December 1, 1979 were rescheduled as
requested by PPIC. Despite the rescheduling of the installment
payments, however, PPIC defaulted. Hence, on April 1, 1985, IFC
served a written notice of default to PPIC demanding the latter to
pay the outstanding principal loan and all its accrued interests.
Despite such notice, PPIC failed to pay the loan and its interests.

The CA reversed the Decision of the trial court, insofar as the latter exonerated ITM
from any obligation to IFC. According to the appellate court, ITM bound itself under
the "Guarantee Agreement" to pay PPIC's obligation upon default. 6 ITM was not
discharged from its obligation as guarantor when PPIC mortgaged the latter's
properties to IFC. 7 The CA, however, held that ITM's liability as a guarantor would
arise only if and when PPIC could not pay. Since PPIC's inability to comply with its
obligation was not sufficiently established, ITM could not immediately be made to
assume the liability. 8

"By virtue of PPIC's failure to pay, IFC, together with DBP, applied
for the extrajudicial foreclosure of mortgages on the real estate,

The September 30, 2003 Resolution of the CA denied reconsideration. 9 Hence, this
Petition. 10
Page 189 of 505

agreement is herein called the Loan Agreement, IFC

agrees to extend to the Company a loan (herein called
the Loan) of seven million dollars ($7,000,000) on the
terms therein set forth, including a provision that all or
part of the Loan may be disbursed in a currency other
than dollars, but only on condition that the Guarantors
agree to guarantee the obligations of the Company in
respect of the Loan as hereinafter provided.

The Issues
Petitioner states the issues in this wise:
"I. Whether or not ITM and Grandtex 11 are sureties and
therefore, jointly and severally liable with PPIC, for the
payment of the loan. TaIHEA
"II. Whether or not the Petition raises a question of law.
"III. Whether or not the Petition raises a theory not raised in the
lower court." 12
The main issue is whether ITM is a surety, and thus solidarily liable with PPIC for the
payment of the loan.

The obligations of the guarantors are meticulously expressed in the following

provision:

The Court's Ruling

The Petition is meritorious.
Main Issue:
Liability of Respondent Under
the Guarantee Agreement
The present controversy arose from the following Contracts: (1) the Loan Agreement
dated December 17, 1974, between IFC and PPIC; 13 and (2) the Guarantee
Agreement dated December 17, 1974, between ITM and Grandtex, on the one hand,
and IFC on the other. 14
IFC claims that, under the Guarantee Agreement, ITM bound itself as a surety to
PPIC's obligations proceeding from the Loan Agreement. 15 For its part, ITM asserts
that, by the terms of the Guarantee Agreement, it was merely a guarantor 16 and not
a surety. Moreover, any ambiguity in the Agreement should be construed against IFC
the party that drafted it. 17
Language
Contract

of

the

The premise of the Guarantee Agreement is found in its preambular clause, which
reads:
"Whereas,
"(A) By an Agreement of even date herewith between IFC and
PHILIPPINE
POLYAMIDE
INDUSTRIAL
CORPORATION (herein called the Company), which

"(B) The Guarantors, in order to induce IFC to enter into the Loan
Agreement, and in consideration of IFC entering into
said Agreement, have agreed so to guarantee such
obligations of the Company." 18

"Section 2.01. The Guarantors jointly and severally, irrevocably,

absolutely
and
unconditionally
guarantee,
as primary
obligors and not as sureties merely, the due and punctual
payment of the principal of, and interest and commitment charge
on, the Loan, and the principal of, and interest on, the Notes,
whether at stated maturity or upon prematuring, all as set forth in
the Loan Agreement and in the Notes." 19
The Agreement uses "guarantee" and "guarantors," prompting ITM to base its
argument on those words. 20 This Court is not convinced that the use of the two
words limits the Contract to a mere guaranty. The specific stipulations in the Contract
show otherwise.
Solidary
Agreed to by ITM

Liability

While referring to ITM as a guarantor, the Agreement specifically stated that the
corporation was "jointly and severally" liable. To put emphasis on the nature of that
liability, the Contract further stated that ITM was a primary obligor, not a mere surety.
Those stipulations meant only one thing: that at bottom, and to all legal intents and
purposes, it was a surety.
Indubitably therefore, ITM bound itself to be solidarily 21 liable with PPIC for the
latter's obligations under the Loan Agreement with IFC. ITM thereby brought itself to
the level of PPIC and could not be deemed merely secondarily liable. SDAaTC
Page 190 of 505

Initially, ITM was a stranger to the Loan Agreement between PPIC and IFC. ITM's
liability commenced only when it guaranteed PPIC's obligation. It became a surety
when it bound itself solidarily with the principal obligor. Thus, the applicable law is as
follows:
"Article 2047. By guaranty, a person, called the guarantor binds
himself to the creditor to fulfill the obligation of the principal in
case the latter should fail to do so.
"If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, Chapter 3, Title I of this Book shall be
observed. In such case the contract shall be called
suretyship." 22

The aforementioned provisions refer to Articles 1207 to 1222 of the Civil Code on
"Joint and Solidary Obligations." Relevant to this case is Article 1216, which states:
"The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand
made against one of them shall not be an obstacle to those which
may subsequently be directed against the others, so long as the
debt has not been fully collected."
Pursuant to this provision, petitioner (as creditor) was justified in taking action directly
against respondent.
No
Undertaking

Ambiguity

in

the

The Court does not find any ambiguity in the provisions of the Guarantee Agreement.
When qualified by the term "jointly and severally," the use of the word "guarantor" to
refer to a "surety" does not violate the law. 23 As Article 2047 provides, a suretyship is
created when a guarantor binds itself solidarily with the principal obligor. Likewise, the
phrase in the Agreement "as primary obligor and not merely as surety" stresses
that ITM is being placed on the same level as PPIC. Those words emphasize the
nature of their liability, which the law characterizes as a suretyship.
The use of the word "guarantee" does not ipso facto make the contract one of
guaranty. 24 This Court has recognized that the word is frequently employed in
business transactions to describe the intention to be bound by a primary or an
independent obligation. 25 The very terms of a contract govern the obligations of the

parties or the extent of the obligor's liability. Thus, this Court has ruled in favor of
suretyship, even though contracts were denominated as a "Guarantor's
Undertaking" 26 or a "Continuing Guaranty." 27
Contracts have the force of law between the parties, 28 who are free to stipulate any
matter not contrary to law, morals, good customs, public order or public
policy. 29None of these circumstances are present, much less alleged by respondent.
Hence, this Court cannot give a different meaning to the plain language of the
Guarantee Agreement.
Indeed, the finding of solidary liability is in line with the premise provided in the
"Whereas" clause of the Guarantee Agreement. The execution of the Agreement was
a condition precedent for the approval of PPIC's loan from IFC. Consistent with the
position of IFC as creditor was its requirement of a higher degree of liability from ITM
in case PPIC committed a breach. ITM agreed with the stipulation in Section 2.01 and
is now estopped from feigning ignorance of its solidary liability. The literal meaning of
the stipulations control when the terms of the contract are clear and there is no doubt
as to the intention of the parties. 30
We note that the CA denied solidary liability, on the theory that the parties would not
have executed a Guarantee Agreement if they had intended to name ITM as a primary
obligor. 31 The appellate court opined that ITM's undertaking was collateral to and
distinct from the Loan Agreement. On this point, the Court stresses that a suretyship
is merely an accessory or a collateral to a principal obligation. 32 Although a surety
contract is secondary to the principal obligation, the liability of the surety is direct,
primary and absolute; or equivalent to that of a regular party to the undertaking. 33 A
surety becomes liable to the debt and duty of the principal obligor even without
possessing a direct or personal interest in the obligations constituted by the latter. 34
ITM's Liability as Surety
With the present finding that ITM is a surety, it is clear that the CA erred in declaring
the former secondarily liable. 35 A surety is considered in law to be on the same
footing as the principal debtor in relation to whatever is adjudged against the
latter. 36 Evidently, the dispositive portion of the assailed Decision should be modified
to require ITM to pay the amount adjudged in favor of IFC. AaDSEC
Peripheral Issues
In addition to the main issue, ITM raised procedural infirmities allegedly justifying the
denial of the present Petition. Before the trial court and the CA, IFC had allegedly
instituted different arguments that effectively changed the corporation's theory on
appeal, in violation of this Court's previous pronouncements. 37 ITM further claims
Page 191 of 505

that the main issue in the present case is a question of fact that is not cognizable by
this Court. 38
These contentions deserve little consideration.
Alleged
Theory on Appeal

Change

of

Petitioner's arguments before the trial court (that ITM was a "primary obligor") and
before the CA (that ITM was a "surety") were related and intertwined in the action to
enforce the solidary liability of ITM under the Guarantee Agreement. We emphasize
that the terms "primary obligor" and "surety" were premised on the same stipulations
in Section 2.01 of the Agreement. Besides, both terms had the same legal
consequences. There was therefore effectively no change of theory on appeal. At any
rate, ITM failed to show to this Court a disparity between IFC's allegations in the trial
court and those in the CA. Bare allegations without proof deserve no credence.
Review
Findings Necessary

of

Factual

As to the issue that only questions of law may be raised in a Petition for
Review, 39 the Court has recognized exceptions, 40 one of which applies to the
present case. The assailed Decision was based on a misapprehension of
facts, 41 which particularly related to certain stipulations in the Guarantee Agreement
stipulations that had not been disputed by the parties. This circumstance
compelled the Court to review the Contract firsthand and to make its own findings and
conclusions accordingly.
WHEREFORE, the Petition is hereby GRANTED, and the assailed Decision and
Resolution MODIFIED in the sense that Imperial Textile Mills, Inc. is declared a surety
to Philippine Polyamide Industrial Corporation. ITM is ORDERED to pay International
Finance Corporation the same amounts adjudged against PPIC in the assailed
Decision. No costs.
SO ORDERED.
Corona, Carpio Morales and Garcia, JJ., concur.
Sandoval-Gutierrez, J., is on official leave.
||| (International Finance Corp. v. Imperial Textile Mills Inc., G.R. No. 160324,
[November 15, 2005], 511 PHIL 591-605)

EN BANC
[G.R. No. 47495. August 14, 1941.]
THE TEXAS COMPANY (PHIL.), INC., petitioner, vs.
ALONSO, respondent.

TOMAS

C. D. Johnston & A. P. Deen, for petitioner.

Tomas Alonso, in his own behalf.

DECISION

LAUREL, J p:
On November 5, 1935 Leonor S. Bantug and Tomas Alonso were sued
by the Texas Company (P. I.), Inc. in the Court of First Instance of Cebu
for the recovery ofthe sum of P629, unpaid balance of the account of Leonor S.
Bantug in connection with her agency contract
with the Texas Company for the faithful performance of which Tomas Alonso
signed the following:
"For value received, we jointly and severally do hereby
bind ourselves and each of us, in solidum, with Leonor S.
Bantug the agent named in the within and foregoing agreement,
Page 192 of 505

for full and complete performance of same hereby waiving notice

of non-performance by or demand upon said agent, and consent
to any and all extensions of time for performance. Liability under
this undertaking, however, shall not exceed the sum of P2,000,
Philippine currency."
"Witness the hand and seal of the undersigned affixed
in the presence of two witnesses, this 12th day of August, 1929."
Leonor S. Bantug was declared in default as a result of her failure to appear or
answer, but Tomas Alonso filed an answer setting up a general denial
and the special defenses that Leonor S. Bantug made him believe that he was
merely a co-security of one Vicente Palanca and that he was never notified
of the acceptance of his bond by the Texas Company. After trial, the Court of First
Instance of Cebu rendered judgment on July 10, 1937, which was amended on
February 1, 1938, sentencing Leonor S. Bantug and Tomas Alonso to pay jointly
and severally to the Texas Company the sum of P629, with interest at the rate of
six per cent (6%) from the date ofthe filing of the complaint, and with proportional
costs. Upon appeal by Tomas Alonso, the Court of Appeals
modified the judgment of the Court of First Instance of Cebu in the sense that
Leonor S. Bantug was held solely liable for the payment of the aforesaid sum of
P629 to the Texas Company, with the consequent absolution of Tomas Alonso.
This case is now before us on petition for review by certiorari of the decision
of the Court of Appeals. It is contended by the petitioner that theCourt of Appeals
erred in holding that there was merely an offer of guaranty on the part
of the respondent, Tomas Alonso, and that the latter cannot be held liable
thereunder because he was never notified by the Texas Company of its
acceptance.
The Court of Appeals has placed reliance upon our decision in National
Bank vs. Garcia (47 Phil., 662), while the petitioner invokes the case of National
Bank vs. Escueta, (50 Phil., 991). In the first case, it was held that there was
merely an offer to give bond and, as there was no acceptance of the offer, this
court refused to give effect to the bond. In the second case, the sureties were
held liable under their surety agreement which was found to have been accepted
by the creditor, and it was therein ruled that an acceptance need not always be
express or in writing. For the purposes of this decision, it is not indispensable for
us to invoke one or the other case above cited. The Court of Appeals found as a
fact, and this is conclusive in this instance, that the bond in question was
executed at the request of the petitioner by virtue of the following clause
of the agency contract:

"Additional Security. The Agent shall whenever

requested by the Company in addition to the guaranty herewith
provided, furnish further guaranty or bond, conditioned
upon the Agent's faithful performance of this contract, in such
form and amount and with such bank as surety or with such
individuals of firms as joint and several sureties as shall be
satisfactory to the Company."
In view of the foregoing clause which should be the law
between the parties, it is obvious that, before a bond is accepted
by the petitioner, it has to be in such form and amount and with such sureties as
shall be satisfactory thereto; in other words, the bond is subject to petitioner's
approval. The logical implication arising from this requirement is that,
if the petitioner is satisfied with any such bond, notice of its acceptance or
approval should necessarily be given to the proper party in interest,
namely, the surety or guarantor. In this connection, we are likewise bound
by the finding of the Court of Appeals that there is no evidence in this case
tending to show that the respondent, Tomas Alonso, ever had knowledge of any
act on the part of the petitioner amounting to an implied acceptance, so as to
justifythe application of our decision in National Bank vs. Escueta (50 Phil., 991).
While unnecessary to this decision, we choose to add a few words
explanatory of the rule regarding the necessity of acceptance in case of bonds.
Where there is merely an offer of, or proposition for, a guaranty, or merely a
conditional guaranty in the sense that it requires action by the creditor
before the obligation becomes fixed, it does not become a binding obligation until
it is accepted and, unless there is a waiver of notice, until notice of such
acceptance is given to, or acquired by, the guarantor, or until he has notice or
knowledge that the creditor has performed the conditions and intends to act
upon the guaranty. (National Bank vs. Garcia, 47 Phil., 662; 28 C. J., sec. 21, p.
901; 24 Am. Jur., sec. 37, p. 899.) The acceptance need not necessarily be
express or in writing, but may be indicated by acts amounting to acceptance.
(National Bank vs. Escueta, 50 Phil., 991.) Where, upon the other
hand, the transaction is not merely an offer of guaranty but amounts to a direct or
unconditional promise of guaranty, unless notice of acceptance is made a
condition of the guaranty, all that is necessary to make the promise binding is
thatthe promises should act upon it, and notice of acceptance is not necessary
(28 C. J., sec. 25, p. 904; 24 Am. Jur., sec 37, p. 899), the reason being
that the contract of guaranty is unilateral (Visayan Surety and Insurance
Corporation vs. Laperal, G. R. No. 46515, promulgated June 14, 1940).
Page 193 of 505

The decision appealed from will be, as the same is hereby, affirmed,
with costs of this instance against the petitioner. So ordered.
Avancea, C.J., Abad Santos and Diaz, JJ., concur.

Separate Opinions
OZAETA, J., dissenting:
We concede that a statement of fact made by the Court of Appeals is
conclusive upon this Court in a petition for review on certiorari. But when it
appears fromthe decision of the Court of Appeals itself that such a statement is
but a conclusion drawn by that Court from the facts found by it, and that such
conclusion is patently erroneous, we hold that this Court should disregard it.
Of that nature, we believe, is the following statement made by the Court
of Appeals in the course of its ratiocination:
"La fianza prestada por el apelante se otorgo a
requerimiento de la demandante en virtud de la siguiente
clausula (15) del contrato de agencia Exhibit A, que dice asi:
" 'ADDITIONAL SECURITY. The Agent shall,
whenever requested by the Company in addition to the guaranty
herewith provided, furnish further guaranty or bond, conditioned
upon the agent's faithful performance of this contract, in such
form and amount and with such bank as surety or with such
individuals or firms as joint and several sureties as shall be
satisfactory to the Company.'" (Pages 8-9, appendix to
petitioner's brief.)
It is important to note that the above-quoted statement forms part
of the court's ratio decidendi and not of its findings of fact. Its findings of fact
appear in thefirst three paragraphs of its decision, which we quote as follows:
"El 12 de agosto de 1929 la demandante y el
demandado Leonor S. Bantug celebraron un contrato, (Exhibit A)
por virtud del cual aquella nombro a este Agente vendedor de
sus productos petroliferos en el Municipio de Maasin, Provincia
de Leyte, mediante pago de una comision sobre el valor de todos
los efectos que llegase a vender, obligandose por su parte
Leonor S. Bantug como Agente, a ingresar y pagar a la

compaia el importe neto de las ventas realizadas, despues de

deducir su comision y los demas gastos de agencia que se
estipularon en el referido contrato.
"En el mismo documento Exhibit A, el otro demandado
Tomas Alonso suscribio una fianza, obligandose mancomunada
y solidariamente con el Agente Leonor S. Bantug a cumplir
fielmente las condiciones del contrato de Agencia hasta la suma
de P2,000.

"El estado de cuentas de la agencia que se presento en

el juicio como Exhibit B, demuestra que la ultima liquidacion
arroja un balance contra el Agente Leonor S. Bantug por la
cantidad de P629; y como esta suma no ha sido pagada ni por
Leonor S. Bantug ni por su fiador Tomas Alonso, a pesar de los
requerimientos que se les ha hecho, de ahi que la demandante,
el 18 de noviembre de 1938, dedujo accion en el Juzgado de
Primera Instancia de Cebu para el cobro de dicha suma y sus
intereses legales desde la presentacion de la demanda." (Pages
1-3, appendix to petitioner's brief.)
Now if, as found by the Court of Appeals itself, the agency contract
between the petitioner and Leonor S. Bantug was Exhibit A, dated August 12,
1929, and that that very same document was on the same date signed
by the respondent Tomas Alonso as bondsman or surety of the agent, how
could the bond in question, which formed part of Exhibit A, be held to have been
executed by virtue of clause 15 of said document providing for additional
security? Indeed, that very clause says thatthe agent shall furnish further
guaranty or bond "in addition to the guaranty herewith provided," whenever
requested by the company. The "guaranty herewith provided" was
obviously the bond or guaranty given by the respondent on the same date and
in the same document. It appears clear to us, therefore, that the bond Exhibit A,
being the original guaranty, could not be the "additional guaranty" mentioned in
clause 15 of said Exhibit A. Moreover, it does not appear that any bond or
guaranty, other than that of the respondent, to secure the performance
of the agency contract in question was in force on and after August 12, 1929.
Another illogical conclusion drawn by the Court of Appeals is this:
"Por el requerimiento que contiene la clausula
preinserta, de que el Agente puede prestar una garantia
Page 194 of 505

adicional a satisfaccion de la compaia, debe entenderse que la

fianza prestada por el apelante era una oferta o proposicion de
garantia, cuya efectividad dependia de la acceptacion de la
compaia, comunicada al garante." (Page 9, appendix to
petitioner's brief.)
If, as previously found by the Court of Appeals, the herein respondent
executed the bond in question "a requerimiento de la demandante," how could
said bond be understood as an "offer or proposition of guaranty" from Alonso
to the plaintiff?
Yet the judgment of the Court of Appeals, as well as the affirming
decision of the majority of this court, is based on the conclusion that the bond
sued upon was an additional guaranty; that it constituted a mere offer of guaranty
and, therefore, had to be accepted by the petitioner; and that, not having been
accepted, it is inefficacious. We have shown that such conclusion is unwarranted.

SECOND DIVISION

Our vote is to reverse the decision of the Court of Appeals and to affirm
that of Judge Felix Martinez of the Court of First Instance of Cebu, who tried this
case.
Moran and Horrilleno, JJ., concur.
||| (Texas Co. (Phil.) v. Alonso, G.R. No. 47495, [August 14, 1941], 73 PHIL 90-96)

[G.R. No. 107062. February 21, 1994.]

PHILIPPINE PRYCE ASSURANCE CORPORATION, petitioner,
vs. THE COURT OF APPEALS, (Fourteenth Division) and
GEGROCO, INC., respondents.

DECISION

NOCON, J p:
Two purely technical, yet mandatory, rules of procedure frustrated petitioner's bid to
get a favorable decision from the Regional Trial Court and then again in the Court of
Appeals. 1 These are non-appearance during the pre-trial despite due notice, and
non-payment of docket fees upon filing of its third-party complaint. Just how strict
should these rules be applied is a crucial issue in this present dispute.
Petitioner, Interworld Assurance Corporation (the company now carries the corporate
name Philippine Pryce Assurance Corporation), was the butt of the complaint for
collection of sum of money, filed on May 13, 1988 by respondent, Gegroco, Inc.
before the Makati Regional Trial Court, Branch 138. The complaint alleged that
Page 195 of 505

petitioner issued two surety bonds (No. 0029, dated July 24, 1987 and No. 0037,
dated October 7, 1987) in behalf of its principal Sagum General Merchandise for FIVE
HUNDRED THOUSAND (P500,000.00) PESOS and ONE MILLION (1,000,000.00)
PESOS, respectively.
On June 16, 1988, summons, together with the copy of the complaint, was served on
petitioner. Within the reglementary period, two successive motions were filed by
petitioner praying for a total of thirty (30) days extension within which to file a
responsive pleading. LexLib
In its Answer, dated July 29, 1988, but filed only on August 4, 1988, petitioner
admitted having executed the said bonds, but denied liability because allegedly 1) the
checks which were to pay for the premiums bounced and were dishonored hence
there is no contract to speak of between petitioner and its supposed principal; and 2)
that the bonds were merely to guarantee payment of its principal's obligation, thus,
excussion is necessary. After the issues had been joined, the case was set for pretrial conference on September 29, 1988. The petitioner received its notice on
September 9, 1988, while the notice addressed to its counsel was returned to the trial
court with the notation "Return to Sender, Unclaimed." 2
On the scheduled date for pre-trial conference, only the counsel for petitioner
appeared while both the representative of respondent and its counsel were present.
The counsel for petitioner manifested that he was unable to contract the VicePresident for operations of petitioner, although his client intended to file a third party
complaint against its principal. Hence, the pre-trial was re-set to October 14, 1988. 3
On October 14, 1988, petitioner filed a "Motion with Leave to Admit Third-Party
Complaint" with the Third-Party Complaint attached. On this same day, in the
presence of the representative for both petitioner and respondent and their respective
counsel, the pre-trial conference was re-set to December 1, 1988. Meanwhile on
November 29, 1988, the court admitted the Third Party Complaint and ordered
service of summons on third party defendants. 4
On scheduled conference in December, petitioner and its counsel did not appear
notwithstanding their notice in open court. 5 The pre-trial was nevertheless re-set to
February 1, 1989. However, when the case was called for pre-trial conference on
February 1, 1989, petitioner was again not represented by its officer or its counsel,
despite being duly notified. Hence, upon motion of respondent, petitioner was
considered as in default and respondent was allowed to present evidence ex-parte,
which was calendared on February 24, 1989. 6 Petitioner received a copy of the

Order of Default and a copy of the Order setting the reception of respondent's
evidenceex-parte, both dated February 1, 1989, on February 15, 1989. 7
On March 6, 1989, a decision was rendered by the trial court; the dispositive portion
reads:
"WHEREFORE, judgment is hereby rendered in favor of the
plaintiff
and
against
the
defendant
Interworld Assurance Corporation to pay the amount of
P1,500,000.00 representing the principal of the amount due, plus
legal interest thereon from April 7, 1988, until date of payment;
and P20,000.00 as and for attorney's fees." 8
Petitioner's "Motion for Reconsideration and New Trial" dated April 17, 1989, having
been denied, it elevated its case to the Court of Appeals which however, affirmed the
decision of the trial court as well as the latter's order denying petitioner's motion for
reconsideration. llcd
Before us, petitioner assigns as errors the following:
I. The respondent Court of Appeals gravely erred in declaring that
the case was already ripe for pre-trial conference when the trial
court set it for the holding thereof.
II. The respondent Court of Appeals gravely erred in affirming the
decision of the trial court by relying on the ruling laid down by this
Honorable
Court
in
the
case
of
Manchester
Development Corporation v. Court of Appeals, 149 SCRA 562,
and disregarding the doctrine laid down in the case of Sun
Insurance Office, Ltd. (SIOL) v. Asuncion, 170 SCRA 274. llcd
III. The respondent Court of Appeals gravely erred in declaring
that it would be useless and a waste of time to remand the case
for further proceedings as defendant-appellant has no meritorious
defense.
We do not find any reversible error in the conclusion reached by the court a quo.
Relying on Section 1, Rule 20 of the Rules of Court, petitioner argues that since the
last pleading, which was supposed to be the third-party defendant's answer has not
been filed, the case is not yet ripe for pre-trial. This argument must fail on three
points. First, the trial court asserted, and we agree, that no answer to the third party
Page 196 of 505

complaint is forthcoming as petitioner never initiated the service of summons on the

third party defendant. The court further said:
". . . Defendant's claim that it was not aware of the Order
admitting the third-party complaint is preposterous. Sec. 8, Rule
13 of the Rules, provides:
'Completeness of service . . . Service by
registered mail is complete upon actual receipt by the
addressee, but if he fails to claim his mail from the post
office within five (5) days from the date of first notice of
the postmaster, service shall take effect at the expiration
of such time." 9
Moreover, we observed that all copies of notices and orders issued by the court for
petitioner's counsel were returned with the notation "Return to Sender, Unclaimed."
Yet when he chose to, he would appear in court despite supposed lack of notice.
Second, in the regular course of events, the third-party defendant's answer would
have been regarded as the last pleading referred to in Sec. 1, Rule 20. However,
petitioner cannot just disregard the court's order to be present during the pre-trial and
give a flimsy excuse, such as that the answer has yet to be filed. cdphil
The pre-trial is mandatory in any action, the main objective being to simplify,
abbreviate and expedite trial, if not to fully dispense with it. Hence, consistent with its
mandatory character the Rules oblige not only the lawyers but the parties as well to
appear for this purpose before the Court 10 and when a party fails to appear at a pretrial conference he may be non-suited or considered as in default. 11
Records show that even at the very start, petitioner could have been declared as in
default since it was not properly represented during the first scheduled pre-trial on
September 29, 1988. Nothing in the record is attached which would show that
petitioner's counsel had a special authority to act in behalf of his client other than as
its lawyer. LLpr
We have said that in those instances where a party may not himself be present at the
pre-trial, and another person substitutes for him, or his lawyer undertakes to appear
not only as an attorney but in substitution of the client's person, it is imperative for that
representative or the lawyer to have "special authority" to enter into agreements which
otherwise only the client has the capacity to make. 12

Third, the Court of Appeals properly considered the third-party complaint as a mere
scrap of paper due to petitioner's failure to pay the requisite docket fees. Said the
court a quo:
"A third-party complaint is one of the pleadings for which Clerks
of Court of Regional Trial Courts are mandated to collect docket
fees pursuant to Section 5, Rule 141 of the Rules of Court. The
record is bereft of any showing tha(t) the appellant paid the
corresponding docket fees on its third-party complaint. Unless
and until the corresponding docket fees are paid, the trial court
would not acquire jurisdiction over the third-party complaint
(Manchester Development Corporation vs. Court of Appeals, 149
SCRA 562). The third-party complaint was thus reduced to a
mere scrap of paper not worthy of the trial court's attention.
Hence, the trial court can and correctly set the case for pre-trial
on the basis of the complaint, the answer and the answer to the
counterclaim." 13
It is really irrelevant in the instant case whether the ruling in Sun Insurance Office, Ltd.
(SIOL) v. Asuncion 14 or that in Manchester Development Corp. v. C.A. 15 was
applied. Sun Insurance and Manchester are mere reiteration of old jurisprudential
pronouncements on the effect of non-payment of docket fees. 16 In previous cases,
we have consistently ruled that the court cannot acquire jurisdiction over the subject
matter of a case, unless the docket fees are paid. LLjur
Moreover, the principle laid down in Manchester could have very well been applied in
Sun Insurance. We then said:
"The principle in Manchester [Manchester Development Corp. v.
C.A., 149 SCRA 562 (1987)] could very well be applied in the
present case. The pattern and the intent to defraud the
government of the docket fee due it is obvious not only in the
filing of the original complaint but also in the filing of the second
amended complaint.

xxx xxx xxx

"In the present case, a more liberal interpretation of the rules is
called for considering that, unlike Manchester, private respondent
demonstrated his willingness to abide by the rules by paying the
Page 197 of 505

additional docket fees as required. The promulgation of the

decision in Manchester must have had that sobering influence on
private respondent who thus paid the additional docket fee as
ordered by the respondent court. It triggered his change of stance
by manifesting his willingness to pay such additional docket fees
as may be ordered. 17
Thus, we laid down the rules as follows:
1. It is not simply the filing of the complaint or
appropriate initiatory pleading, but the payment of the prescribed
docket fee, that vests a trial court with jurisdiction over the
subject-matter or nature of the action. Where the filing of the
initiatory pleading is not accompanied by payment of the docket
fee, the court may allow payment of the fee within a reasonable
time, but in no case beyond the applicable prescriptive or
reglementary period.
2. The
same
rule
applies
to
permissive
counterclaims, third-party claims and similar pleadings, which
shall not be considered filed until and unless the filing fee
prescribed therefor is paid. The court may also allow payment of
said fee within a prescriptive or reglementary period.
3. Where the trial court acquires jurisdiction over a claim
by the filing of the appropriate pleading and payment of the
prescribed filing fee, but subsequently, the judgment awards a
claim nor specified in the pleading, or if specified the same has
not been left for determination by the court, the additional filing
fee therefor shall constitute a lien on the judgment. It shall be the
responsibility of the clerk of court or his duly authorized deputy to
enforce said lien and assess and collect the additional fee. 18
It should be remembered that both in Manchester and Sun Insurance, plaintiffs therein
paid docket fees upon filing of their respective pleadings, although the amount
tendered were found to be insufficient considering the amounts of the reliefs sought in
their complaints. In the present case, petitioner did not and never attempted to pay the
requisite docket fee. Neither is there any showing that petitioner even manifested to
be given time to pay the requisite docket fee, as in fact it was not present during the
scheduled pre-trial on December 1, 1988 and then again on February 1, 1989.
Perforce, it is as if the third-party complaint was never filed. cdll

Finally, there is reason to believe that partitioner does not really have a good defense.
Petitioner hinges its defense on two arguments, namely: a) that the checks issued by
its principal which were supposed to pay for the premiums, bounced, hence there is
no contract of surety to speak of; and 2) that as early as 1986 and covering the time
of the Surety Bond, Interworld Assurance Company (now Phil. Pryce) was not yet
authorized by the Insurance Commission to issue such bonds. LLjur
The Insurance Code states that:
"SECTION 177. The surety is entitled to payment of the premium
as soon as the contract of suretyship or bond is perfected and
delivered to the obligor. No contract of suretyship or bonding shall
be valid and binding unless and until the premium therefor has
been paid, except where the obligee has accepted the bond, in
which case the bond becomes valid and enforceable irrespective
of whether or not the premium has been paid by the obligor to the
surety. . . ." (emphasis added)
The above provision outrightly negates petitioner's first defense. In a desperate
attempt to escape liability, petitioner further asserts that the above provision is not
applicable because the respondent allegedly had not accepted the surety bond,
hence could not have delivered the goods to Sagum Enterprises. This statement
clearly intends to muddle the facts as found by the trial court and which are on
record. cdrep
In the first place, petitioner, in its answer, admitted to have issued the bonds subject
matter of the original action. 19 Secondly, the testimony of Mr. Leonardo T. Guzman,
witness for the respondent, reveals the following:
"Q. What are the conditions and terms of sales you extended to
Sagum General Merchandise?
A. First, we required him to submit to us Surety Bond to guaranty
payment of the spare parts to be purchased. Then we
sell to them on 90 days credit. Also, we required them to
issue post-dated checks.
Q. Did Sagum General Merchandise comply with your surety
bond requirement?
A. Yes. They submitted to us and which we have accepted two
surety bonds.
Page 198 of 505

Q Will you please present to us the aforesaid surety bonds?

Provincial Fiscal Noel of Marinduque for appellee.

A. Interworld Assurance Corp. Surety Bond No. 0029 for

P500,000
dated
July
24,
1987
and
Interworld Assurance Corp. Surety Bond No. 0037 for
P1,000.000 dated October 7, 1987." 20
Likewise attached to the record are exhibits C to C-18 21 consisting of delivery
invoices addressed to Sagum General Merchandise proving that parts were
purchased, delivered and received. cdll
On the other hand, petitioner's defense that it did not have authority to issue a Surety
Bond when it did is an admission of fraud committed against respondent. No person
can claim benefit from the wrong he himself committed. A representation made is
rendered conclusive upon the person making it and cannot be denied or disproved as
against the person relying thereon. 22
WHEREFORE, in view of the foregoing, the decision of the Court of Appeals
dismissing the petition before them and affirming the decision of the trial court and its
order denying petitioner's Motion for Reconsideration are hereby AFFIRMED. The
present petition is DISMISSED for lack of merit.
SO ORDERED.
Narvasa, C .J ., Padilla, Regalado and Puno, JJ ., concur.
||| (Philippine Pryce Assurance Corp. v. Court of Appeals, G.R. No. 107062, [February
21, 1994])

EN BANC
[G.R. No. 43486. September 30, 1936.]
THE MUNICIPALITY OF GASAN, plaintiff-appellee, vs.
MIGUEL MARASIGAN, ANGEL R. SEVILLA and GONZALO L.
LUNA, defendants-appellants.

Luis Atienza Bijis for appellants.

DECISION

DIAZ, J p:
This is an action brought by the municipality of Gasan of the
Province of Marinduque, against Miguel Marasigan, Angel R. Sevilla and Gonzalo
L. Luna, to recover from them the sum of P3,780, alleging that it forms a
part of the license fees which Miguel Marasigan failed to pay for the privilege
granted him of gathering whitefish spawn (semillas de bagus) in the
jurisdictional waters of the plaintiff municipality during the period from January 1,
1931, to December 31 of said year.
The Court of First Instance of Marinduque, which tried the case,
rendered a decision adverse to the defendants, sentencing them to pay jointly to
the plaintiff said sum of P3,780 with legal interest thereon from August 19, 1932,
until fully paid, plus the costs of the suit. From said judgment, the defendants
appealed to this court, attributing to the lower court the five alleged errors relied
upon in their brief, as follows:
"I. The court a quo erred in holding and maintaining that,
notwithstanding the fact that resolution No. 161 of the municipal
council of Gasan which gave rise to the contract and bond,
Exhibits A and B, respectively, of the complaint, has been
declared null and void by the provincial board and by the
Executive Bureau, the contract and bond in question are valid
and, consequently, enforceable on the ground that said resolution
No. 161 is within or had been adopted within the powers ofthe
council.
"II. The court a quo erred in holding that even granting
that the contract Exhibit A is not valid de jure, it is a de
facto contract as to the defendants, particularly the defendantgrantee Miguel Marasigan.
"III. The court a quo erred in not absolving the
defendants Angel R. Sevilla and Gonzalo L. Luna, sureties of the
defendant Miguel Marasigan, notwithstanding the fact that
Page 199 of 505

resolution No. 161, by virtue of which said defendants subscribed

the bond Exhibit B of the complaint, had been declared null and
void by the provincial board and by the Executive Bureau.
"IV. The court a quo erred in holding that the herein
defendant Miguel Marasigan had taken advantage of the privilege
to catch or gather whitefish spawn in the jurisdictional
waters of the municipality of Gasan, during the period from
January 1, to December 31, 1931, notwithstanding the fact that
counsel for the plaintiffmunicipality failed to present evidence,
either documentary or oral, to justify said fact.
"V. The court a quo erred in not absolving each and
every one of the herein defendants from the complaint, and in not
ordering the plaintiff municipality to return to the defendant
Miguel Marasigan the sums of four hundred twenty pesos (P420)
and eight hundred forty pesos (P840) deposited with said plaintiff,
with interest thereon from the respective dates of their deposit,
until their return."
The case was tried by the lower court with no other evidence than the
admissions made by the parties in the stipulation of facts mentioned in the
body of the decision, the pertinent parts of which will be discussed later. Said
stipulation and the attached papers forming a part thereof enables this court to
narrate the material facts of the case, as follows:
The plaintiff-appellee municipality, on December 9, 1930, put up at
auction the privilege of gathering whitefish spawn in its jurisdictional waters for
the periodof one year from January 1, 1931. Two bidders, Graciano Napa and
Miguel Marasigan, appeared at the auction. Both attached to their respective bids
the certificateof not being behind in the payment of any fax, issued by the
municipal treasurer of Gasan, Marinduque, as required by the
provisions of resolution No. 42, series of1930, of the council of said municipality.
Graciano Napa proposed to accept the privilege by paying P5,000 therefor, and
Miguel Marasigan proposed to do likewise, but by paying only P4,200.
The council of the plaintiff-appellee municipality, in its resolution No. 161
(Exhibit 1) of December 11, 1930, rejected Graciano Napa's bid and accepted
that ofthe appellant Miguel Marasigan, granting and selling to the latter the
privilege put up at auction for the sum of P4,200, payable quarterly in advance at
the rate ofP1,050 a quarter (Exhibit A). To secure his compliance with the
terms of the contract which was immediately formalized by him and the plaintiff,

and pursuant to the provisions of section 8 of resolution No. 128,

series of 1925, of the council of said plaintiff, Miguel Marasigan filed the bond,
Exhibit B, subscribed on December 15, 1930, by the defendants-appellants Angel
R. Sevilla and Gonzalo L. Luna, who bound themselves in said document to pay
to the plaintiff the sum of P8,400, if MiguelMarasigan failed to deposit onefourth of P4,200 quarterly in advance in the municipal treasury of Gasan, in
violation of the terms of the contract executed and entered into by him and the
plaintiff on December 11, 1930 (Exhibit A), for the compliance with which they
became sureties.
Before the plaintiff municipality and Miguel Marasigan entered into their
contract, and also before the latter's sureties executed the above-stated bond,
Graciano Napa, whose bid was rejected for the reason that he had not attached
thereto the certificate that he is not behind in the payment of any tax which he
should have obtained from the municipal treasurer of Lemery, his native town,
forwarded a protest (Exhibit 4) to the provincial board, which protest was later
indorsed by said provincial board to the Chief of the Executive Bureau, alleging
that the plaintiff municipality violated the provisions of section 2323 of the
Administrative Code in rejecting his bid.
The provincial board, passing upon Graciano Napa's protest and acting
under the authority which, in its opinion, was granted to it by section 2233 of the
Administrative Code, held that resolution No. 161, series of 1930, by
virtue of which the municipal council of Gasan rejected Graciano Napa's bid and
accepted that ofMiguel Marasigan, notwithstanding the fact that the latter offered
to pay less, was invalid, and suggested that the privilege should be awarded to
Graciano Napa who, in its opinion, appeared to be the highest bidder in
accordance with the provisions of sections 2323 and 2319 of the Administrative
Code (Exhibit 9). The Executive Bureau, concurring with the provincial board's
points of view, declared, in turn, that the concession made to Marasigan was
illegal in view of the fact that Graciano Napa was the highest bidder (Exhibit 13).
The plaintiff municipality, through its municipal council, exerted efforts to
obtain the reconsideration of the decisions of the provincial board of Marinduque
and of the Executive Bureau but, as these two entities maintained their decisions
(Exhibits 14, 15, 16, 17 and 18), it decided, in its resolution No. 11, series of 1931
(Exhibit 19), to award the privilege of gathering whitefish spawn within its waters
to Graciano Napa, giving him a period of six days, which was later extended to
seven days, from January 8, 1931 (Exhibit 19-A), to deposit the sum of P500,
equivalent to 10 per cent of his bid of P5,000, with the municipal
treasurer of Gasan, so as to comply with the provisions of section 8 of the
Page 200 of 505

conditions of the public auction at which he was a bidder, warning him that if he
failed to do so, the contract entered into by the plaintiff, through its president, and
the appellant Miguel Marasigan (Exhibit A), would automatically take effect.
Graciano Napa not only failed to make the deposit required by the plaintiff in its
two above-stated resolutions Nos. 11 and 12, series of 1931 (Exhibits 19 and 19A), but he formally declared, through his duly authorized representative, that he
yielded the privilege granted him to Miguel Marasigan or to any other person
selected by the municipal (Exhibit 20.).

One day later, or on January 15, 1931, the president of the plaintiffappellee municipality sent the letter Exhibit 21 to Miguel Marasigan, which reads:
"SIR:
"By virtue of Res. No. 11, c.s., as amended by Res. No.
12, same series, and the communication of Mr. J. Zaguirre dated
January 14, 1931, copy of which is hereto attached, you are
hereby advised that the contract entered into between you and
the municipality of Gasan for the
lease of the bagus fishery
privilege for the year 1931 becomes effective on January 14,
1931, to run until December 31, 1931.
"You are hereby requested to appear before the
session of the Municipal Council to be held at the office of the
undersigned tomorrow, January 16, 1931, bringing with yourself
the contract and bond executed in your favor for ratification.
"You are further informed that you are given 10 days
from the date hereof, within which time you are to pay the
amount of P1,050, as per tax corresponding to the first quarter,
1931."
Prior to this, but after the adoption by the municipal
council of Gasan of its resolution No. 163 (Exhibit 7) on December 16, 1930, and
two days before the provincial board declared said council's resolutions Nos. 161
and 163 invalid, the president of the plaintiff- appellee municipality notified the
appellant MiguelMarasigan that the contract whereby he was granted the
privilege of gathering whitefish spawn during the year 1931, upon his offer to pay
P4,200 a year therefor, was suspended and that he should consider it ineffective
in the meantime in view of the fact that the question whether he
(Miguel Marasigan) or Graciano Napa was the highest bidder still remained
undecided by the provincial board of Marinduque and by the Executive Bureau.

The English translation of the letter sent by the municipal president to

Miguel Marasigan, which was written in Tagalog (Exhibit 8), reads:
"SIR:
"In view of the fact that the whitefish (bagus) case has
not yet been decided or determined by the provincial board and is
still pending action to date, and in view of the instructions given
me by the representative of the Executive Bureau, Mr. Jose
Zaguirre, I beg to inform you, with due respect, that you should
refrain from carrying out and giving efficacy to the contract signed
by me in the name of the municipality, relative to the
privilege of gathering whitefish in your favor, from this date until
further notice, because this case is still pending action."
Knowing the above-stated facts, let us now turn to the
consideration of the alleged errors attributed to the lower court by the appellants.
The first and third errors should be considered jointly on account of the
close relation existing between them. The determination of one depends upon
that ofthe other.
This court believes that there is no necessity of even discussing the first
error because the plaintiff itself accepted the conclusions and decision of the
provincial board and of the Executive Bureau, so much so that in its resolution
No. 11, series of 1931, it thereafter considered Graciano Napa as the highest
bidder, going to the extent of requiring him, as it in fact required him, to make the
deposit of P500 prescribed by the conditions of the auction sale in which he had
intervened, and granting him a period of seven days to comply with said
requirement (Exhibits 19 and 19-A). Furthermore, when the plaintiff received
Graciano Napa's notice informing it that he ceded the privilege just granted him to
appellant Miguel Marasigan or to any other person that it might choose, said
plaintiff, through its municipal president, required Miguel Marasigan to appear
before its municipal council to present his formerly prepared contract as well as
his bond in order that both documents might be ratified (Exhibit 21). It should be
added to the foregoing that on December 18, 1930, the plaintiff, also through its
municipal president, notified appellant Marasigan that his contract should, in the
meantime, be considered ineffectual and that he should do nothing to put it in
execution because the case was still undecided by the provincial board and by
the Executive Bureau (Exhibit 8). It is clear that it may be logically inferred from
these facts that the contract regarding fishing privilege entered into between the
plaintiff and appellant Marasigan on December 11, 1930 (Exhibit A), not only was
Page 201 of 505

not consummated but was cancelled. Consequently, it now appears useless and
futile to discuss whether or not resolution No. 161 (Exhibit 1) is valid and legal. In
either case, it is a fact that said contract ceased to have life or force to bind
each of the contracting parties. It ceased to be valid from the time it was
cancelled and this being so, neither the appellant Marasigan nor his sureties or
the other appellants were bound to comply with the terms of their respective
contracts of fishing privilege and suretyship. This is so, particularly with respect to
the sureties-appellants, because suretyship cannot exist without a valid obligation
(art. 1824 of the Civil Code). The obligation whose compliance by the
appellant Marasigan was guaranteed by the sureties-appellants, was exclusively
that appearing in Exhibit A, which should begin on January 1, 1931, not on the
14th of said month and year, and end on December 31st next. They intervened in
no other subsequent contract which the plaintiff and MiguelMarasigan might have
entered into on or after January 14, 1931. Guaranty is not presumed; it must be
express and cannot be extended beyond its specified limits (art. 1827 of the Civil
Code). Therefore, after eliminating the obligation for which said suretiesappellants desired to answer with their bond, the bond necessarily ceased and it
ceases to have effects. Consequently, said errors I and III are true and well
founded.
As to the second error, it must be known that among the stipulations
contained in the stipulation of facts submitted to the court are the following:
"21. That on July 20, 1931, Miguel Marasigan paid the
sum of P16.20 to the municipal treasurer of Gasan, as internal
revenue tax on sales of whitefish (bagus) spawn amounting to
P1,080 during the months of April, May and June, 1931; and that
on August 22, 1931, said Miguel Marasigan presented his sales
book to the municipal treasurer of Gasan, Mr. Gregorio D.
Chavez, it appearing therein that said Miguel Marasigan, in the
mouth of July, 1931, sold whitefish spawn amounting to P85; in
the month of August, 1931, none, and in the month of September,
1931, none.
"22. That Miguel Marasigan is the concessionaire of the
privilege to gather whitefish spawn in the jurisdictional
waters of the municipality of Boac, Marinduque, during the period
from January 1, 1931, to December 31 of said year, and that
during said period of time he had paid the sales tax on the
whitefish spawn in question only in the municipality of Gasan,
without having made any payment in the municipality of Boac.

"23. That defendant Miguel Marasigan, as bidder at the

auction of December 9, 1930, deposited in the municipal
treasury of Gasan the sum of P420, equivalent to 10 per
cent of his bid at said auction, and that said sum has not yet been
returned to him to date.
"24. That
on
June
29,
1931,
said
Miguel Marasigan delivered another sum of P840 to the municipal
treasurer of Gasan, making the total amount delivered by him to
said municipal treasurer P1,260, the corresponding receipt
having been issued to Miguel Marasigan to that effect."
The facts resulting from the stipulations in question warrant and justify
the inference that the appellant Miguel Marasigan practically enjoyed the
privilege ofgathering whitefish spawn in the jurisdictional
waters of the municipality of Gasan, under the terms of the contract executed by
him on December 11, 1930, but which was cancelled later by virtue of Graciano
Napa's protest, at least from the month of April to the month of July, 1931,
inclusive. If this were not true, he would not have paid, as he spontaneously paid
to the municipal treasurer of Gasan, the following sum: P840 on June 29, 1931,
and P16.20 on July 20 of said year, nor presented, as he in fact presented to said
official for inspection, his sales book wherein it appears that his sales of whitefish
spawn during the month of July of said year amounted to P85. The
stipulation of facts, however, is silent as to whether or not be enjoyed the privilege
in question during the rest of the year. On the contrary, it states that he sold no
whitefish spawn in August or September.
The excuse now offered by appellant Marasigan in his brief that the
above-stated amounts were on account of license fees or taxes on the
privilege ofgathering whitefish spawn in the jurisdictional waters of Boac,
obtained by him from said municipality, is not supported by the evidence. If the
payments made by him were as he claims them to be, he would have so stated in
the stipulation of facts. Not having done so and, furthermore, the practice
generally observed being to pay an obligation in the municipality where the
payment is due, the only conclusion possible is that said appellant made all such
payments on account of the tacit contract entered into by him and the plaintiff
after he had received the letter of January 15, 1931 (Exhibit 21), sent to him by
said plaintiff through its municipal president. This conclusion is all the more
logical because appellant Marasigan insisted in his answer, and still continues to
insist in his brief, that the plaintiff is obliged to refund to him the amount of P1,260
which he claims to have paid to it, and which is no other than the amount of the
Page 202 of 505

two sums of P420 and P840 stated in the last two paragraphs of the above-stated
stipulation of facts. If it were really true, as said appellant contends, that said
sum of P840 was paid by him on account ofhis contract for privilege of gathering
whitefish spawn, executed in his favor by the municipality of Boac, he would not
have insisted in his answer, nor would be now insist in his brief, that said sum be
refunded to him, because in the absence of evidence to the contrary, it must be
presumed that is was transmitted by the municipal treasurer of Gasan to
that of Boac, inasmuch as, accepting his contention, he was obliged to pay
something to the latter municipality by virtue of his alleged contract with it.

For the foregoing reasons, the conclusion of this court with respect to
the second error attributed to the lower court by appellant Marasigan is that said
error is without merit. The truth is that between him and the plaintiff, there was a
tacit contract for the privilege of gathering whitefish spawn in the jurisdictional
waters ofthe municipality of Gasan, based upon Exhibit A, but without the
intervention of the sureties-appellants, for the above-stated period, or from April
to July, 1931, inclusive, which is equivalent to one and one-third quarter. Said
contract was one which, by its nature, need not be in writing (sec. 335 of Act No.
190); but it is binding because it has all the essential requisites of a valid contract
(art. 1278 of the Civil Code).
The fourth error is practically disposed of by the same reasons stated in
passing upon the second error.
As to the fifth error, it must be stated that appellant Marasigan really
deposited in the municipal treasury of Gasan, as stated in paragraph 23 of the
stipulationof facts, the sum of P420 on account of his cancelled original contract
(Exhibit A), and that said deposit has not as yet been returned to him. Therefore,
he is entitled to be credited with said sum.
Summarizing all that has been stated heretofore, this court holds that
appellant Miguel Marasigan owes and is bound to pay to the
plaintiff municipality the proceeds of one and one-third quarter, for the
privilege of gathering whitefish spawn enjoyed by him in 1931, at the
rate of P4,200 a year, or P1,400 (P1,050 for one quarter and P350 for onethird of a quarter); but he is, in turn, entitled to be credited with the sum of P420
deposited by him on December 9, 1930, and P840 paid by him on June 29, 1931,
or the total amount of P1,260. In other words, appellant Marasigan is bound to
pay the sum of P140 to the plaintiff.

In view of the foregoing considerations, this court absolves the

defendants-appellants Angel R. Sevilla and Gonzalo L. Luna from the complaint
and orders the defendant-appellant Miguel Marasigan to pay the sum of P140 to
the plaintiff municipality.
It is considered unnecessary to expressly mention appellant
Miguel Marasigan's counterclaim because, as may be seen, he is credited in this
judgment with the sum of P1,260 which is all that he claims therein, without
special pronouncement as to costs. So ordered.
Avancea, C.J., Villa-Real, Abad Santos, Imperial and Laurel,
JJ., concur.
||| (Municipality of Gasan v. Marasigan, G.R. No. 43486, [September 30, 1936], 63
PHIL 510-521)

FIRST DIVISION
[G.R. No. 165662. May 3, 2006.]
SELEGNA
MANAGEMENT
AND
DEVELOPMENT
CORPORATION; and Spouses EDGARDO and ZENAIDA
ANGELES, petitioners, vs. UNITED COCONUT PLANTERS
BANK, * respondent.

DECISION

PANGANIBAN, C.J p:
A writ of preliminary injunction is issued to prevent an extrajudicial foreclosure, only
upon a clear showing of a violation of the mortgagor's unmistakable right.
Unsubstantiated allegations of denial of due process and prematurity of a loan are not
sufficient to defeat the mortgagee's unmistakable right to an extrajudicial foreclosure.
The Case
Page 203 of 505

Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, assailing the
May 4, 2004 Amended Decision 2 and the October 12, 2004 Resolution 3 of the Court
of Appeals (CA) in CA-G.R. SP No. 70966. The challenged Amended Decision
disposed thus:
"WHEREFORE, the Motion for Reconsideration is GRANTED.
The July 18, 2003 Decision is hereby REVERSED and SET
ASIDE and another one entered GRANTING the petition and
REVERSING and SETTING ASIDE the March 15, 2002 Order of
the Regional Trial Court, Branch 58, Makati City in Civil Case No.
99-1061." 4
The assailed Resolution denied reconsideration.
The Facts
On September 19, 1995, Petitioners Selegna Management and Development
Corporation and Spouses Edgardo and Zenaida Angeles were granted a credit facility
in the amount of P70 million by Respondent United Coconut Planters Bank (UCPB).
As security for this credit facility, petitioners executed real estate mortgages over
several parcels of land located in the cities of Muntinlupa, Las Pias, Antipolo and
Quezon; and over several condominium units in Makati. Petitioners were likewise
required to execute a promissory note in favor of respondent every time they availed
of the credit facility. As required in these notes, they paid the interest in monthly
amortizations.
The parties stipulated in their Credit Agreement dated September 19, 1995, 5 that
failure to pay "any availment of the accommodation or interest, or any sum due" shall
constitute an event of default, 6 which shall consequently allow respondent bank to
"declare [as immediately due and payable] all outstanding availments of the
accommodation together with accrued interest and any other sum payable." 7
In need of further business capital, petitioners obtained from UCPB an increase in
their credit facility. 8 For this purpose, they executed a Promissory Note for
P103,909,710.82, which was to mature on March 26, 1999. 9 In the same note, they
agreed to an interest rate of 21.75 percent per annum, payable by monthly
amortizations.
On December 21, 1998, respondent sent petitioners a demand letter, worded as
follows:

"With reference to your loan with principal outstanding balance of

[P103,909,710.82], it appears from the records of United Coconut
Planters Bank that you failed to pay interest amortizations
amounting to [P14,959,525.10] on the Promissory Note on its due
date, 30 May 1998. HSaIET
"xxx xxx xxx
"Accordingly, formal demand is hereby made upon you to pay
your outstanding obligations in the total amount of
P14,959,525.10, which includes unpaid interest and penalties as
of 21 December 1998 due on the promissory note, eight (8) days
from date hereof." 10
Respondent decided to invoke the acceleration provision in their Credit Agreement.
Accordingly, through counsel, it relayed its move to petitioners on January 25, 1999 in
a letter, which we quote:
"Gentlemen:
"xxx xxx xxx
"It appears from the record of [UCPB] that you failed to pay the
monthly interest due on said obligation since May 30, 1998 as
well as the penalty charges due thereon. Despite repeated
demands, you refused and continue to refuse to pay the same.
Under the Credit Agreements/Letter Agreements you executed,
failure to pay when due any installments of the loan or interest or
any sum due thereunder, is an event of default.
"Consequently, we hereby inform you that our client has declared
your principal obligation in the amount of [P103,909,710.82],
interest and sums payable under the Credit Agreement/Letter
Agreement/Promissory Note to be immediately due and payable.
"Accordingly, formal demand is hereby made upon you to please
pay within five (5) days from date hereof or up to January 29,
1999 the principal amount of [P103,909,710.82], with the interest,
penalty and other charges due thereon, which as of January 25,
1999 amounts to [P17,351,478.55]." 11

"Gentlemen:
Page 204 of 505

Respondent sent another letter of demand on March 4, 1999. It contained a final

demand on petitioners "to settle in full [petitioners'] said past due obligation to [UCPB]
within five (5) days from [petitioners'] receipt of [the] letter." 12
In response, petitioners paid respondent the amount of P10,199,473.96 as partial
payment of the accrued interests. 13 Apparently unsatisfied, UCPB applied for
extrajudicial foreclosure of petitioners' mortgaged properties.
When petitioners received the Notice of Extra Judicial Foreclosure Sale on May 18,
1999, they requested UCPB to give them a period of sixty (60) days to update their
accrued interest charges; and to restructure or, in the alternative, to negotiate for a
takeout of their account. 14
On May 25, 1999, the Bank denied petitioners' request in these words:
"This is to reply to your letter dated May 20, 1999, which confirms
the request you made the previous day when you paid us a visit.
"As earlier advised, your account has been referred to external
counsel for appropriate legal action. Demand has also been
made for the full settlement of your account.
"We regret that the Bank is unable to grant your request unless a
definite offer is made for settlement." 15
In order to forestall the extrajudicial foreclosure scheduled for May 31, 1999,
petitioners filed a Complaint 16 (docketed as Civil Case No. 99-1061) for "Damages,
Annulment of Interest, Penalty Increase and Accounting with Prayer for Temporary
Restraining Order/Preliminary Injunction." All subsequent proceedings in the trial
court and in the CA involved only the propriety of issuing a TRO and a writ of
preliminary injunction.
Judge Josefina G. Salonga, 17 then executive judge of the Regional Trial Court (RTC)
of Makati City, denied the Urgent Ex-parte Motion for Immediate Issuance of a
Temporary Restraining Order (TRO), filed by petitioners. Judge Salonga denied their
motion on the ground that no great or irreparable injury would be inflicted on them if
the parties would first be heard. 18 Unsatisfied, petitioners filed an Ex-Parte Motion
for Reconsideration, by reason of which the case was eventually raffled to Branch
148, presided by Judge Oscar B. Pimentel. 19
After due hearing, Judge Pimentel issued an Order dated May 31, 1999, granting a
20-day TRO on the scheduled foreclosure of the Antipolo properties, on the ground
that the Notice of Foreclosure had indicated an inexistent auction venue. 20 To

resolve that issue, respondent filed a Manifestation 21 that it would withdraw all its
notices relative to the foreclosure of the mortgaged properties, and that it would repost or re-publish a new set of notices. Accordingly, in an Order dated September 6,
1999, 22 Judge Pimentel denied petitioners' application for a TRO for having been
rendered moot by respondent's Manifestation. 23
Subsequently, respondent filed new applications for foreclosure in the cities where the
mortgaged properties were located. Undaunted, petitioners filed another Motion for
the Issuance of a TRO/Injunction and a Supplementary Motion for the Issuance of
TRO/Injunction with Motion to Clarify Order of September 6, 1999. 24
On October 27, 1999, Judge Pimentel issued an Order 25 granting a 20-day TRO in
favor of petitioners. After several hearings, he issued his November 26, 1999
Order, 26granting their prayer for a writ of preliminary injunction on the foreclosures,
but only for a period of twenty (20) days. The Order states:
"Admitted by defendant witness is the fact that in all the notices of
foreclosure sale of the properties of the plaintiffs . . . it is stated in
each notice that the property will be sold at public auction to
satisfy the mortgage indebtedness of plaintiffs which as of August
31, 1999 amounts to P131,854,773.98. CaTcSA
"xxx xxx xxx
"As the court sees it, this is the problem that should be
addressed by the defendant in this case and in the meantime, the
notice of foreclosure sale should be held in abeyance until such
time as these matters are clarified and cleared by the
defendants . . . Should the defendant be able to remedy the
situation this court will have no more alternative but to allow the
defendant to proceed to its intended action.
"xxx xxx xxx
"WHEREFORE, premises considered, and finding compelling
reason at this point in time to grant the application for preliminary
injunction, the same is hereby granted upon posting of a
preliminary injunction bond in the amount of P3,500,000.00 duly
approved by the court, let a writ of preliminary injunction be
issued." 27
The corresponding Writ of Preliminary Injunction 28 was issued on November 29,
1999.
Page 205 of 505

Respondent moved for reconsideration. On the other hand, petitioners filed a Motion
to Clarify Order of November 26, 1999. Conceding that the November 26 Order had
granted an injunction during the pendency of the case, respondent contended that the
injunctive writ merely restrained it for a period of 20 (twenty) days.
On December 29, 2000, Judge Pimentel issued an Order 29 granting respondent's
Motion for Reconsideration and clarifying his November 26, 1999 Order in this
manner:
"There may have been an error in the Writ of Preliminary
Injunction issued dated November 29, 1999 as the same
[appeared to be actually] an extension of the TRO issued by this
Court dated 27 October 1999 for another 20 days period.
Plaintiff's seeks to enjoin defendants for an indefinite period
pending trial of the case.

"Be that as it may, the Court actually did not have any intention of
restraining the defendants from foreclosing plaintiff[s'] property for
an indefinite period and during the entire proceeding of the case .
...
xxx xxx xxx
"What the [c]ourt wanted the defendants to do was to merely
modify the notice of [the] auction sale in order that the amount of
P131,854,773.98 . . . would not appear to be the value of each
property being sold on auction. . . . . 30
"WHEREFORE, premises considered and after finding merit on
the arguments raised by herein defendants to be impressed with
merit, and having stated in the Order dated 26 November 1999
that no other alternative recourse is available than to allow the
defendants to proceed with their intended action, the Court
hereby rules:
"1.] To give due course to defendant[']s motion for
reconsideration, as the same is hereby GRANTED,
however, with reservation that this Order shall take effect
upon after its[] finality[.]" 31

Consequently, respondent proceeded with the foreclosure sale of some of the

mortgaged properties. On the other hand, petitioners filed an "[O]mnibus [M]otion [for
Reconsideration] and to [S]pecify the [A]pplication of the P92 [M]illion [R]ealized from
the [F]oreclosure [S]ale . . . ." 32 Before this Omnibus Motion could be resolved,
Judge Pimentel inhibited himself from hearing the case. 33
The case was then re-raffled to Branch 58 of the RTC of Makati City, presided by
Judge Escolastico U. Cruz. 34 The proceedings before him were, however, all nullified
by the Supreme Court in its En Banc Resolution dated September 18, 2001. 35 He
was eventually dismissed from service. 36
The case was re-raffled to the pairing judge of Branch 58, Winlove M. Dumayas. On
March 15, 2002, Judge Dumayas granted petitioners' Omnibus Motion for
Reconsideration and Specification of the Foreclosure Proceeds, as follows:
"WHEREFORE, premises considered, the Motion to Reconsider
the Order dated December 29, 2000 is hereby granted and the
Order of November 26, 1999 granting the preliminary injunction is
reinstated subject however to the condition that all properties of
plaintiffs which were extrajudicially foreclosed though public
bidding are subject to an accounting. [A]nd for this purpose
defendant bank is hereby given fifteen (15) days from notice
hereof to render an accounting on the proceeds realized from the
foreclosure of plaintiffs' mortgaged properties located in Antipolo,
Makati, Muntinlupa and Las Pias." 37
The aggrieved respondent filed before the Court of Appeals a Petition for Certiorari,
seeking the nullification of the RTC Order dated March 15, 2002, on the ground that it
was issued with grave abuse of discretion. 38
The Special Fifteenth Division, speaking through Justice Rebecca de Guia-Salvador,
affirmed the ruling of Judge Dumayas. It held that petitioners had a clear right to an
injunction, based on the fact that respondent had kept them in the dark as to how and
why their principal obligation had ballooned to almost P132 million. The CA held that
respondent's refusal to give them a detailed accounting had prevented the
determination of the maturity of the obligation and precluded the possibility of a
foreclosure of the mortgaged properties. Moreover, their payment of P10 million had
the effect of updating, and thereby averting the maturity of, the outstanding
obligation. 39
Respondent filed a Motion for Reconsideration, which was granted by a Special
Division of Five of the Former Special Fifteenth Division.
Page 206 of 505

Ruling of the Court of Appeals

Citing China Banking Corporation v. Court of Appeals, 40 the appellate court held in
its Amended Decision 41 that the foreclosure proceedings should not be enjoined in
the light of the clear failure of petitioners to meet their obligations upon maturity. 42
Also citing Zulueta v. Reyes, 43 the CA, through Justice Jose Catral Mendoza, went
on to say that a pending question on accounting did not warrant an injunction on the
foreclosure.
Parenthetically, the CA added that petitioners were not without recourse or protection.
Further, it noted their pending action for annulment of interest, damages and
accounting. It likewise said that they could protect themselves by causing the
annotation of lis pendens on the titles of the mortgaged or foreclosed properties.
In his Separate Concurring Opinion, 44 Justice Magdangal M. de Leon added that a
prior accounting was not essential to extrajudicial foreclosure. He cited Abaca
Corporation v. Garcia, 45 which had ruled that Act No. 3135 did not require
mortgaged properties to be sold by lot or by only as much as would cover just the
obligation. Thus, he concluded that a request for accounting for the purpose of
determining whether the proceeds of the auction would suffice to cover the
indebtedness would not justify an injunction on the foreclosure.
Petitioners filed a Motion for Reconsideration dated May 31, 2004, which the appellate
court denied. 46
Hence, this Petition. 47
Issues
Petitioners raise the following issues for our consideration:
"I
"Whether or not the Honorable Court of Appeals denied the
petitioners of due process.
"II
"Whether or not the Honorable Court of Appeals supported its
Amended Decision by invoking jurisprudence not applicable and
completely identical with the instant case.
"III

"Whether or not the Honorable Court of Appeals failed to

establish its finding that RTC Judge Winlove Dumayas has acted
with grave abuse of discretion." 48
The resolution of this case hinges on two issues: 1) whether petitioners are in default;
and 2) whether there is basis for preliminarily enjoining the extrajudicial foreclosure.
The other issues raised will be dealt with in the resolution of these two main
questions.
The Court's Ruling
The Petition has no merit.
First Issue:
Default
The resolution of the present controversy necessarily begins with a determination of
respondent's right to foreclose the mortgaged properties extrajudicially.
It is a settled rule of law that foreclosure is proper when the debtors are in default of
the payment of their obligation. In fact, the parties stipulated in their credit
agreements, mortgage contracts and promissory notes that respondent was
authorized to foreclose on the mortgages, in case of a default by petitioners. That this
authority was granted is not disputed. aITECA
Mora solvendi, or debtor's default, is defined as a delay 49 in the fulfillment of an
obligation, by reason of a cause imputable to the debtor. 50 There are three requisites
necessary for a finding of default. First, the obligation is demandable and liquidated;
second, the debtor delays performance; third, the creditor judicially or extrajudicially
requires the debtor's performance. 51
Mortgagors'
Monthly Interest Amortizations

Default

of

In the present case, the Promissory Note executed on March 29, 1998, expressly
states that petitioners had an obligation to pay monthly interest on the principal
obligation. From respondent's demand letter, 52 it is clear and undisputed by
petitioners that they failed to meet those monthly payments since May 30, 1998. Their
nonpayment is defined as an "event of default" in the parties' Credit Agreement, which
we quote:
"Section 8.01. Events of Default. Each of the following events
and occurrences shall constitute an Event of Default of this
AGREEMENT:
Page 207 of 505

"1. The CLIENT shall fail to pay, when due, any availment of the
Accommodation or interest, or any other sum due thereunder in
accordance with the terms thereof;
"xxx xxx xxx"
"Section 8.02. Consequences of Default. (a) If an Event of
Default shall occur and be continuing, the Bank may:
"1. By written notice to the CLIENT, declare all outstanding
availments of the Accommodation together with accrued interest
and any other sum payable hereunder to be immediately due and
payable without presentment, demand or notice of any kind, other
than the notice specifically required by this Section, all of which
are expressly waived by the CLIENT[.]" 53
Considering that the contract is the law between the parties, 54 respondent is justified
in invoking the acceleration clause declaring the entire obligation immediately due and
payable. 55 That clause obliged petitioners to pay the entire loan on January 29,
1999, the date fixed by respondent. 56
Petitioners' failure to pay on that date set into effect Article IX of the Real Estate
Mortgage, 57 worded thus:
"If, at any time, an event of default as defined in the credit
agreements, promissory notes and other related loan documents
referred to in paragraph 5 of ARTICLE I hereof (sic), or the
MORTGAGOR and/or DEBTOR shall fail or refuse to pay the
SECURED OBLIGATIONS, or any of the amortization of such
indebtedness when due, or to comply any (sic) of the conditions
and stipulations herein agreed, . . . then all the obligations of the
MORTGAGOR secured by this MORTGAGE and all the
amortizations thereof shall immediately become due, payable
and defaulted and the MORTGAGEE may immediately
foreclose this MORTGAGE judicially in accordance with the Rules
of Court, or extrajudicially in accordance with Act No. 3135, as
amended, and Presidential Decree No. 385. For the purpose of
extrajudicial foreclosure, the MORTGAGOR hereby appoints the
MORTGAGEE his/her/its attorney-in-fact to sell the property
mortgaged under Act No. 3135, as amended, to sign all
documents and perform any act requisite and necessary to
accomplish said purpose and to appoint its substitutes as such

attorney-in-fact with the same powers as above specified. . . .

[.]" 58
The foregoing discussion satisfactorily shows that UCPB had every right to apply for
extrajudicial foreclosure on the basis of petitioners' undisputed and continuing default.

Petitioners'
Liquidated
Lack of Accounting

Debt
Despite

the

Considered
Alleged

Petitioners do not even attempt to deny the aforementioned matters. They assert,
though, that they have a right to a detailed accounting before they can be declared in
default. As regards the three requisites of default, they say that the first requisite
liquidated debt is absent. Continuing with foreclosure on the basis of an
unliquidated obligation allegedly violates their right to due process. They also maintain
that their partial payment of P10 million averted the maturity of their obligation.59
On the other hand, respondent asserts that questions regarding the running balance
of the obligation of petitioners are not valid reasons for restraining the foreclosure.
Nevertheless, it maintains that it has furnished them a detailed monthly statement of
account.
A debt is liquidated when the amount is known or is determinable by inspection of the
terms and conditions of the relevant promissory notes and related
documentation. 60 Failure to furnish a debtor a detailed statement of account does
not ipso facto result in an unliquidated obligation.
Petitioners executed a Promissory Note, in which they stated that their principal
obligation was in the amount of P103,909,710.82, subject to an interest rate of 21.75
percent per annum. 61 Pursuant to the parties' Credit Agreement, petitioners likewise
know that any delay in the payment of the principal obligation will subject them to a
penalty charge of one percent per month, computed from the due date until the
obligation is paid in full. 62
It is in fact clear from the agreement of the parties that when the payment is
accelerated due to an event of default, the penalty charge shall be based on the total
principal amount outstanding, to be computed from the date of acceleration until the
obligation is paid in full. 63 Their Credit Agreement even provides for the application
of payments. 64 It appears from the agreements that the amount of total obligation is
known or, at the very least, determinable.
Page 208 of 505

Moreover, when they made their partial payment, petitioners did not question the
principal, interest or penalties demanded from them. They only sought additional time
to update their interest payments or to negotiate a possible restructuring of their
account. 65 Hence, there is no basis for their allegation that a statement of account
was necessary for them to know their obligation. We cannot impair respondent's right
to foreclose the properties on the basis of their unsubstantiated allegation of a
violation of due process. ESDcIA

The only possible legal relevance of the partial payment was to evidence the
mortgagee's amenability to granting the mortgagor a grace period. Because the
partial payment would constitute a waiver of the mortgagee's vested right to foreclose,
the grant of a grace period cannot be casually assumed; 72 the bank's agreement
must be clearly shown. Without a doubt, no express agreement was entered into by
the parties. Petitioners only assumed that their partial payment had satisfied
respondent's demand and obtained for them more time to update their account. 73

In Spouses Estares v. CA, 66 we did not find any justification to grant a preliminary
injunction, even when the mortgagors were disputing the amount being sought from
them. We held in that case that "[u]pon the nonpayment of the loan, which was
secured by the mortgage, the mortgaged property is properly subject to a foreclosure
sale." 67

Petitioners are mistaken. When creditors receive partial payment, they are not ipso
facto deemed to have abandoned their prior demand for full payment. Article 1235 of
the Civil Code provides:

Compared with Estares, the denial of injunctive relief in this case is even more
imperative, because the present petitioners do not even assail the amounts due from
them. Neither do they contend that a detailed accounting would show that they
are not in default. A pending question regarding the due amount was not a sufficient
reason to enjoin the foreclosure in Estares. Hence, with more reason should injunction
be denied in the instant case, in which there is no dispute as to the outstanding
obligation of petitioners.
At any rate, whether respondent furnished them a detailed statement of account is a
question of fact that this Court need not and will not resolve in this instance. As held
in Zulueta v. Reyes, 68 in which there was no genuine controversy as to the amounts
due and demandable, the foreclosure should not be restrained by the unnecessary
question of accounting.
Maturity
of
Averted
by
with Respondent's Demand

the

Loan
Partial

Not
Compliance

Petitioners allege that their partial payment of P10 million on March 25, 1999, had the
effect of forestalling the maturity of the loan; 69 hence the foreclosure proceedings are
premature. 70 We disagree.
To be sure, their partial payment did not extinguish the obligation. The Civil Code
states that a debt is not paid "unless the thing . . . in which the obligation consists has
been completely delivered . . . ." 71 Besides, a late partial payment could not have
possibly forestalled a long expired maturity date.

"When the obligee accepts the performance, knowing its

incompleteness or irregularity, and without expressing any protest
or objection, the obligation is deemed fully complied with."
Thus, to imply that creditors accept partial payment as complete performance of their
obligation, their acceptance must be made under circumstances that indicate
their intention to consider the performance complete and to renounce their claim
arising from the defect. 74
There are no circumstances that would indicate a renunciation of the right of
respondent to foreclose the mortgaged properties extrajudicially, on the basis of
petitioners' continuing default. On the contrary, it asserted its right by filing an
application for extrajudicial foreclosure after receiving the partial payment. Clearly, it
did not intend to give petitioners more time to meet their obligation.
Parenthetically, respondent cannot be reproved for accepting their partial payment.
While Article 1248 of the Civil Code states that creditors cannot be compelled to
accept partial payments, it does not prohibit them from accepting such payments.
Second Issue:
Enjoining the Extrajudicial Foreclosure
A writ of preliminary injunction is a provisional remedy that may be resorted to by
litigants, only to protect or preserve their rights or interests during the pendency of the
principal action. To authorize a temporary injunction, the plaintiff must show, at
least prima facie, a right to the final relief. 75 Moreover, it must show that the invasion
of the right sought to be protected is material and substantial, and that there is an
urgent and paramount necessity for the writ to prevent serious damage. 76

Page 209 of 505

In the absence of a clear legal right, the issuance of the injunctive writ constitutes
grave abuse of discretion. Injunction is not designed to protect contingent or future
rights. It is not proper when the complainant's right is doubtful or disputed. 77

have the right to redeem the property within one year after the sale. They can redeem
their real estate by paying the amount due, with interest rate specified, under the
mortgage deed; as well as all the costs and expenses incurred by the bank. 82

As a general rule, courts should avoid issuing this writ, which in effect disposes of the
main case without trial. 78 In Manila International Airport Authority v. CA, 79 we urged
courts to exercise caution in issuing the writ, as follows:

Moreover, in extrajudicial foreclosures, petitioners have the right to receive any

surplus in the selling price. This right was recognized in Sulit v. CA, 83 in which the
Court held that "if the mortgagee is retaining more of the proceeds of the sale than he
is entitled to, this fact alone will not affect the validity of the sale but simply gives the
mortgagor a cause of action to recover such surplus." 84

". . . . We remind trial courts that while generally the grant of a

writ of preliminary injunction rests on the sound discretion of the
court taking cognizance of the case,extreme caution must be
observed in the exercise of such discretion. The discretion of the
court a quo to grant an injunctive writ must be exercised based
on the grounds and in the manner provided by law. Thus, the
Court declared in Garcia v. Burgos:
'It has been consistently held that there is no power the
exercise of which is more delicate, which requires
greater caution, deliberation and sound discretion, or
more dangerous in a doubtful case, than the issuance of
an injunction. It is the strong arm of equity that should
never be extended unless to cases of great injury, where
courts of law cannot afford an adequate or
commensurate remedy in damages.
'Every court should remember that an injunction is a
limitation upon the freedom of action of the defendant
and should not be granted lightly or precipitately. It
should be granted only when the court is fully satisfied
that the law permits it and the emergency demands
it.'" 80 (Citations omitted)
Petitioners do not have any clear right to be protected. As shown in our earlier
findings, they failed to substantiate their allegations that their right to due process had
been violated and the maturity of their obligation forestalled. Since they indisputably
failed to meet their obligations in spite of repeated demands, we hold that there is no
legal justification to enjoin respondent from enforcing its undeniable right to foreclose
the mortgaged properties. CEHcSI
In any case, petitioners will not be deprived outrightly of their property. Pursuant to
Section 47 of the General Banking Law of 2000, 81 mortgagors who have judicially or
extrajudicially sold their real property for the full or partial payment of their obligation

Petitioners failed to demonstrate the prejudice they would probably suffer by reason of
the foreclosure. Also, it is clear that they would be adequately protected by law.
Hence, we find no legal basis to reverse the assailed Amended Decision of the CA
dated May 4, 2004.
WHEREFORE, the Petition is DENIED and the assailed Amended Decision and
Resolution AFFIRMED. Costs against petitioners. CaATDE
SO ORDERED.
Ynares-Santiago, Austria-Martinez and Callejo, Sr., JJ., concur.
Chico-Nazario, J., is on official leave.
||| (Selegna Management and Development Corp. v. United Coconut Planters Bank,
G.R. No. 165662, [May 3, 2006], 522 PHIL 671-693)

SECOND DIVISION
[G.R. No. L-49401. July 30, 1982.]
Page 210 of 505

RIZAL
COMMERCIAL
BANKING
CORPORATION, petitioner, vs. HON. JOSE P. ARRO, Judge of
the Court of First Instance of Davao, and RESIDORO
CHUA, respondents.

Laurente C. Ilagan for petitioner.

Victor A. Clapano for respondents.

SYNOPSIS
Residoro Chua and Enrique Go, Sr. jointly executed a comprehensive surety
agreement to guaranty any existing or future obligation of Davao Agricultural
Industries Corporation (DAICOR) with petitioner bank. Thereafter, a promissory note
in the amount of P100,000.00 was issued in favor of petitioner bank which was signed
solely by Enrique Go, Sr. in his personal capacity and in behalf of DAICOR. When
despite repeated demands the note was not fully paid, petitioner bank filed a
complaint against Daicor, respondent Chua and Enrique Go, Sr. The trial court,
sustaining the private respondent, dismissed the complaint on the ground that it states
no cause of action as against him since he did not sign the subject promissory note,
which is a necessary corollary to the comprehensive surety agreement as evidence of
indebtedness, and without which the said agreement served no purpose. Hence, this
petition.
The Supreme Court held that DAICOR being liable on the promissory note, private
respondent was likewise liable thereon even if he did not sign it, since under the
subsisting comprehensive surety agreement, he jointly bound himself to guaranty
existing and future obligations of DAICOR subject only to the condition that their
obligation will not at any one time exceed the aggregate principal sum of
P100,000.00.
Petition granted. Assailed decision set aside and case remanded to the court of origin
with instruction to set aside the motion to dismiss and to require Residoro Chua to
answer the complaint.

DECISION

DE CASTRO, J p:
Petition for certiorari to annul the orders of respondent judge dated October 6, 1978
and November 7, 1978 in Civil Case No. 11-154 of the Court of First Instance of
Davao, which granted the motion filed by private respondent to dismiss the complaint
of petitioner for a sum of money, on the ground that the complaint states no cause of
action as against private respondent.
After the petition had been filed, petitioner, on December 14, 1978 mailed a
manifestation and motion requesting the special civil action for certiorari be treated as
a petition for review. 1 Said manifestation and motion was noted in the resolution of
January 10, 1979. 2
It appears that on October 19, 1976 Residoro Chua and Enrique Go, Sr. executed a
comprehensive surety agreement 3 to guaranty among others, any existing
indebtedness of Davao Agricultural Industries Corporation (referred to therein as
Borrower, and as Daicor in this decision), and/or induce the bank at any time or from
time to time thereafter, to make loans or advances or to extend credit in other manner
to, or at the request, or for the account of the Borrower, either with or without security,
and or to purchase on discount, or to make any loans or advances evidenced or
secured by any notes, bills, receivables, drafts, acceptances, checks or other
evidences of indebtedness (all hereinafter called "instruments") upon which the
Borrower is or may become liable, provided that the liability shall not exceed at any
one time the aggregate principal sum of P100,000.00. llcd
On April 29, 1977 a promissory note 4 in the amount of P100,000.00 was issued in
favor of petitioner payable on June 13, 1977. Said note was signed by Enrique Go, Sr.
in his personal capacity and in behalf of Daicor. The promissory note was not fully
paid despite repeated demands; hence, on June 30, 1978, petitioner filed a complaint
for a sum of money against Daicor, Enrique Go, Sr. and Residoro Chua. A motion to
dismiss dated September 23, 1978 was filed by respondent Residoro Chua on the
ground that the complaint states no cause of action as against him. 5 It was alleged in
the motion that he can not be held liable under the promissory note because it was
only Enrique Go, Sr. who signed the same in behalf of Daicor and in his own personal
capacity.
In an opposition dated September 26, 1978 6 petitioner alleged that by virtue of the
execution of the comprehensive surety agreement, private respondent is liable
because said agreement covers not merely the promissory note subject of the
complaint, but is continuing; and it encompasses every other indebtedness the
Borrower may, from time to time incur with petitioner bank.
Page 211 of 505

On October 6, 1978 respondent court rendered a decision granting private

respondent's motion to dismiss the complaint. 7 Petitioner filed a motion for
reconsideration dated October 12, 1978 and on November 7, 1978 respondent court
issued an order denying the said motion. 8
The sole issue resolved by respondent court was the interpretation of the
comprehensive surety agreement, particularly in reference to the indebtedness
evidenced by the promissory note involved in the instant case, said comprehensive
surety agreement having been signed by Enrique Go, Sr. and private respondent,
binding themselves as solidary debtors of said corporation not only to existing
obligations but to future ones. Respondent court said that corollary to that agreement
must be another instrument evidencing the obligation in a form of a promissory note
or any other evidence of indebtedness without which the said agreement serves no
purpose; that since the promissory notes, which is primarily the basis of the cause of
action of petitioner, is not signed by private respondent, the latter can not be liable
thereon.
Contesting the aforecited decision and order of respondent judge, the present petition
was filed before this Court assigning the following as errors committed by respondent
court: LibLex
"1. That the respondent court erred in dismissing the complaint
against Chua simply on the reasons that 'Chua is not a signatory
to the promissory note' of April 29, 1977, or that Chua could not
be held liable on the note under the provisions of the
comprehensive surety agreement of October 29, 1976; and/or
"2. That the respondent court erred in interpreting the provisions
of the Comprehensive Surety Agreement towards the conclusion
that respondent Chua is not liable on the promissory note
because said note is not comfortable to the Comprehensive
Surety Agreement; and/or
"3. That the respondent court erred in ordering that there is no
cause of action against respondent Chua in the petitioner's
complaint."
The main issue involved in this case is whether private respondent is liable to pay the
obligation evidence by the promissory note dated April 29, 1977 which he did not sign,
in the light of the provisions of the comprehensive surety agreement which petitioner
and private respondent had earlier executed on October 19, 1976.

We find for the petitioner. The comprehensive surety agreement was jointly executed
by Residoro Chua and Enrique Go, Sr., President and General Manager, respectively
of Daicor, on October 19, 1976 to cover existing as well as future obligations which
Daicor may incur with the petitioner bank, subject only to the proviso that their liability
shall not exceed at any one time the aggregate principal sum of P100,000.00. Thus,
paragraph 1 of the agreement provides:
"For and in consideration of any existing indebtedness to you of
Davao Agricultural Industries Corporation with principal place of
business and postal address at 530 J. P. Cabaguio Ave., Davao
City (hereinafter called the "Borrower), and/or in order to induce,
you in your discretion, at any time or from time to time hereafter,
to make loans or advances or to extend credit in any other
manner to, or at the request or for the account of the Borrower,
either with or without security, and/or to purchase or discount or
to make any loans or advances evidenced or secured by any
notes, bills, receivables, drafts, acceptances, checks or other
instruments or evidences of indebtedness (all hereinafter called
"instruments") upon which the Borrower is or may become liable
as maker, endorser, acceptor, or otherwise) the undersigned
agrees to guarantee, and does hereby guarantee in joint and
several capacity, the punctual payment at maturity to you of any
and all such instruments, loans, advances, credits and/or other
obligations herein before referred to, and also any and all other
indebtedness of every kind which is now or may hereafter
become due or owing to you by the Borrower, together with any
and all expenses which may be incurred by you in covecting all
such instruments or other indebtedness or obligations
hereinbefore referred to . . ., provided, however, that the liability of
the undersigned shall not exceed at any one time the aggregate
principal sum of P100,000.00 . . ."

The agreement was executed obviously to induce petitioner to grant any application
for a loan Daicor may desire to obtain from petitioner bank. The guaranty is a
continuing one which shall remain in full force and effect until the bank is notified of its
termination. cdll

Page 212 of 505

"This is a continuing guaranty and shall remain in full force and

effect until written notice shall have been received by you that it
has been revoked by the undersigned, . . ." 9
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for the
purpose of having an additional capital for buying and selling coco-shell charcoal and
importation of activated carbon, 10 the comprehensive surety agreement was
admittedly in full force and effect. The loan was, therefore, covered by the said
agreement, and private respondent, even if he did not sign the promisory note, is
liable by virtue of the surety agreement. The only condition that would make him liable
thereunder is that the Borrower "is or may become liable as maker, endorser, acceptor
or otherwise". There is no doubt that Daicor is liable on the promissory note
evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal one
which, in this case is the loan obtained by Daicor as evidenced by a promissory note.
What obviously induced petitioner bank to grant the loan was the surety agreement
whereby Go and Chua bound themselves solidarily to guaranty the punctual payment
of the loan at maturity. By terms that are unequivocal, it can be clearly seen that the
surety agreement was executed to guarantee future debts which Daicor may incur
with petitioner, as is legally allowable under the Civil Code. Thus
"Article 2053. A guaranty may also be given as security for
future debts, the amount of which is not yet known; there can be
no claim against the guarantor until the debt is liquidated. A
conditional obligation may also be secured."
In view of the foregoing, the decision (which should have been a mere "order"),
dismissing the complaint is reversed and set side. The case is remanded to the court
of origin with instructions to set aside the motion to dismiss, and to require defendant
Residoro Chua to answer the complaint, after which the case shall proceed as
provided by the Rules of Court. No costs.
SO ORDERED.
Barredo (Chairman), Aquino, Concepcion Jr., Guerrero, Abad Santos and Escolin,
JJ., concur.
||| (RCBC v. Arro, G.R. No. L-49401, [July 30, 1982], 201 PHIL 362-368)
SECOND DIVISION
Page 213 of 505

[G.R. No. 95921. September 2, 1992.]

SPOUSES
ROBERT DINO and
CRISTINA DINO, petitioners, vs. COURT OF APPEALS,
CONSORCIA SOMBRIO and SPOUSES FROILAN PERNITO
and PROSERFINA PERNITO, respondents.

DECISION

NOCON, J p:
This is a petition to review on certiorari the decision 1 dated August 6,
1990 of the Court of Appeals affirming the decision of the trial court 2 in ordering the
Register ofDeeds of Cebu City to cancel TCT No. 87156 which emanated from TCT
No. 73069 and to reinstate TCT No. 67441 in the name of the late Consorcia Sombrio
or issue another one in lieu of the old one, as well as the resolution dated October 24,
1990 denying petitioners' motion for reconsideration of the appealed decision. Cdpr
The facts as found by the trial court are as follows:
On December 21, 1978, Consorcia Sombrio, an old and illiterate lady who is the
registered owner of a parcel of land and its improvements covered by TCT No. 67441
located at 15 F. Gochan Street, Mabolo, Cebu City containing an area of 1,008 square
meters, more or less, was made to sign a document by Maria Ching purportedly to be
a letter authorizing the latter to sell said property to Benedicto. However, said
document turned out to be a Deed of Sale of said property in favor of Maria
Ching. 3Consequently, TCT No. 67441 was cancelled and TCT No. 87156 was issued
in the name of Maria Ching. 4
Upon Sombrio's discovery of said fraud, she filed, on May 11, 1979, an action against
Maria Ching and notary public Ciriaco Alcazar, who notarized said document without
the presence of Sombrio, with the Regional Trial Court of Cebu City, Branch IV in Civil
Case No. R-18073 for the annulment of the sale and the cancellation ofTCT No.
87156 alleging that Maria Ching through fraudulent representations and without any
consideration tricked and deceived Sombrio into signing said Deed of Sale.

Thereafter, Maria Ching mortgaged said property to petitioners spouses Robert and
Cristina Dino with the notice of lis pendens annotated on the TCT No. 87156 as
evidenced by Entry No. 2814-V-19-D.B. on said TCT. 5
On July 22, 1981, a decision based on a compromise agreement executed between
Sombrio and Maria Ching was rendered, to wit:
"A Compromise Agreement, duly signed by the parties, plaintiff,
assisted by counsel, and defendants likewise assisted by their
counsel, has been submitted to thisCourt with a prayer that the
same be approved and that judgment he rendered in accordance
with the terms and conditions thereof. The said agreement reads:
'COMPROMISE AGREEMENT
With the assistance of counsel, this Compromise Agreement,
involving the above-entitled case, made and entered at Cebu
City, Philippines, this 23rd day of June, 1981 by and between
plaintiff and the defendants above-named,
WITNESSETH:
1. That plaintiff, Consorcia Vda. de Sombrio, makes known that
she has not caused the filing of the above-entitled case, the truth
being that she was influenced, forced, coerced, manhandled and
intimidated to sign the complaint by one Froilan Pernito who is
interested in the land subject-matter of this suit; the
occupancy ofFroilan Pernito is merely tolerated whose right, if
any, is subordinate to that of defendant Maria Buracan
Ching; LLpr
2. That right from the start or commencement of this suit, plaintiff
has never engaged the services of counsel; it was Froilan Pernito
who secured, shouldered and paid the services of counsel in the
prosecution of the above-entitled case; just recently, without
authority and consent from the plaintiff, the said Froilan Pernito
has engaged the services of new counsel, Atty. Jose Batiquin,
who is not personally known to the plaintiff;
3. That apart from the reason stated, supra, plaintiff hereby
declares voluntarily and upon her own free will, without any
mental reservation, that the deed ofabsolute sale dated
December 21, 1978, involving the land subject matter of this suit
Page 214 of 505

executed by and between her and Maria B. Ching, notarized by

Ciriaco Alcazar per document No. 884, Page No. 44, Book III,
Series of 1978 is regular and valid and was executed for a
consideration in the amount of ONE HUNDRED THOUSAND
(P100,000.00) PESOS, receipt of which was acknowledged at
the time of the execution of that presents and that she was not
deceived nor fraudulently induced and unlawfully influenced into
signing the aforesaid deed of sale; for which reason, she freely
and voluntarily DESIST from further prosecuting the aboveentitled case;
4. That plaintiff is turning over the physical or actual
possession of the land in question, together with all the
improvements found therein, to the defendant Maria B. Ching,
entitling the latter to such writ of possession as may be
necessary against parties, like Froilan Pernito, whose possession
is illegal and unauthorized;
5. That defendants, on the other hand, hereby waive their right to
proceed with their counterclaims against plaintiff.
WHEREFORE, it is most respectfully prayed that the foregoing
compromise agreement be approved and that judgment be
rendered in accordance therewith.
Cebu City, Philippines, June 23, 1981
(Sgd.) CONSORCIA VDA. DE
SOMBRIO
Plaintiff
(Sgd.) MARIA B. CHING
Defendant
Assisted by:
(Sgd.) EXEQUIL L. RUBI Atty. Pablo Badong & Associates
Counsel for the plaintiff counsel for defendants,
By: (SGD.) MIGUEL R.
ZOSA
SIGNED IN THE PRESENCE OF:
(Sgd.) CORAZON PANTINO

(Sgd.) REMEDIOS SOLON

Finding the Compromise Agreement quoted above to be not
contrary to law, public order, public policy, morals or good
customs, the same is hereby approved, and judgment is hereby
rendered in accordance therewith, without pronouncement as to
costs. Strict compliance with the said Compromise Agreement is
hereby enjoined." 6
From said decision, Maria Ching went to the Register of Deeds of Cebu City to cancel
the notice of lis pendens as evidenced by Entry No. 6008-21-D.B. dated July 27,
1981. 7

On the other hand, Sombrio appealed said decision to the Court of Appeals alleging
that the Compromise Agreement was done under dubious circumstances since she
was kidnapped and released only after said Compromise Agreement had been signed
by her. Moreover, Atty. Jose Batiquin who was Sombrio's counsel of record was
substituted by another counsel, Atty. Exequil Rubi who was a partner of Maria Ching's
lawyer, in said Compromise Agreement. LexLib
In the meantime, on May 30, 1983, while said appeal was still pending with the
appellate court, Maria Ching sold to the petitioners the subject property free from any
written notice of liens or encumbrances. Thereafter, TCT No. 73069 was cancelled
and a new one. TCT No. 87156, was issued in the name of the petitioners by the
Register of Deeds of Cebu City.
Since then, petitioners have been in continuous and peaceful possession of the
subject property which they turned into a clinic and center of autistic and behaviorally
handicapped children.
On February 7, 1989, the Court of Appeals rendered its decision, the dispositive
portion of which reads:
"WHEREFORE, the decision approving the compromise
agreement is hereby set aside and another one is rendered
annulling the deed of sale of December 21, 1978 and cancelling
Transfer
Certificate of Title
No.
73069 of the
Registry of Deeds of Cebu in the name of defendant-appellant
and ordering the Register of Deeds of Cebu to reinstate Transfer
Certificate of Title No. 67441 in the name of plaintiff-appellant or
to issue another one in the name of said plaintiff-appellant in
Page 215 of 505

lieu of the old one. No pronouncement as to damages and

costs." 8
On March 2, 1989, said decision became final and executory. When the records were
remanded to the trial court, Sombrio filed a Motion for Execution on July 18, 1989.
On July 19, 1989, the trial court ordered the issuance of a writ of execution. However,
when the Deputy Provincial Sheriff went to the Register of Deeds of Cebu City to
execute said writ, the latter informed the former that TCT No. 73069 was already
cancelled and transferred to petitioner Dino who was not a party in Civil Case No. R18073.
On July 22, 1989, Sombrio filed a motion for the issuance of a writ of possession
which was granted in an Order dated July 24, 1989, the pertinent portion of which
reads: LexLib
"Finding the motion to be in order, the same is hereby granted
and accordingly, the Register of Deeds for Cebu City is ordered
to implement within three (3) days from receipt hereof, the said
judgment of the Honorable Court of Appeals.
Let a writ of Possession issue directing the Provincial Sheriff or
his duly authorized representative to place plaintiff Consorcia
Sombrio in actual, physical and peaceful possession of a
parcel of land and the improvements thereon covered by Transfer
Certificate of Title No. 67441, Lot No. 1, Block 7 of the
Consolidation and Subdivision Plan Pcs-326, being a part of the
Consolidation Lots Nos. 675 and 1424 of Banilad Friar Estate
GLRO Record 5988 situated in Cebu City, and containing an
area of ONE THOUSAND AND EIGHT (1,008) SQUARE
METERS."
On July 26, 1989, the trial court issued a writ of possession directing the provincial
sheriff of Cebu City to place Consorcia Sombrio in actual physical possession of the
subject property and its improvement. 9
Upon receipt of said writ, the Register of Deeds, on July 27, 1989, filed with the
trial court a
motion
for
the
issuance of an
Order
directing
the
Register of Deeds of Cebu City to perform his duty consistent with his ministerial
function while petitioners, on July 31, 1989, filed with said court an Extremely Urgent
Motion to Quash Writ ofPossession together with an Affidavit of Third-Party claims. 10

On August 8, 1989, private respondents spouses Froilan and Proserfina Pernito filed
their comments on petitioners' Motion to Quash Writ of Execution. Said private
respondents entered their appearance for the first time in Civil Case No. R-18073
claiming to be the successors-in-interest of the late Consorcia Sombrio pursuant to a
Deed of Sale executed between private respondents and Sombrio during the
pendency of this case, 11 to which petitioners filed its Rejoinder on August 11,
1989. 12
Acting on said motions, the trial court issued an Order dated August 17, 1989, the
dispositive portion of which reads:
"WHEREFORE, for all the foregoing considerations, the
motion of spouses Robert and Cristina Dino is denied. The
Register of Deeds of Cebu City is directed to follow and
implement
the
final
judgment of the Court of Appeals by
cancelling Transfer Certificate of Title No. 73069 and Transfer
Certificate of Title No. 87156 emanating therefrom and reinstate
Transfer Certificate of Title No. 67441 in the name of plaintiffappellant Consorcia Sombrio or issue another one in her name in
lieu of the old one by annotating therein 'issued pursuant to a
final judgment rendered by the Court of Appeals in CA-G.R. CV
No. 04725, entitled Consorcia Sombrio v. Maria Buracan Ching,
et al. dated February 7, 1989.' " 13
From said Order, Petitioners filed their Motion for Reconsideration which was denied
on September 30, 1989. cdrep
On October 18, 1989, the trial court issued the following Order:
"Deputy Sheriffs Rene Natividad and Jessie Belarmino in their
manifestation dated October 10, 1989 declared that in
compliance with their appointment as special sheriffs dated July
28, 1989, they implemented the writ of execution issued in this
case but withheld delivery of possession until the rightful
possessor shall have been determined on account of the fact that
plaintiff Consorcia Sombrio is already deceased. The Deputy
Sheriffs found themselves in a quandary as to whom to deliver
the possession of the property because they received a letter
dated October 4, 1989 sent by Atty. Manuelito Inso, counsel for
Spouses
Roberto Dino and
Cristina Dino,
claiming

Page 216 of 505

ownership of the subject property. This matter is already settled

in the Order dated September 30, 1989.
Spouses Froilan Pernito and Proserfina Pernito on record appear
as the successors-in-interest of the deceased Consorcia Sombrio
pursuant to the memorandum ofagreement for the sale of said
land executed on April 23, 1979 marked as Annex 'B' in the
Sheriff's report dated August 1, 1989. The record shows that so
far no heir or successor-in-interest of the deceased Consorcia
Sombrio appeared to claim possession over the property except
the herein spouses Froilan Pernito and Proserfina Pernito.
IN VIEW THEREOF, the above-mentioned Deputy Sheriffs are
directed to deliver the property subject of the writ of execution in
favor of spouses Froilan Pernito and Proserfina Pernito who are
the present claimants or successor-in-interest of Consorcia
Sombrio until they are lawfully dispossessed by other rightful
claimant or successor-in-interest with a better right." 14
On October 23, 1989, petitioners filed with the Court of Appeals a Petition for
Certiorari, Prohibition and Mandamus which was denied on August 6, 1990.
Petitioners' Motion for Reconsideration was, likewise, denied on October 24, 1990.
Hence, this petition.
Petitioners contend that the Court of Appeals acted with grave abuse of discretion
when it ordered the cancellation of petitioners' Transfer Certificate of Title of the
subject property considering that they are not privies to Civil Case No. R-18073 and
to consider them privies to the same would outrightly deny petitioners their right to
due process. Petitioners also contend that they had acquired the subject property in
good faith and for value because the notice of lis pendens was already cancelled at
the time the Deed of Sale was executed therefore they are innocent holder for
value of a certificate of title.

judgment, and no proceeding to vacate or reverse any judgment,

shall have any affect upon registered land as against persons
other than the parties thereto, unless a memorandum or notice
stating the institution of such action or proceeding and
the court wherein the same is pending, as well as the date of the
institution thereof, together with a reference to the number of the
certificate of title, and an adequate description of the land
affected and the registered owner thereof, shall have been filed
and registered."
Under said law, lis pendens may lie only where there is an action or proceeding
in court, which affects title to, or possession of real property. In other words, lis
pendensis the jurisdiction, power, or control which the court acquires over the
property involved in the suit pending the continuance of the action; and until its final
judgment therein, it has for its object the keeping of the subject or res within the
power of the court until the judgment or decree shall be entered, to make it possible
for courts ofjustice to give effect to their judgments and decrees. 15 This, in effect, is
the essence of the rule of lis pendens. When a case is commenced involving any right
to land registered under the Land Registration Law, any decision therein will bind the
parties only, unless a notice of the pendency of such action is registered on the
title of the said land, in order to bind the whole world as well. Therefore, in order that a
notice of lis pendens may affect the right of a subsequent purchaser, such notice
should be annotated on the back of the certificate of title, which is not present in the
case at bar.
The
appellate court acted
without
jurisdiction
when
it
ordered
the
cancellation of petitioners' title as the judgment which was rendered in Civil Case No.
R-18073 and affirmed by the Court of Appeals on February 7, 1989 did not bind
petitioners because at the time petitioners purchased the subject property, the
vendor's (Maria Ching) title to said property was clean and free from any lien and
encumbrance since the notice of lis pendens which was annotated on said title or
certificate had already been cancelled for more than a year.

We find the petition meritorious. cdphil

Section 76 of P.D. 1529 provides that:
"SEC. 76. Notice of lis pendens. No action to recover
possession of real estate, or to quiet title thereto, or to remove
clouds upon the title thereof, or for partition, or other
proceedings of any kind in court directly affecting the title to land
or the use or occupation thereof or the buildings thereon, and no

Where the certificate of title was already in the name of the forger when the land was
sold to an innocent purchaser, the vendee had the right to rely on what appeared in
the certificate and. in the absence of anything to excite suspicion, was under no
obligation to look beyond the certificate and investigate the title of the vendor
appearing on the face of said certificate. 16 Under the Torrens system, registration is
the operative act that gives validity to the transfer or creates a lien upon the land. A
Page 217 of 505

person dealing with registered land is not required to go behind the register to
determine the condition of the property. He is only charged with notice of the burdens
on the property which are noted on the face of the register or the certificate of title. To
require him to do more is to defeat one of the primary objects of the Torrens
system. 17 Moreover, registration of land under the Torrens system extinguishes all
claims, liens and encumbrances asserted prior to registration except statutory liens
and those noted in the certificate of title. 18
As the registered owner of the subject property, petitioners are not bound by the
decision in Civil Case No. R-18073 for they were never summoned in said case and
the notice of lis pendens annotated on TCT No. 73069 was already cancelled at the
time petitioners purchased the subject property. While it is true that petitioners are
indispensable parties in Civil Case No. R-18073, without whom no complete relief
could be accorded to the private respondents, the fact still remains that petitioners
were never actually joined as defendants in said case. Impleading petitioners as
additional defendants only in the execution stage of said case violated petitioners'
right to due process as no notice of lis pendens was annotated on the existing
certificate of title of said property nor were petitioners given notice of the pending
case, therefore petitioners remain strangers in said case and the Order of the
trial court involving them is null and void, considering that petitioners are innocent
purchasersof the subject property for value. cdll
Private respondents' remedy is to file a claim for damages against Maria Ching to
recover the consideration for said property.
WHEREFORE, the decision dated August 6, 1990 of the Court of Appeals and the
resolution dated October 24, 1990 are annulled and set aside. TCT No. 87156 in the
name of petitioners are hereby reinstated. Costs de officio.
SO ORDERED.

SECOND DIVISION

Narvasa, C .J ., Padilla and Regalado, JJ ., concur.

Melo, J ., took no part.
||| (Spouses Dino v. Court of Appeals, G.R. No. 95921, [September 2, 1992])

[G.R. No. 174006. December 8, 2010.]

BANK
OF
COMMERCE
TAALA, petitioners, vs. Spouses
FLORES, respondents.

and
STEPHEN
Z.
ANDRES and ELIZA

DECISION
Page 218 of 505

NACHURA, J p:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court, assailing the Decision 1 dated February 28, 2006 and the Resolution 2 dated
August 9, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 80362.
The facts of the case are as follows:
Respondents filed a case for specific performance against petitioners before the
Regional Trial Court (RTC) of Quezon City, docketed as Civil Case No. Q-98-35425.
Respondents are the registered owners of a condominium unit in Embassy Garden
Homes, West Triangle, Quezon City, registered under Condominium Certificate of
Title (CCT) No. 2130, 3 issued by the Register of Deeds of Quezon City. 4
On October 22, 1993, respondents borrowed money from petitioner bank in the
amount of Nine Hundred Thousand Pesos (P900,000.00). Respondents executed a
Real Estate Mortgage 5 over the condominium unit as collateral, and the same was
annotated at the back of CCT No. 2130.
On October 3, 1995, respondents again borrowed One Million One Hundred
Thousand Pesos (P1,100,000.00) from petitioner bank, which was also secured by a
mortgage over the same property annotated at the back of CCT No. 2130. 6
On January 2, 1996, respondents paid One Million Eleven Thousand Five Hundred
Fifty-Five Pesos and 54 centavos (P1,011,555.54), as evidenced by Official Receipt
No. 147741 7 issued by petitioner bank. On the face of the receipt, it was written that
the payment was "in full payment of the loan and interest." Respondents then asked
petitioner bank to cancel the mortgage annotations on CCT No. 2130 since the loans
secured by the real estate mortgage were already paid in full. However, the bank
refused to cancel the same and demanded payment of Four Million Six Hundred
Thirty-Three Thousand Nine Hundred Sixteen Pesos and Sixty-Seven Centavos (P
4,633,916.67), representing the outstanding obligation of respondents as of February
27, 1998. Respondents requested for an accounting which would explain how the said
amount was arrived at. However, instead of heeding respondents' request, petitioner
bank applied for extra-judicial foreclosure of the mortgages over the condominium
unit. The public auction sale was scheduled on September 4, 1998. Petitioner
Stephen Z. Taala, a notary public, was tasked to preside over the auction
sale. 8 aEcSIH
Respondents filed suit with the RTC, Quezon City, assailing the validity of the
foreclosure and auction sale of the property. They averred that the loans secured by
the property had already been paid in full. Furthermore, they claimed that the Notice

of Auction Sale by Notary Public 9 failed to comply with the provisions of Act No.
3135, as amended by Act No. 4118, requiring the publication and posting of the notice
of auction sale in at least three (3) public places in Quezon City. 10 Respondents
likewise prayed for the payment of moral and exemplary damages, and attorney's
fees, and for the issuance of a temporary restraining order and/or writ of preliminary
injunction to enjoin the extra-judicial foreclosure sale of the property. 11
On October 23, 1998, the RTC granted respondents' prayer for issuance of a writ of
preliminary injunction, restraining petitioner bank from foreclosing on the mortgage.12
Petitioner bank admitted that there were only two (2) mortgage loans annotated at the
back of CCT No. 2130, but denied that respondents had already fully settled their
outstanding obligations with the bank. 13 It averred that several credit lines were
granted to respondent Andres Flores by petitioner bank that were secured by
promissory notes executed by him, and which were either increased or extended from
time to time. The loan that was paid on January 2, 1996, in the amount of
P1,011,555.54, was only one of his loans with the bank. There were remaining loans
already due and demandable, and had not been paid by respondents despite
repeated demands by petitioner bank. The remaining loans, although not availed of at
the same time, were similarly secured by the subject real estate mortgage as provided
in the continuing guaranty agreement therein. 14
Petitioner bank alleged that respondents requested and were granted an increase in
their Bills Discounted Line from Nine Hundred Thousand Pesos (P900,000.00) to Two
Million Pesos (P2,000,000.00), which was secured by the same real estate mortgage
on CCT No. 2130. However, the subject condominium unit commanded only a market
value of One Million Seven Hundred Twenty-Three Thousand Six Hundred Pesos
(P1,723,600.00), and a loan value of Nine Hundred Fifty-Nine Thousand Six Hundred
Sixteen Pesos (P959,616.00). Since the market value of the condominium unit was
lower than the combined loans, the parties agreed to fix the amount of the real estate
mortgage at P1,100,000.00. Moreover, petitioner bank stressed that under the terms
of the two real estate mortgages, future loans of respondents were also covered. 15
On December 4, 2002, the RTC rendered a resolution, 16 the fallo of which reads:
FROM THE FOREGOING MILIEU, the present case for specific
performance with damages and injunction filed by plaintiffs, Sps.
Andres and Eliza Flores against defendants, Bank of Commerce
and Stephen Z. Taala, is hereby DISMISSED. Likewise, the
counterclaim filed by defendants, Bank of Commerce and

Page 219 of 505

Stephen Z. Taala against plaintiffs, Sps. Andres and Eliza Flores

is DISMISSED for insufficiency of evidence. EcTIDA
SO ORDERED. 17
In denying respondents' complaint for specific performance, the RTC ratiocinated that
respondents' right of action hinged mainly on the veracity of their claim that they
faithfully complied with their loan obligations and had fully paid them in January 1996.
The RTC stated that the evidence submitted by petitioner bank, specifically the
promissory notes and statement of account dated February 27, 1998, negated this
contention. The RTC declared that respondents incurred other debts from petitioner
bank, which must be paid first before they could be absolved of liability, and,
consequently, demand the release of the mortgage. The RTC also struck down
respondents' assertion that petitioner bank did not comply with the posting and
publication requirements under Act No. 3135, as amended.
Respondents filed a motion for reconsideration, which was, however, denied by the
RTC in a decision 18 dated August 8, 2003.
Aggrieved, respondents appealed to the CA.
Meanwhile, on March 25, 2004, the auction sale of the subject property was
conducted, and petitioner bank was awarded the property, as the highest bidder.
On February 28, 2006, the CA rendered a Decision 19 reversing the decision and the
resolution of the RTC. The dispositive portion of the CA Decision reads:
IN VIEW OF ALL THE FOREGOING, the instant appeal
is GRANTED; the challenged Decision dated December 4, 2002,
is REVERSED and SET ASIDE; and a new one entered:
(a) ordering the cancellation of the real estate mortgage
annotations on the dorsal side of CCT No. 2130 of the
Registry of Deeds of Quezon City;
(b) ordering appellee Bank to issue a corresponding
release of mortgages to plaintiffs-appellants' CCT No.
2130;
(c) declaring null and void the challenged extra-judicial
foreclosure and public auction sale held on March 25,
2004 together with the Certificate of Sale dated April 14,
2004 issued in favor of appellee Bank; and,

(d) appellees' counterclaims are ordered dismissed, for

lack of sufficient basis therefor.
No costs.
SO ORDERED. 20 aTcIAS
The CA ratiocinated that the principal obligation or loan was already extinguished by
the full payment thereof. Consequently, the real estate mortgages securing the
principal obligation were also extinguished. A real estate mortgage, being an
accessory contract, cannot survive without the principal obligation it secures. The CA
also noted that the two mortgages were individually annotated at the back of CCT No.
2130. Thus, the CA opined that the individual annotations clearly indicated that the
said mortgages were not meant to serve as a continuing guaranty for any future loan
that respondents would obtain from petitioner bank.
Petitioners filed a motion for reconsideration. On August 9, 2006, the CA issued a
Resolution 21 denying the same.
Hence, the instant petition.
The sole issue for resolution is whether the real estate mortgage over the subject
condominium unit is a continuing guaranty for the future loans of respondent spouses
despite the full payment of the principal loans annotated on the title of the subject
property.
We resolve this issue in the affirmative.
The contested portion of the Deed of Real Estate Mortgage dated October 22, 1993
for the principal obligation of P900,000.00 and of the second one dated October 3,
1995 for the sum of P1,100,000.00, uniformly read:
WITNESSETH: That
for and in consideration of the credit accommodations granted by
the MORTGAGEE [Bank of Commerce] to the MORTGAGOR
[Andres Flores] and/or _____________________ hereby initially
fixed
at
_____________________________
PESOS:
(P____________), Philippine Currency, and as security for the
payment of the same, on demand or at maturity as the case
may be, be the interest accruing thereon, the cost of
collecting the same, the cost of keeping the mortgaged
property(ies), of all amounts now owed or hereafter owing by
Page 220 of 505

the MORTGAGOR to the MORTGAGEE under this or separate

instruments and agreements, or in respect of any bill, note,
check, draft accepted, paid or discounted, or advances
made and all other obligations to every kind already incurred
or which may hereafter be incurred, for the use or
accommodation of the MORTGAGOR, as well as the faithful
performance of the terms and conditions of this mortgage
and of the separate instruments and/or documents under
which credits have been or may hereafter be advanced by
the MORTGAGEE to the MORTGAGOR, including their
renewals, extensions and substitutions, any and all of which
separate instruments and/or documents and their renewals,
extensions and substitutions are hereunto incorporated and
made integral parts hereof, the MORTGAGOR [Andres Flores]
has transferred and conveyed, as by these presents it/he does
hereby transfer and convey, by way of First Mortgage, to the
MORTGAGEE [Bank of Commerce], its successors and assigns,
all its/his rights, title and interest to that parcel(s) of land, together
with all the buildings and improvements now existing or which
may hereafter be erected or constructed thereon, including all
other rights or benefits annexed to or inherent therein now
existing or which may hereafter exist, situated in Embassy
Garden Homes, Quezon City, Philippines, and more particularly
described in Original/Transfer Certificate(s) of Title No. CCT No.
2130 of the Registry of Deeds [of] Quezon City, as
follows: CAIaHS
CCT No. 2130
Unit No. L-2, located on Building L, consisting of Ninety Five point
Twenty (95.20) Square Meters, more of less, with Parking Space
No. L-2. 22
It is petitioner bank's contention that the said undertaking, stipulated in the Deed of
Real Estate Mortgage dated October 22, 1993 and October 3, 1995, is a continuing
guaranty meant to secure future debts or credit accommodations granted by petitioner
bank in favor of respondents. On the other hand, respondents posit that, since they
have already paid the loans secured by the real estate mortgages, the mortgage
should not be foreclosed because it does not include future debts of the spouses or
debts not annotated at the back of CCT No. 2130.

A continuing guaranty is a recognized exception to the rule that an action to foreclose

a mortgage must be limited to the amount mentioned in the mortgage
contract.23 Under Article 2053 of the Civil Code, a guaranty may be given to secure
even future debts, the amount of which may not be known at the time the guaranty is
executed. This is the basis for contracts denominated as a continuing guaranty or
suretyship. A continuing guaranty is not limited to a single transaction, but
contemplates a future course of dealing, covering a series of transactions, generally
for an indefinite time or until revoked. It is prospective in its operation and is generally
intended to provide security with respect to future transactions within certain limits,
and contemplates a succession of liabilities, for which, as they accrue, the guarantor
becomes liable. In other words, a continuing guaranty is one that covers all
transactions, including those arising in the future, which are within the description or
contemplation of the contract of guaranty, until the expiration or termination
thereof. 24
A guaranty shall be construed as continuing when, by the terms thereof, it is evident
that the object is to give a standing credit to the principal debtor to be used from time
to time either indefinitely or until a certain period, especially if the right to recall the
guaranty is expressly reserved. In other jurisdictions, it has been held that the use of
particular words and expressions, such as payment of "any debt," "any indebtedness,"
"any deficiency," or "any sum," or the guaranty of "any transaction" or money to be
furnished the principal debtor "at any time" or "on such time" that the principal debtor
may require, has been construed to indicate a continuing guaranty.25
In the instant case, the language of the real estate mortgage unambiguously reveals
that the security provided in the real estate mortgage is continuing in nature. Thus, it
was intended as security for the payment of the loans annotated at the back of CCT
No. 2130, and as security for all amounts that respondents may owe petitioner bank.
It is well settled that mortgages given to secure future advance or loans are valid and
legal contracts, and that the amounts named as consideration in said contracts do not
limit the amount for which the mortgage may stand as security if from the four corners
of the instrument the intent to secure future and other indebtedness can be
gathered. 26
A mortgage given to secure advancements is a continuing security and is not
discharged by repayment of the amount named in the mortgage until the full amounts
of the advancements are paid. 27 Respondents' full payment of the loans annotated
on the title of the property shall not effect the release of the mortgage because, by the
express terms of the mortgage, it was meant to secure all future debts of the spouses
and such debts had been obtained and remain unpaid. Unless full payment is made
Page 221 of 505

by the spouses of all the amounts that they have incurred from petitioner bank, the
property is burdened by the mortgage. DSITEH

SECOND DIVISION

WHEREFORE, in view of the foregoing, the Decision dated February 28, 2006 and
the Resolution dated August 9, 2006 of the Court of Appeals in CA-G.R. CV No.
80362 are hereby REVERSED and SET ASIDE. The decision of the Regional Trial
Court dated December 4, 2002 is hereby REINSTATED.

[G.R. No. 103066. April 25, 1996.]

SO ORDERED.
Carpio, Peralta, Abad and Mendoza, JJ., concur.
||| (Bank of Commerce v. Spouses Flores, G.R. No. 174006, [December 8, 2010], 652
PHIL 97-106)

WILLEX PLASTIC INDUSTRIES,

CORPORATION, petitioner, vs. HON. COURT OF APPEALS
and INTERNATIONAL CORPORATE BANK, respondents.

Tangle-Chua, Cruz & Aquino for petitioner.

Fe B. Macalino & Associates for respondent Interbank.

DECISION

MENDOZA, J p:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals in
C.A.-G.R. CV No. 19094, affirming the decision of the Regional Trial Court of the
National Capital Judicial Region, Branch XLV, Manila, which ordered
petitioner Willex Plastic Industries Corporation and the Inter-Resin Industrial
Corporation, jointly and severally, to pay private respondent International Corporate
Bank certain sums of money, and the appellate court's resolution of October 17, 1989
denying petitioner's motion for reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit with the
Manila Banking Corporation. To secure payment of the credit accommodation, InterResin Industrial and the Investment and Underwriting Corporation of the Philippines
(IUCP) executed two documents, both entitled "Continuing Surety Agreement" and
dated December 1, 1978, whereby they bound themselves solidarily to pay
Manilabank "obligations of every kind, on which the [Inter-Resin Industrial] may now
be indebted or hereafter become indebted to the [Manilabank]." The two agreements
(Exhs. J and K) are the same in all respects, except as to the limit of liability of the
surety, the first surety agreement being limited to US$333,830.00, while the second
one is limited to US$334,087.00.
Page 222 of 505

On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries Corp.,
executed a "Continuing Guaranty" in favor of IUCP whereby "For and in consideration
of the sum or sums obtained and/or to be obtained by Inter-Resin Industrial
Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic jointly and severally
guaranteed "the prompt and punctual payment at maturity of the NOTE/S issued by
the DEBTOR/S . . . to the extent of the aggregate principal sum of FIVE MILLION
PESOS (P5,000,000.00) Philippine Currency and such interests, charges and
penalties as hereafter may be specified."
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum of
P4,334,280.61 representing Inter-Resin Industrial's outstanding obligation. (Exh. M-1)
On February 23 and 24, 1981, Atrium Capital Corp., which in the meantime had
succeeded IUCP, demanded from Inter-Resin Industrial and Willex Plastic the
payment of what it (IUCP) had paid to Manilabank. As neither one of the sureties paid,
Atrium filed this case in the court below against Inter-Resin Industrial
and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn
succeeded Atrium, the sum of P687,500.00 representing the proceeds of its fire
insurance policy for the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty" was
intended to secure payment to Atrium of the amount of P4,334,280.61 which the latter
had paid to Manilabank. It claimed, however, that it had already fully paid its obligation
to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the complaint and
interposed the following Special Affirmative Defenses:
(a) Assuming arguendo that main defendant is indebted to
plaintiff, the former's liability is extinguished due to the
accidental fire that destroyed its premises, which liability
is covered by sufficient insurance assigned to plaintiff;
(b) Again, assuming arguendo, that the main defendant is
indebted to plaintiff, its account is now very much lesser
than those stated in the complaint because of some
payments made by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WILLEX is only a guarantor of the principal obligor, and thus,
its liability is only secondary to that of the principal;

(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its

claim against the principal obligor;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the action. The case then
proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived the
right to present evidence for its failure to appear at the hearing despite due notice. On
the other hand, Willex Plastic rested its case without presenting any evidence.
Thereafter Interbank and Willex Plastic submitted their respective memoranda.

On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial
and Willex Plastic jointly and severally to pay to Interbank the following amounts:
(a) P3,646,780.61, representing their indebtedness to the plaintiff,
with interest of 17% per annum from August 11, 1982, when
Inter-Resin Industrial paid P687,500.00 to the plaintiff, until full
payment of the said amount;
(b) Liquidated damages equivalent to 17% of the amount due;
and
(c) Attorney's fees and expenses of litigation equivalent to 20% of
the total amount due.
Inter-Resin
Industrial
and Willex Plastic appealed
to
the
Court
of
Appeals. Willex Plastic filed its brief, while Inter-Resin Industrial presented a "Motion
to Conduct Hearing and to Receive Evidence to Resolve Factual Issues and to Defer
Filing of the Appellant's Brief." After its motion was denied, Inter-Resin Industrial did
not file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming the ruling
of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to present
evidence to show that Inter-Resin Industrial had already paid its obligation to
Interbank, but its motion was denied on December 6, 1991:
The motion is denied for lack of merit. We denied defendantappellant Inter-Resin Industrial's motion for reception of evidence
Page 223 of 505

because the situation or situations in which we could exercise the

power under B.P. 129 did not exist. Movant here has not
presented any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of February 22,
1991 and the resolution of December 6, 1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing Guaranty" signed on April
2, 1979 petitioner Willex Plastic may be held jointly and severally liable with InterResin Industrial for the amount by Interbank to Manilabank.
As already stated, the amount had been paid by Interbank's predecessor-in-interest,
Atrium Capital, to Manilabank pursuant to the "Continuing Surety Agreements" made
on December 1, 1978. In denying liability to Interbank for the
amount, Willex Plastic argues that under the "Continuing Guaranty," its liability is for
sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by the latter
to Manilabank for the account of Inter-Resin Industrial. In support of this
contention WillexPlastic cites the following portion of the "Continuing Guaranty":
For and in consideration of the sums obtained and/or to be
obtained by INTER-RESIN INDUSTRIAL CORPORATION,
hereinafter referred to as the DEBTOR/S, from youand/or your
principal/s as may be evidenced by promissory note/s, checks,
bills receivable/s and/or other evidence/s of indebtedness
(hereinafter referred to as the NOTE/S), I/We hereby jointly and
severally and unconditionally guarantee unto you and/or your
principal/s, successor/s and assigns the prompt and punctual
payment at maturity of the NOTE/S issued by the DEBTOR/S in
your and/or your principal/s, successor/s and assigns favor to the
extent of the aggregate principal sum of FIVE MILLION PESOS
(P5,000,000.00), Philippine Currency, and such interests,
charges and penalties as may hereinafter be specified.
The contention is untenable. What Willex Plastic has overlooked is the fact that
evidence aliunde was introduced in the trial court to explain that it was actually to
secure payment to Interbank (formerly IUCP) of amounts paid by the latter to
Manilabank that the "Continuing Guaranty" was executed. In its complaint below,
Interbank's predecessor-in-interest Atrium Capital, alleged:

5. to secure the guarantee made by plaintiff of the credit

accommodation granted to defendant IRIC [Inter-Resin Industrial]
by Manilabank, the plaintiff required defendant IRIC [Inter-Resin
Industrial] to execute a chattel mortgage in its favor and a
Continuing Guaranty which was signed by the other defendant
WPIC [WillexPlastic].
In its answer, Inter-Resin Industrial admitted this allegation although it claimed that it
had already paid its obligation in its entirety. On the other hand, Willex Plastic, while
denying the allegation in question, merely did so "for lack of knowledge or information
of the same." But, at the hearing of the case on September 16, 1986, when asked by
the trial judge whether Willex Plastic had not filed a crossclaim against Inter-Resin
Industrial, Willex Plastic's counsel replied in the negative and manifested that "the
plaintiff in this case [Interbank] is the guarantor and my client [Willex Plastic] only
signed as a guarantor to the guarantee." 2
For its part Interbank adduced evidence to show that the "Continuing Guaranty" had
been made to guarantee payment of amounts made by it to Manilabank and not of
any sums given by it as loan to Inter-Resin Industrial. Interbank's witness testified
under cross-examination by counsel for Willex Plastic that Willex "guaranteed the
exposure/of whatever exposure of ACP [Atrium Capital] will later be made because of
the guarantee to Manila Banking Corporation." 3
It has been held that explanatory evidence may be received to show the
circumstances under which a document has been made and to what debt it
relates. 4 At all events, Willex Plastic cannot now claim that its liability is limited to any
amount which Interbank, as creditor, might give directly to Inter-Resin Industrial as
debtor
because,
by
failing
to
object
to
the
parol
evidence
presented, Willex Plastic waived the protection of the parol evidence rule. 5
Accordingly, the trial court found that it was "to secure the guarantee made by plaintiff
of the credit accommodation granted to defendant IRIC [Inter-Resin Industrial] by
Manilabank, [that] the plaintiff required defendant IRIC to execute a chattel mortgage
in its favor and a Continuing Guaranty which was signed by the
defendantWillex Plastic Industries Corporation." 6
Similarly, the Court of Appeals found it to be an undisputed fact that "to secure the
guarantee undertaken by plaintiff-appellee [Interbank] of the credit accommodation
granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee required defendantappellants to sign a Continuing Guaranty." These factual findings of the trial court and
of the Court of Appeals are binding on us not only because of the rule that on appeal
Page 224 of 505

to the Supreme Court such findings are entitled to great weight and respect but also
because our own examination of the record of the trial court confirms these findings of
the two courts. 7
Nor does the record show any other transaction under which Inter-Resin Industrial
may have obtained sums of money from Interbank. It can reasonably be assumed that
Inter-Resin Industrial and Willex Plastic intended to indemnify Interbank for amounts
which it may have paid Manilabank on behalf of Inter-Resin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was "to
secure the aforesaid guarantee, that INTERBANK required principal debtor IRIC
[Inter-Resin Industrial] to execute a chattel mortgage in its favor, and so a 'Continuing
Guaranty'
was
executed
on
April
2,
1979
by WILLEX PLASTIC INDUSTRIESCORPORATION (WILLEX for brevity) in favor of
INTERBANK for and in consideration of the loan obtained by IRIC [Inter-Resin
Industrial]."
[2] Willex Plastic argues that the "Continuing Guaranty," being an accessory contract,
cannot legally exist because of the absence of a valid principal obligation. 8 Its
contention is based on the fact that it is not a party either to the "Continuing Surety
Agreement" or to the loan agreement between Manilabank and Inter-Resin Industrial.
Put in another way the consideration necessary to support a surety obligation need
not pass directly to the surety, a consideration moving to the principal alone being
sufficient. For a "guarantor or surety is bound by the same consideration that makes
the contract effective between the principal parties thereto. . . . It is never necessary
that a guarantor or surety should receive any part or benefit, if such there be, accruing
to his principal." 9 In an analogous case, 10 this Court held:
At the time the loan of P100,000.00 was obtained from petitioner
by Daicor, for the purpose of having an additional capital for
buying and selling coco-shell charcoal and importation of
activated carbon, the comprehensive surety agreement was
admittedly in full force and effect. The loan was, therefore,
covered by the said agreement, and private respondent, even if
he did not sign the promissory note, is liable by virtue of the
surety agreement. The only condition that would make him liable
thereunder is that the Borrower "is or may become liable as
maker, endorser, acceptor or otherwise." There is no doubt that
Daicor is liable on the promissory note evidencing the
indebtedness.

The surety agreement which was earlier signed by Enrique Go,

Sr. and private respondent, is an accessory obligation, it being
dependent upon a principal one which, in this case is the loan
obtained by Daicor as evidenced by a promissory note.
[3] Willex Plastic contends that the "Continuing Guaranty" cannot be retroactively
applied so as to secure the payments made by Interbank under the two "Continuing
Surety Agreements." Willex Plastic invokes the ruling in El Vencedor v.
Canlas 11 and Dio v. Court of Appeals 12 in support of its contention that a contract
of suretyship or guaranty should be applied prospectively.
The cases cited are, however, distinguishable from the present case. In El Vencedor
v. Canlas we held that a contract of suretyship "is not retrospective and no liability
attaches for defaults occurring before it is entered into unless an intent to be so liable
is indicated." There we found nothing in the contract to show that the parties intended
the surety bonds to answer for the debts contracted previous to the execution of the
bonds. In contrast, in this case, the parties to the "Continuing Guaranty" clearly
provided that the guaranty would cover "sums obtained and/or to be obtained" by
Inter-Resin Industrial from Interbank.

On the other hand, in Dio v. Court of Appeals the issue was whether the sureties
could be held liable for an obligation contracted after the execution of the continuing
surety agreement. It was held that by its very nature a continuing suretyship
contemplates a future course of dealing. "It is prospective in its operation and
is generallyintended to provide security with respect to future transactions." By no
means, however, was it meant in that case that in all instances a contract of guaranty
or suretyship should be prospective in application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster, 13 although a
contract of suretyship is ordinarily not to be construed as retrospective, in the end the
intention of the parties as revealed by the evidence is controlling. What was said
there 14 applies mutatis mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true
that bonds or other contracts of suretyship are ordinarily not to be
construed as retrospective, but that rule must yield to the
intention of the contracting parties as revealed by the evidence,
and does not interfere with the use of the ordinary tests and
canons of interpretation which apply in regard to other contracts.
Page 225 of 505

In the present case the circumstances so clearly indicate that the

bond given by Echevarria was intended to cover all of the
indebtedness of the Arrocera upon its current account with the
plaintiff Bank that we cannot possibly adopt the view of the court
below in regard to the effect of the bond.
[4] Willex Plastic says that in any event it cannot be proceeded against without first
exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the benefit
of excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
xxx xxx xxx
The pertinent portion of the "Continuing Guaranty" executed by Willex Plastic and
Inter-Resin Industrial in favor of IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein
guaranteed you and/or your principal/s may directly proceed
against Me/Us without first proceeding against and exhausting
DEBTOR/s properties in the same manner as if all such liabilities
constituted My/Our direct and primary obligations. (emphasis
supplied)
This stipulation embodies an express renunciation of the right of excussion. In
addition, Willex Plastic bound itself solidarily liable with Inter-Resin Industrial under
the same agreement:
For and in consideration of the sums obtained and/or to be
obtained by INTER-RESIN INDUSTRIAL CORPORATION,
hereinafter referred to as the DEBTOR/S, from you and/or your
principal/s as may be evidenced by promissory note/s, checks,
bills receivable/s and/or other evidence/s of indebtedness
(hereinafter referred to as the NOTE/S),I/We hereby jointly and
severally and unconditionally guarantee unto you and/or your
principal/s, successor/s and assigns the prompt and punctual
payment at maturity of the NOTE/S issued by the DEBTOR/S in
your and/or your principal/s, successor/s and assigns favor to the
extent of the aggregate principal sum of FIVE MILLION PESOS

(P5,000,000.00), Philippine Currency, and such interests,

charges and penalties as may hereinafter he specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid its indebtedness
to Interbank and that Willex Plastic should have been allowed by the Court of Appeals
to adduce evidence to prove this. Suffice it to say that Inter-Resin Industrial had been
given generous opportunity to present its evidence but it failed to make use of the
same. On the other hand, Willex Plastic rested its case without presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29, 1987, but
because of its failure to appear on that date, the hearing was reset on March 12, 26
and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion
of Willex Plastic, the hearings on March 12 and 26, 1987 were cancelled and "reset
for the last time" on April 2 and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the trial
court issued the following order:
Considering that, as shown by the records, the Court had exerted
every earnest effort to cause the service of notice or subpoena
on the defendant Inter-Resin Industrial but to no avail, even with
the assistance of the defendant Willex . . . the defendant InterResin Industrial is hereby deemed to have waived the right to
present its evidence.
On the other hand, Willex Plastic announced it was resting its case without
presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its order
and set the hearing anew on July 23, 1987. But Inter-Resin Industrial again moved for
the postponement of the hearing to August 11, 1987. The hearing was, therefore,
reset on September 8 and 22, 1987 but the hearings were reset on October 13, 1987,
this time upon motion of Interbank. To give Interbank time to comment on a motion
filed by Inter-Resin Industrial, the reception of evidence for Inter-Resin Industrial was
again reset on November 17, 26 and December 11, 1987. However, Inter-Resin
Industrial again moved for the postponement of the hearing. Accordingly, the hearing
was reset on November 26 and December 11, 1987, with warning that the hearings
were intransferable.

Page 226 of 505

Again, the reception of evidence for Inter-Resin Industrial was reset on January 22,
1988 and February 5, 1988 upon motion of its counsel. As Inter-Resin Industrial still
failed to present its evidence, it was declared to have waived its evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence, however, the
hearing was postponed to March 4, 1988. Again Inter-Resin Industrial's counsel did
not appear. The trial court, therefore, finally declared Inter-Resin Industrial to have
waived the right to present its evidence. On the other hand, Willex Plastic, as before,
manifested that it was not presenting evidence and requested instead for time to file a
memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given the
opportunity of showing that Inter-Resin Industrial has already paid its obligation to
Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs against
the petitioner.
SO ORDERED.
Regalado, Romero, Puno and Torres, Jr., JJ., concur.
||| (Willex Plastic Industries Corp. v. Court of Appeals, G.R. No. 103066, [April 25,
1996], 326 PHIL 489-504)

EN BANC
[G.R. No. L-13817. August 31, 1961.]
MACONDRAY & COMPANY, INC., plaintiff-appellee, vs. PERFE
CTO PION, ET AL., defendants. RUPERTO K. KANGLEON,
deceased, substituted by VALENTINA TAGLE-KANGLEON,
ET AL., defendants-appellants.

Jose Agbulos for plaintiff-appellee.

San Juan, Africa & Benedicto for defendants-appellants.

DECISION

PADILLA, J p:
On 11 May 1955 the plaintiff filed a complaint 1 against the defendants in the Court of
First Instance of Manila alleging that upon representation and undertaking made by
Ruperto K. Kangleon, then a member of the Senate, in a letter addressed to the
plaintiff dated 30 January 1954, that he would guarantee payment of his codefendants' obligation, should they fail to pay on the due date (Exhibit F), on 2 and 9
February 1954, the plaintiff sold on credit and delivered to the defendants Perfecto
Pion and Conrado Piring, known in the theater and entertainment business as
"Tugak" and "Pugak," respectively, and transacting business under a common name
known as "All Stars Productions," 127 rolls of cinematographic films, F. G. release
positive type 825B, 35 mm. x 1,000 ft., for the total sum of P6,985, payable on or
before 9 May 1954, 12% interest thereon from date of maturity and 20% thereof for
attorney's fee in case of suit for collection (Exhibits A, B, C, D, E); that the principal
debtors have failed to pay the amount owed by them on the due date; that upon
extensive investigations made by the plaintiff as to whether the principal debtors have
any property, real or personal, which may be levied upon for the satisfaction of their
obligation, it has found that they have none; that the defendant Kangleon could not
point to the plaintiff any property of the principal debtors leviable for execution
sufficient to satisfy the obligation; and that the sum of P6,985, the amount owed, or
part thereof, has not been paid by the defendants. It prayed that after hearing
judgment be rendered ordering the defendants, jointly and severally, to pay it the sum
of P6,985, 12% interest thereon from 10 May 1954 until fully paid, 20% of the amount
due or P1,387 as attorney's fee, and costs, and that it be granted other just and
equitable relief (civil No 23947).
On 10 November 1955 the defendant Kangleon answered the plaintiff's complaint
setting up the defense that the letter he had written to the plaintiff dated 30 January
1954 (Exhibit F) was only to introduce his co-defendants; that assuming that there
was an intent on his part to guarantee payment of his co-defendant's obligation, the
said letter (Exhibit F) was but an offer to act as guarantor of his co-defendants; that as
Page 227 of 505

the acceptance of his offer to act as guarantor for his co-defendants has not been
actually made known to him by the plaintiff, the contract of guaranty between them
has not been perfected; and that assuming that there has been a perfected contract of
guaranty between the plaintiff and the answering defendant, the latter's obligation was
extinguished by the extension for payment up to 3 May 1954 granted by the plaintiff to
his co-defendants. By way of counterclaim, he sought from the plaintiff the sum of
P20,000 as damages suffered by his good name and reputation caused by the
plaintiff's clearly unfounded civil action, P2,000 as attorney's fee and P1,000 for
expenses incurred in the litigation. As cross-claim, should he be finally adjudged liable
to pay the plaintiff, he prayed that his co-defendants be ordered to reimburse him
whatever amount he would pay to the plaintiff, and to pay him P3,000 as attorney's fee
and expenses of litigation. He further prayed that he be absolved from the plaintiff's
complaint and that he be granted other just and equitable relief.
The defendants Pion and Piring did not answer the plaintiff's complaint or their codefendants' cross-claim.
On 10 November 1955 the plaintiff answered the defendant's counterclaim.
On 25 August 1956 the plaintiff and the answering defendant entered into a stipulation
of facts and submitted the case for judgment based upon the said stipulation.
Not having answered the complaint against them despite notice, the Court declared
the defendants Pion and Piring in default (p. 5, rec. on app.)
At the trial of the case on 30 August 1956, the plaintiff and the answering defendant
further stipulated that the former had looked for properties of his co-defendants Pion
and Piring but found none (p. 23, rec. on app.). The plaintiff presented its evidence
against the defendants in default.
On 30 September 1957 the Court rendered judgment, the dispositive part of which is:
WHEREFORE, judgment is hereby rendered sentencing the
defendants Perfecto Pion and Conrado Piring to pay the plaintiff
jointly and severally the sum of P6,985.00 plus interest at the rate
of 12% per annum from May 9, 1954 until fully paid and an
amount equivalent to 20% as attorney's fees and costs of suit.
If this judgment becomes unsatisfied by the defendants Perfecto
Pion and Conrado Piring, the defendant Ruperto Kangleon is
hereby sentenced to pay the plaintiff all the amount to which his
co- defendants were sentenced to pay. (p. 29, rec. on app.)

The answering defendant has appealed.

From the stipulation of facts entered into by and between the appellant and appellee
and the documentary evidence submitted by the appellee against the defendants in
default, the following appear: On 30 January 1954 the defendants Piring and Pion
requested the appellant, then a member of the Senate, to help them buy on credit
from the appellee some cinematographic films. To accommodate them, the appellant
wrote a letter to the appellee, as follows:
REPUBLIC OF THE PHILIPPINES
SENATE
MANILA

January 30, 1954

The Manager
Macondray & Company
China Bank Building
Manila
Sir:
This will introduce to you the bearers, Messrs. Conrado Piring
and Perfecto Pion, both well known theater characters under the
names
of
"Pugak"
and
"Tugak", respectively.
I have been made to understand by them in their representations
to me that they wish to place an order for the following items:
10 rolls Negative at P157.00 each, and
100 rolls positive at P55.00 each
of Dupont Release Positives Safety Basis for use of their
firm called "All Stars Productions" under the management
and control of Pugak and Tugak payable within three (3)
months time ending April, 1954 and for which by their
guaranty I pledge payment.
In view of the foregoing, I shall appreciate any help you can give
to facilitate said purchases subject to usual business procedures.
Page 228 of 505

Sincerely,

MAC
OND
RAY
&
CO., I
NC.
s/ILLE
GIBL
E
Collec
tion
Depar
tment

(Sgd.)
RUPERTO K.
KANGLEON
Senator
(Exhibit F) which letter the defendants in default presented to the appellee. On
the strength of the appellant's letter above quoted, on 2 and 9 February 1954, the
appellee sold on credit and delivered to the defendants in default 127 rolls of
cinematographic films, F. G. release positive type 825B, 35 mm. x 1,000 ft. for the
total sum of P6,985, excluding sales tax, which is for the buyers' account, payable
on or before 9 May 1954. The parties, among others, further stipulated that the
buyers would pay interest at the rate of 1% per month on all amounts not paid
when due; that should a litigation arise from non-payment, the venue of action
would be the courts of Manila and that the buyers would pay 20% of the amount
due for attorney's fee and costs of the suit (Exhibits A, B, C, D, E). The
defendants in default failed to pay their obligation on the due date. On 27 May
1954 the appellee wrote to the appellant a letter of the following tenor:
May 27, 1954

On 31 May 1954, the appellant answered the appellee as follows:

May 31, 1954
Macondray & Co., Inc.
3rd Floor, China Bank Bldg.
Manila
Gentlemen:

Honorable Ruperto K. Kangleon

Philippine Senate
Manila

This will acknowledge receipt of your letter of May 27th.

Messrs. Conrado Piring and Perfecto Pion are being contacted
to invite their attention to your letter.

Dear Sir:
On January 30th, last, you requested us to give Messrs. Conrado
Piring and Perfecto Pion, of "All-Stars Productions" certain rolls
of negative end positive films, the cost of which was payable in
three months and payment of which you guaranteed.

Notwithstanding the foregoing, I have been made to understand

by Messrs. Piring and Pion that in arrangements with
that Company an extension of time has been granted them within
which to settle their obligations.

These films were delivered and billed at P6,985.00 on Feb. 9th

last. The amount has not been paid (and) we have difficulty
locating the above gentlemen as they cannot be found in their
offices.
In view of this we hereby request you to send us a check for the
amount as it was due on May 3rd.
Yours
very
truly,

Cordially yours,
(Sgd.)
RUPERTO K.
KANGLEON
On 2 June 1954 the appellee replied to the appellant's answer to the letter thus:
June 2, 1954

Page 229 of 505

Hon. Ruperto K. Kangleon

Philippine Senate
Manila

is received from you immediately, I shall be compelled, much to

my regret, to take this matter to the court.

Dear Sir:
We have your letter of May 31st in reply to ours of the 27th and
note that you are getting in touch with Messrs. Conrado Piring
and Perfecto Pion with regard to their account.
We know of no extension of time for payment being granted to
these people and certainly no one in authority has made such an
arrangement. For this reason, if payment is not received from
them by the 15th inst. we expect to receive a remittance from you
to cover the full amount.

Yours very
truly,
MACONDRAY
& CO., INC.
s/ILLEGIBLE
Collection
Department
On 19 July 1954 the appellee wrote the following letter to the defendants in
default:
July 19, 1954
Mr. Conrado Piring
147 Pureza Extension
Sta. Mesa, Manila
Mr. Perfecto Pion
147 Pureza Extension
Sta. Mesa, Manila
Gentlemen:
Please be advised that Macondray & Co., Inc. has turned over to
me for corresponding judicial action your account for films in the
amount of P6,985.00. As this obligation is now long past due,
payment thereof is earnestly requested. Unless payment thereof

Very truly
Yours,
(Sgd.) JOSE
AGBULOS
Attorney for
Macondary &
Co., Inc.
which was sent to them by registered mail (Exhibits G, G-1 & G-2). Neither the
defendants in default nor the appellant paid the amount owed to the appellee.
During the time this appeal was pending in this Court the appellant died. His heirs or
their legal representative were directed to appear in substitution for the deceased
appellant. Attorneys San Juan, Africa & Benedicto entered their appearance for said
heirs, namely, Mrs. Valentina Tagle-Kangleon, Benjamin T. Kangleon, Juanito T.
Kangleon, Mrs. Flora San Gabriel, Miss Corazon Kangleon, Miss Lourdes Kangleon,
Mrs. Teresita Limcolioc, Mrs. Aida Rosca, Jesus Kangleon, Jose Kangleon and Miss
Cecilia Kangleon.
The appellant contends that although in the stipulation of facts entered into by and
between him and the appellee, he had admitted the liability of his co-defendants, who
were declared in default, under the principle of res inter alios acta, that an admission
by a third person can not bind another, his admission cannot bind the defendants in
default, and no judgment against them may be rendered on the basis of the stipulation
of facts referred to. Since the appellee had not established a case against the
defendants in default, the principal debtors, it cannot directly hold liable the appellant,
the guarantor, whose obligation is only subsidiary to that of the former.
The appellant proceeds from the wrong premise that the case was submitted to the
Court solely on the stipulation of facts entered into by and between him and the
appellee. The records show that when the case was called for trial on 30 August
1956, after the appellant's co-defendants had been declared in default, the appellee
presented its evidence, testimonial and documentary, against them (pp. 5-18, t.s.n.;
Exhibits A, B, C, D, E, G, G, G-1 & G-2), and thereby established their primary
liability.
The appellant claims that the letter (Exhibit F) is merely a letter of introduction and
does not constitute an offer of guaranty. A cursory reading of the letter (Exhibit F)
belies his assertion. While in his opening sentence he says that "This will introduce to
Page 230 of 505

you the bearers, Messrs. Conrado Piring and Perfecto Pion . . . ," who "wish to place
an order for" cinematographic films, yet in the later part he says that "for which by
their guaranty I pledge payment." This can only mean that he undertakes to
guarantee payment of the principal debtors' obligation should they fail to pay. The
appellant is a responsible man and may be presumed to mean what he says. At that
time, he was occupying the exalted position of member of the Senate and his plighted
word given to another would immediately be accepted. It is not, therefore, odd that
upon receipt of the appellant's letter (Exhibit F), the appellee readily sold on credit to
the principal debtors, the defendants in default, the cinematographic films in question.
That the appellant really meant to guarantee payment of the principal debtors'
obligation should they default, is patent in his answer to the appellee's letter dated 27
May 1954, reminding him that on 30 January he requested it "to give Messrs.
Conrado Piring and Perfecto Pion, of "All Stars Productions', certain rolls of negative
and positive films, the cost of which was payable in three months time and payment of
which you guaranteed; that the ''films were delivered and billed at P6,985.00 on Feb.
9th, last;" and that "the amount has not been paid (and) we have difficulty locating the
above gentlemen as they cannot be found in their offices," and requesting the
appellant to send a check for the amount. In his answer to the foregoing letter, dated
31 May 1954, he acknowledged receipt of the appellee's letter of the 27th of the same
month and informed it that the principal debtors were "being contacted to invite their
attention to your letter." Had the appellant meant otherwise, he would have
immediately denied that he ever guaranteed payment of the principal debtors'
obligation. This he did not do.
The appellant's very letter (Exhibit F) constitutes his undertaking of guaranty.
"Contracts shall be obligatory in whatever form they may have been entered into,
provided all the essential requisites for their validity are present." 2 A contract of
guaranty is not a formal contract and shall be valid in whatever form it may be,
provided that it complies with the statute of frauds.
The appellant insists that he should have been notified by the appellee of the
acceptance of his offer of guaranty. In the first place, his letter (Exhibit F) already
constitutes his undertaking of guaranty. In the second place, the contract entered into
by and between the appellee and the defendants in default is the principal contract
and the contract entered into by and between the appellant and the appellee is
subsidiary to the principal contract. Since the principal contract had already been
perfected, the subsidiary contract of guaranty became binding upon effectivity of the
principal contract. Hence no notice of acceptance by the appellee to the appellant is
necessary for its validity.

The appellant states that assuming that the letter Exhibit F constitutes a contract of
guaranty, the films actually sold to the principal debtors were 127 rolls of F. G. release
positive type 825B, 35 mm. x 1,000 ft. at P55 a roll, payable 9 May 1954, while what
he undertook to guarantee payment was 10 rolls negative at P157 each and 100 rolls
positive at P55 each, payable within three months ending April, 1954. Citing article
2055 of the Civil Code that a guaranty cannot extend to more than what is stipulated
therein, the appellant contends that he cannot be held liable for the contract in view of
the variation in his undertaking. The total cost of what was actually sold to and bought
by the principal debtors is P6,985, which is less than the total cost of what was
originally intended to be bought by them amounting to P7,070. The variation was
merely in kind and not in subject matter cinematographic films which did not
render the appellant's obligation more burdensome. Instead his obligation was
rendered less onerous by the reduction in the original price of P7,070 to P6,985. The
fact that in the letter Exhibit F, the appellant mentioned that the principal debtors'
obligation would be "payable within three months time ending April, 1954," while in the
contract entered into by and between the appellee and the principal debtors they have
stipulated that their obligation would be payable on or before 9 May 1954, is of no
moment. The letter Exhibit F was dated 30 January 1954. Counted from that date, the
three months period would expire on 30 April 1954. However, actually the principal
contract was consummated on 9 February 1954 (Exhibit A). It is but fair that the three
months period be counted from that date ending 9 May 1954. Again, the appellant's
obligation has not become more onerous than what he actually bound himself.
The judgment appealed from is affirmed against the heirs of the deceased appellant
herein above named, with costs against them.
Bengzon, C.J., Labrador, Reyes,
Leon and Natividad, JJ., concur.

J.B.L.,

Barrera,

Paredes,

Dizon,

De

Concepcion, J., took no part.

||| (Macondary & Co. v. Pion, G.R. No. L-13817, [August 31, 1961], 112 PHIL 10061016)

Page 231 of 505

his Attorney Tanglao execute on January 16, 1932, a power of attorney (Exhibit
A) in his favor, with the following clause:
"To sign for me as guarantor for himself in his
indebtedness to Wise & Company of Manila, which indebtedness
appears in civil case No. 41129, of the Court of First Instance of
Manila, and to mortgage my lot (No. 517-F of the subdivision plan
Psd-20, being a portion of lot No. 517 of the cadastral survey of
Angeles, G.L.R.O. Cad. Rec. No. 124), to guarantee the said
obligations to the Wise & Company, Inc., of Manila."
On the 18th of said month David subscribed and on the 23d thereof,
filed in court, the following document (Exhibit B):
"COMPROMISE
EN BANC

"Come now the parties, plaintiff by the undersigned

attorneys and defendant in his own behalf and respectfully state:

[G.R. No. 42518. August 29, 1936.]

"I. That defendant confesses judgment for the sum of six

hundred forty pesos (P640), payable at the rate of eighty pesos
(P80) per month, the first payment to be made in February 15,
1932 and successively thereafter until the full amount is paid; that
plaintiff accepts this stipulation.

WISE & CO., INC., plaintiff-appellee, vs.

TANGLAO, defendant-appellant.

DIONISIO

P.

The appellant in his own behalf.

Franco & Reinoso for appellee.

DECISION

AVANCEA, C.J p:
In the Court of First Instance of Manila, Wise & Co. instituted civil case
No. 41129 against Cornelio C. David for the recovery of a certain sum of money.
David was an agent of Wise & Co. and the amount claimed from him was the
result of a liquidation of accounts showing that he was indebted in said amount.
In said case Wise & Co. asked and obtained a preliminary attachment of David's
property. To avoid the execution of said attachment, David succeeded in having

"II. That as security for the payment of the said sum of

P640, defendant binds in favor or, and pledges to the plaintiff, the
following real properties:
"1. House of light materials described under tax
declaration No. 9650 of the municipality of Angeles, Province of
Pampanga, assessed at P320.
"2. Accesoria apartments with a ground floor of 180 sq.
m. with the first story of cement and galvanized of iron roofing
located on the lot belonging to Mariano Tablante Geronimo, said
accesoria is described under tax declaration No. 11164 of the
municipality of Angeles, Pampanga, assessed at P800.
"3. Parcel of land described under Transfer Certificate of
Title No. 2307 of the Province of Pampanga recorded in the
name of Dionisio Tanglao of which defendant herein holds a
special power of attorney to pledge the same in favor of Wise &
Co., Inc., as a guarantee for the payment of the claim against him
in the above entitled cause. The said parcel of land is bounded
Page 232 of 505

as follows: NE lot No. 517 'Part' de Bernardino Tiongco; NW. lot

No. 508 de Clemente Dayrit; containing 431 sq. m. and described
in tax declaration No. 11977 of the municipality of Angeles,
Pampanga, assessed at P423.
"That this guaranty is attached to the properties above
mentioned as first lien and for this reason the parties agree to
register this compromise with the Register of Deeds of
Pampanga, said lien to be cancelled only on the payment of the
full amount of the judgment in this case.
"Wherefore, the parties pray that the above compromise
be admitted and that an order issue requiring the Register of
Deeds of Pampanga to register this compromise previous to the
filing of the legal fees."

(art. 1830 of the Civil Code, and decision of the Supreme Court of Spain in March
2, 1891). The plaintiff has in its favor a judgment against debtor David for the
payment of the debt. It does not appear that the execution of this judgment has
been asked for and Exhibit B, on the other hand, shows that David has two
pieces of property the value of which is in excess of the balance of the debt the
payment of which is sought of Tanglao in his alleged capacity as surety.
For the foregoing considerations, the appealed judgment is reversed
and the defendant is absolved from the complaint, with the costs to the plaintiff.
So ordered.
Villa-Real, Abad Santos, Imperial, Diaz, Recto and Laurel, JJ., concur.
||| (Wise & Co., Inc. v. Tanglao, G.R. No. 42518, [August 29, 1936], 63 PHIL 372-376)

David paid the sum of P343.47 to Wise & Co., on account of the P640
which he bound himself to pay under Exhibit B, leaving an unpaid balance of
P296.53.
Wise & Co. now institutes this case against Tanglao for the recovery of
said balance of P296.53.
There is no doubt that under Exhibit A, Tanglao empowered David, in
his name, to enter into a contract of suretyship and a contract of mortgage of the
property described in the document, with Wise & Co. However, Davide used said
power of attorney only to mortgage the property and did not enter into the
contract of suretyship. Nothing is stated in Exhibit B to the effect that Tanglao
became David's surety for the payment of the sum in question. Neither it this
inferable from any of the clauses thereof, and even if this inferable might be
made, it would be insufficient to create an obligation of suretyship which, under
the law, must be express and cannot be presumed.
It appears from the foregoing that defendant Tanglao could not have
contracted any personal responsibility for the payment of the sum of P640. The
only obligation which Exhibit B, in connection with Exhibit A, has created on the
part of Tanglao, is that resulting from the mortgage of a property belonging to him
to secure the payment of said P640. However, a foreclosure suit is not instituted
in this case against Tanglao, but a purely personal action for the recovery of the
amount still owed by David.
At any rate, even granting that defendant Tanglao may be considered as
a surety under Exhibit B, the action does not yet lie against him on the ground
that all the legal remedies against the debtor have not previously been exhausted

FIRST DIVISION
Page 233 of 505

[G.R. No. 42490. September 9, 1937.]

VALERIANO SOLON, NATIVIDAD SOLON, and MANUELA
IBANEZ, plaintiffs-appellants, vs. APOLONIA SOLON, ZOILO
SOLON, ROBERTA SOLON, FELISA SUICO (minor), and THE
DIRECTOR OF LANDS, defendants-appellees.

Jose Delgado and Vickers, Ohnick, Opisso & Velilla for appellants.
Cuenco & Cuenco for appellees.

DECISION

DIAZ, J p:
In his lifetime Eugenio Solon, father of the parties surnamed Solon,
grandfather of defendant Felisa Suico, and husband of the plaintiff Manuela
Ibaez in second marriage contracted on May 23, 1899, bought, on installments,
from the Bureau of Lands the parcel of land described as "Lot No. 903 of the
Banilad Friar Lands Estate" in transfer certificate of title No. 8379 of the registry
of Cebu, situated in the barrio of Cogon, municipality of Cebu, Cebu Province,
having an area of 6 hectares, 46 ares and 13 centares, and assessed by said
bureau at P403. The sale took place on December 12, 1919, and the time
stipulated for the complete payment of its price was thirteen years, the first
annual installment being P31, and the subsequent twelve installments to be paid
every year being P21 each. On July 30, 1925, with the amount of P126 as part of
the agreed purchase price still unpaid, Eugenio Solon, after securing the consent
and approval of the Bureau of Lands, sold and conveyed for the sum of P1,000
all his rights, title and interest in the land acquired by him, executing for that
purpose in favor of Apolonia Solon who agreed to pay the installments still owing
to the Bureau of Lands, the deed of transfer appearing in the record as Exhibit B.
Apolonia Solon paid to the Bureau of Lands on the same date of the execution of
the deed the amount of P21, and the balance of P105 at one time only a month
thereafter. The year following, or on July 10, 1926, Eugenio Solon died, leaving
no will, and two years, eight months and eight days later, or on March 18, 1929,
the register of deeds of Cebu, upon compliance with the formalities of law, issued

transfer certificate of title No. 8379 in the name of Apolonia Solon. The latter took
charge of the property, occupying it has her own through tenants from the time
she bought the same, according to the evidence for the defendants, and from the
death of Eugenio Solon, according to that for the plaintiffs.
Plaintiffs surnamed Solon, all of whom are children of the deceased
Eugenio Solon in his marriage with his widow Manuela Ibaez, joining with the
latter in maintaining that Exhibit B is false and stimulated and that if the same had
been executed by Eugenio Solon, it was without just consideration, commenced
this suit praying (1) that said document be declared null and void because false
and simulated, (2) that they be adjudged the absolute owners pro indiviso of the
land in question together with the other heirs of Eugenio Solon, (3) that
defendants Apolonia Solon, Zoilo Solon, Roberta Solon and the latter's husband
Andres Montalban, be sentenced to pay, jointly and severally, to the plaintiffs the
value of the fruits of the land in question from the death of Eugenio Solon, and (4)
that said defendants be sentenced to pay, also jointly and severally, to the
plaintiffs the sum of P30,000 as damages, besides the costs of the suit.
Defendants, by way of defense, filed an answer containing a general
denial and the special defense of prescription based on the fact that plaintiffs had
allowed six years to elapse before exercising their right of action.
After trial the lower court rendered judgment dismissing plaintiffs'
complaint, without any pronouncement as to costs, and declaring valid in effect
the transfer made by Eugenio Solon in favor of Apolonia Solon appearing in
Exhibit B. From said judgment plaintiffs appealed to this court after their motion
for new trial on the ground that the judgment was contrary to law and not
sufficiently supported by the evidence was denied.
In support of their appeal appellants assigned eight errors as committed
by the lower court which may be summed up as follows: (1) In giving no credit to
the witnesses for the plaintiffs and in making no mention of the falsehoods
committed by the witnesses for the appellees in their testimony; (2) in failing to
consider the real value of the land in question by reason of its location and value
in 1925 when the alleged transfer took place; (3) in failing to take into account the
conclusion at which it had arrived during trial, that the land in question, being
located near the Osmea bridge, was worth P0.25 pr square meter in 1925, and
declaring afterwards in its decision that it is worth less than P0.01 1/2 per square
meter; (4) in not declaring that Eugenio Solon, like other owners of lands adjacent
to his, knew of the plan to construct the provincial capitol on lot No. 850 adjoining
lot No. 903 in question; (5) in holding that appellants weakened their side of the
case when, after contending that the document Exhibit b is false and simulated,
Page 234 of 505

they conceded that although the same may have been executed, it must, at all
events, be declared void by reason of the disproportion between the price paid
for the land and its true value at the time; (6) in failing to take into account the
various facts and circumstances showing that the transaction which took place
according to Exhibit B, is fraudulent and false, in view of the fact that the
supposed grantor under said deed was an illiterate, 88 years of age and was
furthermore the father of Apolonia Solon, and also of the fact that the whole
transaction was carried put without the knowledge of his wife and other children;
(7) in not holding that Exhibit B is fraudulent and false and that Eugenio Solon,
who was 88 years old, ignorant and illiterate, was induced to sign it: and finally (8)
in not holding null and void the deed in question and in not finding that the land to
which the same refers belongs to all the heirs of the deceased Eugenio Solon.
1. It is a fact clearly shown by the evidence for the defendants, which
appears to us to have more weight than that for the plaintiffs notwithstanding the
latter's efforts to show the contrary, that the transfer of the land in question made
by Eugenio Solon to Apolonia Solon, according to Exhibit B, had taken place long
before the commencement of the suit of Macleod & Co. against Montalban,
husband of Roberta Solon, as principal, and Eugenio Solon, as surety of said
Montalban. It can not, therefore, be believed, and the lower court did well in
refusing to believe, that Andres Montalban had been making statements to the
effect that Apolonia Solon had paid nothing for the transfer made in her favor by
Eugenio Solon, for the reason that the same was not real but only stimulated and
that it was made solely for the sole purpose of placing the land in question
beyond the reach of any action that might be brought by Macleod & Company
against said Eugenio Solon; and that Apolonia Solon had been telling her tenant
named Eugenio Labra that there had been an understanding among her brothers
of the whole blood that they would cede the said land to her as part of her
inheritance from their father, because, in the first place, there was no reason to
fear that Macleod & Company would bring an action against Eugenio Solon for
the collection of an amount greater than P5,000 which as surety, he had bound
himself to pay; and, in the second place, Apolonia Solon could have made the
above statement attributed to her for the simple reason that she was then already
the owners of the land aforesaid by virtue of the purchase appearing in Exhibit B.
When Eugenio Solon bound himself as surety for Andres Montalban for
the payment to Macleod & Company of the amount of P5,000 which Montalban
owed to the latter, he limited himself to giving as security, by way of mortgage, the
land, an no other, belonging to him and described as lot No. 892 of the Banilad
Friar Lands Estate in case No. 5988 of the Court of Land Registration and in
transfer certificate of title No. 2499 of the registry of property of the Province of

Cebu. It is not possible that Macleod & Company could have ever contemplated
bringing an action against Eugenio Solon to obtain possession not only of the
land expressly mortgaged to it, which, as has been said, is lot No. 892 described
in the certificate of title above-mentioned, which is distinct from lot No. 903, but
also of any other belonging to him or of lot No. 903 itself, for the purpose of
collecting its credit against Andres Montalban, because it would not have failed to
know, better than any one else, that the contract of suretyship in its favor does
not admit of the interpretation that it could make Eugenio Solon liable for an
amount greater than P5,000 and that it could require him to pay Montalban's
indebtedness, should the latter fail to do so, with lands other than that he had
mortgaged. This is so because the clauses of a contract of suretyship determine
the extent of the liability of the surety (Government of the Philippine Islands vs..
Herrero, 38 Phil., 410); because said liability should not be extended farther than
the clear terms of the contract of guarantee by mere implications; and because
the surety should be liable only in the manner and to the extent, and under the
circumstances pointed out in the contract of suretyship or which may be clearly
deduced therefrom (La Insular vs.. Manchuca Go-Tauco and Nubla Co-Siong, 39
Phil., 567).

2. Plaintiff's believe having proved that the value of the land in question
in 1925 was P0.25 per square meter. The evidence upon which they rely was the
testimony of the engineer, surveyor and real estate broker Thomas F. Breslin,
who affirmed that a parcel adjacent to the one under discussion had been sold to
a lady named Consolacion Alba de Rodriguez in that year at P0.25 per square
meter. It should be noted that, upon cross-examination, said witness had to admit
that all he knew concerning the transaction had been obtained from said lady.
Although the lower court did not order the striking out of such testimony in spite of
a timely motion by defendants to that effect, inasmuch as it limited itself to
staying: "It will be taken into consideration," the truth is that when it decided the
case dismissing plaintiffs' complaint, it completely disregarded said evidence
which is tantamount to having ordered its exclusion on account of its
incompetency.
The sales made in 1926 and 1927 of lots Nos. 900 and 1009-A by Jose
Vano to Soledad, Salud and Mercedes Espina, and by Maria Solon to Zenon
Diaz, respectively, at the rate of P0.20 and P0.24 per square meter, according to
Exhibits BB and X, and the sale made by Vidal S. Duterte to the spouses
Severino Rodriguez and Consolacion Alba, of lot No. 1009-B, in October, 1925,
at P0.25 per square meter, according to Exhibit Y, do not necessarily prove that
Page 235 of 505

the land in question was worth that much on the date of its sale. It must be
remembered that this had taken place three months before the sale of the land
referred to in Exhibit Y, and one and two years before those set forth in Exhibits
BB and Y, respectively. Those who acquired said lands, according to their own
testimony, desired to speculate because they had heard that the capitol of Cebu
would be erected nearby. It is, nevertheless, a fact that since then until the date of
the decision appealed from in the words of the lower court the capitol had
not been erected, nor had any road been opened through said parcels, nor had
the rumors that the capitol would be constructed sooner or later in the vicinity had
any appearance of truth. However, although there may have been a proposal to
erect the capitol thereon, the evidence does not show that Eugenio Solon had
ever had knowledge of that fact. Furthermore, knowing that he had paid for the
land only P270.70, it is only reasonable to suppose that he was more than
satisfied when he received an offer of P1,000 therefor and was paid that amount
which is, no doubt, almost three times that which he had invested, not at one
time, of course, but in six years. On the other hand, the person to whom he
transferred the land was no other than his own daughter. For these reasons, we
believe and so hold that the second error is without merit.
3. There is nothing in the record which proves that the court found that
the value of the land in dispute in 1925 was P0.25 per square meter. All that the
lower court said during the trial, and it appears only incidentally, in ruling on the
objection to a question made for the purpose of finding out the amount at which
the land would quote per square meter in case the capitol were constructed on
parcel No. 850 which is adjacent to the parcel in question, was the following:
"That is extremely remote. I believe that the best proof is
that of P0.25 per square meter, in 1925. I believe that that is the
real value, and it depends upon whether or not a street will be
opened and on whether or not a capitol will be constructed, and if
it be depression time, as it is now, it can not possibly sell at P2,
so that it is at all too problematical."
And it should be added that the lower court said this before hearing the
other evidence of plaintiffs and before having any idea of what the evidence of
defendants would be. It surely corrected the same thereafter in the manner set
forth in the decision appealed from. We hold that the third error is likewise not
well taken.
4. The fourth error is imaginary. As has been said, there is no evidence
of record show the Eugenio Solon had any knowledge of the plan to construct the
capitol of Cebu near the land in dispute upon selling the same to Apolonia Solon.

The argument of plaintiffs that it must be presumed that every land owner has
knowledge of all the improvements which are to be made in properties near his
own, does not prove anything because it does nowhere appear as a fact that the
capitol of Cebu was to be constructed sooner or later in the immediate vicinity of
the land in question. But even supposing that Eugenio Solon had guessed that
there would be such a plan, this does not imply that the transfer he made to
Apolonia Solon was void because the owner has the right to sell what belongs to
him to whomever he chooses and for whatever price satisfactory to him.
5. And it is no error for the lower court to have considered that the cause
of the plaintiffs was weakened on account of the fact that they maintain two
propositions which are, in reality, incompatible with each other. That the
document of transfer Exhibit B was false and simulated, and that it must simply
be declared void for the reason that the price paid therefor is disproportionate to
its value in 1925 are two irreconcilable things. If the latter were true, then it would
be useless to insist that the said document is false or simulated. But the truth is
that there is no disproportion between the price paid for it and its real value in
1925. The Bureau of Lands itself sold, on July 28, 1924, lot No. 887 of the same
Banilad Friar Lands Estate, located near the land in question and having an area
of 3 hectares, 43 ares, 62 centares for the small sum of P190 or less than 6/10
centavo per square meter. (Exhibit II-A.) There is no occasion to repeat here the
same reasons for the statement that there is no evidence of record in support of
the conclusion that there was a proposal on the part of the Province of Cebu to
construct it capitol on lot No. 850. If there was any disproportion between the
price paid and the real value of land, it was not to the prejudice of Eugenio Solon
because he was paid much more than he really paid therefor to the Bureau of
Lands notwithstanding that he had not made any improvements thereon or
completed the payment he had agreed to make to said office.
6. The sixth error attributed by appellants to the lower court has been
practically shown not to exist for the reasons given in discussing the first five
errors. In addition thereto, it may be said that plaintiffs have not adduced any
evidence to show that said transfer did not take place. On the other hand,
defendants proved that it did take place by means of Exhibit B which, it may be
truthfully said, was executed with all the formalities of the law before a notary
public and in the presence of an official of the Bureau of Lands in the very office
of the latter in Talisay, Cebu, and in that of another witness, and by means of the
approval of said transfer by the Director of Lands. They further proved through
one of the instrumental witnesses to said document and through Apolonia Solon
herself that the price appearing in said document Exhibit B was paid Eugenio
Solon; and that the latter had tried to sell the land before that date to other
Page 236 of 505

persons for P1,500, but that they did not offer him more than P750. All the
foregoing, together with the fact that the last annual payments which Eugenio
Solon should have made to the Bureau of Lands were effected by Apolonia Solon
and that said defendant took possession of the land immediately after the
execution of Exhibit B conclusively show that said document was neither
fraudulent nor false. And it is not true that Eugenio Solon was then 88 years old
and, therefore, could be easily imposed upon by reason of his mental and
physical weakness because the best evidence appearing of record with respect
to his age, Exhibit F, shows that he was only 66 years, 2 months and 7 days at
the time of the transfer.
7 and 8. The seventh and eight errors need no further discussion. The
reasons above given clearly show that they do not exist. The inescapable
conclusion, therefore, is that the appeal taken by plaintiff's is unfounded and
without merit for the reason that the judgment appealed from is in accordance
with law and supported by the evidence.

CHAPTER 2 EFFECTS OF GUARANTY

EN BANC

In view of the foregoing, the judgment appealed from is affirmed with the
costs of the appeal against the plaintiffs and appellants. So ordered.
Avancea, C. J., Villa-Real, Abad Santos, Imperial,
Laurel and Concepcion, JJ., concur.
||| (Solon v. Solon, G.R. No. 42490, [September 9, 1937], 64 PHIL 729-738)

[G.R. No. L-13873. January 31, 1963.]

GENERAL INSURANCE and SURETY CORPORATION, petitio
ner, vs. REPUBLIC OF THE PHILIPPINES and CENTRAL
LUZON EDUCATIONAL FOUNDATION, INC., respondents.

Guido Advincula for petitioner.

Solicitor General for respondents.

DECISION

REGALA, J p:
On May 15, 1954, the Central Luzon Educational Foundation, Inc. and
the General Insurance and Surety Corporation posted in favor of the Department of
Education a bond, the terms of which read as follows:
"KNOW ALL MEN BY THESE PRESENTS:
Page 237 of 505

WHEREAS, the Department of Education has required the

Central Luzon Educational Foundation, Inc., operating the Sison
& Aruego Colleges, of Urdaneta, Pangasinan, Philippines an
institution of learning to file a bond to guarantee the adequate
and efficient administration of said school or college and the
observance of all regulations prescribed by the Secretary of
Education and compliance with all obligations, including the
payment of the salaries of all its teachers and employees, past,
present, and future, and the payment of all other obligations
incurred by, or in behalf of said school;
NOW, THEREFORE, in compliance with said requirement, we,
CENTRAL LUZON EDUCATIONAL FOUNDATION, INC.,
operating the Sison and Aruego Colleges, represented by Dr.
Jose Aruego, its Vice-Chairman, as principal, and
the GENERAL INSURANCE AND SURETY CORPORATION, a
corporation duly organized and existing under and by virtue of the
laws of the Philippines, as surety, are held end firmly bound,
jointly and firmly, unto the Department of Education of
the Republic of the Philippines in the sum of TEN THOUSAND
PESOS (P10,000.00) Philippine currency, for the payment thereof
we bind ourselves, our heirs, executors, administrators,
successors, and assigns, jointly and severally firmly by these
presents;
WHEN the Secretary of Education is satisfied that said institution
of learning had defaulted in any of the foregoing particulars, this
bond may immediately thereafter be declared forfeited and for the
payment of the amount above-specified, we bind ourselves, our
heirs, executors, successors, administrators, and assigns, jointly
and severally.
We further bind ourselves, by these presents, to give the
Department of Education at least sixty (60) days notice of the
intended withdrawal or cancellation of this bond, in order that the
Department can take such action as may be necessary to protect
the interests of such teachers, employees or creditors of the
school and of the Government.
LIABILITY of Surety under this bond will expire on June 15, 1955,
unless sooner revoked.

IN WITNESS WHEREOF, we signed this present guaranty at the

City of Manila, Philippines, this 15th day of May, 1954."
On the same day, May 15, 1954, the Central Luzon Educational Foundation, Inc.,
Teofilo Sison and Jose M. Aruego executed an indemnity agreement binding
themselves jointly and severally to indemnify the surety of "any damages, prejudices,
loss, costs, payments, advances and expenses of whatever kind and nature, including
attorney's fees and legal costs, which the COMPANY may, at any time sustain or
incur, as well as to reimburse to said COMPANY all sums and amounts of money
which the COMPANY or its representatives shall or may pay or cause to be paid or
become liable to pay, on account of or arising from the execution of the above
mentioned Bond."
On June 25, 1954, the surety advised the Secretary of Education that it was
withdrawing and cancelling its bond. Copies of the letter were sent to the Bureau of
Private Schools and to the Central Luzon Educational Foundation, Inc.
It appears that on the date of execution of the bond, the Foundation was indebted to
two of its teachers for salaries, to wit: to Remedios Laoag, in the sum of P685.64, and
to H.B. Arandia, in the sum of P820.00, or a total of P1,505.64.
Demand for the above amount having been refused, the Solicitor General, in behalf of
the Republic of the Philippines, filed a complaint for the forfeiture of the bond, in the
Court of First Instance of Manila on July 11, 1956.
In due to surety the Foundation and prayed that the complaint be dismissed and that it
be indemnified by the Foundation of any amount it might be required to pay the
Government, plus attorney's fees.
For its part, the Foundation denied the cross-claim and contended that, because
Remedios Laoag owed Fr. Cinense the amount of P820.65, there was no basis for the
action; that the bond is illegal and that the Government has no capacity to sue.
The surety also filed a third-party complaint against Teofilo Sison and Jose M. Aruego
on the basis of the indemnity agreement. While admitting the allegations of the thirdparty complaint, Sison and Aruego claimed that because of the cancellation and
withdrawal of the bond, the indemnity agreement ceased to be of force and effect.
Hearing was held and on December 18, 1956, the Court of First Instance rendered
judgment holding the principal and the surety jointly and severally liable to the
Government in the sum of P10,000.00 with legal interest from the date of filing of the
complaint, until the sum is fully paid and ordering the principal to reimburse
Page 238 of 505

thesurety whatever amount it may be compelled to pay to the Government by reason

of the judgment, with costs against both principal and the surety.
The surety filed a motion for reconsideration and a request to decide the third party
complaint which the trial court denied.
On appeal, the Court of Appeals rendered a decision, the dispositive portion of which
reads:
"WHEREFORE, the appealed judgment is hereby modified in the
following manner:
"(a) Ordering Central Luzon Educational Foundation, Inc.,
and General Insurance and Surety Corporation to pay jointly and
severally the Republic of the Philippines the sum of P10,000.00,
plus costs and legal interests from July 11, 1956 until fully paid;
and
"(b) Ordering Central Luzon Educational Foundation, Inc., Teofilo
Sison and Jose M. Aruego to reimburse, jointly and severally,
the General Insurance and SuretyCorporation of all amounts it
may be forced to pay the Republic of the Philippines by virtue of
this judgment, plus costs and P2,000 for counsel's fees."
From this decision, the surety appealed to this Court by way of certiorari, raising
questions of law. 1
In its first four assignments of error, the surety contends that it was no longer liable on
its bond after August 24, 1954 (when the 60-day notice of cancellation and withdrawal
ended) or, at the latest, after June 15, 1955. For support, the Surety invokes the
following provisions of the bond:
"WE further bind ourselves, by these presents to give the
Department of Education at least sixty (60) days notice of the
intended withdrawal or cancellation of this bond, in order that the
Department can take such action as may be necessary to protect
the interest of such teacher, employees Creditor to the
government.
"LIABILITY of the Surety under this bond will expire on June 15,
1955, unless sooner revoked."

On the other hand, the Government contends that since the salaries of the teachers
were due and payable when the bond was still in force, the surety has become liable
on its bond from the moment of its execution on May 15, 1954.
We agree with this contention of the Government.

It must be remembered that, by the terms of the bond, the surety guaranteed to the
Government "compliance (by the Foundation) with all obligations, including the
payment of the salaries of its teachers and employees, past, present and future, and
the payment of all other obligations incurred by, or in behalf of said school." Now, it is
not disputed that even before the execution of the bond, the Foundation was already
indebted to two of its teachers for past salaries. From the moment, therefore, the bond
was executed, the right of the Government to proceed against the bond accrued
because since then, there has been violation of the terms of the bond regarding
payment of past salaries of teachers at the Sison and Aruego Colleges. The fact that
the action was filed only on July 11, 1956 does not militate against this position
because actions based on written contracts prescribe in ten years. (Art. 1144, par. 1,
Civil Code).
The surety also cites our decision in the cases of Jollye vs. Barcelon and
Luzon Surety Co., Inc., 68 Phil. 164 and National Rice and Corn Corp. (NARIC) vs.
Rivera, et al., G.R. No. L-4023, February 29, 1952. But there is nothing in these cases
that supports the proposition that the liability of a surety for obligations arising during
the life of a bond ceases upon the expiration of the bond.
In the Jollye case, the bond provided:
"Whereas, the above bounded principal, on 13th day of February,
1933 entered into an agreement with H. P. L Jollye of Manila, P.I.,
to fully and faithfully refund to said Mr. H.P.L. Jollye the above
stated sum of P7,500 representing the purchase price of the 75
shares of the capital stock of the North Electric Company
(certificate No. 38) paid by said Mr. H.P.L. Jollye to the
undersigned principal, Mr. Emeterio Barcelon, in the event the
title thereto of said Mr. Barcelon is invalidated by any judgment
which may be rendered by the court of Cavite against Vicente
Diosomito or in the event that any of the warranties contained in
that certain deed of sale executed by the undersigned principal
on this 13th day of February, 1933, be invalidated, a copy of
Page 239 of 505

which is hereto attached and made an integral part hereof,

marked Exhibit A."
According to the bond, "the liability of Luzon Surety Company, Inc., under this bond
will expire twelve (12) months from date hereof." The date referred to was February
13, 1933. This Court absolved the surety of liability because the acts for which the
bond was posted happened after its expiration. Thus, We held in that case:
". . . The acts provided therein by reason of which the contract of
suretyship was executed could have taken place within the
stipulated period of twelve months. Hence, the parties fixed that
period exactly at twelve months, limiting thereby the obligation of
the appellee to answer for the payment to the appellant of the
aforesaid sum of P7,500 to not more than the stipulated period. . .
."
Here, on the other hand, the right of the Government to collect on the bond arose
while the bond was in force, because, as earlier noted, even before the execution of
the bond, the principal had already been in debt to its teachers.
Neither does the NARIC case support the surety's position. In that case, the bond
provided that
"This bond expires on March 20th, 1949 and will be cancelled
TEN DAYS after the expiration, unless the surety is notified of any
existing obligation thereunder, or unless the surety renews or
extends it in writing for another term."
and We held that giving notice of existing obligation was a condition precedent to
further liability of the surety and that in default of such notice, liability on the bond
automatically ceased.
Similarly, in the case of Santos, et al. vs. Mejia, et al., G.R. No. L-6383, December 29,
1953, the bond provided that
"Liability of the surety on this bond will expire on THIRTY DAYS
and said bond will be cancelled 10 DAYS after its expiration
unless surety is notified of any existing obligation thereunder."
and We held that the surety could not be held liable because the bond was
cancelled when no notice of existing obligations was given within ten days.
In the present case, there is no provision that the bond will be cancelled unless
the surety is notified of any claim and so no condition precedent has to be complied

with by the Government before it can bring an action. Indeed, the provision of the
bond in the NARIC and Santos cases that it would be cancelled ten days after its
expiration unless notice of claim was given was inserted precisely because, without
such a provision, the surety's liability for obligations arising while the bond was in
force would subsist even after its expiration.
Thus, in Pao Chuan Wek vs. Nomorosa, 54 O.G. No. 11, 3490, We held that under a
provision that the surety "will not be liable for any claim not discovered and presented
to the company within three months from the expiration of this bond and that the
obligee hereby waives his right to file any court action against the suretyafter the
termination of the period of three months above mentioned," the giving of notice is a
condition precedent to be complied with.
And suppose this action were filed while the bond was in force, as the surety would
have the Government do, but the same remained pending after June 15, 1955, would
the surety suggest that the judgment that may be rendered in such action could not
longer be enforced against it because the bond says that its liability under it has
expired?
And what of the provision on 60-day notice? The surety urges that all actions on the
bond must be brought within that period or they would all be barred.
The suretymisread the provision. The 60-day notice is not a period of prescription of
action. The provision merely means that the surety can withdraw as in fact it did in
this case even before June 15, 1955 provided it gave notice of its intention to do so
at least 60 days in advance. If at all, the condition is a limitation on the right of
thesurety to withdraw rather than a limitation of action on the bond. This is clear also
from the Manual of Information of Private Schools 2 which states that "The bond
furnished by a school may not be withdrawn by either or both of the bondsmen except
by giving the Director of Private Schools sixty days notice."
In its fifth assignment of error, the surety contends:
1. That the bond is void for being contrary to public policy insofar as it requires
the surety to pay P10,000.00 regardless of the amount of the salaries of the
teachers. 3 It is claimed that to enforce forfeiture of the bond for the full amount would
be to allow the Government to enrich itself since the unpaid salaries of the teachers
amount to P1,318.84 only.
2. That, under Article 1311 of the Civil Code, 4 since teachers of Sison and Aruego
Colleges are not parties to the bond, "the bond is not effective and binding upon the
obligors (principal and surety) as far as it guarantees payment of the 'past salaries' of
the teachers of said school." This is the same as saying that the surety is not liable to
Page 240 of 505

teachers of Sison and Aruego Colleges because the latter are not parties to the bond
nor are they the beneficiaries of a stipulation pour autrui. But this argument is based
on the false premise that the teachers are trying to enforce the obligation of the bond,
which is not the case here. This is not an action filed by the teachers against
the surety. This is an action brought by the Government, of which the Department of
Education is an instrumentality, to hold the surety liable on its bond for the same has
been violated when the principal failed to comply "with all obligations, including the
payment of salaries of its teachers, past, present and future."

Lastly, in its third and fourth "alternative assignments of error," the surety contends
that it cannot be made to answer for more than the unpaid salaries of H. B. Arandia,
which it claimed amounted to P720.00 only, because Article 2054 states that

"A guarantor may bind himself for less, but not for more than the
principal debtor, both as regards the amount and the onerous
nature of the conditions.

There is nothing against public policy in forfeiting the bond for the full amount. The
bond is penal in nature. Article 1226 of the Code states that in obligation with a penal
clause, the penalty shall substitute the indemnity for damages and the payment of
interests in case of non-compliance, if there is no stipulation to the contrary, and the
party to whom payment is to be made is entitled to recover the sum stipulated without
need of proving damages because one of the primary purposes of a penalty clause is
to avoid such necessity. (Art. 1228, Civil Code. Lambert vs. Fox, 26 Phil. 588;
Palacios vs. Municipality of Cavite, 12 Phil. 140; Manila Racing Club vs. Manila
Jockey Club, 69 Phil. 55). The mere non-performance of the principal obligation gives
rise to the right to the penalty (IV Tolentino, Civil Code of the Philippines 247.)

What We said about the penal nature of the bond would suffice to dispose of this
claim. For whatever may be the amount of salaries due the teachers, the fact remains
that the condition of the bond was violated and so the surety became liable for the
penalty provided for therein.

In its first and second "alternative assignments of error," the surety contends that it
was released from its obligation under the bond when on February 4, 1955, Remedios
Laoag and the Foundation agreed that the latter would pay the former's salaries,
which were then already due, on March 1, 1955. In support of this proposition,
the surety cites Article 2079 of the Code which provides as follows:

Bengzon, C . J ., took no part.

"An extension granted to the debtor by the creditor with out the
consent of the guarantor extinguishes the guaranty. . . ."
But the above provision does not apply to this case. The supposed extension of time
was granted not by the Department but by the Department of Education or the
Government but by the teachers. As already stated, the creditors on the bond are not
the teachers but the Department of Education or the Government.
Even granting that an extension of time was granted without the consent of the surety,
still that fact would not help the surety, because as earlier pointed out, the Foundation
was also in arrears in the payment of the salaries of H. B. Arandia. The case of
Arandia alone would be enough basis for the Government to proceed against the
bond.

"Should he have bound himself for more, his obligations shall be

reduced to the limits of that of the debtor."

WHEREFORE, the decision of the Court of Appeals is hereby affirmed, with costs
against the surety.
Padilla, Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes,
Dizon and Makalintal, JJ ., concur.

||| (General Insurance and Surety Corp. v. Republic, G.R. No. L-13873, [January 31,
1963], 117 PHIL 1-11)
PNB v LUZON SUPRA

SECOND DIVISION
[G.R. No. 130886. January 29, 2004.]
COMMONWEALTH
INSURANCE
CORPORATION, petitioner, vs. COURT OF APPEALS and
RIZAL
COMMERCIAL
BANKING
CORPORATION, respondents.
Page 241 of 505

DECISION

AUSTRIA-MARTINEZ, J p:
Before us is a petition for review on certiorari assailing the Decision 1 of the Court of
Appeals (CA), promulgated on May 16, 1997 in CA-G.R. CV No. 44473 2 , which
modified the decision dated March 5, 1993 of the Regional Trial Court of Makati
(Branch 64); and the Resolution 3 dated September 25, 1997, denying petitioner's
motion for reconsideration.
The facts of the case as summarized by the Court of Appeals are as follows:
In 1984, plaintiff-appellant Rizal Commercial Banking Corporation
(RCBC) granted two export loan lines, one, for P2,500,000.00 to
Jigs Manufacturing Corporation (JIGS) and, the other, for
P1,000,000.00 to Elba Industries, Inc. (ELBA). JIGS and ELBA
which are sister corporations both drew from their respective
credit lines, the former in the amount of P2,499,992.00 and the
latter for P998,033.37 plus P478,985.05 from the case-to-case
basis and trust receipts. These loans were evidenced by
promissory notes (Exhibits 'A' to 'L', inclusive JIGS; Exhibits 'V'
to 'BB', inclusive ELBA) and secured by surety bonds (Exhibits
'M' to 'Q' inclusive JIGS; Exhibits 'CC' to 'FF', inclusive
ELBA) executed by defendant-appellee Commonwealth
Insurance Company (CIC).
Specifically, the surety bonds issued by appellee CIC in favor of
appellant RCBC to secure the obligations of JIGS totaled
P2,894,128.00 while that securing ELBA's obligation was
P1,570,000.00. Hence, the total face value of the surety bonds
issued by appellee CIC was P4,464,128.00,
JIGS and ELBA defaulted in the payment of their respective
loans. On October 30, 1984, appellant RCBC made a written
demand (Exhibit 'N') on appellee CIC to pay JIG's account to the
full extend (sic) of the suretyship. A similar demand (Exhibit 'O')
was made on December 17, 1984 for appellee CIC to pay ELBA's
account to the full extend (sic) of the suretyship. In response to
those demands, appellee CIC made several payments from
February 25, 1985 to February 10, 1988 in the total amount of

P2,000,000.00. There having been a substantial balance unpaid,

appellant RCBC made a final demand for payment (Exhibit 'P') on
July 7, 1988 upon appellee CIC but the latter ignored it. Thus,
appellant RCBC filed the Complaint for a Sum of Money on
September 19, 1988 against appellee CIC. 4
The trial court rendered a decision dated March 5, 1993, the dispositive portion of
which reads as follows:
"WHEREFORE, premises considered, in the light of the above
facts, arguments, discussion, and more important, the law and
jurisprudence, the Court finds the defendants Commonwealth
Insurance Co. and defaulted third party defendants Jigs
Manufacturing Corporation, Elba Industries and Iluminada de
Guzman solidarily liable to pay herein plaintiff Rizal Commercial
Banking Corporation the sum of Two Million Four Hundred SixtyFour
Thousand
One
Hundred
Twenty-Eight
Pesos
(P2,464,128.00), to pay the plaintiff attorney's fees of P10,000.00
and to pay the costs of suit.
"IT IS SO ORDERED." 5
Not satisfied with the trial court's decision, RCBC filed a motion for reconsideration
praying that in addition to the principal sum of P2,464,128.00, defendant CIC be held
liable to pay interests thereon from date of demand at the rate of 12% per annum until
the same is fully paid. However, the trial court denied the motion.
RCBC then appealed to the Court of Appeals.
On May 16, 1997, the CA rendered the herein assailed decision, ruling thus:
xxx xxx xxx
Being solidarily bound, a surety's obligation is primary so that
according to Art. 1216 of the Civil Code, he can be sued alone for
the entire obligation. However, one very important characteristic
of this contract is the fact that a surety's liability shall be limited to
the amount of the bond (Sec. 176, Insurance Code). This does
not mean however that even if he defaults in the performance of
his obligation, the extend (sic) of his liability remains to be the
amount of the bond. If he pays his obligation at maturity upon
demand, then, he cannot be made to pay more than the amount
of the bond. But if he fails or refuses without justifiable cause to
Page 242 of 505

pay his obligation upon a valid demand so that he is in mora

solvendi (Art. 1169, CC), then he must pay damages or interest
in consequence thereof according to Art. 1170. Even if this
interest is in excess of the amount of the bond, the defaulting
surety is liable according to settled jurisprudence.
xxx xxx xxx
Appellant RCBC contends that when appellee CIC failed to pay
the obligation upon extrajudicial demand, it incurred in delay in
consequence of which it became liable to pay legal interest. The
obligation to pay such interest does not arise from the contract of
suretyship but from law as a result of delay or mora. Such an
interest is not, therefore, covered by the limitation of appellee's
liability expressed in the contract. Appellee CIC refutes this
argument stating that since the surety bonds expressly state that
its liability shall in no case exceed the amount stated therein, then
that stipulation controls. Therefore, it cannot be made to assume
an obligation more than what it secured to pay.
The contention of appellant RCBC is correct because it is
supported by Arts. 1169 and 1170 of the Civil Code and the case
of Asia Surety & Insurance Co., Inc. and Manila Surety & Fidelity
Co. supra. On the other hand, the position of appellee CIC which
upholds the appealed decision is untenable. The best way to
show the untenability of this argument is to give this hypothetical
case situation: Surety issued a bond for P1 million to secure a
Debtor's obligation of P1 million to Creditor. Debtor defaults and
Creditor demands payment from Surety. If the theory of appellee
and the lower court is correct, then the Surety may just as well
not pay and use the P1 million in the meantime. It can choose to
pay only after several years after all, his liability can never
exceed P1 million. That would be absurd and the law could not
have intended it. 6 (Emphasis supplied)
and disposed of the case as follows:
WHEREFORE, the appealed Decision is MODIFIED in the
manner following:
The appellee Commonwealth Insurance Company shall pay the
appellant Rizal Commercial Banking Corporation:

1. On the account of JIGS, P2,894,128.00 ONLY with 12% legal

interest per annum from October 30, 1984 minus payments made
by the latter to the former after that date; and on the account of
ELBA, P1,570,000.00 ONLY with 12% legal interest per annum
from December 17, 1984 minus payments made by the latter to
the former after that day; respecting in both accounts the
applications of payment made by appellant RCBC on appellee
CIC's payments;
2. Defendant-appellee Commonwealth Insurance Company shall
pay plaintiff-appellant RIZAL COMMERCIAL BANKING CORP.
and (sic) attorney's fee of P10,000.00 and cost of this suit;
3. The third-party defendants JIGS MANUFACTURING
CORPORATION, ELBA INDUSTRIES and ILUMINADA N. DE
GUZMAN shall respectively indemnify COMMONWEALTH
INSURANCE CORPORATION for whatever it had paid and shall
pay to RIZAL COMMERCIAL BANKING CORPORATION of their
respective individual obligations pursuant to this decision.
SO ORDERED. 7
CIC filed a motion for reconsideration but the CA denied the same.
Hence, herein petition by CIC raising a single assignment of error, to wit:
Respondent Court of Appeals grievously erred in ordering
petitioner to pay respondent RCBC the amount of the surety
bonds plus legal interest of 12% per annum minus payments
made by the petitioner. 8
The sole issue is whether or not petitioner should be held liable to pay legal interest
over and above its principal obligation under the surety bonds issued by it.
Petitioner argues that it should not be made to pay interest because its issuance of
the surety bonds was made on the condition that its liability shall in no case exceed
the amount of the said bonds.
We are not persuaded. Petitioner's argument is misplaced.
Jurisprudence is clear on this matter. As early as Tagawa vs. Aldanese and Union
Guarantee
Co. 9 and reiterated
in Plaridel
Surety
&
Insurance
Co.,
Inc. vs. P.L. Galang Machinery Co., Inc. 10 , and more recently, in Republic vs. Court
Page 243 of 505

of Appeals and R & B Surety and Insurance Company, Inc. 11 , we have sustained the
principle that if a surety upon demand fails to pay, he can be held liable for interest,
even if in thus paying, its liability becomes more than the principal obligation. The
increased liability is not because of the contract but because of the default and the
necessity of judicial collection. 12
Petitioner's liability under the suretyship contract is different from its liability under the
law. There is no question that as a surety, petitioner should not be made to pay more
than its assumed obligation under the surety bonds. 13 However, it is clear from the
above-cited jurisprudence that petitioner's liability for the payment of interest is not by
reason of the suretyship agreement itself but because of the delay in the payment of
its obligation under the said agreement.
Petitioner admits having incurred in delay. Nonetheless, it insists that mere delay does
not warrant the payment of interest. Citing Section 244 of the Insurance
Code, 14petitioner submits that under the said provision of law, interest shall accrue
only when the delay or refusal to pay is unreasonable; that the delay in the payment of
its obligation is not unreasonable because such delay was brought about by
negotiations being made with RCBC for the amicable settlement of the case.
We are not convinced.
It is not disputed that out of the principal sum of P4,464,128.00 petitioner was only
able to pay P2,000,000.00. Letters demanding the payment of the respective
obligations of JIGS and ELBA were initially sent by RCBC to petitioner on October 30,
1984 15 and December 17, 1984. 16 Petitioner made payments on an installment
basis spanning a period of almost three years, i.e., from February 25, 1985 until
February 10, 1988. On July 7, 1988, or after a period of almost five months from its
last payment, RCBC, thru its legal counsel, sent a final letter of demand asking
petitioner to pay the remaining balance of its obligation including interest. 17 Petitioner
failed to pay. As of the date of the filing of the complaint on September 19, 1988,
petitioner was even unable to pay the remaining balance of P2,464,128.00 out of the
principal amount it owes RCBC.

Petitioner's contention that what prevented it from paying its obligation to RCBC is the
fact that the latter insisted on imposing interest and penalties over and above the
principal sum it seeks to recover is not plausible. Considering that petitioner admits its
obligation to pay the principal amount, then it should have paid the remaining balance
of P2,464,128.00, notwithstanding any disagreements with RCBC regarding the
payment of interest. The fact that the negotiations for the settlement of petitioner's

obligation did not push through does not excuse it from paying the principal sum due
to RCBC.
The issue of petitioner's payment of interest is a matter that is totally different from its
obligation to pay the principal amount covered by the surety bonds it issued. Petitioner
offered no valid excuse for not paying the balance of its principal obligation when
demanded by RCBC. Its failure to pay is, therefore, unreasonable. Thus, we find no
error in the appellate court's ruling that petitioner is liable to pay interest.
As to the rate of interest, we do not agree with petitioner's contention that the rate
should be 6% per annum. The appellate court is correct in imposing 12% interest. It is
in accordance with our ruling in Eastern Shipping Lines, Inc. vs. Court of
Appeals, 18 wherein we have established certain guidelines in awarding interest in
the concept of actual and compensatory damages, to wit:
I. When an obligation, regardless of its source, i.e., law,
contracts, quasi-contracts, delicts or quasi-delicts is breached,
the contravenor can be held liable for damages. The provisions
under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.
II. With regard particularly to an award of interest in the concept
of actual and compensatory damages, the rate of interest, as well
as the accrual thereof, is imposed, as follows
1. When the obligation is breached, and it consists in the
payment of a sum of money, i.e., a loan or forbearance of money,
the interest due should be that which may have been stipulated in
writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e. from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of damages
awarded may be imposed at the discretion of the court at the rate
of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand
can be established with reasonable certainty. Accordingly, where
the demand is established with reasonable certainty, the interest
Page 244 of 505

shall begin to run from the time the claim is made judicially or
extrajudicially (Art. 1169, Civil Code) but when such certainty
cannot be reasonably established at the time the demand is
made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of
damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any
case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, whether
the case falls under paragraph 1 or paragraph 2, above, shall be
12% per annum from such finality until its satisfaction, this interim
period being deemed to be by then an equivalent to a
forbearance of credit. 19 (Emphasis supplied)
In the present case, there is no dispute that petitioner's obligation consists of a loan or
forbearance of money. No interest has been agreed upon in writing between petitioner
and respondent. Applying the above-quoted rule to the present case, the Court of
Appeals correctly imposed the rate of interest at 12% per annum to be computed from
the time the extra-judicial demand was made. This is in accordance with the
provisions of Article 1169 20 of the Civil Code and of the settled rule that where there
has been an extra-judicial demand before action for performance was filed, interest on
the amount due begins to run not from the date of the filing of the complaint but from
the date of such extra-judicial demand. 21 RCBC's extra-judicial demand for the
payment of JIGS' obligation was made on October 30, 1984; while the extra-judicial
demand for the payment of ELBA's obligation was made on December 17, 1984. On
the other hand, the complaint for a sum of money was filed by RCBC with the trial
court only on September 19, 1988. DCcHIS
WHEREFORE, the instant petition is DENIED and the assailed Decision and
Resolution of the Court of Appeals are AFFIRMED in toto.
SO ORDERED.
Puno, Quisumbing, Callejo, Sr. and Tinga, JJ., concur.
||| (Commonwealth Insurance Corp. v. Court of Appeals, G.R. No. 130886, [January
29, 2004], 466 PHIL 104-116)
MACHETTI SUPRA

SECOND DIVISION
[G.R. No. L-45848. November 9, 1977.]
TOWERS ASSURANCE CORPORATION, petitioner, vs. OROR
AMA SUPERMART, ITS OWNER-PROPRIETOR, SEE HONG
and JUDGE BENJAMIN K. GOROSPE, Presiding Judge,
Court of First Instance of Misamis Oriental, Branch
I, respondents.

Benjamin Tabique & Zosimo T. Vasalla for petitioner.

Rodrigo F. Lim, Jr. for private respondent.

DECISION

AQUINO, J p:
This case is about the liability of a surety in a counterbond for the lifting of a writ of
preliminary attachment.
On February 17, 1976 See Hong, the proprietor of Ororama Supermart in Cagayan de
Oro City, sued the spouses Ernesto Ong and Conching Ong in the Court of First
Instance of Misamis Oriental for the collection of the sum of P58,400 plus litigation
expenses and attorney's fees (Civil Case No. 4930).
See Hong asked for a writ of preliminary attachment. On March 5, 1976, the lower
court issued an order of attachment. The deputy sheriff attached the properties of the
Ong spouses in Valencia, Bukidnon and in Cagayan de Oro City.
To lift the attachment, the Ong spouses filed on March 11, 1976 a counterbond in the
amount of P58,400 with Towers Assurance Corporation as surety. In that undertaking,
the Ong spouses and Towers Assurance Corporation bound themselves to pay
solidarily to See Hong the sum of P58,400.
On March 24, 1976 the Ong spouses filed an answer with a counterclaim. For nonappearance at the pre-trial, the Ong spouses were declared in default.
Page 245 of 505

On October 25, 1976, the lower court rendered a decision, ordering not only the Ong
spouses but also their surety, Towers Assurance Corporation, to pay solidarily to See
Hong the sum of P58,400. The court also ordered the Ong spouses to pay P10,000
as litigation expenses and attorney's fees. prLL
Ernesto Ong manifested that he did not want to appeal. On March 8,
1977, Ororama Supermart filed a motion for execution. The lower court granted that
motion. The writ of execution was issued on March 14 against the judgment debtors
and their surety. On March 29, 1977, Towers Assurance Corporation filed the instant
petition for certiorari where it assails the decision and writ of execution.
We hold that the lower court acted with grave abuse of discretion in issuing a writ of
execution against the surety without first giving it an opportunity to be heard as
required in Rule 57 of the Rules of Court which provides:

Luzon Surety Co., Inc. vs. Beson, L-26865-66, January 30, 1970, 31 SCRA
313) cdrep
WHEREFORE, the order and writ of execution, insofar as they
concern Towers Assurance Corporation, are set aside. The lower court is directed to
conduct a summary hearing on the surety's liability on its counterbond. No costs.
SO ORDERED.
Fernando (Chairman), Barredo, Antonio, Concepcion Jr. and Santos, JJ., concur.
||| (Towers Assurance Corp. v. Ororama Supermart, G.R. No. L-45848, [November 9,
1977], 170 PHIL 313-316)

"SEC. 17. When execution returned unsatisfied, recovers had

upon bond. If the execution be returned unsatisfied in whole or
in part, the surety or sureties on any counterbond given pursuant
to the provisions of this rule to secure the payment of the
judgment shall become charged on such counterbond, and
bound to pay to the judgment creditor upon demand, the amount
due under the judgment, which amount may be recovered from
such surety or sureties after notice and summary hearing in the
action."

SECOND DIVISION
[G.R. No. 84084. August 20, 1990.]
FINMAN GENERAL ASSURANCE CORPORATION, petitioner, vs. AB
DULGANI SALIK, BALABAGAN AMPILAN, ALI KUBA, GANDHI PUA,
DAUD MALANAO, THE ADMINISTRATOR, PHILIPPINE OVERSEAS
AND EMPLOYMENT ADMINISTRATION, THE SECRETARY OF
LABOR AND EMPLOYMENT, respondents.

Under section 17, in order that the judgment creditor might recover from the surety on
the counterbond, it is necessary (1) that execution be first issued against the principal
debtor and that such execution was returned unsatisfied in whole or in part; (2) that
the creditor made a demand upon the surety for the satisfaction of the judgment, and
(3) that the surety be given notice and a summary hearing in the same action as to his
liability for the judgment under his counterbond.
The first requisite mentioned above is not applicable to this case
because Towers Assurance Corporation assumed a solidary liability for the
satisfaction of the judgment. A surety is not entitled to the exhaustion of the properties
of the principal debtor (Art. 2959, Civil Code; Luzon Steel Corporation vs. Sia, L26449, May 15, 1969, 28 SCRA 58, 63).
But certainly, the surety is entitled to be, heard before an execution can be issued
against him since he is not a party in the case involving his principal. Notice and
hearing constitute the essence of procedural due process. (Martinez vs. Villacete, 116
Phil. 326; Alliance Insurance & Surety Co., Inc. vs. Hon. Piccio, 105 Phil. 1192, 1200;

David I. Unay, Jr. for petitioner.

Kamid D. Abdul for private respondents.
=

DECISION

PARAS, J p:

Page 246 of 505

This is a petition for certiorari seeking to annul 1 the Order dated March 28, 1988 of
the Honorable Secretary of Labor and Employment in POEA, LRO/RRD Case No. 8709-1022-DP entitled Abdulgani Salik, et al. v. Pan Pacific Overseas and Recruiting
Services and Finman General Assurance Corporation, which directed herein
petitioner to pay jointly and severally with Pan Pacific the claims of herein private
respondents amounting to P25,000.00 and 2) the Order dated June 7, 1988, which
denied petitioner's motion for reconsideration (Rollo, p. 2).
The facts of the case are as follows:
Abdulgani Salik et al., private respondents, allegedly applied with Pan Pacific
Overseas Recruiting Services, Inc. (hereinafter referred to as Pan Pacific) on April 22,
1987 and were assured employment abroad by a certain Mrs. Normita Egil. In
consideration thereof, they allegedly paid fees totalling P30,000.00. But despite
numerous assurances of employment abroad given by Celia Arandia and Mrs. Egil,
they were not employed (Ibid., p. 15).
Accordingly, they filed a joint complaint with the Philippine Overseas Employment
Administration (herein referred to as POEA) against Pan Pacific for Violation of
Articles 32 and 34(a) of the Labor Code, as amended, with claims for refund of a total
amount of P30,000.00 (Ibid.).
The POEA motu proprio impleaded and summoned herein petitioner
surety Finman General Assurance Corporation (hereinafter referred to as Finman), in
the latter's capacity as Pan Pacific's bonding company.
Summons were served upon both Pan Pacific and Finman, but they failed to answer.
On October 9, 1987, a hearing was called, but only the private respondents appeared.
Despite being deemed in default for failing to answer, both Finman and Pan Pacific
were still notified of the scheduled hearing. Again they failed to appear. Thus, ex-parte
proceedings ensued.
During the hearing, herein private respondents reiterated the allegations in their
complaint that they first paid P20,000.00 thru Hadji Usop Kabagani for which a receipt
was issued signed by Engineer Arandia and countersigned by Mrs. Egil and a certain
Imelda who are allegedly employed by Pan Pacific; that they paid another P10,000.00
to Engr. Arandia who did not issue any receipt therefor; that the total payment of
P30,000.00 allegedly represents payments for herein private respondents in the
amount of P5,000.00 each, and Abdulnasser Ali, who did not file any complaint
against Pan Pacific (Ibid., pp. 15-16). llcd

Herein private respondents presented as their witness, Hadji Usop Kabagani who they
identified as the one who actually financed their application and who corroborated
their testimonies on all material points including the non-issuance of a receipt for
P10,000.00 by Engr. Arandia.
Herein petitioner, Finman, in an answer which was not timely filed, alleged, among
others, that herein private respondents do not have a valid cause of action against it;
that Finman is not privy to any transaction undertaken by Pan Pacific with herein
private respondents; that herein private respondents claims are barred by the statute
of frauds and by the fact that they executed a waiver; that the receipts presented by
herein private respondents are mere scraps of paper; that it is not liable for the acts of
Mrs. Egil; that Finman has a cash bond of P75,000.00 only which is less than the
required amount of P100,000.00; and that herein private respondents should proceed
directly against the cash bond of Pan Pacific or against Mrs. Egil (Ibid., pp. 16-17).
On March 18, 1988, the Honorable Franklin M. Drilon, then the Secretary of Labor
and Employment, upon the recommendation of the POEA hearing officer, issued an
Order, the dispositive portion of which reads:
"WHEREFORE, premises considered, both respondents are
hereby directed to pay jointly and severally the claims of
complainants, as follows:
1. Abdulgani Salik P5,000.00
2. Balabagan
3. Ali
4. Gandhi
5. Daud Malanao 5,000.00

Ampilan 5,000.00
Kuba 5,000.00
Dua 5,000.00

Based on the records of this Administration, respondent

agency is presently serving a total period of suspension of
seventeen (17) months imposed in three (3) separate
orders issued on June 2, 1987, August 17, 1987 and
September 23, 1987. Under the new schedule of penalties
published on January 21, 1987 in the Philippine Inquirer,
the penalty of cancellation shall be imposed when the
offender has been previously penalized with suspension
the total period of which is 12 months or more. Moreover,
the penalty impossible in the case at bar is two (2) months
suspension for each count of violation or a total period of
suspension of ten (10) months as the acts were committed
Page 247 of 505

in April 1987. Thus, whether under the old schedule of

penalties which required a total period of suspension of
twenty-four (24) months for cancellation to be imposed or
under the new schedule which provides for a twelve (12)
month total suspension period, the penalty of cancellation
may be properly imposed upon the herein respondent
agency. prLL
In view thereof, the license of Pan Pacific Overseas Recruiting
Services is hereby cancelled, effective immediately.

SO ORDERED. (Ibid., pp. 20-21).

A motion for reconsideration having been denied (Ibid., p. 22),
herein petitioner instituted the instant petition for certiorari, raising
the following assigned errors:
I
THE HONORABLE ADMINISTRATOR AND THE HONORABLE
SECRETARY OF LABOR ACTED WITH GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OF JURISDICTION IN
MOTU PROPRIO IMPLEADING FINMAN AS CO-RESPONDENT
OF PAN PACIFIC IN POEA LRO/RRD CASE NO. 87-09-1022 DP
WHICH WAS FILED BY ABDULGANI SALIK, ET AL.;
II
THE HONORABLE SECRETARY OF LABOR ACTED WITHOUT
OR IN EXCESS OF JURISDICTION AND WITH GRAVE ABUSE
OF DISCRETION AMOUNTING TO LACK OF JURISDICTION IN
DIRECTING FINMAN TO PAY JOINTLY AND SEVERALLY WITH
PAN PACIFIC THE CLAIMS OF PRIVATE RESPONDENTS ON
THE
BASIS
OF
THE
SURETYSHIP
AGREEMENT
BETWEEN FINMAN AND PAN PACIFIC AND THE PHILIPPINE
OVERSEAS EMPLOYMENT ADMINISTRATION (POEA FOR
SHORT); AND
III
THE FINDINGS OF FACT MADE BY THE POEA AND UPON
WHICH THE HONORABLE SECRETARY OF LABOR BASED

ITS QUESTIONED ORDERS ARE NOT SUPPORTED BY

SUBSTANTIAL EVIDENCE AND ARE CONTRARY TO LAW.
(Ibid., p. 101)
As required by this Court, herein public respondents filed their
memorandum on July 28, 1989 (Ibid., p. 84); while that of petitioner and private
respondents were filed on September 11, 1989 (Ibid., p. 89) and March 16, 1990
(Ibid., p. 120), respectively. cdrep
The petition is devoid of merit.
In its first and second assigned errors, petitioner maintains that POEA
has no jurisdiction to directly enforce the suretyship undertaking
of FINMAN (herein petitioner) under the surety bond (Ibid., p. 104).
In the case at bar, it remains uncontroverted that herein petitioner and
Pan Pacific entered into a suretyship agreement, with the former agreeing that
the bond is conditioned upon the true and faithful performance and observance of
the bonded principal (Pan Pacific) of its duties and obligations. It was also
understood that under the suretyship agreement, herein petitioner undertook
itself to be jointly and severally liable for all claims arising from recruitment
violation of Pan Pacific (Ibid., p. 23), in keeping with Section 4, Rule V, Book I of
the Implementing Rules of the Labor Code, which provides:
"Section 4. Upon approval of the application, the applicant shall
pay to the Ministry (now Department) a license fee of P6,000.00,
post a cash bond of P50,000.00 or negotiable bonds of
equivalent amount convertible to cash issued by banking or
financial institution duly endorsed to the Ministry (now
Department) as well as a surety bond of P150,000.00 from an
accredited bonding company to answer for valid and legal claims
arising from violations of the conditions of the license or the
contracts of employment and guarantee compliance with the
provisions of the Code, its implementing rules and regulations
and appropriate issuances of the Ministry (now Department)."
(Emphasis Supplied)
Accordingly, the nature of Finman's obligation under the suretyship agreement makes
it privy to the proceedings against its principal (Pan Pacific). As such Finman is
bound, in the absence of collusion, by a judgment against its principal even though it
was not a party to the proceedings (Leyson v. Rizal Surety and Insurance Co., 16
SCRA 551 (1966). Furthermore, in Government of the Philippines v. Tizon (20 SCRA
1182 [1967]), this Court ruled that where the surety bound itself solidarily with the
Page 248 of 505

principal obligor, the former is so dependent on the principal debtor "that the surety is
considered in law as being the same party as the debtor in relation to whatever is
adjudged touching the obligation of the latter." Applying the foregoing principles to the
case at bar, it can be very well said that even if herein Finman was not impleaded in
the instant case, still it (petitioner) can be held jointly and severally liable for all claims
arising from recruitment violation of Pan Pacific. Moreover, as correctly stated by the
Solicitor General, private respondents have a legal claim against Pan Pacific and its
insurer for the placement and processing fees they paid, so much so that in order to
provide a complete relief to private respondents, petitioner had to be impleaded in the
case (Rollo, p. 87).
Furthermore, Finman contends that herein respondent Secretary of Labor cannot
validly assume jurisdiction over the case at bar; otherwise, proceedings will be
railroaded resulting in the deprivation of the former of any remedial measures under
the law. prLL
The records of the case reveal that herein Finman filed a motion for reconsideration of
the adverse decision dated March 18, 1988 of respondent Secretary of Labor. In the
said motion for reconsideration, no jurisdictional challenge was made (Ibid., p. 22). It
was only when it filed this petition that it assailed the jurisdiction of the respondent
Secretary of Labor, and that of the POEA. But then, it was too late. Estoppel had
barred herein petitioner from raising the issue, regardless of its merits (Akay Printing
Press v. Minister of Labor and Employment, 140 SCRA 381 [1985]).
Hence, Finman's contention that POEA's and respondent Secretary's actions in
impleading and directing herein petitioner to pay jointly and severally with Pan Pacific
the claims of private respondents constitute a grave abuse of discretion amounting to
lack of jurisdiction has no basis. (Ibid., p. 101.)

In the case at bar, it is undisputed that when the case was first set for hearing, only
the private respondents appeared, despite summons having been served upon both
herein petitioner and Pan Pacific. This, notwithstanding, both herein petitioner and
Pan Pacific were again notified of the scheduled hearing, but, as aforestated they also
failed to appear (Rollo, p. 15). Accordingly, owing to the absence of any controverting
evidence, respondent Secretary of Labor admitted and considered private
respondents' testimonies and evidence as substantial. Under the circumstances, no
justifiable reason can be found to justify disturbance of the findings of facts of the
respondent Secretary of Labor, supported as they are by substantial evidence and in
the absence of grave abuse of discretion (Asia world Publishing House, Inc. v.
Ople,supra); and in line with the well established principle that the findings of
administrative agencies which have acquired expertise because their jurisdiction is
confined to specific matters are generally accorded not only respect but at times even
finality. (National Federation of Labor Union (NAFLU) v. Ople, 143 SCRA 124 [1986])
PREMISES CONSIDERED, the questioned Orders of respondent Secretary of Labor
are hereby AFFIRMED in toto.
SO ORDERED.
Melencio-Herrera, Padilla and Regalado, JJ., concur.
Sarmiento, J., is on leave.
||| (Finman General Assurance Corp. v. Salik, G.R. No. 84084, [August 20, 1990], 266
PHIL 803-811)

As regards the third assigned error, herein petitioner maintains that the findings of fact
made by the POEA upon which respondent Secretary of Labor based his questioned
Orders are not supported by substantial evidence and are contrary to law, is likewise
untenable.
Herein petitioner, in raising this third issue, is, in effect, asking this Court to review the
respondent Secretary's findings of facts.
Well-settled is the rule that findings of facts of the respondent Secretary are generally
accorded great weight unless there was grave abuse of discretion or lack of
jurisdiction in arriving at such findings (Asia world Publishing House, Inc. vs. Ople,
152 SCRA 219 (1987). cdphil
Page 249 of 505

Raymond P. Palad for JN Dev't. Corporation and Spouses Sta. Ana.

Benito F. Ambrosio for N.V. Cruz.
The Government Corporate Counsel and Ma. Rosario S. ManalangDemegillo & Isabelo G. Gumaru for respondent.
=

DECISION

TINGA, J p:
Before us are consolidated petitions questioning the Decision 1 of the Court of
Appeals (CA) in CA-G.R. CV No. 61318, entitled Philippine Export and Foreign Loan
Guarantee Corporation v. JN Development Corporation, et al., which reversed
the Decision of the Regional Trial Court (RTC) of Makati, Branch 60.

SECOND DIVISION
[G.R. No. 151060. August 31, 2005.]
JN DEVELOPMENT CORPORATION, and SPS. RODRIGO and
LEONOR STA. ANA, petitioners, vs. PHILIPPINE EXPORT AND
FOREIGN LOAN GUARANTEE CORPORATION, respondent.

[G.R. No. 151311. August 31, 2005.]

NARCISO V. CRUZ, petitioner, vs. PHILIPPINE EXPORT and
FOREIGN LOAN GUARANTEE CORPORATION, respondent.

On 13 December 1979, petitioner JN Development Corporation ("JN") and Traders

Royal Bank (TRB) entered into an agreement whereby TRB would extend to JN an
Export Packing Credit Line for Two Million Pesos (P2,000,000.00). The loan was
covered by several securities, including a real estate mortgage 2 and a letter of
guarantee from respondent Philippine Export and Foreign Loan Guarantee
Corporation ("PhilGuarantee"), now Trade and Investment Development Corporation
of the Philippines, covering seventy percent (70%) of the credit line. 3 With
PhilGuarantee issuing a guarantee in favor of TRB, 4 JN, petitioner spouses Rodrigo
and Leonor Sta. Ana 5 and petitioner Narciso Cruz 6 executed a Deed of
Undertaking 7 (Undertaking) to assure repayment to PhilGuarantee.
It appears that JN failed to pay the loan to TRB upon its maturity; thus, on 8 October
1980 TRB requested PhilGuarantee to make good its guarantee. 8 PhilGuarantee
informed JN about the call made by TRB, and inquired about the action of JN to settle
the loan. 9 Having received no response from JN, on 10 March 1981 PhilGuarantee
paid TRB Nine Hundred Thirty Four Thousand Eight Hundred Twenty Four Pesos and
Thirty Four Centavos (P934,824.34). 10 Subsequently, PhilGuarantee made several
demands on JN, but the latter failed to pay. On 30 May 1983, JN, through Rodrigo
Sta. Ana, proposed to settle the obligation "by way of development and sale" of the
mortgaged property. 11 PhilGuarantee, however, rejected the proposal.
Page 250 of 505

PhilGuarantee thus filed a Complaint 12 for collection of money and damages against
herein petitioners.
In
its Decision dated
20
August
1998,
the
RTC
dismissed
PhilGuarantee's Complaint as well as the counterclaim of petitioners. It ruled that
petitioners are not liable to reimburse PhilGuarantee what it had paid to TRB. Crucial
to this holding was the court's finding that TRB was able to foreclose the real estate
mortgage executed by JN, thus extinguishing petitioners' obligation. 13 Moreover,
there was no showing that after the said foreclosure, TRB had demanded from JN any
deficiency or the payment of the difference between the proceeds of the foreclosure
sale and the actual loan. 14 In addition, the RTC held that since PhilGuarantee's
guarantee was good for only one year from 17 December 1979, or until 17 December
1980, and since it was not renewed after the expiry of said period, PhilGuarantee had
no more legal duty to pay TRB on 10 March 1981. 15 The RTC likewise ruled that
Cruz cannot be held liable under the Undertaking since he was not the one who
signed the document, in line with its finding that his signature found in the records is
totally different from the signature on the Undertaking. 16
According to the RTC, the failure of TRB to sue JN for the recovery of the loan
precludes PhilGuarantee from seeking recoupment from the spouses Sta. Ana and
Cruz what it paid to TRB. Thus, PhilGuarantee's payment to TRB amounts to a waiver
of its right under Art. 2058 of the Civil Code. 17
Aggrieved by the RTC Decision, PhilGuarantee appealed to the CA. The appellate
court reversed the RTC and ordered petitioners to pay PhilGuarantee Nine Hundred
Thirty Four Thousand Six Hundred Twenty Four Pesos and Thirty Four Centavos
(P934,624.34), plus service charge and interest. 18
In reaching its denouement, the CA held that the RTC's finding that the loan was
extinguished by virtue of the foreclosure sale of the mortgaged property had no
factual support, 19 and that such finding is negated by Rodrigo Sta. Ana's testimony
that JN did not receive any notice of foreclosure from PhilGuarantee or from
TRB. 20Moreover, Sta. Ana even offered the same mortgaged property to
PhilGuarantee to settle its obligations with the latter. 21
The CA also ruled that JN's obligation had become due and demandable within the
one-year period of effectivity of the guarantee; thus, PhilGuarantee's payment to TRB
conformed with its guarantee, although the payment itself was effected one year after
the maturity date of the loan. 22 Contrary to the trial court's finding, the CA ruled that
the contract of guarantee was not extinguished by the alleged lack of evidence on
PhilGuarantee's consent to the extensions granted by TRB to JN. 23 Interpreting Art.

2058 of the Civil Code, 24 the appellate court explained that while the provision states
that the guarantor cannot be compelled to pay unless the properties of the debtor are
exhausted, the guarantor is not precluded from waiving the benefit of excussion and
paying the obligation altogether. 25
Finally, the CA found that Narciso Cruz was unable to prove the alleged forgery of his
signature in the Undertaking, the evidence presented not being sufficient to overcome
the presumption of regularity of the Undertaking which is a notarized document. 26
Petitioners sought reconsideration of the Decision and prayed for the admission of
documents evidencing the foreclosure of the real estate mortgage, but the motion for
reconsideration was denied by the CA for lack of merit. The CA ruled that the
documentary evidence presented by petitioners cannot be considered as newly
discovered evidence, it being already in existence while the case was pending before
the trial court, the very forum before which it should have been presented. Besides, a
foreclosure sale per se is not proof of petitioners' payment of the loan to
PhilGuarantee, the CA added. 27
So now before the Court are the separate petitions for review of the CA Decision. JN
and the spouses Sta. Ana, petitioners in G.R. No. 151060, posit that the CA erred in
interpreting Articles 2079, 2058, and 2059 of the Civil Code in
its Decision. 28 Meanwhile, petitioner Narciso Cruz in G.R. No. 151311 claims that
the CA erred when it held that petitioners are liable to PhilGuarantee despite its
payment after the expiration of its contract of guarantee and the lack of
PhilGuarantee's consent to the extensions granted by TRB to JN. Moreover, Cruz
questions the reversal of the ruling of the trial court anent his liability as a signatory to
the Undertaking. 29
On the other hand, PhilGuarantee maintains that the date of default, not the actual
date of payment, determines the liability of the guarantor and that having paid TRB
when the loan became due, it should be indemnified by petitioners. 30 It argues that,
contrary to petitioners' claim, there could be no waiver of its right to excussion more
explicit than its act of payment to TRB very directly. 31 Besides, the right to excussion
is for the benefit of the guarantor and is not a defense for the debtor to raise and use
to evade liability. 32 Finally, PhilGuarantee maintains that there is no sufficient
evidence proving the alleged forgery of Cruz's signature on the Undertaking, which is
a notarized document and as such must be accorded the presumption of regularity. 33
The Court finds for PhilGuarantee. SAHEIc
Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so. 34 The
Page 251 of 505

guarantor who pays for a debtor, in turn, must be indemnified by the

latter. 35 However, the guarantor cannot be compelled to pay the creditor unless the
latter has exhausted all the property of the debtor and resorted to all the legal
remedies against the debtor. 36 This is what is otherwise known as the benefit of
excussion.

1980. That payment was actually made only on 10 March 1981 does not take it out of
the terms of the guarantee. What is controlling is that default and demand on
PhilGuarantee had taken place while the guarantee was still in force.

It is clear that excussion may only be invoked after legal remedies against the
principal debtor have been expanded. Thus, it was held that the creditor must first
obtain a judgment against the principal debtor before assuming to run after the
alleged guarantor, "for obviously the 'exhaustion of the principal's property' cannot
even begin to take place before judgment has been obtained." 37 The law imposes
conditions precedent for the invocation of the defense. Thus, in order that the
guarantor may make use of the benefit of excussion, he must set it up against the
creditor upon the latter's demand for payment and point out to the creditor available
property of the debtor within the Philippines sufficient to cover the amount of the
debt. 38

There is likewise no merit in petitioners' claim that PhilGuarantee's failure to give its
express consent to the alleged extensions granted by TRB to JN had extinguished the
guarantee. The requirement that the guarantor should consent to any extension
granted by the creditor to the debtor under Art. 2079 is for the benefit of the guarantor.
As such, it is likewise waivable by the guarantor. Thus, even assuming that extensions
were indeed granted by TRB to JN, PhilGuarantee could have opted to waive the
need for consent to such extensions. Indeed, a guarantor is not precluded from
waiving his right to be notified of or to give his consent to extensions obtained by the
debtor. Such waiver is not contrary to public policy as it is purely personal and does
not affect public interest. 41 In the instant case, PhilGuarantee's waiver can be
inferred from its actual payment to TRB after the latter's demand, despite JN's failure
to pay the renewal/guarantee fee as indicated in the guarantee. 42

While a guarantor enjoys the benefit of excussion, nothing prevents him from paying
the obligation once demand is made on him. Excussion, after all, is a right granted to
him by law and as such he may opt to make use of it or waive it. PhilGuarantee's
waiver of the right of excussion cannot prevent it from demanding reimbursement from
petitioners. The law clearly requires the debtor to indemnify the guarantor what the
latter has paid. 39

For the above reasons, there is no basis for petitioner's claim that PhilGuarantee was
a mere volunteer payor and had no legal obligation to pay TRB. The law does not
prohibit the payment by a guarantor on his own volition, heedless of the benefit of
excussion. In fact, it recognizes the right of a guarantor to recover what it has paid,
even if payment was made before the debt becomes due, 43 or if made without notice
to the debtor, 44 subject of course to some conditions.

Petitioners' claim that PhilGuarantee had no more obligation to pay TRB because of
the alleged expiration of the contract of guarantee is untenable. The guarantee, dated
17 December 1979, states:

Petitioners' invocation of our ruling in Willex Plastic Industries, Corp. v. Court of

Appeals 45 is misplaced, if not irrelevant. In the said case, the guarantor claimed that
it could not be proceeded against without first exhausting all of the properties of the
debtor. The Court, finding that there was an express renunciation of the benefit of
excussion in the contract of guarantee, ruled against the guarantor.

In the event of default by JNDC and as a consequence thereof,

PHILGUARANTEE is made to pay its obligation arising under the
aforesaid guarantee PHILGUARANTEE shall pay the BANK the
amount of P1.4 million or 70% of the total obligation unpaid . . .

xxx xxx xxx

This guarantee shall be valid for a period of one (1) year from
date hereof but may be renewed upon payment by JNDC of the
guarantee fee at the same rate of 1.5%per annum. 40
The guarantee was only up to 17 December 1980. JN's obligation with TRB fell due
on 30 June 1980, and demand on PhilGuarantee was made by TRB on 08 October

The cited case finds no application in the case a quo. PhilGuarantee is not invoking
the benefit of excussion. It cannot be overemphasized that excussion is a right
granted to the guarantor and, therefore, only he may invoke it at his discretion.
The benefit of excussion, as well as the requirement of consent to extensions of
payment, is a protective device pertaining to and conferred on the guarantor. These
may be invoked by the guarantor against the creditor as defenses to bar the
unwarranted enforcement of the guarantee. However, PhilGuarantee did not avail of
these defenses when it paid its obligation according to the tenor of the guarantee
once demand was made on it. What is peculiar in the instant case is that petitioners,
the principal debtors themselves, are muddling the issues and raising the same
Page 252 of 505

defenses against the guarantor, which only the guarantor may invoke against the
creditor, to avoid payment of their own obligation to the guarantor. The Court cannot
countenance their self-seeking desire to be exonerated from the duty to reimburse
PhilGuarantee after it had paid TRB on their behalf and to unjustly enrich themselves
at the expense of PhilGuarantee.
Petitioners assert that TRB's alleged foreclosure of the real estate mortgage over the
land executed as security for the loan agreement had extinguished PhilGuarantee's
obligation; thus, PhilGuarantee's recourse should be directed against TRB, as per
the pari-passu provision 46 in the contract of guarantee. 47 We disagree.
The foreclosure was made on 27 August 1993, "after the case was submitted for
decision in 1992 and before the issuance of the decision of the court a quo in
1998". 48Thus, foreclosure was resorted to by TRB against JN when they both had
become aware that PhilGuarantee had already paid TRB and that there was a
pending case filed by PhilGuarantee against petitioners. This matter was not raised
and proved in the trial court, nor in the appeal before the CA, but raised for the first
time in petitioners' motion for reconsideration in the CA. In their
appellants' Brief, petitioners claimed that "there was no need for the defendantappellee JNDC to present any evidence before the lower court to show that indeed
foreclosure of the REM took place." 49 As properly held by the CA,
. . . Firstly, the documents evidencing foreclosure of mortgage
cannot be considered as newly discovered evidence. The said
documents were already subsisting and should have been
presented during the trial of the case. The alleged foreclosure
sale was made on August 23, 1993 . . . while the decision was
rendered by the trial court on August 20, 1998 about five (5)
years thereafter. These documents were likewise not submitted
by the defendants-appellees when they submitted their appellees'
Brief to this Court. Thus, these cannot be considered as newly
discovered evidence but are more correctly ascribed as
suppressed forgotten evidence . . . Secondly, the alleged
foreclosure sale is not proof of payment of the loan by defendantappellees to the plaintiffs-appellants. 50
Besides, the complaint a quo was filed by PhilGuarantee as guarantor for JN, and its
cause of action was premised on its payment of JN's obligation after the latter's
default. PhilGuarantee was well within its rights to demand reimbursement for such
payment made, regardless of whether the creditor, TRB, was subsequently able to
obtain payment from JN. If double payment was indeed made, then it is JN which

should go after TRB, and not PhilGuarantee. Petitioners have no one to blame but
themselves, having allowed the foreclosure of the property for the full value of the loan
despite knowledge of PhilGuarantee's payment to TRB. Having been aware of such
payment, they should have opposed the foreclosure, or at the very least, filed a
supplemental pleading with the trial court informing the same of the foreclosure
sale. SHaIDE
Likewise, petitioners cannot invoke the pari-passu clause in the guarantee, not being
parties to the said agreement. The clause is clearly for the benefit of the guarantor
and no other.
The Court notes the letter 51 of Rodrigo Sta. Ana offering, by way of settlement of
JN's obligations to PhilGuarantee, the very same parcel of land mortgaged as security
for the loan agreement. This further weakens the position of petitioners, since it
becomes obvious that they acknowledged the payment made by PhilGuarantee on
their behalf and that they were in fact willing to negotiate with PhilGuarantee for the
settlement of the said obligation before the filing of the complaint a quo.
Anent the issue of forgery, the CA is correct in reversing the decision of the trial court.
Save for the denial of Narciso Cruz that it was not his signature in the Undertaking
and the perfunctory comparison of the signatures, nothing in the records would
support the claim of forgery. Forgery cannot be presumed and must be proved by
clear, positive and convincing evidence and the burden of proof lies on the party
alleging forgery. 52 Mere denial will not suffice to overcome the positive value of the
Undertaking, which is a notarized document, has in its favor the presumption of
regularity, and carries the evidentiary weight conferred upon it with respect to its due
execution. 53 Even in cases where the alleged forged signature was compared to
samples of genuine signatures to show its variance therefrom, this Court still found
such evidence insufficient. 54 Mere variance of the signatures cannot be considered
as conclusive proof that the same were forged. 55
WHEREFORE, the consolidated petitions are DENIED. The Decision of the Court of
Appeals in CA-G.R. CV No. 61318 is AFFIRMED.
No pronouncement as to costs.
SO ORDERED.
Puno, Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ., concur.
||| (JN Development Corp. v. Philippine Export and Foreign Loan Guarantee Corp.,
G.R. No. 151060, 151311, [August 31, 2005])
Page 253 of 505

FIRST DIVISION
MACHETTI SUPRA
[G.R. No. 145578. November 18, 2005.]
JOSE C. TUPAZ IV and PETRONILA C. TUPAZ, petitioners, vs.
THE COURT OF APPEALS and BANK OF THE PHILIPPINE
ISLANDS, respondents.

George L. Howard for petitioners.

Benedicto Versoza Gealogo & Burkley for private respondent.

DECISION

CARPIO, J p:
The Case
This is a petition for review 1 of the Decision 2 of the Court of Appeals dated 7
September 2000 and its Resolution dated 18 October 2000. The 7 September 2000
Decision affirmed the ruling of the Regional Trial Court, Makati, Branch 144 in a case
for estafa under Section 13, Presidential Decree No. 115. The Court of Appeals'
Resolution of 18 October 2000 denied petitioners' motion for reconsideration.
The Facts
Petitioners Jose C. Tupaz IV and Petronila C. Tupaz ("petitioners") were VicePresident for Operations and Vice-President/Treasurer, respectively, of El Oro
Engraver Corporation ("El Oro Corporation"). El Oro Corporation had a contract with
the Philippine Army to supply the latter with "survival bolos."
To finance the purchase of the raw materials for the survival bolos, petitioners, on
behalf of El Oro Corporation, applied with respondent Bank of the Philippine Islands
("respondent bank") for two commercial letters of credit. The letters of credit were in
favor
of
El
Oro
Corporation's
suppliers,
Tanchaoco
Manufacturing
Incorporated 3("Tanchaoco Incorporated") and Maresco Rubber and Retreading
Corporation 4 ("Maresco Corporation"). Respondent bank granted petitioners'
Page 254 of 505

application and issued Letter of Credit No. 2-00896-3 for P564,871.05 to Tanchaoco
Incorporated and Letter of Credit No. 2-00914-5 for P294,000 to Maresco
Corporation.
Simultaneous with the issuance of the letters of credit, petitioners signed trust receipts
in favor of respondent bank. On 30 September 1981, petitioner Jose C. Tupaz IV
("petitioner Jose Tupaz") signed, in his personal capacity, a trust receipt
corresponding to Letter of Credit No. 2-00896-3 (for P564,871.05). Petitioner Jose
Tupaz bound himself to sell the goods covered by the letter of credit and to remit the
proceeds to respondent bank, if sold, or to return the goods, if not sold, on or before
29 December 1981.
On 9 October 1981, petitioners signed, in their capacities as officers of El Oro
Corporation, a trust receipt corresponding to Letter of Credit No. 2-00914-5 (for
P294,000). Petitioners bound themselves to sell the goods covered by that letter of
credit and to remit the proceeds to respondent bank, if sold, or to return the goods, if
not sold, on or before 8 December 1981.
After Tanchaoco Incorporated and Maresco Corporation delivered the raw materials to
El Oro Corporation, respondent bank paid the former P564,871.05 and P294,000,
respectively. DIAcTE
Petitioners did not comply with their undertaking under the trust receipts. Respondent
bank made several demands for payments but El Oro Corporation made partial
payments only. On 27 June 1983 and 28 June 1983, respondent bank's
counsel 5 and its representative 6 respectively sent final demand letters to El Oro
Corporation. El Oro Corporation replied that it could not fully pay its debt because the
Armed Forces of the Philippines had delayed paying for the survival bolos.
Respondent bank charged petitioners with estafa under Section 13, Presidential
Decree No. 115 ("Section 13") 7 or Trust Receipts Law ("PD 115"). After preliminary
investigation, the then Makati Fiscal's Office found probable cause to indict
petitioners. The Makati Fiscal's Office filed the corresponding Informations (docketed
as Criminal Case Nos. 8848 and 8849) with the Regional Trial Court, Makati, on 17
January 1984 and the cases were raffled to Branch 144 ("trial court") on 20 January
1984. Petitioners pleaded not guilty to the charges and trial ensued. During the trial,
respondent bank presented evidence on the civil aspect of the cases.
The Ruling of the Trial Court
On 16 July 1992, the trial court rendered judgment acquitting petitioners of estafa on
reasonable doubt. However, the trial court found petitioners solidarily liable with El

Oro Corporation for the balance of El Oro Corporation's principal debt under the trust
receipts. The dispositive portion of the trial court's Decision provides:
WHEREFORE, judgment is hereby rendered ACQUITTING both
accused Jose C. Tupaz, IV and Petronila Tupaz based upon
reasonable doubt.
However, El Oro Engraver Corporation, Jose C. Tupaz, IV and
Petronila Tupaz, are hereby ordered, jointly and solidarily, to pay
the Bank of the Philippine Islands the outstanding principal
obligation of P624,129.19 (as of January 23, 1992) with the
stipulated interest at the rate of 18% per annum; plus 10% of the
total amount due as attorney's fees; P5,000.00 as expenses of
litigation; and costs of the suit. 8
In holding petitioners civilly liable with El Oro Corporation, the trial court held:
[S]ince the civil action for the recovery of the civil liability is
deemed impliedly instituted with the criminal action, as in fact the
prosecution thereof was actively handled by the private
prosecutor, the Court believes that the El Oro Engraver
Corporation and both accused Jose C. Tupaz and Petronila
Tupaz, jointly and solidarily should be held civilly liable to the
Bank of the Philippine Islands. The mere fact that they were
unable to collect in full from the AFP and/or the Department of
National Defense the proceeds of the sale of the delivered
survival bolos manufactured from the raw materials covered by
the trust receipt agreements is no valid defense to the civil claim
of the said complainant and surely could not wipe out their civil
obligation. After all, they are free to institute an action to collect
the same. 9
Petitioners appealed to the Court of Appeals. Petitioners contended that: (1) their
acquittal "operates to extinguish [their] civil liability" and (2) at any rate, they are not
personally liable for El Oro Corporation's debts.
The Ruling of the Court of Appeals
In its Decision of 7 September 2000, the Court of Appeals affirmed the trial court's
ruling. The appellate court held:
It is clear from [Section 13, PD 115] that civil liability arising from
the violation of the trust receipt agreement is distinct from the
Page 255 of 505

criminal liability imposed therein. In the case of Vintola vs. Insular

Bank of Asia and America, our Supreme Court held that acquittal
in the estafa case (P.D. 115) is no bar to the institution of a civil
action for collection. This is because in such cases, the civil
liability of the accused does not arise ex delicto but rather
based ex contractu and as such is distinct and independent from
any criminal proceedings and may proceed regardless of the
result of the latter. Thus, an independent civil action to enforce
the civil liability may be filed against the corporation aside from
the criminal action against the responsible officers or employees.
xxx xxx xxx
[W]e hereby hold that the acquittal of the accused-appellants
from the criminal charge of estafa did not operate to extinguish
their civil liability under the letter of credit-trust receipt
arrangement with plaintiff-appellee, with which they dealt both in
their personal capacity and as officers of El Oro Engraver
Corporation, the letter of credit applicant and principal debtor.
Appellants argued that they cannot be held solidarily liable with
their corporation, El Oro Engraver Corporation, alleging that they
executed the subject documents including the trust receipt
agreements only in their capacity as such corporate officers.
They said that these instruments are mere pro-forma and that
they executed these instruments on the strength of a board
resolution of said corporation authorizing them to apply for the
opening of a letter of credit in favor of their suppliers as well as to
execute the other documents necessary to accomplish the same.
Such contention, however, is contradicted by the evidence on
record. The trust receipt agreement indicated in clear and
unmistakable terms that the accused signed the same
as surety for the corporation and that they bound themselves
directly and immediately liable in the event of default with respect
to the obligation under the letters of credit which were made part
of the said agreement, without need of demand. Even in the
application for the letter of credit, it is likewise clear that the
undertaking of the accused is that of a surety as indicated [in] the
following words: "In consideration of your establishing the
commercial letter of credit herein applied for substantially in

accordance with the foregoing, the undersigned Applicant and

Surety hereby agree, jointly and severally, to each and all
stipulations, provisions and conditions on the reverse side
hereof." caAICE
xxx xxx xxx
Having contractually agreed to hold themselves solidarily liable
with El Oro Engraver Corporation under the subject trust receipt
agreements with appellee Bank of the Philippine Islands, herein
accused-appellants may not, therefore, invoke the separate legal
personality of the said corporation to evade their civil liability
under the letter of credit-trust receipt arrangement with said
appellee, notwithstanding their acquittal in the criminal cases filed
against them. The trial court thus did not err in holding the
appellants solidarily liable with El Oro Engraver Corporation for
the outstanding principal obligation of P624,129.19 (as of
January 23, 1992) with the stipulated interest at the rate of 18%
per annum, plus 10% of the total amount due as attorney's fees,
P5,000.00 as expenses of litigation and costs of suit. 10
Hence, this petition. Petitioners contend that:
1.A JUDGMENT OF ACQUITTAL OPERATE[S] TO EXTINGUISH
THE CIVIL LIABILITY OF PETITIONERS[;]
2.GRANTING WITHOUT ADMITTING THAT THE QUESTIONED
OBLIGATION
WAS
INCURRED
BY
THE
CORPORATION, THE SAME IS NOT YET DUE AND
PAYABLE;
3.GRANTING THAT THE QUESTIONED OBLIGATION WAS
ALREADY DUE AND PAYABLE, . . . PETITIONERS
ARE NOT PERSONALLY LIABLE TO . . .
RESPONDENT BANK, SINCE THEY SIGNED THE
LETTER[S] OF CREDIT AS 'SURETY' AS OFFICERS
OF EL ORO, AND THEREFORE, AN EXCLUSIVE
LIABILITY OF EL ORO; [AND]

4.IN THE ALTERNATIVE, THE QUESTIONED TRANSACTIONS

ARE SIMULATED AND VOID. 11
Page 256 of 505

The Issues
The petition raises these issues:
(1)Whether petitioners bound themselves personally liable for El
Oro Corporation's debts under the trust receipts;
(2)If so
(a)whether petitioners' liability is solidary with El Oro
Corporation; and
(b)whether petitioners' acquittal of estafa under Section
13, PD 115 extinguished their civil liability.
The Ruling of the Court
The petition is partly meritorious. We affirm the Court of Appeals' ruling with the
modification that petitioner Jose Tupaz is liable as guarantor of El Oro Corporation's
debt under the trust receipt dated 30 September 1981.
On Petitioners' Undertaking Under
the Trust Receipts
A corporation, being a juridical entity, may act only through its directors, officers, and
employees. Debts incurred by these individuals, acting as such corporate agents, are
not theirs but the direct liability of the corporation they represent. 12 As an exception,
directors or officers are personally liable for the corporation's debts only if they so
contractually agree or stipulate. 13
Here, the dorsal side of the trust receipts contains the following stipulation:
To the Bank of the Philippine Islands
In consideration of your releasing to _____________ under the
terms of this Trust Receipt the goods described herein, I/We,
jointly and severally, agree and promise to pay to you, on
demand, whatever sum or sums of money which you may call
upon me/us to pay to you, arising out of, pertaining to, and/or in
any way connected with, this Trust Receipt, in the event of default
and/or non-fulfillment in any respect of this undertaking on the
part of the said __________________ I/we further agree that
my/our liability in this guarantee shall be DIRECT AND
IMMEDIATE, without any need whatsoever on your part to take
any steps or exhaust any legal remedies that you may have

against the said __________________ before making demand

upon me/us. 14 (Capitalization in the original) SAHITC
In the trust receipt dated 9 October 1981, petitioners signed below this clause as
officers of El Oro Corporation. Thus, under petitioner Petronila Tupaz's signature are
the words "Vice-PresTreasurer" and under petitioner Jose Tupaz's signature are the
words "Vice-PresOperations." By so signing that trust receipt, petitioners did not bind
themselves personally liable for El Oro Corporation's obligation. In Ong v. Court of
Appeals, 15 a corporate representative signed a solidary guarantee clause in two
trust receipts in his capacity as corporate representative. There, the Court held that
the corporate representative did not undertake to guarantee personally the payment of
the corporation's debts, thus:
[P]etitioner did not sign in his personal capacity the solidary
guarantee clause found on the dorsal portion of the trust receipts.
Petitioner placed his signature after the typewritten words
"ARMCO INDUSTRIAL CORPORATION" found at the end of the
solidary guarantee clause. Evidently, petitioner did not undertake
to guaranty personally the payment of the principal and interest of
ARMAGRI's debt under the two trust receipts.
Hence, for the trust receipt dated 9 October 1981, we sustain petitioners' claim
that they are not personally liable for El Oro Corporation's obligation.
For the trust receipt dated 30 September 1981, the dorsal portion of which petitioner
Jose Tupaz signed alone, we find that he did so in his personal capacity. Petitioner
Jose Tupaz did not indicate that he was signing as El Oro Corporation's VicePresident for Operations. Hence, petitioner Jose Tupaz bound himself personally
liable for El Oro Corporation's debts. Not being a party to the trust receipt dated 30
September 1981, petitioner Petronila Tupaz is not liable under such trust receipt.
The Nature of Petitioner Jose Tupaz's Liability
Under the Trust Receipt Dated 30 September 1981
As stated, the dorsal side of the trust receipt dated 30 September 1981 provides:
To the Bank of the Philippine Islands
In consideration of your releasing to ____________________
under the terms of this Trust Receipt the goods described herein,
I/We, jointly and severally, agree and promise to pay to you, on
demand, whatever sum or sums of money which you may call
upon me/us to pay to you, arising out of, pertaining to, and/or in
Page 257 of 505

any way connected with, this Trust Receipt, in the event of default
and/or non-fulfillment in any respect of this undertaking on the
part of the said ____________________ I/we further agree that
my/our liability in this guarantee shall be DIRECT AND
IMMEDIATE, without any need whatsoever on your part to take
any steps or exhaust any legal remedies that you may have
against the said ___________________ Before making demand
upon me/us. (Underlining supplied; capitalization in the original)
The lower courts interpreted this to mean that petitioner Jose Tupaz bound
himself solidarily liable with El Oro Corporation for the latter's debt under that
trust receipt.
This is error.
In Prudential Bank v. Intermediate Appellate Court, 16 the Court interpreted a
substantially identical clause 17 in a trust receipt signed by a corporate officer who
bound himself personally liable for the corporation's obligation. The petitioner in that
case contended that the stipulation "we jointly and severally agree and undertake"
rendered the corporate officer solidarily liable with the corporation. We dismissed this
claim and held the corporate officer liable as guarantor only. The Court further ruled
that had there been more than one signatories to the trust receipt, the solidary liability
would exist between the guarantors. We held:
Petitioner [Prudential Bank] insists that by virtue of the clear
wording of the . . . clause ". . . we jointly and severally agree and
undertake . . . ," and the concluding sentence on exhaustion,
[respondent] Chi's liability therein is solidary.
xxx xxx xxx
Our . . . reading of the questioned solidary guaranty clause yields
no other conclusion than that the obligation of Chi is only that of
a guarantor. This is further bolstered by the last sentence which
speaks of waiver of exhaustion, which, nevertheless, is ineffective
in this case because the space therein for the party whose
property may not be exhausted was not filled up. Under Article
2058 of the Civil Code, the defense of exhaustion (excussion)
may be raised by a guarantor before he may be held liable for the
obligation. Petitioner likewise admits that the questioned provision
is a solidary guaranty clause, thereby clearly distinguishing it
from a contract of surety. It, however, described the guaranty as

solidary between the guarantors; this would have been correct if

two (2) guarantors had signed it. The clause "we jointly and
severally agree and undertake" refers to the undertaking of the
two (2) parties who are to sign it or to the liability existing
between themselves. It does not refer to the undertaking between
either one or both of them on the one hand and the petitioner on
the other with respect to the liability described under the trust
receipt. . . .
Furthermore, any doubt as to the import or true intent of the
solidary guaranty clause should be resolved against the
petitioner. The trust receipt, together with the questioned solidary
guaranty clause, is on a form drafted and prepared solely by the
petitioner; Chi's participation therein is limited to the affixing of his
signature thereon. It is, therefore, a contract of adhesion; as
such, it must be strictly construed against the party responsible
for its preparation. 18 (Underlining supplied; italicization in the
original) cTADCH
However, respondent bank's suit against petitioner Jose Tupaz stands despite the
Court's finding that he is liable as guarantor only. First, excussion is not a pre-requisite
to secure judgment against a guarantor. The guarantor can still demand deferment of
the execution of the judgment against him until after the assets of the principal debtor
shall have been exhausted. 19 Second, the benefit of excussion may be
waived. 20 Under the trust receipt dated 30 September 1981, petitioner Jose Tupaz
waived excussion when he agreed that his "liability in [the] guaranty shall be DIRECT
AND IMMEDIATE, without any need whatsoever on . . . [the] part [of respondent bank]
to take any steps or exhaust any legal remedies . . . ." The clear import of this
stipulation is that petitioner Jose Tupaz waived the benefit of excussion under his
guarantee.
As guarantor, petitioner Jose Tupaz is liable for El Oro Corporation's principal debt
and other accessory liabilities (as stipulated in the trust receipt and as provided by
law) under the trust receipt dated 30 September 1981. That trust receipt (and the trust
receipt dated 9 October 1981) provided for payment of attorney's fees equivalent to
10% of the total amount due and an "interest at the rate of 7% per annum, or at such
other rate as the bank may fix, from the date due until paid . . . ." 21 In the
applications for the letters of credit, the parties stipulated that drafts drawn under the
letters of credit are subject to interest at the rate of 18% per annum. 22

Page 258 of 505

The lower courts correctly applied the 18% interest rate per annum considering that
the face value of each of the trust receipts is based on the drafts drawn under the
letters of credit. Based on the guidelines laid down in Eastern Shipping Lines, Inc.
v. Court of Appeals, 23 the accrued stipulated interest earns 12% interest per
annum from the time of the filing of the Informations in the Makati Regional Trial Court
on 17 January 1984. Further, the total amount due as of the date of the finality of this
Decision will earn interest at 18% per annum until fully paid since this was the
stipulated rate in the applications for the letters of credit. 24

The accounting of El Oro Corporation's debts as of 23 January 1992, which the trial
court used, is no longer useful as it does not specify the amounts owing under each
of the trust receipts. Hence, in the execution of this Decision, the trial court shall
compute El Oro Corporation's total liability under each of the trust receipts dated 30
September 1981 and 9 October 1981 based on the following formula: 25
TOTAL AMOUNT DUE = [principal + interest + interest on
interest] partial payments made 26
Interest = principal x 18 % per annum x no. of years from due
date 27 until finality of judgment
Interest on interest = interest computed as of the filing of the
complaint (17 January 1984) x 12% x no. of years until finality of
judgment
Attorney's fees is 10% of the total amount computed as of finality
of judgment
Total amount due as of the date of finality of judgment will earn
an interest of 18% per annum until fully paid.
In so delegating this task, we reiterate what we said in Rizal Commercial
Banking Corporation v. Alfa RTW Manufacturing Corporation 28 where we
also ordered the trial court to compute the amount of obligation due based on a
formula substantially similar to that indicated above:
The total amount due . . . [under] the . . . contract[] . . . may be
easily determined by the trial court through a simple
mathematical computation based on the formula specified above.
Mathematics is an exact science, the application of which needs
no further proof from the parties.

Petitioner Jose Tupaz's Acquittal did not

Extinguish his Civil Liability
The rule is that where the civil action is impliedly instituted with the criminal action, the
civil liability is not extinguished by acquittal
[w]here the acquittal is based on reasonable doubt . . . as only
preponderance of evidence is required in civil cases; where the
court expressly declares that the liability of the accused is not
criminal but only civil in nature . . . as, for instance, in the felonies
of estafa, theft, and malicious mischief committed by certain
relatives who thereby incur only civil liability (See Art. 332,
Revised Penal Code); and, where the civil liability does not arise
from or is not based upon the criminal act of which the accused
was acquitted . . . . 29 (Emphasis supplied) cCSDTI
Here, respondent bank chose not to file a separate civil action 30 to recover payment
under the trust receipts. Instead, respondent bank sought to recover payment in
Criminal Case Nos. 8848 and 8849. Although the trial court acquitted petitioner Jose
Tupaz, his acquittal did not extinguish his civil liability. As the Court of Appeals
correctly held, his liability arose not from the criminal act of which he was acquitted
(ex delito) but from the trust receipt contract (ex contractu) of 30 September 1981.
Petitioner Jose Tupaz signed the trust receipt of 30 September 1981 in his personal
capacity.
On the other Matters Petitioners Raise
Petitioners raise for the first time in this appeal the contention that El Oro
Corporation's debts under the trust receipts are not yet due and demandable.
Alternatively, petitioners assail the trust receipts as simulated. These assertions have
no merit. Under the terms of the trust receipts dated 30 September 1981 and 9
October 1981, El Oro Corporation's debts fell due on 29 December 1981 and 8
December 1981, respectively.
Neither is there merit to petitioners' claim that the trust receipts were simulated.
During the trial, petitioners did not deny applying for the letters of credit and
subsequently executing the trust receipts to secure payment of the drafts drawn under
the letters of credit.
WHEREFORE, we GRANT the petition in part. We AFFIRM the Decision of the Court
of Appeals dated 7 September 2000 and its Resolution dated 18 October 2000 with
the following MODIFICATIONS:
Page 259 of 505

1)El Oro Engraver Corporation is principally liable for the total

amount due under the trust receipts dated 30
September 1981 and 9 October 1981, as computed by
the Regional Trial Court, Makati, Branch 144, upon
finality of this Decision, based on the formula provided
above;

THIRD DIVISION

2)Petitioner Jose C. Tupaz IV is liable for El Oro Engraver

Corporation's total debt under the trust receipt dated 30
September 1981 as thus computed by the Regional Trial
Court, Makati, Branch 144; and
3)Petitioners Jose C. Tupaz IV and Petronila C. Tupaz are not
liable under the trust receipt dated 9 October 1981.

[G.R. No. 173526. August 28, 2008.]

BENJAMIN
BITANGA, petitioner, vs.
PYRAMID
CONSTRUCTION ENGINEERING CORPORATION, respondent.

SO ORDERED.
DECISION

Davide, Jr., C.J., Quisumbing, Ynares-Santiago and Azcuna, JJ., concur.

||| (Tupaz IV v. Court of Appeals, G.R. No. 145578, [November 18, 2005], 512 PHIL
47-65)

CHICO-NAZARIO, J p:
Assailed in this Petition for Review under Rule 45 1 of the Revised Rules of Court are:
(1) the Decision 2 dated 11 April 2006 of the Court of Appeals in CA-G.R. CV No.
78007 which affirmed with modification the partial Decision 3 dated 29 November
2002 of the Regional Trial Court (RTC), Branch 96, of Quezon City, in Civil Case No.
Q-01-45041, granting the motion for summary judgment filed by respondent Pyramid
Construction and Engineering Corporation and declaring petitioner Benjamin Bitanga
and his wife, Marilyn Bitanga (Marilyn), solidarily liable to pay P6,000,000.00 to
respondent; and (2) the Resolution 4 dated 5 July 2006 of the appellate court in the
same case denying petitioner's Motion for Reconsideration. 2005jur
The generative facts are:
On 6 September 2001, respondent filed with the RTC a Complaint for specific
performance and damages with application for the issuance of a writ of preliminary
attachment against the petitioner and Marilyn. The Complaint was docketed as Civil
Case No. Q-01-45041.
Respondent alleged in its Complaint that on 26 March 1997, it entered into an
agreement with Macrogen Realty, of which petitioner is the President, to construct for
the latter the Shoppers Gold Building, located at Dr. A. Santos Avenue corner Palayag
Page 260 of 505

Road, Sucat, Paraaque City. Respondent commenced civil, structural, and

architectural works on the construction project by May 1997. However, Macrogen
Realty failed to settle respondent's progress billings. Petitioner, through his
representatives and agents, assured respondent that the outstanding account of
Macrogen Realty would be paid, and requested respondent to continue working on
the construction project. Relying on the assurances made by petitioner, who was no
less than the President of Macrogen Realty, respondent continued the construction
project.
In August 1998, respondent suspended work on the construction project since the
conditions that it imposed for the continuation thereof, including payment of unsettled
accounts, had not been complied with by Macrogen Realty. On 1 September 1999,
respondent instituted with the Construction Industry Arbitration Commission (CIAC) a
case for arbitration against Macrogen Realty seeking payment by the latter of its
unpaid billings and project costs. Petitioner, through counsel, then conveyed to
respondent his purported willingness to amicably settle the arbitration case. On 17
April 2000, before the arbitration case could be set for trial, respondent and Macrogen
Realty entered into a Compromise Agreement, 5 with petitioner acting as signatory for
and in behalf of Macrogen Realty. Under the Compromise Agreement, Macrogen
Realty agreed to pay respondent the total amount of P6,000,000.00 in six equal
monthly installments, with each installment to be delivered on the 15th day of the
month, beginning 15 June 2000. Macrogen Realty also agreed that if it would default
in the payment of two successive monthly installments, immediate execution could
issue against it for the unpaid balance, without need of judgment or decree from any
court or tribunal. Petitioner guaranteed the obligations of Macrogen Realty under the
Compromise Agreement by executing a Contract of Guaranty 6 in favor of
respondent, by virtue of which he irrevocably and unconditionally guaranteed the full
and complete payment of the principal amount of liability of Macrogen Realty in the
sum of P6,000,000.00. Upon joint motion of respondent and Macrogen Realty, the
CIAC approved the Compromise Agreement on 25 April 2000. 7 aAcDSC
However, contrary to petitioner's assurances, Macrogen Realty failed and refused to
pay all the monthly installments agreed upon in the Compromise Agreement. Hence,
on 7 September 2000, respondent moved for the issuance of a writ of
execution 8 against Macrogen Realty, which CIAC granted.
On 29 November 2000, the sheriff 9 filed a return stating that he was unable to locate
any property of Macrogen Realty, except its bank deposit of P20,242.33, with the
Planters Bank, Buendia Branch.

Respondent then made, on 3 January 2001, a written demand 10 on petitioner, as

guarantor of Macrogen Realty, to pay the P6,000,000.00, or to point out available
properties of the Macrogen Realty within the Philippines sufficient to cover the
obligation guaranteed. It also made verbal demands on petitioner. Yet, respondent's
demands were left unheeded.
Thus, according to respondent, petitioner's obligation as guarantor was already due
and demandable. As to Marilyn's liability, respondent contended that Macrogen Realty
was owned and controlled by petitioner and Marilyn and/or by corporations owned
and controlled by them. Macrogen Realty is 99% owned by the Asian Appraisal
Holdings, Inc. (AAHI), which in turn is 99% owned by Marilyn. Since the completion of
the construction project would have redounded to the benefit of both petitioner and
Marilyn and/or their corporations; and considering, moreover, Marilyn's enormous
interest in AAHI, the corporation which controls Macrogen Realty, Marilyn cannot be
unaware of the obligations incurred by Macrogen Realty and/or petitioner in the
course of the business operations of the said corporation.
Respondent prayed in its Complaint that the RTC, after hearing, render a judgment
ordering petitioner and Marilyn to comply with their obligation under the Contract of
Guaranty by paying respondent the amount of P6,000,000.00 (less the bank deposit
of Macrogen Realty with Planter's Bank in the amount of P20,242.23) and
P400,000.00 for attorneys fees and expenses of litigation. Respondent also sought
the issuance of a writ of preliminary attachment as security for the satisfaction of any
judgment that may be recovered in the case in its favor. CIDTcH
Marilyn filed a Motion to Dismiss, 11 asserting that respondent had no cause of action
against her, since she did not co-sign the Contract of Guaranty with her husband; nor
was she a party to the Compromise Agreement between respondent and Macrogen
Realty. She had no part at all in the execution of the said contracts. Mere ownership
by a single stockholder or by another corporation of all or nearly all of the capital stock
of another corporation is not by itself a sufficient ground for disregarding the separate
personality of the latter corporation. Respondent misread Section 4, Rule 3 of the
Revised Rules of Court.
The RTC denied Marilyn's Motion to Dismiss for lack of merit, and in its Order dated
24 January 2002 decreed that:
The Motion To Dismiss Complaint Against Defendant Marilyn
Andal Bitanga filed on November 12, 2001 is denied for lack of
merit considering that Sec. 4, Rule 3, of the Rules of Court (1997)
specifically provides, as follows:
Page 261 of 505

"SEC. 4. Spouses as parties. Husband and wife shall

sue or be sued jointly, except as provided by law."
and that this case does not come within the exception. 12
Petitioner filed with the RTC on 12 November 2001, his Answer 13 to respondent's
Complaint averring therein that he never made representations to respondent that
Macrogen Realty would faithfully comply with its obligations under the Compromise
Agreement. He did not offer to guarantee the obligations of Macrogen Realty to entice
respondent to enter into the Compromise Agreement but that, on the contrary, it was
respondent that required Macrogen Realty to offer some form of security for its
obligations before agreeing to the compromise. Petitioner further alleged that his wife
Marilyn was not aware of the obligations that he assumed under both the Compromise
Agreement and the Contract of Guaranty as he did not inform her about said
contracts, nor did he secure her consent thereto at the time of their
execution. AHDcCT
As a special and affirmative defense, petitioner argued that the benefit of excussion
was still available to him as a guarantor since he had set it up prior to any judgment
against him. According to petitioner, respondent failed to exhaust all legal remedies to
collect from Macrogen Realty the amount due under the Compromise Agreement,
considering that Macrogen Realty still had uncollected credits which were more than
enough to pay for the same. Given these premise, petitioner could not be held liable
as guarantor. Consequently, petitioner presented his counterclaim for damages.
At the pre-trial held on 5 September 2002, the parties submitted the following issues
for the resolution of the RTC:
(1) whether the defendants were liable under the contract of
guarantee dated April 17, 2000 entered into between
Benjamin Bitanga and the plaintiff;
(2) whether defendant wife Marilyn Bitanga is liable in this action;
(3) whether the defendants are entitled to the benefit of
excussion, the plaintiff on the one hand claiming that it
gave due notice to the guarantor, Benjamin Bitanga, and
the defendants contending that no proper notice was
received by Benjamin Bitanga;
(4) if damages are due, which party is liable; and

(5) whether the benefit of excussion can still be invoked by the

defendant guarantor even after the notice has been
allegedly sent by the plaintiff although proper receipt is
denied. 14
On 20 September 2002, prior to the trial proper, respondent filed a Motion for
Summary Judgment. 15 Respondent alleged therein that it was entitled to a summary
judgment on account of petitioner's admission during the pre-trial of the genuineness
and due execution of the Contract of Guaranty. The contention of petitioner and
Marilyn that they were entitled to the benefit of excussion was not a genuine issue.
Respondent had already exhausted all legal remedies to collect from Macrogen
Realty, but its efforts proved unsuccessful. Given that the inability of Macrogen Realty
as debtor to pay the amount of its debt was already proven by the return of the writ of
execution to CIAC unsatisfied, the liability of petitioner as guarantor already
arose. 16 In any event, petitioner and Marilyn were deemed to have forfeited their
right to avail themselves of the benefit of excussion because they failed to comply with
Article 2060 17 of the Civil Code when petitioner ignored respondent's demand letter
dated 3 January 2001 for payment of the amount he guaranteed. 18 The duty to
collect the supposed receivables of Macrogen Realty from its creditors could not be
imposed on respondent, since petitioner and Marilyn never informed respondent
about such uncollected credits even after receipt of the demand letter for payment.
The allegation of petitioner and Marilyn that they could not respond to respondent's
demand letter since they did not receive the same was unsubstantiated and
insufficient to raise a genuine issue of fact which could defeat respondent's Motion for
Summary Judgment. The claim that Marilyn never participated in the transactions that
culminated in petitioner's execution of the Contract of Guaranty was nothing more
than a sham. AaCEDS

In opposing respondent's foregoing Motion for Summary Judgment, petitioner and

Marilyn countered that there were genuinely disputed facts that would require trial on
the merits. They appended thereto an affidavit executed by petitioner, in which he
declared that his spouse Marilyn could not be held personally liable under the
Contract of Guaranty or the Compromise Agreement, nor should her share in the
conjugal partnership be made answerable for the guaranty petitioner assumed,
because his undertaking of the guaranty did not in any way redound to the benefit of
their family. As guarantor, petitioner was entitled to the benefit of excussion, and he
did not waive his right thereto. He never received the respondent's demand letter
dated 3 January 2001, as Ms. Dette Ramos, the person who received it, was not an
employee of Macrogen Realty nor was she authorized to receive the letter on his
Page 262 of 505

behalf. As a guarantor, petitioner could resort to the benefit of excussion at any time
before judgment was rendered against him. 19 Petitioner reiterated that Macrogen
Realty had uncollected credits which were more than sufficient to satisfy the claim of
respondent.
On 29 November 2002, the RTC rendered a partial Decision, the dispositive portion of
which provides:
WHEREFORE, summary judgment is rendered ordering
defendants SPOUSES BENJAMIN BITANGA and MARILYN
ANDAL BITANGA to pay the [herein respondent], jointly and
severally, the amount of P6,000,000.00, less P20,242.23
(representing the amount garnished bank deposit of MACROGEN
in the Planters Bank, Buendia Branch); and the costs of suit.
Within 10 days from receipt of this partial decision, the
[respondent] shall inform the Court whether it shall still pursue the
rest of the claims against the defendants. Otherwise, such claims
shall be considered waived. 20
Petitioner and Marilyn filed a Motion for Reconsideration of the afore-quoted Decision,
which the RTC denied in an Order dated 26 January 2003. 21
In time, petitioner and Marilyn filed an appeal with the Court of Appeals, docketed as
CA-G.R. CV 78007. In its Decision dated 11 April 2006, the appellate court
held: IDTSaC
UPON THE VIEW WE TAKE OF THIS CASE, THUS, the
judgment appealed from must be, as it hereby is, MODIFIED to
the effect that defendant-appellant Marilyn Bitanga is adjudged
not liable, whether solidarily or otherwise, with her husband the
defendant-appellant Benjamin Bitanga, under the compromise
agreement or the contract of guaranty. No costs in this
instance. 22
In holding that Marilyn Bitanga was not liable, the Court of Appeals cited Ramos v.
Court of Appeals, 23 in which it was declared that a contract cannot be enforced
against one who is not a party to it. The Court of Appeals stated further that the
substantial ownership of shares in Macrogen Realty by Marilyn Bitanga was not
enough basis to hold her liable.
The Court of Appeals, in its Resolution dated 5 July 2006, denied petitioner's Motion
for Reconsideration 24 of its earlier Decision.

Petitioner is now before us via the present Petition with the following assignment of
errors:
I
THE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING
THE VALIDITY OF THE PARTIAL SUMMARY JUDGMENT BY
THE REGIONAL TRIAL COURT OF QUEZON CITY, BRANCH
96, DESPITE THE CLEAR EXISTENCE OF DISPUTED
GENUINE AND MATERIAL FACTS OF THE CASE THAT
SHOULD HAVE REQUIRED A TRIAL ON THE MERITS.
II
THE COURT OF APPEALS GRAVELY ERRED IN NOT
UPHOLDING THE RIGHT OF PETITIONER BENJAMIN M.
BITANGA AS A MERE GUARANTOR TO THE BENEFIT OF
EXCUSSION UNDER ARTICLES 2058, 2059, 2060, 2061, AND
2062 OF THE CIVIL CODE OF THE PHILIPPINES. 25
As in the two courts below, it is petitioner's position that summary judgment is
improper in Civil Case No. Q-01-45041 because there are genuine issues of fact
which have to be threshed out during trial, to wit: IcDCaS
(A) Whether or not there was proper service of notice to petitioner
considering the said letter of demand was allegedly received by
one Dette Ramos at Macrogen office and not by him at his
residence.
(B) Whether or not
of excussion? 26

petitioner

is

entitled

to

the

benefit

We are not persuaded by petitioner's arguments.

Rule 35 of the Revised Rules of Civil Procedure provides:
Section 1. Summary judgment for claimant. A party seeking to
recover upon a claim, counterclaim, or cross-claim or to obtain a
declaratory relief may, at any time after the pleading in answer
thereto has been served, move with supporting affidavits,
depositions or admissions for a summary judgment in his favor
upon all or any part thereof.

Page 263 of 505

For a summary judgment to be proper, the movant must establish two requisites: (a)
there must be no genuine issue as to any material fact, except for the amount of
damages; and (b) the party presenting the motion for summary judgment must be
entitled to a judgment as a matter of law. Where, on the basis of the pleadings of a
moving party, including documents appended thereto, no genuine issue as to a
material fact exists, the burden to produce a genuine issue shifts to the opposing
party. If the opposing party fails, the moving party is entitled to a summary
judgment. 27
In a summary judgment, the crucial question is: are the issues raised by the opposing
party not genuine so as to justify a summary judgment? 28
First off, we rule that the issue regarding the propriety of the service of a copy of the
demand letter on the petitioner in his office is a sham issue. It is not a bar to the
issuance of a summary judgment in respondent's favor.
A genuine issue is an issue of fact which requires the presentation of evidence as
distinguished from an issue which is a sham, fictitious, contrived or false claim. To
forestall summary judgment, it is essential for the non-moving party to confirm the
existence of genuine issues, as to which he has substantial, plausible and fairly
arguable defense, i.e., 29 issues of fact calling for the presentation of evidence upon
which reasonable findings of fact could return a verdict for the non-moving party,
although a mere scintilla of evidence in support of the party opposing summary
judgment will be insufficient to preclude entry thereof. aIcDCA
Significantly, petitioner does not deny the receipt of the demand letter from the
respondent. He merely raises a howl on the impropriety of service thereof, stating that
"the address to which the said letter was sent was not his residence but the office of
Macrogen Realty, thus it cannot be considered as the correct manner of conveying a
letter of demand upon him in his personal capacity." 30
Section 6, Rule 13 of the Rules of Court states:
SEC. 6. Personal service. Service of the papers may be made
by delivering personally a copy to the party or his counsel, or by
leaving it in his office with his clerk or with a person having
charge thereof. If no person is found in his office, or his office is
not known, or he has no office, then by leaving the copy, between
the hours of eight in the morning and six in the evening, at the
party's or counsel's residence, if known, with a person of
sufficient age and discretion then residing therein.

The affidavit of Mr. Robert O. Pagdilao, messenger of respondent's counsel states in

part:
2. On 4 January 2001, Atty. Jose Vicente B. Salazar, then one of
the Associates of the ACCRA Law Offices, instructed me
to deliver to the office of Mr. Benjamin Bitanga a letter
dated 3 January 2001, pertaining to Construction
Industry Arbitration Commission (hereafter, "CIAC")
Case No. 99-56, entitled "Pyramid Construction
Engineering Corporation vs. Macrogen Realty
Corporation".
3. As instructed, I immediately proceeded to the office of Mr.
Bitanga located at the 12th Floor, Planters Development
Bank Building, 314 Senator Gil Puyat Avenue, Makati
City. I delivered the said letter to Ms. Dette Ramos, a
person of sufficient age and discretion, who introduced
herself as one of the employees of Mr. Bitanga and/or of
the latter's companies. 31 (Emphasis supplied.) SDIaCT
We emphasize that when petitioner signed the Contract of Guaranty and assumed
obligation as guarantor, his address in the said contract was the same address where
the demand letter was served. 32 He does not deny that the said place of service,
which is the office of Macrogen, was also the address that he used when he signed as
guarantor in the Contract of Guaranty. Nor does he deny that this is his office address;
instead, he merely insists that the person who received the letter and signed the
receiving copy is not an employee of his company. Petitioner could have easily
substantiated his allegation by a submission of an affidavit of the personnel manager
of his office that no such person is indeed employed by petitioner in his office, but that
evidence was not submitted. 33 All things are presumed to have been done correctly
and with due formality until the contrary is proved. This juris tantum presumption
stands even against the most well-reasoned allegation pointing to some possible
irregularity or anomaly. 34 It is petitioner's burden to overcome the presumption by
sufficient evidence, and so far we have not seen anything in the record to support
petitioner's charges of anomaly beyond his bare allegation. Petitioner cannot now be
heard to complain that there was an irregular service of the demand letter, as it does
not escape our attention that petitioner himself indicated "314 Sen. Gil Puyat
Avenue, Makati City" as his office address in the Contract of Guaranty.
Moreover, under Section 6, Rule 13 of the Rules of Court, there is sufficiency of
service when the papers, or in this case, when the demand letter is personally
Page 264 of 505

delivered to the party or his counsel, or by leaving it in his office with his clerk or
with a person having charge thereof, such as what was done in this case.
We have consistently expostulated that in summary judgments, the trial court can
determine a genuine issue on the basis of the pleadings, admissions, documents,
affidavits or counter affidavits submitted by the parties. When the facts as pleaded
appear uncontested or undisputed, then there is no real or genuine issue or question
as to any fact, and summary judgment is called for. 35

The Court of Appeals was correct in holding that:

Here, the issue of non-receipt of the letter of demand is a sham
or pretended issue, not a genuine and substantial issue. Indeed,
against the positive assertion of Mr. Roberto O. Pagdilao (the
private courier) in his affidavit that he delivered the subject letter
to a certain Ms. Dette Ramos who introduced herself as one of
the employees of [herein petitioner] Mr. Benjamin Bitanga and/or
of the latter's companies, said [petitioner] merely offered a bare
denial. But bare denials, unsubstantiated by facts, which would
be admissible in evidence at a hearing, are not sufficient to raise
a genuine issue of fact sufficient to defeat a motion for summary
judgment. 36 aEACcS
We further affirm the findings of both the RTC and the Court of Appeals that, given the
settled facts of this case, petitioner cannot avail himself of the benefit of excussion.
Under a contract of guarantee, the guarantor binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so. The guarantor
who pays for a debtor, in turn, must be indemnified by the latter. However, the
guarantor cannot be compelled to pay the creditor unless the latter has exhausted all
the property of the debtor and resorted to all the legal remedies against the debtor.
This is what is otherwise known as the benefit of excussion. 37
Article 2060 of the Civil Code reads:
Art. 2060. In order that the guarantor may make use of the
benefit of excussion, he must set it up against the creditor upon
the latter's demand for payment from him, and point out to the
creditor available property of the debtor within Philippine territory,
sufficient to cover the amount of the debt. 38

The afore-quoted provision imposes a condition for the invocation of the defense of
excussion. Article 2060 of the Civil Code clearly requires that in order for the
guarantor to make use of the benefit of excussion, he must set it up against the
creditor upon the latter's demand for payment and point out to the creditor available
property of the debtor within the Philippines sufficient to cover the amount of the
debt. 39
It must be stressed that despite having been served a demand letter at his office,
petitioner still failed to point out to the respondent properties of Macrogen Realty
sufficient to cover its debt as required under Article 2060 of the Civil Code. Such
failure on petitioner's part forecloses his right to set up the defense of excussion.
Worthy of note as well is the Sheriff's return stating that the only property of Macrogen
Realty which he found was its deposit of P20,242.23 with the Planters Bank. DcCHTa
Article 2059 (5) of the Civil Code thus finds application and precludes petitioner from
interposing the defense of excussion. We quote:
Art. 2059. This excussion shall not take place:
xxx xxx xxx
(5) If it may be presumed that an execution on the property of the
principal debtor would not result in the satisfaction of the
obligation.
As the Court of Appeals correctly ruled:
We find untenable the claim that the [herein petitioner] Benjamin
Bitanga cannot be compelled to pay Pyramid because the
Macrogen Realty has allegedly sufficient assets. Reason: The
said [petitioner] had not genuinely controverted the return made
by Sheriff Joseph F. Bisnar, who affirmed that, after exerting
diligent efforts, he was not able to locate any property belonging
to the Macrogen Realty, except for a bank deposit with the
Planter's Bank at Buendia, in the amount of P20,242.23. It is
axiomatic that the liability of the guarantor arises when the
insolvency or inability of the debtor to pay the amount of debt is
proven by the return of the writ of execution that had not been
unsatisfied. 40
IN ALL, we fail to point out any impropriety in the rendition of a summary judgment in
favor of the respondent.
Page 265 of 505

WHEREFORE, premises considered, the instant petition is DENIED for lack of merit.
The Decision of the Court of Appeals dated 11 April 2006 and its Resolution dated 5
July 2006 are AFFIRMED. Costs against petitioner.
SO ORDERED.
Ynares-Santiago, Austria-Martinez, Nachura and Reyes, JJ., concur.

FIRST DIVISION

||| (Bitanga v. Pyramid Construction Engineering Corp. , G.R. No. 173526, [August 28,
2008], 585 PHIL 537-554)

DE GUZMAN SUPRA

[G.R. No. 48979. September 29, 1943.]

MIRA HERMANOS,
appellee, vs. MANILA TOBACCONISTS,
AL., defendants. PROVIDENT INSURANCE
appellant.

INC., plaintiffINC.,
ET
CO., defendant-

E. V. Filamor for appellant.

Ramirez & Ortigas for appellee.
Ernesto Zaragoza for defendant, Manila Compaia de Seguras.

DECISION

OZAETA, J p:
This appeal has been certified to this Court by the Court of Appeals
because it involves only a question of law arising from the following facts:
By virtue of a written contract (Exhibit A) entered into
between Mira Hermanos, Inc., and Manila Tobacconists, Inc., the former agreed
to deliver to the latter merchandise for sale on consignment under certain
specified terms and the latter agreed to pay to the former on or before the 20th
day of each month the invoice value of all the merchandise sold during the
preceding month. Mira Hermanos, Inc., required of the Manila Tobacconists, Inc.,
a bond of P3,000, which was executed by the Provident Insurance Co., on
September 2, 1939 (Exhibit B), to secure the fulfillment of the obligation of
the Tobacconists under the contract (Exhibit A) up to the sum of P3,000.
Page 266 of 505

In the month of October, 1940, the volume of the business of

the Tobacconists having increased so that the merchandise received by it on
consignment fromMira Hermanos exceeded P3,000 in
value, Mira Hermanos required of the Tobacconists an additional bond of P2,000,
and in compliance with that requirement the defendant Manila Compaia de
Seguros, on October 16, 1940, executed a bond of P2,000 (Exhibit C) with the
same terms and conditions (except as to the amount) as the bond of the
Provident Insurance Co.
On June 1, 1941, a final and complete liquidation was made of the
transactions between Mira Hermanos and the Tobacconists, as a result of which
there was found a balance due from the latter to the former of P2,272.79, which
indebtedness the Tobacconists recognized but was unable to pay.
Thereupon Mira Hermanosmade a demand upon the two surety companies for
the payment of said sum. The Provident Insurance Co. paid only the sum of
P1,363.67, which is 60% of the amount owed by
the Tobacconists to Mira Hermanos, alleging that the remaining 40% should be
paid by the other surety, Manila Compaia de Seguros, in accordance with article
1837 of the Civil Code. The Manila Compaia de Seguros refused to pay the
balance, contending that so long as the liability of theTobacconists did not exceed
P3,000, it was not bound to pay anything because its bond referred only to the
obligation of the Tobacconists in excess of P3,000 and up to P5,000.
Hence Mira Hermanos, Inc., brought this action against the Manila Tobacconists,
Inc., Provident Insurance Co., and Manila Compaia de Seguros to recover from
them jointly and severally the sum of P909.12 with legal interest thereon from the
date of the complaint.
The controversy is mainly between the two surety companies. In its
answer the defendant Manila Compaia de Seguros alleged as a special
defense:
"4. Que la fianza otorgada por esta demandada
'Manila Compaia de Seguros', el Octubre de 1940 fue exigida
por la demandante solo cuando el importe de las mercancias
servidas
por
esta
y
pedidas
por
la
demandada Manila Tobacconists, Inc., excedio de la suma de
P3,000 garantizada por la otra demandada Provident Insurance
Co.; por lo que quedo entendido entre la demandante y las tres
demandadas que la fianza de P2,000 prestada el Octubre de
1940 por esta demandada, 'Manila Compaia de Seguros', se
limitaba y era para responder solamente del importe de

mercancias servidas a la demandada Manila Tobacconists, Inc.,

en tanto en cuanto el valor de esas mercancias excediese de
P3,000
asegurada
por
la
fianza
P3,000
de
la Manila Tobacconists, Inc."
To that the defendant Provident Insurance Co. replied:
"Que no es verdad el hecho alegado por la demandada
'Manila Compaia de Seguros' en el parrafo 4 de su contestacion
que dice: 'que quedo entendido entre la demandante y las tres
demandadas que la fianza de P2,000 prestada el Octubre de
1940 por esta demandada "Manila Compaia de Seguros" se
limitaba y era para responder solamente del importe de
mercancias servidas a la demandada Manila Tobacconists, Inc.,
en tanto en cuanto el valor de esas mercancias excediese de
P3,000 asegurada por la fianza de P3,000 de la
"Manila Tobacconists, Inc." '
"Que la demandada, aqui compareciente, nunca ha
tenido conocimiento ni menos prestado su consentimiento a esa
supuesta inteligencia.
"Que esta demandada no puede ser privada del
beneficio de division a que tiene derecho como co-fiador, sin que
conste expresamente, por escrito, su conformidad y
consentimiento de renunciar a su derecho."
Thus there was an issue of fact between the two surety companies, viz.:
whether the understanding between the plaintiff and the three defendants was,
that the bond of P2,000 given by the Manila Compaia de Seguros was limited to
and responded for the obligation of the Tobacconists only insofar as it might
exceed the amount of P3,000 secured by the bond of the Provident Insurance
Co. That issue of fact was decided by the trial court in favor of the contention of
the ManilaCompaia de Seguros; and judgment was rendered by it against the
Provident Insurance Co. alone for the amount claimed by the plaintiff.

Appellant's first two assignments of error (the third being a mere

consequence of the first two) read as follows:
"1. El juzgado inferior incurrio en error al hacer caso
omiso del beneficio de division reclamado por la demandada

Page 267 of 505

Provident Insurance Co. of the Philippines con arreglo a lo

dispuesto en el Art. 1837 del Codigo Civil.
"2. El juzgado erro al aplicar, en lugar de lo dispuesto en
el Art. 1837 del Codigo Civil, una teoria suya, declarando que la
fianza de P3,000.00 prestada por Provident Insurance Co. of the
Philippines y la fianza de P2,000 de Manila Compaia de
Seguros, cada una tiene una esfera de responsabilidad propia e
independiente la una de la otra."
Discussing these two assignments of error jointly, counsel says:
"La unica cuestion que se presenta en esta causa es
puramente de derecho. Si el saldo deudor de P2,272.79
que Tobacconists ha dejado de pagar, deben pagarlo en su lugar,
los dos fiadores proporcionalmente a la cuantia en que se
obligaron o debe pagarlo sola y exclusivamente la fiadora
Provident Insurance Co., como ordena la sentencia opelada."
Thus it appears that the issue of fact raised by and between the two
surety companies before the trial court and decided by the latter in favor of the
appelleeManila Compaia de Seguros is no longer raised before this Court,
appellant Provident Insurance Co. having limited the issue in this appeal to
whether or not it is entitled to the "benefit of division" provided in article 1837 of
the Civil Code, which reads as follows:
"Art. 1837. Should there be several sureties of only one
debtor for the same debt, the liability therefor shall be divided
among them all. The creditor can claim from each surety only his
proportional part unless liability in solidumhas been expressly
stipulated.
"The right to the benefit of division against the cosureties for their respective shares ceases in the same cases and
for the same reason as that to an exhaustion of property against
the principal debtor."
With particular reference to the second assignment of error, we find that
the statement of the trial court to the effect that the bond of P3,000 responded for
the obligation of the Tobacconists up to the sum of P3,000 and the bond of
P2,000 responded for the obligation of the Tobacconists only insofar as it might
exceed P3,000 and up to P5,000, is not a mere theory but a finding of fact based
upon the undisputed testimony of the witnesses called by the
defendant Manila Compaia de Seguros in support of its special defense

hereinbefore quoted. While on its face the bond given by the Manila Compaia
de Seguros contains the same terms and conditions (except as to the amount) as
those of the bond given by the Provident Insurance Co., nevertheless it was
pleaded by the Manila Compaia de Seguros and found proven by the trial court
"que la intencion realmente que se habia perseguido, por lo menos en lo que
respecta a la Manila Tobacconists, Inc., y la ManilaCompaia de Seguros, era la
de que esta fianza de P2,000 habria de responder solamente por todo aquello
que excediera de los P3,000."
The evidence upon which that finding is based is not only undisputed
but perfectly reasonable and convincing. For, as the trial court observed, there
would have been no need for the additional bond of P2,000 if its purpose were to
cover the first P2,000 already covered by the P3,000 bond of the Provident
Insurance Co. Indeed, we might add, if the purpose of the additional bond of
P2,000 were to cover not the excess over and above P3,000 but the first P2,000
of the obligation of the principal debtor like the bond of P3,000 which covered
only the first P3,000 of said obligation, then it would result that had the obligation
of the Tobacconistsexceeded P3,000, neither of the two bonds would have
responded for the excess, and that was precisely the event against
which Mira Hermanos wanted to protect itself by demanding the additional bond
of P2,000. For instance, suppose that the obligation of the principal debtor,
the Tobacconists, amounted to P5,000; if both bonds were co-extensive up to
P2,000 as would logically follow if appellant's contention were correct the
result would be that the first P2,000 of the obligation would have to be divided
between and paid equally by the two surety companies, which should pay P1,000
each, and of the balance of P3,000 the Provident Insurance Co. would have to
pay only P1,000 more because its liability is limited to the first P3,000, thus
leaving the plaintiff in the lurch as to the excess of P2,000. That was manifestly
not the intention of the parties. As a matter of fact, when the Provident gave its
bond and fixed the premiums thereon it assumed an obligation of P3,000 in
solidum with the Tobacconists without any expectation of any benefit of division
with any other surety. The additional bond of P2,000 was, more than a year later,
required by the creditor of the principal debtor for the protection of said creditor
and certainly not for the benefit of the original surety, which was not entitled to
expect any such benefit.
The foregoing considerations, which fortify the trial court's conclusion as
to the real intent and agreement of the parties with regard to the bond of P2,000
given by the Manila Compaia de Seguros, destroys at the same time the theory
of the appellant regarding the applicability of article 1837 of the Civil Code.
Page 268 of 505

That article refers to several sureties of only one debtor for the same
debt. In the instant case, altho the two bonds on their face appear to guarantee
the same debt co-extensively up to P2,000 that of the Provident Insurance Co.
alone extending beyond that sum up to P3,000 it was pleaded and
conclusively proven that in reality said bonds, or the two sureties, do not
guarantee the same debt because the Provident Insurance Co. guarantees only
the first P3,000 and the ManilaCompaia de Seguros, only the excess over and
above said amount up to P5,000. Article 1837 does not apply to this factual
situation.
The judgment of the trial court is affirmed, with the only modification that
it shall be entered against the defendants Manila Tobacconists, Inc., and
Provident Insurance Co. jointly and severally. Appellant shall pay the costs of this
instance.
Yulo, C.J., Moran, Paras, and Bocobo, JJ., concur.
||| (Mira Hermanos, Inc. v. Provident Insurance Co., G.R. No. 48979, [September 29,
1943], 74 PHIL 367-374)

EN BANC
[G.R. No. L-9353. May 21, 1957.]
MANILA SURETY AND FIDELITY COMPANY, INC., plaintiffappellant, vs. BATU CONSTRUCTION AND COMPANY,
CARLOS N. BAQUIRAN, GONZALO P. AMBOY and ANDRES
TUNAC, defendants-appellees.

De Santos & Herrera for appellant.

Bienvenido C. Castro and Ruiz, Ruiz, Ruiz & Ruiz for appellees.

DECISION

PADILLA, J p:
In a complaint filed in the Court of First Instance of Manila, the plaintiff, a
domestic corporation engaged in the bonding business, hereafter called the
company, alleges that the Batu Construction & Company, a partnership the
members of which are the other three defendants, requested it to post, as it did, a
surety bond for P8,812 in favor of the Government of the Philippines to secure
the faithful performance of the construction of the Bacarra Bridge, Project PR72(3), in Ilocos Norte, undertaken by the partnership, as stipulated in a
construction on contract entered into on 11 July 1950 by and between the
Page 269 of 505

partnership and the Government of the Philippines, on condition that the

defendants would "indemnify the COMPANY for any damage, loss, costs,
charges, or expenses of whatever kind and nature, including counsel or
attorney's fees, which the COMPANY may, at any time, sustain or incur, as a
consequence of having become surety upon the above-mentioned bond; said
attorney's fees shall not be less than fifteen (15%) per cent of the total amount
claimed in any action which the COMPANY may institute against the undersigned
(the defendants except Andres Tunac) in Court," and that "Said indemnity shall
be paid to the COMPANY as soon as it has become liable for the payment of any
amount, under the above-mentioned bond, whether or not it shall have paid such
sum or sums of money, or any part thereof," as stipulated in a contract executed
on 8 July 1950 (Exhibit B); that on 30 May 1951 because of the unsatisfactory
progress of the work on the bridge, the Director of Public Works, with the
approval of the Secretary of Public Works and Communications, annulle the
construction contract referred to and notified the plaintiff Company that the
Government would hold it (the Company) liable for any amount incurred by the
Government for the completion of the bridge, in excess of the contract price
(Exhibit D); that on 19 December 1951 (should be 23 November 1951), Ricardo
Fernandez and 105 other persons brought an action in the Justice of the Peace
Court of Laoag, Ilocos Norte, against the partnership, the individual partners and
the herein plaintiff Company for the collection of unpaid wages amounting to
P5,960.10, lawful interests thereon and costs (Exhibit E); that the defendants are
in imminent danger of becoming insolvent, and are removing and disposing, or
about to remove and dispose, of their properties with intent to defraud their
creditors, particularly the plaintiff Company; and that the latter has no other
sufficient security to protect its rights against the defendants. Upon these
allegations, the plaintiff prays that, upon the approval of a bond and on the
strength of the allegations of the verified complaint, a writ of attachment be
issued and levied upon the properties of the defendants; and that after hearing,
judgment be rendered "ordering the defendants to deliver to the plaintiff such
sufficient security as shall protect plaintiff from any proceedings by the creditors
on the Surety Bond aforementioned and from the danger of insolvency of the
defendants; and to allow costs to the herein plaintiff," and "for such other
measures of relief as may be proper and just in the premises." Attached to the
complaint are a verification and affidavit of attachment; and copies of the surety
bond marked Annex A; of the indemnity contract marked Annex B; and of the
letter of the Acting Director of Public Works to the plaintiff dated 30 May 1951,
marked Annex C.

Andres Tunac admits in his answer the allegations in paragraphs 1, 2, 3

and 4 of the complaint, but denies the allegations in paragraphs 5, 6, 7, 8 and 9
of the complaint, because he has never promised to put up an indemnity bond in
favor of the plaintiff nor has he ever entered into any indemnity agreement with it;
because the partnership or the Batu Construction & Company was fulfilling its
obligations in accordance with the terms of the construction contract; because the
Republic of the Philippines, through the Director of Public Works, had no
authority to annul the contract at its own initiative; because the Justice of the
Peace court of Laoag, Ilocos Norte had no jurisdiction to hear and decide a case
for collection of P5,960.10; and because the defendants were not in imminent
danger of insolvency, neither did they remove or dispose of their properties with
intent to defraud their creditors. By way of affirmative defenses, he alleges that
the signing by Carlos N. Baquiran of the indemnity agreement for and in behalf of
the partnership Batu Construction & Company did not bind the latter to the
plaintiff and as the partnership is not bound, he (Andres Tunac), as a member
thereof, is also not bound; that he not being a party to the said agreement, the
plaintiff has no cause of action against him; that in the event the partnership is
bound by the indemnity agreement he invokes his right of exhaustion of the
property of the partnership before the plaintiff may proceed against his property.
And as a counterclaim he alleges that the plaintiff brought the action against him
maliciously and in bad faith for the purpose of annoying him and damaging his
professional reputation, he having a flourishing and successful practice as
engineer in Ilocos Norte, thereby compelling him to defend himself; that to secure
the issuance of a writ of attachment the plaintiff made false representations; and
that the issuance of the writ upon such false representations of the plaintiff
caused him damages in the sum of P10,000 including expenses of litigation and
attorney's fees. Upon the foregoing he prays that the complaint be dismissed as
to him and the defendant Batu Construction & Company, with costs against the
plaintiff; that the latter be ordered to pay him the sum of P10,000; and that he be
granted such other remedies as may be just, equitable and proper.
Gonzalo P. Amboy denies in his answer the allegations of the complaint,
except those that may be deemed admitted in the special defenses, and alleges
that he is not in imminent danger of insolvency and is not removing and disposing
or about to remove and dispose of his properties, because he has no property;
that there has been no liquidation of the expenses incurred in the construction of
the Bacarra Bridge, Project PR-72(3), to determine whether there would be a
balance of the contract price which may be applied to pay the claim for unpaid
wages of Ricardo Fernandez et al. sought to be collected in civil case No. 198 of
the Justice of the Peace Court of Laoag, Ilocos Norte, and not until after such
Page 270 of 505

liquidation shall have been made could his liability and that of his co-defendants
be determined and fixed; that if after proper liquidations there be a deficit of the
contract price the defendants are willing to pay the claim for unpaid wages of
Ricardo Fernandez et al. Upon these allegations he prays that the issuance of
the writ of attachment prayed for by the plaintiff be held in abeyance until after
civil case No. 198 of the Justice of the Peace Court of Laoag, Ilocos Norte, shall
have been disposed of.

PR-72 (No. 3) Ilocos Norte Province. On the same date, July 8,

1950, the Batu Construction & Company and the defendants
Carlos N. Baquiran and Gonzales P. Amboy executed an
indemnity agreement to protect the Manila Surety & Fidelity Co.
Inc., against damage, loss or expenses which it may sustain as a
consequence of the surety bond executed by it jointly with Batu
Construction & Company.

Carlos N. Baquiran admits in his answer the allegations in paragraphs 1,

2, 3, 4, 5, 6 and 11 of the complaint but alleges that he has no sufficient
knowledge to form a belief as to the truth of the claim of Ricardo Fernandez et al.
set forth in paragraph 7 of the complaint, for there has never been a liquidation
between the defendants and the Bureau of Public Works. He further denies
specifically paragraphs 8, 9 and 10 of the complaint. By way of special defenses
he alleges that there has been no liquidation by and between the defendants and
the Bureau of Public Works on Project PR- 72(3) to determine whether the total
amount spent for the construction of the bridge exceeded the contract price; that
after the determination of the respective liabilities of the parties in civil case No.
198 of the Justice of the Peace Court of Laoag, Ilocos Norte, if any there be
against the defendants herein, and such liability could not be paid out of the
balance of the contract price of Project PR-72(3), the defendants are ready and
willing to assume their respective responsibilities. Upon these allegations he
prays that the complaint of the plaintiff be dismissed; that the issuance of the writ
of attachment prayed for be denied; and that he be granted such other relief as
may be just and equitable, with costs against the plaintiff.

On or about May 30, 1951, the plaintiff received a notice

from the Director of Public Works (Exhibit B) annulling its contract
with the Government for the construction of the Bacarra Bridge
because of its failure to make satisfactory progress in the
execution of the works, with the warning that any amount spent
by the Government in the continuation of the work, in excess of
the contract price, will be charged against the surety bond
furnished by the plaintiff. It also appears that a complaint by the
laborers in said project of the Batu Construction & Company was
filed against it and the Manila Surety and Fidelity Co., Inc., for
unpaid wages amounting to P5,960.10.

At the hearing, the plaintiff presented its evidence. After the plaintiff had
rested its case, defendant Gonzalo P. Amboy moved for the dismissal of the
complaint, on the ground that the remedy provided for in the last paragraph of
article 2071 of the new Civil Code may be availed of by the guarantor only and
not by a surety.

Acting upon this motion to dismiss the trial court made the following
findings:
. . . That on July 8, 1950, the defendant Batu Construction &
Company, as principal and the plaintiff Manila Surety & Fidelity
Co. Inc., as surety, executed a surety bond for the sum of
P8,812.00 to insure faithful performance of the former's obligation
as contractor for the construction of the Bacarra Bridge, Project

and, being of the opinion that the provisions of article 2071 of the new Civil Code
may be availed of by a guarantor only and not by a surety, dismissed the
complaint, with costs against the plaintiff.
From this order the plaintiff Company has appealed to this Court,
because it proposes to raise only a question of law.
After the order dismissing the complaint had been entered, on 16 and
20 July 1953, the defendants Gonzalo P. Amboy and Andres Tunac moved for
leave to prove damages they allegedly suffered as a result of the attachment
levied upon their properties. On 15 August 1953 the Court heard the evidence on
damages. On 23 September 1953 the Court found and held that the defendant
Gonzalo P. Amboy is entitled to recover from the plaintiff damages equivalent to 6
per cent interest per annum on the sum of P35 in possession of the Provincial
Treasurer of Ilocos Norte, which was garnished pursuant to the writ of
attachment, from the date of garnishment until its discharge; but that the claims
for damages of Andres Tunac and Gonzalo P. Amboy allegedly suffered by them
in their business, moral damages and attorney's fees were without basis in law
and in fact. Hence their recovery was denied. The Court dissolved the writ of
attachment. From this last order only the plaintiff Company has appealed.

Page 271 of 505

The main question to determine is whether the last paragraph of article

2071 of the new Civil Code taken from article 1843 of the old Civil Code may be
availed of by a surety.
A guarantor is the insurer of the solvency of the debtor; a surety is an
insurer of the debt. A guarantor binds himself to pay if the principal is unable to
pay; a surety undertakes to pay if the principal does not pay. 1 The reason which
could be invoked for the non-availability to a surety of the provisions of the last
paragraph of article 2071 of the new Civil Code would be the fact that guaranty
like commodatum 2 is gratuitous. But guaranty could also be for a price or
consideration as provided for in article 2048. So, even if there should be a
consideration or price paid to a guarantor for him to insure the performance of an
obligation by the principal debtor, the provisions of article 2071 would still be
available to the guarantor. In suretyship the surety becomes liable to the creditor
without the benefit of the principal debtor's excussion of his properties, for he (the
surety) may be sued independently. So, he is an insurer of the debt and as such
he has assumed or undertaken a responsibility or obligation greater or more
onerous than that of guarantor. Such being the case, the provisions of article
2071, under guaranty, are applicable and available to a surety. The reference in
article 2047 to the provisions of Section 4, Chapter 3, Title I, Book IV of the new
Civil Code, on solidary or several obligations, does not mean that suretyship
which is a solidary obligation is withdrawn from the applicable provisions
governing guaranty.
The plaintiff's cause of action does not fall under paragraph 2 of article
2071 of the new Civil Code, because there is no proof of the defendants'
insolvency. The fact that the contract was annulled because of lack of progress in
the construction of the bridge is no proof of such insolvency. It does not fall under
paragraph 3, because the defendants have not bound themselves to relieve the
plaintiff from the guaranty within a specified period which already has expired,
because the surety bond does not fix any period of time and the indemnity
agreement stipulates one year extendible or renewable until the bond be
completely cancelled by the person or entity in whose behalf the bond was
executed or by a Court of competent jurisdiction. It does not come under
paragraph 4, because the debt has not become demandable by reason of the
expiration of the period for payment. It does not come under paragraph 5
because of the lapse of 10 years, when the principal obligation has no period for
its maturity, etc., for 10 years have not yet elapsed. It does not fall under
paragraph 6, because there is no proof that "there are reasonable grounds to fear
that the principal debtor intends to abscond." It does not come under paragraph

7, because the defendants, as principal debtors, are not in imminent danger of

becoming insolvent, there being no proof to that effect.
But the plaintiff's cause of action comes under paragraph 1 of article
2071 of the new Civil Code, because the action brought by Ricardo Fernandez
and 105 persons in the Justice of the Peace Court of Laoag, province of Ilocos
Norte, for the collection of unpaid wages amounting to P5,960.10, is in
connection with the construction of the Bacarra Bridge, Project PR-72 (3),
undertaken by the Batu Construction & Company, and one of the defendants
therein is the herein plaintiff, the Manila Surety and Fidelity Co., Inc., and
paragraph 1 of article 2071 of the new Civil Code provides that the guarantor,
even before having paid, may proceed against the principal debtor "to obtain
release from the guaranty, or to demand a security that shall protect him from any
proceedings by the creditor or from the danger of insolvency of the debtor," when
he (the guarantor) is sued for payment. It does not provide that the guarantor be
sued by the creditor for the payment of the debt. It simply provides that the
guarantor of surety be sued for the payment of an amount for which the surety
bond was put up to secure the fulfillment of the obligation undertaken by the
principal debtor. So, the suit filed by Ricardo Fernandez and 105 persons in the
Justice of the Peace Court of Laoag, province of Ilocos Norte, for the collection of
unpaid wages earned in connection with the work done by them in the
construction of the Bacarra Bridge, Project PR-72 (3), is a suit for the payment of
an amount for which the surety bond was put up or posted to secure the faithful
performance of the obligation undertaken by the principal debtors (the
defendants) in favor of the creditor, the Government of the Philippines.
The order appealed from dismissing the complaint is reversed and set
aside, and the case remanded to the court below for determination of the amount
of security that would protect the plaintiff Company from any proceedings by the
creditor or from the danger of insolvency of the defendants, the principal debtors,
and direction to the defendants to put up such amount of security as may be
established by competent evidence, without pronouncement as to costs.
The writ of attachment having been issued improvidently because,
although there is an allegation in the verified complaint that the defendants were
in imminent danger of insolvency and that they were removing or disposing, or
about to remove or dispose, of their properties, with intent to defraud their
creditors, particularly the plaintiff Company, still such allegation was not proved,
the fact that a complaint had been filed against the defendants and the plaintiff
Company in the Justice of the Peace Court of Laoag, Ilocos Norte, for the
collection of an amount for unpaid wages of the plaintiffs therein who claimed to
Page 272 of 505

have worked in the construction of the bridge, being insufficient to prove it, and
because the relief prayed for in the complaint for security that shall protect it from
any proceedings by the creditor and from the danger of the defendants becoming
insolvent is inconsistent with the state of insolvency of the defendants or their
being in imminent danger of insolvency, the order awarding 6 per cent on the sum
of P35 in possession of the Provincial Treasurer owned by the defendant Gonzalo
P. Amboy garnished by virtue of the writ of attachment, from the date of the
garnishment until its discharge, and denying recovery of the amounts of damages
claimed to have been suffered by the defendants, is affirmed, the defendants not
having appealed therefrom.
Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L., Endencia and Felix, JJ., concur.
||| (Manila Surety and Fidelity Co., Inc. v. Batu Construction and Co., G.R. No. L-9353,
[May 21, 1957], 101 PHIL 494-504)

CHAPTER 3

Page 273 of 505

annum. From this judgment Guillermo Garcia Bosque, as principal, and R.G.
France and F. H. Goulette, as sureties.

E. ZOBEL, INC SUPRA

EN BANC
[G.R. No. 24543. July 12, 1926.]
ROSA VILLA Y
MONNA, plaintiff-appellee, vs.
GUILLERMO GARCIA BOSQUE,
ET
AL., defendants. GUILLERMO GARCIA BOSQUE,
F.
H.
GOULETTE, and R. G. FRANCE, appellants.

Eiguren & Razon for the appellant Garcia Bosque.

Benj. S. Ohnick for the appellants France and Goulette.
Fisher, DeWitt, Perkins & Brady and John R. McFie, jr. for appellee.
DECISION
STREET, J p:
This action was instituted in the (Court of First Instance of Manila by
Rosa Villa y Monna, widow of Enrique Bota, for the purpose of recovering from
the defendants, Guillermo Garcia Bosque and Jose Pomar Ruiz, as principals,
and from the defendants R. G. France and F. H. Goulette, as solidary sureties for
said principals, the sum of P20,509.71, with interest, as a balance alleged to be
due to the plaintiff upon the purchase price of a printing establishment and
bookstore located at 89 Escolta, Manila, which had been sold to Bosque and
Ruiz by the plaintiff, acting through her attorney in fact, one Manuel Pirretas y
Monros. The defendant Ruiz put in no appearance, and after publication
judgment by default was entered against him. The other defendants answered
with a general denial and various special defenses. Upon hearing the cause the
trial judge gave judgment in favor of the plaintiff, requiring all of the defendants,
jointly and severally, to pay to the plaintiff the sum of P19,230.01, as capital, with
stipulated interest at the rate of 7 per centum per annum, plus the further sum of
P1,279 70 as interest already accrued and unpaid upon the date of the institution
of the action, with interest upon the latter amount at the rate of 6 per centum per

It appears that prior to September 17, 1919, the plaintiff, Rosa Villa y
Monna, viuda de E. Bota, was the owner of a printing establishment and
bookstore located at 89 Escolta, Manila, and known as La Flor de Catalua,
Viuda de E. Bota, with the machinery, motors, bindery, type material, furniture,
and stock appurtenant thereto. Upon the date stated, the plaintiff, then and now a
resident of Barcelona, Spain, acting through Manuel Pirretas, as attorney in fact,
sold the establishment above-mentioned to the defendants
Guillermo Garcia Bosque and Jose Pomar Ruiz residents of the City of Manila,
for the stipulated sum of P56,000, payable as follows: Fifteen thousand pesos
(P15,000) on November 1, next ensuing upon the execution of the contract, being
the date when the purchasers went to take possession; ten thousand pesos
(P10,000) at one year from the same date; fifteen thousand pesos (P15,000) at
two years; and the remaining fifteen thousand pesos (P15,000) at the end of
three years. By the contract of sale the deferred installments bear interest at the
rate of 7 per centum per annum. In the same document the defendants France
and Goulette obligated themselves as solidary sureties with the
principals Bosque and Ruiz, to answer for any balance, including interest, which
should remain due and unpaid after the dates stipulated for payment of said
installments, expressly renouncing the benefit of exhaustion of the property of the
principals. The first installment of P15,000 was paid conformably to agreement.
In the year 1920, Manuel Pirretas y Monros, the attorney in fact of the
plaintiff, absented himself from the Philippine Islands on a prolonged visit to
Spain; and in contemplation of his departure he executed a document, dated
January 22, 1920, purporting to be a partial substitution agency, whereby he
transferred to "the mercantile entity Figueras Hermanos, or the person, or
persons, having legal representation of the same," the powers that had been
previously conferred on Pirretas by the plaintiff "in order that," so the document
runs, "they may be able to effect the collection of such sums of money as may be
due to the plaintiff by reason of the sale of the bookstore and printing
establishment already mentioned, issuing for such purpose the receipts,
vouchers, letters of payment, and other necessary documents for whatever they
shall have received and collected of the character indicated."
When the time came for the payment of the second installment and
accrued interest due at that time, the purchasers were unable to comply with their
obligation, and after certain negotiations between said purchasers and one
Alfredo Rocha, representative of Figueras Hermanos, acting as attorney in fact
Page 274 of 505

for the plaintiff, an agreement reached, whereby Figueras Hermanos accepted

the payment of P5,800 on November 10, 1920, and received for the balance five
promissory notes payable, respectively, on December 1, 1920, January 1, 1921,
February 1, 1921, March 1, 1921, and April 1, 1921. The first three of these notes
were in the amount of P1,000 each, and the last two for P2,000 each, making a
total of P7,000. It was furthermore agreed that the debtors should pay 9 per
centum per annum on said deferred installments, instead of the 7 per centum
mentioned in the contract of sale. These notes were not paid promptly at maturity
but the balance due upon them was finally paid in full by Bosque on December
24, 1921.
About this time the owners of the business La Flor de Catalua, appear
to have converted it into a limited partnership under the style of
"Guillermo GarciaBosque, S. en C.;" and presently a corporation was formed to
take over the business under the name "Bota Printing Company, Inc." By a
document executed on April 21, 1922, the partnership appears to have conveyed
all its assets to this corporation for the purported consideration of P15,000.
Meanwhile the seven notes representing the unpaid balance of the second
installment and interest were falling due without being paid. Induced by this
dilatoriness on the part of the debtor and supposedly animated by a desire to get
the matter into better shape, M. T. Figueras entered into the agreement attached
as Exhibit 1 to the answer of Bosque. In this document it is recited that
Guillermo Bosque, S. en C., is indebted to Rosa Villa, viuda de E. Bota, in the
amount of P32,000, for which R. G. France and F. H. Goulette are bound as joint
and several sureties and that the partnership mentioned had transferred all its
assets to the Bota Printing Company, Inc., of which one George Andrews was a
principal stockholder. It is then stipulated that France and Goulette shall be
relieved from all liability on their contract as sureties and that in lieu thereof the
creditor, Doria Rosa Villa y Monna, accepts the Bota Printing Company, Inc., as
debtor to the extent of P20,000, which indebtedness was expressly assumed by
it, and George Andrews as debtor to the extent of P12,000, which he undertook
to pay at the rate of P200 per month thereafter. To this contract the name of the
partnership Guillermo Garcia Bosque, S. en C., was affixed by
Guillermo Garcia Bosque while the name of the Bota Printing Company, Inc., was
signed by G. Andrews, the latter also signing in his individual capacity. The name
of the plaintiff was affixed by M. T. Figueras in the following style: "p.p. Rosa Villa,
viuda de E. Bota, M. T. Figueras, party of the second part."
No question is made as to the authenticity of this document or as to the
intention of Figueras to release the sureties; and the latter rely upon the
discharge as a complete defense to the action. The defendant Bosque also relies

upon the same agreement as constituting a novation such as to relieve him from
personal liability. All of the defendants furthermore maintain that even supposing
that M. T. Figueras lacked authority to novate the original contract and discharge
the sureties therefrom, nevertheless the plaintiff has ratified the agreement by
accepting part payment of the amount due thereunder with full knowledge of its
terms. In her amended complaint the plaintiff asserts that Figueras had no
authority to execute the contract containing the release (Exhibit 1) and that the
same had never been ratified by her.
The question thus raised as to whether the plaintiff is bound by Exhibit 1
constitutes the main controversy in the case, since if this point should be
determined in the affirmative the plaintiff obviously has no right of action against
any of the defendants. We accordingly address ourselves this point first.
The partial substitution of agency (Exhibit B to amended complaint)
purports to confer on Figueras Hermanos or the person or persons exercising
legal representation of the same all of the powers that had been conferred on
Pirretas by the plaintiff in the original power of attorney. This original power of
attorney is not before us, but assuming, as is stated in Exhibit B, that this
document contained a general power to Pirretas to sell the business known as La
Flor de Cataluaupon conditions to be fixed by him and power to collect money
due to the plaintiff upon any account, with a further power of substitution, yet it is
obvious upon the face of the act of substitution (Exhibit B) that the sole purpose
was to authorize Figueras Hermanos to collect the balance due to the plaintiff
upon the price of La Flor de Catalua, the sale of which had already been
effected by Pirretas. The words of Exhibit B on this point are quite explicit ("to the
end that the said lady may be able to collect the balance of the selling price of the
Printing Establishment and Bookstore above-mentioned, which has been sold to
Messrs. Bosque and Pomar"). There is nothing here that can be construed to
authorize Figueras Hermanos to discharge any of the debtors without payment or
to novate the contract by which their obligation was created. On the contrary the
terms of the substitution shows the limited extent of the power A further
noteworthy feature of the contract Exhibit 1 has reference to the personality of the
purported attorney in fact and the manner in which the contract was signed.
Under the Exhibit B the substituted authority should be exercised by the
mercantile entity Figueras Hermanos or the person duly authorized to represent
the same. In the actual execution of Exhibit 1, M. T. Figueras intervenes as
purported attorney in fact without anything whatever to show that he is in fact the
legal representative of Figueras Hermanos or that he is there acting in such
capacity. The act of substitution conferred no authority whatever on M. T.
Figueras as an individual. In view of these defects in the granting and exercise of
Page 275 of 505

the substituted power, we agree with the trial judge that the Exhibit 1 is not
binding on the plaintiff. Figueras had no authority to execute the contract of
release and novation in the manner attempted; and apart from this it is shown
that in releasing the sureties Figueras acted contrary to instructions. For instance,
in a letter from Figueras in Manila, dated March 4, 1922, to Pirretas, then in
Barcelona the former stated that he was attempting to settle the affair to the best
advantage and expected to put through an arrangement whereby Doa Rosa
would receive P20,000 in cash, the balance to be paid in installments, "with the
guaranty of France and Goulette." In his reply of April 29 to this letter, Pirretas
expresses the conformity of Doa Rosa in any adjustment of the claim that
Figueras should see fit to make, based upon payment of P20,00 in cash, the
balance in installments payable in the shortest practicable periods, it being
understood, however, that the guaranty of Messrs. France and Goulette should
remain intact. Again, on May 9, Pirretas repeats his assurance that the plaintiff
would be willing to accept P20,000 down with the balance in interest-bearing
installments "with the guaranty of France and Goulette." From this it is obvious
that Figueras had no actual authority whatever to release the sureties or to make
a novation of the contract without their additional guaranty.

But it is asserted that the plaintiff ratified the contrary (Exhibit 1) by

accepting and retaining the sum of P14,000 which, it is asserted, was paid by the
Bota Printing Co., Inc., under that contract. In this connection it should be noted
that when the firm of Guillermo Garcia Bosque, S. en C., conveyed all its assets
on April 21, 1922, to the newly formed corporation, Bota Printing Co., Inc., the
latter obligated itself to pay all the debts of the partnership, including the sum of
P32,000 due to the plaintiff. On April 23 thereafter, Bosque, acting for the Bota
Printing Co., Inc., paid to Figueras the sum of P8,000 upon the third installment
due to the plaintiff under the original contract of sale, and the same was credited
by Figueras accordingly. On May 16 a further sum of P5,000 was similarly paid
and credited; and on May 25, a further sum of P200 was likewise paid, making
P14,000 in all. Now, it will be remembered that in the contract (Exhibit 1),
executed on May 17, 1922, the Bota Printing Co., Inc., undertook to pay the sum
of P20,000; and the parties to the agreement considered that the sum of P13,800
then already paid by the Bota Printing Co., Inc., should be treated as a partial
satisfaction of the larger sum of P20,000 which the Bota Printing Co., Inc., had
obligated itself to pay. In the light of these facts the proposition of the defendants
to the effect that the plaintiff has ratified Exhibit 1 by retaining the sum of
P14,000, paid by the Bota Printing Co., Inc., as above stated, is untenable. By the
assumption of the debts of its predecessor the Bota Printing Co., Inc., had

become a primary debtor to the plaintiff; and she therefore had a right to accept
the payments made by the latter and to apply the same to the satisfaction of the
third installment of the original indebtedness. Nearly all of this money was so paid
prior to the execution of Exhibit 1 and although the sum of P200 was paid a few
days later, we are of the opinion that the plaintiff may lawfully entitled to accept
and retain the whole, applying it in the manner above stated. In other words the
plaintiff may lawfully retain that money notwithstanding her refusal to be bound by
Exhibit 1.
A contention submitted exclusively in behalf of France and Goulette, the
appellant sureties, is that they were mischarged by the agreement between the
principal debtor and Figueras Hermanos, as attorney in fact for the plaintiffs
whereby the period for the payment of the second installment was extended,
without the assent of the sureties, and new promissory notes for the unpaid
balance were executed in the manner already mentioned in this opinion. The
execution of these new promissory notes undoubtedly constituted an extension of
time as to the obligation included therein, such as would release a surety, even
though of the solidary type, under article 1851 of the Civil Code. Nevertheless it
is to be borne in mind that said extension and novation related only to the second
installment of the original obligation and interest accrued up to that time.
Furthermore, the total amount of these notes was afterwards paid in full, and they
are not now the subject of controversy. It results that the extension thus effected
could not discharge the sureties from their liability as to other installments upon
which alone they have been sued in this action: The rule that an extension of time
granted to the debtor by the creditor, without the consent of the sureties
extinguishes the latter's liability is common both to Spanish Jurisprudence and
the common law; and it is well settled in English and American jurisprudence that
where a surety is liable for different payments, such as installment of rent, or
upon a series of promissory notes, an extension of time as to one or more will not
affect the liability of the surety for the others. (32 Cyc., 196; Hopkirk vs.
McConico, 1 Brock., 220; 12 Fed. Cas., No. 6696; Coe vs. Cassidy, 72 N. Y.,
133; Cohn vs. Spitzer, 129 N. Y. Supp., 104; Shephard Land Co. vs. Banigan, 36
R. I., 1; I. J. Cooper Rubber Co. vs. Johnson, 133 Tenn., 562; Bleeker vs.
Johnson, 190 N. W., 1010.) The contention of the sureties on this point is
therefore untenable.
There is one stipulation in the contract (Exhibit A) which, at first blush,
suggests a doubt as to the propriety of applying the doctrine above stated to the
case before us. We refer to clause (f) which declares that the non-fulfillment on
the part of the debtors of the stipulation with respect the payment of any
installment of the indebtedness, with interest, will give to the creditor the right to
Page 276 of 505

treat and declare all of said installments as immediately due. If the stipulation had
been to the effect that the failure to pay any installment when due would ipso
facto cause the other installments to fall due at once, it might be plausibly
contended that after default of the payment of one installment the act of the
creditor in extending the time as to such installment would interfere with the right
of the surety to exercise his legal rights against the debtor, and that the surety
would in such case be discharged by the extension of time, in conformity with
articles 1851 and 1852 of the Civil Code. But it will be noted that in the contract
now under consideration the stipulation is not that the maturity of the later
installments shall be ipso factoaccelerated by default in the payment of a prior
installment, but only that it shall give the creditor a right to treat the subsequent
installments as due; and in this case it does not appear that the creditor has
exercised this election. On the contrary, this action was not instituted until after all
of the installments had fallen due in conformity with the original contract. It results
that the stipulation contained in paragraph (f) does not affect the application of
the doctrine above enunciated to the case before us.
Finally, it is contended by the appellant sureties that they were
discharged by a fraud practiced upon them by the plaintiff in failing to require the
debtor to execute a mortgage upon the printing establishment to secure the debt
which is the subject of this suit. In this connection it is insisted that at the time
France and Goulette entered into the contract of suretyship, it was represented to
them that they would be protected by the execution of a mortgage upon the
printing establishment by the purchasers Bosque and Pomar. No such mortgage
was in fact executed and in the end another creditor appears to have obtained a
mortgage upon the plant which is admitted to be superior to the claim of the
plaintiff. The failure of the creditor to require such a mortgage is alleged to
operate as a discharge of the sureties. With this insistence we are unable to
agree, for the reason that the proof does not show, in our opinion, that the
creditor, or her attorney in fact, was a party to any such agreement. On the other
hand it is to be collected from the evidence that the suggestion that a mortgage
would be executed on the plant to secure the purchase price and that this
mortgage would operate for the protection of the sureties came from the principal
and not from any representative of the plaintiff. As a result of our examination of
the case we find no error in the record prejudicial to any of the appellants, and
the judgment appealed from will be affirmed. So ordered, with costs against the
appellants.
Avancea, C.J., Villamor, Ostrand, Johns, Romualdez and Villa-Real,
JJ., concur.

||| (Villa y Monna v. Bosque, G.R. No. 24543, [July 12, 1926], 49 PHIL 126-136)

SECOND DIVISION
[G.R. No. 42829. September 30, 1935.]
RADIO CORPORATION OF THE PHILIPPINES, plaintiffappellee, vs. JESUS R. ROA ET AL., defendants. RAMON
CHAVEZ, ANDRES ROA and MANUELROA, appellants.

M. H. de Joya and Juan de Borja for appellants.

Barrera & Reyes for appellee.
DECISION
GODDARD, J p:
This is an appeal from a decision of the Court of First Instance of the
City of Manila the dispositive part of which reads:
"In view of all the foregoing, judgment is hereby rendered in favor of the
plaintiff Radio Corporation of the Philippines and against the defendants Jesus
R. Roa, Ramon Chavez, Andres Roa and Manuel Roa; (a) Ordering the
defendant Jesus R. Roa to pay the plaintiff the sum of P22,935, plus P99.64, with
legal interest thereon from the date of the filing of the complaint until fully paid; (b)
that upon failure of the defendant Jesus Roa to pay the said sum indicated, the
Page 277 of 505

chatted described in the second cause of action shall be sold of public auction to
be applied to the satisfaction of the amount of this judgment; (c) that the
defendants Jesus R. Roa, Ramon Chavez, Andres Roa and Manuel Roa pay
jointly and severally to the plaintiff the amount of P10,000; (d) and that Jesus
R. Roa pay to the plaintiff the amount equivalent to 10 per cent of P22,935, as
attorney's fees, and that all the defendants in this case pay the costs of this
action."
The defendants Ramon Chavez, Andres Roa and Manuel Roa have
appealed from the judgment against them for P10,000 and costs. These
appellants make the following assignments of error:
"1. The court below erred in not finding that the balance of the total
indebtedness became immediately due and demandable upon the failure of the
defendant Jesus R. Roa to pay any installment on his note.
"2. The court below erred in not finding that defendant Jesus
R. Roa defaulted in the payment of the installment due on February 27, 1932,
and that plaintiff corporation gave him an extension of time for the payment of
said installment.
"3. The court below erred in not finding that the extension of time given
to defendant Jesus R. Roa for the payment of an overdue installment served as a
release of defendant sureties from liability on all the subsequent installments.
"4. The court below erred in not finding that the sureties were
discharged from their bond when the plaintiff authorized Jesus R. Roa to remove
the photophone, equipment from Cagayan, Misamis Oriental, to Silay, Occidental
Negros, without the knowledge or consent of said sureties.
"5. The court below erred in condemning Ramon Chavez,
Andres Roa and Manuel Roa to pay jointly and severally the sum of P10,000 to
the RadioCorporation of the Philippines."
The defendant Jesus R. Roa became indebted to the Philippine
Theatrical Enterprises, Inc., in the sum of P28,400 payable in seventy-one equal
monthly installments at the rate of P400 a month commending thirty days after
December 11, 1931, with five days grace monthly until complete payment of said
sum. On that same date the Philippine Theatrical Enterprises, Inc., assigned all
its rights and interest in that contract to the Radio Corporation of the Philippines.
The paragraph of that contract in which the accelerating clause appears
reads as follows:

"In case the vendee-mortgagor fails to make any of the payments as

hereinbefore provided, the whole amount remaining unpaid under this mortgage
shall immediately become due and payable and this mortgage on the property
herein mentioned as well as the Luzon Surety Bond may be foreclosed by the
vendor-mortgagee; and, in such case, the vendee- mortgagor further agrees to
pay the vendor-mortgagee an additional sum equivalent to 25 per cent of the
principal due and unpaid as costs, expenses and liquidated damages, which said
sum, shall be added to the principal sum for which this mortgage is given as
security, and shall become a part thereof."
On March 15, 1932, Erlanger & Galinger, Inc. acting in its capacity as
attorney-in-fact of the Radio Corporation of the Philippines wrote the following
letter (Exhibit 13) to the principal debtor Jesus R. Roa:
"Mr. JESUS R. ROA.
Cagayan, Oriental Misamis
"Attention of Mrs. Amparo Chavez de Roa
"DEAR SIR: We acknowledge with thanks the receipt of your letter of
March 9th together with your remittance of P200 for which we enclose receipt No.
7558. We are applying this amount to the balance of your January installment.
"We have no objection to the extension requested by you to pay the
February installment by the first week of April. We would, however, urge you to
make every efforts to bring the account up-to-date as we are given very little
discretion by the RCP in giving extension of payment.
"Very truly yours,
"RADIO CORP. OF THE PHIL.
"By: ERLANGER & GALINGER, INC.
(Sgd.) "H. N. SALET
"Vice-President"
Under the above assignments of error the principal question to be
decided is whether or not the extension granted in the above copied letter by the
plaintiff, without the consent of the guarantors, the herein appellants,
extinguishes the latter's liability not only as to the installments due at that time, as
held by the trial court, but also as to the whole amount of their obligation. Article
1851 of the Civil Code reads as follows:
"ART. 1851. An extension granted to the debtor by the creditors, without
the consent of the guarantor, extinguishes the latter's liability."
Page 278 of 505

This court has held that mere delay in suing for the collection of the debt
does not release the sureties. (Sons of I. de la Rama vs. Donaldson Sim & Co., 5
Phil., 418; Manzano vs. Tan Sunco, 13 Phil., 183; Hongkong & Shanghai Banking
Corporation vs. Aldecoa & Co., 30 Phil., 255.) In the case of Villa vs. Garcia
Bosque (49 Phil., 126, 134, 135), this court stated:
". . . The rule that an extension of time granted to the debtor by the
creditor, without the consent of the sureties, extinguishes the latter's liability is
common both to Spanish jurisprudence and the common law; and it is well settled
in English and American jurisprudence that where a surety is liable for different
payments, such as installments of rent, or upon a series of promissory notes, an
extension of time as to one or more will not affect the liability of the surety for the
others. . . .
"There is one stipulation in the contract (Exhibit A) which, at first blush,
suggests a doubt as to the propriety of applying the doctrine above stated to the
case before us. We refer to clause (f) which declares that the non-fulfillment on
the part of the debtors of the stipulation with respect to the payment of any
installment of the indebtedness, with interest, will give to the creditor the right to
treat and declare all of said installments as immediately due. If the stipulation had
been to the effect that the failure to pay any installment when due would ipso
facto cause the other installments to all due at once, it might be plausibly
contended that after default of the payment of one installment the act of the
creditor in extending the times as to such installment would interfere with the right
of the surety to exercise his legal rights against the debtor, and that the surety
would in such case be discharged by the extension of time, in conformity with
article 1851 and 1852 of the Civil Code. But it will be noted that in the contract
now under consideration the stipulation is not that the maturity of the latter
installments shall be ipso facto accelerated by default in the payment of a prior
installment, but only that it shall give the creditor a right to treat the subsequent
installments as due; and in this case it does not appear that the creditor has
exercised this election. On the contrary, this action was not instituted until after all
of the installments had fallen due in conformity with original contract. It results
that the stipulation contained in paragraph (f) does not affect the application of
the doctrine above enunciated to the case before us."

The stipulation in the contract under consideration, copied above, is to

the effect that upon failure to pay any installment when due the other installments
ipso facto become due and payable. In view of the fact that under the express
provision of the contract, quoted above, the whole unpaid balance automatically

becomes due and payable upon failure to pay one installment, the act of the
plaintiff in extending the payment of the installment corresponding to February,
1932, to April, 1932, without the consent of the guarantors, constituted in fact an
extension of the payment of the whole amount of the indebtedness, as by that
extension the plaintiff could not have filed an action for the collection of the whole
amount until after April, 1932. Therefore appellants' contention that after default
of the payment of one installment the act of the herein creditor in extending the
time of payment discharges them as guarantors in conformity with articles 1851
and 1852 of the Civil Code is correct.
"It is a familiar rule that if a creditor, by positive contract with the
principal debtor, and without the consent of the surety, extends the time of
payment, he thereby discharges the surety. . . . The time of payment may be
quite as important a consideration of the surety as the amount he has promised
conditionally to pay. . . . Again, a surety has the right, on payment of the debt, to
be subrogated to all the rights of the creditor, and to proceed at once to collect it
from the principal; but if the creditor has tied his own hands from proceeding
promptly, by extending the time of collection, the hands of the surety will equally
be found; and before they are loosed, by the expiration of the extended credit, the
principal debtor may have become insolvent and the right of subrogation
rendered worthless. It should be observed, however, that it is really unimportant
whether the extension given has actually proved prejudicial to the surety or not.
The rule stated is quite independent of the event, and the fact that the principal is
insolvent or that the extension granted promised to be beneficial to the surety
would give no right to the creditor to change the terms of the contract without the
knowledge or consent of the surety. Nor does it matter for how short a period the
time of payment may be extended. The principle is the same whether the time is
long or short. The creditor must be in such a situation that when the surety
comes to be substituted in his place by paying the debt, he may have an
immediate right of action against the principal. The suspension of the right to sue
for a month, or even a day, is as effectual to release the surety as a year or two
years." (21 R. C. L., 1018-1020.)
Plaintiff's contention that the enforcement of the accelerating clause is
potestative on the part of the obligee, and not self-executing, is clearly untenable
from a simple reading of the clause copied above. What is potestative on the part
of the obligee is the foreclosure of the mortgage and not the accelerating clause.
Plaintiff-appellee contends that there was no consideration for the
extension granted the principal debtor. Article 1277 of the Civil Code provides
that "even though the consideration should not be expressed in the contract, it
Page 279 of 505

shall be presumed that a consideration exists and that it is licit, unless the debtor
proves the contrary." It was incumbent upon the plaintiff to prove that there was
no valid consideration for the extension granted.
In view of the foregoing the judgment of the trial court is reversed as to
the appellants Ramon Chaves, Andres Roa and Manuel Roa, without costs.
Malcolm, Villa-Real, Hull, and Imperial, JJ., concur.
||| (Radio Corp. of the Phil. v. Chavez, G.R. No. 42829, [September 30, 1935], 62
PHIL 211-218)

SECOND DIVISION
[G.R. No. L-19632. November 13, 1974.]
THE
PHILIPPINE AMERICAN GENERAL INSURANCE COMPANY, I
NC., plaintiff-appellee, vs. MANUEL MUTUC, DOROTEO Q.
MOJICA, and FAUSTO S. ALBERTO, defendants, FAUSTO S.
ALBERTO, defendant-appellant.

Manuel Lim, Manuel Y. Macias & Ricardo T. Bancod for plaintiff-appellee.

V.A. Francisco & Associates for defendant-appellant.

DECISION

FERNANDO, J p:
There is an obstacle, rather formidable in character, that stands in the way of the plea
of appellant Fausto S. Alberto, 1 to have this Court reverse a lower court decision of
February 14, 1962, holding him liable on an indemnity agreement. As pointed out
therein, the language of his undertaking is clear and unmistakable and, therefore,
leaves no alternative for a court except to enforce its terms. The attempt to impugn
such a judgment based on the ground that the stipulation relied upon is contrary to

morals and to public order and policy, while vigorously pressed, is none too
successful. Accordingly, we affirm.
The facts as stipulated by the parties may be gleaned from the appealed decision.
Thus: "On July 16, 1957, defendant Manuel C. Mutuc, as principal, and plaintiff, as
surety, executed a surety bond in the amount of P1,000 in behalf of
defendant Mutuc and in favor of the Maersk Line, in which the surety company
guaranteed the faithful performance by said Manuel C. Mutuc of his duties in
connection with his employment as crew member of the vessel of the Maersk Line,
and more particularly, that he would not desert said vessel while he was engaged as
such crewmember while outside of the Philippines. To protect the plaintiff company,
on July 17, 1957, in consideration of plaintiff's becoming surety of the defendant
Manuel C. Mutuc, under the bond, . . . the defendant Manuel C. Mutuc, Doroteo Q.
Mojica, and Fausto S. Alberto, executed an indemnity agreement in favor of the
plaintiff, . . . The duration of the surety bond, . . . was for the period beginning July 16,
1957 to July 17, 1958, but at the instance of the defendant, Manuel C. Mutuc, it was
renewed for three successive one year periods, the last period of which was from July
17, 1960 to July 17, 1961. The prior consent of the defendant Fausto S. Alberto to the
aforesaid renewal extension was not obtained by the defendant Manuel C. Mutuc or
by the plaintiff. According to the letter of the Immigration and Naturalization Service,
United States Department of Justice, . . . Manuel C. Mutuc was not aboard the vessel
M/S Merit Maersk when it departed from New York at 3:00 o'clock P.M. for Charleston,
South Carolina, and was presumed to be a deserter. The Compania General de
Tobacos de Filipinas which represented the Maersk Lines forwarded this letter to the
plaintiff and asked for the remittance of the forfeited bond of P1,000. On October 6,
1960, the plaintiff wrote a letter to the defendants Doroteo Q. Mojica and Fausto S.
Alberto demanding the payment of the amount of P1,000 in accordance with the
indemnity agreement. On October 25, 1960, plaintiff paid the Tabacalera the sum of
P5,000 in full settlement of the latter's claim against the bond . . .. This action is for
the recovery of the amount of P1,000 against the defendants Mojica and Alberto
based on the indemnity agreement . . . . From the judgment against them by the
Municipal Court, defendant Alberto appealed alleging that the renewal was made
without his consent." 2
The indemnity agreement was insofar as pertinent set forth therein in this wise:
"[Indemnity]: The undersigned agree at all times to jointly and severally indemnify
the [Company] and keep it indemnified and hold and save it harmless from and
against any and all damages, losses, costs, stamps, taxes, penalties, charges and
expenses of whatsoever kind and nature which the [Company] shall or may, at any
time sustain or incur in consequence of having become surety upon this bond herein
Page 280 of 505

above referred to or any extension, renewal, substitution or alteration thereof, made at

the instance of the undersigned or any of them, or any other bond executed on behalf
of the undersigned or any of them; and to pay, reimburse and make good to the
[Company], its successors and assigns, all sums and amount of money which it or its
representatives shall pay or cause to be paid, or become liable to pay, on account of
the undersigned or any of them, of whatsoever kind and nature, including 15% of the
amount involved in the litigation or other matters growing out of or connected
therewith, for and as attorney's fees, but in no case less than P25.00. It is hereby
further agreed that in case of any extension or renewal of the bond we equally bind
ourselves to the [Company] under the same terms and conditions as herein provided
without the necessity of executing another indemnity agreement for the purpose and
that we hereby equally waive our right to be notified of any renewal or extension of the
bond which may be granted under this indemnity agreement. [Renewals, alterations
and substitutions]: The undersigned hereby empower and authorize the Company
to grant or consent to the granting of any extension, continuation, increase
modification, change, alteration, and/or renewal of the original bond herein referred to,
and to execute or consent to the execution of any substitution for said Bond with the
same or different conditions and parties, and the undersigned hereby hold themselves
jointly and severally liable to the Company for the Original Bond herein
abovementioned or for any extension, continuation, increase, modification, change,
alteration, renewal or substitution thereof, until the full amount including principal,
interests, premiums, costs and other expenses due to the Company thereunder is fully
paid up." 3
The lower court after referring to the above stipulation as to "Renewals" which refers
not to a single extension but to "any extension" agreed to in advance by defendant,
now appellant, found for plaintiff, now appellee. As set forth in the decision: "The
defendant having expressly empowered or authorized his principal to the granting of
any extension, his liability under the indemnity agreement necessarily follows." 4 It is
from that decision in favor of plaintiff that this appeal is taken. As set forth at the
outset, there is no legal ground for a reversal.
1. Appellant was not compelled to enter into an indemnity agreement. He did so of his
own free will. He agreed to hold himself liable for the amount therein specified. What
is more, he did consent likewise to be so bound not only for the one year period
specified but to any extension thereafter made, an extension moreover that could be
had without his having to be notified. That was what the contract provided. He gave
his plighted word. The terms were definite and certain. There was no ambiguity. All
that was necessary was to see to its enforcement. The Civil Code explicitly provides.
"If the terms of a contract are clear and leave no doubt upon the intention of the

contracting parties, the literal meaning of its interpretation shall control." 5 That was
how it was worded under the Civil Code of Spain of 1899 formerly in force in this
jurisdiction. 6
A provision like the above exemplifies according to the leading case of Perez v.
Pomar 7 the principle that "the will of the contracting parties is law, . . . ." 8 It is
understandable then why in Alburo v. Villanueva, 9 this Court affirmed that where the
terms of a contract are "clear and explicit," they "do not justify an attempt to read into
it any alleged intention of the parties other than that which appears upon its
face." 10 As was so categorically put forth in Hernandez v. Antonio 11 "The literal
sense of its stipulations must be observed. 12 It was so succinctly observed by Chief
Justice Arellano in Velasco v. Lao Tam, 13 that such is the "first rule on the matter . . .
" 14There is this excerpt from Chinchilla v. Rafel: 15 "That the terms employed in the
contract Exhibit 1 are clear and leave no doubt as to the true genuine intention of the
contracting parties, it is sufficient, in the opinion of this court, to demonstrate it by a
simple reading of the document Exhibit 1 from the wording of which it is not possible
to find any meaning contrary or opposed to the evident intention of the contracting
parties, Rafel and Verdaguer . . . From the literal wording of the document in question,
it is not possible under any circumstance whatsoever to infer a contract distinct from
that which really and truly appears to have been specified in the said
document." 16 Thus, contracts, according to Feliciano v. Limjuco, 17 which are the
private laws of the contracting parties, should be fulfilled according to the literal sense
of their stipulations, if their terms are clear and leave no room for doubt as to the
intention of the contracting parties, for contracts are obligatory, no matter what their
form may be, whenever the essential requisites for their validity are present. 18 A
terse summary of the matter is that of the then Justice, later Chief Justice, Moran: "A
writing must be interpreted according to the legal meaning of its language." 19
2. There was no other valid conclusion that could be reached by the lower court. Even
appellant must have seen that so it ought to be. That would account for the contention
in his brief that the stipulation as to "any extension" without the need for his being
notified was "null and void being contrary to law, morals, good customs, public order
or public policy." 20 That is a pretty tall order. There is more than just a hint of
hyperbole in such a sweeping allegation. Appellant though ought to have realized that
assertion is not the equivalent of proof. A little more objectivity on his part should
bring the realization that no offense to law or morals could be imputed to such a
contractual provision. As to good customs, that category requires something to
substantiate it. A mere denunciatory characterization certainly cannot suffice. That
leaves public order or public policy. It is difficult to follow appellant's train of reasoning.
He would premise it on the indemnity agreement being a contract of adhesion. He
Page 281 of 505

was not at all compelled to agree to it. He was free to act either way. He had a choice.
It may be more offensive to public policy, let alone morals or good customs, if
thereafter he would he allowed to go back on his word. Besides the policy underlying
such a stipulation in this litigation is clear. What was guaranteed was the faithful
performance of defendant Mutuc of his employment as a member of the crew of a
vessel plying overseas. What was more logical considering the difficulty of contacting
him then for the party concerned, here appellant, to agree in advance to any
extension without the need for notification. So the parties agreed. There could be thus
nothing that did offend public policy or public order when such an arrangement was
explicitly provided for. Appellant, clearly, has not made out a case for reversal. 21

SECOND DIVISION
[G.R. No. L-34539. July 14, 1986.]

WHEREFORE, the lower court decision of February 14, 1962 is affirmed. Costs
against appellant.
||| (Phil. American General Insurance Co., Inc. v. Mutuc, G.R. No. L-19632,
[November 13, 1974], 158 PHIL 699-706)

EULALIO PRUDENCIO and

ELISA
T. PRUDENCIO, petitioners, vs. THE
HONORABLE COURT OF APPEALS,
THE
PHILIPPINE
NATIONAL BANK, RAMON C. CONCEPCION and MANUEL M.
TAMAYO, partners of the defunct partnership Concepcion &
Tamayo Construction Company, JOSE TORIBIO, Atty.-in-Fact
of Concepcion & Tamayo Construction Company, and THE
DISTRICT
ENGINEER,
Puerto
Princesa,
Palawan, respondents.

Fernando R. Mangubat, Jr. for respondent PNB.

DECISION

GUTIERREZ, JR., J p:
This is a petition for review seeking to annul and set aside the decision of
the Court of Appeals, now the Intermediate Appellate Court, affirming the order of the
trial court which dismissed the petitioners' complaint for cancellation of their real
estate mortgage and held them jointly and severally liable with the principal debtors
on a promissory note which they signed as accommodation makers.
Page 282 of 505

The factual background of this case is stated in the decision of the appellate court:
"Appellants are the registered owners of a parcel of land located
in Sampaloc, Manila, and covered by T.C.T. 35161 of the Register
of Deeds of Manila. On October 7, 1954, this property was
mortgaged by the appellants to the Philippine National Bank,
hereinafter called PNB, to guarantee a loan of P1,000.00
extended to one Domingo Prudencio.
"Sometime in 1955, the Concepcion & Tamayo Construction
Company, hereinafter called Company, had a pending contract
with the Bureau of Public Works, hereinafter called the Bureau,
for the construction of the municipal building in Puerto Princesa,
Palawan, in the amount of P36,800.00 and, as said Company
needed funds for said construction, Jose Toribio, appellants'
relative, and attorney-in-fact of the Company, approached the
appellants asking them to mortgage their property to secure the
loan of P10,000.00 which the Company was negotiating with the
PNB.
"After some persuasion appellants signed on December 23, 1955
the 'Amendment of Real Estate Mortgage', mortgaging their said
property to the PNB to guaranty the loan of P10,000.00 extended
to the Company. The terms and conditions of the original
mortgage for P1,000.00 were made integral part of the new
mortgage for P10,000.00 and both documents were registered
with the Register of Deeds of Manila. The promissory note
covering the loan of P10,000.00 dated December 29, 1955,
maturing on April 27, 1956, was signed by Jose Toribio, as
attorney-in-fact of the Company, and by the appellants.
Appellants also signed the portion of the promissory note
indicating that they are requesting the PNB to issue the Check
covering the loan to the Company. On the same date (December
23, 1955) that the 'Amendment of Real Estate' was executed,
Jose Toribio, in the same capacity as attorney-in-fact of the
Company, executed also the 'Deed of Assignment' assigning all
payments to be made by the Bureau to the Company on account
of the contract for the construction of the Puerto Princesa building
in favor of the PNB.

"This assignment of credit to the contrary notwithstanding, the

Bureau, with approval, of the PNB, conditioned, however that
they should be for labor and materials, made three payments to
the Company on account of the contract price totalling
P11,234.40. The Bureau's last request for P5,000.00 on June 20,
1956, however, was denied by the PNB for the reason that since
the loan was already overdue as of April 28, 1956) the remaining
balance of the contract price should be applied to the loan.
"The Company abandoned the work, as a consequence of which
on June 30, 1956, the Bureau rescinded the construction contract
and assumed the work of completing the building. On November
14. 1958, appellants wrote the PNB contending that since the
PNB authorized payments to the Company instead of on account
of the loan guaranteed by the mortgage there was a change in
the conditions of the contract without the knowledge of
appellants, which entitled the latter to a cancellation of their
mortgage contract.
"Failing in their bid to have the real estate mortgage cancelled,
appellants filed on June 27, 1959 this action against the PNB, the
Company, the latter's attorney-in-fact Jose Toribio, and the
District Engineer of Puerto Princesa, Palawan, seeking the
cancellation of their real estate mortgage. The complaint was
amended to exclude the Company as defendant, it having been
shown that its life as a partnership had already expired and, in
lieu thereof, Ramon Concepcion and Manuel M. Tamayo,
partners of the defunct Company, were impleaded in their private
capacity as defendants."
After hearing, the trial court rendered judgment, denying the prayer in the complaint
that the petitioners be absolved from their obligation under the mortgage contract and
that the said mortgage be released or cancelled. The petitioners were ordered to pay
jointly and severally with their co-makers Ramon C. Concepcion and Manuel M.
Tamayo the sum of P11,900.19 with interest at the rate of 6% per annum from the
date of the filing of the complaint on June 27, 1959 until fully paid and P1,000.00
attorney's fees.
The decision also provided that if the judgment was not satisfied within 90 days from
its receipt, the mortgaged properties together with all the improvements thereon
Page 283 of 505

belonging to the petitioners would be sold at public auction and applied to the
judgment debt.
The Court of Appeals affirmed the trial court's decision in toto stating that, as
accommodation makers, the petitioners' liability is that of solidary co-makers and that
since "the amounts released to the construction company were used therein and,
therefore, were spent for the successful accomplishment of the work constructed for,
the authorization made by the Philippine National Bank of partial payments to the
construction company which was also one of the solidary debtors cannot constitute a
valid defense on the part of the other solidary debtors. Moreover, those who rendered
services and furnished materials in the construction are preferred creditors and have
a lien on the price of the contract." The appellate court further held that PNB had no
obligation whatsoever to notify the petitioners of its authorizing the three payments in
the total amount of P11,234.00 in favor of the Company because aside from the fact
that the petitioners were not parties to the deed of assignment, there was no
stipulation in said deed making it obligatory on the part of the PNB to notify the
petitioners everytime it authorizes payment to the Company. It ruled that the
petitioners cannot ask to be released from the real estate mortgage.
In this petition, the petitioners raise the following issues which they present in the form
of errors:
I. First Assignment of Error.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT HEREIN PETITIONERS WERE SOLIDARY CO-DEBTORS
INSTEAD OF SURETIES:
II. Second Assignment of Error.
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING
THAT PETITIONERS WERE NOT RELEASED FROM THEIR
OBLIGATION TO THE RESPONDENT PNB, WHEN THE PNB,
WITHOUT THE KNOWLEDGE AND CONSENT OF
PETITIONERS, CHANGED THE TENOR AND CONDITION OF
THE ASSIGNMENT OF PAYMENTS MADE BY THE PRINCIPAL
DEBTOR; CONCEPCION & TAMAYO CONSTRUCTION
COMPANY; AND RELEASED TO SUCH PRINCIPAL DEBTOR
PAYMENTS FROM THE BUREAU OF PUBLIC WORKS WHICH
WERE MORE THAN ENOUGH TO WIPE OUT THE
INDEBTEDNESS TO THE PNB.

The petitioners contend that as accommodation makers, the nature of their liability is
only that of mere sureties instead of solidary co-debtors such that "a material
alteration in the principal contract, effected by the creditor without the knowledge and
consent of the sureties, completely discharges the sureties from all liability on the
contract of suretyship." They state that when respondent PNB did not apply the initial
and subsequent payments to the petitioners' debt as provided for in the deed of
assignment, they were released from their obligation as sureties and, therefore, the
real estate mortgage executed by them should have been cancelled.
Section 29 of the Negotiable Instrument Law provides:
"Liability of accommodation party. An accommodation party is
one who has signed the instrument as maker, drawer, acceptor,
or indorser, without receiving value therefor, and for the purpose
of lending his name to some other person. Such a person is liable
on the instrument to a holder for value, notwithstanding such
holder at the time of taking the instrument knew him to be only an
accommodation party."
In the case of Philippine Bank of Commerce v. Aruego (102 SCRA 530, 539), we held
that ". . . in lending his name to the accommodated party, the accommodation party is
in effect a surety. . . ." However, unlike in a contract of suretyship, the liability of the
accommodation party remains not only primary but also unconditional to a holder for
value such that even if the accommodated party receives an extension of the period
for payment without the consent of the accommodation party, the latter is still liable for
the whole obligation and such extension does not release him because as far as a
holder for value is concerned, he is a solidary co-debtor.
Expounding on the nature of the liability of an accommodation party under the
aforequoted section, we ruled in Ang Tiong v. Ting (22 SCRA 713, 716):
"3. That the appellant, again assuming him to be an
accommodation indorser, may obtain security from the maker to
protect himself against the danger of insolvency of the latter,
cannot in any manner affect his liability to the appellee, as the
said remedy is a matter of concern exclusively between
accommodation indorser and accommodated party. So that the
appellant stands only as a surety in relation to the maker,
granting this to be true for the sake of argument, is immaterial to
the claim of the appellee, and does not a whit diminish nor defeat
the rights of the latter who is a holder for value. The liability of the
Page 284 of 505

appellant remains primary and unconditional. To sanction the

appellant's theory is to give unwarranted legal recognition to the
patent absurdity of a situation where an indorser, when sued on
an instrument by a holder in due course and for value, can
escape liability on his indorsement by the convenient expedient of
interposing the defense that he is a mere accommodation
indorser."

There is, therefore, no question that as accommodation makers, petitioners would be

primarily and unconditionally liable on the promissory note to a holder for value,
regardless of whether they stand as sureties or solidary co-debtors since such
distinction would be entirely immaterial and inconsequential as far as a holder for
value is concerned. Consequently, the petitioners cannot claim to have been released
from their obligation simply because the time of payment of such obligation was
temporarily deferred by PNB without their knowledge and consent. There has to be
another basis for their claim of having been freed from their obligation. The question
which should be resolved in this instant petition, therefore, is whether or not PNB can
be considered a holder for value under Section 29 of the Negotiable Instruments Law
such that the petitioners must be necessarily barred from setting up the defense of
want of consideration or some other personal defenses which may be set up against a
party who is not a holder in due course.
A holder for value under Section 29 of the Negotiable Instruments Law is one who
must meet all the requirements of a holder in due course under Section 52 of the
same law except notice of want of consideration. (Agbayani, Commercial Laws of the
Philippines, 1964, p. 208). If he does not qualify as a holder in due course then he
holds the instrument subject to the same defenses as if it were non-negotiable
(Section 58, Negotiable Instruments Law).
In the case at bar, can PNB, the payee of the promissory note be considered a holder
in due course?
Petitioners contend that the payee PNB is an immediate party and, therefore, is not a
holder in due course and stands on no better footing than a mere assignee.
In those cases where a payee was considered a holder in due course, such payee
either acquired the note from another holder or has not directly dealt with the maker
thereof. As was held in the case of Bank of Commerce and Savings v. Randell (186
NorthWestern Reporter 71):

"We conclude, therefore, that a payee who receives a negotiable

promissory note, in good faith, for value, before maturity, and
without any notice of any infirmity, from a holder, not the maker, to
whom it was negotiated as a completed instrument, is a holder in
due course within the purview of a Negotiable Instruments law, so
as to preclude the defense of fraud and failure of consideration
between the maker and the holder to whom the instrument, was
delivered."
Similarly, in the case of Stone v. Goldberg & Lewis (60 Southern Reporter 748) on
rehearing and quoting Daniel on Negotiable Instruments, it was held:
"It is a general principle of the law merchant that, as between the
immediate parties to a negotiable instrument the parties
between whom there is a privity the consideration may be
inquired into; and as to them the only superiority of a bill or note
over other unsealed evidence of debt is that it prima facie imports
a consideration."
Although as a general rule, a payee may be considered a holder in due course we
think that such a rule cannot apply with respect to the respondent PNB. Not only was
PNB an immediate party or in privy to the promissory note, that is, it had dealt directly
with the petitioners knowing fully well that the latter only signed as accommodation
makers but more important, it was the Deed of Assignment executed by the
Construction Company in favor of PNB which principally moved the petitioners to sign
the promissory note also in favor of PNB. Petitioners were made to believe and on
that belief entered into the agreement that no other conditions would alter the terms
thereof and yet, PNB altered the same. The Deed of Assignment specifically provided
that Jose F. Toribio, on behalf of the Company, "have assigned, transferred and
conveyed and by these presents, do assign, transfer and convey unto the said
Philippine National Bank, its successors and assigns all payments to be received from
the Bureau of Public Works on account of contract for the construction of the Puerto
Princesa Municipal Building in Palawan, involving the total amount of P36,000.00" and
that "This assignment shall be irrevocable and subject to the terms and conditions of
the promissory note and or any other kind of documents which the Philippine National
Bank have required or may require the assignor to execute to evidence the abovementioned obligation."
Under the terms of the above Deed, it is clear that there are no further conditions
which could possibly alter the agreement without the consent of the petitioners such
as the grant of greater priority to obligations other than the payment of the loan due to
Page 285 of 505

the PNB and part of which loan was guaranteed by the petitioners in the amount of
P10,000.00.
This, notwithstanding, PNB approved the Bureau's release of three payments directly
to the Company instead of paying the same to the Bank. This approval was in
violation of the Deed of Assignment and without any notice to the petitioners who
stood to lose their property once the promissory note falls due without the same
having been paid because the PNB, in effect, waived payments of the first three
releases. From the foregoing circumstances, PNB can not be regarded as having
acted in good faith which is also one of the requisites of a holder in due course under
Section 52 of the Negotiable Instruments Law. The PNB knew that the promissory
note which it took from the accommodation makers was signed by the latter because
of full reliance on the Deed of Assignment, which, PNB had no intention to comply
with strictly. Worse, the third payment to the Company in the amount of P4,293.60
was approved by PNB although the promissory note was almost a month overdue, an
act which is clearly detrimental to the petitioners.
We, therefore, hold that respondent PNB is not a holder in due course. Thus, the
petitioners can validly set up their personal defense of release from the real estate
mortgage against PNB. The latter, in authorizing the third payment to the Company
after the promissory note became due, in effect, extended the term of the payment of
the note without the consent of the accommodation makers who stand as sureties to
the accommodated party and to all other parties who are not holders in due course or
who do not derive their right from the same, including PNB.
It may be argued that the Prudencios could have mortgaged their property even
without the promissory note. The records show, however, that they would not have
mortgaged the lot were it not for the sake of the Company whose attorney-in-fact was
their relative. The spouses did not need the money for themselves.
The attorney-in-fact tried twice to convince the Prudencios to mortgage their property
in order to secure a loan in favor of the Company but the Prudencios refused. It was
only when the deed of assignment was shown to the spouses that they consented to
the mortgage and signed the promissory note in the Bank's favor.
Article 2085 of the Civil Code enumerates the requisites of a valid mortgage contract.
Petitioners do not dispute the validity of the mortgage. They only want to have it
cancelled because the Bank violated the deed of assignment and extended the period
of time of payment of the promissory note without the petitioners' consent and to the
latter's detriment.

The mortgage cannot be separated from the promissory note for it is the latter which
is the basis of determining whether the mortgage should be foreclosed or cancelled.
Without the promissory note which determines the amount of indebtedness there
would have been no basis for the mortgage.
True, if the Bank had not been the assignee, then the petitioners would be obliged to
pay the Bank as their creditor on the promissory note, irrespective of whether or not
the deed of assignment had been violated. However, the assignee and the creditor in
this case are one and the same the Bank itself. When the Bank violated the deed
of assignment, it prejudiced itself because its very violation was the reason why it was
not paid on time in its capacity as creditor in the promissory note. It would be unfair to
make the petitioners now answer for the debt or to foreclose on their property.
Neither can PNB justify its acts on the ground that the Bureau of Public Works
approved the deed of assignment with the condition that the wages of laborers and
materials needed in the construction work must take precedence over the payment of
the promissory note. In the first place, PNB did not need the approval of the Bureau.
But even if it did, it should have informed the petitioners about the amendment of the
deed of assignment. Secondly, the wages and materials have already been paid. That
issue is academic. What is in dispute is who should bear the loss in this case. As
between the petitioners and the Bank, the law and the equities of the case favor the
petitioners. And thirdly, the wages and materials constitute a lien only on the
constructed building but do not enjoy preference over the loan unless there is a
liquidation proceeding such as in insolvency or settlement of estate. (See Philippine
Savings Bank v. Lantin, 124 SCRA 476). There were remedies available at the time if
the laborers and the creditors had not been paid. The fact is, they have been paid.
Hence when the PNB accepted the condition imposed by the Bureau without the
knowledge or consent of the petitioners, it amended the deed of assignment which, as
stated earlier, was the principal reason why the petitioners consented to become
accommodation makers.
WHEREFORE,
the
petition
is
GRANTED.
The
decision
of
the Court of Appeals affirming the decision of the trial court is hereby REVERSED
and SET ASIDE and a new one entered absolving the petitioners from liability on the
promissory note and under the mortgage contract. The Philippine National Bank is
ordered to release the real estate mortgage constituted on the property of the
petitioners and to pay the amount of THREE THOUSAND PESOS (P3,000.00) as
attorney's fees.

Page 286 of 505

SO ORDERED.
Feria (Chairman), Fernan, Alampay and Paras, JJ., concur.
||| (Prudencio v. Court of Appeals, G.R. No. L-34539, [July 14, 1986], 227 PHIL 7-18)

EN BANC
[G.R. No. 41795. August 30, 1935.]
J. W. SHANNON and MRS. J. W. SHANNON, plaintiffsappellees, vs.
THE
PHILIPPINE LUMBER & TRANSPORTATION CO., INC., and E.
E. ELSER,defendants. E. E. ELSER, appellant.

Gibbs & McDonough for appellant.

DeWitt, Perkins & Ponce Enrile for appellees.

SYLLABUS
1. DEBTS; PRINCIPAL AND SURETY; LACHES. The plaintiffs let
pass some years from the maturity of the note before bringing the action for the
recovery of its amount. Held: That the delay does not constitute laches in the
sense that it had the effect of releasing both the principal debtor and its sureties
from their obligations, nor did it occasion loss of rights and privileges of such
moment as to give rise to the discharge of the obligation contracted by the
appellant.

DECISION

IMPERIAL, J p:
Page 287 of 505

On March 1, 1926, the Philippine Lumber & Transportation Co., Inc.,

obtained a loan of P12,000 from Mrs. J. W. Shannon and executed a note
promising to pay the said sum to the creditor or to her husband, J. W. Shannon,
on or before March 1, 1927, with interest at 10 per cent per annum, payable
monthly and in advance on the first day of each month. The obligation with its
terms was secured, jointly and severally, by Walter E. Jones and E. E. Elser
jointly and severally, by Walter E. Jones and E. E. Elser who signed the note.
This note was ratified before the notary public, Juan L. Diaz, in the City of Manila,
on March 22, 1926. The principal was not paid on its due date or thereafter, but
the stipulated interest up to October, 1929, inclusive, was paid. Walter E. Jones
died on November 24, 1929, and the plaintiffs filed a claim and recovered from
his estate P1,062 in part payment of accrued interest due.
On August 1, 1927, while the principal obligation was pending payment,
J. W. Shannon obtained a loan of P1,000 from Walter E. Jones; on April 9, 1928,
he obtained another loan of P2,000, and on April 28, 1928, he made Jones pa on
his account a certain bill of exchange drawn upon him in the sum of P1,656,
makingShannon's total loan from Jones P4,656. Both agreed that this amount
should be paid at the rate of P125 a month, with 10 per cent interest per annum,
failing which, Jones was authorized to retain and apply to the monthly payments
whatever amounts he might have belonging to Shannon or to his wife. Jones did
not receive monthly payments from Shannon under this agreement, but instead
he deducted them from the monthly interest which, on the other hand, the
Philippine Lumber &Transportation Co., Inc., of which he was the president, was
bound to pay. These operations were entered in the books of said corporation.
As the Philippine Lumber & Transportation Co., Inc., and its sureties had
not paid the principal and the stipulated interest from November 1, 1929, the
Shannons brought suit against the debtor corporation and the surety, E. E. Elser,
for the recovery of said amounts. The Philippine Lumber & Transportation Co.,
Inc., neither appeared nor answered the complaint, and it was declared in
defaulty. Neither did it intervene nor defend itself at the trial. E. E. Elser appealed
from the judgment ordering the Philippine Lumber & Transportation Co., Inc., to
pay to the plaintiffs the sum of P12,000 with interest at 10 per cent per annum
from November 1, 1929, minus the sum of P1,062 which had been recovered
from the estate of the deceased Walter E. Jones, plus another 10 per cent as
attorney's fees, and the costs, and likewise requiring the said E. E. Elser to pay to
the plaintiffs one-half of all the aforesaid sums of money, except attorney's fees,
which the Philippine Lumber & Transportation Co., Inc., should fail to pay.

The appellant argues that the judgment is erroneous: in not holding that
after the note became due, the plaintiffs had received from the
Philippine Lumber &Transportation Co., Inc., payments in advance of the
stipulated interest for a relatively long period of time, and that, consequently, said
plaintiffs, as creditors, extended the period fixed for the payment of the principal
without his consent; in not permitting him to adduce evidence on his defense of
laches whereby he attempted to show that in 1927 and 1928 the principal debtor
had property and money with which to pay its entire obligation; in not holding that
the plaintiffs were guilty of unreasonable delay in bringing their action, thereby
causing him damages, and in not absolving him from the complaint.
The first assigned error relates to the loans made by Jones
to Shannon up to the amount of P4,656. The appellant contends that these loans
were in truth payments in advance of the stipulated interest which the principal
debtor had to pay monthly and which had the effect of extending the stated period
for the payment of the indebtedness, thereby relieving him of his obligation as
surety under article 1851 of the Civil Code, because his consent was not first
obtained; and in support of his contention cites the decision of this court in Banco
Espaol Filipino vs. Donaldson Sim & Co. (5 Phil., 418). The facts, as we find
them, do not support the contention. It indisputably appears that those amounts
of money were obtained by Shannon not as payments in advance of the interest,
the former was authorized to deduct it from any amount which he might have at
his disposal belonging to Shannon or to his wife. As, on the other hand, Jones
was the president of the principal debtor, and the latter had to pay monthly
interest, the former was authorized to deduct it from any amount which he might
have at his disposal belonging to Shannon or to his wife. As, on the other hand,
Jones was the president of the principal debtor, and the latter had to pay monthly
interest on its indebtedness, Jones deducted monthly from this last interest that
which Shannon failed to pay. It is therefore, evident that which Shannon failed to
pay. It is therefore, evidence that neither the provisions of article 1851 of the Civil
Code nor the doctrine on the matter enunciated in the Banco Espaol Filipino
case is squarely in point.
The appellant attempted to prove at the trial that the plaintiffs had been
guilty of laches and had brought their action against him tardily, because in 1927
and 1928 the principal debtor had sufficient property and money with which it
could have fully paid its obligation, and in so acting the plaintiffs caused him
damages. This kind of evidence was timely objected to, and the objection was
sustained by the court. This ruling is the subject of the second and third assigned
errors. We hold that the judgment is not erroneous on these grounds. True, the
plaintiffs let pass some years from the maturity of the note before bringing the
Page 288 of 505

action for the recovery of its amount. But we hold that the delay does not
constitute laches in the sense that it had the effect of releasing both the principal
debtor and its sureties from their obligations, nor did it occasion loss of rights and
privileges of such moment as to give rise to the discharge of the obligation
contracted by the appellant. In the aforecited Banco Espaol Filipino case, in
ruling upon a similar question, we said: "The decision en casacion of the
Supreme Court of Spain in jurisprudence property interpreting the Spanish Civil
Code. The following doctrine is laid down it the judgment of March 22, 1901: 'The
court which pronounced sentence in this case has not violated article 1851 of the
Civil Code, because the mere circumstance that the creditor does not demand
the compliance with the obligation immediately upon the same becoming due,
and that he more or less delays his action, does not mean or reveal an intention
to grant an extension to the debtor, as according to article 1847 the obligation of
the surety extinguishes at the same time as that of the surety extinguishes at the
same time as that of the debtor, and for the same causes as the other
obligations. . . .' Deferring the filing of the action does not imply a change in the
efficacy of the contract or liability of any kind on the part of the debtor. It is merely,
without demonstration or proof to the contrary, respite, waiting, courtesy, leniency,
passivity, inaction. It does not constitute novation, because this must be express.
It does not engender liability, because on the part of the creditor such can not
arise except from delay, and for this class of delay interpolation on the part of the
party who considers himself injured thereby is necessary. In order that this
waiting or inaction, of itself beneficial to the parties obligated, can be interpreted
as injurious to any of them, it is altogether necessary that this be represented by
means of a protest or interpolation against the delay. Without action of this kind it
continues to be what it is, merely a failure of the creditor to act, which in itself
does not create liability. It can not do so, as we see in the aforesaid sentencia de
casacion. '. . . In accordance with the provisions of number 4 of article 1843, the
surety, even before payment, may proceed against the principal debtor when the
debt has become demandable because the term in which it should have been
paid has expired.' In view of this action, which is a protection against the risk of
possible insolvency on the part of the principal debtor, it is very clearly seen that
the law does not even grant the surety the right to sue the creditor for delay, as
protection against the risks of possible insolvency on the part of the debtor; but in
view of the efficacy of the action of the contract against the surety, beginning with
the date when the obligation becomes due, his vigilance must be exercised rather
against the principal debtor." (5 Phil., 422, 423.)
In Clark vs. Sellner (42 Phil., 384), this court had occasion to reiterate
the same doctrine as follows: "The trial judge took into account the fact that at the

time of the maturity of the note, the collateral security given to guarantee the
payment was worth more than what was due on the note, but is depreciated to
such an extent that, at the time of the institution of this action, it was entirely
valueless. And taking this circumstance, together with the fact that this case was
not commenced until after the lapse of four years from the date on which the
payment fell due, and with the further fact that the defendant had not received
any part of the amount mentioned in the note, he was of the opinion, and so
decided, that the defendant could not be held liable. The theory of the judge a
quo was that the plaintiff's failure to enforce the guaranty for the payment of the
debt, and his delay in instituting this action constitute laches, which had the effect
of extinguishing his right of action. We see no sufficient ground for applying such
a theory to the case before us. As stated, the defendant's position being, as it is,
that of a joint surety, he may, at any time after the maturity of the note, make
payment, thus subrogating himself in the place of the creditor with the right to
enforce the guaranty against the other signers of the note for the reimbursement
of what he is entitled to recover from them. The mere delay of the creditor in
enforcing the guaranty has not by any means impaired his action against the
defendant. It should not be lost sight of that the defendant's signature on the note
is an assurance to the creditor that the collateral guaranty will remain good, and
the otherwise, he, the defendant, will be personally responsible for the payment.
True, that if the creditory had done any act whereby the guaranty was impaired in
its value, or discharged, such an act would have wholly or partially released the
surety; but it must be borne in mind that it is a recognized doctrine in the matter
of suretyship that with respect to the surety, the creditor is under no obligation to
display any diligence in the enforcement of his rights as a creditor. His mere
inaction, indulgence, passiveness, or delay in proceeding against the principal
debtor, or the fact that he did not enforce the guaranty or apply on the payment of
such funds as were available, constitute no defense at all for the surety, unless
the contract expressly requires diligence and promptness on the part of the
creditor, which is not the case in the present action. There is in some decisions a
tendency toward holding that the creditor's laches may discharge the surety,
meaning by laches a negligent forbearance. This theory, however, is not generally
accepted and the courts almost universally consider it essentially inconsistent
with the relation of the parties to the note. (21 R. C. L., 1032-1034.)"

And in Ibaez de Aldecoa vs. Hongkong & Shanghai Banking

Corporation (42 Phil., 1000; 246 U. S., 627; 62 Law. ed., 907), the Supreme
Court of the United States in affirming a decision of this court on the same legal
question, said: "The appellant Isabel Palet assigns as error that the Supreme
Page 289 of 505

Court failed to hold (1) that her liability as surety of Aldecoa and Company had
been extinguished in accordance with the provisions of article 1851 of the Civil
Code, which provides that 'the extension granted to a debtor by the creditor,
without the consent of the surety, extinguishes the security.' (2) Refused to order
for her benefit that the property of the company should be exhausted before
resort be had to her property for satisfaction of the bank's claim. It will be
observed at once that the defense have some dependence upon questions of
that fact upon which the two courts below concurred. From article 1851 of the
Civil Code, abstractly considered, nothing can be deducted. Both the trial and
supreme courts held that "the more failure to bring an action upon a credit, as
soon as the said or any part of it matures, does not constitute an extension of the
term of the obligation.' And it was further he that the extension, to produce the
extinction of the liability 'must be based on some new agreement by which the
creditor deprives himself of the right to immediately enforce the claim.' This
interpretation of the local courts of the local law we defer to. The construction,
moreover, expresses the rule that obtains in other jurisdictions."
The last ground of the remedy requires no extended consideration.
Under the conclusions we have arrived at, it is evident that the judgment is not
erroneous in not absolving the appellant.
The plaintiffs suggest in their brief that we amend the appealed
judgment by ordering the appellant to pay one-half of the attorney's fees which
the principal debtor should fail to pay. We are of the opinion that the contention is
untenable because the plaintiffs did not appeal from the judgment but accepted
and abided by it.

FIRST DIVISION
[G.R. No. L-47369. June 30, 1987.]
JOSEPH
COCHINGYAN,
JR.
and
JOSE
VILLANUEVA, petitioners, vs. R
&
B
SURETY
INSURANCE COMPANY, INC., respondent.

K.
AND

DECISION

In view of the foregoing, the appealed judgment is affirmed, with the

costs of this instance to the appellant. So ordered.
Malcolm, Villa-Real, Butte and Goddard, JJ., concur.
||| (Shannon v. Elser, G.R. No. 41795, [August 30, 1935], 61 PHIL 872-879)

FELICIANO, J p:
This case was certified to us by the Court of Appeals in its resolution dated 11
November 1977 as one involving only questions of law and, therefore, falling within
the exclusive appellate jurisdiction of this Court under Section 17, Republic Act 296,
as amended.
In November 1963, Pacific Agricultural Suppliers, Inc. (PAGRICO) applied for and was
granted an increase in its line of credit from P400,000.00 to P800,000.00 (the
"Principal Obligation"), with the Philippine National Bank (PNB). To secure PNB's
approval, PAGRICO had to give a good and sufficient bond in the amount of
P400,000.00, representing the increment in its line of credit, to secure its faithful
Page 290 of 505

compliance with the terms and conditions under which its line of credit was increased.
In compliance with this requirement, PAGRICO submitted Surety Bond No. 4765,
issued by the respondent R & B Surety and Insurance Co., Inc. ("R & B Surety") in the
specified amount in favor of the PNB. Under the terms of the Surety Bond, PAGRICO
and R & B Surety bound themselves jointly and severally to comply with the "terms
and conditions of the advance line [of credit] established by the [PNB]." PNB had the
right under the Surety Bond to proceed directly against R & B Surety "without the
necessity of first exhausting the assets" of the principal obligor, PAGRICO. The Surety
Bond also provided that R & B Surety's liability was not to be limited to the principal
sum of P400,000.00, but would also include "accrued interest" on the said amount
"plus all expenses, charges or other legal costs incident to collection of the obligation
[of R & B Surety]" under the Surety Bond.
In consideration of R & B Surety's issuance of the Surety Bond, two identical
indemnity agreements were entered into with R & B Surety: (a) one agreement dated
23 December 1963 was executed by the Catholic Church Mart (CCM) and by
petitioner Joseph Cochingyan, Jr.; the latter signed not only as President of CCM but
also in his personal and individual capacity; and (b) another agreement dated 24
December 1963 was executed by PAGRICO, Pacific Copra Export Inc. (PACOCO),
Jose K. Villanueva and Liu Tua Beh; Mr. Villanueva signed both as Manager of
PAGRICO and in his personal and individual capacity; Mr. Liu signed both as
President of PACOCO and in his individual and personal capacity.
Under both indemnity agreements, the indemnitors bound themselves jointly and
severally to R & B Surety to pay an annual premium of P5,103.05 and "for the faithful
compliance of the terms and conditions set forth in said SURETY BOND for a period
beginning . . . until the same is CANCELLED and/or DISCHARGED." The Indemnity
Agreements further provided:
"(b) INDEMNITY: To indemnify the SURETY COMPANY for
any damage, prejudice, loss, costs, payments, advances and
expenses of whatever kind and nature, including [of] attorney's
fees, which the CORPORATION may, at any time, become liable
for, sustain or incur, as consequence of having executed the
above mentioned Bond, its renewals, extensions or substitutions
and said attorney's fees [shall] not be less than twenty [20%] per
cent of the total amount claimed by the CORPORATION in each
action, the same to be due, demandable and payable,
irrespective of whether the case is settled judicially or
extrajudicially and whether the amount has been actually paid or
not;

(c) MATURITY OF OUR OBLIGATIONS AS CONTRACTED

HEREWITH: The said indemnities will be paid to the
CORPORATION as soon as demand is received from the
Creditor or upon receipt of Court order or as soon as it becomes
liable to make payment of any sum under the terms of the abovementioned Bond, its renewals, extensions, modifications or
substitutions, whether the said sum or sums or part thereof, have
been actually paid or not.
We authorize the SURETY COMPANY, to accept in any case and
at its entire discretion, from any of us, payments on account of
the pending obligations, and to grant extension to any of us, to
liquidate said obligations, without necessity of previous
knowledge of [or] consent from the other obligors.
xxx xxx xxx
(e) INCONTESTABILITY OF PAYMENTS MADE BY THE
COMPANY. Any payment or disbursement made by the
SURETY COMPANY on account of the above-mentioned Bonds,
its renewals, extensions or substitutions, either in the belief that
the SURETY COMPANY was obligate[dl to make such payment
or in the belief that said payment was necessary in order to avoid
greater losses or obligations for which the SURETY COMPANY
might be liable by virtue of the terms of the above-mentioned
Bond, its renewals, extensions or substitutions, shall be final and
will not be disputed by the undersigned, who jointly and severally
bind themselves to indemnify the SURETY COMPANY of any
and all such payments as stated in the preceeding clauses.
xxx xxx xxx
When PAGRICO failed to comply with its Principal Obligation to the PNB, the PNB
demanded payment from R & B Surety of the sum of P400,000.00, the full amount of
the Principal Obligation. R & B Surety made a series of payments to PNB by virtue of
that demand totalling P70,000.00 evidenced by detailed vouchers and receipts.
R & B Surety in turn sent formal demand letters to petitioners Joseph Cohingyan, Jr.
and Jose K. Villanueva for reimbursement of the payments made by it to the PNB and
for a discharge of its liability to the PNB under the Surety Bond. When petitioners
failed to heed its demand, R & B Surety brought suit against Joseph Cochingyan, Jr.,
Page 291 of 505

Jose K. Villanueva and Liu Tua Beh in the Court of First Instance of Manila, praying
principally that judgment be rendered:
"b. Ordering defendants to pay jointly and severally, unto the
plaintiff, the sum of P20,412.20 representing the unpaid
premiums for Surety Bond No. 4765 from 1965 up to 1968, and
the additional amount of P5,103.05 yearly until the Surety Bond
No. 4765 is discharged, with interest thereon at the rate of 12%
per annum; [and]
c. Ordering the defendants to pay jointly and severally, unto the
plaintiff the sum of P400,000.00 representing the total amount of
the Surety Bond No. 4765 with interest thereon at the rate of 12%
per annum on the amount of P70,000.00 which had been paid to
the Phil. National Bank already, the interest to begin from the
month of September, 1966;
xxx xxx xxx
Petitioner Joseph Cochingyan, Jr. in his answer maintained that the Indemnity
Agreement he executed in favor of R & B Surety: (i) did not express the true intent of
the parties thereto in that he had been asked by R & B Surety to execute the
Indemnity Agreement merely in order to make it appear that R & B Surety had
complied with the requirements of the PNB that credit lines be secured; (ii) was
executed so that R & B Surety could show that it was complying with the regulations
of the Insurance Commission concerning bonding companies; (iii) that R & B Surety
had assured him that the execution of the agreement was a mere formality and that
he was to be considered a stranger to the transaction between the PNB and R & B
Surety; and (iv) that R & B Surety was estopped from enforcing the Indemnity
Agreement as against him.
Petitioner Jose K. Villanueva claimed in his answer that. (i) he had executed the
Indemnity Agreement in favor of R & B Surety only "for accommodation purposes"
and that it did not express their true intention; (ii) that the Principal Obligation of
PAGRICO to the PNB secured by the Surety Bond had already been assumed by
CCM by virtue of a Trust Agreement entered into with the PNB, where CCM
represented by Joseph Cochingyan, Jr. undertook to pay the Principal Obligation of
PAGRICO to the PNB; (iii) that his obligation under the Indemnity Agreement was
thereby extinguished by novation arising from the change of debtor under the
Principal Obligation; and (iv) that the filing of the complaint was premature,
considering that R & B Surety filed the case against him as indemnitor although the

PNB had not yet proceeded against R & B Surety to enforce the latter's liability under
the Surety Bond.
Petitioner Cochingyan, however, did not present any evidence at all to support his
asserted defenses. Petitioner Villanueva did not submit any evidence either on his
"accommodation" defense. The trial court was therefore constrained to decide the
case on the basis alone of the terms of the Trust Agreement and other documents
submitted in evidence.
In due time, the Court of First Instance of Manila, Branch 24 1 rendered a decision in
favor of R & B Surety, the dispositive portion of which reads as follows:
"Premises considered, judgment is hereby rendered: (a) ordering
the defendants Joseph Cochingyan, Jr. and Jose K. Villanueva to
pay, jointly and severally, unto the plaintiff the sum of 400,000,00,
representing the total amount of their liability on Surety Bond No.
4765, and interest at the rate of 6% per annum on the following
amounts:
On P14,000.00 from September 27, 1966;
On P4,000.00 from November 28, 1966;
On P4,000.00 from December 14, 1966;
On P4,000.00 from January 19, 1967;
On P8,000.00 from February 13, 1967;
On P4,000.00 from March 6, 1967;
On P8,000.00 from June 22, 1967;
On P8,000.00 from September 14, 1967;
On P8,000.00 from November 28, 1967; and
On P8,000.00 from February 26, 1968.
until full payment; (b) ordering said defendants to pay, jointly and
severally, unto the plaintiff the sum of P20,412.00 as the unpaid
premiums for Surety Bond No. 4765, with legal interest thereon
from the filing of plaintiff's complaint on August 1, 1968 until fully
paid, and the further sum of P4,000.00 as and for attorney's fees
Page 292 of 505

and expenses of litigation which this Court deems just and

equitable.
There being no showing the summons was duly served upon the
defendant Liu Tua Beh who has filed no answer in this case,
plaintiff's complaint is hereby dismissed as against defendant Liu
Tua Beh without prejudice.

Costs against the defendants Joseph Cochingyan, Jr. and Jose

K. Villanueva.
Not satisfied with the decision of the trial court, the petitioners took this appeal to the
Court of Appeals which, as already noted, certified the case to us as one raising only
questions of law.
The issues we must confront in this appeal are:
1. whether or not the Trust Agreement had extinguished, by novation, the obligation of
R & B Surety to the PNB under the Surety Bond which, in turn, extinguished the
obligations of the petitioners under the Indemnity Agreements;
2. whether the Trust Agreement extended the term of the Surety Bond so as to
release petitioners from their obligation as indemnitors thereof as they did not give
their consent to the execution of the Trust Agreement; and
3. whether or not the filing of this complaint was premature since the PNB had not yet
filed a suit against R & B Surety for the forfeiture of its Surety Bond.
We address these issues seriatim.
1. The Trust Agreement referred to by both petitioners in their separate briefs, was
executed on 28 December 1965 (two years after the Surety Bond and the Indemnity
Agreements were executed) between: (1) Jose and Susana Cochingyan, Sr., doing
business under the name and style of the Catholic Church Mart, represented by
Joseph Cochingyan, Jr., as Trustor[s]; (2) Tomas Besa, a PNB official, as Trustee; and
(3) the PNB as beneficiary.
The Trust Agreement provided, in pertinent part, as follows:
'WHEREAS, the TRUSTOR has guaranteed a bond in the
amount of P400,000.00 issued by the R & B Surety and
Insurance Co. (R & B) at the instance of Pacific Agricultural

Suppliers, Inc. (PAGRICO) on December 21, 1963, in favor of the

BENEFICIARY in connection with the application of PAGRICO for
an advance line of P400,000.00 to P800,000.00;
'WHEREAS, the TRUSTOR has also guaranteed a bond issued
by the Consolacion Insurance & Surety Co., Inc.
(CONSOLACION) in the amount of P900,000.00 in favor of the
BENEFICIARY to secure certain credit facilities extended by the
BENEFICIARY to the Pacific Copra Export Co., Inc. (PACOCO);
'WHEREAS, the PAGRICO and the PACOCO have defaulted in
the payment of their respective obligations in favor of the
BENEFICIARY guaranteed by the bonds issued by the R & B and
the CONSOLACION, respectively, and by reason of said default,
the BENEFICIARY has demanded compliance by the R & B and
the CONSOLACION of their respective obligations under the
aforesaid bonds;
'WHEREAS, the TRUSTOR is, therefore, bound to comply with
his obligation under the indemnity agreements aforementioned
executed by him in favor of R & B and the CONSOLACION,
respectively and in order to forestall impending suits by the
BENEFICIARY against said companies, he is willing as he
hereby agrees to pay the obligations of said companies in favor of
the BENEFICIARY in the total amount of P1,300,000 without
interest from the net profits arising from the procurement of
reparations consumer goods made thru the allocation of
WARVETS;
xxx xxx xxx
'1. TRUSTOR hereby constitutes and appoints Atty. TOMAS
BESA as TRUSTEE for the purpose of paying to the
BENEFICIARY Philippine National Bank in the manner stated
hereunder, the obligations of the R & B under the R & B Bond No.
G-4765 for P400,000.00 dated December 23, 1963, and of the
CONSOLACION under The Consolacion Bond No. G-5938 of
June 3, 1964 for P900,000.00 or the total amount of
P1,300,000.00 without interest from the net profits arising from
the procurement of reparations consumer goods under the

Page 293 of 505

Memorandum of Settlement and Deeds of Assignment of

February 2, 1959 through the allocation of WARVETS;
xxx xxx xxx
'6. THE BENEFICIARY agrees to hold in abeyance any action to
enforce its claims against R & B and CONSOLACION, subject of
the bond mentioned above. In the meantime that this TRUST
AGREEMENT is being implemented, the BENEFICIARY hereby
agrees to forthwith reinstate the R & B and the CONSOLACION
as among the companies duly accredited to do business with the
BENEFICIARY and its branches, unless said companies have
been blacklisted for reasons other than those relating to the
obligations subject of the herein TRUST AGREEMENT;'
xxx xxx xxx
'9. This agreement shall not in any manner release the R & B and
CONSOLACION from their respective liabilities under the bonds
mentioned above.'" (Emphasis supplied)
There is no question that the Surety Bond has not been cancelled or fully
discharged 2 by payment of the Principal Obligation. Unless, therefore, the Surety
Bond has been extinguished by another means, it must still subsist. And so must the
supporting Indemnity Agreements. 3
We are unable to sustain petitioners' claim that the Surety Bond and their respective
obligations under the Indemnity Agreements were extinguished by novation brought
about by the subsequent execution of the Trust Agreement.
Novation is the extinguishment of an obligation by the substitution or change of the
obligation by a subsequent one which terminates it, either by changing its object or
principal conditions, or by substituting a new debtor in place of the old one, or by
subrogating a third person to the rights of the creditor. 4 Novation through a change of
the object or principal conditions of an existing obligation is referred to as objective (or
real) novation. Novation by the change of either the person of the debtor or of the
creditor is described as subjective (or personal) novation. Novation may also be both
objective and subjective (mixed) at the same time. In both objective and subjective
novation, a dual purpose is achieved an obligation is extinguished and a new one
is created in lieu thereof. 5
If objective novation is to take place, it is imperative that the new obligation expressly
declare that the old obligation is thereby extinguished, or that the new obligation be on

every point incompatible with the old one. 6 Novation is never presumed: it must be
established either by the discharge of the old debt by the express terms of the new
agreement, or by the acts of the parties whose intention to dissolve the old obligation
as a consideration of the emergence of the new one must be clearly discernible. 7
Again, if subjective novation by a change in the person of the debtor is to occur, it is
not enough that the juridical relation between the parties to the original contract is
extended to a third person. It is essential that the old debtor be released from the
obligation, and the third person or new debtor take his place in the new relation. If the
old debtor is not released. no novation occurs and the third person who has assumed
the obligation of the debtor becomes merely a co-debtor or surety or a co-surety. 8
Applying the above principles to the instant case, it is at once evident that the Trust
Agreement does not expressly terminate the obligation of R & B Surety under the
Surety Bond. On the contrary, the Trust Agreement expressly provides for the
continuing subsistence of that obligation by stipulating that "[the Trust Agreement]
shall not in any manner release" R & B Surety from its obligation under the Surety
Bond.
Neither can the petitioners anchor their defense on implied novation. Absent an
unequivocal declaration of extinguishment of a pre-existing obligation, a showing of
complete incompatibility between the old and the new obligation (and nothing else)
would sustain a finding of novation by implication. 9 But where, as in this case, the
parties to the new obligation expressly recognize the continuing existence and validity
of the old one, where, in other words, the parties expressly negated the lapsing of the
old obligation, there can be no novation. The issue of implied novation is not reached
at all.
What the trust agreement did was, at most, merely to bring in another person or
persons the Trustor[s] to assume the same obligation that R & B Surety was
bound to perform under the Surety Bond. It is not unusual in business for a stranger to
a contract to assume obligations thereunder; a contract of surety ship or guarantee is
the classical example. The precise legal effect is the increase of the number of
persons liable to the obligee, and not the extinguishment of the liability of the first
debtor. 10 Thus, in Magdalena Estates vs. Rodriguez, 11 we held that:
"[t]he mere fact that the creditor receives a guaranty or
accepts payments from a third person who has agreed to
assume the obligation, when there is no agreement that
the first debtor shall be released from responsibility, does

Page 294 of 505

not constitute a novation, and the creditor can still enforce

the obligation against the original debtor."
In the present case, we note that the Trustor under the Trust Agreement, the
CCM, was already previously bound to R & B Surety under its Indemnity
Agreement. Under the Trust Agreement, the Trustor also became directly liable to
the PNB. So far as the PNB was concerned, the effect of the Trust Agreement
was that where there had been only two, there would now be three obligors
directly and solidarily bound in favor of the PNB: PAGRICO, R & B Surety and the
Trustor. And the PNB could proceed against any of the three, in any order or
sequence. Clearly, PNB never intended to release, and never did release, R & B
Surety. Thus, R & B Surety, which was not a party to the Trust Agreement, could
not have intended to release any of its own indemnitors simply because one of
those indemnitors, the Trustor under the Trust Agreement, became also directly
liable to the PNB.
2. We turn to the contention of petitioner Jose K. Villanueva that his obligation as
indemnitor under the 24 December 1963 Indemnity Agreement with R & B Surety was
extinguished when the PNB agreed in the Trust Agreement "to hold in abeyance any
action to enforce its claims against [R & B Surety]".

The Indemnity Agreement speaks of the several indemnitors "apply[ing] jointly and
severally (in solidum) to the [R & B Surety] to become SURETY upon a SURETY
BOND demanded by and in favor of [PNB] in the sum of [P400.000.00] for the faithful
compliance of the terms and conditions set forth in said SURETY BOND ." This part
of the Agreement suggests that the indemnitors (including the petitioners) would
become co-sureties on the Security Bond in favor of PNB. The record, however, is
bereft of any indication that the petitioners-indemnitors ever in fact became cosureties of R & B Surety vis-a-vis the PNB. The petitioners, so far as the record goes,
remained simply indemnitors bound to R & B Surety but not to PNB, such that PNB
could not have directly demanded payment of the Principal Obligation from the
petitioners. Thus, we do not see how Article 2079 of the Civil Code which provides
in part that "[a]n extension granted to the debtor by the creditor without the consent of
the guarantor extinguishes the guaranty" could apply in the instant case. The
petitioner-indemnitors are, as it were, second-tier parties so far as the PNB was
concerned and any extension of time granted by PNB to any of the first-tier obligors
(PAGRICO, R & B Surety and the trustor[s]) could not prejudice the second-tier
parties.

There is another reason why petitioner Villanueva's contention must fail. PNB's
undertaking under the Trust Agreement "to hold in abeyance any action to enforce its
claims" against R & B Surety did not extend the maturity of R & B Surety's obligation
under the Surety Bond. The Principal Obligation had in fact already matured, along
with that of R & B Surety, by the time the Trust Agreement was entered into.
Petitioners' obligations under the Indemnity Agreements had, in turn, already similarly
matured, for those obligations were to mature "as soon as [R & B Surety] became
liable to make payment of any sum under the terms of the [Surety Bond] whether
the said sum or sums or part thereof have been actually paid or not." Thus, the
situation was that precisely envisaged in Article 2079:
"[t]he mere failure on the part of the creditor to demand payment
after the debt has become due does not of itself constitute any
extension of time referred to herein." (Emphasis supplied).
The theory behind Article 2079 is that an extension of time given to the principal
debtor by the creditor without the surety's consent would deprive the surety of his
right to pay the creditor and to be immediately subrogated to the creditor's
remedies against the principal debtor upon the original maturity date. The surety
is said to be entitled to protect himself against the contingency of the principal
debtor or the indemnitors becoming insolvent during the extended period. The
underlying rationale is not present in the instant case. As this Court has held,
"mere delay or negligence in proceeding against the principal will
not discharge a surety unless there is between the creditor and
the principal debtor a valid and binding agreement therefor, one
which tends to prejudice [the surety] or to deprive it of the power
of obtaining indemnity by presenting a legal objection for the
time, to the prosecution of an action on the original security." 12
In the instant case, there was nothing to prevent the petitioners from tendering
payment, if they were so minded, to PNB of the matured obligation on behalf of R
& B Surety and thereupon becoming subrogated to such remedies as R & B
Surety may have against PAGRICO.
3. The last issue can be disposed of quickly, Clauses (b) and (c) of the Indemnity
Agreements (quoted above) allow R & B Surety to recover from petitioners even
before R & B Surety shall have paid the PNB. We have previously held similar
indemnity clauses to be enforceable and not violative of any public policy. 13
The petitioners lose sight of the fact that the Indemnity Agreements are contracts of
indemnification not only against actual loss but against liability as well. 14 While in a
Page 295 of 505

contract of indemnity against loss an indemnitor will not be liable until the person to
be indemnified makes payment or sustains loss, in a contract of indemnity against
liability, as in this case, the indemnitor's liability arises as soon as the liability of the
person to be indemnified has arisen without regard to whether or not he has suffered
actual loss. 15 Accordingly, R & B Surety was entitled to proceed against petitioners
not only for the partial payments already made but for the full amount owed by
PAGRICO to the PNB.
Summarizing, we hold that:
(1) The Surety Bond was not novated by the Trust Agreement. Both agreements can
co-exist. The Trust Agreement merely furnished to PNB another party obligor to the
Principal Obligation in addition to PAGRICO and R & B Surety.
(2) The undertaking of the PNB to "hold in abeyance any action to enforce its claim"
against R & B Surety did not amount to an "extension granted to the debtor" without
petitioners' consent so as to release petitioners from their undertaking as indemnitors
of R & B Surety under the Indemnity Agreements; and
(3) Petitioners are indemnitors of R & B Surety against both payments to and liability
for payments to the PNB. The present suit is therefore not premature despite the fact
that the PNB has not instituted any action against R & B Surety for the collection of its
matured obligation under the Surety Bond.
WHEREFORE, the petitioners' appeal is DENIED for lack of merit and the decision of
the trial court is AFFIRMED in toto. Costs against the petitioners.
SO ORDERED.
||| (Cochingyan, Jr. v. R & B Surety and Insurance Co., Inc., G.R. No. L-47369, [June
30, 1987], 235 PHIL 332-349)
EN BANC
[G.R. No. L-18520. September 23, 1922.]
THE HONGKONG & SHANGHAI BANKING CORPORATION, pl
aintiff-appellee, vs.
VICENTE ALDANESE and
UNION
GUARANTEE CO., LTD., defendants.UNION GUARANTEE CO.,
LTD., appellant.

Page 296 of 505

Williams & Ferrier for appellant.

Attorney-General Villa-Real for Aldenese.
No appearance for the appellee.
DECISION
ROMUALDEZ, J p:
The dispositive clause of the judgment appealed from is as follows:
"The defendant Vicente Aldanese, in his capacity as
Collector
of
Customs,
is
sentenced
to
pay
the Hongkong & Shanghai Banking Corporation the
sum
of
P9,340.80, United States currency, with costs. Messrs. Vamenta
& Co., Isidro Vamenta, and Union Guarantee Co., Ltd., are
sentenced to pay the same sum to Mr. Vicente Aldanese, in his
aforesaid capacity, with the costs. In the event that the Union
Guarantee Co., Ltd., be compelled to pay the whole or any part of
the said sum to the defendant Mr. Aldanese by reason of the
insolvency or inability to pay of Messrs. Vamenta & Co. and Isidro
Vamenta, the latter are sentenced to pay said surety company all
such sum as it may have paid as aforesaid, together with the
costs. Each and every payment to be made under this judgment
shall be with legal interest at the rate of six per centum per
annum from April 29, 1920.
"So ordered."
The Union Guarantee Co., Ltd., appeals from this judgment, and
assigns error to the action of the trial court, among others, in finding that
said corporation had given a bond for P9,450 in favor of the Government of the
Philippine Islands to enable Vamenta & Co. to withdraw from the customhouse at
Manila the merchandise mentioned in the complaint.
The document containing the bond was not presented as evidence, nor
was any proof introduced about it, and what the trial court considered as
evidence on this point is merely what it took as a stipulation of facts deduced
from the following statements made during the trial, to wit:
"COURT. Counsel for Vamenta & Co. and Isidro
Vamenta admits that said company and Isidro Vamenta
personally are liable to the defendant Collector of Customs and

the Hongkong & Shanghai Banking Corporation in the manner to

be determined by the court for the value of the merchandise
withdrawn from the customhouse and sold by them, which
merchandise is worth P9,340.80, United States currency,
according to the complaint.
"Mr. FERRIER. But we are in a situation where the
Union Guarantee Co., Ltd., is entitled to a judgment against
Vamenta & Co.
"COURT (Continuing). Same counsel, according to
Attorney Ferrier, who represents the surety company, Union
Guarantee Co., Ltd., states that to protect its interests, he agrees
to a judgment being rendered against the debtors and in favor of
the Union Guarantee Co., Ltd., in the event that the latter, after
the issuance of an execution upon the judgment, shall be
compelled to pay the amount aforementioned or any part thereof
on account of the insolvency of said debtors.
"Mr. FERRIER. It is also agreed between the parties that
the Union Guarantee Co., Ltd., was a company organized and
existing under the laws of the Philippine Islands, and Vamenta &
Co. was a company not registered. We have no more objection to
the action of Vamenta & Co., and Isidro Vamenta." (Folios 4 and
5, transcript, stenographic notes.)
It is true that from the above statements of the trial court not
contradicted by Mr. Ferrier, attorney of the Union Guarantee Co., Ltd., it may be
inferred that thiscorporation, through its said counsel, admitted by his silence to
by surety of Vamenta & Co., although such an inference is not entirely justified
inasmuch as it is based rather on the silence of said attorney when said
statements were made by the trial court, which undoubtedly attempted to
construe the intention of the parties. The Union Guarantee Co., Ltd., now insists
in this court that the so-called stipulation of facts set out in the judgment
appealed from is not the one that was really entered into by the parties. And, as
we have see, the record is doubtful as to whether or not there was really such a
stipulation as was stated by the trial court.
But even supposing that said statements are sufficient to bind the Union
Guarantee Co., Ltd., the fact is that there is no evidence, not even a scintilla of
evidence, as to the amount of this bond which, according to paragraph (f) of the
answer of the defendant Collector of Customs, was given for the sum of P9,450.
Page 297 of 505

The existence, terms, conditions and amount of the bond given by the
Union Guarantee Co., Ltd., as surety of Vamenta & Co., in favor of the
Government of the Philippine Islands, are facts that must be proven or admitted
by the parties before any judgment can be rendered against said corporation, as
prayed for in the answer of the Collector of Customs.
And there exists an intimate connection between the liability of the
Collector of Customs to the Hongkong & Shanghai Banking Corporation, and the
liability of Vamenta & Co. and the Union Guarantee Co., Ltd., to the Collector of
Customs, which latter liability cannot be fixed without sufficient proof of the scope
and conditions of the bond in question. We think that this case requires further
evidence, and to do justice to all the parties interested, we have decided to
remand the record to the court of origin in order that the proper party may
introduce competent evidence as to the existence, conditions and amount of the
alleged bond given by the Union Guarantee Co., Ltd.
The judgment appealed from is reversed and this cause ordered
remanded to the court below for the holding of a new trial for the purposes above
indicated, without special finding as to costs. So ordered.
Araullo, C.J., Johnson, Street, Malcolm, Avancea, Villamor,
Ostrand, and Johns, JJ., concur
||| (HSBC v. Aldanese, G.R. No. L-18520, [September 23, 1922])

EN BANC
[G.R. No. 22071. October 9, 1924.]
THE HONGKONG & SHANGHAI BANKING CORPORATION, pl
aintiff-cross-defendant, vs. VICENTE ALDANESE, defendant
and cross-plaintiff-appellee,VAMENTA & CO., ISIDORO
VAMENTA and THE UNION GUARANTEE CO., LTD., crossdefendants; THE UNION GUARANTEE CO., LTD., appellant.

J. W. Ferrier for appellant.

Attorney-General Villa-Real for appellee.

DECISION
ROMUALDEZ, J p:
There arrived at the port of Manila on October 15, 1919, certain
merchandise consigned to the Hongkong & Shanghai Banking Corporation.
Before the receipt of the bill of lading of the merchandise, Messrs.
Vamenta & Co. and Isidoro Vamenta declared that the value of said merchandise
was P6,854.40, and succeeded in withdrawing the merchandise from the customhouse by giving a bond executed by the Union Guarantee Co., Ltd., as surety for
the sum of P9,450, promising to present the bill of lading within four months from
the date of said bond. This period expired without said bill of lading having been
presented, notwithstanding the repeated demands made for the purpose.
The herein plaintiff corporation presented said bill of lading, with the
invoice annexed thereto, according to which the value of the merchandise in
question was P18,681.60, and claimed it from the Collector of Customs, but the
latter could not deliver the same, having delivered it previously to Vamenta & Co.
and Isidoro Vamenta as above stated, and an action was brought against him by
the herein plaintiff.
At the instance of the Collector of Customs, Vamenta & Co., Isidoro
Vamenta and the surety company, the Union Guarantee Co., Ltd., were included
as defendants, against whom, as well as against the plaintiff, said Collector of
Customs filed a cross-complaint.
After trial, the Court of First Instance of Manila rendered judgment, the
dispositive part of which is as follows:
"The defendant Vicente Aldanese, in his capacity as
Collector
of
Customs,
is
sentenced
to
pay
the Hongkong & Shanghai Banking Corporation the
sum
of
$9,340.80, United States currency, with costs. Messrs. Vamenta
& Co., Isidoro Vamenta and Union Guarantee Co., Ltd., are
sentenced to pay the same sum to Mr. Vicente Aldanese in his
aforesaid capacity, with the costs. In the event that the Union
Guarantee Co., Ltd., be compelled to pay the whole or any part of
the said sum to the defendant Mr. Aldanese by reason of
insolvency or inability to pay of Messrs. Vamenta & Co. and
Isidoro Vamenta, the latter are sentenced to pay said surety
company all such sum as it may have paid as aforesaid, together
with the costs. Each and every payment to be made under this
Page 298 of 505

judgment shall be with legal interest at the rate of 6 per centum

per annum from April 29, 1920."
This judgment became final, except as to the Union Guarantee Co., Ltd.,
which appealed from said judgment, as a result of which a decision was rendered
by this court, containing the following disposition:
". . . We think that this case requires further evidence,
and to do justice to all the parties interested, we have decided to
remand the record to the court of origin in order that the proper
party may introduce competent evidence as to the existence,
conditions and amount of the alleged bond given by the Union
Guarantee Co., Ltd.
"The judgment appealed from is reversed and this cause ordered
remanded to the court below for the holding of a new trial for the purposes above
indicated . . ." 1 The Collector of Customs had already paid to the herein plaintiff
the sum of P20,334.91 as the value of the merchandise in question, with interest
thereon in compliance with the judgment above set out.
The cause having been remanded to the court below, according to the
judgment of this court, new trial was held there, whereat the bond given by
Vamenta & Co. and Isidoro Vamenta and the Union Guarantee Co., Ltd., was
presented as evidence. The latter company did not introduce any evidence. In
compliance with the judgment rendered against him, Isidoro Vamenta paid the
Collector of Customs P8,000 on account. After a hearing, the court sentenced
Vamenta & Co., Isidoro Vamenta and the Union Guarantee Co., Ltd., to pay the
Collector of Customs jointly and severally the balance of P20,334.91 paid by said
Collector of Customs, after deducting the P8,000 paid to the latter by Isidoro
Vamenta, that is, the sum of P12,334.91 with legal interest upon the P20,334.91
paid by the Collector of Customs, computed from October 24, 1921, when said
payment was made, and with interest also at the legal rate on the sum of
P12,334.91 from August 30, 1922, the day next following the payment of the
P8,000 by Isidoro Vamenta.
In said judgment, the Union Guarantee Co., Ltd., was sentenced as
aforesaid, but only up to the amount of the bond given, that is, up to the sum of
P9,450.
The Union Guarantee Co., Ltd., appeals from this judgment, assigning
thereto the following errors, to wit: (a) The fact that it was sentenced to pay the
aforesaid sum; and (b) the denial of its motion for new trial.

In support of the first assignment of error, the appellant alleges that the
defendant Aldanese is not entitled to recover, because the money paid by him is
not his but of the Government. It must be noted that the judgment appealed from
is in favor of "Mr. Aldanese in his capacity as Collector of Customs," and not as a
private individual.
The appellant also alleges that the liability of Vamenta & Co. and Isidoro
Vamenta being joint and several, the P8,000 paid by Isidoro Vamenta must be
applied upon the bond for P9,450 by them. And deducting said P8,000 from the
amount of the bond, there remains only the sum of P1,450 to be paid by the
appellant.
The fact, however, is that Vamenta & Co. and Isidoro Vamenta incurred
and recognized the obligation to indemnify the Collector of Customs, defendant
herein, for what he has paid, amounting to P20,334.91; and on account of said
liability, Isidoro Vamenta paid said Collector of Customs the sum of P8,000.
There remains, therefore, the sum of P12,334.91 for which the Collector
of Customs has the right to be reimbursed. To determine who are liable for this
sum and to what extent, the following must be borne in mind:
For the total sum of P20,334.91, Vamenta & Co. and Isidoro Vamenta
are liable although jointly and severally with the herein appellant up to the sum of
P9,450, the amount of the bond given by them.
From the standpoint of view o f Vamenta & Co. and Isidoro Vamenta,
their liability in connection with said total sum is more onerous with regard to the
amount for which they are liable alone and separately from the surety the Union
Guarantee Co., Ltd., that is, the sum of P10,884.91. To this amount, therefore,
must the payment of P8,000 made by them be applied, for it is so provided by
artcile 1174 of the Civil Code.
Therefore, Vamenta & Co., Isidoro Vamenta and the Union Guarantee
Co., Ltd., are jointly and severally liable for the balance of P12,334.91 up to the
sum of P9,450, Vamenta & Co. and Isidoro Vamenta being liable only for the
remaining sum, that is, P2,884.91.
As this is the result arrived at in the judgment appealed from, we see no
reason for altering it.
The assignments of error not being of any merit, the judgment appealed
from is affirmed, with the costs against the appellant. So ordered.
Johnson, Street, Malcolm, Avancea, Villamor and Ostrand, JJ., concur.
Page 299 of 505

||| (HSBC v. Aldanese, G.R. No. 22071, [October 9, 1924], 48 PHIL 990-994)

FIRST DIVISION
[G.R. No. 147561. June 22, 2006.]
STRONGHOLD INSURANCE COMPANY, INC., petitioner, vs.
REPUBLIC-ASAHI GLASS CORPORATION, respondent.

DECISION

PANGANIBAN, C.J p:
A surety company's liability under the performance bond it issues is solidary. The
death of the principal obligor does not, as a rule, extinguish the obligation and the
solidary nature of that liability.
The Case
Before us is a Petition for Review 1 under Rule 45 of the Rules of Court, seeking to
reverse the March 13, 2001 Decision 2 of the Court of Appeals (CA) in CA-G.R. CV
No. 41630. The assailed Decision disposed as follows:
"WHEREFORE, the Order dated January 28, 1993 issued by the
lower court is REVERSED and SET ASIDE. Let the records of
the instant case be REMANDED to the lower court for the
reception of evidence of all parties." 3
The Facts
The facts of the case are narrated by the CA in this wise:
"On May 24, 1989, [respondent] Republic-Asahi Glass
Corporation (Republic-Asahi) entered into a contract with . . .
Jose D. Santos, Jr., the proprietor of JDS Construction (JDS), for
the construction of roadways and a drainage system in RepublicAsahi's compound in Barrio Pinagbuhatan, Pasig City, where

[respondent] was to pay . . . JDS five million three hundred

thousand pesos (P5,300,000.00) inclusive of value added tax for
said construction, which was supposed to be completed within a
period of two hundred forty (240) days beginning May 8, 1989. In
order 'to guarantee the faithful and satisfactory performance of its
undertakings' . . . JDS, shall post a performance bond of seven
hundred ninety five thousand pesos (P795,000.00). . . . JDS
executed, jointly and severally with [petitioner] Stronghold
Insurance Co., Inc. (SICI) Performance Bond No. SICI25849/g(13)9769.
"On May 23, 1989, [respondent] paid to . . . JDS seven hundred
ninety five thousand pesos (P795,000.00) by way of
downpayment. DEHcTI
"Two progress billings dated August 14, 1989 and September 15,
1989, for the total amount of two hundred seventy four thousand
six hundred twenty one pesos and one centavo (P274,621.01)
were submitted by . . . JDS to [respondent], which the latter paid.
According to [respondent], these two progress billings accounted
for only 7.301% of the work supposed to be undertaken by . . .
JDS under the terms of the contract.
"Several times prior to November of 1989, [respondent's]
engineers called the attention of . . . JDS to the alleged
alarmingly slow pace of the construction, which resulted in the
fear that the construction will not be finished within the stipulated
240-day period. However, said reminders went unheeded by . . .
JDS.
"On November 24, 1989, dissatisfied with the progress of the
work undertaken by . . . JDS, [respondent] Republic-Asahi
extrajudicially rescinded the contract pursuant to Article XIII of
said contract, and wrote a letter to . . . JDS informing the latter of
such rescission. Such rescission, according to Article XV of the
contract shall not be construed as a waiver of [respondent's] right
to recover damages from . . . JDS and the latter's sureties.
"[Respondent] alleged that, as a result of . . . JDS's failure to
comply with the provisions of the contract, which resulted in the
said contract's rescission, it had to hire another contractor to
Page 300 of 505

finish the project, for which it incurred an additional expense of

three million two hundred fifty six thousand, eight hundred
seventy four pesos (P3,256,874.00).
"On January 6, 1990, [respondent] sent a letter to [petitioner] SICI
filing its claim under the bond for not less than P795,000.00. On
March 22, 1991, [respondent] again sent another letter reiterating
its demand for payment under the aforementioned bond. Both
letters allegedly went unheeded.
"[Respondent] then filed [a] complaint against . . . JDS and SICI.
It sought from . . . JDS payment of P3,256,874.00 representing
the additional expenses incurred by [respondent] for the
completion of the project using another contractor, and from . . .
JDS and SICI, jointly and severally, payment of P750,000.00 as
damages in accordance with the performance bond; exemplary
damages in the amount of P100,000.00 and attorney's fees in the
amount of at least P100,000.00.
"According to the Sheriff's Return dated June 14, 1991, submitted
to the lower court by Deputy Sheriff Rene R. Salvador, summons
were duly served on defendant-appellee SICI. However, . . . Jose
D. Santos, Jr. died the previous year (1990), and . . . JDS
Construction was no longer at its address at 2nd Floor, Room
208-A, San Buena Bldg. Cor. Pioneer St., Pasig, Metro Manila,
and its whereabouts were unknown.
"On July 10, 1991, [petitioner] SICI filed its answer, alleging that
the [respondent's] money claims against [petitioner and JDS]
have been extinguished by the death of Jose D. Santos, Jr. Even
if this were not the case, [petitioner] SICI had been released from
its liability under the performance bond because there was no
liquidation, with the active participation and/or involvement,
pursuant to procedural due process, of herein surety and
contractor Jose D. Santos, Jr., hence, there was no
ascertainment of the corresponding liabilities of Santos and SICI
under the performance bond. At this point in time, said liquidation
was impossible because of the death of Santos, who as such can
no longer participate in any liquidation. The unilateral liquidation
on the party (sic) of [respondent] of the work accomplishments
did not bind SICI for being violative of procedural due process.

The claim of [respondent] for the forfeiture of the performance

bond in the amount of P795,000.00 had no factual and legal
basis, as payment of said bond was conditioned on the payment
of damages which [respondent] may sustain in the event . . . JDS
failed to complete the contracted works. [Respondent] can no
longer prove its claim for damages in view of the death of Santos.
SICI was not informed by [respondent] of the death of Santos.
SICI was not informed by [respondent] of the unilateral rescission
of its contract with JDS, thus SICI was deprived of its right to
protect its interests as surety under the performance bond, and
therefore it was released from all liability. SICI was likewise
denied due process when it was not notified of plaintiff-appellant's
process of determining and fixing the amount to be spent in the
completion of the unfinished project. The procedure contained in
Article XV of the contract is against public policy in that it denies
SICI the right to procedural due process. Finally, SICI alleged that
[respondent] deviated from the terms and conditions of the
contract without the written consent of SICI, thus the latter was
released from all liability. SICI also prayed for the award of
P59,750.00 as attorney's fees, and P5,000.00 as litigation
expenses. SEIDAC
"On August 16, 1991, the lower court issued an order dismissing
the complaint of [respondent] against . . . JDS and SICI, on the
ground that the claim against JDS did not survive the death of its
sole proprietor, Jose D. Santos, Jr. The dispositive portion of the
[O]rder reads as follows:
'ACCORDINGLY, the complaint against the defendants
Jose D. Santos, Jr., doing business under trade and
style, 'JDS Construction' and Stronghold Insurance
Company, Inc. is ordered DISMISSED.
'SO ORDERED.'
"On September 4, 1991, [respondent] filed a Motion for
Reconsideration seeking reconsideration of the lower court's
August 16, 1991 order dismissing its complaint. [Petitioner] SICI
field its 'Comment and/or Opposition to the Motion for
Reconsideration.' On October 15, 1991, the lower court issued an
Order, the dispositive portion of which reads as follows:
Page 301 of 505

'WHEREFORE, premises considered, the Motion for

Reconsideration is hereby given due course. The Order
dated 16 August 1991 for the dismissal of the case
against Stronghold Insurance Company, Inc., is
reconsidered and hereby reinstated (sic). However, the
case against defendant Jose D. Santos, Jr. (deceased)
remains undisturbed.
'Motion for Preliminary hearing and Manifestation with
Motion filed by [Stronghold] Insurance Company Inc.,
are set for hearing on November 7, 1991 at 2:00 o'clock
in the afternoon.
'SO ORDERED.'
"On June 4, 1992, [petitioner] SICI filed its 'Memorandum for
Bondsman/Defendant SICI (Re: Effect of Death of defendant
Jose D. Santos, Jr.)' reiterating its prayer for the dismissal of
[respondent's] complaint.
"On January 28, 1993, the lower court issued the assailed Order
reconsidering its Order dated October 15, 1991, and ordered the
case, insofar as SICI is concerned, dismissed. [Respondent] filed
its motion for reconsideration which was opposed by [petitioner]
SICI. On April 16, 1993, the lower court denied [respondent's]
motion for reconsideration. . . . ." 4
Ruling of the Court of Appeals
The CA ruled that SICI's obligation under the surety agreement was not extinguished
by the death of Jose D. Santos, Jr. Consequently, Republic-Asahi could still go after
SICI for the bond.
The appellate court also found that the lower court had erred in pronouncing that the
performance of the Contract in question had become impossible by respondent's act
of rescission. The Contract was rescinded because of the dissatisfaction of
respondent with the slow pace of work and pursuant to Article XIII of its Contract with
JDS.
The CA ruled that "[p]erformance of the [C]ontract was impossible, not because of
[respondent's] fault, but because of the fault of JDS Construction and Jose D. Santos,
Jr. for failure on their part to make satisfactory progress on the project, which
amounted to non-performance of the same. . . . [P]ursuant to the [S]urety [C]ontract,

SICI is liable for the non-performance of said [C]ontract on the part of JDS
Construction." 5
Hence, this Petition. 6
Issue
Petitioner states the issue for the Court's consideration in the following manner:
"Death is a defense of Santos' heirs which Stronghold could also
adopt as its defense against obligee's claim." 7

More precisely, the issue is whether petitioner's liability under the performance bond
was automatically extinguished by the death of Santos, the principal. acHTIC
The Court's Ruling
The Petition has no merit.
Sole Issue:
Effect of Death on the Surety's Liability
Petitioner contends that the death of Santos, the bond principal, extinguished his
liability under the surety bond. Consequently, it says, it is automatically released from
any liability under the bond.
As a general rule, the death of either the creditor or the debtor does not extinguish the
obligation. 8 Obligations are transmissible to the heirs, except when the transmission
is prevented by the law, the stipulations of the parties, or the nature of the
obligation. 9 Only obligations that are personal 10 or are identified with the persons
themselves are extinguished by death. 11
Section 5 of Rule 86 12 of the Rules of Court expressly allows the prosecution of
money claims arising from a contract against the estate of a deceased debtor.
Evidently, those claims are not actually extinguished. 13 What is extinguished is only
the obligee's action or suit filed before the court, which is not then acting as a probate
court. 14
In the present case, whatever monetary liabilities or obligations Santos had under his
contracts with respondent were not intransmissible by their nature, by stipulation, or
by provision of law. Hence, his death did not result in the extinguishment of those
obligations or liabilities, which merely passed on to his estate. 15 Death is not a
defense that he or his estate can set up to wipe out the obligations under the
Page 302 of 505

performance bond. Consequently, petitioner as surety cannot use his death to escape
its monetary obligation under its performance bond.
The liability of petitioner is contractual in nature, because it executed a performance
bond worded as follows:
"KNOW ALL MEN BY THESE PRESENTS:
"That we, JDS CONSTRUCTION of 208-A San Buena Building,
contractor, of Shaw Blvd., Pasig, MM Philippines, as principal and
the STRONGHOLD INSURANCE COMPANY, INC. a corporation
duly organized and existing under and by virtue of the laws of the
Philippines with head office at Makati, as Surety, are held and
firmly
bound
unto
the
REPUBLIC
ASAHI
GLASS
CORPORATION and to any individual, firm, partnership,
corporation or association supplying the principal with labor or
materials in the penal sum of SEVEN HUNDRED NINETY FIVE
THOUSAND (P795,000.00), Philippine Currency, for the payment
of which sum, well and truly to be made, we bind ourselves, our
heirs, executors, administrators, successors and assigns, jointly
and severally, firmly by these presents.
"The CONDITIONS OF THIS OBLIGATION are as follows;
"WHEREAS the above bounden principal on the ___ day of
__________, 19__ entered into a contract with the REPUBLIC
ASAHI
GLASS
CORPORATION
represented
by
_________________, to fully and faithfully. Comply with the site
preparation works road and drainage system of Philippine Float
Plant at Pinagbuhatan, Pasig, Metro Manila.
"WHEREAS, the liability of the Surety Company under this bond
shall in no case exceed the sum of PESOS SEVEN HUNDRED
NINETY FIVE THOUSAND (P795,000.00) Philippine Currency,
inclusive of interest, attorney's fee, and other damages, and shall
not be liable for any advances of the obligee to the principal.
"WHEREAS, said contract requires the said principal to give a
good and sufficient bond in the above-stated sum to secure the
full and faithfull performance on its part of said contract, and the
satisfaction of obligations for materials used and labor employed
upon the work; EcAHDT

"NOW THEREFORE, if the principal shall perform well and truly

and fulfill all the undertakings, covenants, terms, conditions, and
agreements of said contract during the original term of said
contract and any extension thereof that may be granted by the
obligee, with notice to the surety and during the life of any
guaranty required under the contract, and shall also perform well
and truly and fulfill all the undertakings, covenants, terms,
conditions, and agreements of any and all duly authorized
modifications of said contract that may hereinafter be made,
without notice to the surety except when such modifications
increase the contract price; and such principal contractor or his or
its sub-contractors shall promptly make payment to any
individual, firm, partnership, corporation or association supplying
the principal of its sub-contractors with labor and materials in the
prosecution of the work provided for in the said contract, then,
this obligation shall be null and void; otherwise it shall remain in
full force and effect. Any extension of the period of time which
may be granted by the obligee to the contractor shall be
considered as given, and any modifications of said contract shall
be considered as authorized, with the express consent of the
Surety.
"The right of any individual, firm, partnership, corporation or
association supplying the contractor with labor or materials for the
prosecution of the work hereinbefore stated, to institute action on
the penal bond, pursuant to the provision of Act No. 3688, is
hereby acknowledge and confirmed." 16
As a surety, petitioner is solidarily liable with Santos in accordance with the Civil
Code, which provides as follows:
"Art. 2047. By guaranty a person, called the guarantor, binds
himself to the creditor to fulfill the obligation of the principal debtor
in case the latter should fail to do so.
"If a person binds himself solidarily with the principal debtor, the
provisions of Section 4, 17 Chapter 3, Title I of this Book shall be
observed. In such case the contract is called a suretyship."
xxx xxx xxx

Page 303 of 505

"Art. 1216. The creditor may proceed against any one of the
solidary debtors or some or all of them simultaneously. The
demand made against one of them shall not be an obstacle to
those which may subsequently be directed against the others, so
long as the debt has not been fully collected."
Elucidating on these provisions, the Court in Garcia v. Court of Appeals 18 stated
thus:
". . . . The surety's obligation is not an original and direct one for
the performance of his own act, but merely accessory or
collateral to the obligation contracted by the principal.
Nevertheless, although the contract of a surety is in essence
secondary only to a valid principal obligation, his liability to the
creditor or promisee of the principal is said to be direct, primary
and absolute; in other words, he is directly and equally bound
with the principal. . . . ." 19
Under the law and jurisprudence, respondent may sue, separately or together, the
principal debtor and the petitioner herein, in view of the solidary nature of their liability.
The death of the principal debtor will not work to convert, decrease or nullify the
substantive right of the solidary creditor. Evidently, despite the death of the principal
debtor, respondent may still sue petitioner alone, in accordance with the solidary
nature of the latter's liability under the performance bond.

CHAPTER 4

THIRD DIVISION

WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals
AFFIRMED. Costs against petitioner. TCaAHI
SO ORDERED.
||| (Stronghold Insurance Co., Inc. v. Republic-Asahi Glass Corp., G.R. No. 147561,
[June 22, 2006], 525 PHIL 270-281)

[G.R. No. 146997. April 26, 2005.]

SPOUSES
GODOFREDO
&
DOMINICA
FLANCIA, petitioners, vs. COURT OF APPEALS & WILLIAM
ONG GENATO, respondents.

DECISION

CORONA, J p:

Page 304 of 505

Before us is a petition for review under Rule 45 of the Rules of Court, seeking to set
aside the October 6, 2000 decision 1 of the Court of Appeals in CA-G.R. CV No.
56035.
The facts as outlined by the trial court 2 follow.
This is an action to declare null and void the mortgage executed
by defendant Oakland Development Resources Corp. . . . in favor
of defendant William Ong Genato over the house and lot plaintiffs
spouses Godofredo and Dominica Flancia purchased from
defendant corporation.
In the complaint, plaintiffs allege that they purchased from
defendant corporation a parcel of land known as Lot 12, Blk. 3,
Phase III-A containing an area of 128.75 square meters situated
in Prater Village Subd. II located at Brgy. Old Balara, Quezon
City; that by virtue of the contract of sale, defendant corporation
authorized plaintiffs to transport all their personal belongings to
their house at the aforesaid lot; that on December 24, 1992,
plaintiffs received a copy of the execution foreclosing [the]
mortgage issued by the RTC, Branch 98 ordering defendant
Sheriff Sula to sell at public auction several lots formerly owned
by defendant corporation including subject lot of plaintiffs; that the
alleged mortgage of subject lot is null and void as it is not
authorized by plaintiffs pursuant to Art. 2085 of the Civil Code
which requires that the mortgagor must be the absolute owner of
the mortgaged property; that as a consequence of the nullity of
said mortgage, the execution foreclosing [the] mortgage is
likewise null and void; that plaintiffs advised defendants to
exclude subject lot from the auction sale but the latter refused.
Plaintiffs likewise prayed for damages in the sum of P50,000.00.
Defendant William Ong Genato filed a motion to dismiss the
complaint which was opposed by the plaintiffs and denied by the
Court in its Order dated February 16, 1993.
Defendant Genato, then filed his answer averring that on May 19,
1989 co-defendant Oakland Development Resources Corporation
mortgaged to Genato two (2) parcels of land covered by TCT
Nos. 356315 and 366380 as security and guaranty for the
payment of a loan in the sum of P2,000,000.00; that it appears in

the complaint that the subject parcel of land is an unsubdivided

portion of the aforesaid TCT No. 366380 which covers an area of
4,334 square meters more or less; that said real estate mortgage
has been duly annotated at the back of TCT No. 366380 on May
22, 1989; that for non-payment of the loan of P2,000,000.00
defendant Genato filed an action for foreclosure of real estate
mortgage against co-defendant corporation; that after [trial], a
decision was rendered by the Regional Trial Court of Quezon
City, Branch 98 against defendant corporation which decision
was affirmed by the Honorable Court of Appeals; that the
decision of the Court of Appeals has long become final and thus,
the Regional Trial Court, Brach 98 of Quezon City issued an
Order dated December 7, 1992 ordering defendant Sheriff
Ernesto Sula to cause the sale at public auction of the properties
covered by TCT No. 366380 for failure of defendant corporation
to deposit in Court the money judgment within ninety (90) days
from receipt of the decision of the Court of Appeals; that plaintiffs
have no cause of action against defendant Genato; that the
alleged plaintiffs' Contract to Sell does not appear to have been
registered with the Register of Deeds of Quezon City to affect
defendant Genato and the latter is thus not bound by the
plaintiffs' Contract to Sell; that the registered mortgage is superior
to plaintiffs' alleged Contract to Sell and it is sufficient for
defendant Genato as mortgagee to know that the subject TCT
No. 366380 was clean at the time of the execution of the
mortgage contract with defendant corporation and defendant
Genato is not bound to go beyond the title to look for flaws in the
mortgagor's title; that plaintiffs' alleged Contract to Sell is neither
a mutual promise to buy and sell nor a Contract of Sale.
Ownership is retained by the seller, regardless of delivery and is
not to pass until full payment of the price; that defendant Genato
has not received any advice from plaintiffs to exclude the subject
lot from the auction sale, and by way of counterclaim, defendant
Genato prays for P150,000.00 moral damages and P20,000.00
for attorney's fees.ADHcTE
On the other hand, defendant Oakland Development Resources
Corporation likewise filed its answer and alleged that the
complaint states no cause of action; . . . Defendant corporation
also prays for attorney's fees of P20,000.00 in its counterclaim. 3
Page 305 of 505

After trial, the assisting judge 4 of the trial court rendered a decision dated August 16,
1996, the decretal portion of which provided:

1. Defendant Oakland Development Resources to pay to

plaintiffs the amount of P20,000.00 for
litigation-related expenses;

Wherefore, premises considered, judgment is hereby rendered.

2. Ordering defendant Sheriff Ernesto L. Sula to desist

from conducting further proceedings in the
extra-judicial foreclosure insofar as they affect
the plaintiffs, or, in the event that title has been
consolidated in the name of defendant William
O. Genato, ordering said defendant to
reconvey to plaintiffs the title corresponding to
Lot 12, Blk. 3, Phase III-A of Prater Village
[Subd. II], located in Old Balara, Quezon City,
containing an area of 128.75 square meters;
and

1) Ordering defendant Oakland Dev't. Resources Corporation to

pay plaintiffs:
a) the amount of P10,000.00 representing payment for
the 'option to purchase lot';
b) the amount of P140,000.00 representing the first
downpayment of the contract price;
c) the amount of P20,520.80 representing five monthly
amortizations for February, March, April, May
and June 1990;
d) the amount of P3,000.00 representing amortization
for November 1990; all plus legal interest from
the constitution of the mortgage up to the time
the instant case was filed.

3. Dismissing the counterclaims of defendants Oakland

and Genato and with costs against them. 6
On appeal, the Court of Appeals issued the assailed order:

2) Ordering said defendant corporation to pay further to plaintiffs

the sum of P30,000.00 for moral damages, P10,000.00
for exemplary damages and P20,000.00 for and as
reasonable attorney's fees plus cost;

Wherefore, foregoing premises considered, the appeal having

merit in fact and in law is hereby GRANTED and the decision of
the Trial Court dated 27 November 1996 hereby SET
ASIDE and REVERSED, and its judgment dated August 16,
1996 REINSTATED and AFFIRMED IN TOTO. No Costs.

3) Dismissing defendant corporation's counterclaim;

SO ORDERED. 7

4) Dismissing defendant Genato's counterclaim. 5

On motion for reconsideration, the regular presiding judge set aside the judgment of
the assisting judge and rendered a new one on November 27, 1996, the decretal
portion of which read:
WHEREFORE, premises
considered, the Motion for
Reconsideration is hereby GRANTED. The decision dated
August 16, 1996 is hereby set aside and a new one entered in
favor of the plaintiffs, declaring the subject mortgage and the
foreclosure proceedings held thereunder as null and void insofar
as they affect the superior right of the plaintiffs over the subject
lot, and ordering as follows:

Hence, this petition.

For resolution before us now are the following issues:
(1) whether or not the registered mortgage constituted over the
property was valid;
(2) whether or not the registered mortgage was superior to the
contract to sell; and
(3) whether or not the mortgagee was in good faith.
Under the Art. 2085 of the Civil Code, the essential requisites of a contract of
mortgage are: (a) that it be constituted to secure the fulfillment of a principal
obligation; (b) that the mortgagor be the absolute owner of the thing mortgaged; and
Page 306 of 505

(c) that the persons constituting the mortgage have the free disposal of their property,
and in the absence thereof, that they be legally authorized for the purpose.
All these requirements are present in this case.
FIRST ISSUE: WAS THE REGISTERED MORTGAGE VALID?
As to the first essential requisite of a mortgage, it is undisputed that the mortgage was
executed on May 15, 1989 as security for a loan obtained by Oakland from Genato.
As to the second and third requisites, we need to discuss the difference between a
contract of sale and a contract to sell.
In a contract of sale, title to the property passes to the vendee upon the delivery of the
thing sold; in a contract to sell, ownership is, by agreement, reserved by the vendor
and is not to pass to the vendee until full payment of the purchase price.
Otherwise stated, in a contract of sale, the vendor loses ownership over the property
and cannot recover it unless and until the contract is resolved or rescinded; in a
contract to sell, title is retained by the vendor until full payment of the price. 8
In the contract between petitioners and Oakland, aside from the fact that it was
denominated as a contract to sell, the intention of Oakland not to transfer ownership
to petitioners until full payment of the purchase price was very clear. Acts of
ownership over the property were expressly withheld by Oakland from petitioner. All
that was granted to them by the "occupancy permit" was the right to possess
it. SECATH
Specifically, the contract between Oakland and petitioners stated:
xxx xxx xxx
7. That the BUYER/S may be allowed to enter into and
take possession of the property upon issuance of
Occupancy Permit by the OWNER/DEVELOPER
exclusively, although title has not yet passed to the
BUYER/S, in which case his possession shall be that of
a possessor by mere tolerance Lessee, subject to
certain restrictions contained in this deed.

xxx xxx xxx

13. That the BUYER/S cannot sell, mortgage, cede, transfer,

assign or in any manner alienate or dispose of, in
whole or in part, the rights acquired by and the
obligations imposed on the BUYER/S by virtue of this
contract, without the express written consent of the
OWNER/DEVELOPER.
xxx xxx xxx
24. That this Contract to Sell shall not in any way [authorize] the
BUYER/S to occupy the assigned house and lot to
them. 9
xxx xxx xxx
Clearly, when the property was mortgaged to Genato in May 1989, what was in effect
between Oakland and petitioners was a contract to sell, not a contract of sale.
Oakland retained absolute ownership over the property.
Ownership is the independent and general power of a person over a thing for
purposes recognized by law and within the limits established thereby. 10 According to
Art. 428 of the Civil Code, this means that:
The owner has the right to enjoy and dispose of a thing, without
other limitations than those established by law.
xxx xxx xxx
Aside from the jus utendi and the jus abutendi 11 inherent in the right to enjoy the
thing, the right to dispose, or the jus disponendi, is the power of the owner to
alienate, encumber, transform and even destroy the thing owned. 12
Because Oakland retained all the foregoing rights as owner of the property, it was
entitled absolutely to mortgage it to Genato. Hence, the mortgage was valid.
SECOND ISSUE: WAS THE REGISTERED MORTGAGE SUPERIOR TO THE
CONTRACT TO SELL?
In their memorandum, petitioners cite our ruling in State Investment House, Inc. v.
Court of Appeals 13 to the effect that an unregistered sale is preferred over
aregistered mortgage over the same property. The citation is misplaced.
This Court in that case explained the rationale behind the rule:

Page 307 of 505

The unrecorded sale between respondents-spouses and SOLID

is preferred for the reason that if the original owner . . . had
parted with his ownership of the thing sold then he no longer had
ownership and free disposal of that thing as to be able to
mortgage it again.
State Investment House is completely inapplicable to the case at bar. A contract of
sale and a contract to sell are worlds apart. State Investment House clearly pertained
to a contract of sale, not to a contract to sell which was what Oakland and petitioners
had. In State Investment House, ownership had passed completely to the buyers and
therefore, the former owner no longer had any legal right to mortgage the property,
notwithstanding the fact that the new owner-buyers had not registered the sale. In the
case before us, Oakland retained absolute ownership over the property under the
contract to sell and therefore had every right to mortgage it.
In sum, we rule that Genato's registered mortgage was superior to petitioner's
contract to sell, subject to any liabilities Oakland may have incurred in favor of
petitioners by irresponsibly mortgaging the property to Genato despite its
commitments to petitioners under their contract to sell.
THIRD ISSUE: WAS THE MORTGAGE IN GOOD FAITH?
The third issue involves a factual matter which should not be raised in this petition.
Only questions of law may be raised in a Rule 45 petition. This Court is not a trier of
facts. The resolution of factual issues is the function of the lower courts. We therefore
adopt the factual findings of the Court of Appeals and uphold the good faith of the
mortgagee Genato.

lot'; the amount of P140,000.00 which was the first downpayment;

the sum of P20,520.80 representing five monthly amortizations
for February, March, April, May and June 1990 and the amount of
P3,000.00 representing amortization for November 1990 plus
legal interest from the time of the mortgage up to the time this
instant case was filed. Further, considering that defendant
corporation wantonly and fraudulently mortgaged the subject
property without regard to [plaintiffs'] rights over the same, said
defendant should pay plaintiffs moral damages in the reasonable
amount of P30,000.00. . . . Furthermore, since defendant
[corporation's] acts have compelled the plaintiffs to litigate and
incur expenses to protect their interest, it should likewise be
adjudged to pay plaintiffs attorney's fees of P20,000.00 under
Article 2208 paragraph two (2) of the Civil Code. 15
WHEREFORE, the petition for review is hereby DENIED. The decision of the Court of
Appeals reinstating the August 16, 1996 decision of the trial court is hereby
AFFIRMED. cHCSDa
SO ORDERED.
||| (Spouses Flancia v. Court of Appeals, G.R. No. 146997, [April 26, 2005], 496 PHIL
693-703)

RELIANCE ON WHAT APPEARS IN THE TITLE

Just as an innocent purchaser for value may rightfully rely on what appears in the
certificate of title, a mortgagee has the right to rely on what appears in the title
presented to him. In the absence of anything to arouse suspicion, he is under no
obligation to look beyond the certificate and investigate the title of the mortgagor
appearing on the face of the said certificate. 14
We agree with the findings and conclusions of the trial court regarding the liabilities of
Oakland in its August 16, 1996 decision, as affirmed by the Court of Appeals:
Anent [plaintiffs'] prayer for damages, the Court finds that
defendant corporation is liable to return to plaintiffs all the
installments/payments made by plaintiffs consisting of the amount
of P10,000.00 representing payment for the 'option to purchase
Page 308 of 505

SECOND DIVISION
[G.R. No. 94247. September 11, 1991.]
DIONISIO MOJICA,
in
behalf
of
Spouses
LEONARDO MOJICA (now
deceased)
and
MARINA
RUFIDO, petitioner, vs. HON. COURT OF APPEALS,
and
RURAL BANK OF KAWIT, INC., respondents.

Lorenzo F. Miravite for petitioner.

Esteban C. Manuel for private respondent.
DECISION
PARAS, J p:
This is a petition for review on certiorari which seeks to reverse and set aside: the
decision * of the Court of Appeals dated February 15, 1990 in AC-G.R. CV No. 05987
entitled "Dionisio Mojica, in behalf of spouses Leonardo Mojica (now deceased) and
Marina Rufido v. Rural Bank of Kawit, Inc.", which affirmed in toto the decision of the
trial court and (2) the resolution dated June 4, 1990 denying the motion for
reconsideration.
The facts of the case as gathered from the records are as follows:
On February 1, 1971, plaintiff Leonardo Mojica (now deceased) contracted a loan of
P20,000.00 from defendant Rural Bank of Kawit, Inc. (now respondent). This loan was
secured by a real estate mortgage executed on the same date by the plaintiffs
spouses Leonardo Mojica and Marina Rufido (Rollo, Annex "C", p. 40). LLphil
The real estate mortgage contract states among others:
". . . agreement for the payment of the loan of
P20,000.00 and such other loans or other advances already
obtained or still to be obtained by the mortgagors . . . .

"2. . . . but if the mortgagors shall well and truly fulfill the
obligation above stated according to the terms thereof then this
mortgage shall become null and void."
Rollo, Petitioner's Memorandum, pp. 86-87).
The spouses mortgaged to the Rural Bank of Kawit, a parcel of land consisting of
218,794 square meters, located in Naic, Cavite, covered by Transfer Certificate of
Title No. RT-155 (Rollo, Annex "A", p. 31). The real estate mortgage was duly
registered under Entry No. 74661 of the Registry of Deeds of Cavite (Rollo, Annex
"C", p. 41).
The loan of P20,000.00 by the plaintiffs spouses was fully and completely paid (Ibid.).
On March 5, 1974, a new loan in the amount of P18,000.00 was obtained by plaintiffs
spouses from the defendant Rural Bank which loan matured on March 5, 1975 (Rollo,
pp. 32; 41).
No formal deed of real mortgage was constituted over any property of the borrowers,
although the top of the promissory note dated March 5, 1974, contained the following
notation.
"This promissory note is secured by a Real Estate Mortgage
executed before the Notary Public of the Municipality of Kawit,
Mrs. Felisa Senti under Doc. No. 62, Page No. 86, Book No. ___,
series of 1971."
The Real Estate Mortgage mentioned above is the registered mortgage which
guaranteed the already paid loan of P20,000.00 granted on February 1, 1971 (Rollo,
p. 87).
The spouses Leonardo Mojica and Marina Rufido failed to pay their obligation after its
maturity on March 5, 1975. Respondent rural bank extra judicially foreclosed the real
estate mortgage on the justification that it was adopted as a mortgage for the new
loan of P18,000.00 (Rollo, pp. 32; 41).
The subject property was set for auction sale by the Provincial Sheriff of Cavite for
June 27, 1979. In that auction sale, defendant rural bank was the highest bidder, and
its bid corresponded to the total outstanding obligation of plaintiffs
spouses Mojica and Rufido (Rollo, p. 32).
The proceeds from the sale of the piece of land of plaintiffs spouses were applied to
their outstanding obligation with defendant bank (Ibid.).
Page 309 of 505

The corresponding certificate of sale in favor of defendant bank was executed by the
Provincial Sheriff also on June 27, 1979, and the instrument was recorded in the
Office of the Register of Deeds of Cavite on June 29, 1979. The one year period for
redemption elapsed after June 1980 without plaintiffs spouses having redeemed the
foreclosed property (Ibid.).
Meanwhile, on July 19, 1980, Dionisio Mojica, the son of petitioners-spouses, in an
apparent attempt to pay the debt of P18,000.00 made a partial payment in the amount
of P24,658.00 (P19,958.00 of this amount in check bounced) which the defendant
rural bank received and accepted with the issuance of the defendant's official receipt
No. 101269, acknowledging the payment as partial payment of "past due loan",
together with the "interest on past due loan" (Rollo, p. 33). LLjur
On August 11, 1980, another partial payment was made by Dionisio Mojica in the
amount of P9,958.00 in payment also of "past due loan" plus "interest on past due
loan" which payment was received by the defendant rural bank and acknowledged
with the issuance of official receipt No. 101844. These payments were, however,
considered by the bank as deposit for the repurchase of the foreclosed property (Ibid.,
p. 33).
On August 14, 1981, upon inquiry by Dionisio Mojica on the unpaid balance of the
loan, the respondent rural bank issued a "Computation Slip" indicating therein, that as
of August 14, 1981, the outstanding balance plus interest computed from March 5,
1975 was P21,272.50 (Ibid.).
On November 10, 1981, said bank executed an affidavit of consolidation of ownership,
which it subsequently filed with the Register of Deeds of Cavite. As a result, Transfer
Certificate of Title No. T-123964, covering the foreclosed piece of land, was issued in
its favor by the Register of Deeds on January 19, 1982. After having consolidated its
ownership over the foreclosed property, defendant bank scheduled the parcel of land
to be sold at public auction on February 26, 1982, pursuant to the requirement of the
law regarding the disposal by a bank of its acquired assets. Dionisio Mojica and one
Teodorico Rufido, brother-in-law of plaintiff Leonardo Mojica, were notified of such
auction sale. However, no sale was consummated during that scheduled sale and the
property concerned up to now still remains in the possession of respondent bank
(Ibid.).
The refusal of the same bank to allow Dionisio Mojica to pay the unpaid balance of
the loan as per the "Computation Slip" amounting to P21,272.50, resulted in the filing
of a complaint (Rollo, p. 42).

On September 3, 1984, the trial court rendered judgment dismissing the complaint.
On November 5, 1984, petitioner filed a motion for reconsideration of the decision,
which motion was denied in the order dated November 17, 1984. On January 2, 1985,
a notice of appeal was filed in the Intermediate Appellate Court (Rollo, p. 42).
On February 15, 1990, the Appellate Court, rendered its decision, affirming in toto the
decision of the trial court. The dispositive portion of the decision of the appellate court
reads:
"WHEREFORE, finding no reversible error in the decision
appealed from, the same is hereby AFFIRMED in toto. With costs
against plaintiffs-appellants."
The motion for reconsideration of said decision was denied in a resolution dated June
4, 1990 (Rollo, Annex "B", p. 39).
Hence, this petition.
This Court in its resolution dated September 3, 1990 dismissed the petition for noncompliance with certain requisites but later in its resolution dated November 5, 1990,
it reinstated the petition (Rollo, Petition pp. 9-28); Resolutions, pp. 52-53; 61).
The petition is devoid of merit.
The pivotal issue in this case is whether or not the foreclosure sale by the Sheriff on
June 27, 1979, had for its basis, a valid and subsisting mortgage contract. Otherwise
stated, there is a need to ascertain the intention of the parties as to the coverage of
the mortgage in question with respect to future advancements.
Contracts which are not ambiguous are to be interpreted according to their literal
meaning and should not be interpreted beyond their obvious intendment (Plastic Town
Center Corp. v. NLRC, 172 SCRA 580 [1989]). Thus, where the intent of the parties
has been shown unmistakably with clarity by the language used, the literal meaning
shall control (Paramount Surety & Ins. Co., Inc. v. Ago, 171 SCRA 481[1989]).
Correspondingly, stipulations in the mortgage document constitute the law between
the parties, which must be complied with faithfully (Community and Loan Assn.,
Inc. v. Court of Appeals, 153 SCRA 564 [1987]).
As earlier stated, the Real Estate Mortgage in the case at bar expressly stipulates that
it serves as guaranty

Page 310 of 505

". . . for the payment of the loan . . . of P20,000.00 and such other
loans or other advances already obtained or still to be obtained
by the mortgagors as makers . . . ." (Rollo, p. 14).
It has long been settled by a long line of decisions that mortgages given to secure
future advancements are valid and legal contracts; that the amounts named as
consideration in said contract do not limit the amount for which the mortgage may
stand as security if from the four corners of the instrument the intent to secure future
and other indebtedness can be gathered. A mortgage given to secure advancements
is a continuing security and is not discharged by repayment of the amount named in
the mortgage, until the full amount of the advancements are paid (Lim Julian v. Lutero,
49 Phil. 704-705 [1926]). In fact, it has also been held that where the annotation on
the back of a certificate of title about a first mortgage states "that the mortgage
secured the payment of a certain sum of money plus interest plus other obligations
arising thereunder" there was no necessity for any notation of the later loans on the
mortgagors' title. It was incumbent upon any subsequent mortgagee or
encumbrancee of the property in question to examine the books and records of the
bank, as first mortgagee, regarding the credit standing of the debtors (Tady-Y v. PNB,
12 SCRA 19-20 [1964]). prcd

bank from negotiating for the sale of the property to other buyers.
(p. 36, Rollo).
PREMISES CONSIDERED, the petition is DISMISSED and the assailed decision and
resolution of the Intermediate Appellate Court (Court of Appeals) are AFFIRMED.
SO ORDERED.
Melencio-Herrera, Padilla and Regalado, JJ., concur.
Sarmiento, J., is on leave
||| (Mojica v. Court of Appeals, G.R. No. 94247, [September 11, 1991], 278 PHIL 524531)

The evidence on record shows that the amounts of P4,700.00 and P9,958.00 were
accepted by the bank on July 19 and August 11, 1980 as deposits for conventional
redemption after the property covered by real estate mortgage became the acquired
asset of the bank and priced at P85,000.00 and after petitioner had lost all rights
of legal redemption because more than one year had already elapsed from June 29,
1979, the date the certificate of sale was registered in the office of the Registry of
Deeds of Cavite. Indeed, the conventional redemption was subject to be exercised up
to March 3, 1982 and was extended up to April 19, 1982 for a fixed amount of
P85,000.00. The respondent bank even favored the petitioner by giving them the first
preference to repurchase the property but they failed to avail of this opportunity,
although the bank "is certainly disposed to release at anytime" the deposits.
Further, the evidence on record also shows that the mortgage property was auctioned
on June 27, 1979. The only bidder was the respondent bank which bid for
P26,387.04. As the highest bidder, the respondent bank can rightfully consolidate its
title over the property. As aptly stated by respondent Court:
"It would then be unfair to impute that the trial court allowed
defendant bank to appropriate the mortgage property, because
after the plaintiffs-appellants failed to repurchase the property
and filed this action with `lis pendens', the actions prevented the
Page 311 of 505

to be turned over to the mortgagee by way of usufruct, but with no obligation on her
part to apply the harvests to the principal obligation; that said mortgage would be
released only upon payment of the principal loan of P2,000 without any interest and
that the mortgagor promised to defend and warrant the mortgagee's rights over the
land mortgaged.

EN BANC
[G.R. No. L-17072. October 31, 1961.]
CRISTINA
MARCELO
appellee, vs. BRIGIDA
appellants.

VDA.
DE
BAUTISTA, plaintiffMARCOS, ET AL., defendants-

Aladin B. Bermudez for defendants-appellants.

Cube & Fajardo for plaintiff-appellee..
DECISION
REYES, J.B.L., J p:
The main question in this appeal is whether or not a mortgagee may
foreclose a mortgage on a piece of land covered by a free patent where the
mortgage was executed before the patent was issued and is sought to be
foreclosed within five years from its issuance.
The facts of the case appear to be as follows:
On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of P2,000
from plaintiff Cristina Marcelo Vda. de Bautista and to secure payment thereof
conveyed to the latter by way of mortgage a two (2) hectare portion of an unregistered
parcel of land situated in Sta. Ignacia, Tarlac. The deed of mortgage, Exhibit "A",
provided that it was to last for three years, that possession of the land mortgaged was

Subsequently, or in July, 1956, mortgagor Brigida Marcos filed, in behalf of the heirs
of her deceased mother Victoriana Cainglet (who are Brigida herself and her three
sisters), an application for the issuance of a free patent over the land in question, on
the strength of the cultivation and occupation of said land by them and their
predecessor since July, 1915. As a result, Free Patent No. V-64358 was issued to the
applicants on January 25, 1957, and on February 22, 1957, it was registered in their
names under Original Certificate of Title No. P-888 of the office of the Register of
Deeds for the province of Tarlac.
Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having remained unpaid
up to 1959, the latter, on March 4, 1959, filed the present action against Brigida and
her husband (Civil Case No. 3382) in the court below for the payment thereof, or in
default of the debtors to pay, for the foreclosure of her mortgage on the land given as
security. Defendants moved to dismiss the action, pointing out that the land in
question is covered by a free patent and could not, therefore, under the Public Land
Law, be taken within five years from the issuance of the patent for the payment of any
debts of the patentees contracted prior to the expiration of said five-year period; but
the lower court denied the motion to dismiss on the ground that the law cited does not
apply because the mortgage sought to be foreclosed was executed before the patent
was issued. Defendants then filed their answer, reiterating the defense invoked in their
motion to dismiss, and alleging as well that the real contract between the parties was
an antichresis and not a mortgage. Pre-trial of the case followed, after which the lower
court rendered judgment finding the mortgage valid to the extent of the mortgagor's
pro-indiviso share of 15,333 square meters in the land in question, on the theory that
the Public Land Law does not apply in this case because the mortgage in question
was executed before patent was issued over the land in question; that the agreement
of the parties could not be an antichresis because the deed Exhibit "A" clearly shows
a mortgage with usufruct in favor of the mortgagee; and ordered the payment of the
mortgage loan of P2,000 to plaintiff or, upon defendant's failure to do so, the
foreclosure of plaintiff's mortgage on defendant Brigida Marcos' undivided share in the
land in question. From this judgment, defendants Brigida Marcos and her husband
Osmondo Apolonio appealed to this Court.
There is merit in the appeal.
Page 312 of 505

The right of plaintiff-appellee to foreclose her mortgage on the land in question

depends not so much on whether she could take said land within the prohibitive
period of five years from the issuance of defendant's patent for the satisfaction of the
indebtedness in question, but on whether the deed of mortgage Exhibit "A" is at all
valid and enforceable, since the land mortgaged was apparently still part of the public
domain when the deed of mortgage was constituted. As it is an essential requisite for
the validity of a mortgage that the mortgagor be the absolute owner of the thing
mortgaged (Art. 2085), the mortgage here in question is void and ineffective because
at the time it was constituted, the mortgagor was not yet the owner of the land
mortgaged and could not, for that reason, encumber the same to plaintiff-appellee.
Nor could the subsequent acquisition by the mortgagor of title over said land through
the issuance of a free patent validate and legalize the deed of mortgage under the
doctrine of estoppel (cf. Art. 1434, New Civil Code, 1 ), since upon the issuance of
said patent, the land in question was thereby brought under the operation of
the Public Land Law that prohibits the taking of said land for the satisfaction of debts
contracted prior to the expiration of five years from the date of the issuance of the
patent (sec. 118, C.A. No. 141). This prohibition should include not only debts
contracted during the five-year period immediately following the issuance of the patent
but also those contracted before such issuance, if the purpose and policy of the law,
which is "to preserve and keep in the family of the homesteader that portion of public
land which the State has gratuitously given to him" (Pascua v. Talens, 45 O.G. No. 9
[Supp.] 413; De los Santos v. Roman Catholic Church of Midsayap, G.R. No. L-6088,
Feb. 24, 1954), is to be upheld.

obligation to account for the fruits or benefits obtained by her from the land in
question.
WHEREFORE, the judgment appealed from is reversed insofar as it orders the
foreclosure of the mortgage in question, but affirmed in all other respects. Costs
against defendant-appellants.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes, and De
Leon, JJ., concur.
||| (Vda. de Bautista v. Marcos, G.R. No. L-17072, [October 31, 1961], 113 PHIL 421426)

The invalidity of the mortgage Exhibit "A" does not, however, imply the concomitant
invalidity of the collateral agreement in the same deed of mortgage whereby
possession of the land mortgaged was transferred to plaintiff-appellee in usufruct,
without any obligation on her part to account for its harvests or deduct them from
defendants' indebtedness of P2,000. Defendant Brigida Marcos, who, together with
her sisters, was in possession of said land by herself and through her deceased
mother before her since 1915, had possessory rights over the same even before title
vested in her as co-owner by the issuance of the free patent to her and her sisters,
and these possessory rights, she could validly transfer and convey to plaintiffappellee, as she did in the deed of mortgage Exhibit "A". The latter, upon the other
hand, believing her mortgagor to be the owner of the land mortgaged and not being
aware of any flaw which invalidated her mode of acquisition, was a possessor in good
faith (Art. 526, N.C.C.), and as such had the right to all the fruits received during the
entire period of her possession in good faith (Art. 544, N.C.C.). She is, therefore,
entitled to the full payment of her credit of P2,000 from defendants, without any
Page 313 of 505

FIRST DIVISION
[G.R. No. L-34404. June 25, 1980.]
PHILIPPINE
NATIONAL
BANK, petitioner, vs. THE
HON. COURT OF APPEALS (SPECIAL
FIRST
DIVISION),
PEDRO BITANGA, FERNANDO BITANGA, GREGORIO
BITANGA, GUILLERMO BITANGA, CLARITA BITANGA
together with her husband AGRIPINO L. RABAGO and
MELITONA LAGPACAN, assisted by her husband JORGE
MALACAS, respondents.

DECISION

GUERRERO, J p:
This is a petition for review of the decision of the Court of Appeals, promulgated on
September 30, 1971 in CA-G.R. No. 29868-R entitled "Pedro Bitanga, et al., PlaintiffsAppellees, versus Philippine National Bank, et al., Defendants-Appellants, Melitona
Lagpacan, assisted by her husband, Jorge Malacas, Intervenors-Appellees," which
decision 1 affirmed with certain modifications the judgment of the Court of First
Instance of Ilocos Norte in favor of plaintiffs-appellants, now the herein respondents.
This case was commenced on May 17, 1954 when herein respondents Pedro,
Fernando, Gregorio, Guillermo and Clarita, all surnamed Bitanga, filed a complaint
before the Court of First Instance of Ilocos Norte against the Philippine National Bank,
the Register of Deeds of Ilocos Norte and Felizardo Reyes, for reconveyance of real
property and damages, with a prayer for the issuance of an ex-parte writ of
preliminary injunction restraining and enjoining the PNB and Felizardo Reyes from
consummating the sale of the property in question and prohibiting the Register of
Deeds from registering the sale in favor of Felizardo Reyes. As prayed for, the writ of
preliminary injunction was issued. All three of the defendants named in the complaint
filed their respective Answers. During the pendency of the case, herein respondentspouses, Melitona Lagpacan and Jorge Malacas, filed a Motion to admit their
complaint in intervention, alleging that they had a legal interest in the subject matter of
the case, and the same was granted.

The factual background of this case as recited in the decision of respondent court
under review is as follows:
"It is not disputed that the property in question originally belonged
to the spouses Iigo Bitanga and Rosa Ver as their conjugal
property. At the cadastral proceedings during which the said
property was submitted for adjudication, the Cadastral Court
rendered a decision dated December 27, 1934, by virtue of which
a decree of registration of the said lot bearing date of September
14, 1937 was issued. Thereafter, a corresponding title in the
name of the spouses Iigo Bitanga and Rosa Ver was likewise
issued and inserted in the Registry Books of the Register of
Deeds of Ilocos Norte on December 15, 1937 (Exhibit "A").
"Before the issuance of the said original certificate of title (Exhibit
"A"), however, death came to Iigo Bitanga on September 25,
1935, and was survived by his wife, Rosa Ver, and his children,
the plaintiffs herein. A little over a year from the death of her
husband, or on October 20, 1936, to be exact, Rosa Ver
mortgaged the entire property covered by Exhibit "A" (also known
as Exhibit 1-Lagpacan) in favor of the Philippine National Bank
for the sum of FIVE HUNDRED PESOS (P500.00) as shown in
Exhibit 1-Lagpacan. The mortgage document was registered in
the day book of the Register of Deeds of Ilocos Norte on
November 12, 1936; this said mortgage lien was, however, not
annotated in the day book of the Register of Deeds, when the
original certificate of title (Exhibit "A"), was issued. Nevertheless,
the power of attorney dated October 20, 1936 in favor of the
mortgagee Philippine National Bank 'to take possession of, and
retain the property herein mortgaged, to sell or lease the same or
any part thereof, and to do such other acts as necessary in the
performance of the power granted to the mortgagee should the
mortgagor fail or violate the term of the mortgage' was annotated
on said Exhibit "A" some five years from October 20, 1936, i.e. on
February 27, 1941, to be precise (Exhibit "A").
"In the meantime, Rosa Ver had defaulted in the fulfillment of her
obligation with the Manila Trading Company. So the said
company levied upon her share in the lot in question on
December 13, 1939, and had the attachment annotated on the
title on February 14, 1940 (Exhibit "A-3"). Rosa Ver's interest in
Page 314 of 505

the lot in question was afterwards sold at public auction, at which

the Manila Trading Company was the highest bidder; that was on
March 19, 1940, and the deed of sale in favor of the Manila
Trading Company was annotated on the title on May 25, 1940
(Exhibit "A-4").
"On November 14, 1940, the Manila Trading Company sold its
rights over the lot in question to Santiago Sambrano, who
secured the annotation of the said sale on the title on March 20,
1941 (Exhibit "A-5"). Thereafter, as stated, one-half of the said
property passed into the hands of the intervenors as a result of
Civil Case No. 1846 (Exhibits 7, 8, 9, and 9-A).
"Because Rosa Ver failed to settle her obligation with the
Philippine National Bank, the latter sold at public auction the
whole lot that the former had mortgaged to it, and in the same
auction sale, the Philippine National Bank emerged as the
highest bidder (Exhibits 2, 3, 4 and 5); and, after the period of
redemption had expired without the property having been
redeemed, the Philippine National Bank consolidated its title over
it. The document of consolidation was, however, not annotated
upon the owner's duplicate certificate of title as Rosa Ver failed to
surrender the same.
"So it was that on November 25, 1950, the Philippine National
Bank presented a petition before the trial court (Exhibit 14)
asking, on the one hand, that the owner's certificate of title No.
7683 (Exhibit A), be declared null and void, and praying, on the
other, that a new certificate of title be issued in its name. Acting
favorably on the petition, the Court, in an order dated October 2,
1951 (Exhibit 19-A), ordered the Register of Deeds of the
Province of Ilocos Norte to cancel the owner's duplicate
certificate of title No. 7683 (Exhibit A), and to issue a new
owner's duplicate certificate of title in the name of the petitioner
Philippine National Bank. As issued, the new owner's duplicate
certificate of title carried the number-description T-2701 (Exhibit B
or 23).
"Sometime later, that is, on May 24, 1954, the Philippine National
Bank sold the property in question to Felizardo Reyes (Exhibit 16-

A), as a result of which a new owner's duplicate certificate of title,

No. T-3944 (Exhibit 6), was issued in the latter's name." 2
It further appears from the evidence that by virtue of the judgment obtained by the
Manila Trading and Supply Company against the defendants Rosa Ver and Guillermo
Bitanga in Civil Case No. 121519 in the Municipal Court of the City of Manila (Exhibit
"2-Lagpacan"), the property in question was sold by the Provincial Sheriff per
Certificate of Sale (Exhibit 4-Lagpacan) to the Manila Trading and Supply Company
as the highest and only bidder at the auction sale, the latter acquiring therefor "all the
rights, title, interest and participation which the defendants Guillermo Bitanga and
Rosa Ver de Bitanga have or might have in the property." The sale was registered in
the back of the Certificate of Title No. 7683 (Exhibit 4-A Lagpacan) under Entry No.
5100 dated May 25, 1940.
On November 16, 1960, the trial court rendered a decision in favor of the plaintiffs and
intervenors below, the Court finding and holding that: (a) The lot in question is a
conjugal partnership property, one-half of which must go to the heirs of the late Iigo
Bitanga, the plaintiffs herein: (b) The other half goes to Rosa Ver as her share. The
mortgage executed by her of her one-half portion in favor of the Philippine National
Bank is not an existing lien on the said portion because it did not have a "special
mention in the decree of registration." It follows, therefore, that the acquisition of the
said portion by the Manila Trading Company in the manner above-described, was
valid and legal. Consequently, the sale made by the said company to Santiago
Sambrano over the one-half portion must also be valid and legal. In connection with
Civil Case No. 1846 in which the intervenors were the plaintiffs and Santiago
Sambrano was the defendant, what the intervenors had attached and sold in a public
auction in which they (intervenors) were the highest bidders was the very said portion
sold by the Manila Trading Company to Santiago Sambrano; (c) That Felizardo Reyes
is not a purchaser of a registered land for value and in good faith; and (d) Since the
issuance of Transfer Certificate of Title No. 3944 in favor of the Philippine National
Bank, exhibit "B", and Owner's Duplicate Certificate of Title No. 3944, Exhibit "16", in
favor of Felizardo Reyes were without legal basis, they are, therefore, declared null
and void and cancelled. With costs against the defendants. 3
On appeal by PNB and Felizardo Reyes to the Court of Appeals, respondent Court
affirmed the judgment appealed from in all respects except letter (d) thereof which
was modified to read as follows:
"(d) Since the issuance of Transfer Certificate of Title No. T-2701,
Exhibit "B" in favor of the Philippine National Bank, and Transfer
Certificate of Title No. T-3944, Exhibit "16", in favor of Felizardo
Page 315 of 505

Reyes, was without legal basis, they are, therefore, declared null
and void and cancelled. The Register of Deeds is hereby ordered
to issue in lieu of the foregoing transfer certificate of titles another
certificate of title in the names of the plaintiffs and intervenors as
follows:
"Undivided one-half (1/2) share to Pedro Bitanga, married to
Agripina Purisima, Fernando Bitanga, single, Gregorio Bitanga,
single, Guillermo Bitanga, single, Clarita Bitanga, married to
Agripino L. Rabago, all of legal age, Filipino citizens, and
residents of Laoag, Ilocos Norte, and the remaining undivided
one-half (1/2) share to the spouses Jorge Malacas and Melitona
Lagpacan, both of legal age, Filipino citizens, and residents of
Burgos, Ilocos Norte, free from incumbrance regarding the claims
of the Philippine National Bank and Felizardo Reyes, after
payment of lawful fees." 4

Petitioner, not satisfied with the Decision of respondent Court of Appeals and its
Resolution denying the motion for its reconsideration, now comes to Us and submits
the following assignment of errors:
I. The Court of Appeals erred in holding that the mortgage deed
(Exhibit 1-Bank) is valid and existing only with respect to the onehalf portion of the lot in question allegedly belonging to the
mortgagor Rosa Ver as her share in the conjugal partnership with
her husband Iigo Bitanga.
II. The Court of Appeals erred in holding that the mortgage deed
(Exhibit 1-Bank) executed by Rosa Ver was no longer subsisting
simply because the same was not annotated on the face of
original certificate of title No. 7683 (Exhibit A).

spouses Melitona Lagpacan and Jorge Malacas bears the

earmarks of validity and regularity.
Upon being required to comment on this petition, respondents filed a Motion to
Dismiss on the grounds that the decision of respondent court sought to be reviewed
had become final and executory on account of the failure of Felizardo Reyes, the real
party in interest, to join the PNB in this petition, and that the issues presented are
questions of fact and not of law, hence, not proper for review by this Court.
By Resolution of January 10, 1972, this Court denied the petition for lack of merit.
On January 25, 1972, the PNB moved to reconsider the denial contending that at
least the validity of the mortgage deed as to the share of herein respondent-heirs
should be upheld because of their acquiescence thereto, and that the bank still has
an interest over the case for the reason that although it had already sold its interests
over the property which is the subject matter of this litigation to Felizardo Reyes, it still
stands to be affected in the event that this case is finally decided in favor of
respondents. In other words, it is the contention of PNB that it has the personality to
bring this petition, even without Felizardo Reyes, since it still has an interest in the
final outcome of this case.
On March 2, 1972, this Court reconsidered the Resolution of January 10, 1972 and
resolved to give due course to the petition.
On the first assigned error, PNB contends that the mortgage constituted by Rosa Ver
in its favor on October 20, 1936 is valid and covers the entire property known as Lot
9068 for the reasons that: (1) the valid execution, existence and registration of said
real estate mortgage under Act No. 3344 are not denied; and (2) the fact that Tax
Declaration No. 120225-A then covering the mortgaged property was issued in the
exclusive name of mortgagor Rosa Ver was likewise not denied but in fact admitted by
herein respondents, and, therefore, the latter in effect admitted the genuineness and
due execution of said Tax Declaration.

III. The Court of Appeals erred in holding that estoppel and/or

laches has not stepped in to defeat the right of respondents
Bitangas and Rabago over the lot in question, specifically to the
one-half portion thereof representing their undivided share of the
lot as their inheritance from their father Iigo Bitanga.

There is no dispute that the document of mortgage executed by Rosa Ver was in
accordance with the formalities required by law and that same was registered in the
day book of the Register of Deeds of Ilocos Norte within a month after its execution.
What is here contested is whether Rosa Ver could, as she did in fact, mortgage the
entire Lot 9068 to petitioner PNB. In other words, the issue refers to the intrinsic
validity of the mortgage, as distinguished from its formal sufficiency.

IV. The Court of Appeals erred in holding that the acquisition of

the other half portion of the lot in question by the intervenors

The trial court found and so held that Lot 9068 belonged to the conjugal partnership
of the spouses Iigo Bitanga and Rosa Ver. Therefore, when Iigo died on September
Page 316 of 505

25, 1935, his one-half share in said lot was transmitted to his heirs (Article 777, New
Civil Code; Article 657, old Civil Code), 5 and a co-ownership was established
between them and Iigo's surviving spouse Rosa Ver. Hence, on October 20, 1936, a
little over a year after Iigo's death, Rosa Ver, by herself alone, could not have validly
mortgaged the whole of Lot 9068 to PNB.
Under Article 2085, New Civil Code (Art. 1857, Old Civil Code), one of the essential
requisites to the contract of pledge and mortgage is that the pledgor or mortgagor be
the absolute owner of the thing pledged or mortgaged. And under Article 493, New
Civil Code (Art. 399, Old Civil Code), each co-owner shall have the full ownership of
his part and of the fruits and benefits pertaining thereto, and he may therefore
alienate, assign or mortgage it, and even substitute another person in its enjoyment,
except when personal rights are involved. But the effect of the alienation or the
mortgage, with respect to the co-owners, shall be limited to the portion which may be
allotted to him in the division upon the termination of the co-ownership.
Hence, We fully agree with the trial court and the respondent Court and affirm the
holding that "what the Philippine National Bank had acquired from Rosa Ver by virtue
of the mortgage was simply one-half (1/2) of the entire property, for this was all she
had in her power to convey the other half being, as it still is, the lawful share of the
plaintiffs-appellees as inheritance from their father, Iigo Bitanga. Nemo dat quod non
habet One cannot give what is not his." 6
Applying the provisions of the Old Civil Code, 7 the law in force at the time of Iigo
Bitanga's death in 1935, Rosa Ver, as surviving spouse, cannot take part legally in the
sharing of the estate left by her deceased husband (one-half (1/2) of Lot 9068) with
respect to which she only had usufructuary rights. "The usufructuary not being an
owner, cannot alienate or dispose of the objects included in the usufruct. Thus, he
cannot . . . mortgage or pledge the thing . . ." 8
It is not disputed that Tax Declaration No. 120225-A, then covering Lot 9068, was in
the exclusive name of Rosa Ver. Such fact, however, even if expressly admitted by
herein respondent-heirs, does not and cannot alter the conjugal character of the lot in
question, much less would it affect the mortgage in favor of petitioner PNB. We have
already held in several cases that declarations of ownership for purposes of taxation
are not sufficient evidence of title. 9 If petitioner relied upon Tax Declaration No.
120225-A in assuming that the whole property belonged exclusively to mortgagor
Rosa Ver, such erroneous assumption should not prejudice the rights of the other coowners, herein respondent heirs. As far as the latter are concerned, their respective
shares were not included in the mortgage in favor of PNB.

We, therefore, reject PNB's contention that the mortgage constituted by Rosa Ver in
its favor on October 20, 1936 is valid and covers the entire property known as Lot
9068.
In the second assignment of error, petitioner maintains that the respondent appellate
court erred in holding that the mortgage deed (Exhibit 1-Bank) executed by Rosa Ver
was no longer subsisting simply because the same was not annotated on the face of
original certificate of title No. 7683 (Exhibit A).
Petitioner argues that Rosa Ver, being the one who constituted the mortgage deed
and has full knowledge of the existence of the same as well as the respondent
Bitangas and Rabago in their capacity as heirs, subscribing witnesses and as notary
public, respectively, having also full knowledge of the existence of the mortgage
contract, have the legal duty to apprise petitioner Philippine National Bank of the
impending registration proceedings covering the lot in question as well as to the
issuance of the original certificate of title No. 7683, in line with Section 19 of the Land
Registration Act, paragraph 2 (b) that the mortgagor shall not make application
without the consent in writing of the mortgagee, and paragraph 3 which requires that
the decree of registration in case the mortgagor does not consent to the making of the
application shall state that registration is made subject to such mortgage, describing it
. . . Petitioner further argues that no notice whatsoever, either verbal or in writing,
having been made by the mortgagor Rosa Ver and/or the respondents Bitangas and
Rabago, petitioner could not have taken any action to annotate its mortgage lien on
the lot in question on the face of original certificate of title No. 7683 and, therefore,
should not be blamed for its failure to annotate the mortgage lien on the lot within a
period of one (1) year from the issuance of the decree on September 14, 1937 since
under Section 19 of Act 496, it is specifically provided that the decree of registration in
such a case shall state that the registration is subject to such mortgage. Petitioner
concludes that if the mortgage is not so annotated on the face of original certificate of
title No. 7683 within a period of one (1) year from September 14, 1937, then it is not a
fatal defect for the enforcement of the said mortgage lien.
Petitioner further buttresses its stand in distinguishing the requirements of the law as
embodied in Sections 19 and 21 of the Land Registration Act from the "general
notice" contemplated under Section 31 in relation to Section 35 of the same Act in that
the notice required in Sections 19 and 21 are specific while in the latter, the notice is
merely constructive. And to cap his argument, petitioner contends that mortgagor
Rosa Ver and her heirs had already benefitted from the loan and the mortgage
transaction and that they should not be allowed to enrich themselves at the expense
of the petitioner.
Page 317 of 505

Petitioner's theory is clearly untenable and cannot be sustained for otherwise it would
do violence to the fundamental and basic foundation of the Torrens system, which is
the indefeasibility of a Torrens title under Sections 38, 39 and 47 of Act 496, which
provide as follows:

"Sec. 38. If the court after hearing finds that the applicant or
adverse claimant has title as stated in his application or adverse
claim and proper for registration, a decree of confirmation and
registration shall be entered. Every decree of registration shall
bind the land, and quiet title thereto, subject only to the
exceptions stated in the following section. It shall be conclusive
upon and against all persons, including the Insular Government
and all the branches thereof, whether mentioned by name in the
application, notice, or citation, or included in the general
description "To all whom it may concern." Such decree shall not
be opened by reason of the absence, infancy, or other disability
of any person affected thereby, nor by any proceeding in any
court for reversing judgments or decrees; subject, however, to the
right of any person deprived of land or any estate or interest
therein by decree of registration obtained by fraud to file in the
competent Court of First Instance a petition for review within one
year after entry of the decree provided no innocent purchaser for
value has acquired an interest. Upon the expiration of said term
of one year, every decree or certificate of title issued in
accordance with this section shall be incontrovertible. If there is
any such purchaser, the decree of registration shall not be
opened, but shall remain in full force and effect forever, subject
only to the right of appeal hereinbefore provided: Provided,
however, That no decree or certificate of title issued to persons
not parties to the appeal shall be cancelled or annulled. But any
person aggrieved by such decree in any case may pursue his
remedy by action for damages against the applicant or any other
person for fraud in procuring the decree. Whenever the phrase
"innocent purchaser for value" or all equivalent phrase occurs in
this Act, it shall be deemed to include an innocent lessee,
mortgagee, or other encumbrancer for value." (As amended by
Sec. 3, Act No. 3621; and Sec. 1, Act No. 3630).

"Sec. 39. Every person receiving e certificate of title in pursuance

of a decree of registration, and every subsequent purchaser of
registered land who takes a certificate of title for value in good
faith shall hold the same free of all encumbrance except those
noted on said certificate and any of the following encumbrances
which may be subsisting, namely:
First. Liens, claims or rights arising or existing under the laws or
Constitution of the United States or of the Philippine Islands
which the statues of the Philippine Islands cannot require to
appear of record in the registry.
Second. Taxes within two years after the same become due and
payable.
Third. Any public highway, way, private way established by law, or
any Government irrigation canal or lateral thereof, where the
certificate of title does not state that the boundaries of such
highway, way, or irrigation canal or lateral thereof, have been
determined.
But if there are easements or other rights appurtenant to a parcel
of registered land which for any reason have failed to be
registered, such easements or rights shall remain so appurtenant
notwithstanding such failure, and shall be held to pass with the
land until cut off or extinguished by the registration of the servient
estate, or in any other manner." (As amended by Act No. 2011,
and Sec. 4, Act No. 3621).
Sec. 47. The original certificate in the registration book, any copy
thereof duly certified under the signature of the clerk, or of the
register of deeds of the province or city where the land is situated
and the seal of the court, and also the owner's duplicate
certificate shall be received as evidence in all the courts of the
Philippine Islands and shall be conclusive as to all matters
contained therein except so far as otherwise provided in this Act."
Parenthetically, it may be stated that Presidential Decree No. 1529 which amends and
codifies the laws relative to registration of property reiterates the provisions cited
above under the Land Registration Act, Act No. 496. Thus, Section 38 of Act 496 is
reiterated by Sections 29, 30, 31 and 32 of P.D. No. 1529, while Section 39 of Act
Page 318 of 505

496 is repeated under Section 44 of P.D. No. 1529. Section 47 of Act 496 is
substantially repeated in paragraph 2 of Sec. 31 of the Presidential Decree.
It is well-settled in Our jurisprudence that a decree of registration, after the lapse of
the one-year period from its entry, becomes indefeasible and conclusive. (Garcia, et
al. vs. Bello, et al., L-21355, April 30, 1965, 13 SCRA 769, 770; Baldoz vs. Papa, et
al., L-18150, July 30, 1965, 14 SCRA 691; Ylarde, et al. vs. Lichauco, et al., L-22115,
Dec. 29, 1971, 42 SCRA 641, 650). The reason for the rule is succinctly stated
in Gestosani, et al., vs. Insular Development Company, et al., L-21166, September 15,
1967, 21 SCRA 114 by the Supreme Court, speaking through Justice Dizon, thus:
"At the risk of stating what is obvious, We say that land
registration proceedings under Act 496 are in rem and that such
proceedings, as well as the title issued as a result thereof, are
binding and conclusive upon the whole world. Upon the expiration
of one year within which a petition to review the decree of
registration may be filed, said decree and the title issued
pursuant thereto become incontrovertible (Sec. 38, Act 496), and
the same may no longer be changed, altered or modified, much
less set, aside (Director of Lands vs. Gutierrez David, 50 Phil.
797). This has to be the rule, for if even after the ownership of a
property has been decreed by a land registration court in favor of
a particular person, the title issued may still be annulled,
changed, altered or modified after the lapse of the one year
period fixed by the legal provision mentioned above, the object of
the Torrens system, namely, to guarantee the indefeasibility of the
title to the property, would be defeated (Cabaos vs. Register of
Deeds, 40 Phil. 620)."
We agree with the ruling of both the trial and the appellate courts in their adherence to
the doctrine laid down by Us in Snyder vs. the Provincial Fiscal of Cebu and Jose
Avila, No. 17132, February 8, 1922, 42 Phil. 761, which presented a nearly identical
situation as that in the case at bar, where the issue decided was whether or not a
lease contract entered into prior to the original registration of the land subject of the
lease and existing pending the registration proceedings could be registered or
recorded after such original registration. Like the mortgage executed by Rosa Ver in
the instant petition, the contract of lease was entered into prior to the issuance of the
decree of registration and the Supreme Court held, thus:
"It will be noted from the provisions of section 33, above quoted,
that the decree of registration cannot be opened or altered even

by reason of the absence, infancy, or other disability of any

person affected thereby; and it can only be reviewed or modified
upon the petition, filed within one year after the entry of the
decree, of any person who has been deprived of land or of any
estate or interest therein through fraud.
xxx xxx xxx
If, under the Land Registration Act, an owner of land, as against
third parties, and after the lapse of one year, by failing to appear
and claim such ownership during the registration proceeding,
thereby loses the same, with equal or greater reason does a
lessee, mortgagee, or other person having an interest in said
land lose such interest or right so far as the land is concerned, by
not claiming the same during the registration proceeding and by
allowing said land to be registered free of all incumbrances. . . ."
(Emphasis Ours)
Since a clean title was issued in the name of the spouses Iigo Bitanga and Rosa Ver
by virtue of the decree of registration entered on September 14, 1937, and said
decree not having been contested or reopened for a period of one year, the same
became incontrovertible. We must reiterate here the rationale of the doctrine We laid
down in William H. Anderson and Co. vs. Garcia, 64 Phil. 506, 514-515, after an
analysis of the apparently conflicting decisions in the cases of Worcester vs. Ocampo
and Ocampo, 34 Phil. 646; Lanci vs. Yangco, 52 Phil. 563; and Laxamana vs.
Carlos,57 Phil. 722 thus:
"Whatever might have been generally or unqualifiedly stated in
the cases heretofore decided by this court, We hold that under
the Torrens system registration is the operative act that gives
validity to the transfer or creates a lien upon the land (Secs. 50
and 51, Land Registration Act). A person dealing with registered
land is not required to go behind the register to determine the
condition of the property. He is only charged with notice of the
burdens on the property which are noted on the face of the
register or the certificate of title. To require him to do more is to
defeat one of the primary objects of the Torrens system. A bona
fide purchaser for value of such property at an auction sale
acquires good title as against a prior transferee of the same
property if such transfer was unrecorded at the time of the
auction sale . . ."
Page 319 of 505

In the instant case, there is no showing that the Manila Trading Company (MTC) had
any knowledge or notice of the prior mortgage in favor of the PNB, hence, it may be
safely presumed that it (MTC) acquired the rights of Rosa Ver and Guillermo Bitanga
as an innocent purchaser for value and free from all incumbrances. From the MTC,
the aforesaid rights of Rosa and Guillermo passed to Santiago Sambrano, and from
the latter, to herein intervenors. There is no question, therefore, as to intervenors'
rights over the property, as against the PNB or its transferee, Felizardo Reyes. The
intervenors merely stepped into the shoes of MTC, a prior purchaser in good faith,
and thereby became entitled to all the defenses available to said Company, including
those arising from the acquisition of the property in good faith and for value.
(Granados vs. Monton, L-1698, April 8, 1950, 86 Phil. 42).

Upon the clear and explicit provisions of the Land Registration Act and the
jurisprudence on the indefeasibility of the Torrens title after the lapse of one year as
reiterated and emphasized in the unbroken line of authorities, We hold that the
respondent court committed no error in holding that "the lien by reason or on account
of the mortgage executed by Rosa Ver over the entire parcel on October 20, 1936,
which was not annotated on the original certificate of title, could not have attached to
the land. Otherwise stated, the failure of the interested party to appear during the
registration proceeding and claim such interest in the land barred him from thereafter
having such interest annotated on the certificate of title."
The third assignment of error assails the respondent court in holding that estoppel
and/or laches has not stepped in to defeat the right of respondents Bitanga and
Rabago over the lot in question, specifically to the one-half (1/2) portion thereof
representing their undivided share of the lot as their inheritance from their father, Iigo
Bitanga.
In
rejecting
appellant's
defense
respondent Court of Appeals ruled:

of

estoppel

or

laches,

"Corollary to the foregoing, appellants cannot maintain that

estoppel or laches has stepped in to defeat the right of the
plaintiffs-appellees to institute an action to indicate their right. And
the reason is basic in its simplicity: the mortgage contract entered
into by Rosa Ver respecting the other half of the lot in question
having been null and void ab initio, lapse of time could not have
validated or ratified it, and an action, predicated upon the
indubitable nullity of the contract constituted may always be

the

maintained by the aggrieved party to set it aside." (pp. 13-14, CA

Decision).
Petitioner argues that respondents Bitangas and Rabago, as heirs and/or successorsin-interest of Rosa Ver are bound by the mortgage and may not be permitted to
question the validity of the same, and assuming that Rosa Ver does not have any right
to constitute a mortgage on the other half of the lot in question, petitioner contends
that nonetheless the validity of the mortgage deed constituted by her over the share of
her husband should be upheld as well as its acquisition by the petitioner because
respondents Bitangas and Rabago are likewise estopped to question the validity of
the same by reason of acquiescence on their part in that Guillermo Bitanga together
with Mary Bitanga Castillo signed as witnesses to the mortgage deed executed by
their mother on the whole portion of the lot in question on October 20, 1936 while
respondent Atty. Agripino L. Rabago, the son-in-law of the mortgagor Rosa Ver,
notarized the said mortgage deed. Petitioner also points to the fact that respondent
Pedro Bitanga offered to repurchase the whole portion of the property from the
petitioner, which offer is an admission, conclusive upon him that the PNB is the
absolute and legal owner of the lot in question and have the right to dispose of the
same. And citing the case of Cruz vs. Ilagan, 81 Phil. 554, and authority quoted from
21 Am. Jur. 756, petitioner concludes that respondents Bitangas and Rabago, as
heirs of the deceased husband, by their conduct, in effect bound themselves to the
real estate mortgage contract over the share of the husband, as completely and
effectively as though they themselves signed the document as mortgagors over the
share of the husband.
Petitioner also stresses that respondents Bitangas and Rabago filed the complaint for
reconveyance and annulment of mortgage on May 17, 1954, after nineteen (19) solid
years have already elapsed from the time the mortgage was executed on October 20,
1936 by Rosa Ver, and the lot in question had been the subject of several transactions
during which time said respondents never did anything in asserting or vindicating their
right to institute a suit against the petitioner though with ample opportunity to do so
and, therefore, said respondents slept on or neglected in asserting their right, hence
they are guilty of laches.
Petitioner's contention is without merit. First, it must be clarified that not all the
respondent heirs signed the mortgage deed as instrumental witnesses. An
examination of the mortgage contract (Exhibit "1") shows that of the five (5) Bitanga
respondents, namely, Pedro, Fernando, Gregorio, Guillermo and Clarita, only
Guillermo Bitanga signed as one of the instrumental witnesses, the first being Mary B.
Castillo.
Page 320 of 505

Even as regards Guillermo Bitanga, who signed as witness of the deed of

mortgage, PNB's reliance upon the case of Vda. de la Cruz vs. Ilagan is unavailing. In
the De la Cruz case, the heirs of the decedent, who were the parties sought to be
estopped from questioning the validity of the sale made by their co-heir and the
administrator of the decedent's estate, did not merely sign as witnesses to the deed of
sale. In the words of Justice Zaldivar who penned the decision, they "gave their
approval and conformity to the sale and to the administrator's motion by signing with
appropriate expressions both papers." (Cruz vs. Ilagan, 81 Phil. 554, 556). Thus, that
the heirs gave their consent to the sale could not be doubted, as in fact it was
expressed in words in the deed itself and in the motion submitted to the court for
judicial approval of the sale, and on the basis of this express approval and conformity,
the Court held them in estoppel and bound as co-vendors. In the instant case, on the
other hand, the party sought to be estopped signed merely as an instrumental
witness. A distinction should be made, as indeed there is, between one who signs a
document merely as an instrumental witness, and, one who affixes his signature as
proof of his consent to, approval of, and conformity with, the contents of the deed or
document. The former simply attests that the party or parties to the instrument signed
the same in his presence, so that he is frequently referred to as a "Witness to the
signature," and he is not bound to know or be aware of the contents of the document;
while the latter is not only presumed to know the subject matter of the deed, but more
importantly, binds himself thereto as effectively as the party himself would be bound
thereby.
The foregoing distinction makes clear the inapplicability of the ruling in Vda. de la
Cruz vs. Ilagan to the facts obtaining in the case at bar. We cannot hold Guillermo
Bitanga in estoppel by declaring that he bound himself to the mortgage as effectively
as the mortgagor Rosa Ver when he signed the mortgage deed as a witness in the
absence of clear proof that he was in fact aware of the contents of the document at
the time of its execution. We can only go as far as stating that the deed was signed by
the parties thereto in his presence.
Moreover, there is no allegation nor evidence on record to show that petitionermortgagee relied upon the signature of Guillermo Bitanga on the mortgage deed, or
that he made any representations with the PNB for the acceptance of the mortgage.
On the contrary, PNB states that Rosa Ver mortgaged the entire lot "on the basis and
strength of Tax Declaration No. 120225-A" which "was issued and declared in her
exclusive name." 10 As held by this Court, speaking through Justice Zaldivar, in the
case of Kalalo vs. Luz, L-27782, July 31, 1970, 34 SCRA 337, 346-347:
"An essential element of estoppel is that the person invoking it
has been influenced and has relied on the representations or

conduct of the person sought to be estopped, and this element is

wanting in the instant case . . . And in Republic of the
Philippines vs. Garcia, et al. (91 Phil. 46, 49), this Court ruled that
there is no estoppel where the statement or action invoked as its
basis did not mislead the adverse party. Estoppel has been
characterized as harsh or odious, and not favored by law
(Coronel, et al. vs. C.I.R., et al., 24 SCRA 990, 996) . . . Estoppel
cannot be sustained by mere argument or doubtful inference; it
must be clearly proved in all its essential elements by clear,
convincing and satisfactory evidence (Rivers vs. Metropolitan Life
Ins. Co. of New York, 6 N.Y., 2d, 3, 5) . . ."
Consequently, there is no estoppel where there is no reliance upon
representations and where there is no deliberate misleading of another. Intention
to mislead is an important element of estoppel, as well as the mislead party's
reliance upon the declaration, act or omission of the party sought to be estopped.
Both elements have not been proved in the instant case, hence again, estoppel
does not lie against Guillermo Bitanga.
Under this same ground of estoppel, petitioner makes capital of the fact that it was
Atty. Agripino L. Rabago, son-in-law of mortgagor Rosa Ver and husband of one of
herein respondent-heirs, Clarita Bitanga Rabago, who notarized the mortgage deed. It
is contended that since Atty. Rabago acted as the judicial administrator and lawyer of
the Bitanga family estate at the time of the execution of the mortgage, he should have
prevailed upon his mother-in-law Rosa Ver not to mortgage the entire lot but only half
thereof to PNB when he was approached to notarize the "Hipoteca de Bienes
Inmuebles" (Exhibit 1). Furthermore, knowing that the property was already the
subject of original registration proceedings under Act No. 496, he should have
informed the bank thereof.
Again, this contention of petitioner is untenable. Assuming that Atty. Rabago was the
lawyer for the Bitanga family and administrator of its estate of which the trial and
appellate courts made no such finding, his acts, declarations and omissions in the
performance of his duties as such, whether deliberate or not, cannot adversely affect
herein respondent heirs as to deprive them of their right to impugn a contract which
was prejudicial to their interests, Under the circumstances of the case at bar, that Atty.
Rabago could have or should have done a particular thing which he did not do is his
own responsibility. The settled rule in Philippines Jurisprudence that a client is bound
by his counsel's actions, negligence, mistakes and/or shortcomings enunciated in a
number of cases 11 presupposes the existence of a pending litigation whether in
court or in an administrative body, and refers only to matters pertaining to the conduct
Page 321 of 505

of such case. Precisely said rule requires the existence of an attorney-client

relationship, while herein, there is merely a single, independent transaction, that of a
mortgage, which was in no way connected with any pending litigation at the time of its
execution. Therefore, the above stated rule finds no application in the instant case.

We likewise disagree with the contention that Pedro Bitanga's offer to buy the lot in
question, as contained in his letter to the PNB dated September 14, 1949 (Exhibit 10),
is a conclusive admission on his part that the bank was the absolute and legal owner
of the property so as to estop him from contesting the validity of the mortgage (Exhibit
1) and the title (TCT T-2701) procured by the bank over the property. For in the
aforesaid letter, Bitanga categorically wrote: "1. That I offer the amount of P800.00 to
buy said lot, and please consider that the rights which the bank had purchased was
the property and shares of my mother and brother, Guillermo, and that my rights as
well as the rights of my other brothers and sisters were not sold to the bank;" There
can be no estoppel arising from said vehement and assertive claim. If he offered to
buy the entire property despite such expressed claim, his purpose may well be that he
wished to avoid a long-drawn, expensive litigation and not necessarily to admit that
petitioner was the absolute and legal owner of the property.
As to petitioner's contention that respondents are guilty of laches for having slept on
or neglected in asserting their right to the land after the lapse of more than nineteen
(19) years from the time the mortgage was executed on October 20, 1936 by Rosa
Ver, the ruling in Angeles, et al. vs. Court of Appeals, et al., 102 Phil. 1006, declares
that "where the sale of a homestead is null and void, the action to recover the same
does not prescribe because mere lapse of the time cannot give efficacy to the
contracts that are null and void and inexistent." This is a principle recognized
since Tipton vs. Velasco, 6 Phil. 67, that "mere lapse of time cannot give efficacy to
contracts that are null and void," cited in Eugenio vs. Perdido, et al., 97 Phil. 41.
As to the fourth assignment of error faulting the respondent appellate court in holding
that the acquisition of the other half portion of the lot in question by the intervenorsspouses Melitona Lagpacan and Jorge Malacas bears the earmarks of validity and
regularity, petitioner theorizes that the mortgage executed by Rosa Ver on the lot in
question in its entirety was valid and that said mortgage was very much ahead than
that of the levy made by the Manila Trading & Supply Co. since the mortgage was
registered on November 12, 1936 under Act 3344 as then the property mortgaged
was still an unregistered land. On the other hand, the levy made by the Manila Trading
& Supply Co. was noted in the first Torrens title of the land after its registration under
the Torrens system, on February 14, 1940. And being first in time, herein petitioner

maintains it should be first in right and the mortgage should enjoy preference over the
levy.
It must be noted, however, that in Our resolution of the first assignment of error, We
ruled that the mortgage deed was valid and existing only with respect to the one-half
portion of the lot in question belonging to the mortgagor Rosa Ver as her share in the
conjugal partnership with her husband Iigo Bitanga. Hence, petitioner's assumption
that the mortgage of the whole lot was valid, is erroneous. What this Court held is that
the mortgagor, Rosa Ver, as surviving spouse, could convey in mortgage to the
petitioner bank one-half (1/2) of the entire property being her share in the conjugal
partnership with her deceased husband, the other half being the lawful share of the
respondent heirs as inheritance from their deceased father, Iigo Bitanga.
And resolving the second assignment of error, We have ruled likewise that the
respondent court committed no error in holding that the mortgage lien executed by
Rosa Ver over the entire parcel of land on October 20, 1936 which was not annotated
on the original certificate of title could not have attached to the land Stated otherwise,
the failure of the petitioner bank to appear during the registration proceedings and
claim such interest in the land, and further to do so after more than a year after the
issuance of the decree of registration which rendered the title undefeasible and free
from any collateral attack by any person claiming title to or interest in the land prior to
registration proceedings, has resulted into the petitioner bank being virtually deprived
of its mortgage. It follows, therefore, that the acquisition of the other half portion of the
lot in question by the intervenors-spouses Melitona Lagpacan and Jorge Macalas into
whose hands said one-half (1/2) passed as a result of Civil Case No. 1846 of the
Court of First Instance of Ilocos Norte entitled "Jorge Malacas, et al vs. Alfredo
Formoso, et al." was valid and regular, which holding of the Court of Appeals is
correct and We affirm the same.
To recapitulate, the mortgage executed by Rosa Ver in favor of the PNB was valid only
as regards her one half (1/2) conjugal share in Lot 9068. On the other hand, the
intervenors-spouses Melitona Lagpacan and Jorge Malacas acquired their right to the
shares of Rosa Ver and Guillermo Bitanga in the same lot from the Manila Trading
Co., another creditor of Rosa Ver, which acquired "all the rights, title, interests and
participations which xxx Guillermo Bitanga and Rosa Ver de Bitanga have or might
have" over Lot 9068 (Exh. 4-Lagpacan) more than two (2) years after the decree of
registration was entered in the name of the Bitanga spouses on September 14, 1937.
Since Original Certificate of Title No. 7683 covering the land in question was issued
on December 15, 1937 free from any mortgage lien and no such lien was recorded
thereafter even until May 25, 1940 when the certificate of sale in favor of the Manila
Trading Co. as highest bidder of the shares of Rosa and Guillermo was annotated on
Page 322 of 505

the title (Exh. A-4), it is quite clear that as between the PNB and the Manila Trading
Co., the latter had the better rights.
One further point that militates against the claim of the petitioner bank who now
prosecutes its claim or mortgage hen in behalf of Felizardo Reyes to whom the bank
sold the property on May 24, 1954, is the finding of the appellate court that said
Felizardo Reyes is a purchaser in bad faith, a notice of lis pendens having been
annotated on the certificate of title covering the property sometime before the sale
thereof was made by the Philippine National Bank in favor of Felizardo Reyes. This
finding of fact is conclusive and binding upon Us and bad faith We can neither
condone nor reward.
The judgment of the Court of Appeals must, however, be modified. Paragraph (d) of
the dispositive portion of the decision appealed from directed the Register of Deeds to
issue in lieu of Transfer Certificate of Title Nos. T-2701 and T-3944 another certificate
of title in the names of the plaintiffs and intervenors as follows:
"Undivided one-half (1/2) share to Pedro Bitanga, married to
Agripina, Purisima, Fernando Bitanga, single, Gregorio Bitanga,
single, Guillermo Bitanga, single, Clarita Bitanga, married to
Agripino L. Rabago, all of legal age, Filipino citizens, and
residents of Laoag, Ilocos Norte, and the remaining undivided
one-half (1/2) share to the spouses Jorge Malacas and Melitona
Lagpacan, both of legal age, Filipino citizens, and residents of
Burgos, Ilocos Norte free from incumbrance regarding the claims
of the Philippine National Bank and Felizardo Reyes, after
payment of lawful fees."
As We have hereinbefore ruled that the Manila Trading Company acquired not only
the rights, title, interests and participation of Rosa Ver to one-half (1/2) of Lot 9068 but
also that pertaining to Guillermo Bitanga or one-fifth (1/5) of the other half of the lot
which the latter shared with his sister and three (3) brothers, each one having one-fifth
(1/5) share each, the intervenor spouses as successors-in-interest of the Manila
Trading Company are entitled to six-tenths (6/10) or three-fifths (3/5) of the entire lot,
and not merely one-half (1/2) thereof as held by the lower court and the appellate
court. The undivided two-fifths (2/5) share only should appertain to Pedro Bitanga,
Fernando Bitanga, Gregorio Bitanga and Clarita Bitanga.
WHEREFORE, IN VIEW OF THE FOREGOING, the judgment of
the Court of Appeals is hereby affirmed with modification in the sense that paragraph
(d) is hereby amended to read as follows:

(d) Since the issuance of Transfer Certificate of Title No. T-2701, Exhibit "D" in favor
of the Philippine National Bank, and Transfer Certificate of Title No. T-3944, Exhibit
"16", in favor of Felizardo Reyes, was without legal basis, they are, therefore, declared
null and void and cancelled. The Register of Deeds is hereby ordered to issue in lieu
of the foregoing transfer certificates of title another certificate of title in the names of
the private respondents as follows:
Undivided two-fifths (2/5) share to Pedro Bitanga, married to Agripina, Purisima,
Fernando Bitanga, single, Gregorio Bitanga, single, and Clarita Bitanga, married to
Agripino L. Rabago, all of legal age, Filipino citizens, and residents of Laoag, Ilocos
Norte, and the remaining undivided three-fifths (3/5) share to the spouses Jorge
Malacas and Melitona Lagpacan, both of legal age, Filipino citizens, and residents of
Burgos, Ilocos Norte, free from incumbrance regarding the claims of the Philippine
National Bank and Felizardo Reyes, after payment of lawful fees.
Costs against the petitioner.
SO ORDERED.
Makasiar, Fernandez and De Castro, JJ ., concur.
Teehankee, J ., in the result.
Melencio-Herrera, J ., took no part.
||| (PNB v. Court of Appeals, G.R. No. L-34404, [June 25, 1980], 187 PHIL 132-157)

FIRST DIVISION
[G.R. No. 109946. February 9, 1996.]
DEVELOPMENT
BANK
OF
THE
PHILIPPINES, petitioner, vs. COURT OF APPEALS, MYLO O.
QUINTO and JESUSA CHRISTINE S. CHUPUICO, respondents.

Office of the Legal Counsel for DBP.

Page 323 of 505

Alexander Acain for private respondents.

DECISION
BELLOSILLO, J p:
DEVELOPMENT BANK OF THE PHILIPPINES filed this petition for review
on certiorari assailing the decision of the Court of Appeals holding that the mortgages
in favor of the bank were void and ineffectual because when constituted the
mortgagors, who were merely applicants for free patent of the property mortgaged,
were not the owners thereof in fee simple and therefore could not validly encumber
the same. 1
On 20 April 1978 petitioner granted a loan of P94,000.00 to the spouses Santiago
Olidiana and Oliva Olidiana. To secure the loan the Olidiana spouses executed a real
estate mortgage on several properties among which was Lot 2029 (Pls-61) with Tax
Declaration No. 2335/1, situated in Bo. Bago Capalaran, Molave, Zamboanga del Sur,
with an area of 84,108 square meters, more or less. At the time of the mortgage the
property was still the subject of a Free Patent application filed by the Olidianas with
the Bureau of Lands but registered under their name in the Office of the Municipal
Assessor of Molave for taxation purposes. 2
On 2 November 1978 the Olidiana spouses filed with the Bureau of Lands a Request
for Amendment of their Free Patent applications over several parcels of land including
Lot No. 2029 (Pls-61). In this request they renounced, relinquished and waived all
their rights and interests over Lot No. 2029 (Pls-61) in favor of Jesusa Christine
Chupuico and Mylo O. Quinto, respondents herein. On 10 January 1979 Free Patent
Nos. IX-5-2223 (covering one-half of Lot No. 2029 [Pls-61] and IX-5-2224 (covering
the other half of the same Lot No. 2029 [Pls-61]) were accordingly granted
respectively to respondents Jesusa Christine Chupuico and Mylo O. Quinto by the
Bureau of Lands District Land Office No. IX-5, Pagadian City. Jesusa Christine
Chupuico later obtained Original Certificate of Title No. P-27,361 covering
aforementioned property while Mylo O. Quinto was also issued Original Certificate of
Title No. P-27,362 in view of the previous free patent. 3
On 20 April 1979 an additional loan of P62,000.00 was extended by petitioner to the
Olidiana spouses. Thus on 23 April 1979 the Olidianas executed an additional
mortgage on the same parcels of land already covered by the first mortgage of 4 April
1978. This second mortgage also included Lot No. 2029 (Pls-61) as security for the
Olidiana spouses' financial obligation with petitioner. 4

Thereafter, for failure of Santiago and Oliva Olidiana to comply with the terms and
conditions of their promissory notes and mortgage contracts, petitioner extrajudicially
foreclosed all their mortgaged properties. Consequently, on 14 April 1983 these
properties, including Lot No. 2029 (Pls-61) were sold at public auction for P88,650.00
and awarded to petitioner as the highest bidder. A Certificate of Sale was thereafter
executed in favor of petitioner and an Affidavit of Consolidation of
Ownership registered in its name. However, when petitioner tried to register the sale
and the affidavit of consolidation and to have the tax declaration transferred in its
name it was discovered that Lot No. 2029 (Pls-61) had already been divided into two
(2) parcels, one-half (1/2) now known as Lot 2029-A and covered by OCT No. P27,361 in the name of Jesusa Christine Chupuico, while the other half known as Lot
2029-B was covered by the same OCT No. P-27,361 in the name of Mylo O. Quinto. 5
In view of the discovery, petitioner filed an action for Quieting of Title and Cancellation
or Annulment of Certificate of Title against respondents. After trial the Regional Trial
Court of Molave, Zamboanga del Sur, Branch 23, rendered judgment against
petitioner. 6 The court ruled that the contracts of mortgage entered into by petitioner
and the subsequent foreclosure of subject property could not have vested valid title to
petitioner bank because the mortgagors were not the owners in fee simple of the
property mortgaged. The court also found the mortgages over Lot No. 2029 (Pls-61)
of no legal consequence because they were executed in violation of Art. 2085, par. 2,
of the New Civil Code which requires that the mortgagor be the absolute owner of the
thing mortgaged. According to the court a quo there was no evidence to prove that the
mortgagors of the land in dispute were its absolute owners at the time of the
mortgage to petitioner.
The factual findings of the lower court disclose that when the Olidiana spouses
mortgaged Lot No. 2029 (Pls-61) to petitioner it was still the subject of a
miscellaneous sales application by the spouses with the Bureau of Lands. Since there
was no showing that the sales application was approved before the property was
mortgaged, the trial court concluded that the Olidiana spouses were not yet its owners
in fee simple when they mortgaged the property. The lower court also said that with
the subsequent issuance of the Free Patent by the Bureau of Lands in the name of
respondents Chupuico and Quinto, it could be gleaned that the property was indeed
public land when mortgaged to petitioner. Therefore petitioner could not have
acquired a valid title over the subject property by virtue of the foreclosure and
subsequent sale at public auction. 7
Resultantly, the trial court declared the following as null and void insofar as they
related to Lot No. 2029 (Pls-61) being a public land: the real estate mortgage dated 4
April 1978, the second mortgage dated 23 April 1979, the foreclosure sale on 14 April
Page 324 of 505

1983, the certificate of sale registered with the Register of Deeds of Zamboanga del
Sur on 1 September 1983, and the affidavit of consolidation of ownership registered
with the Register of Deeds on 2 August 1985.
Petitioner then appealed to the Court of Appeals which likewise ruled in favor of
respondents, hence the instant petition. 8
Petitioner now seeks to overturn the decision of respondent Court of Appeals holding
that Lot No. 2029 (Pls-61) could not have been the subject of a valid mortgage and
foreclosure proceeding because it was public land at the time of the mortgage, and
that the act of Jesusa Christine S. Chupuico and Mylo O. Quinto in securing the
patents was not tainted with fraud. The crux of this appeal thus lies in the basic issue
of whether the land in dispute could have been validly mortgaged while still the
subject of a Free Patent Application with the government. 9

We agree with the court a quo. We hold that petitioner bank did not acquire valid title
over the land in dispute because it was public land when mortgaged to the bank. We
cannot accept petitioner's contention that the lot in dispute was no longer public land
when mortgaged to it since the Olidiana spouses had been in open, continuous,
adverse and public possession thereof for more than thirty (30) years. 10 In Visayan
Realty, Inc. v. Meer 11 we ruled that the approval of a sales application merely
authorized the applicant to take possession of the land so that he could comply with
the requirements prescribed by law before a final patent could be issued in his favor.
Meanwhile the government still remained the owner thereof, as in fact the application
could still be canceled and the land awarded to another applicant should it be shown
that the legal requirements had not been complied with. What divests the government
of title to the land is the issuance of the sales patent and its subsequent registration
with the Register of Deeds. It is the registration and issuance of the certificate of title
that segregate public lands from the mass of public domain and convert it into private
property. 12 Since the disputed lot in the case before us was still the subject of a Free
Patent Application when mortgaged to petitioner and no patent was granted to the
Olidiana spouses, Lot No. 2029 (Pls-61) remained part of the public domain.
With regard to the validity of the mortgage contracts entered into by the parties, Art.
2085, par. 2, of the New Civil Code specifically requires that the pledgor or mortgagor
be the absolute owner of the thing pledged or mortgaged. Thus, since the disputed
property was not owned by the Olidiana spouses when they mortgaged it to petitioner
the contracts of mortgage and all their subsequent legal consequences as regards Lot
No. 2029 (Pls-61) are null and void. In a much earlier case 13 we held that it was an

essential requisite for the validity of a mortgage that the mortgagor be the absolute
owner of the property mortgaged, and it appearing that the mortgage was constituted
before the issuance of the patent to the mortgagor, the mortgage in question must of
necessity be void and ineffective. For, the law explicitly requires as imperative for the
validity of a mortgage that the mortgagor be the absolute owner of what is
mortgaged. cda
Finally, anent the contention of petitioner that respondents fraudulently obtained the
property in litigation, we also find for the latter. As correctly found by the lower courts,
no evidence existed to show that respondents had prior knowledge of the real estate
mortgages executed by the Olidiana spouses in favor of petitioner. The act of
respondents in securing the patents cannot therefore be categorized as having been
tainted with fraud.
WHEREFORE, the petition is DENIED
the Court of Appeals is AFFIRMED.

and

the

questioned

decision

of

SO ORDERED.
||| (DBP v. Court of Appeals, G.R. No. 109946, [February 9, 1996], 323 PHIL 489497)

THIRD DIVISION
[G.R. No. 150388. March 13, 2009.]
NATIONAL
INVESTMENT
AND
DEVELOPMENT
CORPORATION, petitioner, vs. SPOUSES FRANCISCO AND
BASILISA BAUTISTA, respondents.

DECISION

CHICO-NAZARIO, J p:

Page 325 of 505

Before Us is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of
Court filed by the National Investment and Development Corporation
(NIDC) 1assailing the 15 October 2001 Decision 2 of the Court of Appeals in CA-G.R.
CV No. 60159, entitled, "Spouses Francisco and Basilisa Bautista v. National
Investment Development Corporation". It stemmed from Civil Case No. Q-28360, a
complaint for reconveyance of real property and damages instituted by respondents,
Spouses Francisco Bautista and Basilisa Roque (Spouses Bautista), against Banco
Filipino Savings and Mortgage Bank (Banco Filipino) and NIDC with the Court of First
Instance (CFI) of Rizal, and later assigned to the Regional Trial Court (RTC) of
Quezon City, Branch 94, pursuant to this Court's Administrative Order No. 26-90, as
amended by Administrative Order No. 85B-89, dated 16 February 1990 and 11 March
1991, respectively.

In the interregnum, however, because del Rosario failed to complete payment on the
lots she earlier purchased from the Spouses Bautista, the latter filed on 17 November
1964 before the CFI of Rizal, Quezon City, Branch IV, a complaint docketed as Civil
Case No. Q-8407, entitled, "Spouses Basilisa Roque and Francisco Bautista v.
Araceli W. Vda. de del Rosario and the Philippine Commercial and Industrial
Bank", for the rescission of the Contract of Sale in favor of del Rosario; reconveyance
of the lots subject of the Contract; and the cancellation of the mortgages constituted
over the said lots in favor of PCIB. On 25 January 1965, the CFI rendered a
Decision 3ordering the rescission of the subject Contract of Sale and the return of the
lots covered by said agreement to the Spouses Bautista; without prejudice, however,
to the rights of PCIB as a mortgagee of the same. The Spouses Bautista shall take
the lots subject to the mortgage constituted thereon in favor of PCIB. 4

From the record, the antecedent facts of this case are as follows:

The appeal of the afore-quoted decision to this Court, docketed as G.R. No. L-24873,
was dismissed on 23 September 1966 because it was filed out of time. Hence, the 25
January 1965 Decision of the CFI attained finality.

The Spouses Bautista owned several lots located at Pasong Tamo, Quezon City. One
such property was a 6,368-square (sq.)-meter lot covered by Transfer Certificate of
Title (TCT) No. 35034.
On 26 July 1963, the Spouses Bautista sold several lots to one Araceli Wijangco Vda.
de del Rosario (del Rosario). Included in the lots sold was a portion of the
aforedescribed 6,368-sq.-meter lot, measuring about 822 sq. meters. Del Rosario
succeeded in securing certificates of title covering the purchased lots in her name,
including TCT No. 35034. TCT No. 35034, however, covered not just the 822-sq.meter portion sold to her, but the entire 6,368 sq. meters thereof. A new title, TCT No.
70813, was issued in the names of Spouses Bautista and del Rosario covering the
entire area of 6,368 sq. meters.
Subsequently, del Rosario mortgaged the lots she purchased from the Spouses
Bautista with the Philippine Commercial and Industrial Bank (PCIB) to secure a loan
she obtained from the said bank. Again, the whole 6,368-sq.-meter lot was subjected
to the encumbrance and not just the 822-sq.-meter portion thereof pertaining to del
Rosario. EcTDCI
Del Rosario apparently failed to pay her obligation to PCIB; thus, the said bank
instituted proceedings for the extrajudicial foreclosure of the mortgaged real estate
properties. PCIB was issued on 24 November 1965 the Certificate of Sale for being
the highest bidder of the foreclosed real properties at the public auction sale. On 4
May 1966, PCIB assigned its rights over the aforementioned lots to NIDC. The
Certificate of Sale and subsequent assignment were annotated at the back of TCT
No. 70813 on 16 May 1966.

In view of the foregoing developments, upon motion of the Spouses Bautista, the CFI
ordered the cancellation of the certificates of title to the lots already in the name of del
Rosario, including TCT No. 70813, as well as their replacement in the names of the
Spouses Bautista. Particularly, TCT No. 139925 was issued in replacement of TCT
No. 70813.
Assailing the foregoing order, NIDC came to this Court in G.R. No. L-30150
entitled, "National Investment Development Corporation v. Judge de los Angeles".
On 10 June 1969, the Spouses Bautista obtained a P400,000.00 loan from Banco
Filipino. To secure payment of such debt, they executed a real estate mortgage over
the same lots they previously sold to del Rosario but were reconveyed to them.
By September 1971, the Spouses Bautista defaulted in the payment of their loan with
Banco Filipino, and the latter instituted proceedings for the extrajudicial foreclosure of
the real estate mortgage securing the same. CTEaDc
The lots mortgaged to Banco Filipino by the Spouses Bautista were sold at a public
auction on 22 October 1971 with said bank being the highest bidder. On 27 October
1971, a Certificate of Sale was issued in favor of Banco Filipino, which was duly
registered and annotated at the dorsal portion of all subject certificates of title,
including that of TCT No. 139925.
In a letter 5 dated 13 October 1972, NIDC informed Banco Filipino of its desire to
acquire the lots, including that covered by TCT No. 139925, mortgaged to the latter by
Page 326 of 505

the Spouses Bautista. It averred that by virtue of this Court's decision in National
Investment Development Corporation v. Judge de los Angeles, 6 "it is declared the
rightful owner of these lots . . ." 7 However, it was choosing not to litigate with Banco
Filipino, but, instead, [would] disregard technicalities and exercise its right of
redemption. 8
On 27 October 1972, NIDC paid Banco Filipino P431,473.25 for the aforementioned
lots. A Certificate of Redemption was issued on even date.
Thereafter, NIDC was able to secure in its name new certificates of title over the same
lots. TCT No. 139925 covering the 6,368-sq.-meter lot subject of the present case was
replaced and cancelled by TCT No. 186147 in the name of NIDC.
In several correspondences, 9 the Spouses Bautista attempted to buy back the lots
acquired by NIDC from Banco Filipino including the 5,548-sq.-meter portion of the
6,368-sq.-meter lot covered by TCT No. 186147, to no avail. Though NIDC was
amenable to selling, the parties could not come to an agreement respecting the
purchase price.
On 12 September 1979, the Spouses Bautista filed an action with the CFI of Rizal,
Quezon City, docketed as Civil Case No. Q-28360, entitled, "Spouses Francisco M.
Bautista and Basilisa R. Bautista v. Banco Filipino and National Investment
Development Corporation", against Banco Filipino and NIDC for the recovery of the
lots in question as well as damages.
In their complaint in Civil Case No. Q-28360, the Spouses Bautista alleged that with
respect to the 5,546-sq.-meter portion of the 6,368-sq.-meter lot, they alleged that:
21. That plaintiffs-spouses never intended to mortgage the land in
question [6,368 square meter lot covered by TCT No. 139925] to
Banco Filipino, but for the grave mistake of the latter through its
negligence to include said property in the list of mortgage
properties, when the sole intention was only to annotate
Himlayang Pilipino's right-of-way on said title, makes said
defendant bank liable to reimburse plaintiffs-spouses the amount
of P50,202.39, more or less, which they might be required to pay
defendant NIDC for the recovery of said property. 10
As against NIDC, the Spouse Bautista contended: cCSEaA
16. That defendant NIDC, having learned of the mortgage
executed by plaintiffs-spouses in favor of [Banco Filipino] after the
Supreme Court ruled in NIDC's favor on its certiorari (L-30150),

redeemed the said properties by paying the redemption price to

[Banco Filipino] in the amount of P400,000.00, more or less,
including the 5,546 square meters owned by plaintiff-spouses;
xxx xxx xxx
18. That, also, defendant NIDC, by virtue of the deed of
assignment PCI Bank executed in its favor (sic) holds a lien to the
extent of 822 square meters only on the parcel of land in
question;
19. That defendant NIDC has no right to demand from defendant
bank (Banco Filipino) and for which delivery of the 5,546 square
meters to it was a mistaken by said [Banco Filipino] by its
payment of the redemption price of the mortgage except to the
extent of 822 square meters only assigned to it, among other
parcels of land, by PCI Bank;
20. That in law and equity defendant NIDC is, therefore, under
obligation to return and reconvey the said 5,546 square meters to
plaintiffs-spouses, upon the payment by the latter of the
proportionate amount of P50,202.39, more or less, that
corresponds to the area claimed by taking into consideration the
total area mortgaged to Banco Filipino by equitably distributing
the redemption price defendant NIDC has paid to the entire
area. 11
Ultimately, the relief they sought were as follows:
WHEREFORE, it is most respectfully prayed that after hearing
(sic) judgment be rendered in favor of plaintiffs-spouses by
1. Declaring and ordering that defendant NIDC has no
right to demand the 5,546 square meters
covered by TCT No. 139925 owned by
plaintiffs-spouses and that its delivery to it by
Banco Filipino was a mistake;
2. Ordering defendant NIDC to reconvey the said 5,546
square meters covered by TCT No. 139925,
now TCT No. 186147, to plaintiffs-spouses,
upon payment by the latter of P50,202.39,
more or less, to defendant NIDC for its
Page 327 of 505

recovery; and that TCT No. 186147 be

cancelled and another be issued in accordance
with TCT No. 70813;
3. Ordering defendant Banco Filipino to reimburse
plaintiffs-spouses the amount of P50,202.39
which they would be required to pay defendant
NIDC for the recovery of said parcel of
land; aSITDC

4. Ordering said defendants to pay P30,000.00 [as]

attorney's fees and costs of the suit. 12
In answer to the complaint of the Spouses Bautista, NIDC asserted that "it did not
only redeem but actually purchased from [Banco Filipino]" 13 the entire 6,368-sq.meter lot formerly covered by TCT No. 139925, together with the other lots mortgaged
to the same bank by the Spouses Bautista; and that by purchasing and/or redeeming
said properties, NIDC merely stepped into the shoes of Banco Filipino and is likewise
an innocent purchaser for value.
For its part, Banco Filipino merely denied the allegations contained in the complaint
and argued that the Spouses Bautista had no cause of action against said bank.
During the pendency of Civil Case No. Q-28360, the same was transferred to the RTC
of Quezon City, Branch 94 per this Court's Administrative Order No. 26-90, as
amended by Administrative Order No. 85B-89, dated 16 February 1990 and 11 March
1991, respectively.
On 18 November 1991, the RTC rendered judgment in Civil Case No. Q-28360 in this
wise:
WHEREFORE, premises considered, a judgment is hereby rendered:
1. Dismissing the complaint against Banco Filipino;
2. Ordering National Investment and Development Corporation to
reconvey the 5,546 square meters to [Spouses Bautista] after
reimbursement by the latter;
3. Ordering [Spouses Bautista] to reimburse National Investment
and Development Corporation the amount of P431,470.66 plus

legal interest of 6% from date of redemption, October 27, 1972

until fully paid; and
4. Ordering National Investment and Development Corporation to
pay the costs of suit. 14
The RTC held that NIDC had no right to the 5,546-sq.-meter portion of the 6,368-sq.meter lot, which used to be covered by TCT No. 139925 (now covered by TCT No.
186147 in the name of NIDC). The same was neither sold by the Spouses Bautista to
del Rosario nor mortgaged to PCIB, from whom NIDC acquired its rights. The
redemption by NIDC of the entire 6,368-sq.-meter lot did not make NIDC an absolute
owner thereof, but only a co-owner with the Spouses Bautista of the said undivided
property. 15 The RTC, however, failed to make a finding on the supposed negligence
or mistake of Banco Filipino in including TCT No. 139925 in the list of titles mortgaged
to it to secure the indebtedness of the Spouses Bautista. Instead, it declared that,
except for the 5,546-sq.-meter portion of the 6,368-sq.-meter lot formerly covered by
TCT No. 139925, all other lots mortgaged by the Spouses Bautista as security for
their P400,000.00 loan from Banco Filipino were no longer owned by them at the time
they constituted said mortgage, but by NIDC. SDHTEC
Only NIDC and the Spouses Bautista went to the Court of Appeals in CA-G.R. CV No.
60159 to challenge the foregoing judgment of the RTC.
In a Decision promulgated on 15 October 2001, the Court of Appeals affirmed with
modification the ruling of the RTC. The fallo of said Decision reads:
IN THE LIGHT OF ALL THE FOREGOING, the Decision
appealed from is AFFIRMED with the modification that:
1. The Appellant NIDC is hereby ordered to reconvey to the
Appellants Spouses an undivided portion of that property covered
by Transfer Certificate of Title No. 186147 with an undivided area
of 5,546 square meters;
2. The Appellants Spouses Francisco Bautista are hereby
ordered to remit to the Appellant NIDC an amount proportioned to
the aforesaid area of 5,546 square meters in relation to the entire
area of all the fifty-five (55) parcels of land, purchased by the
Appellant NIDC from the Banco Filipino Savings & Mortgage
Bank, including the aforesaid 5,546 square meters divided by the
purchase price of P431,470.66, the dividend to be multiplied by
said 5,546 square meters. For this purpose, the Court will
Page 328 of 505

conduct a hearing, with due notice to the parties, and receive, if

necessary their evidence to determine the amount to be paid by
the Appellants Spouses, the said amount to earn interest at the
rate of 6% from October 27, 1972. 16
In modifying the decision of the RTC, the Court of Appeals nullified the real estate
mortgage constituted by del Rosario over the 5,546-sq.-meter portion of the 6,368sq.-meter lot in favor of PCIB, for said portion pertained to the Spouses Bautista.
Given that the mortgage of the 5,546-sq.-meter portion to PCIB was null and void, the
appellate court therefore held that no right over the said portion was transferred by
PCIB to NIDC. And "[s]ince [NIDC] had no right of interest over the property [the
Spouses Bautista] had no obligation to redeem the said property from [NIDC]". It
ratiocinated that:
In the present recourse, the [NIDC] anchored its claim over the
subject property under the "Deed of Assignment" executed by
PCIB in favor of [NIDC] under which PCIB assigned its rights and
interests as the highest bidder of the properties, sold at public
auction, resulting from the "Petition" of PCIB for the extrajudicial
foreclosure of the "Real Estate Mortgage" executed by Araceli
del Rosario over parcels of land mortgaged by her in favor of
PCIB. However, included in the "Real Estate Mortgage", without
the consent of the [Spouses Bautista], was the undivided
portion, with an area of 5,546 square meters, owned by the
[Spouses Bautista] covered by Transfer Certificate of Title No.
70813. 17 Since Araceli del Rosario did not own that said
property, she had no right to mortgage the same and, hence, the
"Real Estate Mortgage" over said property in favor of the PCIB
is null and void. AaCTcI
xxx xxx xxx
Hence, PCIB did not acquire any right of interest over the said
property at the sale at public auction. Hence, [NIDC] did not
acquire any right of interest over the property under the "Deed of
Assignment . . ." 18 (Emphases supplied.)
No motion for reconsideration was interposed by the parties to the foregoing decision.
The aforementioned 15 October 2001 Decision of the Court of Appeals in CA-G.R. CV
No. 60159 is now the subject of the Petition for Review on Certiorari 19 before this
Court, where petitioner NIDC assigns the following errors: 20

I.
THE COURT OF APPEALS GRAVELY ERRED IN
DISREGARDING AND IGNORING THE FACT THAT [Spouses
Bautista's] PRESENT ACTION IS BARRED BY PRIOR
JUDGMENT AND/OR STARE DECISIS; and
II.
THE COURT OF APPEALS COMMITTED GRAVE ERROR IN
SUSTAINING [Spouses Bautista's] CONTENTION THAT [NIDC]
IS MERELY A CO-OWNER OF THE SUBJECT PROPERTY,
WHICH IS A COMPLETE CONTRADICTION FROM THE
SUPREME COURT'S RULING IN G.R. NO. L-30150.
NIDC maintains that the Court of Appeals grievously erred in passing upon the validity
of the mortgage between del Rosario and PCIB and deed of assignment between
PCIB and NIDC. It contends that our decision in National Investment Development
Corporation v. Judge de los Angeles already settled the issue of the validity of the said
contracts of mortgage and assignment over all the lots subject herein.
On the other hand, the Spouses Bautista deny that our decision in National
Investment Development Corporation v. Judge de los Angeles amounted to stare
decisisrespecting the real estate mortgages between del Rosario and PCIB and deed
of assignment of rights between PCIB and NIDC. They assert that neither our
pronouncement in National Investment Development Corporation v. Judge de los
Angeles, 21 viz.
It would appear, however, from the facts submitted by the parties,
that a valid assignment, binding upon the [Spouses Bautista], has
been made by the PCIB to the NIDC of its mortgage rights as
well as its rights as purchaser of the lots in question. There does
not appear to be anything in our statutes or jurisprudence which
prohibits a creditor without the consent of the debtor from making
an assignment of his credit and the rights accessory thereto; and,
certainly, an assignment of credit and its accessory rights does
not at all obliterate the obligation of the debtor to pay, but merely
puts the assignee in the place of his assignor[;] AcSCaI
nor our fallo in the same case, which reads
ACCORDINGLY, the order of the court a quo dated March 31,
1967, and its subsequent orders dated May 28, 1968, November
Page 329 of 505

9, 1968 and January 27, 1969, and all related orders are hereby
declared null and void and without legal effect, for having been
issued without jurisdiction. The preliminary injunction issued by
this Court on March 11, 1970 is hereby made permanent. No
pronouncement as to costs[;] 22
declared that the subject mortgage and assignment are valid. In effect, the
Spouses Bautista aver that the validity of the real estate mortgages between del
Rosario and PCIB and assignment of rights between PCIB and NIDC are still
very much open for interpretation by the courts.
We agree with NIDC.
The judicial findings and conclusions made in Civil Case No. Q-8407 and G.R. No. L30150 entitled, National Investment Development Corporation v. Judge de los
Angeles, are binding upon us in the case at bar because the same issue is raised
herein the validity of the assignment of the rights of PCIB to NIDC. The Spouses
Bautista are already barred from raising the same issue under the principle of res
judicata.
Res judicata or bar by prior judgment is a doctrine which holds that a matter that has
been adjudicated by a court of competent jurisdiction must be deemed to have been
finally and conclusively settled if it arises in any subsequent litigation between the
same parties and for the same cause. 23 The doctrine ofres judicata is founded on a
public policy against re-opening that which has previously been decided, 24 so as to
put the litigation to an end. The four requisites for res judicata to apply are: (a) the
former judgment or order must be final; (b) it must have been rendered by a court
having jurisdiction over the subject matter and the parties; (c) it must be a judgment or
an order on the merits; and (d) there must be, between the first and the second
actions, identity of parties, of subject matter and of cause of action. 25

All requisites are present herein.

It should be recalled that Civil Case No. Q-8407 was instituted before the CFI by the
Spouses Bautista against del Rosario for the rescission of the Contract of Sale and
the reconveyance of the properties subject of the said contract, as well as against
PCIB for the cancellation of the real estate mortgages constituted by del Rosario in
favor of PCIB over the same properties. That the CFI made a clear ruling in said case
through its Decision dated 25 January 1965, that the properties mortgaged to PCIB
were done in good faith, is beyond dispute. In the exact words of the CFI: cCDAHE

The rescission of the contracts of sale in question, however,

is without prejudice to the rights of [PCIB] who appears to be
the mortgagee of the parcels of land covered by the contracts of
sale in favor of defendant del Rosario. The plaintiffs take the
parcels of land subject to the mortgage constituted thereon by
[PCIB]. 26(Emphases ours.)
The fallo of the 25 January 1965 Decision of the CFI in Civil Case No. Q-8407
decreed:
IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court
hereby orders the rescission of the contracts of sale . . . and the
return of the parcels of land covered by the said contracts,
respectively, to [Spouses Bautista], subject to the prior lien of
the defendant [PCIB] by reason of the mortgage it has
constituted thereon. The respective claims for damages of all the
parties herein shall be heard separately. 27 (Emphasis ours.)
The foregoing CFI judgment became final and executory when del Rosario's
appeal 28 thereof to this Court was dismissed for being filed out of time. 29
Fully appreciating the CFI Decision dated 25 January 1965, we made permanent,
in National Investment Development Corporation v. Judge de los Angeles, the writ of
preliminary injunction we previously issued on 11 March 1970 in the same case,
basically enjoining the Spouses Bautista and other parties from removing from the
certificates of title the annotations of the assignment by PCIB to NIDC of its rights as
a mortgagee, as well as the highest bidder at the public auction sale of the foreclosed
properties; or from entering into transactions regarding the same properties.
The fallo of our 31 August 1971 Decision reads:
ACCORDINGLY, the order of the court a quo dated March 31,
1967, and its subsequent orders dated May 28, 1968, November
9, 1968 and January 27, 1969, and all related orders are hereby
declared null and void and without legal effect, for having been
issued without jurisdiction. The preliminary injunction issued by
this Court on March 11, 1970 is hereby made permanent. No
pronouncement as to costs.
We reasoned therein that:
It would appear, however, from the facts admitted by the parties,
that a valid assignment, binding upon the private respondents,
Page 330 of 505

has been made by the PCIB to the NIDC of its mortgage rights as
well as its rights as purchaser of the lots in question. There does
not appear to be anything in our statutes or jurisprudence which
prohibits a creditor without the consent of the debtor from making
an assignment of his credit and the rights accessory thereto; and,
certainly, an assignment of credit and its accessory rights does
not at all obliterate the obligation of the debtor to pay, but merely
puts the assignee in the place of his assignor. cSIADH
It is very clear from the afore-quoted ponencia that it abided by the declaration made
by the CFI in Civil Case No. Q-8407, that PCIB was a mortgagee in good faith, and its
subsequent assignment to NIDC of its rights as such, and as the highest bidder of the
foreclosed properties, was valid. This Decision too had become final and executory.
Nonetheless, we clarify that the Spouses Bautista are only barred from challenging
the validity of the real estate mortgages executed by del Rosario in favor of PCIB and
the assignment by PCIB to NIDC of its rights insofar as they pertain to the real
properties actually soldby the Spouses Bautista to del Rosario. The issue of whether
del Rosario could have mortgaged to PCIB the 5,546-sq.-meter portion of the 6,368sq.-meter lot, which was never sold by the Spouses Bautista to her, has not been
squarely raised either in Civil Case No. Q-8407 or National Investment Development
Corporation v. Judge de los Angeles. We now resolve the said issue in the negative.
Since only a portion of the 6,368-sq.-meter lot, measuring 882 sq. meters, was the
subject of the Contract of Sale between the Spouses Bautista and del Rosario, the
remaining portion of the said lot with an area of 5,546 sq. meters was still owned by
the Spouses Bautista. This co-ownership by the Spouses Bautista and del Rosario of
the 6,368-sq.-meter lot, in the proportions so stated, was clearly reflected in TCT No.
70813. Not being the owner of 5,546 sq. meters of the 6,368 sq. meter lot, del Rosario
could not have constituted a mortgage on the same in favor of PCIB as security for
her loan.
The requirements of a valid mortgage are plainly laid down in Article 2085 of the New
Civil Code, viz.:
ART. 2085. The following requisites are essential to the contracts
of pledge and mortgage:
(1) That they be constituted to secure the fulfillment of a principal
obligation;

(2) That the pledgor or mortgagor be the absolute owner of the

thing pledged or mortgaged;
(3) That the persons constituting the pledge or mortgage have
the free disposal of their property, and in the absence thereof,
that they be legally authorized for the purpose.
Third persons who are not parties to the principal obligation may
secure the latter by pledging or mortgaging their own
property. EcSCHD
For a person to validly constitute a mortgage on real estate, he must be the absolute
owner thereof as required by Article 2085 of the New Civil Code. In other words, the
mortgagor must be the owner; otherwise, the mortgage is void. 30 Del Rosario was
NOT the owner of the 5,546-sq.-meter portion of the 6,368-sq.-meter lot, so she
could not have mortgaged the same to PCIB. There being no valid mortgage of the
said portion to PCIB, it could not be subjected to foreclosure; it could not be sold at
the public auction; it could not be bought by PCIB as the highest bidder at the public
auction; and it could not be assigned by PCIB to NIDC.
The 5,546-sq.-meter portion of the 6,368-sq.-meter lot remained the property of the
Spouses Bautista. The 882-sq.-meter portion of the same lot was reconveyed to the
Spouses Bautista after the rescission of its sale to del Rosario, but subject to the
rights of PCIB as mortgagee and highest bidder for the same (which rights PCIB
would later assign to NIDC).
The more pressing issue for us to resolve now is whether the Spouses Bautista
mortgaged the 6,368-sq.-meter lot, then covered by TCT No. 139925, to Banco
Filipino. A negative answer would mean that there was no valid mortgage of the
6,368-sq.-meter lot, and Banco Filipino could not have foreclosed the same; and the
5,546-sq.-meter portion thereof would still remain the property of the Spouses
Bautista (no longer at issue is the 882-sq.-meter portion, which already pertains to
NIDC).
Since the inception of the case at bar, the Spouses Bautista have maintained that they
did not deliver TCT No. 139925 to Banco Filipino as part of the security for their loan
from the said bank, but solely for the purpose of annotating at the dorsal part of said
certificate of title the Right-of-Way of Himlayang Pilipino, a sister company of Banco
Filipino, on a portion of the 6,368-sq.-meter lot, i.e., the 822-sq.-meter portion thereof.
The records of the present petition, however, reveal enough evidence to belie their
denial of the mortgage constituted on the 6,368-sq.-meter lot; and to attest to the real
Page 331 of 505

intent of the parties, that is, to make the 6,368 sq. meter lot covered by TCT No.
139925 part of the security for the P400,000.00 loan obtained by the Spouses
Bautista from Banco Filipino. First, since 10 June 1969, when the real estate
mortgage contract was executed by the Spouses Bautista in favor of Banco Filipino,
until after the foreclosure, auction sale, and "redemption" of the mortgaged properties,
no objection, written or otherwise, was ever communicated by the Spouses Bautista
to Banco Filipino on the supposed erroneous inclusion of TCT No. 139925 in the list
of mortgaged properties. Second, if it were true that the Spouses Bautista delivered
TCT No. 139925 merely for the annotation thereon of the right-of-way of Himlayang
Pilipino over 822-sq.-meter portion of the 6,368-sq.-meter lot, they should have
surrendered the said certificate to the Register of Deeds of Quezon City and not to
Don Tomas Aguirre of Banco Filipino. Third, the Spouses Bautista wrote several
letters 31 to NIDC, from 5 February 1973 until 21 May 1974, imploring the latter to sell
to them the properties NIDC "redeemed" from Banco Filipino upon payment by the
Spouses Bautista of a certain amount. And, fourth, it was only on 3 March
1975 32 that the Spouses Bautista intimated that the 5,546-sq.-meter portion of the
6,368-sq.-meter lot covered by TCT No. 139925 was never intended to be mortgaged
to Banco Filipino, and that NIDC "redeemed" it by mistake; thus, they demanded from
NIDC the return of the 5,546-sq.-meter portion of the 6,368-sq.-meter lot covered by
TCT No. 139925.
NIDC "redeemed" the properties mortgaged by the Spouses Bautista from Banco
Filipino, which were foreclosed and bought by the latter as the highest bidder at the
public auction. Except for the 5,546-sq.-meter portion of the 6,368-sq.-meter lot, NIDC
basically acquired the very same properties assigned to it by PCIB; such assignment
had been held legal and valid by the CFI in Civil Case No. Q-8407 in its 25 January
1965 Decision, which became final and executory. Instead of litigating over the
properties mortgaged to, and foreclosed and bought by, Banco Filipino, NIDC chose
to strengthen and reaffirm its rights over said properties by "redeeming" the same
from Banco Filipino. But was the course of action of NIDC regarding the subject real
properties effectively a "redemption" thereof? cTACIa

That the properties mortgaged by the Spouses Bautista to Banco Filipino were validly
foreclosed and sold at the public auction held on 22 October 1971 is not an issue; nor
is the fact that the Certificate of Sale in the name of Banco Filipino was registered on
27 October 1971.
Reference is made to the governing law on extrajudicial foreclosure of real estate
mortgages, i.e., Republic Act No. 3135 entitled "An Act to Regulate the Sale of

Property Under Special Powers Inserted in or Annexed to Real Estate Mortgages", as

amended by Republic Act No. 4118. 33 Section 6 of the said statute provides:
SEC. 6. In all cases in which an extrajudicial sale is made under
the special power hereinbefore referred to, the debtor, his
successors in interest or any judicial creditor or judgment creditor
of said debtor, or any person having a lien on the property
subsequent to the mortgage or deed of trust under which the
property is sold, may redeem the same at any time within the
term of one year from and after the date of the sale . . .
(Emphasis ours.)
In a long line of cases, however, we have consistently held that this one-year
redemption period should be counted not from the date of foreclosure sale, but from
the time the certificate of sale was registered with the Register of Deeds. 34 In this
case, therefore, the one-year redemption period should be reckoned from the time the
certificate of sale was registered on 27 October 1971. 35
The law speaks of "one year" period within which to exercise
redemption. Under Article 13 of the New Civil Code, a year is understood to be of
three hundred sixty-five (365) days. Applying said article, the period of one year
within which to redeem the properties mortgaged to Banco Filipino by the
Spouses Bautista shall be 365 days from 27 October 1971. Thus, excluding the
first day and counting from 28 October 1971, 36 and bearing in mind that 1972
was a leap year, the redemption of the properties in question from Banco Filipino
could only be made until 26 October 1972.
The tender of P431,570.66, supposedly the redemption price, by NIDC to Banco
Filipino on 27 October 1972 was clearly one (1) day beyond the period for
redemption. Consequently, with no one availing oneself of the right of redemption
within the period, the mortgaged properties, including the entire 6,368-sq.-meter lot
then covered by TCT No. 139925, became an acquired asset of the mortgagee
Banco Filipino. Like any other ordinary property owner, Banco Filipino had the right to
enjoy all the attributes of ownership, one of which was to sell the property for
whatever price it may deem reasonable and in favor of whomsoever it chose to sell
the same. EcTCAD
To summarize, this Court's affirmation of NIDC's entitlement to the 5,546-sq.-meter
portion of the 6,368-sq.-meter lot is brought about by the following findings: (1) that
the judicial conclusions made in Civil Case No. Q8407 and G.R. No. L-30150,
entitled, "National Investment Development Corporation v. Judge de los Angeles",
Page 332 of 505

which declared and affirmed, respectively, the validity of the mortgage made by del
Rosario in favor of PCIB and the subsequent assignment by the latter to NIDC of the
properties del Rosario earlier purchased from the Spouses Bautista, are binding upon
the parties in the present petition; thus, these issues shall not be raised anew in
consonance with the principle of res judicata; (2) that with respect to the 5,546-sq.meter portion of the 6,368-sq.-meter lot, however, we recognize that the same
judgments cannot bar the Spouses Bautista from assailing the mortgage to PCIB
and/or assignment to NIDC of the said portion, as the same was never actually sold
by the spouses to del Rosario, but the latter, nevertheless, mortgaged it in full to PCIB
despite acquiring only an 822-sq.-meter portion of the total 6,368-sq.-meter area,
because this issue was never even raised in either of the two (2) preceding cases; (3)
that the 5,546-sq.-meter portion of the 6,368-sq.-meter lot remained the property of
the Spouses Bautista at the time they obtained a P400,000.00 loan from Banco
Filipino; (4) that, notwithstanding their protestations, the evidence on record speaks of
the fact that the Spouses Bautista presented the entire 6,368-sq.-meter lot as part of
the security for said indebtedness, and not just to have a right-of-way established with
respect to the 822-sq.-meter portion of the 6,368-sq.-meter lot and to have said
easement annotated at the back of the certificate of title covering said lot; (5) that
since it was established that the 5,546-sq.-meter portion of the 6,368-sq.-meter lot
was, indeed, mortgaged to Banco Filipino, the same was validly foreclosed and sold
at public auction when the Spouses Bautista failed to pay their loan to Banco Filipino;
and (6) that regardless of the terminology used, after negotiation, the redemption by
NIDC from Banco Filipino of the properties mortgaged to the latter by the Spouses
Bautista, including the 5,546-sq.-meter portion of the 6,368-sq.-meter lot, was actually
an ordinary sale, considering that the one-year redemption period provided by law
had expired without anyone having redeemed the foreclosed properties.
Essentially, therefore, except for the 5,546-sq.-meter portion of the 6,368-sq.-meter
lot, NIDC twice became the owner of said properties, having already acquired them by
virtue of the assignment executed in its favor by PCIB and, again, having purchased
the same from Banco Filipino.
WHEREFORE, premises considered, the petition for review on certiorari filed by
petitioner National Investment Development Corporation is GRANTED. The assailed
Decision of the Court of Appeals in CA-G.R. CV No. 60159 dated 15 October 2001 is
REVERSED and SET ASIDE. Consequently, the complaint in Civil Case No. Q-28360
filed by respondent Spouses Francisco Bautista and Basilisa Roque is hereby
DISMISSED. With costs against respondent Spouses Bautista.
SO ORDERED.

||| (National Investment and Development Corp. v. Spouses Bautista, G.R. No.
150388, [March 13, 2009], 600 PHIL 137-159)

EN BANC
[G.R. No. L-9306. May 25, 1956.]
SOUTHERN MOTORS, INC., plaintiff-appellee, vs.
BARBOSA, defendant-appellant.

ELISEO

Diosdado Garingalao for appellee.

Juan V. Borra and Eduardo Gildoro for appellant.
DECISION
CONCEPCION, J p:
This is an appeal from a decision of the Court of First Instance of Iloilo:
"(a) Ordering the defendant Eliseo Barbosa to pay to the
Court, for the benefit of the plaintiff within a period of ninety (90)
days from receipt by the defendant hereof, the sum of P2,889.53,
with interest at the rate of 12% per annum computed on the basis
of the amounts of the installments mentioned in the mortgage
and of the dates they respectively fell due, until fully paid; the
sum of P200 by way of attorney's fees, plus costs; and (b) Upon
failure of the defendant to pay as aforesaid, ordering the land
described in the complaint and subject of the mortgage to be sold
at public auction in accordance with law in order to realize the
amount of the judgment debt and costs."
Although originally forwarded to the Court of Appeals, the same has
certified the record to this Court in view of the fact that the issues raised in the
appeal involve merely questions of law.
Plaintiff, Southern Motors, Inc., brought this action against Eliseo
Barbosa, to foreclose a real estate mortgage, constituted by the latter in favor of
the former, as security for the payment of the sum of P2,889.53 due to said
Page 333 of 505

plaintiff from one Alfredo Brillantes, who had failed to settle his obligation in
accordance with the terms and conditions of the corresponding deed of
mortgage. Defendant Eliseo Barbosa filed an answer admitting the allegations of
the complaint and alleging, by way of "special and affirmative" defense:
"That the defendant herein has executed the deed of
mortgage Annex A for the only purpose of guaranteeing as
surety and/or guarantor the payment of the above mentioned
debt of Mr. Alfredo Brillantes in favor of the plaintiff.
"That the plaintiff until now has no right action against
the herein defendant on the ground that said plaintiff, without
motive whatsoever, did not intent or intent to exhaust all
recourses to collect from the true debtor Mr. Alfredo Brillantes the
debt contracted by the latter in favor of said plaintiff, and did not
resort nor intends to resort all the legal remedies against the true
debtor Mr. Alfredo Brillantes, notwithstanding the fact that said
Mr. Alfredo Brillantes is solvent and has many properties within
the Province of Iloilo."
Thereupon, plaintiff moved for summary judgment which a branch of the
Court of First Instance of Iloilo, presided over by Hon. Roman Ibaez, Judge,
denied upon the ground that it "is premature". Plaintiff moved for a
reconsideration of the order to this effect. Soon later, he filed, also, another
motion praying that the case be transferred to another branch of said court,
because that of Judge Ibaez would be busy trying cadastral cases, and had
adopted the "policy of refraining from entertaining any other civil cases and all
incidents related thereto, until after said cadastral cases shall have been finally
disposed of." With the express authority of Judge Ibaez, the case was referred
to the branch of said court, presided over by Hon. Querube C. Makalintal, Judge,
for action, upon said motion for reconsideration. Thereafter, Judge Makalintal
rendered the aforementioned decision, from which the defendant has appealed.
He maintains, in his brief, that:
"1. The trial court erred in hearing plaintiff-appellee's
'motion for reconsideration' dated June 9, 1951, notwithstanding
the fact that defendant-appellant was not served with a copy
thereof nor served with notice of the hearing thereof.
2. "The trial court erred in rendering a 'judgment on the
pleadings' in appellee's favor when no issue was at all submitted

to it for resolution, to the prejudice of the substantial rights of

appellant.
3. "The court a quo erred in depriving defendantappellant of his property rights without due process of law."
The first assignment of error is based upon an erroneous predicate, for,
contrary to defendant's assertion, his counsel in the lower court, Atty. Manuel F.
Zamora, through an employee of his office, by the name of Agripino Aguilar, was
actually served on June 9, 1951, with copy of plaintiff's motion for
reconsideration, with notice to the effect that said motion would be submitted for
the consideration and approval of the lower court, on Saturday, June 16, 1951, at
8:00 a.m., or soon thereafter as counsel may be heard.
The second assignment of error is, likewise, untenable. It is not true that
there was no issue submitted for determination by the lower court when it
rendered the decision appealed from.
It will be recalled that each one of the allegations made in plaintiff's
complaint were expressly admitted in defendant's answer, in which he merely
alleged, as "special and affirmative" defense, that plaintiff is not entitled to
foreclose the mortgage constituted in its favor by the defendant, because the
property of Alfredo Brillantes, the principal debtors, had not been exhausted as
yet, and were not sought to be exhausted, for the satisfaction of plaintiff's credit.
Thus, there was no question of fact left for determination. The only issue set up
by the pleadings was the sufficiency of said affirmative defense. And such was
the only point discussed by the defendant in his opposition to plaintiff's motion for
a summary judgment, referring, evidently, to a judgment on the pleadings.
Plaintiff's motion for reconsideration of the order of Judge Roman
Ibaez refusing to render said judgment, upon the ground that it was premature,
revived said issue of sufficiency of the aforementioned affirmative defense, apart
from calling for a reexamination of the question posed by said order of Judge
Ibaez, namely, whether it was proper, under the circumstances, to render a
judgment on the pleadings. In other words, said motion for reconsideration had
the effect of placing before then Judge Makalintal, for resolution, the following
issues, to wit: (1) whether a summary judgment or a judgment on the pleadings
was in order, considering the allegations of plaintiff's complaint and those of
defendant's answer; and (2) whether the mortgage in question could be
foreclosed although plaintiff had not exhausted, and did not intend to exhaust, the
properties of his principal debtor, Alfredo Brillantes.

Page 334 of 505

The third assignment of error is predicated upon the alleged lack of

notice of the hearing of plaintiff's motion for reconsideration. As stated in our
discussion of the first assignment of error, this pretense is refuted by the record.
Moreover, it is obvious that defendant's affirmative defense is devoid of merit for:
1. The deed of mortgage executed by him specifically provides:
"That if said Mr. Alfredo Brillantes or herein mortgagor,
his heirs, executors, administrators and assigns shall well and
truly perform the full obligations above-stated according to the
terms thereof, then this mortgage shall be null and void,
otherwise it shall remain in full force and effect, in which event
herein mortgagor authorizes and empowers herein mortgageecompany to take any of the following actions to enforce said
payment;.
"(a) Foreclose, judicially or extrajudicially, the chattel
mortgage above referred to and/or also this mortgage, applying
the proceeds of the purchase price at public sale of the real
property herein mortgaged to any deficiency or difference
between the purchase price of said chattel at public auction and
the amount of P2,889.53, together with its interest hereby
secured; or

ART.
2126. "The
mortgage directly and immediately subjects the property upon
which it is imposed, whoever the possessor may be, to the
fulfillment of the obligation for whose security it was constituted."
3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a
mortgagor is not entitled to the exhaustion of the property of the principal debtor.

4. Although an ordinary personal guarantor not a mortgagor or

pledgor may demand the aforementioned exhaustion, the creditor may, prior
thereto, secure a judgment against said guarantor, who shall be entitled,
however, to a deferment of the execution of said judgment against him until after
the properties of the principal debtor shall have been exhausted to satisfy the
obligation involved in the case.
Wherefore, the decision appealed from is hereby affirmed, with costs
against the defendant-appellant. It is so ordered.
Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Jugo, Bautista
Angelo, Labrador, Reyes, J.B.L., and Endencia, JJ., concur.
||| (Southern Motors, Inc. v. Barbosa, G.R. No. L-9306, [May 25, 1956], 99 PHIL 263268)

"(b) Simply foreclose this mortgage judicially in

accordance with the provisions of section 2, Rule 70, Rules of
Court, or extra- judicially under the provisions ofAct No.
3135 and Act No. 4118, to satisfy the full amount of P2,889.53,
together with its interest of 12 per cent per annum."
2. The right of guarantors, under Article 2058 of the Civil Code of the
Philippines, to demand exhaustion of the property of the principal debtor, exists
only when a pledge or a mortgage has not been given as special security for the
payment of the principal obligation. Guarantees, without any such pledge or
mortgage, are governed by Title XV of said Code, whereas pledges and
mortgages fall under Title XVI of the same Code, in which the following
provisions, among others, are found:
ART. 2087. "It is also of the essence of these contracts
that when the principal obligation becomes due, the things in
which the pledge or mortgage consists may be alienated for the
payment to the creditor."
Page 335 of 505

purpose, the owner's duplicate

petitioner AFrancisco Realty.

SECOND DIVISION
[G.R. No. 125055. October 30, 1998.]
A. FRANCISCO REALTY
AND DEVELOPMENT CORPORATION, petitioner, vs. COURT
OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR
and ERLINDA P. JAVILLONAR, respondents.

DECISION

MENDOZA, J p:
This is a petition for review on certiorari of the decision rendered on February 29,
1996 by the Court of Appeals 1 reversing, in toto, the decision of the Regional Trial
Court of Pasig City in Civil Case No. 62290, as well as the appellate court's resolution
of May 7, 1996 denying reconsideration.
Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5
Million to private respondents, the spouses Romulo and Erlinda Javillonar, in
consideration of which the latter executed the following documents: (a) a promissory
note, dated November 27, 1991, stating an interest charge of 4% per month for six
months; (b) a deed of mortgage over realty covered by TCT No. 58748, together with
the improvements thereon; and (c); an undated deed of sale of the mortgaged
property in favor of the mortgagee, petitioner A. Francisco Realty. 2
The interest on the said loan was to be paid in four installments: half of the total
amount agreed upon (P900,000.00) to be paid in advance through a deduction from
the proceeds of the loan, while the balance to be paid monthly by means of checks
post-dated March 27, April 27, and May 27, 1992. The promissory note expressly
provided that upon "failure of the MORTGAGOR [private respondents] to pay the
interest without prior arrangement with the MORTGAGEE [petitioner], full possession
of the property will be transferred and the deed of sale will be registered." 3 For this

of

TCT

No.

58748

was

delivered

to

Petitioner claims that private respondents failed to pay the interest and,
as a consequence, it registered the sale of the land in its favor on February 21, 1992.
As a result, TCT No. 58748 was cancelled and in lieu thereof TCT No. PT-85569 was
issued in the name of petitioner A. Francisco Realty. 4 prcd
Private respondents subsequently obtained an additional loan of P2.5 Million from
petitioner on March 13, 1992 for which they signed a promissory note which reads:
PROMISSORY NOTE
For value received, I promise to pay A. FRANCISCO REALTY
AND DEVELOPMENT CORPORATION, the additional sum of
Two Million Five Hundred Thousand Pesos (P2,500,000.00) on or
before April 27, 1992, with interest at the rate of four percent
(4%) a month until fully paid and if after the said date this note
and/or the other promissory note of P7.5 Million remains unpaid
and/or unsettled, without any need for prior demand or
notification, I promise to vacate voluntarily and willfully and/or
allow A FRANCISCO REALTY
AND DEVELOPMENT CORPORATION to appropriate and
occupy for their exclusive use the real property located at 56
Dragonfly, Valle Verde VI, Pasig, Metro Manila. 5

Petitioner demanded possession of the mortgaged realty and the payment of 4%

monthly interest from May 1992, plus surcharges. As respondent spouses refused to
vacate, petitioner filed the present action for possession before the Regional Trial
Court in Pasig City. 6
In their answer, respondents admitted liability on the loan but alleged that it was not
their intent to sell the realty as the undated deed of sale was executed by them merely
as an additional security for the payment of their loan. Furthermore, they claimed that
they were not notified of the registration of the sale in favor of
petitionerA.. Francisco Realty and that there was no interest then unpaid as they had
in fact been paying interest even subsequent to the registration of the sale. As an
alternative defense, respondents contended that the complaint was actually for
ejectment and, therefore, the Regional Trial Court had no jurisdiction to try the case.
As counterclaim, respondents sought the cancellation of TCT No. PT-85569 as
Page 336 of 505

secured by petitioner and the issuance of a new title evidencing their ownership of the
property. 7
On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive
portion of which reads as follows:
WHEREFORE, prescinding from the foregoing considerations,
judgment is hereby rendered declaring as legal and valid, the
right
of
ownership
of A Francisco Realty
AndDevelopment Corporation, over the property subject of this
case and now registered in its name as owner thereof, under TCT
No. 85569 of the Register of Deeds of Rizal, situated at No. 56
Dragonfly Street, Valle Verde VI, Pasig, Metro Manila.
Consequently, defendants are hereby ordered to cease and
desist from further committing acts of dispossession or from
withholding possession from plaintiff, of the said property as
herein described and specified.
Claim for damages in all its forms, however, including attorney's
fees, are hereby denied, no competent proofs having been
adduced on record, in support thereof. 8
Respondent spouses appealed to the Court of Appeals which reversed the decision of
the trial court and dismissed the complaint against them. The appellate court ruled
that the Regional Trial Court had no jurisdiction over the case because it was actually
an action for unlawful detainer which is exclusively cognizable by municipal trial
courts. Furthermore, it ruled that, even presuming jurisdiction of the trial court, the
deed of sale was void for being in fact a pactum commissorium which is prohibited by
Art. 2088 of the Civil Code.
Petitioner A. Francisco Realty
filed a motion
for
reconsideration,
but
the Court of Appeals denied the motion in its resolution, dated May 7, 1996. Hence,
this petition for review on certiorari raising the following issues:
WHETHER OR NOT THE COURT OF APPEALS ERRED IN
RULING THAT THE REGIONAL TRIAL COURT HAD NO
JURISDICTION OVER THE COMPLAINT FILED BY THE
PETITIONER.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN
RULING THAT THE CONTRACTUAL DOCUMENTS SUBJECT
OF THE INSTANT CASE ARE CONSTITUTIVE OF PACTUM

COMMISSORIUM AS DEFINED UNDER ARTICLE 2088 OF

THE CIVIL CODE OF THE PHILIPPINES.
On the first issue, the appellate court stated:
Ostensibly, the cause of action in the complaint indicates a case
for unlawful detainer, as contra-distinguished from accion
publiciana. As contemplated by Rule 70 of the Rules of Court, an
action for unlawful detainer which falls under the exclusive
jurisdiction of the Metropolitan or Municipal Trial Courts, is
defined as withholding from by a person from another for not
more than one year, the possession of the land or building to
which the latter is entitled after the expiration or termination of the
supposed rights to hold possession by virtue of a contract,
express or implied. (Tenorio vs. Gamboa, 81 Phil. 54; Dikit vs.
Dicaciano, 89 Phil. 44). If no action is initiated for forcible entry or
unlawful detainer within the expiration of the 1 year period, the
case may still be filed under the plenary action to recover
possession byaccion publiciana before the Court of First Instance
(now the Regional Trial Court) (Medina vs. Valdellon, 63 SCRA
278) in plain language, the case at bar is a legitimate ejectment
case filed within the 1 year period from the jurisdictional demand
to vacate. Thus, the Regional Trial Court has no jurisdiction over
the case. Accordingly, under Section 33 of B.P. Blg.
129 Municipal Trial Courts are vested with the exclusive original
jurisdiction over forcible entry and unlawful detainer case. (Sen
Po Ek Marketing Corp. vs. CA, 212 SCRA 154 [1990]) 9
We think the appellate court is in error. What really distinguishes an action for
unlawful
detainer
from a possessory
action
(accion
publiciana)
and
from a reivindicatory action (accion reivindicatoria) is that the first is limited to the
question of possession de facto.
An unlawful detainer suit (accion interdictal) together with forcible
entry are the two forms of an ejectment suit that may be filed to
recover possession of real property. Aside from the summary
action of ejectment, accion publiciana or the plenary action to
recover the right of possession and accion reivindicatoria or the
action to recover ownership which includes recovery of
possession, make up the three kinds of actions to judicially
recover possession. dctai
Page 337 of 505

Illegal detainer consists in withholding by a person from another

of the possession of a land or building to which the latter is
entitled after the expiration or termination of the former's right to
hold possession by virtue of a contract, express or implied An
ejectment suit is brought before the proper inferior court to
recover physical possession only or possession de facto and not
possession de jure, where dispossession has lasted for not more
than one year. Forcible entry and unlawful detainer are quieting
processes and the one-year time bar to the suit is in pursuance of
the summary nature of the action. The use of summary
procedure in ejectment cases is intended to provide an
expeditious means of protecting actual possession or right to
possession of the property. They are not processes to determine
the actual title to an estate. If at all, inferior courts are empowered
to rule on the question of ownership raised by the defendant in
such suits, only to resolve the issue of possession. Its
determination on the ownership issue is, however, not
conclusive. 10
The allegations in both the original and the amended complaints of petitioner before
the trial court clearly raise issues involving more than the question of possession, to
wit: (a) the validity of the transfer of ownership to petitioner; (b) the alleged new
liability of private respondents for P400,000.00 a month from the time petitioner made
its demand on them to vacate; and (c) the alleged continuing liability of private
respondents under both loans to pay interest and surcharges on such. As
petitioner A. Francisco Realty alleged in its amended complaint:
5. To secure the payment of the sum of P7.5 Million together with
the monthly interest, the defendant spouses agreed to
execute a Deed of Mortgage over the property with the express
condition that if and when they fail to pay monthly interest or any
infringement thereof they agreed to convert the mortgage
into a Deed of Absolute Sale in favor of the plaintiff by executing
Deed of Sale thereto, copy of which is hereto attached and
incorporated herein as Annex "A";
6. That in order to authorize the Register of Deeds into registering
the Absolute Sale and transfer to the plaintiff, defendant delivered
unto the plaintiff the said Deed of Sale together with the original
owner's copy of Transfer Certificate of Title No. 58748 of the

Registry of Rizal, copy of which is hereto attached and made an

integral part herein as Annex "B";
7. That defendant spouses later secured from the plaintiff an
additional loan of P2.5 Million with the same condition as
aforementioned with 4% monthly interest;
8. That defendants spouses failed to pay the stipulated monthly
interest and as per agreement of the parties, plaintiff recorded
and registered the Absolute Deed of Sale in its favor on and was
issued Transfer Certificate of Title No. PT-85569, copy of which is
hereto attached and incorporated herein as Annex "C";
9. That upon registration and transfer of the Transfer Certificate of
Title in the name of the plaintiff, copy of which is hereto attached
and incorporated herein as Annex "C", plaintiff demanded the
surrender of the possession of the above-described parcel of land
together with the improvements thereon, but defendants failed
and refused to surrender the same to the plaintiff without
justifiable reasons thereto; Neither did the defendants pay the
interest of 4% a month from May, 1992 plus surcharges up to the
present;
10. That it was the understanding of the parties that if and when
the defendants shall fail to pay the interest due and that the Deed
of Sale be registered in favor of plaintiff, the defendants shall
pay a monthly rental of P400,000.00 a month until they vacate the
premises, and that if they still fail to pay as they are still failing to
pay the amount of P400,000.00 a month as rentals and/or
interest, the plaintiff shall take physical possession of the said
property; 11
It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues
which involved more than a simple claim for the immediate possession of the subject
property. Such issues range across the full scope of rights of the respective parties
under their contractual arrangements. As held in an analogous case:
The disagreement of the parties in Civil Case No. 96 of the
Justice of the Peace of Hagonoy, Bulacan extended far beyond
the issues generally involved in unlawful detainer suits. The
litigants therein did not raise merely the question of who among
them was entitled to the possession of the fishpond of Federico
Page 338 of 505

Suntay. For all judicial purposes, they likewise prayed of the court
to rule on their respective rights under the various contractual
documents their respective deeds of lease, the deed of
assignment and the promissory note upon which they
predicate their claims to the possession of the said fishpond. In
other words, they gave the court no alternative but to rule on the
validity or nullity of the above documents. Clearly, the case was
converted into the determination of the nature of the proceedings
from amere detainer suit to one that is "incapable of pecuniary
estimation" and thus beyond the legitimate authority of the Justice
of the Peace Court to rule on. 12

Nor can it be said that the compulsory counterclaim filed by respondent spouses
challenging the title of petitioner A. Francisco Realty was merely a collateral attack
which would bar a ruling here on the validity of the said title. dctai
A counterclaim is considered a complaint, only this time, it is the
original defendant who becomes the plaintiff (Valisno v. Plan, 143
SCRA 502 (1986) It stands on the same footing and is to be
tested by the same rules as if it were an independent action.
Hence, the same rules on jurisdiction in an independent action
apply to acounterclaim (Vivar v Vivar, 8 SCRA 847 (1963); Calo v.
Ajax International, Inc. v. 22 SCRA 996(1968); Javier v.
Intermediate Appellate Court, 171 SCRA 605 (1989); Quiason,
Philippine Courts and Their Jurisdictions, 1993 ed, p. 203). 13
On the second issue, the Court of Appeals held that, even "on the assumption that the
trial court has jurisdiction over the instant case," petitioner's action could not succeed
because the deed of sale on which it was based was void, being in the nature
of a pactum commissorium prohibited by Art. 2088 of the Civil Code which provides:
ART. 2088. The creditor cannot appropriate the things given by
way to pledge or mortgage, or dispose of them. Any stipulation to
the contrary is null and void.
With respect to this question, the ruling of the appellate court should be affirmed.
Petitioner denies, however, that the promissory notes contain a pactum
commissorium. It contends that

What is envisioned by Article 2088 of the Civil Code of the

Philippines is a provision in the deed of mortgage providing for
the automatic conveyance of the mortgaged property in case of
the failure of the debtor to pay the loan (Tan v West Coast Life
Assurance Co., 54 Phil. 361) A pactum commissorium
is a forfeiture clause in a deed of mortgage (Hechanova v. Adil,
144 SCRA 450; Montevergen v. Court of Appeals, 112 SCRA
641; Report of the Code Commission, 156).
Thus, before Article 2088 can find application herein, the subject
deed of mortgage must be scrutinized to determine if it contains
such a provision giving the creditor the right "to appropriate the
things given by way of mortgage without following the procedure
prescribed by law for the foreclosure of the mortgage (Ranjo v.
Salmon, 15 Phil. 436) IN SHORT, THE PROSCRIBED
STIPULATION SHOULD BE FOUND IN THE MORTGAGE DEED
ITSELF. 14
The contention is patently without merit. To sustain the theory of petitioner would be to
allow a subversion of the prohibition in Art. 2088.
In Nakpil v. Intermediate
Appellate
Court, 15 which
involved
the
violation
of a constructive trust, no deed of mortgage was expressly executed between the
parties in that case. Nevertheless, this Court ruled that an agreement whereby
property held in trust was ceded to the trustee upon failure of the beneficiary to pay
his debt to the former as secured by the said property was void for being a pactum
commissorium. It was there held:
The arrangement entered into between the parties, whereby
Pulong Maulap was to be "considered sold to him (respondent) . .
." in case petitioner fails to reimburse Valdes, must then be
construed as tantamount to a pactum commissorium which is
expressly prohibited by Art. 2088 of the Civil Code. For, there was
to be automatic appropriation of the property by Valdez in the
event of failure of petitioner to pay the value of the
advances. Thus, contrary to respondent's manifestations, all the
elements of a pactum commissorium were present there
was a creditor-debtor relationship between the parties; the
property was used as security for the loan; and, there was
automatic appropriation by respondent of Pulong Maulap in case
of default of petitioner. 16
Page 339 of 505

Similarly, the Court has struck down such stipulations as contained in deeds of sale
purporting to be pacto de retro sales but found actually to be equitable mortgages.
It has been consistently held that the presence of even one of the
circumstances enumerated in Art. 1602 of the New Civil Code is
sufficient to declare a contract of sale with right to repurchase an
equitable mortgage. This is so because pacto de retro sales with
the stringent and onerous effects that accompany them are not
favored. In case of doubt, a contract purporting to be a sale with
right to repurchase shall be construed as an equitable mortgage.
Petitioner, to prove her claim, cannot rely on the stipulation in the
contract providing that complete and absolute title shall be vested
on the vendee should the vendors fail to redeem the property on
the specified date. Such stipulation that the ownership of the
property would automatically pass to the vendee in case no
redemption was effected within the stipulated period is void for
being a pactum commissorium which enables the mortgagee to
acquire ownership of the mortgaged property without need of
foreclosure. Its insertion in the contract is an avowal of the
intention to mortgage rather that to sell the property. 17
Indeed, in Reyes v. Sierra 18 this Court categorically ruled that a mortgage's mere act
of registering the mortgaged property in his own name upon the mortgagor's failure to
redeem the property amounted to the excise of the privilege of a mortgagee
in a pactum commissorium.
Obviously, from the nature of the transaction, applicant's
predecessor-in-interest is a mere mortgagee, and ownership of
the thing mortgaged is retained by Basilia Beltran, the mortgagor,
The mortgagee, however, may recover the loan, although the
mortgage document evidencing the loan was nonregistrable
being a purely private instrument Failure of mortgagor to redeem
the property does not automatically vest ownership of the
property to the mortgagee, which would grant the latter the right
to appropriate the thing mortgaged or dispose of it. This violates
the provision of Article 2088 of the New Civil Code, which reads:
The creditor cannot appropriate the things given by way
of pledge or mortgage, or dispose by them. Any
stipulation to the contrary is null and void.

The act of applicant in registering the property in his own name

upon mortgagor's failure to redeem the property would amount
to a pactum commissorium which is against good morals and
public policy. 19
Thus, in the case at bar, the stipulations in the promissory notes providing that, upon
failure of respondent spouses to pay interest, ownership of the property would be
automatically transferred to petitioner A. Francisco Realty and the deed of sale in its
favor would be registered, are in substance a pactum commissorium. They embody
the
two
elements
of pactum
commissorium as
laid;
down
in Uy
Tong v. Court of Appeals, 20 to wit:
The prohibition on pactum commissorium stipulations is provided
for by Article 2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate the things given by
way of pledge or mortgagee, or dispose of the same Any
stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum
commissorium to exist: (1) that there should be a pledge or
mortgage wherein a property is pledged or mortgaged by way of
security for the payment of the principal obligation; and (2) that
there should be a stipulation for an automatic appropriation by the
creditor of the thing pledged or mortgaged in the event of nonpayment of the principal obligation within the stipulated period. 21
The subject transaction being void, the registration of the deed of sale, by virtue of
which petitioner A. Francisco Realty was able to obtain TCT No. PT-85569 covering
the subject lot, must also be declared void, as prayed for by respondents in their
counterclaim. cdtai
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it
dismissed petitioner's complaint against respondent spouses on the ground that the
stipulations in the promissory notes are void for being a pactum commissorium but
REVERSED insofar as it ruled that the trial court had no jurisdiction over this case.
The Register of Deeds of Pasig City is hereby ORDERED to CANCEL TCT No. PT85569 issued to petitioner and ISSUE a new one in the name of respondent spouses.
SO ORDERED.
||| (A. Francisco Realty and Development Corp. v. Court of Appeals, G.R. No. 125055,
[October 30, 1998], 358 PHIL 833-848)
Page 340 of 505

FIRST DIVISION
[G.R. No. 168523. March 9, 2011.]
SPOUSES FERNANDO and ANGELINA
EDRALIN, petitioners, vs.
PHILIPPINE
VETERANS BANK, respondent.

DECISION

DEL CASTILLO, J p:
The right to possess a property follows the right of ownership; consequently, it would
be illogical to hold that a person having ownership of a parcel of land is barred from
seeking possession thereof.
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of
Court, 1 assailing the Decision 2 dated June 10, 2005 of the Court of Appeals (CA) in
CA-G.R. SP No. 89248. The dispositive portion of the assailed Decision reads:
WHEREFORE, premises considered, the
present petition is hereby GIVEN DUE
COURSE and the writ prayed for
accordingly GRANTED. The assailed Orders
dated November 8, 2004 and January 28,
2005 dismissing the ex-parte petition for
issuance of writ of possession and denying
petitioner's motion for reconsideration,
respectively, are hereby ANNULLED and
SET ASIDE. Respondent Judge is hereby
DIRECTED to issue the writ of possession
prayed for by the petitioner Philippine
Veterans Bank over the subject property
covered by TCT No. 78332 of the Registry of
Deeds for Paraaque City, Metro Manila.
Page 341 of 505

No pronouncement as to costs.
SO ORDERED. 3
Factual Antecedents
Respondent Philippine Veterans Bank (Veterans Bank) is a commercial banking
institution created under Republic Act (RA) No. 3518, 4as amended by RA
No. 7169. 5
On February 5, 1976, Veterans Bank granted petitioner spouses Fernando and
Angelina Edralin (Edralins) a loan in the amount of Two Hundred Seventy Thousand
Pesos (P270,000.00). As security thereof, petitioners executed a Real Estate
Mortgage (REM) 6 in favor of Veterans Bank over a real property situated in the
Municipality of Paraaque and registered in the name of petitioner Fernando Edralin.
The mortgaged property is more particularly described in Transfer Certificate of Title
(TCT) No. 204889. The REM was registered with the Registry of Deeds of the
Province of Rizal. 7 The REM and its subsequent amendments 8 were all duly
annotated at the back of TCT No. 204889. 9
The Edralins failed to pay their obligation to Veterans Bank. Thus, on June 28, 1983,
Veterans Bank filed a Petition for Extrajudicial Foreclosure 10 of the REM with the
Office of the Clerk of Court and Ex-Officio Sheriff of Rizal. EDATSC
In due course, the foreclosure sale was held on September 8, 1983, in which the ExOfficio Sheriff of Rizal sold the mortgaged property at public auction. Veterans Bank
emerged as the highest bidder at the said foreclosure sale and was issued the
correspondingCertificate of Sale. 11 The said Certificate of Sale was registered with
the Registry of Deeds of the Province of Rizal and annotated at the back of TCT No.
204889 under Entry No. 83-62953/T-No. 43153-A on October 25, 1983. 12
Upon the Edralins' failure to redeem the property during the one-year period provided
under Act No. 3135, Veterans Bank acquired absolute ownership of the subject
property. Consequently, Veterans Bank caused the consolidation of ownership of the
subject property in its name on January 19, 1994. 13 The Register of Deeds of
Paraaque, Metro Manila cancelled TCT No. 204889 under the name of Fernando
Edralin and replaced it with a new transfer certificate of title, TCT No. 78332, 14 in the
name of Veterans Bank on February 3, 1994.
Despite the foregoing, the Edralins failed to vacate and surrender possession of the
subject property to Veterans Bank. Thus, on May 24, 1996, Veterans Bank filed
an Ex-Parte Petition for the Issuance of a Writ of Possession, docketed as Land
Registration Case (LRC) No. 06-060 before Branch 274 of the Regional Trial Court
(RTC) of Paraaque City. The same, however, was dismissed for Veterans Bank's
failure to prosecute. 15
On July 29, 2003, Veterans Bank again filed an Ex-Parte Petition for Issuance of Writ
of Possession, 16 this time docketed as Land Registration Case No. 03-0121, before
the RTC of Paraaque City. Veterans Bank divulged in its Certification against ForumShopping17 that the earlier case, LRC No. 96-060, involving the same subject matter
and parties, was dismissed.

The Edralins moved to dismiss 18 the petition on the ground that the dismissal of
LRC No. 96-060 constituted res judicata.
Ruling of the Regional Trial Court
The trial court denied the motion to dismiss explaining that the ground of failure to
present evidence is not a determination of the merits of the case hence does not
constitute res judicata on the petition for issuance of a writ of possession. 19
Nevertheless, the trial court found no merit in the Veterans Bank's application and
dismissed the same in its Order dated November 8, 2004. 20 The trial court explained
that, under paragraph (d) of the REM, the Veterans Bank agreed to take possession
of the Edralins' property without any judicial intervention. The court held that granting
the writ of possession to the Veterans Bank will violate the contractual agreement of
the parties. Paragraph (d) reads:
(d) Effective upon the breach of any
condition of this mortgage and in addition
to the remedies herein stipulated, the
Mortgagee is hereby likewise appointed
attorney-in-fact of the Mortgagor with full
powers and authority, with the use of force, if
necessary to take actual possession of
the mortgaged property, without the
necessity of any judicial order or any
permission, or power, to collect rents, to
eject tenants, to lease or sell the mortgaged
property or any part thereof, at a private sale
without previous notice or advertisement of
any kind and execute the corresponding bills
of sale, lease or other agreement that may
be deemed convenient, to make repairs or
improvements on the mortgaged property
and pay for the same and perform any
other act which the Mortgagee may deem
convenient for the proper administration
of the mortgaged property. The payment
of any expenses advanced by the
Mortgagee in connection with the purposes
indicated herein is also guaranteed by this
Mortgage and such amount advanced shall
bear interest at the rate of 12% per annum.
Any amount received from sale, disposal or
administration above-mentioned may be
applied to the payment of the repairs,
improvements, taxes and any other
incidental expenses and obligations and
also the payment of the original
indebtedness and interest thereof. The
power herein granted shall not be revoked
during the life of this mortgage, and all acts
Page 342 of 505

that may be executed by the Mortgagee by

virtue of said power are hereby ratified. In
addition to the foregoing, the Mortgagor also
hereby agrees, that the Auditor General
shall withhold any money due or which may
become due the Mortgagor or debtor from
the Government or from any of its
instrumentalities, except those exempted by
law from attachment or execution, and apply
the same in settlement of any and all
amount due to the Mortgagee; 21
The trial court held that, assuming the contract allowed for the issuance of a writ of
possession, Veterans Bank's right to seek possession had already prescribed.
Without citing authority and adequate explanation, the court held that Veterans Bank
had only 10 years from February 24, 1983 to seek possession of the
property. EAHcCT
Veterans Bank moved for the reconsideration 22 of the adverse decision. It directed
the court's attention to paragraph (c) of the real estate mortgage, which expressly
granted the mortgagee the right to avail itself of the remedy of extrajudicial
foreclosure in case of the mortgagor's default. Paragraph (c) reads:
(c) If at any time the Mortgagor shall fail or
refuse to pay the obligations herein secured,
or any of the amortizations of such
indebtedness when due, or to comply with
any of the conditions and stipulations herein
agreed, or shall, during the time this
mortgage is in force, institute insolvency
proceedings or be involuntarily declared
insolvent, or shall use the proceeds of this
loan for purposes other than those specified
herein, or if this mortgage cannot be
recorded in the corresponding Registry of
Deeds, then all the obligations of the
Mortgagor secured by this Mortgage and all
the
amortization
thereof
shall
immediately become due, payable and
defaulted, and the Mortgagee may
immediately foreclose this mortgage
judicially in accordance with the Rules of
Court, or extra-judicially in accordance
with Act No. 3135, as amended, and
under Act 2612, as amended. For the
purpose of extra-judicial foreclosure the
Mortgagor hereby appoints the Mortgagee
his attorney-in-fact to sell the property
mortgaged under Act No. 3135, as
amended, to sign all documents and perform

any act requisite and necessary to

accomplish said purpose and to appoint its
substitutes as such attorney-in-fact with the
same powers as above specified. . . . 23
The motion for reconsideration was set for hearing on January 28, 2005. Due to a
conflict of schedule, Veterans Bank's counsel moved24 to reset the hearing on its
motion. In apparent denial of the motion to reset, the trial court proceeded to deny
Veterans Bank's motion for reconsideration in the Order dated January 28,
2005. 25 The trial court reiterated that paragraph (d) of the REM allowed Veterans
Bank to take immediate possession of the property without need of a judicial order. It
would be redundant for the court to issue a writ of possession in its favor.
This prompted Veterans Bank to file a Petition for Mandamus with Prayer for
Issuance of a Preliminary Mandatory Injunction 26 before the CA.
First among its arguments, Veterans Bank maintained that it was the trial court's
ministerial duty 27 to grant a writ of possession to the mortgagee who has
consolidated and registered the property in its name.
Veterans Bank then assailed the trial court's holding that its right to a writ of
possession had already prescribed. Respondent maintained that the writ can be
issued at any time after the mortgagor failed to redeem the foreclosed property. 28
Lastly, Veterans Bank argued that, contrary to the trial court's finding, it did not
contract away its right to an extrajudicial foreclosure under Act No. 3135, as
amended, by the inclusion of paragraph (d) in the REM. Veterans Bank pointed out
that, as evidenced by paragraph (c) of the REM, it expressly reserved the right to
avail of the remedies under Act No. 3135. 29
Ruling of the Court of Appeals 30
The appellate court ruled in favor of Veterans Bank.
It held that the contractual provision in paragraph (d) to immediately take possession
of the mortgaged property without need of judicial intervention is distinct from the right
to avail of extrajudicial foreclosure under Section 7 of Act No. 3135, which was
expressly reserved by Veterans Bank in paragraph (c) of the REM. The fact that the
two paragraphs do not negate each other is evidenced by the qualifying phrase "in
addition to the remedies herein stipulated" found in paragraph (c).
Having availed itself of the remedy of extrajudicial foreclosure, Veterans Bank, as the
highest bidder, has the right to a writ of possession. This right may be availed of any
time after the buyer consolidates ownership. In fact, the issuance of the writ of
possession is a ministerial function, the right to which cannot be enjoined or stayed,
even by an action for annulment of the mortgage or the foreclosure sale itself.
The trial court's ruling that Veterans Bank's right to possess has prescribed is likewise
erroneous. As already stated, Veterans Bank's right to possess the property is not
based on their contract but on Act No. 3135. TDcEaH

Page 343 of 505

Since the issuance of a writ of possession is a ministerial act of the trial

judge, mandamus lies to compel the performance of the said duty.

there is no appeal [available]," which appears in certiorari and prohibition petitions, is

conspicuously missing for petitions for mandamus.

Petitioners immediately filed this petition for review.

We rule that mandamus is a proper remedy to compel the issuance of a writ of

possession. The purpose of mandamus is to compel the performance of a ministerial
duty. A ministerial act is "one which an officer or tribunal performs in a given state of
facts, in a prescribed manner, in obedience to the mandate of legal authority, without
regard to or the exercise of his own judgment upon the propriety or impropriety of the
act done." 35

Issues
Petitioners submit the following issues for our consideration:
1. Whether mandamus was resorted to as a
substitute for a lost appeal
2. Whether mandamus is the proper remedy
to seek a review of the final orders of the
trial court
3. Whether the consolidation of ownership of
the extrajudicially foreclosed property
through a Deed of Sale is in accordance
with law
4. Whether the issuance of a writ of
possession under Act [No.] 3135 is subject
to the statute of limitations 31
Our Ruling
Propriety of the Remedy of Mandamus
Petitioners argue that Veterans Bank availed itself of the remedy of mandamus as a
substitute for a lost appeal. 32 Petitioners narrate the relevant dates that allegedly
show the belatedness and impropriety of the petition for mandamus. Veterans Bank
received the Order dated November 8, 2004 on November 18, 2004, thus it had until
December 3, 2004 to file a motion for reconsideration. Since December 3, 2004 was
declared a non-working holiday, Veterans Bank filed its motion for reconsideration on
the next working day, December 6, 2004. With the said dates, it had only one day left
from receipt of the January 28, 2005 Order, or until February 10, 2005, to file an
appeal (citing Section 2, Rule 22) of the Rules of Court. Since Veterans Bank did not
file an appeal on the following day, it had lost its right to appeal and the assailed
orders allegedly attained finality.
Respondent counters that the issuance of a writ of possession is not an ordinary
action for which the rules on appeal apply. The writ being a mere motion or an order
of execution, appeal is not the proper remedy to question the trial court's ruling. In
fact, Section 1, Rule 41 of the Rules of Court provides that no appeal may be taken
from an order of execution, but Rule 65 special civil actions are available.33 Given
that the issuance of the writ of possession is a ministerial act of the judge, respondent
maintains that a petition for mandamusis the proper remedy.
Respondent adds that, even if appeal were available, the same is not the plain,
speedy and adequate remedy to compel the performance of the ministerial
act. 34 Respondent maintains that Section 3 of Rule 65 recognizes that the remedy
of mandamus is available in conjunction with an appeal. The qualifying phrase "and

The issuance of a writ of possession is outlined in Section 7 of Act No. 3135, as

amended by Act No. 4118, which provides:
SEC. 7. In any sale made under the
provisions of this Act, the purchaser
may petition the Court of First Instance of
the province or place where the property
or any part thereof is situated, to give him
possession thereof during the redemption
period, furnishing bond in an amount
equivalent to the use of the property for a
period of twelve months, to indemnify the
debtor in case it be shown that the sale was
made without violating the mortgage or
without complying with the requirements of
[this] Act. Such petition shall be made under
oath and filed in form of an ex parte motion
. . . and the court shall, upon approval of
the bond, order that a writ of possession
issue, addressed to the sheriff of the
province in which the property is situated,
who shall execute said order immediately.
During the period of redemption, the mortgagee is entitled to
a writ of possession upon depositing the approved bond.
When the redemption period expires without the mortgagor
exercising his right of redemption, the mortgagor is deemed
to have lost all interest over the foreclosed property, and the
purchaser acquires absolute ownership of the property. The
purchaser's right is aptly described thus: ESacHC
Consequently, the purchaser, who has a
right to possession after the expiration of
the redemption period, becomes the
absolute owner of the property when no
redemption is made. In this regard, the
bond is no longer needed. The purchaser
can demand possession at any time
following the consolidation of ownership
in his name and the issuance to him of a
new TCT. After consolidation of title in the
Page 344 of 505

purchaser's name for failure of the

mortgagor to redeem the property, the
purchaser's right to possession ripens into
the absolute right of a confirmed owner. At
that point, the issuance of a writ of
possession, upon proper application and
proof of title becomes merely a
ministerial function. Effectively, the court
cannot exercise its discretion.

The aforequoted Section 18 grants to mortgagors of Veterans Bank the right to

redeem their judicially foreclosed properties. This provision had to be included
because in judicial foreclosures, mortgagors generally do not have the right of
redemption unless there is an express grant by law. 41

Therefore, the issuance by the RTC of a writ

of possession in favor of the respondent in
this case is proper. We have consistently
held that the duty of the trial court to grant a
writ of possession in such instances is
ministerial, and the court may not exercise
discretion or judgment . . . 36

Moreover, the availability of extra-judicial foreclosure to a mortgagee depends upon

the agreement of the contracting parties. Section 1 of Act No. 3135 provides: DAETcC

But, contrary to petitioners' averments, there is nothing in Section 18 which can be

interpreted to mean that Veterans Bank is limited to judicial foreclosures only, or that it
cannot avail itself of the benefits provided under Act No. 3135, 42 as amended,
allowing extrajudicial foreclosures.

With the consolidated title, the purchaser becomes entitled

to a writ of possession and the trial court has the ministerial
duty to issue such writ of possession. 37 Thus, "the remedy
of mandamus lies to compel the performance of [this]
ministerial duty." 38
Does
the
charter
of
prohibit extrajudicial foreclosures?

Veterans

Bank

Petitioners then assail Veterans Bank's power to extrajudicially foreclose on

mortgages. They maintain that the legislature intended to limit Veterans Bank to
judicial foreclosures only, 39 citing Section 18 of the Veterans Bank's charter, RA No.
3518, which provides:
Section 18. Right of redemption of property
foreclosed. The mortgagor shall have the
right, within one year after the sale of the
real estate as a result of the foreclosure of a
mortgage, to redeem the property by paying
the amount fixed by the court in the order of
execution, with interest thereon at the rate
specified in the mortgage, and all the costs
and other judicial expenses incurred by the
Bank by reason of the execution and sale,
and for the custody of said property.
Respondent counters that the inclusion of the phrase "fixed by the Court" in Section
18 of RA No. 3518 does not necessarily mean that only judicial foreclosures are
available to Veterans Bank. Moreover, resort to an extrajudicial foreclosure was
voluntarily entered into by the contracting parties in their REM. 40
There is no merit in petitioners' contention.

Section 1. When a sale is made under a

special power inserted in or attached to any
real-estate mortgage hereafter made as
security for the payment of money or the
fulfillment of any other obligation, the
provisions of the following sections shall
govern as to the manner in which the
sale and redemption shall be effected,
whether or not provision for the same is
made in the power. (Emphasis supplied.)
In the case at bar, paragraph (c) of the parties' REM granted
Veterans Bank the special power as attorney-in-fact of the
petitioners to perform all acts necessary for the purpose of
extrajudicial foreclosure under Act No. 3135. Thus, there is
no obstacle preventing Veterans Bank from availing itself of
the remedy of extrajudicial foreclosure.
Was
the
consolidation
accordance with law?

of

title

done

in

Petitioners argue that Veterans Bank is not entitled

to a writ of possession because it failed to properly
consolidate its title over the subject property. 43 They
maintain that the Deed of Sale executed by the Veterans
Bank in the bank's own favor during the consolidation of title
constitutes a pactum commissorium, which is prohibited
under Article 2088 of the Civil Code. 44
Respondent contends that petitioners never questioned the validity of the foreclosure
proceedings or the auction sale. The failure to do so resulted in the ripening of the
consolidation of ownership. 45
There is no merit in petitioners' argument.
Pactum commissorium is "a stipulation empowering the creditor to appropriate the
thing given as guaranty for the fulfillment of the obligation in the event the obligor fails
to live up to his undertakings, without further formality, such as foreclosure
Page 345 of 505

proceedings, and a public sale." 46 "The elements of pactum commissorium, which

enable the mortgagee to acquire ownership of the mortgaged propertywithout the
need of any foreclosure proceedings, are: (1) there should be a property mortgaged
by way of security for the payment of the principal obligation, and (2) there should be
a stipulation for automatic appropriation by the creditor of the thing mortgaged in case
of non-payment of the principal obligation within the stipulated period." 47

we are not aware of any, to the effect that

the failure of a buyer in a foreclosure sale to
secure a Certificate of Final Sale, execute
an Affidavit of Consolidation of Ownership
and obtain a writ of possession over the
property thus acquired, within ten (10) years
from the registration of the Certificate of
Sale will operate to bring ownership back to
him whose property has been previously
foreclosed and sold. . . .

The second element is missing to characterize the Deed of Sale as a form of pactum
commissorium. Veterans Bank did not, upon the petitioners' default, automatically
acquire or appropriate the mortgaged property for itself. On the contrary, the Veterans
Bank resorted to extrajudicial foreclosure and was issued a Certificate of Sale by the
sheriff as proof of its purchase of the subject property during the foreclosure sale.
That Veterans Bank went through all the stages of extrajudicial foreclosure indicates
that there was no pactum commissorium.
Does
the
prescribe?

right

to

writ

of

xxx xxx xxx

Moreover, with the rule that the expiration of
the 1-year redemption period forecloses the
obligors' right to redeem and that the sale
thereby becomes absolute, the issuance
thereafter of a final deed of sale is at best a
mere formality and mere confirmation of the
title that is already vested in the
purchaser. . . . 57

possession

Petitioners assail the CA's ruling that the issuance of a writ of possession does not
prescribe. 48 They maintain that Articles 1139, 491149, 50 and 1150 51 of the Civil
Code regarding prescriptive periods cover all kinds of action, which necessarily
include the issuance of a writ of possession. Petitioners posit that, for purposes of the
latter, it is the five-year prescriptive period provided in Article 1149 of the Civil Code
which applies because Act No. 3135 itself did not provide for its prescriptive period.
Thus, Veterans Bank had only five years from September 12, 1983, the date when
the Certificate of Sale was issued in its favor, to move for the issuance of a writ of
possession.52
Respondent argues that jurisprudence has consistently held that a registered owner
of the land, such as the buyer in an auction sale, is entitled to a writ of possession
at any time after the consolidation of ownership. 53 ACSaHc
We cannot accept petitioners' contention. We have held before that the purchaser's
right "to request for the issuance of the writ of possession of the land never
prescribes." 54 "The right to possess a property merely follows the right of
ownership," 55 and it would be illogical to hold that a person having ownership of a
parcel of land is barred from seeking possession thereof. In Calacala v. Republic of
the Philippines, 56 the Republic was the highest bidder in the public auction but failed
for a long period of time to execute an Affidavit of Consolidation and to seek a writ of
possession. Calacala insisted that, by such inaction, the Republic's right over the land
had prescribed, been abandoned or waived. The Court's language in rejecting
Calacala's theory is illuminating:

Moreover, the provisions cited by petitioners refer to prescription

of actions. An action is "defined as an ordinary suit in a court of justice, by which one
party prosecutes another for the enforcement or protection of a right, or the
prevention or redress of a wrong." 58 On the other hand "[a] petition for the issuance
of the writ, under Section 7 of Act No. 3135, as amended, is not an ordinary
action filed in court, by which one party 'sues another for the enforcement or
protection of a right, or prevention or redress of a wrong.' It is in the nature of an ex
parte motion [in] which the court hears only one side. It is taken or granted at the
instance and for the benefit of one party, and without notice to or consent by any party
adversely affected. Accordingly, upon the filing of a proper motion by the purchaser in
a foreclosure sale, and the approval of the corresponding bond, the writ of possession
issues as a matter of course and the trial court has no discretion on this matter." 59
WHEREFORE, premises considered, the Petition is DENIED for lack of merit. The CA
Decision dated June 10, 2005 in CA-G.R. SP No. 89248 is AFFIRMED.
SO ORDERED.
||| (Spouses Edralin v. Philippine Veterans Bank, G.R. No. 168523, [March 9, 2011])

[T]he Republic's failure to execute the acts

referred to by the petitioners within ten (10)
years from the registration of the Certificate
of Sale cannot, in any way, operate to
restore
whatever
rights
petitioners'
predecessors-in-interest had over the same.
For sure, petitioners have yet to cite any
provision of law or rule of jurisprudence, and
Page 346 of 505

SECOND DIVISION
[G.R. No. 172592. July 9, 2008.]
SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIOONG, petitioners, vs. ROBAN LENDING
CORPORATION, respondent.

DECISION

CARPIO-MORALES, J p:
On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Wilfredo
N. Ong and Edna Sheila Paguio-Ong obtained several loans from Roban Lending
Corporation (respondent) in the total amount of P4,000,000.00. These loans were
secured by a real estate mortgage on petitioners' parcels of land located in
Binauganan, Tarlac City and covered by TCT No. 297840. 1
On February 12, 2001, petitioners and respondent executed an Amendment to
Amended Real Estate Mortgage 2 consolidating their loans inclusive of charges
thereon which totaled P5,916,117.50. On even date, the parties executed a Dacion in
Payment Agreement 3 wherein petitioners assigned the properties covered by TCT
No. 297840 to respondent in settlement of their total obligation, and a Memorandum
of Agreement 4 reading: AIaSTE
That the FIRST PARTY [Roban Lending Corporation] and the
SECOND PARTY [the petitioners] agreed to consolidate and

restructure all aforementioned loans, which have been all past

due and delinquent since April 19, 2000, and outstanding
obligations totaling P5,916,117.50. The SECOND PARTY hereby
sign [sic] another promissory note in the amount of
P5,916,117.50 (a copy of which is hereto attached and forms . . .
an integral part of this document), with a promise to pay the
FIRST PARTY in full within one year from the date of the
consolidation and restructuring, otherwise the SECOND PARTY
agree to have their "DACION IN PAYMENT" agreement, which
they have executed and signed today in favor of the FIRST
PARTY be enforced[.] 5
In April 2002 (the day is illegible), petitioners filed a Complaint, 6 docketed as Civil
Case No. 9322, before the Regional Trial Court (RTC) of Tarlac City, for declaration of
mortgage contract as abandoned, annulment of deeds, illegal exaction, unjust
enrichment, accounting, and damages, alleging that the Memorandum of Agreement
and the Dacion in Payment executed are void for being pactum commissorium. 7
Petitioners alleged that the loans extended to them from July 14, 1999 to March 20,
2000 were founded on several uniform promissory notes, which provided for 3.5%
monthly interest rates, 5% penalty per month on the total amount due and
demandable, and a further sum of 25% attorney's fees thereon, 8 and in addition,
respondent exacted certain sums denominated as "EVAT/AR". 9 Petitioners decried
these additional charges as "illegal, iniquitous, unconscionable, and revolting to the
conscience as they hardly allow any borrower any chance of survival in case of
default." 10
Petitioners further alleged that they had previously made payments on their loan
accounts, but because of the illegal exactions thereon, the total balance appears not
to have moved at all, hence, accounting was in order. 11
Petitioners thus prayed for judgment:
a) Declaring the Real Estate Mortgage Contract and its
amendments . . . as null and void and without legal force and
effect for having been renounced, abandoned, and given up;
b) Declaring the "Memorandum of Agreement" . . . and "Dacion in
Payment" . . . as null and void for being pactum commissorium;
c) Declaring the interests, penalties, Evat [sic] and attorney's fees
assessed and loaded into the loan accounts of the plaintiffs with
Page 347 of 505

defendant as unjust, iniquitous, unconscionable and illegal and

therefore, stricken out or set aside;
d) Ordering an accounting on plaintiffs' loan accounts to
determine the true and correct balances on their obligation
against legal charges only; and
e) Ordering defendant to [pay] to the plaintiffs:
e.1 Moral damages in an amount not less than
P100,000.00 and exemplary damages of P50,000.00;
e.2 Attorney's fees in the amount of P50,000.00 plus
P1,000.00 appearance fee per hearing; and
e.3 The cost of suit. 12
as well as other just and equitable reliefs.
In its Answer with Counterclaim, 13 respondent maintained the legality of its
transactions with petitioners, alleging that: CaEIST
xxx xxx xxx
If the voluntary execution of the Memorandum of Agreement and
Dacion in Payment Agreement novated the Real Estate Mortgage
then the allegation of Pactum Commissorium has no more legal
leg to stand on;
The Dacion in Payment Agreement is lawful and valid as it is
recognized . . . under Art. 1245 of the Civil Code as a special
form of payment whereby the debtor-Plaintiffs alienates their
property to the creditor-Defendant in satisfaction of their
monetary obligation;
The accumulated interest and other charges which were
computed for more than two (2) years would stand reasonable
and valid taking into consideration [that] the principal loan is
P4,000,000 and if indeed it became beyond the Plaintiffs'
capacity to pay then the fault is attributed to them and not the
Defendant[.] 14
After pre-trial, the initial hearing of the case, originally set on December 11, 2002, was
reset several times due to, among other things, the parties' efforts to settle the case
amicably. 15

During the scheduled initial hearing of May 7, 2003, the RTC issued the following
order:
Considering that the plaintiff Wilfredo Ong is not around on the
ground that he is in Manila and he is attending to a very sick
relative, without objection on the part of the defendant's counsel,
the initial hearing of this case is reset to June 18, 2003 at 10:00
o'clock in the morning. DSATCI
Just in case [plaintiff's counsel] Atty. Concepcion cannot present
his witness in the person of Mr. Wilfredo Ong in the next
scheduled hearing, the counsel manifested that he will submit the
case for summary judgment. 16 (Underscoring supplied)
It appears that the June 18, 2003 setting was eventually rescheduled to February 11,
2004 at which both counsels were present 17 and the RTC issued the following order:
The counsel[s] agreed to reset this case on April 14, 2004, at
10:00 o'clock in the morning. However, the counsels are directed
to be ready with their memorand[a]together with all the exhibits or
evidence needed to support their respective positions which
should be the basis for the judgment on the pleadings if the
parties fail to settle the case in the next scheduled
setting. ESTCHa
xxx xxx xxx 18 (Underscoring supplied)
At the scheduled April 14, 2004 hearing, both counsels appeared but only the counsel
of respondent filed a memorandum. 19
By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the basis
of the pleadings that there was no pactum commissorium, dismissed the complaint.20
On appeal, 21 the Court of Appeals 22 noted that:
. . . [W]hile the trial court in its decision stated that it was
rendering judgment on the pleadings, . . . what it actually
rendered was a summary judgment. A judgment on the pleadings
is proper when the answer fails to tender an issue, or otherwise
admits the material allegations of the adverse party's pleading.
However, a judgment on the pleadings would not have been
proper in this case as the answer tendered an issue, i.e. the
validity of the MOA and DPA. On the other hand, a summary
Page 348 of 505

judgment may be rendered by the court if the pleadings,

supporting affidavits, and other documents show that, except as
to the amount of damages, there is no genuine issue as to any
material fact. 23
Nevertheless, finding the error in nomenclature "to be mere semantics with no bearing
on the merits of the case", 24 the Court of Appeals upheld the RTC decision that there
was no pactum commissorium. 25
Their Motion for Reconsideration 26 having been denied, 27 petitioners filed the
instant Petition for Review on Certiorari, 28 faulting the Court of Appeals for having
committed a clear and reversible error:
I. . . . WHEN IT FAILED AND REFUSED TO APPLY
PROCEDURAL REQUISITES WHICH WOULD
WARRANT THE SETTING ASIDE OF THE SUMMARY
JUDGMENT IN VIOLATION OF APPELLANTS' RIGHT
TO DUE PROCESS;
II. . . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN THIS
CASE IS NECESSARY BECAUSE THE FACTS ARE
VERY MUCH IN DISPUTE;
III. . . . WHEN IT FAILED AND REFUSED TO HOLD THAT THE
MEMORANDUM OF AGREEMENT (MOA) AND THE
DACION EN PAGO AGREEMENT (DPA) WERE
DESIGNED TO CIRCUMVENT THE LAW
AGAINST PACTUM COMMISSORIUM; and
IV. . . . WHEN IT FAILED TO CONSIDER THAT THE
MEMORANDUM OF AGREEMENT (MOA) AND THE
DACION EN PAGO (DPA) ARE NULL AND VOID FOR
BEING CONTRARY TO LAW AND PUBLIC POLICY. 29

The creditor cannot appropriate the things given by way of pledge

or mortgage, or dispose of them. Any stipulation to the contrary is
null and void."
The elements of pactum commissorium, which enables the mortgagee to acquire
ownership of the mortgaged property without the need of any foreclosure
proceedings, 30 are: (1) there should be a property mortgaged by way of security for
the payment of the principal obligation, and (2) there should be a stipulation for
automatic appropriation by the creditor of the thing mortgaged in case of non-payment
of the principal obligation within the stipulated period. 31
In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain
no provisions for foreclosure proceedings nor redemption. Under the Memorandum of
Agreement, the failure by the petitioners to pay their debt within the one-year period
gives respondent the right to enforce the Dacion in Payment transferring to it
ownership of the properties covered by TCT No. 297840. Respondent, in effect,
automatically acquires ownership of the properties upon petitioners' failure to pay their
debt within the stipulated period. ASEIDH

Respondent argues that the law recognizes dacion en pago as a special form of
payment whereby the debtor alienates property to the creditor in satisfaction of a
monetary obligation. 32 This does not persuade. In a true dacion en pago, the
assignment of the property extinguishes the monetary debt. 33 In the case at bar, the
alienation of the properties was by way of security, and not by way of satisfying the
debt. 34 The Dacion in Payment did not extinguish petitioners' obligation to
respondent. On the contrary, under the Memorandum of Agreement executed on the
same day as the Dacion in Payment, petitioners had to execute a promissory note for
P5,916,117.50 which they were to pay within one year. 35

The petition is meritorious.

Respondent cites Solid Homes, Inc. v. Court of Appeals 36 where this Court upheld a
Memorandum of Agreement/Dacion en Pago. 37 That case did not involve the issue
of pactum commissorium. 38

Both parties admit the execution and contents of the Memorandum of Agreement and
Dacion in Payment. They differ, however, on whether both contracts constitutepactum
commissorium or dacion en pago. cAIDEa

That the questioned contracts were freely and voluntarily executed by petitioners and
respondent is of no moment, pactum commissorium being void for being prohibited by
law. 39

This Court finds that the Memorandum of Agreement and Dacion in Payment
constitute pactum commissorium, which is prohibited under Article 2088 of the Civil
Code which provides:

Respecting the charges on the loans, courts may reduce interest rates, penalty
charges, and attorney's fees if they are iniquitous or unconscionable. 40
Page 349 of 505

This Court, based on existing jurisprudence, 41 finds the monthly interest rate of
3.5%, or 42% per annum unconscionable and thus reduces it to 12% per annum. This
Court finds too the penalty fee at the monthly rate of 5% (60% per annum) of the total
amount due and demandable principal plus interest, with interest not paid when
due added to and becoming part of the principal and likewise bearing interest at the
same rate, compounded monthly 42 unconscionable and reduces it to a yearly rate
of 12% of the amount due, to be computed from the time of demand. 43 This Court
finds the attorney's fees of 25% of the principal, interests and interests thereon, and
the penalty fees unconscionable, and thus reduces the attorney's fees to 25% of the
principal amount only. 44
The prayer for accounting in petitioners' complaint requires presentation of evidence,
they claiming to have made partial payments on their loans, vis a vis respondent's
denial thereof. 45 A remand of the case is thus in order. TDCAIS
Prescinding from the above disquisition, the trial court and the Court of Appeals erred
in holding that a summary judgment is proper. A summary judgment is permitted only
if there is no genuine issue as to any material fact and a moving party is entitled to a
judgment as a matter of law. 46 A summary judgment is proper if, while the pleadings
on their face appear to raise issues, the affidavits, depositions, and admissions
presented by the moving party show that such issues are not genuine. 47 A genuine
issue, as opposed to a fictitious or contrived one, is an issue of fact that requires the
presentation of evidence. 48 As mentioned above, petitioners' prayer for accounting
requires the presentation of evidence on the issue of partial payment.
But neither is a judgment on the pleadings proper. A judgment on the pleadings may
be rendered only when an answer fails to tender an issue or otherwise admits the
material allegations of the adverse party's pleadings. 49 In the case at bar,
respondent's Answer with Counterclaim disputed petitioners' claims that the
Memorandum of Agreement and Dation in Payment are illegal and that the extra
charges on the loans are unconscionable. 50 Respondent disputed too petitioners'
allegation of bad faith. 51
WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET
ASIDE. The Memorandum of Agreement and the Dacion in Payment executed by
petitioner spouses Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent
Roban Lending Corporation on February 12, 2001 are declared NULL AND VOID for
beingpactum commissorium. ECDAcS
In line with the foregoing findings, the following terms of the loan contracts between
the parties are MODIFIED as follows:

1. The monthly interest rate of 3.5%, or 42% per annum, is

reduced to 12% per annum;
2. The monthly penalty fee of 5% of the total amount due and
demandable is reduced to 12% per annum, to be
computed from the time of demand; and
3. The attorney's fees are reduced to 25% of the principal amount
only. cHCaIE
Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of
receiving evidence on petitioners' prayer for accounting.
SO ORDERED.
||| (Spouses Ong v. Roban Lending Corporation, G.R. No. 172592, [July 9, 2008], 579
PHIL 769-780)

EN BANC
[G.R. No. L-29388. December 28, 1970.]
VINCENT
P. DAYRIT, petitioner, vs. THE COURT OF APPEALS, HON.
FRANCISCO ARCA, Judge of the Court of First Instance of
Manila, Branch I, MOBIL OIL PHILIPPINES, INC., and ELADIO
YLAGAN, Special Sheriff, respondents.

Ramon Quisumbing, Jr., for petitioner.

Faylona, Cruz, Berroya, Norte & Nentanilla for respondent Mobil Oil Philippines, Inc.

DECISION
Page 350 of 505

CASTRO, J p:
Petition for certiorari by way of appeal from the Court of Appeals' minute resolution of
June 14, 1968 dismissing the petition for certiorari in CA-G.R. No. 41359-R, as well
as its resolutions of July 9, 1968 and August 5, 1968 denying the first and second
motions for reconsideration, respectively, in the same case.

The defendants violated the Loan & Mortgage Agreement, they having paid but one
installment in the amount of P3,816, of which P1,250 was applied to interest, and the
remaining P2,566 to the principal obligation. The defendants likewise failed to buy the
quantities of products as required in the Sales Agreement (exh. D). The plaintiff made
due demand (exh. I), which the defendant Dayrit answered, acknowledging his liability
in his letter exh. I-1.

On July 21, 1965, the defendants Vincent Dayrit, Leonila T. Sumbillo and Reynaldo
Angeles entered into a contract with the Mobil Oil Philippines, Inc., entitled "LOAN &
MORTGAGE AGREEMENT," providing, among others, that:

On November 17, 1967, after trial and after the parties had submitted their
memoranda, 1 the trial court rendered its decision, the dispositive portion of which
reads:

"(a) For and in consideration of Sales Agreement dated July 21,

1965 among, the parties herein, Mobil grants a loan of P150,000
to borrowers.
"(b) Defendants-Borrowers shall repay Mobil the whole amount of
P150,000 plus 10% interest per annum on the diminishing
balance for 48 months.
"(c) To secure the prompt repayment of such loan by defendantsborrowers to Mobil and the faithful performance by Borrowers of
that Sales Agreement, Defendants-Borrowers hereby transfer in
favor of Mobil by way of first mortgage lands covered by TCT No.
45169 and TCT No. 45170, together with the improvements
existing in said two (2) parcels of land.
"(d) In case of default of Defendants-Borrowers in payment of any
of the installments and/or their failure to purchase the quantity of
products stated therein Mobil shall have the right to foreclose this
mortgage.
"(e) Mobil, in case of default and foreclosure, shall be entitled to
attorney's fees and cost of collection equivalent to not less than
25% of total indebtedness remaining unpaid.
"(f) All expenses in connection with the preparation and
registration of this mortgage as well as cancellation of same shall
be for the account of Defendants-Borrowers.
"(g) If Defendants-Borrowers shall perform the full obligation
above stated according to the terms thereof, then this obligation
shall be null and void, otherwise, it shall remain in full force and
effect."

"WHEREFORE, judgment is hereby rendered in

favor of the plaintiff and against the defendants
Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles,
ordering them to pay to the plaintiff one-third each of the
sum of P147,434.00 with interest of 10% per annum from
the time it fell due according to agreement, and in default
of such payment, the properties put up in collateral shall
be sold in foreclosure sale in accordance with law, the
proceeds to be applied in payment of the amount due to
the plaintiff from the defendants as claimed in the
complaint provided that, as to Dayrit, his liability shall in no
case exceed 1/3 of the total obligation.
"The defendants are likewise ordered to pay to
the plaintiff, in the same proportion of 1/3 each, 25% of the
obligation as attorney's fees as provided in the contract;
and P300.60 for the registration of the contract.
xxx xxx xxx
"Each of the three said defendants shall also pay
1/3 of the costs."
No appeal having been interposed by the defendants, the above decision became
final and executory.
An undated Mobil's motion for execution of the decision and for the appointment of
Eladio Ylagan as special sheriff (annex D) was received by the herein
petitionerDayrit on February 8, 1968. Whereupon, he filed his opposition and motion
to stay execution, alleging that before the finality of the aforesaid judgment, he and
the plaintiff had agreed not to appeal and/or file any motion for reconsideration, the
Page 351 of 505

petitioner offering to pay his one-third share with a reasonable discount, if possible, in
so far as the interests and the award for attorney's fees were concerned, with the
corresponding release of the mortgage on all his properties, and praying, in view
thereof, for a 30-day grace period within which to pay the plaintiff. The 30-day grace
period was granted by the court in its order of February 24, 1968.
On March 25, 1968 the petitioner filed another motion for 20 days' extension within
which to pay his one-third share of the judgment obligation and to submit the
corresponding compromise agreement for the satisfaction of the judgment. The said
motion was granted on April 1, 1968.
Thereafter, the respondent Mobil filed an "Urgent Reply to Opposition and Motion to
Stay Execution dated Feb. 21, 1968 and Motion dated March 25, 1968," alleging
therein that the respondent agreed to release the mortgage or collateral for the entire
judgment obligation only if "the whole principal mortgaged debt plus the whole
accrued interest" were fully paid. Mobil further prayed for a writ of execution to be
issued against the petitioner after the lapse of 20 days from March 25, 1968, if by then
the parties shall not have submitted to compromise agreement for the satisfaction of
the judgment; Mobil also reiterated its prayer for the appointment of respondent Eladio
Ylagan as special sheriff.
On April 3, 1968 the petitioner filed a manifestation and motion, praying that he be
allowed to deposit with the Clerk of Court the amount corresponding to his one-third
share of the obligation under the decision of November 17, 1967, and that thereupon
the collateral or mortgage over petitioner's properties or lands be ordered released or
cancelled.
On April 10, 1968 the court a quo ordered all pending incidents set for hearing on
April 19, 1968, "so that the Court may have the opportunity to confer with the parties
to thresh out the settlement of this case." At this hearing Mobil did not appear; the
court reset the hearing for May 23, 1968.
Under date of May 8, 1968, Mobil filed an addendum to its reply dated April 1, 1968
and opposition to petitioner's motion dated April 3, 1968, praying that the motion of
petitioner Dayrit that the entire mortgaged collateral be released upon his payment of
mere 1/3 of the loan obligation, be denied and instead a writ of execution against him
in accordance with the dispositive portion of the decision and sections 2 and 3 of Rule
68 of the Revised Rules of Court be issued.
On May 18, 1968 the petitioner filed his rejoinder to respondent Mobil's aforesaid
addendum and opposition.

On May 23, 1968, after hearing oral argument, the court denied the manifestation and
motion of Dayrit filed thru counsel and dated April 3, 1968; the court further ruled that
"There is no further need to issue an order for the issuance of a writ of execution and
appointment of special sheriff . . . considering that the Court, in its order of February
24, 1968, has already ordered the issuance of a writ of execution for the satisfaction
of the judgment."
The petitioner then filed his petition for certiorari with the Court of Appeals, dated May
30, 1968, alleging that "respondent Judge Arca acted without or in excess of his
jurisdiction and/or with grave abuse of discretion, in denying petitioner's motion to
allow him to pay or deposit his one-third share of the judgment obligation" as well as
the consequent release or cancellation of the mortgage on his properties.
The Court of Appeals, however, in its minute resolution of June 14, 1968, dismissed
the petition for certiorari, in the following words:
"Upon consideration of the petition for certiorari
filed in this case, the Court RESOLVED TO DISMISS the
petition, there being no abuse of discretion in ordering the
execution of a final judgment. Details of execution for
satisfaction of Vincent Dayrit's liability will be worked out in
connection with the sale of the collateral for mortgaged
debt, and the judgment in Civil Case No. 64138 of the
CFI-Manila will control the disposition and application of
the collateral."
The petitioner filed a motion for reconsideration dated June 9, 1968 which
the Court of Appeals denied in its resolution of July 9, 1968, as follows:
"Both the petition and the motion for
reconsideration are based on a misapprehension of the
terms of the judgment. The mortgage obligation is one and
indivisible. it was executed to assure payment of the total
indebtedness of the three defendants in Civil Case No.
64138, and not merely one-third (1/3) thereof
corresponding to petitioner Vincent P. Dayrit's liability."
The petitioner's second motion for reconsideration of July 25, 1968 was summarily
dismissed on August 5, 1968, for lack of merit.
The petitioner, in his present petition, tenders the following issues for resolution:

Page 352 of 505

"1) Whether or not respondent Judge [CFIManila] acted without or in excess of his jurisdiction,
and/or with grave abuse of discretion in denying
petitioner's motion to allow him to exercise his clearly legal
right to pay or deposit his one-third share of the judgment
obligation;

first motion was pending, is to afford the court sufficient time to evaluate whether there
is prima facie merit therein, so that, "if the court finds merit prima facie in the motion
for re-hearing or reconsideration, the adverse party shall be given time to answer,
after which the court, in its discretion, may set the case for oral argument." 4 And only
upon compliance with the above stated requirements may the second motion for
reconsideration stay the final order or judgment sought to be re-examined. 5

"2) The next issue was that brought about by

the Court of Appeals' resolution dismissing the petition for
certiorari, and which was raised in petitioner's motion
dated June 19, 1968 for reconsideration of said resolution,
contending that the ground for dismissal did not jibe with
the issue raised in the petition for certiorari

The Court of Appeals gave due course to the second motion for reconsideration of the
herein petitioner, but nevertheless, dismissed the same summarily for lack of merit.

"3) And lastly the Court of Appeals' resolution of

July 9, 1968 denying said motion for reconsideration
injected the issue of alleged misapprehension on the part
of petitioner of the terms of the judgment of respondent
judge."

1. The question raised by the respondent Mobil that the present petition for certiorari
was filed way beyond the reglementary period of 15 days from appellant's receipt of
notice of judgment or of the denial of his motion for reconsideration pursuant to
section 1, Rule 45 of the Revised Rules of Court, 2 needs to be resolved before
consideration of this case on the merits. Admittedly, the ex parte first motion for
reconsideration filed by the herein petitioner was denied, and copy of such denial was
received by the petitioner on July 15, 1968. Still not satisfied, petitioner filed
another ex parte motion for reconsideration on July 26, 1968, notice of the denial of
which, under CA resolution dated August 5, 1968, was received by said petitioner
on August 9, 1968.
Respondent Mobil contends that the second motion for reconsideration filed by the
petitioner was a mere scrap of paper and pro-forma since it was filed ex
parte andwithout express leave of court, contrary to the mandate of section 1, Rule 52
of the Rules of Court. 3
The rule appears to be inflexible in the sense that no more than one motion for
reconsideration shall be filed without express leave of court. The requirement that the
second motion for reconsideration must be presented, with leave of court, within
fifteen days from notice of the order or judgment, deducting the time during which the

However, even assuming, that the ex parte second motion for reconsideration was
properly filed so as to toll the reglementary period within which to appeal, it appears
that the petition for certiorari filed with this Court on August 20, 1968 was time-barred.
From the date of denial of the petitioner's ex parte first motion for reconsideration
received by him on July 15, 1968 assuming that the period was interrupted by
the ex parte second motion for reconsideration from July 26, 1968 to August 9, 1968
(15 days) to the elevation of the said case to this Court on August 20, 1968, 36
days had elapsed. Deducting the 15 days during which the ex partesecond motion for
reconsideration was pending from the total period of 36 days leaves 21 days. This
means that the present petition was filed with this Court six days late, contrary to and
in violation of section 1, Rule 45, which specifically provides that a petition for
certiorari under such Rule should be filed within 15 days from notice of judgment or
denial of motion for reconsideration. Hence, the present petition may be dismissed on
the aforestated ground.
But we opt, nevertheless, to consider the merits of this case, if only to demonstrate to
the petitioner his error.
2. The decision of the lower court, let it not be forgotten, has admittedly become final
and executory. The controverted judgment ordered the defendants (Dayrit, Sumbillo
and Angeles) "to pay to the plaintiff one-third each of the sum of P147,434.00 with
interest of 10% per annum from the time it fell due according to agreement, and in
default of such payment, the properties put up in collateral shall be sold in foreclosure
sale in accordance with law, the proceeds to be applied in payment of the amount due
to the plaintiff from the defendants as claimed in the complaint, provided that, as
to Dayrit, his liability shall in no case exceed 1/3 of the total obligation."
In sum, the issue that must be resolved in the instant case is, whether or not the
Court of First Instance of Manila erred in ordering the sale at public auction of the
mortgaged properties to answer for the entire P147,434 principal obligation after the
defendants (Dayrit, Sumbillo and Angeles) had failed to pay their respective one-third
shares of the obligation to the respondent Mobil; otherwise stated, whether or not the
Page 353 of 505

respondents Court of First Instance and the Court of Appeals erred in refusing to
allow the alleged proposed deposit of a sum equivalent to 1/3 of the loan agreed upon
and in refusing to release forever the collaterals owned by Dayrit, although the other
2/3 portion of the loan obligation had not been satisfied due to insolvency of the other
two co-defendants.
To begin with, the prayer of the complaint filed with the respondent Court of First
Instance recites as follows:
"WHEREFORE, it is respectfully prayed that
judgment be rendered
"a) Ordering the defendants to pay the sum of
P147,434 with 10% interest per annum from the time it fell
due as agreed upon and that in default of such payment,
the above described properties be sold and the proceeds
of sale be applied to the payment of the amount due to the
plaintiff from the defendant under this complaint."
The complaint, in effect, is a collection suit with damages and foreclosure of mortgage
against the three defendants, Leonila Sumbillo, Reynaldo Angeles and VincentDayrit.
Although the Loan and Mortgage Agreement was signed by the three defendants as
mortgagors, the properties being foreclosed belong solely to, and are registered
solely in the name of, the petitioner Vincent Dayrit.
The pertinent dispositive portion of the decision rendered by the lower court reads:
"WHEREFORE, judgment is hereby rendered in
favor of the plaintiff and against the defendants
Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles,
ordering them to pay to the plaintiff one-third each of the
sum of P147,434 with interest of 10% per annum from the
time it fell due according to agreement, and in default of
such payment, the properties put up in collateral shall be
sold in foreclosure sale in accordance with law, the
proceeds to be applied in payment of the amount due to
the plaintiff from the defendants as claimed in the
complaint, provided that, as to Dayrit, his liability shall in
no case exceed 1/3 of the total obligation."
The petitioner contends that the said judgment is a simple money judgment and not
a foreclosure judgment, and that because the respondent Mobil resorted to the

remedy of enforcing his right by a complaint against the defendant-petitioner for

collection of a sum of money, with the consequent simple money judgment, the
satisfaction of his 1/3 share of the joint obligation would release all the mortgaged
properties put up as collateral to secure the payment of the whole obligation. The
reason advanced by the petitioner is that the decision rendered being a simple money
judgment and not a mortgage-foreclosure judgment, the distinction in its execution is
decisive, that is, whereas in mortgage foreclosure the judgment should conform to the
requirement, embodied in section 2, Rule 68 of the Rules of Court, that the order of
payment be made into the court "within a period not less than ninety (90) days . . . and
in default of such payment, the property mortgaged be sold to realize" the
indebtedness, in a simple money judgment, upon satisfaction of part in the instant
case his 1/3 share) of the joint obligation, the mortgaged properties should be
released from such mortgage contract.
This contention of the petitioner is clearly devoid of merit.
The decision which the petitioner describes as a simple money judgment orders the
defendants Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles to pay the
plaintiff the sum of P147,434, and in default of such payment, the properties put up in
collateral shall be sold in foreclosure sale in accordance with law, the proceeds to be
applied in payment of the amount due to the plaintiff from the defendants as claimed
in the complaint. While it is true that the obligation is merely joint and each of the
defendants is obliged to pay only his/her 1/3 share of the joint obligation, the
undisputed fact remains that the intent and purpose of the Loan and Mortgage
Agreement was to secure, inter alia, the entire loan of P150,000 that the respondent
Mobil extended to the defendants. The court below found that the defendants had
violated the Loan and Mortgage Agreement, they having paid but one installment. The
undisputed fact also remains that the petitioner alone benefited from the proceeds of
the loan of P150,000, the said amount having been paid directly to the Bank of the
Philippines to bail out the same properties from a mortgage that was about to be
foreclosed. In effect, Mobil merely stepped into the shoes of the Bank of the
Philippines.
The petitioner insists that the dispositive portion of the judgment declaring the
obligation merely joint with the proviso that "as to Dayrit, his liability shall in no case
exceed 1/3 of the total obligation," should be construed in the light of the opinion of
the lower court that "said collateral must answer in full but only to the extent ofDayrit's
liability which as above determined" is 1/3 of the obligation," thereby entitling him to
pay or deposit in court his corresponding share of the joint obligation in satisfaction
thereof, with the automatic release of all the mortgaged properties.
Page 354 of 505

A judgment must be distinguished from an opinion. The latter is the informal

expression of the views of the court and cannot prevail against its final order or
decision. "While the two may be combined in one instrument, the opinion forms no
part of the judgment. There is a distinction between the findings and conclusion of a
court and its judgment. While they may constitute its decision and amount to a
rendition of a judgment they are not the judgment itself. They amount to nothing more
than an order for judgment which must be distinguished from the judgment Only the
dispositive portion may be executed." 6

Besides, well-entrenched in law is the rule that a mortgage directly and immediately
subjects the property upon which it is imposed, 7 the same being indivisible even
though the debt may be divided, 8 and such indivisibility likewise being unaffected by
the fact that the debtors are not solidarily liable. 9 As Tolentino, in his Commentaries
and Jurisprudence on the Civil Code of the Philippines, 10 puts it
"When several things are pledged or mortgaged,
each thing for a determinate portion of the debt, the
pledges or mortgages are considered separate from each
other. But when the several things are given to secure the
same debt in its entirety, all of them are liable for the debt,
and the creditor does not have to divide his action by
distributing the debt among the various things pledged or
mortgaged. Even when only a part of the debt remains
unpaid, all the things are still liable for such balance.
Hence, a mortgage voluntarily constituted by the debtor on
two or more parcels of land is one and indivisible, and the
mortgagee has the right to have either or both parcels,
jointly or singly, sold to satisfy his claim. In case the
mortgaged properties are a house and lot, it can not be
claimed that the lot and the house should be sold
separately and not together."

payment, the properties put up in collateral shall be sold in foreclosure sale in

accordance with law, the proceeds to be applied in payment of the amount due to the
plaintiff as claimed in the complaint." And the claim in the complaint was the full
satisfaction of the total indebtedness of P147,434; therefore, the release of all the
mortgaged properties may be authorized only upon the full payment of the abovestated amount secured by the said mortgage.
With respect to the provisions of section 2 of Rule 68 of the Rules of Court giving the
petitioner a period of 90 days within which he might voluntarily pay the debt before the
sale of the collateral at public auction was ordered, we agree that the trial court failed
to provide such period. However, this failure can be regarded as having resulted in
mere damnum absque injuria. From November 17, 1967 when the decision was
rendered to May 23, 1968 when the final order to sell the mortgaged properties was
issued, a period of more than six months had passed, which is considerably much
more than the 90-day period of grace allowed the petitioner to validly tender the
proper payment.
ACCORDINGLY, the petition is denied, at petitioner's cost.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Teehankee, Barredo,
Villamor and Makasiar, JJ., concur.
Fernando, J., did not take part.
||| (Dayrit v. Court of Appeals, G.R. No. L-29388, [December 28, 1970], 146 PHIL
1032-1046)

But then there is this other seeming posture of the petitioner: that the judgment which
has become final and executory either modified or superseded the Loan and
Mortgage Agreement between the parties, and since the obligation is merely joint,
upon payment thereof, as in attachment, the properties mortgaged are released from
liability. The decision under consideration, however, did nothing of the sort. The
petitioner conveniently refuses to recognize the true import of the dispositive portion
of the judgment. The said portion unequivocally states that "in default of such
Page 355 of 505

Under a Real Estate Mortgage dated August 15, 1994 2 and Amendments of Real
Estate Mortgage dated April 4, 1995 3 and December 4, 1995, 4 spouses Vicente Yu
and Demetria Lee-Yu (petitioners) and spouses Ramon T. Yu and Virginia A. Tiu, or
Yu Tian Hock aka Victorino/Vicente Yu, mortgaged their title, interest, and
participation over several parcels of land located in Dagupan City and Quezon City, in
favor of the Philippine Commercial International Bank (respondent) as security for the
payment of a loan in the amount of P9,000,000.00. 5
As the petitioners failed to pay the loan, the interest, and the penalties due thereon,
respondent filed on July 21, 1998 with the Office of the Clerk of Court and Ex-Officio
Sheriff of the Regional Trial Court of Dagupan City a Petition for Extra-Judicial
Foreclosure of Real Estate Mortgage on the Dagupan City properties. 6 On August 3,
1998, the City Sheriff issued a Notice of Extra-Judicial Sale scheduling the auction
sale on September 10, 1998 at 10:00 o'clock in the morning or soon thereafter in front
of the Justice Hall, Bonuan, Tondaligan, Dagupan City. 7
At the auction sale on September 10, 1998, respondent emerged as the highest
bidder. 8 On September 14, 1998, a Certificate of Sale was issued in favor of
respondent.9 On October 1, 1998, the sale was registered with the Registry of Deeds
of Dagupan City.

FIRST DIVISION
[G.R. No. 147902. March 17, 2006.]
SPOUSES
VICENTE
YU
AND
YU, petitioners, vs.
PHILIPPINE
INTERNATIONAL BANK, respondent.

DEMETRIA
LEECOMMERCIAL

DECISION

AUSTRIA-MARTINEZ, J p:
Before the Court is a Petition for Review on Certiorari of the Decision 1 dated
November 14, 2000 of the Court of Appeals (CA) in CA-G.R. SP No. 58982 and the
CA Resolution dated April 26, 2001, which denied petitioner's Motion for
Reconsideration.
The factual background of the case is as follows:

About two months before the expiration of the redemption period, or on August 20,
1999, respondent filed an Ex-Parte Petition for Writ of Possession before the Regional
Trial Court of Dagupan City, docketed as Special Proceeding No. 99-00988-D and
raffled to Branch 43 (RTC Branch 43). 10 Hearing was conducted on September 14,
1999 and respondent presented its evidence ex-parte. 11 The testimony of Rodante
Manuel was admitted ex-parte and thereafter the petition was deemed submitted for
resolution. CAETcH
On September 30, 1999, petitioners filed a Motion to Dismiss and to Strike Out
Testimony of Rodante Manuel stating that the Certificate of Sale dated September 14,
1998 is void because respondent violated Article 2089 of the Civil Code on the
indivisibility of the mortgaged by conducting two separate foreclosure proceedings on
the mortgage properties in Dagupan City and Quezon City and indicating in the two
notices of extra-judicial sale that petitioners' obligation is P10,437,015.20 12 as of
March 31, 1998, when petitioners are not indebted for the total amount of
P20,874,031.56. 13
In the meantime, petitioners filed a complaint for Annulment of Certificate of Sale
before the Regional Trial Court of Dagupan City, docketed as Civil Case No. 9903169-D and raffled to Branch 44 (RTC Branch 44).
Page 356 of 505

On February 14, 2000, RTC Branch 43 denied petitioners' Motion to Dismiss and to
Strike Out Testimony of Rodante Manuel, ruling that the filing of a motion to dismiss is
not allowed in petitions for issuance of writ of possession under Section 7 of Act No.
3135. 14
On February 24, 2000, petitioners filed a Motion for Reconsideration, further arguing
that the pendency of Civil Case No. 99-03169-D in RTC Branch 44 is a prejudicial
issue to Spec. Proc. No. 99-00988-D in RTC Branch 43, the resolution of which is
determinative on the propriety of the issuance of a writ of possession. 15
On May 8, 2000, RTC Branch 43 denied petitioners' Motion for Reconsideration,
holding that the principle of prejudicial question is not applicable because the case
pending before RTC Branch 44 is also a civil case and not a criminal case. 16
On June 1, 2000, petitioners filed a Petition for Certiorari with the CA. 17 On
November 14, 2000, the CA dismissed petitioners' Petition for Certiorari on the
grounds that petitioners violated Section 8 of Act No. 3135 and disregarded the rule
against multiplicity of suits in filing Civil Case No. 99-03169-D in RTC Branch 44
despite full knowledge of the pendency of Spec. Proc. No. 99-00988-D in RTC Branch
43; that since the one-year period of redemption has already lapsed, the issuance of a
writ of possession in favor of respondent becomes a ministerial duty of the trial court;
that the issues in Civil Case No. 99-03169-D are not prejudicial questions to Spec.
Proc. No. 99-00988-D because: (a) the special proceeding is already fait accompli, (b)
Civil Case No. 99-03169-D is deemed not filed for being contrary to Section 8 of Act
No. 3135, (c) the filing of Civil Case No. 99-03169-D is an afterthought and dilatory in
nature, and (d) legally speaking what seems to exist is litis pendentia and not
prejudicial question. 18
Petitioners filed a Motion for Reconsideration 19 but it was denied by the CA on April
26, 2001. 20
Hence, the present Petition for Review on Certiorari.
Petitioners pose two issues for resolution, to wit:
A. Whether or not a real estate mortgage over several properties
located in different locality [sic] can be separately foreclosed in
different places.
B. Whether or not the pendency of a prejudicial issue renders the
issues in Special Proceedings No. 99-00988-D as [sic] moot and
academic. 21

Anent the first issue, petitioners contend that since a real estate mortgage is
indivisible, the mortgaged properties in Dagupan City and Quezon City cannot be
separately foreclosed. Petitioners further point out that two notices of extra-judicial
sale indicated that petitioners' obligation is P10,437,015.20 22 each as of March 31,
1998 or a total of P20,874,030.40, 23 yet their own computation yields only
P9,957,508.90 as of February 27, 1998.
As to the second issue, petitioners posit that the pendency of Civil Case No. 9903169-D is a prejudicial issue, the resolution of which will render the issues in Spec.
Proc. No. 99-00988-D moot and academic. Petitioners further aver that they did not
violate Section 8 of Act No. 3135 in filing a separate case to annul the certificate of
sale since the use of the word "may" in said provision indicates that they have the
option to seek relief of filing a petition to annul the certificate of sale in the proceeding
involving the application for a writ of possession or in a separate proceeding.
Respondent contends 24 that, with respect to the first issue, the filing of two separate
foreclosure proceedings did not violate Article 2089 of the Civil Code on the
indivisibility of a real estate mortgage since Section 2 of Act No. 3135 expressly
provides that extra-judicial foreclosure may only be made in the province or
municipality where the property is situated. Respondent further submits that the filing
of separate applications for extra-judicial foreclosure of mortgage involving several
properties in different locations is allowed by A.M. No. 99-10-05-0, the Procedure on
Extra-Judicial Foreclosure of Mortgage, as further amended on August 7,
2001. DTcACa
As to the second issue, respondent maintains that there is no prejudicial question
between Civil Case No. 99-03169-D and Spec. Proc. No. 99-00988-D since the
pendency of a civil action questioning the validity of the mortgage and the extrajudicial foreclosure thereof does not bar the issuance of a writ of possession.
Respondent also insists that petitioners should have filed their Petition to Annul the
Certificate of Sale in the same case where possession is being sought, that is, in
Spec. Proc. No. 99-00988-D, and not in a separate proceeding (Civil Case No. 9901369-D) because the venue of the action to question the validity of the foreclosure is
not discretionary since the use of the word "may" in Section 8 of Act No. 3135 refers
to the filing of the petition or action itself and not to the venue. Respondent further
argues that even if petitioners filed the Petition to Annul the Certificate of Sale in
Spec. Proc. No. 99-00988-D, the writ of possession must still be issued because
issuance of the writ in favor of the purchaser is a ministerial act of the trial court and
the one-year period of redemption has already lapsed.

Page 357 of 505

Anent the first issue, the Court finds that petitioners have a mistaken notion that the
indivisibility of a real estate mortgage relates to the venue of extra-judicial foreclosure
proceedings. The rule on indivisibility of a real estate mortgage is provided for in
Article 2089 of the Civil Code, which provides:
Art. 2089. A pledge or mortgage is indivisible, even though the
debt may be divided among the successors in interest of the
debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt
cannot ask for the proportionate extinguishment of the pledge or
mortgage as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt
return the pledge or cancel the mortgage, to the prejudice of the
other heirs who have not been paid.
From these provisions is excepted the case in which, there being
several things given in mortgage or pledge, each one of them
guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment
of the pledge or mortgage as the portion of the debt for which
each thing is specially answerable is satisfied.
This rule presupposes several heirs of the debtor or creditor 25 and therefore not
applicable to the present case. Furthermore, what the law proscribes is the
foreclosure of only a portion of the property or a number of the several properties
mortgaged corresponding to the unpaid portion of the debt where, before
foreclosure proceedings, partial payment was made by the debtor on his total
outstanding loan or obligation. This also means that the debtor cannot ask for the
release of any portion of the mortgaged property or of one or some of the several
lots mortgaged unless and until the loan thus secured has been fully paid,
notwithstanding the fact that there has been partial fulfillment of the obligation.
Hence, it is provided that the debtor who has paid a part of the debt cannot ask
for the proportionate extinguishment of the mortgage as long as the debt is not
completely satisfied. 26 In essence, indivisibility means that the mortgage
obligation cannot be divided among the different lots, 27 that is, each and every
parcel under mortgage answers for the totality of the debt. 28

On the other hand, the venue of the extra-judicial foreclosure proceedings is the place
where each of the mortgaged property is located, as prescribed by Section 2 ofAct
No. 3135, 29 to wit:
SECTION 2. Said sale cannot be made legally outside of the
province in which the property sold is situated; and in case the
place within said province in which the sale is to be made is
subject to stipulation, such sale shall be made in said place or in
the municipal building of the municipality in which the property or
part thereof is situated. ETCcSa
A.M. No. 99-10-05-0, 30 the Procedure on Extra-Judicial Foreclosure of Mortgage,
lays down the guidelines for extra-judicial foreclosure proceedings on mortgaged
properties located in different provinces. It provides that the venue of the extra-judicial
foreclosure proceedings is the place where each of the mortgaged property is located.
Relevant portion thereof provides:
Where the application concerns the extrajudicial foreclosure of
mortgages of real estates and/or chattels in different locations
covering one indebtedness, only one filing fee corresponding to
such indebtedness shall be collected. The collecting Clerk of
Court shall, apart from the official receipt of the fees, issue a
certificate of payment indicating the amount of indebtedness, the
filing fees collected, the mortgages sought to be foreclosed, the
real estates and/or chattels mortgaged and their respective
locations, which certificate shall serve the purpose of having
the application docketed with the Clerks of Court of the
places where the other properties are located and of
allowing the extrajudicial foreclosures to proceed thereat.
(Emphasis supplied)
The indivisibility of the real estate mortgage is not violated by conducting two separate
foreclosure proceedings on mortgaged properties located in different provinces as
long as each parcel of land is answerable for the entire debt. Petitioners' assumption
that their total obligation is P20,874,030.40 because the two notices of extra-judicial
sale indicated that petitioners' obligation is P10,437,015.20 31 each, is therefore
flawed. Considering the indivisibility of a real estate mortgage, the mortgaged
properties in Dagupan City and Quezon City are made to answer for the entire debt of
P10,437,015.29. 32

Page 358 of 505

As to the second issue, that is, whether a civil case for annulment of a certificate of
sale is a prejudicial question to a petition for issuance of a writ of possession, this
issue is far from novel and, in fact, not without precedence. In Pahang v. Vestil, 33 the
Court said:
A prejudicial question is one that arises in a case the resolution of
which is a logical antecedent of the issue involved therein, and
the cognizance of which pertains to another tribunal. It generally
comes into play in a situation where a civil action and a criminal
action are both pending and there exists in the former an issue
that must be preemptively resolved before the criminal action may
proceed, because howsoever the issue raised in the civil action is
resolved would be determinative juris et de jure of the guilt or
innocence of the accused in the criminal case. The rationale
behind the principle of prejudicial question is to avoid two
conflicting decisions.
In the present case, the complaint of the petitioners for
Annulment of Extrajudicial Sale is a civil action and the
respondent's petition for the issuance of a writ of possession of
Lot No. 3-A, Block 1, Psd-07-021410, TCT No. 44668 is but an
incident in the land registration case and, therefore, no prejudicial
question can arise from the existence of the two actions. A similar
issue was raised in Manalo v. Court of Appeals, where we held
that:
At any rate, it taxes our imagination why the questions
raised in Case No. 98-0868 must be considered
determinative of Case No. 9011. The basic issue in the
former is whether the respondent, as the purchaser in
the extrajudicial foreclosure proceedings, may be
compelled to have the property repurchased or resold to
a mortgagor's successor-in-interest (petitioner); while
that in the latter is merely whether the respondent, as
the purchaser in the extrajudicial foreclosure
proceedings, is entitled to a writ of possession after the
statutory period for redemption has expired. The two
cases, assuming both are pending, can proceed
separately and take their own direction independent of
each other. 34

In the present case, Civil Case No. 99-01369-D and Spec. Proc. No. 99-00988-D are
both civil in nature. The issue in Civil Case No. 99-01369-D is whether the extrajudicial foreclosure of the real estate mortgage executed by the petitioners in favor of
the respondent and the sale of their properties at public auction are null and void,
whereas, the issue in Spec. Proc. No. 99-00988-D is whether the respondent is
entitled to a writ of possession of the foreclosed properties. Clearly, no prejudicial
question can arise from the existence of the two actions. The two cases can proceed
separately and take their own direction independently of each other. CHaDIT
Nevertheless, there is a need to correct the CA's view that petitioners violated Section
8 of Act No. 3135 and disregarded the proscription on multiplicity of suits by instituting
a separate civil suit for annulment of the certificate of sale while there is a pending
petition for issuance of the writ of possession in a special proceeding.
Section 8 of Act No. 3135 provides:
Sec. 8. Setting aside of sale and writ of possession. The
debtor may, in the proceedings in which possession was
requested, but not later than thirty days after the purchaser
was given possession, petition that the sale be set aside and
the writ of possession cancelled, specifying the damages
suffered by him, because the mortgage was not violated or the
sale was not made in accordance with the provisions hereof, and
the court shall take cognizance of this petition in accordance with
the summary procedure provided for in section one hundred and
twelve of Act Numbered Four hundred and ninety-six; and if it
finds the complaint of the debtor justified, it shall dispose in his
favor of all or part of the bond furnished by the person who
obtained possession. Either of the parties may appeal from the
order of the judge in accordance with section fourteen of Act
Numbered Four hundred and ninety-six; but the order of
possession shall continue in effect during the pendency of the
appeal. (Emphasis supplied)
Under the provision above cited, the mortgagor may file a petition to set aside the sale
and for the cancellation of a writ of possession with the trial court which issued the
writ of possession within 30 days after the purchaser mortgagee was given
possession. It provides the plain, speedy, and adequate remedy in opposing the
issuance of a writ of possession. 35 Thus, this provision presupposes that the trial
court already issued a writ of possession. In Sps. Ong v. Court of Appeals, 36 the
Court elucidated:
Page 359 of 505

The law is clear that the purchaser must first be placed in

possession of the mortgaged property pending proceedings
assailing the issuance of the writ of possession. If the trial court
later finds merit in the petition to set aside the writ of possession,
it shall dispose in favor of the mortgagor the bond furnished by
the purchaser. Thereafter, either party may appeal from the order
of the judge in accordance with Section 14 of Act 496, which
provides that "every order, decision, and decree of the Court of
Land Registration may be reviewed . . . in the same manner as
an order, decision, decree or judgment of a Court of First
Instance (RTC) might be reviewed." The rationale for the
mandate is to allow the purchaser to have possession of the
foreclosed property without delay, such possession being
founded on his right of ownership. 37
Accordingly, Section 8 of Act No. 3135 is not applicable to the present case since at
the time of the filing of the separate civil suit for annulment of the certificate of sale in
RTC Branch 44, no writ of possession was yet issued by RTC Branch 43.
Similarly, the Court rejects the CA's application of the principle of litis pendentia to
Civil Case No. 99-03169-D in relation to Spec. Proc. No. 99-00988-D. Litis
pendentiarefers to that situation wherein another action is pending between the same
parties for the same cause of actions and that the second action becomes
unnecessary and vexatious. For litis pendentia to be invoked, the concurrence of the
following requisites is necessary: (a) identity of parties or at least such as represent
the same interest in both actions; (b) identity of rights asserted and reliefs prayed for,
the reliefs being founded on the same facts; and, (c) the identity in the two cases
should be such that the judgment that may be rendered in one would, regardless of
which party is successful, amount to res judicata in the other. 38

properties located in different provinces since these are two unrelated concepts. Also,
no prejudicial question can arise from the existence of a civil case for annulment of a
certificate of sale and a petition for the issuance of a writ of possession in a special
proceeding since the two cases are both civil in nature which can proceed separately
and take their own direction independently of each other. STcEIC

Furthermore, since the one-year period to redeem the foreclosed properties lapsed on
October 1, 1999, title to the foreclosed properties had already been consolidated
under the name of the respondent. As the owner of the properties, respondent is
entitled to its possession as a matter of right. 40 The issuance of a writ of possession
over the properties by the trial court is merely a ministerial function. As such, the trial
court neither exercises its official discretion nor judgment. 41 Any question regarding
the validity of the mortgage or its foreclosure cannot be a legal ground for refusing the
issuance of a writ of possession. 42 Regardless of the pending suit for annulment of
the certificate of sale, respondent is entitled to a writ of possession, without prejudice
of course to the eventual outcome of said case. 43
WHEREFORE, the petition is DENIED.
SO ORDERED.
||| (Spouses Yu v. Philippine Commercial International Bank, G.R. No. 147902, [March
17, 2006], 519 PHIL 740-757)

Applying the foregoing criteria in the instant case, litis pendentia does not obtain in
this case because of the absence of the second and third requisites. The issuance of
the writ of possession being a ministerial function, and summary in nature, it cannot
be said to be a judgment on the merits, but simply an incident in the transfer of title.
Hence, a separate case for annulment of mortgage and foreclosure sale cannot be
barred by litis pendentia or res judicata. 39 Thus, insofar as Spec. Proc. No. 9900988-D and Civil Case No. 99-03169-D pending before different branches of RTC
Dagupan City are concerned, there is no litis pendentia.
To sum up, the Court holds that the rule on indivisibility of the real estate mortgage
cannot be equated with the venue of foreclosure proceedings on mortgaged
Page 360 of 505

the pledge was made without his knowledge and consent. Petitioner, on the other
hand, alleged that the tractor was validly pledged to him by respondent's son to
answer for his financial obligations. In the alternative, petitioner asserted that the
tractor was left with him in the concept of an innkeeper, on deposit. The trial court
rendered judgment in favor of private respondent. The same was affirmed on appeal
by the Court of Appeals. Hence, this recourse. TcCEDS
In a contract of pledge, the creditor is given the right to retain his debtor's movable
property in his possession, or that of a third person to whom it has been delivered. It
does not apply where, as in this case, the lessee is not the owner of the property. In
deposit, a person receives an object belonging to another with the obligation of safely
keeping it and of returning the same. There is no deposit where the principal purpose
for receiving the object is not for safekeeping.
DECISION
QUISUMBING, J p:
PLEDGE

SECOND DIVISION
[G.R. No. 120528. January 29, 2001.]
ATTY. DIONISIO CALIBO, JR., petitioner, vs. COURT OF
APPEALS and DR. PABLO U. ABELLA, respondents.

Dionisio A. Calibo, Jr. in his own behalf.

Delfin M. Quijano for private respondent.

SYNOPSIS
A tractor owned by private respondent was offered by Mike Abella, his son, as security
in the payment of his rents in arrears with petitioner who took possession thereof. This
tractor became the subject of a suit for replevin with private respondent alleging that

Before us is the petition for review on certiorari by petitioner Dionisio Calibo, Jr.,
assailing the decision of the Court of Appeals in CA-G.R. CV No. 39705, which
affirmed the decision of the Regional Trial Court of Cebu, Branch 11, declaring private
respondent as the lawful possessor of a tractor subject of a replevin suit and ordering
petitioner to pay private respondent actual damages and attorney's fees.
The facts of the case, as summarized by respondent court, are undisputed.
". . . on January 25, 1979, plaintiff-appellee [herein petitioner]
Pablo U. Abella purchased an MF 210 agricultural tractor with
Serial No. 00105 and Engine No. P126M00199 (Exhibit A;
Record, p. 5) which he used in his farm in Dagohoy, Bohol.
Sometime in October or November 1985, Pablo Abella's son,
Mike Abella rented for residential purposes the house of
defendant-appellant Dionisio R. Calibo, Jr., in Tagbilaran City.
In October 1986, Pablo Abella pulled out his aforementioned
tractor from his farm in Dagohoy, Bohol, and left it in the
safekeeping of his son, Mike Abella, in Tagbilaran City. Mike kept
the tractor in the garage of the house he was leasing from Calibo.
Since he started renting Calibo's house, Mike had been
religiously paying the monthly rentals therefor, but beginning
November of 1986, he stopped doing so. The following month,
Page 361 of 505

Calibo learned that Mike had never paid the charges for electric
and water consumption in the leased premises which the latter
was duty-bound to shoulder. Thus, Calibo confronted Mike about
his rental arrears and the unpaid electric and water bills. During
this confrontation, Mike informed Calibo that he (Mike) would be
staying in the leased property only until the end of December
1986. Mike also assured Calibo that he would be settling his
account with the latter, offering the tractor as security. Mike even
asked Calibo to help him find a buyer for the tractor so he could
sooner pay his outstanding obligation.
In January 1987 when a new tenant moved into the house
formerly leased to Mike, Calibo had the tractor moved to the
garage of his father's house, also in Tagbilaran City.
Apprehensive over Mike's unsettled account, Calibo visited him in
his Cebu City address in January, February and March, 1987 and
tried to collect payment. On all three occasions, Calibo was
unable to talk to Mike as the latter was reportedly out of town. On
his third trip to Cebu City, Calibo left word with the occupants of
the Abella residence thereat that there was a prospective buyer
for the tractor. The following week, Mike saw Calibo in Tagbilaran
City to inquire about the possible tractor buyer. The sale,
however, did not push through as the buyer did not come back
anymore. When again confronted with his outstanding obligation,
Mike reassured Calibo that the tractor would stand as a
guarantee for its payment. That was the last time Calibo saw or
heard from Mike.
After a long while, or on November 22, 1988, Mike's father, Pablo
Abella, came to Tagbilaran City to claim and take possession of
the tractor. Calibo, however, informed Pablo that Mike left the
tractor with him as security for the payment of Mike's obligation to
him. Pablo offered to write Mike a check for P2,000.00 in
payment of Mike's unpaid lease rentals, in addition to issuing
postdated checks to cover the unpaid electric and water bills the
correctness of which Pablo said he still had to verify with Mike.
Calibo told Pablo that he would accept the P2,000.00-check only
if the latter would execute a promissory note in his favor to cover
the amount of the unpaid electric and water bills. Pablo was not
amenable to this proposal. The two of them having failed to come

to an agreement, Pablo left and went back to Cebu City,

unsuccessful in his attempt to take possession of the tractor." 1
On November 25, 1988, private respondent instituted an action for replevin, claiming
ownership of the tractor and seeking to recover possession thereof from petitioner. As
adverted to above, the trial court ruled in favor of private respondent; so did the Court
of Appeals when petitioner appealed. ICTacD
The Court of Appeals sustained the ruling of the trial court that Mike Abella could not
have validly pledged the subject tractor to petitioner since he was not the owner
thereof, nor was he authorized by its owner to pledge the tractor. Respondent court
also rejected petitioner's contention that, if not a pledge, then a deposit was created.
The Court of Appeals said that under the Civil Code, the primary purpose of a deposit
is only safekeeping and not, as in this case, securing payment of a debt.
The Court of Appeals reduced the amount of actual damages payable to private
respondent, deducting therefrom the cost of transporting the tractor from Tagbilaran,
Bohol, to Cebu City.
Hence, this petition.
Essentially, petitioner claims that the tractor in question was validly pledged to him by
private respondent's son Mike Abella to answer for the latter's monetary obligations to
petitioner. In the alternative, petitioner asserts that the tractor was left with him, in the
concept of an innkeeper, on deposit and that he may validly hold on thereto until Mike
Abella pays his obligations.
Petitioner maintains that even if Mike Abella were not the owner of the tractor, a
principal-agent relationship may be implied between Mike Abella and private
respondent. He contends that the latter failed to repudiate the alleged agency,
knowing that his son is acting on his behalf without authority when he pledged the
tractor to petitioner. Petitioner argues that, under Article 1911 of the Civil Code,
private respondent is bound by the pledge, even if it were beyond the authority of his
son to pledge the tractor, since he allowed his son to act as though he had full
powers.
On the other hand, private respondent asserts that respondent court had correctly
ruled on the matter.
In a contract of pledge, the creditor is given the right to retain his debtor's movable
property in his possession, or in that of a third person to whom it has been delivered,
until the debt is paid. For the contract to be valid, it is necessary that: (1) the pledge is
constituted to secure the fulfillment of a principal obligation; (2) the pledgor be the
Page 362 of 505

absolute owner of the thing pledged; and (3) the person constituting the pledge has
the free disposal of his property, and in the absence thereof, that he be legally
authorized for the purpose. 2
As found by the trial court and affirmed by respondent court, the pledgor in this case,
Mike Abella, was not the absolute owner of the tractor that was allegedly pledged to
petitioner. The tractor was owned by his father, private respondent, who left the
equipment with him for safekeeping. Clearly, the second requisite for a valid pledge,
that the pledgor be the absolute owner of the property, is absent in this case. Hence,
there is no valid pledge.

"He who is not the owner or proprietor of the property pledged or

mortgaged to guarantee the fulfillment of a principal obligation,
cannot legally constitute such a guaranty as may validly bind the
property in favor of his creditor, and the pledgee or mortgagee in
such a case acquires no right whatsoever in the property pledged
or mortgaged." 3
There also does not appear to be any agency in this case. We agree with the Court of
Appeals that:

There is likewise no valid deposit in this case. In a contract of deposit, a person

receives an object belonging to another with the obligation of safely keeping it and of
returning the same. 5 Petitioner himself states that he received the tractor not to safely
keep it but as a form of security for the payment of Mike Abella's obligations. There is
no deposit where the principal purpose for receiving the object is not safekeeping. 6
Consequently, petitioner had no right to refuse delivery of the tractor to its lawful
owner. On the other hand, private respondent, as owner, had every right to seek to
repossess the tractor, including the institution of the instant action for replevin.
We do not here pass upon the other assignment of errors made by petitioner
concerning alleged irregularities in the raffle and disposition of the case at the trial
court. A petition for review on certiorari is not the proper vehicle for such allegations.
WHEREFORE, the instant petition is DENIED for lack of merit, and the decision of the
Court of Appeals in CA-G.R. CV No. 39705 is AFFIRMED. Costs against petitioner.
SO ORDERED.
Bellosillo, Mendoza, Buena and De Leon, Jr., JJ., concur.
||| (Calibo, Jr. v. Court of Appeals, G.R. No. 120528, [January 29, 2001], 403 PHIL
340-346)

"As indicated in Article 1869, for an agency relationship to be

deemed as implied, the principal must know that another person
is acting on his behalf without authority. Here, appellee
categorically stated that the only purpose for his leaving the
subject tractor in the care and custody of Mike Abella was for
safekeeping, and definitely not for him to pledge or alienate the
same. If it were true that Mike pledged appellee's tractor to
appellant, then Mike was acting not only without appellee's
authority but without the latter's knowledge as well.
Article 1911, on the other hand, mandates that the principal is
solidarily liable with the agent if the former allowed the latter to
act as though he had full powers. Again, in view of appellee's lack
of knowledge of Mike's pledging the tractor without any authority
from him, it stands to reason that the former could not have
allowed the latter to pledge the tractor as if he had full powers to
do so." 4

Page 363 of 505

executed in conformity with the Chattel Mortgage Law and has not been
recorded, is of no effect as against parties.
2. PLEDGE; EFFECT AS AGAINST THIRD PARTIES; EVIDENCE OF
DATE MUST APPEAR IN PUBLIC INSTRUMENT. A pledge is not effective as
against third parties unless evidence of its date appears in a public instrument.
3. DOCUMENT OF PLEDGE; FILING WITH SHERIFF CREATES NO
SUPERIOR TO A PREVIOUS ATTACHMENT. The filing of a private document
of pledge with the sheriff after the levy of execution does not create a lien
superior to that of the attachment.
4. PLEDGE; POSSESSION OF PROPERTY. The delivery of
possession referred to in article 1863 of the Civil Code and essential to the
validity of a pledge means actual possession of the property pledged and a mere
symbolic delivery is not sufficient.

DECISION

EN BANC
[G.R. No. 24137. March 29, 1926.]
EULOGIO BETITA, plaintiff-appellee, vs.
SIMEON GANZON,
ALEJO DE LA FLOR, and CLEMENTE PEDREA, defendantsappellants.

Padilla, Trefias & Magalona for appellants.

Varela & Ybiernas for appellee.

SYLLABUS
1. UNRECORDED CHATTEL MORTGAGE; EFFECT AS AGAIN THIRD
PARTIES. A document purporting to be a chattel mortgage, but which is not

OSTRAND, J p:
This action is brought to recover the possession of four carabaos with
damages in the sum of P200. Briefly stated the facts are as follows: On May 15,
1924, the defendant Alejo de la Flor recovered a judgment against Tiburcia
Buhayan for the sum of P140 with costs. Under this judgment the
defendant Ganzon, as sheriff, levied execution on the carabaos in question which
were found in the possession of one Simon Jacinto but registered in the named
Tiburcia Buhayan. The plaintiff herein, Eulogio Betita presented a third party
claim (terceria) alleging that the carabaos had been mortgaged to him and as
evidence thereof presented a document dated May 6, 1924, but the sheriff
proceeded with the sale of the animals at public auction where they were
purchased by the defendant Clemente Pedrea for the sum of P200, and this
action thereupon brought.
The document upon which the plaintiff bases his cause of action is in
the Visayan dialect and in translation reads as follows:
"I, Tiburcia Buhayan, of age, widow and resident of
the sitio of Jimamanay, municipality of Balasan, Province of Iloilo,
Page 364 of 505

Philippine Islands, do hereby execute this document

extrajudicially and state that I am indebted to Mr. Eulogio Betita,
resident of the municipality of Estancia, Province of Iloilo,
Philippine Islands, in the sum of P470, Philippine currency, and
was so indebted since the year 1922, and as a security to my
creditor I hereby offer four head of carabaos belonging to me
exclusively (three females and one male), the certificates of
registration of said animals being Nos. 2832851, 4670520,
4670521 and 4670522, which I have delivered to said Mr.
Eulogio Betita.
"I hereby promise to pay said debt in the coming month
of February, 1925; in case I will not be able to pay, Mr.
Eulogio Betita may dispose of the carabaos given as security for
said debt.
"This document is a new one or a renewal of our former
document because the first carabaos mortgaged died and were
substituted for by the newly branded ones.
"In testimony whereof and not knowing how to sign my
name, I caused my name to be written and marked same with my
right thumb.
"Estancia, May 6, 1924.
(Marked). "TIBURCIA BUHAYAN
"Signed in the presence of:
"MIGUEL MERCURIO
"TIRZO ZEPEDA"
The court below held that inasmuch as this document was prior in date
to the judgment under which the execution was levied, it was a preferred credit
and judgment was rendered in favor of the plaintiff for the possession of the
carabaos, without damages and without costs. From this judgment the
defendants appeal.
The judgment must be reversed unless the document above quoted can
be considered either a chattel mortgage or else a pledge. That it is not a
sufficient chattel mortgage is evident; it does not meet the requirements of
section 5 of the Chattel Mortgage Law (Act No-1508), has not been recorded
and, considered as a chattel mortgage, is consequently of no effect as against

third parties (William vs. McMicking, 17 Phil., 408; Giberson vs. A. N. Jureidini
Bros., 44 Phil., 216; Benedicto de Tarrosa vs. F. M. Yap Tico & Co. and Provincial
Sheriff of Occidental Negros, 46 Phil., 753).
Neither did the document constitute a sufficient pledge of the property
valid against third parties. Article 1865 of the Civil Code provides that "no pledge
shall be effective as against third parties unless evidence of its date appears in a
public instrument." The document in question is not in public, but it is suggested
that its filing with the sheriff in connection with the terceria gave it the effect of a
public instrument and served to fix the date of the pledge, and that it therefore
fulfills the requirements of article 1865. Assuming, without conceding, that the
filing of the document with the sheriff had that effect, it seems nevertheless
obvious that the pledge only became effective as against the plaintiff in execution
from the date of the filing and did not rise superior to the execution attachment
previously levied (see Civil Code, article 1227).
Manresa, in commenting on article 1865, says:
"ART. 1865. A pledge will not be valid against a third
party if the certainty of the date is not expressed in a public
instrument.
"This article, the precept of which did not exist in our old
law, answers the necessity for not disturbing the relationship or
the status of the ownership of things with hidden or simulated
contracts of pledge, in the same way and for the identical reasons
that were taken into account by the mortgage law in order to
suppress the implied and legal mortgages which produce so
much instability in real property.
"Considering the effects of a contract of pledge, it is
easily understood that, without this warranty demanded by law,
the case may happen wherein a debtor in bad faith from the
moment that he sees his movable property in danger of execution
may attempt to withdraw the same from the action of justice and
the reach of his creditors by stimulating, through criminal
confabulations, anterior and fraudulent alterations in his
possession by means of feigned contracts of this nature; and,
with the object of avoiding or preventing such abuses, almost all
the foreign writers advise that, for the effectiveness of the pledge,
it be demanded as a precise condition that in every case the
contract be executed in a public writing, for otherwise, the
Page 365 of 505

determination of its date will be rendered difficult and its proof

more so, even in cases in which it is executed before witnesses,
due to the difficulty to be encountered in seeking those before
whom it was executed.
"Our code has not gone so far, for it does not demand in
express terms that in all cases the pledge be constituted or
formalized in a public writing, nor even in private document, but
only that the certainty of the date be expressed in the first of the
said class of instruments in order that it may be valid against a
third party; and, in default of any express provision of law, in the
cases where no agreement requiring the execution in a public
writing exists, it should be subjected to the general rule, and
especially to that established in the last paragraph of article 1280,
according to which all contracts not included in the foregoing
cases of the said article should be made in writing even though it
be private, whenever the amount of the prestation of one or of the
two contracting parties exceeds 1,500 pesetas." (Vol. 12, 2d ed.,
p. 421.)
If the mere filing of a private document with the sheriff after the levy of
execution can create a lien of pledge superior to the attachment, the purpose of
the provision Article 1865 as explained by Manresa would clearly be defeated.
Such could not have been the intention of the authors of the code. (See also
Ocejo, Perez & Co. vs. International Banking Corporation, 37 Phil., 631, and Bi &
Co. vs. Chartered Bank of India, Australia & China, 41 Phil., 596.)
The alleged pledge is also ineffective for another reason, namely, that
the plaintiff pledge never had actual possession of the property within the
meaning of article 1863 of the Civil Code. But it is argued that at the time of the
levy the animals in question were in the possession of one Simon Jacinto ;- that
Jacinto was the plaintiff's tenant; and that the tenant's possession was the
possession of his landlord.
It appears, however, from the evidence that though not legally married,
Simon Jacinto and Tiburcia Buhayan were living together as husband and wife
and had been so living for many years. Testifying as a witness for the
plaintiff, Jacinto on cross-examination made the following statements:
"Q. But the caraballas in question had never been possession of
Eulogio Betita? A. The three young ones did not get
into his hands.

"Q. And the others?. A. Sometimes they were in hands

of Betita and at other times in the hands of Buhayan.
"Q. Those are the caraballas which formerly were mortgaged by
Buhayan to Betita, isn't that so? A Yes, sir.
"Q. And the four carabaos now in question had never been in
possession of Betita, but were in your possession? A
When I worked they were in my hands.
"Q. And before you worked, these caraballas were in possession
of your mistress, Tiburcia Buhayan? A. Yes sir.
"Q. Do you mean to say that from the possession of Tiburcia
Buhayan the animals passed immediately into your
possession? A. Yes sir."
This testimony is substantially in accord with that of the defendant sheriff
to the effect that he found the animals at the place where Tiburcia Buhayan was
living. Article 1863 of the Civil Code reads as follows:
"In addition to the requisites mentioned in article 1857, it
shall be necessary, in order to constitute the contract of pledge,
that the pledge be placed in the possession of the creditor or of a
third person appointed- by common consent."

In his commentary on this article Manresa says:

This requisite is most essential and is characteristic of a
pledge without which the contract cannot be regarded as entered
into or completed, because, precisely, in this delivery lies the
security of the pledge. Therefore, in order that the contract of
pledge may be complete, it is indispensable that the aforesaid
delivery take place . . . (P. 411, supra.)
It is, of course, evident that the delivery of possession referred to in
article 1863 implies a change in the actual possession of the property pledged
and that a mere symbolic delivery is not sufficient. In the present case the
animals in question were in the possession of Tiburcia Buhayan and Simon
Jacinto before the alleged pledge was entered into and apparently remained with
them until the execution was levied, and there was no actual delivery of
possession to the plaintiff himself. There was therefore in reality no change in
possession.
Page 366 of 505

It may further be noted that the alleged relation of landlord and tenant
between the plaintiff and Simon Jacinto is somewhat obscure and it is, perhaps,
doubtful if any tenancy, properly speaking, existed. The land cultivated by Jacinto
was not the property of the plaintiff, but it appears that a part of the products was
to be applied towards the payment of Tiburcia Buhayan's debt to plaintiff. Jacinto
states that he was not a tenant until after the pledge was made.
From what has been said it follows that the judgment appealed from
must be reversed and it is ordered and adjudged that the plaintiff take nothing by
his action. Without costs. So ordered.
Avancea, C.J., Street, Villamor, Johns, Romualdez and Villa-Real,
JJ., concur.
Malcolm, J., concurs in the result.
||| (Betita v. Ganzon, G.R. No. 24137, [March 29, 1926], 49 PHIL 87-94)

SECOND DIVISION
[G.R. No. L-33157. June 29, 1982.]
BENITO
H. LOPEZ, petitioner, vs. THE COURT OF APPEALS and THE
PHILIPPINE AMERICAN GENERAL INSURANCE CO.,
INC., respondents.

On June 2, 1959, petitioner obtained a loan of P20,000.00 from

Prudential Bank payable in one year with an interest of 10% per annum.
Petitioner posted a surety bond to secure his full and faithful performance of his
obligation under the promissory now with the Philippine American Insurance
Company (Philamgen) as his surety. In return for the undertaking of Philamgen
under the surety bond, petitioner executed on the same day an indemnity
agreement and a deed of assignment of shares of stock in favor of the said
company, endorsing in blank and delivering the stock certificate to the latter. The
assignment of shares was made due to a commitment made by determinate third
parties to the surety that in case petitioner defaults in payment said third parties
would buy the shares from the surety and the proceeds will be paid to the bank.
When the obligation became due, and petitioner failed to pay, Philamgen paid the
loan and subsequently sued petitioner for reimbursement. The trial court after
hearing dismissed the complaint finding that the transfer of stock in the name of
Philamgen was absolute and had extinguished petitioner's obligation under the
indemnity agreement. On appeal, the Court of Appeals held that the stock
assignment made in favor of the surety was a pledge, intended as a security for
the payment of the obligation of petitioner to the surety. In this petition for review,
petitioner claims that the transfer of shares was a dacion en pago; and that there
was novation of the indemnity contract when the surety and the determinate third
parties agreed that the latter would buy the shares of stock from the former so
that the bank obligations of petitioner could be paid from the proceeds.
The Supreme Court held that considering that the indemnity agreement
connotes a continuing obligation of petitioner towards the surety while the stock
assignment indicates a complete discharge of the same obligation, the existence
of the indemnity agreement is inconsistent with the theory of an absolute sale for
and in consideration of the same undertaking of the surety, and strong and
cogent reasons exist to conclude that the surety and petitioner intended the stock
assignment as a pledge; that the assignment of stock is not a dation in payment
since the obligation of the petitioner towards the surety has not matured at the
time the same was executed; and that there was no novation of the obligation by
substitution of debtor since it was not established nor shown that petitioner would
be released from responsibility.
Appealed decision AFFIRMED in toto.

SYNOPSIS
DECISION
Page 367 of 505

GUERRERO, J p:
On June 2, 1959, petitioner Benito H. Lopez obtained a loan in
the amount of P20,000.00 from the Prudential Bank and Trust Company.
On the same date, he executed a promissory note for the same amount, in
favor of the said Bank, binding himself to repay the said sum one (1) year
after the said date, with interest at the rate of 10% per annum. In addition
to said promissory note, he executed Surety Bond No. 14164 in which he,
as principal, and Philippine American General Insurance Co., Inc.
(PHILAMGEN) as surety, bound themselves jointly and severally in favor
of Prudential Bank for the payment of the sum of P20,000.00.
On the same occasion, Lopez also executed in favor of
Philamgen an indemnity agreement whereby he agreed "to indemnify the
Company and keep it indemnified and hold the same harmless from and
against any and all damages, losses, costs, stamps, taxes, penalties,
charges and expenses of whatever kind and nature which the Company
shall or may at any time sustain or incur in consequence of having
become surety upon the bond." 1 At the same time, Lopezexecuted a
deed of assignment of 4,000 shares of the Baguio Military Institution
entitled "Stock Assignment Separate from Certificate", which reads:
"This deed of assignment executed by BENITO
H. LOPEZ, Filipino, of legal age, married and with
residence and postal address at Baguio City, Philippines,
now and hereinafter called the 'ASSIGNOR', in favor of the
PHILIPPINE AMERICAN GENERAL INSURANCE CO.,
INC., a corporation duly organized and existing under and
by virtue of the laws of the Philippines, with principal
offices at Wilson Building, Juan Luna, Manila, Philippines,
now and hereinafter called the 'ASSIGNEE-SURETY
COMPANY'
WITNESSETH
"That for and in consideration of the obligations
undertaken by the ASSIGNEE-SURETY COMPANY under
the terms and conditions of SURETY BOND NO. 14164,
issued on behalf of said BENITO H. LOPEZ and in favor of
the PRUDENTIAL BANK & TRUST COMPANY, Manila,
Philippines, in the amount of PESOS TWENTY
THOUSAND ONLY (P20,000.00), Philippine Currency,

and for value received, the ASSIGNOR hereby sells,

assigns, and transfers unto THE PHILIPPINE AMERICAN
GENERAL INSURANCE CO., INC., Four Thousand
(4,000) shares of the Baguio Military Institute, Inc.
standing in the name of said Assignor on the books of said
Baguio Military Institute, Inc. represented by Certificate
No. 44 herewith and do hereby irrevocably constitutes and
appoints THE PHILIPPINE AMERICAN GENERAL
INSURANCE CO., INC. as attorney to transfer the said
stock on the books of the within named military institute
with full power of substitution in the premises." 2
With the execution of this deed of assignment, Lopez endorsed
the stock certificate and delivered it to Philamgen.
It appears from the evidence on record that the loan of
P20,000.00 was approved conditioned upon the posting of a surety bond
of a bonding company acceptable to the bank. Thus, Lopez persuaded
Emilio Abello, Assistant Executive Vice-President of Philamgen and
member of the Bond Underwriting Committee to request Atty. Timoteo J.
Sumawang, Assistant Vice-President and Manager of the Bonding
Department, to accommodate him in putting up the bond against the
security of his shares of stock with the Baguio Military Institute, Inc. It was
their understanding that if he could not pay the loan, Vice-President Abello
and Pio Pedrosa of the Prudential Bank would buy the shares of stocks
and out of the proceeds thereof, the loan would be paid to the Prudential
Bank.

On June 2, 1960, Lopez' obligation matured without it being

settled. Thus, the Prudential Bank made demands for payment both
upon Lopez and Philamgen. In turn, Philamgen sent Lopez several written
demands for the latter to pay his note (Exhibit H, H-1 & H-2),
but Lopez did not comply with said demands. Hence, the Prudential Bank
sometime in August, 1961 filed a case against them to enforce payment
on the promissory note plus interest.
Upon receipt of the copies of complaint, Atty. Sumawang
confronted Emilio Abello and Pio Pedrosa regarding their commitment to
buy the shares of stock of Lopez in the event that the latter failed to pay
his obligations to the Prudential Bank. Vice-President Abello then
Page 368 of 505

instructed Atty. Sumawang to transfer the shares of stock to Philamgen

and made a commitment that thereafter he (Abello) and Pio Pedrosa will
buy the shares of stock from it so that the proceeds could be paid to the
bank, and in the meantime Philamgen will not pay the bank because it did
not want payment under the terms of the bank. 3
Due to said commitment and instruction of Vice-President Abello,
Assistant Treasurer Marcial C. Cruz requested the transfer of Stock
Certificate No. 44 for 4,000 shares to Philamgen in a letter dated October
31, 1961. Stock Certificate No. 44 in the name of Lopez was accordingly
cancelled and in lieu thereof Stock Certificate No. 171 was issued by the
Baguio Military Institute in the name of Philamgen on November 17, 1961.
The complaint was thereafter dismissed. But when no payment
was still made by the principal debtor or by the surety, the Prudential Bank
filed on November 8, 1963 another complaint for the recovery of the
P20,000.00. On November 18, 1963, after being informed of said
complaint, Lopez addressed the following letter to Philamgen:
"Dear Mr. Sumawang:
This is with reference to yours of the 13th instant
advising me of a complaint filed against us by Prudential
Bank & Trust Co. regarding my loan of P20,000.00. In this
connection, I would like to know what happened to my
shares of stocks of Baguio Military Academy which were
pledged to your goodselves to secure said obligation.
These shares of stock I think are more than enough to
answer for said obligation." 4
On December 9, 1963, Philamgen was forced to pay the
Prudential Bank the sum of P27,785.89 which included the principal loan
and accumulated interest and the Prudential Bank executed a subrogation
receipt on the same date.
On March 18, 1965, Philamgen brought an action in the Court of
First Instance of Manila (Civil Case No. 60272, "The Philippine American
General Insurance Co., Inc. vs. Benito H. Lopez") for reimbursement of
the said amount. After hearing, the said court rendered judgment
dismissing the complaint holding:
"The contention of the plaintiff that the stock of
the defendant were merely pledged to it by the defendant
is not borne out by the evidence. On the contrary, it

appears to be contradicted by the facts of the case. The

shares of stock of the defendant were actually transferred
to the plaintiff when it became clear after the plaintiff and
the defendant had been sued by the Prudential Bank that
plaintiff would be compelled to make the payment to the
Prudential Bank, in view of the inability of the defendant
Benito H. Lopez to pay his said obligation. The certificate
bearing No. 44 was cancelled and upon request of the
plaintiff to the Baguio Military Institute a new certificate of
stock was issued in the name of the plaintiff bearing No.
171, by means of which plaintiff became the registered
owner of the 4,000 shares originally belonging to the
defendant.
"It is noteworthy that the transfer of the stocks of
the defendant in the name of the plaintiff company was
made at the instance of Messrs. Abello and Pedrosa, who
promised to buy the same from the plaintiff. Now that
these shares of stock of the defendant had already been
transferred in the name of the plaintiff, the defendant has
already divested himself of the said stocks, and it would
seem that the remedy of the plaintiff is to go after Messrs.
Abello and Pedrosa on their promise to pay for the said
stocks. To go after the defendant after the plaintiff had
already become the owner of his shares of stock and
compel him to pay his obligation to the Prudential Bank
would be most unfair, unjust and illogical for it would
amount to double payment on his part. After the plaintiff
had already appropriated the said shares of stock, it has
already lost its right to recover anything from the
defendant, for the reason that the transfer of the said
stocks was made without qualification. This transfer takes
the form of a reimbursement of what plaintiff had paid to
the Prudential Bank, thereby depriving the plaintiff of its
right to go after the defendant herein." 5
Philamgen appealed to the Court of Appeals raising these
assignments of errors:
I
Page 369 of 505

"The lower court erred in finding that the

evidence does not bear out the contention of plaintiff that
the shares of stock belonging to defendant were
transferred by him to plaintiff by way of pledge.
II
"The lower court erred in finding that plaintiff
company appropriated unto itself the shares of stock
pledged to it by defendant Benito Lopez and in finding
that, with the transfer of the stock in the name of plaintiff
company, the latter has already been paid or reimbursed
what it paid to Prudential Bank.
III
"The lower court erred in not finding that the
instant case is one where the pledge has abandoned the
security and elected instead to enforce his claim against
the pledgor by ordinary action." 6
On December 17, 1970, the Court of Appeals promulgated a
decision in favor of the Philamgen, thereby upholding the foregoing
assignments of errors. It declared that the stock assignment was a mere
pledge; that the transfer of the stocks in the name of Philamgen was not
intended to make it the owner thereof; that assuming that Philamgen had
appropriated the stocks, this appropriation is null and void as a stipulation
authorizing it is a pactum commissorium; and that pending payment,
Philamgen is merely holding the stock as a security for the payment
of Lopez' obligation. The dispositive portion of the said decision states:

obligations having arisen, the latter causes the shares of stock to be

transferred in its name, what is the juridical nature of the transaction a
dation in payment or a pledge?
b) Where, as in this case, the debtor assigns the shares of stock
to the creditor under an agreement between the latter and determinate
third persons that the latter would buy the shares of stock so that the
obligations could be paid out of the proceeds, was there a novation of the
obligation by substitution of debtor? 8
Philamgen failed to file its comment on the petition for review on
certiorari within the extended period which expired on March 19, 1971.
This Court thereby resolved to require Lopez to file his brief. 9
Under the first assignment of error, Lopez argues in his brief:
"That the Court of Appeals erred in holding that
when petitioner 'sold, assigned, transferred' and delivered
shares of stock, duly endorsed in blank, to private
respondent in consideration of a contingent obligation of
the former to the latter and the obligation having thereafter
arisen, the latter caused the shares of stock to be
transferred to it, taking a new certificate of stock in its
name, the transaction was a pledge, and in not holding
instead that it was a dation in payment." 10

The motion for reconsideration with prayer to set the same for
oral argument having been denied, Lopez brought this petition for review
on certiorari presenting for resolution these questions:

Considering the explicit terms of the deed denominated "Stock

Assignment Separate from Certificate", hereinbefore
copied verbatim, Lopez sold, assigned and transferred unto Philamgen the
stocks involved "for and in consideration of the obligations undertaken" by
Philamgen "under the terms and conditions of the surety bond executed by
it in favor of the Prudential Bank" and "for value received". On its face, it is
neither pledge nor dation in payment. The document speaks of an outright
sale as there is a complete and unconditional divestiture of the incorporeal
property consisting of stocks from Lopez to Philamgen. The transfer
appears to have been an absolute conveyance of the stocks to
Philamgen whether or not Lopez defaults in the payment of P20,000.00 to
Prudential Bank. While it is a conveyance in consideration of a contingent
obligation, it is not itself a conditional conveyance.

a) here, as in this case, a party "sells, assigns and transfers" and

delivers shares of stock to another, duly endorsed in blank, in
consideration of a contingent obligation of the former to the latter, and, the

It is true that if Lopez should "well and truly perform and fulfill all
the undertakings, covenants, terms, conditions, and agreements
stipulated" in his promissory note to Prudential Bank, the obligation of

"WHEREFORE, the decision of the lower court is hereby

reversed, and another one is hereby entered ordering the defendant to
pay the plaintiff the sum of P27,785.89 with interest at the rate of 12% per
annum from December 9, 1963, 10% of the P27,785.89 as attorney's fees
and the costs of the suit." 7

Page 370 of 505

Philamgen under the surety bond would become null and void. Corollarily,
the stock assignment, which is predicated on the obligation of Philamgen
under the surety bond, would necessarily become null and void likewise,
for want of cause or consideration under Article 1352 of the New Civil
Code. But this is not the case here because aside from the obligations
undertaken by Philamgen under the surety bond, the stock assignment
had other considerations referred to therein as "value received". Hence,
based on the manifest terms thereof, it is an absolute transfer.
Notwithstanding the express terms of the "Stock Assignment
Separate from Certificate", however, We hold and rule that the transaction
should not be regarded as an absolute conveyance in view of the
circumstances obtaining at the time of the execution thereof.

It should be remembered that on June 2, 1959, the

day Lopez obtained a loan of P20,000.00 from Prudential
Bank, Lopez executed a promissory note for P20,000.00, plus interest at
the rate of ten (10%) per cent per annum, in favor of said Bank. He
likewise posted a surety bond to secure his full and faithful performance of
his obligation under the promissory note with Philamgen as his surety. In
return for the undertaking of Philamgen under the surety
bond, Lopezexecuted on the same day not only an indemnity agreement
but also a stock assignment.
The indemnity agreement and the stock assignment must be
considered together as related transactions because in order to judge the
intention of the contracting parties, their contemporaneous and
subsequent acts shall be principally considered. (Article 1371, New Civil
Code). Thus, considering that the indemnity agreement connotes a
continuing obligation of Lopez towards Philamgen while the stock
assignment indicates a complete discharge of the same obligation, the
existence of the indemnity agreement whereby Lopez had to pay a
premium of P1,000.00 for a period of one year and agreed at all times to
indemnify Philamgen of any and all kinds of losses which the latter might
sustain by reason of it becoming a surety, is inconsistent with the theory of
an absolute sale for and in consideration of the same undertaking of
Philamgen. There would have been no necessity for the execution of the
indemnity agreement if the stock assignment was really intended as an
absolute conveyance. Hence, there are strong and cogent reasons to
conclude that the parties intended said stock assignment to complement

the indemnity agreement and thereby sufficiently guarantee the

indemnification of Philamgen should it be required to pay Lopez' loan to
Prudential Bank.
"The character of the transaction between the
parties is to be determined by their intention, regardless of
what language was used or what the form of the transfer
was. If it was intended to secure the payment of money, it
must be construed as a pledge; but if there was some
other intention, it is not a pledge. However, even though a
transfer, if regarded by itself, appears to have been
absolute, its object and character might still be qualified
and explained by a contemporaneous writing declaring it
to have been a deposit of the property as collateral
security. It has been said that a transfer of property by the
debtor to a creditor, even if sufficient on its face to make
an absolute conveyance, should be treated as a pledge if
the debt continues in existence and is not discharged by
the transfer, and that accordingly, the use of the terms
ordinarily importing conveyance, of absolute ownership
will not be given that effect in such a transaction if they are
also commonly used in pledges and mortgages and
therefore do not unqualifiedly indicate a transfer of
absolute ownership, in the absence of clear and
unambiguous language or other circumstances excluding
an intent to pledge." 11
We agree with the holding of the
respondent Court of Appeals that the stock assignment, Exhibit C, is in
truth and in fact, a pledge. Indeed, the facts and circumstances leading to
the execution of the stock assignment, Exhibit C, and the admission
of Lopez prove that it is in fact a pledge. The appellate court is correct in
ruling that the following requirements of a contract of pledge have been
satisfied: (1) that it be constituted to secure the fulfillment of a principal
obligation; (2) that the pledgor be the absolute owner of the thing pledged;
and (3) that the person constituting the pledge has the free disposal of the
property, and in the absence thereof, that he be legally authorized for the
purpose. (Article 2085, New Civil Code).
Article 2087 of the New Civil Code providing that it is also the
essence of these contracts (pledge, mortgage, and antichresis) that when
Page 371 of 505

the principal obligation becomes due, the things in which the pledge or
mortgage consists may be alienated for the payment to the creditor,
further supports the appellate court's ruling, which We also affirm. On this
point further, the Court of Appeals correctly ruled:
"In addition to the requisites prescribed in article
2085, it is necessary, in order to constitute the contract of
pledge, that the thing pledged be placed in the possession
of the creditor, or of a third person by common agreement.
(Art. 2093, N.C.C.) Incorporeal rights, including shares of
stock may also be pledged (Art. 2095, N.C.C.) All these
requisites are found in the transaction between the parties
leading to the execution of the Stock Assignment, Exhibit
C. And that it is a pledge was admitted by the defendant in
his letter of November 18, 1963, Exhibit G, already quoted
above, where he asked what had happened to his shares
of stock 'which were pledged to your goodselves to secure
the said obligation'. The testimony of the defendantappellee that it was their agreement or understanding that
if he would be unable to pay the loan to the Prudential
Bank, plaintiff could sell the shares of stock or appropriate
the same in full payment of his debt is a mere afterthought, conceived after he learned of the transfer of his
stock to the plaintiff in the books of the Baguio Military
Institute."
We also do not agree with the contention of petitioner that
"petitioner's 'sale, assignment and transfer' unto private respondent of the
shares of stock, coupled with their endorsement in blank and delivery,
comes exactly under the Civil Code's definition of dation in payment, a
long recognized and deeply rooted concept in Civil Law denominated by
Spanish commentators as 'adjudicacion en pago'"
According to Article 1245 of the New Civil Code, dation in
payment, whereby property is alienated to the creditor in satisfaction of a
debt in money, shall be governed by the law of sales.
Speaking of the concept of dation in payment, it is well to cite
that:
"Dation in payment is the delivery and
transmission of ownership of a thing by the debtor to the

creditor as an accepted equivalent of the performance of

the obligation. (2 Castan 525; 8 Manresa, 324) The
property given may consist, not only of a thing, but also of
a real right (such as a usufruct) or of a credit against a
third person. (Perez Gonzales & Alguer: 2-I Enneccerus,
Kipp & Wolff 317). Thus, it has been held that the
assignment to the creditor of the interest of the debtor in
an inheritance in payment of his debt, is valid and
extinguishes the debt. (Ignacio vs. Martinez, 33 Phil. 576)
"The modern concept of dation in payment
considers it as a novation by change of the object, and this
is to our mind the more juridically correct view. Our Civil
Code, however, provides in this article that, where the debt
is in money, the law on sales shall govern; in this case, the
act is deemed to be a sale, with the amount of the
obligation to the extent that it is extinguished being
considered as the price. Does this mean that there can be
no dation in payment if the debt is not in money? We do
not think so. It is precisely in obligations which are not
money debts, in which the true juridical nature of dation in
payment becomes manifest. There is a real novation with
immediate performance of the new obligation. The fact
that there must be a prior agreement of the parties on the
delivery of the thing in lieu of the original prestation, shows
that there is a novation which, extinguishes the original
obligation, and the delivery is a mere performance of the
new obligation.
"The dation in payment extinguishes the
obligation to the extent of the value of the thing delivered,
either as agreed upon by the parties or as may be proved,
unless the parties by agreement, express or implied, or by
their silence, consider the thing as equivalent to the
obligation, in which case the obligation is totally
extinguished. (8 Manresa 324; 3 Valverde 174 fn.)
"Assignment of property by the debtor to his
creditors, provided for in article 1255, is similar to dation in
payment in that both are substitute forms of performance
of an obligation. Unlike the assignment for the benefit of
Page 372 of 505

creditors, however, dation in payment does not involve

plurality of creditors, nor the whole of the property of the
debtor. It does not suppose a situation of financial
difficulties, for it may be made even by a person who is
completely solvent. It merely involves a change of the
object of the obligation by agreement of the parties and at
the same time fulfilling the same voluntarily. (8 Manresa
324)." 12
Considering the above jurisprudence, We find that the debt or
obligation at bar has not matured on June 2, 1959 when Lopez "alienated"
his 4,000 shares of stock to Philamgen. Lopez' obligation would arise only
when he would default in the payment of the principal obligation (the loan)
to the bank and Philamgen had to pay for it. Such fact being adverse to
the nature and concept of dation in payment, the same could not have
been constituted when the stock assignment was executed. Moreover,
there is no express provision in the terms of the stock assignment
between Philamgen and Lopez that the principal obligation (which is the
loan) is immediately extinguished by reason of such assignment.
In case of doubt as to whether a transaction is a pledge or a
dation in payment, the presumption is in favor of pledge, the latter being
the lesser transmission of rights and interests. Under American
jurisprudence.
"A distinction might also be made between
delivery of property in payment of debt and delivery of
such property as collateral security for the debt.Generally,
such a transfer was presumed to be made for collateral
security, in the absence of evidence tending to show an
intention on the part of the parties that the transfer was in
satisfaction of the debt. This presumption of a transfer for
collateral security arose particularly where the property
given was commercial paper, or some other 'specialty'
chose of action, that conferred rights upon transfer by
delivery of a different nature from the debt, whose value
was neither intrinsic nor apparent and was not agreed
upon by the parties." 13

Petitioner's argument that even assuming, arguendo that the

transaction was at its inception a pledge, it gave way to a dation in
payment when the obligation secured came into existence and private
respondent had the stocks transferred to it in the corporate books and
took a stock certificate in its name, is without merit. The fact that the
execution of the stock assignment is accompanied by the delivery of the
shares of stock, duly endorsed in blank to Philamgen is no proof that the
transaction is a dation in payment. Likewise, the fact that Philamgen had
the shares of stock transferred to it in the books of the corporation and
took a certificate in its name in lieu of Lopez which was cancelled does not
amount to conversion of the stock to one's own use. The transfer of title to
incorporeal property is generally an essential part of the delivery of the
same in pledge. It merely constitutes evidence of the pledgee's right of
property in the thing pledged.
"By the contract of pledge, the pledgor does not
part with his general right of property in the collateral. The
general property therein remains in him, and only a
special property vests in the pledgee. The pledgee does
not acquire an interest in the property, except as a security
for his debt. Thus, the pledgee holds possession of the
security subject to the rights of the pledgor; he cannot
acquire any interest therein that is adverse to the pledgor's
title. Moreover, even where the legal title to incorporeal
property which may be pledged is transferred to a pledgee
as collateral security, he takes only a special property
therein. Such transfer merely performs the office that the
delivery of possession does in case of a pledge of
corporeal property.
xxx xxx xxx
"The pledgee has been considered as having a
lien on the pledged property. The extent of such lien is
measured by the amount of the debt or the obligation that
is secured by the collateral, and the lien continues to exist
as long as the pledgee retains actual or symbolic
possession of the property, and the debt or obligation
remains unpaid. Payment of the debt extinguishes the lien.
"Though a pledgee of corporation stock does not
become personally liable as a stockholder of the company,
Page 373 of 505

he may have the shares transferred to him on the books of

the corporation if he has been authorized to do so.
"The general property in the pledge remains in
the pledgor after default as well as prior thereto. The
failure of the pledgor to pay his debt at maturity in no way
affects the nature of the pledgee's rights concerning the
property pledged, except that he then becomes entitled to
proceed to make the security available in the manner
prescribed by law or by the terms of the contract, . . ." 14
In his second assignment of error, petitioner contends that
the Court of Appeals erred in not holding that since private respondent
entered into an agreement with determinate third persons whereby the
latter would buy the said shares so sold, assigned and transferred to the
former by the petitioner for the purpose of paying petitioner's obligation out
of the proceeds, there was a novation of the obligation by substitution of
debtor.
We do not agree.
Under Article 1291 of the New Civil Code, obligations may be
modified by: (1) changing their object or principal condition; (2)
substituting the person of the debtor; (3) subrogating a third person in the
rights of the creditor. And in order that an obligation may be extinguished
by another which substitute the same, it is imperative that it be so
declared in unequivocal terms, or that the old and the new obligations be
on every point incompatible with each other. (Article 1292, N.C.C.)
Novation which consists in substituting a new debtor in the place of the
original one, may be made even without the knowledge or against the will
of the latter, but not without the consent of the creditor. Payment by the
new debtor gives him the rights mentioned in Articles 1236 and 1237.
(Article 1293, N.C.C.)
Commenting on the second concept of novation, that is,
substituting the person of the debtor, Manresa opines, thus: LexLib
"In this kind of novation, it is not enough to
extend the juridical relation to a third person; it is
necessary that the old debtor be released from the
obligation, and the third person or new debtor take his
place in the relation. Without such release, there is no
novation; the third person who has assumed the obligation

of the debtor merely becomes a co-debtor or a surety. If

there is no agreement as to solidarity, the first and the new
debtor are considered obligated jointly." (8 Manresa 435,
cited in Tolentino, Commentaries and Jurisprudence on
the Civil Code of the Philippines, Vol. IV, p. 360)
In the case at bar, the undertaking of Messrs. Emilio Abello and
Pio Pedrosa that they would buy the shares of stock so that Philamgen
could be reimbursed from the proceeds that it paid to Prudential Bank
does not necessarily imply the extinguishment of the liability of
petitioner Lopez. Since it was not established nor shown that Lopez would
be released from responsibility, the same does not constitute novation and
hence, Philamgen may still enforce the obligation. As
the Court of Appeals correctly held that "(t)he representation of Mr. Abello
to Atty. Sumawang that he and Mr. Pedrosa would buy the stocks was a
purely private arrangement between them, not an agreement between
(Philamgen) and (Lopez)" and which We hereby affirm, petitioner's second
assignment of error must be rejected.
In fine, We hold and rule that the transaction entered into by and
between petitioner and respondent under the Stock Assignment Separate
From Certificate in relation to the Surety Bond No. 14164 and the
Indemnity Agreement, all executed and dated June 2, 1959, constitutes a
pledge of the 40,000 shares of stock by the petitioner-pledgor in favor of
the private respondent-pledgee, and not a dacion en pago. It is also Our
ruling that upon the facts established, there was no novation of the
obligation by substitution of debtor.
The promise of Abello and Pedrosa to buy the shares from
private respondent not having materialized (which promise was given to
said respondent only and not to petitioner) and no action was taken
against the two by said respondent who chose instead to sue the
petitioner on the Indemnity Agreement, it is quite clear that this respondent
has abandoned its right and interest over the pledged properties and
must, therefore, release or return the same to the petitioner-pledgor upon
the latter's satisfaction of his obligation under the Indemnity Agreement.
It must also be made clear that there is no double payment nor
unjust enrichment in this case because We have ruled that the shares of
stock were merely pledged. As the Court of Appeals said:

Page 374 of 505

"The appellant (Philam) is not enriching himself

at the expense of the appellee. True, the stock certificate
of the appellee had been in the name of the appellant but
the transfer was merely nominal, and was not intended to
make the plaintiff the owner thereof. No offer had been
made for the return of the stocks to the defendant. As the
appellant had stated, the appellee could have the stocks
transferred to him anytime as long as he reimburses the
plaintiff the amount it had paid to the Prudential Bank.
Pending payment, plaintiff is merely holding the
certificates as a pledge or security for the payment of
defendant's obligation."

her husband JOSE SOBERANO, JR., JULIA R. GENEROSO,

TERESITA R. NATIVIDAD and GENOVEVA R. SORONIO
assisted by her husband ALFONSO SORONIO,respondents.

Diores Law Office for petitioners.

Florido & Associates for Heirs of Dra. A. Rodriguez.
Gregorio B. Escasinas for D. Soberano.
Mario Ortiz for Sps. Jarol.
DECISION

The above holding of the appellate court is correct and We affirm

the same. LLpr

TINGA, J p:

As to the third assignment of error which is merely the

consequence of the first two assignments of errors, the same is also
devoid of merit.

The assailed decision of the Court of Appeals took off on the premise that pledged
shares of stock auctioned off in a notarial sale could still be redeemed by their
owners. This notion is wrong, and we thus reverse.

WHEREFORE, IN VIEW OF ALL THE FOREGOING, the

decision of the Court of Appeals is hereby AFFIRMED in toto, with costs
against the petitioner.

The facts, as culled from the record, follow.

SO ORDERED
||| (Lopez v. Court of Appeals, G.R. No. L-33157, [June 29, 1982], 200 PHIL 150-168)

Respondents were the owners, in their respective personal capacities, of shares of

stock in a corporation known as the Quirino-Leonor-Rodriguez Realty
Inc. 1 Sometime during the years 1979 to 1980, respondents secured by way of
pledge of some of their shares of stock to petitioners Bonifacio and Faustina Paray
("Parays") the payment of certain loan obligations. The shares pledged are listed
below:
Miguel Rodriguez Jariol

THIRD DIVISION
[G.R. No. 132287. January 24, 2006.]
SPOUSES BONIFACIO and FAUSTINA PARAY, and VIDAL
ESPELETA, petitioners, vs. DRA. ABDULIA C. RODRIGUEZ,
MIGUELA R. JARIOL assisted by her husband ANTOLIN
JARIOL, SR., LEONORA NOLASCO assisted by her husband
FELICIANO NOLASCO, DOLORES SOBERANO assisted by

1,000 shares covered b

Certificates No. 011, 06
Abdulia C. Rodriguez
300 shares covered by
No. 023 & 093;
Leonora R. Nolasco
407 shares covered by
No. 091 & 092;
Genoveva Soronio
699 shares covered by
No. 025, 059 & 099;
Dolores R. Soberano
699 shares covered by
No. 021, 053, 022 & 09
Julia Generoso
1,100 shares covered b
Certificates No. 085, 05
Teresita Natividad
440 shares covered by
Nos. 054 & 055 2
When the Parays attempted to foreclose the pledges on account of respondents'
failure to pay their loans, respondents filed complaints with the Regional Trial Court
Page 375 of 505

(RTC) of Cebu City. The actions, which were consolidated and tried before RTC
Branch 14, Cebu City, sought the declaration of nullity of the pledge agreements,
among others. However the RTC, in its decision 3 dated 14 October 1988, dismissed
the complaint and gave "due course to the foreclosure and sale at public auction of
the various pledges subject of these two cases." 4 This decision attained finality after
it was affirmed by the Court of Appeals and the Supreme Court. The Entry of
Judgment was issued on 14 August 1991. AISHcD

Eighth Division however reversed the RTC on appeal, ruling that the consignations
extinguished the loan obligations and the subject pledge contracts; and the auction
sale of 4 November 1991 as null and void. 8 Most crucially, the appellate court chose
to uphold the sufficiency of the consignations owing to an imputed policy of the law
that favored redemption and mandated a liberal construction to redemption laws. The
attempts at payment by respondents were characterized as made in the exercise of
the right of redemption.

Respondents then received Notices of Sale which indicated that the pledged shares
were to be sold at public auction on 4 November 1991. However, before the
scheduled date of auction, all of respondents caused the consignation with the RTC
Clerk of Court of various amounts. It was claimed that respondents had attempted to
tender these payments to the Parays, but had been rebuffed. The deposited amounts
were as follows:

The Court of Appeals likewise found fault with the auction sale, holding that there was
a need to individually sell the various shares of stock as they had belonged to different
pledgors. Thus, it was observed that the minutes of the auction sale should have
specified in detail the bids submitted for each of the shares of the pledgors for the
purpose of knowing the price to be paid by the different pledgors upon redemption of
the auctioned sales of stock.

Abdulia C. Rodriguez
Leonora R. Nolasco
Genoveva R. Soronio

P120,066.66
277,381.82
425,353.50
38,385.44
Julia R. Generoso
638,385.00
Teresita R. Natividad
264,375.00
Dolores R. Soberano
12,031.61
520,216.39
Miguela Jariol
490,000.00
88,000.00
Notwithstanding the consignations, the public auction took place as scheduled, with
petitioner Vidal Espeleta successfully bidding the amount of P6,200,000.00 for all of
the pledged shares. None of respondents participated or appeared at the auction of 4
November 1991.
Respondents instead filed on 13 November 1991 a complaint seeking the declaration
of nullity of the concluded public auction. The complaint, docketed as Civil Case No.
CEB-10926, was assigned to Branch 16 of the Cebu City RTC. Respondents argued
that their tender of payment and subsequent consignations served to extinguish their
loan obligations and discharged the pledge contracts. Petitioners countered that the
auction sale was conducted pursuant to the final and executory judgment in Civil
Cases Nos. R-20120 and 20131, and that the tender of payment and consignations
were made long after their obligations had fallen due.
The Cebu City RTC dismissed the complaint, expressing agreement with the position
of the Parays. 6 It held, among others that respondents had failed to tender or consign
payments within a reasonable period after default and that the proper remedy of
respondents was to have participated in the auction sale. 7 The Court of Appeals

Petitioners now argue before this Court that they were authorized to refuse as they did
the tender of payment since they were undertaking the auction sale pursuant to the
final and executory decision in Civil Cases Nos. R-20120 and 20131, which did not
authorize the payment of the principal obligation by respondents. They point out that
the amounts consigned could not extinguish the principal loan obligations of
respondents since they were not sufficient to cover the interests due on the debt. They
likewise argue that the essential procedural requisites for the auction sale had been
satisfied.
We rule in favor of petitioners.
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 factobecome
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 specification 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. HDITCS
The appellate court's dwelling on the right of redemption is utterly off-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
Page 376 of 505

foreclosure sale. The proper focus of the Court of Appeals should have been whether
the consignations made by respondents sufficiently 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 clarified that the subject sale of pledged shares was an
extrajudicial sale, specifically a notarial sale, as distinguished from a judicial sale as
typified 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 satisfied in due time, is to proceed before a Notary Public to the
sale of the thing pledged. 9
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 filing of Civil Cases No. R-20120 and 20131, which sought to annul the
pledge contracts. The final and executory judgment in those cases affirmed the
pledge contracts and disposed them in the following fashion:
WHEREFORE, premises considered, judgment
rendered dismissing the complaints at bar, and

is

hereby

(1)Declaring the various pledges covered in Civil Cases Nos. R20120 and R-20131 valid and effective; and
(2)Giving due course to the foreclosure and sale at public auction
of the various pledges subject of these two cases.
Costs against the plaintiffs.
SO ORDERED. 10
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 not detract from the fact that the sale so authorized is actually
extrajudicial in character. Note that the final 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 affirmed by the Civil Code, 11 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 final judgments in the aforementioned
civil cases. If the sale were truly in compliance with a final 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 affirmed 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 affirms 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. 12
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
benefit 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 definitely 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 1. v. Valdez, 13 the Court ruled
that sugar cane crops are personal property, and thus, not subject to the right of
redemption. 14 No countervailing statute has been enacted since then that would
Page 377 of 505

accord the right of redemption over personal property, hence the Court can affirm this
decades-old ruling as effective to date. cdtai
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.
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 first 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. 15 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 different 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 insignificance of ascertaining the definite 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 deficiency or excess there may be
between the purchase price and the amount of the principal obligation. 16
A different 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 significant 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 deficiency, 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 satisfied, 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 clarifies 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 satisfied in due time,
the creditor may proceed with the sale by public auction under the procedure provided
under Article 2112 of the Code. IaAEHD
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 sufficient to cover the
interests due on these loans, which were pegged at the rate of 5% per month or 60%
per annum. Before this 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." 17
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 final. 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
Page 378 of 505

or excessively usurious. This is because for sometime now, usury has become 'legally
inexistent.'" 18 The finality 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 effect of extinguishing the pledge contracts, such
amounts should cover not just the principal loans, but also the 5% monthly interests
thereon.

WHEREFORE, the petition is GRANTED. The assailed decision of the Court of

Appeals is SET ASIDE and the decision of the Cebu City RTC, Branch 16, dated 18
November 1992 is REINSTATED. Costs against respondents.
SO ORDERED.
||| (Spouses Paray v. Rodriguez, G.R. No. 132287, [January 24, 2006], 515 PHIL 546559)

It bears noting that the Court of Appeals also ruled that respondents had satisfied 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. 19 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
insufficient to stay the sale.
The effect of the finality 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
affirmed not only by law, but also by a final court judgment. Any subsequent court
ruling that would enjoin the petitioners from exercising such right would have the effect
of superseding a final 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. 20 Moreover, they would have had a
better right had they matched the terms of the highest bidder. 21 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 deficiency from the debtors should
the sale price be insufficient 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 beneficial resort wholly
accorded them by law is their loss. Now, all respondents can recover is the amounts
they had consigned. TSIDaH

Page 379 of 505

Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan)
are domestic corporations engaged in the business of apparel manufacturing. 6Both
respondent corporations are owned and operated by respondent Alain Juniat (Juniat),
a French national based in Hongkong. 7 Respondent Nonwoven Fabric Philippines,
Inc. (Nonwoven) is a Philippine corporation engaged in the manufacture and sale of
various types of nonwoven fabrics. 8

FIRST DIVISION
[G.R. No. 171569. August 1, 2011.]
UNION
BANK
OF
THE
PHILIPPINES, petitioner, vs.
ALAIN * JUNIAT, WINWOOD APPAREL, INC., WINGYAN
APPAREL,
INC.,
NONWOVEN
FABRIC
PHILIPPINES, respondents.

DECISION

DEL CASTILLO, J p:
To have a binding effect on third parties, a contract of pledge must appear in a public
instrument. 1 CTHDcS
This Petition for Review on Certiorari 2 under Rule 45 of the Rules of Court assails
the June 23, 2005 Decision 3 and the February 9, 2006 Resolution 4 of the Court of
Appeals (CA) in CA-G.R. CV No. 66392.
Factual Antecedents
Petitioner Union Bank of the Philippines (Union Bank) is a universal banking
corporation organized and existing under Philippine laws. 5

On September 3, 1992, petitioner filed with the Regional Trial Court (RTC) of Makati,
Branch 57, a Complaint 9 with prayer for the issuance of ex-parte writs of preliminary
attachment and replevin against Juniat, Winwood, Wingyan, and the person in
possession
of
the
mortgaged
motorized
sewing
machines
and
equipment. 10Petitioner alleged that Juniat, acting for and in behalf of Winwood and
Wingyan, executed a promissory note 11 dated April 11, 1992 and a Chattel
Mortgage 12 dated March 27, 1992 over several motorized sewing machines and
other allied equipment to secure their obligation arising from export bills transactions
to petitioner in the amount of P1,131,134.35; 13 that as additional security for the
obligation, Juniat executed a Continuing Surety Agreement 14 dated April 11, 1992 in
favor of petitioner; 15that the loan remains unpaid; 16 and that the mortgaged
motorized sewing machines are insufficient to answer for the obligation.17
On September 10, 1992, the RTC issued writs of preliminary attachment and replevin
in favor of petitioner. 18 The writs were served by the Sheriff upon Nonwoven as it
was in possession of the motorized sewing machines and equipment. 19 Although
Nonwoven was not impleaded in the complaint filed by petitioner, the RTC likewise
served summons upon Nonwoven since it was in possession of the motorized sewing
machines and equipment. 20
On September 28, 1992, Nonwoven filed an Answer, 21 contending that the
unnotarized Chattel Mortgage executed in favor of petitioner has no binding effect on
Nonwoven and that it has a better title over the motorized sewing machines and
equipment because these were assigned to it by Juniat pursuant to their
Agreement 22dated May 9, 1992. 23 Juniat, Winwood, and Wingyan, on the other
hand, were declared in default for failure to file an answer within the reglementary
period. 24
On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by
Replevin, 25 praying that the motorized sewing machines and equipment be sold to
avoid depreciation and deterioration. 26 However, on May 18, 1993, before the RTC
could act on the motion, petitioner sold the attached properties for the amount of
P1,350,000.00. 27
Page 380 of 505

Nonwowen moved to cite the officers of petitioner in contempt for selling the attached
properties, but the RTC denied the same on the ground that Union Bank acted in
good faith. 28 AHDTIE
Ruling of the Regional Trial Court
On May 20, 1999, the RTC of Makati, Branch 145, 29 rendered a Decision 30 in favor
of petitioner. The RTC ruled that both the Chattel Mortgage dated March 27, 1992 in
favor of petitioner and the Agreement dated May 9, 1992 in favor of Nonwoven have
no obligatory effect on third persons because these documents were not
notarized. 31 However, since the Chattel Mortgage in favor of petitioner was executed
earlier, petitioner has a better right over the motorized sewing machines and
equipment under the doctrine of "first in time, stronger in right" (prius tempore, potior
jure). 32 Thus, the RTC disposed of the case in this wise:
WHEREFORE, above premises considered, judgment is hereby
rendered as follows:
1.]Declaring the [petitioner] UNION BANK OF THE
PHILIPPINES, as having the better right to the goods and/or
machineries subject of the Writs of Preliminary Attachment and
Replevin issued by this Court on September 10, 1992.
2.]Declaring the [petitioner] as entitled to the proceeds of the sale
of the subject machineries in the amount of P1,350,000.00;
3.]Declaring [respondents] Allain Juniat, Winwood Apparel, Inc.
and Wingyan Apparel, Inc. to be jointly and severally liable to the
[petitioner], for the deficiency between the proceeds of the sale of
the machineries subject of this suit [P1,350,000.00] and original
claim of the plaintiff [P1,919,907.03], in the amount of
P569,907.03, with legal interest at the rate of 12% per annum
from date of this judgment until fully paid; and
4.]Declaring [respondents] Allain Juniat, Winwood Apparel, Inc.
and Wingyan Apparel, Inc. to be jointly and severally liable to the
[petitioner] for the amount of P50,000.00 as reasonable attorneys
fees; and
5.]Cost of this suit against the [respondents].
SO ORDERED. 33

Nonwoven moved for reconsideration 34 but the RTC denied the same in its
Order 35 dated July 14, 1999.
Ruling of the Court of Appeals
On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract of
pledge entered into between Juniat and Nonwoven is valid and binding, and that the
motorized sewing machines and equipment were ceded to Nonwoven by Juniat by
virtue of a dacion en pago. 36 Thus, the CA declared Nonwoven entitled to the
proceeds of the sale of the attached properties. 37 The fallo reads:
WHEREFORE, premises considered, the assailed decision is
hereby REVERSED and SET ASIDE. [Petitioner] Union Bank of
the Philippines is hereby DIRECTED to pay Nonwoven Fabric
Philippines, Inc. P1,350,000.00, the amount it holds in escrow,
realized from the May 18, 1993 sale of the machineries to avoid
deterioration during pendency of suit. No pronouncement as to
costs.
SO ORDERED. 38
Petitioner sought reconsideration 39 which
Resolution 40 dated February 9, 2006.

was

denied

by

the

CA

in

Issues
Hence, the present recourse where petitioner interposes the following issues:
1.Whether . . . the Court of Appeals committed serious reversible
error in setting aside the Decision of the trial court
holding that Union Bank of the Philippines had a better
right over the machineries seized/levied upon in the
proceedings before the trial court and/or the proceeds of
the sale thereof; ACIEaH
2.Whether . . . the Court of Appeals seriously erred in holding that
[Nonwoven] has a valid claim over the subject sewing
machines. 41
Petitioner's Arguments
Echoing the reasoning of the RTC, petitioner insists that it has a better title to the
proceeds of the sale. 42 Although the Chattel Mortgage executed in its favor was not
notarized, petitioner insists that it is nevertheless valid, and thus, has preference over
a subsequent unnotarized agreement. 43 Petitioner further claims that except for the
Page 381 of 505

said agreement, no other evidence was presented by Nonwoven to show that the
motorized sewing machines and equipment were indeed transferred to them by
Juniat/Winwood/Wingyan. 44
Respondent Nonwoven's Arguments
Nonwoven, on the other hand, claims ownership over the proceeds of the sale under
Article 1544 45 of the Civil Code on double sale, which it claims can be applied by
analogy in the instant case. 46 Nonwoven contends that since its prior possession
over the motorized sewing machines and equipment was in good faith, it has a better
title over the proceeds of the sale. 47 Nonwoven likewise maintains that petitioner has
no right over the proceeds of the sale because the Chattel Mortgage executed in its
favor was unnotarized, unregistered, and without an affidavit of good faith. 48
Our Ruling
The petition has merit.
Nonwoven lays claim to the attached motorized sewing machines and equipment
pursuant to the Agreement it entered into with Juniat, to wit:
Hong Kong, 9th May, 1992
With reference to talks held this morning at the Holiday Inn
Golden Mile Coffee Shop, among the following parties:
a.Redflower Garments Inc. Mrs. Maglipon
b.Nonwoven Fabrics Phils. Inc. Mr. J. Tan
c.Winwood Apparel Inc./Wing Yan Apparel, Inc. Mr. A. Juniat,
Mrs. S. Juniat
IT WAS AGREED THAT:
a.Settlement of the accounts between Nonwoven Fabrics Phils,
Inc. and Winwood Apparel Inc./Wing Yan Apparel, Inc. should be
effected as agreed through partial payment by L/C with the
balance to be settled at a later date for which Winwood
Apparel, Inc. agrees to consign 94 sewing machines, 3 snap
machines and 2 boilers, presently in the care of Redflower
Garments Inc., to the care of Nonwoven Fabrics Phils., Inc.
as guarantee. Meanwhile, Nonwoven will resume delivery to
Winwood/Win Yang as usual.

xxx

xxx

xxx 49 (Emphasis supplied.)

It insists that since the attached properties were assigned or ceded to it by Juniat, it
has a better right over the proceeds of the sale of the attached properties than
petitioner, whose claim is based on an unnotarized Chattel Mortgage.
We do not agree.
Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of
Wingyan and Winwood, in favor of petitioner does not bind Nonwoven. 50 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. 51 Thus, the fact that the Chattel Mortgage executed in
favor of petitioner was not notarized does not affect 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 effect 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. TcAECH
Neither can we sustain the finding 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." 53 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. 54 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. 55
Page 382 of 505

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.
WHEREFORE, the petition is hereby GRANTED. The assailed June 23, 2005
Decision and the February 9, 2006 Resolution of the Court of Appeals in CA-G.R. CV
No. 66392 are hereby REVERSED and SET ASIDE. The May 20, 1999 Decision of
the
Regional
Trial
Court
of
Makati,
Branch
145,
is
hereby REINSTATED and AFFIRMED.
SO ORDERED.
Corona, C.J., Leonardo de Castro, Bersamin and Villarama, Jr., JJ., concur.
||| (Union Bank of the Phils. v. Juniat, G.R. No. 171569, [August 1, 2011], 670 PHIL
438-448)

FIRST DIVISION
[G.R. No. 18500. October 2, 1922.]
FILOMENA SARMIENTO and her husband EUSEBIO M.
VILLA
SENOR, plaintiffs-appellants, vs.
GLICERIO JAVELLANA, defendant-appellant.

Montinola, Montinola & Hontiveros for plaintiffs-appellants.

J. M. Arroyo and Fisher & DeWitt for defendant appellant.
DECISION
AVANCEA, J p:

On August 28, 1911, the defendant loaned the plaintiffs the sum of
P1,500 with interest at the rate of 25 per cent per annum for the term of one year.
To guarantee this loan, the plaintiffs pledged a large medal with a diamond in the
center and surrounded with ten diamonds, a pair of diamonds earrings, a small
comb with twenty-diamonds, and two diamond rings, which the contracting
parties appraised at P4,000. This loan is evidenced by two documents (Exhibit A
and 1) wherein the amount appears to be P1,875, which includes the 25 per cent
interest on the sum of P1,500 for the term of one year.
The plaintiff allege that at the maturity of this loan, August 31, 1912, the
plaintiff Eusenio M. Villasenor, being unable to pay the loan, obtained from the
defendant an extension, with the condition that the loan was to continue, drawing
interest at the rate of 25 per cent per annum, so long as the security given was
sufficient to cover the capital and the accrued interest. In the month of August,
1919, the plaintiff Eusebio M. Dreyfus, went to the house of the defendant and
offered to pay the loan and redeem the jewels, taking with him, for this purpose,
the sum of P11,000, but the defendant then informed them that the time for the
redemption had already elapsed. The plaintiffs renewed their offer to redeem the
jewelry by paying the loan, but met with the same reply. These facts are proven
by the testimony of the plaintiffs, corroborated by Carlos M. Dreyfus.
The plaintiffs now bring this action to compel the defendant to return the
jewels pledged, or their value, upon the payment by them of the sum they owe
the defendant, with the interest thereon.
The defendant alleges, in his defense, that upon the maturity of the
loan, August 31, 1912, he requested the plaintiff, Eusebio M. Villasenor, to secure
the money, pay the loan and redeem the jewels, as he needed money to
purchase a certain piece of land; that one month thereafter, the plaintiff,
Filomena Sarmiento, went to his house and offered to sell him the jewels pledged
for P3,000; that the defendant then told her to come back on the next day, as he
was to see his brother, Catalino Javellana, and ask him if wanted to take the
jewels for that sum; that on the next day the plaintiff, Filomena Sarmiento, went
back to the house of the defendant who then paid her the sum of P1,125, which
was the balance remaining of the P3,000 after deducting the plaintiffs' loan.
It appearing that the defendant possessed these jewels originally, as a
pledge to secure the payment of a loan stated in writing, the mere testimony of
the defendant to the effect that later they were sold to him by the plaintiff,
Filomena Sarmiento, against the positive testimony of the latter that she did not
make any such sale, requires a strong corroboration to be accepted. We do not
find the testimony of Jose Sison to be of sufficient value as such corroboration.
Page 383 of 505

This witness testified to having been in the house of the defendant when
Filomena went there to offer to sell the defendant the jewels, as well as on the
third day when she returned to receive the price. According to this witness, he
happened to be in the house of the defendant remained in the house of the
defendant for three days, and that was how he happened to witness the offer to
sell, as well as the receipt of the price on the third day. But not only do we find
that the defendant has not sufficiently established, by his evidence, the fact of the
purchase of the jewels, but also that there is a circumstance tending to show the
contrary, which is the fact that up to the trial of this cause the defendant
continued in possession of the documents, Exhibits A and 1, evidencing the loan
and the pledge. If the defendant really bought these jewels, it seems natural that
Filomena would have demanded the surrender of the documents evidencing the
loan and the pledge, and the defendant would have returned them to plaintiff.
Our conclusion is that the jewels pledged to defendant were not sold to
him afterwards.
Another point on which evidence was introduced by both parties is as to
the value of the jewels in the event that they were not returned by the defendant.
In view of the evidence of record, we accept the value of P12,000 fixed by the
trial court.
From the foregoing that, as the jewels in question were in the
possession of the defendant to secure the payment of a loan of P1,500, with
interest thereon at the rate of 25 per cent annum from August 31, 1911, to August
31, 1912, and the defendant having subsequently extended the term of the loan
indefinitely, and so long as the value of the jewels pledge was sufficient to secure
the payment of the capital and accrued interest, the defendant is bound to return
the jewels or their value (P12,000) to plaintiffs, and the plaintiffs, and the plaintiffs
have the right to demand the same upon the payment by them of the rate of 25
per cent per annum from August 28, 1911.
The judgment appealed from being in accordance with this finding, the
same is affirmed without special pronouncement as to costs. So ordered.
Araullo, C.J., Street, Malcolm, Villamor, Ostrand, and Romualdez,
JJ., concur.
RESOLUTION ON A MOTION FOR RECONSIDERATION
April 4, 1923
AVANCEA, J p:

The defendant contends that the plaintiffs' action for the recovery of the
jewels pledged has prescribed. Without deciding whether or not the action to
recover the thing pledged may prescribe in any case, it not being necessary for
the purposes of this opinion, but supposing that it may, still the defendant's
contention is untenable. In the document evidencing the loan in question there is
stated: "I transfer by way of pledge the following jewels." That this is a valid
contract of pledge there can be no question. As a matter of fact the defendant
does not question it, but takes it for granted. However, it is contended that the
obligation of the defendant to return the jewels pledged must be considered as
not stated in writing, for this obligation is not expressly mentioned in the
document. But if this contract of pledge is in writing, it must necessarily be
admitted that the action to enforce the right, which constitutes the essence of this
contract, is covered by a written contract. The duty of the creditor to return the
thing pledge in case the principal obligation is fulfilled is essential in all contracts
of pledge. This constitutes, precisely, the consideration of the debtor in this
accessory contract, so that if this obligation of the creditor to return the thing
pledge, and the right of the debtor to demand the return thereof, are eliminated,
the contract would not be a contract of pledge. It would be a donation.
It the right of the plaintiffs to recover the thing pledged is covered by a
written contract, the time for the prescription of this action is ten years, according
to section 43 of the Code of Civil Procedure.
The defendant contends that the time of prescription of the action of the
plaintiffs to recover the things pledged must be computed from August 28, 1911,
the date of the making of the contract of loan secured by this pledge. The term of
this loan is one year. However, it is contended that the action of the plaintiffs to
recover the thing pledged accrued on the very date of the making of the contract,
inasmuch as from that date they could have recovered the same by paying the
loan even before the expiration of the period fixed for payment. This view is
contrary to law. Whenever a term for the performance of an obligation is fixed, it
is presumed to have been established for the benefit of the creditor as well as
that of the debtor, unless from its tenor or from other circumstances it should
appear that the term was established for the benefit of one or the other only (art.
1128 of the Civil Code). In this case it does not appear, either from any
circumstance, or from the tenor of the contract, that the term of one year allowed
the plaintiffs to pay the debt was established in their favor only. Hence it must be
presumed to have been established for the benefit of the defendant also. And it
must be so, for this is a case of a loan, with interest, wherein the term benefits
the plaintiffs by the use of the money, as well as the defendant by the interest.
This being so, the plaintiffs had no right to pay the loan before the lapse of one
Page 384 of 505

year, without the consent of the defendant, because such a payment in advance
would have deprived the latter of the benefit of the stipulated interest. It follows
from this that appellant is in error when he contends that the plaintiffs could have
paid the loan and recovered the thing pledged from the date of the execution of
the contract and, therefore, his theory that the action of the plaintiffs to recover
the thing pledged accrued from the date of the execution of the contract is not
tenable.

It must, therefore, be admitted that the action of the plaintiffs for the
recovery of the thing pledged did not accrue until August 31, 1912, when the term
fixed for the loan expired. Computing the time from that date to that of the filing of
the complaint in this cause, October 9, 1920, it appears that the ten years fixed
by the law for the prescription of the action have not yet elapsed.
On the other hand, the contract of loan with pledge is in writing and the
action of the defendant for the recovery of the loan does not prescribed until after
ten years. It is unjust to hold that the action of the plaintiffs for the recovery of the
thing pledged, after the payment of the loan, has already prescribed while the
action of the defendant for the recovery of the loan has not yet prescribed. The
result of this would be that the defendant might have collected the loan and at the
same time kept the thing pledge.

MORTGAGE

The motion, C. J., Malcolm, Ostrand, and Romualdez, JJ., concur.

FIRST DIVISION

||| (Sarmiento v. Javellana, G.R. No. 18500, [October 2, 1922], 43 PHIL 880-887)
[G.R. No. 168736. April 19, 2006.]
SPOUSES ADELINA S. CUYCO and FELICIANO U.
CUYCO, petitioners, vs. SPOUSES RENATO CUYCO and
FILIPINA CUYCO, respondents.

DECISION

YNARES-SANTIAGO, J p:
This petition for review on certiorari assails the Decision 1 of the Court of Appeals
(CA) in CA G.R. CV No. 62352 dated November 5, 2003 which modified the
Page 385 of 505

Decision 2 of the Regional Trial Court (RTC) of Quezon City, Branch 105 in Civil Case
No. Q-97-32130 dated January 27, 1999, as well as the Resolution 3 dated June 28,
2005 denying the motion for reconsideration thereof.
The facts of the case are as follows:
Petitioners, spouses Adelina and Feliciano Cuyco, obtained a loan in the amount of
P1,500,000.00 from respondents, spouses Renato and Filipina Cuyco, payable within
one year at 18% interest per annum, and secured by a Real Estate Mortgage 4 over a
parcel of land with improvements thereon situated in Cubao, Quezon City covered by
TCT No. RT-43723 (188321). 5
Subsequently, petitioners obtained additional loans from the respondents in the
aggregate amount of P1,250,000.00, broken down as follows: (1) P150,000.00 on
May 30, 1992; (2) P150,000.00 on July 1, 1992; (3) P500,000.00 on September 5,
1992; (4) P200,000.00 on October 29, 1992; and (5) P250,000.00 on January 13,
1993. 6
Petitioners made payments amounting to P291,700.00, 7 but failed to settle their
outstanding loan obligations. Thus, on September 10, 1997, respondents filed a
complaint 8 for foreclosure of mortgage with the RTC of Quezon City, which was
docketed as Civil Case No. Q-97-32130. They alleged that petitioners' loans were
secured by the real estate mortgage; that as of August 31, 1997, their indebtedness
amounted to P6,967,241.14, inclusive of the 18% interest compounded monthly; and
that petitioners' refusal to settle the same entitles the respondents to foreclose the
real estate mortgage. DcSTaC
Petitioners filed a motion to dismiss 9 on the ground that the complaint states no
cause of action which was denied by the RTC 10 for lack of merit.
In their answer, 11 petitioners admitted their loan obligations but argued that only the
original loan of P1,500,000.00 was secured by the real estate mortgage at 18% per
annum and that there was no agreement that the same will be compounded monthly.
On January 27, 1999, the RTC rendered judgment 12 in favor of the respondents, the
dispositive portion of which reads:
WHEREFORE, in the light of the foregoing, the Court renders
judgment on the Complaint in favor of the plaintiffs and hereby
orders the defendants to pay to the Court or to the plaintiffs the
amounts of P6,332,019.84, plus interest until fully paid,
P25,000.00 as attorney's fees, and costs of suit, within a period
of one hundred and twenty (120) days from the entry of

judgment, and in case of default of such payment and upon

proper motion, the property shall be ordered sold at public
auction to satisfy the judgment. Further, defendants[']
counterclaim is dismissed.
SO ORDERED. 13
Petitioners appealed to the CA reiterating their previous claim that only the amount of
P1,500,000.00 was secured by the real estate mortgage. 14 They also contended that
the RTC erred in ordering the foreclosure of the real estate mortgage to satisfy the
total indebtedness of P6,532,019.84, as of January 10, 1999, plus interest until fully
paid, and in imposing legal interest of 12% per annum on the stipulated interest of
18% from the filing of the case until fully paid. 15
On November 5, 2003, the CA partially granted the petition and modified the RTC
decision insofar as the amount of the loan obligations secured by the real estate
mortgage. It held that by express intention of the parties, the real estate mortgage
secured the original P1,500,000.00 loan and the subsequent loans of P150,000.00
and P500,000.00 obtained on July 1, 1992 and September 5, 1992, respectively. As
regards the loans obtained on May 31, 1992, October 29, 1992 and January 13, 1993
in the amounts of P150,000.00, P200,000.00 and P250,000.00, respectively, the
appellate tribunal held that the parties never intended the same to be secured by the
real estate mortgage. The Court of Appeals also found that the trial court properly
imposed 12% legal interest on the stipulated interest from the date of filing of the
complaint. The dispositive portion of the Decision reads:
WHEREFORE, the instant appeal is PARTIALLY GRANTED. The
assailed decision of the Regional Trial Court of Quezon City,
Branch 105, in Civil Case No. Q-97-32130 is hereby MODIFIED
to read:
"WHEREFORE, in the light of the foregoing, the Court
renders judgment on the Complaint in favor of the
plaintiffs and hereby orders the defendants to pay to the
Court or to the plaintiffs the amount of P2,149,113.92[,]
representing the total outstanding principal loan of the
said defendants, plus the stipulated interest at the rate
of 18% per annum accruing thereon until fully paid,
within a period of one hundred and twenty days from the
entry of judgment, and in case of default of such
payment and upon motion, the property, subject of the
Page 386 of 505

real estate mortgage contract, shall be ordered sold at

public auction in satisfaction of the mortgage
debts. CaATDE
Defendants are further, ordered to pay the plaintiffs the
following:
1. the legal interest at the rate of 12% per annum on the
stipulated interest of 18% per annum,
computed from the filing of the complaint until
fully paid;
2. the sum of P25,000.00 as and for attorney's fees; and
3. the costs of suit."
SO ORDERED. 16
Hence, the instant petition for review on the sole issue:
WHETHER
OR
NOT
PETITIONERS
MUST
PAY
RESPONDENTS LEGAL INTEREST OF 12% PER ANNUM ON
THE STIPULATED INTEREST OF 18% PER ANNUM,
COMPUTED FROM THE FILING OF THE COMPLAINT UNTIL
FULL PAID. 17
Petitioners contend that the imposition of the 12% legal interest per annum on the
stipulated interest of 18% per annum computed from the filing of the complaint until
fully paid was not provided in the real estate mortgage contract, thus, the same has
no legal basis.
We are not persuaded.
While a contract is the law between the parties, 18 it is also settled that an existing
law enters into and forms part of a valid contract without the need for the parties
expressly making reference to it. 19 Thus, the lower courts correctly applied Article
2212 of the Civil Code as the basis for the imposition of the legal interest on the
stipulated interest due. It reads:
Art. 2212. Interest due shall earn legal interest from the time it is
judicially demanded, although the obligation may be silent
upon this point.

The foregoing provision has been incorporated in the comprehensive summary of

existing rules on the computation of legal interest enunciated by the Court in Eastern
Shipping Lines, Inc. v. Court of Appeals, 20 to wit:
1. When an obligation is breached, and it consists in the payment
of a sum of money, i.e., a loan or forbearance of money,
the interest due should be that which may have been
stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is
judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed
from default, i.e., from judicial or extrajudicial demand
under and subject to the provisions of Article 1169 of the
Civil Code. IDEHCa
2. When an obligation, not constituting a loan or forbearance of
money, is breached, an interest on the amount of
damages awarded may be imposed at thediscretion of
the court at the rate of 6% per annum. No interest,
however, shall be adjudged on unliquidated claims or
damages except when or until the demand can be
established with reasonable certainty. Accordingly,
where the demand is established with reasonable
certainty, the interest shall begin to run from the time the
claim is made judicially or extrajudicially (Art. 1169, Civil
Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest
shall begin to run only from the date the judgment of the
court is made (at which time the quantification of
damages may be deemed to have been reasonably
ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally
adjudged.
3. When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from
such finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a
forbearance of credit. (Emphasis supplied)
Page 387 of 505

In the case at bar, the evidence shows that petitioners obtained several loans from the
respondent, some of which as held by the CA were secured by real estate mortgage
and earned an interest of 18% per annum. Upon default thereof, respondents
demanded payment from the petitioners by filing an action for foreclosure of the real
estate mortgage. Clearly, the case falls under the rule stated in paragraph 1.
Applying the rules in the computation of interest, the principal amount of loans subject
of the real estate mortgage must earn the stipulated interest of 18% per annum, which
interest, as long as unpaid, also earns legal interest of 12% per annum, computed
from the date of the filing of the complaint on September 10, 1997 until finality of the
Court's Decision. Such interest is not due to stipulation but due to the mandate of the
law 21 as embodied in Article 2212 of the Civil Code. From such date of finality, the
total amount due shall earn interest of 12% per annum until satisfied. 22
Certainly, the computed interest from the filing of the complaint on September 10,
1997 would no longer be true upon the finality of this Court's decision. In accordance
with the rules laid down in Eastern Shipping Lines, Inc. v. Court of Appeals, we derive
the following formula 23 for the RTC's guidance:

TOTAL AMOUNT DUE = [principal + interest + interest on

interest] - partial payments made
Interest = principal x 18 % per annum x no. of years from due
date until finality of judgment
Interest on interest = Interest computed as of the filing of the
complaint (September 10, 1997) x 12% x no. of years until finality
of judgment
Total amount due as of the date of finality of judgment will earn
an interest of 12% per annum until fully paid.
In Rizal Commercial Banking Corporation v. Alfa RTW Manufacturing
Corporation, 24 this Court held that the total amount due on the contracts of loan may
be easily determined by the trial court through a simple mathematical computation
based on the formula specified above. Mathematics is an exact science, the
application of which needs no further proof from the parties. ESHAcI
As regards what loans were secured by the real estate mortgage, respondents
contended that all five additional loans were intended by the parties to be secured by
the real estate mortgage. Thus, the CA erred in ruling that only two of the five

additional loans were secured by the real estate mortgage when the documents
evidencing said loans would show at least three loans were secured by the real estate
mortgage, namely: (1) P150,000.00 obtained on May 31, 1992; (2) P150,000.00
obtained on July 1, 1992; and (3) P500,000.00 obtained on September 5, 1992. 25
In their Reply, petitioners alleged that their petition only raised the sole issue of
interest on the interest due, thus, by not filing their own petition for review,
respondents waived their privilege to bring matters for the Court's review that do not
deal with the sole issue raised.
Procedurally, the appellate court in deciding the case shall consider only the assigned
errors, however, it is equally settled that the Court is clothed with ample authority to
review matters not assigned as errors in an appeal, if it finds that their consideration is
necessary to arrive at a just disposition of the case. 26
Moreover, as an exception to the rule that findings of facts of the CA are conclusive
and binding on the Court, 27 an independent evaluation of facts may be done by it
when the findings of facts are conflicting, 28 as in this case.
The RTC held that all the additional loans were secured by the real estate mortgage,
thus:
There is, therefore, a preponderance of evidence to show that the
parties agreed that the additional loans would be against the
mortgaged property. It is of no moment that the Deed of
Mortgage (Exh. B) was not amended and thereafter annotated at
the back of the title (Exh. C) because under Article 2125 of the
Civil Code, if the instrument of mortgage is not recorded, the
mortgage is nevertheless binding between the parties. It is
extremely difficult for the court to perceive that the plaintiffs
required the defendants to execute a mortgage on the first loan
and thereafter fail to do so on the succeeding loans. Such
contrary behavior is unlikely. 29
The CA modified the RTC decision holding that:
However, the real estate mortgage contract was supplemented by
the express intention of the mortgagors (defendants-appellants)
to secure the subsequent loans they obtained from the
mortgagees (plaintiffs-appellees), on 01 July 1992, in the amount
of P150,000.00, and on 05 September 1992, in the amount of
P500,000.00. The mortgagors' (defendants-appellants) intention
Page 388 of 505

to secure a larger amount than that stated in the real estate

mortgage contract was unmistakable in the acknowledgment
receipts they issued on the said loans. The acknowledgment
receipts read:
"July
[1]992

1,

"Received from Mr. & Mrs. Renato Q. Cuyco PCIB Ck #

498243 in the amount of P150,000.00 July 1/92 as
additional loan against mortgaged property TCT No. RT43723 (188321) Q.C.
(SGD)
Adelina
Cuyco"

S.

"Sept. 05/92
"Received from Mr. R. Cuyco the amount of
P500,000.00 (five hundred thousand) PCIB Ck #
468657 as additional loan from mortgage property TCT
RT-43723.
(SGD)
Adelina
Cuyco"

S.

In such case, the specific amount mentioned in the real estate

mortgage contract no longer controls. By express intention of the
mortgagors (defendants-appellants) the real estate mortgage
contract, as supplemented, secures the P1,500,000.00 loan
obtained on 25 November 1991; the P150,000.00 loan obtained
on 01 July 1992; and the P500,000.00 loan obtained on 05
September 1992. All these loans are subject to stipulated interest
of 18% per annum provided in the real estate mortgage contract.
With respect to the other subsequent loans of the defendantsappellants in the amount of P150,000.00, obtained on 31 May
1992; in the amount of P200,000.00, obtained on 29 October
1992; and, in the amount of P250,000.00, obtained on 13
January 1993, nothing in the records remotely suggests that the
mortgagor (defendants-appellants), likewise, intended the said

loans to be secured by the real estate mortgage contract.

Consequently, we rule that the trial court did err in declaring said
loans to be secured by the real estate mortgage contract. 30
As a general rule, a mortgage liability is usually limited to the amount mentioned in
the contract. 31 However, the amounts named as consideration in a contract of
mortgage do not limit the amount for which the mortgage may stand as security if
from the four corners of the instrument the intent to secure future and other
indebtedness can be gathered. This stipulation is valid and binding between the
parties and is known in American Jurisprudence as the "blanket mortgage clause,"
also known as a "dragnet clause." 32
A "dragnet clause" operates as a convenience and accommodation to the borrowers
as it makes available additional funds without their having to execute additional
security documents, thereby saving time, travel, loan closing costs, costs of extra
legal services, recording fees, et cetera. 33
While a real estate mortgage may exceptionally secure future loans or advancements,
these future debts must be sufficiently described in the mortgage contract. An
obligation is not secured by a mortgage unless it comes fairly within the terms of the
mortgage contract. 34
The pertinent provisions of the November 26, 1991 real estate mortgage reads:
That the MORTGAGOR is indebted unto the MORTGAGEE in the
sum of ONE MILLION FIVE THOUSAND PESOS (sic)
(1,500,000.00) Philippine Currency, receipt whereof is hereby
acknowledged and confessed, payable within a period of one
year, with interest at the rate of eighteen percent (18%) per
annum; HcTSDa
That for and in consideration of said indebtedness, the
MORTGAGOR does hereby convey and deliver by way of
MORTGAGE unto said MORTGAGEE, the latter's heirs and
assigns, the following realty together with all the improvements
thereon and situated at Cubao, Quezon City, and described as
follows:
xxx xxx xxx
PROVIDED HOWEVER, that should the MORTGAGOR duly pay
or cause to be paid unto the MORTGAGEE or his heirs and
assigns, the said indebtedness of ONE MILLION FIVE
Page 389 of 505

HUNDRED THOUSAND PESOS (1,500,000.00), Philippine

Currency, together with the agreed interest thereon, within the
agreed term of one year on a monthly basis then this
MORTGAGE shall be discharged, and rendered of no force and
effect, otherwise it shall subsist and be subject to foreclosure in
the manner and form provided by law.
It is clear from a perusal of the aforequoted real estate mortgage that there is no
stipulation that the mortgaged realty shall also secure future loans and
advancements. Thus, what applies is the general rule above stated.
Even if the parties intended the additional loans of P150,000.00 obtained on May 30,
1992, P150,000.00 obtained on July 1, 1992, and P500,00.00 obtained on September
5, 1992 to be secured by the same real estate mortgage, as shown in the
acknowledgement receipts, it is not sufficient in law to bind the realty for it was not
made substantially in the form prescribed by law.
In order to constitute a legal mortgage, it must be executed in a public document,
besides being recorded. A provision in a private document, although denominating the
agreement as one of mortgage, cannot be considered as it is not susceptible of
inscription in the property registry. A mortgage in legal form is not constituted by a
private document, even if such mortgage be accompanied with delivery of possession
of the mortgage property. 35 Besides, by express provisions of Section 127 of Act No.
496, a mortgage affecting land, whether registered under said Act or not registered at
all, is not deemed to be sufficient in law nor may it be effective to encumber or bind
the land unless made substantially in the form therein prescribed. It is required,
among other things, that the document be signed by the mortgagor executing the
same, in the presence of two witnesses, and acknowledged as his free act and deed
before a notary public. A mortgage constituted by means of a private document
obviously does not comply with such legal requirements. 36
What the parties could have done in order to bind the realty for the additional loans
was to execute a new real estate mortgage or to amend the old mortgage
conformably with the form prescribed by the law. Failing to do so, the realty cannot be
bound by such additional loans, which may be recovered by the respondents in an
ordinary action for collection of sums of money. HTcADC

Lastly, the CA held that to discharge the real estate mortgage, payment only of the
principal and the stipulated interest of 18% per annum is sufficient as the mortgage
document does not contain a stipulation that the legal interest on the stipulated
interest due, attorney's fees, and costs of suit must be paid first before the same may
be discharged. 37
We do not agree.
Section 2, Rule 68 of the Rules of Court provides:
SEC. 2. Judgment on foreclosure for payment or sale. If
upon the trial in such action the court shall find the facts set forth
in the complaint to be true, it shall ascertain the amount due to
the plaintiff upon the mortgage debt or obligation, including
interest and other charges as approved by the court, and
costs, and shall render judgment for the sum so found due and
order that the same be paid to the court or to the judgment
obligee within a period of not less than ninety (90) days nor more
than one hundred twenty (120) days from the entry of judgment,
and that in default of such payment the property shall be sold at
public auction to satisfy the judgment. (Emphasis added)

Indeed, the above provision of the Rules of Court provides that the mortgaged
property may be charged not only for the mortgage debt or obligation but also for the
interest, other charges and costs approved by the court. Thus, to discharge the real
estate mortgage, petitioners must pay the respondents (1) the total amount due, as
computed in accordance with the formula indicated above, that is, the principal loan of
P1,500,000.00, the stipulated interest of 18%, the interest on the stipulated interest
due of 12% computed from the filing of the complaint until finality of the decision less
partial payments made, (2) the 12% legal interest on the total amount due from finality
until fully satisfied, (3) the reasonable attorney's fees of P25,000.00 and (4) the costs
of suit, within the period specified by the Rules. Should the petitioners default in the
payment thereof, the property shall be sold at public auction to satisfy the judgment.
WHEREFORE, in view of the foregoing, the Decision of the Court of Appeals in CA
G.R. CV No. 62352 dated November 5, 2003, which modified the Decision of the
Regional Trial Court of Quezon City, Branch 105, in Civil Case No. Q-97-32130, is
AFFIRMED with the MODIFICATIONS that petitioners are ordered to pay the
respondents (1) the total amount due, as computed by the RTC in accordance with
the formula specified above, (2) the legal interest of 12% per annum on the total
Page 390 of 505

amount due from such finality until fully paid, (3) the reasonable amount of
P25,000.00 as attorney's fees, and (4) the costs of suit, within a period of not less
than 90 days nor more than 120 days from the entry of judgment, and in case of
default of such payment the property shall be sold at public auction to satisfy the
judgment.
SO ORDERED.
||| (Spouses Cuyco v. Spouses Cuyco, G.R. No. 168736, [April 19, 2006])

to give something or to render some service." 2 So it is likewise under American

law. Thus: "A contract is a promise or a set of promises for the breach of which
the law gives a Remedy, or the performance of which the law in some way
recognizes as a duty." 3
The law may go further and require that certain formalities be executed. Thus, for a
mortgage to be validly constituted, "it is indispensable, . . ., that the document in
which it appears be recorded in the Registry of Property." The same codal provision
goes on: "If the instrument is not recorded, the mortgage is nevertheless binding
between the parties." 4
The question before us in this appeal from a lower court decision, one we have to
pass upon for the first time, is the effect, if any, to be given to a mortgage contract
admittedly not registered, only the parties being involved in the suit. The lower court
was of the opinion that while it "created a personal obligation [it] did not establish a
real estate mortgage." 5 It did not decree foreclosure therefor. Plaintiff-appellant
appealed. We view the matter differently and reverse the lower court.

EN BANC
[G.R. No. L-26371. September 30, 1969.]
MOBIL OIL PHILIPPINES, INC., plaintiff-appellant, vs. RUTH R.
DIOCARES, ET AL., defendants-appellees.

Faylona, Berroya, Norte & Associates for plaintiff-appellant.

Vivencio G. Ibrado, Jr. for defendants-appellees.
DECISION
FERNANDO, J p:
It may very well be, as noted by jurists of repute, that to stress the
element of a promise as the basis of contracts is to acknowledge the influence of
natural law. 1 Nonetheless, it does not admit of doubt that whether under the civil
law or the common law, the existence of a contract is unthinkable without one's
word being plighted. So the New Civil Code provides: "A contract is a meeting of
minds between two persons whereby one binds himself, with respect to the other,

The case for the plaintiff, Mobil Oil Philippines, Inc., now appellant, was summarized
in the lower court order of February 25, 1966, subject of this appeal. Thus: "In its
complaint plaintiff alleged that on Feb. 9, 1965 defendants Ruth R. Diocares and Lope
T. Diocares entered into a contract of loan and real estate mortgage wherein the
plaintiff extended to the said defendants a loan of P45,000.00; that said defendants
also agreed to buy from the plaintiff on cash basis their petroleum requirements in an
amount of not less than 50,000 liters per month; that the said defendants will pay to
the plaintiff 9-1/2% per annum on the diminishing balance of the amount of their loan;
that the defendants will repay the said loan in monthly installments of P950.88 for a
period of five (5) years from February 9, 1965; that to secure the performance of the
foregoing obligation they executed a first mortgage on two parcels of land covered by
Transfer Certificates of Title Nos. T-27136 and T-27946, both issued by the Register
of Deeds of Bacolod City. The agreement further provided that in case of failure of the
defendants to pay any of the installments due and purchase their petroleum
requirements in the minimum amount of 50,000 liters per month from the plaintiff, the
latter has the right to foreclose the mortgage or recover the payment of the entire
obligation or its remaining unpaid balance; that in case of foreclosure the plaintiff shall
be entitled to 12% of the indebtedness as damages and attorney's fees. A copy of the
loan and real estate mortgage contract executed between the plaintiff and the
defendants is attached to the complaint and made a part thereof. The complaint
further alleges that the defendant paid only the amount of P1,901.76 to the plaintiff,
thus leaving a balance of P43,098.24, excluding interest, on their indebtedness. The
Page 391 of 505

said defendants also failed to buy on cash basis the minimum amount of petroleum
which they agreed to purchase from the plaintiff. The plaintiff, therefore, prayed that
the defendants be ordered to pay the amount of P43,098.24, with interest at 9-1/2%
per annum from the date it fell due, and in default of such payment that the mortgaged
properties be sold and the proceeds applied to the payment of defendants'
Obligation." 6

governing article 10 that 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." Note that it ignored the succeeding sentence: "If the instrument is not
recorded, the mortgage is nevertheless binding between the parties." Its conclusion,
however, is that what was thus created was merely "a personal obligation but did not
establish a real estate mortgage."

Defendants, Ruth R. Diocares and Lope T. Diocares, now appellees, admitted their
indebtedness as set forth above, denying merely the alleged refusal to pay, the truth,
according to them, being that they sought for an extension of time to do so, inasmuch
as they were not in a position to comply with their obligation. They further set forth
that they did request plaintiff to furnish them with the statement of accounts with the
view of paying the same on installment basis, which request was, however, turned
down by the plaintiff.

Such a conclusion does not commend itself for approval. The codal provision is clear
and explicit. Even if the instrument were not recorded, "the mortgage is nevertheless
binding between the parties." The law cannot be any clearer. Effect must be given to it
as written. The mortgage subsists; the parties are bound. As between them, the mere
fact that there is as yet no compliance with the requirement that it be recorded cannot
be a bar to foreclosure.

Then came a motion from the plaintiff for a judgment on the pleadings, which motion
was favorably acted on by the lower court. As was stated in the order appealed from:
"The answer of the defendants dated October 21, 1965 did not raise any issue. On
the contrary, said answer admitted the material allegations of the complaint. The
plaintiff is entitled to a judgment on the pleadings." 7
As to why the foreclosure sought by plaintiff was denied, the lower court order on
appeal reads thus: "The Court cannot, however, order the foreclosure of the mortgage
of properties, as prayed for, because there is no allegation in the complaint nor does it
appear from the copy of the loan and real estate mortgage contract attached to the
complaint that the mortgage had been registered. The said loan agreement although
binding among the parties merely created a personal obligation but did not establish a
real estate mortgage. The document should have been registered. (Art. 2125, Civil
Code of the Phil.)" 8 The dispositive portion is thus limited to ordering defendants "to
pay the plaintiff the account of P43,098.24, with interest at the rate of 9-1/2% per
annum from the date of the filing of the complaint until fully paid, plus the amount of
P2,000.00 as attorneys' fees, and the costs of the suit." 9
Hence this appeal, plaintiff-appellant assigning as errors the holding of the lower court
that no real estate mortgage was established and its consequent refusal to order the
foreclosure of the mortgaged properties. As set forth at the outset, we find the appeal
meritorious.
The lower court should not have held that no real estate mortgage was established
and should have ordered its foreclosure. The lower court predicated its inability to
order the foreclosure in view of the categorical nature of the opening sentence of the

A contrary conclusion would manifest less than full respect to what the codal provision
ordains. The liability of the mortgagor is therein explicitly recognized. To hold, as the
lower court did, that no foreclosure would lie under the circumstances would be to
render the provision in question nugatory. That we are not allowed to do. What the law
requires in unambiguous language must be lived up to. No interpretation is needed,
only its application, the undisputed facts calling for it. 11
Moreover to rule as the lower court did would be to show less than fealty to the
purpose that animated the legislators in giving expression to their will that the failure
of the instrument to be recorded does not result in the mortgage being any the less
"binding between the parties." In the language of the Report of the Code Commission:
"In article [2125] an additional provision is made that if the instrument of mortgage is
not recorded, the mortgage is nevertheless binding between the parties." 12 We are
not free to adopt then an interpretation, even assuming that the codal provision lacks
the forthrightness and clarity that this particular norm does and, therefore, requires
construction, that would frustrate or nullify such legislative objective.
Nor is the reason difficult to discern why such an exception should be made to the rule
that is indispensable for a mortgage to be validly constituted that it be recorded.
Equity so demands, and justice is served. There is thus full acknowledgment of the
binding effect of a promise, which must be lived up to, otherwise the freedom a
contracting party is supposed to possess becomes meaningless. It could be said of
course that to allow foreclosure in the absence of such a formality is to offend against
the demands of jural symmetry. What is "indispensable" may be dispensed with. Such

Page 392 of 505

an objection is far from fatal. This would not be the first time when logic yields to what
is fair and what is just. To such an overmastering requirement, law is not immune.
WHEREFORE, the lower court order of February 25, 1966 is affirmed with the
modification that in default of the payment of the above amount of P43,028.94 with
interests at the rate of 9-1/2% per annum from the date of the filing of the complaint,
that the mortgage be foreclosed with the properties subject thereof being sold and the
proceeds of the sale applied to the payment of the amounts due the plaintiff in
accordance with law. With costs against defendants-appellees.
Concepcion, C.J., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Capistrano,
Teehankee and Barredo, JJ., concur.
Reyes, J.B.L., J., is on official trip.
||| (Mobil Oil Phil., Inc. v. Diocares, G.R. No. L-26371, [September 30, 1969], 140
PHIL 171-177)

FIRST DIVISION
[G.R. No. L-49940. September 25, 1986.]
GEMMA R. HECHANOVA, accompanied by her husband
NICANOR HECHANOVA, JR., and PRESCILLA R. MASA
accompanied
by
her
husband,
FRANCISCO
MASA, petitioners, vs. HON. MIDPANTAO L. ADIL, Presiding
Judge, Branch II, Court of First Instance of Iloilo, THE
PROVINCIAL
SHERIFF
OF
ILOILO,
and
PIO
SERVANDO, respondents.

DECISION

YAP, J p:
Petitioners seek the annulment of various orders issued by the respondent Presiding
Judge of Branch II, Court of First Instance of Iloilo, in Civil Case No. 12312 entitled
"Pio Servando versus Jose Y. Servando et al." A temporary restraining order was
Page 393 of 505

issued by this Court on May 9, 1979, staying until further orders the execution of the
decision rendered by the respondent Judge in said case.
The case under review is for the annulment of a deed of sale dated March 11, 1978,
executed by defendant Jose Y. Servando in favor of his co-defendants, the petitioners
herein, covering three parcels of land situated in Iloilo City. Claiming that the said
parcels of land were mortgaged to him in 1970 by the vendor, who is his cousin, to
secure a loan of P20,000.00, the plaintiff Pio Servando impugned the validity of the
sale as being fraudulent, and prayed that it be declared null and void and the transfer
certificates of title issued to the vendees be cancelled, or alternatively, if the sale is
not annulled, to order the defendant Jose Servando to pay the amount of P20,000.00,
plus interests, and to order defendants to pay damages. Attached to the complaint
was a copy of the private document evidencing the alleged mortgage (Annex A),
which is quoted hereunder: llcd
"
August
20, 1970
"This is to certify that I, Jose Yusay Servando, the sole owner of
three parcel of land under Tax Declaration No. 28905, 44123 and
31591 at Lot No. 1, 1863-Portion of 1863 & 1860 situated at Sto.
Nio St., Arevalo, Compania St. & Compania St., Interior Molo,
respectively, have this date mortgaged the said property to my
cousin Pio Servando, in the amount of TWENTY THOUSAND
PESOS (P20,000.00), redeemable for a period not exceeding ten
(10) years, the mortgage amount bearing an interest of 10% per
annum.
I further certify that in case I fail to redeem the said properties
within the period stated above, my cousin Pio Servando, shall
become the sole owner thereof.

mere private document and was not recorded in the Registry of Deeds; and that the
plaintiff was not the real party in interest and, as a mere mortgagee, had no standing
to question the validity of the sale. The motion was denied by the respondent Judge,
in its order dated June 20, 1978, "on the ground that this action is actually one for
collection."
On June 23, 1978, defendant Jose Y. Servando died. The defendants filed a
Manifestation and Motion, informing the trial court accordingly, and moving for the
dismissal of the complaint pursuant to Section 21 of Rule 3 of the Rules of Court,
pointing out that the action was for recovery of money based on an actionable
document to which only the deceased defendant was a party. The motion to dismiss
was denied on July 25, 1978, "it appearing from the face of the complaint that the
instant action is not purely a money claim, it being only incidental, the main action
being one for annulment and damages."
On August 1, 1978, plaintiff filed a motion to declare defendants in default, and on the
very next day, August 2, the respondent Judge granted the motion and set the hearing
for presentation of plaintiff's evidence ex-parte on August 24, 1978.
On August 2, 1978, or the same day that the default order was issued, defendants
Hechanova and Masa filed their Answers, denying the allegations of the complaint
and repeating, by way of special and affirmative defenses, the grounds stated in their
motions to dismiss.
On August 25, 1978, a judgment by default was rendered against the defendants,
annulling the deed of sale in question and ordering the Register of Deeds of Iloilo to
cancel the titles issued to Priscilla Masa and Gemma Hechanova, and to revive the
title issued in the name of Jose Y. Servando and to deliver the same to the
plaintiff. LLjur

WITNESSES:

The defendants took timely steps to appeal the decision to the Court of Appeals by
filing a notice of appeal, an appeal bond, and a record on appeal. However, the trial
court disapproved the record on appeal due to the failure of defendants to comply with
its order to eliminate therefrom the answer filed on August 2, 1978 and accordingly,
dismissed the appeal, and on February 2, 1978, issued an order granting the writ of
execution prayed for by plaintiff.

(Sgd) Ernesto G. Jeruta.

We find the petition meritorious, and the same is hereby given due course.

(Sgd) Francisco B. Villanueva"

It is clear from the records of this case that the plaintiff has no cause of action. Plaintiff
has no standing to question the validity of the deed of sale executed by the deceased
defendant Jose Servando in favor of his co-defendants Hechanova and Masa. No

(SGD.) JOSE YUSAY

SERVANDO

The defendants moved to dismiss the complaint on the grounds that it did not state a
cause of action, the alleged mortgage being invalid and unenforceable since it was a

Page 394 of 505

valid mortgage has been constituted in plaintiff's favor, the alleged deed of mortgage
being a mere private document and not registered; moreover, it contains a
stipulation (pacto comisorio) which is null and void under Article 2088 of the Civil
Code. Even assuming that the property was validly mortgaged to the plaintiff, his
recourse was to foreclose the mortgage, not to seek annulment of the sale.
WHEREFORE, the decision of the respondent court dated August 25, 1973 and its
Order of February 2, 1979 are set aside, and the complaint filed by plaintiff dated
February 4, 1978 is hereby dismissed.
SO ORDERED.
Narvasa, Melencio-Herrera Paras and Feliciano, JJ., concur.
Cruz, J., is on leave.

SECOND DIVISION
[G.R. No. L-49101. October 24, 1983.]
RAOUL
S.V. BONNEVIE and
HONESTO V. BONNEVIE, petitioners, vs. THE
HONORABLE COURT OF APPEALS and THE PHILIPPINE
BANK OF COMMERCE, respondents.

Edgardo I. De Leon for petitioners.

||| (Hechanova v. Adil, G.R. No. L-49940, [September 25, 1986], 228 PHIL 425-428)

Siguion Reyna, Montecillo & Associates for private respondent.

DECISION
GUERRERO, J p:
Petition for review on certiorari seeking the reversal of the decision of the
defunct Court of Appeals, now Intermediate Appellate Court, in CA-G.R. No. 61193-R,
entitled "Honesto Bonnevie vs. Philippine Bank of Commerce, et al.," promulgated
August 11, 1978 1 as well as the Resolution denying the motion for reconsideration.

The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the
Court of First Instance of Rizal against respondent Philippine Bank of Commerce
sought the annulment of the Deed of Mortgage dated December 6, 1966 executed in
favor of the Philippine Bank of Commerce by the spouses Jose M. Lozano and Josefa
P. Lozano as well as the extrajudicial foreclosure made on September 4, 1968. It
alleged among others that (a) the Deed of Mortgage lacks consideration and (b) the
mortgage was executed by one who was not the owner of the mortgaged property. It
further alleged that the property in question was foreclosed pursuant to Act No.
3135 as amended, without, however, complying with the condition imposed for a valid
foreclosure. Granting the validity of the mortgage and the extrajudicial foreclosure, it
finally alleged that respondent Bank should have accepted petitioner's offer to redeem
the property under the principle of equity and justice.
Page 395 of 505

On the other hand, the answer of defendant Banks, now private respondent herein,
specifically denied most of the allegations in the complaint and raised the following
affirmative defenses: (a) that the defendant has not given its consent, much less the
requisite written consent, to the sale of the mortgaged property to plaintiff and the
assumption by the latter of the loan secured thereby; (b) that the demand letters and
notice of foreclosure were sent to Jose Lozano at his address; (c) that it was notified
for the first time about the alleged sale after it had foreclosed the Lozano mortgage;
(d) that the law on contracts requires defendant's consent before Jose Lozano can be
released from his bilateral agreement with the former and doubly so, before plaintiff
may be substituted for Jose Lozano and Alfonso Lim; (e) that the loan of P75,000.00
which was secured by mortgage, after two renewals remain unpaid despite countless
reminders and demands; (f) that the property in question remained registered in the
name of Jose M. Lozano in the land records of Rizal and there was no entry, notation
or indication of the alleged sale to plaintiff; (g) that it is an established banking
practice that payments against accounts need not be personally made by the debtor
himself; and (h) that it is not true that the mortgage, at the time of its execution and
registration, was without consideration as alleged because the execution and
registration of the securing mortgage, the signing and delivery of the promissory note
and the disbursement of the proceeds of the loan are mere implementation of the
basic consensual contract of loan.
After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul
S.V. Bonnevie filed a motion for intervention. The intervention was premised on the
Deed of Assignment executed by petitioner Honesto Bonnevie in favor of petitioner
Raoul
S.V. Bonnevie covering
the
rights
and
interests
of
petitioner
Honesto Bonnevie over the subject property. The intervention was ultimately granted
in order that all issues be resolved in one proceeding to avoid multiplicity of suits.
On March 29, 1976, the lower court rendered its decision, the dispositive portion of
which reads as follows: LibLex
"WHEREFORE, all the foregoing promises considered, judgment
is hereby rendered dismissing the complaint with costs against
the plaintiff and the intervenor."
After the motion for reconsideration of the lower court's decision was denied,
petitioners appealed to respondent Court of Appeals assigning the following errors:
1. The lower court erred in not finding that the real estate
mortgage executed by Jose Lozano was null and void;

2. The lower court erred in not finding that the auction sale made
on August 19, 1968 was null and void;
3. The lower court erred in not allowing the plaintiff and the
intervenor to redeem the property;
4. The lower court erred in not finding that the defendant acted in
bad faith; and
5. The lower court erred in dismissing the complaint.
On August 11, 1978, the respondent court promulgated its decision affirming the
decision of the lower court, and on October 3, 1978 denied the motion for
reconsideration. Hence, the present petition for review.
The factual findings of respondent Court of Appeals being conclusive upon this Court,
We hereby adopt the facts found by the trial court and found by
the Court ofAppeals to be consistent with the evidence adduced during trial, to wit:
"It is not disputed that spouses Jose M. Lozano and Josefa P.
Lozano were the owners of the property which they mortgaged
on December 6, 1966, to secure the payment of the loan in the
principal amount of P75,000.00 they were about to obtain from
defendant-appellee Philippine Bank of Commerce; that on
December 8, 1966, they executed in favor of plaintiff-appellant the
Deed of Sale with Assumption of Mortgage, for and in
consideration of the sum of P100,000.00, P20,000.00 of which
amount being payable to the Lozano spouses upon the execution
of the document, and the balance of P75,000.00 being payable to
defendant-appellee; that on December 6, 1966, when the
mortgage was executed by the Lozano spouses in favor of
defendant-appellee, the loan of P75,000.00 was not yet received
by them, as it was on December 12, 1966 when they and their
co-maker Alfonso Lim signed the promissory note for that
amount; that from April 28, 1967 to July 12, 1968, plaintiffappellant made payments to defendant-appellee on the mortgage
in the total amount of P18,944.22; that on May 4, 1968, plaintiffappellant assigned all his rights under the Deed of Sale with
Assumption of Mortgage to his brother, intervenor
Raoul Bonnevie; that on June 10, 1968, defendant-appellee
applied for the foreclosure of the mortgage, and notice of sale
was published in the Luzon Weekly Courier on June 30, July 7,
Page 396 of 505

and July 14, 1968; that auction sale was conducted on August
19, 1968, and the property was sold to defendant-appellee for
P84,387.00; and that offers from plaintiff-appellant to repurchase
the property failed, and on October 9, 1969, he caused an
adverse claim to be annotated on the title of the property."
(Decision of the Court of Appeals, p. 5)
Presented for resolution in this review are the following issues:
I
Whether the real estate mortgage executed by the spouses
Lozano in favor of respondent bank was validly and legally
executed.
II
Whether the extrajudicial foreclosure of the said mortgage was
validly and legally effected.
III
Whether petitioners had a right to redeem the foreclosed
property.
IV
Granting that petitioners had such a right, whether respondent
was justified in refusing their offers to repurchase the property.
As clearly seen from the foregoing issues raised, petitioners' course of action is threefold. They primarily attack the validity of the mortgage executed by the Lozano
spouses in favor of respondent Bank. Next, they attack the validity of the extrajudicial
foreclosure and finally, appeal to justice and equity. In attacking the validity of the
deed of mortgage, they contended that when it was executed on December 6, 1966
there was yet no principal obligation to secure as the loan of P75,000.00 was not
received by the Lozano spouses "so much so that in the absence of a principal
obligation, there is want of consideration in the accessory contract, which
consequently impairs its validity and fatally affects its very existence." (Petitioners'
Brief, par. 1, p. 7)
This contention is patently devoid of merit. From the recitals of the mortgage deed
itself, it is clearly seen that the mortgage deed was executed for and on condition of
the loan granted to the Lozano spouses. The fact that the latter did not collect from
the respondent Bank the consideration of the mortgage on the date it was executed is

immaterial. A contract of loan being a consensual contract, the herein contract of loan
was perfected at the same time the contract of mortgage was executed. The
promissory note executed on December 12, 1966 is only an evidence of indebtedness
and does not indicate lack of consideration of the mortgage at the time of its
execution.
Petitioners also argued that granting the validity of the mortgage, the subsequent
renewals of the original loan, using as security the same property which the Lozano
spouses had already sold to petitioners, rendered the mortgage null and void.
This argument failed to consider the provision 2 of the contract of mortgage which
prohibits the sale, disposition of, mortgage and encumbrance of the mortgaged
properties, without the written consent of the mortgagee, as well as the additional
proviso that if in spite of said stipulation, the mortgaged property is sold, the vendee
shall assume the mortgage in the terms and conditions under which it is constituted.
These provisions are expressly made part and parcel of the Deed of Sale with
Assumption of Mortgage.
Petitioners admit that they did not secure the consent of respondent Bank to the sale
with assumption of mortgage. Coupled with the fact that the sale/assignment was not
registered so that the title remained in the name of the Lozano spouses, insofar as
respondent Bank was concerned, the Lozano spouses could rightfully and validly
mortgage the property. Respondent Bank had every right to rely on the certificate of
title. It was not bound to go behind the same to look for flaws in the mortgagor's title,
the doctrine of innocent purchaser for value being applicable to an innocent
mortgagee for value. (Roxas vs. Dinglasan, 28 SCRA 430; Mallorca vs. De Ocampo,
32 SCRA 48). Another argument for the respondent Bank is that a mortgage follows
the property whoever the possessor may be and subjects the fulfillment of the
obligation for whose security it was constituted. Finally, it can also be said that
petitioners voluntarily assumed the mortgage when they entered into the Deed of Sale
with Assumption of Mortgage. They are, therefore, estopped from impugning its
validity whether on the original loan or renewals thereof.

Petitioners next assail the validity and legality of the extrajudicial foreclosure on the
following grounds: LLpr
a) Petitioners were never notified of the foreclosure sale.
b) The notice of auction sale was not posted for the period
required by law.
Page 397 of 505

c) The publication of the notice of auction sale in the Luzon

Weekly Courier was not in accordance with law.
The lack of notice of the foreclosure sale on petitioners is a flimsy ground.
Respondent Bank not being a party to the Deed of Sale with Assumption of Mortgage,
it can validly claim that it was not aware of the same and hence, it may not be obliged
to notify petitioners. Secondly, petitioner Honesto Bonnevie was not entitled to any
notice because as of May 14, 1968, he had transferred and assigned all his rights and
interests over the property in favor of intervenor Raoul Bonnevie and respondent Bank
was not likewise informed of the same. For the same reason, Raoul Bonnevie is not
entitled to notice. Most importantly, Act No. 3135 does not require personal notice on
the mortgagor. The requirement on notice is that:
"Section 3. Notice shall be given by posting notices of the sale for
not less than twenty days in at least three pub]ic places of the
municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall
also be published once a week for at least three consecutive
weeks in a newspaper of general circulation in the municipality or
city."
In the case at bar, the notice of sale was published in the Luzon Courier on June 30,
July 7 and July 14, 1968 and notices of the sale were posted for not less than twenty
days in at least three (3) public places in the Municipality where the property is
located. Petitioners were thus placed on constructive notice.
The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable
because said case involved a judicial foreclosure and the sale to the vendee of the
mortgaged property was duly registered making the mortgaged privy to the sale.
As regards the claim that the period of publication of the notice of auction sale was
not in accordance with law, namely: once a week for at least three consecutive weeks,
the Court of Appeals ruled that the publication of notice on June 30, July 7 and July
14, 1968 satisfies the publication requirement under Act No. 3135notwithstanding the
fact that June 30 to July 14 is only 14 days. We agree. Act No. 3135 merely requires
that "such notice shall be published once a week for at least three consecutive
weeks." Such phrase, as interpreted by this Court in Basa vs. Mercado, 61 Phil. 632,
does not mean that notice should be published for three full weeks.
The argument that the publication of the notice in the "Luzon Weekly Courier" was not
in accordance with law as said newspaper is not of general circulation must likewise
be disregarded. The affidavit of publication, executed by the publisher,

business/advertising manager of the Luzon Weekly Courier, states that it is "a

newspaper of general circulation in . . . Rizal: and that the Notice of Sheriff's sale was
published in said paper on June 30, July 7 and July 14, 1968." This constitutes prima
facie evidence of compliance with the requisite publication. (Sadang vs. GSIS, 18
SCRA 491) Cdpr
To be a newspaper of general circulation, it is enough that "it is published for the
dissemination of local news and general information; that it has a bona fide
subscription list of paying subscribers; that it is published at regular intervals."
(Basa vs. Mercado, 61 Phil. 632). The newspaper need not have the largest
circulation so long as it is of general circulation. (Banta vs. Pacheco, 74 Phil. 67). The
testimony of three witnesses that they do read the Luzon Weekly Courier is no proof
that said newspaper is not a newspaper of general circulation in the province of Rizal.
Whether or not the notice of auction sale was posted for the period required by law is
a question of fact. It can no longer be entertained by this Court. (see Reyes, et al.vs.
CA, et al., 107 SCRA 126). Nevertheless, the records show that copies of said notice
were posted in three conspicuous places in the municipality of Pasig, Rizal namely:
the Hall of Justice, the Pasig Municipal Market and Pasig Municipal Hall. In the same
manner, copies of said notice were also posted in the place where the property was
located, namely: the Municipal Building of San Juan, Rizal; the Municipal Market and
on Benitez Street. The following statement of Atty. Santiago Pastor, head of the legal
department of respondent bank, namely:
"Q How many days were the notices posted in these two places,
if you know?
A We posted them only once in one day." (TSN, p. 45, July 25,
1973)
is not a sufficient countervailing evidence to prove that there was no compliance with
the posting requirement in the absence of proof or even of allegation that the notices
were removed before the expiration of the twenty-day period. A single act of posting
(which may even extend beyond the period required by law) satisfies the requirement
of law. The burden of proving that the posting requirement was not complied with is
now shifted to the one who alleges non compliance.
On the question of whether or not the petitioners had a right to redeem the property,
We hold that the Court of Appeals did not err in ruling that they had no right to
redeem. No consent having been secured from respondent Bank to the sale with
assumption of mortgage by petitioners, the latter were not validly substituted as
debtors. In fact, their rights were never recorded and hence, respondent Bank is
Page 398 of 505

charged with the obligation to recognize the right of redemption only of the Lozano
spouses. But even granting that as purchaser or assignee of the property, as the case
may be, the petitioners had acquired a right to redeem the property, petitioners failed
to exercise said right within the period granted by law. The certificate of sale in favor
of appellee was registered on September 2, 1968 and the one year redemption period
expired on September 3, 1969. It was not until September 29, 1969 that petitioner
Honesto Bonnevie first wrote respondent and offered to redeem the property.
Moreover, on September 29, 1969, Honesto had at that time already transferred his
rights to intervenor Raoul Bonnevie.

||| (Bonnevie v. Court of Appeals, G.R. No. L-49101, [October 24, 1983], 210 PHIL
100-113)

On the question of whether or not respondent Court of Appeals erred in holding that
respondent Bank did not act in bad faith, petitioners rely on Exhibit "B" which is the
letter of Jose Lozano to respondent Bank dated December 8, 1966 advising the latter
that Honesto Bonnevie was authorized to make payments for the amount secured by
the mortgage on the subject property, to receive acknowledgment of payments, obtain
the Release of the Mortgage after full payment of the obligation and to take delivery of
the title of said property. On the assumption that said letter was received by
respondent Bank, a careful reading of the same shows that the plaintiff was merely
authorized to do acts mentioned therein and does not mention that petitioner is the
new owner of the property nor request that all correspondence and notice should be
sent to him. LLphil
The claim of appellants that the collection of interests on the loan up to July 12, 1968
extends the maturity of said loan up to said date and accordingly on June 10, 1968
when defendant applied for the foreclosure of the mortgage, the loan was not yet due
and demandable, is totally incorrect and misleading. The undeniable fact is that the
loan matured on December 26, 1967. On June 10, 1968, when respondent Bank
applied for foreclosure, the loan was already six months overdue. Petitioners' payment
of interest on July 12, 1968 does not thereby make the earlier act of respondent Bank
inequitous nor does it ipso facto result in the renewal of the loan. In order that a
renewal of a loan may be effected, not only the payment of the accrued interest is
necessary but also the payment of interest for the proposed period of renewal as well.
Besides, whether or not a loan may be renewed does not solely depend on the debtor
but more so on the discretion of the bank. Respondent Bank may not be, therefore,
charged of bad faith.
WHEREFORE, the appeal being devoid of merit, the
the Court of Appeals is hereby AFFIRMED. Costs against petitioners.
SO ORDERED.

decision

of

THIRD DIVISION

[G.R. No. 147074. July 15, 2005.]

Spouses RODRIGO PADERES and SONIA
PADERES, petitioners, vs.
The
Hon.
COURT OF APPEALS, 1 Hon. CARLOTA
P. VALENZUELA, in her capacity as the
Liquidator of Banco Filipino Savings and
Mortgage Bank, 2 respondents.

[G.R. No. 147075. July 15, 2005.]

Page 399 of 505

Spouses ISABELO BERGARDO and

JUANA
HERMINIA
BERGARDO, petitioners, vs. The Hon.
COURT OF APPEALS, 1 Hon. CARLOTA
P. VALENZUELA, in her capacity as the
Liquidator of Banco Filipino Savings and
Mortgage Bank, 2 respondents.

Luciano D. Valencia for petitioners.

Francisco A. Rivera for Banco Filipino Savings, etc.

DECISION

CARPIO MORALES, J p:
By their Petition for review on certiorari under Rule 45 of the Rules of Court,
petitioners spouses Rodrigo and Sonia Paderes and spouses Isabelo and Juana
Bergado seek the reversal of the September 20, 2000 Decision 3 and February 16,
2001 Resolution of the Court of Appeals, which dismissed their original Petition and
denied their Motion for Reconsideration, respectively.
On September 14, 1982, Manila International Construction Corporation (MICC)
executed a real estate mortgage 4 over 21 registered parcels of land including the
improvements thereon in favor of Banco Filipino Savings and Mortgage Bank (Banco
Filipino) in order to secure a loan of P1,885,000.00. The mortgage was registered
with the Registry of Deeds of Pasay City and annotated on the corresponding transfer
certificates of title (TCTs) covering the properties on December 17, 1982. 5
The 21 mortgaged properties included two lots, one with an area of 264 square
meters, and the other with an area of 263, both located in the then Municipality of
Paraaque (now Paraaque City) covered by TCT Nos. 61062 6 and
61078, 7 respectively.
Subsequently or in August 1983, MICC sold the lot 8 covered by TCT No. 61078,
together with the house 9 thereon, to the petitioners in the first case, the Paderes
spouses. And on January 9, 1984, MICC sold the house 10 built on the lot covered by
TCT No. 61062 to the petitioners in the second case, the Bergado spouses. Neither
sale was registered, however. 11

On January 25, 1985, for failure of MICC to settle its obligations, Banco Filipino filed a
verified Petition 12 for the extrajudicial foreclosure of MICC's mortgage. At the auction
sale of the foreclosed properties on March 25, 1985, Banco Filipino submitted a bid of
P3,092,547.82 and was declared the highest bidder. A Certificate of Sale 13 was
issued in its favor which was registered with the Registry of Deeds and annotated on
the corresponding TCTs covering the mortgaged properties on July 29, 1985.
No redemption of the foreclosed mortgage having been made within the reglementary
period, Carlota P. Valenzuela, the then Liquidator of Banco Filipino, filed on October
16, 1987 an ex parte Petition 14 for the issuance of a Writ of Possession of the
foreclosed properties with the Regional Trial Court (RTC) of Makati. After hearing, the
Petition was granted by Order dated September 8, 1988 15 of Branch 59 of the RTC.
On November 7, 1996, copies of the Writ of Possession dated November 5, 1996,
together with a notice addressed to MICC "and/or All persons claiming rights under
them" to voluntarily vacate the premises within 7 days from receipt thereof, were
served on petitioners. 16
Instead of vacating the two lots, however, petitioners filed separate petitions before
the Court of Appeals, docketed as C.A. G.R. Numbers 42470 and 42471 which were
later consolidated, 17 assailing the validity of the Writ of Possession.
On September 20, 2000, the Court of Appeals promulgated its questioned
Decision 18 dismissing the consolidated petitions for lack of merit and upholding the
validity of the Writ of Possession.
Petitioners' Motion for Reconsideration of the appellate court's decision having been
denied by Resolution of February 16, 2001, they jointly come before this Court
arguing that: (1) having purchased their respective properties in good faith from
MICC, they are third parties whose right thereto are superior to that of Banco Filipino;
(2) they are still entitled to redeem the properties and in fact a binding agreement
between them and the bank had been reached; (3) their respective houses should not
have been included in the auction sale of the mortgaged properties; (4) on the
contrary, as builders in good faith, they are entitled to the benefits of Article 448 of the
Civil Code; and (5) the writ of possession issued by the RTC in 1996 had already lost
its validity and efficacy.
The petition must be denied.
In extra-judicial foreclosures of real estate mortgages, the issuance of a writ of
possession, which is an order commanding the sheriff to place a person in
possession of the foreclosed property, 19 is governed by Section 7 of Act No.
3135 (AN ACT TO REGULATE THE SALE OF PROPERTY UNDER SPECIAL
POWERS INSERTED IN OR ANNEXED TO REAL ESTATE MORTGAGES), as
amended:
Sec. 7.In any sale made under the
provisions of this Act, the purchaser may
petition the Court of First Instance of the
province or place where the property or any
part thereof is situated, to give him
Page 400 of 505

possession thereof during the redemption

period, furnishing bond in an amount
equivalent to the use of the property for a
period of twelve months, to indemnify the
debtor in case it be shown that the sale was
made without violating the mortgage or
without complying with the requirements of
this Act. Such petition shall be made under
oath and filed in form of an ex parte motion
in the registration or cadastral proceedings if
the property is registered, or in special
proceedings in the case of property
registered under the Mortgage Law or under
section one hundred and ninety-four of the
Administrative Code, or of any other real
property encumbered with a mortgage duly
registered in the office of any register of
deeds in accordance with any existing law,
and in each case the clerk of the court shall,
upon the filing of such petition, collect the
fees specified in paragraph eleven of section
one hundred and fourteen of Act Numbered
Four hundred and ninety-six, as amended
by Act Numbered Twenty-eight hundred and
sixty-six, and the court shall, upon approval
of the bond, order that a writ of possession
issue, addressed to the sheriff of the
province in which the property is situated,
who shall execute said order immediately.
That petitioners purchased their properties from MICC in good faith is of no moment.
The purchases took place after MICC's mortgage to Banco Filipino had been
registered in accordance with Article 2125 20 of the Civil Code and the provisions
of P.D. 1529 (PROPERTY REGISTRY DECREE). 21 As such, under Articles
1312 22 and 2126 23 of the Civil Code, a real right or lien in favor of Banco Filipino
had already been established, subsisting over the properties until the discharge of the
principal obligation, whoever the possessor(s) of the land might be. aIDHET
In rejecting a similar argument, this Court, in Philippine National Bank v.
Mallorca, 24 ratiocinated:
1.Appellant's stand is that her undivided
interest consisting of 20,000 square meters
of the mortgaged lot, remained unaffected
by the foreclosure and subsequent sale to
PNB, and she "neither secured nor
contracted a loan" with said bank. What
PNB foreclosed, she maintains, "was that
portion belonging to Ruperta Lavilles only,"
not the part belonging to her.

Appellant's position clashes with precepts

well-entrenched in law. By Article 2126 of
the Civil Code, a "mortgage directly and
immediately subjects the property on which
it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for
whose security it was constituted." Sale or
transfer cannot affect or release the
mortgage. A purchaser is necessarily
bound to acknowledge and respect the
encumbrance to which is subjected the
purchased thing and which is at the
disposal of the creditor "in order that he,
under the terms of the contract, may
recover the amount of his credit
therefrom." For, a recorded real estate
mortgage is a right in rem, a lien on the
property whoever its owner may be.
Because the personality of the owner is
disregarded; the mortgage subsists
notwithstanding changes of ownership;
the last transferee is just as much of a
debtor as the first one; and this,
independent of whether the transferee
knows or not the person of the
mortgagee. So it is, that a mortgage lien
is inseparable from
the
property
mortgaged. All subsequent purchasers
thereof must respect the mortgage,
whether the transfer to them be with or
without
the
consent
of
the
mortgagee. For, the mortgage, until
discharge, follows
the
property. 25 (Emphasis and underscoring
supplied; italics in the original; citations
omitted)
And in Roxas v. Buan 26 this Court held:
Contending that petitioner Roxas is a party
actually holding the property adversely to
the debtor, Arcadio Valentin, petitioners
argue that under the provisions of Act No.
3135 they cannot be ordered to vacate the
property. Hence, the question of whether,
under the circumstances, petitioner Roxas
indeed is a party actually holding the
property adversely to Valentin.

Page 401 of 505

It will be recalled that Roxas' possession of

the property was premised on its alleged
sale to him by Valentin for the amount of
P100,000.00. Assuming this to be true, it is
readily apparent that Roxas holds title to
and possesses the property as Valentin's
transferee. Any right he has to the property
is necessarily derived from that of Valentin.
As transferee, he steps into the latter's
shoes. Thus, in the instant case, considering
that the property had already been sold at
public auction pursuant to an extrajudicial
foreclosure, the only interest that may be
transferred by Valentin to Roxas is the right
to redeem it within the period prescribed by
law. Roxas is therefore the successor-ininterest of Valentin, to whom the latter had
conveyed his interest in the property for the
purpose of redemption [Rule 39, Sec. 29 (a)
of the Revised Rules of Court; Magno v.
Viola, 61 Phil. 80 (1934); Rosete v. Prov.
Sheriff of Zambales, 95 Phil. 560
(1954).] Consequently, Roxas' occupancy
of the property cannot be considered
adverse to Valentin.

Thus, in Belleza v. Zandaga [98 Phil. 702

(1956)], the Court held that where the
purchaser in an execution sale has already
received the definitive deed of sale, he
becomes the owner of the property bought
and, as absolute owner, he is entitled to its
possession and cannot be excluded
therefrom by one who merely claims to be a
"successor-in-interest of the judgment
debtor," unless it is adjudged that the
alleged successor has a better right to the
property than the purchaser at the execution
sale. Stated differently, the purchaser's
right of possession is recognized only as
against the judgment debtor and his
successor-in-interest but not against
persons whose right of possession is
adverse to the latter. The rule was
reiterated in Guevara v. Ramos [G.R. No. L24358, March 31, 1971, 38 SCRA 194].

The rule in Belleza, although relating to the

possession of property sold in execution
sales under what is now Sec. 35, Rule 39 of
the Revised Rules of Court, is also
applicable to the possession of property sold
at extrajudicial foreclosure sales pursuant
to Sec. 6 of Act No. 3135 [see IFC Service
Leasing and Acceptance Corp. v. Nera,
supra]. Thus, as petitioner Roxas is not a
party holding the property adversely to
Valentin, being the latter's successor-ininterest, there was no bar to the
respondent trial court's issuance of a writ
of possession upon private respondent
Buan's application.
It does not matter that petitioner Roxas was
not specifically named in the writ of
possession, as he merely stepped into the
shoes of Valentin, being the latter's
successor-in-interest. On the other hand,
petitioner de Guia was occupying the house
as Roxas' alleged tenant [Rollo, p. 24].
Moreover, respondent court's decision
granting private respondent Buan's petition
for the issuance of a writ of possession
ordered the Provincial Sheriff of Zambales
or any of his deputies to remove Valentin "or
any person claiming interest under him" from
the property [Rollo, p. 16]. Undeniably,
petitioners
fell
under
this
category. 27 (Emphasis supplied)
As transferees of mortgagor MICC, petitioners merely stepped into its shoes and are
necessarily bound to acknowledge and respect the mortgage it had earlier executed
in favor of Banco Filipino.
As for petitioners' argument that they are still entitled to redeem the foreclosed
properties, it must be rejected too.
The debtor in extra-judicial foreclosures under Act No. 3135, or his successor-ininterest, has, one year from the date of registration of the Certificate of Sale with the
Registry of Deeds, a right to redeem the foreclosed mortgage, 28 hence, petitioners,
as MICC's successors-in-interest, had one year from the registration of the Certificate
of Sale on July 29, 1985 or until July 29, 1986 for the purpose.
Petitioners, however, failed to do so. Ownership of the subject properties was thus
consolidated in favor of Banco Filipino, 29 and TCT Nos. 112352 (in lieu of TCT No.
61078) and 112353 (in lieu of TCT No. 61062) were issued in its name.
As this Court held in F. David Enterprises v. Insular Bank of Asia and America: 30
Page 402 of 505

It is settled that the buyer in a

foreclosure sale becomes the absolute
owner of the property purchased if it is
not redeemed during the period of one
year after the registration of the sale. As
such, he is entitled to the possession of
the said property and can demand it at
any time following the consolidation of
ownership in his name and the issuance
to him of a new transfer certificate of
title. The buyer can in fact demand
possession of the land even during the
redemption period except that he has to post
a bond in accordance with Section 7 of Act
No. 3135 as amended. No such bond is
required after the redemption period if the
property is not redeemed. Possession of
the land then becomes an absolute right
of the purchaser as confirmed owner.
Upon proper application and proof of
title, the issuance of the writ of
possession becomes a ministerial duty
of the court. 31 (Emphasis supplied)
Petitioners assert, however, that a binding agreement for the repurchase of the
subject properties was reached with Banco Filipino as, so they claim, reflected in the
following exchange of communications:
October 17, 1996
Mrs. Luz B. Dacasin
Asst. Vice-President
Real Estate Dept.
Banco Filipino Savings and Mortgage Bank
101 Paseo De Roxas cro. [sic] Dela Rosa
Sts.
Makati City
Dear Madam:
I am writing to you, on behalf of spouses
Sonia and Rodrigo Paderes re: TCT No.
61078
formerly
owned
by
Manila
International
Construction
Corporation
(MICC for short) now TCT No. 112352,
registered in the name of Banco Filipino
Savings and Mortgage Bank in July 30,

1996 at the Register of Deeds of

Paraaque, Metro Manila. Incidentally, the
property is denominated as Block 48, Lot 5
located at Leon Florentino St., BF Executive,
Paraaque, Metro Manila.
The background facts of TCT No. 61078 are
as follows:
In August 1983, the MICC executed a Deed
of Absolute Sale of that lot covered by TCT
No. 61078 in favor of spouses Sonia and
Rodrigo Paderes which was acknowledged
before a Notary Public on October 1, 1983.
The value of the lot was P115,720.00. In the
same year, the parties executed an
addendum to the said deed of absolute sale
which covered a house valued at
P242,874.45. The net package price of the
house and lot was fixed at P329,405.75.
From this amount, the spouses Sonia and
Rodrigo Paderes paid MICC inclusive of
equity the amount of P125,437.35 leaving a
balance of P212,985.60. The spouses
moved in the house in November
1983. THaDEA
Unknown to the spouses, MICC mortgaged
TCT No. 61078 in favor of Banco Filipino
Savings and Mortgage Bank for P1,885.00
duly inscribed in TCT No. 112352 on
December 12, 1982. It was foreclosed by
the bank for P3,092,547.82 pursuant to the
certificate of sale executed by the sheriff as
inscribed on TCT No. 112352 [should be
TCT No. 61078] on July 29, 1985 . . .
Then came the news that Banco Filipino
Savings and Mortgage Bank was under
conservatorship by the Board of Liquidators.
On the other hand, MICC became bankrupt
and closed shop. The spouses were [sic]
nowhere to go to then at the time to get the
title of the property they purchased from
MICC.
Until, the spouses received a letter dated
April 6, 1987 from the Board of Liquidators
via Alberto Reyes, Deputy Liquidator,
informing the spouses that the property they
purchased from MICC was already
Page 403 of 505

foreclosed by the bank. The spouses

answered the letter and disclaimed any
knowledge of the foreclosure. In their
answer to the said letter, they emphasized
that their unpaid balance with MICC was
P188,985.60.

Counsel for Sps. Paderes

JPA Subdivision, Muntinlupa
Dear Sir:
This is with regard to your letter dated
October 17, 1996 concerning the property
formerly owned by Manila International
Construction Corporation (MICC) foreclosed
by the Bank.

We are addressing your goodself [sic] to

inform the bank that the spouses Sonia
and Rodrigo Paderes are exercising their
right of redemption as subrogees of the
defunct MICC under special laws.
From reliable information, the bank had
already made appraisal of the property
and from that end, may we be informed
[at] the soonest possible time the value
of the property to enable the spouses to
prepare for such eventuality. And, upon
receipt of the said appraisal value we
shall immediately inform you [of] our
position on the matter.
Thank you very much.

Please inform Sps. Rodrigo and Sonia

Paderes to come to the bank to discuss
said foreclosed property directly with the
bank.
Thank you.
Very truly yours,
[SGD.]
LUZ B. DACASIN
Assistant Vice-President

Very truly
yours,

Real Estate Department 33

xxx xxx xxx (Emphasis supplied; italics in the original).

[SGD.]
LUCIANO
D.
VALENCI
A
Counsel
for
Spouses
Paderes
JPA
Subdivisio
n, City of
Muntinlup
a 32
xxx xxx xxx (Emphasis supplied).
October 25, 1996
Mr. Luciano D. Valencia

November 4, 1996
Mrs. Luz B. Dacasin
Asst. Vice-President
Real Estate Dept., Banco Filipino
Makati City
Dear Madam:
Thank you very much for your letter dated
October 25, 1996, which was received on
October 31, 1996, the contents of which had
been duly noted. Pursuant thereto I advised
my clients spouses Rodrigo and Sonia
Paderes to see [you].
With your indulgence, I also advised my
other clients spouses Isabelo and Juana
Herminia Bergado to go along with the
Page 404 of 505

spouses Paderes, who are similarly situated

with spouses Paderes property.
Incidentally, on October 28, 1996, I also
wrote your goodself another letter at the
behest of spouses Isabelo and Juana
Herminia Bergado whose property is equally
footed with spouses Paderes.
It is hoped that, out of that conference per
your invitation my clients above-named be
informed formally the total amounts due the
bank as a consequence of the right of
redemption extended to them. Of course,
whatever appraised value arrived at by
the bank on the properties subject of
redemption the same shall not be
construed as my clients' committed
liability.
Thank you very much.
Very truly
yours,
[SGD.]
LUCIANO
D.
VALENCI
A
Counsel
for
Spouses
Paderes
JPA
Subdivisio
n, City of
Muntinlup
a 34
xxx xxx xxx (Emphasis supplied).
November 8, 1996
Mrs. LUZ B. DACASIN
Asst. Vice-President
Real Estate Department

Banco Filipino Savings & Mortgage Bank

Makati City
Re:Lot 18,
Gamboa St.

Block

48

BF Homes, Paraaque,
MM (264 SQ.M.)
Occupied by Sps. Isabelo
Bergado
&
Juana Herminia Bergado
Lot 5, Block
Florentino St.

48,

L.

BF Homes, Paraaque,
MM (263 SQ.M.)
Occupied by Sps. Rodrigo
Paderes
&
Sonia Paderes
Dear Madam Asst. Vice-President:
Pursuant to our conference this morning
November 8, 1996, regarding our desire to
redeem the properties above-captioned,
which your good office accommodated, and
per your advi[c]e, we submit the following
facts taken out and our proposals:
1.Regarding the lot, you mentioned that,
the cost per square meter was P7,500.00.
To this price we are no-committal for the
said price is high. Although, we are still
to have the amount re-negotiated.

2.We appreciate very much your having

excluded the house built in the said lot for
purposes of fixing the redemption price.
3.Your advi[c]e to subject the properties
(house and lot) to a real-estate mortgage
with the bank so that the amount to be
loaned will be used as payment of the
properties to be redeemed is accepted,
and we are committed to it.
Thank you very much.
Page 405 of 505

Very truly yours,

[SGD.]
SPS.
RODRIGO PADERES

SONIA

[SGD.]
SPS.
JUANA HERMINIA BERGADO 35

&
ISABELO

&

(Emphasis supplied).

other words, when something is desired

which is not exactly what is proposed in the
offer. It is necessary that the acceptance
be unequivocal and unconditional, and
the acceptance and the proposition shall
be without any variation whatsoever; and
any modification or variation from the
terms of the offer annuls the latter and
frees the offeror. 37 (Emphasis supplied)

Petitioners' assertion does not pass muster.

A reading of the above-quoted correspondence reveals the absence of both a definite

offer and an absolute acceptance of any definite offer by any of the parties.

Under Article 1318 of the Civil Code, there are three essential requisites which must
concur in order to give rise to a binding contract: (1) consent of the contracting
parties; (2) object certain which is the subject matter of the contract; and (3) cause of
the obligation which is established. "Consent" is further defined in Article 1319 of the
Code as follows:

The letters dated October 17, 1996 and November 4, 1996, signed by petitioners'
counsel, while ostensibly proposing to redeem the foreclosed properties and
requesting Banco Filipino to suggest a price for their repurchase, made it clear that
any proposal by the bank would be subject to further action on the part of petitioners.

Art. 1319.Consent is manifested by the

meeting of the offer and the acceptance
upon the thing and the cause which are
to constitute the contract. The offer must
be certain and the acceptance absolute.
A qualified acceptance constitutes a
counter-offer.
Acceptance made by letter or telegram does
not bind the offerer except from the time it
came to his knowledge. The contract, in
such a case, is presumed to have been
entered into in the place where the offer was
made. (Emphasis supplied)
By "offer" is meant a unilateral proposition which one party makes to the other for the
celebration of the contract. There is an "offer" in the context of Article 1319 only if the
contract can come into existence by the mere acceptance of the offeree, without any
further act on the part of the offeror. Hence, the "offer" must be definite, complete and
intentional. 36
With regard to the "acceptance," a learned authority notes that:
To produce a contract, the acceptance
must not qualify the terms of the
offer. There is no acceptance sufficient to
produce consent, when a condition in the
offer is removed, or a pure offer is accepted
with a condition, or when a term is
established, or changed, in the acceptance,
or when a simple obligation is converted by
the acceptance into an alternative one; in

The letter dated October 25, 1996 signed by Luz Dacasin, Assistant Vice-President of
Banco Filipino, merely invited petitioners to engage in further negotiations and does
not contain a recognition of petitioners' claimed right of redemption or a definite offer
to sell the subject properties back to them.
Petitioners emphasize that in item no. 3 of their letter dated November 8, 1996 they
committed to "subject the properties (house and lot) to a real-estate mortgage with
the bank so that the amount to be loaned will be used as payment of the properties to
be redeemed." It is clear from item no. 1 of the same letter, however, that petitioners
did not accept Banco Filipino's valuation of the properties at P7,500.00 per square
meter and intended to "have the amount [renegotiated]."
Moreover, while purporting to be a memorandum of the matters taken up in the
conference between petitioners and Banco Filipino Vice-President Dacasin,
petitioners' letter of November 8, 1996 does not contain the concurrence of Ms.
Dacasin or any other authorized agent of Banco Filipino. Where the alleged contract
document was signed by only one party and the record shows that the other party did
not execute or sign the same, there is no perfected contract. 38
The Court of Appeals, therefore, committed no error in concluding that "nothing
concrete came out of the meeting" between petitioners and Banco Filipino.
Respecting petitioners' claim that their houses should have been excluded from the
auction sale of the mortgaged properties, it does not lie. The provision of Article
448 39 of the Civil Code, cited by petitioners, which pertain to those who, in good
faith, mistakenly build, plant or sow on the land of another, has no application to the
case at bar.
Here, the record clearly shows that petitioners purchased their respective houses
from MICC, as evidenced by the Addendum to Deed of Sale dated October 1, 1983
and the Deed of Absolute Sale dated January 9, 1984. Cdpr

Page 406 of 505

Being improvements on the subject properties constructed by mortgagor MICC, there

is no question that they were also covered by MICC's real estate mortgage following
the terms of its contract with Banco Filipino and Article 2127 of the Civil Code:
Art. 2127.The mortgage extends to the
natural accessions, to the improvements,
growing fruits, and the rents or income not
yet received when the obligation becomes
due, and to the amount of the indemnity
granted or owing to the proprietor from the
insurers of the property mortgaged, or in
virtue of expropriation for public use, with
the
declarations,
amplifications
and
limitations established by law, whether the
estate remains in the possession of the
mortgagor, or it passes into the hands of a
third person. (Underscoring supplied).
The early case of Cu Unjieng e Hijos v. Mabalacat Sugar Co. 40 is illustrative. In that
case, this Court held:
. . . (1) That a mortgage constituted on a
sugar central includes not only the land on
which it is built but also the buildings,
machinery, and accessories installed at
the time the mortgage was constituted as
well as all the buildings, machinery and
accessories belonging to the mortgagor,
installed
after
the
constitution
thereof (Bischoff vs. Pomar and Compaia
General de Tabacos, 12 Phil. 690); (2) that
the notice announcing the sale at public
auction of all the properties of a sugar
central extends to the machinery and
accessories acquired and installed in its mill
after the constitution of the mortgage; (3)
that the court, that has ordered the placing
of the mortgaged properties in the hands of
a receiver in a foreclosure suit, has
jurisdiction to order the sale at public auction
of the said mortgaged properties even
before the termination of the receivership;
and (4) that the fact that the price at which
the mortgaged properties were sold at public
auction is inadequate, is not in itself
sufficient to justify the annulment of the
sale. 41 (Emphasis supplied)
Petitioners finally proffer that the issuance, on Banco Filipino's mere motion, of the
Writ of Possession on November 5, 1996, more than 8 years since the promulgation

of the RTC Order granting its petition on September 8, 1988, violated Section 6, Rule
39 of the Rules of Court, viz:
Sec. 6.Execution by motion or by
independent action. A final and executory
judgment or order may be executed on
motion within five (5) years from the date of
its entry. After the lapse of such time, and
before it is barred by the statute of
limitations, a judgment may be enforced by
action. The revived judgment may also be
enforced by motion within five (5) years from
the date of its entry and thereafter by action
before it is barred by the statute of
limitations.
Hence, petitioners argue, the writ of possession had lost its
validity and efficacy and should therefore be declared null
and void.
Petitioners' ultimate argument fails too. In Rodil vs. Benedicto, 42 this Court
categorically held that the right of the applicant or a subsequent purchaser to request
for the issuance of a writ of possession of the land never prescribes:
The respondents claim that the petition for
the issuance of a writ of possession was
filed out of time, the said petition having
been filed more than five years after the
issuance of the final decree of registration.
In support of their contention, the
respondents cite the case of Sorogon vs.
Makalintal [80 Phil. 259 (1948)], wherein the
following was stated:
"It is the law and well settled
doctrine in this jurisdiction that a
writ of possession must be issued
within the same period of time in
which a judgment in ordinary civil
actions
may
be
summarily
executed (section 17, Act 496, as
amended), upon the petition of the
registered owner or his successors
in interest and against all parties
who claim a right to or interest in
the land registered prior to the
registration proceeding."
The
better
rule,
however, is that
enunciated in the case of Manlapas and
Tolentino vs. Lorente [48 Phil. 298 (1925)],
Page 407 of 505

which has not yet been abandoned, that the

right of the applicant or a subsequent
purchaser to ask for the issuance of a
writ of possession of the land never
prescribes . . .

must immediately enforce a

judgment that is secured as
against the adverse party, and
his failure to act to enforce the
same within a reasonable time
as provided in the Rules makes
the
decision
unenforceable
against the losing party. In
special proceedings the purpose
is to establish a status, condition
or fact; in land registration
proceedings, the ownership by a
person or a parcel of land is
sought to be established. After
the ownership has been proved
and
confirmed
judicial
declaration,
no
further
proceeding to enforce said
ownership is necessary, except
when the adverse or losing party
had been in possession of the
land and the winning party
desires
to
oust
him
therefrom. 43 (Emphasis
and
underscoring supplied)

xxx xxx xxx

In a later case [Sta. Ana v. Menla, 111 Phil.
947 (1961)], the Court also ruled that the
provision in the Rules of Court to the
effect that judgment may be enforced
within five years by motion, and after five
years but within ten years by an action
(Section 6, Rule 39) refers to civil actions
and is not applicable to special
proceedings, such as land registration
cases. The Court said:
"The second assignment of error is
as follows:
'That the lower court erred in
ordering that the decision rendered
in this land registration case on
November 28, 1931 or twenty six
years ago, has not yet become final
and unenforceable.
We fail to understand the
arguments of the appellant in
support of the above assignment,
except in so far as it supports his
theory that after a decision in a
land registration case has become
final, it may not be enforced after
the lapse of a period of 10 years,
except by another proceeding to
enforce the judgment or decision.
Authority for this theory is the
provision in the Rules of Court to
the effect that judgment may be
enforced within 5 years by motion,
and after five years but within 10
years, by an action (Sec. 6, Rule
39). This provision of the Rules
refers to civil actions and is not
applicable
to
special
proceedings, such as a land
registration case. This is so
because a party in a civil action

Petitioners have not supplied any cogent reason for this

Court to deviate from the foregoing ruling.
The established doctrine that the issuance of a writ of possession is a ministerial
function whereby the issuing court exercises neither discretion nor judgment bears
reiterating. The writ issues as a matter of course upon the filing of the proper motion
and, if filed before the lapse of the redemption period, the approval of the
corresponding bond. 44
Petitioners, however, are not without remedy. As reflected in the challenged Court of
Appeals decision, under Section 8 45 of Act No. 3135, as amended, petitioners, as
successors-in-interest of mortgagor MICC, have 30 days from the time Banco Filipino
is given possession of the subject properties to question the validity of the auction
sale under any of the two grounds therein stated by filing a petition to set aside the
same and cancel the writ of possession.
WHEREFORE, the petition is hereby DENIED.
Costs against petitioners.
SO ORDERED.
||| (Spouses Paderes v. Court of Appeals, G.R. No. 147074, 147075, [July 15, 2005])
Page 408 of 505

FIRST DIVISION
[G.R. No. 88602. April 6, 1990.]
TOMASA VDA. DE JACOB, as Special Administratrix of the Estate
of
the
Deceased
ALFREDO
E. JACOB, petitioner, vs. HONORABLE COURT OF APPEALS,
BICOL SAVINGS & LOAN ASSOCIATION, JORGE CENTENERA,
AND LORENZO C. ROSALES, respondents.

[G.R. No. 89544. April 6, 1990.]

THE ESTATE OF THE LATE ALFREDO JACOB, represented by its
Administrator,
TOMASA
VDA.
DE JACOB, petitioner, vs. HONORABLE COURT OF APPEALS, AND
UNITED BICOL SAVINGS BANK, respondents.

Benito P. Fabie for petitioner.

Contreras & Associates for private respondents.
Rosales & Associates Law Office for private respondent Rosales.
Ramon Quisumbing, Jr. for private respondent Centenera.

DECISION

GANCAYCO, J p:
The question of whether or not an extrajudicial foreclosure of a mortgage may
proceed even after the death of the mortgagor and whether or not a petition for the
issuance of a writ of possession may be barred by estoppel, are the issues presented
in this petition.

Page 409 of 505

Dr. Alfredo E. Jacob as the registered owner of a parcel of land described under
Transfer Certificate of Title No. 1433 of the Register of Deeds of Naga
City. 1 Sometime in 1972 Jorge Centenera was appointed as administrator of
Hacienda Jacob until January 1, 1978 when the Special Power of Attorney executed
in his favor by Dr. Jacob was revoked by the latter. 2 The land in question is located at
Liboton, Naga City and has an area of approximately 3,376 square meters. Because
of the problem of paying realty taxes, internal revenue taxes and unpaid wages of
farm laborers of the hacienda, Dr. Jacob asked Centenera to negotiate for a loan. For
this purpose, a special power of attorney was executed and acknowledged by
Dr. Jacob before notary public Lorenzo Rosales, the material portions of which read
as follows:
"That I, ALFREDO E. JACOB, Filipino, of legal age, widower,
address at Tigaon, Camarines Sur, have named, constituted and
appointed and by these presents do name, constitute and appoint
JORGE CENTENERA, Filipino, of legal age, married to Judith E.
Centenera, resident of and with postal address at Naga City, to
be my true and lawful attorney-in-fact, for me and in my name,
place and stead, and to do and perform all the necessary acts
and deeds, to wit:
1. To mortgage and/or hypothecate with any banking institution in
the City of Naga or elsewhere in the Philippines, the following
described properties of which I am the absolute owner, as
follows:
'A parcel of land (Plan Ps-80014, Lot 818 of
Naga Cad. 290 Case No. M-472 L.R.C. Rec. No. N5986) located at Liboton, Naga City. Bounded on the
NE, by Alfredo Cleto (Lot 383); Martin Perez (Lot 385)
and Benedicto Naz (Lot 394); SE. by Benedicto Naz (Lot
394); S. by Pedro San Juan (Lot 317); SW by Margarita
Narciso vs. Simeon Ty Ganco (Lot 319); and NW, by the
Calawag Street, containing an area of 3,376 square m.
covered by TCT No. 1433.
'A parcel of land (Lot 15, Block 4 of the
subdivision plan Psd-46484, being a portion of Lot
1105-now of the Cad. survey of Naga, L.R.C. Cad. Rec.
N. N-78), situated in Tinago, Naga City. Bounded on the
SE., along line 1-2 by Lot 17, Block 4; along line 2-3 by

road lot 4; along line 3-4 by Lot 13, Block 4; and along
line 4-1 by Lot 14, Block 4 all of the subdivision plan.
Containing an area of 236 square meters, covered by
TCT No. 393.
'A parcel of land (Lot 14, Block 4 of the
subdivision plan Psd-46464, being a portion of Lot
1106-now Cad. survey of Naga, L.R.C. Cad. Rec. No.
N-78), situated in Tinago, Naga City. Bounded on SW.,
along line 1-2 by Lot 15; Block 4; along line 2-3 by Lot
12, Block 4; along line 3-4 by road lot 3; and along line
4-1 by Lot 16, Block 4, all of the subdivision plan,
containing an area of 239 square meters, covered by
TCT No. 397.'
2. To receive cash in any amount made in payment of the
mortgage of the above described properties; to sign checks,
drafts, money orders, treasury warrants, to indorse the same, to
cash and make deposits with any bank here or elsewhere and to
withdraw such deposit; to execute, sign and deliver any or all
documents of mortgage, contracts, deeds or any instrument
necessary and pertinent for purposes of mortgaging and/or
encumbering said properties in favor of any banking institution in
the City of Naga or elsewhere and lastly, to do and perform any
and all acts and deeds which to him may seem most to my own
benefit and advantage.
HEREBY GIVING AND GRANTING unto my said attorney-in-fact
full power and authority to do and perform any and every act and
thing whatever requisite or necessary or proper to be done in and
about the premises, as fully to all intents and purposes as I might
or could do if personally present and acting in person and I
hereby ratify and confirm all that my said attorney shall do and
had done lawfully or cause to be done under any by virtue of
these presents." 3
Consequently, Centenera secured a loan in the amount of P18,000.00 from the Bicol
Savings & Loan Association sometime in September 1972. Centenera signed and
executed the real estate mortgage and promissory note as attorney-in-fact of
Dr. Jacob. 4 When the loan fell due in 1975 Centenera failed to pay the same but was
able to arrange a restructuring of the loan using the same special power of attorney
Page 410 of 505

and property as security. Another set of loan documents, namely: an amended real
estate mortgage and promissory note dated November 27, 1975 was executed by
Centenera as attorney-in-fact of Dr. Jacob. 5 Again, Centenera failed to pay the loan
when it fell due and so he arranged for another restructuring of the loan with the bank
on November 23, 1976. The corresponding promissory note was again executed by
Centenera on behalf of Jacob under the special power of attorney.
The mortgage was annotated on the title 6 and when the loan was twice re-structured,
the proceeds of the same were not actually given by the bank to Centenera since the
transaction was actually nothing but a renewal of the first or original loan and the
supposed proceeds were applied as payment for the loan. The accrued interest for
sixty (60) days was, however, paid by Centenera.
Centenera again failed to pay the loan upon the maturity date forcing the bank to send
a demand letter. 7 A copy of the demand letter was sent to Dr. Jacob but no reply or
denial was received by the bank. Thus, the bank foreclosed the real estate mortgage
and the corresponding provisional sale of the mortgaged property to the respondent
bank was effected. On November 5, 1982 a definite deed of sale of the property was
executed in favor of the respondent bank as the sole and highest bidder. 8
Tomasa Vda. de Jacob who was subsequently named administratrix of the estate of
Dr. Jacob and who claimed to be an heir of the latter, conducted her own investigation
and therefore she filed a complaint in the Regional Trial Court of Camarines Sur
alleging that the special power of attorney and the documents therein indicated are
forged and therefore the loan and/or real estate mortgages and promissory notes are
null and void. After trial on the merit a decision was rendered on July 30, 1987, the
dispositive part of which reads as follows: prLL
"WHEREFORE, plaintiffs complaint is ordered DISMISSED for
lack of a cause of action and/or her failure to prove the cause(s)
of action alleged in the complaint; and judgment is rendered
against the Estate of the late Dr. Alfredo Jacob in favor of the
defendants on their respective counterclaim, ordering payment
from said estate of the following:
(a) actual damages in the sum of P30,000.00; exemplary
damages in the sum of P20,000.00; and attorney's fees of
P10,000.00; to defendant Bicol Savings and Loan Association;

(b) actual damages in the sum of P30,000.00; exemplary

damages in the sum of P20,000.00; moral damages in the sum of
P50,000.00; attorney's fees in the sum of P10,000.00 to
defendant Jorge Centenera;
(c) actual damages in the sum of P30,000.00, exemplary
damages in the sum of P20,000.00; attorney's fees in the sum of
P10,000.00 to defendant Atty. Lorenzo Rosales.
with interest at the legal rate from the time of the filing of
the complaint, until full payment.
Costs against the plaintiff.
SO ORDERED." 9
Not
satisfied
therewith
the
plaintiff
appealed
therefrom
to
the Court of Appeals wherein on May 30, 1989 a decision was rendered affirming in
toto the decision of the lower court and dismissing the appeal for lack of merit. 10
Hence, the herein petition for review docketed as G.R. No. 88602 that was filed by
plaintiff therein and which raises two issues, to wit:
A. The
Honorable Court of Appeals failed
and
completely
neglected to exercise appellate determination on material issues
which, independently of what said Court determined, would
cause nullification of the mortgage deed and amendment thereto,
as well as extrajudicial foreclosure proceedings and sale thereof.
B. The Honorable Court of Appeals likewise ignored to resolve,
nay, pass upon, the issue of excessive and unfounded award of
damages, which certainly calls for appellate determination as it
was squarely raised on appeal." 11
However, while the action for annulment of mortgage, etc. aforestated was pending in
the trial court, on November 5, 1982, a definite deed of sale was issued by the sheriff
in favor of respondent bank. Without redemption having been exercised within the
prescribed period, the title in the name of Dr. Jacob was cancelled and in its place,
Transfer Certificate of Title No. 14661 was issued on August 9, 1983 in favor of
respondent bank. Respondent bank then filed a petition for the issuance of a writ of
possession in the Regional Trial Court of Naga City which was opposed by petitioner.
In due course a writ of possession was issued by the trial court in a decision dated

Page 411 of 505

July 21, 1987 in favor of the respondent bank, the dispositive part of which reads as
follows:
"WHEREFORE, the petitioner UNITED BICOL SAVINGS BANK
being entitled to possession of the property covered by Transfer
Certificate of Title No. 14661 (registry of Naga City) let a Writ of
Possession issue addressed to the respondent ESTATE OF THE
LATE ALFREDO JACOB, by its administratix Tomasa Vda.
de Jacob, directing the said respondent to deliver the possession
of said property to the petitioner United Bicol Savings Bank within
thirty (30) days from the date this judgment becomes final; and
for the Provincial Sheriff to enforce said writ and to place said
petitioner United Bicol Savings Bank in possession of said
property, with costs against the said respondent.
SO ORDERED."
Not satisfied therewith petitioner appealed to the Court of Appeals wherein in due
course a decision was rendered on June 27, 1989 affirming the decision appealed
from without pronouncement as to costs. 12 A motion for reconsideration of said
decision which was filed by the petitioner was denied in a resolution dated July 28,
1989. LLjur
Hence the petition for review docketed as G.R. No. 89544 wherein petitioner contends
that the writ of possession may not validly issue where from the admitted facts the
extrajudicial foreclosure and auction sale is patently void.
The petition in G.R. No. 89544 was consolidated with the petition in G.R. No. 88602
hereinabove discussed being closely related to each other.
The petition in G.R. No. 88602 is devoid of merit.
Petitioner contends that the extrajudicial foreclosure proceedings and the sale of the
property mortgaged under the amended real estate mortgage after the mortgagor
died are null and void. It is pointed out that Dr. Jacob died on March 9, 1979 and that
the extrajudicial for enclosure proceedings were effected after his death, that is, the
public auction sale was made on May 11, 1979. Petitioner argues that such
extrajudicial foreclosure can only be prosecuted during the lifetime of Dr. Jacob for the
reason that such kind of foreclosure under Act No. 3135, as amended, is authorized
only because of the special power of attorney inserted in the mortgage deed; and that
said special power of attorney cannot extend beyond the lifetime of the supposed
mortgagor.

Section 7, Rule 86 of the Rules of Court provides as follows:

"SEC. 7. Mortgage debt due from estate. A creditor holding a
claim against the deceased secured by mortgage or other
collateral security, may abandon the security and prosecute his
claim in the manner provided in this rule, and share in the general
distribution of the assets of the estate; or he may foreclose his
mortgage or realize upon his security, by action in court, making
the executor or administrator a party defendant, and if there is a
judgment for a deficiency, after the sale of the mortgaged
premises, or the property pledged, in the foreclosure or other
proceeding to realize upon the security, he may claim his
deficiency judgment in the manner provided in the preceding
section; or he may rely upon his mortgage or other security
alone, and foreclose the same at any time within the period of the
statute of limitations, and in that event he shall not be admitted as
a creditor, and shall receive no share in the distribution of the
other assets of the estate; but nothing herein contained shall
prohibit the executor or administrator from redeeming the
property mortgaged or pledged, by paying the debt for which it is
held as security, under the direction of the court, if the court shall
adjudge it to be for the best interest of the estate that such
redemption shall be made."
From the foregoing provision of the Rules it is clearly recognized that a mortgagee
has three remedies that may be alternately availed of in case the mortgagor dies, to
wit: LibLex
(1) to waive the mortgage and claim the entire debt from the
estate of the mortgagor as an ordinary claim;
(2) to foreclose the mortgage judicially and prove the deficiency
as an ordinary claim; and
(3) to rely on the mortgage exclusively, or other security and
foreclose the same at anytime, before it is barred by
prescription, without the right to file a claim for any
deficiency.
From the foregoing it is clear that the mortgagee does not lose its right to
extrajudicially foreclose the mortgage even after the death of the mortgagor as a third
alternative under Section 7, Rule 86 of the Rules of Court.
Page 412 of 505

The power to foreclose a mortgage is not an ordinary agency that contemplated

exclusively the representation of the principal by the agent but is primarily an authority
conferred upon the mortgagee for the latter's own protection. That power survives the
death of the mortgagor. 13
The right of the mortgagee bank to extrajudicially foreclose the mortgage after the
death of the mortgagor, acting through his attorney-in-fact, did not depend on the
authority in the deed of mortgage executed by the latter. That right existed
independently of said stipulation and is clearly recognized in Section 7, Rule 86 of the
Rules of Court aforecited. 14
The other issues raised in the petition are questions of fact which cannot be
considered in this proceeding. The findings of facts of the appellate court are
conclusive and cannot be reviewed at this level.
Likewise, the petition in G.R. No. 89544 is devoid of merit.
It is premised on the assumption that the extrajudicial foreclosure and auction sale
was patently void and was without basis. On the contrary the appellate court found
and so does this Court, that the extrajudicial foreclosure and auction sale was regular
and in accordance with law. LibLex
While it is true that the question of the validity of said mortgage and consequently the
extrajudicial foreclosure thereof was raised in a separate proceeding before the trial
court, the pendency of such separate civil suit can be no obstacle to the issuance of
the writ of possession which is a ministerial act of the trial court after a title on the
property has been consolidated in the mortgagee. 15
WHEREFORE, petitions in G.R, Nos. 88602 and 89544 are hereby DISMISSED for
lack of merit, with costs against petitioner.
SO ORDERED.
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.
||| (Vda. De Jacob v. Court of Appeals, G.R. No. 88602, 89544, [April 6, 1990])

EN BANC
[G.R. No. 4373. February 2, 1909.]
SAMUEL BISCHOFF, plaintiff-appellant, vs.
JUAN
D. POMAR and THE COMPAIA GENERAL DE TABACOS DE
FILIPINAS, defendants-appellees.

Espiridion Guanko, for appellant.

Jose M. Arroyo, for appellee.
DECISION
TORRES, J p:
Without prejudice to the issuance of a statement of the basis upon which
this court affirms the Judgment of the lower court of February 28, 1907, appealed
Page 413 of 505

from, by virtue whereof it is held that the steam sugar mill fitted with a portable 8horsepower boiler, with its attachments and a complete tramway with rails and
other fittings and fifteen small cars, all of which were at the Hacienda San Jose,
should be considered as included in the mortgage executed by Romana Ganzon
in favor of Lazaro Mota, which mortgage was afterwards transferred and
conveyed by the mortgagor to the Compaia General de Tabacos, we absolve
the defendants without special ruling as to costs, and reserve in favor of the
plaintiff, Samuel Bischoff, the right of action which he may have to recover from
Romana Ganzon the sum paid for that property, and said judgment is hereby
affirmed without special ruling as to the costs in this instance.
Arellano, C.J., Mapa, Carson, Willard and Tracey, JJ., concur.
BASIS OF THE DECISION
FEBRUARY 6, 1909.
TORRES, J .:
On the 27th of December, 1905, counsel for Samuel Bischoff filed a
complaint, alleging that the latter was the owner of a steam sugar mill fitted with a
portable 8-horse-power boiler with its attachments, a complete tramway with rails
and other fittings for a distance of not less than 3 kilometers, and fifteen small
cars, all of which were at the Hacienda San Jose, of San Carlos, Occidental
Negros; that the defendant Compaia de Tabacos had asked and obtained from
the Court of First Instance, in or about the month of October of the same year,
the appointment of a receiver for the property of Romana Ganzon, among which
property that described above was included at the instance of the defendant as
belonging to the debtor Ganzon; that at the designation of the Compaia de
Tabacos Juan Pomarwas appointed receiver and upon taking charge of the
property of the said Romana Ganzon he did not confine himself thereto, but
unlawfully and without any right whatever took possession, as receiver, of the
property of the plaintiff hereinbefore described; that notwithstanding the repeated
demands made by the plaintiff,Bischoff, the latter was unable to secure from the
defendants the return of the said property; that they refused to deliver the said
property to him and continued to use the same to the prejudice of the plaintiff,
whose loss and damages amounted to P30 a day; the plaintiff therefore prayed
that judgment be entered in his favor, declaring that the property described in the
first paragraph of the complaint belonged to him, and that the said defendants be
ordered to pay the said losses and damages with costs.

In his written answer, counsel for the Compaia General de Tabacos

denied the allegations 1, 4, 6, 7, and 8 of the complaint, and as a defense
alleged, that under a public instrument executed before the notary Gregorio Yulo,
on the 20th of July, 1900, Lazaro Mota y Ayo loaned to Roman Ganzon or
Tanson, widow of Vega, the sum of 11,209 pesos, payable at the expiration of
two years from the date of the instrument, and as security for her debt, the said
Romana Ganzon mortgaged to her creditor, Mota, the sugar plantation called
San Jose, situated in the sitio of Sibungcogon, barrio of San Carlos, in the town
of Calatrava, Occidental Negros; that by another instrument executed on October
8, 1900, Lazaro Mota and Romana Ganzon agreed to increase the said
mortgage credit by a further sum of 4,177.20 pesos; that this was duly paid to the
debtor, whose total indebtedness thus amounted to 15,386.20 pesos, the said
mortgage remaining as security for both amounts; that by another instrument
executed on September 6, 1902, before the same notary, the loan or debt was
further increased by the sum of 6,037.73 pesos, which Mota delivered to Ganzon;
this last amount, added to the previous 15,386.20 pesos, makes a total of
21,423.93 pesos, and it was agreed upon between the parties in this last
instrument that, if Ganzon was not able to pay the creditor Mota on or before July
20, 1904, the mortgaged hacienda would be disposed of at public auction,
together with its buildings, machinery and agricultural implements, and the whole
amount of the indebtedness would be collected from the proceeds thereof; that
this instrument was entered in the registry of property on October 11, 1902; that
by an instrument dated September 30, 1904, Lazaro Mota y Ayo unreservedly
transferred the said credit, free of all incumbrance, together with all of his rights,
to the Compaia General de Tabacos for the sum of P21,423.93, subrogating to
the latter all his rights with respect to the collection of the debt from Ganzon; that
by another instrument dated December 10, 1904, Romana Ganzon created a
mortgage in favor of the said company on the aforesaid Hacienda of San Jose for
all the amounts owed, which amounts are, the said P21,423.93 transferred by
Mota to the Compaia General de Tabacos, and P31,195.99, plus P422.61 as
interest at 10 per cent on Mota's credit, making a grand total of P53,042.53, said
instrument being entered in the registry of property; that the aforesaid steam
sugar mill and portable 8-horsepower boiler, the tramway, with all its fittings,
appurtenances, and rails, and all the cars upon the above-mentioned Hacienda
of San Jose, are fixtures thereon, and the machinery, vessels, implements, and
utensils are necessary for the working of said hacienda and formed an integral
part of the same when the said mortgages were executed; that the
plaintiffBischoff was informed and knew of said mortgages prior to making the
alleged purchase of the goods mentioned in his complaint; that the property
Page 414 of 505

referred to in the complaint, together with the Hacienda of San Jose, was
mortgaged to the creditor company as security for its loan of P53,042.53; that
said mortgage still stands because neither Romana Ganzon nor the plaintiff have
paid it; that the credit of the Compaia General de Tabacos, secured by the said
mortgages, is anterior and preferent to the purchase alleged by the plaintiff, and,
therefore, the defendant prays that judgment he entered in his favor dismissing
the complaint; that all the property claimed by the plaintiff as his own property, be
held to be included in the mortgage in favor of the Compaia General de
Tabacos, and that the mortgage credit of the said Compaia General de Tabacos
be declared as preferred.
The other defendant, Juan Pomar, in his answer denied the allegations
contained in the complaint, and as a defense set forth that by virtue of an order of
the Court of First Instance of Occidental Negros, dated September 27, 1905, in
the matter of The Compaia General de Tabacos vs. Romana Ganzon or
Tanson, viuda de Vega, the deponent was appointed receiver of the property
claimed in the complaint; that both the petitioner and the Compaia Tabacalera
had executed the bonds required by law in the amounts of P12,000 and P6,000,
respectively, which bonds were approved on the 31st of October of the same
year; that after being duly sworn, he was appointed receiver, assumed the duties
of his office, and took charge of the said property with no other interest than the
faithful and exact compliance of the orders of the lower court in the performance
of his duties; for this reason he prayed that the complaint be dismissed with
costs.
At the trial of the case evidence was adduced by both parties and their
exhibits were made of record. On February 28, 1907, the court below rendered
judgment, holding that the steam sugar mill and 8-horsepower portable boiler and
fittings, the tramway, rails and cars upon the Hacienda of San Jose, should be
considered as included in the mortgage executed by Romana Ganzon in favor of
Lazaro Mota, which mortgage was transferred to the Compaia General de
Tabacos and ratified in favor of the latter by the debtor; the defendants were
therefore absolved of the complaint without costs, and such right of action was
reserved to Samuel Bischoff as he may be entitled for the return from Romana
Ganzon of whatever sum he paid for the said property.

From the above judgment the plaintiff appealed and moved that the
same be set aside and a new trial granted; his motion was overruled, to which
overruling he excepted and presented the corresponding bill of exceptions; the
latter was approved by the court below and submitted to this court.

Supposing that the steam sugar mill and portable boiler, and the
tramway with fifteen small wagons, rails, and other fittings, mounted at the
Hacienda San Jose and in use thereon, were improvements upon said hacienda,
are they to be considered for this sole reason as necessarily included in the
mortgage of the said hacienda, even though not specifically described in the
instruments as included therein?
The plaintiff avers, without proof, that the said articles were excluded
from the mortgage of the Hacienda San Jose where they are to be found,
because in the instruments wherein the Hacienda San Jose was repeatedly
mortgaged, far from it being stated that, by agreement between the contracting
parties, the objects claimed in the complaint should be understood to be
positively excluded, in the successive mortgage deeds executed by Romana
Ganzon in favor of Lazaro Mota y Ayo on July 20 and October 8, 1900, and
September 6, 1902, Exhibit D, as security for the increasing loans made by the
latter, the debtor mortgaged her Hacienda San Jose with the improvements
thereon to guarantee the payment of the total sum of 21,423.93 pesos; in the last
instrument, as well as in the previous ones, it is stated that the warehouse,
farmhouse, furnaces, machinery, and the described land that constitutes the said
hacienda shall be liable for the payment of her total indebtedness, the legal
interest thereon, and loss and damages and costs in case of judicial proceedings
having to be instituted; said instrument, like the previous ones, was recorded in
the registry of property, and it should be noted that by express desire of the
contracting parties, in the successive documents of indebtedness of 1900, the
mortgage of the hacienda with the improvements thereon was maintained, and
was afterwards repeated in the last instrument.
Owing to the nonpayment of the said sum of P21,423.93,
notwithstanding the demands made upon, and extensions of time granted to the
debtor, on September 30, 1904, the creditor, Lazaro Mota, assigned and
transferred the said credit with all his rights to the Compaia General de Tabacos
by means of a public instrument which was recorded in the registry, and appears
as Exhibit B herein.
In the private document marked as Exhibit A. dated September 10,
1902, it appears that the Compaia General de Tabacos opened an annual credit
of P15,000 under the conditions therein stated, the debtor having offered as
security the said hacienda with the cattle, buildings, and two steam engines, and
stating in addition, that the said hacienda with its buildings, machinery, and cattle
had already been mortgaged by her to Lazaro Mota.
Page 415 of 505

Moreover, even in the instrument executed on the 10th of December,

1901, when Romana Ganzon created a mortgaged in favor of the Compaia
General de Tubacos to guarantee her debt of P53,042.53, she designated the
said hacienda with all the improvements, buildings, machinery, and carabaos
thereon, and in addition declared that the same hacienda and its dependencies
were already mortgaged to the said Lazaro Mota.
So that in the instruments of mortgage above referred to, three of which
are anterior to the sale a retro, effected on the 8th of November, 1904, upon
which the plaintiff bases his claim, the improvements on the Hacienda San Jose,
among which is the machinery that was already mounted, appear as expressly
mortgaged at the time of executing the instrument of mortgage of September 6,
1902, and later on, that of transfer of the mortgage credit on the 30th of
September, 1904, to the Compaia General de Tabacos.
From none of the said instruments does it appear that the contracting
parties had expressly agreed to exclude the said machinery and tramway from
the repeated mortgages of said hacienda, so that no value would be given to the
words written therein proving in an unquestionable manner that it wax the will of
the contracting parties to include in the lien all the improvements upon the
hacienda, among which was the machinery mounted thereon for the needs of the
said hacienda:
Article 110 of the Mortgage Law in force reads:
"A mortgage extends to natural increase, improvements,
growing crops, and rents not collected when the obligation falls
due, and the value of indemnities allowed or due the owner for
insurance on the property mortgaged, or by virtue of
condemnation by right of eminent domain."
The same precept is repeated in detail and more extensively in the
following article 111 of said law.
Article 1877 of the Civil Code contains the same precept but treats at
greater length than in the preinserted article 110 of the Mortgage Law; it is as
follows:
"A mortgage includes the natural accessions,
improvements, growing fruits, and rents not collected when the
obligation is due, and the amount of the indemnities granted or
due the owner by the underwriters of the property mortgaged or
by virtue of the exercise of eminent domain by reason of public
utility, with the declarations, amplifications, and limitations

established by law, in case the estate continues in the possession

of the person who mortgaged it, as well as when it passes into
the hands of a third person."
As may be seen from the doctrine established by the Supreme Court of
Washington in its decision in the matter of The Royal Insurance Company vs. R.
Miller, liquidator, and Amadeo (26 Sup. Ct. Rep., 46 1 ) the above-quoted legal
precepts in force in these Islands are in accord with the American laws:
"3. Mortgage Right of Mortgagee to Insurance on
Harvested Crop. The avails of insurance on sugar and
molasses coming into the sugar house on a sugar plantation as
the result of the manufacture of a crop growing thereon when the
insurance was effected inure to the benefit of the mortgagee in a
mortgage of the realty and the fruits thereof if the loss occurred
after the execution of the mortgage, under the Porto Rico
Mortgage Law of 1880, which subjects to a mortgage of real
property the crops growing or harvested when the mortgage falls
due, 'but not yet removed or warehoused,' and the indemnities
awarded or due the owner of the realty either for the insurance or
for the crops, provided the damage occurred after the creation of
the mortgage.
"4. Mortgage Right of Mortgagee to Sue for
Insurance without Exhausting Other Remedies. The mortgage
creditor in a mortgage governed by the civil law may sue for the
avails of insurance subject to his mortgage without first
exhausting, his remedies against other property embraced by the
mortgage."
So that even though no mention had been made of said machinery and
tramway in the mortgage instrument, the mortgage of the property whereon they
are located is understood by law to extend to them and they must be considered
as included therein, as well as all other improvements, unless there was an
express stipulation between the parties that they should be excluded. Such
exclusion, however, certainly does not appear in the record; on the contrary, they
are manifestly included in the mortgage.
It has already been stated that the machinery in question was already
mounted on said property and was in use thereon when the mortgage given to
secure the debt of Romana Ganzon to the original creditor, Lazaro Mota, was
created; but even if this were not so, article 111 of the Mortgage Law,
Page 416 of 505

hereinbefore cited, provides that the following shall be considered as mortgaged

with the estate, provided they belong to the owner of said estate, although they
be not mentioned in the contract:
"1. Chattels permanently located in a building, either
useful or ornamental, or for the service of some industry, even
though they were placed there after the creation of the
mortgage."

For the above considerations, and accepting the conclusions contained

in the judgment appealed from in so far as they agree with the foregoing, it is our
opinion that the same should be affirmed, without any ruling as to the costs of this
instance.
Arellano, C.J., Mapa, Carson and Willard, JJ., concur.
||| (Bischoff v. Pomar, G.R. No. 4373, [February 2, 1909], 12 PHIL 690-700)

It should be noted that the said machinery and tramway were exclusively
owned by Romana Ganzon, the owner of the hacienda, and at the time when the
mortgage was made they had not yet been sold a retro to the plaintiff Bischoff;
this sale was effected on November 8, 1904, long after the property was
mortgaged.
Given the rights of dominion possessed by Romana Ganzon over the
articles in question it is not possible to deny that she had the right to dispose of
them, as she did, by sale under pacto de retro to the plaintiff, but the alienation
thereof does not release them from the encumbrance to which they are subjected
until redeemed from the mortgage that weighs upon them, since the right of the
creditor limits that of the owner of the thing mortgaged, and the purchaser,
assuming that he was able to effect a valid purchase, is necessarily bound to
acknowledge and respect the encumbrance to which is subjected the purchased
thing and which is at the disposal of the said creditor in order that he, under the
terms of the contract, may recover the amount of his credit therefrom.
If it be a true and incontrovertible fact that at the time the
plaintiff Bischoff acquired under pacto de retro the machinery and the tramway in
question, they were already affected by and included in the mortgage of the
Hacienda San Jose, the placing of the said hacienda, together with all of the
property existing thereon in the hands of a receiver at the instance of the creditor,
the Compaia General de Tabacos, has not occasioned any damage to the
plaintiff, inasmuch as the defendant limited itself to the exercise of a perfect right
protected by law, and it is the duty of the plaintiff to respect the encumbrance that
burdens the property acquired by him under these conditions, and therefore, he
can not have acquired any right to indemnity for loss and damages, for the
reason that he purchased goods that were already liable to the credit of the
company that was the creditor of Romana Ganzon, and which latter sold them
on pacto de retro; he therefore did not obtain possession of the same.

Page 417 of 505

found respondent spouses jointly and solidarily liable to petitioner and were ordered to
pay (a) P26,633.09; plus interest at 14% per annum (b); 25% of the above sum as
liquidated damages; (c) P5,000.00 as attorney's fees. The third party defendant
Tecson was ordered to reimburse the respondent spouses for the sum that they would
pay to petitioner. On appeal, the Court of Appeals reversed and set aside the
judgment of the Court of Appeals on the principal ground that respondent spouses
were not notified of the assignment to petitioner. Hence, this petition for
review. CIaASH

FIRST DIVISION
[G.R. No. 116363. December 10, 1999.]
SERVICEWIDE
INCORPORATED, petitioner, vs. THE
APPEALS,
JESUS
PONCE,
PONCE, respondents.

HON.
and

SPECIALISTS,
COURT
OF
ELIZABETH

Labaguis, Loyola, Atienza, Felipe, Santos & Associates for petitioner.

Jesus M. Ponce for private respondents.

SYNOPSIS
Sometime in 1975, respondent spouses bought on installment a Holden Torana
vehicle from CR Tecson Enterprises. They executed a promissory note and a chattel
mortgage in favor of Tecson, which in turn, executed a deed of assignment of said
promissory note and chattel mortgage in favor of Filinvest Credit Corporation. In 1976,
respondent spouses transferred and delivered the vehicle to Tecson Enterprises by
way of sale with assumption of mortgage. In 1978, Filinvest assigned all its rights and
interest over the same promissory note and chattel mortgage to Servicewide
Specialist Inc. without notice to respondent spouses. Due to the failure of herein
respondents to pay the installments under the promissory note from October 1977 to
March 1978 and despite demands to pay the same or return the vehicle, petitioner
was constrained to file before the Regional Trial Court of Manila on May 22, 1978, a
complaint for replevin with damages against respondents. After trial, the lower court

The Supreme Court found the petition meritorious. Only notice to the debtor of the
assignment of credit is required. His consent is not required. In contrast, consent of
the creditor-mortgagee to the alienation of the mortgaged property is necessary in
order to bind said creditor. Accordingly, the decision of the Court of Appeals was
reversed and set aside. The decision of the Regional Trial Court was affirmed and
reinstated.

DECISION

YNARES-SANTIAGO, J p:
This controversy is between a mortgagor who alienated the mortgaged property
without the consent of the mortgagee, on the one hand, and the assignee of the
mortgagee to whom the latter assigned his credit without notice to the mortgagor, on
the other hand. cda
Sometime in 1975, respondent spouses Atty. Jesus and Elizabeth Ponce bought on
installment a Holden Torana vehicle from C.R. Tecson Enterprises. They executed a
promissory note and a chattel mortgage on the vehicle dated December 24, 1975 in
favor of the C.R. Tecson Enterprises to secure payment of the note. The mortgage
was registered both in the Registry of Deeds and the Land Transportation Office. On
the same date, C.R. Tecson Enterprises, in turn, executed a deed of assignment of
said promissory note and chattel mortgage in favor of Filinvest Credit Corporation with
the conformity of respondent spouses. The latter were aware of the endorsement of
the note and the mortgage to Filinvest as they in fact availed of its financing services
to pay for the car. In 1976, respondent spouses transferred and delivered the vehicle
to Conrado R. Tecson by way of sale with assumption of mortgage. Subsequently, in
1978, Filinvest assigned all its rights and interest over the same promissory note and
Page 418 of 505

chattel mortgage to petitioner Servicewide Specialists Inc. without notice to

respondent spouses. Due to the failure of respondent spouses to pay the installments
under the promissory note from October 1977 to March 1978, and despite demands
to pay the same or to return the vehicle, petitioner was constrained to file before the
Regional Trial Court of Manila on May 22, 1978 a complaint for replevin with damages
against them, docketed as Civil Case No. 115567. In their answer, respondent
spouses denied any liability claiming they had already returned the car to Conrado
Tecson pursuant to the Deed of Sale with Assumption of Mortgage. Thus, they filed a
third party complaint against Conrado Tecson praying that in case they are adjudged
liable to petitioner, Conrado Tecson should reimburse them.
After trial, the lower court found respondent spouses jointly and solidarily liable to
petitioner, however, the third party defendant Conrado Tecson was ordered to
reimburse the respondent spouses for the sum that they would pay to petitioner. 1 On
appeal, the Court of Appeals reversed and set aside the judgment of the court a
quo on the principal ground that respondent spouses were not notified of the
assignment of the promissory note and chattel mortgage to petitioner. 2 Hence, this
petition for review.
The resolution of the petition hinges on whether the assignment of a credit requires
notice to the debtor in order to bind him. More specifically, is the debtor-mortgagor
who sold the property to another entitled to notice of the assignment of credit made by
the creditor to another party such that if the debtor was not notified of the assignment,
he can no longer be held liable since he already alienated the property? Conversely,
is the consent of the creditor-mortgagee necessary when the debtor-mortgagor
alienates the property to a third person?
Only notice to the debtor of the assignment of credit is required. His consent is not
required. In contrast, consent of the creditor-mortgagee to the alienation of the
mortgaged property is necessary in order to bind said creditor. To evade liability,
respondent spouses invoked Article 1626 of the Civil Code which provides that "the
debtor who, before having knowledge of the assignment, pays his creditor shall be
released from the obligation." They argue that they were not notified of the
assignment made to petitioner. This provision, however, is applicable only where the
debtor pays the creditor prior to acquiring knowledge of the latters assignment of his
credit. It does not apply, nor is it relevant, to cases of non-payment after the debtor
came to know of the assignment of credit. This is precisely so since the debtor did not
make any payment after the assignment. LibLex

In the case at bar, what is relevant is not the assignment of credit between petitioner
and its assignor, but the knowledge or consent of the creditor's assignee to the
debtor-mortgagor's sale of the property to another.

When the credit was assigned to petitioner, only notice to but not the consent of the
debtor-mortgagor was necessary to bind the latter. Applying Article 1627 of the Civil
Code, 3 the assignment made to petitioner includes the accessory rights such as the
mortgage. Article 2141, on the other hand, states that the provisions concerning a
contract of pledge shall be applicable to a chattel mortgage, such as the one at bar,
insofar as there is no conflict with Act No. 1508, the Chattel Mortgage Law. As
provided in Article 2096 in relation to Article 2141 of the Civil Code, 4 a thing pledged
may be alienated by the pledgor or owner "with the consent of the pledgee." This
provision is in accordance with Act No. 1508 which provides that "a mortgagor of
personal property shall not sell or pledge such property, or any part thereof,
mortgaged by him without the consent of the mortgagee in writing on the back of the
mortgage and on the margin of the record thereof in the office where such mortgage
is recorded." 5 Although this provision in the chattel mortgage has been expressly
repealed by Article 367 of the Revised Penal Code, yet under Article 319(2) of the
same Code, the sale of the thing mortgaged may be made provided that the
mortgagee gives his consent and that the same is recorded. 6 In any case, applying
by analogy Article 2128 of the Civil Code 7 to a chattel mortgage, it appears that a
mortgage credit may be alienated or assigned to a third person. Since the assignee of
the credit steps into the shoes of the creditor-mortgagee to whom the chattel was
mortgaged, it follows that the assignee's consent is necessary in order to bind him of
the alienation of the mortgaged thing by the debtor-mortgagor. This is tantamount to a
novation. As the new assignee, petitioner's consent is necessary before respondent
spouses' alienation of the vehicle can be considered as binding against third persons.
Petitioner is considered a third person with respect to the sale with mortgage between
respondent spouses and third party defendant Conrado Tecson.
In this case, however, since the alienation by the respondent spouses of the vehicle
occurred prior to the assignment of credit to petitioner, it follows that the former were
not bound to obtain the consent of the latter as it was not yet an assignee of the credit
at the time of the alienation of the mortgaged vehicle.
The next question is whether respondent spouses needed to notify or secure the
consent of petitioner's predecessor to the alienation of the vehicle. The sale with
assumption of mortgage made by respondent spouses is tantamount to a substitution
of debtors. In such case, mere notice to the creditor is not enough, his consent is
Page 419 of 505

always necessary as provided in Article 1293 of the Civil Code. 8 Without such
consent by the creditor, the alienation made by respondent spouses is not binding on
the former. On the other hand, Articles 1625, 9 1626 10 and 1627 of the Civil Code on
assignment of credits do not require the debtor's consent for the validity thereof and
so as to render him liable to the assignee. The law speaks not of consent but of notice
to the debtor, the purpose of which is to inform the latter that from the date of
assignment he should make payment to the assignee and not to the original creditor.
Notice is thus for the protection of the assignee because before said date, payment to
the original creditor is valid.

Respondents Jesus Ponce and Elizabeth Ponce are ORDERED to pay petitioner,
jointly and severally, the following sums:

When Tecson Enterprises assigned the promissory note and the chattel mortgage to
Filinvest, it was made with respondent spouses' tacit approval. When Filinvest in turn,
as assignee, assigned it further to petitioner, the latter should have notified the
respondent spouses of the assignment in order to bind them. This, they failed to do.
The testimony of petitioner's witness that notice of assignment was sent to respondent
spouses was stricken off the record. Having asserted the affirmative on the issue of
notice, petitioner should have substantiated its allegations in order to obtain a
favorable judgment. In civil cases, the burden is on the party who would be defeated if
no evidence is given on either side. 11 Being the plaintiff in the trial below, petitioner
must establish its case, relying on the strength of its own evidence and not upon the
weakness of that of its opponent. 12 The consent to the assignment given by
respondent spouses to Filinvest cannot be construed as the spouses' knowledge of
the assignment to petitioner precisely because at the time of the assignment to the
latter, the spouses had earlier sold the vehicle to another. LLpr

In connection with the Third Party Complaint of the respondents, the third party
defendant Conrado Tecson is hereby ordered to reimburse respondents Ponce for all
the sums the latter would pay to petitioner, and attorney's fees of P3,000.00.

a) P26,633,09, plus interest at 14% per annum from April 26,

1978 until fully paid;
b) 25% of the above sum in item (a) as liquidated damages;
c) P5,000.00 as attorney's fees; and
d) costs of suit.

SO ORDERED. prcd
Davide, Jr., C.J., Puno, Kapunan and Pardo, JJ., conc
||| (Servicewide Specialists, Inc. v. Court of Appeals, G.R. No. 116363, [December 10,
1999], 378 PHIL 223-231)

One thing, however, that militates against the posture of respondent spouses is that
although they are not bound to obtain the consent of the petitioner before alienating
the property, they should have obtained the consent of Filinvest since they were
already aware of the assignment to the latter. So that, insofar as Filinvest is
concerned, the debtor is still respondent spouses because of the absence of its
consent to the sale. Worse, Filinvest was not even notified of such sale. Having
subsequently stepped into the shoes of Filinvest, petitioner acquired the same rights
as the former had against respondent spouses. The defenses that could have been
invoked by Filinvest against the spouses can be successfully raised by petitioner.
Therefore, for failure of respondent spouses to obtain the consent of Filinvest thereto,
the sale of the vehicle to Conrado R. Tecson was not binding on the former. When the
credit was assigned by Filinvest to petitioner, respondent spouses stood on record as
the debtor-mortgagor.
WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE.
The decision of the Regional Trial Court is AFFIRMED and REINSTATED.
Page 420 of 505

THE FACTUAL ANTECEDENTS

In December 1987, petitioner Manuel Cinco (Manuel) obtained a commercial loan in
the amount of P700,000.00 from respondent Maasin Traders Lending
Corporation(MTLC). The loan was evidenced by a promissory note dated December
11, 1987, 4 and secured by a real estate mortgage executed on December 15, 1987
over the spouses Go Cinco's land and 4-storey building located in Maasin, Southern
Leyte.
Under the terms of the promissory note, the P700,000.00 loan was subject to a
monthly interest rate of 3% or 36% per annum and was payable within a term of 180
days or 6 months, renewable for another 180 days. As of July 16, 1989, Manuel's
outstanding obligation with MTLC amounted to P1,071,256.66, which amount
included the principal, interest, and penalties. 5

SECOND DIVISION
[G.R. No. 151903. October 9, 2009.]
MANUEL
GO
CINCO
and
ARACELI
S.
GO
CINCO, petitioners, vs. COURT OF APPEALS, ESTER
SERVACIO
and
MAASIN
TRADERS
LENDING
CORPORATION, respondents.

DECISION

BRION, J p:
Before the Court is a petition for review on certiorari 1 filed by petitioners, spouses
Manuel and Araceli Go Cinco (collectively, the spouses Go Cinco), assailing the
decision 2 dated June 22, 2001 of the Court of Appeals (CA) in CA-G.R. CV No.
47578, as well as the resolution 3 dated January 25, 2002 denying the spouses Go
Cinco's motion for reconsideration.

To be able to pay the loan in favor of MTLC, the spouses Go Cinco applied for a loan
with the Philippine National Bank, Maasin Branch (PNB or the bank) and offered as
collateral the same properties they previously mortgaged to MTLC. The PNB
approved the loan application for P1.3 Million 6 through a letter dated July 8, 1989;
the release of the amount, however, was conditioned on the cancellation of the
mortgage in favor of MTLC.
On July 16, 1989, Manuel went to the house of respondent Ester
Servacio (Ester), MTLC's President, to inform her that there was money with the PNB
for the payment of his loan with MTLC. Ester then proceeded to the PNB to verify the
information, but she claimed that the bank's officers informed her that Manuel had no
pending loan application with them. When she told Manuel of the bank's response,
Manuel assured her there was money with the PNB and promised to execute a
document that would allow her to collect the proceeds of the PNB loan.
On July 20, 1989, Manuel executed a Special Power of
Attorney 7 (SPA) authorizing Ester to collect the proceeds of his PNB loan. Ester
again went to the bank to inquire about the proceeds of the loan. This time, the
bank's officers confirmed the existence of the P1.3 Million loan, but they required
Ester to first sign a deed of release/cancellation of mortgage before they could
release the proceeds of the loan to her. Outraged that the spouses Go Cinco
used the same properties mortgaged to MTLC as collateral for the PNB loan,
Ester refused to sign the deed and did not collect the P1.3 Million loan proceeds.
As the MTLC loan was already due, Ester instituted foreclosure proceedings against
the spouses Go Cinco on July 24, 1989.
Page 421 of 505

To prevent the foreclosure of their properties, the spouses Go Cinco filed an action for
specific performance, damages, and preliminary injunction 8 before the Regional Trial
Court (RTC), Branch 25, Maasin, Southern Leyte. The spouses Go Cinco alleged that
foreclosure of the mortgage was no longer proper as there had already been
settlement of Manuel's obligation in favor of MTLC. They claimed that the assignment
of the proceeds of the PNB loan amounted to the payment of the MTLC loan. Ester's
refusal to sign the deed of release/cancellation of mortgage and to collect the
proceeds of the PNB loan were, to the spouses Go Cinco, completely unjustified and
entitled them to the payment of damages.
Ester countered these allegations by claiming that she had not been previously
informed of the spouses Go Cinco's plan to obtain a loan from the PNB and to use the
loan proceeds to settle Manuel's loan with MTLC. She claimed that she had no explicit
agreement with Manuel authorizing her to apply the proceeds of the PNB loan to
Manuel's loan with MTLC; the SPA merely authorized her to collect the proceeds of
the loan. She thus averred that it was unfair for the spouses Go Cinco to require the
release of the mortgage to MTLC when no actual payment of the loan had been
made.
In a decision dated August 16, 1994, 9 the RTC ruled in favor of the spouses Go
Cinco. The trial court found that the evidence sufficiently established the existence of
the PNB loan whose proceeds were available to satisfy Manuel's obligation with
MTLC, and that Ester unjustifiably refused to collect the amount. Creditors, it ruled,
cannot unreasonably prevent payment or performance of obligation to the damage
and prejudice of debtors who may stand liable for payment of higher interest
rates. 10 After finding MTLC and Ester liable for abuse of rights, the RTC ordered the
award of the following amounts to the spouses Go Cinco:
(a) P1,044,475.15 plus 535.63 per day hereafter,
representing loss of savings on interest, by way
of actual or compensatory damages, if
defendant corporation insists on the original
3% monthly interest rate;
(b) P100,000.00 as unrealized profit;
(c) P1,000,000.00 as moral damages;
(d) P20,000.00 as exemplary damages;
(e) P22,000.00 as litigation expenses; and

(f) 10% of the total amount as attorney's fees plus

costs. 11
Through an appeal with the CA, MTLC and Ester successfully secured a reversal of
the RTC's decision. Unlike the trial court, the appellate court found it significant that
there was no explicit agreement between Ester and the spouses Go Cinco for the
cancellation of the MTLC mortgage in favor of PNB to facilitate the release and
collection by Ester of the proceeds of the PNB loan. The CA read the SPA as merely
authorizing Ester to withdraw the proceeds of the loan. As Manuel's loan obligation
with MTLC remained unpaid, the CA ruled that no valid objection could be made to
the institution of the foreclosure proceedings. Accordingly, it dismissed the spouses
Go Cinco' complaint. From this dismissal, the spouses Go Cinco filed the present
appeal by certiorari.
THE PETITION
The spouses Go Cinco impute error on the part of the CA for its failure to consider
their acts as equivalent to payment that extinguished the MTLC loan; their act of
applying for a loan with the PNB was indicative of their good faith and honest intention
to settle the loan with MTLC. They contend that the creditors have the correlative duty
to accept the payment.
The spouses Go Cinco charge MTLC and Ester with bad faith and ill-motive for
unjustly refusing to collect the proceeds of the loan and to execute the deed of release
of mortgage. They assert that Ester's justifications for refusing the payment were
flimsy excuses so she could proceed with the foreclosure of the mortgaged properties
that were worth more than the amount due to MTLC. Thus, they conclude that the
acts of MTLC and of Ester amount to abuse of rights that warrants the award of
damages in their (spouses Go Cinco's) favor.
In refuting the claims of the spouses Go Cinco, MTLC and Ester raise the same
arguments they raised before the RTC and the CA. They claim that they were not
aware of the loan and the mortgage to PNB, and that there was no agreement that the
proceeds of the PNB loan were to be used to settle Manuel's obligation with MTLC.
Since the MTLC loan remained unpaid, they insist that the institution of the
foreclosure proceedings was proper. Additionally, MTLC and Ester contend that the
present petition raised questions of fact that cannot be addressed in a Rule 45
petition.
THE COURT'S RULING
The Court finds the petition meritorious.
Page 422 of 505

Preliminary Considerations
Our review of the records shows that there are no factual questions involved in this
case; the ultimate facts necessary for the resolution of the case already appear in the
records. The RTC and the CA decisions differed not so much on the findings of fact,
but on the conclusions derived from these factual findings. The correctness of the
conclusions derived from factual findings raises legal questions when the conclusions
are so linked to, or are inextricably intertwined with, the appreciation of the applicable
law that the case requires, as in the present case. 12 The petition raises the issue
of whether the loan due the MTLC had been extinguished; this is a question of law
that this Court can fully address and settle in an appeal by certiorari.
Payment
as
Extinguishing Obligations

Mode

of

Obligations are extinguished, among others, by payment or performance, 13 the

mode most relevant to the factual situation in the present case. Under Article 1232 of
the Civil Code, payment means not only the delivery of money but also the
performance, in any other manner, of an obligation. Article 1233 of the Civil Code
states that "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". In contracts of loan, the debtor is expected to deliver the sum of
money due the creditor. These provisions must be read in relation with the other rules
on payment under the Civil Code, 14 which rules impliedly require acceptance by the
creditor of the payment in order to extinguish an obligation.
In the present case, Manuel sought to pay Ester by authorizing her, through an SPA,
to collect the proceeds of the PNB loan an act that would have led to payment if
Ester had collected the loan proceeds as authorized. Admittedly, the delivery of the
SPA was not, strictly speaking, a delivery of the sum of money due to MTLC, and
Ester could not be compelled to accept it as payment based on Article 1233.
Nonetheless, the SPA stood as an authority to collect the proceeds of the alreadyapproved PNB loan that, upon receipt by Ester, would have constituted as payment of
the MTLC loan. 15 Had Ester presented the SPA to the bank and signed the deed of
release/cancellation of mortgage, the delivery of the sum of money would have been
effected and the obligation extinguished. 16 As the records show, Ester refused to
collect and allow the cancellation of the mortgage.

Under these facts, Manuel posits two things: first, that Ester's refusal was based on
completely unjustifiable grounds; and second, that the refusal was equivalent to
payment that led to the extinguishment of the obligation.
a. Unjust Refusal to Accept Payment
After considering Ester's arguments, we agree with Manuel that Ester's refusal of the
payment was without basis.
Ester refused to accept the payment because the bank required her to first sign a
deed of release/cancellation of the mortgage before the proceeds of the PNB loan
could be released. As a prior mortgagee, she claimed that the spouses Go Cinco
should have obtained her consent before offering the properties already mortgaged to
her as security for the PNB loan. Moreover, Ester alleged that the SPA merely
authorized her to collect the proceeds of the loan; there was no explicit agreement
that the MTLC loan would be paid out of the proceeds of the PNB loan.
There is nothing legally objectionable in a mortgagor's act of taking a second or
subsequent mortgage on a property already mortgaged; a subsequent mortgage is
recognized as valid by law and by commercial practice, subject to the prior rights of
previous mortgages. Section 4, Rule 68 of the 1997 Rules of Civil Procedure on the
disposition of the proceeds of sale after foreclosure actually requires the payment of
the proceeds to, among others, the junior encumbrancers in the order of their
priority. 17 Under Article 2130 of the Civil Code, a stipulation forbidding the owner
from alienating the immovable mortgaged is considered void. If the mortgagor-owner
is allowed to convey the entirety of his interests in the mortgaged property, reason
dictates that the lesser right to encumber his property with other liens must also be
recognized. Ester, therefore, could not validly require the spouses Go Cinco to first
obtain her consent to the PNB loan and mortgage. Besides, with the payment of the
MTLC loan using the proceeds of the PNB loan, the mortgage in favor of the MTLC
would have naturally been cancelled.
We find it improbable for Ester to claim that there was no agreement to apply the
proceeds of the PNB loan to the MTLC loan. Beginning July 16, 1989, Manuel had
already expressed intent to pay his loan with MTLC and thus requested for an
updated statement of account. Given Manuel's express intent of fully settling the
MTLC loan and of paying through the PNB loan he would secure (and in fact
secured), we also cannot give credit to the claim that the SPA only allowed Ester to
collect the proceeds of the PNB loan, without giving her the accompanying authority,
although verbal, to apply these proceeds to the MTLC loan. Even Ester's actions belie

Page 423 of 505

her claim as she in fact even went to the PNB to collect the proceeds. In sum, the
surrounding circumstances of the case simply do not support Ester's position.
b. Unjust Refusal Cannot be Equated to Payment
While Ester's refusal was unjustified and unreasonable, we cannot agree with
Manuel's position that this refusal had the effect of payment that extinguished his
obligation to MTLC. Article 1256 is clear and unequivocal on this point when it
provides that
ARTICLE 1256. If the creditor to whom tender of payment has
been made refuses without just cause to accept it, the debtor
shall be released from responsibility by the consignation of the
thing or sum due. [Emphasis supplied.]
In short, a refusal without just cause is not equivalent to payment; to have the
effect of payment and the consequent extinguishment of the obligation to pay, the
law requires the companion acts of tender of payment and consignation.
Tender of payment, as defined in Far East Bank and Trust Company v. Diaz Realty,
Inc., 18 is the definitive act of offering the creditor what is due him or her, together with
the demand that the creditor accept the same. When a creditor refuses the debtor's
tender of payment, the law allows the consignation of the thing or the sum due.
Tender and consignation have the effect of payment, as by consignation, the thing
due is deposited and placed at the disposal of the judicial authorities for the creditor to
collect. 19
A sad twist in this case for Manuel was that he could not avail of consignation to
extinguish his obligation to MTLC, as PNB would not release the proceeds of the loan
unless and until Ester had signed the deed of release/cancellation of mortgage, which
she unjustly refused to do. Hence, to compel Ester to accept the loan proceeds and to
prevent their mortgaged properties from being foreclosed, the spouses Go Cinco
found it necessary to institute the present case for specific performance and
damages.
c. Effects of Unjust Refusal
Under these circumstances, we hold that while no completed tender of payment and
consignation took place sufficient to constitute payment, the spouses Go Cinco duly
established that they have legitimately secured a means of paying off their loan with
MTLC; they were only prevented from doing so by the unjust refusal of Ester to accept
the proceeds of the PNB loan through her refusal to execute the release of the
mortgage on the properties mortgaged to MTLC. In other words, MTLC and Ester in

fact prevented the spouses Go Cinco from the exercise of their right to secure
payment of their loan. No reason exists under this legal situation why we cannot
compel MTLC and Ester: (1) to release the mortgage to MTLC as a condition to the
release of the proceeds of the PNB loan, upon PNB's acknowledgment that the
proceeds of the loan are ready and shall forthwith be released; and (2) to accept the
proceeds, sufficient to cover the total amount of the loan to MTLC, as payment for
Manuel's loan with MTLC.
We also find that under the circumstances, the spouses Go Cinco have undertaken,
at the very least, the equivalent of a tender of payment that cannot but have legal
effect. Since payment was available and was unjustifiably refused, justice and equity
demand that the spouses Go Cinco be freed from the obligation to pay interest on
the outstanding amount from the time the unjust refusal took place; 20 they
would not have been liable for any interest from the time tender of payment was made
if the payment had only been accepted. Under Article 19 of the Civil Code, they
should likewise be entitled to damages, as the unjust refusal was effectively an
abusive act contrary to the duty to act with honesty and good faith in the exercise of
rights and the fulfillment of duty.
For these reasons, we delete the amounts awarded by the RTC to the spouses Go
Cinco (P1,044,475.15, plus P563.63 per month) representing loss of savings on
interests for lack of legal basis. These amounts were computed based on the
difference in the interest rates charged by the MTLC (36% per annum) and the PNB
(17% to 18% per annum), from the date of tender of payment up to the time of the
promulgation of the RTC decision. The trial court failed to consider the effects of a
tender of payment and erroneously declared that MTLC can charge interest at the rate
of only 18% per annum the same rate that PNB charged, not the 36% interest rate
that MTLC charged; the RTC awarded the difference in the interest rates as actual
damages.
As part of the actual and compensatory damages, the RTC also awarded
P100,000.00 to the spouses Go Cinco representing unrealized profits. Apparently, if
the proceeds of the PNB loan (P1,203,685.17) had been applied to the MTLC loan
(P1,071,256.55), there would have been a balance of P132,428.62 left, which amount
the spouses Go Cinco could have invested in their businesses that would have
earned them a profit of at least P100,000.00.
We find no factual basis for this award. The spouses Go Cinco were unable to
substantiate the amount they claimed as unrealized profits; there was only their bare
claim that the excess could have been invested in their other businesses. Without
Page 424 of 505

more, this claim of expected profits is at best speculative and cannot be the basis for
a claim for damages. In Lucas v. Spouses Royo, 21 we declared that:
In determining actual damages, the Court cannot rely on
speculation, conjecture or guesswork as to the amount. Actual
and compensatory damages are those recoverable because
of pecuniary loss in business, trade, property, profession, job or
occupation and the same must be sufficiently proved,
otherwise, if the proof is flimsy and unsubstantiated, no
damages will be given. [Emphasis supplied.]
We agree, however, that there was basis for the award of moral and exemplary
damages and attorney's fees.
Ester's act of refusing payment was motivated by bad faith as evidenced by the utter
lack of substantial reasons to support it. Her unjust refusal, in her behalf and for the
MTLC which she represents, amounted to an abuse of rights; they acted in an
oppressive manner and, thus, are liable for moral and exemplary damages. 22 We
nevertheless reduce the P1,000,000.00 to P100,000.00 as the originally awarded
amount for moral damages is plainly excessive.

(2) The award for loss of savings and unrealized profit is deleted;
(3) The award for moral damages is reduced to P100,000.00; and
(4) The awards for exemplary damages, attorney's fees, and
expenses of litigation are retained.
The awards under (3) and (4) above shall be deducted from the amount of the
outstanding loan due the respondents as of June 20, 1989. Costs against the
respondents.
SO ORDERED.
||| (Spouses Cinco v. Court of Appeals, G.R. No. 151903, [October 9, 2009], 618 PHIL
104-120)

We affirm the grant of exemplary damages by way of example or correction for the
public good in light of the same reasons that justified the grant of moral damages.
As the spouses Go Cinco were compelled to litigate to protect their interests, they are
entitled to payment of 10% of the total amount of awarded damages as attorney's fees
and expenses of litigation.
WHEREFORE,
we GRANT the
petitioners'
petition
for
review
on certiorari, and REVERSE the decision of June 22, 2001 of the Court of Appeals in
CA-G.R. CV No. 47578, as well as the resolution of January 25, 2002 that followed.
We REINSTATE the decision dated August 16, 1994 of the Regional Trial Court,
Branch 25, Maasin, Southern Leyte, with the following MODIFICATIONS:
(1) The respondents are hereby directed to accept the proceeds
of the spouses Go Cinco's PNB loan, if still available,
and to consent to the release of the mortgage on the
property given as security for the loan upon PNB's
acknowledgment that the proceeds of the loan, sufficient
to cover the total indebtedness to respondent Maasin
Traders Lending Corporation computed as of June 20,
1989, shall forthwith be released;
Page 425 of 505

On July 6, 1993, Galas, with her daughter, Ophelia G. Pingol (Pingol), as co-maker,
mortgaged the subject property to Yolanda Valdez Villar (Villar) as security for a loan
in the amount of Two Million Two Hundred Thousand Pesos (P2,200,000.00). 6
On October 10, 1994, Galas, again with Pingol as her co-maker, mortgaged the same
subject property to Pablo P. Garcia (Garcia) to secure her loan of One Million Eight
Hundred Thousand Pesos (P1,800,000.00). 7
Both mortgages were annotated at the back of TCT No. RT-67970 (253279), to wit:
REAL ESTATE MORTGAGE

FIRST DIVISION

Entry No. 6537/T-RT-67970 (253279) MORTGAGE In favor of

Yolanda Valdez Villar m/to Jaime Villar to guarantee a principal
obligation in the sum of P2,200,000 mortgagee's consent
necessary in case of subsequent encumbrance or alienation of
the property; Other conditions set forth in Doc. No. 97, Book No.
VI, Page No. 20 of the Not. Pub. of Diana P. Magpantay IHTASa
Date of Instrument: 7-6-93

[G.R. No. 158891. June 27, 2012.]

PABLO P. GARCIA, petitioner, vs. YOLANDA VALDEZ
VILLAR, respondent.

DECISION

LEONARDO-DE CASTRO, * J p:
This is a petition for review on certiorari 1 of the February 27, 2003 Decision 2 and
July 2, 2003 Resolution 3 of the Court of Appeals in CA-G.R. SP No. 72714, which
reversed the May 27, 2002 Decision 4 of the Regional Trial Court (RTC), Branch 92 of
Quezon City in Civil Case No. Q-99-39139.
Lourdes V. Galas (Galas) was the original owner of a piece of property (subject
property) located at Malindang St., Quezon City, covered by Transfer Certificate of
Title (TCT) No. RT-67970 (253279). 5

Date of Inscription: 7-7-93

SECOND REAL ESTATE MORTGAGE
Entry No. 821/T-RT-67970(253279) MORTGAGE In favor of
Pablo Garcia m/to Isabela Garcia to guarantee a principal
obligation in the sum of P1,800,000.00 mortgagee's consent
necessary in case of subsequent encumbrance or alienation of
the property; Other conditions set forth in Doc. No. 08, Book No.
VII, Page No. 03 of the Not. Pub. of Azucena Espejo Lozada
Date of Instrument: 10/10/94
Date of Inscription: 10/11/94
LRC Consulta No. 169 8 SDaHEc
On November 21, 1996, Galas sold the subject property to Villar for One Million Five
Hundred Thousand Pesos (P1,500,000.00), and declared in the Deed of Sale 9 that
such property was "free and clear of all liens and encumbrances of any kind
whatsoever." 10
On December 3, 1996, the Deed of Sale was registered and, consequently, TCT No.
RT-67970 (253279) was cancelled and TCT No. N-168361 11 was issued in the name
Page 426 of 505

of Villar. Both Villar's and Garcia's mortgages were carried over and annotated at the
back of Villar's new TCT. 12
On October 27, 1999, Garcia filed a Petition for Mandamus with Damages 13 against
Villar before the RTC, Branch 92 of Quezon City. Garcia subsequently amended his
petition to a Complaint for Foreclosure of Real Estate Mortgage with
Damages. 14 Garcia alleged that when Villar purchased the subject property, she
acted in bad faith and with malice as she knowingly and willfully disregarded the
provisions on laws on judicial and extrajudicial foreclosure of mortgaged property.
Garcia further claimed that when Villar purchased the subject property, Galas was
relieved of her contractual obligation and the characters of creditor and debtor were
merged in the person of Villar. Therefore, Garcia argued, he, as the second
mortgagee, was subrogated to Villar's original status as first mortgagee, which is the
creditor with the right to foreclose. Garcia further asserted that he had demanded
payment from Villar, 15 whose refusal compelled him to incur expenses in filing an
action in court. 16
Villar, in her Answer, 17 claimed that the complaint stated no cause of action and that
the second mortgage was done in bad faith as it was without her consent and
knowledge. Villar alleged that she only discovered the second mortgage when she
had the Deed of Sale registered. Villar blamed Garcia for the controversy as he
accepted the second mortgage without prior consent from her. She averred that there
could be no subrogation as the assignment of credit was done with neither her
knowledge nor prior consent. Villar added that Garcia should seek recourse against
Galas and Pingol, with whom he had privity insofar as the second mortgage of
property is concerned.
On May 23, 2000, the RTC issued a Pre-Trial Order 18 wherein the parties agreed on
the following facts and issue:
STIPULATIONS OF FACTS/ADMISSIONS
The following are admitted:
1.the defendant admits the second mortgage annotated
at the back of TCT No. RT-67970 of Lourdes V.
Galas with the qualification that the existence
of said mortgage was discovered only in 1996
after the sale; HICcSA
2.the defendant admits the existence of the annotation
of the second mortgage at the back of the title

despite the transfer of the title in the name of

the defendant;
3.the plaintiff admits that defendant Yolanda Valdez
Villar is the first mortgagee;
4.the plaintiff admits that the first mortgage was
annotated at the back of the title of the
mortgagor Lourdes V. Galas; and
5.the plaintiff admits that by virtue of the deed of sale
the title of the property was transferred from
the previous owner in favor of defendant
Yolanda Valdez Villar.
xxx xxx xxx
ISSUE
Whether or not the plaintiff, at this point in time, could judicially
foreclose the property in question.
On June 8, 2000, upon Garcia's manifestation, in open court, of his intention to file a
Motion for Summary Judgment, 19 the RTC issued an Order 20 directing the parties
to simultaneously file their respective memoranda within 20 days.
On June 26, 2000, Garcia filed a Motion for Summary Judgment with Affidavit of
Merit 21 on the grounds that there was no genuine issue as to any of the material
facts of the case and that he was entitled to a judgment as a matter of law.
On June 28, 2000, Garcia filed his Memorandum 22 in support of his Motion for
Summary Judgment and in compliance with the RTC's June 8, 2000 Order. Garcia
alleged that his equity of redemption had not yet been claimed since Villar did not
foreclose the mortgaged property to satisfy her claim.
On August 13, 2000, Villar filed an Urgent Ex-Parte Motion for Extension of Time to
File Her Memorandum. 23 This, however, was denied 24 by the RTC in view of
Garcia's Opposition. 25 CTDHSE
On May 27, 2002, the RTC rendered its Decision, the dispositive portion of which
reads:
WHEREFORE, the foregoing premises considered, judgment is
hereby rendered in favor of the plaintiff Pablo P. Garcia and
Page 427 of 505

against the defendant Yolanda V. Villar, who is ordered to pay to

the former within a period of not less than ninety (90) days nor
more than one hundred twenty (120) days from entry of
judgment, the sum of P1,800,000.00 plus legal interest from
October 27, 1999 and upon failure of the defendant to pay the
said amount within the prescribed period, the property subject
matter of the 2nd Real Estate Mortgage dated October 10, 1994
shall, upon motion of the plaintiff, be sold at public auction in the
manner and under the provisions of Rules 39 and 68 of the 1997
Revised Rules of Civil Procedure and other regulations governing
sale of real estate under execution in order to satisfy the
judgment in this case. The defendant is further ordered to pay
costs. 26
The RTC declared that the direct sale of the subject property to Villar, the first
mortgagee, could not operate to deprive Garcia of his right as a second mortgagee.
The RTC said that upon Galas's failure to pay her obligation, Villar should have
foreclosed the subject property pursuant to Act No. 3135 as amended, to provide
junior mortgagees like Garcia, the opportunity to satisfy their claims from the residue,
if any, of the foreclosure sale proceeds. This, the RTC added, would have resulted in
the extinguishment of the mortgages. 27 STHDAc
The RTC held that the second mortgage constituted in Garcia's favor had not been
discharged, and that Villar, as the new registered owner of the subject property with a
subsisting mortgage, was liable for it. 28
Villar appealed 29 this Decision to the Court of Appeals based on the arguments that
Garcia had no valid cause of action against her; that he was in bad faith when he
entered into a contract of mortgage with Galas, in light of the restriction imposed by
the first mortgage; and that Garcia, as the one who gave the occasion for the
commission of fraud, should suffer. Villar further asseverated that the second
mortgage is a void and inexistent contract considering that its cause or object is
contrary to law, moral, good customs, and public order or public policy, insofar as she
was concerned. 30
Garcia, in his Memorandum, 31 reiterated his position that his equity of redemption
remained "unforeclosed" since Villar did not institute foreclosure proceedings. Garcia
added that "the mortgage, until discharged, follows the property to whomever it may
be transferred no matter how many times over it changes hands as long as the
annotation is carried over." 32

The Court of Appeals reversed the RTC in a Decision dated February 27, 2003, to wit:
WHEREFORE, the decision appealed from is REVERSED and
another one entered DISMISSING the complaint for judicial
foreclosure of real estate mortgage with damages. 33
The Court of Appeals declared that Galas was free to mortgage the subject property
even without Villar's consent as the restriction that the mortgagee's consent was
necessary in case of a subsequent encumbrance was absent in the Deed of Real
Estate Mortgage. In the same vein, the Court of Appeals said that the sale of the
subject property to Villar was valid as it found nothing in the records that would show
that Galas violated the Deed of Real Estate Mortgage prior to the sale. 34
In dismissing the complaint for judicial foreclosure of real estate mortgage with
damages, the Court of Appeals held that Garcia had no cause of action against Villar
"in the absence of evidence showing that the second mortgage executed in his favor
by Lourdes V. Galas [had] been violated and that he [had] made a demand on the
latter for the payment of the obligation secured by said mortgage prior to the
institution of his complaint against Villar." 35 cEAHSC
On March 20, 2003, Garcia filed a Motion for Reconsideration 36 on the ground that
the Court of Appeals failed to resolve the main issue of the case, which was whether
or not Garcia, as the second mortgagee, could still foreclose the mortgage after the
subject property had been sold by Galas, the mortgage debtor, to Villar, the mortgage
creditor.
This motion was denied for lack of merit by the Court of Appeals in its July 2, 2003
Resolution.
Garcia is now before this Court, with the same arguments he posited before the lower
courts. In his Memorandum, 37 he added that the Deed of Real Estate Mortgage
contained a stipulation, which is violative of the prohibition on pactum commissorium.
Issues
The crux of the controversy before us boils down to the propriety of Garcia's demand
upon Villar to either pay Galas's debt of P1,800,000.00, or to judicially foreclose the
subject property to satisfy the aforesaid debt. This Court will, however, address the
following issues in seriatim:
1.Whether or not the second mortgage to Garcia was valid;
2.Whether or not the sale of the subject property to Villar was
valid;
Page 428 of 505

3.Whether or not the sale of the subject property to Villar was in

violation of the prohibition on pactum commissorium;
4.Whether or not Garcia's action for foreclosure of mortgage on
the subject property can prosper.
Discussion
Validity of second mortgage to Garcia
and sale of subject property to Villar
At the onset, this Court would like to address the validity of the second mortgage to
Garcia and the sale of the subject property to Villar. We agree with the Court of
Appeals that both are valid under the terms and conditions of the Deed of Real Estate
Mortgage executed by Galas and Villar. AEHTIC
While it is true that the annotation of the first mortgage to Villar on Galas's TCT
contained a restriction on further encumbrances without the mortgagee's prior
consent, this restriction was nowhere to be found in the Deed of Real Estate
Mortgage. As this Deed became the basis for the annotation on Galas's title, its terms
and conditions take precedence over the standard, stamped annotation placed on her
title. If it were the intention of the parties to impose such restriction, they would have
and should have stipulated such in the Deed of Real Estate Mortgage itself.
Neither did this Deed proscribe the sale or alienation of the subject property during
the life of the mortgages. Garcia's insistence that Villar should have judicially or
extrajudicially foreclosed the mortgage to satisfy Galas's debt is misplaced. The Deed
of Real Estate Mortgage merely provided for the options Villar may undertake in case
Galas or Pingol fail to pay their loan. Nowhere was it stated in the Deed that Galas
could not opt to sell the subject property to Villar, or to any other person. Such
stipulation would have been void anyway, as it is not allowed under Article 2130 of the
Civil Code, to wit:
Art. 2130.A stipulation forbidding the owner from alienating the
immovable mortgaged shall be void.
Prohibition on pactum commissorium
Garcia claims that the stipulation appointing Villar, the mortgagee, as the mortgagor's
attorney-in-fact, to sell the property in case of default in the payment of the loan, is in
violation of the prohibition on pactum commissorium, as stated under Article 2088 of
the Civil Code, viz.:

Art. 2088.The creditor cannot appropriate the things given by way

of pledge or mortgage, or dispose of them. Any stipulation to the
contrary is null and void.
The power of attorney provision in the Deed of Real Estate Mortgage reads:
5.Power of Attorney of MORTGAGEE. Effective upon the
breach of any condition of this Mortgage, and in addition to the
remedies herein stipulated, the MORTGAGEE is likewise
appointed attorney-in-fact of the MORTGAGOR with full power
and authority to take actual possession of the mortgaged
properties, to sell, lease any of the mortgaged properties, to
collect rents, to execute deeds of sale, lease, or agreement that
may be deemed convenient, to make repairs or improvements on
the mortgaged properties and to pay the same, and perform any
other act which the MORTGAGEE may deem convenient for the
proper administration of the mortgaged properties. The payment
of any expenses advanced by the MORTGAGEE in connection
with the purpose indicated herein is also secured by this
Mortgage. Any amount received from the sale, disposal or
administration abovementioned maybe applied by assessments
and other incidental expenses and obligations and to the
payment of original indebtedness including interest and penalties
thereon. The power herein granted shall not be revoked during
the life of this Mortgage and all acts which may be executed by
the MORTGAGEE by virtue of said power are hereby
ratified. 38 ETAICc
The following are the elements of pactum commissorium:
(1)There should be a property mortgaged by way of security for the payment of the
principal obligation; and
(2)There should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated
period. 39
Villar's purchase of the subject property did not violate the prohibition on pactum
commissorium. The power of attorney provision above did not provide that the
ownership over the subject property would automatically pass to Villar upon Galas's
failure to pay the loan on time. What it granted was the mere appointment of Villar as
attorney-in-fact, with authority to sell or otherwise dispose of the subject property, and
Page 429 of 505

to apply the proceeds to the payment of the loan. 40 This provision is customary in
mortgage contracts, and is in conformity with Article 2087 of the Civil Code, which
reads:
Art. 2087.It is also of the essence of these contracts that when
the principal obligation becomes due, the things in which the
pledge or mortgage consists may be alienated for the payment to
the creditor.
Galas's decision to eventually sell the subject property to Villar for an additional
P1,500,000.00 was well within the scope of her rights as the owner of the subject
property. The subject property was transferred to Villar by virtue of another and
separate contract, which is the Deed of Sale. Garcia never alleged that the transfer of
the subject property to Villar was automatic upon Galas's failure to discharge her
debt, or that the sale was simulated to cover up such automatic transfer.
Propriety of Garcia's action
for foreclosure of mortgage
The real nature of a mortgage is described in Article 2126 of the Civil Code, to wit:
Art. 2126.The mortgage directly and immediately subjects the
property upon which it is imposed, whoever the possessor may
be, to the fulfillment of the obligation for whose security it was
constituted. ITESAc
Simply put, a mortgage is a real right, which follows the property, even after
subsequent transfers by the mortgagor. "A registered mortgage lien is considered
inseparable from the property inasmuch as it is a right in rem." 41
The sale or transfer of the mortgaged property cannot affect or release the mortgage;
thus the purchaser or transferee is necessarily bound to acknowledge and respect the
encumbrance. 42 In fact, under Article 2129 of the Civil Code, the mortgage on the
property may still be foreclosed despite the transfer, viz.:
Art. 2129.The creditor may claim from a third person in
possession of the mortgaged property, the payment of the part of
the credit secured by the property which said third person
possesses, in terms and with the formalities which the law
establishes.
While we agree with Garcia that since the second mortgage, of which he is the
mortgagee, has not yet been discharged, we find that said mortgage subsists and is

still enforceable. However, Villar, in buying the subject property with notice that it was
mortgaged, only undertook to pay such mortgage or allow the subject property to be
sold upon failure of the mortgage creditor to obtain payment from the principal debtor
once the debt matures. Villar did not obligate herself to replace the debtor in the
principal obligation, and could not do so in law without the creditor's
consent. 43 Article 1293 of the Civil Code provides:
Art. 1293.Novation which consists in substituting a new debtor in
the place of the original one, may be made even without the
knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him the
rights mentioned in articles 1236 and 1237.
Therefore, the obligation to pay the mortgage indebtedness remains with the original
debtors Galas and Pingol. 44 The case of E.C. McCullough & Co. v. Veloso and
Serna 45 is square on this point:
The effects of a transfer of a mortgaged property to a third person
are well determined by the Civil Code. According to article
1879 46 of this Code, the creditor may demand of the third
person in possession of the property mortgaged payment of such
part of the debt, as is secured by the property in his possession,
in the manner and form established by the law. The Mortgage
Law in force at the promulgation of the Civil Code and referred to
in the latter, provided, among other things, that the debtor should
not pay the debt upon its maturity after judicial or notarial
demand, for payment has been made by the creditor upon him.
(Art. 135 of the Mortgage Law of the Philippines of 1889.)
According to this, the obligation of the new possessor to pay the
debt originated only from the right of the creditor to demand
payment of him, it being necessary that a demand for payment
should have previously been made upon the debtor and the latter
should have failed to pay. And even if these requirements were
complied with, still the third possessor might abandon the
property mortgaged, and in that case it is considered to be in the
possession of the debtor. (Art. 136 of the same law.) This clearly
shows that the spirit of the Civil Code is to let the obligation of the
debtor to pay the debt stand although the property mortgaged to
secure the payment of said debt may have been transferred to a
third person. While the Mortgage Law of 1893 eliminated these
provisions, it contained nothing indicating any change in the spirit
Page 430 of 505

of the law in this respect. Article 129 of this law, which provides
the substitution of the debtor by the third person in possession of
the property, for the purposes of the giving of notice, does not
show this change and has reference to a case where the action is
directed only against the property burdened with the mortgage.
(Art. 168 of the Regulation.) 47
This pronouncement was reiterated in Rodriguez v. Reyes 48 wherein this Court, even
before quoting the same above portion in E.C. McCullough & Co. v. Veloso and
Serna, held: cdtai
We find the stand of petitioners-appellants to be unmeritorious
and untenable. The maxim "caveat emptor" applies only to
execution sales, and this was not one such. The mere fact that
the purchaser of an immovable has notice that the acquired realty
is encumbered with a mortgage does not render him liable for the
payment of the debt guaranteed by the mortgage, in the absence
of stipulation or condition that he is to assume payment of the
mortgage debt. The reason is plain: the mortgage is merely an
encumbrance on the property, entitling the mortgagee to have the
property foreclosed, i.e., sold, in case the principal obligor does
not pay the mortgage debt, and apply the proceeds of the sale to
the satisfaction of his credit. Mortgage is merely an accessory
undertaking for the convenience and security of the mortgage
creditor, and exists independently of the obligation to pay the debt
secured by it. The mortgagee, if he is so minded, can waive the
mortgage security and proceed to collect the principal debt by
personal action against the original mortgagor. 49
In view of the foregoing, Garcia has no cause of action against Villar in the absence of
evidence to show that the second mortgage executed in favor of Garcia has been
violated by his debtors, Galas and Pingol, i.e., specifically that Garcia has made a
demand on said debtors for the payment of the obligation secured by the second
mortgage and they have failed to pay.
WHEREFORE, this Court hereby AFFIRMS the February 27, 2003 Decision and
March 8, 2003 Resolution of the Court of Appeals in CA-G.R. SP No.
72714. HTDcCE
SO ORDERED.
||| (Garcia v. Villar, G.R. No. 158891, [June 27, 2012], 689 PHIL 363-378)

FIRST DIVISION
[G.R. No. 97070. March 19, 1993.]
ARTURO
GRAVINA
AND
ZENAIDA
GRAVINA, petitioners, vs. THE HON. COURT OF APPEALS,
THE HON. ALFIN S. VICENCIO, PRESIDING JUDGE, BR. 50,
RTC, MANILA ALFREDO B. TAN, LUCILA EDNA TAN, DAILY
SAVINGS
AND
LOAN
ASSOCIATION,
INC.,
AND
MERCANTILE FINANCING CORPORATION,respondents.

DECISION

GRIO-AQUINO, J p:
Petitioners herein, Spouses Arturo Gravina and Zenaida Gravina, were original
owners of a 116 square-meter lot in Tondo, Manila, which they mortgaged to the Daily
Savings Loan Association (DLSA) in 1973, as security for loans totalling P109,000.00,
obtained by them from the Association.
Having failed to settle their obligation when it fell due, the DLSA foreclosed the
mortgage on September 10, 1974, and bought the property as the highest bidder at
the public-auction sale.
On October 10, 1974, ownership of the foreclosed property was consolidated in favor
of DLSA and Transfer Certificate of Title No. 119695 of the Registry of Deeds, of
Manila was issued in its name.
Page 431 of 505

On January 29, 1976, DLSA sold the property to Mercantile Financing for P40,000.00.
TCT No. 119695 was cancelled and TCT No. 120865 of the Registry of Deeds of
Manila was issued to Mercantile Financing Corporation.
On February 25, 1976, Mercantile Financing Corporation sold the property to the
Spouses Alfredo and Lucila Edna Tan for P66,500.00. TCT No. 1121130 of the
Registry of Deeds of Manila was issued to the vendees.
On March 3, 1983, the Tans filed an ejectment complaint against the petitioners,
Arturo and Zenaida Gravina, in the Metropolitan Trial Court of Manila (Civil Case No.
011866). A decision was rendered in favor of the Tans. Petitioners appealed to the
Regional Trial Court of Manila. The RTC dismissed the case holding that the proper
remedy of the Tans was an accion reivindicatoria or for recovery of property.
The Tans filed an action to recover possession in the Regional Trial Court of Manila
(Civil Case No. 83-16015). On November 7, 1986, the trial court rendered a decision
in their favor, ordering the Gravinas to vacate and surrender the possession of the
property to them (the Tans). The Gravina spouses filed a notice of appeal.
However, before the perfection of the appeal, the petitioners (now private
respondents) filed on November 26, 1986, a motion for execution pending appeal.
The trial judge denied the motion. The private respondents went to the Court of
Appeals on certiorari assailing the denial of their motion.
The Court of Appeals consolidated the appeal of the Gravinas (CA-G.R. CV No.
13369) with the petition for certiorari filed by the Tans. On July 9, 1990, the Court of
Appeals rendered judgment as follows:
"WHEREFORE, the judgment appealed from in CA-G.R. CV No.
13369 entitled 'Alfredo Tan, et al. vs. Arturo Gravina, et al.,
Defendants and Third Party Plaintiffs' is hereby AFFIRMED.
Costs against the appellants; and
"In the certiorari case, CA-G.R. SP No. 12432 entitled 'Alfredo
Tan, et al., vs. Hon. Alfin Vicencio, et al.,' the petition is DENIED
DUE COURSE and ordered DISMISSED. No pronouncement as
to costs." (p. 37 Rollo.)
The Gravinas have filed the instant petition for review of the Court of Appeals'
decision raising the following issues:
1. Whether or not the foreclosure of the mortgage executed by
the Daily Savings and Loan Association Inc., was valid;

2. Whether or not the public auction sale by the sheriff was made
in accordance with law;
3. Whether or not the consolidation of title in the name of Daily
Savings and Loan Association was valid; and
4. Whether or not the sale to the mortgagee bank personnel is
valid.
The first three issues focus on the validity of the extrajudicial foreclosure of the
mortgage which according to the petitioners, was done without notice to them as
mortgagors. Whether or not they were notified of the extrajudicial foreclosure is,
however, a factual issue.
The finding of the trial court, which was sustained by the Court of Appeals, was that
the DLSA did send a letter to the petitioners informing them of the foreclosure of the
mortgage but the petitioners failed to claim the letter. The Court also found that said
notice was published in the Evening News, a newspaper of general circulation in the
City of Manila. We are bound by those factual findings of the Court of Appeals
(Leuterio vs. CA, 197 SCRA 369).
Moreover, Section 3 of Act No. 3135 (Mortgage Law) requires only the posting of the
notices of sale in three public places and the publication of the same in a newspaper
of general circulation. Personal notice is not required.
"Sec. 3. Notice shall be given by posting notices of the sale for
not less than twenty days in at least three public places of the
municipality or city where the property is situated, and if such
property is worth more than four hundred pesos, such notice shall
also be published once a week for at least three consecutive
weeks in a newspaper of general circulation in the municipality or
City."
In the case of Philippine National Bank vs. International Corporate Bank, 199 SCRA
508, 509, the Court likewise ruled that:
"The contention of private respondent in its opposition that the
extrajudicial foreclosure is null and void for failure of the petitioner
to inform them of the said foreclosure and the pertinent dates of
redemption so that it can exercise its prerogatives under the law
is untenable. There being obviously no contractual stipulation
therefor, personal notice is not necessary and what governs is the
general rule in Section 3 of Act 3135, as amended, which directs
Page 432 of 505

the posting of notices of the sale in at least three (3) public places
of the municipality where the property is situated, and the
publication thereof in a newspaper of general circulation in said
municipality."
There is no merit in petitioners' contention that the sale of the foreclosed property to
Lucila Edna Tan, an employee of the bank, was invalid. In the first place, the Tans did
not buy the property from the mortgagee, the Daily Savings and Loan Association, but
from the Mercantile Financing Corporation. Secondly, it is not prohibited for the bank
to sell to its employee property acquired by the bank at a mortgage foreclosure sale.
The claim of the petitioners that there was collusion between DLSA and the Tans was
not proven. The Court of Appeals held:
"As to the argument of the appellant that there was conspiracy
and collusion among the plaintiffs and the third party defendants,
the trial court held that there was no sufficient proof to sustain the
defense and We see no cogent reason for Us to disturb these
findings of fact on appeal." (p. 36, Rollo.)
WHEREFORE, the petition for review of the decision of the Court of Appeals in CA
G.R. SP No. 12432 is DENIED for lack of merit.
SO ORDERED.
Cruz, Bellosillo and Quiason, JJ., concur.
||| (Gravina v. Court of Appeals, G.R. No. 97070, [March 19, 1993])

BENGUET MANAGEMENT CORPORATION, petitioner, vs.

COURT OF APPEALS, KEPPEL BANK PHILIPPINES, INC., as
Trustee for METROPOLITAN BANK AND TRUST COMPANY,
UNITED COCONUT PLANTERS BANK, RIZAL COMMERCIAL
BANKING CORPORATION, FAR EAST BANK AND TRUST
COMPANY and BANK OF THE PHILIPPINE ISLANDS under
the Mortgage Trust Indenture, and THE REGISTER OF
DEEDS OF CALAMBA, respondents.

De Castro & Cagampang Law Offices and Otilla Dimayuga-Molo for petitioner.
Padila Law Office for private respondents.

SYNOPSIS
Petitioner Benguet Management Corp. (BMC) and private respondent Keppel Bank
(KBPI), in behalf of the other respondent banks, entered into a Loan Agreement and
Mortgage Trust Indenture (MTI) whereby BMC, in consideration of P190M total loan,
constituted in favor of KBPI a mortgage on several lots located in Alaminos, Laguna
and Iba, Zambales. Later, for failure to BMC to pay its obligations, KBPI filed an
application for extra judicial foreclosure of mortgage at the RTC, Zambales and later,
a similar application at the RTC, San Pablo City. KBPI's application was subsequently
granted and the case reached the Court of Appeals. As the auction sale already
proceeded with KBPI as the highest bidder and the same also registered, BMC asked
the appellate court to enjoin the consolidation of titles over the foreclosed properties
in the name of respondent banks. The same was denied and hence, this special civil
action for certiorari.
The Court reversed the appellate court's resolutions denying BMC's application for
temporary restraining order to enjoin the consolidation of titles of the foreclosed
properties. As the case involved factual issues, the case was remanded to the Court
of Appeals for determination of the case on its merits.

FIRST DIVISION

DECISION

[G.R. No. 153571. September 18, 2003.]

Page 433 of 505

YNARES-SANTIAGO, J p:
Assailed in this petition for certiorari under Rule 65 of the Revised Rules of Court is
the Resolution of the Court of Appeals in CA-G.R. SP No. 69503 dated April 5,
2002, 1which denied petitioner's application for the issuance of a temporary
restraining order, as well as its May 28, 2002 2 Resolution denying the motion for
reconsideration.
The antecedent facts reveal that on November 29, 1994, petitioner Benguet
Management Corporation (BMC) and Keppel Bank Philippines, Inc. (KBPI), 3 acting
as trustee of the other respondent banks, entered into a Loan Agreement and
Mortgage Trust Indenture (MTI) whereby BMC, in consideration of the syndicated loan
of P190,000,000.00, constituted in favor of KBPI a mortgage on several lots located in
Alaminos, Laguna and Iba, Zambales.
On September 28, 2001, for failure of BMC to pay in full the installments due on the
Loan Agreement and Mortgage Trust Indenture, KBPI filed an application 4 for extrajudicial foreclosure of mortgage before the Office of the Clerk of Court of the Regional
Trial Court of Iba, Zambales. On October 29, 2001, a similar application 5 for extra
judicial foreclosure of mortgage was filed by KBPI with the Office of the Clerk of Court
of the Regional Trial Court of San Pablo City, docketed as EJF No. Sp-2546 (01).
Accompanying the latter application was a certification 6 from the Clerk of Court of the
Regional Trial Court of Iba, Zambales, stating that KBPI had paid the corresponding
foreclosure fees covering BMC's properties situated in Zambales and
Laguna. HDAECI
On October 31, 2001, BMC filed with the Office of the Executive Judge of the
Regional Trial Court of San Pablo City a "Request Not To Give Due Course To The
Application for Extra-Judicial Foreclosure. . ." 7 in EJF No. Sp-2546 (01). BMC
claimed that the application should be denied because it is insufficient in form and
substance and there is no need to proceed with the foreclosure of its properties
situated in Laguna because it was willing to execute a dacion en pago in place of the
mortgaged properties. Subsequently, BMC filed a "Compliance and Supplementary
Grounds to Disapprove Application for Extra judicial Foreclosure of Real Estate
Mortgage" 8 and a Memorandum. 9 BMC contended that the application for
foreclosure should be denied because KBPI included unauthorized penalties in the
statement of accounts and it did not comply with its obligation to give BMC a 60-day
grace period. BMC further claimed that the MTI securing the principal loan of P190
Million cannot be foreclosed because it was not registered with the Register of Deeds.

KBPI opposed the letter-request of BMC on the ground, inter alia, of wrong remedy
and forum shopping. 10
Meanwhile, on November 7, 2001, BMC filed with the Regional Trial Court of Iba,
Zambales, Branch 70, a complaint for damages, accounting and nullification of
foreclosure of its properties in Zambales, with prayer for the issuance of a temporary
restraining order, docketed as Civil Case No. RTC-1852-I. 11 BMC averred that the
foreclosure of its properties should be annulled because KBPI imposed unauthorized
penalties, interest and charges. Assuming that the amount claimed is due and
demandable, BMC maintained that the same cannot be enforced because KBPI did
not comply with the 60-day grace period. BMC added that dacion en pago should be
preferred over the foreclosure of the collaterals because the other respondent banks
are agreeable to such proposal.
On the same date, the Regional Trial Court of Iba, Zambales issued a temporary
restraining order enjoining the sale at public auction of BMC's properties in
Zambales. 12
On February 6, 2002, KBPI's application for extra-judicial foreclosure of mortgage was
found to be sufficient in form and substance, and was granted. 13 BMC filed a motion
for reconsideration, which was denied on March 4, 2002. 14
Hence, BMC filed a petition for certiorari with the Court of Appeals, 15 reiterating its
arguments in EJF No. Sp-2546 (01) and assailing the validity of the foreclosure of its
properties in Laguna. It prayed for the issuance of a preliminary injunction and/or
temporary restraining order to enjoin the scheduled sale of its properties in Laguna on
March 19, 2002 at 10:00 pm. Since no injunction or restraining order was issued by
the Court of Appeals, the auction sale proceeded as scheduled with KBPI as the
highest bidder.
To restrain the registration of the certificate of sale, 16 BMC filed a Supplemental
Petition 17 which was favorably acted upon by the Court of Appeals on March 22,
2002.18 On the same day, a temporary restraining order enjoining the registration of
the certificate of sale was issued by the appellate court, albeit, late as the certificate
was already registered at 2:15 p.m. of March 22, 2002.

Subsequently, BMC filed with the appellate court an Amended Supplemental

Petition, 19 followed by an Urgent Manifestation 20 praying for the issuance of a writ
of preliminary injunction and/or temporary restraining order to enjoin the consolidation
of titles over the foreclosed properties in the name of respondent banks. BMC
Page 434 of 505

contended that the foreclosure sale should be annulled because (1) the bid price
was grossly inadequate; (2) the sale was conducted in violation of Sections 2 and 3
of Act No. 3135 on the requirements of place of sale and posting of notice; and (3) the
other creditor banks are amenable to the proposed dacion en pago instead of the
foreclosure.
In its Resolution dated April 5, 2002, the Court of Appeals denied BMC's prayer to
restrain the consolidation of title in the name of KBPI, thus:
The petitioner's filing of an Amended Supplemental Petition dated
March 25, 2002, and an Urgent Manifestation dated March 27,
2002 is hereby noted. aESIHT
However, we see no justifiable reason to grant an injunctive relief
at this point in time, since the acts sought to be restrained or
enjoined are positive rights of a buyer in a foreclosure sale.
Unless the petitioner could prove the nullity of such sale, there is
no reason to stop the Register of Deeds concerned from
performing its ministerial duty under the law.
WHEREFORE, the application for temporary restraining order in
the Amended Supplemental Petition is hereby DENIED.
The respondents are directed to also file their comment thereto
within ten (10) days from notice hereof. Should the parties prefer,
the case shall be set for hearing to enable the parties to prove
their respective positions as to issues in the petition as well as
subsequent Supplemental Petition and Amended Supplemental
Petition.
In the meantime, the Chief of the Mailing Section is directed to
investigate and report to us within fifteen (15) days from notice,
how and who made the unauthorized insertion of the "Register of
Deeds of Laguna" to the Court's Notice of Resolution of March
22, 2002.
SO ORDERED. 21
BMC filed a motion for reconsideration claiming, among others, that Section 47 of the
General Banking Act (Republic Act No. 8791), which reduced the period of
redemption for extra-judicially foreclosed properties of juridical persons from one year
to "until, but not after, the registration of the certificate of foreclosure sale . . . which

in no case shall be more than three (3) months after foreclosure, whichever is earlier,"
is unduly discriminatory and therefore unconstitutional.
On May 28, 2002, the Court of Appeals denied BMC's motion
reconsideration. 22 Hence, BMC filed the instant petition, contending that

for

I
THE COURT OF APPEALS ACTED WITH GRAVE ABUSE OF
DISCRETION IN DENYING PETITIONER'S APPLICATION FOR
TRO TO RESTRAIN THE CONSOLIDATION OF TITLES AFTER
IT HAD EARLIER RESTRAINED, ALBEIT TOO LATE, THE
REGISTRATION OF THE SHERIFF'S CERTIFICATE OF SALE,
DEMONSTRATIVELY HAVING BEEN CONVINCED OF THE
MERIT OF THE LEGAL GROUNDS RAISED BY THE
PETITIONER IN SUPPORT OF THE APPLICATION FOR
TEMPORARY RESTRAINING ORDER.
II
THE NEW LAW (GENERAL BANKING LAW OF 2000)
ABROGATING THE RIGHT TO ONE YEAR REDEMPTION
PERIOD
OF
CORPORATE
MORTGAGORS
IS
UNCONSTITUTIONAL.
III
ASSUMING THAT THE NEW LAW IS CONSTITUTIONAL, IT
SHOULD BE GIVEN PROSPECTIVE APPLICATION.
IV
THE BID PRICE OF ONLY P162,354,329.46 FOR THE
FOUNDRY PROJECT WITH A FAIR MARKET VALUE OF
P444,184,000.00, SOUND VALUE OF P493,732,000.00 COST
OF REPRODUCTION OF P989,605,000.00 IS SO GROSSLY
INADEQUATE AS TO RENDER THE SALE NULL AND VOID IN
LAW AND IN EQUITY.
V
THE AUCTION SALE CONDUCTED IN SAN PABLO CITY IS
NULL AND VOID FOR BEING IN VIOLATION OF SECTION 2
OF ACT 3135, AS AMENDED AND THE EXPRESS PROVISION
Page 435 of 505

OF THE MORTGAGE TRUST INDENTURE THAT: IN ANY

EXTRA-JUDICIAL FORECLOSURE UNDER ACT 3135, AS
AMENDED . . . THE AUCTION SALE SHALL TAKE PLACE IN
THE CITY OR CAPITAL OF THE PROVINCE WHERE THE
COLLATERAL IS SITUATED.
VI
THE REQUIREMENTS OF SECTION 3 OF ACT 3135, AS
AMENDED, FOR POSTING OF NOTICES WERE NOT
COMPLIED WITH IN THE FORECLOSURE PROCEEDINGS IN
QUESTION.
VII
THE INTEREST BASED ON THE FLOATING RATE
STIPULATED IN THE PROMISSORY NOTES IS NULL AND
VOID FOR BEING POTESTATIVE IN CHARACTER AND FOR
BEING VIOLATIVE OF THE PRINCIPLE OF MUTUALITY OF
CONTRACT, HENCE THE FORECLOSURE MAY PROCEED
ONLY ONCE THE CORRECT LEGAL AMOUNT OF THE LOAN
IS DETERMINED AND ONLY IF THE MORTGAGOR CANNOT
PAY FOLLOWING THAT DETERMINATION. 23
On June 26, 2002, a status quo order was issued enjoining the cancellation of titles
over the mortgaged properties in the name of BMC as well as the issuance of new
titles and the consolidation thereof in the name of private respondent banks 24
We deem it proper to resolve the issue of forum shopping raised by private
respondents.
Under the Procedure on Extra-Judicial Foreclosure of Mortgage (A.M. No. 99-10-050), 25 the applicant in an extra-judicial foreclosure covering properties located in
different provinces is required to pay only one filing fee regardless of the number of
properties to be foreclosed so long as the application covers only one transaction or
indebtedness. The venue, however, of the extra-judicial foreclosure proceedings is the
place where each of the mortgaged property is located. Pertinent portion thereof
states
Where the application concerns the extra-judicial foreclosure of
mortgages, of real estates and/or chattels in different locations
covering one indebtedness, only one filing fee corresponding to
such indebtedness shall be collected. The collecting Clerk of

Court shall, apart from the official receipt of the fees, issue a
certificate of payment indicating the amount of indebtedness, the
filing fees collected, the mortgages sought to be foreclosed, the
real estates and/or chattels mortgaged and their respective
locations, which certificate shall serve the purpose of having the
application docketed with the Clerks of Court of the places where
the other properties are located and of allowing the extra-judicial
foreclosures to proceed thereat.
In Spouses Caviles v. Court of Appeals, 26 we recognized the predicament that
confronts a mortgagor seeking to restrain the extra judicial foreclosure of mortgages
arising from a single transaction but concerning properties found in different
provinces. Thus
. . . [W]e find it necessary to dwell on the issue of whether or not
the act of petitioners in filing three civil actions one with the
RTC of Makati, another with the RTC of Bian, Laguna (Branch
24) and the third one, with the Bian Assisting Court, constitutes
forum shopping.
The problem of petitioners is an off-shoot of the express
provisions of B.P. Blg. 129, to wit:
"Sec. 21. Original jurisdiction in other cases. Regional
Trial Courts shall exercise original jurisdiction:
"(1)
In
the
issuance
of
writs
of certiorari,
prohibition, mandamus,
quo
warranto,
habeas
corpus and injunction which may be enforced in any part
of their respective regions; (Emphasis, supplied) CSIcTa
and Section 3, Rule 2 of the Rules of Court which provides that a
party may not institute more than one suit for a single cause of
action. (Emphasis supplied)
In the said case, the mortgagors filed separate actions for breach of mortgage
contract with injunction to restrain the extra-judicial foreclosure proceedings
commenced by the mortgagee in Makati and Bian, Laguna where the properties
were situated. The Court did not find the mortgagors guilty of forum shopping insofar
as the cases filed with the Makati and Bian, Laguna (Branch 24) courts were
concerned. The obvious reason is that since injunction is enforceable only within the
territorial limits of the trial court, the mortgagor is left without remedy as to the
Page 436 of 505

properties located outside the jurisdiction of the issuing court, unless an application
for injunction is made with another court which has jurisdiction over the latter
properties.
In the case at bar, BMC is not guilty of forum shopping precisely because the remedy
available to them under the law was the filing of separate injunction suits. It is
mandated to file only one case for a single cause of action, e.g., breach of mortgage
contract, yet, it cannot enforce any injunctive writ issued by the court to protect its
properties situated outside the jurisdiction of said court. Besides, BMC was honest
enough to inform the Zambales court in the certification 27 of its complaint that it has
a pending request not to give due course to the foreclosure proceedings with the San
Pablo court, in the same manner that its petition for certiorari with the Court of
Appeals notified the appellate court of the pendency of its complaint with the
Zambales court. 28 It would therefore be unfair to dismiss the cases filed by BMC on
the ground of forum shopping where under the circumstances the law gives it no other
remedy.

SP No. 69503, insofar as they denied BMC's application for temporary restraining
order, are REVERSED and SET ASIDE. The status quo order issued by the Court on
June 26, 2002 shall stand until further order of the Court, and the instant case is
REMANDED to the Court of Appeals for determination of the case on its merits.
Petitioner BMC is ordered to inform the appellate court of the present status of Civil
Case No. RTC-1852-1, then pending with the Regional Trial Court of Iba, Zambales,
Branch 70, and if it had been decided and the decision is on appeal in the Court of
Appeals, the latter may consider its consolidation with CA-G.R. SP No. 69503 if
warranted.
No pronouncement as to costs.
SO ORDERED.
||| (Benguet Management Corp. v. Court of Appeals, G.R. No. 153571, [September
18, 2003], 458 PHIL 204-216)

The issues involved in the instant petition for certiorari are not only limited to the
propriety of the Court of Appeals' denial of BMC's prayer to enjoin the consolidation of
title of the foreclosed properties in the name of private respondents. There are
likewise raised factual issues, i.e., the validity of the foreclosure and the sale at public
auction of its properties, which are yet to be resolved by the Court of Appeals. Since
this Court is not a trier of facts, the remand of this case to the appellate court is
necessary.
Anent the constitutional issue raised by BMC, we have repeatedly held that the
constitutionality of a law may be passed upon by the Court, where there is an actual
case and that the resolution of the constitutional question must be necessary in
deciding the controversy. 29 In this case, the resolution of the constitutionality of
Section 47 of the General Banking Act (Republic Act No. 8791) which reduced the
period of redemption of extra-judicially foreclosed properties of juridical persons is not
the verylis mota of the controversy. BMC is not asserting a legal right for which it is
entitled to a judicial determination at this time inasmuch as it may not even be entitled
to redeem the foreclosed properties. Until an actual controversy is brought to test the
constitutionality of Republic Act No. 8791, the presumption of validity, which inheres in
every statute, must be accorded to it. cASTED

WHEREFORE, in view of all the foregoing, the petition is PARTLY GRANTED. The
Resolutions of the Court of Appeals dated April 5, 2002 and May 28, 2002, in CA-G.R.

FIRST DIVISION
[G.R. No. 150097. February 26, 2007.]
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs.
ALEJANDRO and ADELAIDA LICUANAN, respondents.

DECISION

CORONA, J p:
In this petition for review on certiorari, 1 petitioner Development Bank of the
Philippines assails the February 9, 2001 decision 2 and September 17, 2001
resolution 3 of the Court of Appeals (CA) in CA-G.R. CV No. 37784.

Page 437 of 505

Respondent spouses Alejandro and Adelaida Licuanan were granted a piggery loan
in the amount of P4,700 by petitioner, evidenced by a promissory note dated
September 20, 1974 and secured by a real estate mortgage 4 over a 980-square
meter parcel of land with a two-storey building. The loan's maturity date was
September 23, 1979. 5

On November 16, 1984, petitioner sent respondents a letter informing them that the
properties could be reacquired by negotiated sale for cash or installment. 13 Three
days later, however, on November 19, 1984, the properties were sold through
negotiated sale to one Emelita A. Peralta. Respondents were informed of the sale by
petitioner through a letter dated December 6, 1984. CIAcSa

Petitioner granted respondents an additional loan of P12,000 evidenced by a

promissory note dated May 29, 1975 payable on or before the year 1980. This was
secured by a real estate mortgage over four parcels of land situated in Pangasinan
covered by TCT Nos. 109825, 109762, 109763 and 109764. 6

On the same day, petitioner executed a deed of conditional sale in favor of

Peralta. 14 On December 11, 1984, respondents offered to repurchase the properties
from petitioner but they had already been sold to Peralta. 15

On October 2, 1975, petitioner granted respondent spouses another loan of P22,000

evidenced by a promissory note maturing on October 3, 1985. This was secured by a
real estate mortgage executed in favor of petitioner over three parcels of land covered
by TCT Nos. 112608, 112607 and 112609, all of the Registry of Deeds of
Pangasinan. 7
On August 6, 1979, petitioner and respondents restructured the P12,000 loan,
extending the maturity date from June 22, 1979 to June 22, 1982. On the same date,
respondents executed a promissory note for P12,320.73 and another for P6,519.90. 8
On July 6, 1981, petitioner sent a letter by registered mail to respondents informing
them that, since the conditions of the mortgage had been breached, petitioner would
have the mortgaged properties sold by the sheriff under Act 3135. The total amount
due from the three loans had by then ballooned to P75,298.32. 9
On July 20, 1981, petitioner filed an application for extrajudicial foreclosure. 10 The
mortgaged properties were sold in a public auction on December 16, 1981. Petitioner,
as the highest bidder, acquired them for a total of P16,340. The certificate of sale was
registered on January 25, 1982. 11
On February 4, 1983, petitioner consolidated its ownership over the properties. After
more than a year or on October 16, 1984, petitioner wrote respondents by registered
mail, informing them that the properties (now acquired assets of the bank) would be
disposed of by public auction. On November 11, 1984, petitioner published an
advertisement stating that on November 14, 1984, the properties would be sold by
oral bidding. On this date, however, there were no bidders. 12

Respondents then filed a complaint for recovery of real properties and damages on
July 18, 1985 in the Regional Trial Court (RTC) of Lingayen, Pangasinan, Branch 39
against petitioner and Peralta. 16 The RTC rendered judgment dated September 17,
1991 in favor of respondents.
The trial court found that there was no demand for payment prior to the extrajudicial
foreclosure. Thus, the foreclosure proceedings were null and void. It ordered Peralta
to reconvey the properties to respondents subject to Peralta's right to be paid by
respondents the amount of P104,000 in consideration of such reconveyance. It also
held that petitioner did not deal fairly with respondents making it liable for nominal and
moral damages to the latter. The RTC further ordered petitioner to pay respondents
attorney's fees and litigation expenses.
On appeal, the CA affirmed the RTC but decreased the amount of nominal damages
from P75,000 to P50,000. 17
Hence this petition. 18
The main issues to be resolved are the following:
1) whether a demand for payment of the loans was made before
the mortgage was foreclosed;
2) whether demand is necessary to make respondents guilty of
default;
3) whether or not respondents are liable for the deficiency claim
of petitioner and
4) whether or not petitioner is liable for damages.
The issue of whether demand was made before the foreclosure was effected 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.
Page 438 of 505

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. 19

of the named defendant to respect or not to violate such right;

and (3) an act or omission on the part of such defendant violative
of the right of the plaintiff or constituting a breach of the obligation
of the defendant to the plaintiff.

Whether or not demand was made is a question of fact. In petitions for review
on certiorari under Rule 45, only questions of law may be raised by the parties and
passed upon by this Court. 20 Factual findings of the trial court, when adopted and
confirmed by the CA, are binding and conclusive on this Court and will generally not
be reviewed on appeal. 21 Inquiry into the veracity of the CA's factual findings and
conclusions is not the function of the Supreme Court for the Court is not a trier of
facts. 22 Neither is it our function to re-examine and weigh anew the respective
evidence of the parties. 23 While this Court has recognized several exceptions to this
rule,24 none of these exceptions finds application here.

It bears stressing that it is only when the last element occurs that
a cause of action arises. Accordingly, a cause of action on a
written contract accrues only when an actual breach or violation
thereof occurs. EHTADa

Both the CA and RTC found that demand was never made. No compelling reason
whatsoever has been shown by petitioner for this Court to review and reverse the trial
court's findings and conclusions, as affirmed by the CA.
Petitioner asserts that demand was unnecessary because the maturity dates of all
loans were specified, i.e., the notes expressly stated the specific dates when the
amortizations were to fall due. 25
We disagree.
Unless demand is proven, one cannot be held in default. 26 Petitioner's cause of
action did not accrue on the maturity dates stated in the promissory notes. It is only
when demand to pay is made and subsequently refused that respondents can be
considered in default and petitioner obtains the right to file an action to collect the debt
or foreclose the mortgage. 27 As we held in China Banking Corporation v. Court of
Appeals: 28
Well-settled is the rule that since a cause of action requires, as
essential elements, not only a legal right of the plaintiff and a
correlative duty of the defendant but also "an act or omission of
the defendant in violation of said legal right," the cause of action
does not accrue until the party obligated refuses, expressly or
impliedly, to comply with its duty.
Otherwise stated, a cause of action has three elements, to wit,
(1) a right in favor of the plaintiff by whatever means and under
whatever law it arises or is created; (2) an obligation on the part

Applying the foregoing principle to the instant case, we rule that

private respondent's cause of action accrued only on July
20, 1995, when its demand for payment of the Home Notes
was refused by petitioner. It was only at that time, and not
before that, when the written contract was breached and private
respondent could properly file an action in court.
The cause of action cannot be said to accrue on the uniform
maturity date of the Home Notes as petitioner posits
because at that point, the third essential element of a cause
of action, namely, an act or omission on the part of
petitioner violative of the right of private respondent or
constituting a breach of the obligation of petitioner to private
respondent, had not yet occurred. 29 (emphasis supplied)
The acceleration clause of the promissory notes stated that "[i]n case of non-payment
of this note or any portion of it on demand, when due, on account of this note, the
entire obligation shall become due and demandable . . . ." 30 Hence, the maturity
dates only indicate when payment can be demanded. It is the refusal to pay after
demand that gives the creditor a cause of action against the debtor.
Since demand, which is necessary to make respondents guilty of default, was never
made on respondents, the CA and RTC correctly ruled that the foreclosure was
premature and therefore null and void.
In arguing that the foreclosure was valid, petitioner also avers that respondents are
estopped from questioning the validity of the foreclosure sale since they offered to
repurchase the foreclosed properties. 31 We are not persuaded. The reason why
respondents offered to repurchase the properties was clearly stated in their letter to
petitioner:

Page 439 of 505

I am very much interested in repurchasing back these properties

because they are the only properties which my family have and
because our house is located inside this property and for this
matter I am willing to pay [for] these properties in cash which I
already told the bank when I went there. 32

Besides, we have already ruled that an offer to repurchase should not be

construed as a waiver of the right to question the sale. 33 Instead, it must be
taken as an intention to avoid further litigation and thus is in the nature of an offer
to compromise. 34 By offering to redeem the properties, respondents can attain
their ultimate objective: to pay off their debt and regain ownership of their
lands. 35
Moreover, it was petitioner, in its November 16, 1984 letter, which informed
respondents that the properties were available for sale. Respondents merely took up
petitioner's offer for them to reacquire their properties.
Petitioner assigns as error the failure of the CA to rule on its deficiency claim. It
alleged that the price the mortgaged property was sold for (P104,000) was less than
the amount of respondents' indebtedness (P131,642.33), thus it is entitled to claim the
difference (P27,642.33) with interest. Respondents cannot be held liable for the
deficiency claim. While it is true that in extrajudicial foreclosure of mortgage, the
mortgagee has the right to recover the deficiency from the debtor, 36 this
presupposes that the foreclosure must first be valid. 37
The last issue is whether the award of moral and nominal damages, expenses of
litigation and attorney's fees is proper. Crucial to the determination of the propriety of
the award of damages are the findings of the RTC, which were affirmed by the CA, on
the matter of bad faith:
Apart from the precipitate foreclosure proceedings, the Court
observes that certain acts of [petitioner] were most certainly less
than fair and less than honest, which negates the rehabilitation
(prior name of the bank) or development aspect or purpose of
[petitioner]. These certainly caused serious anxiety and wounded
feelings to [respondents]. They are:
FIRST. [Petitioner] granted a loan of P4,700.00; then a second
loan of P12,000.00 re-structured to P18,840.61; and a third loan
of P22,200.00, or a total of P45,740.61 during the period from

September 1974 to October 2, 1975. Obviously, these loans were

granted because the market value of the collaterals exceeds
P100,000.00 and [petitioner's] appraisal value is more or less
P80,000.00. However, six (6) years later, when the value must
have appreciated in terms of pesos, the [petitioner] bidded for a
[measly] P16,000.00 and [claimed] a deficiency. That it was
[measly] and shocking to the conscience was conclusively proven
by the fact that [Peralta] offered and did in fact buy the properties
for P104,000.00 barely three (3) years later. To the mind of the
Court, the actuations of the bank must have been revolting to
[respondents] and to honest men, especially considering that
[petitioner] is a government financial institution, capitalized with
the money of the people, and created principally "to assist
agricultural producers . . . in developing their farms . . . to
accelerate national progress", more than to realize profit. DACaTI
SECOND. [Respondents] are simple-minded persons in the
country side. It strikes the court as odd and certainly less than
candid WHY on AUGUST 6, 1979, [petitioner] restructured the
second loan which will mature on May 1980, but did not
restructure the first loan which was due to mature on September
23, 1979 or barely one month hence. It appears that the result
lulled [respondents] into a false sense of security and a feeling of
relief that the entire loan accommodation will mature in 1985. And
then like a bolt of lightning from a clear sky, [respondents] were
hit with [foreclosure] proceedings, causing them to suffer
sleepless nights.
THIRD. A letter dated November 16, 1984 was addressed to
[respondents] informing them practically that they are given the
priority to recover their properties by negotiated sale. And yet
before the letter was sent, or on November 14, 1984 the
[petitioner] had already negotiated with [Peralta] for the latter to
buy the assets for P104,000.00 in installment and as a matter of
fact the Contract for Conditional Sale was executed on November
19, 1984 even before the letter was received by [respondents].
[Heart-rending] was the plea of [respondents] which we quote:
"I am very much interested in repurchasing back these
properties because they are the only properties which
my family have and because our house is located inside
Page 440 of 505

this property and for this matter I am willing to pay [for]

these properties in cash which I already told the bank
when I went there." (underscoring supplied)
Nevertheless, such supplications fell on deaf ears and did not
even merit sympathy from a heartless [petitioner]. At the very
least, the letter of 16 November 1984 was a very bad joke
gleefully made in bad taste and foisted on the hapless
[respondents]. It added insult to injury.

WHEREFORE, we hereby AFFIRM the decision of the Court of Appeals in CA-G.R.

CV No. 37784.
Costs against petitioner.
SO ORDERED.
||| (DBP v. Licuanan, G.R. No. 150097, [February 26, 2007], 545 PHIL 544-559)

And to top it all, [petitioner] even has the temerity to allege in

paragraph 2 of its compulsory counterclaim "that as of November
7, 1984 the total obligations of [respondents] on account of their
loans with [petitioner] amounted to P131,642.33" and making a
deficiency claim of P27,642.33 plus daily interest of P9.61
beginning November 8, 1984 "which [respondents] are allegedly
still liable to pay the [petitioner]". This is unconscionable.
Certainly, there is abundant evidence that the rights of
[respondents] have been violated or invaded with unconcerned
ruthlessness by the [petitioner]. 38
Both the RTC and CA found that there was factual basis for the moral damages
adjudged against petitioner. They found that petitioner was guilty of bad faith in its
actuations against respondents. Again, this is a factual matter binding and conclusive
on this Court:
It is settled that bad faith must be duly proved and not merely
presumed. The existence of bad faith, being a factual question,
and the Supreme Court not being a trier of facts, the findings
thereon of the trial court as well as of the Court of Appeals shall
not be disturbed on appeal and are entitled to great weight and
respect. Said findings are final and conclusive upon the Supreme
Court except, inter alia, where the findings of the Court of
Appeals and the trial court are contrary to each other. 39
The lower court also found that respondents' property rights were invaded or
violated, 40 hence the grant of nominal damages was also proper. aIAEcD
Respondents are likewise entitled to the award of attorney's fees and expenses of
litigation since the premature foreclosure by petitioner compelled them to incur
expenses to protect their interest. 41
Page 441 of 505

Both the promissory note and the real estate mortgage deed contained an escalation
clause that allowed PNB to increase the 12% interest rate at anytime without notice,
within the limits allowed by law. The pertinent portion of the promissory note stated:

SECOND DIVISION
[G.R. No. 164549. September 18, 2009.]
PHILIPPINE NATIONAL BANK, petitioner, vs.
AGUSTIN and PILAR ROCAMORA, respondents.

SPOUSES

For value received, we, jointly and severally, promise to pay to the
ORDER of the PHILIPPINE NATIONAL BANK, at its office in Pto.
Princesa City, Philippines, the sum of xxx together with interest
thereon at the rate of 12% per annum until paid, which interest
rate the Bank may at any time, without notice, raise within
the limits allowed by law, and I/we also agree to pay jointly and
severally, 5% per annum penalty charge, by way of liquidated
damages, should this note be unpaid or is not renewed on due
date. [Emphasis supplied.] SAcaDE
While paragraph (k) of the real estate mortgage deed provided:
(k)INCREASE OF INTEREST RATE

DECISION

BRION, J p:
We resolve in this petition for review on certiorari 1 the legal propriety of the deficiency
judgment that the petitioner Philippine National Bank (PNB) seeks against the
respondents the spouses Agustin and Pilar Rocamora (spouses Rocamora).
THE FACTUAL ANTECEDENTS
On September 25, 1981, the spouses Rocamora obtained a loan from PNB in the
aggregate amount of P100,000.00 under the Cottage Industry Guarantee and Loan
Fund (CIGLF). The loan was payable in five years, under the following terms: P35,000
payable semi-annually and P65,000 payable annually. In addition to the principal
amount, the spouses Rocamora agreed to pay interest at the rate of 12% per annum,
plus a penalty fee of 5% per annum in case of delayed payments. The spouses
Rocamora signed two promissory notes 2 evidencing the loan.
To secure their loan obligations, the spouses Rocamora executed two mortgages: a
real estate mortgage 3 over a property covered by Transfer Certificate of Title No.
7160 in the amount of P10,000, and a chattel mortgage 4 over various machineries in
the amount of P25,000. Payment of the remaining P65,000 was under the CIGLF
guarantee, with the spouses Rocamora paying the required guarantee fee.

The MORTGAGEE reserves the right to increase the interest

rate charged on the obligation secured by this mortgage
including any amount which it may have advanced within the
limits allowed by law at any time depending on whatever
policy it may adopt in the future; Provided, that the interest rate
on the accommodation/s secured by the mortgage shall be
correspondingly decreased in the event that the applicable
maximum interest rate is reduced by law or by the Monetary
Board. In either case, the adjustment in the interest rate agreed
upon shall take effect on the effectivity date of the increase or
decrease in that maximum interest rate. [Emphasis supplied.]
The spouses Rocamora only paid a total of P32,383.65 5 on the loan. Hence, the
PNB commenced foreclosure proceedings in August and October 1990. The
foreclosure of the mortgaged properties yielded P75,500.00 as total proceeds.
After the foreclosure, PNB found that the recovered proceeds and the amounts the
spouses Rocamora previously paid were not sufficient to satisfy the loan obligations.
PNB thus filed, on January 18, 1994, a complaint for deficiency judgment 6 before
the Regional Trial Court (RTC) of Puerto Princesa City, Branch 48. The PNB alleged
that as of January 7, 1994, the outstanding balance of the spouses Rocamora's
loan (including interests and penalties) was P206,297.47, broken down as follows:
PrincipalP79,484.65
Page 442 of 505

Total interest due up to 01-07-9451,229.35

THE PETITION

Total penalty due up to 01-07-9475,583.47

In insisting that it is entitled to a deficiency judgment of P206,297.47, PNB argues that

the RTC and the CA erred in invalidating the escalation clause in the parties'
agreement because it fully complied with the requirements for a valid escalation
clause under this Court's following pronouncement in Banco Filipino Savings and
Mortgage Bank v. Navarro: 12

TOTAL AMOUNT DUE AND PAYABLEP206,297.47 7

===========
The PNB claimed that the outstanding principal balance as of foreclosure date
(September 19, 1990) was P79,484.65, plus interest and penalties, for a total due and
demandable obligation of P250,812.10. Allegedly, after deducting the P75,500
proceeds of the foreclosure sale, the spouses Rocamora still owed the bank
P206,297.47.
The spouses Rocamora refused to pay the amount claimed as deficiency. They
alleged that the PNB "practically created" the deficiency by (a) increasing the interest
rates from 12% to 42% per annum, and (b) failing to immediately foreclose the
mortgage pursuant to Presidential Decree No. 385 (PD 385 or the Mandatory
Foreclosure Law) to prevent the interest and penalty charges from accruing.
The RTC dismissed PNB's complaint in its decision dated November 10, 1999. 8 The
trial court invalidated the escalation clause in the promissory note and the resulting
increased interest rates. The court also rejected PNB's reason for the delay in
commencing foreclosure proceedings, ruling that the delay was contrary to the
immediate and mandatory foreclosure that PD 385 required. The finding that the
bank's actions were contrary to law, justice, and morals justified the award of actual,
moral, and exemplary damages to the spouses Rocamora. Attorney's fees and costs
of suit were also ordered paid. 9 CTSHDI
Except for modifications in the awarded damages, the Court of Appeals (CA) decision
of March 23, 2004 affirmed the RTC ruling. 10 The CA held that the PNB effectively
negated the principle of mutuality of contracts when it increased the interest rates
without the spouses Rocamora's conformity. The CA also found the long delay in the
foreclosure of the mortgage, apparently a management lapse, prejudicial to the
spouses Rocamora's interests and contrary as well to law and justice. More
importantly, the CA found insufficient evidence to support the P206,297.47 deficiency
claim; the bank's testimonial and documentary evidence did not support the
deficiency claim that, moreover, was computed based on bloated interest rates. The
CA maintained these rulings despite the motion for reconsideration PNB
filed; 11 hence, PNB's present recourse to this Court.

It is now clear that from March 17, 1980 [the effectivity date
of Presidential Decree No. 1684 allowing the increase in the
stipulated rate of interest], escalation clauses, to be valid,
should specifically provide: (1) that there can be an increase
in interest if increased by law or by the Monetary Board; and
(2) in order for such stipulation to be valid, it must include a
provision for reduction of the stipulated interest "in the
event that the applicable maximum rate of interest is
reduced by law or by the Monetary Board". [Emphasis
supplied.]
The PNB posits that the presence of a "de-escalation clause" (referring to the
second of the above requirements, which was designed to prevent a resulting
one-sided situation on the part of the lender-bank) in the real estate mortgage
deed rules out any violation of the principle of mutuality of contracts.
The PNB also contends that it did not unreasonably delay the institution of foreclosure
proceedings by acting three years after the spouses Rocamora defaulted on their
obligation. Under Article 1142 of the Civil Code, a mortgage action prescribes in 10
years; the same 10-year period is provided in Article 1144 (1) for actions based on
written contracts. Thus, the PNB alleges that it had 10 years from 1987 (the time
when the spouses Rocamora allegedly defaulted from paying their loan obligation) to
institute the foreclosure proceedings. Its decision to foreclose in 1990 three years
after the default should not be taken against it, especially since the delay was
prompted by the bank's sincere desire to assist the spouses Rocamora.
Additionally, the PNB claims that the decision to foreclose is entirely the bank's
prerogative. The provisions of PD 385 should not be read as a limitation affecting the
right of banks to foreclose within the 10-year period granted under the Civil Code.
While PD 385 requires government banks to immediately foreclose mortgages under
specified conditions, the provision does not limit the period within which the bank can
foreclose; to hold otherwise would be contrary to the stated objectives of PD 385to
enhance the resources of government financial institutions and to facilitate the
financing of essential development programs and projects. ECAaTS
Page 443 of 505

On the basis of these arguments, the PNB contests the damages awarded to the
spouses Rocamora, as the PNB had no malice, nor any furtive design: when it
increased the interest rates pursuant to the escalation clause; when it decided to
foreclose the mortgages only in 1990; and when it sought to claim the deficiency. PNB
claimed all these to be proper acts made in the exercise of its rights.
Opposing the PNB's arguments, the spouses Rocamora allege the following:
a.The PNB failed to sufficiently and satisfactorily prove the
amount of P250,812.10, claimed to be the total
obligation due at the time of foreclosure, against which
the proceeds of the foreclosure sale (P75,500.00) were
deducted and which became the basis of the bank's
deficiency claim (P206,297.47);
b.The "ballooning" of the spouses Rocamora's loan obligation
was the PNB's own doing when it increased the interest
rates and failed to immediately foreclose the mortgages;
c.The PNB's unilateral increase of interest rates violated the
principle of mutuality of contracts;
d.The PNB failed to comply with the immediate and mandatory
foreclosure required under PD 385; and
e.The PNB failed to call on the CIGLF which secured the
payment of P65,000.00 of the loan.
THE COURT'S RULING
We find no basis to reverse the CA's decision and, consequently, deny the
petition.

Proof of Deficiency Claim Necessary

The foreclosure of chattel and real estate mortgages is governed by Act Nos. 1508
and 3135, respectively. Although both laws do not contain a provision expressly or
impliedly authorizing the mortgagee to recover the deficiency resulting after the
foreclosure proceeds are deducted from the principal obligation, the Court has
construed the laws' silence as a grant to the mortgagee of the right to maintain an
action for the deficiency; the mortgages are given merely as security, not as
settlement or satisfaction of the indebtedness. 13

As in any claim for payment of money, a mortgagee must be able to prove the basis
for the deficiency judgment it seeks. The right of the mortgagee to pursue the debtor
arises only when the proceeds of the foreclosure sale are ascertained to be
insufficient to cover the obligation and the other costs at the time of the sale. 14 Thus,
the amount of the obligation prior to foreclosure and the proceeds of the foreclosure
are material in a claim for deficiency. CDAHaE
In this case, both the RTC and the CA found that PNB failed to prove the claimed
deficiency; its own testimonial and documentary evidence in fact contradicted one
another. The PNB alleged that the spouses Rocamora's obligation at the time of
foreclosure (September 19, 1990) amounted to P250,812.10, yet its own documentary
evidence 15 showed that, as of that date, the total obligation was only P206,664.34;
the PNB's own witness, Mr. Reynaldo Caso, testified that the amount due from the
spouses Rocamora was only P206,664.34.
At any rate, whether the total obligation due at the time of foreclosure was
P250,812.10 as PNB insisted or P206,664.34 as its own record disclosed, our own
computation of the amounts involved does not add up to the P206,297.47 PNB
claimed as deficiency. 16 We find it significant that PNB has been consistently unable
to provide a detailed and credible accounting of the claimed deficiency. What appears
clear is that after adding up the spouses Rocamora's partial payments and the
proceeds of the foreclosure, the PNB has already received a total of P107,883.68 as
payment for the spouses Rocamora's P100,000.00 loan; the claimed P206,297.47
deficiency consisted mainly of interests and penalty charges (or about 61.5% of the
amount claimed). The spouses Rocamora posit that their loan would not have bloated
to more than double the original amount if PNB had not increased the interest rates
and had it immediately foreclosed the mortgages.
Escalation
the
rates

clauses
unilateral

do
increase

not
of

authorize
interest

Escalation clauses are valid and do not contravene public policy. 17 These clauses
are common in credit agreements as means of maintaining fiscal stability and
retaining the value of money on long-term contracts. To avoid any resulting one-sided
situation that escalation clauses may bring, we required in Banco Filipino 18 the
inclusion in the parties' agreement of a de-escalation clause that would authorize a
reduction in the interest rates corresponding to downward changes made by law or by
the Monetary Board.
The validity of escalation clauses notwithstanding, we cautioned that these clauses do
not give creditors the unbridled right to adjust interest rates unilaterally. 19 As we said
Page 444 of 505

in the same Banco Filipino case, any increase in the rate of interest made
pursuant to an escalation clause must be the result of an agreement between
the parties. 20 The minds of all the parties must meet on the proposed modification
as this modification affects an important aspect of the agreement. There can be no
contract in the true sense in the absence of the element of an agreement, i.e., the
parties' mutual consent. Thus, any change must be mutually agreed upon,
otherwise, the change carries no binding effect. 21 A stipulation on the validity or
compliance with the contract that is left solely to the will of one of the parties is void;
the stipulation goes against the principle of mutuality of contract under Article 1308 of
the Civil Code. 22 As correctly found by the appellate court, even with a de-escalation
clause, no matter how elaborately worded, an unconsented increase in interest rates
is ineffective if it transgresses the principle of mutuality of contracts. IHEAcC
Precisely for this reason, we struck down in several cases many of them involving
PNB the increase of interest rates unilaterally imposed by creditors. In the 1991
case of PNB v. CA and Ambrosio Padilla, 23 we declared:
In order that obligations arising from contracts may have the force
of law between the parties, there must be mutuality between the
parties based on their essential equality. A contract containing a
condition which makes its fulfillment dependent exclusively upon
the uncontrolled will of one of the contracting parties, is
void. Hence, even assuming that the P1.8 million loan
agreement between the PNB and private respondent gave
the PNB a license (although in fact there was none) to
increase the interest rate at will during the term of the loan,
that license would have been null and void for being
violative of the principle of mutuality essential in contracts. It
would have invested the loan agreement with the character of a
contract of adhesion, where the parties do not bargain on equal
footing, the weaker party's (the debtor) participation being
reduced to the alternative "to take it or leave it". Such a contract
is a veritable trap for the weaker party whom the courts of justice
must protect against abuse and imposition.

We repeated this rule in the 1994 case of PNB v. CA and JaymeFernandez 24 and the 1996 case of PNB v. CA and Spouses Basco. 25 Taking
no heed of these rulings, the escalation clause PNB used in the present case to
justify the increased interest rates is no different from the escalation clause
assailed in the 1996 PNB case; 26 in both, the interest rates were increased from
the agreed 12% per annum rate to 42%. We held:
PNB successively increased the stipulated interest so that what
was originally 12% per annum became, after only two years,
42%. In declaring the increases invalid, we held:
We cannot countenance petitioner bank's posturing
that the escalation clause at bench gives it
unbridled right to unilaterally upwardly adjust the
interest on private respondents' loan. That
would completely take
away
from
private
respondents the right to assent to an important
modification in their agreement, and would negate
the element of mutuality in contracts.
xxx xxx xxx
In this case no attempt was made by PNB to secure the
conformity of private respondents to the successive
increases in the interest rate. Private respondents' assent to
the increases cannot be implied from their lack of response
to the letters sent by PNB, informing them of the increases.
For as stated in one case, no one receiving a proposal to
change
a
contract
is
obliged
to
answer
the
proposal. 27 [Emphasis supplied.]
On the strength of this ruling, PNB's argument that the spouses Rocamora's failure
to contest the increased interest rates that were purportedly reflected in the
statements of account and the demand letters sent by the bank amounted to their
implied acceptance of the increase should likewise fail. TIDHCc
Evidently, PNB's failure to secure the spouses Rocamora's consent to the increased
interest rates prompted the lower courts to declare excessive and illegal the interest
rates imposed. To go around this lower court finding, PNB alleges that the
P206,297.47 deficiency claim was computed using only the original 12% per annum
interest rate. We find this unlikely. Our examination of PNB's own ledgers, included in
the records of the case, clearly indicates that PNB imposed interest rates higher than
Page 445 of 505

the agreed 12% per annum rate. 28 This confirmatory finding, albeit based solely on
ledgers found in the records, reinforces the application in this case of the rule that
findings of the RTC, when affirmed by the CA, are binding upon this Court.
PD
385 mandates
foreclosure
of
securities
when
amount
to
at
least
total outstanding obligation

collaterals
the
20%

immediate
and
arrearages
of
the

Another reason that militates against the deficiency claim is PNB's own admitted
delay in instituting the foreclosure proceedings. 29
Section 1 of PD 385 states:
Section 1.It shall be mandatory for government financial
institutions, after the lapse of sixty (60) days from the issuance
of this Decree, to foreclose the collaterals and/or securities
for any loan, credit, accommodation, and/or guarantees
granted by them whenever the arrearages on such account,
including accrued interest and other charges, amount to at
least twenty percent (20%) of the total outstanding
obligations, including interest and other charges, as
appearing in the books of account and/or related records of the
financial institution concerned. This shall be without prejudice to
the exercise by the government financial institutions of such rights
and/or remedies available to them under their respective
contracts with their debtors, including the right to foreclose on
loans, credits, accommodations and/or guarantees on which the
arrearages are less than twenty percent (20%). [Emphasis
supplied.]
Under PD 385, government financial institutions which was PNB's status prior to its
full privatization in 1996 are mandated to immediately foreclose the
securities given for any loan when the arrearages amount to at least 20% of the total
outstanding obligation. 30
As stated in the narrated facts, PNB commenced foreclosure proceedings in 1990 or
three years after the spouses defaulted on their obligation in 1987. On this factual
premise, the PNB now insists as a legal argument that its right to foreclose should not
be affected by the mandatory tenor of PD 385, since it exercised its right still within

the 10-year prescription period allowed under Articles 1142 and 1144 (1) of the Civil
Code.

PNB's argument completely misses the point. The issue before us is the effect of the
delay in commencing foreclosure proceedings on PNB's right to recover the
deficiency, not on its right to foreclose. The delay in commencing foreclosure
proceedings bears a significant function in the deficiency amount being claimed, as
the amount undoubtedly includes interest and penalty charges which accrued during
the period covered by the delay. The depreciation of the mortgaged properties during
the period of delay must also be factored in, as this affects the proceeds that the
mortgagee can recover in the foreclosure sale, which in turn affects its deficiency
claim. There was also, in this case, the four-year gap between the foreclosure
proceedings and the filing of the complaint for deficiency judgment during which
time interest, whether at the 12% per annum rate or higher, and penalty charges also
accrued. For the Court to grant the PNB's deficiency claim would be to award it for its
delay and its undisputed disregard of PD 385. CETIDH
The Award for Damages
Moral damages are not recoverable simply because a contract has been breached.
They are recoverable only if the defendant acted fraudulently or in bad faith or in
wanton disregard of his contractual obligations. 31 The breach must be wanton,
reckless, malicious or in bad faith, and oppressive or abusive. Likewise, a breach of
contract may give rise to exemplary damages only if the guilty party acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner. 32
We are not sufficiently convinced that PNB acted fraudulently, in bad faith, or in
wanton disregard of its contractual obligations, simply because it increased the
interest rates and delayed the foreclosure of the mortgages. Bad faith cannot be
imputed simply because the defendant acted with bad judgment or with attendant
negligence. Bad faith is more than these; it pertains to a dishonest purpose, to some
moral obliquity, or to the conscious doing of a wrong, a breach of a known duty
attributable to a motive, interest or ill will that partakes of the nature of fraud. 33 Proof
of actions of this character is undisputably lacking in this case. Consequently, we do
not find the spouses Rocamora entitled to an award of moral and exemplary
damages. Under these circumstances, neither should they recover attorney's fees and
litigation expense. 34 These awards are accordingly deleted.
WHEREFORE,
we DENY the
petitioner's
petition
for
review
on certiorari, and MODIFY the March 23, 2004 decision of the Court of Appeals in
Page 446 of 505

CA-G.R. CV No. 66088 byDELETING the moral and exemplary damages, attorney's
fees, and litigation costs awarded to the respondents. All other aspects of the assailed
decision are AFFIRMED. Costs against the petitioner.
SO ORDERED
||| (Philippine National Bank v. Spouses Rocamora, G.R. No. 164549, [September 18,
2009], 616 PHIL 369-386)

THIRD DIVISION
[G.R. No. 128567. September 1, 2000.]
HUERTA ALBA RESORT INC., petitioner, vs. COURT OF
APPEALS and SYNDICATED MANAGEMENT GROUP
INC., respondents.

Benjamin C. Santos & Ofelia Calcetas-Santos and Santos Parungao Aquino &
Santos for petitioner.
Oben, Ventura Defensor.
Abola Associates for petitioner.
Atienza Tabora Del Rosario & Castillo Law Office for respondents.

SYNOPSIS
Private respondent Syndicated Management Group, Inc. (SMGI), as mortgageeassignee of Intercom Fund Resource, Inc., filed a complaint for judicial foreclosure of
four parcels of land mortgaged by petitioner Huerta Alba Resort, Inc. before the
Regional Trial Court of Makati City. The trial court ruled in favor of private respondent
and ordered the petitioner to pay all its obligations within a period of not less than 150
days from receipt of the decision. The appeals to the Court of Appeals as well as the
Petition for Certiorari to the Supreme Court filed by petitioner were all dismissed. The

dismissal became final and executory and it was entered in the Book of Entries of
Judgment on March 14, 1994. Accordingly, a writ of execution was issued and the
auction sale of the subject properties was set on September 6, 1994. The petitioner
then questioned the issuance of the said Writ of Execution by claiming that the 150day period for petitioner to pay the judgment obligation had not yet lapsed. This issue
was again raised by petitioner to the Court of Appeals. The Court of Appeals ruled
that the 150-day period should be computed from the date the petitioner was notified
of the Entry of Judgment and it expired on September 11, 1994. Subsequently, the
trial court confirmed the sale of subject properties to the private respondent. When the
private respondent filed a motion for a Writ of Possession, again it was opposed by
petitioner by filing a motion to compel private respondent to accept redemption. This is
the first time petitioner asserted its right to redeem the subject properties under
Section 78 of R.A. No. 337 (General Banking Act). The trial court allowed the
petitioner to redeem the subject properties. However, in a Petition for Certiorari,
Prohibition and Mandamus filed by private respondents, the Court of Appeals set
aside the said Order of the trial court. Hence, this petition. THCSAE
The Court ruled that the claim that petitioner is entitled to the beneficial provisions of
Section 78 of R.A. No. 337 since private respondent's predecessor-in-interest is a
credit institution is in the nature of a compulsory counterclaim which should have
been averred in petitioner's answer to the complaint for judicial foreclosure. The failure
of petitioner to seasonably assert its alleged right under Section 78 of R.A. No.
337 precludes it from so doing at this late stage of the case. Estoppel may be
successfully invoked if the party fails to raise the question in the early stages of the
proceedings. Hence, in conformity with the ruling in Limpin vs. IAC (166 SCRA 87),
the sale of the subject properties, operated to divest the rights of all the parties to the
action and to vest their rights in private respondent. There then existed only what is
known as the equity of redemption, which is simply the right of the petitioner to
extinguish the mortgage and retain ownership of the property by paying the secured
debt within the 90-day period after judgment became final. There being an explicit
finding by the Court of Appeals in its decision that the herein petitioner failed to
exercise its equity of redemption within the prescribed period, redemption can no
longer be effected. The confirmation of the sale and the issuance of the transfer
certificates of title covering the subject properties to private respondent was in order.
The trial court, therefore, has the ministerial duty to place private respondent in the
possession of subject properties.

DECISION
Page 447 of 505

PURISIMA, J. p:
Litigation must at some time be terminated, even at the risk of occasional errors.
Public policy dictates that once a judgment becomes final, executory and
unappealable, the prevailing party should not be denied the fruits of his victory by
some subterfuge devised by the losing party. Unjustified delay in the enforcement of a
judgment sets at naught the role of courts in disposing justiciable controversies with
finality.
The Case
At bar is a petition assailing the Decision, dated November 14, 1996, and Resolution,
dated March 11, 1997, of the Court of Appeals in CA-G.R. No. 38747, which set aside
the Order, dated July 21, 1995 and Order, dated September 4, 1997, of the Regional
Trial Court of Makati City, in Civil Case No. 89-5424. The aforesaid orders of the trial
court held that petitioner had the right to redeem subject pieces of property within the
one-year period prescribed by Section 78 of Republic Act No. 337 otherwise known
as the General Banking Act.
Section 78 of R.A. No. 337 provides that "in case of a foreclosure of a mortgage in
favor of a bank, banking or credit institution, whether judicially or extrajudicially, the
mortgagor shall have the right, within one year after the sale of the real estate as a
result of the foreclosure of the respective mortgage, to redeem the property."
The Facts
The facts that matter are undisputed:
In a complaint for judicial foreclosure of mortgage with preliminary injunction filed on
October 19, 1989, docketed as Civil Case No. 89-5424 before the Regional Trial
Court of Makati City, the herein private respondent sought the foreclosure of four (4)
parcels of land mortgaged by petitioner to Intercon Fund Resource, Inc. ("Intercon").
Private respondent instituted Civil Case No. 89-5424 as mortgagee-assignee of a
loan amounting to P8.5 million obtained by petitioner from Intercon, in whose favor
petitioner mortgaged the aforesaid parcels of land as security for the said loan.
In its answer below, petitioner questioned the assignment by Intercon of its mortgage
right thereover to the private respondent, on the ground that the same was ultra vires.
Petitioner also questioned during the trial the correctness of the charges and interest
on the mortgage debt in question.
On April 30, 1992, the trial court, through the then Judge now Court of Appeals
Justice Buenaventura J. Guerrero, came out with its decision "granting herein private

respondent SMGI's complaint for judicial foreclosure of mortgage", disposing as

follows: aSECAD
"WHEREFORE, judgment is hereby rendered ordering defendant
to pay plaintiff the following:
(1) P8,500,000.00 representing the principal of the amount due;
(2) P850,000.00 as penalty charges with interest at 6% per
annum, until fully paid;
(3) 22% per annum interest on the
September 6, 1998, until fully paid;

above

principal

from

(4) 5% of the sum total of the above amounts, as reasonable

attorney's fees; and,
(5) Costs.
All the above must be paid within a period of not less than 150
days from receipt hereof by the defendant. In default of such
payment, the four parcels of land subject matter of the suit
including its improvements shall be sold to realize the mortgage
debt and costs, in the manner and under the regulations that
govern sales of real estate under execution." 1
Petitioner appealed the decision of the trial court to the Court of Appeals, the appeal
docketed as CA-G.R. CV No. 39243 before the Sixth Division of the appellate court,
which dismissed the case on June 29, 1993 on the ground of late payment of docket
fees.
Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to this Court via
a petition for certiorari, docketed as G.R. No. 112044, which this court resolved to
dismiss on December 13, 1993, on the finding that the Court of Appeals erred not in
dismissing the appeal of petitioner.
Petitioner's motion for reconsideration of the dismissal of its petition in G.R. No.
112044 was denied with finality in this Court's Resolution promulgated on February
16, 1994. On March 10, 1994, leave to present a second motion for reconsideration in
G.R. No. 112044 or to submit the case for hearing by the Court en banc was filed, but
to no avail. The Court resolved to deny the same on May 11, 1994. LibLex
On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No. 112044
became final and executory and was entered in the Book of Entries of Judgment.
Page 448 of 505

On July 4, 1994, private respondent filed with the trial court of origin a motion for
execution of the Decision promulgated on April 30, 1992 in Civil Case No. 89-5424.
The said motion was granted on July 15, 1994.

On September 26, 1994, the trial court ruled that the period of redemption of subject
property should be governed by the rule on the sale of judicially foreclosed property
under Rule 68 of the Rules of Court.

Accordingly, on July 15, 1994 a writ of execution issued and, on July 20, 1994, a
Notice of Levy and Execution was issued by the Sheriff concerned, who issued on
August 1, 1994 a Notice of Sheriff's Sale for the auction of subject properties on
September 6, 1994.

Thereafter, petitioner then filed an Exception to the Order dated September 26, 1994
and Motion to Set Aside Said Order, contending that the said Order materially altered
the Decision dated April 30, 1992 "which declared that the satisfaction of the
judgment shall be in the manner and under the regulation that govern sale of real
estate under execution."

On August 23, 1994, petitioner filed with the same trial court an Urgent Motion to
Quash and Set Aside Writ of Execution ascribing to it grave abuse of discretion in
issuing the questioned Writ of Execution. To support its motion, petitioner invited
attention and argued that the records of the case were still with the Court of Appeals
and therefore, issuance of the writ of execution was premature since the 150-day
period for petitioner to pay the judgment obligation had not yet lapsed and petitioner
had not yet defaulted in the payment thereof since no demand for its payment was
made by the private respondent. In petitioner's own words, the dispute between the
parties was "principally on the issue as to when the 150-day period within which
Huerta Alba may exercise its equity of redemption should be counted."
In its Order of September 2, 1994, the lower court denied petitioner's urgent motion to
quash the writ of execution in Civil Case No. 89-5424, opining that subject judgment
had become final and executory and consequently, execution thereof was a matter of
right and the issuance of the corresponding writ of execution became its ministerial
duty.
Challenging the said order granting execution, petitioner filed once more with the
Court of Appeals another petition for certiorari and prohibition with preliminary
injunction, docketed as C.A.-G.R. SP No. 35086, predicated on the same grounds
invoked for its Motion to Quash Writ of Execution.
On September 6, 1994, the scheduled auction sale of subject pieces of properties
proceeded and the private respondent was declared the highest bidder. Thus, private
respondent was awarded subject bidded pieces of property. The covering Certificate
of Sale issued in its favor was registered with the Registry of Deeds on October 21,
1994.
On September 7, 1994, petitioner presented an Ex-Parte Motion for Clarification
asking the trial court to "clarify" whether or not the twelve (12) month period of
redemption for ordinary execution applied in the case.

Meanwhile, in its Decision of September 30, 1994, the Court of Appeals resolved the
issues raised by the petitioner in C.A.-G.R. SP No. 35086, holding that the one
hundred-fifty day period within which petitioner may redeem subject properties should
be computed from the date petitioner was notified of the Entry of Judgment in G.R.
No. 112044; and that the 150-day period within which petitioner may exercise its
equity of redemption expired on September 11, 1994.
Thus:
"Petitioner must have received the resolution of the Supreme
Court dated February 16, 1994 denying with finality its motion for
reconsideration in G.R. No. 112044before March 14, 1994,
otherwise the Supreme Court would not have made an entry of
judgment on March 14, 1994. While, computing the 150-day
period. Petitioner may have until September 11, 1994. within
which to pay the amounts covered by the judgment, such period
has already expired by this time, and therefore, this Court has no
more reason to pass upon the parties' opposing contentions, the
same having become moot and academic." 2 (underscoring
supplied). IcaHTA
Petitioner moved for reconsideration of the Decision of the Court of Appeals in C.A.G.R. SP No. 35086. In its Motion for Reconsideration dated October 18, 1994,
petitioner theorized that the period of one hundred fifty (150) days should not be
reckoned with from Entry of Judgment but from receipt on or before July 29, 1994 by
the trial court of the records of Civil Case No. 89-5424 from the Court of Appeals. So
also, petitioner maintained that it may not be considered in default, even after the
expiration of 150 days from July 29, 1994, because prior demand to pay was never
made on it by the private respondent. According to petitioner, it was therefore,
premature for the trial court to issue a writ of execution to enforce the judgment.

Page 449 of 505

The trial court deferred action on the Motion for Confirmation of the Certificate of Sale
in view of the pendency of petitioner's Motion for Reconsideration in CA-G.R. SP No.
35086.
On December 23, 1994, the Court of Appeals denied petitioner's motion for
reconsideration in CA-G.R. SP No. 35086. Absent any further action with respect to
the denial of the subject motion for reconsideration, private respondent presented a
Second Motion for Confirmation of Certificate of Sale before the trial court.
As regards the Decision rendered on September 30, 1994 by the Court of Appeals in
CA G.R. SP No. 35086 it became final and executory on January 25, 1995.
On February 10, 1995, the lower court confirmed the sale of subject properties to the
private respondent. The pertinent Order declared that all pending incidents relating to
the Order dated September 26, 1994 had become moot and academic. Conformably,
the Transfer Certificates of Title to subject pieces of property were then issued to the
private respondent.
On February 27, 1995, petitioner filed with the Court of Appeals a Motion for
Clarification seeking "clarification" of the date of commencement of the one (1) year
period for the redemption of the properties in question.
In its Resolution dated March 20, 1995, the Court of Appeals merely noted such
Motion for Clarification since its Decision promulgated on September 30, 1994 had
already become final and executory; ratiocinating thus:
"We view the motion for clarification filed by petitioner,
purportedly signed by its proprietor, but which we believe was
prepared by a lawyer who wishes to hide under the cloak of
anonymity, as a veiled attempt to buy time and to delay further
the disposition of this case.
Our decision of September 30, 1994 never dealt on the right and
period of redemption of petitioner, but was merely circumscribed
to the question of whether respondent judge could issue a writ of
execution in its Civil Case No. 89-5424 . . . .
We further ruled that the one-hundred fifty day period within
which petitioner may exercise its equity of redemption should be
counted, not from the receipt of respondent court of the records
of Civil Case No. 89-5424 but from the date petitioner was
notified of the entry of judgment made by the appellate court.

But we never made any pronouncement on the one-year right of

redemption of petitioner because, in the first place, the
foreclosure in this case is judicial. and as such the mortgagor has
only the equity not the right of redemption . . . . While it may be
true that under Section 78 of R.A. 337 as amended, otherwise
known as the General Banking Act, a mortgagor of a bank,
banking or credit institution, whether the foreclosure was
done judicially or extrajudicially, has a period of one year from the
auction sale within which to redeem the foreclosed property, the
question of whether the Syndicated Management Group, Inc., is
a bank or credit institution was never brought before us
squarely, and it is indeed odd and strange that petitioner would
now sarcastically ask a rhetorical question in its motion for
clarification." 3 (Emphasis supplied).
Indeed, if petitioner did really act in good faith, it would have ventilated before the
Court of Appeals in CA-G.R. No. 35086 its pretended right under Section 78 of R.A.
No. 337 but it never did so.
At the earliest opportunity, when it filed its answer to the complaint for judicial
foreclosure, petitioner should have averred in its pleading that it was entitled to the
beneficial provisions of Section 78 of R.A. No. 337; but again, petitioner did not make
any such allegation in its answer.
From the said Resolution, petitioner took no further step such that on March 31, 1995,
the private respondent filed a Motion for Issuance of Writ of Possession with the trial
court. THCSEA
During the hearing called on April 21, 1995, the counsel of record of petitioner entered
appearance and asked for time to interpose opposition to the Motion for Issuance of
Writ of Possession.
On May 2, 1995, in opposition to private respondent's Motion for Issuance of writ of
Possession, petitioner filed a "Motion to Compel Private Respondent to Accept
Redemption." It was the first time petitioner ever asserted the right to redeem subject
properties under Section 78 of R.A. No. 337, the General Banking Act; theorizing that
the original mortgagee, being a credit institution, its assignment of the mortgage credit
to petitioner did not remove petitioner from the coverage of Section 78 ofR.A. No. 337.
Therefore, it should have the right to redeem subject properties within one year from
registration of the auction sale, theorized the petitioner which concluded that in view

Page 450 of 505

of its "right of redemption," the issuance of the titles over subject parcels of land to the
private respondent was irregular and premature.

(1) The Motion for Issuance of Writ of Possession is

hereby denied;

In its Order of July 21, 1995, the trial court, presided over by Judge Napoleon
Inoturan, denied private respondent's motion for a writ of possession, opining that
Section 78 of the General Banking Act was applicable and therefore, the petitioner
had until October 21, 1995 to redeem the said parcels of land, said Order ruled as
follows:

(2) Plaintiff is directed to accept the redemption on or

before October 21, 1995 in an amount computed
according to the terms stated in the Writ of Execution
dated July 15, 1994 plus all other related costs and
expenses mentioned under Section 78, RA 337, as
amended; and

"It is undisputed that Intercon is a credit institution from which

defendant obtained a loan secured with a real estate mortgage
over four (4) parcels of land. Assuming that the mortgage debt
had not been assigned to plaintiff, there is then no question that
defendant would have a right of redemption in case of
foreclosure, judicially or extrajudicially, pursuant to the above
quoted Section 78 of RA 337, as amended.

However, the pivotal issue here is whether or not the defendant lost its right of
redemption by virtue of the assignment of its mortgage debt by Intercon to plaintiff,
which is not a bank or credit institution. The issue is resolved in the negative. The
right of redemption in this case is vested by law and is therefore an absolute privilege
which defendant may not lose even though plaintiff-assignee is not a bank or credit
institution (Tolentino versus Court of Appeals, 106 SCRA 513). Indeed, a contrary
ruling will lead to a possible circumvention of Section 78 because all that may be
needed to deprive a defaulting mortgagor of his right of redemption is to assign his
mortgage debt from a bank or credit institution to one which is not. Protection of
defaulting mortgagors, which is the avowed policy behind the provision, would not be
achieved if the ruling were otherwise. Consequently, defendant still possesses its right
of redemption which it may exercise up to October 21, 1995 only, which is one year
from the date of registration of the certificate of sale of subject properties (GSIS
versus Iloilo, 175 SCRA 19, citing Limpin versus IAC, 166 SCRA 87).
Since the period to exercise defendant's right of redemption has
not yet expired, the cancellation of defendant's transfer
certificates of title and the issuance of new ones in lieu thereof in
favor of plaintiff are therefore illegal for being premature, thereby
necessitating reconveyance (see Sec. 63 (a) PD 1529, as
amended).
WHEREFORE, the Court hereby rules as follows:

(3) The Register of Deeds of Valenzuela, Bulacan is

directed (a) to reconvey to the defendant the following
titles of the four (4) parcels of land, namely TCT Nos. V38878, V-38879, V-38880, and V-38881, now in the
name of plaintiff, and (b) to register the certificate of sale
dated October 7, 1994 and the Order confirming the
sale dated February 10, 1995 by a brief memorandum
thereof upon the transfer certificates of title to be issued
in the name of defendant, pursuant to Sec. 63 (a) PD
1529, as amended.
The Omnibus Motion dated June 5, 1995, together with the
Opposition thereto, is now deemed resolved.
SO ORDERED." 4
Private respondent interposed a Motion for Reconsideration seeking the reversal of
the Order but to no avail. In its Order dated September 4, 1995, the trial court denied
the same.
To attack and challenge the aforesaid order of July 21, 1995 and subsequent Order of
September 4, 1995 of the trial court, the private respondent filed with this court a
Petition for Certiorari, Prohibition and Mandamus, docketed as G.R. No. 121893, but
absent any special and cogent reason shown for entertaining the same, the Court
referred the petition to the Court of Appeals, for proper determination.
Docketed as G.R. No. 387457 on November 14, 1996, the Court of Appeals gave due
course to the petition and set aside the trial court's Order dated July 21, 1995 and
Order dated September 4, 1995.
In its Resolution of March 11, 1997, the Court of Appeals denied petitioner's Motion
for Reconsideration of the Decision promulgated on November 14, 1996 in CA-G.R.
No. 38747. ESCacI
Page 451 of 505

Undaunted, petitioner has come to this Court via the present petition, placing reliance
on the assignment of errors, that:
I
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY
IN HOLDING THAT THE COURT OF APPEALS (TWELFTH
DIVISION) IN CA G.R. SP NO. 35086 HAD RESOLVED "WITH
FINALITY" THAT PETITIONER HUERTA ALBA HAD NO RIGHT
OF REDEMPTION BUT ONLY THE EQUITY OF REDEMPTION.
II
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY
IN IGNORING THAT PETITIONER HUERTA ALBA POSSESSES
THE ONE-YEAR RIGHT OF REDEMPTION UNDER SECTION
78, R.A. NO. 337 (THE GENERAL BANKING ACT).
III
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY
IN HOLDING THAT PRIVATE RESPONDENT SYNDICATED
MANAGEMENT GROUP, INC. IS ENTITLED TO THE
ISSUANCE OF A WRIT OF POSSESSION OVER THE
SUBJECT PROPERTY. 5
In its comment on the petition, private respondent countered that:
"A. THE HONORABLE COURT OF APPEALS CORRECTLY
HELD THAT IT RESOLVED WITH FINALITY IN C.A.G.R. SP NO. 35086 THAT PETITIONER ONLY HAD
THE RIGHT OF REDEMPTION IN RESPECT OF THE
SUBJECT PROPERTIES.
B. THE PETITION IS AN INSIDIOUS AND UNDERHANDED
ATTEMPT TO EVADE THE FINALITY OF VARIOUS
DECISIONS, RESOLUTIONS AND ORDERS WHICH
HELD THAT, PETITIONER ONLY POSSESSES THE
EQUITY OF REDEMPTION IN RESPECT OF THE
SUBJECT PROPERTIES.
C. PETITIONER IS BARRED BY ESTOPPEL FROM
BELATEDLY RAISING THE ISSUE OF ITS ALLEGED
'RIGHT OF REDEMPTION.

D. IN HOLDING THAT THE PETITIONER HAD THE 'RIGHT OF

REDEMPTION' OVER THE SUBJECT PROPERTIES,
THE TRIAL COURT MADE A MOCKERY OF THE 'LAW
OF THE CASE."' 6
And by way of Reply, petitioner argued, that:
I.
THE COURT OF APPEALS IN CA G.R. SP NO. 35086 COULD
NOT HAVE POSSIBLY RESOLVED THEREIN WHETHER
WITH FINALITY OR OTHERWISE THE ISSUE OF
PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION
UNDER SECTION 78, R.A. NO. 337.
II.
THERE IS NO ESTOPPEL HERE. PETITIONER HUERTA ALBA
INVOKED ITS RIGHT OF REDEMPTION UNDER SECTION
78, R.A. NO. 337 IN TIMELY FASHION, i.e., AFTER
CONFIRMATION BY THE COURT OF THE FORECLOSURE
SALE, AND WITHIN ONE (1) YEAR FROM THE DATE OF
REGISTRATION OF THE CERTIFICATE OF SALE.
III.
THE PRINCIPLE OF 'THE LAW OF THE CASE' HAS
ABSOLUTELY NO BEARING HERE:
(1)
THE RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO.
337 IS IN FACT PREDICATED UPON THE FINALITY AND
CORRECTNESS OF THE DECISION IN CIVIL CASE NO. 895424. AaHcIT
(2)
THUS, THE RTC'S ORDER RECOGNIZING PETITIONER
HUERTA ALBA'S RIGHT OF REDEMPTION UNDER SECTION
78, R.A. NO. 337 DOES NOT IN ANY WAY HAVE THE EFFECT
OF AMENDING, MODIFYING, OR SETTING ASIDE THE
DECISION IN CIVIL CASE NO. 89-5424.
Page 452 of 505

The above arguments and counter-arguments advanced relate to the pivotal issue of
whether or not the petitioner has the one-year right of redemption of subject
properties under Section 78 of Republic Act No. 337 otherwise known as the General
Banking Act.
The petition is not visited by merit.
Petitioner's assertion of right of redemption under Section 78 of Republic Act No.
337 is premised on the submission that the Court of Appeals did not resolve such
issue in CA-G.R. SP No. 35086; contending thus:
(1)
BY NO STRETCH OF LOGIC CAN THE 20 MARCH 1995
RESOLUTION IN CA G.R. SP NO. 35086 BE INTERPRETED
TO MEAN THE COURT OF APPEALS HAD RESOLVED 'WITH
FINALITY' THE ISSUE OF WHETHER PETITIONER HUERTA
ALBA HAD THE RIGHT OF REDEMPTION WHEN ALL THAT
THE RESOLUTION DID WAS TO MERELY NOTE THE MOTION
FOR CLARIFICATION.
(2)
THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086
IS NOT A FINAL JUDGMENT, ORDER OR DECREE. IT IS NOT
EVEN A JUDGMENT OR ORDER TO BEGIN WITH. IT
ORDERS NOTHING; IT ADJUDICATES NOTHING.
(3)
PETITIONER HUERTA ALBA'S RIGHT OF REDEMPTION
UNDER SECTION 78, R.A. NO. 37 WAS NOT AN ISSUE AND
WAS NOT IN ISSUE, AND COULD NOT HAVE POSSIBLY BEEN
AN ISSUE NOR IN ISSUE, IN CA G.R. SP NO. 35086.
(4)
THE 30 SEPTEMBER 1994 DECISION IN CA G.R. SP NO.
35086 HAVING ALREADY BECOME FINAL EVEN BEFORE
THE FILING OF THE MOTION FOR CLARIFICATION, THE
COURT OF APPEALS NO LONGER HAD ANY JURISDICTION
TO ACT OF THE MOTION OR ANY OTHER MATTER IN CA
G.R. SP NO. 35086, EXCEPT TO MERELY NOTE THE MOTION.

II.
IN STARK CONTRAST, THE ISSUE OF PETITIONER HUERTA
ALBA'S RIGHT OF REDEMPTION UNDER SECTION 78, R.A.
NO. 337 WAS DIRECTLY RAISED AND JOINED BY THE
PARTIES, AND THE SAME DULY RESOLVED BY THE TRIAL
COURT.
III.
THE RIGHT OF REDEMPTION UNDER SECTION 78 OF R.A.
NO. 337 IS MANDATORY AND AUTOMATICALLY EXISTS BY
LAW. THE COURTS ARE DUTY-BOUND TO RECOGNIZE
SUCH RIGHT.
IV.
EQUITABLE CONSIDERATIONS WEIGH HEAVILY IN FAVOR
OF PETITIONER HUERTA ALBA, NOT THE LEAST OF WHICH
IS THE WELL-SETTLED POLICY OF THE LAW TO AID
RATHER THAN DEFEAT THE RIGHT OF REDEMPTION.
V.
THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995
ORDERS OF THE TRIAL COURT ARE VALID AND PROPER IN
ACCORDANCE WITH THE MANDATE OF THE LAW.
From the various decisions, resolutions and orders a quo it can be gleaned that what
petitioner has been adjudged to have was only the equity of redemption over subject
properties. On the distinction between the equity of redemption and right of
redemption, the case of Gregorio Y. Limpin vs. Intermediate Appellate Court, 7comes
to the fore. Held the Court in the said case:
"The equity of redemption is, to be sure, different from and should
not be confused with the right of redemption.
The right of redemption in relation to a mortgage understood in
the sense of a prerogative to re-acquire mortgaged property after
registration of the foreclosure sale exists only in the case of
the extrajudicial foreclosure of the mortgage. No such right is
recognized in a judicial foreclosure except only where the
mortgagee is the Philippine National Bank or a bank or banking
institution.
Page 453 of 505

Where a mortgage is foreclosed extrajudicially, Act 3135 grants

to the mortgagor the right of redemption within one (1) year from
the registration of the sheriff's certificate of foreclosure sale.
Where the foreclosure is judicially effected, however, no
equivalent right of redemption exists. The law declares that
a judicial foreclosure sale 'when confirmed be an order of the
court, . . . shall operate to divest the rights of all the parties to the
action and to vest their rights in the purchaser, subject to such
rights of redemption as may be allowed by law.' Such rights
exceptionally 'allowed by law' (i.e., even after confirmation by an
order of the court) are those granted by the charter of the
Philippine National Bank (Acts No. 2747 and 2938), and
the General Banking Act (R.A. 337). These laws confer on the
mortgagor, his successors in interest or any judgment creditor of
the mortgagor, the right to redeem the property sold on
foreclosure after confirmation by the court of the foreclosure
sale which right may be exercised within a period of one (1)
year, counted from the date of registration of the certificate of sale
in the Registry of Property.

But, to repeat, no such right of redemption exists in

case of judicial foreclosure of a mortgage if the mortgagee is not
the PNB or a bank or banking institution. In such a case, the
foreclosure sale, 'when confirmed by an order of the court. . .
shall operate to divest the rights of all the parties to the action
and to vest their rights in the purchaser.' There then exists only
what is known as the equity of redemption. This is simply the
right of the defendant mortgagor to extinguish the mortgage and
retain ownership of the property by paying the secured debt
within the 90-day period after the judgment becomes final, in
accordance with Rule 68, or even after the foreclosure sale but
prior to its confirmation.
Section 2, Rule 68 provides that
'. . . If upon the trial . . . the court shall find the facts set forth in
the complaint to be true, it shall ascertain the amount due to the
plaintiff upon the mortgage debt or obligation, including interest
and costs, and shall render judgment for the sum so found due

and order the same to be paid into court within a period of not
less thanninety (90) days from the date of the service of such
order, and that in default of such payment the property be sold to
realize the mortgage debt and costs.'
This is the mortgagor's equity (not right) of redemption which, as
above stated, may be exercised by him even beyond the 90-day
period 'from the date of service of the order,' and even after the
foreclosure sale itself, provided it be before the order of
confirmation of the sale. After such order of confirmation, no
redemption can be effected any longer." 8 (Emphasis supplied)
Petitioner failed to seasonably invoke its purported right under Section 78 of R.A. No.
337.
Petitioner avers in its petition that the Intercon, predecessor in interest of the private
respondent, is a credit institution, such that Section 78 of Republic Act No. 337should
apply in this case. Stated differently, it is the submission of petitioner that it should be
allowed to redeem subject properties within one year from the date of sale as a result
of the foreclosure of the mortgage constituted thereon.
The pivot of inquiry here therefore, is whether the petitioner seasonably invoked its
asserted right under Section 78 of R.A. No. 337 to redeem subject properties.
Petitioner theorizes that it invoked its "right" in "timely fashion", that is, after
confirmation by the court of the foreclosure sale, and within one (1) year from the date
of registration of the certificate of sale. Indeed, the facts show that it was only on May
2, 1995 when, in opposition to the Motion for Issuance of Writ of Possession, did
petitioner file a Motion to Compel Private Respondent to Accept Redemption, invoking
for the very first time its alleged right to redeem subject properties under to Section 78
of R.A. No. 337.
In light of the aforestated facts, it was too late in the day for petitioner to invoke a right
to redeem under Section 78 of R.A. No. 337. Petitioner failed to assert a right to
redeem in several crucial stages of the proceedings.
For instance, on September 7, 1994, when it filed with the trial court an Expart Motion for Clarification, petitioner failed to allege and prove that private
respondent's predecessor in interest was a credit institution and therefore, Section 78
of R.A. No. 337 was applicable. Petitioner merely asked the trial court to clarify
whether the sale of subject properties was execution sale or judicial foreclosure sale.

Page 454 of 505

So also, when it presented before the trial court an Exception to the Order and Motion
to Set Aside Said Order dated October 13, 1994, petitioner again was silent on its
alleged right under Section 78 of R.A. No. 337, even as it failed to show that private
respondent's predecessor in interest is a credit institution. Petitioner just argued that
the aforementioned Order materially altered the trial court's Decision of April 30, 1992.
Then, too, nothing was heard from petitioner on its alleged right under Section 78
of R.A. No. 337 and of the predecessor in interest of private respondent as a credit
institution, when the trial court came out with an order on February 10, 1995,
confirming the sale of subject properties in favor of private respondent and declaring
that all pending incidents with respect to the Order dated September 26, 1994 had
become moot and academic.
Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification with the
Court of Appeals, seeking "clarification" of the date of commencement of the one (1)
year redemption period for the subject properties, petitioner never intimated any
alleged right under Section 78 of R.A. No. 337 nor did it invite attention to its present
stance that private respondent's predecessor-in-interest was a credit institution.
Consequently, in its Resolution dated March 20, 1995, the Court of Appeals ruled on
the said motion thus:
"But we never made any pronouncement on the one-year right of
redemption of petitioner because, in the first place, the
foreclosure in this case is judicial, and as such. the mortgagor
has only the equity, not the right of redemption, . . . While it may
be true that under Section 78 of R.A. 337 as amended, otherwise
known as theGeneral Banking Act, a mortgagor of a bank,
banking or credit institution, whether the foreclosure was
done judicially or extrajudicially, has a period of one year from the
auction sale within which to redeem the foreclosed property, the
question of whether the Syndicated Management Group. Inc., is
bank or credit institution was never brought before us
squarely, and it is indeed odd and strange that petitioner would
now sarcastically ask a rhetorical question in its motion for
clarification." 9(Emphasis supplied). AaHcIT
If petitioner were really acting in good faith, it would have ventilated before the Court
of Appeals in CA-G.R. No. 35086 its alleged right under Section 78 of R.A. No. 337;
but petitioner never did do so.

Indeed, at the earliest opportunity, when it submitted its answer to the complaint for
judicial foreclosure, petitioner should have alleged that it was entitled to the beneficial
provisions of Section 78 of R.A. No. 337 but again, it did not make any allegation in its
answer regarding any right thereunder. It bears stressing that the applicability of
Section 78 of R.A. No. 337 hinges on the factual question of whether or not private
respondent's predecessor in interest was a credit institution. As was held in Limpin, a
judicial foreclosure sale, "when confirmed by an order of the court, . . . shall operate to
divest the rights of all the parties to the action and to vest their rights in the
purchaser, subject to such rights of redemption as may be allowed by law'," 10 which
confer on the mortgagor, his successors in interest or any judgment creditor of the
mortgagor, the right to redeem the property sold on foreclosure after confirmation by
the court of the judicial foreclosure sale. Thus, the claim that petitioner is entitled to
the beneficial provisions of Section 78 of R.A. No. 337 since private respondent's
predecessor-in-interest is a credit institution is in the nature of a compulsory
counterclaim which should have been averred in petitioner's answer to the compliant
for judicial foreclosure.
". . . A counterclaim is, most broadly, a cause of action existing in
favor of the defendant against the plaintiff. More narrowly, it is a
claim whic, if established, will defeat or in some way qualify a
judgment or relief to which plaintiff is otherwise entitled. It is
sometimes defined as any cause of action arising in contract
available against any action also arising in contract and existing
at the time of the commencement of such an action. It is
frequently defined by the codes as a cause of action arising out
of the contract or transaction set forth in the complaint as the
foundation of the plaintiff's claim, or connected with the subject of
the action." 11 (emphasis supplied)
"The counterclaim is in itself a distinct and independent cause of
action, so that when properly stated as such, the defendant
becomes, in respect to the matters stated by him, an actor, and
there are two simultaneous actions pending between the same
parties, wherein each is at the same time both a plaintiff and a
defendant. Counterclaim is an offensive as well as a defensive
plea and is not necessarily confined to the justice of the plaintiff's
claim. It represents the right of the defendant to have the claims
of the parties counterbalanced in whole or in part, and judgment
to be entered in excess, if any. A counterclaim stands on the
Page 455 of 505

same footing, and is to be tested by the same rules, as if it were

an independent action." 12 (emphasis supplied)
The very purpose of a counterclaim would have been served had petitioner alleged in
its answer its purported right under Section 78 of R.A. No. 337:
". . . The rules of counterclaim are designed to enable the
disposition of a whole controversy of interested parties' conflicting
claims, at one time and in one action, provided all parties' be
brought before the court and the matter decided without
prejudicing the rights of any party." 13
The failure of petitioner to seasonably assert its alleged right under Section 78 of R.A.
No. 337 precludes it from so doing at this late stage case. Estoppel may be
successfully invoked if the party fails to raise the question in the early stages of the
proceedings. 14 Thus, "a party to a case who failed to invoke his claim in the main
case, while having the opportunity to do so, will be precluded, subsequently, from
invoking his claim, even if it were true, after the decision has become final, otherwise
the judgment may be reduced to a mockery and the administration of justice may be
placed in disrepute." 15
All things viewed in proper perspective, it is decisively clear that the trial court erred in
still allowing petitioner to introduce evidence that private respondent's predecessor-ininterest was a credit institution, and to thereafter rule that the petitioner was entitled to
avail of the provisions of Section 78 of R.A. No. 337. In effect, the trial court permitted
the petitioner to accomplish what the latter failed to do before the Court of Appeals,
that is, to invoke its alleged right under Section 78 of R.A. No. 337 although the Court
of Appeals in CA-G.R. No. 35086 already found that 'the question of whether the
Syndicated Management Council Group, Inc. is a bank or credit institution was never
brought before (the Court of Appeals) squarely." The said pronouncement by the
Court of Appeals unerringly signified that petitioner did not make a timely assertion of
any right under Section 78 of R.A. No. 337 in all the stages of the proceedings below.

Verily, the petitioner has only itself to blame for not alleging at the outset that the
predecessor-in-interest of the private respondent is a credit institution. Thus, when the
trial court, and the Court of Appeals repeatedly passed upon the issue of whether or
not petitioner had the right of redemption or equity of redemption over subject
properties in the decisions, resolutions and orders, particularly in Civil Case No. 895424, CA-G.R. CV No. 39243, CA-G.R. SP No. 35086, and CA-G.R. SP No. 38747, it
was unmistakable that the petitioner was adjudged to just have the equity of

redemption without any qualification whatsoever, that is, without any right of
redemption allowed by law. HCITcA
The "law of case" holds that petitioner has the equity of
redemption without any qualification.
There is, therefore, merit in private respondent's contention that to allow petitioner to
belatedly invoke its right under Section 78 of R.A. No. 337 will disturb the "law of the
case." However, private respondent's statement of what constitutes the "law of the
case" is not entirely accurate. The "law of the case" is not simply that the defendant
possesses an equity of redemption. As the Court has stated, the "law of the case"
holds that petitioner has the equity of the redemption without any qualification
whatsoever, that is, without the right of redemption afforded by Section 78 of R.A. No.
337. Whether or not the "law of the case" is erroneous is immaterial, it still remains
the "law of the case". A contrary rule will contradict both the letter and spirit of the
rulings of the Court of Appeals in CA-G.R. SP No. 35086, CA-G.R. CV No. 39243,
and CA-G.R. 38747, which clearly saw through the repeated attempts of petitioner to
forestall so simple a matter as making the security given for a just debt to answer for
its payment.
Hence, in conformity with the ruling in Limpin, the sale of the subject properties, as
confirmed by the Order dated February 10, 1995 of the trial court in Civil Case No. 895424 operated to divest the rights of all the parties to the action and to vest their rights
in private respondent. There then existed only what is known as the equity of
redemption, which is simply the right of the petitioner to extinguish the mortgage and
retain ownership of the property by paying the secured debt within the 90-day period
after the judgment became final. There being an explicit finding on the part of the
Court of Appeals in its Decision of September 30, 1994 in CA-G.R. No. 35086 that
the herein petitioner failed to exercise its equity of redemption within the prescribed
period, redemption can no longer be effected. The confirmation of the sale and the
issuance of the transfer certificates of title covering the subject properties to private
respondent was then, in order. The trial court therefore, has the ministerial duty to
place private respondent in the possession of subject properties. aSTAcH
WHEREFORE, the petition is DENIED, and the assailed decision of the Court of
Appeals, declaring null and void the Order dated 21 July 1995 and Order dated 4
September 1997 of the Regional Trial Court of Makati City in Civil Case No. 89-5424,
AFFIRMED. No pronouncement as to costs.
SO ORDERED.

Page 456 of 505

||| (Huerta Alba Resort Inc. v. Court of Appeals, G.R. No. 128567, [September 1,
2000], 394 PHIL 22-48)

AUSTRIA-MARTINEZ, J p:
Before us is a petition for review on certiorari filed by petitioner seeking to annul the
Decision 1 of the Court of Appeals (CA) dated March 31, 2000 in CA-G.R. CV No.
47044, which reversed the Order of the trial court dated May 10, 1994, dismissing
private respondent's complaint for failure to state a cause of action; and the
Resolution dated July 3, 2000 2 denying petitioner's motion for reconsideration.
On December 20, 1993, private respondent Santiago (Isabela) Memorial Park, Inc.
filed a complaint for redemption and specific performance with the Regional Trial
Court of Santiago, Isabela, Branch 21, against herein petitioner Banco Filipino
Savings & Mortgage Bank, the material and relevant allegations of which read as
follows:
COMPLAINT
Plaintiff, by counsel, to this Honorable Court most respectfully
alleges:
1. . . .
2. . . .
3. That in February 1981, plaintiff mortgaged the above described
property in favor of defendant to secure a loan of P500,000.00
obtained by plaintiff from defendant;

SECOND DIVISION
[G.R. No. 143896. July 8, 2005.]
BANCO FILIPINO SAVINGS AND MORTGAGE
BANK, petitioner, vs. COURT OF APPEALS AND SANTIAGO
(ISABELA) MEMORIAL PARK, INC., respondents.

DECISION

4. That due to the failure of plaintiff to pay the aforementioned

loan, defendant foreclosed the mortgage and in consequence
thereof Sheriff David R. Medina of this Honorable Court issued a
SHERIFF'S CERTIFICATE OF SALE in favor of defendant which
is dated October 9, 1990 and which instrument was inscribed at
the back of TCT T-128647 of Isabela on January 21, 1991;
5. That in a letter of the President of plaintiff dated August 6,
1991, plaintiff made manifest its interest to exercise its right of
redemption and made an offer of P700,000.00 as redemption to
defendant through the then Deputy Liquidator, ROSAURO NAPA;
this started the negotiation for the redemption of the above
described property;
6. That in a letter of the Deputy Liquidator dated January 23,
1992, plaintiff was given up to the end of March 1992 to negotiate
Page 457 of 505

and make special arrangement for any satisfactory plan of

payment for the redemption;
7. That in a letter of the Deputy Liquidator dated March 12, 1992,
plaintiff was directed to remit at least P50,000.00 to defendant
which would manifest the interest and willingness of plaintiff to
redeem the property, and forthwith on March 24, 1992, plaintiff
remitted the sum of P50,000.00 to defendant which was duly
receipted by the latter under Official Receipt No. 279968 A dated
March 24,1992;
8. That in a letter of the President of plaintiff dated January 20,
1993, plaintiff amended its first offer and made an offer of
P1,000,000.00 as redemption which offer included a plan of
payment;
9. That between January 20, 1993 to November 1993, plaintiff
exerted earnest efforts in order to finally effect the redemption,
but defendant dilly dallied on the matter.
10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice
President of defendant, dated November 5, 1993, there is a
turnaround by defendant and is now demanding P5,830,000.00
as purchase price of the property, instead of the original agreed
redemption;
11. That the delay of the defendant in the finalization of the terms
of redemption did not in any manner alter the right of plaintiff to
redeem the property from defendant; AcTDaH
12. That plaintiff is still in actual possession of the property and
intend to remain in actual possession of the property, while
defendant was never in actual possession of said property;
13. That plaintiff is ready and willing to pay the redemption
money, which is the total bank claim of P925,448.17 plus lawful
interest and other allowable expenses incident to the foreclosure
proceedings:
14. That the latest actuations of defendant are indicative of the
refusal of defendant to allow the exercise of redemption by herein
plaintiff, reason for which there is a need for judicial determination
of the rights and obligations of the parties to this case;

15. That on account of the unlawful actuations of defendant in

refusing the redemption of the property by plaintiff, the latter
engaged the services of counsel for a fee of P30,000.00 which
defendant should pay to plaintiff.
WHEREFORE, it is respectfully prayed of this Honorable Court
that, after due hearing, judgment be rendered:
a. ordering defendant to accept from plaintiff the lawful
redemption amount which shall be determined
by this Honorable Court;
b. ordering defendant to execute the necessary
instrument in order to effect the redemption of
the property;
c. ordering defendant to pay to plaintiff the sum of
P30,000.00 by way of attorney's fees;
AND PLAINTIFF PRAYS for further reliefs just and equitable
under the premises.
Petitioner filed a motion to dismiss on the ground that the complaint does not state a
cause of action. It alleges that assuming that the allegations in the complaint are true
and correct, still there was no redemption effected within one year from the date of
registration of the sheriff's certificate of sale with the Register of Deeds on January
21, 1991, thus private respondent had lost its right to redeem the subject land.
Petitioner claimed that the letter cited in paragraph 5 of the complaint was a mere
offer to redeem the property which was promptly answered by a letter dated August
28, 1991, which categorically denied private respondent's offer and stated that when it
comes to redemption, the basis of payment is the total claim of the bank at the time
the property was foreclosed plus 12% thereof and all litigation expenses attached
thereto or its present appraised value whichever is higher; that the letter mentioned in
paragraph 6 of the complaint dated January 23, 1992 of the Deputy Liquidator was
about negotiation and special arrangement and not redemption for at that stage the
period of redemption had already expired; that the letter mentioned in paragraph 7
dated March 12, 1992 was of the postponement of the consolidation of the subject
property and not of any extension for the period of redemption; that the amount of
P50,000.00 remitted by private respondent was in consideration of the postponement
of the consolidation of the property in petitioner's name and as manifestation of
private respondent's sincerity to repurchase the foreclosed property; that when private
respondent remitted P50,000.00, the Deputy Liquidator of petitioner bank requested
Page 458 of 505

the legal counsel of petitioner to defer consolidation of property in petitioner's name;

that in a letter dated November 5, 1993, petitioner's Senior Vice President declared
that the subject property is available for repurchase in the amount of P5,830,600.00 to
which private respondent in another letter asked for an extension of 30 days to make
an offer. TDESCa
Private respondent filed its opposition to the motion to dismiss alleging among others
that the complaint states a cause of action; that the annexes of the motion to dismiss
should not be considered in the resolution of such motion.
On May 10, 1994, the trial court rendered an Order 3 dismissing the complaint. It
ratiocinated that (1) the letter dated August 6, 1991 was an offer to redeem for
P700,000.00 without any tender of the money; (2) the reply letter of petitioner dated
August 28, 1991 stated that the redemption price is P1,146,837.81 representing the
bank's claim of P925,448.17 plus 12% interest and expenses of foreclosure or the
appraised value which was P1,457,650.00; (3) the March 12, 1992 letter of the
petitioner categorically informed private respondent that the period for redemption had
expired, however, the bank agreed to postpone the consolidation of title of the land in
the bank's name up to the end of March 1992 if the plaintiff shall deposit P50,000.00
in order to avoid consolidation. Under Section 6 of Act 3135, on redemption of
foreclosed property, it is provided that a debtor may redeem the property at anytime
within one year from and after the date of sale, i.e., one year period to be reckoned
from the registration of the sheriff's certificate of sale. The registration of sheriff's sale
was on January 21, 1991 so that the redemption period was until January 21, 1992;
that although there was an offer to redeem the property for P700,000.00 on August 6,
1991, which was within the redemption period, there was no tender of redemption
price and the P700,000.00 offered was not the correct redemption price. It found that
the complaint did not state that private respondent tendered the correct redemption
price within the redemption period as required under Section 30 of Rule 39 of the
Rules of Court. Private respondent's motion for reconsideration was denied in an
Order dated July 25, 1994. 4
Private respondent filed its appeal with the CA which reversed the trial court in its
assailed decision, the dispositive portion of which reads:
WHEREFORE, the Orders of the respondent trial court dated
May 10, 1994, and July 25, 1994 are hereby REVERSED and
SET ASIDE. The appellants are declared entitled to repurchase
the property in question within THIRTY (30) days from notice
hereof which shall be effected upon payment of the repurchase
price of P925,448.17 less P50,000.00, which is the deposit on the

redemption price, with legal interest from March 24, 1992, the
time the contract extending the period of redemption of the
property took effect until it is fully paid. 5
The CA ruled that:
A perusal of the allegations in the complaint shows that there was
sufficient basis to make out a case against Banco Filipino. The
complaint alleged that as early as August 6, 1991 or about six (6)
months before the statutory period for redemption would expire,
the appellant had exerted earnest efforts to effect the redemption
of the property in question and that after an agreement had been
reached by the parties, with the corresponding deposit on the
redemption price had been given by the appellant, the appellee
bank led the appellant to believe that the appellee was
negotiating with the former in good faith. However, the true
intention of the appellee bank was to refuse the redemption of the
property as manifested by its act of increasing the amount of the
redemption price after the period for redemption had expired and
after a deposit on the redemption price had been duly accepted
by it as evidenced by a receipt issued by the appellee.

Even assuming however that the appellant is now barred from

exercising its right of redemption, yet it can still repurchase the
property in question based on a new contract entered into
between the parties extending the period within which to
purchase the property as evidenced by the appellee's Deputy
Liquidator Rosauro Napa's letter to Belen Jocson dated March
12, 1992 and the letter addressed to Atty. German M. Balot,
Legal Counsel, Banco Filipino Santiago, Isabela dated April 7,
1992.
xxx xxx xxx
In the case of Philippine National Bank vs. Court of Appeals, the
Court held: Indeed under Article 1482 of the Civil Code, earnest
money given in a sale transaction is considered part of the
purchase price and proof of the perfection of the sale. This.
provision, however, gives no more than a disputable presumption
that prevails in the absence of contrary or rebuttal evidence. In
Page 459 of 505

the instant case, the letter-agreements themselves are the

evidence of an intention on the part of herein private parties to
enter into negotiations leading to a contract of sale that is
mutually acceptable as to absolutely bind them to the
performance of their obligations thereunder. The letteragreements are replete with substantial condition precedents,
acceptance of which on the part of private respondent must first
be made in order for petitioner to proceed to the next step in the
negotiations.
xxx xxx xxx 6
In compliance with the CA decision, private respondent on April 27, 2000, made a
tender of payment and consignation with the CA in the amount of P1,300,987.96
through a Philippine National Bank check which was duly receipted by the appellate
court. 7
Hence, the herein petition for review on certiorari filed by petitioner alleging that the
appellate court erred in holding that (1) the allegations in the complaint of private
respondent against petitioner are sufficient to constitute a cause of action for
redemption and specific performance; and (2) respondent was entitled to repurchase
back from petitioner it's foreclosed property for only P925,448.17.
The basic issue is whether private respondent's complaint for redemption and specific
performance states a cause of action against petitioner.
It is a well-settled rule that the existence of a cause of action is determined by the
allegations in the complaint. 8 In resolving a motion to dismiss based on the failure to
state a cause of action, only the facts alleged in the complaint must be considered.
The test is whether the court can render a valid judgment on the complaint based on
the facts alleged and the prayer asked for. 9 Indeed, the elementary test for failure to
state a cause of action is whether the complaint alleges facts which if true would
justify the relief demanded. Only ultimate facts and not legal conclusions or
evidentiary facts, which should not be alleged in the complaint in the first place, are
considered for purposes of applying the test. 10
Based on the allegations in the complaint, we find that private respondent has no
cause of action for redemption against petitioner.
Paragraph 4 of the complaint states:
4. That due to the failure of plaintiff to pay the aforementioned
loan, defendant foreclosed the mortgage and in consequence

thereof Sheriff David R. Medina of this Honorable Court issued a

SHERIFF'S CERTIFICATE OF SALE in favor of defendant which
is dated October 9, 1990 and which instrument was inscribed at
the back of TCT T-128647 of Isabela on January 21,
1991; CTHaSD
The sheriff's certificate of sale was registered on January 21, 1991. Section 6 of Act
3135 provides for the requisites for a valid redemption, thus:
SEC. 6. In all cases in which an extrajudicial sale is made under
the special power hereinbefore referred to, the debtor, his
successors in interest or any judicial creditor or judgment creditor
of said debtor, or any person having a lien on the property
subsequent to the mortgage or deed of trust under which the
property is sold, may redeem the same at any time within the
term of one year from and after the date of sale; and such
redemption shall be governed by the provisions of sections four
hundred and sixty-four to four hundred and sixty-six, inclusive, of
the Code of Civil Procedure, 11 insofar as these are not
inconsistent with the provisions of this Act.
However, considering that petitioner is a banking institution, the determination of the
redemption price is governed by Section 78 of the General Banking Act which
provides:
In the event of foreclosure, whether judicially or extrajudicially, of
any mortgage on real estate which is security for any loan
granted before the passage of this Act or under the provisions of
this Act, the mortgagor or debtor whose real property has been
sold at public auction, judicially or extrajudicially, for the full or
partial payment of an obligation to any bank, banking or credit
institution, within the purview of this Act shall have the right,
within one year after the sale of the real estate as a result of the
foreclosure of the respective mortgage, to redeem the property by
paying the amount fixed by the court in the order of execution, or
the amount due under the mortgage deed, as the case may be,
with interest thereon at the rate specified in the mortgage, and all
the costs, and judicial and other expenses incurred by the bank
or institution concerned by reason of the execution and sale and
as a result of the custody of said property less the income
received from the property.
Page 460 of 505

Clearly, the right of redemption should be exercised within the specified time limit,
which is one year from the date of registration of the certificate of sale. The
redemptioner should make an actual tender in good faith of the full amount of the
purchase price as provided above, i.e., the amount fixed by the court in the order of
execution or the amount due under the mortgage deed, as the case may be, with
interest thereon at the rate specified in the mortgage, and all the costs, and judicial
and other expenses incurred by the bank or institution concerned by reason of the
execution and sale and as a result of the custody of said property less the income
received from the property.
In case of disagreement over the redemption price, the redemptioner may preserve
his right of redemption through judicial action which in every case must be filed within
the one-year period of redemption. 12 The filing of the court action to enforce
redemption, being equivalent to a formal offer to redeem, would have the effect of
preserving his redemptive rights and "freezing" the expiration of the one-year period.
In this case, the period of redemption expired on January 21, 1992. The complaint
was filed on December 20, 1992.
Moreover, while the complaint alleges that private respondent made an offer to
redeem the subject property on August 6, 1991, which was within the period of
redemption, it is not alleged in the complaint that there was an actual tender of
payment of the redemption price as required by the rules. It was alleged that private
respondent merely made an offer of P700,000.00 as redemption price, which
however, as stated under paragraph 13 of the same complaint, the redemption money
was the total bank claim of P925,448.17 plus lawful interest and other allowable
expenses incident to the foreclosure proceedings. Thus, the offer was even very much
lower than the price paid by petitioner as the highest bidder in the auction
sale. AacCHD

allowed by law is not a matter of intent but a question of payment

or valid tender of the full redemption price within said period.
Although the letter dated January 23, 1992 gave private respondent up to the end of
March 1992, to negotiate and make special arrangement for a satisfactory plan of
payment for the redemption, there was no categorical allegation in the complaint that
the original period of redemption had been extended. Assuming arguendo that the
period for redemption had been extended, i.e., up to end of March 1992, still private
respondent failed to exercise its right within said period. This is shown by private
respondent's allegation under paragraph 8 of its complaint that in a letter dated
January 20, 1993, private respondent's President amended his first offer and made an
offer of P1 million as redemption price. Notably, such offer was made beyond the end
of the March 1992 alleged extended period. Thus, private respondent has no more
right to seek redemption by force of law which petitioner was bound to accept.
We find that the CA also erred in stating that assuming appellant is now barred from
exercising its right of redemption, it can still repurchase the property in question based
on a new contract entered into between the parties extending the period within which
to purchase the property. ISDCaT
The allegations in the complaint do not show that a new contract was entered into
between the parties. The March 12, 1992 letter referred to by the CA as well as in the
complaint only directed private respondent to remit at least P50,000.00 to petitioner as
a manifestation of the former's interest and willingness to redeem the property. Thus,
the P50,000.00 remitted by private respondent was only the first step to show its
interest in redeeming the property. In no way did it establish that a contract of sale, as
found by the CA, had been perfected and that the P50,000.00 remitted by private
respondent is considered as earnest money.

In BPI Family Savings Bank, Inc. vs. Veloso, 13 we held:

The general rule in redemption is that it is not sufficient that a
person offering to redeem manifests his desire to do so. The
statement of intention must be accompanied by an actual and
simultaneous tender of payment. This constitutes the exercise of
the right to repurchase.
xxx xxx xxx
Whether or not respondents were diligent in asserting their
willingness to pay is irrelevant. Redemption within the period

Article 1475 of the Civil Code provides:

The contract of sale is perfected at the moment there is a
meeting of minds upon the thing which is the object of the
contract and upon the price.
From that moment, the parties may reciprocally demand
performance, subject to the provisions of the law governing the
form of contracts.

Page 461 of 505

There was no showing in the complaint that private respondent and petitioner had
already agreed on the purchase price of the foreclosed property. In fact, the
allegations in paragraphs 8 to 10 of the complaint show otherwise, thus:
8. That in a letter of the President of plaintiff dated January 20,
1993, plaintiff amended its first offer and made an offer of
P1,000,000.00 as redemption which offer included a plan of
payment;
9. That between January 20, 1993 to November 1993, plaintiff
exerted earnest efforts in order to finally effect the redemption,
but defendant dilly dallied on the matter.
10. That in a letter of Atty. ORLANDO O. SAMSON, Senior Vice
President of defendant, dated November 5, 1993, there is a turnaround by defendant and is now demanding P5,830,000.00 as
purchase price of the property, instead of the original agreed
redemption;
The complaint does not allege that there was already a meeting of the minds of the
parties.
Based on the foregoing, there is no basis for the order of the CA to allow private
respondent to repurchase the foreclosed property in the amount of P925,448.17 plus
the expenses incurred in the sale of the property, including the necessary and useful
expenses made on the thing sold.
WHEREFORE, the decision of the Court of Appeals dated March 31, 2000 is hereby
REVERSED and SET ASIDE. The Order of the Regional Trial Court of Santiago,
Isabela, Branch 21, dated May 10, 1994 in Civil Case No. 2036 dismissing the
complaint for redemption and specific performance is REINSTATED and AFFIRMED.
SO ORDERED.
||| (Banco Filipino Savings and Mortgage Bank v. Court of Appeals, G.R. No. 143896,
[July 8, 2005], 501 PHIL 372-386)

FIRST DIVISION
[G.R. No. 129644. September 7, 2001.]
CHINA BANKING CORPORATION, petitioner, vs. HON. COURT
OF APPEALS, PAULINO ROXAS CHUA and KIANG MING
CHU CHUA, respondents.

Lim Vigila Alcala Dumlao & Orencia for petitioner.

R.P. Nogales Law Office for private respondents.

Page 462 of 505

SYNOPSIS
A residential land covered by Transfer Certificate of Title No. 410603 in
the name of spouses Alfonso Roxas Chua and Kiang Ming Chu Chua was levied
on execution. The latter filed an action questioning the levy on the ground that the
land was conjugal partnership property. This resulted in a compromise
agreement to the effect that the levy shall be valid only to the extent of the 1/2
share pertaining to Alfonso Roxas Chua. Accordingly, an alias notice of levy was
issued affecting the said 1/2 undivided portion of the property. After the execution
sale, a certificate of sale was executed in favor of Metrobank, the judgment
creditor, and the same was annotated on TCT No. 410603 on December 22,
1987. Meanwhile, China Banking Corporation filed a complaint for sum of money
against Pacific Multi Agro-Industrial Corporation and Alfonso Roxas Chua.
Judgment was rendered ordering defendants to pay Chinabank the aggregate
amount of P2,500,000.00 plus interests, penalties and attorney's fees.
Defendants appealed to the Court of Appeals, but the same was dismissed for
failure to file appellants' brief. Thus, notice of levy on execution was issued on
February 4, 1991 against the right and interest of Alfonso Roxas Chua in TCT No.
410603. The same was later sold at public auction and a certificate of sale was
executed in favor of Chinabank, and inscribed on TCT 410603 on May 4, 1992.
However, Alfonso Roxas Chua previously executed in favor of his son, Paulino
Roxas Chua, an "Assignment of Right to Redeem," pertaining to his right to
redeem the 1/2 undivided portion of the land sold to Metrobank. On January 11,
1989, Paulino redeemed the property from Metrobank, which was annotated on
TCT No. 410603 on March 14, 1989. Paulino and his mother filed a civil case
alleging that Paulino has a prior and better right over Chinabank inasmuch as the
assignment to him of the right to redeem and his redemption of Alfonso's share in
the property were inscribed on the title on an earlier date than the annotation of
the notice of levy and certificate Chinabank. Both the trial court and the Court of
Appeals ruled in favor of private respondents and enjoined Chinabank, the Sheriff
of Manila and the Register of Deeds of San Juan from causing the transfer of
possession, ownership and certificate of title, or otherwise disposing of the
property covered by TCT No. 410603 in favor of Chinabank or any other person.
On March 7, 2000, the Supreme Court issued the now assailed decision
reversing the judgment of the Court of Appeals and rescinding the assignment of
right to redeem executed by Alfonso in favor of Paulino, for having been entered
into in fraud of creditors. Private respondents, thus, filed this motion for
reconsideration of the said decision.

The Supreme Court ruled that private respondents sufficiently

established that the conveyance was made in good faith and for valuable
consideration. Suffice it to state that Metrobank accepted the same and
reconveyed the property to Paulino. At the time Chinabank levied on Alfonso
Roxas Chua's share in TCT No. 410603 on February 4, 1991, the said property
was no longer his. The same had already been acquired by Metrobank and, later,
redeemed by Paulino. Even without the assignment of the right to redeem to
Paulino, the subject 1/2 share in the property would pertain to Metrobank. Either
way, Chinabank would not stand to acquire the same. It is an established doctrine
that a judgment creditor only acquires at an execution sale the identical interest
possessed by the judgment debtor in the property, which is the subject of the
sale. It follows that if, at the time of the execution sale, the judgment debtor had
no more right to or interest in the property because he had already sold it to
another, then the purchaser acquires nothing. Chinabank's objective was to
acquire ownership of the 1/2 undivided portion of the subject property. However,
the acquisition by Chinabank, or Metrobank for that matter, of the said portion will
create an absurd co-ownership between a bank, on the one hand, and a family,
on the other hand, of the latter's family home. The rigid and technical application
of the Rules may be relaxed in order to avoid an absurd result. The Supreme
Court affirmed the decision of the Court of Appeals except the awards of moral
and exemplary damages, which were deleted. Thus, its earlier decision dated
March 7, 2000 was reconsidered and set aside, and the assailed decision of the
Court of Appeals was affirmed with modification.
RESOLUTION
YNARES-SANTIAGO, J p:
Private respondents Paulino Roxas Chua and Kiang Ming Chu Chua have filed before
this Court a Motion for Reconsideration of the Decision dated March 7, 2000, the
dispositive portion of which reads:
WHEREFORE, the petition is GRANTED. The decision of the
Court
of
Appeals
in
CA-G.R.
CV
No.
46735
is REVERSED and SET ASIDE. The permanent injunction
enjoining petitioner, the Sheriff of Manila, the Register of Deeds
of San Juan, their officers, representatives, agents and persons
acting on their behalf from causing the transfer of possession,
ownership and title of the property covered by TCT No. 410603 in
favor of petitioner is LIFTED. The Assignment of Rights to
Redeem dated November 21, 1988 executed by Alfonso Roxas
Page 463 of 505

Chua in favor of Paulino Roxas Chua is ordered RESCINDED.

The levy on execution dated February 4, 1991 and the Certificate
of Sale dated April 30, 1992 in favor of petitioner are DECLARED
VALID against the one-half portion of the subject property.
SO ORDERED.
Briefly, the facts are restated as follows:
By virtue of the adverse decision of the Regional Trial Court of Manila, Branch 46, in
Civil Case No. 82-14134, entitled "Metropolitan Bank and Trust Company v. Pacific
Multi Commercial Corporation and Alfonso Roxas Chua," the residential land covered
by Transfer Certificate of Title No. 410603 in the name of spouses Alfonso Roxas
Chua and Kiang Ming Chu Chua was levied on execution. Kiang Ming Chu Chua filed
an action questioning the levy on the ground that the land was conjugal partnership
property. This resulted in a compromise agreement to the effect that the levy shall be
valid only to the extent of the 1/2 share pertaining to Alfonso Roxas Chua.
Accordingly, an alias notice of levy was issued affecting the said 1/2 undivided portion
of the property. After the execution sale, a certificate of sale was executed in favor of
Metrobank, the judgment creditor, and the same was annotated on TCT No. 410603
on December 22, 1987.
Meanwhile, China Banking Corporation filed a complaint for sum of money against
Pacific Multi Agro-Industrial Corporation and Alfonso Roxas Chua, docketed as Civil
Case No. 85-31257 of the Regional Trial Court of Manila, Branch 29. On November 7,
1985, judgment was rendered ordering defendants to pay Chinabank the aggregate
amount of P2,500,000.00 plus interests, penalties and attorney's fees. Defendants
appealed to the Court of Appeals but the same was dismissed for failure to file
appellants' brief. Thus, notice of levy on execution was issued on February 4, 1991
against the right and interest of Alfonso Roxas Chua in TCT No. 410603. The same
was later sold at public auction and a certificate of sale was executed in favor of
Chinabank, and inscribed on TCT 410603 on May 4, 1992.
Previously, however, on November 21, 1988, Alfonso Roxas Chua executed in favor of
his son, Paulino Roxas Chua, an "Assignment of Right to Redeem," pertaining to his
right to redeem the 1/2 undivided portion of the land sold to Metrobank. On January
11, 1989, Paulino redeemed the property from Metrobank. On March 14, 1989, the
Assignment of Right to Redeem and the redemption by Paulino Roxas Chua of the
property from Metrobank were annotated on TCT No. 410603.
Private respondents Paulino Roxas Chua and Kiang Ming Chu Chua filed Civil Case
No. 63199 before the Regional Trial Court of Pasig, Branch 163, alleging that Paulino

has a prior and better right over Chinabank inasmuch as the assignment to him of the
right to redeem and his redemption of Alfonso's share in the property were inscribed
on the title on an earlier date than the annotation of the notice of levy and certificate of
sale in favor of Chinabank. Both the trial court and the Court of Appeals ruled in favor
of private respondents and enjoined Chinabank, the Sheriff of Manila and the Register
of Deeds of San Juan from causing the transfer of possession, ownership and
certificate of title, or otherwise disposing of the property covered by TCT No. 410603
in favor of Chinabank or any other person.
On March 7, 2000, we rendered the now assailed Decision reversing he judgment of
the Court of Appeals and rescinding the Assignment of Right to Redeem executed by
Alfonso in favor of Paulino Roxas Chua, for having been entered into in fraud of
creditors.
In their Motion for Reconsideration, private respondents raise the following grounds:
2.1. The Decision, with due respect, failed to consider vital facts
showing that the assignment was indubitably:
[a] for valuable consideration; and
[b] In good faith;
which if considered, would result in a complete reversal.
2.2. The dispositive portion of the decision rescinding the
assignment of the right to redeem and validating the levy on
execution dated April 30, 1992 in favor of petitioner, with due
respect, cannot be enforced because:
[a] rescission is late; and
[b] levy on execution was on the wrong property.
2.3. The Petition was invalid and failed to vest the Honorable
Court with the jurisdiction to review the decision by the Court of
Appeals. 1
Petitioner filed its Comment, 2 and private respondents filed their Reply with leave of
Court. 3
Under their first ground, private respondents argue that there was sufficient evidence
to overthrow the presumption that the assignment of the right to redeem was in fraud

Page 464 of 505

of creditors. After a re-examination of the evidence, we agree with private

respondents.
Indeed, Article 1387 of the Civil Code provides that alienations made by a debtor by
gratuitous title are presumed fraudulent when the donor did not reserve sufficient
property to pay his outstanding debts. Likewise, alienations by onerous title are
presumed fraudulent when made by persons against whom some judgment has been
rendered or some writ of attachment has been issued. These, however, are mere
presumptions which are in no way conclusive. The presumption of fraud can be
overthrown by evidence showing that the conveyance was made in good faith and for
a sufficient and valuable consideration. 4
In the case at bar, private respondents sufficiently established that the conveyance
was made in good faith and for valuable consideration. Paulino maintains that he had
no knowledge of his father Alfonso's financial problem with petitioner Chinabank until
he was about to cause the cancellation of TCT No. 410603. 5 Furthermore, he paid
the sum of P100,000.00 to Alfonso for the right to redeem, 6 and paid the redemption
amount of P1,463,375.39 to Metrobank. 7
Expectedly, petitioner refutes these, saying that the amounts paid by Paulino were
grossly disproportionate to the right to redeem the property, which is a residential
house and lot located in North Greenhills, San Juan, Metro Manila. But as correctly
pointed out by private respondents, the amount of P100,000.00 paid by Paulino to
Alfonso was not for the property itself, but merely for the right to redeem the same. As
a matter of fact, Paulino still had to pay Metrobank the redemption price of
P1,463,375.39. Whether or not the latter amount was adequate is beyond the scope
of this inquiry. Suffice it to state that Metrobank accepted the same and reconveyed
the property to Paulino. Moreover, only Alfonso's conjugal share in the property was
affected, and the determination of its value was still subject to liquidation of debts and
charges against the conjugal partnership.
It must be emphasized that the reconsideration of our earlier Decision on this score
does not depart from well-settled doctrines and jurisprudence. Rather, it entailed
merely a re-evaluation of the evidence on record. TEcAHI
Going now to the second ground, private respondent points out that the dispositive
portion of our Decision can not be executed without affecting the rights of Metrobank
inasmuch as Alfonso's right of redemption, which he assigned to Paulino, only had a
lifetime of twelve months from the date of registration of the certificate of sale in favor
of Metrobank. The rescission of the assignment of the right to redeem would have had
the effect of allowing the twelve-month period of redemption to lapse, and thus confer

on Metrobank the right to consolidate ownership over the property and to the
execution of the sheriff's final deed of sale.

The certificate of sale in favor of Metrobank was registered on December 22,

1987. Under the 1964 Rules of Court which were in effect at that time, the judgment
debtor or redemptioner had the right to redeem the property from Metrobank within
twelve months 8 from the date of registration of the certificate of sale. 9 Chinabank
was a redemptioner, being then a creditor with a lien by judgment on the property
sold, subsequent to the judgment under which the property was sold. 10
Upon the expiration of the twelve-month period of redemption and no such
redemption is made, the purchaser shall be entitled to the final deed of sale over the
property sold on execution.
Deed and possession to be given at expiration of redemption
period. By whom executed or given. If no redemption be made
within twelve (12) months after the sale, the purchaser, or his
assignee, is entitled to a conveyance and possession of the
property; or, if so redeemed, whenever sixty (60) days have
elapsed and no other redemption has been made, and notice
thereof given, and the time for redemption has expired, the last
redemptioner, or his assignee, is entitled to the conveyance and
possession; but in all cases the judgment debtor shall have the
entire period of twelve (12) months from the date of the sale to
redeem the property. The deed shall be executed by the officer
making the sale or by his successor in office, and in the latter
case shall have the same validity, as though the officer making
the sale had continued in office and executed it.
Upon the execution and delivery of said deed, the purchaser, or
redemptioner, or his assignee, shall be substituted to and acquire
all the right, title, interest and claim of the judgment debtor to the
property as of the time of the levy, except as against the
judgment debtor in possession, in which case the substitution
shall be effective as of the date of the deed. The possession of
the property shall be given to the purchaser or last redemptioner
by the same officer unless a third party is actually holding the
property adversely to the judgment debtor. 11

Page 465 of 505

Hence, at the time Chinabank levied on Alfonso Roxas Chua's share in TCT No.
410603 on February 4, 1991, the said property was no longer his. The same had
already been acquired by Metrobank and, later, redeemed by Paulino Roxas Chua.
Even without the assignment of the right to redeem to Paulino, the subject 1/2 share
in the property would pertain to Metrobank. Either way, Chinabank would not stand to
acquire the same. It is an established doctrine that a judgment creditor only acquires
at an execution sale the identical interest possessed by the judgment debtor in the
property which is the subject of the sale. It follows that if, at the time of the execution
sale, the judgment debtor had no more right to or interest in the property because he
had already sold it to another, then the purchaser acquires nothing. 12
Otherwise stated, the rescission of the assignment of the right to redeem would have
nullified Paulino's redemption of the property. Thus, Metrobank's inchoate right to the
property would have become complete as of December 1988, when the twelve-month
redemption period expired without the right of redemption having been exercised.
As stated above, Chinabank was a redemptioner that could redeem the property from
Metrobank. It was a judgment creditor with a lien on the property sold subsequent to
the judgment under which the property was sold. Hence, what Chinabank could have
done was to redeem the property ahead of Paulino. In the alternative, it could have
moved for the rescission of the assignment to Paulino of the right to redeem, but
within the twelve-month period of redemption. Beyond that, there would be no more
right of redemption and, thus, no more assignment to rescind.
Assuming that there was no valid assignment of the right to redeem, Paulino, as the
son and compulsory heir of Alfonso, could still redeem his father's 1/2 share in the
property from Metrobank. Under Rule 39, Section 29 (a) of the 1964 Rules of Court,
the judgment debtor or his successor-in-interest may redeem real property sold on
execution. Paulino is included within the term "successor-in-interest."

redeem a property sold on execution, then the son is such a successor-in-interest, as

he has an inchoate right to the property of his father."
Thus, Paulino's redemption on January 11, 1989 from Metrobank of the 1/2 share of
Alfonso Roxas Chua in the property covered by TCT No. 410603, with or without the
execution of the "Assignment of Right to Redeem," was valid. Necessarily, therefore,
the said property no longer belonged to Alfonso Roxas Chua on February 4, 1991,
when notice of levy was made against him pursuant to the judgment in Civil Case No.
85-31257 in favor of Chinabank. Petitioner should have levied on other properties of
Alfonso Roxas Chua.
Finally, it is not disputed that the property covered by TCT No. 410603 is a family
home occupied by Kiang Ming Chu Chua and her children. The levy and execution
sale in favor of Metrobank affected the 1/2 undivided share thereof. In the instant
petition, Chinabank prays that the assignment to Paulino of Alfonso's right to redeem
be declared null and void and that the levy in its favor on the 1/2 undivided portion of
the property be declared valid. Ultimately, petitioner Chinabank's objective is to
acquire ownership of the 1/2 undivided portion of the property. However, the
acquisition by Chinabank, or Metrobank for that matter, of the said portion will create
an absurd co-ownership between a bank, on the one hand, and a family, on the other
hand, of the latter's family home.
The rigid and technical application of the Rules may be relaxed in order to avoid an
absurd result. After all, the Rules of Court mandates that a liberal construction of the
Rules be adopted in order to promote their object and to assist the parties in obtaining
just, speedy and inexpensive determination of every action and proceeding. This rule
of construction is especially useful in the present case where adherence to the letter
of the law would result in absurdity and manifest injustice. 15

The "successor-in-interest" contemplated by the above provisions includes a person

to whom the judgment debtor has transferred his right of redemption, or one to whom
he has conveyed his interests in the property for purposes of redemption, or one who
succeeds to his property by operation of law, or a person with a joint interest in the
property, or his spouse or heirs. A compulsory heir to the judgment debtor qualifies as
a successor-in-interest who can redeem property sold on execution. 13

Therefore, we affirm the decision of the Court of Appeals in CA-G.R. CV No. 46735,
except the awards of moral and exemplary damages, which are deleted. There is no
proof of private respondents' physical or mental suffering as a result of petitioner's
acts. Likewise, petitioner does not appear to have acted in a malevolent or oppressive
manner towards private respondents. However, petitioner should be liable for the
attorney's fees incurred by private respondents, since its act of resisting private
respondents' causes of action compelled private respondents to litigate.

In Director of Lands v. Lagniton, 14 we held that "the right of a son, with respect to the
property of a father or mother, is an inchoate or contingent interest, because upon the
death of the father or the mother or both, he will have a right to inherit said conjugal
property. If any holder of an inchoate interest is a successor-in-interest with right to

WHEREFORE, in view of the foregoing, our Decision dated March 7, 2000 is

RECONSIDERED AND SET ASIDE. The decision of the Court of Appeals in CA-G.R.
CV No. 46735 is AFFIRMED with MODIFICATION. Petitioner is ordered to pay private
respondents the sum of P100,000.00 as attorney's fees and to pay the costs.
Page 466 of 505

Petitioner China Banking Corporation, the Sheriff of Manila, and the Register of
Deeds of San Juan, Metro Manila, their officers, representatives, agents or persons
acting on their behalf, are PERMANENTLY ENJOINED from causing the transfer of
possession, ownership and title, or from otherwise disposing, of the property covered
by Transfer Certificate of Title No. 410603 in favor of petitioner China Banking
Corporation or to any other person acting on its behalf. The Register of Deeds of San
Juan, Metro Manila is ordered to CANCEL all annotations on TCT No. 410603 in favor
of China Banking Corporation pursuant to Civil Case No. 85-31257.
SO ORDERED.
||| (China Banking Corp. v. Court of Appeals, G.R. No. 129644 (Resolution),
[September 7, 2001])

THIRD DIVISION
[G.R. No. 141974. August 9, 2004.]
BPI FAMILY SAVINGS
JANUARIO
ANTONIO
VELOSO, respondents.

BANK, INC., petitioner, vs. SPS.

VELOSO
AND
NATIVIDAD

DECISION

CORONA, J p:
Before us is a petition for review of the decision 1 dated February 14, 2000 of the
Court of Appeals affirming the decision of the Regional Trial Court, Branch 94,
Quezon City, 2 which upheld the validity of the extra-judicial foreclosure proceedings
initiated by Family Bank and Trust Company (Family Bank) on the mortgaged
properties of respondent spouses Januario Antonio Veloso and Natividad Veloso but
allowed the latter to redeem the same properties.
On January 8, 1983, respondent spouses obtained a loan of P1,300,000 from
petitioners predecessor-in-interest Family Bank and Trust Company. To secure
payment of the loan, respondent spouses executed in favor of the bank a deed of

mortgage over three parcels of land, with improvements, registered in their names
under TCT Nos. 272227, 272228 and 272229 of the Registry of Deeds of Quezon
City.
On February 9, 1983, respondents, for value received, executed a promissory note for
P1,300,000. Subsequently, however, respondents defaulted in the monthly
installments due on their loan. When efforts to update the account failed, Family Bank
instituted extra-judicial foreclosure proceedings on the respondents mortgaged
properties.
On July 1, 1985, the properties were sold at public auction with Family Bank as the
highest bidder for P2,782,554.66.
On August 5, 1985, Family Bank assigned all its rights and interests in the foreclosed
properties to petitioner BPI Family Bank, Inc. (BPI).
On August 28, 1985, the sheriffs certificate of sale was registered with the Registry of
Deeds of Quezon City.
On July 24, 1986, respondents, through counsel, wrote BPI offering to redeem the
foreclosed properties for P1,872,935. This was, however, rejected by petitioner.
On August 27, 1986, respondents filed in the RTC of Quezon City, Branch 94, a
complaint for annulment of foreclosure, with consignation and prayer for damages. On
motion of respondents, the trial court, in an order dated August 27, 1986, allowed
respondents to deposit with the clerk of court the sum of P1,500,000 representing the
redemption price. Thereafter, trial on the merits ensued.
Meanwhile, in Branch 76 of the Regional Trial Court of Quezon City, BPI was able to
secure a writ of possession over the foreclosed properties. This prompted
respondents to file with the Court of Appeals a petition for certiorari with preliminary
injunction docketed as CA-G.R. SP No. 22681. On October 8, 1990, the Court of
Appeals resolved to grant respondents motion for preliminary mandatory injunction.
Eventually, however, in a decision promulgated on May 31, 1991, the Court of
Appeals, in CA-G.R. SP No. 22681, resolved the issue of possession in favor of BPI
and accordingly lifted the preliminary mandatory injunction it had earlier issued,
denying altogether respondents petition. From this decision, respondents came to this
Court via a petition for review which was, however, denied in a resolution dated
January 13, 1992. The resolution affirmed, in effect, petitioners right to the
possession of the subject properties.

Page 467 of 505

On December 16, 1992, upon motion of respondents and despite the opposition of
petitioner, Branch 94 ordered the release of P1,400,000 of the consigned amount to
respondents, with the balance of P100,000 to take the place of the injunction bond to
answer for whatever damages petitioner might suffer because of the issuance of the
preliminary injunction (previously issued and later lifted) in favor of respondents.
Finally, on August 18, 1995, after almost a decade of protracted litigation, the trial
court rendered a decision declaring the validity of the extra-judicial foreclosure of the
mortgaged properties of respondents but allowed the redemption of the same at a
redemption price of P2,140,000.
BPI elevated the matter to the Court of Appeals which affirmed the trial courts
decision, with modification:
WHEREFORE, subject to the modification declaring
P2,678,639.80 as the redemption price due the appellant, the
decision appealed from is hereby AFFIRMED in all other
respects. 3
Hence, the instant petition based on the following assigned errors:
I
THE HONORABLE COURT OF APPEALS DECIDED A
QUESTION OF SUBSTANCE IN A WAY NOT IN ACCORD WITH
LAW AND THE APPLICABLE DECISIONS OF THIS
HONORABLE COURT WHEN IT AFFIRMED THE DECISION
OF THE TRIAL COURT AND ALLOWED THE RESPONDENTS
TO REDEEM THE FORECLOSED PROPERTY.
II
ASSUMING FOR THE SAKE OF ARGUMENT, BUT WITHOUT
ADMITTING, THAT THE HONORABLE COURT OF APPEALS
DID NOT ERR IN AFFIRMING THE DECISION OF THE TRIAL
COURT, NEVERTHELESS IT DECIDED A QUESTION OF
SUBSTANCE IN A WAY NOT IN ACCORD WITH LAW AND THE
APPLICABLE DECISIONS OF THIS HONORABLE COURT
WHEN IT FIXED THE REDEMPTION PRICE TO BE PAID BY
RESPONDENTS TO PETITIONER AT ONLY P2,678,639.80 AND
SHALL ONLY EARN 1% PER MONTH UNDER SECTION 28,
RULE 39 OF THE 1997 RULES OF CIVIL PROCEDURE.

The fact is that, at the time of the foreclosure sale on July 1, 1985, respondent
spouses Veloso had already defaulted on their loan to petitioners predecessor-ininterest Family Bank. In a real estate mortgage, when the principal obligation is not
paid when due, the mortgagee has the right to foreclose on the mortgage and to have
the property seized and sold, and to apply the proceeds to the
obligation. 4 Foreclosure is proper if the debtor is in default in the payment of his
obligation. 5 And in this case, the validity of the extra-judicial foreclosure on July 1,
1985 was confirmed by both the trial court and the Court of Appeals. We find no
reason to question it.
The sole question therefore that remains to be resolved is: did respondent spouses
comply with all the requirements for the redemption of the subject properties?
We answer in the negative.
The general rule in redemption is that it is not sufficient that a person offering to
redeem manifests his desire to do so. The statement of intention must be
accompanied by an actual and simultaneous tender of payment. This constitutes the
exercise of the right to repurchase. 6
In several cases 7 decided by the Court where the right to repurchase was held to
have been properly exercised, there was an unequivocal tender of payment for the full
amount of the repurchase price. Otherwise, the offer to redeem is ineffectual. 8 Bona
fide redemption necessarily implies a reasonable and valid tender of the entire
repurchase price, otherwise the rule on the redemption period fixed by law can easily
be circumvented. As explained by this Court in Basbas vs. Entena: 9
. . . the existence of the right of redemption operates to depress
the market value of the land until the period expires, and to
render that period indefinite by permitting the tenant to file a suit
for redemption, with either party unable to foresee when final
judgment will terminate the action, would render nugatory the
period of two years fixed by the statute for making the redemption
and virtually paralyze any efforts of the landowner to realize the
value of his land. No buyer can be expected to acquire it without
any certainty as to the amount for which it may be redeemed, so
that he can recover at least his investment in case of redemption.
In the meantime, the landowners needs and obligations cannot
be met. It is doubtful if any such result was intended by the
statute, absent clear wording to that effect. CIHAED

Page 468 of 505

Consequently, in this case, the offer by respondents on July 24, 1986 to redeem the
foreclosed properties for P1,872,935 and the subsequent consignation in court of
P1,500,000 on August 27, 1986, while made within the period 10 of redemption, was
ineffective since the amount offered and actually consigned not only did not include
the interest but was in fact also way below the P2,782,554.66 paid by the highest
bidder/purchaser of the properties during the auction sale.
In Bodiongan vs. Court of Appeals, 11 we held:
In order to effect a redemption, the judgment debtor must pay the
purchaser the redemption price composed of the following: (1)
the price which the purchaser paid for the property; (2) interest of
1% per month on the purchase price; (3) the amount of any
assessments or taxes which the purchaser may have paid on the
property after the purchase; and (4) interest of 1% per month on
such assessments and taxes . . .
Furthermore, Article 1616 of the Civil Code of the Philippines provides:
The vendor cannot avail himself of the right to repurchase without
returning to the vendee the price of the sale . . .
It is not difficult to understand why the redemption price should either be fully offered
in legal tender or else validly consigned in court. Only by such means can the auction
winner be assured that the offer to redeem is being made in good faith.
The sum of P1,400,000 consigned by respondents in Branch 94 was subsequently
withdrawn by them, leaving only P100,000 to take the place of the injunction bond.
This would have been tantamount to requiring petitioner to accept payment by
installments as there would have necessarily been an indefinite extension of the
redemption period. 12 If a partial payment can bind the winning bidder or purchaser in
an auction sale, by what rule can the payment of the balance be determined?
Petitioner could not be expected to entertain an offer of redemption without any
assurance that respondents could pay the repurchase price immediately. A contrary
rule would leave the buyers at foreclosure sales open to harassment by expectedly
angry debtors and cause unnecessary prolongation of the redemption period,
contrary to the policy of the law.

The disposition of the instant case in the trial court unnecessarily dragged for almost
a decade. Now, it is on its 18th year and still respondents have not tendered the full
redemption price. Nor have they consigned the full amount, if only to prove their
willingness and ability to pay. This would have evidenced their good faith.
The law granted respondents the right of redemption. But in so granting that right, the
law intended that their offer to redeem be valid and effective, accompanied by an
actual tender of the redemption price. Fixing a definite term within which the property
should be redeemed is meant to avoid prolonged economic uncertainty over the
ownership of the thing sold. In the case at bar, the offer was not a legal and effective
exercise of the right of redemption contemplated by law, hence, refusal of the offer by
petitioner was completely justified.
Finally, respondents cannot argue that the law on equity should prevail. Equity applies
only in the absence of, and never against, statutory law or judicial rules of
procedure. 13
WHEREFORE, the appealed decision of the Court of Appeals is hereby REVERSED
and SET ASIDE. The complaint filed by respondents, the spouses Veloso, is hereby
dismissed.
SO ORDERED.
Panganiban and Carpio Morales, JJ ., concur.
Sandoval-Gutierrez, J ., is on leave.
||| (BPI Family Savings Bank v. Spouses Veloso, G.R. No. 141974, [August 9, 2004],
479 PHIL 627-635)

Whether or not respondents were diligent in asserting their willingness to pay is

irrelevant. Redemption within the period allowed by law is not a matter of intent but a
question of payment or valid tender of the full redemption price within said period.
Page 469 of 505

P2,000, without interest, payable within four years from the date of the mortgage
(Exhibit "A"). After the execution of the deed, possession of the mortgaged properties
were turned over to the mortgagee.
The debtor having failed to pay the loan after four years, the mortgagee Diego made
several demands upon him for payment; and as the demands were
unheeded,Diego filed this action for foreclosure of mortgage.
Defendant Fernando's defense was that the true transaction between him and plaintiff
was one of antichresis and not of mortgage; and that as plaintiff had allegedly
received a total of 120 cavans of palay from the properties given as security, which, at
the rate of P10 a cavan, represented a value of P5,200, his debt had already been
paid, with plaintiff still owing him a refund of some P2,720.00.

EN BANC
[G.R. No. L-15128. August 25, 1960.]
CECILIO DIEGO, plaintiff-appellee, vs. SEGUNDO FERNANDO,
defendant-appellant.

Espinosa Law Offices for appellant.

N. L. Dasig and C. L. Francisco for appellee.
DECISION
REYES, J. B. L., J p:
Appeal by defendant Segundo Fernando from the judgment of the Court
of First Instance of Nueva Ecija in its Civil Case No. 1694 for foreclosure of
mortgage. The appeal was originally brought to the Court of Appeals, but was
certified to us by that tribunal because it raises only questions of law.
The facts are not disputed. On May 26, 1950, the defendant
Segundo Fernando executed a deed of mortgage in favor of plaintiff
Cecilio Diego over two parcels of land registered in his name, to secure a loan of

The Court below, however, found that there was nothing in the deed of mortgage
Exhibit "A" to show that it was not a true contract of mortgage, and that the fact that
possession of the mortgaged properties were turned over to the mortgagee did not
alter the transaction; that the parties must have intended that the mortgagee would
collect the fruits of the mortgaged properties as interest on his loan, which agreement
is not uncommon; and that the evidence showed that plaintiff had already received 55
cavans of palay from the properties during the period of his possession. Whereupon,
judgment was rendered for plaintiff in the amount of P2,000, the loan he gave the
defendant, with legal interest from the filing of the action until full payment, plus P500
as attorney's fees and the costs; and in case of default in payment, for the foreclosure
of the mortgage. From this judgment, defendant took the present appeal.
The main issue raised is whether the contract between the parties is one of mortgage
or of antichresis. Appellant, while admitting that the contract Exhibit "A" shows a deed
of mortgage, contends that the admitted fact that the loan was without interest,
coupled with the transfer of the possession of the properties mortgaged to the
mortgagee, reveals that the true transaction between him and appellee was one of
antichresis. As correctly pointed out by appellee and the lower court, however, it is not
an essential requisite of a mortgage that possession of the mortgaged premises be
retained by the mortgagor (Legaspi and Salcedo vs. Celestial, 66 Phil., 372). To be
antichresis, it must be expressly agreed between creditor and debtor that the former,
having been given possession of the properties given as security, is to apply their
fruits to the payment of the interest, if owing, and thereafter to the principal of his
credit (Art. 2132, Civil Code, Barretto vs. Barretto, 37 Phil., 234; Diaz vs. De
Mendezona, 48 Phil., 666); so that if a contract of loan with security does not stipulate
the payment of interest but provides for the delivery to the creditor by the debtor of the
property given as security, in order that the latter may gather its fruits, without stating
Page 470 of 505

that said fruits are to be applied to the payment of interest, if any, and afterwards that
of the principal, the contract is a mortgage and not antichresis
(Legaspi vs. Celestial, supra). The court below, therefore, did not err in holding that
the contract Exhibit "A" is a true mortgage and not an antichresis.
The above conclusion does not mean, however, that appellee, having received the
fruits of the properties mortgaged, will be allowed to appropriate them for himself and
not be required to account for them to the appellant. For the contract of mortgage
Exhibit "A" clearly provides that the loan of P2,000 was "without interest within four (4)
years from date of this instrument"; and there being no evidence to show that the
parties had intended to supersede such stipulation when the possession of the
mortgaged properties were turned over to the appellee by another allowing the latter
to collect, the fruits thereof as interest on the loan, the trial court is not authorized to
infer from this transfer of possession alone that the parties had verbally modified their
written agreement that the loan was to be without interest for four years, and
substituted another giving appellee the right to receive the fruits of the mortgaged
properties as interests.
The true position of appellee herein under his contract with appellant is a "mortgage
in possession" as that term is understood in American equity jurisprudence; that is,
"one who has lawfully acquired actual or constructive possession of the premises
mortgaged to him, standing upon his rights as mortgagee and not claiming under
another title, for the purpose of enforcing his security upon such property or making
its income help to pay his debt" (Diaz vs. De Mendezona, citing 27 Cyc. 1237, 48
Phil., 666). As such mortgagee in possession, his rights and obligations are, as
pointed out by this Court in Macapinlac vs. Gutierrez Repide (43 Phil., 770), similar to
those of an antichretic creditor:
"The respective rights and obligations of the parties to a
contract of antichresis, under the Civil Code, appear to be similar
and in many respects identical with those recognized in the
equity jurisprudence of England and America as incident to the
position of a mortgagee in possession, in reference to which the
following propositions may be taken to be established, namely,
that if the mortgagee acquires possession in any lawful manner,
he is entitled to retain such possession until the indebtedness is
satisfied and the property redeemed; that the non-payment of the
debt within the term agreed does not vest the ownership of the
property in the creditor; that the general duty of the mortgagee in
possession towards the premises is that of the ordinary prudent
owner; that the mortgagee must account for the rents and profits

of the land, or its value for purposes of use and occupation, any
amount thus realized going towards the discharge on the
mortgage debt; that if the mortgagee remains in possession after
the mortgage debt has been satisfied, he becomes a trustee for
the mortgagor as to the excess of the rents and profits over such
debt; and lastly, that the mortgagor can only enforce his rights to
the land by an equitable action for an account and to redeem. (3
Pom. Eq. Jur. secs. 1215-1218)"
Similarly, in Enriquez vs. National Bank, 55 Phil., 414, we ruled that a creditor with a
lien on real property who took possession thereof with the consent of the debtor, held
it as an "antichretic creditor with the right to collect the credit with interest from the
fruits, returning to the antichretic debtor the balance, if any, after deducting the
expenses", because the fact that the debtor consented and asked the creditor to take
charge of managing his property "does not entitle the latter to appropriate to itself the
fruits thereof unless the former has expressly waived his right thereto".
In the present case, the parties having agreed that the loan was to be without interest,
and the appellant not having expressly waived his right to the fruits of the properties
mortgaged during the time they were in appellee's possession, the latter, like an
antichretic creditor, must account for the value of the fruits received by him, and
deduct it from the loan obtained by appellant. According to the findings of the trial
court, appellee had received a net share of 55 cavans of palay out of the mortgaged
properties up to the time he filed the present action; at the rate of P9.00 per cavan (a
rate admitted by the parties), the total value of the fruits received by appellee is
P495.00. Deducting this amount from the loan of P2,000 received by appellant from
appellee, the former has only P1,505.00 left to pay the latter.
Appellant also claims that the lower court erred in ordering him to pay legal interest on
his indebtedness to plaintiff from the filing of the action, since the latter is, up to the
present, still in the possession of the properties mortgaged and still enjoying its fruits.
The court did not err in so holding, since at the time the action was filed and up to the
present, appellant has not discharged his indebtedness to appellee, and the law
allows the latter, in the absence of stipulation as to payment of interest, legal interest
from the time of the debtor's default (Art. 2209, New Civil Code, Art. 1108, old).
However, appellee should be made to account for the fruits he received from the
properties mortgaged from the time of the filing of this action until full payment by
appellant, which fruits should be deducted from the total amount due him from
appellant under this judgment.

Page 471 of 505

Wherefore, the judgment of the court below is modified in the sense that the amount
of appellee's principal recovery is reduced to P1,505, with an obligation on the part of
appellee to render an accounting of all the fruits received by him from the properties in
question from the time of the filing of this action until full payment, or in case of
appellant's failure to pay, until foreclosure of the mortgage thereon, the value of which
fruits shall be deducted from the total amount of his recovery. No costs in this
instance.
Pars, C.J., Bengzon, Padilla, Bautista
Barrera, and Gutierrez David, JJ., concur.

Angelo,

Labrador,

Concepcin,

||| (Diego v. Fernando, G.R. No. L-15128, [August 25, 1960], 109 PHIL 143-148)

FIRST DIVISION
[G.R. No. 103576. August 22, 1996.]
ACME SHOE, RUBBER & PLASTIC CORPORATION and
CHUA PAC, petitioners, vs. HON. COURT OF APPEALS,
PRODUCERS BANK OF THE PHILIPPINES and REGIONAL
SHERIFF OF CALOOCAN CITY, respondents.

Sotto & Sotto Law Offices for petitioners.

R. C. Domingo, Jr., & Associates for Producers Bank of the Philippines.
DECISION
VITUG, J p:
Would it be valid and effective to have a clause in a chattel mortgage that purports to
likewise extend its coverage to obligations yet to be contracted or incurred? This
question is the core issue in the instant petition for review on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe,
Rubber & Plastic Corporation," executed on 27 June 1978, for and in behalf of the
company, a chattel mortgage in favor of private respondent Producers Bank of the
Philippines. The mortgage stood by way of security for petitioner's corporate loan of
Page 472 of 505

three million pesos (P3,000,000.00). A provision in the chattel mortgage agreement

was to this effect
"(c) If the MORTGAGOR, his heirs, executors or administrators
shall well and truly perform the full obligation or obligations
above-stated according to the terms thereof, then this mortgage
shall be null and void. . . .
"In case the MORTGAGOR executes subsequent promissory
note or notes either as a renewal of the former note, as an
extension thereof, or as a new loan, or is given any other kind of
accommodations such as overdrafts, letters of credit,
acceptances and bills of exchange, releases of import shipments
on Trust Receipts, etc., this mortgage shall also stand as security
for the payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new
contract and this mortgage shall have the same force and effect
as if the said promissory note or notes and/or accommodations
were existing on the date thereof. This mortgage shall also stand
as security for said obligations and any and all other obligations
of the MORTGAGOR to the MORTGAGEE of whatever kind and
nature, whether such obligations have been contracted before,
during or after the constitution of this mortgage." 1

In due time, the loan of P3,000,000.00 was paid by petitioner corporation.

Subsequently, in 1981, it obtained from respondent bank additional financial
accommodations totalling P2,700,000.00. 2 These borrowings were on due date also
fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a
loan of one million pesos (P1,000,000.00) covered by four promissory notes for
P250,000.00 each. Due to financial constraints, the loan was not settled at
maturity. 3 Respondent bank thereupon applied for an extrajudicial foreclosure of the
chattel mortgage, hereinbefore cited, with the Sheriff of Caloocan City, prompting
petitioner corporation to forthwith file an action for injunction, with damages and a
prayer for a writ of preliminary injunction, before the Regional Trial Court of Caloocan
City (Civil Case No. C-12081). Ultimately, the court dismissed the complaint and
ordered the foreclosure of the chattel mortgage. It held petitioner corporation bound
by the stipulations, aforequoted, of the chattel mortgage.

Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991,

affirmed, "in all respects," the decision of the court a quo. The motion for
reconsideration was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially denied on 04
March 1992 by this Court for having been insufficient in form and substance. Private
respondent filed a motion to dismiss the petition while petitioner corporation filed a
compliance and an opposition to private respondent's motion to dismiss. The Court
denied petitioner's first motion for reconsideration but granted a second motion for
reconsideration, thereby reinstating the petition and requiring private respondent to
comment thereon. 5
Except in criminal cases where the penalty of reclusion perpetua or death is
imposed 6 which the Court so reviews as a matter of course, an appeal from
judgments of lower courts is not a matter of right but of sound judicial discretion. The
circulars of the Court prescribing technical and other procedural requirements are
meant to weed out unmeritorious petitions that can unnecessarily clog the docket and
needlessly consume the time of the Court. These technical and procedural rules,
however, are intended to help secure, not suppress, substantial justice. A deviation
from the rigid enforcement of the rules may thus be allowed to attain the prime
objective for, after all, the dispensation of justice is the core reason for the existence
of courts. In this instance, once again, the Court is constrained to relax the rules in
order to give way to and uphold the paramount and overriding interest of justice.
Contracts of security are either personal or real. In contracts of personal security,
such as a guaranty or a suretyship, the faithful performance of the obligation by the
principal debtor is secured by the personal commitment of another (the guarantor or
surety). In contracts of real security, such as a pledge, a mortgage or an antichresis,
that fulfillment is secured by an encumbrance of property in pledge, the placing of
movable property in the possession of the creditor; in chattelmortgage, by the
execution of the corresponding deed substantially in the form prescribed by law; in
real estate mortgage, by the execution of a public instrument encumbering the real
property covered thereby; and in antichresis, by a written instrument granting to the
creditor the right to receive the fruits of an immovable property with the obligation to
apply such fruits to the payment of interest, if owing, and thereafter to the principal of
his credit upon the essential condition that if the principal obligation becomes due
and the debtor defaults, then the property encumbered can be alienated for the
payment of the obligation, 7 but that should the obligation be duly paid, then the
contract is automatically extinguished proceeding from the accessory character 8 of
the agreement. As the law so puts it, once the obligation is complied with, then the
contract of security becomes, ipso facto, null and void. 9
Page 473 of 505

While a pledge, real estate mortgage, or antichresis may exceptionally secure afterincurred obligations so long as these future debts are accurately described, 10 a
chattel mortgage, however, can only cover obligations existing at the time the
mortgage is constituted. Although a promise expressed in a chattel mortgage to
include debts that are yet to be contracted can be a binding commitment that can be
compelled upon, the security itself, however, does not come into existence or arise
until after a chattel mortgage agreement covering the newly contracted debt is
executed either by concluding a fresh chattel mortgage or by amending the old
contract conformably with the form prescribed by the Chattel Mortgage
Law. 11 Refusal on the part of the borrower to execute the agreement so as to cover
the after-incurred obligation can constitute an act of default on the part of the borrower
of the financing agreement whereon the promise is written but, of course, the remedy
of foreclosure can only cover the debts extant at the time of constitution and during
the life of the chattel mortgage sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply substantially with the
form prescribed by the Chattel Mortgage Law itself. One of the requisites,
underSection 5 thereof, is an affidavit of good faith. While it is not doubted that if such
an affidavit is not appended to the agreement, the chattel mortgage would still be valid
between the parties (not against third persons acting in good faith 12 ), the fact,
however, that the statute has provided that the parties to the contract must execute an
oath that
". . . (the) mortgage is made for the purpose of securing the
obligation specified in the conditions thereof, and for no other
purpose, and that the same is a just and valid obligation, and one
not entered into for the purpose of fraud." 13
makes it obvious that the debt referred to in the law is a current, not an obligation
that is yet merely contemplated. In the chattel mortgage here involved, the only
obligation specified in the chattel mortgage contract was the P3,000,000.00 loan
which petitioner corporation later fully paid. By virtue of Section 3 of the
ChattelMortgage Law, the payment of the obligation automatically rendered the
chattel mortgage void or terminated. In Belgian Catholic Missionaries, Inc., vs.
Magallanes Press, Inc., et al., 14 the Court said
". . . A mortgage that contains a stipulation in regard to future
advances in the credit will take effect only from the date the same
are made and not from the date of the mortgage." 15
The significance of the ruling to the instant problem would be that since the 1978
chattel mortgage had ceased to exist coincidentally with the full payment of the

P3,000,000.00 loan, 16 there no longer was any chattel mortgage that could cover the
new loans that were concluded thereafter.
We find no merit in petitioner corporation's other prayer that the case should be
remanded to the trial court for a specific finding on the amount of damages it has
sustained "as a result of the unlawful action taken by respondent bank against
it." 17 This prayer is not reflected in its complaint which has merely asked for the
amount of P3,000,000.00 by way of moral damages. 18 In LBC Express, Inc. vs.
Court of Appeals, 19 we have said:
"Moral damages are granted in recompense for physical
suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, moral shock, social humiliation,
and similar injury. A corporation, being an artificial person and
having existence only in legal contemplation, has no feelings, no
emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be
experienced only by one having a nervous system and it flows
from real ills, sorrows, and griefs of life all of which cannot be
suffered by respondent bank as an artificial person." 20
While Chua Pac is included in the case, the complaint, however, clearly states
that he has merely been so named as a party in representation of petitioner
corporation.
Petitioner corporation's counsel could be commended for his zeal in pursuing his
client's cause. It instead turned out to be, however, a source of disappointment for this
Court to read in petitioner's reply to private respondent's comment on the petition his
so-called "One Final Word;" viz:
"In simply quoting in toto the patently erroneous decision of the
trial court, respondent Court of Appeals should be required to
justify its decision which completely disregarded the basic laws
on obligations and contracts, as well as the clear provisions of the
Chattel Mortgage Law and well-settled jurisprudence of this
Honorable Court; that in the event that its explanation is wholly
unacceptable, this Honorable Court should impose appropriate
sanctions on the erring justices. This is one positive step in
ridding our courts of law of incompetent and dishonest
magistrates especially members of a superior court of appellate
jurisdiction." 21 (Emphasis supplied.)
Page 474 of 505

The statement is not called for. The Court invites counsel's attention to the admonition
in Guerrero vs. Villamor; 22 thus:
"(L)awyers . . . should bear in mind their basic duty 'to observe
and maintain the respect due to the courts of justice and judicial
officers and . . . (to) insist on similar conduct by others.' This
respectful attitude towards the court is to be observed, 'not for the
sake of the temporary incumbent of the judicial office, but for the
maintenance of its supreme importance.' And it is 'through a
scrupulous preference for respectful language that a lawyer best
demonstrates his observance of the respect due to the courts
and judicial officers . . ..'" 23

The virtues of humility and of respect and concern for others must still live on even in
an age of materialism.
WHEREFORE, the questioned decisions of the appellate court and the lower court
are set aside without prejudice to the appropriate legal recourse by private respondent
as may still be warranted as an unsecured creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in
dealing with the courts.

EN BANC

SO ORDERED.
||| (Acme Shoe, Rubber & Plastic Corp. v. Court of Appeals, G.R. No. 103576,
[August 22, 1996], 329 PHIL 531-543)

[G.R. No. L-8133. May 18, 1956.]

MANUEL
C. MANARANG and
LUCIA
D. MANARANG, petitioners-appellants, vs.
MACARIO
M. OFILADA, Sheriff of the City of Manila and ERNESTO
ESTEBAN, respondents-appellees.

Macapagal, Punzalan & Yabut for appellants.

Armando T. de Guzman for appellees.
City Fiscal Eugenio Angeles and Assistant City Fiscal Eulogio S.
Serrano for the Sheriff of the City of Manila.
DECISION
LABRADOR, J p:
Page 475 of 505

On September 8, 1951, petitioner Lucia D. Manarang obtained a loan of

P200 from Ernesto Esteban, and to secure its payment she executed a chattel
mortgage over a house of mixed materials erected on a lot on Alvarado Street,
Manila. As Manarang did not pay the loan as agreed upon, Esteban brought an
action against her in the municipal court of Manila for its recovery, alleging that
the loan was secured by a chattel mortgage on her property. Judgment having
been entered in plaintiff's favor, execution was issued against the same property
mortgaged.
Before the property could be sold Manarang offered to pay the sum of
P277, which represented the amount of the judgment of P250, the interest
thereon, the costs, and the sheriff's fees, but the sheriff refused the tender unless
the additional amount of P260 representing the publication of the notice of sale in
two newspapers be paid also. So defendants therein brought this suit to compel
the sheriff to accept the amount of P277 as full payment of the judgment and to
annul the published notice of sale.
It is to be noted that in the complaint filed in the municipal court, a copy
of the chattel mortgage is attached and mention made of its registration, and in
the prayer request is made that the house mortgaged be sold at public auction to
satisfy the debt. It is also important to note that the house mortgaged was levied
upon at plaintiff's request (Exhibit "E").
On the basis of the above facts counsel for Manarang contended in the
court below that the house in question should be considered as personal
property and the publication of the notice of its sale at public auction in execution
considered unnecessary. The Court of First Instance held that although real
property may sometimes be considered as personal property, the sheriff was in
duty bound to cause the publication of the notice of its sale in order to make the
sale valid or to prevent its being declared void or voidable, and he did not,
therefore, err in causing such publication of the notice. So it denied the petition.
There can not be any question that a building of mixed materials may be
the subject of a chattel mortgage, in which case it is considered as between the
parties as personal property. We held so expressly in the cases of
Luna vs.Encarnacion, et al., * 48 Off. Gaz., No. 7, p. 2664; Standard Oil Co. of
New York vs.Jaranillo, 44 Phil., 630; and De Jesus vs. Guan Dee Co., Inc., 72
Phil., 464. The matter depends on the circumstances and the intention of the
parties.
". . . The general principle of law is that a building
permanently fixed to the freehold becomes a part of it, that prima

facie a house is real estate, belonging to the owner of the land on

which it stands, even though it was erected against the will of the
landowner, or without his consent. . . . The general rule is
otherwise, however, where the improvement is made with the
consent of the landowner, and pursuant to an understanding
either expressed or implied that it shall remain personal property.
Nor does the general rule apply to a building which is wrongfully
removed from the land and placed on the land of the person
removing it." (42 Am. Jur. 199-200.)
". . . Among the principal criteria for determining whether
property remains personally or becomes realty are annexation to
the soil, either actual or construction, and the intention of the
parties. . .
"Personal property may retain its character as such
where it is so agreed by the parties interested even though
annexed to the realty, or where it is affixed in the soil to be used
for a particular purpose for a short period and then removed as
soon as it has served its purpose. . . ." (Ibid., 209-210.)
The question now before us, however, is: Does the fact that the parties
entering into a contract regarding a house gave said property the consideration of
personal property in their contract, bind the sheriff in advertising the property's
sale at public auction as personal property? It is to be remembered that in the
case at bar the action was to collect a loan secured by a chattel mortgage on the
house. It is also to be remembered that in practice it is the judgment creditor who
points out to the sheriff the properties that the sheriff is to levy upon in execution,
and the judgment creditor in the case at bar is the party in whose favor the owner
of the house and conveyed it by way of chattel mortgage and, therefore, knew its
consideration as personal property.
These considerations notwithstanding, we hold that the rules on
execution do not allow, and we should not interpret them in such a way as to
allow, the special consideration that parties to a contract may have desired to
impart to real estate, for example, as personal property, when they are not
ordinarily so. Sales on execution affect the public and third persons. The
regulation governing sales on execution are for public officials to follow. The form
of proceedings prescribed for each kind of property is suited to its character, not
to the character which the parties have given to it or desire to give it. When the
rules speak of personal property, property which is ordinarily so considered is
meant; and when real property is spoken of, it means property which is generally
Page 476 of 505

known as real property. The regulations were never intended to suit the
consideration that parties, may have privately given to the property levied upon.
Enforcement of regulations would be difficult were the convenience or agreement
of private parties to determine or govern the nature of the proceedings. We,
therefore, hold that the mere fact that a house was the subject of a chattel
mortgage and was considered as personal property by the parties does not make
said house personal property for purposes of the notice to be given for its sale at
public auction. This ruling is demanded by the need for a definite, orderly and
well- defined regulation for official and public guidance and which would prevent
confusion and misunderstanding.
We, therefore, declare that the house of mixed materials levied upon on
execution, although subject of a contract of chattel mortgage between the owner
and a third person, is real property within the purview of Rule 39, section 16, of
the Rules of Court as it has become a permanent fixture on the land, which is
real property. (42 Am. Jur. 199-200; Leung Yee vs. Strong Machinery Co., 37
Phil., 644; Republic vs. Ceniza, et al., 90 Phil., 544; Ladera, et al. vs. Hodges, et
al., [C. A], 48 Off. Gaz., 5374.).
The judgment appealed from is hereby affirmed, with costs. So ordered.
Paras, C.J., Bengzon, Padilla., Montemayor, Reyes, A., Jugo, Bautista
Angelo, Concepcion, Reyes, J.B.L. and Endencia, JJ., concur.
||| (Manarang v. Ofilada, G.R. No. L-8133, [May 18, 1956], 99 PHIL 108-112)

EN BANC
[G.R. No. L-30173. September 30, 1971.]
GAVINO
A. TUMALAD and
GENEROSA
R. TUMALAD, plaintiffs-appellees, vs. ALBERTA VICENCIO an
d EMILIANO SIMEON, defendants-appellants.

Castelo & Suck for plaintiffs-appellees.

Jose Q. Calingo for defendants-appellants.
DECISION
REYES, J.B.L., J p:
Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-R) for the
reason that only questions of law are involved.
This case was originally commenced by defendants-appellants in the municipal court
of Manila in Civil Case No. 43073, for ejectment. Having lost therein, defendantsappellants appealed to the court a quo (Civil Case No. 30993) which also rendered a
decision against them, the dispositive portion of which follows:
"WHEREFORE, the court hereby renders judgment in favor of the
plaintiffs and against the defendants, ordering the latter to pay
jointly and severally the former a monthly rent of P200.00 on the
house, subject-matter of this action, from March 27, 1956, to
January 14, 1967, with interest at the legal rate from April 18,
1956, the filing of the complaint, until fully paid, plus attorney's
fees in the sum of P300.00 and to pay the costs."
It appears on the records that on 1 September 1955 defendants-appellants executed
a chattel mortgage 1 in favor of plaintiffs-appellees over their house of strong
Page 477 of 505

materials located at No. 550 Int. 3, Quezon Boulevard, Quiapo, Manila, over Lot No.
6-B and 7-B, Block No. 2554, which were being rented from Madrigal & Company, Inc.
The mortgage was registered in the Registry of Deeds of Manila on 2 September
1955. The herein mortgage was executed to guarantee a loan of P4,800.00 received
from plaintiffs-appellees, payable within one year at 12% per annum. The mode of
payment was P150.00 monthly, starting September, 1955, up to July 1956, and the
lump sum of P3,150 was payable on or before August, 1956. It was also agreed that
default in the payment of any of the amortizations would cause the remaining unpaid
balance to become immediately due and payable and
"the Chattel Mortgage will be enforceable in accordance with the
provisions of Special Act No. 3135, and for this purpose, the
Sheriff of the City of Manila or any of his deputies is hereby
empowered and authorized to sell all the Mortgagor's property
after the necessary publication in order to settle the financial
debts of P4,500.00, plus 12% yearly interest, and attorney's
fees. . ." 2
When defendants-appellants defaulted in paying, the mortgage was extrajudicially
foreclosed, and on 27 March 1956, the house was sold at public auction pursuant to
the said contract. As highest bidder, plaintiffs-appellees were issued the
corresponding certificate of sale. 3 Thereafter, on 18 April 1956, plaintiffs-appellees
commenced Civil Case No. 43073 in the municipal court of Manila, praying, among
other things, that the house be vacated and its possession surrendered to them, and
for defendants-appellants to pay rent of P200.00 monthly from 27 March 1956 up to
the time the possession is surrendered. 4 On 21 September 1956, the municipal court
rendered its decision
". . . ordering the defendants to vacate the premises described in
the complaint; ordering further to pay monthly the amount of
P200.00 from March 27, 1956, until such (time that) the premises
is (sic) completely vacated; plus attorney's fees of P100.00 and
the costs of the suit." 5

Defendants-appellants, in their answers in both the municipal court and court a

quo impugned the legality of the chattel mortgage, claiming that they are still the
owners of the house; but they waived the right to introduce evidence, oral or
documentary. Instead, they relied on their memoranda in support of their motion to
dismiss, predicated mainly on the grounds that: (a) the municipal court did not have
jurisdiction to try and decide the case because (1) the issue involved is ownership,
and (2) there was no allegation of prior possession; and (b) failure to prove prior
demand pursuant to Section 2, Rule 72, of the Rules of Courts. 6
During the pendency of the appeal to the Court of First Instance, defendantsappellants failed to deposit the rent for November, 1956 within the first 10 days of
December, 1956 as ordered in the decision of the municipal court. As a result, the
court granted plaintiffs-appellees' motion for execution, and it was actually issued on
24 January 1957. However, the judgment regarding the surrender of possession to
plaintiffs-appellees could not be executed because the subject house had been
already demolished on 14 January 1957 pursuant to the order of the court in a
separate civil case (No. 25816) for ejectment against the present defendants for nonpayment of rentals on the land on which the house was constructed.
The motion of plaintiffs for dismissal of the appeal, execution of the supersedeas bond
and withdrawal of deposited rentals was denied for the reason that the liability therefor
was disclaimed and was still being litigated, and under Section 8, Rule 72, rentals
deposited had to be held until final disposition of the appeal. 7
On 7 October 1957, the appellate court of First Instance rendered its decision, the
dispositive portion of which is quoted earlier. The said decision was appealed by
defendants to the Court of Appeals which, in turn, certified the appeal to this Court.
Plaintiffs-appellees failed to file a brief and this appeal was submitted for decision
without it.

Defendants-appellants submitted numerous assignments of error which can be

condensed into two questions, namely:
(a) Whether the municipal court from which the case originated had jurisdiction to
adjudicate the same;
(b) Whether the defendants are, under the law, legally bound to pay rentals to the
plaintiffs during the period of one (1) year provided by law for the redemption of the
extrajudicially foreclosed house.
We will consider these questions seriatim.
Page 478 of 505

(a) Defendants-appellants mortgagors question the jurisdiction of the municipal court

from which the case originated, and consequently, the appellate jurisdiction of the
Court of First Instance a quo, on the theory that the chattel mortgage is void ab initio;
whence it would follow that the extrajudicial foreclosure, and necessarily the
consequent auction sale, are also void. Thus, the ownership of the house still
remained with defendants-appellants who are entitled to possession and not plaintiffsappellees. Therefore, it is argued by defendants-appellants, the issue of ownership
will have to be adjudicated first in order to determine possession. It is contended
further that ownership being in issue, it is the Court of First Instance which has
jurisdiction and not the municipal court.
Defendants-appellants predicate their theory of nullity of the chattel mortgage on two
grounds, which are: (a) that their signatures on the chattel mortgage were obtained
through fraud, deceit, or trickery; and (b) that the subject matter of the mortgage is a
house of strong materials, and, being an immovable, it can only be the subject of a
real estate mortgage and not a chattel mortgage.
On the charge of fraud, deceit or trickery, the Court of First Instance found
defendants-appellants' contentions as not supported by evidence and accordingly
dismissed the charge, 8 confirming the earlier finding of the municipal court that "the
defense of ownership as well as the allegations of fraud and deceit . . . are mere
allegations."9
It has been held in Supia and Batiaco vs. Quintero and Ayala 10 that "the answer is a
mere statement of the facts which the party filing it expects to prove, but it is not
evidence; 11 and further, that when the question to be determined is one of title, the
Court is given the authority to proceed with the hearing of the cause until this fact is
clearly established. In the case of Sy vs. Dalman, 12 wherein the defendant was also
a successful bidder in an auction sale, it was likewise held by this Court that in
detainer cases the claim of ownership "is a matter of defense and raises an issue of
fact which should be determined from the evidence at the trial." What determines
jurisdiction are the allegations or averments in the complaint and the relief asked
for. 13
Moreover, even granting that the charge is true, fraud or deceit does not render a
contract void ab initio, and can only be a ground for rendering the contract voidable or
annullable pursuant to Article 1390 of the New Civil Code, by a proper action in
court. 14 There is nothing on record to show that the mortgage has been annulled.
Neither is it disclosed that steps were taken to nullify the same. Hence, defendantsappellants' claim of ownership on the basis of a voidable contract which has not been
voided fails.

It is claimed in the alternative by defendants-appellants that even if there was no

fraud, deceit or trickery, the chattel mortgage was still null and void ab initio because
only personal properties can be subject of a chattel mortgage. The rule about the
status of buildings as immovable property is stated in Lopez vs. Orosa, Jr. and Plaza
Theatre, Inc., 15 cited in Associated Insurance Surety Co., Inc. vs. Iya, et al. 16 to the
effect that
". . . it is obvious that the inclusion of the building, separate and
distinct from the land, in the enumeration of what may constitute
real properties (art. 415, New Civil Code) could only mean one
thing that a building is by itself an immovable
property irrespective of whether or not said structure and the land
on which it is adhered to belong to the same owner."
Certain deviations, however, have been allowed for various reasons. In the case of
Manarang and Manarang vs. Ofilada, 17 is Court stated that "it is undeniable that the
parties to a contract may by agreement treat as personal property that which by
,nature would be real property", citing Standard Oil Company of New York vs.
Jaramillo.18 In the latter case, the mortgagor conveyed and transferred to the
mortgagee by way of mortgage "the following described personal property." 19 The
"personal property" consisted of leasehold rights and a building. Again, in the case of
Luna vs. Encarnacion, 20 the subject of the contract designated as Chattel Mortgage
was a house of mixed materials, and this Court held therein that it was a valid Chattel
mortgage because it was so expressly designated and specifically that the property
given as security "is a house of mixed materials, which by its very nature is
considered personal property." In the later case of Navarro vs. Pineda, 21 this Court
stated that
"The view that parties to a deed of chattel mortgage may agree to
consider a house as personal property for the purposes of said
contract, 'is good only insofar as the contracting parties are
concerned. It is based, partly, upon the principle of estoppel'
(Evangelista vs. Alto Surety, No. L-11139, 23 April 1958). In a
case, a mortgaged house built on a rented land was held to be a
personal property, not only because the deed of mortgage
considered it as such, but also because it did not form part of the
land (Evangelista vs. Abad, [CA]; 36 O.G. 2913), for it is now
settled that an object placed on land by one who had only a
temporary right to the same, such as the lessee or usufructuary,
does not become immobilized by attachment (Valdez vs. Central
Altagracia, 222 U.S. 58, cited in Davao Sawmill Co., Inc. vs.
Page 479 of 505

Castillo, et al., 61 Phil. 709). Hence, if a house belonging to a

person stands on a rented land belonging to another person, it
may be mortgaged as a personal property as so stipulated in the
document of mortgage. (Evangelista vs. Abad, supra.) It should
be noted, however that the principle is predicated on statements
by the owner declaring his house to be a chattel, a conduct that
may conceivably estop him from subsequently claiming
otherwise." (Ladera vs. C.N. Hodges, [CA] 48 O.G. 5374). 22
In the contract now before Us, the house on rented land is not only expressly
designated as Chattel Mortgage; it specifically provides that "the mortgagor . . .
voluntarily CEDES, SELLS and TRANSFERS by way of Chattel Mortgage 23 the
property together with its leasehold rights over the lot on which it is constructed and
participation . . ."24 Although there is no specific statement referring to the subject
house as personal property, yet by ceding, selling or transferring a property by way of
chattel mortgage defendants-appellants could only have meant to convey the house
as chattel, or at least, intended to treat the same as such, so that they should not now
be allowed to make an inconsistent stand by claiming otherwise. Moreover, the
subject house stood on a rented lot to which defendants-appellants merely had a
temporary right as lessee, and although this can not in itself alone determine the
status of the property, it does so when combined with other factors to sustain the
interpretation that the parties, particularly the mortgagors, intended to treat the house
as personality. Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. and Plaza Theatre,
Inc. 25 and Leung Yee vs. F. L. Strong Machinery and Williamson, 26 wherein third
persons assailed the validity of the chattel mortgage, 27 it is the defendantsappellants themselves, as debtors-mortgagors, who are attacking the validity of the
chattel mortgage in this case. The doctrine of estoppel therefore applies to the herein
defendants-appellants, having treated the subject house as personalty.
(b) Turning now to the question of possession and rentals of the premises in question.
The Court of First Instance noted in its decision that nearly a year after the foreclosure
sale the mortgaged house had been demolished on 14 and 15 January 1957 by virtue
of a decision obtained by the lessor of the land on which the house stood. For this
reason, the said court limited itself to sentencing the erstwhile mortgagors to pay
plaintiffs a monthly rent of P200.00 from 27 March 1956 (when the chattel mortgage
was foreclosed and the house sold) until 14 January 1957 (when it was torn down by
the Sheriff), plus P300.00 attorney's fees.
Appellants mortgagors question this award, claiming that they were entitled to remain
in possession without any obligation to pay rent during the one year redemption

period after the foreclosure sale, i.e., until 27 March 1957. On this issue, We must rule
for the appellants.
Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act No.
1508. 28 Section 14 of this Act allows the mortgagee to have the property mortgaged
sold at public auction through a public officer in almost the same manner as that
allowed by Act No. 3135, as amended by Act No. 4118, provided that the
requirements of the law relative to notice and registration are complied with. 29 In the
instant case, the parties specifically stipulated that "the chattel mortgage will
be enforceable in accordance with the provisions of Special Act No.
3135 . . ." 30 (Emphasis supplied).
Section 6 of the Act referred to 31 provides that the debtor-mortgagor (defendantsappellants herein) may, at any time within one year from and after the date of the
auction sale, redeem the property sold at the extra judicial foreclosure sale. Section 7
of the same Act 32 allows the purchaser of the property to obtain from the court the
possession during the period of redemption: but the same provision expressly
requires the filing of a petition with the proper Court of First Instance and the
furnishing of a bond. It is only upon filing of the proper motion and the approval of the
corresponding bond that the order for a writ of possession issues as a matter of
course. No discretion is left to the court. 33 In the absence of such a compliance, as
in the instant case, the purchaser can not claim possession during the period of
redemption as a matter of right. In such a case, the governing provision is Section 34,
Rule 39, of the Revised Rules of Court 34 which also applies to properties purchased
in extrajudicial foreclosure proceedings. 35 Construing the said section, this Court
stated in the aforestated case of Reyes vs. Hamada,

"In other words, before the expiration of the 1-year period within
which the judgment-debtor or mortgagor may redeem the
property, the purchaser thereof is not entitled, as a matter of right,
to possession of the same. Thus, while it is true that the Rules of
Court allow the purchaser to receive the rentals if the purchased
property is occupied by tenants, he is, nevertheless, accountable
to the judgment-debtor or mortgagor as the case may be, for the
amount so received and the same will be duly credited against
the redemption price when the said debtor or mortgagor effects
the redemption. Differently stated, the rentals receivable from
tenants, although they may be collected by the purchaser during
the redemption period, do not belong to the latter but still pertain
Page 480 of 505

to the debtor of mortgagor. The rationale for the Rule, it seems, is

to secure for the benefit of the debtor or mortgagor, the payment
of the redemption amount and the consequent return to him of his
properties sold at public auction." (Emphasis supplied)
The Hamada case reiterates the previous ruling in Chan vs. Espe. 36
Since the defendants-appellants were occupying the house at the time of the auction
sale, they are entitled to remain in possession during the period of redemption or
within one year from and after 27 March 1956, the date of the auction sale, and to
collect the rents or profits during the said period.
It will be noted further that in the case at bar the period of redemption had not yet
expired when action was instituted in the court of origin, and that plaintiffs-appellees
did not choose to take possession under Section 7, Act No. 3135, as amended, which
is the law selected by the parties to govern the extrajudicial foreclosure of the chattel
mortgage. Neither was there an allegation to that effect. Since plaintiffs-appellees'
right to possess was not yet born at the filing of the complaint, there could be no
violation or breach thereof. Wherefore, the original complaint stated no cause of
action and was prematurely filed. For this reason, the same should be ordered
dismissed, even if there was no assignment of error to that effect. The Supreme Court
is clothed with ample authority to review palpable errors not assigned as such if it
finds that their consideration is necessary in arriving at a just decision of the case. 37
It follows that the court below erred in requiring the mortgagors to pay rents for the
year following the foreclosure sale, as well as attorney's fees.
FOR THE FOREGOING REASONS, the decision appealed from is reversed and
another one entered, dismissing the complaint. With costs against plaintiffs-appellees.
Concepcion, C .J ., Dizon, Makalintal, Zaldivar, Castro, Fernando, Teehankee,
Barredo, Villamor and Makasiar, JJ ., concur.
||| (Tumalad v. Vicencio, G.R. No. L-30173, [September 30, 1971], 148-B PHIL 625638)
SECOND DIVISION
[G.R. No. L-58469. May 16, 1983.]

Page 481 of 505

MAKATI LEASING and FINANCE CORPORATION, petitioner, vs. WE

AREVER TEXTILE MILLS, INC., and HONORABLE COURT OF
APPEALS, respondents.

respondent to enforce said writ. The lower court reaffirmed its stand upon private
respondent's filing of a further motion for reconsideration.

Loreto C. Baduan for petitioner.

The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by

herein private respondent, set aside the Orders of the lower court and ordered the
return of the drive motor seized by the sheriff pursuant to said Orders, after ruling that
the machinery in suit cannot be the subject of replevin, much less of a chattel
mortgage, because it is a real property pursuant to Article 415 of the new Civil Code,
the same being attached to the ground by means of bolts and the only way to remove
it from respondent's plant would be to drill out or destroy the concrete floor, the reason
why all that the sheriff could do to enforce the writ was to take the main drive motor of
said machinery. The appellate court rejected petitioner's argument that private
respondent is estopped from claiming that the machine is real property by constituting
a chattel mortgage thereon.

Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner.

Jose V. Mancella for respondent..
DECISION
DE CASTRO, J p:
Petition for review on certiorari of the decision of the Court of Appeals (now
Intermediate Appellate Court) promulgation August 27, 1981 in CA-G.R. No. SP12731, setting aside certain Orders later specified herein, of Judge Ricardo J.
Francisco, as Presiding Judge of the Court of First Instance of Rizal, Branch VI,
issued in Civil Case No. 36040, as well as the resolution dated September 22, 1981 of
the said appellate court, denying petitioner's motion for reconsideration.
It appears that in order to obtain financial accommodations from herein
petitioner Makati Leasing and Finance Corporation, the private respondent Wearever
Textile Mills, Inc., discounted and assigned several receivables with the former under
a Receivable Purchase Agreement. To secure the collection of the receivables
assigned, private respondent executed a Chattel Mortgage over certain raw materials
inventory as well as a machinery described as an Artos Aero Dryer Stentering Range.
Upon private respondent's default, petitioner filed a petition for extrajudicial
foreclosure of the properties mortgage to it. However, the Deputy Sheriff assigned to
implement the foreclosure failed to gain entry into private respondent's premises and
was not able to effect the seizure of the aforedescribed machinery. Petitioner
thereafter filed a complaint for judicial foreclosure with the Court of First Instance of
Rizal, Branch VI, docketed as Civil Case No. 36040, the case before the lower
court.LexLib
Acting on petitioner's application for replevin, the lower court issued a writ of seizure,
the enforcement of which was however subsequently restrained upon private
respondent's filing of a motion for reconsideration. After several incidents, the lower
court finally issued on February 11, 1981, an order lifting the restraining order for the
enforcement of the writ of seizure and an order to break open the premises of private

On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of
private respondent and removed the main drive motor of the subject machinery.

A motion for reconsideration of this decision of the Court of Appeals having been
denied, petitioner has brought the case to this Court for review by writ of certiorari. It
is contended by private respondent, however, that the instant petition was rendered
moot and academic by petitioner's act of returning the subject motor drive of
respondent's machinery after the Court of Appeals' decision was promulgated.
The contention of private respondent is without merit. When petitioner returned the
subject motor drive, it made itself' unequivocably clear that said action was without
prejudice to a motion for reconsideration of the Court of Appeals decision, as shown
by the receipt duly signed by respondent's representative. 1 Considering that
petitioner has reserved its right to question the propriety of the Court of Appeals'
decision, the contention of private respondent that this petition has been mooted by
such return may not be sustained.
The next and the more crucial question to be resolved in this petition is whether the
machinery in suit is real or personal property from the point of view of the parties, with
petitioner arguing that it is a personalty, while the respondent claiming the contrary,
and was sustained by the appellate court, which accordingly held that the chattel
mortgage constituted thereon is null and void, as contended by said respondent. LLpr
A similar, if not identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where
this Court, speaking through Justice J.B.L. Reyes, ruled:

Page 482 of 505

"Although there is no specific statement referring to the subject

house as personal property, yet by ceding, selling or transferring
a property by way of chattel mortgage defendants-appellants
could only have meant to convey the house as chattel, or at least,
intended to treat the same as such, so that they should not now
be allowed to make an inconsistent stand by claiming otherwise.
Moreover, the subject house stood on a rented lot to which
defendants-appellants merely had a temporary right as lessee,
and although this can not in itself alone determine the status of
the property, it does so when combined with other factors to
sustain the interpretation that the parties, particularly the
mortgagors, intended to treat the house as Personalty. Finally,
unlike in the Iya cases, Lopez vs. Orosa, Jr. & Plaza Theatre, Inc.
& Leung Yee vs. F.L. Strong Machinery & Williamson, wherein
third persons assailed the validity of the chattel mortgage, it is the
defendants-appellants themselves, as debtors mortgagors, who
are attacking the validity of the chattel mortgage in this case. The
doctrine of estoppel therefore applies to the herein defendants
appellants, having treated the subject house as personalty."

Examining the records of the instant case, We find no logical justification to exclude
the rule out, as the appellate court did, the present case from the application of the
abovequoted pronouncement. If a house of strong materials, like what was involved in
the above Tumalad case, may be considered as personal property for purposes of
executing a chattel mortgage thereon as long as the parties to the contract so agree
and no innocent third party will be prejudiced thereby, there is absolutely no reason
why a machinery, which is movable in its nature and becomes immobilized only by
destination or purpose, may not be likewise treated as such. This is really because
one who has so agreed is estopped from denying the existence of the chattel
mortgage.
In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the
Court of Appeals lays stress on the fact that the house involved therein was built on a
land that did not belong to the owner of such house. But the law makes no distinction
with respect to the ownership of the land on which the house is built and We should
not lay down distinctions not contemplated by law.
It must be pointed out that the characterization of the subject machinery as chattel by
the private respondent is indicative of intention and impresses upon the property the

character determined by the parties. As stated in Standard Oil Co. of New York v.
Jaramillo, 44 Phil. 630, it is undeniable that the parties to a contract may by
agreement treat as personal property that which by nature would be real property, as
long as no interest of third parties would be prejudiced thereby.
Private respondent contends that estoppel cannot apply against it because it had
never represented nor agreed that the machinery in suit be considered as personal
property but was merely required and dictated on by herein petitioner to sign a printed
form of chattel mortgage which was in a blank form at the time of signing. This
contention lacks persuasiveness. As aptly pointed out by petitioner and not denied by
the respondent, the status of the subject machinery as movable or immovable was
never placed in issue before the lower court and the Court of Appeals except in a
supplemental memorandum in support of the petition filed in the appellate court.
Moreover, even granting that the charge is true, such fact alone does not render a
contract void ab initio, but can only be a ground for rendering said contract voidable,
or annullable pursuant to Article 1390 of the new Civil Code, by a proper action in
court. There is nothing on record to show that the mortgage has been annulled.
Neither is it disclosed that steps were taken to nullify the same. On the other hand, as
pointed out by petitioner and again not refuted by respondent, the latter has
indubitably benefited from said contract. Equity dictates that one should not benefit at
the expense of another. Private respondent could not now therefore, be allowed to
impugn the efficacy of the chattel mortgage after it has benefited therefrom. LexLib
From what has been said above, the error of the appellate court in ruling that the
questioned machinery is real, not personal property, becomes very apparent.
Moreover, the case of Machinery and Engineering Supplies, Inc. v. CA, 96 Phil. 70,
heavily relied upon by said court is not applicable to the case at bar, the nature of the
machinery and equipment involved therein as real properties never having been
disputed nor in issue, and they were not the subject of a Chattel Mortgage.
Undoubtedly, the Tumalad case bears more nearly perfect parity with the instant case
to be the more controlling jurisprudential authority.
WHEREFORE, the questioned decision and resolution of the Court of Appeals are
hereby reversed and set aside, and the Orders of the lower court are hereby
reinstated, with costs against the private respondent.
SO ORDERED.
Makasiar (Chairman), Aquino, Concepcion, Jr., Guerrero and Escolin, JJ., concur.
Abad Santos, J., concurs in the result.
Page 483 of 505

||| (Makati Leasing and Finance Corp. v. Wearever Textile Mills, Inc., G.R. No. L58469, [May 16, 1983], 207 PHIL 262-269)

URBANO JACA and

BONIFACIO JACA, petitioners, vs. DAVAO LUMBER COMPAN
Y and HONORABLE MANASES REYES, as Judge of the
Court of First Instance of Davao, respondents.

Victorio S. Advincula for petitioners.

Ambrosio Padilla, Reynaldo T. Mempin & Cesar E. Nitorreda for
respondent Davao Lumber Co.

SYNOPSIS

FIRST DIVISION
[G.R. No. L-25771. March 29, 1982.]

Petitioners filed with the Court of First Instance a Complaint for Accounting, Return of
Price Differentials and Damages against respondent Davao Lumber Company. In its
answer and counterclaim, respondent company alleged, among others, that
petitioners Urbano Jaca and Bonifacio Jaca were the ones indebted to it in the sum of
P756,236.52 and P91,651.97, respectively; that on January 24, 1961,
Urbano Jaca executed a chattel mortgage in favor of respondent company to secure
the payment of any and all obligations contracted by them in favor of said company
covering several chattels valued at P532,000.00; that said obligation of
Urbano Jaca totalling P756,236.52 is overdue and unpaid despite repeated formal
demands for settlement thereof; and that the action brought by petitioners is purely
baseless and malicious for which they should be required to pay respondent company
damages and attorney's fees amounting to at least P20,000.00. The trial court
dismissed the complaint and ordered petitioners to pay the amounts claimed by
respondent company. Later, upon motion of respondent company, respondent judge,
in an order, granted execution pending appeal for the following reasons: (a) First, the
consistent refusal of petitioner to deliver the mortgaged chattels to the receiver; (b)
Second, the fact that Urbano Jaca violated Article 319 of the Revised Penal Code by
selling some of the mortgaged properties; and (c) Third, the fact that petitioners have
no properties and assets to satisfy the judgment. Reconsideration having been
denied, petitioners brought this petition. In its answer, respondent lumber company
contends that petitioners, having availed of the remedy of appeal, are barred from
filing a petition for certiorari.
On review, the Supreme Court held: (1) that the reasons stated in the order of
execution pending appeal are not well-founded because (a) the chattel mortgage is
void because it provides that the security stated therein is for the payment of any and
Page 484 of 505

all obligations herein before contracted and which may hereafter be contracted by the
mortgagor in favor of the mortgagee;(b) the deed of mortgage being void, petitioner
Urbano Jaca could not have violated Article 319 of the Revised Penal Code; and (c)
the basis of respondent judge's conclusion that petitioners do not have sufficient
assets is an unsubstantiated allegation in the motion for execution pending appeal;(2)
that since the decision in the trial court requires petitioners to pay an enormous
amount of money, it is clear that premature execution of said decision will result in
irreparable damage to petitioners as the collection of said amount may be enforced
through the seizure of the money and/or sale of properties used in the logging
business of petitioners; (3) that if the judgment is executed now, and on appeal the
same is reversed, although there are provisions for restitution, damages incurred by
petitioners can not be fully compensated; (4) that the appeal of petitioners appears to
be meritorious, hence the fear of respondent company that the judgment of the trial
court might not be satisfied if not executed at once is not well-founded; and (5) that
the availability of the ordinary course of appeal does not constitute sufficient ground to
prevent a party from making use of the extra-ordinary remedy of certiorari where the
appeal is not an adequate remedy or equally beneficial, speedy and sufficient.
Petition granted. Assailed orders of the lower court, nullified and set aside.
DECISION
FERNANDEZ, J p:
This is a petition for certiorari with a prayer for a writ of preliminary injunction filed by
Urbano Jaca and Bonifacio Jaca against the Davao Lumber Company and Honorable
Manases Reyes as Judge of the Court of First Instance of Davao seeking the
following relief:
"WHEREFORE, petitioners pray
"1. That a writ of Preliminary Injunction be immediately issued
restraining the respondent Judge from carrying out or enforcing
the Orders (Annexes "Z" and "FF") complained of pending the
hearing of the merits of the instant petition;

"2. After due hearing, that this Honorable Court annuls and sets
aside the complained Orders (Annexes "Z" and "FF");
"Petitioners further pray for all other reliefs which are just and
equitable in the premises.

"Davao City, Philippines, February 5, 1966." 1

In November, 1963, Urbano Jaca and Bonifacio Jaca filed with the Court of First
Instance of Davao a complaint for Accounting, Return of Price Differentials and
Damages against the Davao Lumber Company. The case was docketed as Civil Case
No. 4189.
The complaint alleges that the plaintiff Urbano Jaca has been, and still is, a licensee
of a logging concession located in the City of Davao, and together with his co-plaintiff,
Bonifacio Jaca, engaged in the logging business of producing timber and logs for
export and/or domestic purposes; that the defendant is a business corporation with
which plaintiffs had business dealings covering the sale and/or exportation of their
logs; that sometime in 1954, the herein parties-litigants entered into an agreement
whereby plaintiffs may secure, by way of advances, either cash or materials,
foodstuffs, and or equipment from the defendant corporation; that the payment of
such account was to be made either in cash and/or by plaintiff's turning over all the
logs that they produce in the aforesaid concession to the defendant, and in the latter
case, the current prices, either export or domestic, of the logs at the time of their
delivery was to be considered; that while the aforesaid business relationship between
the parties was subsisting, defendant made plaintiff Urbano Jaca execute in its favor a
chattel mortgage, a copy of which instrument, however, plaintiffs were never furnished
but that as far as they can recollect the primary conditions of such chattel mortgage
were that plaintiffs would turn over to defendant corporation all the logs they may
produce from the aforesaid concession the same to be priced either as export or
domestic and their value to be applied by defendant to, and be credited for, the
account of plaintiff's indebtedness, and further that in case of need, plaintiffs may
secure, by way of advances, either cash, foodstuffs, materials or equipment, under an
"open credit account"; that under the aforementioned "open credit account"
relationship between the plaintiffs and defendant, orders were secured by plaintiffs, by
way of advances, from the defendant, this to be paid by them with plaintiffs' production
from their concession, liquidating those old accounts and keeping all accounts
current; that in pursuance to the agreement, as aforestated, plaintiff
Urbano Jaca executed assignments of letters of credit in favor of the defendant, in
order that the latter may be able to use, as defendant corporation did in fact use, the
said letters of credit for bank negotiations of the former in the exportation of logs; that
the plaintiffs and defendant had this business relationship, as aforementioned; from
1954 up to sometime in August, 1963; that during this whole period of time, the
plaintiffs had been faithfully delivering all their log production to the defendant for
export or domestic purposes; that before the filing of this complaint, the plaintiff made
repeated demands on the defendant for a formal accounting of their business
Page 485 of 505

relationship from 1954 up to August, 1963, but that the defendant failed and refused,
and still fails and refuses, to effect such formal accounting, asserting that it had no
time as yet to examine into all the details of the accounting; that sometime on October
30, 1963, much to their surprise, plaintiffs received letters of demand from the
defendant in which they were requested to pay their accounts in favor of defendant,
which according to the latter had long been overdue; (Copies of such letters are
hereto attached marked as Annexes "A" and "B", and made integral parts of this
complaint) that plaintiffs are no longer indebted to the defendant, and as a matter of
fact it is their belief that, if a formal accounting be made, there would still appear a
claim in their favor in the amount of P250,000.00 more or less, representing the price
differentials of logs which they delivered to the defendant from 1954 up to August,
1963; and that further, there was a deliberate fraud practised by the defendant on
them, especially in defendant's under grading and/or reclassification of logs delivered
to it by plaintiffs; that further, there were many errors committed in the monthly
statements submitted to the plaintiffs, arising from the fact that there were charges of
cash, equipments, materials and foodstuffs in said statements never ordered and/or
received by plaintiffs; and still further that the proceeds of the letter of credit were not
fully applied and/or credited to the account of plaintiffs; that defendant has up to the
present denied the plaintiffs the benefits of a formal accounting and inasmuch as the
invoices, receipts, vouchers, requisition slips and other pertinent papers and
document of their business transactions are in the possession of defendant, it is
difficult for plaintiffs to ascertain with accuracy the ledger balance between the
parties, unless a detailed examination of the matter is had; that plaintiffs have thereby
been constrained to file this case in Court in order to compel defendant to have a
formal accounting between them, and that it is the desire of plaintiffs that pending the
formal hearing of this case, three commissioners, constituting accountants be
judicially appointed for the purpose of examining all the books, pertinent papers and
documents and all other data in relation with their business transaction; that in order
to protect their interest and to litigate this case, the plaintiffs were compelled to secure
and retain the services of attorneys, and that they have thereby suffered damages in
the sum of Twenty Thousand Pesos (P20,000.00) by way of attorney's fees. 2
In December, 1963, the Davao Lumber Company filed its Answer with Affirmative
Defenses and Counterclaim. 3
In its counterclaim, the Davao Lumber Company alleged that Plaintiffs
Urbano Jaca and Bonifacio Jaca are the ones indebted to the defendant in the sum of
P756,236.52 and P91,651.97, respectively; that on January 24, 1961, the plaintiff
Urbano Jaca executed a chattel mortgage in favor of the defendant to secure the
payment of any and all obligations contracted by him in favor of the defendant

covering several chattels valued at P532,000.00; that said obligation of

Urbano Jaca totalling P756,236.52 is overdue and unpaid despite repeated formal
demands for settlement thereof made by defendant; that the action brought by the
plaintiffs is purely baseless and malicious for which the plaintiffs should be required to
pay defendant damages and attorney's fees amounting to at least P20,000.00. 4
In June, 1965, the respondent Judge rendered a decision the dispositive portion of
which reads:
"CONSIDERING THE FOREGOING, judgment is hereby
rendered in favor of defendant and against the plaintiff, ordering
that:
"1. The complaint for accounting, return of price differentials and
damages
filed
by
plaintiffs
Urbano Jaca and
Bonifacio Jaca versus defendant Davao LumberCompany
is
dismissed, as it is hereby dismissed;
"2. Ordering Urbano Jaca to pay defendant the amount of
P756,236.52 with legal interest from the date of the filing of the
counterclaim;
"3. Ordering plaintiff Bonifacio Jaca to pay defendant the amount
of P91,651.00 with legal interest;
"4. Ordering that the chattel mortgage executed by
Urbano Jaca in favor of defendant Exhibit "3", be foreclosed as it
is hereby foreclosed;
"5. Ordering plaintiffs to pay jointly and severally P20,000.00 as
attorney's fees in favor of defendant.
"6. With cost against plaintiffs.
"SO ORDERED.
"Given at Davao City, on this 11th day of June, 1965." 5
In September, 1965, the Davao Lumber Company filed a motion for execution pending
appeal on the following grounds:
"3. There are good reasons to authorize an order of execution
pending appeal pursuant to Rule 39, Section 2 of the Rules of
Court, which provides:
Page 486 of 505

"SEC. 2. Execution pending appeal. On motion of the

prevailing party with notice to the adverse party the court may, in
its discretion, order execution to issue before the expiration of the
time to appeal, upon good reasons to be stated in a special order.
If a record on appeal is filed thereafter, the motion and the special
order shall be included therein.
"(a) In this same civil case, the court issued an Order dated
November 17, 1964 directing the plaintiffs 'to deliver to the
receiver all the properties, chattels and equipment covered by the
Chattel Mortgage, the delivery to be made within thirty (30) days,'
but plaintiffs did not comply with said Order of November 17,
1964.
"(b) Defendant's counsel filed a 'Motion to Implement Order
ordering Urbano Jaca to deliver Chattels to Receiver' dated July
28, 1965, but up to this date, plaintiffs have not complied with the
said Order.
"(c) That there are various reports from the receiver, one of them
dated April 19, 1965, stating that the Receiver has not taken
custody of the mortgaged chattels due to the refusal or inability of
mortgagor Urbano Jaca to deliver the same to him.
"(d) Despite the long lapse of time from the Order of November
17, 1964, the court in its Order of September 1, 1965, directed
said mortgagor Urbano Jaca to comply forthwith with the Order
dated November 17, 1964 'fifteen (15) days upon receipt of this
Order,' but up to this date there has been consistent refusal or
failure to comply with said order of delivery.
"(2) Another good reason for execution pending appeal (Rule 39,
Section 2) is the fact that plaintiff Urbana Jaca, the mortgagor in
the deed of chattel mortgage dated January 24, 1961, has
violated Article 319 of the Revised Penal Code, for he has sold
some of the mortgaged properties to third persons, particularly, a
wrecker, to Teodoro M. Alagon of Davao City on February 12,
1962 for P10,000.00. A copy of the letter-complaint addressed by
defendant's counsel to the City Fiscal of Davao, dated February
5, 1964 is attached hereto and made an integral part of this
Motion as Annex "A".

"(3) Moreover, plaintiffs have not only failed to comply with the
Order of the Honorable Court for the delivery of the properties
under receivership to the Receiver (par. 3 of this Motion) and in
fact has violated the Chattel Mortgage contract (Par. 4 of this
Motion), but plaintiffs have no properties or assets with which to
satisfy the judgment of this Honorable Court, which amounts to
principal items of P756,326.52, P91,651.00 and P20,000.00, or a
total of P867,887.52.
"(4) Obviously, the appeal interposed by the plaintiffs is
to delay the enforcement and/or execution of the decision
rendered by this Honorable Court, so that when the Decision
correctly rendered by this Honorable Court should be affirmed on
appeal, the judgment will become nugatory." 6
The respondent judge granted the motion for execution pending appeal in an order
dated November 29, 1965. 7
Urbano Jaca and Bonifacio Jaca filed a motion for reconsideration of the order
granting execution pending appeal in December, 1965, 8 but the same was denied in
an order dated January 10, 1966. 9
Petitioners Urbano Jaca and Bonifacio Jaca contend that the respondent Judge acted
in excess of jurisdiction and/or with grave abuse of discretion in issuing the order
granting execution pending appeal and the order denying the motion for
reconsideration of the order granting execution pending appeal because said orders
were issued in complete disregard of the applicable provisions of the Rules of Court,
the laws, and the settled decisions of the Honorable Supreme Court.
Petitioners assail the order granting execution pending appeal and the order denying
the motion for execution pending appeal on the following grounds:
"1) granting that execution pending appeal will issue in a
foreclosure proceedings
"the respondent Judge acted in excess of
jurisdiction when he considered, over the objection of
petitioners, in the motion for reconsideration of the
Order granting premature execution (Annex "AA") the
alleged sale by Florentina Perez, wife of petitioner,
Urbano Jaca, of the two (2) chevrolet trucks which were
Page 487 of 505

not part of the mortgaged chattels to Atty. Raul

Nengasca as a reason for execution pending appeal in
his Order (Annex "FF") denying the motion for
reconsideration, since this matter is not among the
grounds stated in the motion for execution pending
appeal (Annex "X"), neither has it been brought out
during the hearing of said motion, nor is it one of the
reasons stated in the Order of execution pending appeal
(Annex "Z") which is the Order sought to be
reconsidered and it is a cardinal rule in pleadings that a
motion should state the grounds upon which it is based
(Section 3, Rule 15 of the Rules of Court) and the order
sought to be obtained and that no other grounds can be
entertained, passed upon and considered by the court
over the objection of the adverse party;
"2) the respondent Judge acted with grave abuse of discretion
equivalent to lack of jurisdiction in finding that there exists special
or good reasons for execution pending appeal because
discretionary execution under Section 2, Rule 39 of the Rules of
Court will only issue if there are superior circumstances
demanding urgency which outweigh the injury or damage that the
losing party may suffer upon securing a reversal of the judgment
on appeal, considering the merits of his appeal (Moran, Com. on
the Rules of Court Vol. 2, Part II, 1963 ed., p. 239 and p. 242,
citing
Aguilos vs. Barrios,
et
al.,
72
Phil.
285;
Ledesma vs. Teodoro, 52 O.G. 784; De Leon, et al. vs.Soriano, et
al., L-7684, Sept. 17, 1954; City of Bacolod vs. Enriquez, 55 O.G.
p. 10545), and in the instant case, the reasons ultimately relied
upon by the respondent Judge in granting execution pending
appeal as stated in the Order (Annex "FF"), denying petitioner's
motion for reconsideration of the Order granting execution, are
not such superior circumstances demanding urgency of execution
because:
(a) "the
first
reason
that
petitioner
Urbano Jaca sold a wrecker to Teodoro M. Alagon is
alleged to have been made yet on February 12, 1962, or
about over one and a half years prior to the filing of the
instant case on November 22, 1963, and such sale

would not show a fraudulent design on the part of

petitioner Urbano Jaca to defeat the judgment against
him by disposing of the mortgaged chattels and thus
would demand urgency of execution of the judgment;
(b) "the second reason regarding the sale of
the two chevrolet trucks (not alleged to be a part of the
mortgaged
chattels
to
the
respondent DavaoLumber Company) to Atty. Raul
Nengasca does not refer to the property of either of the
petitioners, neither does it refer to a sale made by
anyone of them; rather, it refers to a sale made by
Florentina Perez (wife of petitioner Urbano Jaca), who is
not a party to the action, regarding her own property;
(c) "the third and last reason that the Orders of
the court directing petitioner Urbano Jaca to deliver all
the mortgaged chattels to the receiver are valid and
must be complied with could not even be considered
any reason at all for immediate execution, as it does not
supply at all any element of a superior circumstance
requiring urgency of execution for there is, in fact, no
legal connection whatsoever in the validity of such
Orders and their compliance with the propriety of an
immediate execution of the judgment pending appeal;
"furthermore, the appeal of petitioners are based on
good grounds and could never be said to be intended
merely for delay, and that the amount involved in the
judgment is huge;
"3. That there are, in fact, good reasons for not allowing
execution pending appeal considering
(1) that the amount involved in the judgment is
huge;
(2) that the petitioners have challenged the
Counterclaim, under which the judgment sought to be
executed is rendered, for lack of cause of action;

Page 488 of 505

(3) that the petitioners have challenged the

chattel mortgage, under which the judgment of
foreclosure has been rendered, as null and void ab
initioand that no cause of action can arise therefrom;
(4) that the petitioners have challenged the
Commissioner's Report to be null and void which is the
primary, if not in fact the sole, evidence of said
respondent on its Counterclaim and upon which the
judgment sought to be executed is based;
"4) no execution pending appeal, in fact, can issue on foreclosure
proceedings because the ninety-day period provided in Section 2,
Rule 68 of the Rules of Court is a substantive right granted to the
mortgagor-debtor which may not be omitted and that upon taking
an appeal, said period is suspended and is not revived until the
judgment is affirmed by the appellate court and the case returned
to the trial court, and in the instant case, the respondent judge
acted in excess of jurisdiction in allowing execution pending
appeal when the Counterclaim under which the judgment sought
to be executed is rendered, is for a foreclosure of chattel
mortgage and that petitioners have taken an appeal to the
judgment rendered against them . . .;
"(5) granting arguendo, that the foreclosure proceedings is only
against petitioner Urbano Jaca, as mortgagor, but the action
against petitioner Bonifacio Jaca is for a collection of a sum of
money, the respondent Judge acted with grave abuse of
discretion equivalent to lack of jurisdiction in allowing execution
pending appeal as against said petitioner Bonifacio Jaca because
in so far as said petitioner is concerned there is no showing of
any special or good reasons, in fact, there is no showing of any
reason at all anywhere in the records of the case, including the
Orders complained of, as a basis for which discretionary
execution may be issued against him." 10
The private respondent maintains that the respondent judge acted in full compliance
with the Rules of Court, the law and applicable decisions of this Honorable Court
because:

"1) The present case is an action for accounting and not a

foreclosure proceeding. Therefore, execution pending appeal can
be issued pursuant to Sec. 2 of Rule 39, Rules of Court. This
provision of the Rules of Court applies in the present case for
there are good and valid reasons for the issuance of a writ of
execution pending appeal as stated in respondents' Motion
(Annex "X"). Moreover, petitioners have no properties or assets
with which to satisfy the judgment of P867,887.52 plus other
items stated in the Decision. The respondent Judge, therefore,
was correct in ordering the issuance of a writ of execution (Annex
"1"). Furthermore, to stay execution, petitioners should have filed
a supersedeas bond in accordance with Sec. 3 of Rule 3.
"a) Respondent denies the erroneous and
gratuitous conclusion of alleged 'excess of jurisdiction'
as alleged in par. 44(a) of the Petition. It further denies
the other misleading statements alleged therein, the
truth of the matter being the grounds enumerated in the
Motion for Execution Pending Appeal (Annex "X") and
the reasons mentioned in the Order of (Annex "Z")
granting said motion.
"b) Respondent
denies
the
erroneous
conclusion that the respondent Judge acted with grave
abuse of discretion, equivalent to lack of jurisdiction as
alleged in par. 44(b) of the Petition, and states that the
respondent Judge correctly acted in accordance with
Sec. 2, Rule 39 of the Rules of Court. It further denies
the misleading statement therein that the reasons
ultimately relied upon by the respondent Judge are
those stated in the Order (Annex "FF"), which is false,
because the good and valid reasons relied upon by the
respondent Judge are those stated in his Order (Annex
"Z") granting the Motion for Execution Pending Appeal
(Annex "X").
"(1) Respondent admits the
allegation that petitioner
Urbano Jaca sold a wrecker to Teodoro
M. Alagon on February 12, 1962 for
P10,000.00; and denies the statement
Page 489 of 505

that such sale would not show a

fraudulent design on his part to defeat
the judgment against him. It further
alleges that it is one of the good and
valid reasons for execution pending
appeal (Rule 39, Sec. 2), because said
petitioner, the mortgagor in the deed of
chattel mortgage dated January 24,
1961, has violated Article 319 of the
Revised Penal Code in selling the said
mortgaged property;.

"(2) The misleading allegations

contained in sub-paragraphs 2 and 3 of
par. 44(b) of the Petition are false, for
they are matters that arose in the
petitioners' Motion for Reconsideration
of the Order granting execution pending
appeal. Respondent further states that
they are not the original and valid
reasons given by the respondent Judge
in his Order (Annex "Z");
"c) There are good reasons for allowing
execution pending appeal considering that
"(1) the amount involved in the
judgment in favor of
respondent Davao Lumber Company is
P867,887.52 plus attorney's fees of
P20,000.00, and the petitioners
admitted at the hearing of the Motion for
Execution Pending Appeal that they are
insolvent (See Order, Annex "Z");
"(2) the petitioners have never
challenged the Counterclaim of
respondent Davao Lumber Company
during the hearing on the merits;

"(3) the petitioners failed to

present any evidence challenging the
chattel mortgage under which the
counterclaim for foreclosure has been
rendered;
"(4) the petitioners have not
disproved the Commissioner's Report
(Annex "K"). In fact, they failed to
present their own evidence before the
Commissioner which might tend to
controvert the undisputed documentary
evidence of
respondent Davao Lumber Company;
"(5) execution pending appeal
was properly issued in the present case,
which is an ordinary civil action for
accounting and not primarily a
foreclosure of chattel mortgage. The
respondent Judge, therefore, acted in
full compliance with the law and
jurisprudence in allowing execution
pending appeal;
"(6) the judgment sought to be
executed pending appeal sentences
petitioner Urbano Jaca to pay
respondent Davao Lumber Company
the amount of P756,236.52 with legal
interest; sentences petitioner
Bonifacio Jaca to pay said respondent
the amount of P91,651.00 with legal
interest; orders the Chattel Mortgage
executed by Urbano Jaca in favor of
said respondent foreclosed; orders
petitioners to pay, jointly and severally,
the amount of P20,000.00 as attorney's
fees and costs; the said judgment was
rendered after hearing on the merits of
this action for accounting, which is not a
Page 490 of 505

proceeding for foreclosure of chattel

mortgage; the provisions of the Rules of
Court on foreclosure proceeding
invoked by petitioners do not find any
application in the case at bar; the
respondent Judge, therefore, in allowing
execution pending appeal, precisely
acted in full compliance with Sec. 2 of
Rule 39;
"(7) as above pointed out, the
judgment rendered in this case is joint
and several, and consequently, the
respondent Judge was correct in
ordering the execution thereof as
against both petitioners who have no
properties or assets to satisfy the
judgment in favor of respondent
company."11
The basic issue in this case is whether or not there are good reasons justifying the
issuance of an order granting premature execution.
Section 2, Rule 39 of the Rules of Court provides that on motion of the prevailing
party with notice to the adverse party the court may, in its discretion, order execution
to issue even before the expiration of the time to appeal, upon good reasons to be
stated in a special order. If a record on appeal is filed thereafter, the motion and the
special order shall be included therein. The discretionary power of the Court of First
Instance to grant or deny a motion for execution before the expiration of the time to
appeal will not be interfered with by the appellate court, unless it be shown that there
has been an abuse thereof or a subsequent change of conditions. 12
As provided in Sec. 2, Rule 39 of the New Rules of Court, the existence of good
reasons is what confers discretionary power on a court of first instance to issue a writ
of execution pending appeal. 13 The reasons allowing execution must constitute
superior circumstances demanding urgency which will outweigh the injury or damage
should the losing party secure a reversal of the judgment on appeal. 14
The decision in Civil Case No. 4189 requires petitioners to pay the enormous amount
of P867,887.52. Clearly, premature execution of said decision will result in irreparable
damage to petitioners as the collection of said amount may be enforced through the
seizure of money and/or sale of properties used in the logging business of petitioners.

In other words, execution of the decision in Civil Case No. 4189 may result in the
termination of petitioner's business. Thus, any damage to the petitioners brought
about by the premature execution of the decision will be justified only upon a finding
that the appeal is being taken only for the purpose of delay and of rendering the
judgment nugatory.
The facts of record show that the petitioner's appeal is not frivolous and not intended
for delay. The findings of the respondent judge that the petitioners are indebted to the
respondent Davao Lumber Company are based solely on the report submitted by
Estanislao R. Lagman, the commissioner appointed by the court. This report was
assailed by the petitioners as null and void in a motion to strike out the report from the
records of the case. According to petitioners, the report is null and void because:
". . . the so-called 'findings of the Commissioner in his report filed
before this Honorable Court is the result of the exercise of certain
highly irregular function not contemplated by the Rules of Court
and, therefore deprived Plaintiffs' their constitutional right to their
day in court.'
ARGUMENTS :
"1. That among other things, Section 3, Rule 33 of Rules of
Court, provides:
'Section 3: . . . Subject to the specifications and
limitations stated in the order the commissioner has and
shall exercise the power to regulate the proceedings in
every hearing before him and to do all acts and take
measures necessary or proper for the efficient
performance of his duties under the order, . . . The trial
or hearing before him shall proceed in all respect as
though the same had been had before the Court.
"2. That on August 22, 1964, without the proper notice to their
respective counsels, the Plaintiffs received the following letter
from the Commissioner, pertinent portions of which reads as
follows: and, copy of which letter is attached hereto, forming an
integral part in this Opposition, marked Annex "A"
'In compliance to the above order, I am now to proceed,
as ordered by the Court, to examine your books of
accounts and other records for the year 1962 and 1963.
Page 491 of 505

'I will be dropping at your office on August 25, 1964.

Kindly have your records ready.
"3. That on August 25, 1964, the Commissioner went to Plaintiffs'
office and asked to see the Books, and if possible to bring the
same with him to his office; that, the plaintiffs' counsel refused to
have said records examined in such manner;
"4. That the Counsel for the Plaintiffs reminded the Commissioner
on many occasions that, the examination of books and records of
Accounts should be done in a manner provided for under the
Rules of Court and that in pursuance of said mandate, a hearing
and/or proceedings be conducted in the presence of all parties,
their witnesses and, their counsels and, the hearing be
conducted as/if it were taken before the court of justice, as said
accounts being one controversial and contested in issues;
"5. That said commissioner refused to conduct said hearing in
accordance to law;
"6. That report is void in law." 15
In an order dated November 17, 1964, the respondent judge approved the
commissioners' report in toto. As to the allegation of the plaintiffs that they were
denied their day in court, the respondent judge stated that "plaintiffs deliberately
ignored to comply with the lawful order of the court directing them to present the
pertinent books of accounts on the 12th day of October, 1964, at 2:00 P.M. Sala of
Branch II, and therefore, their position that they are denied their day in court is clearly
untenable." 16
The petitioners filed their motion for reconsideration of the order approving the
commissioner's report in November, 1964, explaining that their failure to appear was
due to the fact that they received the order requiring them to appear on October 12,
1964 already after said date when it was too late for them to comply with the order of
appearance. 17 Notwithstanding the reasonable explanation of their absence in the
hearing of October 12, 1964, the respondent judge denied the motion for
reconsideration in an order dated December 4, 1964. 18
It is obvious that the refusal of the respondent judge to order a hearing before the
commissioner was in clear violation of Section 3, Rule 33, Revised Rules of Court,
which specifically provides ". . . that the trial or hearing before a commissioner shall
proceed in all respects as though the same had been had before the court." For this

purpose Section 5 of the same Rule provides that "upon receipt of the order of
reference, unless otherwise provided therein, the commissioner shall forthwith set a
time and place for the first meeting of the parties or their attorneys to be held within
ten (10) days after the date of reference. . . . Pertinent also is Section 10 of Rule 33
which provides that ". . . Objections to the report based upon grounds which were
available to the parties during the proceedings before the commissioner, other than
objections to the findings and conclusions therein set forth, shall not be considered by
the court unless they were made before the commissioner."
The respondent judge's refusal to order the commissioner to conduct a hearing in
accordance with Section 5, Rule 33 was fatal to the cause of the petitioners. Under
Section 10 of Rule 33, objections to the report based upon grounds which were
available to the parties during the proceedings before the commissioner other than
objections to the findings and conclusions therein set forth shall not be considered by
the court, unless they were made before the commissioner. Objections to the report
which were available to the parties during the proceedings refer to objections to the
admissibility or non-admissibility of evidence to be considered by the commissioner.
Since no meeting was held before the commissioner, petitioners never had the
opportunity to object to the admissibility of evidence of cash, equipment, materials
and foodstuff, which they alleged in their complaint, were never received by them.
Also, they failed to question the failure of the commissioner to include in his
examination the price quotations of the logs which, as claimed in the complaint, were
under-classified and undergraded.

The records show that respondent Davao Lumber Company was able to prove its
claim against petitioners because respondent judge refused to order the
commissioner to hold a hearing as required by the rules. Thus, objections which
petitioners may have against the claims of respondent were never considered. In the
same manner, the claim of petitioner that respondent Davao Lumber Company is
indebted to them was not also considered. The commissioner limited his examination
to the following:
MR. URBANO JACA'S ACCOUNTS :
"(a) From Feb. 17, 1961 to Oct. 31, 1962, Urbano
Jaca purchased
on
account
from
the
Merchandise
Dept.
of Davao Lumber Co.
per
statement
attached,
marked
schedule 1 P190,010.41
Page 492 of 505

"(b) From July 2, 1960 to Oct. 31, 1962, Urbano

Jaca purchased
on
account
from
the
Sawmill
Dept.
of Davao Lumber Co.
per
statement
hereto
attached,
marked
schedule 2 P75,075.73
"(c) Old
vales
or
cash
advances
prior
to
July
25,
1963
which
Urbano Jaca replaced
with four (4) BPI Checks Nos. D-236619
to
D-236622
P50,000.00
each
as
alleged
by DLC P200,000.00
"(d) From Nov. 3, 1962 to Aug. 30, 1963,
Urbano Jaca purchased
on
accounts
from
the
Sawmill
Dept.
various
goods,
per
attached statement, marked schedule 3 P57,459.27
"(e) From Nov. 3, 1962 to Aug. 30, 1963, Urbano
Jaca purchased
from
Mdse.
Dept.
of
DLC
various
goods,
per
attached
statement,
marked schedule 4 P68,857.07
"(f) From July 25, 1963 to Sept. 16, 1963
Urbano Jaca obtained
cash
advances
or
vales
per
attached
statement,
marked
schedule 5 P164,844.45
"(g) Purchase
of
gasoline
Jaca from
Shell Co.,
Co.'s guaranty P2,523.60

made
by
Urbano
under Davao Lumber

"Total
amount
due Davao Lumber Co.
from Urbano Jaca P758,770.53"
"The amount of P2,523.60 due Shell Co. may be deducted from
the total amount if Urbano Jaca can show proof that the account
has been paid.
MR. BONIFACIO JACA'S ACCOUNTS:

"(a) From Nov. 3, 1962 to Aug. 8, 1963 Bonifacio

Jaca purchased
on
account
various
goods
from
the
Sawmill
Dept.
of
DLC,
per
attached statement, marked schedule 6 P39,999.69
"(b) Prom Feb. 4, 1963 to Aug. 8, 1963 Bonifacio
Jaca purchased on account from the Mdse.
Dept. various goods, per attached statement
marked schedule 7 P48,319.08
"(c) Purchases
of
gasoline
from
Shell Co.,
guaranteed by Davao Lumber Co. P5,252.12
"(d) From Aug. 6, 1963 to Aug. 23, 1963,
Bonifacio Jaca obtained
cash
advances
or
vales,
per
attached
statement
marked
schedule 8 P3,333.20
"Total
amount
due Davao Lumber Co.
from Mr. Bonifacio Jaca P96,904,09." 19
Clearly, the examination was only made on advances made to petitioners. There was
not even an attempt to examine receipts of payments made by petitioners. It is hard to
believe that the petitioners had not paid any amount for the advances made to them.
In fact, the respondents stated in paragraph 4 of its answer to the complaint that the
plaintiffs stopped delivering logs in August, 1963, 20 indicating that from 1962 to
1963, the years included in the report of the commissioner, the petitioners had
delivered logs to the Davao Lumber Company.
There
is
doubt
that
petitioners
are
really
indebted
to
respondent Davao Lumber Company in such a big amount as found by the trial court.
The appeal of the petitioner appears to be meritorious. The fear of respondent that the
judgment of the trial court might not be satisfied if not executed at once is not well
founded. If the judgment is executed now, and on appeal the same is reversed,
although there are provisions for restitution, damages incurred by petitioners can not
be fully compensated. 21
The reasons stated in the order of execution pending appeal are not well founded.
The first reason stated in the order was the consistent refusal of petitioner to deliver
the mortgaged chattels to the receiver. 22 The records disclose that
respondentDavao Lumber Company is not even entitled to the appointment of a
receiver. It is an established rule that the applicant for receivership must have an
Page 493 of 505

actual and existing interest in the property for which a receiver is sought to be
appointed. 23 The Davao Lumber Company's proof of interest in the property is the
deed
of
chattel
mortgage
executed
by
Urbano Jaca in
favor
of
the Davao Lumber Company on January 24, 1961. This deed of chattel mortgage is
void because it provides that the security stated therein is for the payment of any and
all obligations herein before contracted and which may hereafter be contracted by the
Mortgagor in favor of the Mortgagee. 24 In the case of Belgian Catholic
Missionaries vs. Magallanes Press this Court held:
"A mortgage that contains a stipulation in regard to future
advances in the credit will take effect only from the date the same
are made and not from the date of the mortgage (11 CJ, 448; 5
R.C.L. 420-421). . . . Where the statute provides that the parties
to a chattel mortgage must make oath that the debt is a just debt,
honestly due and owing from the mortgagor to the mortgagee, it
is obvious that a valid mortgage cannot be made to secure a debt
to be thereafter contracted. (11 CJ. 448)" 25
The second reason stated was the fact that petitioner Urbano Jaca violated Article
319 of the Revised Penal Code by selling to a certain Teodoro Alagon some of the
mortgaged properties. 26 As already discussed, the deed of chattel mortgage
executed by Urbano Jaca in favor of the Davao Lumber Company is void. Hence,
petitioner Urbano Jaca could not have violated Article 319 of the Revised Penal Code.
Moreover, the respondent Davao Lumber Company has not successfully refuted the
allegation of the petitioners that the sale of the wrecker to Teodoro Alagon, was
exclusively negotiated by the lumber company's managing partner, Tian Se, and that
the latter caused Urbano Jaca to sign the deed of sale because he was the owner of
the wrecker.
The third reason stated is the fact that petitioners have no properties and assets to
satisfy the judgment. 27 The basis of respondent judge's conclusion that petitioners
do not have sufficient assets is an unsubstantiated allegation in the motion for
execution pending appeal of respondent lumber company. 28 To rectify this omission,
respondent lumber company, in its opposition to the motion for reconsideration of the
order of execution pending appeal, tried to point out that the sale of two chevrolet
trucks by Urbano Jaca and their failure to file a counterbond indicate that they are
without sufficient assets. 29 This later attempt to substantiate a baseless allegation in
the motion for execution pending appeal is futile. The trucks alleged to be sold are not
properties of petitioner Urbano Jaca. They are paraphernal properties of his wife,
Florentino Perez, and the same trucks were in fact sold by her. And even if said trucks
were owned by Urbano Jaca, their sale to Atty. Raul Nengasca does not totally

indicate insolvency. As has been repeatedly observed, petitioner Urbano Jaca is

engaged in business. Sale of property used in business does not establish insolvency.
The sale may have been prompted by the need for more modern equipment on
account of obsolescense, or the need of cash to be directed to more profitable
endeavor. The same reason applies to their failure to file a counterbond. The cash
needed for the counterbond may be utilized for the continuance of the business or to
increase business profits. In short, the acts of petitioners can not always be
interpreted as signs of insolvency but may also indicate sound business judgment
prompted by the need to have a liquid reserve of cash.
In its answer to the petition, 30 respondent lumber company contends that petitioners,
having availed of the remedy of appeal are barred from filing a petition for certiorari.
Although Section 1, Rule 65 of the Rules of Court provides that the special civil action
of certiorari may only be invoked when "there is no appeal, nor any plain speedy and
adequate remedy in the course of law," this rule is not without exception. The
availability of the ordinary course of appeal does not constitute sufficient ground to
prevent a party from making use of the extraordinary remedy of certiorari where the
appeal is not an adequate remedy or equally beneficial, speedy and sufficient. 31 It is
the inadequacy not the mere absence of all other legal remedies and the danger
of failure of justice without the writ, that must usually determine the propriety of
certiorari.
In the case at bar, the remedy of appeal is inadequate. It will not immediately relieve
petitioners from the injurious effect of the order granting execution. The slow and
inexpensive remedy of appeal will not prevent respondent judge from executing his
decision requiring petitioners to pay the huge amount of P867,887.52. Moreover, to
dismiss the petition on the ground that petitioner has already availed of the remedy of
appeal will only aggravate the patent injustice already inflicted on petitioners.
The reasons stated in the order granting execution pending appeal are not sufficient.
WHEREFORE, the petition for writ of certiorari is granted and the orders granting
execution pending appeal dated November 29, 1965 and the order denying the
motion for reconsideration of the order granting execution pending appeal dated
January 10, 1966 are nullified and set aside, without pronouncement as to costs.
SO ORDERED.
||| (Jaca v. Davao Lumber Co., G.R. No. L-25771, [March 29, 1982], 198 PHIL 493517)

Page 494 of 505

FIRST DIVISION
[G.R. No. 19207. December 21, 1922.]
W. R. GIBERSON, plaintiff-appellee, vs. A.
N. JUREIDINI BROS., INC., defendant-appellant.
Del Rosario & Del Rosario for appellant.
McVean & Vickers and Block, Johnston & Greenbaum for appellee.
DECISION
MALCOLM, J p:
This is an appeal from a judgment rendered by the Honorable Adolph
Wislizenus, Judge of First Instance of Cebu, finding in favor of each of plaintiff's
four causes of action, and authorizing the recovery by the plaintiff, the receiver in
insolvency proceedings in civil case No. 3586, of various goods, wares,
merchandise, credits, and money transferred by H. K. Motoomul & Co. to A.
N. Jureidini Bros., Inc., on May 24, 1921, and June 13, 1921.
H. K. Motoomul & Co. was, at the times mentioned in the complaint, a
partnership doing business in the cities of Cebu and Iloilo. Sometime prior to May
24, 1921, the company became financially embarrassed. A. N. Jureidini Bros.,
Inc., a large creditor of Motoomul & Co., became aware of the precarious
condition of the latter, because of the diminishing payments on account of a debt.
ultimately, Motoomul & Co., delivered to Jureidini Brothers, on May 24, 1921, one
of the debtor's Iloilo stores known as Bazar Aguila de Oro. On the same day also,
credits receivable belonging to Motoomul & Co. were transferred
to Jureidini Bros. Still later, on June 13, 1921, another stock of goods belonging
to Motoomul 7 co. passed to jureidini Bros. The documents evidencing these
transfers appear record.
Within thirty days after these assignments were made, or, to be exact,
on June 22, 1921, a number of creditors of H. K. Motoomul & Co. initiated
successfully involuntary insolvency proceedings against it. Later, action was
brought by the receiver appointed by the court, with the result above related.
The above constitute the principal facts, which are accurately stated in
the decision of the trial court. In so far as the ten assignments of error made in
this court relate to questions of fact, we may say, generally, that we agree with
the findings of the trial judge.
Page 495 of 505

It would be possible to forego consideration of many of appellant's

points, because he himself announces on page 46 of the bill of exceptions, "that
the defendant has not filed the bond required by the court, because it agrees to
the judgment being executed in accordance with law, except so far as concerns
the second cause of action." We prefer, however, not to hold appellant to this
allegation or admission in his own pleadings, and propose, therefore, to comment
on the various assignments of error.
Addressing attention directly to appellant's third, fifth, sixth, and eight
assignments of error, the court clearly did not err in holding that the transfers or
assignments must be revoked, because made for the purpose of giving
A.N. Jureidini Bros., Inc., preference over the other creditors of H. K. Motoomul &
Co. The provisions of section 70 of the Insolvency Law (Act No. 1956), were
placed on the statute books to cover exactly such a situation, and to give equal
rights to all of the creditors of the insolvent. The evidence discloses that
A.N. Jureidini Bros., Inc. had reasonable cause to believe that H. K. Motoomul &
Co. was insolvent.
With reference to appellant's first and seventh assignment of error, no
one denies that H. K. Motoomul & Co. was indebted to A. N. Jureidini Bros., Inc.
for a considerable sum of money. This reason, alone, however, gives the creditor
no right to a preference. But, in this connection, appellant relies on Exhibit 1,
which purports to be a chattel mortgage executed in the sum of P100,000 by H.
Dialdas Motoomul and A. N. Jureidini Bros., Inc., on December 1, 1919, but not
registered until May 5, 1921. The operative words in the alleged mortgage make
reference to the list A, and the only description of the property contained in this
list is "1. A store No. 79 on Magallanes Street, municipality of Cebu, formerly
belonging to T. Thakurdas, with all the merchandise, effects, wares and other
bazar goods contained in the said store. 2. A store No. 19 on Real Street, Iloilo,
Panay, P.I., formerly belonging to Guillermo Asayas, with all the merchandise,
effects, wares and other bazar goods contained in the said store." The
documents contains no oath as required by our Chatel Mortgage Law.
The trial judge held, and properly, that Exhibit 1 was invalid because the
oath required by law did not appear therein, and because the subject-matter was
not described therein with sufficient particularity. The Chattel Mortgage Law, in its
section 5, in describing what shall be deemed sufficient to constitute a good
chattel mortgage, includes the requirement of an affidavit of good faith appended
to the mortgage and recorded herewith. It has been held by reputable courts that
the absence of the affidavit vitiates a mortgage as against creditors and
subsequent encumbrancers. (People vs Burns [1910], 161 Mich., 169;137 A. S.

R., 466, and notes; Deseret National Bank vs. Kidman [1903], 25 Utah, 379;95 A.
S. R., 856.) Section 7 of the Chattel Mortgage Law provides that "The description
of the mortgage property shall be such as to enable the parties to the mortgage,
or any other person, after reasonable inquiry and investigation, to identify the
same." Identification of the mortgaged property would be impossible in this case.
Moreover, if there should exist any doubt on the questions we have just
discussed, they should be thrashed out in the insolvency proceedings. Our
constant ruling has been that the court having possession of the property of the
insolvent has ancillary jurisdiction to hear and determine all questions concerning
the title, possession, or control of the same. (De Amuzategui vs. Macleod [1915],
33 Phil., 80; De Krafft vs. Velez [1916], 34 Phil., 854; Mitsui Bussan Kaisha vs.
Hongkong & Shanghai Banking Corporation [1917], 36 Phil., 27.)
With reference to the proper valuation of the merchandise, which is the
subject of appellant's second and fourth assignments of error, we find sufficient
evidence in the record to support the findings of the trial court. The documents of
transfer did not accurately appraise the value of the property.
As to the credits amounting to P16,892.72, assigned by H.K. Motoomul
& Co. to the defendant, the evidence discloses that with the possible exception of
P1,117.06 paid by Florencio Espiritu and P400 paid by Panjoomul Fulsidas, none
of the rest have been collected. Hence, appellant's ninth assignment of error
should be sustained in part. The assignee takes the property in the same plight
and condition that the bankrupt held it. (Winsor vs. McLellan [1843], 2 Story 492;
Fed. Cas. No. 17887; Stewart vs. Platt [1879], 101 U.S., 739.)
Judgment is affirmed, with the sole modification that the defendant,
under plaintiff's second cause of action, shall turn over to the plaintiff only such
portions of the credits as have been realized, but the evidences of indebtedness
shall pass to the receiver for such action as may be proper. Without special
finding as to costs in this instance, it is so ordered.
Araullo, C.J. Street, Avancea, Villamor, Ostrand,
Johns, and Romualdez, JJ., concur
||| (Giberson v. A. N. Jureidini Bros., Inc., G.R. No. 19207, [December 21, 1922], 44
PHIL 216-220)

Page 496 of 505

Emiliano Tabasondra for appellee Company.

Teodoro Padilla for the other appellees.
DECISION
REYES, J. B. L., J p:
This case arose from a complaint for damages filed by Buenaventura
Saldaa (docketed as Civil Case No. 32703 of the Court of First Instance of
Manila) that was dismissed by order of the Court dated August 20, 1957, for lack
of sufficient cause of action. In another order of September 30, 1957 of the same
court, plaintiff's motion for reconsideration was denied, and the case was
appealed to this Court.
The facts are that on May 8, 1953, in order to secure an indebtedness of
P15,000.00, Josefina Vda. de Eleazar executed in favor of the plaintiff-appellant
Buenaventura Saldaa a chattel mortgage covering properties described as
follows:
"A building of strong materials, used for restaurant business,
located in front of the San Juan de Dios Hospital at Dewey
Boulevard, Pasay City, and the following personal properties
therein contained:
1 Radio, Zenith, cabinet type
1 Cooler
1 Electric range, stateside, 4 burners
1 Frigidaire, 8 cubic feet
1 G.E. Deepfreezer
FIRST DIVISION

8 Tables, stateside
32 Chromium chairs, stateside

[G.R. No. L-13194. January 29, 1960.]

BUENAVENTURA
T.
SALDAA, plaintiffappellant, vs. PHILIPPINE GUARANTY COMPANY, INC., et
al., defendants-appellees.

Gatchalin & Padilla for appellant.

1 Sala set upholstered, 6 pieces

1 Bedroom set, 6 pieces.
And all other furnitures, fixtures or equipment found in the said
premises."
Subsequent to the execution of said mortgage and while the same was
still in force, the defendant Hospital de San Juan de Dios, Inc. obtained, in Civil
Case No. 1930 of the Municipal Court of Pasay City, a judgment against Josefina
Page 497 of 505

Vda. de Eleazar. A writ of execution was duly issued and, on January 28, 1957,
the same was served on the judgment debtor by the sheriff of Pasay City;
whereupon, the following properties of Josefina Eleazar were levied upon:
8 Tables with 4 (upholstered) chairs each
1 Table with 4 (wooden) chairs
1 Table (large) with 5 chairs
1 Radio-phono (Zenith, 8 tubes)
2 Showcases (big, with mirrors)
1 Rattan sala set with 4 chairs, 1 table and 3 sidetables
1 Wooden drawer
1 Tocador (brown with mirror)
1 Aparador
2 Beds (single type)
1 Freezer (deep freeze)
1 Gas range (magic chef, with 4 burners)
1 Freezer (G.E.).
On January 31, 1957, the plaintiff-appellant Saldaa filed a third-party
claim asserting that the above-described properties levied are subject to his
chattel mortgage of May 8, 1953. In virtue thereof, the sheriff released only some
of the property originally included in the levy of January 28, 1957, to wit:
1 Radio, Zenith, cabinet type
8 Tables, stateside
32 Chromium chairs, stateside
1 G.E. Deep freezer.
To proceed with the execution sale of the rest of the properties still under levy, the
defendants-appellees Hospital de San Juan de Dios, Inc. and the Philippine
Guaranty Co., Inc. executed an indemnity bond to answer for any damages that
plaintiff might suffer. Accordingly, on February 13, 1957, the said properties were
sold to the defendant hospital as the highest bidder, for P1,500.00.
Appellant claims that the phrase in the chattel mortgage contract
"and all other furnitures, fixtures and equipment found in the said premises",
validly and sufficiently covered within its terms the personal properties disposed

of in the auction sale, as to warrant an action for damages by the plaintiff

mortgagee.
There is merit in appellant's contention. Section 7 of Act No. 1508,
commonly and better known as the Chattel Mortgage Law, does not demand a
minute and specific description of every chattel mortgaged in the deed of
mortgage but only requires that the description of the properties be such "as to
enable the parties in the mortgage, or any other person, after reasonable inquiry
and investigation to identify the same." Gauged by this standard, general
descriptions have been held valid by this Court. (See Strochecker vs. Ramirez,
44 Phil., 993; Pedro de Jesus vs. Guam Bee Co., Inc., 72 Phil., 464).
A similar rule obtains in the United States courts and decisions there
have repeatedly upheld clauses of general import in mortgages of chattels other
than goods for trade, and containing expressions similar to that of the contract
now before us. Thus, "and all other stones belonging to me and all other goods
and chattels" (Russel vs. Winne, 97 Am. Dec. 755); "all of the property of the said
W.W. Allen used or situated upon the leased premises" (Dorman vs. Crooks State
Bank, 64 A.L.R. 614); "all goods in the store where they are doing business in E.
City, N.C." (Davis vs. Turner, 120 Fed. 605); "all and singular the goods, wares,
stock, iron tools manufactured articles and property of every description, being
situated in or about the shop or building now occupied by me in Howley Street"
(Winslow vs.Merchants Ins. Co., 38 Am. Dec. 368, were held sufficient
description, on the theory that parol evidence could supplement it to render
identification of the chattels mortgaged possible. The prevailing rule is expressed
in Walker vs. Johnson (Mont.) 124 A.L.R. 937:
"The courts and textbook writers have developed several rules for
determination of the sufficiency of the description in a chattel
mortgage. The rules are general in nature and are different where
the controversy is between the parties to the mortgage from the
situation where third parties without actual notice come in. In 11
C.J. 457, it is said: 'As against third persons the description in the
mortgage must point out its subject matter so that such person
may identify the chattels covered, but it is not essential that the
description be so specific that the property may be identified by it
alone, if such description or means of identification which, if
pursued will disclose the property conveyed.' In 5 R.C.L. 423 the
rule is stated that a description which will enable a third person,
aided by inquiries which the instrument itself suggests to identify
the property is sufficiently definite.' In 1 Jones on Chattel
Page 498 of 505

Mortgages and Conditional Sales, Bower's Edition, at page 95

the writer says: 'As to them (third persons), the description is
sufficient if it points to evidence whereby the precise thing
mortgaged may be ascertained with certainty.' Here there is
nothing in the description '873 head of sheep' from which anyone,
the mortgagee or third persons, could ascertain with any certainty
what chattels were covered by the mortgage.

The rule in the Jureidini case is further weakened by the Court's

observation that (44 Phil., p. 220)

"In many instances the courts have held the description good
where, though otherwise faulty, the mortgage explicitly states that
the property is in the possession of the mortgagor, and especially
where it is the only property of that kind owned by him."

which appears inconsistent with the definitive character of the rulings invoked.

The specifications in the chattel mortgage contract in the instant case

are, we believe, in substantial compliance with the "reasonable description
rule" fixed by the chattel Mortgage Act. We may notice in the agreement,
moreover, that the phrase in question is found after an enumeration of other
specific articles. It can thus be reasonably inferred therefrom that the "furnitures,
fixtures and equipment" referred to are properties of like nature, similarly situated
or similarly used in the restaurant of the mortgagor located in front of the San
Juan de Dios Hospital at Dewey Boulevard, Pasay City, which articles can be
definitely pointed out or ascertained by simple inquiry at or about the premises.
Note that the limitation found in the last paragraph of section 7 of the Chattel
Mortgage Law 1 on "like or substituted properties" make reference to
those "thereafter acquired by the mortgagor and placed in the same depository
as the property originally mortgaged", not to those already existing and originally
included at the date of the constitution of the chattel mortgage. A contrary view
would unduly impose a more rigid condition than what the law prescribes, which
is that the description be only such as to enable identification after a reasonable
inquiry and investigation.
The case of Giberson vs. A. N. Jureidini Bros., 44 Phil., 216, 219, cited
by the appellees and the lower court, cannot be likened to the case at bar, for
there, what were sought to be mortgaged included two stores with all its
merchandise, effects, wares, and other bazar goods which were being constantly
disposed of and replaced with new supplies in connection with the business,
thereby making any particular or definite identification either impractical or
impossible under the circumstances. Here, the properties deemed covered were
more or less fixed, or at least permanently situate or used in the premises of the
mortgagor's restaurant.

"Moreover, if there should exist any doubts on the questions we

have just discussed, they should be threshed out in the
insolvency proceedings,"

We find that the ground for the appealed order (lack of cause of action)
does not appear so indubitable as to warrant a dismissal of the action without
inquiry into the merits and without submission of evidence, since the latter may
supplement the description in the deed of mortgage (Nico vs. Blanco, 81 Phil.,
213; Zobel vs.Abreau, 52 Off. Gaz., 3592).
Wherefore, the orders appealed from are set aside and the case
remanded to the lower court for further proceedings. Costs against appellees.
Pars, C. J., Bengzon, Montemayor, Bautista Angelo, Labrador,
Concepcin, Endencia, Barrera and Gutirrez David, JJ., concur.
||| (Saldaa v. Philippine Guaranty Co., Inc., G.R. No. L-13194, [January 29, 1960],
106 PHIL 919-925)

THIRD DIVISION
[G.R. No. 106435. July 14, 1999.]
PAMECA WOOD TREATMENT PLANT, INC., HERMINIO G.
TEVES, VICTORIA V. TEVES and HIRAM DIDAY R.
PULIDO, petitioners, vs. HON. COURT OF APPEALS and
DEVELOPMENT BANK OF THE PHILIPPINES, respondents.

Americo H. Acosta for petitioners.

Bonifacio M. Abad and Vicente Cuison for private respondent.

SYNOPSIS
Page 499 of 505

This is a review on certiorari of a judgment of the Court of Appeals affirming in toto the
decision of the Regional Trial Court of Makati to award respondent bank's deficiency
claim, arising from a loan secured by a chattel mortgage.
The Court denied the petition. It held that since the Chattel Mortgage Law bars the
creditor-mortgagee from retaining the excess of the sale proceeds, there is a corollary
obligation on the part of the debtor-mortgagor to pay the deficiency in case of a
reduction in the price at public auction.
As to petitioners' contention that the public auction sale is void on ground of fraud and
inadequacy of price, the Court ruled that parties may not bring on appeal issues that
were not raised on trial. Petitioners never assailed the validity of the sale in the RTC
and only in the Court of Appeals did they attempt to prove inadequacy of price.
Moreover, fraud is a serious allegation that requires full and convincing evidence and
may not be inferred from the lone circumstance that it was only respondent bank that
bid in the sale of the foreclosed properties. TAaIDH
DECISION
GONZAGA-REYES, J p:
Before Us for review on certiorari is the decision of the respondent Court of Appeals
in CA G.R. CV No. 27861, promulgated on April 23, 1992, 1 affirming in toto the
decision of the Regional Trial Court of Makati 2 to award respondent bank's deficiency
claim, arising from a loan secured by chattel mortgage. LLpr
The antecedents of the case are as follows:
On April 17, 1980, petitioner PAMECA Wood Treatment Plant, Inc. (PAMECA)
obtained a loan of US$267,881.67, or the equivalent of P2,000,000.00 from
respondent Bank. By virtue of this loan, petitioner PAMECA, through its President,
petitioner Herminio C. Teves, executed a promissory note for the said amount,
promising to pay the loan by installment. As security for the said loan, a chattel
mortgage was also executed over PAMECA's properties in Dumaguete City,
consisting of inventories, furniture and equipment, to cover the whole value of the
loan.
On January 18, 1984, and upon petitioner PAMECA's failure to pay, respondent bank
extrajudicially foreclosed the chattel mortgage, and, as sole bidder in the public
auction, purchased the foreclosed properties for a sum of P322,350.00. On June 29,
1984, respondent bank filed a complaint for the collection of the balance of
P4,366,332.46 3 with Branch 132 of the Regional Trial Court of Makati City against

petitioner PAMECA and private petitioners herein, as solidary debtors with PAMECA
under the promissory note.
On February 8, 1990, the RTC of Makati rendered a decision on the case, the
dispositive portion of which we reproduce as follows:
"WHEREFORE, judgment is hereby rendered ordering the
defendants to pay jointly and severally plaintiff the (1) sum of
P4,366,332.46 representing the deficiency claim of the latter as
of March 31, 1984, plus 21% interest per annum and other
charges from April 1, 1984 until the whole amount is fully paid
and (2) the costs of the suit. SO ORDERED." 4 cdasia
The Court of Appeals affirmed the RTC decision. Hence, this Petition.
The petition raises the following grounds:
"1. Respondent appellate court gravely erred in not reversing the
decision of the trial court, and in not holding that the
public auction sale of petitioner PAMECA's chattels were
tainted with fraud, as the chattels of the said petitioner
were bought by private respondent as sole bidder in only
1/6 of the market value of the property, hence
unconscionable and inequitable, and therefore null and
void.
2. Respondent appellate court gravely erred in not applying by
analogy Article 1484 and Article 2115 of the Civil Code
by reading the spirit of the law, and taking into
consideration the fact that the contract of loan was a
contract of adhesion.
3. The appellate court gravely erred in holding the petitioners
Herminio Teves, Victoria Teves and Hiram Diday R.
Pulido solidarily liable with PAMECA Wood Treatment
Plant, Inc. when the intention of the parties was that the
loan is only for the corporation's benefit." LLphil
Relative to the first ground, petitioners contend that the amount of P322,350.00 at
which respondent bank bid for and purchased the mortgaged properties was
unconscionable and inequitable considering that, at the time of the public sale, the
mortgaged properties had a total value of more than P2,000,000.00. According to
petitioners, this is evident from an inventory dated March 31, 1980, 5 which valued the
Page 500 of 505

properties at P2,518,621.00, in accordance with the terms of the chattel mortgage

contract 6 between the parties that required that the inventories "be maintained at a
level no less than P2 million". Petitioners argue that respondent bank's act of bidding
and purchasing the mortgaged properties for P322,350.00 or only about 1/6 of their
actual value in a public sale in which it was the sole bidder was fraudulent,
unconscionable and inequitable, and constitutes sufficient ground for the annulment of
the auction sale.
To this, respondent bank contends that the above-cited inventory and chattel
mortgage contract were not in fact submitted as evidence before the RTC of Makati,
and that these documents were first produced by petitioners only when the case was
brought to the Court of Appeals. 7 The Court of Appeals, in turn, disregarded these
documents for petitioners' failure to present them in evidence, or to even allude to
them in their testimonies before the lower court. 8 Instead, respondent court declared
that it is not at all unlikely for the chattels to have sufficiently deteriorated as to have
fetched such a low price at the time of the auction sale. 9 Neither did respondent
court find anything irregular or fraudulent in the circumstance that respondent bank
was the sole bidder in the sale, as all the legal procedures for the conduct of a
foreclosure sale have been complied with, thus giving rise to the presumption of
regularity in the performance of public duties. 10

Petitioners also question the ruling of respondent court, affirming the RTC, to hold
private petitioners, officers and stockholders of petitioner PAMECA, liable with
PAMECA for the obligation under the loan obtained from respondent bank, contrary to
the doctrine of separate and distinct corporate personality. 11 Private petitioners
contend that they became signatories to the promissory note "only as a matter of
practice by the respondent bank", that the promissory note was in the nature of a
contract of adhesion, and that the loan was for the benefit of the corporation,
PAMECA, alone. 12
Lastly, invoking the equity jurisdiction of the Supreme Court, petitioners submit that
Articles 1484 13 and 2115 14 of the Civil Code be applied in analogy to the instant
case to preclude the recovery of a deficiency claim. 15
Petitioners are not the first to posit the theory of the applicability of Article 2115 to
foreclosures of chattel mortgage. In the leading case of Ablaza vs. Ignacio, 16 the
lower court dismissed the complaint for collection of deficiency judgment in view of
Article 2141 of the Civil Code, which provides that the provisions of the Civil Code on
pledge shall also apply to chattel mortgages, insofar as they are not in conflict with

the Chattel Mortgage Law. It was the lower court's opinion that, by virtue of Article
2141, the provisions of Article 2115 which deny the creditor-pledgee the right to
recover deficiency in case the proceeds of the foreclosure sale are less than the
amount of the principal obligation, will apply. prcd
This Court reversed the ruling of the lower court and held that the provisions of
the Chattel Mortgage Law regarding the effects of foreclosure of chattel mortgage,
being contrary to the provisions of Article 2115, Article 2115 in relation to Article 2141,
may not be applied to the case.
Section 14 of Act No. 1508, as amended, or the Chattel Mortgage Law, states:
"xxx xxx xxx
The officer making the sale shall, within thirty days thereafter,
make in writing a return of his doings and file the same in the
office of the Registry of Deeds where the mortgage is recorded,
and the Register of Deeds shall record the same. The fees of the
officer for selling the property shall be the same as the case of
sale on execution as provided in Act Numbered One Hundred
and Ninety, and the amendments thereto, and the fees of the
Register of Deeds for registering the officer's return shall be taxed
as a part of the costs of sale, which the officer shall pay to the
Register of Deeds. The return shall particularly describe the
articles sold, and state the amount received for each article, and
shall operate as a discharge of the lien thereon created by the
mortgage. The proceeds of such sale shall be applied to the
payment, first, of the costs and expenses of keeping and sale,
and then to the payment of the demand or obligation secured by
such mortgage, and the residue shall be paid to persons holding
subsequent mortgages in their order, and the balance, after
paying the mortgage, shall be paid to the mortgagor or persons
holding under him on demand." (Emphasis supplied) cdasia
It is clear from the above provision that the effects of foreclosure under the Chattel
Mortgage Law run inconsistent with those of pledge under Article 2115. Whereas, in
pledge, the sale of the thing pledged extinguishes the entire principal obligation, such
that the pledgor may no longer recover proceeds of the sale in excess of the amount
of the principal obligation, Section 14 of the Chattel Mortgage Law expressly entitles
the mortgagor to the balance of the proceeds, upon satisfaction of the principal
obligation and costs.
Page 501 of 505

Since the Chattel Mortgage Law bars the creditor-mortgagee from retaining the
excess of the sale proceeds there is a corollary obligation on the part of the debtormortgagee to pay the deficiency in case of a reduction in the price at public auction.
As explained in Manila Trading and Supply Co. vs. Tamaraw Plantation Co., 17 cited
in Ablaza vs. Ignacio, supra:
"While it is true that section 3 of Act No. 1508 provides that 'a
chattel mortgage is a conditional sale', it further provides that it 'is
a conditional sale of personal property as security for the
payment of a debt, or for the performance of some other
obligation specified therein.' The lower court overlooked the fact
that the chattels included in the chattel mortgage are only given
as security and not as a payment of the debt, in case of a failure
of payment. cdtai
The theory of the lower court would lead to the absurd conclusion
that if the chattels mentioned in the mortgage, given as security,
should sell for more than the amount of the indebtedness
secured, that the creditor would be entitled to the full amount for
which it might be sold, even though that amount was greatly in
excess of the indebtedness. Such a result certainly was not
contemplated by the legislature when it adopted Act No. 1508.
There seems to be no reason supporting that theory under the
provision of the law. The value of the chattels changes greatly
from time to time, and sometimes very rapidly. If, for example, the
chattels should greatly increase in value and a sale under that
condition should result in largely overpaying the indebtedness,
and if the creditor is not permitted to retain the excess, then the
same token would require the debtor to pay the deficiency in case
of a reduction in the price of the chattels between the date of the
contract and a breach of the condition.
Mr. Justice Kent, in the 12th Edition of his Commentaries, as well
as other authors on the question of chattel mortgages, have said,
that 'in case of a sale under a foreclosure of a chattel mortgage,
there is no question that the mortgagee or creditor may maintain
an action for the deficiency, if any should occur.' And the fact
thatAct No. 1508 permits a private sale, such sale is not, in fact, a
satisfaction of the debt, to any greater extent than the value of the
property at the time of the sale. The amount received at the time
of the sale, of course, always requiring good faith and honesty in

the sale, is only a payment, pro tanto, and an action may be

maintained for a deficiency in the debt."
We find no reason to disturb the ruling in Ablaza vs. Ignacio, and the cases reiterating
it. 18
Neither do We find tenable the application by analogy of Article 1484 of the Civil Code
to the instant case. As correctly pointed out by the trial court, the said article applies
clearly and solely to the sale of personal property the price of which is payable in
installments. Although Article 1484, paragraph (3) expressly bars any further action
against the purchaser to recover an unpaid balance of the price, where the vendor
opts to foreclose the chattel mortgage on the thing sold, should the vendee's failure to
pay cover two or more installments, this provision is specifically applicable to a sale
on installments.
To accommodate petitioners' prayer even on the basis of equity would be to expand
the application of the provisions of Article 1484 to situations beyond its specific
purview, and ignore the language and intent of the Chattel Mortgage Law. Equity,
which has been aptly described as "justice outside legality", is applied only in the
absence of, and never against, statutory law or judicial rules of procedure. 19
We are also unable to find merit in petitioners' submission that the public auction sale
is void on grounds of fraud and inadequacy of price. Petitioners never assailed the
validity of the sale in the RTC, and only in the Court of Appeals did they attempt to
prove inadequacy of price through the documents, i.e., the "Open-End Mortgage on
Inventory" and inventory dated March 31, 1980, likewise attached to their Petition
before this Court. Basic is the rule that parties may not bring on appeal issues that
were not raised on trial. LLpr
Having nonetheless examined the inventory and chattel mortgage document as part
of the records, We are not convinced that they effectively prove that the mortgaged
properties had a market value of at least P2,000,000.00 on January 18, 1984, the
date of the foreclosure sale. At best, the chattel mortgage contract only indicates the
obligation of the mortgagor to maintain the inventory at a value of at least
P2,000,000.00, but does not evidence compliance therewith. The inventory, in turn,
was as of March 31, 1980, or even prior to April 17, 1980, the date when the parties
entered into the contracts of loan and chattel mortgage, and is far from being an
accurate estimate of the market value of the properties at the time of the foreclosure
sale four years thereafter. Thus, even assuming that the inventory and chattel
mortgage contract were duly submitted as evidence before the trial court, it is clear
that they cannot suffice to substantiate petitioners' allegation of inadequacy of price.
Page 502 of 505

Furthermore, the mere fact that respondent bank was the sole bidder for the
mortgaged properties in the public sale does not warrant the conclusion that the
transaction was attended with fraud. Fraud is a serious allegation that requires full and
convincing evidence, 20 and may not be inferred from the lone circumstance that it
was only respondent bank that bid in the sale of the foreclosed properties. The
sparseness of petitioners' evidence in this regard leaves Us no discretion but to
uphold the presumption of regularity in the conduct of the public sale.
We likewise affirm private petitioners' joint and several liability with petitioner
corporation in the loan. As found by the trial court and the Court of Appeals, the terms
of the promissory note unmistakably set forth the solidary nature of private petitioners'
commitment. Thus: cdrep
"On or before May 12, 1980, for value received, PAMECA WOOD
TREATMENT PLANT, INC., a corporation organized and existing
under the laws of the Philippines, with principal office at 304 El
Hogar Filipina Building, San Juan, Manila, promise to pay to the
order of DEVELOPMENT BANK OF THE PHILIPPINES at its
office located at corner Buendia and Makati Avenues, Makati,
Metro Manila, the principal sum of TWO HUNDRED SIXTY
SEVEN THOUSAND EIGHT HUNDRED AND EIGHTY ONE &
67/100 US DOLLARS (US$267,881.67) with interest at the rate
of three per cent (3%) per annum over DBP's borrowing rate for
these funds. Before the date of maturity, we hereby bind
ourselves, jointly and severally, to make partial payments as
follows:"

"In addition to the above, we also bind ourselves to pay for bank
advances for insurance premiums, taxes . . ."
xxx xxx xxx
"We further bind ourselves to reimburse DBP on a pro-rata basis
for all costs incurred by DBP on the foreign currency borrowings
from where the loan shall be drawn . . ."
xxx xxx xxx
"In case of non-payment of the amount of this note or any portion
of it on demand, when due, or any other amount or amounts due
on account of this note, the entire obligation shall become due
and demandable, and if, for the enforcement of the payment
thereof, the DEVELOPMENT BANK OF THE PHILIPPINES is
constrained to entrust the case to its attorneys, we jointly and
severally bind ourselves to pay for attorney's fees as provided for
in the mortgage contract, in addition to the legal fees and other
incidental expenses. In the event of foreclosure of the mortgage
securing this note, we further bind ourselves jointly and severally
to pay the deficiency, if any." (Emphasis supplied) 21
The promissory note was signed by private petitioners in the following manner: cdll
"PAMECA WOOD TREATMENT PLANT, INC.
By:
(Sgd) HERMINIO G. TEVES

xxx xxx xxx

"In case of default in the payment of any installment above, we
bind ourselves to pay DBP for advances . . ."
xxx xxx xxx
"We further bind ourselves to pay additional interest and penalty
charges on loan amortizations or portion thereof in arrears as
follows:"
xxx xxx xxx

(For
corporation)

himself

&

as

President

of

above-named

(Sgd) HIRAM DIDAY PULIDO

(Sgd) VICTORIA V. TEVES" 22
From the foregoing, it is clear that private petitioners intended to bind themselves
solidarily with petitioner PAMECA in the loan. As correctly submitted by respondent
bank, private petitioners are not made to answer for the corporate act of petitioner
PAMECA, but are made liable because they made themselves co-makers with
PAMECA under the promissory note. LibLex

Page 503 of 505

IN VIEW OF THE FOREGOING, the Petition is DENIED and the Decision of the Court
of Appeals dated April 23, 1992 in CA G.R. CV No. 27861 is hereby AFFIRMED.
Costs against petitioners.
SO ORDERED.
||| (Pameca Wood Treatment Plant, Inc. v. Court of Appeals, G.R. No. 106435, [July
14, 1999], 369 PHIL 544-557)

Page 504 of 505

Page 505 of 505