G.R. No.

L-22001 November 4, 1924

CHINA BANKING CORPORATION, in substitution of Filipinas Compania de Seguros, plaintiffs-appellee,

vs.

FAUSTINO LICHAUCO, ET AL., defendants-appellants.

Jose A. Espiritu for appellants.

Feria and La O and P. J. Sevilla for appellee.

AVANCEA, J.:

The dispositive part of the judgment appealed from is literally as follows:

For all of the foregoing it is adjudged and decreed that the defendant Faustino Lichauco be, as is hereby,
sentenced to pay the plaintiff the sum of P21,500, with interest at 12 per cent per year from September
13, 1922 until full payment thereof, and in addition, interest at 6 per cent per annum from the filing of
the complaint upon P1,935, interest of the sum claimed for 9 months prior to the filing of the complaint,
and of such sums as subsequently have become or may become due, from their respective dates of
maturity until the payment of said interest; he is further sentenced to pay the sum of P14,200 as fees of
plaintiff's attorney, expenses and troubles caused by the litigation for the collection of said sum of
P21,500, with interest thereon; and all the defendants are sentenced to pay the sum of P50,000 with
interest at the rate of 12 per cent per annum from September 5, 1921, capitalized monthly to earn the
same interest as the principal, until full payments thereof, and in addition 5 per cent of P50,000 and the
interest due at the time of the filing of the complaint, as costs of suit and other expenses of whatever
kind, including attorney's fees, incurred by the plaintiff for the recovery of said sum, and it is ordered
that the payment of all these amounts be made within three months from the date of the judgment and
that in case of nonpayment of all these amounts within the aforesaid period, the mortgaged property be
sold for the payment of the amount or amounts not paid.

The judgment appealed from contains a complete and exact statement of all the facts from which the
liability of the defendants arose.
There is no question in this appeal but that the defendant Faustino Lichauco owes the plaintiff the sum
of P21,500, with interest thereon at the rate of 12 per cent per year from September 13, 1922. Nor is
there about the fact that, at the filing of the herein complaint, Faustino Lichauco owed the sum of
P1,935, as interest for the preceding nine months. But it is alleged that the lower court erred in allowing
legal interest at the rate of 6 per cent from the filing of the complaint upon this sum of P1,935, the
amount of interest due on that date. This is no error. Article 1109 of the Civil Code expressly provides
that interest due shall earn legal interest from the date payment thereof is judicially demanded,
although the obligation may be silent on the matter.

As to the part of the judgment sentencing all the defendants to pay the plaintiff the sum of P50,000, it is
necessary to take into account the previous transactions that gave rise to this liability of the defendants.
Lichauco & Company, Inc., owed the plaintiff a large sum by way of loan. On September 5, 1921,
Faustino Lichauco and his wife Luisa F. de Lichauco executed a document (Exhibit C) in favor of the
plaintiff whereby they secured with a mortgage upon the property described in the document the
payment of a part of this loan in the amount of P50,000 with interest at 9 per cent per year. It was
agreed that in case of non-fulfillment of the contract, this mortgage would stand as security also for the
payment of all the costs of the suit and expenses of any kind, including attorney's fees, which by way of
liquidated damages are fixed at 5 per cent of the principal. It is stated lastly in this document that if
Faustino Lichauco and Luisa F. de Lichauco should fail to pay this amount of P50,000, the mortgage shall
be in full force and effect.

On the 20th of December, 1922, Lichauco & Co., Inc., Faustino Lichauco, and Luisa F. de Lichauco
executed another document (Exhibit D) in which, among the other things, they ratified the former
mortgage and stated that the payment of the P50,000 shall continue to be secured in the same manner
and with the same property, and shall earn interest at 12 per cent per year from October 20, 1920.
1awphil.net

The appellants argue in this court that the obligation of Faustino Lichauco and Luisa F. de Lichauco
lacked consideration, because what they guaranteed with this mortgage was a debt of Lichauco & Co.,
Inc. This contention does not find support in law. As a mortgage is an accessory contract, its
consideration is the very consideration of the principal contract, from which it receives its life, and
without which it cannot exist as an independent contract, although, as in the instant case, it may secure
an obligation incurred by another (art. 1857 of the Civil Code). That this amount of P50,000 is to earn
interest, and that 5 per cent must be paid in addition for judicial expenses and attorney's fees, was
expressly stipulated in the contract. The trial court, however, fixed this interest at 12 per cent from
September 5, 1921, which we believe is an error. In the contract of December 20, 1922, it was stipulated
that from October 20, 1920, the interest must be 12 per cent. Undoubtedly a clerical error was
committed in the writing of this date, inasmuch as then Faustino Lichauco and Luisa F. de Lichauco had
not executed the mortgage yet. The lower court held that this date must be September 5, 1921, but this
view is groundless, since in the contract of September 5, 1921, this interest was fixed at 9 per cent. This
date must, therefore, be construed to be the date of the second contract, December 20, 1922, as it
cannot be presumed that the parties ever intended to make it effective from a former date.

For the foregoing, it being understood that the defendants must pay interest at 9 per cent from
September 5, 1921, and 12 per cent from December 20, 1922, the judgment appealed from is affirmed
in all other respects, without special pronouncement as to costs. So ordered.

G.R. No. 133876 December 29, 1999

BANK OF AMERICA, NT and SA, petitioner,

vs.

AMERICAN REALTY CORPORATION and COURT OF APPEALS, respondents.

BUENA, J.:

Does a mortgage-creditor waive its remedy to foreclose the real estate mortgage constituted over a
third party mortgagor's property situated in the Philippines by filing an action for the collection of the
principal loan before foreign courts?

Sought to be reversed in the instant petition for review on certiorari under Rule 45 of the Rules of Court
are the decision 1 of public respondent Court of Appeals in CA G.R. CV No. 51094, promulgated on 30
September 1997 and its resolution, 2 dated 22 May 1998, denying petitioner's motion for
reconsideration.
Petitioner Bank of America NT & SA (BANTSA) is an international banking and financing institution duly
licensed to do business in the Philippines, organized and existing under and by virtue of the laws of the
State of California, United States of America while private respondent American Realty Corporation (ARC)
is a domestic corporation.

Bank of America International Limited (BAIL), on the other hand, is a limited liability company organized
and existing under the laws of England.

As borne by the records, BANTSA and BAIL on several occasions granted three major multi-million
United States (US) Dollar loans to the following corporate borrowers: (1) Liberian Transport Navigation,
S.A.; (2) El Challenger S.A. and (3) Eshley Compania Naviera S.A. (hereinafter collectively referred to as
"borrowers"), all of which are existing under and by virtue of the laws of the Republic of Panama and are
foreign affiliates of private

respondent. 3

Due to the default in the payment of the loan amortizations, BANTSA and the corporate borrowers
signed and entered into restructuring agreements. As additional security for the restructured loans,
private respondent ARC as third party mortgagor executed two real estate mortgages, 4 dated 17
February 1983 and 20 July 1984, over its parcels of land including improvements thereon, located at
Barrio Sto. Cristo, San Jose Del Monte, Bulacan, and which are covered by Transfer Certificate of Title
Nos. T-78759, T-78760, T-78761, T-78762 and T-78763.

Eventually, the corporate borrowers defaulted in the payment of the restructured loans prompting
petitioner BANTSA to file civil actions 5 before foreign courts for the collection of the principal loan, to
wit:

a) In England, in its High Court of Justice, Queen's Bench Division, Commercial Court (1992-Folio No 2098)
against Liberian Transport Navigation S.A., Eshley Compania Naviera S.A., El Challenger S.A., Espriona
Shipping Company S.A., Eddie Navigation Corp., S.A., Eduardo Katipunan Litonjua and Aurelio Katipunan
Litonjua on June 17, 1992.
b) In England, in its High Court of Justice, Queen's Bench Division, Commercial Court (1992-Folio No.
2245) against El Challenger S.A., Espriona Shipping Company S.A., Eduardo Katipuan Litonjua & Aurelio
Katipunan Litonjua on July 2, 1992;

c) In Hongkong, in the Supreme Court of Hongkong High Court (Action No. 4039 of 1992) against Eshley
Compania Naviera S.A., El Challenger S.A., Espriona Shipping Company S.A. Pacific Navigators
Corporation, Eddie Navigation Corporation S.A., Litonjua Chartering (Edyship) Co., Inc., Aurelio
Katipunan Litonjua, Jr. and Eduardo Katipunan Litonjua on November 19, 1992; and

d) In Hongkong, in the Supreme Court of Hongkong High Court (Action No. 4040 of 1992) against Eshley
Compania Naviera S.A., El Challenger S.A., Espriona Shipping Company, S.A., Pacific Navigators
Corporation, Eddie Navigation Corporation S.A., Litonjua Chartering (Edyship) Co., Jr. and Eduardo
Katipunan Litonjua on November 21, 1992.

In the civil suits instituted before the foreign courts, private respondent ARC, being a third party
mortgagor, was private not impleaded as party-defendant.

On 16 December 1992, petitioner BANTSA filed before the Office of the Provincial Sheriff of Bulacan,
Philippines an application for extrajudicial foreclosure 6 of real estate mortgage.

On 22 January 1993, after due publication and notice, the mortgaged real properties were sold at public
auction in an extrajudicial foreclosure sale, with Integrated Credit and Corporation Services Co (ICCS) as
the highest bidder for the sum of Twenty four Million Pesos (P24,000.000.00). 7

On 12 February 1993, private respondent filed before the Pasig Regional Trial Court, Branch 159, an
action for damages 8 against the petitioner, for the latter's act of foreclosing extrajudicially the real
estate mortgages despite the pendency of civil suits before foreign courts for the collection of the
principal loan.

In its answer 9 petitioner alleged that the rule prohibiting the mortgagee from foreclosing the mortgage
after an ordinary suit for collection has been filed, is not applicable in the present case, claiming that:
a) The plaintiff, being a mere third party mortgagor and not a party to the principal restructuring
agreements, was never made a party defendant in the civil cases filed in Hongkong and England;

b) There is actually no civil suit for sum of money filed in the Philippines since the civil actions were filed
in Hongkong and England. As such, any decisions (sic) which may be rendered in the abovementioned
courts are not (sic) enforceable in the Philippines unless a separate action to enforce the foreign
judgments is first filed in the Philippines, pursuant to Rule 39, Section 50 of the Revised Rules of Court.

c) Under English Law, which is the governing law under the principal agreements, the mortgagee does
not lose its security interest by filing civil actions for sums of money.

On 14 December 1993, private respondent filed a motion for

suspension 10 of the redemption period on the ground that "it cannot exercise said right of redemption
without at the same time waiving or contradicting its contentions in the case that the foreclosure of the
mortgage on its properties is legally improper and therefore invalid."

In an order 11 dated 28 January 1994, the trial court granted the private respondent's motion for
suspension after which a copy of said order was duly received by the Register of Deeds of Meycauayan,
Bulacan.

On 07 February 1994, ICCS, the purchaser of the mortgaged properties at the foreclosure sale,
consolidated its ownership over the real properties, resulting to the issuance of Transfer Certificate of
Title Nos. T-18627, T-186272, T-186273, T-16471 and T-16472 in its name.

On 18 March 1994, after the consolidation of ownership in its favor, ICCS sold the real properties to
Stateland Investment Corporation for the amount of Thirty Nine Million Pesos (P39,000,000.00). 12
Accordingly, Transfer Certificate of Title Nos. T-187781(m), T-187782(m), T-187783(m), T-16653P(m) and
T-16652P(m) were issued in the latter's name.

After trial, the lower court rendered a decision 13 in favor of private respondent ARC dated 12 May
1993, the decretal portion of which reads:
WHEREFORE, judgment is hereby rendered declaring that the filing in foreign courts by the defendant of
collection suits against the principal debtors operated as a waiver of the security of the mortgages.
Consequently, the plaintiff's rights as owner and possessor of the properties then covered by Transfer
Certificates of Title Nos. T-78759, T-78762, T-78763, T-78760 and T-78761, all of the Register of Deeds of
Meycauayan, Bulacan, Philippines, were violated when the defendant caused the extrajudicial
foreclosure of the mortgages constituted thereon.

Accordingly, the defendant is hereby ordered to pay the plaintiff the following sums, all with legal
interest thereon from the date of the filing of the complaint up to the date of actual payment:

1) Actual or compensatory damages in the amount of Ninety Nine Million Pesos (P99,000,000.00);

2) Exemplary damages in the amount of Five Million Pesos (P5,000,000.00); and

3) Costs of suit.

SO ORDERED.

On appeal, the Court of Appeals affirmed the assailed decision of the lower court prompting petitioner
to file a motion for reconsideration which the appellate court denied.

Hence, the instant petition for review 14 on certiorari where herein petitioner BANTSA ascribes to the
Court of Appeals the following assignment of errors:

1. The Honorable Court of Appeals disregarded the doctrines laid down by this Hon. Supreme Court in
the cases of Caltex Philippines, Inc. vs. Intermediate Appellate Court docketed as G.R. No. 74730
promulgated on August 25, 1989 and Philippine Commercial International Bank vs. IAC, 196 SCRA 29
(1991 case), although said cases were duly cited, extensively discussed and specifically mentioned, as
one of the issues in the assignment of errors found on page 5 of the decision dated September 30, 1997.
2. The Hon. Court of Appeals acted with grave abuse of discretion when it awarded the private
respondent actual and exemplary damages totalling P171,600,000.00, as of July 12, 1998 although such
huge amount was not asked nor prayed for in private respondent's complaint, is contrary to law and is
totally unsupported by evidence (sic).

In fine, this Court is called upon to resolve two main issues:

1. Whether or not the petitioner's act of filing a collection suit against the principal debtors for the
recovery of the loan before foreign courts constituted a waiver of the remedy of foreclosure.

2. Whether or not the award by the lower court of actual and exemplary damages in favor of private
respondent ARC, as third-party mortgagor, is proper.

The petition is bereft of merit.

First, as to the issue of availability of remedies, petitioner submits that a waiver of the remedy of
foreclosure requires the concurrence of two requisites: an ordinary civil action for collection should be
filed and subsequently a final judgment be correspondingly rendered therein.

According to petitioner, the mere filing of a personal action to collect the principal loan does not suffice;
a final judgment must be secured and obtained in the personal action so that waiver of the remedy of
foreclosure may be appreciated. To put it differently, absent any of the two requisites, the mortgagee-
creditor is deemed not to have waived the remedy of foreclosure.

We do not agree.

Certainly, this Court finds petitioner's arguments untenable and upholds the jurisprudence laid down in
Bachrach 15 and similar cases adjudicated thereafter, thus:
In the absence of express statutory provisions, a mortgage creditor may institute against the mortgage
debtor either a personal action or debt or a real action to foreclose the mortgage. In other words, he
may he may pursue either of the two remedies, but not both. By such election, his cause of action can
by no means be impaired, for each of the two remedies is complete in itself. Thus, an election to bring a
personal action will leave open to him all the properties of the debtor for attachment and execution,
even including the mortgaged property itself. And, if he waives such personal action and pursues his
remedy against the mortgaged property, an unsatisfied judgment thereon would still give him the right
to sue for a deficiency judgment, in which case, all the properties of the defendant, other than the
mortgaged property, are again open to him for the satisfaction of the deficiency. In either case, his
remedy is complete, his cause of action undiminished, and any advantages attendant to the pursuit of
one or the other remedy are purely accidental and are all under his right of election. On the other hand,
a rule that would authorize the plaintiff to bring a personal action against the debtor and simultaneously
or successively another action against the mortgaged property, would result not only in multiplicity of
suits so offensive to justice (Soriano vs. Enriques, 24 Phil. 584) and obnoxious to law and equity (Osorio
vs. San Agustin, 25 Phil., 404), but also in subjecting the defendant to the vexation of being sued in the
place of his residence or of the residence of the plaintiff, and then again in the place where the property
lies.

In Danao vs. Court of Appeals, 16 this Court, reiterating jurisprudence enunciated in Manila Trading and
Supply Co vs. Co Kim 17 and Movido vs.

RFC, 18 invariably held:

. . . The rule is now settled that a mortgage creditor may elect to waive his security and bring, instead, an
ordinary action to recover the indebtedness with the right to execute a judgment thereon on all the
properties of the debtor, including the subject matter of the mortgage . . . , subject to the qualification
that if he fails in the remedy by him elected, he cannot pursue further the remedy he has waived.
(Emphasis Ours)

Anent real properties in particular, the Court has laid down the rule that a mortgage creditor may
institute against the mortgage debtor either a personal action for debt or a real action to foreclose the
mortgage. 19

In our jurisdiction, the remedies available to the mortgage creditor are deemed alternative and not
cumulative. Notably, an election of one remedy operates as a waiver of the other. For this purpose, a
remedy is deemed chosen upon the filing of the suit for collection or upon the filing of the complaint in
an action for foreclosure of mortgage, pursuant to the provision of Rule 68 of the of the 1997 Rules of
Civil Procedure. As to extrajudicial foreclosure, such remedy is deemed elected by the mortgage creditor
upon filing of the petition not with any court of justice but with the Office of the Sheriff of the province
where the sale is to be made, in accordance with the provisions of Act No. 3135, as amended by Act No.
4118.

In the case at bench, private respondent ARC constituted real estate mortgages over its properties as
security for the debt of the principal debtors. By doing so, private respondent subjected itself to the
liabilities of a third party mortgagor. Under the law, third persons who are not parties to a loan may
secure the latter by pledging or mortgaging their own property. 20

Notwithstanding, there is no legal provision nor jurisprudence in our jurisdiction which makes a third
person who secures the fulfillment of another's obligation by mortgaging his own property, to be
solidarily bound with the principal obligor. The signatory to the principal contractloanremains to be
primarily bound. It is only upon default of the latter that the creditor may have recourse on the
mortgagors by foreclosing the mortgaged properties in lieu of an action for the recovery of the amount
of the loan. 21

In the instant case, petitioner's contention that the requisites of filing the action for collection and
rendition of final judgment therein should concur, is untenable.

Thus, in Cerna vs. Court of Appeals, 22 we agreed with the petitioner in said case, that the filing of a
collection suit barred the foreclosure of the mortgage:

A mortgagee who files a suit for collection abandons the remedy of foreclosure of the chattel mortgage
constituted over the personal property as security for the debt or value of the promissory note when he
seeks to recover in the said collection suit.

. . . When the mortgagee elects to file a suit for collection, not foreclosure, thereby abandoning the
chattel mortgage as basis for relief, he clearly manifests his lack of desire and interest to go after the
mortgaged property as security for the promissory note . . . .

Contrary to petitioner's arguments, we therefore reiterate the rule, for clarity and emphasis, that the
mere act of filing of an ordinary action for collection operates as a waiver of the mortgage-creditor's
remedy to foreclose the mortgage. By the mere filing of the ordinary action for collection against the
principal debtors, the petitioner in the present case is deemed to have elected a remedy, as a result of
which a waiver of the other necessarily must arise. Corollarily, no final judgment in the collection suit is
required for the rule on waiver to apply.

Hence, in Caltex Philippines, Inc. vs. Intermediate-Appellate Court, 23 a case relied upon by petitioner,
supposedly to buttress its contention, this Court had occasion to rule that the mere act of filing a
collection suit for the recovery of a debt secured by a mortgage constitutes waiver of the other remedy
of foreclosure.

In the case at bar, petitioner BANTSA only has one cause of action which is non-payment of the debt.
Nevertheless, alternative remedies are available for its enjoyment and exercise. Petitioner then may opt
to exercise only one of two remedies so as not to violate the rule against splitting a cause of action.

As elucidated by this Court in the landmark case of Bachrach Motor Co., Inc, vs. Icarangal. 24

For non-payment of a note secured by mortgage, the creditor has a single cause of action against the
debtor. This single cause of action consists in the recovery of the credit with execution of the security. In
other words, the creditor in his action may make two demands, the payment of the debt and the
foreclosure of his mortgage. But both demands arise from the same cause, the non-payment of the debt,
and for that reason, they constitute a single cause of action. Though the debt and the mortgage
constitute separate agreements, the latter is subsidiary to the former, and both refer to one and the
same obligation. Consequently, there exists only one cause of action for a single breach of that
obligation. Plaintiff, then, by applying the rules above stated, cannot split up his single cause of action by
filing a complaint for payment of the debt, and thereafter another complaint for foreclosure of the
mortgage. If he does so, the filing of the first complaint will bar the subsequent complaint. By allowing
the creditor to file two separate complaints simultaneously or successively, one to recover his credit and
another to foreclose his mortgage, we will, in effect, be authorizing him plural redress for a single
breach of contract at so much cost to the courts and with so much vexation and oppression to the
debtor.

Petitioner further faults the Court of Appeals for allegedly disregarding the doctrine enunciated in Caltex
wherein this High Court relaxed the application of the general rules to wit:
In the present case, however, we shall not follow this rule to the letter but declare that it is the
collection suit which was waived and/or abandoned. This ruling is more in harmony with the principles
underlying our judicial system. It is of no moment that the collection suit was filed ahead, what is
determinative is the fact that the foreclosure proceedings ended even before the decision in the
collection suit was rendered. . . .

Notably, though, petitioner took the Caltex ruling out of context. We must stress that the Caltex case
was never intended to overrule the well-entrenched doctrine enunciated Bachrach, which to our mind
still finds applicability in cases of this sort. To reiterate, Bachrach is still good law.

We then quote the decision 25 of the trial court, in the present case, thus:

The aforequoted ruling in Caltex is the exception rather than the rule, dictated by the peculiar
circumstances obtaining therein. In the said case, the Supreme Court chastised Caltex for making ". . . a
mockery of our judicial system when it initially filed a collection suit then, during the pendency thereof,
foreclosed extrajudicially the mortgaged property which secured the indebtedness, and still pursued the
collection suit to the end." Thus, to prevent a mockery of our judicial system", the collection suit had to
be nullified because the foreclosure proceedings have already been pursued to their end and can no
longer be undone.

xxx xxx xxx

In the case at bar, it has not been shown whether the defendant pursued to the end or are still pursuing
the collection suits filed in foreign courts. There is no occasion, therefore, for this court to apply the
exception laid down by the Supreme Court in Caltex by nullifying the collection suits. Quite obviously,
too, the aforesaid collection suits are beyond the reach of this Court. Thus the only way the court may
prevent the spector of a creditor having "plural redress for a single breach of contract" is by holding, as
the Court hereby holds, that the defendant has waived the right to foreclose the mortgages constituted
by the plaintiff on its properties originally covered by Transfer Certificates of Title Nos. T-78759, T-78762,
T-78760 and T-78761. (RTC Decision pp., 10-11)

In this light, the actuations of Caltex are deserving of severe criticism, to say the least. 26
Moreover, petitioner attempts to mislead this Court by citing the case of PCIB vs. IAC. 27 Again,
petitioner tried to fit a square peg in a round hole. It must be stressed that far from overturning the
doctrine laid down in Bachrach, this Court in PCIB buttressed its firm stand on this issue by declaring:

While the law allows a mortgage creditor to either institute a personal action for the debt or a real
action to foreclosure the mortgage, he cannot pursue both remedies simultaneously or successively as
was done by PCIB in this case.

xxx xxx xxx

Thus, when the PCIB filed Civil Case No. 29392 to enforce payment of the 1.3 million promissory note
secured by real estate mortgages and subsequently filed a petition for extrajudicial foreclosure, it
violates the rule against splitting a cause of action.

Accordingly, applying the foregoing rules, we hold that petitioner, by the expediency of filing four civil
suits before foreign courts, necessarily abandoned the remedy to foreclose the real estate mortgages
constituted over the properties of third-party mortgagor and herein private respondent ARC. Moreover,
by filing the four civil actions and by eventually foreclosing extrajudicially the mortgages, petitioner in
effect transgressed the rules against splitting a cause of action well-enshrined in jurisprudence and our
statute books.

In Bachrach, this Court resolved to deny the creditor the remedy of foreclosure after the collection suit
was filed, considering that the creditor should not be afforded "plural redress for a single breach of
contract." For cause of action should not be confused with the remedy created for its enforcement. 28

Notably, it is not the nature of the redress which is crucial but the efficacy of the remedy chosen in
addressing the creditor's cause. Hence, a suit brought before a foreign court having competence and
jurisdiction to entertain the action is deemed, for this purpose, to be within the contemplation of the
remedy available to the mortgagee-creditor. This pronouncement would best serve the interest of
justice and fair play and further discourage the noxious practice of splitting up a lone cause of action.
Incidentally, BANTSA alleges that under English Law, which according to petitioner is the governing law
with regard to the principal agreements, the mortgagee does not lose its security interest by simply
filing civil actions for sums of money. 29

We rule in the negative.

This argument shows desperation on the part of petitioner to rivet its crumbling cause. In the case at
bench, Philippine law shall apply notwithstanding the evidence presented by petitioner to prove the
English law on the matter.

In a long line of decisions, this Court adopted the well-imbedded principle in our jurisdiction that there is
no judicial notice of any foreign law. A foreign law must be properly pleaded and proved as a fact. 30
Thus, if the foreign law involved is not properly pleaded and proved, our courts will presume that the
foreign law is the same as our local or domestic or internal

law. 31 This is what we refer to as the doctrine of processual presumption.

In the instant case, assuming arguendo that the English Law on the matter were properly pleaded and
proved in accordance with Section 24, Rule 132 of the Rules of Court and the jurisprudence laid down in
Yao Kee, et al. vs.

Sy-Gonzales, 32 said foreign law would still not find applicability.

Thus, when the foreign law, judgment or contract is contrary to a sound and established public policy of
the forum, the said foreign law, judgment or order shall not be applied. 33

Additionally, prohibitive laws concerning persons, their acts or property, and those which have for their
object public order, public policy and good customs shall not be rendered ineffective by laws or
judgments promulgated, or by determinations or conventions agreed upon in a foreign country. 34

The public policy sought to be protected in the instant case is the principle imbedded in our jurisdiction
proscribing the splitting up of a single cause of action.
Section 4, Rule 2 of the 1997 Rules of Civil Procedure is pertinent

If two or more suits are instituted on the basis of the same cause of action, the filing of one or a
judgment upon the merits in any one is available as a ground for the dismissal of the others.

Moreover, foreign law should not be applied when its application would work undeniable injustice to
the citizens or residents of the forum. To give justice is the most important function of law; hence, a law,
or judgment or contract that is obviously unjust negates the fundamental principles of Conflict of Laws.
35

Clearly then, English Law is not applicable.

As to the second pivotal issue, we hold that the private respondent is entitled to the award of actual or
compensatory damages inasmuch as the act of petitioner BANTSA in extrajudicially foreclosing the real
estate mortgages constituted a clear violation of the rights of herein private respondent ARC, as third-
party mortgagor.

Actual or compensatory damages are those recoverable because of pecuniary loss in business, trade,
property, profession, job or occupation and the same must be proved, otherwise if the proof is flimsy
and non-substantial, no damages will be given. 36 Indeed, the question of the value of property is
always a difficult one to settle as valuation of real property is an imprecise process since real estate has
no inherent value readily ascertainable by an appraiser or by the court. 37 The opinions of men vary so
much concerning the real value of property that the best the courts can do is hear all of the witnesses
which the respective parties desire to present, and then, by carefully weighing that testimony, arrive at
a conclusion which is just and equitable. 38

In the instant case, petitioner assails the Court of Appeals for relying heavily on the valuation made by
Philippine Appraisal Company. In effect, BANTSA questions the act of the appellate court in giving due
weight to the appraisal report composed of twenty three pages, signed by Mr. Lauro Marquez and
submitted as evidence by private respondent. The appraisal report, as the records would readily show,
was corroborated by the testimony of Mr. Reynaldo Flores, witness for private respondent.

On this matter, the trial court observed:

The record herein reveals that plaintiff-appellee formally offered as evidence the appraisal report dated
March 29, 1993 (Exhibit J, Records, p. 409), consisting of twenty three (23) pages which set out in detail
the valuation of the property to determine its fair market value (TSN, April 22, 1994, p. 4), in the amount
of P99,986,592.00 (TSN, ibid., p. 5), together with the corroborative testimony of one Mr. Reynaldo F.
Flores, an appraiser and director of Philippine Appraisal Company, Inc. (TSN, ibid., p. 3). The latter's
testimony was subjected to extensive cross-examination by counsel for defendant-appellant (TSN, April
22, 1994, pp. 6-22). 39

In the matter of credibility of witnesses, the Court reiterates the familiar and well-entrenched rule that
the factual findings of the trial court should be respected. 40 The time-tested jurisprudence is that the
findings and conclusions of the trial court on the credibility of witnesses enjoy a badge of respect for the
reason that trial courts have the advantage of observing the demeanor of witnesses as they testify. 41

This Court will not alter the findings of the trial court on the credibility of witnesses, principally because
they are in a better position to assess the same than the appellate court. 42 Besides, trial courts are in a
better position to examine real evidence as well as observe the demeanor of witnesses. 43

Similarly, the appreciation of evidence and the assessment of the credibility of witnesses rest primarily
with the trial court. 44 In the case at bar, we see no reason that would justify this Court to disturb the
factual findings of the trial court, as affirmed by the Court of Appeals, with regard to the award of actual
damages.

In arriving at the amount of actual damages, the trial court justified the award by presenting the
following ratiocination in its assailed decision 45, to wit:

Indeed, the Court has its own mind in the matter of valuation. The size of the subject real properties are
(sic) set forth in their individuals titles, and the Court itself has seen the character and nature of said
properties during the ocular inspection it conducted. Based principally on the foregoing, the Court
makes the following observations:
1. The properties consist of about 39 hectares in Bo. Sto. Cristo, San Jose del Monte, Bulacan, which is
(sic) not distant from Metro Manila the biggest urban center in the Philippines and are easily
accessible through well-paved roads;

2. The properties are suitable for development into a subdivision for low cost housing, as admitted by
defendant's own appraiser (TSN, May 30, 1994, p. 31);

3. The pigpens which used to exist in the property have already been demolished. Houses of strong
materials are found in the vicinity of the property (Exhs. 2, 2-1 to 2-7), and the vicinity is a growing
community. It has even been shown that the house of the Barangay Chairman is located adjacent to the
property in question (Exh. 27), and the only remaining piggery (named Cherry Farm) in the vicinity is
about 2 kilometers away from the western boundary of the property in question (TSN, November 19, p.
3);

4. It will not be hard to find interested buyers of the property, as indubitably shown by the fact that on
March 18, 1994, ICCS (the buyer during the foreclosure sale) sold the consolidated real estate properties
to Stateland Investment Corporation, in whose favor new titles were issued, i.e., TCT Nos. T-187781(m);
T-187782(m), T-187783(m); T-16653P(m) and T-166521(m) by the Register of Deeds of Meycauayan (sic),
Bulacan;

5. The fact that ICCS was able to sell the subject properties to Stateland Investment Corporation for
Thirty Nine Million (P39,000,000.00) Pesos, which is more than triple defendant's appraisal (Exh. 2)
clearly shows that the Court cannot rely on defendant's aforesaid estimate (Decision, Records, p. 603).

It is a fundamental legal aphorism that the conclusions of the trial judge on the credibility of witnesses
command great respect and consideration especially when the conclusions are supported by the
evidence on record. 46 Applying the foregoing principle, we therefore hold that the trial court
committed no palpable error in giving credence to the testimony of Reynaldo Flores, who according to
the records, is a licensed real estate broker, appraiser and director of Philippine Appraisal Company, Inc.
since 1990. 47 As the records show, Flores had been with the company for 26 years at the time of his
testimony.

Of equal importance is the fact that the trial court did not confine itself to the appraisal report dated 29
March 1993, and the testimony given by Mr. Reynaldo Flores, in determining the fair market value of
the real property. Above all these, the record would likewise show that the trial judge in order to
appraise himself of the characteristics and condition of the property, conducted an ocular inspection
where the opposing parties appeared and were duly represented.

Based on these considerations and the evidence submitted, we affirm the ruling of the trial court as
regards the valuation of the property

. . . a valuation of Ninety Nine Million Pesos (P99,000,000.00) for the 39-hectare properties (sic)
translates to just about Two Hundred Fifty Four Pesos (P254.00) per square meter. This appears to be, as
the court so holds, a better approximation of the fair market value of the subject properties. This is the
amount which should be restituted by the defendant to the plaintiff by way of actual or compensatory
damages . . . . 48

Further, petitioner ascribes error to the lower court awarding an amount allegedly not asked nor prayed
for in private respondent's complaint.

Notwithstanding the fact that the award of actual and compensatory damages by the lower court
exceeded that prayed for in the complaint, the same is nonetheless valid, subject to certain
qualifications.

On this issue, Rule 10, Section 5 of the Rules of Court is pertinent:

Sec. 5. Amendment to conform to or authorize presentation of evidence. When issues not raised by
the pleadings are tried with the express or implied consent of the parties, they shall be treated in all
respects as if they had been raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise these issues may be made upon
motion of any party at any time, even after judgement; but failure to amend does not affect the result
of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the
issues made by the pleadings, the court may allow the pleadings to be amended and shall do so with
liberality if the presentation of the merits of the action and the ends of substantial justice will be
subserved thereby. The court may grant a continuance to enable the amendment to be made.
The jurisprudence enunciated in Talisay-Silay Milling Co., Inc. vs. Asociacion de Agricultures de Talisay-
Silay, Inc. 49 citing Northern Cement Corporation vs. Intermediate Appellate Court 50 is enlightening:

There have been instances where the Court has held that even without the necessary amendment, the
amount proved at the trial may be validly awarded, as in Tuazon v. Bolanos (95 Phil. 106), where we said
that if the facts shown entitled plaintiff to relief other than that asked for, no amendment to the
complaint was necessary, especially where defendant had himself raised the point on which recovery
was based. The appellate court could treat the pleading as amended to conform to the evidence
although the pleadings were actually not amended. Amendment is also unnecessary when only clerical
error or non substantial matters are involved, as we held in Bank of the Philippine Islands vs. Laguna (48
Phil. 5). In Co Tiamco vs. Diaz (75 Phil. 672), we stressed that the rule on amendment need not be
applied rigidly, particularly where no surprise or prejudice is caused the objecting party. And in the
recent case of National Power Corporation vs. Court of Appeals (113 SCRA 556), we held that where
there is a variance in the defendant's pleadings and the evidence adduced by it at the trial, the Court
may treat the pleading as amended to conform with the evidence.

It is the view of the Court that pursuant to the above-mentioned rule and in light of the decisions cited,
the trial court should not be precluded from awarding an amount higher than that claimed in the
pleading notwithstanding the absence of the required amendment. But it is upon the condition that the
evidence of such higher amount has been presented properly, with full opportunity on the part of the
opposing parties to support their respective contentions and to refute each other's evidence.

The failure of a party to amend a pleading to conform to the evidence adduced during trial does not
preclude an adjudication by the court on the basis of such evidence which may embody new issues not
raised in the pleadings, or serve as a basis for a higher award of damages. Although the pleading may
not have been amended to conform to the evidence submitted during trial, judgment may nonetheless
be rendered, not simply on the basis of the issues alleged but also the basis of issues discussed and the
assertions of fact proved in the course of trial. The court may treat the pleading as if it had been
amended to conform to the evidence, although it had not been actually so amended. Former Chief
Justice Moran put the matter in this way:

When evidence is presented by one party, with the expressed or implied consent of the adverse party,
as to issues not alleged in the pleadings, judgment may be rendered validly as regards those issues,
which shall be considered as if they have been raised in the pleadings. There is implied consent to the
evidence thus presented when the adverse party fails to object thereto.
Clearly, a court may rule and render judgment on the basis of the evidence before it even though the
relevant pleading had not been previously amended, so long as no surprise or prejudice is thereby
caused to the adverse party. Put a little differently, so long as the basis requirements of fair play had
been met, as where litigants were given full opportunity to support their respective contentions and to
object to or refute each other's evidence, the court may validly treat the pleadings as if they had been
amended to conform to the evidence and proceed to adjudicate on the basis of all the evidence before
it.

In the instant case, inasmuch as the petitioner was afforded the opportunity to refute and object to the
evidence, both documentary and testimonial, formally offered by private respondent, the rudiments of
fair play are deemed satisfied. In fact, the testimony of Reynaldo Flores was put under scrutiny during
the course of the cross-examination. Under these circumstances, the court acted within the bounds of
its jurisdiction and committed no reversible error in awarding actual damages the amount of which is
higher than that prayed for. Verily, the lower court's actuations are sanctioned by the Rules and
supported by jurisprudence.

Similarly, we affirm the grant of exemplary damages although the amount of Five Million Pesos
(P5,000,000.00) awarded, being excessive, is subject to reduction. Exemplary or corrective damages are
imposed, by way of example or correction for the public good, in addition to the moral, temperate,
liquidated or compensatory damages. 51 Considering its purpose, it must be fair and reasonable in every
case and should not be awarded to unjustly enrich a prevailing party. 52 In our view, an award of
P50,000.00 as exemplary damages in the present case qualifies the test of reasonableness.

WHEREFORE, premises considered, the instant petition is DENIED for lack of merit. The decision of the
Court of Appeals is hereby AFFIRMED with MODIFICATION of the amount awarded as exemplary
damages. According, petitioner is hereby ordered to pay private respondent the sum of P99,000,000.00
as actual or compensatory damages; P50,000.00 as exemplary damage and the costs of suit.

SO ORDERED

G.R. No. L-2344 February 10, 1906

GONZALO TUASON, plaintiff-appellee,

vs.

DOLORES OROZCO, defendant-appellant.

Hartigan, Marple, Rohde and Gutierrez for appellant.

Ledesma, Sumulong and Quintos for appellee.

MAPA, J.:

On November 19, 1888, Juan de Vargas y Amaya, the defendant's husband, executed a power of
attorney to Enrique Grupe, authorizing him, among other things, to dispose of all his property, and
particularly of a certain house and lot known as No. 24 Calle Nueva, Malate, in the city of Manila, for the
price at which it was actually sold. He was also authorized to mortgage the house for the purpose of
securing the payment of any amount advanced to his wife, Dolores Orozco de Rivero, who, inasmuch as
the property had been acquired with funds belonging to the conjugal partnership, was a necessary party
to its sale or incumbrance.

On the 21st of January, 1890, Enrique Grupe and Dolores Orozco de Rivero obtained a loan from the
plaintiff secured by a mortgage on the property referred to in the power of attorney. In the caption of
the instrument evidencing the debt it is stated that Grupe and Dolores Orozco appeared as the parties
of the first part and Gonzalo Tuason, the plaintiff, as the party of the second part; that Grupe acted for
himself and also in behalf of Juan Vargas by virtue of the power granted him by the latter, and that
Dolores Orozco appeared merely for the purpose of complying with the requirement contained in the
power of attorney. In the body of the instrument the following appears:

1. Enrique Grupe acknowledges to have this day received from Gonzalo Tuason as a loan, after
deducting therefrom the interest agreed upon, the sum of 3,500 pesos in cash, to his entire satisfaction,
which sum he promises to pay within one year from the date hereof.

2. Grupe also declares that of the 3,500 pesos, he has delivered to Dolores Orozco the sum of 2,200
pesos, having retained the remaining 1,300 pesos for use in his business; that notwithstanding this
distribution of the amount borrowed, he assumes liability for the whole sum of 3,500 pesos, which he
promises to repay in current gold or silver coin, without discount, in this city on the date of the maturity
of the loan, he otherwise to be liable for all expenses incurred and damages suffered by his creditor by
reason of his failure to comply with any or all of the conditions stipulated herein, and to pay further
interest at the rate of 1 per cent per month from the date of default until the debt is fully paid.

3. Grupe pledges as special security for the payment of the debt 13 shares of stock in the "Compaia de
los Tranvias de Filipinas," which shares he has delivered to his creditor duly indorsed so that the latter in
case of his insolvency may dispose of the same without any further formalities.

4. To secure the payment of the 2,200 pesos delivered to Dolores Orozco as aforesaid he specially
mortgages the house and lot No. 24, Calle Nueva, Malate, in the city of Manila (the same house referred
to in the power at attorney executed by Vargas to Grupe).

5. Dolores Orozco states that, in accordance with the requirement contained in the power of attorney
executed by Vargas to Grupe, she appears for the purpose of confirming the mortgage created upon the
property in question.

6. Gonzalo Tuason does hereby accept all rights and actions accruing to him under his contract.

This instrument was duly recorded in the Registry of Property, and it appears therefrom that Enrique
Grupe, as attorney in fact for Vargas, received from the plaintiff a loan of 2,200 pesos and delivered the
same to the defendant; that to secure its payment he mortgaged the property of his principal with
defendant's consent as required in the power of attorney. He also received 1,300 pesos. This amount he
borrowed for his own use. The recovery of this sum not being involved in this action, it will not be
necessary to refer to it in this decision. The complaint refers only to the 2,200 pesos delivered to the
defendant under the terms of the agreement.

The defendant denies having received this sum, but her denial can not overcome the proof to the
contrary contained in the agreement. She was one of the parties to that instrument and signed it. This
necessarily implies an admission on her part that the statements in the agreement relating to her are
true. She executed another act which corroborates the delivery to her of the money in question that
is, her personal intervention in the execution of the mortgage and her statement in the deed that the
mortgage had been created with her knowledge and consent. The lien was created precisely upon the
assumption that she had received that amount and for the purpose of securing its payment.
In addition to this the defendant wrote a letter on October 23, 1903, to the attorneys for the plaintiff
promising to pay the debt on or before the 5th day of November following. The defendant admits the
authenticity of this letter, which is a further evidence of the fact that she had received the amount in
question. Thirteen years had elapsed since she signed the mortgage deed. During all this time she never
denied having received the money. On the contrary, she promised to settle within a short time. The only
explanation that we can find for this is that she actually received the money as set forth in the
instrument.

The fact that the defendant received the money from her husband's agent and not from the creditor
does not affect the validity of the mortgage in view of the conditions contained in the power of attorney
under which the mortgage was created. Nowhere does it appear in this power that the money was to be
delivered to her by the creditor himself and not through the agent or any other person. The important
thing was that she should have received the money. This we think is fully established by the record.

This being an action for the recovery of the debt referred to, the court below properly admitted the
instrument executed January 21, 1890, evidencing the debt.

The appellant claims that the instrument is evidence of a debt personally incurred by Enrique Grupe for
his own benefit, and not incurred for the benefit of his principal, Vargas, as alleged in the complaint. As
a matter of fact, Grupe, by the terms of the agreement, bound himself personally to pay the debt. The
appellant's contention however, can not be sustained. The agreement, so far as that amount is
concerned, was signed by Grupe as attorney in fact for Vargas. Pursuant to instructions contained in the
power of attorney the money was delivered to Varga's wife, the defendant in this case. To secure the
payment of the debt, Varga's property was mortgaged. His wife took part in the execution of the
mortgage as required in the power of attorney. A debt thus incurred by the agent is binding directly
upon the principal, provided the former acted, as in the present case, within the scope of his authority.
(Art. 1727 of the Civil Code.) The fact that the agent has also bound himself to pay the debt does not
relieve from liability the principal for whose benefit the debt was incurred. The individual liability of the
agent constitutes in the present case a further security in favor of the creditor and does not affect or
preclude the liability of the principal. In the present case the latter's liability was further guaranteed by a
mortgage upon his property. The law does not provide that the agent can not bind himself personally to
the fulfillment of an obligation incurred by him in the name and on behalf of his principal. On the
contrary, it provides that such act on the part of an agent would be valid. (Art. 1725 of the Civil Code.)
The above mortgage being valid and having been duly recorded in the Register of Property, directly
subjects the property thus encumbered, whoever its possessor may be, to the fulfillment of the
obligation for the security of which it was created. (Art. 1876 of the Civil Code and art. 105 of the
Mortgage Law.) This presents another phase of the question. Under the view we have taken of the case
it is practically of no importance whether or not Enrique Grupe bound himself personally to pay the debt
in question. Be this as it may and assuming that Vargas, though principal in the agency, was not the
principal debtor, the right in rem arising from the mortgage would have justified the creditor in bringing
his action directly against the property encumbered had he chosen to foreclose the mortgage rather
than to sue Grupe, the alleged principal debtor. This would be true irrespective of the personal liability
incurred by Grupe. The result would be practically the same even though it were admitted that
appellant's contention is correct.

The appellant also alleges that Enrique Grupe pledged to the plaintiff thirteen shares of stock in the
"Compaia de los Tranvias de Filipinas" to secure the payment of the entire debt, and contends that it
must be shown what has become of these shares, the value of which might be amply sufficient to pay
the debt, before proceeding to foreclose the mortgage. This contention can not be sustained in the face
of the law above quoted to the effect that a mortgage directly subjects the property encumbered,
whoever its possessor may be, to the fulfillment of the obligation for the security of which it was created.
Moreover it was incumbent upon the appellant to show that the debt had been paid with those shares.
Payment is not presumed but must be proved. It is a defense which the defendant may interpose. It was
therefore her duty to show this fact affirmatively. She failed, however, to do so.

The appellant's final contention is that in order to render judgment against the mortgaged property it
would be necessary that the minor children of Juan de Vargas be made parties defendant in this action,
they having an interest in the property. Under article 154 of the Civil Code, which was in force at the
time of the death of Vargas, the defendant had the parental authority over her children and
consequently the legal representation of their persons and property. (Arts. 155 and 159 of the Civil
Code.) It can not be said, therefore, that they were not properly represented at the trial. Furthermore
this action was brought against the defendant in her capacity as administratrix of the estate of the
deceased Vargas. She did not deny in her answer that she was such administratix.

Vargas having incurred this debt during his marriage, the same should not be paid out of property
belonging to the defendant exclusively but from that pertaining to the conjugal partnership. This fact
should be borne in mind in case the proceeds of the mortgaged property be not sufficient to ay the debt
and interest thereon. The judgment of the court below should be modified in so far as it holds the
defendant personally liable for the payment of the debt.
The judgment thus modified is affirmed and the defendant is hereby ordered to pay to the plaintiff the
sum of 2,200 pesos as principal, together with interest thereon from the 21st day of January, 1891, until
the debt shall have been fully discharged. The appellant shall pay the costs of this appeal.

After the expiration of ten days let judgment be entered in accordance herewith and let the case be
remanded to the court below for execution. So ordered.

G.R. No. L-25694 December 31, 1926

LEOCADIO ANGELO, applicant,

vs.

THE DIRECTOR OF LANDS, ET AL., claimants-appellees;

LUCIA F. VALLE CRUZ and CIPRIANO PACHECO, claimants-appellants.

Juan T. Santos and Teodoro Gonzalez for appellants

Attorney-General Jaranilla for the Director of Lands

Gregorio M. Banaga and Teotimo Duque for the other appellees.

OSTRAND, J.:

This is an appeal from an order of the Court of First Instance of Tarlac setting aside a decree of
registration entered in a land registration case.

It appears from the record that One Leocadia Angelo on July 2, 1920, made application for the
registration of 659 hectares of land alleged to be situated in the barrios of Barang and Mabilang,
municipality of Paniqui, Tarlac. The case did not come up for the final hearing until the 20th of
September, 1923, when a decision was rendered ordering the registration of the land in favor of the
applicant. Final decree was entered on July 16, 1924, and a certificate of title was issued in favor of
Leocadia Angelo two days later. In the meantime Leocadia had executed a deed for the sale of the land
to Cipriano Pacheco, to whom transfer certificate of title No. 786 of the registry of deeds of Tarlac was
issued by virtue of the deed immediately upon the completion of the registration in favor of the vendor.
Five days later, on July 23, 1924, Cipriano Pacheco executed a deed ostensibly evidencing a sale of the
land to Lucia F. de Valle Cruz for P15,000 with pacto de retro for the term of five years, the transaction
being noted by memorandum upon transfer certificate of title No. 786. The deed provided that Pacheco
was to remain in possession of the land as a tenant paying the sum of P150 per month as rent.

On October 6, 1924, the Director of Lands filed a petition in the aforesaid land registration case for a
review of the decree under section 38 of the Land Registration Act, it being alleged that the decrees was
obtained by fraud and that the land was occupied by several hundred adverse claimants, who through
the fraud of Leocadia Angelo, did not receive any notification neither of the survey of the land nor of the
registration proceedings, and that Leocadia never had possession of the land and had no title thereto
prior to the registration. On the same date a large number of adverse claimants and occupants of the
land also filed petitions for review similar to that of the Director of Lands, alleging substantially the same
facts. Upon hearing, the Court of First Instance of Tarlac held that Leocadia Angelo had obtained the
decree in question by fraud; that the sale made to Cipriano Pacheco was not made in good faith, and
that the good faith of Lucia F. de Valle Cruz was doubtful. The court therefore declared the decree
issued in favor of Leocadia Angelo null and void and ordered the cancellation of the transfer certificate
of title issued in favor of Cipriano Pacheco. From this judgment both Cipriano Pacheco and Lucia F. de
Valle Cruz appealed.

Upon the record before us, there can no doubt whatever that the registration of the land in question
was obtained by fraud. It is true that there is no testimony showing that the land was occupied by
persons other than the applicant at the time the application for registration was filed, but it is alleged in
the duly verified amended petition for review presented by the Director of Lands that there were 350
persons occupying different portions of the land and that this fact was known to the applicant, but that
she nevertheless stated in said application that she was in the actual, real and peaceful possession and
occupation of the land and that there were no other claimants thereto. If that allegation is true, and
must so assume in the absence of a denial, the applicant was guilty of a deliberate misrepresentation
which tended to prevent the adverse claimants or occupants from receiving formal notice of the
registration proceedings and from asserting their rights. That was unquestionably fraud within the
meaning of section 38 of the Land Registration Act. It appears very clearly that Pacheco had full
knowledge of the situation before he received his transfer certificate of title and he can therefore not be
regarded as a bona fide holder of the certificate.
But we are unable to find any evidence of bad faith on the part of the appellant Lucia F. del Valle Cruz
and she must therefore be regarded as an innocent purchaser for value, a fact which creates a peculiar
situation. Section 38 of the Land Registration Act reads as follows:1awphil.net

If the court after hearing finds that the applicant has title as stated in his application, 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 the 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 of
any estate or interest therein by decree of registration obtained by fraud to file in the Court of Land
Registration a petition for review within one year after entry of the decree, provided no innocent
purchaser for value has acquired an interest. If there is any such purchaser, the decree or registration
shall not be opened, but shall remain in full force and effect forever, subject only to the right of appeal
hereinbefore provided. 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 an equivalent phrase occurs in this Act, it shall
be deemed to include an innocent lessee, mortgagee, or other encumbrancer for value.

It is apparent from the document itself that the transaction evidenced by the so-called deed of sale with
pacto de retro executed by Pacheco in favor of Lucia F. de Valle Cruz was in reality not a sale, but only a
loan of P15,000, with interest at the rate of 12 per cent per annum and secured by an equitable
mortgage upon the land. Under the last sentence of the section quoted, the mortgagee must
nevertheless be regarded as an innocent purchaser for value and, at first blush, it may therefore seem
that the remedy provided for in said section for the review of the decree of registration is barred. But
looking to the spirit of the law rather than to the letter, we do not think the law should be so
interpreted. The land Registration Act was never designed to serve as a shield for fraud, and we do not
think that the Legislature intended that a person obtaining a certificate of title by fraud should be
allowed to escape the consequences of his own fraud by mortgaging the land to an innocent third party
for a fraction of its value. The intent of the Torrens System of registration is to protect the innocent
party and not the guilty one. Applying this principle, and bearing in mind that a mortgagee of registered
land, for value and in good faith, cannot be deprived of his rights by the reopening of the decree of
registration, we find no difficulty in arriving at an equitable solution of the problem before us and in
doing justice to all parties.
The record shows that the occupants of the land, now petitioners for review, were negligent in failing to
assert their rights in the proceedings for the registration of the land in question. It is true that they were
not formally notified of the proceedings and of the hearings thereon, but the land was duly surveyed in
February, 1918, and concrete monuments placed on most of the corners; the application for the
registration of the land was filed on July 2, 1920, and the case was not heard until September 20, 1923.
In these circumstances, we cannot believe that the purchasers for review were, during all those years,
ignorant of the fact that registration had been applied for, and the boundary lines indicated by
monuments, they must also have fairly clear idea of the extent and location of the land which the
applicant sought to register. As a matter of fact, a considerable number of the herein petitioners for
review did appear at the hearing of the land registration case and presented their oppositions, which
they afterwards withdrew on the ground that they had arrived at a satisfactory agreement with the
applicant. It is therefore evident that they were partly to blame for the success of the applicant's
fraudulent designs, which eventually resulted in the deceit practiced upon the mortgagee Lucia F. de
Valle Cruz. Her lien upon the mortgagee Lucia F. de Valle Cruz. Her lien upon the land must be respected
and, in view if the facts stated, the adverse occupants are not in position to complain if we declare, as
we do, that the lien will subsist until the debt secured by it is paid.

For the reasons stated, the order appealed from is modified by declaring that the appellant Lucia F. de
Valle Cruz, on her successors in the interest, shall have a lien upon the land described in transfer
certificate No. 786 of the registry of deeds of the Province of Tarlac for the sum of P15,000, with interest
at the rate of 12 per cent per annum from July 23, 1924, until paid; that if said sum with interest should
not be paid within six months from the date of the notification of this decision, the lien may be
foreclosed in the manner provided for in sections 254-259 of the Code of Civil Procedure, except that in
the sale under such foreclosure, the portions of the land which are occupied by the herein petitioners,
for review shall not be sold until the portions not so occupied have been sold and the proceeds of the
sale found insufficient for the satisfaction of the lien. In all other respects, the appealed order is
affirmed without the costs in the instance. So ordered.

G.R. No. L-25118 July 30, 1926

EL HOGAR FILIPINO, plaintiff-appellee,

vs.

A. W. PRAUTCH and VICENTE POBLETE, defendants-appellants.

Wm. J. Rohde and M. G. Goyena for the appellant Prautch.

Gregorio Perfecto for the appellant Prautch.

Antonio Sanz for appellee.

STATEMENT

Plaintiff seeks to recover from the defendants P10,000 as actual damages, and P10,000 as punitive
damages, for the publication of an alleged libelous article in a monthly paper known as Rural Credit, a
copy of which is attached to, and made a part of, the complaint.

Defendants filed a general demurrer to the complaint which was covered, and then filed an answer,
pleading the general issue, and alleging as special defense the truth of the article, and that it was
published in good motives and for justifiable ends. It was later amended in which it was alleged that the
plaintiff is an illegal and fraudulent entity wrongfully and unlawfully simulating a mutual building and
loan association.

Upon such issues, the case was tried, and judgment was rendered against the defendant Prautch for
punitive damages for P300, and the defendant Poblete for P100.

The defendants filed a motion for a new trial which was overruled.

Upon their appeal, they contend:

I. The lower court erred in not sustaining the second special defense of the appellants and in holding
that the appellee is a legal mutual building and loan association.

II. The lower court erred in overruling defendants' demurrer to plaintiff's complaint.

III. The lower court erred in not sustaining defendants' defense of truth, good motives, and justifiable
ends.
IV. The lower court erred in awarding plaintiff punitive damages.

JOHNS, J.:

There is no dispute about any material-fact. The defendant Prautch admits that he was the author of the
article which was published, and the defendant Poblete admits its publication as alleged.

The appellants have filed an exhaustive brief of 103 pages largely devoted to their first and second
assignments of error. Under our view, assignments of error Nos. 3 and 4 are the only ones material to
this opinion.

It is admitted that the Rural Credit, in which the article appeared, is a monthly periodical of general
circulation in the Philippine Islands, and that it is published in the City of Manila, and that the article was
published in volume 4, of the issue of March, 1924.

It also appears that on the 14th of August, 1923, the Honorable Eduardo Gutierrez David, Judge of the
Twenty-second Judicial District, rendered an opinion in a suit pending before him, in which Buenventura
Lopez et al. were plaintiffs, and the El Hogar Filipino et al. were defendants, in which, among other
things, the court said:

The court believes that all the controversy depends upon the solution of the following fundamental
questions: (a) Is the contract of mortgage Exhibit 1 usurious or not? and (b) Is clause of said contract of
mortgage Exhibit 1 valid or not?

As to the first proposition, the court, after making an exhaustive analysis of the facts, said:

In view of these facts, the court is of the opinion that to compel payment of interest at 9 per cent per
annum upon the total amount of P84,000 in each year, without proportionately reducing the capital of
the debt to correspond to what is really and in fact paid on account thereof, it authorizes the creditor to
collect the usurious interest from the debtor, inasmuch as the time will come when the amount paid in
by the borrowers or the value of his shares should reach said sum, and, if applied upon the original
principal, would reduce this principal to a sum, the interest of which, at 18 per cent, would be less than
P7,560. In such case, the interest of P7,560 in fact would be usurious interest, and in successive years,
when additional payments are made, the fixed interest of P7,560 would be more and more usurious. In
sound jurisprudence, mere forms or devices are not tolerated to cover what is essentially and in fact a
usury. The court does not see any other purpose in the system adopted in the contract in question than
to enable the creditor to collect from the debtors, as payment for the use of the money given as a loan,
amounts which, without said system, would be manifestly usurious.

Besides, it appears that the rate of premium charged by the El Hogar Filipino from the herein plaintiff
was P16.67 per cent on the amount of the loan. This premium plus the interest at 9 per cent for the first
year amount to P25.67 per cent. Consequently, in the first year of the loan, at least P25.67 per cent was
collected upon the amount of the loan which exceeds the 18 per cent per annum fixed by the Usury Law
for premiums, interest and fines.

It also found that clause 10 of the contract was null and void, and the mortgage itself was void ab initio,
and that the sale under clause 10 was null and void, and rendered judgement in favor of the plaintiffs
and against the El Hogar Filipino for the sum of P12,500, with legal interest, and the further sum of
P5,000 as attorney's fees, as provided for by section 6 of Act No. 2655, and dismissed the counterclaim
of the El Hogar Filipino, with costs against the defendants. From the judgment, an appeal was taken to
this court where it was reversed by a divided court. 1 Pending the appeal, Attorney Hildo prepared and
filed a printed brief for the plaintiffs in the lower court, who were appellees in this court. After the brief
was filed in this court, and about seven months after the decision of Judge Gutierrez David was
rendered, the article in question was published.

Although there are some expressions in the article that are more forcible than elegant, in substance, it
follows the analysis and reasoning of the opinion of Judge Gutierrez David, and of the brief of Attorney
Hilado, both of which were of a public record in a judicial proceeding. The article in question purports to
be an analysis by the writer of the terms and conditions and legal force and effect of paragraph 1, 2, 3, 5,
6, 7, 8, 9 and 10 of the mortgage, which was executed by Lopez to the Hogar Filipino, in which the writer
forcibly contends that the El Hogar Filipino is not a mutual building and loan association, and that it is a
scheme and device to enable its special and preferred stockholders to obtain and collect usurious
interest, and that the mortgage itself is usurious, and that the power of sale is null and void. That was
legal force and effect of the decision of the lower court, from which the appeal was taken, and that was
the argument which was made by the attorney for the appellees on appeal to this court.
It is worthy of note that at the time the article was published, the majority opinion of this court had not
been rendered.

Section 11 of Act No. 277 provides:

In addition to the criminal action hereby prescribed, a right of civil action is also hereby given to any
person libeled as hereinbefore set forth against the person libeling him for damages sustained by such
libel, and the person so libeled shall be entitled to recover in such civil action not only the actual
pecuniary damages sustained by him but also damages for injury to his feelings and reputation, and in
addition such punitive damages as the court may think will be a just punishment to the libeler and an
example to others. Suit may be brought in any Court of First Instance having jurisdiction of the parties.
The presumptions, rules of evidence, and especial defenses herein provided for criminal prosecutions
shall be equally applicable in civil actions under this section.

Section 4 of the Libel Law, page 168 of the Penal Code, 2 provides:

In all criminal prosecutions for libel the truth may be given in evidence to the court, and if it appears to
the court that the matter charged as libelous is true and was published with good motives and for
justifiable ends, the party shall be acquitted; otherwise he shall be convicted; but to establish this
defense, not only must the truth of the matter so charged be proven, but also that it was published with
good motives and for justifiable ends.

The whole tenor of the article was an analysis of the legal force and effect of the mortgage made to the
El Hogar Filipino, and its real purpose and intent was to show how and wherein the mortgage was null
and void, as held by Judge Gutierrez David, and as contended for the Attorney Hilado, and while the
contention made in the article was later overruled by this court, there was a vigorous dissenting opinion
in this court.

So long as it is done in good faith, newspapers have the legal right to have and express opinions on legal
questions. To deny them that right would infringe upon the freedom of the press.

The case in question, about which the article was written, was one of great importance not only to the El
Hogar Filipino, but to the public in general, and the whole article was founded upon and was confined
and limited to an analysis and discussion of the terms and provisions of the real mortgage which was a
public record, and the question as to the validity of which was then pending in court, and in legal effect
the article follows and approves the reasoning used in the opinion of the lower court and the brief for
the appellees in this court.

Its publication could well be justified under section 7 (Libel Law), page 168 of the Penal Code (above
cited) which provides:

No reporter, editor, or proprietor of any newspapers is liable to any prosecution for a fair and true
report of any judicial, legislative, or other public official proceedings, or of any statement, speech,
argument, or debate in the course of the same, except upon proof of malice in making such report,
which shall not be implied from the mere fact of publication. (Act No. 277, sec. 7.)

The judgment of the lower court is reversed, and one will be entered here for the defendants, with costs
against the plaintiff. So ordered

G.R. No. 172020 December 6, 2010

TRADERS ROYAL BANK, Petitioner,

vs.

NORBERTO CASTAARES and MILAGROS CASTAARES, Respondents.

DECISION

VILLARAMA, JR., J.:

Assailed in this petition for review under Rule 45 of the 1997 Rules of Civil Procedure, as amended, is the
Decision1 dated January 11, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 67257 which reversed
the Joint Decision2 dated August 26, 1998 of the Regional Trial Court (RTC) of Cebu City, Branch 13 in
Civil Case Nos. R-22608 and CEB-112.

The Facts

Respondent-spouses Norberto and Milagros Castaares are engaged in the business of exporting shell
crafts and other handicrafts. Between 1977 and 1978, respondents obtained from petitioner Traders
Royal Bank various loans and credit accommodations. Respondents executed two real estate mortgages
(REMs) dated April 18, 1977 and January 25, 1978 covering their properties (TCT Nos. T-38346, T-37536,
T-37535, T-37192 and T-37191). As evidenced by Promissory Note No. BD-77-113 dated May 10, 1977,
petitioner released only the amount of 35,000.00 although the mortgage deeds indicated the principal
amounts as 86,000.00 and 60,000.00.3

Respondents were further granted additional funds on various dates under promissory notes4 they
executed in favor of the petitioner:

Type of Loan Date Granted

Amount

Packing Credit May 10, 1977 P19,000.00

Packing Credit May 18, 1977 P25,000.00

Packing Credit June 23, 1977 P12,500.00

Packing Credit August 19, 1977 P 2,900.00

Packing Credit April 4, 1978 P18,000.00

Packing Credit April 19, 1978 P23,000.00

On June 22, 1977, petitioner transferred the amount of 1,150.00 from respondents current account to
their savings account, which was erroneously posted as 1,500.00 but later corrected to reflect the
figure 1,150.00 in the savings account passbook. By the second quarter of 1978, the loans began to
mature and the letters of credit against which the packing advances were granted started to expire.
Meanwhile, on December 7, 1979, petitioner, without notifying the respondents, applied to the
payment of respondents outstanding obligations the sum of $4,220.00 or 30,930.49 which was
remitted to the respondents thru telegraphic transfer from AMROBANK, Amsterdam by one Richard
Wagner. The aforesaid entries in the passbook of respondents and the $4,220.00 telegraphic transfer
were the subject of respondents letter-complaint5 dated September 20, 1982 addressed to the
Manager of the Regional Office of the Central Bank of the Philippines.

For failure of the respondents to pay their outstanding loans with petitioner, the latter proceeded with
the extrajudicial foreclosure of the real estate mortgages.6 Thereafter, a Certificate of Sale7 covering all
the mortgaged properties was issued by Deputy Sheriff Wilfredo P. Borces in favor of petitioner as the
lone bidder for 117,000.00 during the auction sale conducted on November 24, 1981. Said certificate
of sale was registered with the Office of the Register of Deeds on February 4, 1982.

On November 24, 1982, petitioner instituted Civil Case No. R-22608 for deficiency judgment, claiming
that after applying the proceeds of foreclosure sale to the total unpaid obligations of respondents
(200,397.78), respondents were still indebted to petitioner for the sum of 83,397.68.8 Respondents
filed their Answer With Counterclaim on December 27, 1982.9

On February 10, 1983, respondents filed Civil Case No. CEB-112 for the recovery of the sums of
2,584.27 debited from their savings account passbook and the equivalent amount of $4,220.00
telegraphic transfer, and in addition, $55,258.85 representing the damage suffered by the respondents
from letters of credit left un-negotiated because of petitioners refusal to pay the $4,220.00 demanded
by the respondents.10

The cases were consolidated before Branch 13, RTC of Cebu City.

Ruling of the RTC

In a Joint Decision11 dated August 26, 1998, the RTC ruled in favor of the petitioner, as follows:

WHEREFORE, in view of the foregoing, judgment is hereby rendered in Civil Case No. R-22608 in favor of
the plaintiff and against the defendants directing the defendants jointly and solidarily to pay plaintiff the
sum of 83,397.68 with legal rate of interest to be computed from November 24, 1981 (the date of the
auction sale) until full payment thereof. They are likewise directed to pay plaintiff attorneys fees in the
sum of 10,000.00 plus litigation expenses in the amount of 2,500.00.
With cost against defendants.

In CEB-112, judgment is hereby rendered dismissing the complaint.

With cost against the plaintiff.

SO ORDERED.12

The trial court found that despite respondents insistence that the REM covered only a separate loan for
86,000.00 which they believed petitioner committed to lend them, the evidence clearly shows that said
REM was constituted as security for all the promissory notes. No separate demand was made for the
amount of 86,000.00 stated in the REM, as the demand was limited to the amounts of the promissory
notes. The trial court further noted that respondents never questioned the judgment for extrajudicial
foreclosure, the certificate of sale and the deficiency in that case.13

With respect to the passbook entries, the trial court stated that no objection thereto was made by the
respondents until five years later when in a letter dated August 10, 1982, respondents counsel asked
petitioner to be enlightened on the matter. Neither did respondents protest the application of the
balance (1,150.00) in the passbook to his account with petitioner. More important, respondent
Norberto Castaares in his testimony admitted that the matter was already clarified to him by petitioner
and that the latter had the right to apply his deposit to his loan accounts. Admittedly, his complaint has
to do more with the lack of consent on his part and the non-issuance of official receipt. However, he did
not follow up his request for official receipt as he did not want to be going back and forth to the bank.14

CA Ruling

With the trial courts denial of their motion for reconsideration, respondents appealed to the CA.
Finding merit in respondents arguments, the appellate court set aside the trial courts judgment under
its Decision15 dated January 11, 2006, thus:
WHEREFORE, in view of the foregoing premises, judgment is hereby rendered by us GRANTING the
appeal filed in this case and REVERSING AND SETTING ASIDE the Joint Decision dated August 26, 1998,
Regional Trial Court, 7th Judicial Region, Branch 13, in Civil Case No. R-22608 and Civil Case No. CEB-112.
With regard to Civil Case No. R-22608, the real estate mortgage dated April 18, 1977 is hereby
DECLARED as valid in part as to the amount of P35,000.00 actually released in favor of appellants, while
the real estate mortgage dated January 26, 1978 is hereby declared as null and void. Furthermore, in
Civil Case No. CEB-112, TRB is hereby ordered to release the amount of US$4,220.90 to the appellants at
its current rate of exchange. No pronouncement as to costs.

SO ORDERED.16

The CA held that the RTC overlooked the fact that there were no adequate evidence presented to prove
that petitioner released in full to the respondents the proceeds of the REM loan. Citing Filipinas Marble
Corporation v. Intermediate Appellate Court17 and Naguiat v. Court of Appeals,18 the appellate court
declared that where there was failure of the mortgagee bank to deliver the consideration for which the
mortgage was executed, the contract of loan was invalid and consequently the accessory contract of
mortgage is likewise null and void. In this case, only 35,000.00 out of the 86,000.00 stated in the REM
dated April 18, 1977 was released to respondents, and hence the REM was valid only to that extent. For
the same reason, the second REM was null and void since no actual loan proceeds were released to the
respondents-mortgagors. The REMs are not connected to the subsequent promissory notes because
these were signed by respondents for the sole purpose of securing packing credits and export advances.
Further citing Acme Shoe, Rubber and Plastic Corp. v. Court of Appeals,19 the CA stated that the rule is
that a pledge, real estate mortgage or antichresis may exceptionally secure after-incurred obligations
only as long as these debts are accurately described therein. In this case, neither of the two REMs
accurately described or even mentioned the securing of future debts or obligations.20

The CA thus held that petitioners remedy would be to file a collection case on the unpaid promissory
notes which were not secured by the REMs.

As to the $4,220.00 telegraphic transfer, the CA ruled that petitioner had no basis for withholding and
applying the said amount to respondents loan account. Said transaction was separate and distinct from
the contract of loan between petitioner and respondents. Petitioner had no authority to convert the
said telegraphic transfer into cash since the participation of respondents was necessary to sign and
indorse the disbursement voucher and check. Moreover, petitioner was not transparent in its actions as
it did not inform the respondents of its intention to apply the proceeds of the telegraphic transfer to
their loan account and worse, it did not even present an official receipt to prove payment. Section 5 of
Republic Act No. 6426, otherwise known as the Foreign Currency Deposit Act, provides that there shall
be no restriction on the withdrawability by the depositor of his deposit or the transferability of the same
abroad except those arising from contract between the depositor and the bank.21

The Petition

Petitioner raised the following grounds in the review of the CA decision:

I. THE COURT OF APPEALS ERRED IN HOLDING THAT THE REAL ESTATE MORTGAGE DATED 18 APRIL 1977
IS VALID ONLY IN PART TO THE EXTENT OF PHP35,000.00 WHICH IS ALLEGEDLY THE AMOUNT PROVED
TO HAVE BEEN ACTUALLY RELEASED TO RESPONDENTS OUT OF THE SUM OF PHP86,000.00.

II. THE COURT OF APPEALS ERRED IN DECLARING AS NULL AND VOID THE REAL ESTATE MORTGAGE
DATED 26 JANUARY 1978 IN THAT NO ACTUAL LOAN PROCEEDS WERE RELEASED IN FAVOR OF THE
RESPONDENTS.

III. THE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAD NO BASIS IN WITHHOLDING AND
SUBSEQUENTLY APPLYING IN PAYMENT OF RESPONDENTS OVERDUE ACCOUNT IN THE TELEGRAPHIC
TRANSFER IN THE AMOUNT OF U.S.$4,220.00.22

Petitioner contends that the CA overlooked the specific stipulation in the REMs that the mortgage
extends not only to the amounts specified therein but also to loans or credits subsequently granted,
which include the packing credits and export advances obtained by the respondents. Moreover, the
amounts indicated on the REMs need not exactly be the same amounts that should be released and
covered by checks or credit memos, the same being only the maximum sum or "ceiling" which the REM
secures, as explained by petitioners witness, Ms. Blesy Nemeo. Her testimony does not prove that the
proceeds of the loans were not released in full, as no credit memos in the specific amounts received by
the respondents can be presented.

Petitioner argues that the rulings cited by the CA do not at all support its conclusion that the promissory
notes were totally unrelated to the REMs. In the Acme case, the pronouncement was that the after-
incurred obligations must, at the time they are contracted, only be accurately described in a proper
instrument as in the case of a promissory note. The confusion was brought by the use in the CA decision
of the word "therein" which is not found in the text of the Acme ruling. Besides, it is way too impossible
that future loans can be accurately described, as the CA opined, at the time that a deed of real estate
mortgage is executed. The CAs reliance on the case of Filipinas Marble Corporation, is likewise
misplaced as it finds no application under the facts obtaining in the present case. The misappropriation
by some individuals of the loan proceeds secured by petitioner was the consideration which compelled
this Court to rule that there was failure on the part of DBP to deliver the consideration for which the
mortgage was executed. Similarly, the case of Naguiat is inapplicable in that there was evidence that an
agent of the creditor withheld from the debtor the checks representing the proceeds of the loan
pending delivery of additional collateral.

Finally, petitioner reiterates that it had the right by way of set-off the telegraphic transfer in the sum of
$4,220.00 against the unpaid loan account of respondents. Citing Bank of the Philippine Islands v. Court
of Appeals,23 petitioner asserts that they are bound principally as both creditors and debtors of each
other, the debts consisting of a sum of money, both due, liquidated and demandable, and are not
claimed by a third person. Hence, the RTC did not err in holding that petitioner validly applied the
amount of 30,930.20 (peso equivalent of $4,220.00) to the loan account of the respondents.

Our Ruling

We rule for the petitioner.

The subject REMs contain the following provision:

That, for and in consideration of certain loans, overdrafts and other credit accommodations obtained,
from the Mortgagee by the Mortgagor and/or SPS. NORBERTO V. CASTAARES & MILAGROS M.
CASTAARES and to secure the payment of the same, the principal of all of which is hereby fixed at
EIGHTY-SIX THOUSAND PESOS ONLY (P86,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may hereafter extend to the Mortgagor x x x, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or indirect, principal or secondary, as appears in the
accounts, books and records of the Mortgagee x x x.24 (Emphasis supplied.)

The above stipulation is also known as "dragnet clause" or "blanket mortgage clause" in American
jurisprudence that would subsume all debts of past and future origins. It has been held as a valid and
legal undertaking, the amounts specified as consideration in the contracts do not limit the amount for
which the pledge or mortgage stands as security, if from the four corners of the instrument, the intent
to secure future and other indebtedness can be gathered. A pledge or mortgage given to secure future
advancements is a continuing security and is not discharged by the repayment of the amount named in
the mortgage until the full amount of all advancements shall have been paid.25

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.26 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.27

In holding that the REMs were null and void, the CA opined that the full amount of the principal loan
stated in the deed should have been released in full, sustaining the position of the respondents that the
promissory notes were not secured by the mortgage and unrelated to it. However, a reading of the
afore-quoted provision of the REMs shows that its terms are broad enough to cover packing credits and
export advances granted by the petitioner to respondents. That the respondents subsequently availed
of letters of credit and export advances in various amounts as reflected in the promissory notes,
buttressed the claim of petitioner that the amounts of 86,000.00 and 60,000.00 stated in the REMs
merely represent the maximum total loans which will be secured by the mortgage. This must be so as
respondents confirmed that the mortgage was constituted for the purpose of obtaining additional
capital as dictated by the needs of their export business. Significantly, no complaint was made by the
respondents as to the non-release of 86,000.00 and 60,000.00, in full, simultaneous or immediately
following the execution of the REMs -- under a single promissory note each equivalent to the said sums -
- and no demand for the said specific amounts was ever made by the petitioner. Even the letter-
complaint sent by respondents to the Central Bank almost a year after the extrajudicial foreclosure sale
mentioned only the questioned entries in their passbook and the $4,220.00 telegraphic transfer.
Considering that respondents deemed it a serious "banking malpractice" for petitioner not to release in
full the loan amount stated in the REMs, it can only be inferred that respondents themselves
understood that the 86,000.00 and 60,000.00 indicated in the REMs was intended merely to fix a
ceiling for the loan accommodations which will be secured thereby and not the actual principal loan to
be released at one time. Thus, the RTC did not err in upholding the validity of the REMs and ordering the
respondents to pay the deficiency in the foreclosure sale to satisfy the remaining mortgage
indebtedness.

The cases relied upon by the CA are all inapplicable to the present controversy.lawph!1 In Filipinas
Marble Corporation, we held that pending the outcome of litigation between DBP which together with
Bancom officers were alleged by the petitioner-mortgagor to have misspent and misappropriated the $5
million loan granted by DBP, the provisions of P.D. No. 385 prohibiting injunctions against foreclosures
by government financial institutions, cannot be automatically applied. Foreclosure of the mortgaged
properties for the whole amount of the loan was deemed prejudicial to the petitioner, its employees
and their families since the true amount of the loan which was applied for the benefit of the petitioner
can be determined only after a trial on the merits.28 No such act of misappropriation by corporate
officers appointed by the mortgagee is involved in this case. Besides, the respondents never denied
receiving the amounts under the promissory notes which were all covered by the REMs and the very
obligations subject of the extrajudicial foreclosure.

As to the ruling in Naguiat, we found therein no compelling reason to disturb the lower courts finding
that the lender did not remit and the borrower did not receive the proceeds of the loan. Hence, we held
the mortgage contract, being just an accessory contract, as null and void for absence of consideration.29
In this case, however, respondents admitted they received all the amounts under the promissory notes
presented by the petitioner. The consideration in the execution of the REMs consist of those credit
accommodations to fund their export transactions. Respondents as an afterthought raised issue on the
nature of the amounts of principal loan indicated in the REMs long after these obligations have matured
and the mortgage foreclosed due to their failure to fully settle their outstanding accounts with
petitioner. Having expressly agreed to the terms of the REMs which are phrased to secure all such loans
and advancements to be obtained from petitioner, although the principal amount stated therein were
not released at one time and under several, not just one, subsequently issued promissory notes,
respondents may not be allowed to complain later that the amounts they received were unrelated to
the REMs.

On the issue of the $4,220.00 telegraphic transfer which was applied by the petitioner to the loan
account of respondents, we hold that the CA erred in holding that petitioner had no authority to do so
by way of compensation or set off. In this case, the parties stipulated on the manner of such set off in
case of non-payment of the amount due under each promissory note.

The subject promissory notes thus provide:

In case of non-payment of this note or any installments thereof at maturity, I/We jointly and severally,
agree to pay an additional amount equivalent to two per cent (2%) per annum of the amount due and
demandable as penalty and collection charges, in the form of liquidated damages, until fully paid; and
the further sum of ten per cent (10%) thereof in full, without any deduction, as and for attorneys fees
whether actually incurred or not, exclusive of costs and judicial/extrajudicial expenses; moreover, I/We,
jointly and severally, further empower and authorize the TRADERS ROYAL BANK, at its option, and
without notice, to set-off or to apply to the payment of this note any and all funds, which may be in its
hands on deposit or otherwise belonging to anyone or all of us, and to hold as security therefor any real
or personal property, which may be in its possession or control by virtue of any other contract.30
(Emphasis supplied.)

Agreements for compensation of debts or any obligations when the parties are mutually creditors and
debtors are allowed under Art. 1282 of the Civil Code even though not all the legal requisites for legal
compensation are present. Voluntary or conventional compensation is not limited to obligations which
are not yet due.31 The only requirements for conventional compensation are (1) that each of the parties
can fully dispose of the credit he seeks to compensate, and (2) that they agree to the extinguishment of
their mutual credits.32 Consequently, no error was committed by the trial court in holding that
petitioner validly applied, by way of compensation, the $4,220.00 telegraphic transfer remitted by
respondents foreign client through the petitioner.

WHEREFORE, the petition is GRANTED. The Decision dated January 11, 2006 of the Court of Appeals in
CA-G.R. CV No. 67257 is REVERSED and SET ASIDE. The Joint Decision dated August 26, 1998 of the
Regional Trial Court of Cebu City, Branch 13 in Civil Case Nos. R-22608 and CEB-112 is REINSTATED and
UPHELD.

No pronouncement as to costs.

SO ORDERED.

G.R. No. 183987 July 25, 2012

ASIA TRUST DEVELOPMENT BANK, Petitioner,

vs.

CARMELO H. TUBLE, Respondent.

DECISION
SERENO, J.:

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised Rules of Court,
seeking to review the Court of Appeals (CA) 28 March 2008 Decision and 30 July 2008 Resolution in CA-
G.R. CV No. 87410. The CA affirmed the Regional Trial Court (RTC) Decision of 15 May 2006 in Civil Case
No. 67973, which granted to respondent the refund of 845,805.491 representing the amount he had
paid in excess of the redemption price.

The antecedent facts are as follows: 2

Respondent Carmelo H. Tuble, who served as the vice-president of petitioner Asiatrust Development
Bank, availed himself of the car incentive plan and loan privileges offered by the bank. He was also
entitled to the banks Senior Managers Deferred Incentive Plan (DIP).

Respondent acquired a Nissan Vanette through the companys car incentive plan. The arrangement was
made to appear as a lease agreement requiring only the payment of monthly rentals. Accordingly, the
lease would be terminated in case of the employees resignation or retirement prior to full payment of
the price.

As regards the loan privileges, Tuble obtained three separate loans. The first, a real estate loan
evidenced by the 18 January 1993 Promissory Note No. 01423 with maturity date of 1 January 1999, was
secured by a mortgage over his property covered by Transfer Certificate of Title No. T 145794. No
interest on this loan was indicated.

The second was a consumption loan, evidenced by the 10 January 1994 Promissory Note No. 01434 with
the maturity date of 31 January 1995 and interest at 18% per annum. Aside from the said indebtedness,
Tuble allegedly obtained a salary loan, his third loan.

On 30 March 1995, he resigned. Subsequently, he was given the option to either return the vehicle
without any further obligation or retain the unit and pay its remaining book value.
Respondent had the following obligations to the bank after his retirement: (1) the purchase or return of
the Nissan Vanette; (2) 100,000 as consumption loan; (3) 421,800 as real estate loan; and (4) 16,250
as salary loan.5

In turn, petitioner owed Tuble (1) his pro-rata share in the DIP, which was to be issued after the bank
had given the resigned employees clearance; and (2) 25,797.35 representing his final salary and
corresponding 13th month pay.

Respondent claimed that since he and the bank were debtors and creditors of each other, the offsetting
of loans could legally take place. He then asked the bank to simply compute his DIP and apply his
receivables to his outstanding loans.6 However, instead of heeding his request, the bank sent him a 1
June 1995 demand letter7 obliging him to pay his debts. The bank also required him to return the Nissan
Vanette. Despite this demand, the vehicle was not surrendered.

On 14 August 1995, Tuble wrote the bank again to follow up his request to offset the loans. This letter
was not immediately acted upon. It was only on 13 October 1995 that the bank finally allowed the
offsetting of his various claims and liabilities. As a result, his liabilities were reduced to 970,691.46 plus
the unreturned value of the vehicle.

In order to recover the Nissan Vanette, the bank filed a Complaint for replevin against Tuble. Petitioner
obtained a favorable judgment. Then, to collect the liabilities of respondent, it also filed a Petition for
Extra-judicial Foreclosure of real estate mortgage over his property. The Petition was based only on his
real estate loan, which at that time amounted to 421,800. His other liabilities to the bank were
excluded. The foreclosure proceedings terminated, with the bank emerging as the purchaser of the
secured property.

Thereafter, Tuble timely redeemed the property on 17 March 1997 for 1,318,401.91.8 Notably, the
redemption price increased to this figure, because the bank had unilaterally imposed additional interest
and other charges.

With the payment of 1,318,401.91, Tuble was deemed to have fully paid his accountabilities. Thus,
three years after his payment, the bank issued him a Clearance necessary for the release of his DIP share.
Subsequently, he received a Managers Check in the amount of 166,049.73 representing his share in
the DIP funds.

Despite his payment of the redemption price, Tuble questioned how the foreclosure basis of 421,800
ballooned to 1,318,401.91 in a matter of one year. Belatedly, the bank explained that this redemption
price included the Nissan Vanettes book value, the salary loan, car insurance, 18% annual interest on
the banks redemption price of 421,800, penalty and interest charges on Promissory Note No. 0142,
and litigation expenses.9 By way of note, from these items, the amounts that remained to be collected
as stated in the Petition before us, are (1) the 18% annual interest on the redemption price and (2) the
interest charge on Promissory Note No. 0142.

Because Tuble disputed the redemption price, he filed a Complaint for recovery of a sum of money and
damages before the RTC. He specifically sought to collect 896,602.0210 representing the excess
charges on the redemption price. Additionally, he prayed for moral and exemplary damages.

The RTC ruled in favor of Tuble. The trial court characterized the redemption price as excessive and
arbitrary, because the correct redemption price should not have included the above-mentioned charges.
Moral and exemplary damages were also awarded to him.

According to the trial court,11 the value of the car should not have been included, considering that the
bank had already recovered the Nissan Vanette. The obligations arising from the salary loan and car
insurance should have also been excluded, for there was no proof that these debts existed. The interest
and penalty charges should have been deleted, too, because Promissory Note No. 0142 did not indicate
any interest or penalty charges. Neither should litigation expenses have been added, since there was no
proof that the bank incurred those expenses.

As for the 18% annual interest on the bid price of 421,800, the RTC agreed with Tuble that this charge
was unlawful. Act 313512 as amended, in relation to Section 28 of Rule 39 of the Rules of Court,13 only
allows the mortgagee to charge an interest of 1% per month if the foreclosed property is redeemed.
Ultimately, under the principle of solutio indebiti, the trial court required the refund of these amounts
charged in excess of the correct redemption price.
On appeal, the CA affirmed the findings of the RTC.14 The appellate court only expounded the rule that,
at the time of redemption, the one who redeemed is liable to pay only 1% monthly interest plus taxes.
Thus, the CA also concluded that there was practically no basis to impose the additional charges.

Before this Court, petitioner reiterates its claims regarding the inclusion in the redemption price of the
18% annual interest on the bid price of 421,800 and the interest charges on Promissory Note No. 0142.
Petitioner emphasizes that an 18% interest rate allegedly referred to in the mortgage deed is the proper
basis of the interest. Pointing to the Real Estate Mortgage Contract, the bank highlights the blanket
security clause or "dragnet clause" that purports to cover all obligations owed by Tuble:15

All obligations of the Borrower and/or Mortgagor, its renewal, extension, amendment or novation
irrespective of whether such obligations as renewed, extended, amended or novated are in the nature
of new, separate or additional obligations;

All other obligations of the Borrower and/or Mortgagor in favor of the Mortgagee, executed before or
after the execution of this document whether presently owing or hereinafter incurred and whether or
not arising from or connection with the aforesaid loan/Credit accommodation; x x x.

Tubles obligations are defined in Promissory Note Nos. 0142 and 0143. By way of recap, Promissory
Note No. 0142 refers to the real estate loan; it does not contain any stipulation on interest. On the other
hand, Promissory Note No. 0143 refers to the consumption loan; it charges an 18% annual interest rate.
Petitioner uses this latter rate to impose an interest over the bid price of 421,800.

Further, the bank sees the inclusion in the redemption price of an addition 12% annual interest on
Tubles real estate loan.

On top of these claims, the bank raises a new item the cars rental fee to be included in the
redemption price. In dealing with this argument raised for the first time on certiorari, this Court
dismisses the contention based on the well-entrenched prohibition on raising new issues, especially
factual ones, on appeal.16
Thus, the pertinent issue in the instant appeal is whether or not the bank is entitled to include these
items in the redemption price: (1) the interest charges on Promissory Note No. 0142; and (2) the 18%
annual interest on the bid price of P421,800.

RULING OF THE COURT

The 18% Annual Interest on the Bid

Price of 421,800

The Applicable Law

The bank argues that instead of referring to the Rules of Court to compute the redemption price, the
courts a quo should have applied the General Banking Law,17 considering that petitioner is a banking
institution.

The statute referred to requires that in the event of judicial or extrajudicial foreclosure of any mortgage
on real estate that is used as security for an obligation to any bank, banking institution, or credit
institution, the mortgagor can 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.18

Petitioner is correct. We have already established in Union Bank of the Philippines v. Court of Appeals,19
citing Ponce de Leon v. Rehabilitation Finance Corporation20 and Sy v. Court of Appeals,21 that the
General Banking Act being a special and subsequent legislation has the effect of amending Section 6
of Act No. 3135, insofar as the redemption price is concerned, when the mortgagee is a bank. Thus, the
amount to be paid in redeeming the property is determined by the General Banking Act, and not by the
Rules of Court in Relation to Act 3135.

The Remedy of Foreclosure

In reviewing the banks additional charges on the redemption price as a result of the foreclosure, this
Court will first clarify certain vital points of fact and law that both parties and the courts a quo seem to
have missed.

Firstly, at the time respondent resigned, which was chronologically before the foreclosure proceedings,
he had several liabilities to the bank. Secondly, when the bank later on instituted the foreclosure
proceedings, it foreclosed only the mortgage secured by the real estate loan of 421,800.22 It did not
seek to include, in the foreclosure, the consumption loan under Promissory Note No. 0143 or the other
alleged obligations of respondent. Thirdly, on 28 February 1996, the bank availed itself of the remedy of
foreclosure and, in doing so, effectively gained the property.

As a result of these established facts, one evident conclusion surfaces: the Real Estate Mortgage
Contract on the secured property is already extinguished.

In foreclosures, the mortgaged property is subjected to the proceedings for the satisfaction of the
obligation.23 As a result, payment is effected by abnormal means whereby the debtor is forced by a
judicial proceeding to comply with the presentation or to pay indemnity.24

Once the proceeds from the sale of the property are applied to the payment of the obligation, the
obligation is already extinguished.25 Thus, in Spouses Romero v. Court of Appeals,26 we held that the
mortgage indebtedness was extinguished with the foreclosure and sale of the mortgaged property, and
that what remained was the right of redemption granted by law.

Consequently, since the Real Estate Mortgage Contract is already extinguished, petitioner can no longer
rely on it or invoke its provisions, including the dragnet clause stipulated therein. It follows that the bank
cannot refer to the 18% annual interest charged in Promissory Note No. 0143, an obligation allegedly
covered by the terms of the Contract.

Neither can the bank use the consummated contract to collect on the rest of the obligations, which
were not included when it earlier instituted the foreclosure proceedings. It cannot be allowed to use the
same security to collect on the other loans. To do so would be akin to foreclosing an already foreclosed
property.
Rather than relying on an expired contract, the bank should have collected on the excluded loans by
instituting the proper actions for recovery of sums of money. Simply put, petitioner should have run
after Tuble separately, instead of hostaging the same property to cover all of his liabilities.

The Right of Redemption

Despite the extinguishment of the Real Estate Mortgage Contract, Tuble had the right to redeem the
security by paying the redemption price.

The right of redemption of foreclosed properties was a statutory privilege27 he enjoyed. Redemption is
by force of law, and the purchaser at public auction is bound to accept it.28 Thus, it is the law that
provides the terms of the right; the mortgagee cannot dictate them. The terms of this right, based on
Section 47 of the General Banking Law, are as follows:

1. The redemptioner shall have the right within one year after the sale of the real estate, to redeem
the property.

2. The redemptioner shall pay the amount due under the mortgage deed, with interest thereon at
rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from
the sale and custody of said property less the income derived therefrom.

3. In case of redemptioners who are considered by law as juridical persons, they shall have the right to
redeem not after the registration of the certificate of foreclosure sale with the applicable Register of
Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier.

Consequently, the bank cannot alter that right by imposing additional charges and including other loans.
Verily, the freedom to stipulate the terms and conditions of an agreement is limited by law.29

Thus, we held in Rural Bank of San Mateo, Inc. v. Intermediate Appellate Court30 that the power to
decide whether or not to foreclose is the prerogative of the mortgagee; however, once it has made the
decision by filing a petition with the sheriff, the acts of the latter shall thereafter be governed by the
provisions of the mortgage laws, and not by the instructions of the mortgagee. In direct contravention
of this ruling, though, the bank included numerous charges and loans in the redemption price, which
inexplicably ballooned to 1,318,401.91. On this error alone, the claims of petitioner covering all the
additional charges should be denied. Thus, considering the undue inclusions of the additional charges,
the bank cannot impose the 18% annual interest on the redemption price.

The Dragnet Clause

In any event, assuming that the Real Estate Mortgage Contract subsists, we rule that the dragnet clause
therein does not justify the imposition of an 18% annual interest on the redemption price.

This Court has recognized that, through a dragnet clause, a real estate mortgage contract may
exceptionally secure future loans or advancements.31 But an obligation is not secured by a mortgage,
unless, that mortgage comes fairly within the terms of the mortgage contract.32

We have also emphasized that the mortgage agreement, being a contract of adhesion, is to be carefully
scrutinized and strictly construed against the bank, the party that prepared the agreement.33

Here, after reviewing the entire deed, this Court finds that there is no specific mention of interest to be
added in case of either default or redemption. The Real Estate Mortgage Contract itself is silent on the
computation of the redemption price. Although it refers to the Promissory Notes as constitutive of
Tubles secured obligations, the said contract does not state that the interest to be charged in case of
redemption should be what is specified in the Promissory Notes.

In Philippine Banking Communications v. Court of Appeals,34 we have construed such silence or

omission of additional charges strictly against the bank. In that case, we affirmed the findings of the
courts a quo that penalties and charges are not due for want of stipulation in the mortgage contract.

Worse, when petitioner invites us to look at the Promissory Notes in determining the interest, these
loan agreements offer different interest charges: Promissory Note No. 0142, which corresponds exactly
to the real estate loan, contains no stipulation on interest; while Promissory Note No. 0143, which in
turn corresponds to the consumption loan, provides a charge of 18% interest per annum.
Thus, an ambiguity results as to which interest shall be applied, for to apply an 18% interest per annum
based on Promissory Note No. 0143 will negate the existence of the 0% interest charged by Promissory
Note No. 0142. Notably, it is this latter Promissory Note that refers to the principal agreement to which
the security attaches.

In resolving this ambiguity, we refer to a basic principle in the law of contracts: "Any ambiguity is to be
taken contra proferentem, that is, construed against the party who caused the ambiguity which could
have avoided it by the exercise of a little more care."35 Therefore, the ambiguity in the mortgage deed
whose terms are susceptible of different interpretations must be read against the bank that drafted it.
Consequently, we cannot impute grave error on the part of the courts a quo for not appreciating a
charge of 18% interest per annum.

Furthermore, this Court refuses to be blindsided by the dragnet clause in the Real Estate Mortgage
Contract to automatically include the consumption loan, and its corresponding interest, in computing
the redemption price.

As we have held in Prudential Bank v. Alviar,36 in the absence of clear and supportive evidence of a
contrary intention, a mortgage containing a dragnet clause will not be extended to cover future
advances, unless the document evidencing the subsequent advance refers to the mortgage as providing
security therefor.

In this regard, this Court adopted the "reliance on the security test" used in the above-mentioned cases,
Prudential Bank37 and Philippine Bank of Communications.38 In these Decisions, we elucidated the test
as follows:

x x x A mortgage with a "dragnet clause" is an "offer" by the mortgagor to the bank to provide the
security of the mortgage for advances of and when they were made. Thus, it was concluded that the
"offer" was not accepted by the bank when a subsequent advance was made because (1) the second
note was secured by a chattel mortgage on certain vehicles, and the clause therein stated that the note
was secured by such chattel mortgage; (2) there was no reference in the second note or chattel
mortgage indicating a connection between the real estate mortgage and the advance; (3) the mortgagor
signed the real estate mortgage by her name alone, whereas the second note and chattel mortgage
were signed by the mortgagor doing business under an assumed name; and (4) there was no allegation
by the bank, and apparently no proof, that it relied on the security of the real estate mortgage in making
the advance.39 (Emphasis supplied)

Here, the second loan agreement, or Promissory Note No. 0143, referring to the consumption loan
makes no reference to the earlier loan with a real estate mortgage. Neither does the bank make any
allegation that it relied on the security of the real estate mortgage in issuing the consumption loan to
Tuble.

It must be remembered that Tuble was petitioners previous vice-president. Hence, as one of the senior
officers, the consumption loan was given to him not as an ordinary loan, but as a form of
accommodation or privilege.40 The banks grant of the salary loan to Tuble was apparently not
motivated by the creation of a security in favor of the bank, but by the fact the he was a top executive of
petitioner.

Thus, the bank cannot claim that it relied on the previous security in granting the consumption loan to
Tuble. For this reason, the dragnet clause will not be extended to cover the consumption loan. It follows,
therefore, that its corresponding interest 18% per annum is inapplicable. Consequently, the courts a
quo did not gravely abuse their discretion in refusing to apply an annual interest of 18% in computing
the redemption price. A finding of grave abuse of discretion necessitates that the judgment must have
been exercised arbitrarily and without basis in fact and in law.41

The Interest Charges on Promissory

Note No. 0142

In addition to the 18% annual interest, the bank also claims a 12% interest per annum on the
consumption loan. Notwithstanding that Promissory Note No. 0142 contains no stipulation on interest
payments, the bank still claims that Tuble is liable to pay the legal interest. This interest is currently at
12% per annum, pursuant to Central Bank Circular No. 416 and Article 2209 of the Civil Code, which
provides:

If 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.
(Emphasis supplied)

While Article 2209 allows the recovery of interest sans stipulation, this charge is provided not as a form
of monetary interest, but as one of compensatory interest.42

Monetary interest refers to the compensation set by the parties for the use or forbearance of money.43
On the other hand, compensatory interest refers to the penalty or indemnity for damages imposed by
law or by the courts.44 Compensatory interest, as a form of damages, is due only if the obligor is proven
to have defaulted in paying the loan.45

Thus, a default must exist before the bank can collect the compensatory legal interest of 12% per annum.
In this regard, Tuble denies being in default since, by way of legal compensation, he effectively paid his
liabilities on time.

This argument is flawed. The bank correctly explains in its Petition that in order for legal compensation
to take effect, Article 1279 of the Civil Code requires that the debts be liquidated and demandable. This
provision reads:

(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. (Emphasis supplied)

Liquidated debts are those whose exact amount has already been determined.46 In this case, the
receivable of Tuble, including his DIP share, was not yet determined; it was the petitioners policy to
compute and issue the computation only after the retired employee had been cleared by the bank. Thus,
Tuble incorrectly invoked legal compensation in addressing this issue of default.

Nevertheless, based on the findings of the RTC and the CA, the obligation of Tuble as evidenced by
Promissory Note No. 0142, was set to mature on 1 January 1999. But then, he had already settled his
liabilities on 17 March 1997 by paying 1,318,401.91 as redemption price. Then, in 1999, the bank
issued his Clearance and share in the DIP in view of the full settlement of his obligations. Thus, there
being no substantial delay on his part, the CA did not grievously err in not declaring him to be in default.

The Award of Moral and Exemplary

Damages

The courts a quo awarded Tuble 200,000 as moral damages and 50,000 as exemplary
damages.1wphi1 As appreciated by the RTC, which had the opportunity to examine the parties,47 the
bank treated Tuble unfairly and unreasonably by refusing to lend even a little charity and human
consideration when it immediately foreclosed the loans of its previous vice-president instead of heeding
his request to make a straightforward calculation of his receivables and offset them against his
liabilities.48

To the mind of the trial court, this was such a simple request within the control of the bank to grant; and
if petitioner had only acceded, the troubles of the lawsuit would have been avoided.1wphi1

Moreover, the RTC found that the bank caused Tuble severe humiliation when the Nissan Vannette was
seized from his new office at Kuok Properties Philippines. The trial court also highlighted the fact that
respondent as the previous vice-president of petitioner was no ordinary employee he was a man of
good professional standing, and one who actively participated in civic organizations. The RTC then
concluded that a man of his standing deserved fair treatment from his employer, especially since they
served common goals.
This Court affirms the dispositions of the RTC and the CA. They correctly ruled that the award of moral
damages also includes cases of besmirched reputation, moral shock, social humiliation and similar injury.
In this regard, the social and financial standings of the parties are additional elements that should be
taken into account in the determination of the amount of moral damages.49 Based on their findings that
Tuble suffered undue embarrassment, given his social standing, the courts a quo had factual Basis50 to
justify the award of moral damages and, consequently, exemplary damages51 in his favor.

From all the foregoing, we rule that the appellate court correctly deleted the 18% annual interest
charges, albeit for different reasons. First, the interest cannot be imposed, because any reference to it
under the Real Estate Mortgage Contract is misplaced, as the contract is already extinguished. Second,
the said interest cannot be collected without any basis in terms of Tuble's redemption rights. Third,
assuming that the Real Estate Mortgage Contract subsists, the bank cannot collect the interest because
of the contract's ambiguity. Fourth, the dragnet clause referred to in the contract cannot be presumed
to include the 18% annual interest specified in the consumption loan. Fifth, with respect to the
compensatory interest claimed by the bank, we hold that neither is the interest due, because Tuble
cannot be deemed to be in default of his obligations.

IN VIEW THEREOF, the assailed 28 March 2008 Decision and 30 July 2008 Resolution of the Court of
Appeals in CA-G.R. CV No. 87410 are hereby AFFIRMED.

SO ORDERED.

G.R. No. 9358 September 24, 1915

BANK OF THE PHILIPPINE ISLANDS, plaintiff-appellee,

vs.

GREGORIO YULO, defendant-appellant.

Rohde and Wright for appellant.

William A. Kincaid and Thomas L. Hartigan for appellee.

JOHNSON, J.:

On the 7th of October, 1912, the plaintiff filed its complaint in the Court of First Instance of the Province
of Iloilo, for the purpose of recovering of the defendant the sum of P43,212.95, together with interest at
8 per cent, and P2,000 as costs. The plaintiff also alleged that, to secure the payment of said sum, the
defendant, on the 26th of June, 1907, had executed and delivered a mortgage upon certain property
particularly described therein, and prayed for a judgment for the amount above stated. To the petition
of the plaintiff the defendant filed a general denial.

Upon the issue thus presented, the case was brought on for trial. After hearing the evidence, the
Honorable James S. Powell, judge, rendered a judgment in favor of the plaintiff and against the
defendant for the sum of P41,275.18 with interest, from the 21st of January, 1913, at 8 per cent until
paid and for the further sum of P2,000 as attorney's fees, as provided in said mortgage, and costs.

The lower court further ordered "that the said sums be paid into this court by the defendant on or
before the first day of the next term of this court immediately succeeding this January term, 1913, said
principal and interest and costs, and, in default of such payment, the land and other improvements
named in said mortgage will be sold to realize the amount due on said mortgage, with costs."

From that judgment the defendant appealed to this court and made the following assignments of error:
"(1.) The court erred in not ordering the sale of the various properties for the aliquot parts of the debts
as provided for in the mortgage. (2.) The court erred in rendering judgment against the defendant for
the fees of counsel for the plaintiff."

In support of the first assignment of error, the appellant cites article 1860 of the Civil Code. In reply to
that argument, the appellee calls our attention to section 256 and 257 of the Code of Procedure in Civil
Actions, as well as the decisions of this court in the cases of Banco Espaol Filipino vs. Donaldson Sim &
Co. (5 Phil. Rep., 418) and Yangco vs. Cruz Herrera (11 Phil. Rep., 402). In the case of Banco Espaol-
Filipino vs. Donaldson Sim & Co. this court said, speaking through its Chief Justice, "the sale of the
pledged articles should be had in accordance with the provisions of the present Code of Civil Procedure,
and not in accordance with those of the code in force at the time the contract was made."
The present case is even stronger than that, for the reason that the contract in the present case was
made after the adoption of the new Code of Procedure in Civil Actions. The doctrine announced in the
case of Banco Espaol- Filipino vs. Donaldson Sim & Co. is further confirmed by the case of Yangco vs.
Cruz Herrera supra. In that case this court said, speaking through Justice Tracey, "Even though a clause
be inserted in a mortgage fixing a tipo or upset price to become operative in the event of foreclosure,
nevertheless, the sale must take place and the property must be awarded to the highest bidder. Parties
cannot, by agreement, contravene the statutes and interfere with the lawful procedure of the courts."
See also Warner, Barnes & Co., vs. Jaucian, 13 Phil. Rep., 4.

It would seem unnecessary to cite the foregoing decisions against the contention of the appellant, for
the reason that paragraph 7 of the mortgage expressly provides that, even though the mortgage
contains an upset price," the defendant expressly gave his consent to have the property sold in
accordance with the provisions of the Code of Procedure in Civil Actions.

We find no reason for reversing or modifying the decision of the lower court, based upon the fist
assignment of error.

With reference to the second assignment of error, that the lower court should not have imposed a
judgment upon the defendant for P2,000 as attorney's fees, it may be said, that the mortgage contains a
provision for the payment of P2,000, in case the plaintiff is compelled to resort to the courts to recover
the amount due on said mortgage, "por gastos y costas." In view of that provision, we are of the opinion
that it was only intended that the plaintiff should recover of the defendant, in case an action was
brought for the foreclosure of said mortgage, his costs and expenses necessarily incurred in the
foreclosure of the mortgage. We do not believe that it was an absolute promise to pay P2,000 as
attorney's fees. The mortgage does not contain a stipulation to that effect. We are of the opinion, and
so hold, that the purpose of said clause in the mortgage was simply in case an action was brought. There
is no proof in the record to show what were the expenses incurred by virtue of the present action by the
plaintiff. In our opinion, therefore, that part of the judgment of the lower court should be modified, in
addition to the sum for which judgment was rendered by the lower court, his costs only.

With that modification, the judgment of the lower court is hereby affirmed. So ordered.
G.R. No. 70987 January 30, 1987

GREGORIO Y. LIMPIN, JR. and ROGELIO SARMIENTO, petitioners,

vs.

INTERMEDIATE APPELLATE COURT and GUILLERMO PONCE, respondents.

Danilo A. Basa for petitioners.

Sycip, Salazar, Feliciano & Hernandez Law Office and Eugenio C. Lindo for private respondent.

NARVASA, J:

Assailed in this petition for review is the decision of the Intermediate Appellate Court in A.C.-G.R. No.
02516, entitled "Guillermo Ponce, versus Hon. Antonio P. Solano, etc., et al.," the dispositive portion of
which reads

WHEREFORE, the orders dated October 16, 1983 1 and December 19, 1983 of the respondent court, so
far as they deny the confirmation of the sale of the lots formerly covered by TCT Nos. 92836 and 92837,
are SET ASIDE and the respondent court is hereby ORDERED to confirm the sale and issue a writ of
possession to the petitioner with respect to the aforesaid lots, subject to the equity of redemption of
the respondent Rogelio V. Sarmiento. Without costs.

SO ORDERED.

The conflict in claims resulting from the mortgage and subsequent sale to different persons of the same
real property, and the execution sale thereof at a still later date at the instance of yet another party, is
what is chiefly involved in the case at bar, as well as the matter of the remedies available to correct
errors in the execution of a final and executory judgment.

On February 28, 1973, four lots covered by TCTs Nos. 92836, 92837, 92839 and 92840 of the Register of
Deeds of Quezon City were mortgaged by the spouses Jose and Marcelina Aquino to Guillermo Ponce
and his wife Adela (since deceased) as security for a loan of P2,200,000.00. The mortgages were
registered on March 1, 1973. Two of the lots, those covered by TCTs Nos. 92836 and 92837, were
afterwards sold in 1978 by the Aquinos to the Butuan Bay Wood Export Corporation, which caused an
adverse claim to be annotated on the certificates of title on February 24, 1978. 2

In 1979, Gregorio Y. Limpin, Jr. obtained a money Judgement against Butuan Bay Wood Export
Corporation in Civil Case No. 10463 of the Court of First Instance of Davao. To satisfy the judgment, the
lots covered by TCTs Nos. 92836 and 92837 were levied upon on September 3, 1980 and sold at public
auction to Limpin as the highest bidder for the sum of P517,485.41 on October 6, 1980. On order of the
trial court, the covering titles were cancelled and in their stead TCTs Nos. 285450 and 285451 were
issued to Limpin. On November 21, 1981, Limpin sold the two lots to Rogelio M. Sarmiento. By virtue of
said sale, TCTs Nos. 285450 and 285451 were cancelled on November 4, 1983, and replaced by TCTs Nos.
307100 and 397124 in Sarmiento's name. 3

On September 2, 1980 (a day before Limpin's levy on the two lots), Ponce filed suit against the Aquino
spouses for judicial foreclosure of the mortgage over the Aquinos' four lots. The case was docketed as
Civil Case No. Q-30726 of the former Court of First Instance of Quezon City. On June 8, 1982, judgment
was rendered in favor of Ponce. After the judgment became final, the Trial Court, in an order dated
September 13, 1983, directed the sale at public auction of the four (4) mortgaged lots to satisfy the
judgment. On October 12, 1983, the four lots, including those formerly covered by TCTs Nos. 92836 and
92837, were sold to Ponce himself whose bid of P5,200,000.00 was the highest and exactly correspond
to the judgment debt. On the same day, the sheriff's certificate of sale was registered. 4

Ponce then moved for the confirmation of the sale and the issuance of a writ of possession in his favor
covering an the four lots. But the Trial Court, by order dated October 26, 1983, confirmed only the sale
of the lots covered by TCTs Nos. 02839 and 92840, refusing to confirm the sale or issue a writ of
possession in regard to the lots covered by TCTs Nos. 92836 and 92837 on the ground that those titles
had already been cancelled and new ones issued to Gregorio F. Limpin, by order of February 16, 1982 of
the Court of First Instance of Davao City in Civil Case No. 10463, already referred to.
Ponce filed a motion for reconsideration and notified Limpin. Limpin however refused to participate in
the hearings contending that the Court had no jurisdiction over his person; but he did comment that the
mortgage over the lots covered by TCTs Nos. 92836 and 92837 had been released by Ponce by virtue of
a "Partial Release of Real Estate Mortgage" dated July 20, 1977. The Trial Court denied Ponce's motion
for reconsideration, whereupon he sought corrective relief by filing a special civil action for certiorari
and mandamus in the Intermediate Appellate Court, impleading Limpin and Rogelio M. Sarmiento,
Limpin's vendee, as private respondents. 5

After hearing and submission by the parties of extensive memoranda as well as documentary evidence,
the respondent Appellate Court rendered the questioned decision on February 28, 1985, setting aside
the judgment of the Trial Court which denied the confirmation of the sale of the lots formerly covered
by TCTs Nos. 92836 and 92837, and ordering said Court to confirm the same and issue a writ of
possession to Ponce with respect thereto, subject to Sarmiento's equity of redemption.

Hence, this petition for review, filed by Limpin and Sarmiento.

The petition should be denied.

The petitioners' contention that the action of certiorari and mandamus (instituted by Ponce in the
Intermediate Appellate Court) was not the proper remedy is not well taken. The Appellate Court
disposed of this preliminary issue as follows:

Nor is there any merit in the argument of the respondents that petitioner's remedy is to appeal from the
orders denying the motion for confirmation of the sale. The respondents claim that these orders are
final orders and cite in support of their contention the decision in Domalante vs. Martinez, 20 SCRA 1136
(1967), where it was held that "An order of confirmation in court foreclosure proceedings is a final order,
not merely interlocutory. The right of appeal therefore, has long been recognized." The Court was there
speaking of an order confirming the sale, as between the parties to a mortgage, not of an order, such as
the ones herein in question, denying confirmation because a third party, not a party in the foreclosure
proceedings, asserts a right to the properties sought to be foreclosed. Only a separate proceeding, such
as the present case, could possibly determine mine the rights of such party. (See Rivero de Ortega v.
Natividad, 71 Phil. 340 (1941).lwphl@it 6
Certain it is that courts have plenary authority and control over the execution of their final and
executory judgments and orders. 7 Indeed, once that authority i timely and properly in voked, it
becomes the court's ministerial and mandatory function to direct execution. 8

That authority lasts until the judgments are fully satisfied, subject only to the time limitations prescribed
therefor. 9 With particular reference to the execution of a judgment hi a mortgage foreclosure action,
the authority to direct and effect the same exists until the confirmation of the foreclosure sale (and
issuance and implementation of the writ of possession), confirmation being the final act which disposes
of the case. 10

Certain it is too, that execution of final and executory judgments may no longer be contested and
prevented, and no appeal should lie therefrom; otherwise, cases would be interminable, and there
would be negation of the overmastering need to end litigations. 11

There may, to be sure, be instances when an error may be committed in the course of execution
proceedings prejudicial to the rights of a party. These instances, rare though they may be, do call for
correction by a superior court, as where

1) the writ of executio nvaries the judgment 12

2) there has been a change in the situation of the parties making execution inequitable or unjust; 13

3) execution is sought to be enforced against property exempt from execution; 14

4) it appears that the controversy has never been submitted to the judgment of the court; 15

5) the terms of the judgment are not clear enough and there remains room for interpretation thereof;
16 or,
6) it appears that the writ of execution has been improvidently issued, or that it is defective in substance,
or is issued against the wrong party, or that the judgment debt has been paid or otherwise satisfied, or
the writ was issued without authority;17

In these exceptional circumstances, considerations of justice and equity dictate that there be some
mode available to the party aggrieved of elevating the question to a higher court, That mode of
elevation may be either by appeal (writ of error or certiorari, 18 or by a special civil action of certiorari,
prohibition, or mandamus.) 19

The petitioners also question the jurisdiction of the Intermediate Appellate Court over their persons,
alleging that they were not original parties to the action for judicial foreclosure. It appears, however,
that despite awareness of this ostensible defect, they fully participated without objection in the
certiorari and mandamus proceedings before the respondent Appellate Court. Having thus voluntarily
appeared and seen the case through its final resolution, they cannot now be permitted to turn about
and repudiate the Appellate Court's jurisdiction over them.

This Court has ruled:

* * * * And as we have previously quoted approvingly "a party cannot invoke the jurisdiction of a court
to secure affirmative relief against his opponent and, after obtaining or failing to obtain such relief,
repudiate or question that same jurisdiction." While the jurisdiction of a tribunal may be challenged at
any time, sound public policy bars the petitioners from so doing after having procured that jurisdiction
themselves, speculating on the fortunes of litigation.

xxx xxx xxx

The petitioners, to borrow the language of Justice Bautista Angelo, "cannot adopt a posture of double-
dealing without running afoul of the doctrine of estoppel." The principle of estoppel is in the interest of
a sound administration of the laws. It should deter those who are disposed to trifle with the courts by
taking inconsistent positions contrary to the elementary principles of right dealing and good faith. For
this reason, this Court closes the door to the petitioners' challenge against the jurisdiction of the Court
of Appellants' and will not even honor the question with a pronouncement.20
Petitioner, however, is estopped, on ground of public policy, from invoking the plea of lack of
jurisdiction after submitting itself to the jurisdiction of the Court of Appeals and assailing its jurisdiction
only after an adverse judgment was rendered against the petitioner. ... 21

The petitioners further argue that the Appellate Court erred in according superiority to the mortgage
rights of Ponce over the levy and sale in favor of petitioner Limpin and the subsequent sale of the
property to petitioner Sarmiento.

The Appellate Court correctly ruled that the rights and interests of petitioners Limpin and Sarmiento to
the property in question are subordinate to those of respondent Ponce, who holds a prior and senior
lien. According to said Court:

* * * This case is controlled by the decision in Santiago v. Dionisio, 92 Phil. 495 (1935). In the Santiago
case, Ramon San Diego mortgaged his land to Eulalia Resurreccion. Later he sold it to Apolonia Santiago.
As the mortgage debt was not paid, Resurreccion had the mortgage foreclosed. The Supreme Court
upheld the sale to Dionisio, subject, however, to the equity of redemption of Santiago. The Court stated:

... [T]he effect of the failure to implead a subordinate lienholder or subsequent purchaser or both is to
render the foreclosure ineffective as against them, with the result that there remains in their favor the
"unforeclosed equity of redemption." But the foreclosure is valid as between the parties to the suit. (Ibid;
2 Moran's Rules of Court, 3rd ed., p. 239)

Applied to this case, this means that the sale to Ponce, as the highest bidder in the foreclosure sale of
the two lots in question should have been confirmed, subject to Limpin's (and now Sarmiento's equity to
redemption. As held in Santiago v. Dionisio supra, the registration of the lands, first in the name of
Limpin and later of Sarmiento, was premature. At most what they were entitled to was the registration
of their equity of redemption. 22

Moreover:

The superiority of the mortgagee's lien over that of a subsequent judgment creditor is now expressly
provided in Rule 39, Section 16 of the Revised Rules of Court, which states with regard to the effect of
levy on execution that it shall create a lien in favor of a judgment creditor over the right title and
interest of the judgment debtor in such property at the time of the levy, subject to the liens or
encumbrances then existing. 23

It is well settled that a recorded mortgage is a right in rem, a hen on the property whoever its owner
may be. 24 The recordation of the mortgage in this case put the whole world, petitioners included, on
constructive notice of its existence and warned everyone who thereafter dealt with the property on
which it was constituted that he would have to reckon with that encumbrance. Hence, Limpin's
subsequent purchase of the "interests and participation" of Butuan Bay Wood Export Corporation in the
lots covered by TCTs Nos. 92836 and 92837, as well as the sale of the same to Sarmiento on November
21, 1981, were both subject to said mortgage. On the other hand, Ponce's purchase of the lots
mortgaged to him at the foreclosure sale on October 12, 1983, was subject to no prior lien or
encumbrance, and could in no way be affected or prejudiced by a subsequent or junior lien, such as that
of Limpin. 25 Petitioner Sarmiento having acquired no better right than his predecessor-in-interest,
petitioner Limpin, his title must likewise fail.

The fact that at the time Ponce foreclosed the mortgage on October 21, 1983, the lots had already been
bought by Limpin and subsequently sold to Sarmiento is of no consequence, since the settled doctrine is
that the effects of the foreclosure sale retroact to the date of registration of the mortgage, i.e., March 1,
1973 in the present case.

* * * It is well to note that the mortgage in favor of the late Ramon Eugelio was annotated on November
13, 1952 at the back of the certificates of title in controversy, while the adverse claim was only
annotated on the same certificate more than one year later, on December 21, 1953. Hence, the adverse
claim could not effect the rights of the mortgagee; and the fact that the foreclosure of the mortgage and
the consequent public auction sale have been effected long after the annotation of the adverse claim is
of no moment, because the foreclosure sale retroacts to the date of registration of the mortgage. 26

Anent the claim that respondent Ponce executed a deed of partial release of his mortgage on July 20,
1977, the evidence discloses that Ponce and Jose Aquino, the mortgagor, thereafter executed separate
affidavits dated December 1, 1983, stating that the said partial release was void, not only for want of
consideration but also for lack of the signatures of Ponce's two sons who at the time of the execution of
the document, were co-mortgagees as successors and heirs of Mrs. Adela Ponce. Moreover, the Deed of
Partial Release was not registered but had simply been attached, together with the Deed of Sale of the
lands to Butuan Bay Wood Export Corporation, to said corporation's affidavit of adverse claim, the last
being the document which was actually registered, on February 4, 1978 as already stated. Thus the
mortgage in favor of Ponce and his late wife was still subsisting, when the notice of levy in favor of
Limpin was annotated on the original of OCTs Nos. 92836 and 92837, and even when the execution sale
in favor of Limpin pursuant to the levy was registered. Said annotation was cancelled only on November
25, 1981, after the properties had been sold on execution to Limpin on October 6, 1981.

The petitioners finally assert that respondent Ponce did not have a right of action for foreclosure over
the lots in question in the Trial Court, much less to pursue this case, first in the respondent Intermediate
Appellate Court and now, before this Court, because as early as August 18, 1976, he and his wife had
donated the lots to the Doa Josefa Edralin Marcos Foundation and the donation had been accepted on
August 31, 1976. However, that donation was never registered, a fact that the petitioners admit. Even if
this Court were inclined to take up that issue now, though raised only for the first time, it is obvious that
no resolution thereof could possibly improve the petitioners' position as against that of the private
respondent or the latter's transferee.

WHEREFORE, the petition is denied, with costs against petitioners.

SO ORDERED

G.R. No. L-40062 May 3, 1989

MONTELIBANO ESGUERRA, petitioner,

vs.

HON. COURT OF APPEALS, G.A. MACHINERIES, INC., JOSE TINO and MANUEL DORE respondents.

G.R. No. L-40102 May 3, 1989

G.A. MACHINERIES, INC., petitioner,

vs.

HONORABLE COURT OF APPEALS and MONTELIBANO ESGUERRA, respondents.

Dominguez, Fortuno, & Gervacio for petitioner, Montelibano Esguerra in L-40062.

Bengzon, Villegas, Zarraga, Narciso & Cudala for petitioner in L-40102.

BIDIN, J.:

These are petitions for review on certiorari filed by G.A. Machineries, Inc. in L-40102 entitled G.A.
Machineries Inc. v. Montelibano Esguerra et al. and by Montelibano Esguerra in L-40062 entitled
Montelibano Esguerra v. Court of Appeals, et al., seeking to reserve and set aside the October 23, 1974
Decision of the Court Appeals ** in CA-G.R. No. 46900-R "Montelibano Esguerra v. G.A. Machineries Inc.,
et al.," setting aside the September 23, 1969 Decision of the then Court of First Instance of Cavite; and
the January 14, 1975 Resolution of the same appellate Court denying the motions for reconsideration of
said decision.

This is a case for the recovery of a Ford-Trader cargo truck, alledgedly, unlawfully seized by the agents of
G.A. Machineries, Inc. (GAMI for short). This said cargo truck, on October 21, 1964, was sold by GAMI to
Hilario Lagmay and Bonifacio Masilungan. Subsequently, the right to the same was bought by
Montelibano Esguerra, the latter assuming the unpaid purchase price of P20, 454.74. In so doing,
Esguerra executed in favor of GAMI a promissory note and a chattel mortgage over the said truck
(Partial Stipulation of Facts, par. 4, Record on Appeal, p. 99). On February 20, 1966, Esguerra having
defaulted in his obligation and GAMI having granted his request for extension, a new chattel mortgage
and a new promissory note were executed (Ibid., pars. 5 and 6, pp. 99-100) to secure the unpaid balance
of P16,000.00 plus 1% per month, payable in monthly installments of P1,000.00, the first installment to
be due on March 15, 1966 and the succeeding monthly installments on the 15th day of each month. On
May 18, 1966, Esguerra had paid GAMI the total sum of P1,297.00 (Ibid., par. 7, p. 100), broken down as
follows:

AMOUNT PAID DATE

P400.00 March 22, 1966

397.87 April 18, 1966

200.00 May 4, 1966

150.00 May 12, 1966

150.00 May 18, 1966

On June 3, 1966, the said truck was taken by GAMI'S agents while the same was in the possession of
Esguerra's driver, Carlito Padua; and the same had remained in the possession of GAMI, notwithstanding
demands for its return by Esguerra.

On June 20, 1966, Esguerra filed a complaint with the then Court of First Instance of Cavite, Branch IV,
Tagaytay City, presided by Hon. Jose G. Colayco, to recover said truck and for damages. The said
complaint was docketed therein as Civil Case No. TG-64. In the said complaint, Esguerra alleged among
others, that due to his failure to pay the installments due, the agents of GAMI, Jose Tino and Samuel
Dore representing themselves as deputy sheriffs and with use of force, threats and intimidation, seized
the cargo truck in question from his driver, Carlito Padua, while unloading gravel and sand in Pasay City;
and that despite repeated demands, GAMI refused and failed to return the same.

GAMI, et al. filed their answer with a counterclaim, alleging as affirmative defense that the plaintiff gave
his consent to the taking of the truck by the agents of the corporation on condition that he be allowed
to recover its possession upon payment of his back accounts (Record on Appeal p. 102). After trial, the
lower court, in a Decision dated September 23, 1969, dismissed the complaint as well as the
counterclaim as follows:

Since it is admitted that Esguerra was in arrears in the payment of his account, the G.A. Machineries, Inc.
therefore could exercise its option under the contract of mortgage to take possession of the truck
without court action as long as the mortgagor agreed (Luna vs. Encarnacion, G.R. L-4637, June 30, 1952).
Having chosen this remedy however, the mortgagee has no further action against Esguerra to recover
the unpaid balance of the purchase price (Art. 1484, (3), Civil Code of the Phil.).
WHEREFORE, the complaint as well as the counterclaim are hereby dismissed, without costs. (Rollo, L-
40062, pp. 24-31).

On appeal by Esguerra, the Court of Appeals sustained the findings of the trial court that it was not
unlawful on the part of GAMI to repossess the cargo truck in question as Esguerra gave his consent to
the repossession. However, said appellate court, took exception to GAMI's failure to sell at public
auction said truck. It held that while it is true the chattel mortgage contract, the mortgagee can take
possession of the chattel but such taking did not amount to the foreclosure of the mortgage. Otherwise
stated, GAMI should have foreclosed the mortgage. Thus, in a Decision promulgated on October 23,
1974 (Ibid., pp. 34-35), respondent appellate court set aside the appealed decision and entered another
one; the decretal portion of which reads:

WHEREFORE, the judgment appealed from is hereby set aside, and another entered, sentencing the
appellee to pay the appellant the sum of P2,000.00 in concept of attorney's fees and P1,000.00 and
P2,000.00 by way of moral and exemplary damages, respectively, with costs against said appellee.

Both Esguerra and GAMI, et al. moved for the reconsideration of the decision, but in a Resolution dated
January 14, 1975 (Ibid., p. 57), both motions were denied. Hence, the instant petitions.

Acting on GAMI'S petition, docketed as G.R. No. L-40102, the First Division of this Court, in a Resolution
dated March 5, 1975, required Esguerra to comment (Ibid., p. 48), while the petition of Esguerra,
docketed as G.R. No. L-40062, was denied by the same Division of this Court in a Resolution dated
March 7, 1975 (Rollo of G.R. No. L-40062, p. 62).

On April 4, 1975, Esguerra, in compliance with the March 5, 1975 Resolution of the First Division of this
Court, filed his comment (Rollo of G.R. No. 40102, pp. 56-59).

On April 18, 1975, Esguerra filed his Motion for Reconsideration of the March 7, 1975 Resolution
denying his petition in G.R. No. L-40062, (Rollo, pp. 69-72).

In the Resolution of May 16, 1975, the resolution of March 7, 1975, was reconsidered and both petitions
were given due course. (Rollo of G.R. No. L-40102, p. 75).
Esguerra raised three (3) assignments of errors, to wit:

THE RESPONDENT COURT ERRED IN NOT DECLARING AS ILLEGAL AND UNLAWFUL THE PROVISION OF
THE CHATTEL MORTGAGE AUTHORIZING THE RESPONDENT-MORTGAGEE TO REPOSSESS THE CARGO
TRUCK IN CASE OF DEFAULT IN THE PAYMENT OF ANY OBLIGATION.

II

THE RESPONDENT COURT GRAVELY ABUSED ITS DISCRETION WHEN AFTER SETTING ASIDE THE
JUDGMENT APPEALED FROM AND AWARDING DAMAGES AND ATTORNEY'S FEES TO PETITIONER, THE
SAID RESPONDENT COURT DENIED PETITIONER'S MAIN PRAYER IN HIS COMPLAINT, WHICH IS TO ORDER
THE RETURN OF PETITIONER'S CARGO TRUCK AND TO PAY UNEARNED INCOME OF PETITIONER.

III

THE RESPONDENT COURT FINALLY ERRED WHEN AFTER DECLARING THAT THE TAKING OF APPELLANT'S
TRUCK BY THE APPELLEE WITHOUT HAVING PROCEEDED TO SELL IT AT PUBLIC AUCTION BUT
APPROPRIATING SAME IN PAYMENT OF APPELLANT'S INDEBTEDNESS AS NOT LAWFUL, SAID
RESPONDENT COURT DID NOT ORDER THE RETURN OF SAID TRUCK OR THE SALE THEREOF AT PUBLIC
AUCTION.

GAMI, on the other hand, likewise, raised three (3) assignments of errors, to wit:

I
THE HONORABLE COURT OF APPEALS ERRED IN HOLDING, THAT PETITIONER, AS AN UNPAID SELLER
MORTGAGE, WAS LEGALLY OBLIGATED TO FORECLOSE THE MORTGAGE OVER THE CHATTEL IN
QUESTION AND TO SELL SAID CHATTEL AT PUBLIC AUCTION, NOTWITHSTANDING THAT PETITIONER, AS
SUCH UNPAID SELLER, LEGALLY REPOSSESSED THE CHATTEL IN QUESTION AND THAT RESPONDENT
MONTELIBANO ESGUERRA GAVE HIS CONSENT TO PETITIONER'S REPOSSESSION THEREOF.

II

THE HONORABLE COURT OF APPEALS ERRED IN NOT UPHOLDING THE RIGHT OF HEREIN PETITIONER TO
CANCEL A CONTRACT OF SALE UPON NON-PAYMENT OR DEFAULT OF THE BUYER.

III

THE HONORABLE COURT OF APPEALS ERRED IN AWARDING DAMAGES TO RESPONDENT MONTELIBANO

ESGUERRA IN THE FORM OF ATTORNEY'S FEES, MORAL DAMAGES AND EXEMPLARY DAMAGES.

The pivotal issue in this case is whether or not the mortgage vendor of personal property sold on
installment is legally obligated to foreclose the chattel mortgage and sell the chattel subject thereof at
public auction in case the mortgagor-vendee defaults in the payment of the agreed installments.

The Chattel Mortgage Contract provides:

Should the mortgagor fail to make any of the payments as herein before provided or to pay the interest
that may be due as provided herein or should he fail to comply with anyone of the obligations or
conditions herein set forth, then the whole amount remaining unpaid under this mortgage shall
automatically become due and demandable, and the mortgage on the property herein described may be
foreclosed by the mortgagee either judicially or extra-judicially, at the option of the mortgagee in
accordance with law. In case of foreclosure, it is expressly agreed that the sale may be made by the
mortgagee itself and the mortgagor expressly consents that the mortgaged property may be taken by
the mortgagee outside of the municipality or city where the mortgagee may conveniently sell the same.
And in case of sale, the mortgagor further agrees to pay to the mortgagee an additional sum equivalent
to twenty five (25%) per centum of the principal and interest due and unpaid, as liquidated damages
which this mortgage is given as security and shall become a part thereof, and the mortgagor hereby
waives reimbursements of the amounts heretofore paid by him to the mortgagee. (Decision CA-G.R. No.
46900-R, Rollo p. 37)

Esguerra admitted that he is in arrears in the payments of his account. Consequently, the mortgagee,
under the above cited provision of the mortgage contract has the option to foreclose the mortgage
either judicially or extrajudicially and in case of foreclosure, it was expressly agreed by the parties that
the mortgagee may take the property outside the municipality or city where the mortgagee may
conveniently sell the same.

Both the trial court and the Court of Appeals found that there was no forcible taking of the cargo truck.
Esguerra consented to the repossession of the truck or at least did not make any objection thereto. He
simply requested that he been given a chance to settle the account, which was evidently granted as on
the following day, June 14, 1966, appellant sent his wife with P500.00 with which to partially settle his
account (Rollo p. 40). Under the circumstances, both courts concluded that it was not unlawful on the
part of the appellee to repossess the cargo truck in question.

It is well settled that these findings are binding on the Supreme Court (Rizal Cement Co. Inc. v. Villareal,
135 SCRA 575 [1985]; Collector of Customs Manila v. Intermediate Appellate Court, 137 SCRA 3 [1985]),
as it is not the function of this Court to analyze or weigh evidence all over again, its jurisdiction being
limited to reviewing errors of law that might have been committed by the lower court (Baniqued v.
Court of Appeals, 127 SCRA 636 [1984]).

However, the respondent appellate court did not err in holding that while the mortgagee can take
possession of the chattel, such taking did not amount to the foreclosure of the mortgage. Otherwise
stated, the taking of Esguerra's truck without proceeding to the sale of the same at public auction, but
instead, appropriating the same in payment of Esguerra's indebtedness, is not lawful.

As clearly stated in the chattel mortgage contract, the express purpose of the taking of the mortgaged
property is to sell the same and/or foreclose the mortgage constituted thereon either judicially or
extrajudicially and thereby, liquidate the indebtedness in accordance with law.

More than that, even if such automatic appropriation of the cargo truck in question can be inferred from
or be contemplated under the aforesaid mortgage contract, such stipulation would be pactum
commissorium which is expressly prohibited by Article 2088 of the Civil Code and therefore, null and
void (Tan Chun Tic v. West Coast Life, 54 Phil., 361 [1933]; Reyes v. Nebrija 98 Phil. 639 [1955]; Ranjo v.
Salmon, 15 Phil. 436 [1910]; Paras, 'Civil Code of the Philippines', pp. 814-815; Vol. V, Seventh Edition).

Having opted to foreclose the chattel mortgage, respondent GAMI can no longer cancel the sale. The
three remedies of the vendor in case the vendee defaults, in a contract of sale of personal property the
price of which is payable in installment under Article 1484 of the Civil Code, are alternative and cannot
be exercised simultaneously or cumulatively by the vendor-creditor. In Cruz vs. Filipinas Investment and
Finance Corporation (23 SCRA 791, [19681; the Supreme Court construing Article 1484 of the Civil Code,
held:

Should the vendee or purchaser of a personal property default in the payment of two or more of the
agreed installments, the vendor or seller has the option to avail of any one of these three remedies
either to exact fulfillment by the purchaser of the obligation, or to cancel the sale, or to foreclose the
mortgage on the purchased personal property, if one was constituted. These remedies have been
recognized as alternative, not cumulative, that the exercise of one would bar the exercise of the others.
It may also be stated that the established rule is to the effect that the foreclosure and actual sale of a
mortgaged chattel bars further recovery by the vendor of any balance on the purchaser's outstanding
obligation not so satisfied by the sale.

It will be observed, however, that the award of exemplary damages is apparently unwarranted, there
being no showing that the mortgagee acted in a wanton, fraudulent, reckless or oppressive manner (Dee
Hua Liong Electrical Equipment Corp. v. Reyes, 145 SCRA 714 [1986]). The trial court did not find blatant
fault on the part of the mortgagee for not immediately proceeding with the foreclosure of the mortgage,
especially so where the filing of the instant case has put a legal obstacle to it. On the other hand, the
appellate court is of the view and rightly so that the mortgagee should have immediately foreclosed the
mortgage and offered the truck for sale at public auction as provided under the chattel mortgage
contract.

It will be recalled, that under the chattel mortgage contract, the mortgagee is expressly authorized to
sell the mortgaged property and the mortgagee had already commenced foreclosure of the chattel
mortgage (par. 13, amended answer) but the sale presumably could not be immediately made because
of the request of the mortgagor himself to give him a chance to settle his account.

WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED with the modification that the
award of exemplary damages is deleted. Respondent GAMI is hereby ordered to foreclose the chattel
mortgage by selling the subject cargo truck at public auction and liquidate the indebtedness in
accordance with law.

SO ORDERED.

G.R. No. L-13057 February 27, 1963

DELFIN MONTANO, plaintiff-appellee,

vs.

JOSE LIM ANG, ET AL., defendants.

ANGEL M. TINIO, third-party plaintiff-appellant,

vs.

MANILA TRADING & SUPPLY COMPANY, third-party defendant-appellant.

MANILA TRADING & SUPPLY COMPANY, fourth-party plaintiff-appellant,

vs.

AMADOR D. SANTOS, substituted by his wife DOLORES L. SANTOS, fourth-party defendant-appellant.

AMADOR D. SANTOS, substituted by his wife DOLORES L. SANTOS, fifth-party plaintiff-appellant,

vs.

MARCIANO VILLANUEVA and EUGENIO VILLANUEVA, fifth-party defendants-appellees.

MARCIANO VILLANUEVA and EUGENIO VILLANUEVA, cross-claimants-appellees,

vs.

JOSE LIM ANG, cross-defendant.

Roxas & Sarmiento for plaintiff-appellee Delfin Montano.

Arsenio R. Reyes for third-party plaintiff-appellant Angel M. Tinio.

Ross, Selph, Carrascoso & Janda for third-party defendant-appellant Manila Trading & Supply Company.

Vicente J. Francisco, for cross-claimants-appellees Marciano Villanueva and Eugenio Villanueva.

Jose Lim Ang for and in his own-behalf as cross-defendant.

BAUTISTA ANGELO, J.:

Delfin Montano brought to the Philippines from the United States a Cadillac car which he registered in
his name in the Motor Vehicles Office and for which he obtained a certificate of registration. On May 30,
1952, he sold the car to Jose Lim Ang and his wife Teodora A. Gonzales for the sum of P28,000.00,
payable in installments, for which the latter executed a promissory note. Having paid part of the price,
said spouses executed on the same date a chattel mortgage on the car in favor of Montano to guarantee
the payment of the balance. Because Montano did not want to transfer the registration certificate to
Jose Lim Ang before the registration of the mortgage, the latter was registered in the office of the
register of deeds on June 4, 1952, but Montano failed to notify the Motor Vehicles Office of the
execution of the mortgage pursuant to the requirement of Section 5(e) of Act No. 3992, known as the
Revised Motor Vehicle Law.

On June 12, 1952, Jose Lim Ang transferred the registration certificate to Eugenio Villanueva. On June 18,
1952, Villanueva sold the car to Amador D. Santos for P25,000.00, transferring to the latter the
registration certificate. On the same date, Santos sold the car to the Manila Trading & Supply Company
for P25,000.00, and on the same date this company sold the car to Angel M. Tinio for P26,000.00. Tinio
made a down payment of P12,000.00 and for the balance he executed a promissory note which he
assumed to pay in monthly installments. He also executed a chattel mortgage on the same car to secure
the payment of the promissory note. This mortgage was registered both in the office of the register of
deeds as well as in the Motor Vehicles Office. After paying his obligation in full, the mortgage executed
by Tinio in favor of the Manila Trading & Supply Company was cancelled, and as a consequence he
secured the transfer to his name of the certificate of registration from the Motor Vehicles Office. None
of the transferees took the trouble of investigating from whom Jose Lim Ang had acquired the Cadillac
car, and neither did any of them investigate in the office of the register of deeds if there was any
encumbrance existing thereon.
Jose Lim Ang failed to pay the balance of the purchase price to Montano in spite of the latter's demand
and so on December 8, 1952 Montano requested the sheriff of Manila to sell the car in accordance with
the conditions agreed upon in the chattel mortgage. Having found, however, that the car was no longer
in the possession of Lim Ang but in that of Angel M. Tinio who claimed ownership thereof, on July 8,
1953 Montano commenced the present action of replevin before the Court of First Instance of Manila
against spouses Jose Lim Ang and Teodora A. Gonzales and Angel M. Tinio to recover the ownership and
possession of the car in question (Civil Case No. 1998).

In order to obtain possession of the car, Montano put up a bond in the amount of P30,000.00 and,
accordingly, on July 11, 1953 an order for the seizure of the car was issued by the trial court. The sheriff
hauled the car from Tinio's garage only to return the same on the promise of Tinio to post a
counterbond to enable him to retain possession thereof. In effect, Tinio posted a counterbond in the
amount of P30,000.00, and forthwith filed a third-party complaint in the same case against the Manila
Trading & Supply Company from which he bought the car in question. This company in turn filed a
fourth-party complaint against Amador D. Santos, who in turn brought into the case as defendants
Marciano and Eugenio Villanueva. The Villanuevas filed a cross-claim against Jose Lim Ang and his wife
Teodora A. Gonzales. On March 29, 1954, these spouses were declared in default for their failure to
answer Montano's complaint within the reglementary period.

Meanwhile, during the pendency of the replevin case, it was brought to the attention of the court a quo
that on May 15, 1953, at the instance of Montano, the aforesaid spouses were accused of estafa under
Article 319, paragraph 2, of the Revised Penal Code for having sold the car in question without the
consent of Montano notwithstanding the existence thereon of the chattel mortgage (Criminal Case No.
22627); that Atty. Abraham Sarmiento, Montano's counsel in the replevin case, appeared as private
prosecutor in the criminal case; and that having been awarded an indemnity in the amount of P7,875.00
which is the same amount Montano seeks to recover in the civil case, said award has the effect of a
waiver on his part to further prosecute the same.

Wherefore, the parties respectfully pray that the foregoing stipulation of facts be admitted and
approved by this Honorable Court, without prejudice to the parties adducing other evidence to prove
their case not covered by this stipulation of facts. 1wph1.t

On September 24, 1955, the court a quo rendered decision the dispositive part of which reads:
(a) The court orders defendants Jose Lim Ang, Teodora A. Gonzales and Angel M. Tinio to deliver the car
in question to plaintiff Delfin Montano or to pay jointly and severally to plaintiff Delfin Montano the sum
of P6,000.00, plus 12% interest per annum from August 15, 1952, until the amount is fully paid, with
costs;

(b) The court orders Manila Trading & Supply Co. to reimburse defendant and third-party plaintiff Angel
M. Tinio the amount of P6,000.00, plus interest at the rate of 12% per annum from August 15, 1952,
until the said amount is fully paid, with costs. This amount of reimbursement shall be made by Manila
Trading & Supply Co. even if defendant and third-party plaintiff Angel M. Tinio delivers the car back to
Delfin Montano. If Angel M. Tinio elects to return the car to Delfin Montano instead of paying him the
sum of P6,000.00 plus 12% interest per annum, the value of the car must have been reduced to
P6,000.00 only, or less, due to its use. Manila Trading & Supply Co. as third-party defendant shall also
pay to defendant Angel M. Tinio as third-party plaintiff the sum of P3,000.00 for damages actual and
moral, expenses so far incurred by him in defending himself in this case, and attorney's fees;

(c) The court orders fourth-party defendant Amador D. Santos to reimburse to fourth-party plaintiff
Manila Trading & Supply Co. the sum of P6,000.00, plus 12% interest per annum from August 15, 1952,
until this sum is paid by Manila Trading & Supply Co. to defendant and third-party plaintiff Angel M.
Tinio, plus costs. No reimbursement for damages and attorney's fees is ordered because Manila Trading
& Supply Co. waived damages and attorney's fees from Amador D. Santos;

(d) The court orders defendant spouses Jose Lim Ang and Teodora A. Gonzales to pay jointly and
severally to Amador D. Santos, as reimbursement, all sums the said Amador D. Santos shall have paid
Manila Trading & Supply Co. in compliance with this decision.

Fifth-party defendants Marciano Villanueva and Eugenio Villanueva are absolved from the fifth-party
complaint of Amador D. Santos because the evidence is conclusive that Eugenio Villanueva acted as
dummy only of Jose Lim Ang. Amador D. Santos himself testified expressly and positively that he refused
to buy the car in question unless it was transferred to the Villanuevas. Fifth-party defendants Eugenio
Villanueva and Marciano Villanueva conclusively proved that they received not a cent of the price of the
car in question from Amador D. Santos. The sum of P11,228.50, for which Amador D. Santos extended a
promissory note and which was paid by him the following day, was the price of Eugenio Villanueva's
Oldsmobile car. The Villanuevas conclusively established that on June 18, 1953, when the car in question
was sold to Amador D. Santos, Eugenio Villanueva signed the deed of sale in order to get the payment
for his Oldsmobile car.
Their motions for reconsideration having been denied, defendant and third-party plaintiff Angel M. Tinio,
third-party defendant and fourth-party plaintiff Manila Trading & Supply Company, fourth-party
defendant and fifth-party plaintiff Amador D. Santos, fifth-party defendants and cross-claimants
Marciano Villanueva and Eugenio Villanueva appealed to the Court of Appeals. The case is now before
us upon certification of the Court of Appeals on the ground that only questions of law are involved.

Amador D. Santos died during the pendency of this case and so he was substituted by his wife Dolores L.
Santos, special administratrix of his estate.

The issues posed in this appeal are: (1) whether or not the chattel mortgage executed by Jose Lim Ang
and his wife Teodora A. Gonzales on May 30, 1952 before the car was actually registered in their name
is valid and regular; (2) Whether or not the chattel mortgage executed by Jose Lim Ang and Teodora A.
Gonzales in favor of Delfin Montano is binding against third persons even if they failed to give notice
thereof to the Motor Vehicles Office as required by Section 5(e) of the Revised Motor Vehicle Law; and
(3) whether or not the intervention of Montano in the prosecution of the criminal case against Jose Lim
Ang and his wife for estafa under Article 319, paragraph 2, of the Revised Penal Code wherein he was
awarded an indemnity of P7,875.00 constitutes a waiver of his right to foreclose the chattel mortgage
executed by said spouses on the car in question.

Anent the first issue, appellants maintain the negative. They aver that since the chattel mortgage was
executed on May 30, 1952 and the transfer of the registration certificate was made only on June 7, 1952,
said mortgage is invalid because the mortgagors were not yet the owners of the car when the mortgage
was executed. They bolster up their claim by invoking the testimony of Montano to the effect that on
May 31, 1952, he still considered himself owner of the car because he intended to transfer its ownership
to the mortgagors only after the registration of the mortgage in the office of the register of deeds.

This contention is untenable. It is not disputed that Montano agreed to sell and the spouses Ang agreed
to buy the car for P28,000.00 for which a promissory note was executed and that to guarantee the same
the spouses executed a chattel mortgage and took possession of the car sold. It is therefore safe to
conclude that at the time of the sale wherein the parties agreed over the car and the price, the contract
became perfected, and when part of the purchase price was paid and the car was delivered upon the
execution of the promissory note and the mortgage, the same became consummated.1 The fact that the
registration certificate of the car has not as yet been transmitted to the purchasers when the mortgage
was constituted is of no moment for, as this Court well said: "The registry of the transfer of automobiles
and of the certificates of license for their use in the Bureau of Public Works (now Motor Vehicles Office)
merely constitutes an administrative proceeding which does not bear any essential relation to the
contract of sale entered into between the parties."2 At any rate, this flaw, if any, is deemed to have
been cured when after the registration of the mortgage the registration certificate was transferred to
the purchasers on June 4, 1952.

The second issue raised is not new. In a similar case3 decided by this Court, we said: "A mortgage in
order to affect third persons should not only be registered in the Chattel Mortgage Registry, but the
same should also be recorded in the Motor Vehicles Office as required by section 5(e) of the Revised
Motor Vehicle Law. And the failure of the respondent mortgagee to report the mortgage executed in its
favor had the effect of making said mortgage ineffective against Borlough, who had his purchase
registered in the said Motor Vehicles Office."' Adopting this view in our case the inevitable conclusion is
that as between Montano whose mortgage over the car was not recorded in the Motor Vehicles Office
and Angel M. Tinio who notified said office of his purchase and registered the car in his name, the latter
is entitled to preference considering that the mere registration of the chattel mortgage in the office of
the register of deeds is in itself not sufficient to hold it binding against third persons.

Having reached the foregoing conclusion, we deem it unnecessary to discuss the third issue relative to
Montano's intervention in Criminal Case No. 22627.

With regard to the claim for damages of Angel M. Tinio, we find no factual basis to grant the same it
appearing that Montano filed the present case merely to protect his interest.

WHEREFORE, the decision appealed from is affirmed insofar as it orders defendants Jose Lim Ang and his
wife Teodora A. Gonzales to pay Delfin Montano the sum of P6,000.00, plus 12% interest thereon per
annum from August 15, 1952 until it is fully paid.

The rest of the decision is reversed, without pronouncement as to costs.

R. No. L-18456 November 30, 1963

CONRADO P. NAVARRO, plaintiff-appellee,

vs.

RUFINO G. PINEDA, RAMONA REYES, ET AL., defendants-appellants.

Deogracias Taedo, Jr. for plaintiff-appellee.

Renato A. Santos for defendants-appellants.

PAREDES, J.:

On December 14, 1959, defendants Rufino G. Pineda and his mother Juana Gonzales (married to
Gregorio Pineda), borrowed from plaintiff Conrado P. Navarro, the sum of P2,500.00, payable 6 months
after said date or on June 14, 1959. To secure the indebtedness, Rufino executed a document captioned
"DEED OF REAL ESTATE and CHATTEL MORTGAGES", whereby Juana Gonzales, by way of Real Estate
Mortgage hypothecated a parcel of land, belonging to her, registered with the Register of Deeds of
Tarlac, under Transfer Certificate of Title No. 25776, and Rufino G. Pineda, by way of Chattel Mortgage,
mortgaged his two-story residential house, having a floor area of 912 square meters, erected on a lot
belonging to Atty. Vicente Castro, located at Bo. San Roque, Tarlac, Tarlac; and one motor truck,
registered in his name, under Motor Vehicle Registration Certificate No. A-171806. Both mortgages
were contained in one instrument, which was registered in both the Office of the Register of Deeds and
the Motor Vehicles Office of Tarlac.

When the mortgage debt became due and payable, the defendants, after demands made on them,
failed to pay. They, however, asked and were granted extension up to June 30, 1960, within which to
pay. Came June 30, defendants again failed to pay and, for the second time, asked for another extension,
which was given, up to July 30, 1960. In the second extension, defendant Pineda in a document entitled
"Promise", categorically stated that in the remote event he should fail to make good the obligation on
such date (July 30, 1960), the defendant would no longer ask for further extension and there would be
no need for any formal demand, and plaintiff could proceed to take whatever action he might desire to
enforce his rights, under the said mortgage contract. In spite of said promise, defendants, failed and
refused to pay the obligation.

On August 10, 1960, plaintiff filed a complaint for foreclosure of the mortgage and for damages, which
consisted of liquidated damages in the sum of P500.00 and 12% per annum interest on the principal,
effective on the date of maturity, until fully paid.
Defendants, answering the complaint, among others, stated

Defendants admit that the loan is overdue but deny that portion of paragraph 4 of the First Cause of
Action which states that the defendants unreasonably failed and refuse to pay their obligation to the
plaintiff the truth being the defendants are hard up these days and pleaded to the plaintiff to grant
them more time within which to pay their obligation and the plaintiff refused;

WHEREFORE, in view of the foregoing it is most respectfully prayed that this Honorable Court render
judgment granting the defendants until January 31, 1961, within which to pay their obligation to the
plaintiff.

On September 30, 1960, plaintiff presented a Motion for summary Judgment, claiming that the Answer
failed to tender any genuine and material issue. The motion was set for hearing, but the record is not
clear what ruling the lower court made on the said motion. On November 11, 1960, however, the
parties submitted a Stipulation of Facts, wherein the defendants admitted the indebtedness, the
authenticity and due execution of the Real Estate and Chattel Mortgages; that the indebtedness has
been due and unpaid since June 14, 1960; that a liability of 12% per annum as interest was agreed, upon
failure to pay the principal when due and P500.00 as liquidated damages; that the instrument had been
registered in the Registry of Property and Motor Vehicles Office, both of the province of Tarlac; that the
only issue in the case is whether or not the residential house, subject of the mortgage therein, can be
considered a Chattel and the propriety of the attorney's fees.

On February 24, 1961, the lower court held

... WHEREFORE, this Court renders decision in this Case:

(a) Dismissing the complaint with regard to defendant Gregorio Pineda;

(b) Ordering defendants Juana Gonzales and the spouses Rufino Pineda and Ramon Reyes, to pay jointly
and severally and within ninety (90) days from the receipt of the copy of this decision to the plaintiff
Conrado P. Navarro the principal sum of P2,550.00 with 12% compounded interest per annum from
June 14, 1960, until said principal sum and interests are fully paid, plus P500.00 as liquidated damages
and the costs of this suit, with the warning that in default of said payment of the properties mentioned
in the deed of real estate mortgage and chattel mortgage (Annex "A" to the complaint) be sold to realize
said mortgage debt, interests, liquidated damages and costs, in accordance with the pertinent
provisions of Act 3135, as amended by Act 4118, and Art. 14 of the Chattel Mortgage Law, Act 1508; and

(c) Ordering the defendants Rufino Pineda and Ramona Reyes, to deliver immediately to the Provincial
Sheriff of Tarlac the personal properties mentioned in said Annex "A", immediately after the lapse of the
ninety (90) days above-mentioned, in default of such payment.

The above judgment was directly appealed to this Court, the defendants therein assigning only a single
error, allegedly committed by the lower court, to wit

In holding that the deed of real estate and chattel mortgages appended to the complaint is valid,
notwithstanding the fact that the house of the defendant Rufino G. Pineda was made the subject of the
chattel mortgage, for the reason that it is erected on a land that belongs to a third person.

Appellants contend that article 415 of the New Civil Code, in classifying a house as immovable property,
makes no distinction whether the owner of the land is or not the owner of the building; the fact that the
land belongs to another is immaterial, it is enough that the house adheres to the land; that in case of
immovables by incorporation, such as houses, trees, plants, etc; the Code does not require that the
attachment or incorporation be made by the owner of the land, the only criterion being the union or
incorporation with the soil. In other words, it is claimed that "a building is an immovable property,
irrespective of whether or not said structure and the land on which it is adhered to, belong to the same
owner" (Lopez v. Orosa, G.R. Nos. L-10817-8, Feb. 28, 1958). (See also the case of Leung Yee v. Strong
Machinery Co., 37 Phil. 644). Appellants argue that since only movables can be the subject of a chattel
mortgage (sec. 1, Act No. 3952) then the mortgage in question which is the basis of the present action,
cannot give rise to an action for foreclosure, because it is nullity. (Citing Associated Ins. Co., et al. v.
Isabel Iya v. Adriano Valino, et al., L-10838, May 30, 1958.)

The trial court did not predicate its decision declaring the deed of chattel mortgage valid solely on the
ground that the house mortgaged was erected on the land which belonged to a third person, but also
and principally on the doctrine of estoppel, in that "the parties have so expressly agreed" in the
mortgage to consider the house as chattel "for its smallness and mixed materials of sawali and wood". In
construing arts. 334 and 335 of the Spanish Civil Code (corresponding to arts. 415 and 416, N.C.C.), for
purposes of the application of the Chattel Mortgage Law, it was held that under certain conditions, "a
property may have a character different from that imputed to it in said articles. It is undeniable that the
parties to a contract may by agreement, treat as personal property that which by nature would be real
property" (Standard Oil Co. of N.Y. v. Jaranillo, 44 Phil. 632-633)."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. ... The matter depends on the circumstances 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 ...". (42 Am. Jur. 209-210, cited in Manarang, et al.
v. Ofilada, et al., G.R. No. L-8133, May 18, 1956; 52 O.G. No. 8, p. 3954.) The view that parties to a deed
of chattel mortgagee 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
principles of estoppel ..." (Evangelista v. Alto Surety, No. L-11139, Apr. 23, 1958). In a case, a mortgage
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 v. Abad
[CA];36 O.G. 2913), for it is now well settled that an object placed on land by one who has only a
temporary right to the same, such as a lessee or usufructuary, does not become immobilized by
attachment (Valdez v. Central Altagracia, 222 U.S. 58, cited in Davao Sawmill Co., Inc. v. 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 is so stipulated in the document of mortgage.
(Evangelista v. 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, et al.. v. C. N. Hodges, et al., [CA]; 48 O.G. 5374). The doctrine,
therefore, gathered from these cases is that although in some instances, a house of mixed materials has
been considered as a chattel between them, has been recognized, it has been a constant criterion
nevertheless that, with respect to third persons, who are not parties to the contract, and specially in
execution proceedings, the house is considered as an immovable property (Art. 1431, New Civil Code).

In the case at bar, the house in question was treated as personal or movable property, by the parties to
the contract themselves. In the deed of chattel mortgage, appellant Rufino G. Pineda conveyed by way
of "Chattel Mortgage" "my personal properties", a residential house and a truck. The mortgagor himself
grouped the house with the truck, which is, inherently a movable property. The house which was not
even declared for taxation purposes was small and made of light construction materials: G.I. sheets
roofing, sawali and wooden walls and wooden posts; built on land belonging to another.

The cases cited by appellants are not applicable to the present case. The Iya cases (L-10837-38, supra),
refer to a building or a house of strong materials, permanently adhered to the land, belonging to the
owner of the house himself. In the case of Lopez v. Orosa, (L-10817-18), the subject building was a
theatre, built of materials worth more than P62,000, attached permanently to the soil. In these cases
and in the Leung Yee case, supra, third persons assailed the validity of the deed of chattel mortgages; in
the present case, it was one of the parties to the contract of mortgages who assailed its validity.

CONFORMABLY WITH ALL THE FOREGOING, the decision appealed from, should be, as it is hereby
affirmed, with costs against appellants.

G.R. No. L-9957 August 8, 1916

PERFECTO DE LA VEGA, ET AL., plaintiffs-appellees,

vs.

TOMAS BALLILOS (or BALIELOS), defendant-appellant.

Silvestre Apacible for appellants.

P. Joya Admana for appellees.

TORRES, J.:

This appeal by bill of exceptions was raised by counsel for the defendant from the judgment of January
23, 1914, in which the Court of First Instance of Batangas absolved the defendant from the complaint
with respect to the parcels of land Nos. 2, 3, 4, and 8 in the rough sketch admitted by agreement of the
parties, and ordered him to return and deliver to the plaintiffs the parcels of land designated on the said
sketch as Nos. 1, 5 and 7, upon the plaintiffs paying to the defendant the sum of P430; with the costs of
the proceedings against the appellant.

By a writing of May 9, 1913, plaintiffs through their counsel filed a complaint in the Court of First
Instance of Batangas, alleging as a cause of action that they were the sole heirs of their common
predecessors in interest, Victor de la Vega and Ursula de Guzman, who at their deaths were in
possession of a parcel of land measuring six cavanes and a half, situated in the barrio of Dao of the
pueblo of Balayan, Batangas with the metes and bounds given and described in the rough sketch
specifically mentioned in Paragraph I of the complaint; that the plaintiffs had continued in the common
and pro indiviso possession of the said parcel of land, which was divided into seven parts or lots, as seen
by the rough sketch attached to the complaint; that about the year 1895, Fidel de la Vega, one of the
coowners of the said property, in consideration of a loan of P430 which he had received from the
defendant Tomas Balielos (or Ballilos) conveyed to the latter the parcels of land Nos. 1, 4, and 6, by
means of a contract of antichresis, until such time as the said debtor, or some one of the coowners of
the land, should return the said borrowed sum; that subsequently, to wit, in the year 1905, the plaintiffs,
with the exception of Policarpo de la Vega, successively borrowed from the defendant the sums of P40,
P18 and P60, under the same contract of antichresis, but this time they gave as security the lots marked
Nos. 2, 3, and 7, from which lots the defendant was to collect the interest due, as in fact he did, from the
date of the encumbrance of the said parcels of land up to the time the complaint was filed when they
offered to pay the defendant the said sums of P430, P40, P18, and P60, a total of P548, in order to
reacquire the said parcels; but that the defendant refused and still unlawfully refuses to receive the said
sums and has appropriated to himself the said parcels of land. The plaintiffs therefore prayed that the
defendant be ordered to deliver the restore the said parcels of land to them, after they should have paid
him the sum of P548, and that he be further ordered to pay to the plaintiffs the sum of P500 for the
losses and damages suffered by them, with the costs of the proceedings against the defendant.

His demurrer having been overruled, the defendant in his answer denied each and all of the allegations
contained in the complaint, and in special defense set forth that the description of the parcels of land in
question was that found in the map inserted in paragraph (a) of his special defense. He added that the
lots Nos. 1, 4, and 6, shown in the said sketch, were sold to him in July, 1896, by Fidel de la Vega with
the consent of the other plaintiffs for the price of P430 on the condition that they might be repurchased,
but that no period whatever was fixed for their redemption; that as the property had not been
redeemed within the legal period, the ownership of the said parcels of land had become consolidated in
the purchaser by force of law; that in about the same year, 1896, Roberta de la Vega, with the consent
and authorization of the other plaintiffs, also sold to the defendant, for the sum of P40, lot No. 3, a
parcel which measured one-half cavan of seed; that parcel No. 2 likewise had been sold to him by Felina
Alio with the consent of the plaintiffs, in or about the month of February, 1901, for the sum of P28; and,
finally, that parcel No. 5 likewise had been sold to him by Felina Alio with the consent of the plaintiffs,
in or about the month of February, 1901, for the sum of P28; and, finally, that parcel No. 5 was sold to
him by Fidel de la Vega with the consent of the other plaintiffs, in the year 1891, for the price of P80, on
condition that it might be redeemed by the vendors at the same price; that no period was fixed within
which it was to be repurchased and that as it was not repurchased by the plaintiffs within the period
fixed by law, the ownership of the land had consequently become consolidated in the defendant; and
that the latter had for many years been in the quiet, public, and continuous possession of the parcels of
the land in question as the owner thereof, to the exclusion of every other person. Defendant therefore
prayed that he be absolved from the complaint, with the costs against the plaintiffs.
After the hearing and the introduction of evidence by both parties, the court rendered the
aforementioned judgment to which the defendant excepted and in writing moved for a reopening of the
case and a new hearing. To the order overruling his motion defendant excepted and duly filed the
proper bill of exceptions which was approved and transmitted to the clerk of this court.

The appeal in this case is therefore restricted to the parcels of land Nos. 1, 5, and 7 which defendant in
the judgment appealed from is ordered to deliver and restore to the plaintiffs upon payment to him of
the sum of P430, and the question here raised is whether the deed of conveyance of the said parcels of
land, executed by Fidel de la Vega in favor of the defendant on July 29, 1896, and found in the document
Exhibit O is a contract of antichresis, as contended by the plaintiffs, or whether it is a sale under pacto
de retro, as the defendant-appellant in this instance alleges it to be.

According to the stipulation of the parties, the lots referred to on this appeal are those marked Nos. 1, 5,
and 7 on the rough sketch shown on page 22 of the bill of exceptions, three parcels of land that were
the subject matter of the contract executed between Fidel de la Vega and the defendant and contained
in the document Exhibit O, dated Balayan, Batangas, July 29, 1896.

In order to determine the nature of and to classify the said contract, the essential part of the document
Exhibit O, as found at pages 16 to 18 of the bill of exceptions, is transcribed here below. The parts
thereof which refer to the names of the coowners of the two parcels of land mentioned in the contract,
and to the area, metes, and bounds of each one of these two parcels, have been omitted. The said
essential part is as follows:

. . . . and whereas on this day I have mortgaged the two parcels of land above-mentioned to the said D.
Tomas Ballilos for the sum of P430 and for the term of eight years, counting from this day, at the
expiration of which I may redeem them; that should I not then do so, the said lands shall continue to be
mortgaged until I have the money available wherewith the redeem them; therefore, I hereby mortgage
the two parcels of land hereinabove mentioned to D. Tomas Ballilos for the said sum of P430, which I
have received from him in current coin, and as the same was not received in our presence, we waive the
exception of money not paid in cash; therefore, henceforth and during the period above stipulated, I
grant and convey my ownership and possession in the said two parcels of land to the said D. Tomas
Ballilos in order that he may manage and enjoy the same in consideration of the sum for which they are
mortgaged.
There being present D. Tomas Ballilos . . . ., he stated that he had received in mortgage, to his entire
satisfaction, the two parcels of tillable land above mentioned, under the conditions and for the time
stipulated, for the sum of P430, which he has already delivered to the said D. Fidel de a Vega, who in
turn states that the said lands are free of all charges and encumbrances and binds himself to warrant
this mortgage in case of legal proceedings.

The said contract apparently records a loan of P430, secured by a mortgage of the aforementioned two
parcels of land and payable within the period of eight years, or within such time as the debtor Fidel de la
Vega might be able to pay his debt and redeem the said land. However, notwithstanding the terms of
the document, legally there is no mortgage inasmuch as the said instrument is not of the nature of a
public instrument. And even though it were, it was not recorded in the property registry as it ought to
have been. Furthermore, the instrument recites that the debtor thenceforth ceded and conveyed his
ownership and possession in the said two parcels of land to the creditor Ballilos in order that Ballilos
might manage and enjoy the same in consideration of the sum for which the lands, free of all burden
and encumbrance according to the debtor, were mortgaged.

If the instrument above mentioned can not be construed as a mortgage of the said two parcels of land in
security for P430, the amount loaned, and for the payment of the debt within eight years or some other
period, neither can it be held to be a sale under pacto de retro inasmuch as the said document contains
no mention whatever of any sale with right of redemption, although it does say that the debtor ceded
and conveyed to the creditor the ownership and possession of the lands in order that he might manage
and enjoy them in consideration of the sum for which they were mortgaged.

As it is not shown that the said document is a contract of mortgage executed as security for a loan, still
less does it appear to be a contract of pacto de retro, in view of the terms of the agreement Exhibit O, as
stipulated between the contracting parties, of the allegations of both parties, and of the findings of the
court in regard to the allegations, made and proven at the trial by the contending parties, we find the
classification of the said contract as one of antichresis to be correct and proper, taking into account the
intention of the contracting parties as revealed by the words and terms employed by them and recorded
in the said document.

Several articles of the Civil Code relating to the contract of antichresis, are as follows:
ART. 1881. By antichresis a creditor acquires a right to receive the fruits of real property of his debtor,
with the obligation to apply them to the payment of interest, if due, and afterwards to the principal of
his credit.

ART. 1883. The debtor can not recover the enjoyment of the real property without previously paying in
full what he owes to his creditor.

But the latter, in order to free himself from the obligations imposed on him by the preceding article,
may always compel the debtor to reenter upon the enjoyment of the estate, unless there be an
agreement to the contrary.

ART. 1884. The creditor does not acquire the ownership of the real property by nonpayment of the debt
within the term agreed upon.

Any stipulation to the contrary shall be void. But in this case the creditor may demand, in the manner
prescribed in the law of civil procedure, the payment of the debtor or the sale of the reality.

ART. 1885. The contracting parties may stipulate that the interest of the debt be set off against the fruits
of the estate given in antichresis.

This contract is somewhat similar to those of pledge and mortgage and for this reason article 1886
prescribed that certain articles relative to these latter contracts are applicable to contracts of antichresis,
for both the former and the latter contracts are comprised in title 15, book 4, of the Civil Code.

The court's construction as to the form of the contract entered into by the parties as found in the
judgment appealed from, is fully supported by the law, the pleadings, and the evidence. The contract
entered into by the contracting parties which has produced between them rights and obligations is in
fact one of antichresis, for article 1281 of the Civil Code prescribes among other things that if the words
should appear to conflict with the evident intent of the contracting parties, the intent shall prevail.
Article 1283 provides that however general the terms of the contract may be, they should not be
understood to include things and cases different from those with regard to which the interested parties
intended to contract; and, further, article 1284 of the same code says that if any stipulation of a contract
should admit of several different meanings, that most suitable to give it effect should be applied.
In the said Exhibit O it was stipulated that even after eight years the debtor, the owner of the property,
might redeem it whenever he should have the means to pay his debt and recover the lands given in
antichresis to his creditor who might told them in usufruct in consideration for the money he had loaned;
and as the foregoing articles of the Civil Code fixes no term for the recovery of the enjoyment of
immovables given in antichresis, provided that the debtor previously pay what he owes to this creditor,
the plaintiffs have an unquestionable right to recover parcels Nos. 1, 5, and 7 of the land designated in
the map or plan admitted by agreement of the parties, after first paying the debt of P430 to the
defendant-creditor.

By the foregoing reasons, the errors assigned by the appellant to the judgment rendered in this suit
have been fully refuted, and, therefore, as the said judgment is in accordance with the law and the
evidence, it should be, as it is hereby, affirmed, with the costs against the defendant. So ordered.

G.R. Nos. L-43673 and 43674 October 24, 1938

LICERIO LEGASPI and JULIAN SALCEDO, plaintiffs-appellants,

vs.

DAMASO CELESTIAL, defendant-appellee.

Ambrosio Santos and Calixto M. Legaspi for appellants.

Juan S. Rustia for appellee.

VILLA-REAL, J.:

The plaintiffs Licerio Legaspi and Julian Salcedo appeal to this court from the judgment rendered by the
Court of First Instance of Cavite in civil cases Nos. 3025 and 3037 of said court, the dispositive part of
which reads as follows:
Wherefore, judgment is rendered by this court holding that both the so-called instrument of mortgage
Exhibit A and the instrument Exhibit C-1 are really contracts of antichresis and, consequently, the
plaintiffs should render to the defendant an account of the 65 salt beds, which are the subject matter of
the two cases, as soon this decision becomes final, taking into consideration the sums already paid by
the defendant to the plaintiffs.

The writ of preliminary attachment issued in civil case No. 3037 is set aside, without costs in both cases.
It is so ordered.

In support of their appeal, the appellants assign the following alleged errors as committed by the court a
quo in its judgment in question, to wit:

1. The court erred in holding that both the instrument of mortgage Exhibit A and the instrument Exhibit
C-1 are really contracts of antichresis.

2. The court likewise erred in ordering the plaintiffs to render to the defendant an account of the fruits
produced by the 65 salt beds, which are the subject matter of both cases.

3. Lastly, the court erred in not absolving the plaintiffs from the counterclaim and cross-complaint filed
by the defendant, with the costs to the latter.

On January 17, 1935, the plaintiffs brought an action against the defendant Damaso Celestial in the
justice of the peace court of Kawit, Cavite, praying that judgment be rendered, ordering said defendant
to pay to the abovenamed plaintiffs the sum of P556.160, plus the corresponding legal interest thereon
from the date of the filing of the complaint, until fully paid, and the costs.

The defendant, answering the complaint, admitted the essential facts alleged therein, stating that he
was disposed to pay what he should appear still to be indebted and, by way of counterclaim and cross-
complaint, claimed that, the contract entered into between him and the plaintiffs being an antichresis,
the latter were bound to render an account of the products of the five salt beds, the total production of
which was from 300 to 350 cavans of salt at P1 a cavan.
After due trial of the case, the justice of the peace court of Kawit, Cavite, on February 5, 1935, rendered
judgment in said case, the dispositive part of which reads as follows:

Premises considered, judgment hereby rendered ordering the defendant to pay the herein plaintiffs the
sum of P556.60 with interest at the legal rate from January 17, 1935, and to pay the costs of suit. It is so
ordered.

From the foregoing judgment, the defendant appealed to the Court of First Instance of Cavite.

On January 30, 1935, the same plaintiffs filed a complaint in civil case No. 3025 of said Court of First
Instance, praying that the same defendant Damaso Celestial be ordered to pay them the sum of P7,637,
with the legal interest thereon from the date of the filing of the complaint, until fully paid, and the costs
of the suit, and that, upon his failure to do so, the mortgage constituted by said defendant in their favor
to secure the payment of the loan in question be ordered foreclosed.lwphi1.nt

The defendant, answering the complaint, admitted the material facts alleged therein as well as the
conditions set forth in the documents Exhibit "A" attached thereto, stating that he had never refused to
pay any balance of the debt resulting after a rendition of accounts by the plaintiffs and a liquidation; and
by way of counterclaim and cross-complaint, alleged that the sixty-five salt beds administered by the
plaintiffs, by virtue of the above-stated documents, yielded a net produced of a about 6,500 cavans of
salt every six months at P1 a cavan; that the plaintiffs should render to the defendant an account of said
products so that they may be applied to the payment of his loan or debt; that the approximate total
value of half of the number of cavans of salt reaped and availed of by the plaintiffs from the sixty-five
salt beds administered by them during three years and eleven months, that is, from February 23, 1931,
to February 8, 1935, the date of the filing of the answer, was P13,000; that after deducting from said
P13,000 the total amount of the defendant's debt to the plaintiffs under the above-stated contracts,
that is, P8,193.60, there would still remain a balance in favor of the defendant in the sum of P4,806.40,
which he is entitled to collect from the plaintiffs. He prayed that judgment be rendered, ordering the
plaintiffs to render an account of their administration and to pay jointly and severally the sum of
P4,806.40, with the legal interest thereon, plus the damages that would result if the contract of
mortgage already perfected with Melchor de Lara should be frustrated and should he fail to find another
to execute said contract of mortgage in the sum of P25,000.

The plaintiffs, replying to the special defense and cross-complaint, denied each and every one of the
facts alleged therein, stating that the salt gathered from the 60 salt beds mentioned in the complaint
was for the exclusive use, benefit and enjoyment of the plaintiffs who, under the provisions of Exhibit A
and the intention of the parties, were not obliged to submit to the defendant a liquidation of the salt
produced and gathered, in order that the same may be deducted from the principal.

On February 25, 1935, the parties to civil case No. 3025 submitted the following stipulation to the court,
to wit:

Come now the parties to this case, assisted by their respective attorney, and respectfully submit the
following stipulation:

1. That, aside from this case, the same plaintiffs had instituted against the same defendant in the justice
of the peace court of Kawit, Cavite, civil case No. 165, for the recovery of the sum of P556.60
representing a loan made by the plaintiffs on a portion of the same parcel of land which is the subject
matter of the mortgage in this case before this Honorable Court of First Instance, as evidenced by
another notarial document dated August 13, 1932. And in this stipulation, said case shall be understood
to be consolidated with the present one.

2. That the defendants agrees and is disposed to make immediate delivery to the plaintiffs of the total
amount of P8,193.60, without prejudice to his right to prosecute the case in connection with his
contention of their administration. In must render to him an account of their administration. In
consideration hereof, the plaintiffs, in turn, agree and bind themselves now to secure the amount in
question, or the receipt thereof, for the due compliance with the judgment to be rendered by the court
on said rendition of accounts, with sufficient property of their own worth not less than the 14th instant,;
and likewise forthwith to respect, turn over and restore now, as they hereby do so, to the defendant or
his assignees, the conclusive possession, administration, benefit and use of the mortgaged property in
question, particularly the sixty-five salt beds administered by said plaintiffs to date.

Wherefore, both parties sign this stipulation and pray this honorable court to render its decision in
accordance herewith, upon acting on the motion of the defendant, dated February 7, 1935.

Cavite, Cavite, February 9, 1935.

In view of the foregoing stipulation, the court a quo rendered contracts entered into between the
plaintiffs Licerio Legaspi and Julian Salcedo, on the one hand, and Damaso Celestial, on the other hand,
appearing in the instruments Exhibits A and C-1 are of mortgage or antichresis.

The contracts Exhibit C-1, entitled "Contract of Antichresis", contains the following stipulation:

That during the existence of this Contract, the Party of the SECOND PART (Licerio Legaspi and Julian
Salcedo) or their representative shall administer and enjoy the benefits and fruits gathered and
harvested thereon; and that the Party of the FIRST PART (Damaso Celestial) shall give and turn over to
the Party of the SECOND PART the administration and to possession of the said 5 salt beds during the
term of this contract.

In the contract Exhibit A, the parties stipulated the following:

(a) The term of this mortgage is three (3) years to be counted from February 23, 1931, and should the
party of the first part, after the expiration of this term, fail to pay to the party of the second part the
amount of this mortgage, this contract shall subsist in full force and effect and continue the debt or
amount of the mortgage is fully paid.

(b) During the term of the mortgage, the party of the second part of the mortgagees shall administer or
take charge of the work and harvest of the 60 salt beds and pay for the maintenance of the croppers
and defray the expenses for the improvement thereof; and the party of the first part shall turn over to
the party of the second part the administration of the sixty salt beds mortgaged for the duration of the
stipulation contract.

(c) The crop from the sixty salt beds shall be shared equally by the croppers and the party of the second
part, after deducting the expenses paid by the party of the second part during each harvest period and
throughout the existence of this mortgage.

It should be noted that the contract Exhibit C-1 is entitled "Contract of Artichresis" while the contract
Exhibit A is entitled "Contract of Mortgage". Both in the contract Exhibit C-1 and in the contract Exhibit A,
the defendant Damaso Calestial, as debtor, agrees to turn over to the plaintiffs, as creditors, the
possession of the salt beds so that the latter, after paying the expenses for the production,
administration and harvest of the salt with one-half of the produce, may keep the other half of the use,
benefit and enjoyment. It is not stipulated that the net produce of the salt beds shall first be applied to
the payment of the interest, if any, and afterwards to that of the principal of their credit. Both contracts
merely provide that the creditors shall keep one-half of the products. Therefore, they are not contracts
of antichresis, as defined by article 1881 of the Civil Code. In a contract of mortgage, the mortgagor, as a
general rule, retains the possession of the property mortgaged as security for the payment of the sum of
money borrowed from the mortgagee, and pays the latter a certain per cent thereof as interest on his
principal by way of compensation for his sacrifice in depriving himself of the use of said money and the
enjoyment of its fruits, in order to give them to the mortgagor. Inasmuch as it is not an essential
requisite of the contract of mortgage that the property mortgaged remain in the possession of the
mortgagor (article 1857 of the Civil Code), the latter may deliver said property to the mortgagee,
without thereby altering the nature of the contract. It not being an essential requisite of said contract of
mortgage that the principal of the mortgage credit bear interest, or that the interest, as compensation
for the use of the principal and enjoyment of its fruits, be in the form of a certain per cent thereof, such
interest may be in the form of fruits of the property mortgage, without the contract's longing thereby its
character of a mortgage contract. It is stipulated in the contracts under consideration that, during the
term thereof and while the total amount of the loan remains unpaid by the debtor, the salt beds
constituted as security for the payment of said loan, shall be administered by the creditors who shall
destine one-half of the products thereof for the maintenance and support of the croppers and the
improvements of the property, keeping the other half for themselves. It appears, therefore, that the
debtor, instead of paying a certain per cent of the principal of the loan as compensation for the sacrifice
made by the creditors in depriving themselves of the use of their principal and the enjoyment of its
fruits, so as to give them to the debtor, has delivered to them the property constituted as a security for
the payment of the loan, so that they may administer and use it, enjoying its fruits, by way of
compensation for their said sacrifice in lending said debtor their money. Therefore, the contracts, which
are the subject matter of this action, have all the essential requsites of a mortgage, enumerated in
article 1857 of the Civil Code and, consequently, are mortgage contracts.

With respects to the second assignment of alleged error, this court, having arrived at the conclusion that
the contracts entered into between the plaintiffs and the defendant are contracts of mortgage and not
of antichresis, finds the same to be well founded.

This court likewise finds the third assignment of alleged error to be well founded.

From the foregoing considerations, this court is of the opinion and so holds, that when a contracts of
loan with security does not stipulate the payment of interest but provides for the delivery to the
creditor by the debtor of the real property constituted as security for the payment thereof, in order that
the creditor may administer the same and avail himself of its fruits, without stating that said fruits are to
be applied to the payment of interest, if any, and afterwards to that of the principal of the credit, the
contract shall be considered to be one of mortgage and not of antichresis.

Wherefore, the appealed judgment is reversed, and the defendant's debt to the plaintiffs is declared
paid and the deeds of security executed by both parties cancelled, dismissing the counterclaim and
cross-complained filed by said defendant and appellee Damaso Celestial, with costs to the latter. So
ordered.