EXTINGUISHMENT (ARTS.

2073-2075)
G.R. No. L-20588 December 17, 1923

THE ASIATIC PETROLEUM COMPANY (PHILIPPINE ISLANDS), LTD., plaintiff-appellant,

vs.
FRANCISCO HIZON Y SINGIAN and JUSTINO A. DAVID, defendants. FRANCISCO HIZON Y SINGIAN,defendant-
appellant.

This civil action was instituted in the Court of First Instance of the Province of Pampanga by the Asiatic Petroleum
Company (Philippine Islands), Ltd., to recover of Justino A. David, as principal, and of Francisco Hizon y Singian, as
security, the sum of P51,560.12, an alleged balance due upon liquidation of accounts between the plaintiff and said David,
and for which Francisco Hizon y Singian is alleged to be obligated as joint and several surety with the principal debtor. At
the hearing judgment was rendered in favor of the plaintiff to recover of Justino A. David, as principal, the sum
P40,786.98, and of Francisco Hizon y Singian, as surety, a portion of the same debt not to exceed the sum of P5,000.
From this judgment Justino A. David did not appeal, and his obligation, as principal debtor, to the extent adjudged by the
trial court, is not now in question. As regards the liability declared by the trial court against Francisco Hizon y Singian, an
appeal was taken both by the plaintiff and by said Hizon, the plaintiff contending that the court should have held Hizon
jointly and severally responsible for the entire sum adjudged against the principal debtor, while Hizon claims that he
should have been wholly absolved.

It appears in evidence that the plaintiff is a corporation lawfully engaged in the selling of petroleum products in the
Philippine Islands. In the year 1916 the plaintiff made a contract (Exhibit B) with Justino A. David, whereby the latter
became the selling agent of the plaintiff at San Fernando, in the Province of Pampanga, with authority extending not only
over the municipality of San Fernando but over the neighboring places of Guagua, Angeles, San Simon, Capas,
Magalang, and Mabalakat, in the same province. In accordance with this contract and in conformity with the practices of
the contracting parties thereunder, the said Justino A. David from time to time over a period of about five years received
for sale and distribution at the places mentioned various consignments of kerosene, gasoline, and similar petroleum
products, which were sold and disposed of by Justino A. David as selling agent. The relation thus established was
continued without interruption until in the year 1921, when all the transactions between the two parties were gone over,
and it was found that David was indebted to the plaintiff in the amount of nearly P60,000, a sum which, by subsequent
payments, was reduced to P40,786.98, as found and adjudged by the trial court.

The alleged liability of the appellant, Francisco Hizon y Singian, is planted upon a document (Exhibit B-1), which, as
appearing in evidence, is pasted to the Exhibit B. By the said exhibit B-1, Francisco Hizon y Singian obligates himself to
answer jointly and severally with the agent (Justino A. David) for all the obligations contracted or to be contracted by the
latter in accordance with the terms of the contract of agency (Exhibit B), and the said Francisco Hizon y Singian further
agrees finally to answer for any balance that should be due to the plaintiff from said agent upon liquidation of the account,
or accounts, between said two parties.

The contract of suretyship (Exhibit B-1) consists of a single sheet of paper and the agreement therein expressed consists
of a printed form completed by the interpolation, with pen and ink, of the names of the parties and the date of the
transaction. It purports to have been signed on November 13, 1916, but the notarial acknowledgment appended thereto
bears date of November 17, 1916, which is the same as the date upon which the contract Exhibit B was acknowledged.
As already stated the document B-1 is pasted to the contract Exhibit B, also made upon a printed form, but the two
documents do not form integral parts of the same sheet, or sheets. However, the document B-1 refers to the contract of
agency to which it is appended; and when the two are considered together, it would appear that the contract Exhibit B is
the identical instrument referred to in Exhibit B-1 and that the former was executed in relation with the latter. Upon this
point, however, a question is made, which constitutes in our opinion the decisive feature of the case.1awphi1.net

As already stated the contract Exhibit B declares that David shall serve the plaintiff company as its only selling agent at
San Fernando, Guagua, Angeles, San Simon, Capas, Magalang, and Mabalakat, in the Province of Pampanga; and the
indebtedness which is the subject of this action was incurred by said David as selling agent of the plaintiff at all the places
named.

From the time demand was first made upon the present appellant, Hizon, for the satisfaction of the balance due to the
plaintiff upon liquidation of the account of David, the appellant has insisted that he had obligated himself to answer for
indebtedness to be incurred by David as selling agent at and for the town of San Fernando and that he had been given to
understand, at the time he contracted the obligation, that the indebtedness so incurred would not be in excess of P5,000.

The representation as to the amount into which the indebtedness would run — a representation which seems to have
come exclusively from David — we consider unimportant, since the written contract places no limit upon the amount of the
obligation; but the defendant's contention concerning the place, or places, over which David's agency extended is of a
more serious character.

In this connection it is important to note that in the principal contract (Exhibit B), as submitted in evidence, the words
"Guagua, Angeles, San Simon, Capas, Magalang, Mabalakat" (after the words San Fernando), have been inserted in the
printed form by means of a typewriting machine, and owing to lack of space in the printed form, it was necessary for the
typist to interline the words "Guagua, Angeles, and San Simon." Furthermore, the word "Mabalakat" as written by the
typist, overlaps and obscures the succeeding printed words, "in the," standing before "Province of Pampanga." There is of
course nothing particularly suspicious about this, but the situation thus revealed suggests the possibility that the words
Guagua, Angeles, San Simon, Capas, Magalang, and Mabalakat may have been inserted after the contract of suretyship
had been signed and acknowledged by the appellant Hizon. Conclusive proof on this point comes, however, from another
quarter and from a source not at all dependent upon the credibility of the oral testimony of the appellant Hizon. Said proof
consists in the fact now to be stated.

It appears that at the time the appellant acknowledged the contract of suretyship (Exhibit B-1), duplicate copies of the
principal contract were produced before the notary public and were there present for the inspection of the parties. The
notary who acted in the matter was one A.E. Cuyugan, an attorney, who, at the time of the incident now in question, was
engaged in the exercise of the legal profession, and at the time he was examined as a witness was filing the office of
assistant attorney of the Bureau of Justice. This witness was introduced by the plaintiff, and his testimony has every
appearance of being candid and truthful. He states that the two copies of the principal contract which were produced at
the time the acknowledgment of Hizon to the contract of suretyship was taken were the same.

Now, after the principal contract had been acknowledged by Justino A. David, as appears from the notarial certificate
appended thereto, and after the contract of suretyship had been at the same time acknowledged by the appellant, as
appears from the contemporaneous notarial certificate appended thereto, the notary public delivered to David one copy of
the principal contract, together with one copy of the contract of suretyship acknowledged by the appellant; and these two
documents went to the hands of the plaintiff and have appeared in evidence as Exhibits B and B-1, as already stated. The
other copy of the principal contract was retained in possession of the notary, in accordance with notarial usage in such
matters. It thus became a part of his official records and, with other documents, was afterwards delivered by the notary to
the clerk of court, of the Province of Pampanga, by whom it was transmitted to the division of archives of the Philippine
Library and Museum.

In the course of the trial of this case, a duly authenticated copy of said contract, as appearing in the official archives of
said division, was introduced in evidence in this case; and upon comparison of said copy with the Exhibit B, the two
documents are found to differ in the sole circumstance that the words Guagua, Angeles, San Simon, Capas, Magalang,
and Mabalakat, are wanting in the instrument now preserved in the division of archives.

Upon this circumstance, in relation with the testimony of the notary public and the appellant, the trial judge reached the
conclusion that at the time the appellant signed and acknowledged the contract of suretyship the principal contract made
no mention of other places than San Fernando, had been interpolated in the document Exhibit B after the contract of
suretyship had been acknowledged. We believe that there can be little doubt as to the correctness of this conclusion, and
it completely bears out the contention of the appellant to the effect that he really obligated himself only to answer for such
indebtedness as might be incurred by David as agent at San Fernando. We may add that no witness was produced by the
plaintiff for the purpose of explaining in any way the discrepancy between the two documents above referred to.

The circumstance should not pass unnoticed that the appellant's contention concerning the extent of the agency at the
time he obligated himself was formulated at a time when he did not know of the existence of a copy of the contract of
agency in the files of the division of archives; and the subsequent discovery of this piece of evidence is strongly
suggestive of the appellant's good faith in claiming that he had obligated himself only for the results of an agency to be
established at San Fernando. Our conclusion upon a careful consideration of the evidence is that, when the appellant
acknowledged the contract of suretyship, the principal contract was limited to the agency at that place and that the
document Exhibit B was subsequently amended by agreement between the plaintiff and Justino A. David, but without the
knowledged or consent of the appellant, by the insertion therein of the names of the other places mentioned in said
exhibit.

It is fundamental in the law of suretyship that any agreement between the creditor and the principal debtor which
essentially varies the terms of the principal contract, without the consent of the surety, will release the surety from liability.
(21 R.C.L., 1004.) This principle is equally valid under the civil as under the common law; and though not specifically
expressed in the Civil Code, it may be deduced, so far as its application to the facts of this case is concerned, from the
second paragraph of article 1822 in relation with article 1143 of the same Code. It requires no argument to show that the
increase of liability incident to the extension of the agency to other places that San Fernando was prejudicial to the
interest of the appellant, and the change could not be lawfully made without his consent.

The trial judge was therefore not in error in holding that the appellant was in effect discharged from liability under the
contract of suretyship (Exhibit B-1); but his Honor nevertheless gave judgment against the defendant for the sum of
P5,000. In doing so he proceeded upon the idea that the defendant admitted that he had intended to obligate himself to
the extent of P5,000, and his Honor concluded that by entering into the contract of suretyship the defendant had induced
the plaintiff to make the contract of agency — which appears to have been signed by the representative of the plaintiff
after it had been signed and acknowledged by David; for which reason his Honor considered it just to hold the defendant
to the extent at least in which he had intended to bind himself. The validity of this conclusion cannot be admitted. The only
obligation which was created on the part of the defendant was the contract of suretyship (Exhibit B-1), and when that
obligation was nullified by the subsequent alteration of the principal contract, the appellant was discharged in toto.

In the course of this decision the fact has not escaped our attention that the answer of the appellant does not specially
plead the alteration of the contract of agency. But this is sufficiently explained by the circumstance that the document
which conclusively proves the fact of alteration had not been discovered in the division of archives at the time the answer
was filed. We note further that when a copy of said document was finally produced, it was introduced in evidence and
admitted without question. Upon this state of facts it would be permissible, if necessary, for this court to direct an
amendment of the answer, as was done in Harty vs. Macabuhay (39 Phil., 495). But as the point is purely defensive and
the right clear, we consider it unnecessary to require the appellant to go through the form of this technicality.

In the light of what has been said it becomes necessary to reverse the appealed judgment in so far as it awards the sum
of P5,000 against the appellant Francisco Hizon y Singian, and he will be completely absolved from the complaint.
G.R. No. 42829 September 30, 1935

RADIO CORPORATION OF THE PHILIPPINES, plaintiff-appellee,

vs.
JESUS R. ROA, ET AL., defendants.
RAMON CHAVES, ANDRES ROA and MANUEL ROA, appellants.

This is an appeal from decision of the Court of First Instance of the City of Manila the dispositive part of which reads:

In view of all the foregoing, judgment is hereby rendered in favor of the plaintiff Radio Corporation of the
Philippines and against the defendants Jesus R. Roa, Ramon Chavez, Andes Roa and Manuel Roa: (a) Ordering
the defendant Jesus R. Roa to pay the plaintiff the sum of P22,935, plus P99.64, with legal interest thereon from
the date of the filing of the complaint until fully paid: (b) that upon failure of the defendant Jesus Roa to pay the
said sum indicated, the chattel described in the second cause of action shall be sold at public auction to be
applied to the satisfaction of the amount of this judgment; (c) that the defendants Jesus R. Roa, Ramon Chavez,
Andres Roa and Manuel Roa pay jointly and severally to the plaintiff the amount of P10,000; (d) and that Jesus R.
Roa pay to the plaintiff the amount equivalent to 10 per cent of P22,935, as attorney's fees, and that all the
defendants in this case pay the costs of this action.

The defendants Ramon Chavez, Andres Roa and Manuel Roa have appealed from the judgment against them for P10,00
and costs. These appellants make the following assignments of error:

1. The court below erred in not finding that the balance of the total indebtedness became immediately due and
demandable upon the failure of the defendant Jesus R. Roa to pay any installment on his note.

2. The court below erred in not finding that defendant Jesus R. Roa defaulted in the payment of the installment
due on February 27,1932, and that plaintiff corporation gave him an extension of time for the payment of said
installment.

3. The court below erred in not finding that the extension of time given to defendant Jesus R. Roa for the payment
of an overdue installment served as a release of defendant sureties from liability on all the subsequent
installments.

4. The court below erred in not finding that the sureties were discharged from their bond when the plaintiff
authorized Jesus R. Roa to remove the photophone equipment from Cagayan, Misamis Oriental, to Silay,
Occidental Negros, without the knowledge or consent of said sureties.

5. The court below erred in condemning Ramon Chavez, Andres Roa and Manuel Roa to pay jointly and severally
the sum of P10,000 to the Radio Corporation of the Philippines.

The defendant Jesus R. Roa became indebted to the Philippine Theatrical Enterprises, Inc., in the sum of P28,400
payable in seventy-one equal monthly installments at the rate of P400 a month commencing thirty days after December
11, 1931, with five days grace monthly until complete payment of said sum. On that same date the Philippine Theatrical
Enterprises, Inc., assigned all its right and interest in that contract to the Radio Corporation of the Philippines.

The paragraph of that contract in which the accelerating clause appears reads as follows:

In case the vendee-mortgagor fails to make any of the payments as hereinbefore provided, the whole amount
remaining unpaid under this mortgage shall immediately become due and payable and this mortgage on the
property herein mentioned as well as the Luzon Surety Bond may be foreclosed by the vendor-mortgagee; and, in
such case, the vendee-mortgager further agrees to pay the vendor- mortgagee an additional sum equivalent to 25
per cent of the principal due unpaid as costs, expenses and liquidated damages, which said sum, shall be added
to the principal sum for which this mortgage is given as security, and shall become a part, thereof.

On March 15, 1932, Erlanger & Galinger, Inc., acting in its capacity as attorney-in-fact of the Radio Corporation of the
Philippines wrote the following letter (Exhibit 13) to the principal debtor Jesus R. Roa:

Mr. JESUS R. ROA

Cagayan, Oriental Misamis
 Attention of Mrs. Amparo Chavez de Roa

DEAR SIR: We acknowledge with thanks the receipt of your letter of March 9th together with your remittance of
P200 for which we enclose receipt No. 7558. We are applying this amount to the balance of your January
installment.

We have no objection to the extension requested by you to pay the February installment by the first week of April.
We would, however, urge you to make every efforts to bring the account up-to date as we are given very little
discretion by the RCP in giving extension of payment.

Very truly yours,

RADIO CORP. OF THE PHIL.
By: ERLANGER & GALINGER, INC.
(Sgd.) H.N. SALET
Vice-President

Under the above assignments of error the principal question to be decided is whether or not the extension granted in the
above copied letter by the plaintiff, without the consent of the guarantors, the herein appellants, extinguishes the latter's
liability not only as to the installments due at that time, as held by the trial court, but also as to the whole amount of their
obligation. Articles 1851 of the Civil Code reads as follows:

ART. 1851. An extension grated to the debtor by the creditor, without the consent of the guarantor, extinguishes
the latter's liability.

This court has held that mere delay in suing for the collection of the does not release the sureties. (Sons of I. de la
Rama vs. Estate of Benedicto, 5 Phil., 512; Banco Español Filipino vs. Donaldson Sim & Co., 5 Phil., 418;
Manzano vs. Tan Suanco, 13 Phil., 183; Hongkong & Shanghai Baking Corporation vs. Aldecoa & Co., 30 Phil., 255.) In
the case of Villa vs. Garcia Bosque (49 Phil., 126, 134, 135), this court stated:

. . . The rule that an extension of time granted to the debtor by the creditor, without the consent of the sureties,
extinguishes the latter's liability is common both to Spanish jurisprudence and the common law; and it is well
settled in English and American jurisprudence that where a surety is liable for different payments, such as
installments of rent, or upon a series of promissory notes, an extension of time as to one or more will not affect
the liability of the surety for the others. . . .

There is one stipulation in the contract (Exhibit A) which, at first blush, suggests a doubt as to the propriety of
applying the doctrine above stated to the case before us. We refer to clause (f) which declares that the non-
fulfillment on the part of the debtors of the stipulation with respect to the payment of any installment of the
indebtedness, with interest, will give to the creditor the right to treat and declare all of said installments as
immediately due. If the stipulation had been to the effect that the failure to pay any installment when due
would ipso facto cause the other installments to fall due at once, it might be plausibly contended that after default
of the payment of one installment the act of the creditor in extending the time as to such installment would
interfere with the right of the surety to exercise his legal rights against the debtor, and that the surety would in
such case be discharged by the extension of time, in conformity with article 1851 and 1852 of the Civil Code. But
it will be noted that in the contract now under consideration the stipulation is not that the maturity of the latter
installments shall be ipso facto accelerated by default in the payment of a prior installment, but only that it shall
give the creditor a right treat the subsequent installments as due; and in this case it does not appear that the
creditor has exercised this election. On the contrary, this action was not instituted until after all of the installments
had fallen due in conformity with original contract. It results that the stipulation contained in paragraph (f) does not
effect the application of the doctrine above enunciated to the case before us.

The stipulation in the contract under consideration, copied above, is to the effect that upon failure to pay any installment
when due the other installments ipso facto become due and payable. In view of of the fact that under the express
provision of the contract, quoted above, the whole unpaid balance automatically becomes due and payable upon failure to
pay one installment, the act of the plaintiff in extending the payment of the installment corresponding to February, 1932, to
April, 1932, without the consent of the guarantors, constituted in fact an extension of the payment of the whole amount of
the indebtedness, as by that extension the plaintiff could not have filed an action for the collection of the whole amount
until after April, 1932. Therefore appellants' contention that after default of the payment of one installment the act of the
herein creditor in extending the time of payment discharges them as guarantors in conformity with articles 1851 and 1852
of the Civil Code is correct.

It is a familiar rule that if a creditor, by positive contract with the principal debtor, and without the consent of the
surety, extends the time of payment, he thereby discharges the surety. . . . The time of payment may be quite as
important a consideration to the surety as the amount he has promised conditionally to pay. . . .Again, a surety
has the right, on payment of the debt, to be subrogated to all the rights of the creditor, and to proceed at once to
collect it from the principal; but if the creditor has tied own hands from proceeding promptly, by extending the time
of collection, the hands of the surety will equally be bound; and before they are loosed, by the expiration of the
extended credit, the principal debtor may have become insolvent and the right of subrogation rendered worthless.
It should be observed, however, that it is really unimportant whewther the extension given has actually proved
prejudicial to the surety or not. The rule stated is quite independent of the event, and the fact that the principal is
insolvent or that the extension granted promised to be beneficial to the surety would give no right to the creditor to
change the terms of the contract without the knowledge or consent of the surety. Nor does it matter for how short
a period the time of payment may be extended. The principle is the same whether the time is long or short. The
creditor must be in such a situation that when the surety comes to be substituted in his place by paying the debt,
he may have an immediate right of action against the principal. The suspension of the right to sue for a month, or
even a day, is as effectual to release the surety as a year or two years. (21 R.C.L., 1018-1020.)

Plaintiff's contention that the enforcement of the accelerating clause is potestative on the part of the obligee, and not self-
executing, is clearly untenable from a simple reading of the clause copied above. What is potestative on the part of the
obligee is the foreclosure of the mortgage and not the accelerating clause.

Plaintiff-appellee contends that there was no consideration for the extension granted the principal debtor. Article 1277 of
the Civil Code provides that "even though the consideration should be expressed in the contract, it shall be presumed that
a consideration exists and that it is licit, unless the debtor proves the contrary." It was incumbent upon the plaintiff to prove
that there was no valid consideration for the extension granted.

In view of the forgoing the judgment of the trial court is reversed as to the appellants Ramon Chavez, Andres Roa and
Manuel Roa, without costs.
G.R. No. L-29666 October 29, 1971

PFOPLES BANK AND TRUST COMPANY, plaintiff-appellee,

vs.
JOSE MARIA TAMBUNTING, MARIA PAZ TAMBUNTING, and FRANCISCO D. SANTANA, defendants. FRANCISCO
D. SANTANA, defendant-appellant.

Appellant Francisco D. Santana was sued by plaintiff, now appellee, Peoples Bank & Trust Company, along with the other
defendants, Jose Maria Tambunting and Maria Paz Tambunting, his son-in-law and his daughter, for the recovery of the
sum of money due in an overdraft agreement, with the Tambunting couple as principal debtors and appellant as surety.
The judgment went against him notwithstanding his plea based on Article 2080 of the Civil Code, releasing guarantors,
even if they be solidary, if by some act of the creditor subrogation is thereby precluded.1The lower court, presided by the
then Judge, now Justice of the Court of Appeals, Jose N. Leuterio, in a well-written decision, found such a defense
untenable as in what was characterized by the lower courts as the "contract of absolute guaranty", appellant had waived
his rights to the benefit conferred by such a provision. In this appeal, would vigorously contend that what was thus agreed
to by him was bereft of a binding force. The law in its wisdom does not lend its approval to such an ill-disguised attempt
for turn one's back to all obligation arising from a valid contract. We have to affirm.

The decision, now on appeal, after stating the nature of the action which as noted is for the recovery of a sum of money
due on an overdraft agreement set forth the undisputed facts thus: "On September 9, 1968, plaintiff and defendants
executed a contract denominated 'overdraft agreement and pledge' wherein the plaintiff granted to the spouses Jose
Maria Tambunting and Maria Paz Tambunting an overdraft from time to time on their current account with the plaintiff
bank not to exceed P200,000.00 with interest at the rate of 9% per annum until September 10, 1964, ..., the proceeds of
which were to be used by the Tambuntings in their logging operations. Defendant Francisco D. Santana, as guarantor,
and the spouses Tambuntings, conveyed to the bank shares of capital stock of the International Sports Development
Corporation collateral security for the payment of any and all indebtedness incurred or arising from the overdraft, and all
extensions, renewals, amendments or applications thereof. On the same day, defendant Francisco D. Santana executed
a document denominated as absolute guaranty in which, in consideration of the 'overdraft agreement and pledge,' he
bound himself to the bank, jointly and severally, with the Tambunting spouses for the full and prompt payment of all the
indebtedness incurred or to be incurred by said spouses on account of the overdraft line. On July 24, 1964, Jose Maria
Tambunting wrote to the plaintiff bank [a] latter, ..., requesting renewal of the overdraft agreement. Plaintiff bank, in a letter
dated September 21, 1964, ..., granted the Tambunting spouses an extension of the overdraft line for six (6) months from
September 10, 1964, but reducing the overdraft line to P185,000.00 with the understanding that other terms and
conditions of the overdraft agreement would be in full force and effect. Before the expiration of the six (6) months period,
or on March 5, 1965, Jose Maria Tambunting asked for another renewal of the overdraft line for another year, ... .
Apparently, this letter was granted by the plaintiff on March 15, 1965, for in another letter of Jose Maria Tambunting to the
bank, ... the defendant, on March 29, 1965, assured the bank that he would comply with the requirements of the plaintiff.
In a letter dated May 11, 1965, ... of the bank to Tambunting, the Manager of the Credit Department advised Jose Maria
Tambunting that the Board of Directors of the plaintiff bank approved his request for an extension of the overdraft line in
the amount of P185,000.00 for another year, or until March 10, 1966, but with interest at the rate of 10% per annum; that
in the same meeting, the Board also approved the release of the pledge of 135 shares of stocks of the International
Sports Development Corporation. The defendants failed to pay the indebtedness on the date due and demand for
payment was made upon Francisco Santana and Tambunting as per letters dated December 14, 1965, January 24, 1966
and March 4, 1966, ... . As of December 27, 1966, the total amount due from the defendants, including interests, was
P219,165.18, ... ."2 The decision went on to state: "The Tambunting spouses failed to answer the complaint and were
declared in default. The defendant Santana does not dispute the indebtedness. However, it is the contention that he had
been released from the guaranty for several reasons. Defendant Santana contends that he was released from his
obligation on the overdraft line because the plaintiff had extended the time of payment and released to the Tambuntings
without his consent, the 135 shares of stocks of the International Sports Development Corporation which had been
pledged to the bank to secure the overdraft line. It is argued that, in accordance with Article 2080 of the New Civil Code,
'The guarantors, even though they be solidary, are released from their obligation whenever by some act of the creditor
they cannot be subrogated to the rights, mortgages, andpreferences of the latter.' "3

Why such a contention was held devoid of merit was explained in such decision thus: "The contract of absolute guaranty,
..., expressly authorized the plaintiff bank to extend the time of payment and to release or surrender any security or part
thereof held by it without notice to, the consent of, Santana. He had consented in advance the release of the guaranty
which the bank might make, Santana cannot now complain that the release of the pledge was without his consent, and
that it deprived him of the right to be subrogated to the rights of the creditor. The waiver is not contrary to law, nor is it
contrary to public policy. The law does not prohibit the debtor-guarantor from agreeing in advance and without notice to
the release of any security which had been given to assure payment of the obligation. The waiver is not contrary to public
policy, because the right is purely personal, and does not affect public interest nor does it violate any public policy. Neither
does the return of the shares of stocks novate the original contract for the obligation remains the same; and if it is a
novation, it is a novation made with the consent of Santana. Moreover, the pledge is merely an accessory obligation, and
its release does not vary the terms of the principal obligation."4

The appealed decision speaks for itself. It cannot, as was made plain in the opening paragraph of this opinion be
overturned.

1. It is thus obvious that the contract of absolute guaranty executed by appellant Santana is the measure of rights and
duties. As it is with him, so it is with the plaintiff bank. What was therein stipulated had to be complied with by both parties.
Nor could appellant have any valid cause for complaint. He had given his word; he must live up to it. Once the validity of
its terms is conceded, he cannot be indulged in his unilateral determination to disregard his commitment. A promise to
which the law accords binding force must be fulfilled. It is as simple as that. So the Civil Code explicitly requires:
"Obligations arising from contracts have the force of law between the contracting parties and should be complied with in
good faith."5

2. It could have been different if there were no such contract of absolute guaranty to which appellant was a party under
the aforesaid Article 2080. He would have been freed from the obligation as a result of plaintiff releasing to the
Tambuntings without his consent the 135 shares of the International Sports Development Corporation pledged to plaintiff
bank to secure the overdraft line. For thereby subrogation became meaningless. Such a provision is intended for the
benefit of a surety. That was a right he could avail of. He is not precluded however from waiving it. That was what
appellant did precisely when he agreed to the contract of absolute guaranty. Again the law is clear. A right may be waived
unless it would be contrary to law, public order, public policy, morals or good customs. 6 There is no occasion here for the
exceptions coming into play. It has been traditional in the Philippine for parents to extend all available aid and assistance
to their children. That is a custom of long standing. Nor is there anything offensive to morals by an assumption of
contingent liability as thus worded. The law has not been thwarted. Neither is public order nor public policy disregarded.
The lower court was right thereto in yielding full assent to the waiver in question. 7 The vigor with which counsel for
appellant impugned the lower decision cannot therefore be attended with success. It can stand its ground notwithstanding
such a sustained and spirited attack.

WHEREFORE, the decision of October 30, 1967, as modified on January 8, 1969, is affirmed. With costs against
appellant Francisco D. Santana.
G.R. No. L-20567 July 30, 1965

PHILIPPINE NATIONAL BANK, petitioner,

vs.
MANILA SURETY and FIDELITY CO., INC. and THE COURT OF APPEALS (Second Division), respondents.

The Philippine National Bank petitions for the review and reversal of the decision rendered by the Court of Appeals
(Second Division), in its case CA-G.R. No. 24232-R, dismissing the Bank's complaint against respondent Manila Surety &
Fidelity Co., Inc., and modifying the judgment of the Court of First Instance of Manila in its Civil Case No. 11263.

The material facts of the case, as found by the appellate Court, are as follows:

The Philippine National Bank had opened a letter of credit and advanced thereon $120,000.00 to Edgington Oil Refinery
for 8,000 tons of hot asphalt. Of this amount, 2,000 tons worth P279,000.00 were released and delivered to Adams &
Taguba Corporation (known as ATACO) under a trust receipt guaranteed by Manila Surety & Fidelity Co. up to the
amount of P75,000.00. To pay for the asphalt, ATACO constituted the Bank its assignee and attorney-in-fact to receive
and collect from the Bureau of Public Works the amount aforesaid out of funds payable to the assignor under Purchase
Order No. 71947. This assignment (Exhibit "A") stipulated that:

The conditions of this assignment are as follows:

1. The same shall remain irrevocable until the said credit accomodation is fully liquidated.

2. The PHILIPPINE NATIONAL BANK is hereby appointed as our Attorney-in-Fact for us and in our name, place
and stead, to collect and to receive the payments to be made by virtue of the aforesaid Purchase Order, with full
power and authority to execute and deliver on our behalf, receipt for all payments made to it; to endorse for
deposit or encashment checks, money order and treasury warrants which said Bank may receive, and to apply
said payments to the settlement of said credit accommodation.

This power of attorney shall also remain irrevocable until our total indebtedness to the said Bank have been fully
liquidated. (Exhibit E)

ATACO delivered to the Bureau of Public Works, and the latter accepted, asphalt to the total value of P431,466.52. Of this
amount the Bank regularly collected, from April 21, 1948 to November 18, 1948, P106,382.01. Thereafter, for unexplained
reasons, the Bank ceased to collect, until in 1952 its investigators found that more moneys were payable to ATACO from
the Public Works office, because the latter had allowed mother creditor to collect funds due to ATACO under the same
purchase order to a total of P311,230.41.

Its demands on the principal debtor and the Surety having been refused, the Bank sued both in the Court of First Instance
of Manila to recover the balance of P158,563.18 as of February 15, 1950, plus interests and costs.

On October 4, 1958, the trial court rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered as follows:

1. Ordering defendants, Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc., to pay plaintiff,
Philippines National Bank, the sum of P174,462.34 as of February 24, 1956, minus the amount of P8,000 which
defendant, Manila Surety Co., Inc. paid from March, 1956 to October, 1956 with interest at the rate of 5% per
annum from February 25, 1956, until fully paid provided that the total amount that should be paid by defendant
Manila Surety Co., Inc., on account of this case shall not exceed P75,000.00, and to pay the costs;

2. Orderinq cross-defendant, Adams & Taguba Corporation, and third-party defendant, Pedro A. Taguba, jointly
and severally, to pay cross and third-party plaintiff, Manila Surety & Fidelity Co., Inc., whatever amount the latter
has paid or shall pay under this judgment;

3. Dismissing the complaint insofar as the claim for 17% special tax is concerned; and

4. Dismissing the counterclaim of defendants Adams & Taguba Corporation and Manila Surety & Fidelity Co., Inc.
From said decision, only the defendant Surety Company has duly perfected its appeal. The Central Bank of the
Philippines did not appeal, while defendant ATACO failed to perfect its appeal.

The Bank recoursed to the Court of Appeals, which rendered an adverse decision and modified the judgment of the court
of origin as to the surety's liability. Its motions for reconsideration having proved unavailing, the Bank appealed to this
Court.

The Court of Appeals found the Bank to have been negligent in having stopped collecting from the Bureau of Public
Works the moneys falling due in favor of the principal debtor, ATACO, from and after November 18, 1948, before the debt
was fully collected, thereby allowing such funds to be taken and exhausted by other creditors to the prejudice of the
surety, and held that the Bank's negligence resulted in exoneration of respondent Manila Surety & Fidelity Company.

This holding is now assailed by the Bank. It contends the power of attorney obtained from ATACO was merely in
additional security in its favor, and that it was the duty of the surety, and not that of the creditor, owed see to it that the
obligor fulfills his obligation, and that the creditor owed the surety no duty of active diligence to collect any, sum from the
principal debtor, citing Judge Advocate General vs. Court of Appeals, G.R. No. L-10671, October 23, 1958.

This argument of appellant Bank misses the point. The Court of Appeals did not hold the Bank answerable for negligence
in failing to collect from the principal debtor but for its neglect in collecting the sums due to the debtor from the Bureau of
Public Works, contrary to its duty as holder of an exclusive and irrevocable power of attorney to make such collections,
since an agent is required to act with the care of a good father of a family (Civ. Code, Art. 1887) and becomes liable for
the damages which the principal may suffer through his non-performance (Civ. Code, Art. 1884). Certainly, the Bank could
not expect that the Bank would diligently perform its duty under its power of attorney, but because they could not have
collected from the Bureau even if they had attempted to do so. It must not be forgotten that the Bank's power to collect
was expressly made irrevocable, so that the Bureau of Public Works could very well refuse to make payments to the
principal debtor itself, and a fortiori reject any demands by the surety.

Even if the assignment with power of attorney from the principal debtor were considered as mere additional security still,
by allowing the assigned funds to be exhausted without notifying the surety, the Bank deprived the former of any
possibility of recoursing against that security. The Bank thereby exonerated the surety, pursuant to Article 2080 of the
Civil Code:

ART. 2080. — The guarantors, even though they be solidary, are released from their obligation whenever by
come act of the creditor they cannot be subrogated to the rights, mortgages and preferences of the latter.
(Emphasis supplied.)

The appellant points out to its letter of demand, Exhibit "K", addressed to the Bureau of Public Works, on May 5, 1949,
and its letter to ATACO, Exhibit "G", informing the debtor that as of its date, October 31, 1949, its outstanding balance
was P156,374.83. Said Exhibit "G" has no bearing on the issue whether the Bank has exercised due diligence in
collecting from the Bureau of Public Works, since the letter was addressed to ATACO, and the funds were to come from
elsewhere. As to the letter of demand on the Public Works office, it does not appear that any reply thereto was made; nor
that the demand was pressed, nor that the debtor or the surety were ever apprised that payment was not being made.
The fact remains that because of the Bank's inactivity the other creditors were enabled to collect P173,870.31, when the
balance due to appellant Bank was only P158,563.18. The finding of negligence made by the Court of Appeals is thus not
only conclusive on us but fully supported by the evidence.

Even if the Court of Appeals erred on the second reason it advanced in support of the decision now under appeal,
because the rules on application of payments, giving preference to secured obligations are only operative in cases where
there are several distinct debts, and not where there is only one that is partially secured, the error is of no importance,
since the principal reason based on the Bank's negligence furnishes adequate support to the decision of the Court of
Appeals that the surety was thereby released.

WHEREFORE, the appealed decision is affirmed, with costs against appellant Philippine National Bank.
[G.R. No. 154183. August 7, 2003]
SPOUSES VICKY TAN TOH and LUIS TOH, petitioners, vs. SOLID BANK CORPORATION, FIRST BUSINESS
PAPER CORPORATION, KENNETH NG LI and MA. VICTORIA NG LI, respondents.

RESPONDENT SOLID BANK CORPORATION AGREED TO EXTEND an omnibus line credit facility worth P10
million in favor of respondent First Business Paper Corporation (FBPC).The terms and conditions of the agreement as
well as the checklist of documents necessary to open the credit line were stipulated in a letter-advise of the Bank dated 16
[1] [2]
May 1993 addressed to FBPC and to its President, respondent Kenneth Ng Li. The letter-advise was effective upon
[3]
compliance with the documentary requirements.
The documents essential for the credit facility and submitted for this purpose were the (a) Board Resolution or
excerpts of the Board of Directors Meeting, duly ratified by a Notary Public, authorizing the loan and security arrangement
as well as designating the officers to negotiate and sign for FBPC specifically stating authority to mortgage, pledge and/or
assign the properties of the corporation; (b) agreement to purchase Domestic Bills; and, (c) Continuing Guaranty for any
and all amounts signed by petitioner-spouses Luis Toh and Vicky Tan Toh, and respondent-spouses Kenneth and Ma.
Victoria Ng Li.[4] The spouses Luis Toh and Vicky Tan Toh were then Chairman of the Board and Vice-President,
respectively, of FBPC, while respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li were President and General
[5]
Manager, respectively, of the same corporation.
It is not disputed that the credit facility as well as its terms and conditions was not cancelled or terminated, and that
there was no prior notice of such fact as required in the letter-advise, if any was done.
On 10 May 1993, more than thirty (30) days from date of the letter-advise, petitioner-spouses Luis Toh and Vicky Tan
Toh and respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li signed the required Continuing Guaranty, which was
embodied in a public document prepared solely by respondent Bank. [6] The terms of the instrument defined the contract
arising therefrom as a surety agreement and provided for the solidary liability of the signatories thereto for and in
consideration of loans or advances and credit in any other manner to, or at the request or for the account of FBPC.
The Continuing Guaranty set forth no maximum limit on the indebtedness that respondent FBPC may incur and for
which the sureties may be liable, stating that the credit facility covers any and all existing indebtedness of, and such other
loans and credit facilities which may hereafter be granted to FIRST BUSINESS PAPER CORPORATION. The surety also
contained a de facto acceleration clause if default be made in the payment of any of the instruments, indebtedness, or
other obligation guaranteed by petitioners and respondents. So as to strengthen this security, the Continuing Guaranty
waived rights of the sureties against delay or absence of notice or demand on the part of respondent Bank, and gave
future consent to the Banks action to extend or change the time payment, and/or the manner, place or terms of payment,
including renewal, of the credit facility or any part thereof in such manner and upon such terms as the Bank may deem
proper without notice to or further assent from the sureties.
The effectivity of the Continuing Guaranty was not contingent upon any event or cause other than the written
revocation thereof with notice to the Bank that may be executed by the sureties.
On 16 June 1993 respondent FBPC started to avail of the credit facility and procure letters of credit. [7] On 17
[8]
November 1993 FBPC opened thirteen (13) letters of credit and obtained loans totaling P15,227,510.00. As the letters of
credit were secured, FBPC through its officers Kenneth Ng Li, Ma. Victoria Ng Li and Redentor Padilla as signatories
executed a series of trust receipts over the goods allegedly purchased from the proceeds of the loans. [9]
On 13 January 1994 respondent Bank received information that respondent-spouses Kenneth Ng Li and Ma. Victoria
Ng Li had fraudulently departed from their conjugal home.[10] On 14 January 1994 the Bank served a demand letter upon
FBPC and petitioner Luis Toh invoking the acceleration clause[11] in the trust receipts of FBPC and claimed payment
for P10,539,758.68 as unpaid overdue accounts on the letters of credit plus interests and penalties within twenty-four (24)
[12]
hours from receipt thereof. The Bank also invoked the Continuing Guaranty executed by petitioner-spouses Luis Toh
and Vicky Tan Toh who were the only parties known to be within national jurisdiction to answer as sureties for the credit
facility of FBPC.[13]
On 17 January 1994 respondent Bank filed a complaint for sum of money with ex parte application for a writ of
preliminary attachment against FBPC, spouses Kenneth Ng Li and Ma. Victoria Ng Li, and spouses Luis Toh and Vicky
Tan Toh, docketed as Civil Case No. 64047 of RTC-Br. 161, Pasig City.[14] Alias summonses were served upon FBPC and
spouses Luis Toh and Vicky Tan Toh but not upon Kenneth Ng Li and Ma. Victoria Ng Li who had apparently
[15]
absconded.
Meanwhile, with the implementation of the writ of preliminary attachment resulting in the impounding of purported
[16]
properties of FBPC, the trial court was deluged with third-party claims contesting the propriety of the attachment. In the
end, the Bank relinquished possession of all the attached properties to the third-party claimants except for two (2)
insignificant items as it allegedly could barely cope with the yearly premiums on the attachment bonds.[17]
 Petitioner-spouses Luis Toh and Vicky Tan Toh filed a joint answer to the complaint where they admitted being part
of FBPC from its incorporation on 29 August 1991, which was then known as MNL Paper, Inc., until its corporate name
was changed to First Business Paper Corporation.[18] They also acknowledged that on 6 March 1992 Luis Toh was
designated as one of the authorized corporate signatories for transactions in relation to FBPCs checking account with
respondent Bank.[19] Meanwhile, for failing to file an answer, respondent FBPC was declared in default.[20]
Petitioner-spouses however could not be certain whether to deny or admit the due execution and authenticity of the
[21]
Continuing Guaranty. They could only allege that they were made to sign papers in blank and the Continuing Guaranty
could have been one of them.
Still, as petitioners asserted, it was impossible and absurd for them to have freely and consciously executed the
surety on 10 May 1993, the date appearing on its face[22] since beginning March of that year they had already divested
their shares in FBPC and assigned them in favor of respondent Kenneth Ng Li although the deeds of assignment were
[23]
notarized only on 14 June 1993. Petitioners also contended that through FBPC Board Resolution dated 12 May 1993
petitioner Luis Toh was removed as an authorized signatory for FBPC and replaced by respondent-spouses Kenneth Ng
Li and Ma. Victoria Ng Li and Redentor Padilla for all the transactions of FBPC with respondent Bank. [24] They even
resigned from their respective positions in FBPC as reflected in the 12 June 1993 Secretarys Certificate submitted to the
[25]
Securities and Exchange Commission as petitioner Luis Toh was succeeded as Chairman by respondent Ma. Victoria
[26]
Ng Li, while one Mylene C. Padilla took the place of petitioner Vicky Tan Toh as Vice-President.
Finally, petitioners averred that sometime in June 1993 they obtained from respondent Kenneth Ng Li their exclusion
from the several surety agreements they had entered into with different banks, i.e., Hongkong and Shanghai Bank, China
Banking Corporation, Far East Bank and Trust Company, and herein respondent Bank. [27] As a matter of record, these
other banks executed written surety agreements that showed respondent Kenneth Ng Li as the only surety of FBPCs
indebtedness.[28]
On 16 May 1996 the trial court promulgated its Decision in Civil Case No. 64047 finding respondent FBPC liable to
pay respondent Solid Bank Corporation the principal of P10,539,758.68 plus twelve percent (12%) interest per
annum from finality of the Decision until fully paid, but absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any
liability to respondent Bank.[29] The court a quo found that petitioners voluntarily affixed their signature[s] on the
Continuing Guaranty and were thus at some given point in time willing to be liable under those forms, [30] although it held
that petitioners were not bound by the surety contract since the letters of credit it was supposed to secure were opened
long after petitioners had ceased to be part of FBPC.[31]
The trial court described the Continuing Guaranty as effective only while petitioner-spouses were stockholders and
officers of FBPC since respondent Bank compelled petitioners to underwrite FBPCs indebtedness as sureties without the
requisite investigation of their personal solvency and capability to undertake such risk. [32] The lower court also believed
that the Bank knew of petitioners divestment of their shares in FBPC and their subsequent resignation as officers thereof
as these facts were obvious from the numerous public documents that detailed the changes and substitutions in the list of
authorized signatories for transactions between FBPC and the Bank, including the many trust receipts being signed by
persons other than petitioners,[33] as well as the designation of new FBPC officers which came to the notice of the Banks
Vice-President Jose Chan Jr. and other officers.[34]
On 26 September 1996 the RTC-Br. 161 of Pasig City denied reconsideration of its Decision.[35]
On 9 October 1996 respondent Bank appealed the Decision to the Court of Appeals, docketed as CA-G.R. CV No.
55957.[36] Petitioner-spouses did not move for reconsideration nor appeal the finding of the trial court that they voluntarily
executed the Continuing Guaranty.
The appellate court modified the Decision of the trial court and held that by signing the Continuing Guaranty,
petitioner-spouses became solidarily liable with FBPC to pay respondent Bank the amount of P10,539,758.68 as principal
with twelve percent (12%) interest per annum from finality of the judgment until completely paid. [37] The Court of Appeals
ratiocinated that the provisions of the surety agreement did not indicate that Spouses Luis and Vicky Toh x x x signed the
[38]
instrument in their capacities as Chairman of the Board and Vice-President, respectively, of FBPC only. Hence, the
court a quo deduced, [a]bsent any such indication, it was error for the trial court to have presumed that the appellees
indeed signed the same not in their personal capacities.[39] The appellate court also ruled that as petitioners failed to
execute any written revocation of the Continuing Guaranty with notice to respondent Bank, the instrument remained in full
[40]
force and effect when the letters of credit were availed of by respondent FBPC.
Finally, the Court of Appeals rejected petitioners argument that there were material alterations in the provisions of the
letter-advise, i.e., that only domestic letters of credit were opened when the credit facility was for importation of papers
and other materials, and that marginal deposits were not paid, contrary to the requirements stated in the letter-
advise.[41] The simple response of the appellate court to this challenge was, first, the letter-advise itself authorized the
issuance of domestic letters of credit, and second, the several waivers extended by petitioners in the Continuing
Guaranty, which included changing the time and manner of payment of the indebtedness, justified the action of
[42]
respondent Bank not to charge marginal deposits.
Petitioner-spouses moved for reconsideration of the Decision, and after respondent Banks comment, filed a
[43]
lengthy Reply with Motion for Oral Argument. On 2 July 2002 reconsideration of the Decision was denied on the ground
that no new matter was raised to warrant the reversal or modification thereof.[44] Hence, this Petition for Review.
Petitioner-spouses Luis Toh and Vicky Tan Toh argue that the Court of Appeals denied them due process when it did
not grant their motion for reconsideration and without bother[ing] to consider [their] Reply with Motion for Oral
Argument. They maintain that the Continuing Guaranty is not legally valid and binding against them for having been
executed long after they had withdrawn from FBPC. Lastly, they claim that the surety agreement has been extinguished
by the material alterations thereof and of the letter-advise which were allegedly brought about by (a) the provision of an
acceleration clause in the trust receipts; (b) the flight of their co-sureties, respondent-spouses Kenneth Ng Li and Ma.
Victoria Ng Li; (c) the grant of credit facility despite the non-payment of marginal deposits in an amount beyond the credit
limit of P10 million pesos; (d) the inordinate delay of the Bank in demanding the payment of the indebtedness; (e) the
presence of ghost deliveries and fictitious purchases using the Banks letters of credit and trust receipts; (f) the extension
of the due dates of the letters of credit without the required 25% partial payment per extension; (g) the approval of another
letter of credit, L/C 93-0042, even after respondent-spouses Kenneth Ng Li and Ma. Victoria Ng Li had defaulted on their
previous obligations; and, (h) the unmistakable pattern of fraud.
Respondent Solid Bank maintains on the other hand that the appellate court is presumed to have passed upon all
points raised by petitioners Reply with Motion for Oral Argument as this pleading formed part of the records of the
appellate court. It also debunks the claim of petitioners that they were inexperienced and ignorant parties who were taken
advantage of in the Continuing Guaranty since petitioners are astute businessmen who are very familiar with the ins and
outs of banking practice. The Bank further argues that the notarization of the Continuing Guaranty discredits the
uncorroborated assertions against the authenticity and due execution thereof, and that the Decision of the trial court in the
civil case finding the surety agreement to be valid and binding is now res judicata for failure of petitioners to appeal
therefrom. As a final point, the Bank refers to the various waivers made by petitioner-spouses in the Continuing Guaranty
to justify the extension of the due dates of the letters of credit.
To begin with, we find no merit in petitioners claim that the Court of Appeals deprived them of their right to due
process when the court a quo did not address specifically and explicitly their Reply with Motion for Oral Argument. While
the Resolution of the appellate court of 2 July 2002 made no mention thereof in disposing of their arguments on
reconsideration, it is presumed that all matters within an issue raised in a case were laid before the court and passed
upon it.[45] In the absence of evidence to the contrary, we must rule that the court a quo discharged its task
properly. Moreover, a reading of the assailed Resolution clearly makes reference to a careful review of the records, which
undeniably includes the Reply with Motion for Oral Argument, hence there is no reason for petitioners to asseverate
otherwise.
This Court holds that the Continuing Guaranty is a valid and binding contract of petitioner-spouses as it is a public
document that enjoys the presumption of authenticity and due execution. Although petitioners as appellees may raise
issues that have not been assigned as errors by respondent Bank as party-appellant, i.e., unenforceability of the surety
contract, we are bound by the consistent finding of the courts a quo that petitioner-spouses Luis Toh and Vicky Tan Toh
voluntarily affixed their signature[s] on the surety agreement and were thus at some given point in time willing to be liable
under those forms.[46] In the absence of clear, convincing and more than preponderant evidence to the contrary, our ruling
cannot be otherwise.
Similarly, there is no basis for petitioners to limit their responsibility thereon so long as they were corporate officers
and stockholders of FBPC. Nothing in the Continuing Guaranty restricts their contractual undertaking to such condition or
eventuality. In fact the obligations assumed by them therein subsist upon the undersigned, the heirs, executors,
administrators, successors and assigns of the undersigned, and shall inure to the benefit of, and be enforceable by you,
your successors, transferees and assigns, and that their commitment shall remain in full force and effect until written
notice shall have been received by [the Bank] that it has been revoked by the undersigned. Verily, if petitioners intended
not to be charged as sureties after their withdrawal from FBPC, they could have simply terminated the agreement by
serving the required notice of revocation upon the Bank as expressly allowed therein. [47] In Garcia v. Court of
[48]
Appeals we ruled

Regarding the petitioners claim that he is liable only as a corporate officer of WMC, the surety agreement shows that he
signed the same not in representation of WMC or as its president but in his personal capacity. He is therefore personally
bound. There is no law that prohibits a corporate officer from binding himself personally to answer for a corporate debt.
While the limited liability doctrine is intended to protect the stockholder by immunizing him from personal liability for the
corporate debts, he may nevertheless divest himself of this protection by voluntarily binding himself to the payment of the
corporate debts. The petitioner cannot therefore take refuge in this doctrine that he has by his own acts effectively waived.
 But as we bind the spouses Luis Toh and Vicky Tan Toh to the surety agreement they signed so must we also hold
respondent Bank to its representations in the letter-advise of 16 May 1993. Particularly, as to the extension of the due
dates of the letters of credit, we cannot exclude from the Continuing Guaranty the preconditions of the Bank that were
plainly stipulated in the letter-advise. Fairness and justice dictate our doing so, for the Bank itself liberally applies the
provisions of cognate agreements whenever convenient to enforce its contractual rights, such as, when it harnessed a
provision in the trust receipts executed by respondent FBPC to declare its entire indebtedness as due and demandable
and thereafter to exact payment thereof from petitioners as sureties. [49] In the same manner, we cannot disregard the
provisions of the letter-advise in sizing up the panoply of commercial obligations between the parties herein.
Insofar as petitioners stipulate in the Continuing Guaranty that respondent Bank may at any time, or from time to
time, in [its] discretion x x x extend or change the time payment, this provision even if understood as a waiver is
confined per se to the grant of an extension and does not surrender the prerequisites therefor as mandated in the letter-
advise. In other words, the authority of the Bank to defer collection contemplates only authorized extensions, that is, those
that meet the terms of the letter-advise.
Certainly, while the Bank may extend the due date at its discretion pursuant to the Continuing Guaranty, it should
nonetheless comply with the requirements that domestic letters of credit be supported by fifteen percent (15%) marginal
deposit extendible three (3) times for a period of thirty (30) days for each extension, subject to twenty-five percent (25%)
partial payment per extension. This reading of the Continuing Guaranty is consistent with Philippine National Bank v.
[50]
Court of Appeals that any doubt on the terms and conditions of the surety agreement should be resolved in favor of the
surety.
Furthermore, the assurance of the sureties in the Continuing Guaranty that [n]o act or omission of any kind on [the
Banks] part in the premises shall in any event affect or impair this guaranty[51] must also be read strictissimi juris for the
reason that petitioners are only accommodation sureties, i.e., they received nothing out of the security contract they
signed.[52] Thus said, the acts or omissions of the Bank conceded by petitioners as not affecting nor impairing the surety
contract refer only to those occurring in the premises, or those that have been the subject of the waiver in the Continuing
Guaranty, and stretch to no other. Stated otherwise, an extension of the period for enforcing the indebtedness does not by
itself bring about the discharge of the sureties unless the extra time is not permitted within the terms of the waiver, i.e.,
where there is no payment or there is deficient settlement of the marginal deposit and the twenty-five percent (25%)
consideration, in which case the illicit extension releases the sureties. Under Art. 2055 of the Civil Code, the liability of a
surety is measured by the terms of his contract, and while he is liable to the full extent thereof, his accountability is strictly
limited to that assumed by its terms.
It is admitted in the Complaint of respondent Bank before the trial court that several letters of credit were irrevocably
extended for ninety (90) days with alarmingly flawed and inadequate consideration - the indispensable marginal deposit of
fifteen percent (15%) and the twenty-five percent (25%) prerequisite for each extension of thirty (30) days. It bears
stressing that the requisite marginal deposit and security for every thirty (30) - day extension specified in the letter-advise
were not set aside or abrogated nor was there any prior notice of such fact, if any was done.
Moreover, these irregular extensions were candidly admitted by Victor Ruben L. Tuazon, an account officer and
manager of respondent Bank and its lone witness in the civil case
Q: You extended it even if there was no marginal deposit?
A: Yes.
Q: And even if partial payment is less than 25%?
A: Yes x x x x
Q: You have repeatedly extended despite the insufficiency partial payment requirement?
A: I would say yes.[53]
The foregoing extensions of the letters of credit made by respondent Bank without observing the rigid restrictions for
exercising the privilege are not covered by the waiver stipulated in the Continuing Guaranty. Evidently, they
constitute illicit extensions prohibited under Art. 2079 of the Civil Code, [a]n extension granted to the debtor by the creditor
without the consent of the guarantor extinguishes the guaranty. This act of the Bank is not mere failure or delay on its part
to demand payment after the debt has become due, as was the case in unpaid five (5) letters of credit which the Bank did
not extend, defer or put off,[54] but comprises conscious, separate and binding agreements to extend the due date, as was
admitted by the Bank itself
Q: How much was supposed to be paid on 14 September 1993, the original LC of P1,655,675.13?
A: Under LC 93-0017 first matured on 14 September 1993. We rolled it over, extended it to December 13, 1993
but they made partial payment that is why we extended it.
Q: The question to you now is how much was paid? How much is supposed to be paid on September 14, 1993
on the basis of the original amount of P1,655,675.13?
 A: Whenever this obligation becomes due and demandable except when you roll it over so there is novation
there on the original obligations[55] (underscoring supplied).
As a result of these illicit extensions, petitioner-spouses Luis Toh and Vicky Tan Toh are relieved of their obligations
as sureties of respondent FBPC under Art. 2079 of the Civil Code.
Further, we note several suspicious circumstances that militate against the enforcement of the Continuing Guaranty
against the accommodation sureties. Firstly, the guaranty was executed more than thirty (30) days from the original
acceptance period as required in the letter-advise. Thereafter, barely two (2) days after the Continuing Guaranty was
signed, corporate agents of FBPC were replaced on 12 May 1993 and other adjustments in the corporate structure of
FBPC ensued in the month of June 1993, which the Bank did not investigate although such were made known to it.
By the same token, there is no explanation on record for the utter worthlessness of the trust receipts in favor of the
Bank when these documents ought to have added more security to the indebtedness of FBPC. The Bank has in fact no
[56]
information whether the trust receipts were indeed used for the purpose for which they were obtained. To be sure, the
goods subject of the trust receipts were not entirely lost since the security officer of respondent Bank who conducted
surveillance of FBPC even had the chance to intercept the surreptitious transfer of the items under trust: We saw two (2)
delivery vans with Plates Nos. TGH 257 and PAZ 928 coming out of the compound x x x [which were] taking out the last
[57]
supplies stored in the compound. In addition, the attached properties of FBPC, except for two (2) of them, were
[58]
perfunctorily abandoned by respondent Bank although the bonds therefor were considerably reduced by the trial court.
The consequence of these omissions is to discharge the surety, petitioners herein, under Art. 2080 of the Civil
Code,[59] or at the very least, mitigate the liability of the surety up to the value of the property or lien released

If the creditor x x x has acquired a lien upon the property of a principal, the creditor at once becomes charged with the
duty of retaining such security, or maintaining such lien in the interest of the surety, and any release or impairment of this
security as a primary resource for the payment of a debt, will discharge the surety to the extent of the value of the property
or lien released x x x x [for] there immediately arises a trust relation between the parties, and the creditor as trustee is
bound to account to the surety for the value of the security in his hands.[60]

For the same reason, the grace period granted by respondent Bank represents unceremonious abandonment and
forfeiture of the fifteen percent (15%) marginal deposit and the twenty-five percent (25%) partial payment as fixed in the
letter-advise. These payments are unmistakably additional securities intended to protect both respondent Bank and the
sureties in the event that the principal debtor FBPC becomes insolvent during the extension period. Compliance with
these requisites was not waived by petitioners in the Continuing Guaranty. For this unwarranted exercise of discretion,
respondent Bank bears the loss; due to its unauthorized extensions to pay granted to FBPC, petitioner-spouses Luis Toh
and Vicky Tan Toh are discharged as sureties under the Continuing Guaranty.
Finally, the foregoing omission or negligence of respondent Bank in failing to safe-keep the security provided by the
marginal deposit and the twenty-five percent (25%) requirement results in the material alteration of the principal contract,
i.e., the letter-advise, and consequently releases the surety.[61] This inference was admitted by the Bank through the
testimony of its lone witness that [w]henever this obligation becomes due and demandable, except when you roll it over,
(so) there is novation there on the original obligations. As has been said, if the suretyship contract was made upon the
condition that the principal shall furnish the creditor additional security, and the security being furnished under these
conditions is afterwards released by the creditor, the surety is wholly discharged, without regard to the value of the
securities released, for such a transaction amounts to an alteration of the main contract.[62]
WHEREFORE, the instant Petition for Review is GRANTED. The Decision of the Court of Appeals dated 12
December 2001 in CA-G.R. CV No. 55957, Solid Bank Corporation v. First Business Paper Corporation, Kenneth Ng Li,
Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, holding petitioner-spouses Luis Toh and Vicky Tan Toh solidarily liable
with First Business Paper Corporation to pay Solid Bank Corporation the amount of P10,539,758.68 as principal with
twelve percent (12%) interest per annum until fully paid, and its Resolution of 2 July 2002 denying reconsideration thereof
are REVERSED and SET ASIDE.
The Decision dated 16 May 1996 of RTC-Br. 161 of Pasig City in Civil Case No. 64047, Solid Bank Corporation v.
First Business Paper Corporation, Kenneth Ng Li, Ma. Victoria Ng Li, Luis Toh and Vicky Tan Toh, finding First Business
Paper Corporation liable to pay respondent Solid Bank Corporation the principal of P10,539,758.68 plus twelve percent
(12%) interest per annum until fully paid, but absolving petitioner-spouses Luis Toh and Vicky Tan Toh of any liability to
respondent Solid Bank Corporation is REINSTATED and AFFIRMED. No costs.
SO ORDERED.
AUTOCORP GROUP and PETER Y. RODRIGUEZ v. INTRA STRATA ASSURANCE CORPORATION and BUREAU
OF CUSTOMS (G.R. No. 166662, June 27, 2008)
[1]
This is a Petition for Review on Certiorari from the Decision of the Court of Appeals dated 30 June 2004 in CA-
G.R. CV No. 62564 which affirmed with modification the Decision[2] of the Regional Trial Court (RTC) of Makati City,
Branch 150 in Civil Case No. 95-1584 dated 16 September 1998.

The factual and procedural antecedents of this case are as follows:

On 19 August 1990, petitioner Autocorp Group, represented by its President, petitioner Peter Y. Rodriguez,
secured an ordinary re-export bond, Instrata Bond No. 5770, from private respondent Intra Strata Assurance Corporation
(ISAC) in favor of public respondent Bureau of Customs (BOC), in the amount of P327,040.00, to guarantee the re-export
of one unit of Hyundai Excel 4-door 1.5 LS and/or to pay the taxes and duties thereon.

On 21 December 1990, petitioners obtained another ordinary re-export bond, Instrata Bond No. 7154, from ISAC
in favor of the BOC, in the amount of P447,671.00, which was eventually increased to P707,609.00 per Bond
Endorsement No. BE-0912/91 dated 10 January 1991, to guarantee the re-export of one unit of Hyundai Sonata 2.4 GLS
and/or to pay the taxes and duties thereon.

Petitioners executed and signed two Indemnity Agreements with identical stipulations in favor of ISAC, agreeing
to act as surety of the subject bonds. Petitioner Rodriguez signed the Indemnity Agreements both as President of the
Autocorp Group and in his personal capacity. Petitioners thus agreed to the following provisions:

INDEMNITY: - The undersigned agree at all times to jointly and severally indemnify the COMPANY and
keep it indemnified and hold and save it harmless from and against any and all damages, losses, costs,
stamps, taxes, penalties, charges and expenses of whatsoever kind and nature including counsel or
attorneys fee which the COMPANY shall or may at any time sustain or incur in consequence of having
become surety upon the bond herein above referred to or any extension, renewal, substitution or
alteration thereof, made at the instance of the undersigned or any of them, or any other bond executed
on behalf of the undersigned or any of them, and to pay; reimburse and make good to the COMPANY, its
successors and assigns, alls sums and amounts of money which it or its representatives shall pay or
cause to be paid, or become liable to pay on accounts of the undersigned or any of them, of whatsoever
kind and nature, including 25% of the amount involved in the litigation or other matters growing out of or
connected therewith, for and as attorneys fees, but in no case less than P300.00 and which shall be
payable whether or not the case be extrajudicially settled, it being understood that demand made upon
anyone of the undersigned herein is admitted as demand made on all of the signatories hereof. It is
hereby further agreed that in case of any extension or renewal of the bond, we equally bind ourselves to
the COMPANY under the same terms and conditions as therein provided without the necessity of
executing another indemnity agreement for the purpose and that we may be granted under this indemnity
agreement.

MATURITY OF OUR OBLIGATIONS AS CONTRACTED HEREWITH AND ACCRUAL OF ACTION: -

Notwithstanding of (sic) the next preceding paragraph where the obligation involves a liquidated amount
for the payment of which the COMPANY has become legally liable under the terms of the obligation and
its suretyship undertaking, or by the demand of the obligee or otherwise and the latter has merely allowed
the COMPANYs aforesaid liability irrespective of whether or not payment has actually been made by the
COMPANY, the COMPANY for the protection of its interest may forthwith proceed against the
undersigned or either of them by court action or otherwise to enforce payment, even prior to making
payment to the obligee which may hereafter be done by the COMPANY.

INTEREST IN CASE OF DELAY: - In the event of delay in payment of the said sum or sums by the
undersigned they will pay interest at the rate of 12% per annum or same, which interest, if not paid, will
be liquidated and accumulated to the capital quarterly, and shall earn the same interest as the capital; all
this without prejudice to the COMPANYs right to demand judicially or extrajudicially the full payment of its
claims.

INCONTESTABILITY OF PAYMENT MADE BY THE COMPANY: - Any payment or disbursement made

by the COMPANY on account of the above-mentioned Bond, its renewals, extensions or substitutions,
replacement or novation in the belief either that the COMPANY was obligated to make such payment or
that said payment was necessary in order to avoid greater losses or obligations for which the COMPANY
might be liable by virtue of the terms of the above-mentioned Bond, its renewal, extensions or
 substitutions, shall be final and will not be disputed by the undersigned, who bind themselves to jointly
and severally indemnify the COMPANY of any such payments, as stated in the preceding clauses:

WAIVER OF VENUE OF ACTION: - We hereby agree that any question which may arise between the
COMPANY and the undersigned by reason of this document and which has to be submitted for decision
to a court of justice shall be brought before the court of competent jurisdiction in Makati, Rizal, waiving for
this purpose any other venue.

WAIVER: - The undersigned hereby waive all the rights[,] privileges and benefits that they have or may
have under Articles 2077, 2078, 2079, 2080 and 2081, of the Civil Code of the Philippines.

The undersigned, by this instrument, grant a special power of attorney in favor of all or any of the other
undersigned so that any of the undersigned may represent all the others in all transactions related to this
Bond, its renewals, extensions, or any other agreements in connection with this Counter-Guaranty,
without the necessity of the knowledge or consent of the others who hereby promise to accept as valid
each and every act done or executed by any of the attorneys-in-fact by virtue of the special power of
attorney.

OUR LIABILITY HEREUNDER: - It shall not be necessary for the COMPANY to bring suit against the
principal upon his default or to exhaust the property of the principal, but the liability hereunder of the
undersigned indemnitors shall be jointly and severally, a primary one, the same as that of the principal,
and shall be exigible immediately upon the occurrence of such default.

CANCELLATION OF BOND BY THE COMPANY: - The COMPANY may at any time cancel the above-
mentioned Bond, its renewals, extensions or substitutions, subject to any liability which might have
accrued prior to the date of cancellation refunding the proportionate amount of the premium unearned on
the date of cancellation.

RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The undersigned hereby empower and authorize
the COMPANY to grant or consent to the granting of any extension, continuation, increase, modification,
change, alteration and/or renewal of the original bond herein referred to, and to execute or consent to the
execution of any substitution for said Bond with the same or different, conditions and parties, and the
undersigned hereby hold themselves jointly and severally liable to the COMPANY for the original Bond
herein above-mentioned or for any extension, continuation, increase, modification, change, alteration,
renewal or substitution thereof without the necessary of any new indemnity agreement being executed
until the full amount including principal, interest, premiums, costs, and other expenses due to the
COMPANY thereunder is fully paid up.

SEVERABILITY OF PROVISIONS: - It is hereby agreed that should any provision or provisions of this
agreement be declared by competent public authority to be invalid or otherwise unenforceable, all
remaining provisions herein contained shall remain in full force and effect.

NOTIFICATION: - The undersigned hereby accept due notice of that the COMPANY has accepted this
[3]
guaranty, executed by the undersigned in favor of the COMPANY.

In sum, ISAC issued the subject bonds to guarantee compliance by petitioners with their undertaking with the
BOC to re-export the imported vehicles within the given period and pay the taxes and/or duties due thereon. In turn,
petitioners agreed, as surety, to indemnify ISAC for the liability the latter may incur on the said bonds.

Petitioner Autocorp Group failed to re-export the items guaranteed by the bonds and/or liquidate the entries or
cancel the bonds, and pay the taxes and duties pertaining to the said items despite repeated demands made by the BOC,
as well as by ISAC. By reason thereof, the BOC considered the two bonds, with a total face value of P1,034,649.00,
forfeited.

Failing to secure from petitioners the payment of the face value of the two bonds, despite several demands sent
to each of them as surety under the Indemnity Agreements, ISAC filed with the RTC on 24 October 1995 an action
against petitioners to recover the sum of P1,034,649.00, plus 25% thereof or P258,662.25 as attorneys fees. ISAC
impleaded the BOC as a necessary party plaintiff in order that the reward of money or judgment shall be adjudged unto
the said necessary plaintiff.[4] The case was docketed as Civil Case No. 95-1584.
 Petitioners filed a Motion to Dismiss on 11 December 1995 on the grounds that (1) the Complaint states no cause
of action; and (2) the BOC is an improper party.

The RTC, in an Order[5] dated 27 February 1996, denied petitioners Motion to Dismiss. Petitioners thus filed their
Answer to the Complaint, claiming that they sought permission from the BOC for an extension of time to re-export the
items covered by the bonds; that the BOC has yet to issue an assessment for petitioners alleged default; and that the
claim of ISAC for payment is premature as the subject bonds are not yet due and demandable.

During the pre-trial conference, petitioners admitted the genuineness and due execution of Instrata Bonds No.
5770 and No. 7154, but specifically denied those of the corresponding Indemnity Agreements. The parties agreed to limit
the issue to whether or not these bonds are now due and demandable.

On 16 September 1998, the RTC rendered its Decision ordering petitioners to pay ISAC and/or the BOC the face
value of the subject bonds in the total amount of P1,034,649.00, and to pay ISAC P258,662.25 as attorneys fees, thus:

WHEREFORE, judgment is hereby rendered in favor of the [herein private respondent ISAC] and
as against the [herein petitioners] who are ordered to pay the [private respondent] Intra Strata Assurance
Corporation and/or the Bureau of Customs the amount of P1,034,649.00 which is the equivalent amount
of the subject bonds as well as to pay the plaintiff corporation the sum of P258,662.25 as and for
attorneys fees.[6]

Petitioners Motion for Reconsideration was denied by the RTC in a Resolution dated 15 January 1999.[7]

Petitioners appealed to the Court of Appeals. On 30 June 2004, the Court of Appeals rendered its Decision
affirming the RTC Decision, only modifying the amount of the attorneys fees awarded:

WHEREFORE, the appealed 16 September 1998 Decision is MODIFIED to reduce the award of
attorneys fees to One Hundred Three Thousand Four Hundred Sixty Four Pesos & Ninety Centavos
(P103,464.90). The rest is affirmed in toto. Costs against [herein petitioners].[8]

In a Resolution dated 5 January 2005, the Court of Appeals refused to reconsider its Decision.

Petitioners thus filed the instant Petition for Review on Certiorari, assigning the following errors allegedly
committed by the Court of Appeals:

I. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RENDERING

JUDGMENT AGAINST PETITIONERS BASED ON A PREMATURE ACTION AND/OR RULING
IN FAVOR OF RESPONDENTS WHO HAVE NO CAUSE OF ACTION AGAINST PETITIONERS.

II. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN AFFIRMING THE

DECISION OF BRANCH 150, REGIONAL TRIAL COURT OF MAKATI CITY BASED ON
MISAPPREHENSION OF FACTS, UNSUPPORTED BY EVIDENCE ON RECORD &
CONTRARY TO LAW.

III. THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT GIVING MERIT TO
THE ISSUE RAISED BY PETITIONERS THAT THE BUREAU OF CUSTOMS IS IMPROPERLY
IMPLEADED BY INTRA STRATA.

IV. THE HONORABLE COURT OF APPEALS GRAVELY ERRED [IN] AFFIRMING THE
PORTION OF THE DECISION HOLDING PETITIONER PETER Y. RODRIGUEZ AS JOINTLY
LIABLE WHEN AMENDMENTS WERE INTRODUCED, WITHOUT HIS CONSENT AND
[9]
APPROVAL.

The present Petition is without merit.

Absence of actual forfeiture of the subject bonds

 Petitioners contend that their obligation to ISAC is not yet due and demandable. They cannot be made liable by
ISAC in the absence of an actual forfeiture of the subject bonds by the BOC and/or an explicit pronouncement by the
same bureau that ISAC is already liable on the said bonds. In this case, there is yet no actual forfeiture of the bonds, but
[10]
merely a recommendation of forfeiture, for no writ of execution has been issued against such bonds. Hence, Civil Case
No. 95-1584 was prematurely filed by ISAC.Petitioners further argue that:

Secondly, it bears emphasis that as borne by the records, not only is there no writ of forfeiture
against Surety Bond No. 7154, there is likewise no evidence adduced on record to prove that respondent
Intra Strata has made legal demand against Surety Bond No. 5770 neither is there a showing that
[11]
respondent BOC initiated a demand or issued notice for its forfeiture and/or confiscation.

The Court of Appeals, in its assailed Decision, already directly addressed petitioners arguments by ruling that an
actual forfeiture of the subject bonds is not necessary for petitioners to be liable thereon to ISAC as surety under the
Indemnity Agreements.

According to the relevant provision of the Indemnity Agreements executed between petitioner and ISAC, which
reads:

[W]here the obligation involves a liquidated amount for the payment of which [ISAC] has become legally
liable under the terms of the obligation and its suretyship undertaking or by the demand of the [BOC] or
otherwise and the latter has merely allowed the [ISACs] aforesaid liability, irrespective of whether or not
payment has actually been made by the [ISAC], the [ISAC] for the protection of its interest may forthwith
proceed against [petitioners Autocorp Group and Rodriguez] or either of them by court action or otherwise
to enforce payment, even prior to making payment to the [BOC] which may hereafter be done by
[ISAC][,][12]

petitioners obligation to indemnify ISAC became due and demandable the moment the bonds issued by ISAC became
answerable for petitioners non-compliance with its undertaking with the BOC. Stated differently, petitioners became liable
to indemnify ISAC at the same time the bonds issued by ISAC were placed at the risk of forfeiture by the BOC for non-
compliance by petitioners with its undertaking.

The subject bonds, Instrata Bonds No. 5770 and No. 7154, became due and demandable upon the failure of
petitioner Autocorp Group to comply with a condition set forth in its undertaking with the BOC, specifically to re-export the
imported vehicles within the period of six months from their date of entry. Since it issued the subject bonds, ISAC then
also became liable to the BOC. At this point, the Indemnity Agreements already give ISAC the right to proceed against
petitioners via court action or otherwise.

The Indemnity Agreements, therefore, give ISAC the right to recover from petitioners the face value of the subject
bonds plus attorneys fees at the time ISAC becomes liable on the said bonds to the BOC, regardless of whether the BOC
had actually forfeited the bonds, demanded payment thereof and/or received such payment. It must be pointed out that
the Indemnity Agreements explicitly provide that petitioners shall be liable to indemnify ISAC whether or not payment has
actually been made by the [ISAC] and ISAC may proceed against petitioners by court action or otherwise even prior to
making payment to the [BOC] which may hereafter be done by [ISAC].

Even when the BOC already admitted that it not only made a demand upon ISAC for the payment of the bond but
even filed a complaint against ISAC for such payment,[13] such demand and complaint are not necessary to hold
petitioners liable to ISAC for the amount of such bonds. Petitioners attempts to prove that there was no actual forfeiture of
the subject bonds are completely irrelevant to the case at bar.

It is worthy to note that petitioners did not impugn the validity of the stipulation in the Indemnity Agreements
allowing ISAC to proceed against petitioners the moment the subject bonds become due and demandable, even prior to
actual forfeiture or payment thereof. Even if they did so, the Court would be constrained to uphold the validity of such a
stipulation for it is but a slightly expanded contractual expression of Article 2071 of the Civil Code which provides, inter
alia, that the guarantor may proceed against the principal debtor the moment the debt becomes due and
demandable. Article 2071 of the Civil Code provides:
 Art. 2071. The guarantor, even before having paid, may proceed against the principal
debtor:
(1) When he is sued for the payment;

(2) In case of insolvency of the principal debtor;

(3) When the debtor has bound himself to relieve him from the guaranty within a specified period,
and this period has expired;

(4) When the debt has become demandable, by reason of the expiration of the period for
payment;

(5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity,
unless it be of such nature that it cannot be extinguished except within a period longer than ten years;

(6) If there are reasonable grounds to fear that the principal debtor intends to abscond;

(7) If the principal debtor is in imminent danger of becoming insolvent.

In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand
a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of
the debtor. (Emphases ours.)

Petitioners also invoke the alleged lack of demand on the part of ISAC on petitioners as regards Instrata Bond No.
5770 before it instituted Civil Case No. 95-1584. Even if proven true, such a fact does not carry much weight considering
that demand, whether judicial or extrajudicial, is not required before an obligation becomes due and demandable.A
demand is only necessary in order to put an obligor in a due and demandable obligation in delay, [14] which in turn is for the
purpose of making the obligor liable for interests or damages for the period of delay. [15] Thus, unless stipulated otherwise,
an extrajudicial demand is not required before a judicial demand, i.e., filing a civil case for collection, can be resorted to.

Inclusion of the Bureau of Customs as a party to the case

ISAC included the BOC as a necessary party plaintiff in order that the reward of money or judgment shall be
adjudged unto the said necessary plaintiff.[16]

Petitioners assail this inclusion of the BOC as a party in Civil Case No. 95-1584 on the ground that it was not
properly represented by the Solicitor General. Petitioners also contend that the inclusion of the BOC as a party in Civil
Case No. 95-1584 is highly improper and should not be countenanced as the net result would be tantamount to collusion
between Intra Strata and the Bureau of Customs which would deny and deprive petitioners their personal defenses
against the BOC.[17]

In its assailed Decision, the Court of Appeals did not find merit in petitioners arguments on the matter, holding that
when the BOC forfeited the subject bonds issued by ISAC, subrogation took place so that whatever right the BOC had
against petitioners were eventually transferred to ISAC. As ISAC merely steps into the shoes of the BOC, whatever
defenses petitioners may have against the BOC would still be available against ISAC.

The Court likewise cannot sustain petitioners position.

The misjoinder of parties does not warrant the dismissal of the action. Section 11, Rule 3 of the Rules of Court
explicitly states:

SEC. 11. Misjoinder and non-joinder of parties.Neither misjoinder nor non-joinder of parties is
ground for dismissal of an action. Parties may be dropped or added by order of the court on motion of
any party or on its own initiative at any stage of the action and on such terms as are just. Any claim
against a misjoined party may be severed and proceeded with separately.
Consequently, the purported misjoinder of the BOC as a party cannot result in the dismissal of Civil Case No. 95-1584. If
indeed the BOC was improperly impleaded as a party in Civil Case No. 95-1584, at most, it may be dropped by order of
the court, on motion of any party or on its own initiative, at any stage of the action and on such terms as are just.

Should the BOC then be dropped as a party to Civil Case No. 95-1584?
[18]
ISAC alleged in its Complaint that the BOC is being joined as a necessary party in Civil Case No. 95-1584.

A necessary party is defined in Section 8, Rule 3 of the Rules of Court as follows:

SEC. 8. Necessary party.A necessary party is one who is not indispensable but who ought to be
joined as a party if complete relief is to be accorded as to those already parties, or for a complete
determination or settlement of the claim subject of the action.

The subject matter of Civil Case No. 95-1584 is the liability of Autocorp Group to the BOC, which ISAC is also
bound to pay as the guarantor who issued the bonds therefor. Clearly, there would be no complete settlement of the
subject matter of the case at bar the liability of Autocorp Group to the BOC should Autocorp Group be merely ordered to
pay its obligations with the BOC to ISAC. BOC is, therefore, a necessary party in the case at bar, and should not be
dropped as a party to the present case.

It can only be conceded that there was an irregularity in the manner the BOC was joined as a necessary party in
Civil Case No. 95-1584. As the BOC, through the Solicitor General, was not the one who initiated Civil Case No. 95-1584,
and neither was its consent obtained for the filing of the same, it may be considered an unwilling co-plaintiff of ISAC in
said action. The proper way to implead the BOC as a necessary party to Civil Case No. 95-1584 should have been in
accordance with Section 10, Rule 3 of the Rules of Court, viz:

SEC. 10. Unwilling co-plaintiff. If the consent of any party who should be joined as plaintiff can not
be obtained, he may be made a defendant and the reason therefor shall be stated in the complaint.

Nonetheless, the irregularity in the inclusion of the BOC as a party to Civil Case No. 95-1584 would not in any way affect
the disposition thereof. As the Court already found that the BOC is a necessary party to Civil Case No. 95-1584, it would
be a graver injustice to drop it as a party.

Petitioners argument that the inclusion of the BOC as a party to this case would deprive them of their personal
defenses against the BOC is utterly baseless.

First, as ruled by the Court of Appeals, petitioners defenses against the BOC are completely available against
ISAC, since the right of the latter to seek indemnity from petitioner depends on the right of the BOC to proceed against the
bonds.

The Court, however, deems it essential to qualify that ISACs right to seek indemnity from petitioners does not
constitute subrogation under the Civil Code, considering that there has been no payment yet by ISAC to the BOC. There
are indeed cases in the aforementioned Article 2071 of the Civil Code wherein the guarantor or surety, even before having
paid, may proceed against the principal debtor, but in all these cases, Article 2071 of the Civil Code merely grants the
guarantor or surety an action to obtain release from the guaranty, or to demand a security that shall protect him from any
proceedings by the creditor and from the danger of insolvency of the debtor. The benefit of subrogation, an extinctive
subjective novation by a change of creditor, which transfers to the person subrogated, the credit and all the rights thereto
appertaining, either against the debtor or against third persons,[19] is granted by the Article 2067 of the Civil Code only to
the guarantor (or surety) who pays.[20]

ISAC cannot be said to have stepped into the shoes of the BOC, because the BOC still retains said rights until it
is paid. ISACs right to file Civil Case No. 95-1584 is based on the express provision of the Indemnity Agreements making
petitioners liable to ISAC at the very moment ISACs bonds become due and demandable for the liability of Autocorp
Group to the BOC, without need for actual payment by ISAC to the BOC. But it is still correct to say that all the defenses
available to petitioners against the BOC can likewise be invoked against ISAC because the latters contractual right to
proceed against petitioners only arises when the Autocorp Group becomes liable to the BOC for non-compliance with its
undertakings. Indeed, the arguments and evidence petitioners can present against the BOC to prove that Autocorp
Groups liability to the BOC is not yet due and demandable would also establish that petitioners liability to ISAC under the
Indemnity Agreements has not yet arisen.

Second, making the BOC a necessary party to Civil Case No. 95-1584 actually allows petitioners to
simultaneously invoke its defenses against both the BOC and ISAC. Instead of depriving petitioners of their personal
defenses against the BOC, Civil Case No. 95-1584 actually gave them the opportunity to kill two birds with one stone: to
disprove its liability to the BOC and, thus, negate its liability to ISAC.

Liability of petitioner Rodriguez

Petitioner Rodriguez posits that he is merely a guarantor, and that his liability arises only when the person with
whom he guarantees the credit, Autocorp Group in this case, fails to pay the obligation. Petitioner Rodriguez invokes
Article 2079 of the Civil Code on Extinguishment of Guaranty, which states:

Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor
extinguishes the guaranty. The mere failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension of time referred to herein.

Petitioner Rodriguez argues that there was an amendment as to the effectivity of the bonds, and this constitutes a
modification of the agreement without his consent, thereby exonerating him from any liability.

We must take note at this point that petitioners have not presented any evidence of this alleged amendment as to the
effectivity of the bonds.[21] Be that as it may, even if there was indeed such an amendment, such would not cause the
exoneration of petitioner Rodriguez from liability on the bonds.

The Court of Appeals, in its assailed Decision, held that the use of the term guarantee in a contract does not ipso
facto mean that the contract is one of guaranty. It thus ruled that both petitioners assumed liability as a regular party and
obligated themselves as original promissors, i.e., sureties, as shown in the following provisions of the Indemnity
Agreement:

INDEMNITY: - The undersigned [Autocorp Group and Rodriguez] agree at all times to jointly
and severally indemnify the COMPANY [ISAC] and keep it indemnified and hold and save it harmless
from and against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of
whatsoever kind and nature including counsel or attorneys fee which the COMPANY [ISAC] shall or may
at any time sustain or incur in consequence of having become surety upon the bond herein above
referred to x x x

xxxx

OUR LIABILITY HEREUNDER: - It shall not be necessary for the COMPANY [ISAC] to bring suit
against the principal [Autocorp Group] upon his default or to exhaust the property of the principal
[Autocorp Group], but the liability hereunder of the undersigned indemnitors [Rodriguez] shall be
jointly and severally, a primary one, the same as that of the principal [Autocorp Group], and shall
be exigible immediately upon the occurrence of such default. (Emphases supplied.)

The Court of Appeals concluded that since petitioner Rodriguez was a surety, Article 2079 of the Civil Code does
not apply. The appellate court further noted that both petitioners authorized ISAC to consent to the granting of an
extension of the subject bonds.

The Court of Appeals committed a slight error on this point. The provisions of the Civil Code on Guarantee, other
[22]
than the benefit of excussion, are applicable and available to the surety. The Court finds no reason why the provisions
of Article 2079 would not apply to a surety.

This, however, would not cause a reversal of the Decision of the Court of Appeals. The Court of Appeals was
correct that even granting arguendo that there was a modification as to the effectivity of the bonds, petitioners would still
not be absolved from liability since they had authorized ISAC to consent to the granting of any extension, modification,
alteration and/or renewal of the subject bonds, as expressly set out in the Indemnity Agreements:
 RENEWALS, ALTERATIONS AND SUBSTITUTIONS: - The undersigned [Autocorp Group
and Rodriguez] hereby empower and authorize the COMPANY [ISAC] to grant or consent to the
granting of any extension, continuation, increase, modification, change, alteration and/or renewal
of the original bond herein referred to, and to execute or consent to the execution of any substitution
for said Bond with the same or different, conditions and parties, and the undersigned [Autocorp Group
and Rodriguez] hereby hold themselves jointly and severally liable to the COMPANY [ISAC] for the
original Bond herein above-mentioned or for any extension, continuation, increase, modification,
change, alteration, renewal or substitution thereof without the necessary of any new indemnity
agreement being executed until the full amount including principal, interest, premiums, costs, and other
[23]
expenses due to the COMPANY [ISAC] thereunder is fully paid up. (Emphases supplied.)

The foregoing provision in the Indemnity Agreements clearly authorized ISAC to consent to the granting of any
extension, modification, alteration and/or renewal of the subject bonds.
[24]
There is nothing illegal in such a provision. In Philippine American General Insurance Co., Inc. v. Mutuc, the
Court held that an agreement whereby the sureties bound themselves to be liable in case of an extension or renewal of
the bond, without the necessity of executing another indemnity agreement for the purpose and without the necessity of
being notified of such extension or renewal, is valid; and that there is nothing in it that militates against the law, good
customs, good morals, public order or public policy.

WHEREFORE, the instant Petition for Review on Certiorari is DENIED. The Decision of the Court of Appeals
dated 30 June 2004 in CA-G.R. CV No. 62564 which affirmed with modification the Decision of the Regional Trial Court of
Makati City, in Civil Case No. 95-1584 dated 16 September 1998 is AFFIRMED in toto. Costs against petitioners.

SO ORDERED.
STRONGHOLD INSURANCE COMPANY, INC. v. REPUBLIC-ASAHI GLASS CORPORATION (G.R. No. 147561, June 22,
2006)

A surety companys liability under the performance bond it issues is solidary. The death of the principal obligor does not,

as a rule, extinguish the obligation and the solidary nature of that liability.

The Case

[1] [2]
Before us is a Petition for Review under Rule 45 of the Rules of Court, seeking to reverse the March 13, 2001 Decision of the

Court of Appeals (CA) in CA-GR CV No. 41630. The assailed Decision disposed as follows:

WHEREFORE, the Order dated January 28, 1993 issued by the lower court is REVERSED and SET
ASIDE. Let the records of the instant case be REMANDEDto the lower court for the reception of evidence of all
[3]
parties.

The Facts

The facts of the case are narrated by the CA in this wise:

On May 24, 1989, [respondent] Republic-Asahi Glass Corporation (Republic-Asahi) entered into a
contract with x x x Jose D. Santos, Jr., the proprietor of JDS Construction (JDS), for the construction of
roadways and a drainage system in Republic-Asahis compound in Barrio Pinagbuhatan, Pasig City,
where [respondent] was to pay x x x JDS five million three hundred thousand pesos (P5,300,000.00)
inclusive of value added tax for said construction, which was supposed to be completed within a period of
two hundred forty (240) days beginning May 8, 1989. In order to guarantee the faithful and satisfactory
performance of its undertakings x x x JDS, shall post a performance bond of seven hundred ninety five
thousand pesos (P795,000.00). x x x JDS executed, jointly and severally with [petitioner] Stronghold
Insurance Co., Inc. (SICI) Performance Bond No. SICI-25849/g(13)9769.

On May 23, 1989, [respondent] paid to x x x JDS seven hundred ninety five thousand pesos
(P795,000.00) by way of downpayment.

Two progress billings dated August 14, 1989 and September 15, 1989, for the total amount of two
hundred seventy four thousand six hundred twenty one pesos and one centavo (P274,621.01) were
submitted by x x x JDS to [respondent], which the latter paid. According to [respondent], these two
progress billings accounted for only 7.301% of the work supposed to be undertaken by x x x JDS under
the terms of the contract.

Several times prior to November of 1989, [respondents] engineers called the attention of x x x JDS to the
alleged alarmingly slow pace of the construction, which resulted in the fear that the construction will not
be finished within the stipulated 240-day period. However, said reminders went unheeded by x x x JDS.

On November 24, 1989, dissatisfied with the progress of the work undertaken by x x x JDS, [respondent]
Republic-Asahi extrajudicially rescinded the contract pursuant to Article XIII of said contract, and wrote a
letter to x x x JDS informing the latter of such rescission. Such rescission, according to Article XV of the
contract shall not be construed as a waiver of [respondents] right to recover damages from x x x JDS and
the latters sureties.

[Respondent] alleged that, as a result of x x x JDSs failure to comply with the provisions of the contract,
which resulted in the said contracts rescission, it had to hire another contractor to finish the project, for
which it incurred an additional expense of three million two hundred fifty six thousand, eight hundred
seventy four pesos (P3,256,874.00).
On January 6, 1990, [respondent] sent a letter to [petitioner] SICI filing its claim under the bond for not
less than P795,000.00. On March 22, 1991, [respondent] again sent another letter reiterating its demand
for payment under the aforementioned bond. Both letters allegedly went unheeded.

[Respondent] then filed [a] complaint against x x x JDS and SICI. It sought from x x x JDS payment
of P3,256,874.00 representing the additional expenses incurred by [respondent] for the completion of the
project using another contractor, and from x x x JDS and SICI, jointly and severally, payment
of P750,000.00 as damages in accordance with the performance bond; exemplary damages in the
amount of P100,000.00 and attorneys fees in the amount of at least P100,000.00.

According to the Sheriffs Return dated June 14, 1991, submitted to the lower court by Deputy Sheriff
Rene R. Salvador, summons were duly served on defendant-appellee SICI. However, x x x Jose
D. Santos, Jr. died the previous year (1990), and x x x JDS Construction was no longer at its address at
2nd Floor, Room 208-A, San Buena Bldg. Cor. Pioneer St., Pasig, Metro Manila, and its whereabouts
were unknown.

On July 10, 1991, [petitioner] SICI filed its answer, alleging that the [respondents] money claims against
[petitioner and JDS] have been extinguished by the death of Jose D. Santos, Jr. Even if this were not the
case, [petitioner] SICI had been released from its liability under the performance bond because there was
no liquidation, with the active participation and/or involvement, pursuant to procedural due process, of
herein surety and contractor Jose D. Santos, Jr., hence, there was no ascertainment of the corresponding
liabilities of Santos and SICI under the performance bond. At this point in time, said liquidation was
impossible because of the death of Santos, who as such can no longer participate in any liquidation. The
unilateral liquidation on the party (sic) of [respondent] of the work accomplishments did not bind SICI for
being violative of procedural due process. The claim of [respondent] for the forfeiture of the performance
bond in the amount of P795,000.00 had no factual and legal basis, as payment of said bond was
conditioned on the payment of damages which [respondent] may sustain in the event x x x JDS failed to
complete the contracted works. [Respondent] can no longer prove its claim for damages in view of the
death of Santos. SICI was not informed by [respondent] of the death of Santos. SICI was not informed by
[respondent] of the unilateral rescission of its contract with JDS, thus SICI was deprived of its right to
protect its interests as surety under the performance bond, and therefore it was released from all
liability. SICI was likewise denied due process when it was not notified of plaintiff-appellants process of
determining and fixing the amount to be spent in the completion of the unfinished project. The procedure
contained in Article XV of the contract is against public policy in that it denies SICI the right to procedural
due process. Finally, SICI alleged that [respondent] deviated from the terms and conditions of the
contract without the written consent of SICI, thus the latter was released from all liability. SICI also prayed
for the award of P59,750.00 as attorneys fees, and P5,000.00 as litigation expenses.
On August 16, 1991, the lower court issued an order dismissing the complaint of [respondent] against x x
x JDS and SICI, on the ground that the claim against JDS did not survive the death of its sole proprietor,
Jose D. Santos, Jr. The dispositive portion of the [O]rder reads as follows:

ACCORDINGLY, the complaint against the defendants Jose D. Santos, Jr., doing
business under trade and style, JDS Construction and Stronghold Insurance Company,
Inc. is ordered DISMISSED.

SO ORDERED.

On September 4, 1991, [respondent] filed a Motion for Reconsideration seeking reconsideration of the
lower courts August 16, 1991 order dismissing its complaint. [Petitioner] SICI field its Comment and/or
Opposition to the Motion for Reconsideration. On October 15, 1991, the lower court issued an Order, the
dispositive portion of which reads as follows:

WHEREFORE, premises considered, the Motion for Reconsideration is hereby given due
course. The Order dated 16 August 1991 for the dismissal of the case against Stronghold
Insurance Company, Inc., is reconsidered and hereby reinstated (sic). However, the case
against defendant Jose D. Santos, Jr. (deceased) remains undisturbed.

Motion for Preliminary hearing and Manifestation with Motion filed by [Stronghold]
Insurance Company Inc., are set for hearing on November 7, 1991at 2:00 oclock in the
afternoon.
 SO ORDERED.

On June 4, 1992, [petitioner] SICI filed its Memorandum for Bondsman/Defendant SICI (Re: Effect of
Death of defendant Jose D. Santos, Jr.) reiterating its prayer for the dismissal of [respondents] complaint.

On January 28, 1993, the lower court issued the assailed Order reconsidering its Order dated October 15,
1991, and ordered the case, insofar as SICI is concerned, dismissed. [Respondent] filed its motion for
reconsideration which was opposed by [petitioner] SICI. On April 16, 1993, the lower court denied
[respondents] motion for reconsideration. x x x.[4]

Ruling of the Court of Appeals

The CA ruled that SICIs obligation under the surety agreement was not extinguished by the death of Jose D. Santos,

Jr. Consequently, Republic-Asahi could still go after SICI for the bond.

The appellate court also found that the lower court had erred in pronouncing that the performance of the Contract in

question had become impossible by respondents act of rescission. The Contract was rescinded because of the

dissatisfaction of respondent with the slow pace of work and pursuant to Article XIII of its Contract with JDS.

The CA ruled that [p]erformance of the [C]ontract was impossible, not because of [respondents] fault, but because of the

fault of JDS Construction and Jose D. Santos, Jr. for failure on their part to make satisfactory progress on the project,

which amounted to non-performance of the same. x x x [P]ursuant to the [S]urety [C]ontract, SICI is liable for the non-

performance of said [C]ontract on the part of JDS Construction.[5]

[6]
Hence, this Petition.

Issue

Petitioner states the issue for the Courts consideration in the following manner:

Death is a defense of Santos heirs which Stronghold could also adopt as its defense against obligees
claim.[7]

More precisely, the issue is whether petitioners liability under the performance bond was automatically extinguished by

the death of Santos, the principal.

The Courts Ruling

The Petition has no merit.

Sole Issue:
Effect of Death on the Suretys Liability

Petitioner contends that the death of Santos, the bond principal, extinguished his liability under the surety
bond. Consequently, it says, it is automatically released from any liability under the bond.

As a general rule, the death of either the creditor or the debtor does not extinguish the obligation. [8] Obligations
are transmissible to the heirs, except when the transmission is prevented by the law, the stipulations of the parties, or the
nature of the obligation.[9] Only obligations that are personal[10] or are identified with the persons themselves are
extinguished by death.[11]

Section 5 of Rule 86[12] of the Rules of Court expressly allows the prosecution of money claims arising from a
contract against the estate of a deceased debtor. Evidently, those claims are not actually extinguished.[13] What is
extinguished is only the obligees action or suit filed before the court, which is not then acting as a probate court.[14]

In the present case, whatever monetary liabilities or obligations Santos had under his contracts with respondent
were not intransmissible by their nature, by stipulation, or by provision of law. Hence, his death did not result in the
extinguishment of those obligations or liabilities, which merely passed on to his estate. [15] Death is not a defense that he or
his estate can set up to wipe out the obligations under the performance bond. Consequently, petitioner as surety cannot
use his death to escape its monetary obligation under its performance bond.

The liability of petitioner is contractual in nature, because it executed a performance bond worded as follows:

KNOW ALL MEN BY THESE PRESENTS:

That we, JDS CONSTRUCTION of 208-A San Buena Building, contractor, of Shaw Blvd., Pasig,
MM Philippines, as principal and the STRONGHOLD INSURANCE COMPANY, INC. a corporation duly
organized and existing under and by virtue of the laws of the Philippines with head office at Makati, as
Surety, are held and firmly bound unto the REPUBLIC ASAHI GLASS CORPORATION and to any
individual, firm, partnership, corporation or association supplying the principal with labor or materials in
 the penal sum of SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00), Philippine Currency, for
the payment of which sum, well and truly to be made, we bind ourselves, our heirs, executors,
administrators, successors and assigns, jointly and severally, firmly by these presents.

The CONDITIONS OF THIS OBLIGATION are as follows;

WHEREAS the above bounden principal on the ___ day of __________, 19__ entered into a contract
with the REPUBLIC ASAHI GLASS CORPORATION represented by _________________, to fully and
faithfully. Comply with the site preparation works road and drainage system of Philippine Float Plant at
Pinagbuhatan, Pasig, Metro Manila.

WHEREAS, the liability of the Surety Company under this bond shall in no case exceed the sum of
PESOS SEVEN HUNDRED NINETY FIVE THOUSAND (P795,000.00) Philippine Currency, inclusive of
interest, attorneys fee, and other damages, and shall not be liable for any advances of the obligee to the
principal.

WHEREAS, said contract requires the said principal to give a good and sufficient bond in the above-
stated sum to secure the full and faithfull performance on its part of said contract, and the satisfaction of
obligations for materials used and labor employed upon the work;

NOW THEREFORE, if the principal shall perform well and truly and fulfill all the undertakings, covenants,
terms, conditions, and agreements of said contract during the original term of said contract and any
extension thereof that may be granted by the obligee, with notice to the surety and during the life of any
guaranty required under the contract, and shall also perform well and truly and fulfill all the undertakings,
covenants, terms, conditions, and agreements of any and all duly authorized modifications of said
contract that may hereinafter be made, without notice to the surety except when such modifications
increase the contract price; and such principal contractor or his or its sub-contractors shall promptly make
payment to any individual, firm, partnership, corporation or association supplying the principal of its sub-
contractors with labor and materials in the prosecution of the work provided for in the said contract, then,
this obligation shall be null and void; otherwise it shall remain in full force and effect. Any extension of the
period of time which may be granted by the obligee to the contractor shall be considered as given, and
any modifications of said contract shall be considered as authorized, with the express consent of the
Surety.

The right of any individual, firm, partnership, corporation or association supplying the contractor with labor
or materials for the prosecution of the work hereinbefore stated, to institute action on the penal bond,
[16]
pursuant to the provision of Act No. 3688, is hereby acknowledge and confirmed.

As a surety, petitioner is solidarily liable with Santos in accordance with the Civil Code, which provides as follows:

Art. 2047. By guaranty a person, called the guarantor, binds himself to the creditor to fulfill the
obligation of the principal debtor in case the latter should fail to do so.
 If a person binds himself solidarily with the principal debtor, the provisions of Section
[17]
4, Chapter 3, Title I of this Book shall be observed. In such case the contract is called a suretyship.

xxxxxxxxx

Art. 1216. The creditor may proceed against any one of the solidary debtors or some or all of
them simultaneously. The demand made against one of them shall not be an obstacle to those which
may subsequently be directed against the others, so long as the debt has not been fully collected.

Elucidating on these provisions, the Court in Garcia v. Court of Appeals[18] stated thus:

x x x. The suretys obligation is not an original and direct one for the performance of his own act, but
merely accessory or collateral to the obligation contracted by the principal. Nevertheless, although the
contract of a surety is in essence secondary only to a valid principal obligation, his liability to the creditor
or promisee of the principal is said to be direct, primary and absolute; in other words, he is directly and
equally bound with the principal. x x x.[19]

Under the law and jurisprudence, respondent may sue, separately or together, the principal debtor and the petitioner
herein, in view of the solidary nature of their liability. The death of the principal debtor will not work to convert, decrease or
nullify the substantive right of the solidary creditor. Evidently, despite the death of the principal debtor, respondent may
still sue petitioner alone, in accordance with the solidary nature of the latters liability under the performance bond.

WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals AFFIRMED. Costs against
petitioner.

SO ORDERED.
 VI. PLEDGE, MORTGAGE AND
ANTICHRESIS

COMMON PROVISION (ARTS. 2085-2092)

G.R. No. 77465 May 21, 1988

SPOUSES UY TONG & KHO PO GIOK, petitioners,

vs.
HONORABLE COURT OF APPEALS, HONORABLE BIENVENIDO C. EJERCITO, Judge of the Court of First
Instance of Manila, Branch XXXVII and BAYANIHAN AUTOMOTIVE CORPORATION, respondents.

In the present petition, petitioners assail the validity of a deed of assignment over an apartment unit and the leasehold
rights over the land on which the building housing the said apartment stands for allegedly being in the nature of a pactum
commissorium.

The facts are not disputed.

Petitioners Uy Tong (also known as Henry Uy) and Kho Po Giok (SPOUSES) used to be the owners of Apartment No.
307 of the Ligaya Building, together with the leasehold right for ninety- nine (99) years over the land on which the building
stands. The land is registered in the name of Ligaya Investments, Inc. as evidenced by Transfer Certificate of Title No.
79420 of the Registry of Deeds of the City of Manila. It appears that Ligaya Investments, Inc. owned the building which
houses the apartment units but sold Apartment No. 307 and leased a portion of the land in which the building stands to
the SPOUSES.

In February, 1969, the SPOUSES purchased from private respondent Bayanihan Automotive, Inc. (BAYANIHAN) seven
(7) units of motor vehicles for a total amount of P47,700.00 payable in three (3) installments. The transaction was
evidenced by a written "Agreement" wherein the terms of payment had been specified as follows:

That immediately upon signing of this Agreement, the VENDEE shall pay unto the VENDOR the amount
of Seven Thousand Seven Hundred (P7,000.00) Pesos, Philippine Currency, and the amount of Fifteen
Thousand (P15,000.00) Pesos shah be paid on or before March 30, 1969 and the balance of Twenty Five
Thousand (P25,000.00) Pesos shall be paid on or before April 30, 1969, the said amount again to be
secured by another postdated check with maturity on April 30, 1969 to be drawn by the VENDEE;

That it is fully understood that should the two (2) aforementioned checks be not honored on their
respective maturity dates, herein VENDOR will give VENDEE another sixty (60) days from maturity dates,
within which to pay or redeem the value of the said checks;

That if for any reason the VENDEE should fail to pay her aforementioned obligation to the VENDOR,the
latter shall become automatically the owner of the former's apartment which is located at No. 307, Ligaya
Building, Alvarado St., Binondo, Manila, with the only obligation on its part to pay unto the VENDEE the
amount of Three Thousand Five Hundred Thirty Five (P3,535.00) Pesos, Philippine Currency; and in such
event the VENDEE shall execute the corresponding Deed of absolute Sale in favor of the VENDOR and
or the Assignment of Leasehold Rights. [emphasis supplied]. (Quoted in Decision in Civil Case No.
80420, Exhibit "A" of Civil Case No. 1315321].

After making a downpayment of P7,700.00, the SPOUSES failed to pay the balance of P40,000.00. Due to these unpaid
balances, BAYANIHAN filed an action for specific performance against the SPOUSES docketed as Civil Case No. 80420
with the Court of First Instance of Manila.

On October 28, 1978, after hearing, judgment was rendered in favor of BAYANIHAN in a decision the dispositive portion
of which reads:

WHEREFORE, judgment is hereby rendered, ordering the defendants, jointly and severally, to pay the
plaintiffs, the sum of P40,000.00, with interest at the legal rate from July 1, 1970 until full payment. In the
event of their failure to do so within thirty (30) days from notice of this judgment, they are hereby ordered
to execute the corresponding deed of absolute sale in favor of the plaintiff and/or the assignment of
leasehold rights over the defendant's apartment located at 307 Ligaya Building, Alvarado Street, Binondo,
Manila, upon the payment by the plaintiff to the defendants of the sum of P3,535.00. [emphasis supplied].

Pursuant to said judgment, an order for execution pending appeal was issued by the trial court and a deed of assignment
dated May 27, 1972, was executed by the SPOUSES [Exhibit "B", CFI Records, p. 127] over Apartment No. 307 of the
Ligaya Building together with the leasehold right over the land on which the building stands. The SPOUSES
acknowledged receipt of the sum of P3,000.00 more or less, paid by BAYANIHAN pursuant to the said judgment.
Notwithstanding the execution of the deed of assignment the SPOUSES remained in possession of the premises.
Subsequently, they were allowed to remain in the premises as lessees for a stipulated monthly rental until November
30,1972.

Despite the expiration of the said period, the SPOUSES failed to surrender possession of the premises in favor of
BAYANIHAN. This prompted BAYANIHAN to file an ejectment case against them in the City Court of Manila docketed as
Civil Case No. 240019. This action was however dismissed on the ground that BAYANIHAN was not the real party in
interest, not being the owner of the building.

On February 7, 1979, after demands to vacate the subject apartment made by BAYANIHAN's counsel was again ignored
by the SPOUSES, an action for recovery of possession with damages was filed with the Court of First Instance of Manila,
docketed as Civil Case No. 121532 against the SPOUSES and impleading Ligaya Investments, Inc. as party defendant.
On March 17, 1981, decision in said case was rendered in favor of BAYANIHAN ordering the following:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants spouses
UY TONG and KHO GIOK and defendant Ligaya Investment, Inc., dismissing defendants' counterclaim
and ordering:

1. The defendants spouses UY TONG and KHO PO GIOK and any andlor persons claiming right under
them, to vacate, surrender and deliver possession of Apartment 307, Ligaya Building, located at 64
Alvarado Street, Binondo, Manila to the plaintiff;

2. Ordering defendant Ligaya Investment, Inc. to recognize the right of ownership and possession of the
plaintiff over Apartment No. 307, Ligaya Building;

3. Ordering Ligaya Investment, Inc. to acknowledge plaintiff as assignee-lessee in liue of defendants

spouses Uy Tong and Kho Po Giok over the lot on which the building was constructed;

4. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay to the plaintiff the sum of P200.00
commencing from June, 1971 to November 30, 1972, or a total amount of P3,400.00 as rental for the
apartment, and the sum of P200.00 from December 1, 1972 until the premises are finally vacated and
surrendered to the plaintiff, as reasonable compensation for the use of the apartment; and

5. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay P3,000.00 as and for attorney's
fees to the plaintiff, and the costs of this suit.

Not satisfied with this decision, the SPOUSES appealed to the Court of Appeals. On October 2,1984, the respondent
Court of Appeals affirmed in toto the decision appealed from [Petition, Annex "A", Rollo, pp. 15-20]. A motion for
reconsideration of the said decision was denied by the respondent Court in a resolution dated February 11, 1987 [Petition,
Annex "C", Rollo, pp. 31- 34].

Petitioners-SPOUSES in seeking a reversal of the decision of the Court of Appeals rely on the following reasons:

I. The deed of assignment is null and void because it is in the nature of a pactum commissorium and/or
was borne out of the same.

II. The genuineness and due Prosecution of the deed of assignment was not deemed admitted by
petitioner.

III. The deed of assignment is unenforceable because the condition for its execution was not complied
with.

IV. The refusal of petitioners to vacate and surrender the premises in question to private respondent is
justified and warranted by the circumstances obtaining in the instant case.

I. In support of the first argument, petitioners bring to the fore the contract entered into by the parties whereby petitioner
Kho Po Giok agreed that the apartment in question will automatically become the property of private respondent
BAYANIHAN upon her mere failure to pay her obligation. This agreement, according to the petitioners is in the nature of
a pactum commissorium which is null and void, hence, the deed of assignment which was borne out of the same
agreement suffers the same fate.

The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of
the same. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge
or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation;
and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged
in the event of non-payment of the principal obligation within the stipulated period.

A perusal of the terms of the questioned agreement evinces no basis for the application of the pactum
commissorium provision. First, there is no indication of 'any contract of mortgage entered into by the parties. It is a fact
that the parties agreed on the sale and purchase of trucks.

Second, there is no case of automatic appropriation of the property by BAYANIHAN. When the SPOUSES defaulted in
their payments of the second and third installments of the trucks they purchased, BAYANIHAN filed an action in court for
specific performance. The trial court rendered favorable judgment for BAYANIHAN and ordered the SPOUSES to pay the
balance of their obligation and in case of failure to do so, to execute a deed of assignment over the property involved in
this case. The SPOUSES elected to execute the deed of assignment pursuant to said judgment.

Clearly, there was no automatic vesting of title on BAYANIHAN because it took the intervention of the trial court to exact
fulfillment of the obligation, which, by its very nature is ". . anathema to the concept of pacto commissorio" [Northern
Motors, Inc. v. Herrera, G.R. No. L-32674, February 22, 1973, 49 SCRA 392]. And even granting that the original
agreement between the parties had the badges of pactum commissorium, the deed of assignment does not suffer the
same fate as this was executed pursuant to a valid judgment in Civil Case No. 80420 as can be gleaned from its very
terms and conditions:

DEED OF ASSIGNMENT

KNOW ALL MEN BY THESE PRESENTS:

This deed made and entered into by Uy Tiong also known as Henry Uy and Kho Po Giok, both of legal
age, husband and wife, respectively, and presently residing at 307 Ligaya Bldg., Alvarado St., Binondo,
Manila, and hereinafter to be known and called as the ASSIGNORS, in favor of Bayanihan Automotive
Corporation, an entity duly organized and existing under the laws of the Philippines, with principal
business address at 1690 Otis St., Paco, Manila and hereinafter to be known and called the ASSIGNEE;

-witnesseth-

WHEREAS, the ASSIGNEE has filed a civil complaint for "Specific Performance with Damages" against
the ASSIGNORS in the Court of First Instance of Manila, Branch V, said case having been docketed as
Civil Case No. 80420;

WHEREAS, the ASSIGNEE was able to obtain a judgment against the ASSIGNOR wherein the latter was
ordered by the court as follows, to wit:

WHEREFORE, judgment is hereby rendered ordering the defendants, jointly and

severally to pay the plaintiff the sum of P40,000.00, with interest at the legal rate from
July 31, 1970 until full payment. In the event of their failure to do so within thirty (30) days
from notice of this judgment, they are hereby ordered to execute the corresponding deed
of absolute sale in favor of the plaintiff and/or the assignment of leasehold, rights over the
defendants' apartment located at No. 307 Ligaya Building, Alvarado Street, Binondo,
Manila, upon the payment by the plaintiff to the defendants the sum of P 3,535.00. The
defendants shall pay the costs.
 WHEREAS, the court, upon petition by herein ASSIGNEE and its deposit of sufficient bond, has ordered
for the immediate execution of the said decision even pending appeal of the aforesaid decision;

WHEREAS, the ASSIGNORS have elected to just execute the necessary deed of sale and/or assignment
of leasehold rights over the apartment mentioned in the decision in favor of the herein ASSIGNEE;

NOW, THEREFORE, for and in consideration of the foregoing premises, the ASSIGNORS have
transferred assigned and ceded, and by these presents do hereby transfer, assign and cede all their
rights and interests over that place known as Apartment No. 307 at the Ligaya Building which is located at
No. 864 Alvarado St., Binondo, Manila, together with the corresponding leasehold rights over the lot on
which the said building is constructed, in favor of the hererein ASSIGNEE, its heirs or assigns.

IN WITNESS WHEREOF, We have hereunto signed our names this 27th day of May, 1971 at Manila,
Philippines.

UY TONG/HENRY UY KHO PO GIOK

Assignor Assignor

ACR-2151166 Manila 1/13/51 ACR-C-001620

Manila March 3, 1965

This being the case, there is no reason to impugn the validity of the said deed of assignment.

II. The SPOUSES take exception to the ruling of the Court of Appeals that their failure to deny the genuineness and due
execution of the deed of assignment was deemed an admission thereof. The basis for this exception is the SPOUSES'
insistence that the deed of assignment having been borne out of pactum commissorio is not subject to ratification and its
invalidity cannot be waived.

There is no compelling reason to reverse the abovementioned ruling of the appellate court. Considering this Court's above
conclusion that the deed of assignment is not invalid, it follows that when an action founded on this written instrument is
filed, the rule on contesting its genuineness and due execution must be followed.

That facts reveal that the action in Civil Case No. 121532 was founded on the deed of assignment. However, the
SPOUSES, in their answer to the complaint, failed to deny under oath and specifically the genuineness and due execution
of the said deed. Perforce, under Section 8, Rule 8 of the Revised Rules of Court, the SPOUSES are deemed to have
admitted the deed's genuineness and due execution. Besides, they themselves admit that ". . . the contract was duly
executed and that the same is genuine" [Sur-Rejoinder, Rollo, p. 67]. They cannot now claim otherwise.

III. The SPOUSES also question the enforceability of the deed of assignment. They contend that the deed is
unenforceable because the condition for its execution was not complied with. What petitioners SPOUSES refer to is that
portion of the disposition in Civil Case No. 80420 requiring BAYANIHAN to pay the former the sum of P 3,535.00. To
buttress their claim of non- compliance, they invoke the following receipt issued by the SPOUSES to show that
BAYANIHAN was P535.00 short of the complete payment.

RECEIPT

This is to acknowledge the fact that the amount of THREE THOUSAND (P3,000.00) PESOS, more or
less as indicated in the judgment of the Hon. Conrado Vasquez, Presiding Judge of the Court of First
Instance of Manila, Branch V, in Civil Case entitled "Bayanihan Automotive Corp. v. Pho (sic) Po Giok,
etc." and docketed as Civil Case No. 80420 has been applied for the payment of the previous rentals of
the property which is the subject matter of the aforesaid judgment. [emphasis supplied.]

(Sgd.) Pho (sic) Po Glok

(Sgd.) Henry Uy
 August 21, 1971

The issue presented involves a question of fact which is not within this Court's competence to look into. Suffice it to say
that this Court is of the view that findings and conclusion of the trial court and the Court of Appeals on the question of
whether there was compliance by BAYANIHAN of its obligation under the decision in Civil Case No. 80420 to pay the
SPOUSES the sum of P3,535.00 is borne by the evidence on record. The Court finds merit in the following findings of the
trial court:

... Defendants 'contention that the P 3,535.00 required in the decision in Civil Case No. 80420 as a
condition for the execution of the deed of assignment was not paid by the plaintiff to the defendants is
belied by the fact that the defendants acknowledged payment of P3,000.00, more or less, in a receipt
dated August 21, 1971. This amount was expressly mentioned in this receipt as indicated in the judgment
of the Honorable Conrado Vasquez, presiding Judge of the CFI of Manila, Branch V, in Civil Case entitled
Bayanihan Automotive Corp. versus Kho Po Giok, docketed as Civil Case No. 80420, and also expressly
mentioned as having been applied for the payment of the previous rentals of the property subject matter
of the said judgment. Nothing could be more explicit. The contention that there is still a difference of
P535.00 is had to believe because the spouses Kho Po Giok and Uy Tong executed the deed of
assignment without first demanding from the plaintiff the payment of P535.00. Indeed, as contended by
the plaintiff, for it to refuse to pay this small amount and thus gave defendants a reason not to execute the
Deed of Assignment. is hard to believe Defendants further confirm by the joint manifestation of plaintiff
and defendants, duly assisted by counsel, Puerto and Associates, dated September, 1971, Exhibit "O",
wherein it was stated that plaintiff has fully complied with its obligation to the defendants caused upon it
(sic) by the pronouncement of the judgment as a condition for the execution of their (sic) leasehold rights
of defendants, as evidenced by the receipt duly executed by the defendants, and which was already
submitted in open court for the consideration of the sum of P3,535.00. [Emphasis supplied]. [Decision,
Civil Case No. 121532, pp. 3-4].

This Court agrees with private respondent BAYANIHAN's reasoning that inasmuch as the decision in Civil Case No.
80420 imposed upon the parties correlative obligations which were simultaneously demandable so much so that if private
respondent refused to comply with its obligation under the judgment to pay the sum of P 3,535.00 then it could not compel
petitioners to comply with their own obligation to execute the deed of assignment over the subject premises. The fact that
petitioners executed the deed of assignment with the assistance of their counsel leads to no other conclusion that private
respondent itself had paid the full amount.

IV. Petitioners attempt to justify their continued refusal to vacate the premises subject of this litigation on the following
grounds:

(a) The deed of assingnment is in the nature of a pactum commissorium and, therefore, null and void.

(b) There was no full compliance by private respondent of the condition imposed in the deed of
assignment.

(c) Proof that petitioners have been allowed to stay in the premises, is the very admission of private
respondent who declared that petitioners were allowed to stay in the premises until November 20, 1972.
This admission is very significant. Private respondent merely stated that there was a term-until November
30, 1972-in order to give a semblance of validity to its attempt to dispossess herein petitioners of the
subject premises. In short, this is one way of rendering seemingly illegal petitioners 'possession of the
premises after November 30, 1972.

The first two classifications are mere reiterations of the arguments presented by the petitioners and which had been
passed upon already in this decision. As regards the third ground, it is enough to state that the deed of assignment has
vested in the private respondent the rights and interests of the SPOUSES over the apartment unit in question including
the leasehold rights over the land on which the building stands. BAYANIHAN is therefore entitled to the possession
thereof. These are the clear terms of the deed of assignment which cannot be superseded by bare allegations of fact that
find no support in the record.

WHEREFORE, the petition is hereby DENIED for lack of merit and the decision of the Court of Appeals is AFFIRMED in
toto. SO ORDERED.
[G.R. No. 125055. October 30, 1998]
A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS and
SPOUSES ROMULO S.A. JAVILLONAR and ERLINDA P. JAVILLONAR, respondents.
This is a petition for review on certiorari of the decision rendered on February 29, 1996 by the Court of
Appeals[1] reversing, in toto, the decision of the Regional Trial Court of Pasig City in Civil Case No. 62290, as well as the
appellate courts resolution of May 7, 1996 denying reconsideration.
Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to private respondents,
the spouses Romulo and Erlinda Javillonar, in consideration of which the latter executed the following documents: (a) a
promissory note, dated November 27, 1991, stating an interest charge of 4% per month for six months; (b) a deed of
mortgage over realty covered by TCT No. 58748, together with the improvements thereon; and (c) an undated deed of
sale of the mortgaged property in favor of the mortgagee, petitioner A. Francisco Realty. [2]
The interest on the said loan was to be paid in four installments: half of the total amount agreed upon (P900,000.00)
to be paid in advance through a deduction from the proceeds of the loan, while the balance to be paid monthly by means
of checks post-dated March 27, April 27, and May 27, 1992. The promissory note expressly provided that upon failure of
the MORTGAGOR [private respondents] to pay the interest without prior arrangement with the MORTGAGEE [petitioner],
[3]
full possession of the property will be transferred and the deed of sale will be registered. For this purpose, the owners
duplicate of TCT No. 58748 was delivered to petitioner A. Francisco Realty.
Petitioner claims that private respondents failed to pay the interest and, as a consequence, it registered the sale of
the land in its favor on February 21, 1992. As a result, TCT No. 58748 was cancelled and in lieu thereof TCT No. PT-
85569 was issued in the name of petitioner A. Francisco Realty. [4]
Private respondents subsequently obtained an additional loan of P2.5 Million from petitioner on March 13, 1992 for
which they signed a promissory note which reads:

PROMISSORY NOTE

For value received, I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, the additional
sum of Two Million Five Hundred Thousand Pesos (P2,500,000.00) on or before April 27, 1992, with interest at the rate of
four percent (4%) a month until fully paid and if after the said date this note and/or the other promissory note of P7.5
Million remains unpaid and/or unsettled, without any need for prior demand or notification, I promise to vacate voluntarily
and willfully and/or allow A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION to appropriate and occupy for
their exclusive use the real property located at 56 Dragonfly, Valle Verde VI, Pasig, Metro Manila. [5]

Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly interest from May 1992,
plus surcharges. As respondent spouses refused to vacate, petitioner filed the present action for possession before the
Regional Trial Court in Pasig City.[6]
In their answer, respondents admitted liability on the loan but alleged that it was not their intent to sell the realty as
the undated deed of sale was executed by them merely as an additional security for the payment of their loan.
Furthermore, they claimed that they were not notified of the registration of the sale in favor of petitioner A. Francisco
Realty and that there was no interest then unpaid as they had in fact been paying interest even subsequent to the
registration of the sale. As an alternative defense, respondents contended that the complaint was actually for ejectment
and, therefore, the Regional Trial Court had no jurisdiction to try the case. As counterclaim, respondents sought the
cancellation of TCT No. PT-85569 as secured by petitioner and the issuance of a new title evidencing their ownership of
[7]
the property.
On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive portion of which reads as
follows:

WHEREFORE, prescinding from the foregoing considerations, judgment is hereby rendered declaring as legal and valid,
the right of ownership of A. Francisco Realty And Development Corporation, over the property subject of this case and
now registered in its name as owner thereof, under TCT No. 85569 of the Register of Deeds of Rizal, situated at No. 56
Dragonfly Street, Valle Verde VI, Pasig, Metro Manila.

Consequently, defendants are hereby ordered to cease and desist from further committing acts of dispossession or from
withholding possession from plaintiff, of the said property as herein described and specified.
Claim for damages in all its forms, however, including attorneys fees, are hereby denied, no competent proofs having
been adduced on record, in support thereof.[8]

Respondent spouses appealed to the Court of Appeals which reversed the decision of the trial court and dismissed
the complaint against them. The appellate court ruled that the Regional Trial Court had no jurisdiction over the case
because it was actually an action for unlawful detainer which is exclusively cognizable by municipal trial
courts. Furthermore, it ruled that, even presuming jurisdiction of the trial court, the deed of sale was void for being in fact
a pactum commissorium which is prohibited by Art. 2088 of the Civil Code.
Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals denied the motion in its
resolution, dated May 7, 1996. Hence, this petition for review on certiorari raising the following issues:

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL TRIAL COURT HAD NO
JURISDICTION OVER THE COMPLAINT FILED BY THE PETITIONER.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACTUAL DOCUMENTS
SUBJECT OF THE INSTANT CASE ARE CONSTITUTIVE OF PACTUM COMMISSORIUM AS DEFINED UNDER
ARTICLE 2088 OF THE CIVIL CODE OF THE PHILIPPINES.

On the first issue, the appellate court stated:

Ostensibly, the cause of action in the complaint indicates a case for unlawful detainer, as contra-distinguished from accion
publiciana. As contemplated by Rule 70 of the Rules of Court, an action for unlawful detainer which falls under the
exclusive jurisdiction of the Metropolitan or Municipal Trial Courts, is defined as withholding from by a person from another
for not more than one year, the possession of the land or building to which the latter is entitled after the expiration or
termination of the supposed rights to hold possession by virtue of a contract, express or implied. (Tenorio vs. Gamboa, 81
Phil. 54; Dikit vs. Dicaciano, 89 Phil. 44). If no action is initiated for forcible entry or unlawful detainer within the expiration
of the 1 year period, the case may still be filed under the plenary action to recover possession by accion publiciana before
the Court of First Instance (now the Regional Trial Court) (Medina vs. Valdellon, 63 SCRA 278). In plain language, the
case at bar is a legitimate ejectment case filed within the 1 year period from the jurisdictional demand to vacate. Thus, the
Regional Trial Court has no jurisdiction over the case. Accordingly, under Section 33 of B.P. Blg. 129 Municipal Trial
Courts are vested with the exclusive original jurisdiction over forcible entry and unlawful detainer case. (Sen Po Ek
[9]
Marketing Corp. vs. CA, 212 SCRA 154 [1990])

We think the appellate court is in error. What really distinguishes an action for unlawful detainer from a possessory
action (accion publiciana) and from a reivindicatory action (accion reivindicatoria) is that the first is limited to the question
of possession de facto.

An unlawful detainer suit (accion interdictal) together with forcible entry are the two forms of an ejectment suit that may be
filed to recover possession of real property. Aside from the summary action of ejectment, accion publiciana or the plenary
action to recover the right of possession and accion reivindicatoria or the action to recover ownership which includes
recovery of possession, make up the three kinds of actions to judicially recover possession.

Illegal detainer consists in withholding by a person from another of the possession of a land or building to which the latter
is entitled after the expiration or termination of the formers right to hold possession by virtue of a contract, express or
implied. An ejectment suit is brought before the proper inferior court to recover physical possession only or possession de
facto and not possession de jure, where dispossession has lasted for not more than one year. Forcible entry and unlawful
detainer are quieting processes and the one-year time bar to the suit is in pursuance of the summary nature of the action.
The use of summary procedure in ejectment cases is intended to provide an expeditious means of protecting actual
possession or right to possession of the property. They are not processes to determine the actual title to an estate. If at
all, inferior courts are empowered to rule on the question of ownership raised by the defendant in such suits, only to
[10]
resolve the issue of possession. Its determination on the ownership issue is, however, not conclusive.

The allegations in both the original and the amended complaints of petitioner before the trial court clearly raise issues
involving more than the question of possession, to wit: (a) the validity of the transfer of ownership to petitioner; (b) the
alleged new liability of private respondents for P400,000.00 a month from the time petitioner made its demand on them to
vacate; and (c) the alleged continuing liability of private respondents under both loans to pay interest and surcharges on
such. As petitioner A. Francisco Realty alleged in its amended complaint:
5. To secure the payment of the sum of P7.5 Million together with the monthly interest, the defendant spouses
agreed to execute a Deed of Mortgage over the property with the express condition that if and when they fail to
 pay monthly interest or any infringement thereof they agreed to convert the mortgage into a Deed of Absolute
Sale in favor of the plaintiff by executing Deed of Sale thereto, copy of which is hereto attached and
incorporated herein as Annex A;
6. That in order to authorize the Register of Deeds into registering the Absolute Sale and transfer to the plaintiff,
defendant delivered unto the plaintiff the said Deed of Sale together with the original owners copy of Transfer
Certificate of Title No. 58748 of the Registry of Rizal, copy of which is hereto attached and made an integral part
herein as Annex B;
7. That defendant spouses later secured from the plaintiff an additional loan of P2.5 Million with the same
condition as aforementioned with 4% monthly interest;
8. That defendants spouses failed to pay the stipulated monthly interest and as per agreement of the parties,
plaintiff recorded and registered the Absolute Deed of Sale in its favor on and was issued Transfer Certificate
of Title No. PT-85569, copy of which is hereto attached and incorporated herein as Annex C;
9. That upon registration and transfer of the Transfer Certificate of Title in the name of the plaintiff, copy of which
is hereto attached and incorporated herein as Annex C, plaintiff demanded the surrender of the possession of
the above-described parcel of land together with the improvements thereon, but defendants failed and refused
to surrender the same to the plaintiff without justifiable reasons thereto; Neither did the defendants pay the
interest of 4% a month from May, 1992 plus surcharges up to the present;
10. That it was the understanding of the parties that if and when the defendants shall fail to pay the interest due
and that the Deed of Sale be registered in favor of plaintiff, the defendants shall pay a monthly rental
of P400,000.00 a month until they vacate the premises, and that if they still fail to pay as they are still failing to
pay the amount of P400,000.00 a month as rentals and/or interest, the plaintiff shall take physical possession of
the said property;[11]
It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues which involved more than a
simple claim for the immediate possession of the subject property. Such issues range across the full scope of rights of the
respective parties under their contractual arrangements. As held in an analogous case:

The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace of Hagonoy, Bulacan extended far
beyond the issues generally involved in unlawful detainer suits. The litigants therein did not raise merely the question of
who among them was entitled to the possession of the fishpond of Federico Suntay. For all judicial purposes, they
likewise prayed of the court to rule on their respective rights under the various contractual documents their respective
deeds of lease, the deed of assignment and the promissory note upon which they predicate their claims to the possession
of the said fishpond. In other words, they gave the court no alternative but to rule on the validity or nullity of the above
documents. Clearly, the case was converted into the determination of the nature of the proceedings from a mere detainer
suit to one that is incapable of pecuniary estimation and thus beyond the legitimate authority of the Justice of the Peace
Court to rule on.[12]

Nor can it be said that the compulsory counterclaim filed by respondent spouses challenging the title of petitioner A.
Francisco Realty was merely a collateral attack which would bar a ruling here on the validity of the said title.

A counterclaim is considered a complaint, only this time, it is the original defendant who becomes the plaintiff (Valisno v.
Plan, 143 SCRA 502 (1986). It stands on the same footing and is to be tested by the same rules as if it were an
independent action. Hence, the same rules on jurisdiction in an independent action apply to a counterclaim (Vivar v. Vivar,
8 SCRA 847 (1963); Calo v. Ajax International, Inc. v. 22 SCRA 996 (1968); Javier v. Intermediate Appellate Court, 171
[13]
SCRA 605 (1989); Quiason, Philippine Courts and Their Jurisdictions, 1993 ed., p. 203).

On the second issue, the Court of Appeals held that, even on the assumption that the trial court has jurisdiction over
the instant case, petitioners action could not succeed because the deed of sale on which it was based was void, being in
the nature of a pactum commissorium prohibited by Art. 2088 of the Civil Code which provides:

ART. 2088. The creditor cannot appropriate the things given by way to pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.

With respect to this question, the ruling of the appellate court should be affirmed. Petitioner denies, however, that the
promissory notes contain a pactum commissorium. It contends that

What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision in the deed of mortgage providing for
the automatic conveyance of the mortgaged property in case of the failure of the debtor to pay the loan (Tan v. West
Coast Life Assurance Co., 54 Phil. 361). A pactum commissorium is a forfeiture clause in a deed of
mortgage (Hechanova v. Adil, 144 SCRA 450; Montevergen v. Court of Appeals, 112 SCRA 641; Report of the Code
Commission, 156).

Thus, before Article 2088 can find application herein, the subject deed of mortgage must be scrutinized to determine if it
contains such a provision giving the creditor the right to appropriate the things given by way of mortgage without following
the procedure prescribed by law for the foreclosure of the mortgage (Ranjo v. Salmon, 15 Phil. 436). IN SHORT, THE
PROSCRIBED STIPULATION SHOULD BE FOUND IN THE MORTGAGE DEED ITSELF.[14]

The contention is patently without merit. To sustain the theory of petitioner would be to allow a subversion of the
prohibition in Art. 2088.
[15]
In Nakpil v. Intermediate Appellate Court, which involved the violation of a constructive trust, no deed of mortgage
was expressly executed between the parties in that case. Nevertheless, this Court ruled that an agreement whereby
property held in trust was ceded to the trustee upon failure of the beneficiary to pay his debt to the former as secured by
the said property was void for being a pactum commissorium. It was there held:

The arrangement entered into between the parties, whereby Pulong Maulap was to be considered sold to him
(respondent) x x x in case petitioner fails to reimburse Valdes, must then be construed as tantamount to a pactum
commissorium which is expressly prohibited by Art. 2088 of the Civil Code. For, there was to be automatic appropriation
of the property by Valdez in the event of failure of petitioner to pay the value of the advances. Thus, contrary to
respondents manifestations, all the elements of a pactum commissorium were present: there was a creditor-debtor
relationship between the parties; the property was used as security for the loan; and, there was automatic appropriation
by respondent of Pulong Maulap in case of default of petitioner.[16]

Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting to be pacto de
retro sales but found actually to be equitable mortgages.

It has been consistently held that the presence of even one of the circumstances enumerated in Art. 1602 of the New Civil
Code is sufficient to declare a contract of sale with right to repurchase an equitable mortgage. This is so because pacto
de retro sales with the stringent and onerous effects that accompany them are not favored. In case of doubt, a contract
purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.

Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that complete and absolute title shall
be vested on the vendee should the vendors fail to redeem the property on the specified date. Such stipulation that the
ownership of the property would automatically pass to the vendee in case no redemption was effected within the
stipulated period is void for being a pactum commissorium which enables the mortgagee to acquire ownership of the
mortgaged property without need of foreclosure. Its insertion in the contract is an avowal of the intention to mortgage
rather that to sell the property.[17]

Indeed, in Reyes v. Sierra[18] this Court categorically ruled that a mortgagees mere act of registering the mortgaged
property in his own name upon the mortgagors failure to redeem the property amounted to the exercise of the privilege of
a mortgagee in a pactum commissorium.

Obviously, from the nature of the transaction, applicants predecessor-in-interest is a mere mortgagee, and ownership of
the thing mortgaged is retained by Basilia Beltran, the mortgagor. The mortgagee, however, may recover the loan,
although the mortgage document evidencing the loan was nonregistrable being a purely private instrument. Failure of
mortgagor to redeem the property does not automatically vest ownership of the property to the mortgagee, which would
grant the latter the right to appropriate the thing mortgaged or dispose of it. This violates the provision of Article 2088 of
the New Civil Code, which reads:

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose by them. Any stipulation to the
contrary is null and void.

The act of applicant in registering the property in his own name upon mortgagors failure to redeem the property would
amount to a pactum commissorium which is against good morals and public policy.[19]

Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of respondent spouses
to pay interest, ownership of the property would be automatically transferred to petitioner A. Francisco Realty and the
deed of sale in its favor would be registered, are in substance a pactum commissorium. They embody the two elements
of pactum commissorium as laid down in Uy Tong v. Court of Appeals,[20] to wit:

The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil Code:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgagee, or dispose of the same. Any
stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge
or mortgage wherein a property is pledged or mortgaged by way of security for the payment of the principal obligation;
and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged or mortgaged
in the event of non-payment of the principal obligation within the stipulated period.[21]

The subject transaction being void, the registration of the deed of sale, by virtue of which petitioner A. Francisco
Realty was able to obtain TCT No. PT-85569 covering the subject lot, must also be declared void, as prayed for by
respondents in their counterclaim.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it dismissed petitioners complaint
against respondent spouses on the ground that the stipulations in the promissory notes are void for being a pactum
commissorium, but REVERSED insofar as it ruled that the trial court had no jurisdiction over this case. The Register of
Deeds of Pasig City is hereby ORDERED to CANCEL TCT No. PT-85569 issued to petitioner and ISSUE a new one in
the name of respondent spouses.
SO ORDERED.
G.R. No. L-28658 October 18, 1979

VICENTE C. REYES, applicant-appellee,

vs.
FRANCISCO SIERRA, EMILIO SIERRA, ALEJANDRA SIERRA, FELIMON SIERRA, AURELIO SIERRA,
CONSTANCIO SIERRA, CIRILO SIERRA and ANTONIA SANTOS, oppositors-appellants.

Appeal from the decision dated December 29, 1966 of the Court of First Instance of Rizal Branch 1, Pasig, which declared
applicant Vicente Reyes the true and rightful owner of the land covered by Plan Psu-189753 and ordered the registration
of his title thereto.

On January 3, 1961, Vicente Reyes filed an application for registration of his title to a parcel of land situated in Antipolo,
Rizal and covered by Plan Psu-189753 of the Bureau of Lands. In his application, he declared that he acquired the land
by inheritance from his father who died sometime in 1944. Applicant is one of the heirs of the deceased Vicente Reyes Sr.
but the other heirs executed a deed of quit claim in favor of the applicant.

The notice of initial hearing was published in the Official Gazette, and a copy thereof was posted in a conspicuous place
in the land in question and in the municipal building of Antipolo, Rizal. An opposition was filed by the Director of Lands,
Francisco Sierra and Emilio Sierra. An Order of General Default was issued on June 28, 1962. A motion to set aside an
interlocutory default order was filed by Alejandra, Felimon, Aurelio, Apolonio, Constancio, Cirilo, all surnamed Sierra and
Antonia Santos, thru counsel, and the trial court issued an Order on February 4, 1966 amending the general order of
default so as to include the aforementioned movants as oppositors.

The case was set for hearing, and after trial the court rendered a decision, the dispositive portion of which reads as
follows:

IN VIEW OF THE ABOVE CONSIDERATIONS this Court declares Vicente Reyes the true and rightful
owner of the land covered by Plan, Psu-189753 and orders the registration of his title thereto, provided
that the title to be issued shall be subject to a public easement of right of-way over a 2.00 meter-wide strip
of the land along Lucay Street for the latter's widening and improvement.

As soon as this decision is final let, the corresponding degree be issued in favor of VICENTE REYES,
widower, Pilipino, of legal age and resident of 1851 P. Guevarra Street, Santa Cruz, Manila. (P. 25,
Record on Appeal).

Oppositors appealed from the aforesaid decision, with the following assignment of errors:

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT ARTICLES 1134 AND 1137 OF
THE NEW CIVIL CODE ARE APPLICABLE TO THIS INSTANT CASE ALTHOUGH THERE WAS NO
FORECLOSURE OR SALE OF THE PROPERTY TO THE HIGHEST BIDDER.

II

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT APPLICANT-APPELLEE AND HIS
PREDECESSOR-IN-INTEREST HAD BEEN IN CONSTRUCTIVE POSSESSION OF THE LAND FROM
APRIL 19, 1926 UP TO THE PRESENT AS SHOWING BY THE FACT THAT THEY HAD PAID THE
REALTY TAXES.

III

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT BECAUSE OPPOSITORS-
APPELLANTS AND THEIR PREDECESSORS-IN-INTEREST HAD NOT TAKEN ANY ACTIVE
INTEREST TO PAY REALTY TAXES SINCE 1926 AND IT WAS APPLICANT- APPELLEE AND HIS
PREDECESSOR-IN-INTEREST THAT PAID THE REALTY 'TAXES FROM THE SAME PERIOD, THIS
CONSTITUTES STRONG CORROBORATING EVIDENCE OF APPLICANT'S ADVERSE POSSESSION.

IV
 THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT DOCUMENT EXH. "D" EXECUTED
BY BASILIA BELTRAN IN 1926 WAS ALREADY A CONVEYANCE OF THE LAND I N QUESTION TO
VICENTE REYES AND THE FAILURE OF BASILIA BELTRAN AND HER CHILDREN TO REDEEM THE
SAME, COULD BE CONSIDERED AS IF THE LAND HAD ALREADY BEEN SOLD TO HIM. (p. 2 1,
Rollo.)

The land applied for was originally owned by Basilia Beltran's parents, and upon their death in 1894, Basilia inherited the
property. On April 19, 1926, Basilia Beltran, a widow, borrowed from applicant's father, Vicente Reyes, Sr. the amount of
P100.00 and secured the loan with the piece of land in question, AS evidenced by exhibit "D" quoted hereunder:

SA KAALAMAN NANG LAHAT NA BUMASA AT

NAKAKITA NITONG KASULATAN:

Kaming mag-kakapatid may sapat na gulang na nakalagda Sa kasulatan ito, bilang katibayan nang pag
papahintulot sa aming Ina na si Bacilia Beltran na ipananagutan kay G. Vicente Reyes sa inutang ha
halagang isang daan piso (P100.00) na walang anopamang pakinabang; ang isang lagay na lupa sa
kallehon Sukay, Antipolo, Rizal, naliligiran nang mga lupang may titulo Torrents, expendientes Nos. 770,
1831, lote 1, 645 at 1839 lote 2, may kabu-uan humigit kumulang sa apat na raan metro; ito'y aring
naiwan ng ama naming namatay na si Melecio Sierra.

Ang katotohanan kahit isangla o ipag-bile man ng tuluyan ang nasabing pag-aaral' o lupa wala kaming
kinalaman, sapagkat ipinauubaya nang lubusan sa arming Ina ang kapamahalaan.

Sa katunayan nagsilagda kaming mga anak, at apo kay Esteban, sa harap nang saksing magpapatotoo.

Ngayon ika 19 nang Abril nang 1926. Antipolo, Rizal. K.P.

Lagda ni

Bacilia Beltran

Gregorio Sierra

Saksi:

-------------------------

-------------------------

Since the execution of this document, Vicente Reyes, Sr. began paying the realty taxes up to the time of his death in
1944, after which, his children continued paying the taxes. Basilia Beltran died in 1938 before Reyes could recover from
the loan.

Applicant, in seeking the registration of the land, relied on his belief that the property belongs to his father who bought the
same from Basilia Beltran, as borne out by his testimony during the trial on direct examination.

Q. Mr. Reyes, do you claim to be the owner of this property included or described in your
application?

A Yes, sir.

Q How did you acquire this property'?

A. Since 1926 we were the ones paying the land taxes.

Q. From whom did you acquire this property?

 A. Basilia Beltran.

Q. Do you mean to say that you yourself bought this property.

A. My father was the one who bought the property.

Q. What is the name of your father?

A. Vicente C. Reyes.

Q. Where is he now?

A. He is already dead.

Q. Can you inform this Honorable Court, if you know, how your father acquired this
property?

A. Since 1926 my father bought that land.

Q. Was that transaction evidenced by a document?

A. Yes, there is a document.

Q. From whom did your father allegedly purchase the property?

A. Basilia Beltran.

From the above-quoted testimony of applicant, it is evident that he considered the document marked Exhibit "D as
contract of Sale and not as a mortgage. Oppositors contended that the words "isinangla," "na ipananagutan sa inutang na
halagang isang daang piso," "Kahit isangla o ipagbili," etc., manifest that the document should be treated as a mortgage,
antichresis, or pactum commission and not as an absolute sale or pacto de retro sale. (p. 28, Brief, Oppositors-
Appellants).

The Court is of the opinion that Exhibit "D" is a mortgage contract. The intention of the parties at the time of the execution
of the contract must prevail, that is, the borrowing and lending of money with security. The use of the word Debt (utang) in
an agreement helps to point out that the transaction was intended to be a loan with mortgage, because the term "utang"
implies the existence of a creditor-debtor relationship. The ' Court has invariably upheld the validity of an agreement or
understanding whereby the lender of money has taken a deed to the land as security for repayment of the loan. Thus:

The fact that the real transaction between the parties was a borrowing and lending, will, whenever, or
however, it may appear, show that a deed, absolute on its face was intended as a security for money; and
whenever it can be ascertained to be a security for money, it is only a mortgage, however artfully it may
be disguised. (Villa vs. Santiago, 38 Phil. 163).

The whole case really turns on the question of whether the written instrument in controversy was a
mortgage or a conditional sale. ... The real intention of the parties at the time the written instrument was
made must concern in the interpretation given to it by the courts. ... The correct test, where it can be
applied, is the continued existence of a debt or liability between the parties. If such exists, the
conveyance may be held to be merely a security for the debt or an indemnity against the liability.
(Cuyugan vs. Santos, 34 Phil. 112).

The Cuyugan Case quoted some provisions in Jones' Commentaries on Evidence, vol. 3, paragraphs 446-447 which are
likewise applicable to the facts of the case at bar:

446. To show that instruments apparently absolute are only securities. ... It is an established doctrine that
a court of equity will treat a deed, absolute in form, as a mortgage, when it is executed as security for loan
of money, The court looks beyond the terms of the instrument to the real transaction; and when that is
shown to be one of security and not of sale, it will give effect to the actual contract of the parties.
 447. Same-Real intention of the parties to be ascertained ... As we have shown in the preceding section,
the intention of the parties must govern and it matters not what peculiar form the transaction may have
taken. The inquiry always is, Was a security for the loan of money or other property intended? ... A debt
owing to the mortgagee, or a liability incurred for the grantor, either pre-existing or created at the time the
deed is made, is essential to give the deed the character of a mortgage. The relation of debtor and
creditor must appear. The existence of the debt is one on the tests. ... In construing the deed to be a
mortgage, its character as such must have existed from its very inception, - created at the time the
conveyance was made.

The same principle was laid down in a later case, that of Macapinlac vs. Gutierrez Rapide, 43 Phil. 781, quoting 3
Pomeroy's Equity Jurisdiction, Section .1195, wherein it was stated:

... The doctrine has been firmly established from an early day that when the character of a mortgage has
attached at the commencement of the transaction, so that the instrument, whatever be its form, is
regarded in equity as a mortgage, that character of mortgage must and will always continue. If the
instrument is in its essence a mortgage, the parties cannot by any stipulations, however express and
positive, render it anything but a mortgage or deprive it of the essential attributes belonging to a mortgage
in equity.

Concerning the legal effects of such contract, Pomeroy observes:

... Whenever a deed absolute on its face is thus treated as a mortgage, the parties are clothed with all the
rights, are subject to all liabilities, and are entitled to all the remedies of ordinary mortgagors and
mortgagees. The grantee may maintain an action for the foreclosure of the grantor equity of redemption;
the grantor may maintain an action to redeem and to compel a reconvayance upon his payment of the
debt secured. If the grantee goes into possession, and as such is liable to account for the rents and
profits.

Obviously, from the nature of the transaction, applicant's predecessor-in-interest is a mere mortgagee, and ownership of
the thing mortgaged is retained by Basilia Beltran, the mortgagor. The mortgagee, however, may recover the loan,
although the mortgage document evidencing the loan was non-registrable being a purely private instrument. Failure of
mortgagor to redeem the property does not automatically vest ownership of the property to the mortgagee, which would
grant the latter the right to appropriate the thing mortgaged or dispose of it. This violates the provision of Article 2088 of
the New Civil Code, which reads:

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose by them. Any
stipulation to the contrary is null and void.

The act of applicant in registering the property in his own name upon mortgagor's failure to redeem the property would
amount to a pactum commissorium which is against good morals and public policy.

In declaring applicant as the "true and rightful owner of the land in question," the trial court held that applicant and his
predecessor-in- interest acquired ownership over the property by means of prescription having been in constructive
possession of the land applied for since 1926, applying Arts, 1134 and 1137 of the New Civil Code:

Art. 1134. - Ownership and other real rights over immovable property are acquired by ordinary
prescription through possession of ten years.

Art. 1137. - Ownership and other real rights over immovables also prescribe through uninterrupted
adverse possession thereof for thirty years, without need of title or good faith.

Applicant in his testimony on cross-examination, admitted that he and his father did not take possession of the property
but only made use of the same for the purpose of spending vacation there, which practice they discontinued for the last 23
years. Possession of the property must. be in the concept of an owner. This is a fundamental principle of the law of
prescription in this jurisdiction. In the case at bar, the possession of applicant was not adverse, nor continuous.

An applicant for registration of title must prove his title and should not rely on the absence or weakness of the evidence of
the oppositors. For purposes of prescription, there is just title when adverse claimant came into possession of the property
through one of the modes recognized by law for the acquisition of ownership (Art. 1129, New Civil Code). Just title must
be proved and is never presumed (Art. 1131, New Civil Code). Mortgage does not constitute just title on the part of the
mortgagee. since ownership is retained by the mortgagor. When possession is asserted to convert itself into ownership, a
new right is sought to be created, and the law becomes more exacting and requires positive proof of title. Applicant failed
to present sufficient evidence to prove that he is entitled to register the property. The trial court's finding that since
applicant and his father had been continuously paying the realty taxes, that fact "constitutes strong corroborating evidence
of applicant's adverse possession," does not carry much weight. Mere failure of the owner to pay the taxes does not
warrant a conclusion that there was abandonment of a right to the property. The payment of taxes on property does not
alone constitute sufficient evidence of title. (Elumbaring vs. Elumbaring, 12 Phil. 389)

The belief of applicant that he owns the property in question which he inherited from his father cannot overthrow the fact
that the transaction is a mortgage. The doctrine "once a mortgage always a mortgage" has been firmly established
whatever be its form. (Macapinlac vs. Gutierrez Rapide, supra) The parties cannot by any stipulation, however express
and positive, render it anything but a mortgage. No right passes to applicant except that of a mortgage since one cannot
acquire a right from another who was not in possession thereof A derivative right cannot rise higher than its source.

Applicant having failed to show by sufficient evidence a registrable title to the land in question, the application for
registration should be dismissed.

WHEREFORE, the decision appealed from is hereby set aside, and let another one be entered ordering the registration of
the title of the land in question in the name of the oppositors- appellants. The said oppositors-appellants are hereby
directed to pay the applicant- appellee within ninety (90) days from the finality of this decision, the debt in the amount of
P100.00 plus interest at the rate of six per cent (6%) per annum from April 19, 1926 until paid. No pronouncement as to
costs.

SO ORDERED.
G.R. No. 109696 August 14, 1995

THELMA P. OLEA, petitioner,

vs.
COURT OF APPEALS, ELENA VDA. DE PACARDO, JESUS PALENCIA, ELIZABETH PALENCIA AND MONSERRAT
PACIENTE, respondents.

This is a petition for review of the decision of the Court of Appeals affirming that of the court a quo which dismissed the
complaint of petitioner for recovery of possession on the ground that the action had already prescribed and that the deed
of sale with right to repurchase on which petitioner based her claim was an equitable mortgage.

On 27 January 1947 spouses Filoteo Pacardo and Severa de Pacardo executed a deed of Sale Con Pacto de Retroover
Lot No. 767 of the Passi Cadastre covered by Transfer Certificate of Title No. 26424 in their name for a consideration of
P950.00 in favor of Maura Palabrica, predecessor in interest of petitioner, subject to the condition that —

. . . if we, the said spouses, Filoteo Pacardo and Severa de Pacardo, our heirs, assigns, successors-in-
interest, executors and administrators shall and will truly repurchase the above-described parcel of land
from the said Maura Palabrica, her heirs, assigns, successors-in-interest after THREE YEARS counting
from the date of the execution of this instrument, to wit, on January 27, 1950 in cash payment in the sum
of Five Hundred Pesos, Philippine currency, plus Four Hundred and Fifty Pesos (P450), also lawful
currency, in cash or eighteen (18) cavans of palay (Provincial Measurement) at our option, then this sale
shall become null and void and of no force and effect whatsoever. On the contrary, the same will become
irrevocable, definite and final and will vest complete and absolute title on the vendee upon the premises. 1

The contract of sale with right to repurchase was acknowledged by the vendors before Notary Public Victorio Tagamolila
on the same day the contract was executed in the Municipality of Passi, Province of Iloilo. The vendors also delivered to
the vendee their owner's copy of the title.

After the execution of the sale, the Pacardo spouses as vendors remained in possession of the land and continued the
cultivation thereof. Since the sale on 27 January 1947 up to August 1987, or for a period of about 40 years, the spouses
delivered annually one-third (1/3) of the produce of the land to Maura Palabrica and kept for themselves the remaining
two-thirds (2/3).

On 27 January 1950, despite the lapse of three (3) years, the Pacardo spouses did not repurchase the land but faithfully
continued to give 1/3 of the produce to Maura Palabrica. When the spouses died, their son Filoteo Jr., took over the
possession and assumed the cultivation of the land and, like his parents, gave 1/3 of the produce to Maura Palabrica and
later to her daughter, petitioner herein, who would eventually buy from her the lot subject of the litigation.

On 22 September 1966 Maura Palabrica caused the registration of the Sale Con Pacto de Retro with the Register of
Deeds of Iloilo and its annotation on Transfer Certificate of Title No. 26424 covering the subject lot.

On 10 May 1978 Maura Palabrica sold Lot No. 767 for P40,000.00 to one of her daughters, petitioner Thelma Olea. From
then on it was petitioner who received the one-third (1/3) share of the annual produce of the land from Filoteo Pacardo,
Jr., until he died in August 1987. His widow Elena Vda. de Pacardo however refused to give to petitioner the one-third
(1/3) share of the produce. After Elena transferred residence to another barangay the spouses Jesus and Elizabeth
Palencia took over the possession and cultivation of the property. Elizabeth Palencia is a sister of Filoteo Jr., and is one of
the children of spouses Filoteo and Severina Pacardo. The Palencias delivered the share of the produce not to petitioner
but to respondent Elena Pacardo.

Hence, on 25 January 1989, petitioner filed a complaint against Elena Pacardo and the spouses Jesus and Elizabeth
Palencia for recovery of possession with damages. She alleged that she was the owner of Lot No. 767 having acquired
the same from her mother Maura Palabrica through a deed of sale, who in turn acquired the lot from the spouses Filoteo
and Severa Pacardo through a pacto de retro sale, and that due to the failure of the spouses to redeem the property three
(3) years thereafter ownership thereof passed on to Maura Palabrica who later caused the registration of the Sale Con
Pacto de Retro with the Registry of Deeds of Iloilo and its annotation on TCT No. 26424.

Private respondents Elena Vda. de Pacardo and Jesus and Elizabeth Palencia filed their answer alleging that their
parents intended the disputed transaction to be an equitable mortgage and not a sale with right to repurchase.
Respondent Monserrat Paciente, another daughter of the vendor-spouses Filoteo and Severa Pacardo, filed an answer in
intervention raising likewise as defense that the Sale Con Pacto de Retro was indeed an equitable mortgage.
On 19 February 1991 the trial court rendered judgment dismissing the complaint. Petitioner appealed to the Court of
Appeals which on 16 December 1992 affirmed the judgment of the trial court.

In the instant recourse, petitioner assails the Court of Appeals for its conclusions and findings allegedly grounded entirely
on speculations, surmises, conjectures and misapprehension of facts.2 Petitioner submits that the terms and conditions of
the Sale Con Pacto de Retro between her mother Maura Palabrica and the Pacardos on 27 January 1947 are clear and
leave no room for interpretation; that the parties to the transaction have specified that the consideration of the sale was
P950.00 and the repurchase price was P500.00 in cash plus P450.00 cash or eighteen (18) cavans of palay at the option
of the vendor-spouses in case they repurchased the property three (3) years afterwards; and that the Court of Appeals
erred in holding that the repurchase price was only P450.00 or eighteen cavans of palay.

Petitioner also asserts that the failure of her mother, the vendee Maura Palabrica, to consolidate ownership under Art.
1607 of the New Civil Code should not be a ground for considering the sale to be an equitable mortgage because both
parties have stipulated in the contract that when the spouses should fail to repurchase Lot No. 767 on 27 January 1950
complete and absolute title would forthwith be vested in Maura Palabrica; and that even granting that Art. 1607 of the New
Civil Code, which took effect 30 August 1950, be granted retroactive effect Maura Palabrica had already acquired a
vested right of ownership over the land as of 27 January 1950 which Art. 1607 can no longer invalidate under Art. 2252 of
the New Civil Code. Moreover, petitioner submits that the Pacardo spouses remained in possession of the land they sold
to Palabrica because of their good relations with each other and the latter consented that the spouses would be the ones
to till the land.

We cannot sustain petitioner. Art. 1602 of the New Civil Code provides that the contract of sale with right to repurchase
shall be presumed to be an equitable mortgage in any of the following cases: (a) when the price of the sale is unusually
inadequate; (b) when the vendor remains in possession as lessee or otherwise; (c) when upon or after the expiration of
the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (d)
when the purchaser retains for himself a part of the purchase price; (e) when the vendor binds himself to pay the taxes on
the thing sold; and, (f) in any other case where it may be fairly inferred that the real intention of the parties is that the
transaction shall secure the payment of a debt or the performance of any other obligation. Being remedial in nature, Art.
1602 may be applied retroactively to cases prior to the effectivity of the New Civil Code3 Hence it may apply to the instant
case where the deed of sale with right to repurchase was executed on 27 January 1947.

It has been held that a contract should be construed as a mortgage or a loan instead of a pacto de retro sale when its
terms are ambiguous or the circumstances surrounding its execution or its performance are incompatible or inconsistent
with the theory that it is a sale.4 Even when a document appears on its face to be a sale with pacto de retro the owner of
the property may prove that the contract is really a loan with mortgage by raising as an issue the fact that the document
does not express the true intent and agreement of the parties. In this case, parol evidence then becomes competent and
admissible to prove that the instrument was in truth and in fact given merely as a security for the repayment of a loan. And
upon proof of the truth of such allegations, the court will enforce the agreement or understanding in consonance with the
true intent of the parties at the time of execution of the contract. 5 This principle is applicable even if the purported Sale
Con Pacto de Retro was registered in the name of the transferee and a new certificate of title was issued in the name of
the latter.6

There is no dispute that when Maura Palabrica "bought" the land on 27 January 1947 the vendors, the Pacardo spouses,
remained in possession of the property and cultivated the same. Their son continued the cultivation when the spouses
died, which cultivation was continued later by his widow Elena Vda. de Pacardo and then by his sister Elizabeth Palencia.
During the direct examination, petitioner admitted —

Q. And who later on cultivated this lot 767 if you know?

A. When the Pacardos sold to my mother, it was the spouses who cultivated the land.
7
When Filoteo Pacardo Sr. could no longer till, it was Filoteo Pacardo Jr. who took over.

Defendant-intervenor Monserrat Paciente also testified —

Q. Do you know whether any transaction was had between your mother Severa Pacardo
and Maura Palabrica involving this Lot No. 767?

A. There was a transaction. Every year, dues was (sic) paid to this land when the land
was mortgaged. It was a 1/3 transaction, 1/3 was given to them and 2/3 were taken by
us.
 Q. When did you come to know that alleged transaction between your parents and the
late Maura Palabrica?

8
A. When I came to the age of reason, it was told to me by my parents.

The rule is settled that where in a contract of sale with pacto de retro the vendor remains in physical possession of the
9
land sold as lessee or otherwise, the contract should be considered an equitable mortgage. The same presumption
10
applies when the vendee was given the right to appropriate the fruits thereof in lieu of receiving interest on the loan.

Moreover, the terms of the document itself can aid in arriving at the true nature of the transaction. Where the contract
contains a stipulation, as in this case, that upon payment by the vendor of the purchase price within a certain period the
document shall become null and void and have no legal force or effect, the purported sale should be considered a
mortgage contract. In pacto de retro sale the payment of the repurchase price does not merely render the document null
and void but there is the obligation on the part of the vendee to sell back the property. 11

It has been consistently held that the presence of even one of the circumstances enumerated in Art. 1602 of the New Civil
12
Code is sufficient to declare a contract of sale with right to repurchase an equitable mortgage. This is so because pacto
de retro sales with the stringent and onerous effects that accompany them are not favored. In case of doubt, a contract
purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. 13

Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that complete and absolute title shall
be vested on the vendee should the vendors fail to redeem the property on the specified date. Such stipulation that the
ownership of the property would automatically pass to the vendee in case no redemption was effected within the
stipulated period is void for being a pactum commissorium which enables the mortgagee to acquire ownership of the
mortgaged property without need of foreclosure. Its insertion in the contract is an avowal of the intention to mortgage
14
rather than to sell the property.

Consequently, there was no valid sale to Maura Palabrica. Ownership over the property was not transferred to her for she
was merely a mortgagee. There being no title to the land that Palabrica acquired from the spouses Filoteo and Severa
Pacardo, it follows that Palabrica had no title to the same land which could be conveyed to petitioner. 15Hence there is no
legal basis for petitioner to recover possession of the property.

It is clear from the contract that the amount loaned to the Pacardo spouses was P950.00 and Lot No. 767 was mortgaged
as security. The spouses were allowed under the contract to pay the amount of the loan on 27 January 1950 by tendering
the amount of the P500.00 in cash and P450.00 cash or 18 cavans of palay at their option. The trial court made its factual
finding that from 1947 when the purported sale was executed to 1972 alone, the spouses and their successors in interest
delivered a total of 1,166 cavans of palay to Maura Palabrica. The delivery of 1/3 of the annual produce to Palabrica and
later to petitioner continued until 1987. Under the last paragraph of Art. 1602, this produce received by the alleged vendee
as rent or otherwise should be considered as interest.

There is no dispute that the Pacardo spouses or their successors in interest failed to pay the amount of the loan on 27
January 1950 as stipulated in the contract although they continued to deliver the produce to Palabrica and petitioner until
1987 by way of interest on the loan. Even if we treat petitioner's action to recover possession of Lot No. 767 as one for the
enforcement of her right as mortgagee, the same has already prescribed. Art. 1142 of the New Civil Code provides that a
mortgage action prescribes after ten (10) years. Since 27 January 1950 when the Pacardo spouses failed to pay the loan
up to 1989 when the action for recovery of possession was filed, thirty-nine (39) years had already elapsed. As a result,
petitioner is not only barred by prescription from instituting her action; she is also guilty of estoppel by laches.

WHEREFORE, the petition is DENIED and the assailed decision of the Court of Appeals dated 16 December 1992
sustaining that of the Regional Trial Court of Iloilo City is AFFIRMED. Costs against petitioner.

SO ORDERED.
VINCENT P. DAYRIT, PETITIONER, VS. THE COURT OF APPEALS, HON. FRANCISCO ARCA, JUDGE OF THE
COURT OF FIRST INSTANCE OF MANILA, BRANCH I, MOBIL OIL PHILIPPINES, INC., AND ELADIO YLAGAN,
SPECIAL SHERIFF, RESPONDENTS.

[ G.R. No. L-29388, December 28, 1970 ]

Petition for certiorari by way of appeal from the Court of Appeals' minute resolution of June 14, 1968 dismissing the
petition for certiorari in CA-G.R. No. 41359-R, as well as its resolutions of July 9, 1968 and August 5, 1968 denying the
first and second motions for reconsideration, respectively, in the same case.

On July 21, 1965, the defendants Vincent Dayrit, Leonila T. Sumbillo and, Reynaldo Angeles entered into a contract with
the Mobil Oil Philippines, Inc., entitled "LOAN & MORTGAGE AGREEMENT," providing, among others, that:

"(a) For and in consideration of Sales Agreement dated July 21, 1965, among the parties herein, Mobil grants a loan of
P150,000 to borrowers.

"(b) Defendants-Borrowers shall repay Mobil the whole amount of P150,000 plus 10% interest per annum on the
diminishingbalance for 48 months.

"(c) To secure the prompt repayment of such loan by defendants-borrowers to Mobil and the faithful performance by
Borrowers of that Sales Agreement, Defendants-Borrowers hereby transfer in favor of Mobil by way of first mortgage
lands covered by TCT No. 45169 and TCT No. 45170, together with the improvements existing in said two (2) parcels of
land.

"(d) In case of default of Defendants-Borrowers in payment of any of the installments and/or their failure to purchase the
quantity of products stated therein Mobil shall have the right to foreclose this mortgage.

"(e) Mobil, in case of default and foreclosure shall be entitled to attorney's fees and cost of collection equivalent to not less
than 25% of total indebtedness remaining unpaid.

"(f) All expenses in connection with the preparation and registration of this mortgage as well as cancellation of same shall
be for the account of Defendants-Borrowers.

"(g) If Defendants-Borrowers shall perform the full obligation above stated according to the terms thereof, then this
obligation shall be null and void, otherwise, it shall remain in full force and effect."

The defendants violated the Loan & Mortgage Agreement, they having paid but one installment in the amount of P 3,816,
of which P1,250 was applied to interest, and the remaining P2,566 to the principal obligation. The defendants likewise
failed to buy the quantities of products as required in the Sales Agreement (exh. D). The plaintiff made due demand (exh.
I), which the defendant Dayrit answered, acknowledging his liability in his letter exh. I-1.

On November 17, 1967, after trial and after the parties had submitted their memoranda,[1] the trial court rendered its
decision, the dispositive portion of which reads:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants
Vincent Dayrit, Leonila T. Sunbilloand Reynaldo Angeles, ordering them to pay to the plaintiff one-third each of the sum
of P147,434.00 with interest of 10% per annum from the time it fell due according to agreement, and in default of such
payment, the properties put up in collateral shall be sold in foreclosure sale in accordance with law, the proceeds to be
applied in payment of the amount due to the plaintiff from the defendants as claimed in the complaint, provided that,
as to Dayrit, his liability shall in no case exceed 1/3 of the total obligation.

"The defendants are likewise ordered to pay to the plaintiff, in the same proportion of 1/3 each, 25% of the obligation as
attorney's fees as provided in the contract; and P300.60 for the registration of the contract.

* * *

"Each of the three said defendants shall also pay 1/3 of the costs."

No appeal having been interposed by the defendants, the above decision became final and executory.

An undated Mobil's motion for execution of the decision and for the appointment of Eladio Ylagan as special sheriff (annex
D) was received by the herein petitioner Dayrit on February 8, 1968. Whereupon, he filed his opposition and motion to
stay execution, alleging that before the finality of the aforesaid judgment, he and the plaintiff had agreed not to appeal
and/or file any motion for reconsideration, the petitioner offering to pay his one-third share with a reasonable discount, if
possible, in so far as the interests and the award for attorney's fees were concerned, with the corresponding release of the
mortgage on all his properties, and praying, in view thereof, for a 30-day grace period within which to pay the
plaintiff. The 30-day grace period was granted by the court in its order of February 24, 1968.

On March 25, 1968 the petitioner filed another motion for 20 days' extension within which to pay his one-third share of the
judgment obligation and to submit the corresponding compromise agreement for the satisfaction of the judgment. The
said motion was granted on April 1, 1968.

Thereafter, the respondent Mobil filed an "Urgent Reply to Opposition and Motion to Stay Execution dated Feb. 21, 1968
and Motion dated March 25, 1968," alleging therein that the respondent agreed to release the mortgage or collateral for
the entire judgment obligation only if "the whole principal mortgaged debt plus the whole accrued interest" were fully paid.
Mobil further prayed for a writ of execution to be issued against the petitioner after the lapse of 20 days from March 25,
1968, if by then the parties shall not have submitted a compromise agreement for the satisfaction of the judgment; Mobil
also reiterated its prayer for the appointment of respondent EladioYlagan as special sheriff.

On April 3, 1968 the petitioner filed a manifestation and motion, praying that he be allowed to deposit with the Clerk of
Court the amount corresponding to his one-third share of the obligation under the decision of November 17, 1967, and
that thereupon the collateral or mortgage over petitioner's properties or lands be ordered released or cancelled.

On April 10, 1968 the court a quo ordered all pending incidents set for hearing on. April 19, 1968, "so that the Court may
have the opportunity to confer with the parties to thresh out the settlement of this case." At this hearing Mobil did not
appear; the court reset the hearing for May 23, 1968.

Under date of May 8, 1968, Mobil filed an addendum to its reply dated April 1, 1968 and opposition to petitioner's motion
dated April 3, 1968, praying that the motion of petitioner Dayrit that the entire mortgaged collateral be released upon his
payment of mere 1/3 of the loan obligation, be denied and instead a writ of execution against him in accordance with
the dispositive portion of the decision and sections 2 and 3 of Rule 68 of the Revised Rules of Court be issued.

On May 18, 1968 the petitioner filed his rejoinder to respondent Mobil's aforesaid addendum and opposition.

On May 23, 1968; after hearing oral argument, the court denied the manifestation and motion of Dayrit filed thru counsel
and dated April3, 1968; the court further ruled that "There is no further need to issue an order for the issuance of a writ of
execution and appointment of special sheriff ... considering that the Court, in its order of February 24, 1968, has already
ordered the issuance of a writ of execution for the satisfaction of the judgment."

The petitioner then filed his petition for certiorari with the Court of Appeals, dated May 30, 1968, alleging that "respondent
Judge Arcaacted without or in excess of his jurisdiction and/or with grave abuse of discretion, in denying petitioner's
motion to allow him to pay or deposit his one-third share of the judgment obligation" as well as the consequent release or
cancellation of the mortgage on his properties.

The Court of Appeals, however, in its minute resolution of June 14, 1968, dismissed the petition for certiorari, in the
following words:

"Upon consideration of the petition for certiorari filed in this case, the Court RESOLVED TO DISMISS the petition, there
being no abuse of discretion in ordering the execution of a final judgment. Details of execution for satisfaction of
Vincent Dayrit's liability will be worked out in connection with the sale of the collateral for mortgaged debt, and the
judgment in Civil Case No. 64138 of the CFI-Manila will control the disposition and application of the collateral."

The petitioner filed a motion for reconsideration dated June 9, 1968 which the Court of Appeals denied in its resolution of
July 9, 1968, as follows:

"Both the petition and the motion for reconsideration are based on a misapprehension of the terms of the judgment. The
Mortgage obligation is one and indivisible. It was executed to assure payment of the total indebtedness of the three
defendants in Civil Case No. 64138, and not merely one-third (1/3) thereof corresponding to petitioner Vincent
P. Dayrit's liability."

The petitioner's second motion for reconsideration of July 25, 1968 was summarily dismissed on August 5, 1968, for lack
of merit.

The petitioner, in his present petition, tenders the following issues for resolution:
"1) Whether or not respondent Judge [CFI-Manila] acted without or in excess of his jurisdiction, and/ or with grave abuse
of discretion in denying petitioner's motion to allow him to exercise his clearly legal right to pay or deposit his one-third
share of the judgment;

"2) The next issue was that brought about by the Court of Appeals resolution dismissing the petition for certiorari, and
which was raised in petitioner's motion dated June 19, 1968 for reconsideration of said resolution, contending that the
ground for dismissal did not jibe with the issue raised in the petition for certiorari;

"3) And lastly, the Court of Appeals' resolution of July 9, 1968 denying said motion for reconsideration apprehension on
the part of petitioner of the terms of the respondent judge."

1. The question raised by the respondent Mobil that the present petition for certiorari was filed way beyond the regle-
mentary period of 15 days from appellant's receipt of notice of judgment or of the denial of his motion for reconsideration
pursuant to section 1, Rule 45 of the Revised Rules of Court, [2] needs to be resolved before consideration of this case on
the merits. Admittedly, the ex parte first motion for reconsideration filed by the herein petitioner was denied, and copy of
such denial was received by the petitioner on July 15, 1968. Still not satisfied, petitioner filed another ex parte motion for
reconsideration on July 26, 1968, notice of the denial of which, under CA resolution dated August 5, 1968,
was received by said petitioner on August 9, 1968.

Respondent Mobil contends that the second motion for reconsideration filed by the petitioner was a mere scrap of
paper and pro formasince it was filed ex parte and without express leave of court, contrary to the mandate of section 1,
Rule 52 of the Rules of Court.[3]

The rule appears to be inflexible in the sense that no more than one motion for reconsideration shall be filed without
express leave of court. The requirement that the second motion for reconsideration must be presented, with leave of
court, within fifteen days from notice of the order or judgment, deducting the time during which the first motion was
pending, is to afford the court sufficient time to evaluate whether there is prima facie merit therein, so that, "if the court
finds merit prima facie in the motion for rehearing or reconsideration, the adverse party shall be given time to answer,
after which the court, in its discretion, may set the case for oral argument."[4] And only upon compliance with the above
stated requirements may the second motion for reconsideration stay the final order or judgment sought to be re-
examined.[5]

The Court of Appeals gave due course to the second motion for reconsideration of the herein petitioner, but nevertheless,
dismissed the same summarily for lack of merit.

However, even assuming, that the ex parte second motion for reconsideration was properly filed so as to toll
the reglementary period within which to appeal, it appears that the petition for certiorari filed with this Court on August 20,
1968 was time barred. From the date of denial of the petitioner's ex parte first motion for reconsideration received by him
on July 15, 1968 assuming that the period was interrupted by the ex parte second motion for reconsideration from July 26,
1968 to August 9, 1968 (15 days) - to the elevation of the said case to this Court on August 20, 1968, 36 days had
elapsed. Deducting the 15 days during which the ex parte second motion for reconsideration was pending from the total
period of 36 days leaves 21 days. This means that the present petition was filed with this Court six days late, contrary to
and in violation of section 1, Rule 45, which specifically provides that a petition for certiorari under such Rule should be
filed within 15 days from notice of judgment or denial of motion for reconsideration. Hence, the present petition may be
dismissed on the aforestated ground.

But we opt, nevertheless, to consider the merits of this case, if only to demonstrate to the petitioner his error.

2. The decision of the lower court, let it not be forgotten, has admittedly become final
and executory. The controverted judgment ordered the defendants (Dayrit, Sumbillo and Angeles) "to pay the plaintiff
one-third each of the sum of P147,434.00 with interest of 10% per annum from the time it fell due according to
agreement, and in default of such payment, the properties put up in collateral shall be sold in foreclosure sale in
accordance with law, the proceeds to be applied due to the plaintiff from the defendants as claimed in the
complaint,provided that, as to Dayrit, his liability shall in no case exceed 1/3 of the total obligation."

In sum, the issue that must be resolved in the instant case is, whether or not the Court of First Instance of Manila
erred in ordering the sale at public auction of the mortgaged properties to answer for the entire P147,434 principal
obligation after the defendants (DayritSumbillo and Angeles) had failed to pay their respective one-third shares of the
obligation to the respondent Mobil; otherwise stated,whether or not the respondents Court of First Instance and the Court
of Appeals erred in refusing to allow the alleged proposed deposit of a sum equivalent to 1/3 of the loan agreed upon and
in refusing to release forever the collaterals owned by Dayrit, although the other 2/3 portion of the loan obligation had
not been satisfied due to insolvency of the other two co-defendants.

To begin with, the prayer of the complaint filed with the respondent Court of First Instance recites as follows:
"WHEREFORE, it is respectfully prayed that judgment be rendered

"a) Ordering the defendants to pay the sum of P147,484 with 10% interest per annum from the time, it fell due as agreed
upon and that in default of such payment, the above described properties be sold and the proceeds of sale be applied to
the payment of the amount due to the plaintiff from the defendants under this complaint."

The complaint, in effect, is acollection suit with damages and foreclosure of mortgage against the three
defendants, Leonila Sumbillo, Reynaldo Angeles and Vincent Dayrit. Although the Loan and Mortgage Agreement was
signed by the three defendants as mortgagors, the properties being foreclosed belong solely to, and are registered solely
in the name of, the petitioner Vincent Dayrit.

The pertinent dispositive portion of the decision rendered by the lower court reads:

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants"'
Vincent Dayrit; Leonila T. Sumbillo and Reynaldo Angeles, ordering them to pay to the plaintiff one?third each of the sum
of P147,434 with interest of 10% per annum from the time it fell due according to agreement, and in default of such
payment, the properties put in collateral shall, be sold in foreclosure sale in accordance with law, the proceeds to be
applied in payment of the amount due to the plaintiff from the defendants as claimed in the complaint, provided that, as
to Dayrit, his liability shall in no case exceed 1/3 of the total obligation."

The petitioner contends that the said judgment is a simple money judgment and not a foreclosure judgment, and that
because the respondent Mobil resorted to the remedy of enforcing his right by a complaint against the defendant-
petitioner for collection of a sum of money, with the consequent simple money judgment, the satisfaction of his 1/3 share
of the joint obligation would release all the mortgaged properties put up as collateral to secure the payment of the whole
obligation. The reason advanced by the petitioner is that the decision rendered being a simple money judgment and not a
mortgage-foreclosure judgment, the distinction in its execution is decisive, that is, whereas in mortgage foreclosure the
judgment should conform to the requirement, embodied in section 2, Rule 68 of the Rules of Court, that the order of
payment be made into the court "within a period not less than ninety (90) days x x x and in default of such payment, the
property mortgaged be sold to realize" the indebtedness, in a simple money judgment, upon satisfaction of part (in the
instant case his 1/3 share) of the joint obligation, the mortgaged properties should be released from such mortgage
contract.

This contention of the petitioner is clearly devoid of merit.

The decision which the petitioner describes as a simple money judgment orders the defendants
Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles to pay the plaintiff the sum of P147,434, and in default of such
payment, the properties put up in collateral shall be sold in foreclosure sale in accordance with law, the proceeds to be
applied in payment of the amount due to the plaintiff from the defendants as claimed in the complaint. While it is true that
the obligation is merely joint and each of the defendants is obliged to pay only his/her 1/3 share of the joint obligation, the
undisputed fact remains that the intent and purpose of the Loan and Mortgage Agreement was to secure, inter alia, the
entire loan of P150,000 that the respondent Mobil extended to the defendants. The court below found that the defendants
had violated the Loan and Mortgage Agreement, they having paid but one installment. The undisputed fact also remains
that the petitioner alone benefited from the proceeds of the loan of P150,000, the said amount having been paid directly to
the Bank of the Philippines to bail out the same properties from a mortgage that was about to be foreclosed. In effect,
Mobil merely stepped into the shares of the Bank of the Philippines.

The petitioner insists that the dispositive portion of the judgment declaring the obligation merely joint with the proviso that
"as to Dayrit,his liability shall in no case exceed 1/3 of the total obligation, should be construed in the light of the opinion of
the lower court that "said collateral must answer in full but only to the extent of Dayrits liability which as above deter-
mined, is 1/3 of the obligation, thereby entitling him to pay or deposit in court his corresponding share of the joint
obligation in satisfaction thereof, with the automatic release of all the mortgaged properties.

A judgment must be distinguished from an opinion. The latter is the informal expression of the views of the court
and cannot prevailagainst its final order or decision. "While the two may be combined in one instrument, the opinion forms
no part of the judgment. There is a distinction between the findings and conclusion of a court and its judgment. While
they may constitute its decision and amount to a rendition of a judgment they are not the judgment itself. They amount to
nothing more than an order for judgment which must be distinguished from the judgment. Only the dispositive portion
may be executed."[6]

Besides, well-entrenched in law is the rule that a mortgage directly and immediately subjects the property upon which it is
imposed,[7]the same being indivisible even though the debt may be divided,[8] and such indivisibility likewise being
[9]
unaffected by the fact that the debtors are not solidarily liable. As Tolentino, in his Commentaries and Jurisprudence on
[10]
the Civil Code of the Philippines, puts it -
"When several things are pledged or mortgaged, each thing for a determinate portion of the debt, the pledges or
mortgages are considered separate from each other. But when the several things are given to secure the same debt in its
entirety, all of them are liable for the debt, and the creditor does not have to divide his action by distributing the debt
among the various things pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things are still
liable for such balance. Hence, a mortgage voluntarily constituted by the debtor on two or more parcels of land is one and
indivisible, and the mortgagee has the right to have either or both parcels, jointly or singly, sold to satisfy his claim. In
case the mortgaged properties are a house and lot, it can not be claimed that the lot and the house should be sold
separately and not together."

But then there is this other seeming posture of the petitioner: that the judgment which has become final
and executory either modified or superseded the Loan and Mortgage Agreement between the parties, and since the
obligation is merely joint, upon payment thereof, as in attachment, the properties mortgaged are released from
liability. The decision under consideration, however, did nothing of the sort. The petitioner conveniently refused to
recognize the true import of the dispositive portion of the judgment. The said portion unequivocally states that "in default
of such payment, the properties put up in collateral shall be sold in foreclosure sale in accordance with law, the proceeds
to be applied in payment of the amount due to the plaintiff as claims d in the complaint." And the claim in the complaint
was the full satisfaction of the total indebtedness of P147,434; therefore, the release of all the mortgaged properties may
be authorized only upon the full payment of the above-stated amount secured by the said mortgage.

With respect to the provisions of section 2 of Rule 68 of the Rules of Court giving the petitioner a period of 90 days within
which he might voluntarily pay the debt before the sale of the collateral at public auction was ordered, we agree that the
trial court failed to provide such period. However, this failure can be regarded as having resulted in
mere damnum absque injuria. From November 17, 1967 when the decision was rendered to May 23, 1968 when the final
order to sell the mortgaged properties was issued, a period of more than six months had passed, which is considerably
much more than the 90-day period of grace allowed the petitioner to validly tender the proper payment.

ACCORDINGLY, the petition is denied, at petitioner's cost.

[G.R. No. 134330. March 1, 2001]
SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, petitioners, vs. PHILIPPINE NATIONAL BANK and
SPOUSES MARCOS and ARSENIA ESLABON, respondents.

Before us is a petition for review on certiorari of the Decision[1] and Resolution[2] in CA-G.R. No. 53865 of the Court of
[3] [4]
Appeals dated May 21, 1998 and June 29, 1998, respectively, which modified the Decision dated April 30, 1996 of the
[5]
Regional Trial Court of Roxas City, Branch 19 in a suit for Declaration of Nullity of the Contract of Mortgage.
The facts are as follows:
Eduarda Belo owned an agricultural land with an area of six hundred sixty one thousand two hundred eighty eight
(661,288) square meters located in Timpas, Panitan, Capiz, covered and described in Transfer Certificate of Title (TCT for
brevity) No. T-7493. She leased a portion of the said tract of land to respondents spouses Marcos and Arsenia Eslabon in
connection with the said spouses sugar plantation business. The lease contract was effective for a period of seven (7)
years at the rental rate of Seven Thousand Pesos (P7,000.00) per year.
To finance their business venture, respondents spouses Eslabon obtained a loan from respondent Philippine
National Bank (PNB for brevity) secured by a real estate mortgage on their own four (4) residential houses located in
Roxas City, as well as on the agricultural land owned by Eduarda Belo. The assent of Eduarda Belo to the mortgage was
acquired through a special power of attorney which she executed in favor of respondent Marcos Eslabon on June 15,
1982.
Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation, extrajudicial foreclosure
proceedings against the mortgaged properties were instituted by respondent PNB. At the auction sale on June 10, 1991,
respondent PNB was the highest bidder of the foreclosed properties at Four Hundred Forty Seven Thousand Six Hundred
Thirty Two Pesos (P447,632.00).
In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of the sale at public auction of her
agricultural land on June 10, 1991 as well as the registration of the Certificate of Sheriffs Sale in its favor on July 1, 1991,
and the one-year period to redeem the land.
Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses Enrique and Florencia Belo under a
deed of absolute sale of proprietary and redemption rights.
Before the expiration of the redemption period, petitioners spouses Belo tendered payment for the redemption of the
agricultural land in the amount of Four Hundred Eighty Four Thousand Four Hundred Eighty Two Pesos and Ninety Six
Centavos (P484,482.96), which includes the bid price of respondent PNB, plus interest and expenses as provided under
Act No. 3135.
However, respondent PNB rejected the tender of payment of petitioners spouses Belo. It contended that the
redemption price should be the total claim of the bank on the date of the auction sale and custody of property plus
charges accrued and interests amounting to Two Million Seven Hundred Seventy Nine Thousand Nine Hundred Seventy
Eight and Seventy Two Centavos (P2,779,978.72).[6]Petitioners spouses disagreed and refused to pay the said total claim
of respondent PNB.
On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court of Roxas City, Civil Case No. V-6182
which is an action for declaration of nullity of mortgage, with an alternative cause of action, in the event that the
accommodation mortgage be held to be valid, to compel respondent PNB to accept the redemption price tendered by
petitioners spouses Belo which is based on the winning bid price of respondent PNB in the extrajudicial foreclosure in the
amount of Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00) plus interest and
expenses.
In its Answer, respondent PNB raised, among others, the following defenses, to wit:
xxx
77. In all loan contracts granted and mortgage contracts executed under the 1975 Revised Charter (PD 694, as
amended), the proper rate of interest to be charged during the redemption period is the rate specified in the
mortgage contract based on Sec. 25[7] of PD 694 and the mortgage contract which incorporates by reference
the provisions of the PNB Charters. Additionally, under Sec. 78 of the General Banking Act (RA No. 337, as
amended) made applicable to PNB pursuant to Sec. 38 of PD No. 694, the rate of interest collectible during
the redemption period is the rate specified in the mortgage contract.
78. Since plaintiffs failed to tender and pay the required amount for redemption of the property under the
provisions of the General Banking Act, no redemption was validly effected;[8]
 xxx
After trial on the merits, the trial court rendered its Decision dated April 30, 1996 granting the alternative cause of
action of spouses Belo, the decretal portion of which reads:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of plaintiffs Spouses Enrique M. Belo
and Florencia G. Belo and against defendants Philippine National Bank and Spouses Marcos and Arsenia Eslabon:

1. Making the injunction issued by the court permanent, insofar as the property of Eduarda Belo covered by
Transfer Certificate of Title No. T-7493 is concerned;
2. Ordering defendant Philippine National Bank to allow plaintiff Enrique M. Belo to redeem only Eduarda Belos
property situated in Brgy. Timpas, Panitan, Capiz, and covered by Transfer Certificate of Title No. T-7493 by
paying only its bid price of P447,632.00, plus interest and other charges provided for in Section 30, Rule 39
of the Rules of Court, less the loan value, as originally appraised by said defendant Bank, of the foreclosed
four (4) residential lots of defendants Spouses Marcos and Arsenia Eslabon; and
3. Dismissing for lack of merit the respective counterclaims of defendants Philippine National Bank and spouses
Marcos and Arsenia Eslabon.

With costs against defendants.

SO ORDERED.[9]

Dissatisfied with the foregoing judgment of the trial court, respondent PNB appealed to the Court of Appeals. In its
Decision rendered on May 21, 1998, the appellate court, while upholding the decision of the trial court on the validity of
the real estate mortgage on Eduarda Belos property, the extrajudicial foreclosure and the public auction sale, modified the
trial courts finding on the appropriate redemption price by ruling that the petitioners spouses Belo should pay the entire
amount due to PNB under the mortgage deed at the time of the foreclosure sale plus interest, costs and
expenses.[10]
Petitioners spouses Belo sought reconsideration[11] of the said Decision but the same was denied by the appellate
court in its Resolution promulgated on June 29, 1998, ratiocinating, thus:

Once more, the Court shies away from declaring the nullity of the mortgage contract obligating Eduarda Belo as co-
mortgagor, considering that it has not been sufficiently established that Eduarda Belos assent to the special power of
attorney and to the mortgage contract was tainted by any vitiating cause. Moreover, in tendering an offer to redeem the
property (Exhibit 20, p. 602 Record) after its extrajudicial foreclosure, she has thereby admitted the validity of the
mortgage, as well as the transactions leading to its inception. Eduarda Belo, and the appellees as mere assignees of
Eduardas right to redeem the property, are therefore estopped from questioning the efficacy of the mortgage and its
subsequent foreclosure.[12]

The appellate court further declared that petitioners spouses Belo are obligated to pay the total banks claim
representing the redemption price for the foreclosed properties, as provided by Section 25 of P.D. No. 694, holding that:

On the other hand, the courts ruling that the appellees, being the assignee of the right of repurchase of Eduarda Belo,
were bound by the redemption price as provided by Section 25 of P.D. 694, stands. The attack on the constitutionality of
Section 25 of P.D. 694 cannot be allowed, as the High Court, in previous instances, (Dulay v. Carriaga, 123 SCRA 794
[1983]; Philippine National Bank v. Remigio, 231 SCRA 362 [1994]) has regarded the said provision of law with respect,
using the same in determining the proper redemption price in foreclosure of mortgages involving the PNB as mortgagee.

The terms of the said provision are quite clear and leave no room for qualification, as the appellees would have us
rule. The said rule, as amended, makes no specific distinction as to assignees or transferees of the mortgagor of his
redemptive right. In the absence of such distinction by the law, the Court cannot make a distinction. As admitted
assignees of Eduarda Belos right of redemption, the appellees succeed to the precise right of Eduarda including all
conditions attendant to such right.

Moreover, the indivisible character of a contract of mortgage (Article 2089, Civil Code) will extend to apply in the
redemption stage of the mortgage.
As we have previously remarked, Section 25 of P.D. 694 is a sanctioned deviation from the rule embodied in Rule 39,
Section 30 of the Rules of Court, and is a special protection given to government lending institutions, particularly, the
Philippine National Bank. (Dulay v. Carriaga, supra)[13]

Hence, the instant petition.

During the oral argument, petitioners, through counsel, Atty. Enrique M. Belo, agreed to limit the assignment of errors
to the following:
xxxxxxxxx
II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL COURT ON THE BASIS OF
THE ASSIGNMENT OF ERRORS ALLEGED BY PETITIONERS IN THEIR BRIEF:

(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY EDUARDA BELO IN FAVOR OF
RESPONDENT ESLABON WAS NULL AND VOID;

(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY RESPONDENT MARCOS ESLABON UNDER
SAID INVALID SPECIAL POWER OF ATTORNEY IS ALSO NULL AND VOID;

III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB ACTED IN BAD FAITH
AND CONNIVED WITH RESPONDENTS-DEBTORS ESLABONS TO OBTAIN THE CONSENT OF
EDUARDA BELO, PETITIONERS PREDECESSOR, THROUGH FRAUD.
IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB WAS NEGLIGENT IN
THE PERFORMANCE OF ITS DUTY AS COMMERCIAL MONEY LENDER.
V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA BELO, PETITIONERS
PREDECESSOR, HAD WAIVED THE RIGHT TO QUESTION THE LEGALITY OF THE ACCOMMODATION
MORTGAGE.
VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT BY HOLDING THAT ON
REDEMPTION, PETITIONERS SHOULD PAY THE ENTIRE CLAIM OF PNB AGAINST RESPONDENTS-
DEBTORS ESLABONS.
VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT SHOULD PETITIONERS DECIDE TO PAY
THE ENTIRE CLAIM OF RESPONDENT PNB AGAINST THE RESPONDENTS-DEBTORS ESLABONS,
PETITIONERS SHALL SUCCEED TO ALL THE RIGHTS OF RESPONDENT PNB WITH THE RIGHT TO
REIMBURSEMENT BY RESPONDENTS-DEBTORS, ESLABONS.
VIII. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT SHOULD PETITIONERS DECIDE NOT TO
EXERCISE THEIR RIGHT OF REDEMPTION, PETITIONERS SHALL BE ENTITLED TO THE VALUE OF
THEIR IMPROVEMENTS MADE IN GOOD FAITH AND FOR THE REAL ESTATE TAX DUE PRIOR TO
THE FORECLOSURE SALE.[14]
Petitioners challenge the appreciation of the facts of the appellate court, pointing out the following facts which the
appellate court allegedly failed to fully interpret and appreciate:
1. That respondent PNB in its Answer admitted that Eduarda Belo was merely an accommodation mortgagor
and that she has no personal liability to respondent PNB.
xxx
2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. D) used to bind Eduarda Belo as
accommodation mortgagor authorized the agent Eslabons to borrow and mortgage her agricultural land for
her (Eduarda Belo) use and benefit. Instead, said PNB SPA Form No. 74 was used by debtors Eslabons and
PNB to bind Eduarda Belo as accommodation mortgagor for the crop loan extended by PNB to the Eslabons.
3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo in blank, without specifying the amount of
the loan to be granted by respondent PNB to the respondents-debtors Eslabons upon assurance by the PNB
manager that the SPA was merely a formality and that the bank will not lend beyond the value of the four (4)
[Roxas City] residential lots located in Roxas City mortgaged by respondents-debtors Eslabons (see Exhibit
D; Eduarda Belos deposition, Exhibit V, pp. 7 to 24).
4. That PNB did not advise Eduarda Belo of the amount of the loan granted to the Eslabons, did not make
demands upon her for payment, did not advise her of Eslabons default. The pre-auction sale notice intended
 for Eduarda Belo was addressed and delivered to the address of the debtors Eslabons residence at Baybay,
Roxas City, not to the Belo Family House which is the residence of Eduarda Belo located in the heart of
Roxas City. The trial court stated in its Decision that the PNB witness Miss Ignacio admitted that through
oversight, no demand letters were sent to Eduarda Belo, the accommodation mortgagor (see p. 7, RTC
Decision).
xxx
5. As an agreed fact stated in the Pre-Trial Order of the Regional Trial Court, the loan which was unpaid at the
time of the extrajudicial foreclosure sale was only P789,897.00.
xxx
6. That herein petitioners Spouses Belo in making the tender to redeem Eduarda Belos agricultural
land expressly reserved the right to question the legality of the accommodation mortgage in the event that
[15]
said tender to redeem was rejected by PNB (Exh. I).
Petitioners present basically two (2) issues before this Court. First, whether or not the Special Power of Attorney
(SPA for brevity), the real estate mortgage contract, the foreclosure proceedings and the subsequent auction sale
involving Eduarda Belos property are valid. Second, assuming they are valid, whether or not the petitioners are required
to pay, as redemption price, the entire claim of respondent PNB in the amount of P2,779,978.72 as of the date of the
public auction sale on June 10, 1991.
On the first issue, the petitioners contend that the SPA is void for the reason that the amount for which the spouses
Eslabon are authorized to borrow from respondent bank was unlimited; and that, while the SPA states that the amount
loaned is for the benefit of Eduarda Belo, it was in fact used for the benefit of the respondents spouses Eslabon. For the
said reasons petitioners contend that the mortgage contract lacks valid consent, object and consideration; that it violates a
concept in the law of agency which provides that the contract entered into by the agent must always be for the benefit of
the principal; and, that it does not express the true intent of the parties.
The subject SPA, the real estate mortgage contract, the foreclosure proceedings and the subsequent auction sale of
Eduarda Belos property are valid and legal.
First, the validity of the SPA and the mortgage contract cannot anymore be assailed due to petitioners failure to
appeal the same after the trial court rendered its decision affirming their validity. After the trial court rendered its decision
granting petitioners their alternative cause of action, i.e., that they can redeem the subject property on the basis of the
winning bid price of respondent PNB, petitioners did not anymore bother to appeal that decision on their first cause of
action. If they felt aggrieved by the trial courts decision upholding the validity of the said two (2) documents, then they
should have also partially appealed therefrom but they did not. It is an abuse of legal remedies for petitioners to belatedly
pursue a claim that was settled with finality due to their own shortcoming. As held in Caliguia v. National Labor Relations
Commission,[16] where a party did not appeal from the Labor Arbiters decision denying claims for actual, moral and
exemplary damages and instead moved for immediate execution, the decision then became final as to him and by asking
for its execution, he was estopped from relitigating his claims for damages.
Second, well-entrenched is the rule that the findings of trial courts which are factual in nature, especially
when affirmed by the Court of Appeals, deserve to be respected and affirmed by the Supreme Court, provided it
[17]
is supported by substantial evidence. The finding of facts of the trial court to the effect that Eduarda Belo was
not induced by the manager of respondent PNB but instead that she freely consented to the execution of the SPA
is given the highest respect as it was affirmed by the appellate court. In the case at bar, the burden of proof was on
the petitioners to prove or show that there was alleged inducement and misrepresentation by the manager of respondent
PNB and the spouses Eslabon. Their allegation that Eduarda Belo only agreed to sign the SPA after she was assured that
the spouses Eslabon would not borrow more than the value of their own four (4) residential lots in Roxas City was
properly objected to by respondent PNB.[18] Also their contention that Eduarda Belo signed the SPA in blank was properly
objected to by respondent PNB on the ground that the best evidence was the SPA. There is also no proof to sustain
petitioners allegation that respondent PNB acted in bad faith and connived with the debtors, respondents spouses
Eslabon, to obtain Eduarda Belos consent to the mortgage through fraud. Eduarda Belo very well knew that the
respondents spouses Eslabon would use her property as additional mortgage collateral for loans inasmuch as the
mortgage contract states that the consideration of this mortgage is hereby initially fixed at P229,000.00.[19] The mortgage
contract sufficiently apprises Eduarda Belo that the respondents spouses Eslabon can apply for more loans with her
property as continuing additional security. If she found the said provision questionable, she should have complained
immediately.Instead, almost ten (10) years had passed before she and the petitioners sought the annulment of the said
contracts.
Third, after having gone through the records, this Court finds that the courts a quo did not err in holding that the SPA
executed by Eduarda Belo in favor of the respondents spouses Eslabon and the Real Estate Mortgage executed by the
respondents spouses in favor of respondent PNB are valid. It is stipulated in paragraph three (3) of the SPA that Eduarda
Belo appointed the Eslabon spouses to make, sign, execute and deliver any contract of mortgage or any other documents
of whatever nature or kind .... which may be necessary or proper in connection with the loan herein mentioned, or with any
loan which my attorney-in-fact may contract personally in his own name ... [20] This portion of the SPA is quite relevant to
the case at bar. This was the main reason why the SPA was executed in the first place inasmuch as Eduarda Belo
consented to have her land mortgaged for the benefit of the respondents spouses Eslabon. The SPA was not meant to
make her a co-obligor to the principal contract of loan between respondent PNB, as lender, and the spouses Eslabon, as
borrowers. The accommodation real estate mortgage over her property, which was executed in favor of respondent PNB
by the respondents spouses Eslabon, in their capacity as her attorneys-in-fact by virtue of her SPA, is merely an
accessory contract.
Eduarda Belo consented to be an accommodation mortgagor in the sense that she signed the SPA to authorize
respondents spouses Eslabons to execute a mortgage on her land. Petitioners themselves even acknowledged that the
relation created by the SPA and the mortgage contract was merely that of mortgagor-mortgagee relationship. The SPA
form of the PNB was utilized to authorize the spouses Eslabon to mortgage Eduarda Belos land as additional collateral of
the Eslabon spouses loan from respondent PNB. Thus, the petitioners contention that the SPA is void is
untenable. Besides, Eduarda Belo benefited, in signing the SPA, in the sense that she was able to collect the rentals on
[21]
her leased property from the Eslabons.
An accommodation mortgage is not necessarily void simply because the accommodation mortgagor did not benefit
from the same. The validity of an accommodation mortgage is allowed under Article 2085 of the New Civil Code which
provides that (t)hird persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property. An accommodation mortgagor, ordinarily, is not himself a recipient of the loan, otherwise
that would be contrary to his designation as such. It is not always necessary that the accommodation mortgagor be
appraised beforehand of the entire amount of the loan nor should it first be determined before the execution of the SPA for
it has been held that:

(real) mortgages given to secure future advancements are valid and legal contracts; that the amounts named as
consideration in said contract do not limit the amount for which the mortgage may stand as security if from the four
corners of the instrument the intent to secure future and other indebtedness can be gathered. A mortgage given to
secure advancements is a continuing security and is not discharged by repayment of the amount named in the
mortgage, until the full amount of the advancements are paid.[22]

Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed to respondent PNB manifesting her
intent to redeem the property is a waiver of her right to question the validity of the SPA and the mortgage contract as well
as the foreclosure and the sale of her subject property. Petitioners claim that her letter was not an offer to redeem as it
was merely a declaration of her intention to redeem.Respondent PNBs answer to her letter would have carried certain
legal effects. Had respondent PNB accepted her letter-offer, it would have surely bound the bank into accepting the
redemption price offered by Eduarda Belo. If it was her opinion that her SPA and the mortgage contract were null and
void, she would not have manifested her intent to redeem but instead questioned their validity before a court of
justice. Her offer was a recognition on her part that the said contracts are valid and produced legal effects. Inasmuch as
Eduarda Belo is estopped from questioning the validity of the contracts, her assignees who are the petitioners in the
instant case, are likewise estopped from disputing the validity of her SPA, the accommodation real estate mortgage
contract, the foreclosure proceedings, the auction sale and the Sheriffs Certificate of Sale.
The second issue pertains to the applicable law on redemption to the case at bar. Respondent PNB maintains that
Section 25 of Presidential Decree No. 694 should apply, thus:

SEC. 25. Right of redemption of foreclosed property Right of possession during redemption period. - Within one year from
the registration of the foreclosure sale of real estate, the mortgagor shall have the right to redeem the property by paying
all claims of the Bank against him on the date of the sale including all the costs and other expenses incurred by reason of
the foreclosure sale and custody of the property, as well as charges and accrued interests. [23]

Additionally, respondent bank seeks the application to the case at bar of Section 78 of the General Banking Act, as
amended by P.D. No. 1828, which states that -

In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any
loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose real
property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any
bank, banking or credit institution, within the purview of this Act shall have the right, within one year after the sale of the
real estate as a result of the foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by
the court in the order of execution, or the amount due under the mortgage deed, as the case may be, with interest thereon
at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution
concerned by reason of the execution and sale and as a result of the custody of said property less the income received
[24]
from the property.

On the other hand, petitioners assert that only the amount of the winning bidders purchase together with the interest
thereon and on all other related expenses should be paid as redemption price in accordance with Section 6 of Act No.
3135 which provides that:

Sec. 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore referred to, the debtor, his
successor in interest or any judicial creditor or judgment creditor of said debtor, or any person having a lien on the
property subsequent to the mortgage or deed of trust under which the property is sold, may redeem the same at any time
within the term of one year from and after the date of the sale; and such redemption shall be governed by the provisions
of sections four hundred and sixty-four to four hundred and sixty six, inclusive, of the Code of Civil Procedure[25], in so far
as these are not inconsistent with the provisions of this Act.

Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that:

SEC. 28. Time and manner of, and amounts payable on, successive redemptions; notice to be given and filed. - The
judgment obligor, or redemptioner, may redeem the property from the purchaser, at any time within one (1) year from the
date of the registration of the certificate of sale, by paying the purchaser the amount of his purchase, within one per
centum per month interest thereon in addition, up to the time of redemption, together with the amount of any assessments
or taxes which the purchaser may have paid thereon after purchase, and interest on such last named amount at the same
rate; and if the purchaser be also a creditor having a prior lien to that of the redemptioner, other than the judgment under
which such purchase was made, the amount of such other lien, with interest. (Italics supplied)

xxx xxx xxx

This Court finds the petitioners position on that issue to be meritorious.
There is no doubt that Eduarda Belo, assignor of the petitioners, is an accommodation mortgagor. The Pre-trial Order
and respondent PNBs brief contain a declaration of this fact. The dispute between the parties is whether Section 25 of
P.D. No. 694 applies to an accommodation mortgagor, or her assignees. The said legal provision does not make a
distinction between a debtor-mortgagor and an accommodation mortgagor as it uses the broad term mortgagor. The
appellate court thus ruled that the provision applies even to an accommodation mortgagor inasmuch as the law does not
make any distinction. We disagree. Where a word used in a statute has both a restricted and a general meaning, the
general must prevail over the restricted unless the nature of the subject matter or the context in which it is employed
clearly indicates that the limited sense is intended.[26] It is presumed that the legislature intended exceptions to its
language which would avoid absurd consequences of this character.[27] In the case at bar, the qualification to the general
rule applies. The same provision of Section 25 of P.D. No. 694 provides that the mortgagor shall have the right to redeem
the property by paying all claims of the Bank against him. From said provision can be deduced that the mortgagor referred
to by that law is one from whom the bank has a claim in the form of outstanding or unpaid loan; he is also called a
borrower or debtor-mortgagor. On the other hand, respondent PNB has no claim against accommodation mortgagor
Eduarda Belo inasmuch as she only mortgaged her property to accommodate the Eslabon spouses who are the loan
borrowers of the PNB. The principal contract is the contract of loan between the Eslabon spouses, as borrowers/debtors,
and the PNB as lender. The accommodation real estate mortgage (which secures the loan) is only an accessory
contract. It is our view and we hold that the term mortgagor in Section 25 of P.D. No. 694 pertains only to a debtor-
mortgagor and not to an accommodation mortgagor.
It is well settled that courts are not to give a statute a meaning that would lead to absurdities. If the words of a statute
are susceptible of more than one meaning, the absurdity of the result of one construction is a strong argument against its
[28]
adoption, and in favor of such sensible interpretation. We test a law by its result. A law should not be interpreted so as
not to cause an injustice. There are laws which are generally valid but may seem arbitrary when applied in a particular
case because of its peculiar circumstances. We are not bound to apply them in slavish obedience to their language.[29]
The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is unfair and unjust to accommodation
mortgagors and their assignees. Forcing an accommodation mortgagor like Eduarda Belo to pay for what the principal
debtors (Eslabon spouses) owe to respondent bank is to punish her for the accommodation and generosity she accorded
to the Eslabon spouses who were then hard pressed for additional collaterals needed to secure their bank
loan. Respondents PNB and spouses Eslabons very well knew that she merely consented to be a mere accommodation
mortgagor.
The circumstances of the case at bar also provide for ample reason why petitioners cannot be made to pay the entire
liability of the principal debtors, Eslabon spouses, to respondent PNB.
 The trial court found that respondent PNBs application for extrajudicial foreclosure and public auction sale of
[30]
Eduarda Belos mortgaged property was filed under Act No. 3135, as amended by P.D. No. 385. The notice of
extrajudicial sale, the Certificate of Sheriffs Sale, and the letter it sent to Eduarda Belo did not mention P. D. No. 694 as
the basis for redemption. As aptly ruled by the trial court -

In fairness to these mortgagors, their successors-in-interest, or innocent purchasers for value of their redemption rights,
PNB should have at least advised them that redemption would be governed by its Revised Charter or PD 69, and not by
Act 3135 and the Rules of Court, as commonly practiced This practice of defendant Bank is manifestly unfair and unjust to
these redemptioners who are caught by surprise and usually taken aback by the enormous claims of the Bank not shown
in the Notice of Extrajudicial Sale or the Certificate of Sheriffs Sale, as in this case. [31]

Moreover, the mortgage contract explicitly provides that . the mortgagee may immediately foreclose this mortgage
judicially in accordance with the Rules of Court or extrajudicially in accordance with Act No. 3135, as amended and
[32]
Presidential Decree No. 385... Since the mortgage contract in this case is in the nature of a contract of adhesion as it
was prepared solely by respondent, it has to be interpreted in favor of petitioners. The respondent bank however tries to
[33]
renege on this contractual commitment by seeking refuge in the 1989 case of Sy v. Court of Appeals wherein this Court
ruled that the redemption price is equal to the total amount of indebtedness to the banks claim inasmuch as Section 78 of
the General Banking Act is an amendment to Section 6 of Act No. 3135, despite the fact that the extrajudicial foreclosure
procedure followed by the PNB was explicitly under or in accordance with Act No. 3135.
In the 1996 case of China Banking Corporation v. Court of Appeals,[34] where the parties also stipulated that Act No.
3135 is the controlling law in case of foreclosure, this Court ruled that;

By invoking the said Act, there is no doubt that it must govern the manner in which the sale and redemption shall be
effected. Clearly, the fundamental principle that contracts are respected as the law between the contracting parties finds
application in the present case, specially where they are not contrary to law, morals, good customs and public policy. [35]

More importantly, the ruling pronounced in Sy v. Court of Appeals and other cases,[36] that the General Banking Act
and P.D. No. 694 shall prevail over Act No. 3135 with respect to the redemption price, does not apply here inasmuch as in
the said cases the redemptioners were the debtors themselves or their assignees, and not an accommodation mortgagor
or the latters assignees such as in the case at bar. In the said cases, the debtor-mortgagors were required to pay as
redemption price their entire liability to the bank inasmuch as they were obligated to pay their loan which is a principal
obligation in the first place. On the other hand, accommodation mortgagors as such are not in anyway liable for the
payment of the loan or principal obligation of the debtor/borrower. The liability of the accommodation mortgagors extends
only up to the loan value of their mortgaged property and not to the entire loan itself. Hence, it is only just that they be
allowed to redeem their mortgaged property by paying only the winning bid price thereof (plus interest thereon) at the
public auction sale.
One wonders why respondent PNB invokes Act No. 3135 in its contracts without qualification and yet in the end
appears to disregard the same when it finds its provisions unfavorable to it. This is unfair to the other contracting party
who in good faith believes that respondent PNB would comply with the contractual agreement.
It is therefore our view and we hold that Section 78 of the General Banking Act, as amended by P.D. No. 1828, is
inapplicable to accommodation mortgagors in the redemption of their mortgaged properties.
While the petitioners, as assignees of Eduarda Belo, are not required to pay the entire claim of respondent PNB
against the principal debtors, spouses Eslabon, they can only exercise their right of redemption with respect to the parcel
of land belonging to Eduarda Belo, the accommodation mortgagor. Thus, they have to pay the bid price less the
corresponding loan value of the foreclosed four (4) residential lots of the spouses Eslabon.
The respondent PNB contends that to allow petitioners to redeem only the property belonging to their assignor,
Eduarda Belo, would violate the principle of indivisibility of mortgage contracts. We disagree.
Article 2089 of the Civil Code of the Philippines, provides that:

A pledge or mortgage is indivisible, even though the debt may be divided among the successors in interest of the debtor
or of the creditor.

Therefore, the debtors heir who has paid a part of the debt cannot ask for the proportionate extinguishment of the pledge
or mortgage as the debt is not completely satisfied.

Neither can the creditors heir who received his share of the debt return the pledge or cancel the mortgage, to the
prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in mortgage or pledge, each one of
them guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the debt for
which each thing is specially answerable is satisfied.

There is no dispute that the mortgage on the four (4) parcels of land by the Eslabon spouses and the other mortgage
on the property of Eduarda Belo both secure the loan obligation of respondents spouses Eslabon to respondent
PNB. However, we are not persuaded by the contention of the respondent PNB that the indivisibility concept applies to the
right of redemption of an accommodation mortgagor and her assignees. The jurisprudence in Philippine National Bank v.
Agudelo[37] is enlightening to the case at bar, to wit:
xxxxxxxxx

However, Paz Agudelo y Gonzaga (the principal) x x x gave her consent to the lien on lot No. 878 x x x. This
acknowledgment, however, does not extend to lots Nos. 207 and 61 inasmuch as, although it is true that a mortgage is
indivisible as to the contracting parties and as to their successors in interest (Article 1860, Civil code), it is not so with
respect to a third person who did not take part in the constitution thereof either personally or through an agent x x
x. Therefore, the only liability of the defendant-appellant Paz Agudelo y Gonzaga is that which arises from the aforesaid
acknowledgment but only with respect to the lien and not to the principal obligation secured by the mortgage
acknowledged by her to have been constituted on said lot No. 878 x x x. Such liability is not direct but a subsidiary one.[38]

xxxxxxxxx

Wherefore, it is hereby held that the liability contracted by the aforesaid defendant-appellant Paz Agudelo y Gonzaga is
merely subsidiary to that of Mauro A. Garrucho (the agent), limited to lot No. 87.

xxxxxxxxx
From the wordings of the law, indivisibility arises only when there is a debt, that is, there is a debtor-creditor
relationship. But, this relationship is wanting in the case at bar in the sense that petitioners are assignees of an
accommodation mortgagor and not of a debtor-mortgagor. Hence, it is fair and logical to allow the petitioners to redeem
only the property belonging to their assignor, Eduarda Belo.
With respect to the four (4) parcels of residential land belonging to the Eslabon spouses, petitioners - being total
strangers to said lots - lack legal personality to redeem the same. Fair play and justice demand that the respondent PNBs
interest of recovering its entire bank claim should not be at the expense of petitioners, as assignees of Eduarda Belo, who
is not indebted to it. Besides, the letter[39] sent by respondent PNB to Eduarda Belo states that your (Belo) mortgaged
property/ies with PNB covered by TCT # T-7493 was/were sold at public auction ..... It further states that You (Belo) have,
therefore, one year from July 1, 1991 within which to redeem your mortgaged property/ies, should you desire to redeem it.
Respondent PNB never mentioned that she was bound to redeem the entire mortgaged properties including the four (4)
residential properties of the spouses Eslabon. The letter was explicit in mentioning Eduarda Belos property only. From the
said statement, there is then an admission on the part of respondent PNB that redemption only extends to the subject
property of Eduarda Belo for the reason that the notice of the sale limited the redemption to said property.
WHEREFORE, the petition is partially granted in that the petitioners are hereby allowed to redeem only the property,
covered and described in Transfer Certificate of Title No. T-7493-Capiz registered in the name of Eduarda Belo, by paying
only the bid price less the corresponding loan value of the foreclosed four (4) residential lots of the respondents spouses
Marcos and Arsenia Eslabon, consistent with the Decision of the Regional Trial Court of Roxas City in Civil Case No. V-
6182.
SO ORDERED.