G.R. No.

109125 December 2, 1994

ANG YU ASUNCION, ARTHUR GO AND KEH TIONG, petitioners,
vs.
THE HON. COURT OF APPEALS and BUEN REALTY DEVELOPMENT CORPORATION, respondents. .
The antecedents are recited in good detail by the appellate court thusly:
On July 29, 1987 a Second Amended Complaint for Specific Performance was filed by Ang Yu Asuncion and
Keh Tiong, et al., against Bobby Cu Unjieng, Rose Cu Unjieng and Jose Tan before the Regional Trial Court,
Branch 31, Manila in Civil Case No. 87-41058, alleging, among others, that plaintiffs are tenants or lessees of
residential and commercial spaces owned by defendants described as Nos. 630-638 Ongpin Street, Binondo,
Manila; that they have occupied said spaces since 1935 and have been religiously paying the rental and
complying with all the conditions of the lease contract; that on several occasions before October 9, 1986,
defendants informed plaintiffs that they are offering to sell the premises and are giving them priority to acquire
the same; that during the negotiations, Bobby Cu Unjieng offered a price of P6-million while plaintiffs made a
counter offer of P5-million; that plaintiffs thereafter asked the defendants to put their offer in writing to which
request defendants acceded; that in reply to defendant's letter, plaintiffs wrote them on October 24, 1986 asking
that they specify the terms and conditions of the offer to sell; that when plaintiffs did not receive any reply, they
sent another letter dated January 28, 1987 with the same request; that since defendants failed to specify the
terms and conditions of the offer to sell and because of information received that defendants were about to sell
the property, plaintiffs were compelled to file the complaint to compel defendants to sell the property to them.
Defendants filed their answer denying the material allegations of the complaint and interposing a special
defense of lack of cause of action.
After the issues were joined, defendants filed a motion for summary judgment which was granted by the lower
court. The trial court found that defendants' offer to sell was never accepted by the plaintiffs for the reason that
the parties did not agree upon the terms and conditions of the proposed sale, hence, there was no contract of
sale at all. Nonetheless, the lower court ruled that should the defendants subsequently offer their property for
sale at a price of P11-million or below, plaintiffs will have the right of first refusal. Thus the dispositive portion of
the decision states:
WHEREFORE, judgment is hereby rendered in favor of the defendants and against the
plaintiffs summarily dismissing the complaint subject to the aforementioned condition that if
the defendants subsequently decide to offer their property for sale for a purchase price of
Eleven Million Pesos or lower, then the plaintiffs has the option to purchase the property or
of first refusal, otherwise, defendants need not offer the property to the plaintiffs if the
purchase price is higher than Eleven Million Pesos.
SO ORDERED.
Aggrieved by the decision, plaintiffs appealed to this Court in
CA-G.R. CV No. 21123. n a decision promulgated on September 21, 1990 (penned by Justice Segundino G.
Chua and concurred in by Justices Vicente V. Mendoza and Fernando A. Santiago), this Court affirmed with
modification the lower court's judgment, holding:
n resume, there was no meeting of the minds between the parties concerning the sale of
the property. Absent such requirement, the claim for specific performance will not lie.
Appellants' demand for actual, moral and exemplary damages will likewise fail as there
exists no justifiable ground for its award. Summary judgment for defendants was properly
granted. Courts may render summary judgment when there is no genuine issue as to any
material fact and the moving party is entitled to a judgment as a matter of law (Garcia vs.
Court of Appeals, 176 SCRA 815). All requisites obtaining, the decision of the court a
quo is legally justifiable.
WHEREFORE, finding the appeal unmeritorious, the judgment appealed from is hereby
AFFRMED, but subject to the following modification: The court a quo in the aforestated
decision gave the plaintiffs-appellants the right of first refusal only if the property is sold for
a purchase price of Eleven Million pesos or lower; however, considering the mercurial and
uncertain forces in our market economy today. We find no reason not to grant the same
right of first refusal to herein appellants in the event that the subject property is sold for a
price in excess of Eleven Million pesos. No pronouncement as to costs.
SO ORDERED.
The decision of this Court was brought to the Supreme Court by petition for review on certiorari. The Supreme
Court denied the appeal on May 6, 1991 "for insufficiency in form and substances" (Annex H, Petition).
On November 15, 1990, while CA-G.R. CV No. 21123 was pending consideration by this Court, the Cu Unjieng
spouses executed a Deed of Sale (Annex D, Petition) transferring the property in question to herein petitioner
Buen Realty and Development Corporation, subject to the following terms and conditions:
1. That for and in consideration of the sum of FFTEEN MLLON PESOS
(P15,000,000.00), receipt of which in full is hereby acknowledged, the VENDORS hereby
sells, transfers and conveys for and in favor of the VENDEE, his heirs, executors,
administrators or assigns, the above-described property with all the improvements found
therein including all the rights and interest in the said property free from all liens and
encumbrances of whatever nature, except the pending ejectment proceeding;
2. That the VENDEE shall pay the Documentary Stamp Tax, registration fees for the
transfer of title in his favor and other expenses incidental to the sale of above-described
property including capital gains tax and accrued real estate taxes.
As a consequence of the sale, TCT No. 105254/T-881 in the name of the Cu Unjieng spouses was cancelled
and, in lieu thereof, TCT No. 195816 was issued in the name of petitioner on December 3, 1990.
On July 1, 1991, petitioner as the new owner of the subject property wrote a letter to the lessees demanding
that the latter vacate the premises.
On July 16, 1991, the lessees wrote a reply to petitioner stating that petitioner brought the property subject to
the notice of lis pendens regarding Civil Case No. 87-41058 annotated on TCT No. 105254/T-881 in the name
of the Cu Unjiengs.
The lessees filed a Motion for Execution dated August 27, 1991 of the Decision in Civil Case No. 87-41058 as
modified by the Court of Appeals in CA-G.R. CV No. 21123.
On August 30, 1991, respondent Judge issued an order (Annex A, Petition) quoted as follows:
Presented before the Court is a Motion for Execution filed by plaintiff represented by Atty.
Antonio Albano. Both defendants Bobby Cu Unjieng and Rose Cu Unjieng represented by
Atty. Vicente Sison and Atty. Anacleto Magno respectively were duly notified in today's
consideration of the motion as evidenced by the rubber stamp and signatures upon the
copy of the Motion for Execution.
The gist of the motion is that the Decision of the Court dated September 21, 1990 as
modified by the Court of Appeals in its decision in CA G.R. CV-21123, and elevated to the
Supreme Court upon the petition for review and that the same was denied by the highest
tribunal in its resolution dated May 6, 1991 in G.R. No.
L-97276, had now become final and executory. As a consequence, there was an Entry of
Judgment by the Supreme Court as of June 6, 1991, stating that the aforesaid modified
decision had already become final and executory.
t is the observation of the Court that this property in dispute was the subject of theNotice of
Lis Pendens and that the modified decision of this Court promulgated by the Court of
Appeals which had become final to the effect that should the defendants decide to offer the
property for sale for a price of P11 Million or lower, and considering the mercurial and
uncertain forces in our market economy today, the same right of first refusal to herein
plaintiffs/appellants in the event that the subject property is sold for a price in excess of
Eleven Million pesos or more.
WHEREFORE, defendants are hereby ordered to execute the necessary Deed of Sale of
the property in litigation in favor of plaintiffs Ang Yu Asuncion, Keh Tiong and Arthur Go for
the consideration of P15 Million pesos in recognition of plaintiffs' right of first refusal and
that a new Transfer Certificate of Title be issued in favor of the buyer.
All previous transactions involving the same property notwithstanding the issuance of
another title to Buen Realty Corporation, is hereby set aside as having been executed in
bad faith.
SO ORDERED.
On September 22, 1991 respondent Judge issued another order, the dispositive portion of which reads:
WHEREFORE, let there be Writ of Execution issue in the above-entitled case directing the
Deputy Sheriff Ramon Enriquez of this Court to implement said Writ of Execution ordering
the defendants among others to comply with the aforesaid Order of this Court within a
period of one (1) week from receipt of this Order and for defendants to execute the
necessary Deed of Sale of the property in litigation in favor of the plaintiffs Ang Yu
Asuncion, Keh Tiong and Arthur Go for the consideration of P15,000,000.00 and ordering
the Register of Deeds of the City of Manila, to cancel and set aside the title already issued
in favor of Buen Realty Corporation which was previously executed between the latter and
defendants and to register the new title in favor of the aforesaid plaintiffs Ang Yu Asuncion,
Keh Tiong and Arthur Go.
SO ORDERED.
On the same day, September 27, 1991 the corresponding writ of execution (Annex C, Petition) was issued.
1

On 04 December 1991, the appellate court, on appeal to it by private respondent, set aside and declared without force and effect
the above questioned orders of the court a quo.
n this petition for review on certiorari, petitioners contend that Buen Realty can be held bound by the writ of execution by virtue of
the notice of lis pendens, carried over on TCT No. 195816 issued in the name of Buen Realty, at the time of the latter's purchase of
the property on 15 November 1991 from the Cu Unjiengs.
We affirm the decision of the appellate court.
A not too recent development in real estate transactions is the adoption of such arrangements as the right of first refusal, a purchase
option and a contract to sell. For ready reference, we might point out some fundamental precepts that may find some relevance to
this discussion.
An obligation is a juridical necessity to give, to do or not to do (Art. 1156, Civil Code). The obligation is constituted upon the
concurrence of the essential elements thereof, viz: (a) The vinculum juris or juridical tie which is the efficient cause established by
the various sources of obligations (law, contracts, quasi-contracts, delicts and quasi-delicts); (b) the object which is the prestation or
conduct; required to be observed (to give, to do or not to do); and (c) the subject-persons who, viewed from the demandability of the
obligation, are the active (obligee) and the passive (obligor) subjects.
Among the sources of an obligation is a contract (Art. 1157, Civil Code), which is a meeting of minds between two persons whereby
one binds himself, with respect to the other, to give something or to render some service (Art. 1305, Civil Code). A contract
undergoes various stages that include its negotiation or preparation, its perfection and, finally, its consummation. Negotiation covers
the period from the time the prospective contracting parties indicate interest in the contract to the time the contract is concluded
(perfected). The perfection of the contract takes place upon the concurrence of the essential elements thereof. A contract which
is consensual as to perfection is so established upon a mere meeting of minds, i.e., the concurrence of offer and acceptance, on the
object and on the cause thereof. A contract which requires, in addition to the above, the delivery of the object of the agreement, as
in a pledge or commodatum, is commonly referred to as a real contract. n a solemn contract, compliance with certain formalities
prescribed by law, such as in a donation of real property, is essential in order to make the act valid, the prescribed form being
thereby an essential element thereof. The stage of consummationbegins when the parties perform their respective undertakings
under the contract culminating in the extinguishment thereof.
Until the contract is perfected, it cannot, as an independent source of obligation, serve as a binding juridical relation. n sales,
particularly, to which the topic for discussion about the case at bench belongs, the contract is perfected when a person, called the
seller, obligates himself, for a price certain, to deliver and to transfer ownership of a thing or right to another, called the buyer, over
which the latter agrees. Article 1458 of the Civil Code provides:
Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership of
and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.
A contract of sale may be absolute or conditional.
When the sale is not absolute but conditional, such as in a "Contract to Sell" where invariably the ownership of the thing sold is
retained until the fulfillment of a positive suspensive condition (normally, the full payment of the purchase price), the breach of the
condition will prevent the obligation to convey title from acquiring an obligatory force.
2
n ignos vs. Court of Appeals (158 SCRA
375), we have said that, although denominated a "Deed of Conditional Sale," a sale is still absolute where the contract is devoid of
any proviso that title is reserved or the right to unilaterally rescind is stipulated, e.g., until or unless the price is paid. Ownership will
then be transferred to the buyer upon actual or constructive delivery (e.g., by the execution of a public document) of the property
sold. Where the condition is imposed upon the perfection of the contract itself, the failure of the condition would prevent such
perfection.
3
f the condition is imposed on the obligation of a party which is not fulfilled, the other party may either waive the
condition or refuse to proceed with the sale (Art. 1545, Civil Code).
4

An unconditional mutual promise to buy and sell, as long as the object is made determinate and the price is fixed, can be obligatory
on the parties, and compliance therewith may accordingly be exacted.
5

An accepted unilateral promise which specifies the thing to be sold and the price to be paid, when coupled with a valuable
consideration distinct and separate from the price, is what may properly be termed a perfected contract ofoption. This contract is
legally binding, and in sales, it conforms with the second paragraph of Article 1479 of the Civil Code, viz:
Art. 1479. . . .
An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the
promissor if the promise is supported by a consideration distinct from the price. (1451a)
6

Observe, however, that the option is not the contract of sale itself.
7
The optionee has the right, but not the obligation, to buy. Once
the option is exercised timely, i.e., the offer is accepted before a breach of the option, a bilateral promise to sell and to buy ensues
and both parties are then reciprocally bound to comply with their respective undertakings.
8

Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect promise policitacion) is merely an offer. Public
advertisements or solicitations and the like are ordinarily construed as mere invitations to make offers or only as proposals. These
relations, until a contract is perfected, are not considered binding commitments. Thus, at any time prior to the perfection of the
contract, either negotiating party may stop the negotiation. The offer, at this stage, may be withdrawn; the withdrawal is effective
immediately after its manifestation, such as by its mailing and not necessarily when the offeree learns of the withdrawal (Laudico vs.
Arias, 43 Phil. 270). Where a period is given to the offeree within which to accept the offer, the following rules generally govern:
(1) f the period is not itself founded upon or supported by a consideration, the offeror is still free and has the right to withdraw the
offer before its acceptance, or, if an acceptance has been made, before the offeror's coming to know of such fact, by communicating
that withdrawal to the offeree (see Art. 1324, Civil Code; see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is
applicable to a unilateral promise to sell under Art. 1479, modifying the previous decision in South Western Sugar vs. Atlantic Gulf,
97 Phil. 249; see also Art. 1319, Civil Code; Rural Bank of Paraaque, Inc., vs. Remolado, 135 SCRA 409; Sanchez vs. Rigos, 45
SCRA 368). The right to withdraw, however, must not be exercised whimsically or arbitrarily; otherwise, it could give rise to a
damage claim under Article 19 of the Civil Code which ordains that "every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and observe honesty and good faith."
(2) f the period has a separate consideration, a contract of "option" is deemed perfected, and it would be a breach of that contract to
withdraw the offer during the agreed period. The option, however, is an independent contract by itself, and it is to be distinguished
from the projected main agreement (subject matter of the option) which is obviously yet to be concluded. f, in fact, the optioner-
offeror withdraws the offer before its acceptance(exercise of the option) by the optionee-offeree, the latter may not sue for specific
performance on the proposed contract ("object" of the option) since it has failed to reach its own stage of perfection. The optioner-
offeror, however, renders himself liable for damages for breach of the option. n these cases, care should be taken of the real nature
of the consideration given, for if, in fact, it has been intended to be part of the consideration for the main contract with a right of
withdrawal on the part of the optionee, the main contract could be deemed perfected; a similar instance would be an "earnest
money" in a contract of sale that can evidence its perfection (Art. 1482, Civil Code).
n the law on sales, the so-called "right of first refusal" is an innovative juridical relation. Needless to point out, it cannot be deemed
a perfected contract of sale under Article 1458 of the Civil Code. Neither can the right of first refusal, understood in its normal
concept, per se be brought within the purview of an option under the second paragraph of Article 1479, aforequoted, or possibly of
an offer under Article 1319
9
of the same Code. An option or an offer would require, among other things,
10
a clear certainty on both
the object and the cause or consideration of the envisioned contract. n a right of first refusal, while the object might be made
determinate, the exercise of the right, however, would be dependent not only on the grantor's eventual intention to enter into a
binding juridical relation with another but also on terms, including the price, that obviously are yet to be later firmed up. Prior thereto,
it can at best be so described as merely belonging to a class of preparatory juridical relations governed not by contracts (since the
essential elements to establish the vinculum juris would still be indefinite and inconclusive) but by, among other laws of general
application, the pertinent scattered provisions of the Civil Code on human conduct.
Even on the premise that such right of first refusal has been decreed under a final judgment, like here, its breach cannot justify
correspondingly an issuance of a writ of execution under a judgment that merely recognizes its existence, nor would it sanction an
action for specific performance without thereby negating the indispensable element of consensuality in the perfection of
contracts.
11
t is not to say, however, that the right of first refusal would be inconsequential for, such as already intimated above, an
unjustified disregard thereof, given, for instance, the circumstances expressed in Article 19
12
of the Civil Code, can warrant a
recovery for damages.
The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a "right of first refusal" in favor of
petitioners. The consequence of such a declaration entails no more than what has heretofore been said. n fine, if, as it is here so
conveyed to us, petitioners are aggrieved by the failure of private respondents to honor the right of first refusal, the remedy is not a
writ of execution on the judgment, since there is none to execute, but an action for damages in a proper forum for the purpose.
Furthermore, whether private respondent Buen Realty Development Corporation, the alleged purchaser of the property, has acted in
good faith or bad faith and whether or not it should, in any case, be considered bound to respect the registration of the lis
pendens in Civil Case No. 87-41058 are matters that must be independently addressed in appropriate proceedings. Buen Realty,
not having been impleaded in Civil Case No. 87-41058, cannot be held subject to the writ of execution issued by respondent Judge,
let alone ousted from the ownership and possession of the property, without first being duly afforded its day in court.
We are also unable to agree with petitioners that the Court of Appeals has erred in holding that the writ of execution varies the terms
of the judgment in Civil Case No. 87-41058, later affirmed in CA-G.R. CV-21123. The Court of Appeals, in this regard, has
observed:
Finally, the questioned writ of execution is in variance with the decision of the trial court as modified by this
Court. As already stated, there was nothing in said decision
13
that decreed the execution of a deed of sale
between the Cu Unjiengs and respondent lessees, or the fixing of the price of the sale, or the cancellation of
title in the name of petitioner (Limpin vs. AC, 147 SCRA 516; Pamantasan ng Lungsod ng Maynila vs. AC, 143
SCRA 311; De Guzman vs. CA, 137 SCRA 730; Pastor vs. CA, 122 SCRA 885).
t is likewise quite obvious to us that the decision in Civil Case No. 87-41058 could not have decreed at the time the execution of
any deed of sale between the Cu Unjiengs and petitioners.
WHEREFORE, we UPHOLD the Court of Appeals in ultimately setting aside the questioned Orders, dated 30 August 1991 and 27
September 1991, of the court a quo. Costs against petitioners.
SO ORDERED.

G.R. No. 77860 November 22, 1988
BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION, petitioners,
vs.
HON. COURT OF APPEALS and NILCAR Y. FAJILAN, respondents..

GRIO-AQUINO,
The only issue in this case is whether or not a suit brought by a withdrawing stockholder against the corporation to enforce payment
of the balance due on the consideration (evidenced by a corporate promissory note) for the surrender of his shares of stock and
interests in the corporation, involves an intra-corporate dispute. The resolution of that issue will determine whether the Securities
and Exchange Commission (SEC) or a regular court has jurisdiction over the action.
On May 7, 1984, respondent Nilcar Y. Fajilan offered in writing to resign as President and Member of the Board of Directors of
petitioner, Boman Environmental Development Corporation (BEDECO), and to sell to the company all his shares, rights, and
interests therein for P 300,000 plus the transfer to him of the company's suzu pick-up truck which he had been using. The letter-
offer (Exh. A-1) To assure you of payment of the above amount on respective due dates, the company will execute the necessary
promissory note.
n addition to the above, the Ford Courier Pick-up will belong to you subject to your assumption of the
outstanding obligation thereof with Fil-nvest. t is understood that upon your full payment of the pick-up,
arrangement will be made and negotiated with Fil-nvest regarding the transfer of the ownership of the vehicle
to your name.
f the above meets your requirements, kindly signify your conformity/approval by signing below.
CONFORME:
(SGD) NLCAR Y. FAJLAN
Noted:
(SGD) ALFREDO S. PANGLNAN (SGD) MAXMO R. REBALDO (SGD) BENEDCTO M. EMPAYNADO
SUBSCRBED AND SWORN TO before me, this 3rd day of July, 1984, Alfredo S. Pangilinan exhibiting to me
his Residence Certificate No. 1696224 issued at Makati, Metro Manila on January 24, 1984, in his capacity as
President of Boman Environmental Development Corporation with Corporate Residence Certificate No. 207911
issued at Makati, Metro Manila on March 26, 1984.
Doc. No. 392
Page No. 80
Book No. X
Series of 1984. (p. 245, Rollo.)
A promissory note dated July 3, 1984, was signed by BEDECO'S new president, Alfredo Pangilinan, in the presence of two
directors, committing BEDECO to pay him P300,000 over a six-month period from July 15, 1984 to December 15, 1984. The
promissory note (Exh. D) provided as follows:
PROMSSORY NOTE

However, BEDECO paid only P50,000 on July 15, 1984 and another P50,000 on August 31, 1984 and defaulted in paying the
balance of P200,000.
On April 30, 1985, Fajilan filed a complaint in the Regional Trial Court of Makati for collection of that balance from BEDECO.
n an order dated September 9, 1985, the trial court, through Judge Ansberto Paredes, dismissed the complaint for lack of
jurisdiction. t ruled that the controversy arose out of intracorporate relations, hence, the Securities and Exchange Commission has
original and exclusive jurisdiction to hear and decide it.
His motion for reconsideration of that order having been denied, Fajilan filed a "Petition for Certiorari, and mandamus with
Preliminary Attachment" in the ntermediate Appellate Court.
n a decision dated March 2, 1987, the Court of Appeals set aside Judge Paredes' order of dismissal and directed him to take
cognizance of the case. BEDECO's motion for reconsideration was denied in a resolution dated March 24, 1987 of the Court of
Appeals.
n its decision, the Appellate Court characterized the case as a suit for collection of a sum of money as Fajilan "was merely suing on
the balance of the promissory note" (p. 4, Decision; p. 196, Rollo) which BEDECO failed and refused to pay in full. More particularly,
the Court of Appeals held:
While it is true that the circumstances which led to the execution of the promissory note by the Board of
Directors of respondent corporation was an intra- corporate matter, there arose no controversy as to the sale of
petitioner's interests and rights as well as his shares as Member of the Board of Directors and President of
respondent corporation. The intra-corporate matter of the resignation of petitioner as Member of the Board of
Directors and President of respondent corporation has long been settled without issue.
The Board of Directors of respondent corporation has likewise long settled the sale by petitioner of all his
shares, rights and interests in favor of the corporation. No controversy arose out of this transaction. The
jurisdiction of the Securities and Exchange Commission therefore need not be invoked on this matter. (p. 196,
Rollo.)
The petition is impressed with merit.
Section 5(b) of P.D. No. 902-A, as amended, grants the SEC original and exclusive jurisdiction to hear and decide cases involving
b) Controversies arising out of intra-corporate or partnership relations, between and among stockholders
members, or associates; between any or all of them and the corporation, partnership or association of which
they are stockholders, members or associates, respectively; ... (Emphasis supplied.)
This case involves an intra-corporate controversy because the parties are a stockholder and the corporation. As correctly observed
by the trial court, the perfection of the agreement to sell Fajilan's participation and interests in BEDECO and the execution of the
promissory note for payment of the price of the sale did not remove the dispute from the coverage of Section 5(b) of P.D. No. 902,
as amended, for both the said agreement (Annex C) and the promissory note (Annex D) arose from intra-corporate relations.
ndeed, all the signatories of both documents were stockholders of the corporation at the time of signing the same. t was an intra-
corporate transaction, hence, this suit is an intra-corporate controversy.
Fajilan's offer to resign as president and director "effective as soon as my shares and interests thereto (sic) are sold and fully paid"
(Annex A-1, p. 239, Rollo) implied that he would remain a stockholder until his shares and interests were fully paid for, for one
cannot be a director or president of a corporation unless he is also a stockholder thereof. The fact that he was replaced as president
of the corporation did not necessaryily mean that he ceased to be a stockholder considering how the corporation failed to complete
payment of the consideration for the purchase of his shares of stock and interests in the goodwill of the business. There has been
no actual transfer of his shares to the corporation. n the books of the corporation he is still a stockholder.
Fajilan's suit against the corporation to enforce the latter's promissory note or compel the corporation to pay for his shareholdings is
cognizable by the SEC alone which shall determine whether such payment will not constitute a distribution of corporate assets to a
stockholder in preference over creditors of the corporation. The SEC has exclusive supervision, control and regulatory jurisdiction to
investigate whether the corporation has unrestricted retained earnings to cover the payment for the shares, and whether the
purchase is for a legitimate corporate purpose as provided in Sections 41 and 122 of the Corporation Code, which reads as follows:
SEC. 41. Power to acquire own shares.A stock corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes, including but not limited to the following
cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the shares to be
purchased or acquired;
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this
Code,
Sec. 12. Corporate liquidation. ...
xxx xxx xxx
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any
of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities, (77a,
89a, 16a).
These provisions of the Corporation Code should be deemed written into the agreement between the corporation and the
stockholders even if there is no express reference to them in the promissory note. The principle is well settled that an existing law
enters into and forms part of a valid contract without need for the parties' expressly making reference to it (Lakas ng
Manggagawang Makabayan vs. Abiera, 36 SCRA 437).
The requirement of unrestricted retained earnings to cover the shares is based on the trust fund doctrine which means that the
capital stock, property and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. The
reason is that creditors of a corporation are preferred over the stockholders in the distribution of corporate assets. There can be no
distribution of assets among the stockholders without first paying corporate creditors. Hence, any disposition of corporate funds to
the prejudice of creditors is null and void. "Creditors of a corporation have the right to assume that so long as there are outstanding
debts and liabilities, the board of directors will not use the assets of the corporation to purchase its own stock ..."(Steinberg vs.
Velasco, 52 Phil. 953.)
WHEREFORE, the petition for certiorari is granted. The decision of the Court of Appeals is reversed and set aside. The order of the
trial court dismissing the complaint for lack of jurisdiction is hereby reinstated. No costs.
SO ORDERED.
G.R. No. 107207 November 23, 1995
VIRGILIO R. ROMERO, petitioner,
vs.
HON. COURT OF APPEALS and ENRIQUETA CHUA VDA. DE ONGSIONG, respondents.

VITUG,
The parties pose this question: May the vendor demand the rescission of a contract for the sale of a parcel of land for a cause
traceable to his own failure to have the squatters on the subject property evicted within the contractually-stipulated period?
Petitioner Virgilio R. Romero, a civil engineer, was engaged in the business of production, manufacture and exportation of perlite
filter aids, permalite insulation and processed perlite ore. n 1988, petitioner and his foreign partners decided to put up a central
warehouse in Metro Manila on a land area of approximately 2,000 square meters. The project was made known to several freelance
real estate brokers.
A day or so after the announcement, Alfonso Flores and his wife, accompanied by a broker, offered a parcel of land measuring
1,952 square meters. Located in Barangay San Dionisio, Paraaque, Metro Manila, the lot was covered by TCT No. 361402 in the
name of private respondent Enriqueta Chua vda. de Ongsiong. Petitioner visited the property and, except for the presence of
squatters in the area, he found the place suitable for a central warehouse.
Later, the Flores spouses called on petitioner with a proposal that should he advance the amount of P50,000.00 which could be
used in taking up an ejectment case against the squatters, private respondent would agree to sell the property for only P800.00 per
square meter. Petitioner expressed his concurrence. On 09 June 1988, a contract, denominated "Deed of Conditional Sale," was
executed between petitioner and private respondent. The simply-drawn contract read:
1. That the sum of FFTY THOUSAND PESOS (P50,000.00) ONLY Philippine Currency, is
to be paid upon signing and execution of this instrument.
2. The balance of the purchase price in the amount of ONE MLLON FVE HUNDRED
ELEVEN THOUSAND SX HUNDRED PESOS (P1,511,600.00) ONLY shall be paid 45
days after the removal of all squatters from the above described property.
3. Upon full payment of the overall purchase price as aforesaid, VENDOR without necessity
of demand shall immediately sign, execute, acknowledged (sic) and deliver the
corresponding deed of absolute sale in favor of the VENDEE free from all liens and
encumbrances and all Real Estate taxes are all paid and updated.
t is hereby agreed, covenanted and stipulated by and between the parties hereto that if after 60 days from the
date of the signing of this contract the VENDOR shall not be able to remove the squatters from the property
being purchased, the downpayment made by the buyer shall be returned/reimbursed by the VENDOR to the
VENDEE.
That in the event that the VENDEE shall not be able to pay the VENDOR the balance of the purchase price of
ONE MLLON FVE HUNDRED ELEVEN THOUSAND SX HUNDRED PESOS (P1,511,600.00) ONLY after 45
days from written notification to the VENDEE of the removal of the squatters from the property being purchased,
the FFTY THOUSAND PESOS (P50,000.00) previously paid as downpayment shall be forfeited in favor of the
VENDOR.
Expenses for the registration such as registration fees, documentary stamp, transfer fee, assurances and such
other fees and expenses as may be necessary to transfer the title to the name of the VENDEE shall be for the
account of the VENDEE while capital gains tax shall be paid by the VENDOR.
N WTNESS WHEREOF, the parties hereunto signed those (sic) presents in the City of Makati MM, Philippines
on this 9th day of June, 1988.
(Sgd.) (Sgd.)
VRGLO R. ROMERO ENRQUETA CHUA VDA.
DE ONGSONG
Vendee Vendor
SGNED N THE PRESENCE OF:
(Sgd.) (Sgd.)
Rowena C. Ongsiong Jack M. Cruz
1

Alfonso Flores, in behalf of private respondent, forthwith received and acknowledged a check for P50,000.00
2
from
petitioner.
3

Pursuant to the agreement, private respondent filed a complaint for ejectment (Civil Case No. 7579) against Melchor Musa and 29
other squatter families with the Metropolitan Trial Court of Paraaque. A few months later, or on 21 February 1989, judgment was
rendered ordering the defendants to vacate the premises. The decision was handed down beyond the 60-day period (expiring 09
August 1988) stipulated in the contract. The writ of execution of the judgment was issued, still later, on 30 March 1989.
n a letter, dated 07 April 1989, private respondent sought to return the P50,000.00 she received from petitioner since, she said, she
could not "get rid of the squatters" on the lot. Atty. Sergio A.F. Apostol, counsel for petitioner, in his reply of 17 April 1989, refused
the tender and stated:.
Our client believes that with the exercise of reasonable diligence considering the favorable decision rendered by
the Court and the writ of execution issued pursuant thereto, it is now possible to eject the squatters from the
premises of the subject property, for which reason, he proposes that he shall take it upon himself to eject the
squatters, provided, that expenses which shall be incurred by reason thereof shall be chargeable to the
purchase price of the land.
4

Meanwhile, the Presidential Commission for the Urban Poor ("PCUD"), through its Regional Director for Luzon, Farley O. Viloria,
asked the Metropolitan Trial Court of Paraaque for a grace period of 45 days from 21 April 1989 within which to relocate and
transfer the squatter families. Acting favorably on the request, the court suspended the enforcement of the writ of execution
accordingly.
On 08 June 1989, Atty. Apostol reminded private respondent on the expiry of the 45-day grace period and his client's willingness to
"underwrite the expenses for the execution of the judgment and ejectment of the occupants."
5

n his letter of 19 June 1989, Atty. Joaquin Yuseco, Jr., counsel for private respondent, advised Atty. Apostol that the Deed of
Conditional Sale had been rendered null and void by virtue of his client's failure to evict the squatters from the premises within the
agreed 60-day period. He added that private respondent had "decided to retain the property."
6

On 23 June 1989, Atty. Apostol wrote back to explain:
The contract of sale between the parties was perfected from the very moment that there was a meeting of the
minds of the parties upon the subject lot and the price in the amount of P1,561,600.00. Moreover, the contract
had already been partially fulfilled and executed upon receipt of the downpayment of your client. Ms. Ongsiong
is precluded from rejecting its binding effects relying upon her inability to eject the squatters from the premises
of subject property during the agreed period. Suffice it to state that, the provision of the Deed of Conditional
Sale do not grant her the option or prerogative to rescind the contract and to retain the property should she fail
to comply with the obligation she has assumed under the contract. n fact, a perusal of the terms and conditions
of the contract clearly shows that the right to rescind the contract and to demand the return/reimbursement of
the downpayment is granted to our client for his protection.
nstead, however, of availing himself of the power to rescind the contract and demand the return,
reimbursement of the downpayment, our client had opted to take it upon himself to eject the squatters from the
premises. Precisely, we refer you to our letters addressed to your client dated April 17, 1989 and June 8, 1989.
Moreover, it is basic under the law on contracts that the power to rescind is given to the injured party.
Undoubtedly, under the circumstances, our client is the injured party.
Furthermore, your client has not complied with her obligation under their contract in good faith. t is undeniable
that Ms. Ongsiong deliberately refused to exert efforts to eject the squatters from the premises of the subject
property and her decision to retain the property was brought about by the sudden increase in the value of
realties in the surrounding areas.
Please consider this letter as a tender of payment to your client and a demand to execute the absolute Deed of
Sale.
7

A few days later (or on 27 June 1989), private respondent, prompted by petitioner's continued refusal to accept the return of the
P50,000.00 advance payment, filed with the Regional Trial Court of Makati, Branch 133, Civil Case No. 89-4394 for rescission of the
deed of "conditional" sale, plus damages, and for the consignation of P50,000.00 cash.
Meanwhile, on 25 August 1989, the Metropolitan Trial Court issued an alias writ of execution in Civil Case No. 7579 on motion of
private respondent but the squatters apparently still stayed on.
Back to Civil Case No. 89-4394, on 26 June 1990, the Regional Trial Court of Makati
8
rendered decision holding that private
respondent had no right to rescind the contract since it was she who "violated her obligation to eject the squatters from the subject
property" and that petitioner, being the injured party, was the party who could, under Article 1191 of the Civil Code, rescind the
agreement. The court ruled that the provisions in the contract relating to (a) the return/reimbursement of the P50,000.00 if the
vendor were to fail in her obligation to free the property from squatters within the stipulated period or (b), upon the other hand, the
sum's forfeiture by the vendor if the vendee were to fail in paying the agreed purchase price, amounted to "penalty clauses". The
court added:
This Court is not convinced of the ground relied upon by the plaintiff in seeking the rescission, namely: (1) he
(sic) is afraid of the squatters; and (2) she has spent so much to eject them from the premises (p. 6, tsn, ses.
Jan. 3, 1990). Militating against her profession of good faith is plaintiffs conduct which is not in accord with the
rules of fair play and justice. Notably, she caused the issuance of an alias writ of execution on August 25, 1989
(Exh. 6) in the ejectment suit which was almost two months after she filed the complaint before this Court on
June 27, 1989. f she were really afraid of the squatters, then she should not have pursued the issuance of
an alias writ of execution. Besides, she did not even report to the police the alleged phone threats from the
squatters. To the mind of the Court, the so-called squatter factor is simply factuitous (sic).
9

The lower court, accordingly, dismissed the complaint and ordered, instead, private respondent to eject or cause the
ejectment of the squatters from the property and to execute the absolute deed of conveyance upon payment of the full
purchase price by petitioner.
Private respondent appealed to the Court of Appeals. On 29 May 1992, the appellate court rendered its decision.
10
t opined that the
contract entered into by the parties was subject to a resolutory condition, i.e., the ejectment of the squatters from the land, the non-
occurrence of which resulted in the failure of the object of the contract; that private respondent substantially complied with her
obligation to evict the squatters; that it was petitioner who was not ready to pay the purchase price and fulfill his part of the contract,
and that the provision requiring a mandatory return/reimbursement of the P50,000.00 in case private respondent would fail to eject
the squatters within the 60-day period was not a penal clause. Thus, it concluded.
WHEREFORE, the decision appealed from is REVERSED and SET ASDE, and a new one entered declaring
the contract of conditional sale dated June 9, 1988 cancelled and ordering the defendant-appellee to accept the
return of the downpayment in the amount of P50,000.00 which was deposited in the court below. No
pronouncement as to costs.
11

Failing to obtain a reconsideration, petitioner filed this petition for review on certiorari raising issues that, in fine, center on the nature
of the contract adverted to and the P50,000.00 remittance made by petitioner.
A perfected contract of sale may either be absolute or conditional
12
depending on whether the agreement is devoid of, or subject to,
any condition imposed on the passing of title of the thing to be conveyed or on theobligation of a party thereto. When ownership is
retained until the fulfillment of a positive condition the breach of the condition will simply prevent the duty to convey title from
acquiring an obligatory force. f the condition is imposed on an obligation of a party which is not complied with, the other party may
either refuse to proceed or waive said condition (Art. 1545, Civil Code). Where, of course, the condition is imposed upon
the perfection of the contract itself, the failure of such condition would prevent the juridical relation itself from coming into
existence.
13

n determining the real character of the contract, the title given to it by the parties is not as much significant as its substance. For
example, a deed of sale, although denominated as a deed of conditional sale, may be treated as absolute in nature, if title to the
property sold is not reserved in the vendor or if the vendor is not granted the right to unilaterally rescind the contract predicated
on the fulfillment or non-fulfillment, as the case may be, of the prescribed condition.
14

The term "condition" in the context of a perfected contract of sale pertains, in reality, to the compliance by one party of an
undertaking the fulfillment of which would beckon, in turn, the demandability of the reciprocal prestation of the other party. The
reciprocal obligations referred to would normally be, in the case of vendee, the payment of the agreed purchase price and, in the
case of the vendor, the fulfillment of certain express warranties (which, in the case at bench is the timely eviction of the squatters on
the property).
t would be futile to challenge the agreement here in question as not being a duly perfected contract. A sale is at once perfected
when a person (the seller) obligates himself, for a price certain, to deliver and to transfer ownership of a specified thing or right to
another (the buyer) over which the latter agrees.
15

The object of the sale, in the case before us, was specifically identified to be a 1,952-square meter lot in San Dionisio, Paraaque,
Rizal, covered by Transfer Certificate of Title No. 361402 of the Registry of Deeds for Pasig and therein technically described. The
purchase price was fixed at P1,561,600.00, of which P50,000.00 was to be paid upon the execution of the document of sale and the
balance of P1,511,600.00 payable "45 days after the removal of all squatters from the above described property."
From the moment the contract is perfected, the parties are bound not only to the fulfillment of what has been expressly stipulated
but also to all the consequences which, according to their nature, may be in keeping with good faith, usage and law. Under the
agreement, private respondent is obligated to evict the squatters on the property. The ejectment of the squatters is a condition the
operative act of which sets into motion the period of compliance by petitioner of his own obligation, i.e., to pay the balance of the
purchase price. Private respondent's failure "to remove the squatters from the property" within the stipulated period gives petitioner
the right to either refuse to proceed with the agreement or waive that condition in consonance with Article 1545 of the Civil
Code.
16
This option clearly belongs to petitioner and not to private respondent.
We share the opinion of the appellate court that the undertaking required of private respondent does not constitute a "potestative
condition dependent solely on his will" that might, otherwise, be void in accordance with Article 1182 of the Civil Code
17
but a
"mixed" condition "dependent not on the will of the vendor alone but also of third persons like the squatters and government
agencies and personnel concerned."
18
We must hasten to add, however, that where the so-called "potestative condition" is imposed
not on the birth of the obligation but on its fulfillment, only the obligation is avoided, leaving unaffected the obligation itself.
19

n contracts of sale particularly, Article 1545 of the Civil Code, aforementioned, allows the obligee to choose between proceeding
with the agreement or waiving the performance of the condition. t is this provision which is the pertinent rule in the case at bench.
Here, evidently, petitioner has waived the performance of the condition imposed on private respondent to free the property from
squatters.
20

n any case, private respondent's action for rescission is not warranted. She is not the injured party.
21
The right of resolution of a
party to an obligation under Article 1191 of the Civil Code is predicated on a breach of faith by the other party that violates the
reciprocity between them.
22
t is private respondent who has failed in her obligation under the contract. Petitioner did not breach the
agreement. He has agreed, in fact, to shoulder the expenses of the execution of the judgment in the ejectment case and to make
arrangements with the sheriff to effect such execution. n his letter of 23 June 1989, counsel for petitioner has tendered payment
and demanded forthwith the execution of the deed of absolute sale. Parenthetically, this offer to pay, having been made prior to the
demand for rescission, assuming for the sake of argument that such a demand is proper under Article 1592
23
of the Civil Code,
would likewise suffice to defeat private respondent's prerogative to rescind thereunder.
There is no need to still belabor the question of whether the P50,000.00 advance payment is reimbursable to petitioner or forfeitable
by private respondent, since, on the basis of our foregoing conclusions, the matter has ceased to be an issue. Suffice it to say that
petitioner having opted to proceed with the sale, neither may petitioner demand its reimbursement from private respondent nor may
private respondent subject it to forfeiture.
WHEREFORE, the questioned decision of the Court of Appeals is hereby REVERSED AND SET ASDE, and another is entered
ordering petitioner to pay private respondent the balance of the purchase price and the latter to execute the deed of absolute sale in
favor of petitioner. No costs.
SO ORDERED.
SALVADOR ADORABLE and LIGAYA ADORABLE, petitioners, vs. COURT OF APPEALS, HON. 1OSE O. RAMOS, FRANCISCO
BARENG and SATURNINO BARENG, respondents.
D E C I S I O N
MENDOZA, 1.:
This is a petition Ior review under Rule 45 oI the decision
|1|
oI the Court oI Appeals, dated January 6, 1995, sustaining the dismissal by
Branch 24 oI the Regional Trial Court, Echague, Isabela, oI the complaint Iiled by petitioners, spouses Salvador and Ligaya Adorable, Ior lack oI
cause oI action.
The Iacts are as Iollows:
Private respondent Saturnino Bareng was the registered owner oI two parcels oI land, one identiIied as Lot No. 661-D-5-A, with an area oI
20,000 sq. m., covered by TCT No. T-162837, and the other known as Lot No. 661-E, with an area oI 4.0628 hectares, covered by TCT No. T-
60814, both oI which are in San Fabian, Echague, Isabela. Petitioners were lessees oI a 200 sq.m. portion oI Lot No. 661-D-5-A.
On April 29, 1985, Saturnino Bareng and his son, private respondent Francisco Bareng, obtained a loan Irom petitioners amounting to
twenty six thousand pesos (P26,000), in consideration oI which they promised to transIer the possession and enjoyment oI the Iruits oI Lot No.
661-E.
On August 3, 1986, Saturnino sold to his son Francisco 18,500 sq.m. oI Lot No. 661-D-5-A. The conveyance was annotated on the back
oI TCT No. T-162873. In turn, Francisco sold on August 27, 1986 to private respondent Jose Ramos 3,000 sq.m. oI the lot. The portion oI land
being rented to petitioners was included in the portion sold to Jose Ramos. The deeds oI sale evidencing the conveyances were not registered in
the oIIice oI the register oI deeds.
As the Barengs Iailed to pay their loan, petitioners complained to Police Captain RodolIo Saet oI the Integrated National Police (INP) oI
Echague through whose mediation a Compromise Agreement was executed between Francisco Bareng and the Adorables whereby the Iormer
acknowledged his indebtedness oI P56,385.00 which he promised to pay on or beIore July 15, 1987. When the maturity date arrived, however,
Francisco Bareng Iailed to pay. A demand letter was sent to Francisco Bareng, but he reIused to pay.
Petitioners, learning oI the sale made by Francisco Bareng to Jose Ramos, then Iiled a complaint with the Regional Trial Court, Branch 24,
Echague, Isabela Ior the annulment or rescission oI the sale on the ground that the sale was Iraudulently prepared and executed.
During trial, petitioners presented as witness Jose Ramos. AIter his testimony, the next hearing was set on August 4 and 5, 1990. On said
hearing dates, however, petitioners were absent. The trial court thereIore ordered the presentation oI evidence Ior petitioners terminated and
allowed private respondents to present their evidence ex parte. On February 15, 1991, the trial court rendered judgment dismissing the complaint
Ior lack oI cause oI action, declaring the contract oI sale between Francisco Bareng and Jose Ramos valid and ordering Francisco Bareng to pay
the amount he owed petitioners.
On appeal, the Court oI Appeals aIIirmed the decision oI the Regional Trial Court, with modiIication as to the amount oI Francisco
Bareng`s debt to petitioners.
Hence, this petition Ior review, raising the Iollowing issues: (1) whether the Court oI Appeals erred in dismissing the complaint Ior lack oI
cause oI action; (2) whether petitioners enjoyed legal preIerence to purchase the lots they lease; and (3) whether the Court oI Appeals erred in
sustaining the lower court`s order terminating petitioners` presentation oI evidence and allowing private respondents to present their evidence ex
parte.
In sustaining the decision oI the trial court dismissing the complaint Ior lack oI cause oI action, the Court oI Appeals premised its decision
on Rule 3, 2 oI the Iormer Rules oI Court which provided:
Parties in interest. Every action must be prosecuted and deIended in the name oI the real party in interest. All persons having an interest in
the subject oI the action and in obtaining the relieI demanded shall be joined as plaintiIIs. All persons who claim an interest in the controversy or
who are necessary to a complete determination or settlement oI the questions involved therein shall be joined as deIendants.
A real party in interest is one who would be beneIited or injured by the judgment, or who is entitled to the avails oI the suit. 'Interest,
within the meaning oI this rule, should be material, directly in issue and to be aIIected by the decree, as distinguished Irom a mere incidental
interest or in the question involved.
|2|
Otherwise put, an action shall be prosecuted in the name oI the party who, by the substantive law, has the
right sought to be enIorced.
|3|

Petitioners anchor their interest on their right as creditors oI Francisco Bareng, as well as on their claim oI preIerence over the sale oI the
contested lot.
|4|
They contend that the sale between Francisco Bareng and Jose Ramos prejudiced their interests over the property as creditors oI
Francisco Bareng. Moreover, they claim that, under Commonwealth Act No. 539, they have a preIerential right, as tenants or lessees, to purchase
the land in question.
The petition has no merit.
irst. We hold that, as creditors, petitioners do not have such material interest as to allow them to sue Ior rescission oI the contract oI
sale. At the outset, petitioners` right against private respondents is only a personal right to receive payment Ior the loan; it is not a real right over
the lot subject oI the deed oI sale.
A personal right is the power oI one person to demand oI another, as a deIinite passive subject, the IulIillment oI a prestation to give, to do,
or not to do. On the other hand, a real right is the power belonging to a person over a speciIic thing, without a passive subject individually
determined, against whom such right may be personally exercised.
|5|
In this case, while petitioners have an interest in securing payment oI the
loan they extended, their right to seek payment does not in any manner attach to a particular portion oI the patrimony oI their debtor, Francisco
Bareng.
Nor can we sustain petitioners` claim that the sale was made in Iraud oI creditors. Art. 1177 oI the Civil Code provides:
The creditors, aIter having pursued the property in possession oI the debtor to satisIy their claims, may exercise all the rights and bring all the
actions oI the latter Ior the same purpose, save those which are inherent in his person; they may also impugn the actions which the debtor may
have done to deIraud them. (Emphasis added)
Thus, the Iollowing successive measures must be taken by a creditor beIore he may bring an action Ior rescission oI an allegedly Iraudulent
sale: (1) exhaust the properties oI the debtor through levying by attachment and execution upon all the property oI the debtor, except such as are
exempt by law Irom execution; (2) exercise all the rights and actions oI the debtor, save those personal to him (accion subrogatoria); and (3) seek
rescission oI the contracts executed by the debtor in Iraud oI their rights (accion pauliana). Without availing oI the Iirst and second
remedies, i.e., exhausting the properties oI the debtor or subrogating themselves in Francisco Bareng`s transmissible rights and actions,
petitioners simply undertook the third measure and Iiled an action Ior annulment oI the sale. This cannot be done.
Indeed, an action Ior rescission is a subsidiary remedy; it cannot be instituted except when the party suIIering damage has no other legal
means to obtain reparation Ior the same.
|6|
Thus, Art. 1380 oI the Civil Code provides:
The Iollowing contracts are rescissible:
. . . .
(3) Those undertaken in Iraud oI creditors when the latter cannot in any other manner collect the claims due them;
Petitioners have not shown that they have no other means oI enIorcing their credit. As the Court oI Appeals pointed out in its decision:
In this case, plaintiIIs-appellants had not even commenced an action against deIendants-appellees Bareng Ior the collection oI the alleged
indebtedness. PlaintiIIs-appellants had not even tried to exhaust the property oI deIendants-appellees Bareng. PlaintiIIs-appellants, in seeking
Ior the rescission oI the contracts oI sale entered into between deIendants-appellees, Iailed to show and prove that deIendants-appellees Bareng
had no other property, either at the time oI the sale or at the time this action was Iiled, out oI which they could have collected this (sic) debts.
Second. Nor do petitioners enjoy any preIerence to buy the questioned property. In Aldecoa v. Hongkong and Shanghai Banking
Corporation,
|7|
it was held that in order that one who is not obligated in a contract either principally or subsidiarily may maintain an action Ior
nulliIying the same, his complaint must show the injury that would positively result to him Irom the contract in which he has not intervened, with
regard at least to one oI the contracting parties.
Petitioners attempt to establish such legal injury through a claim oI preIerence created under C.A. No. 539, the pertinent provision oI
which provides:
SEC. 1. The President oI the Philippines is authorized to acquire private lands or any interest therein, through purchase or expropriation, and to
subdivide the same into home lots or small Iarms Ior resale at reasonable prices and under such conditions as he may Iix to their bona Iide tenants
or occupants or to private individuals who will work the lands themselves and who are qualiIied to acquire and own lands in the Philippines.
This statute was passed to implement Art. XIII, 4 oI the 1935 Constitution which provided that 'The Congress may authorize, upon
payment oI just compensation, the expropriation oI lands to be subdivided into small lots and conveyed at cost to individuals. It is obvious that
neither under this provision oI the Iormer Constitution nor that oI C.A. No. 539 can petitioners claim any right since the grant oI preIerence
therein applies only to bona Iide tenants, aIter the expropriation or purchase by the government oI the land they are occupying.
|8|
Petitioners are
not tenants oI the land in question in this case. Nor has the land been acquired by the government Ior their beneIit.
Third. Finally, we hold that no error was committed by the Court oI Appeals in aIIirming the order oI the trial court terminating the
presentation oI petitioners` evidence and allowing private respondents to proceed with theirs because oI petitioners` Iailure to present Iurther
evidence at the scheduled dates oI trial.
Petitioners contend that since their counsel holds oIIice in Makati, the latter`s Iailure to appear at the trial in Isabela at the scheduled date
oI hearing should have been treated by the court with a 'sense oI Iairness.
|9|

This is more a plea Ior compassion rather than explanation based on reason. We cannot Iind grave abuse oI discretion simply because a
court decides to proceed with the trial oI a case rather than postpone the hearing to another day, because oI the absence oI a party. That the
absence oI a party during trial constitutes waiver oI his right to present evidence and cross-examine the opponent`s witnesses is Iirmly supported
by jurisprudence.
|10|
To constitute grave abuse oI discretion amounting to lack or excess oI jurisdiction, the reIusal oI the court to postpone the
hearing must be characterized by arbitrariness or capriciousness. Here, as correctly noted by the Court oI Appeals, petitioners` counsel was duly
notiIied through registered mail oI the scheduled trials.
|11|
His only excuse Ior his Iailure to appear at the scheduled hearings is that he 'comes
Irom Makati. This excuse might hold water iI counsel was simply late in arriving in the courtroom. But this was not the case. He did not appear
at all.
HEREFORE, the petition Ior review is DENIED, and the decision oI the Court oI Appeals is AFFIRMED.
SO ORDERED.
G.R. No. 133107 March 25, 1999
RIZAL COMMERCIAL BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS and FELIPE LUSTRE, respondents.

KAPUNAN,
A simple telephone call and an ounce of good faith on the part of petitioner could have prevented the present controversy.
On March 10, 1993, private respondent Atty. Felipe Lustre purchased a Toyota Corolla from Toyota Shaw, nc. for which he made a
down payment of P164,620.00, the balance of the purchase price to be paid in 24 equal monthly installments. Private respondent
thus issued 24 postdated checks for the amount of P14,976.00 each. The first was dated April 10, 1991; subsequent checks were
dated every 10th day of each succeeding month.
To secure the balance, private respondent executed a promissory note
1
and a contract of chattel mortgage
2
over the vehicle in
favor of Toyota Shaw, nc. The contract of chattel mortgage, in paragraph 11 thereof, provided for an acceleration clause stating that
should the mortgagor default in the payment of any installment, the whole amount remaining unpaid shall become due. n addition,
the mortgagor shall be liable for 25% of the principal due as liquidated damages.
On March 14, 1991, Toyota Shaw, nc. assigned all its rights and interests in the chattel mortgage to petitioner Rizal Commercial
Banking Corporation (RCBC).
All the checks dated April 10, 1991 to January 10, 1993 were thereafter encashed and debited by RCBC from private respondent's
account, except for RCBC Check No. 279805 representing the payment for August 10, 1991, which was unsigned. Previously, the
amount represented by RCBC Check No. 279805 was debited from private respondent's account but was later recalled and re-
credited, to him. Because of the recall, the last two checks, dated February 10, 1993 and March 10, 1993, were no longer presented
for payment. This was purportedly in conformity with petitioner bank's procedure that once a client's account was forwarded to its
account representative, all remaining checks outstanding as of the date the account was forwarded were no longer presented for
patent.
On the theory that respondent defaulted in his payments, the check representing the payment for August 10, 1991 being unsigned,
petitioner, in a letter dated January 21, 1993, demanded from private respondent the payment of the balance of the debt, including
liquidated damages. The latter refused, prompting petitioner to file an action for replevin and damages before the Pasay City
Regional Trial Court (RTC). Private respondent, in his Answer, interposed a counterclaim for damages.
After trial, the. RTC
3
rendered a decision disposing of the case as follows:
WHEREFORE, in view of the foregoing, judgment is hereby, rendered as follows:
. The complaint; for lack of cause of action, is hereby DSMSSED and plaintiff RCBC is hereby ordered,
A. To accept the payment equivalent to the three checks amounting to
a total of P44,938.00, without interest.
B. To release/cancel the mortgage on the car . . . upon payment of the
amount of P44,938.00, without interest.
C. To pay the cost of suit.
. On The Counterclaim.
A. Plaintiff RCBC to pay Atty. Lustre the amount of P200,000.00 as
moral damages.
B. RCBC to pay P100,000.00 as exemplary damages.
C. RCBC to pay Atty. Obispo P50,000.00 as Attorney's fees. Atty.
Lustre is not entitled to any fee for lawyering for himself.
All awards for damages are subject to payment of fees to be assessed by the Clerk of
Court, RTC, Pasay City.
SO ORDERED.
On appeal by petitioner, the Court of Appeals affirmed the decision of the RTC, thus:
We . . . concur with the trial court's ruling that the Chattel Mortgage contract being a contract of adhesion that
is, one wherein a party, usually a corporation, prepares the stipulations in the contract, while the other party
merely affixes his signature or his "adhesion" thereto . . . is to be strictly construed against appellant bank
which prepared the form Contract . . . Hence . . . paragraph 11 of the Chattel Mortgage contract [containing the
acceleration clause] should be construed to cover only deliberate and advertent failure on the part of the
mortgagor to pay an amortization as it became due in line with the consistent holding of the Supreme Court
construing obscurities and ambiguities in the restrictive sense against the drafter thereof . . . in the light of
Article 1377 of the Civil Code.
n the case at bench, plaintiff-appellant's imputation of default to defendant-appellee rested solely on the fact
that the 5th check issued by appellee . . . was recalled for lack of signature. However, the check was recalled
only after the amount covered thereby had been deducted from defendant-appellee's account, as shown by the
testimony of plaintiff's own witness Francisco Bulatao who was in charge of the preparation of the list and trial
balances of bank customers . . . . The "default" was therefore not a case of failure to pay, the check being
sufficiently funded, and which amount was in fact already debited [sic] from appellee's account by the appellant
bank which subsequently re-credited the amount to defendant-appelle's account for lack of signature. All these
actions RCBC did on its own without notifying defendant until sixteen (16) months later when it wrote its
demand letter dated January 21, 1993.
Clearly, appellant bank was remiss in the performance, of its functions for it could have easily called the
defendant's attention to the lack of signature on the check and sent the check to or summoned, the latter to affix
his signature. t is also to be noted that the demand letter contains no explanation as to how defendant-appellee
incurred arrearages in the amount of P66,255.70, which is why defendant-appellee made a protest notation
thereon.
Notably, all the other checks issued by the appellee dated subsequent to August 10, 1991 and dated earlier
than the demand letter, were duly encashed. This fact should have already prompted the appellant bank to
review its action relative to the unsigned check. . . .
4

We take exception to the application by both the trial and appellate courts of Article 1377 of the Civil Code, which states:
The interpretation of obscure words or stipulations in a contract shall not favor the party
who caused the obscurity.
t bears stressing that a contract of adhesion is just as binding as ordinary contracts.
5
t is true that we have, on occasion, struck
down such contracts as void when the weaker party is imposed upon in dealing with the dominant bargaining party and is reduced
to the alternative of taking it or leaving it, completely deprived of the opportunity to bargain on equal footing.
6
Nevertheless,
contracts of adhesion are not invalid per se;
7
they are not entirely prohibited.
8
The one who adheres to the contract is in reality free
to reject it entirely; if he adheres, he gives his consent.
9

While ambiguities in a contract of adhesion are to be construed against the party that prepared the same,
10
this rule applies only if
the stipulations in such contract are obscure or ambiguous. f the terms thereof are clear and leave no doubt upon the intention of
the contracting parties, the literal meaning of its stipulations shall control.
11
n the latter case, there would be no need for
construction.
12

Here, the terms of paragraph 11 of the Chattel Mortgage Contract
13
are clear. Said paragraph states:
11. n case the MORTGAGOR fails to pay any of the installments, or to pay the interest that may be due as
provided in the said promissory note, the whole amount remaining unpaid therein shall immediately become
due and payable and the mortgage on the property (ies) herein-above described may be foreclosed by the
MORTGAGEE, or the MORTGAGEE may take any other legal action to enforce collection of the obligation
hereby secured, and in either case the MORTGAGOR further agrees to pay the MORTGAGEE an additional
sum of 25% of the principal due and unpaid, as liquidated damages, which said sum shall become part thereof.
The MORTGAGOR hereby waives reimbursement of the amount heretofore paid by him/it to the
MORTGAGEE.
The above terms leave no room for construction. All that is required is the application thereof.
Petitioner claims that private respondent's check representing the fifth installment was "not encashed,"
14
such that the installment
for August 1991 was not paid. By virtue of paragraph 11 above, petitioner submits that it "was justified in treating the entire balance
of the obligation as due and
demandable."
15
Despite demand by petitioner, however, private respondent refused to pay the balance of the debt. Petitioner, in
sum imputes delay on the part of private respondent.
We do not subscribe to petitioner's theory.
Art. 170 of the Civil Code states that those who in the performance of their obligations are guilty of delay are liable for damages. The
delay in the performance of the obligation, however, must be either malicious or negligent.
16
Thus, assuming that private respondent
was guilty of delay in the payment of the value of unsigned check, private respondent cannot be held liable for damages. There is no
imputation, much less evidence, that private respondent acted with malice or negligence in failing to sign the check. ndeed, we
agree with the Court of Appeals finding that such omission was mere "in advertence" on the part of private respondent. Toyota
salesperson Jorge Geronimo testified that he even verified whether private respondent had signed all the checks and in fact
returned three or four unsigned checks to him for signing:
Atty. Obispo:
After these receipts were issued, what else did you do about the transaction?
A: During our transaction with Atty. Lustre, found out when he issued to me the 24 checks,
found out 3 to 4 checks are unsigned and asked him to signed these checks.
Atty. Obispo:
What did you do?
A: asked him to sign the checks. After signing the checks, reviewed again all the
documents, after reviewed all the documents and found out that all are completed and the
down payments was completed, we realed to him the car.
17

Even when the checks were delivered to petitioner, it did not object to the unsigned check. n view of the lack of malice or
negligence on the part of private respondent, petitioner's blind and mechanical invocation of paragraph 11 of the contract
of chattel mortgage was unwarranted.
Petitioner's conduct, in the light of the circumstances of this case, can only be described as mercenary. Petitioner had already
debited the value of the unsigned check from private respondent's account only to re-credit it much later to him. Thereafter,
petitioner encashed checks subsequently dated, then abruptly refused to encash the last two. More than a year after the date of the
unsigned check, petitioner, claiming delay and invoking paragraph 11, demanded from private respondent payment of the value of
said check and that of the last two checks, including liquidated damages. As pointed out by the trial court, this whole controversy
could have been avoided if only petitioner bothered to call up private respondent and ask him to sign the check. Good faith not only
in compliance with its contractual obligations,
18
but also in observance of the standard in human relations, for every person "to act
with justice, give everyone his due, and observe honesty and good faith."
19
behooved the bank to do so.
Failing thus, petitioner is liable for damages caused to private respondent.
20
These include moral damages for the mental anguish,
serious anxiety, besmirched reputation, wounded feelings and social humiliation suffered by the latter.
21
The trial court found that
private respondent was:
[a] client who has shared transactions for over twenty years with a bank . . ..The shabby treatment given the
defendant is unpardonable since he was put to shame and embarrassment after the case was filed in Court. He
is a lawyer in his own right, married to another member of the bar. He sired children who are all professionals in
their chosen field. He is known to the community of golfers with whom he gravitates. Surely the filing of the case
made defendant feel so bad and bothered.
To deter others from emulating petitioner's callous example, we affirm the award of exemplary damages.
22
As exemplary damages
are warranted, so are attorney's fees.
23

We, however, find excessive the amount of damages awarded by the trial court in favor of private respondent with respect to his
counterclaims and, accordingly, reduce the same as follows:
(a) Moral damages from P200,000.00 to P100,000.00
(b) Exemplary damages from P100,000.00 to P75,000.00
(c) Attorney's fees from P50,000.00 to P 30,000.00
WHEREFORE, subject to these modifications, the decision of the Court of Appeals is AFFRMED.
SO ORDERED.
G.R. No. L-33084 November 14, 1988
ROSE PACKING COMPANY, INC., petitioner,
vs.
THE COURT OF APPEALS, HON. PEDRO C. NAVARRO, Judge of the Court of First Instance of RizaI (Br. III), PHILIPPINE
COMMERCIAL & INDUSTRIAL BANK & PROVINCIAL SHERIFF OF RIZAL, respondents.

PARAS,
This is a petition for review on certiorari of the decision 1 of the Court of Appeals in CA-G.R. No. 43198-R promulgated on
December 16,1970 (Rollo, pp. 237-249), the dispositive portion of which reads as follows:
WHEREFORE, in view of the foregoing, this Court hereby renders judgment:
1. Denying the petition to set aside and annul the questioned orders dated January 31, 1969 and May 7,1969
rendered by respondent Judge, the same having been issued in consonance with the exercise of the Court's
discretion.
2. Declaring valid the foreclosure sale of May 9, 1969 but finding the consolidation of ownership over the
properties sold at such sale to have been prematurely executed thereby rendering it void ab initio.
3. n accordance with this Court's resolution dated May 8, 1970, petitioner is hereby granted sixty (60) days
from receipt of a copy of this decision within which to redeem the properties sold at the foreclosure sale of May
9, 1969.
4. Dismissing the charge of contempt against PCB and its Executive Vice-President and General Manager,
Eugenio R. Unson,. for lack of merit.
and its Resolution 2 dated January 12, 1971 (Rollo, p. 280), denying petitioner's motion for reconsideration, as wen as its
Resolution 3 dated January 22, 1971 (Rollo, p. 281) denying petitioner's supplement to motion for reconsideration.
The facts of the case as presented by petitioner and as embodied in the decision of the Court of Appeals are as follows:
On December 12, 1962 respondent bank (PCB) approved a letter- request by petitioner for the reactivation of its overdraft line of
P50,000.00, discounting line of P100,000.00 and a letter of credit-trust receipt line of P550,000.00 as wen as an application for a
loan of P300,000.00, on fully secured real estate and chattel mortgage and on the further condition that respondent PCB appoint as
it did appoint its executive
vice-president Roberto S. Benedicto as its representative in petitioner's board of directors.
On November 3, 1965 the National nvestment & Development Corporation (NDC), the wholly owned investment subsidiary of the
Philippine National Bank, approved a P2.6 million loan application of petitioner with certain conditions. Pursuant thereto, the NDC
released to petitioner on November 7, 1965 the amount of P100,000.00. Subsequently, petitioner purchased five (5) parcels of land
in Pasig, Rizal making a down payment thereon.
On January 5,1966, the NDC released another P100,000.00 to petitioner and on January 12, 1966, the aforesaid releases totalling
P200,000.00 were applied to the payment of preferred stock which NDC subscribed in petitioner corporation to partially implement
its P1,000,000.00 investment scheme as per agreement. Thereafter, the NDC refused to make further releases on the approved
loan of petitioner.
On August 3, 1966 and October 5, 1966, respondent PCB approved additional accomodations to petitioner consisting of a
P710,000.00 loan for the payment of the balance of the purchase price of those lots in Pasig required to be bought, P500,000.00
loan for operating capital, P200,000.00 loan to be paid directly to petitioner's creditors, while consolidating all previous
accommodations at P1,597,000.00all of which were still secured by chattel and real estate mortgages. However, PCB released
only P300,000.00 of the P710,000.00 approved loan for the payment of the Pasig lands and some P300,000.00 for operating
capital.
On June 29,1967, the Development Bank of the Philippines approved an application by petitioner for a loan of P1,840,000.00 and a
guarantee for $652,682.00 for the purchase of can making equipment. mmediately upon receipt of notice of the approval of the
Development Bank of the loan, petitioner advised respondent PCB of the availability of P800,000.00 to partially pay off its account
and requested the release of the titles to the Pasig lots for delivery to the Development Bank of the Philippines. Respondent PCB
verbally advised petitioner of its refusal, stating that all obligations should be liquidated before the release of the titles to the Pasig
properties. Following the PCB's rejection of petitioner's counter-proposal, petitioner purchased a parcel of land at Valenzuela,
Bulacan with the P800,000.00 DBP loan, with the latter's consent.
On January 5, 1968 respondent PCB filed a complaint against petitioner and Rene Knecht, its president for the collection of
petitioner's indebtedness to respondent bank, which complaint was docketed as Civil Case No. 71697 of the Court of First nstance
of Manila.
On January 22, 1968, PCB gave petitioner notice that it would cause the real estate mortgage to be foreclosed at an auction sale,
which it scheduled for February 27,1968. Thus, respondent Sheriff served notice of sheriffs sale (of the real properties mortgaged to
respondent PCB) on July 18,1968 at 10:00 a.m., more particularly, T.C.T. No. 73620 (barrio Sto. Domingo, municipality of Cainta);
T.C.T. No. 177019 (barrio of San Joaquin, Pasig, Rizal); and T.C.T. No. 175595 (barrio San Joaquin, Pasig, Rizal). Subsequently,
on July 15, 1968, petitioner filed a complaint docketed as Civil Case No. 11015 in the Court of First nstance of Rizal to enjoin
respondents PCB and the sheriff from proceeding with the foreclosure sale, to ask the lower court to fix a new period for the
payment of the obligations of petitioner to PCB and for other related matters. Petitioner likewise prayed, pending final judgment, for
the issuance ex-parte of a writ of preliminary injunction enjoining herein respondents from proceeding with the foreclosure sale
scheduled to be held on July 18, 1968.
On January 31, 1969, the lower court issued ail order denying the application for preliminary injunction and dissolving its restraining
order which had been issued on July 17, 1968. Petitioner promptly filed a motion for reconsideration which was denied by the lower
court on May 7, 1969.
On May 8, 1969 petitioner filed with respondent Court of Appeals a petition for certiorari with application for a restraining order and
preliminary injunction against the foreclosure sale (Rollo, p. 54).<re||an1w> On May 13, 1969 respondent Court resolved to
issue a writ of preliminary injunction upon filing by petitioner of a bond in the amount of P60,000.00. However, petitioner moved for
amendment of the Order issuing the preliminary injunction, on the ground that the aforementioned resolution of respondent Court
came too late to stop the foreclosure sale which was held on May 9, 1969, praying instead that the preliminary injunction should now
enjoin respondents, particularly respondent Provincial Sheriff, from proceeding to give effect to the foreclosure sale of May 9, 1969;
that said sheriff should refrain from issuing a deed of certificate of sale pursuant thereto and from registering the certificate of deed
of sale in the Registry of Deeds; and to toll or stop the running of the period of redemption. Respondent Court resolved to deny said
motion in its Resolution dated May 28, 1969 (Rollo, pp. 237-242).
On May 8, 1970, on urgent motion of petitioner, respondent Court granted petitioner a period of sixty (60) days from receipt of the
decision to be rendered in
CA-G.R. No. 43198 within which to redeem its properties sold, should the said decision be one declaring the execution sale in
dispute to be valid (Rollo, p. 231).
Meantime, on May 12, 1970, an affidavit of consolidation of ownership executed by Eugenio R. Unson for and in behalf of
respondent PCB concerning the properties involved in the instant petition for certiorari, was registered with the Register of Deeds of
Pasig, Rizal at 8:00 a.m.. Consequently, the old transfer certificates of title covering the aforementioned properties were cancelled
and new ones issued in the name of respondent PCB, the buyer at the foreclosure sale. n view thereof, petitioner filed a motion
charging respondent PCB and its Executive Vice-President and Assistant General Manager Eugenio R. Unson with contempt of
court. Petitioner prayed that (a) the Deed of Sale dated May 12, 1970 and the consolidation of ownership of the same date be
declared null and void; (b) that the new transfer certificates of title TCT Nos. 286174, 286175, and 286176be cancelled and the
old ones, TCT Nos. 177019,175595, and 73620 be restored or revived by the Register of Deeds of Rizal; and (c) that the
respondent PCB be ordered to surrender and deposit the TCT Nos. 177019, 175595, and 73620 with respondent Court for
safekeeping (Rollo. p. 243).
On December 16, 1970 respondent Court promulgated the questioned decision (Rollo, pp. 237-249). On January 12, 1971 it
resolved (Rollo, p. 280) to deny petitioner's motion for reconsideration dated January 5, 1971 (Rollo, p. 250) and on January 22,
1971 it again resolved (Rollo, p. 281) to deny petitioner's supplement to motion for reconsideration dated January 18, 1971 (Rollo, p.
260).
The instant Petition for Review on certiorari (Rollo, p. 12) was filed with the Court on February 16, 1971. On February 23, 1971, the
Court resolved to give due course to the petition and ordered the issuance of preliminary injunction enjoining respondents from
enforcing or implementing the appealed decision of respondent Court of Appeals, upon petitioner's posting a bond of P50,000.00
(Rollo, p. 584). The writ of preliminary injunction was issued on April 28, 1971 (Rollo, p. 619).
The Brief for Petitioner was filed on June 18, 1971 (Rollo, p. 631). The Brief for the Respondents was filed on September 20, 1971
(Rollo, p. 655). The Reply Brief was filed on December 6, 1971 (Rollo, p. 678).
On April 2, 1971 respondent PCB filed a motion for leave to lease real estate properties in custodia legis, more specifically the 31,
447 sq.m. lot located at Sto. Domingo, Cainta, Rizal covered by TCT No. 286176 (Rollo, p. 697). Petitioner filed its opposition to the
motion on May 27, 1971 (Rollo, p. 712). The reply to the opposition was filed on December 6,1971 (Rollo, p. 730); the rejoinder to
respondent PCB's reply to opposition, on November 19, 1971 (Rollo, p. 736). Meantime the case was transferred to the Second
Division, by a Resolution of the First Division dated January 17, 1983
(Rollo, p. 752).
The issues raised in this case are the following:
1. WHETHER OR NOT RESPONDENT COURT ERRED N FNDNG THAT THE LOWER COURT DD NOT
COMMT AN ABUSE OF DSCRETON N DENYNG PETTONER'S APPLCATON FOR A PRELMNARY
NJUNCTON AND DSSOLVNG THE RESTRANNG ORDER PREVOUSLY SSUED. (Brief for Petitioner,
pp. 21-47);
2. WHETHER OR NOT RESPONDENT COURT ERRED N DECLARNG VALD THE FORECLOSURE SALE
ON MAY 9,1969 OF THE MORTGAGED PROPERTES EN MASSE WHEN THEY REFER TO SEVERAL
REAL ESTATE MORTGAGES EXECUTED ON DFFERENT DATES. (Brief for Petitioner, pp. 47-50).
The main issue is whether or not private respondents have the right to the extrajudicial foreclosure sale of petitioner's mortgaged
properties before trial on the merits. The answer is in the negative.
Petitioner filed Civil Case No. 11015 in the Court of First nstance of Rizal, Branch , to obtain judgment (1) enjoining defendants
(respondents herein) from proceeding with the foreclosure sale of the subject real estate mortgages, (2) fixing a new period for the
payment of the obligations of plaintiff to defendant PCB sufficiently long to enable it to recover from the effects of defendant PCB's
inequitable acts, (3) ordering defendant PCB to immediately give up management of plaintiffs canning industry and to pay plaintiff
such damages as it may prove in the concept of actual, compensatory and exemplary or corrective damages, aside from attorney's
fees and expenses of litigation, plus costs (Rollo, p. 98). t is to be noted that petitioner filed the above case mainly to forestall the
foreclosure sale of the mortgaged properties before final judgment. The issuance of a writ of preliminary injuction could have
preserved the status quo of the parties in relation to the subject matter litigated by them during the pendency of the action (Lasala v.
Fernandez, 5 SCRA 79 [1962]; De Lara v. Cloribel, 14 SCRA 269 [1965]; Locsin v. Climaco, 26 SCRA 816 [1969].
When the lower court denied the issuance of the writ prayed for and dissolved the restraining order it had previously issued, in its
order dated January 31, 1969 (Rollo, p. 138) it practically adjudicated the case before trial on the merits.
While petitioner corporation does not deny, in fact, it admits its indebtedness to respondent bank (Brief for Petitioner, pp. 7-11),
there were matters that needed the preservation of the status quo between the parties. The foreclosure sale was premature.
First was the question of whether or not petitioner corporation was already in default. n its letter dated August 12,1966 to petitioner
corporation, among the conditions that respondent bank set for the consolidation of the outstanding obligations of petitioner was the
liquidation of the said obligations together with the latter's other obligations in the financing scheme already approved by the NDC
and PDCP. To quote:
a) These facilities shall be temporary and shall be fully liquidated, together with other obligations from a
refinancing scheme already approved by the NDC and PDCP totalling Pl million in equity and P2.6 million in
long term financing. n this connection, the firm shall present to this Bank a certified copy of the terms and
conditions of the approval by the NDC and PDCP. (Brief for the Respondent, p. 41).
n other words, the loans of petitioner corporation from respondent bank were supposed to become due only at the time that it
receives from the NDC and PDCP the proceeds of the approved financing scheme. As it is, the conditions did not happen. NDC
refused to make further releases after it had made two releases totalling P200,000.00 which were all applied to the payment of the
preferred stock NDC subscribed in petitioner corporation to partially implement its P1,000,000.00 investment scheme (Brief for
Petitioner, p. 9). The efficacy or obligatory force of a conditional obligation is subordinated to the happening of a future and uncertain
event so that if the suspensive condition does not take place, the parties would stand as if the conditional obligation had never
existed (Gaite v. Fonacier, 2 SCRA 831 [1961]).<re||an1w>
Petitioner corporation alleges that there had been no demand on the part of respondent bank previous to its filing a complaint
against petitioner and Rene Knecht personally for collection on petitioner's indebtedness (Brief for Petitioner, p. 13). For an
obligation to become due there must generally be a demand. Default generally begins from the moment the creditor demands the
performance of the obligation. Without such demand, judicial or extrajudicial, the effects of default will not arise (Namarco v.
Federation of United Namarco Distributors, nc. 49 SCRA 238 [1973]; Borje v. CF of Misamis Occidental, 88 SCRA 576 [1979]).
Whether petitioner corporation is already in default or not and whether demand had been properly made or not had to be
determined in the lower court.
Granting that the findings of the lower court after trial on the merits answer both questions in the affirmative, another question that
had to be determined was the question of cause or consideration.
The loan agreements between petitioner and respondent Bank are reciprocal obligations (the obligation or promise of each party is
the consideration for that of the other Penacio v. Ruaya, 110 SCRA 46 [1981], cited. in Central Bank of the Philippines v. Court of
Appeals, 139 SCRA 46 [1985] ). A contract of loan is not a unilateral contract as respondent Bank thinks it is (Brief for the
Respondent, p. 19). The promise of petitioner to pay is the consideration for the obligation of respondent bank to furnish the loan
(Ibid.).
Respondent bank had complete control of the financial affairs and the management of petitioner corporation. t appointed its
executive vice-president Roberto S. Benedicto as its representative in petitioner's board of directors, giving him the position of
vice-president in petitioner corporation (Brief for Petitioner, p. 7). Upon the resignation of Roberto S. Benedicto as vice-president
and member of the board of directors of petitioner corporation on December 29, 1965 (Brief for Petitioner, p. 8), respondent bank
designated Rafael Ledesma as its representative in petitioner corporation's board of directors, due representation in the board of
petitioner being a condition for the loan granted to the petitioner (Rollo, p. 166). n fact, Rafael Ledesma was designated Chairman
of the Board of Directors (Rollo, p. 169). Respondent bank required petitioner to appoint Sycip, Gorrez, Velayo & Co. as full-time
comptroller-treasurer of the corporation at a monthly salary of P1,500.00 (Brief for Petitioner, p. 9; Brief for the Respondent, p. 41).
On January 2, 1967, it also required petitioner to replace its then manager, the Management & nvestment Development Associates
(MDA) and to appoint instead Edmundo Ledesma at a monthly salary of P3,000.00 and transportation allowance of P1,000.00 plus
an assistant manager, Venancio Concepcion at a salary of P1,000.00 a month. During the next 18 months' management by
defendant's designated manager, no meeting of the board of directors of petitioner was called- Edmundo Ledesma exercised full
control and management (Brief for Petitioner, pp. 10-11; Rollo, p. 167). Respondent Bank has not given up management of
petitioner's food canning industry and continues to hold it. Even Atty. Juan de Ocampo has been retained by petitioner as corporate
counsel, at the insistence of respondent bank (Brief for Petitioner, p. 14). This has not been denied by respondent bank.
Respondent bank's designation of its own choice of people holding key positions in petitioner corporation tied the hands of
petitioner's board of directors to make decisions for the interest of petitioner corporation, in fact, undermined the latter's financial
stability. During the 18 months of Edmundo Ledesma's management, petitioner's factory produced some P200,000.00 worth of
canned goods which according to petitioner is only equivalent to its normal production in three weeks (Brief for Petitioner, pp.10-11).
Respondent bank justifies the underproduction by averring that petitioner at that time did not have sufficient capital to operate the
factory, and that said factory was only operating for the purpose of avoiding spoilage and deterioration of the raw materials then in
store at the petitioner's factory (Rollo. p. 168) and yet respondent bank insists, that it had released the entire amount of P500,000.00
loan to petitioner (Rollo, p. 167) earmarked for operating capital purposes (Brief for the Respondent, p. 43) and admits having
granted a P40,000.00 loan at a higher interest of 14% per annum to petitioner at the request of the same Edmundo Ledesma (Rollo,
p. 167). After the Development Bank of the Philippines had approved on June 29, 1967 a loan of P1,840,000.00 applied for by
petitioner in 1961, respondent bank informed of the availability of P800,000.00 to pay off partially petitioner's account with it and
requested to release the titles of the Pasig parcels for delivery to the Development Bank of the Philippines, and the amount actually
released by the Development Bank, Rafael Ledesma, in his capacity as Chairman of petitioner's board of directors wrote a letter to
the Development Bank of the Philippines stating that Rene Knecht, petitioner's president, had no authority to borrow for petitioner,
being a mere figurehead president, although Rene Knecht, controlled 87% of the stockholding of petitioner and the by-laws
authorized the president to borrow for the company (Brief for Petitioner, pp. 11-13).<re||an1w> That Rafael Ledesma wrote a
letter to the Development Bank of the Philippines is admitted by respondent bank (Rollo, p. 169). The Development Bank of the
Philippines refused to make further releases on the approved loan or to issue the dollar guaranty for the importation of can making
machinery. t was Atty. Juan de Ocampo, the corporate counsel retained by petitioner at the insistence of respondent bank that
instituted the collection suit and
extra-judicial foreclosure for respondent bank against petitioner (Brief for Petitioner, pp. 13-14; Rollo, p. 79).
t is apparent that it is respondent bank practically managing petitioner corporation through its representatives occupying key
positions therein. Not even the president of petitioner corporation could escape control by respondent bank through the Comptroller
Treasurer assigned "to countersign all checks and other disbursements and decide on all financial matters regarding the operations
and who shall see to it that operations are carried out" (Brief for the Respondent, p. 41). There is basis for petitioner's complaint of
interference by respondent bank with petitioner's financing (Brief for Petitioner, pp. 3132) and such interference is only a
consequence of respondent bank's management of petitioner corporation through the officers occupying key positions therein. Thus,
if ever petitioner corporation was in financial straits instead of being rehabilitated this can be attributed to the mismanagement of
respondent corporation through its representatives in petitioner corporation.
n a similar case, Filipinas Marble Corporation v. ntermediate Appellate Court (142 SCRA 180 [1986]) where the lending institution
took over the management of the borrowing corporation and led that corporation to bankcruptcy through mismanagement or
misappropriation of the funds, defeating the very purpose of the loan which is to develop the projects of the corporation, the Court
ruled that it is as if the loan was never delivered to it and thus, there was failure on the part of the respondent DBP to deliver the
consideration for which the mortgage and the assignment of deed were executed.
t cannot be determined at this point how much of the total loan, most especially the P500,000.00 loan for operating capital and the
P40,000.00 loan of the manager, Edmundo Ledesma, had been mismanaged or misspent by respondent bank through its
representatives. This matter should rightfully be litigated below in the main action (Filipinas Marble Corportion v. ntermediate
Appellate Court. (supra).
Furthermore, respondent bank was in default in fulfilling its reciprocal obligation under their loan agreement. By its own admission it
failed to release the P710,000.00 loan (Rollo, p. 167) it approved on October 13, 1966 (Brief for Respondent, p. 44) in which case,
petitioner corporation, under Article 1191 of the Civil Code, may choose between specific performance or rescission with damages
in either case (Central Bank of the Philippines v. Court of Appeals, 139 SCRA 46 [1985]).
As a consequence, the real estate mortgage of petitioner corporation cannot be entirely foreclosed to satisfy its total debt to
respondent bank. (Central Bank of the Philippines v. Court of Appeals, supra.)
The issue of whether the foreclosure sale of the mortgaged properties en masse was valid or not must be answered in the negative.
The rule of indivisibility of a real estate mortgage refers to the provisions of Article 2089 of the Civil Code, which provides:
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be divided among the successors in
interest of the debtor or of the creditor.
Therefore the debtor's heir who has paid a part of the debt cannot ask for the proportionate extinguishment of
the pledge or mortgage as the debt is not completely satisfied.
Neither can the creditor's heir who received his share of the debt return the pledge or cancel the mortgage, to
the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things given in mortgage or pledge,
each one of them guarantees only a determinate portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion of the
debt for which each thing is specially answerable is satisfied.
Respondent bank cites the above-quoted article in its argument that the mortgage contract is indivisible and that the loan it secures
cannot be divided among the different lots (Brief for Respondent, p. 27). Respondent Court upheld the validity of the sale en
masse (Rollo, p. 246).
The rule, however, is not applicable to the instant case as it presupposes several heirs of the debtor or creditor which does not
obtain in this case (Central Bank of the Philippines v. Court of Appeals, supra.) Furthermore, granting that there was consolidation of
the entire loan of petitioner corporations approved by respondent bank, the rule of indivisibility of mortgage cannot apply where
there was failure of consideration on the part of respondent bank for the mismanagement of the affairs of petitioner corporation and
where said bank is in default in complying with its obligation to release to petitioner corporation the amount of P710,000.00. n fact
the real estate mortgage itself becomes unenforceable (Central Bank of the Philippines v. Court of Appeals, supra). Finally, it is
noted that as already stated hereinabove, the exact amount of petitioner's total debt was still unknown.
PREMSES CONSDERED, (1) the decision of the Court of Appeals is REVERSED insofar as it sustained: (a) the lower court's
denial of petitioner's application for preliminary injunction and (b) the validity of the foreclosure sale; (2) the lower court is ordered to
proceed with the trial on the merits of the main case together with a determination of exactly how much are petitioner's liabilities in
favor of respondent bank PCB so that proper measures may be taken for their eventual liquidation; (3) the preliminary injunction
issued by this Court on April 28, 1971 remains in force until the merits of the main case are resolved; and (4) the motion of
respondent bank dated April 1, 1981 for leave to lease the real properties in custodia legis is DENED.
SO ORDERED.