EN BANC [G.R. No. L-9306. May 25, 1956.] SOUTHERN MOTORS, INC., Plaintiff-Appellee, vs. ELISEO BARBOSA, Defendant-Appellant.

CONCEPCION, J.: This is an appeal from a decision of the Court of First Instance of Iloilo:chanroblesvirtuallawlibrary (a) Ordering the Defendant Eliseo Barbosa to pay to the Court, for the benefit of the Plaintiff within a period of ninety (90) days from receipt by the Defendant hereof, the sum of P2,889.53, with interest at the rate of 12% per annum computed on the basis of the amounts of the installments mentioned in the mortgage and of the dates they respectively fell due, until fully paid; chan roblesvirtualawlibrarythe sum of P200 by way of attorneys fees, plus costs; chan roblesvirtualawlibraryand (b) Upon failure of the Defendant to pay as aforesaid, ordering the land described in the complaint and subject of the mortgage to be sold at public auction in accordance with law in order to realize the amount of the judgment debt and costs. Although originally forwarded to the Court of Appeals, the same has certified the record to this Court in view of the fact that the issues raised in the appeal involve merely questions of law. Plaintiff, Southern Motors, Inc., brought this action against Eliseo Barbosa, to foreclose a real estate mortgage, constituted by the latter in favor of the former, as security for the payment of the sum of P2,889.53 due to said Plaintiff from one Alfredo Brillantes, who had failed to settle his obligation in accordance with the terms and conditions of the corresponding deed of mortgage. Defendant Eliseo Barbosa filed an answer admitting the allegations of the complaint and alleging, by way of special and affirmative defense:chanroblesvirtuallawlibrary That the Defendant herein has executed the deed of mortgage Annex A for the only purpose of guaranteeing as surety and/or guarantor the payment of the above mentioned debt of Mr. Alfredo Brillantes in favor of the Plaintiff. That the Plaintiff until now has no right action against the herein Defendant on the ground that said Plaintiff, without motive whatsoever, did not intent or intent to exhaust all recourses to collect from the true debtor Mr. Alfredo Brillantes the debt contracted by the latter in favor of said Plaintiff, and did not resort nor intends to resort all the legal remedies against the true debtor Mr. Alfredo Brillantes, notwithstanding the fact that said Mr. Alfredo Brillantes is solvent and has many properties within the Province of Iloilo. DECISION

Thereupon, Plaintiff moved for summary judgment which a branch of the Court of First Instance of Iloilo, presided over by Hon. Roman Ibaez, Judge, denied upon the ground that it is premature. Plaintiff moved for a reconsideration of the order to this effect. Soon later, he filed, also, another motion praying that the case be transferred to another branch of said court, because that of Judge Ibaez would be busy trying cadastral cases, and had adopted the policy of refraining from entertaining any other civil cases and all incidents related thereto, until after said cadastral cases shall have been finally disposed of. With the express authority of Judge Ibaez, the case was referred to the branch of said court, presided over by Hon. Querube C. Makalintal, Judge, for action, upon said motion for reconsideration. Thereafter, Judge Makalintal rendered the aforementioned decision, from which the Defendant has appealed. He maintains, in his brief, that:chanroblesvirtuallawlibrary 1. The trial court erred in hearing Plaintiff-Appellees motion for reconsideration dated June 9, 1951, notwithstanding the fact that Defendant-Appellant was not served with a copy thereof nor served with notice of the hearing thereof. 2. The trial court erred in rendering a judgment on the pleadings in Appellees favor when no issue was at all submitted to it for resolution, to the prejudice of the substantial rights of Appellant. 3. The court a quo erred in depriving Defendant-Appellant of his property rights without due process of law. The first assignment of error is based upon an erroneous predicate, for, contrary to Defendants assertion, his counsel in the lower court, Atty. Manuel F. Zamora, through an employee of his office, by the name of Agripino Aguilar, was actually served on June 9, 1951, with copy of Plaintiffs motion for reconsideration, with notice to the effect that said motion would be submitted for the consideration and approval of the lower court, on Saturday, June 16, 1951, at 8:chanroblesvirtuallawlibrary00 a.m., or soon thereafter as counsel may be heard. The second assignment of error is, likewise, untenable. It is not true that there was no issue submitted for determination by the lower court when it rendered the decision appealed from. It will be recalled that each one of the allegations made in Plaintiffs complaint were expressly admitted in Defendants answer, in which he merely alleged, as special and affirmative defense, that Plaintiff is not entitled to foreclose the mortgage constituted in its favor by the Defendant, because the property of Alfredo Brillantes, the principal debtors, had not been exhausted as yet, and were not sought to be exhausted, for the satisfaction of Plaintiffs credit. Thus, there was no question of fact left for determination. The only issue set up by the pleadings was the sufficiency of said affirmative

defense. And such was the only point discussed by the Defendant in his opposition to Plaintiffs motion for a summary judgment, referring, evidently, to a judgment on the pleadings. Plaintiffs motion for reconsideration of the order of Judge Roman Ibaez refusing to render said judgment, upon the ground that it was premature, revived said issue of sufficiency of the aforementioned affirmative defense, apart from calling for a reexamination of the question posed by said order of Judge Ibaez, namely, whether it was proper, under the circumstances, to render a judgment on the pleadings. In other words, said motion for reconsideration had the effect of placing before then Judge Makalintal, for resolution, the following issues, to wit:chanroblesvirtuallawlibrary (1) whether a summary judgment or a judgment on the pleadings was in order, considering the allegations of Plaintiffs complaint and those of Defendants answer; chan roblesvirtualawlibraryand (2) whether the mortgage in question could be foreclosed although Plaintiff had not exhausted, and did not intend to exhaust, the properties of his principal debtor, Alfredo Brillantes. The third assignment of error is predicated upon the alleged lack of notice of the hearing of Plaintiffs motion for reconsideration. As stated in our discussion of the first assignment of error, this pretense is refuted by the record. Moreover, it is obvious that Defendants affirmative defense is devoid of merit for:chanroblesvirtuallawlibrary 1. The deed of mortgage executed by him specifically provides:chanroblesvirtuallawlibrary That if said Mr. Alfredo Brillantes or herein mortgagor, his heirs, executors, administrators and assigns shall well and truly perform the full obligations above-stated according to the terms thereof, then this mortgage shall be null and void, otherwise it shall remain in full force and effect, in which event herein mortgagor authorizes and empowers herein mortgagee-company to take any of the following actions to enforce said payment;. (a) Foreclose, judicially or extrajudicially, the chattel mortgage above referred to and/or also this mortgage, applying the proceeds of the purchase price at public sale of the real property herein mortgaged to any deficiency or difference between the purchase price of said chattel at public auction and the amount of P2,889.53, together with its interest hereby secured; chan roblesvirtualawlibraryor (b) Simply foreclose this mortgage judicially in accordance with the provisions of section 2, Rule 70, Rules of Court, or extrajudicially under the provisions of Act No. 3135 and Act No. 4118, to satisfy the full amount of P2,889.53, together with its interest of 12 per cent per annum.

2. The right of guarantors, under Article 2058 of the Civil Code of the Philippines, to demand exhaustion of the property of the principal debtor, exists only when a pledge or a mortgage has not been given as special security for the payment of the principal obligation. Guarantees, without any such pledge or mortgage, are governed by Title XV of said Code, whereas pledges and mortgages fall under Title XVI of the same Code, in which the following provisions, among others, are found:chanroblesvirtuallawlibrary ART. 2087. It is also of the essence of these contracts that when the principal obligation becomes due, the things in which the pledge or mortgage consists may be alienated for the payment to the creditor. ART. 2126. The mortgage directly and immediately subjects the property upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security it was constituted. 3. It has been held already (Saavedra vs. Price, 68 Phil., 688), that a mortgagor is not entitled to the exhaustion of the property of the principal debtor. 4. Although an ordinary personal guarantor not a mortgagor or pledgor may demand the aforementioned exhaustion, the creditor may, prior thereto, secure a judgment against said guarantor, who shall be entitled, however, to a deferment of the execution of said judgment against him until after the properties of the principal debtor shall have been exhausted to satisfy the obligation involved in the case. Wherefore, the decision appealed from is hereby affirmed, with costs against the Defendant-Appellant. It is SO ORDERED. Paras, C.J., Bengzon, Padilla, Montemayor, Reyes, A., Jugo, Bautista Angelo, Labrador, Reyes, J.B.L., and Endencia, JJ., concur. G.R. No. L-40334 February 28, 1985 CENTRAL SURETY and INSURANCE COMPANY, INC., petitioner, vs. Hon. ALBERTO Q. UBAY as Judge of the Court of First Instance of Rizal, Caloocan City, Branch XXXII and ONG CHI, doing business under the Firm Name. "TABLERIA DE LUXE respondents. Alfredo Feraren for petitioner. S.I.A. Gonzales for respondents. ABAD SANTOS, J.:

Ong Chi, doing business under the firm name "Tableria de Luxe sued Francisco Reyes, Jr. for a sum of money in the City Court of Caloocan City. Ong Chi applied for a writ of attachment and upon filing a bond in the amount of P6,464.18, a jeep belonging to Reyes was placed in custodia legis. Reyes moved to dissolve the writ of attachment. He posted a counterbond in the amount of P 6,465.00; his surety was Central Surety and Insurance Co., the petitioner herein. The condition of the counterbond is that "in consideration of the dissolution of said attachment, [Francisco Reyes, Jr., as principal and Central Surety and Insurance Co., as surety] hereby jointly and severally, bind ourselves in the sum of SIX THOUSAND FOUR HUNDRED SIXTY FIVE ONLY ( P 6,465.00 ) Philippine Currency, under the condition that in the case the plantiff recovers judgment in the action the defendant will on demand redeliver the attached property so released to the officer of the Court to be applied to the payment of the judgment or in default thereof that the defendant and surety will on demand pay to the plaintiff the full value of the property released." (Rollo, p. 11) The writ of attachment was thereafter lifted and the jeep was returned to Reyes. In the course of time, the City Court rendered judgment as follows: WHEREFORE, judgment is hereby rendered in favor of the Plaintiff and against the defendant, ordering said defendant to pay plaintiff the sum of P 6,964.18, with legal interests thereon from the date of the filing of this complaint until fully paid, plus the sum of P 500. 00, as and by way of attorney's fees, and the costs of the suit. (Id, p. 14.) Defendant Reyes appealed to the Court of First Instance of Rizal but said court affirmed the judgment in toto. (Rollo, p. 16.) Upon finality of the judgment, a writ of execution was issued against Reyes. The jeep which was the object of the attachment was sold by the sheriff for P4,000.00 and the amount was credited against the judgment in partial satisfaction thereof. Soon after the sale of the jeep, Central Surety and Insurance Co. filed a motion to cancel the counterbond. Ong Chi not only opposed the motion but he also asked that the surety company pay the deficiency on the judgment in the amount of P5,730. 00 (P9,730.00 as of the filing of the motion, less P4,000.00 the proceeds of the sale of the jeep). The motion for a deficiency judgment was opposed by the surety on the ground that it had fulfilled the condition of the counterbond. Despite the opposition, the court ordered the surety to pay. A motion for reconsideration was denied which accounts for the instant petition. The issue is whether or not the petitioner surety is liable for the deficiency. The petitioner urges a negative answer; it relies on the

terms of the counterbond. Upon the other hand, the private respondent claims that an affirmative answer is proper, he relies on Section 17 of Rule 57, Rules of Court which stipulates thus: SEC. 17. When execution returned unsatisfied, recovery had upon bond. If the execution be returned unsatisfied in whole or in part, the surety or sureties on any counterbond given pursuant to the provisions of this rule to secure the payment of the judgment shall become charged on such counterbond, and bound to pay to the judgment creditor upon demand, the amount due under the judgment, which amount may be recovered from such surety or sureties after notice and summary hearing in the same action. The petition is highly impressed with merit. The stipulation in the counterbond executed by the petitioner is the law between the parties in this case and not the provisions of the Rules of Court. Under the counterbond, the petitioner surety company bound itself solidarily with the principal obligor "in the sum of P 6,465.00 under the condition that in case the plaintiff recovers judgment in the action, the defendant will, on demand, redeliver the attached property so released to the officer of the court to be applied to the payment of the judgment or in default thereof that the defendant and surety will, on demand, pay to the plaintiff the full value of the property released." The main obligation of the surety was to redeliver the jeep so that it could be sold in case execution was issued against the principal obligor. The amount of P6,465.00 was merely to fix the limit of the surety's liability in case the jeep could not be reached. In the instant case, the jeep was made available for execution of the judgment by the surety. The surety had done its part; the obligation of the bond had been discharged; the bond should be cancelled. The impropriety of the orders of the respondent judge is made more manifest by still another circumstance. The petitioner's surety bond was for the amount of P6,465.00. So even on the assumption that the bond was not discharged, since the sale of the jeep yielded P4,000.00, the surety can be held liable at most for P2,465.00. But the respondent judge ordered the surety to pay P5,730.00 which is the entire deficiency and is in excess of P2,465.00. It is axiomatic that the obligation of a surety cannot extend beyond what is stipulated. WHEREFORE, the petition is granted; the questioned orders of the respondent judge are hereby set aside and in lieu thereof another is entered cancelling the petitioner's counterbond, with costs against the private respondent.

SO ORDERED. Makasiar (Chairman), Aquino, Concepcion, Jr., Escolin and Cuevas, JJ., concur. G.R. No. L-27249 July 31, 1970 MANILA SURETY & FIDELITY CO., INC., plaintiff-appellant, vs. NOEMI ALMEDA, doing business under the name and style of ALMEDA TRADING, GENEROSO ESQUILLO and NATIONAL MARKETING CORPORATION, defendants-appellees. De Santos & Delfino for plaintiff-appellant. Government Corporate Counsel Leopoldo M. Abellera and Trial Attorney Arsenio J. Mepale for defendant-appellee National Marketing Corporation. REYES, J.B.L., J.: This is an appeal from the ruling of the Court of First Instance of Manila, rendered in Civil Case No. 62518, that the insolvency of a debtor-principal does not release the surety from its obligation to the creditor under the bond. The lower court found that on 4 December 1961, Noemi Almeda, married to Generoso Esquillo, and doing business under the name and style of Almeda Trading, entered into a contract with the National Marketing Corporation (NAMARCO) for the purchase of goods on credit, payable in 30 days from the dates of deliveries thereof. As required by' the NAMARCO, a bond for P5,000.00, undertaken by the Manila Surety & Fidelity Co., Inc. (Exhibit "A"), was posted by the purchaser to secure the latter's faithful compliance with the terms of the contract. The agreement was later supplemented on 17 October 1962 and a new bond for the same amount of P5,000.00, also undertaken by the Manila Surety & Fidelity Co., Inc. (Exhibit "C"), 1 was given in favor of the NAMARCO The bonds uniformly contained the following provisions: 2. Should the Principal's account on any purchase be not paid on time, then the Surety, shall, upon demand, pay said account immediately to the NAMARCO; 3. Should the account of the Principal exceed the amount of FIVE THOUSAND (P5,000.00) PESOS, Philippine Currency, such excess up to twenty (20%) per cent of said amount shall also be deemed secured by this Bond; 4. The Surety expressly waives its right to demand payment and notice of non-payment and agreed that the liability of the Surety shall be direct and immediate and not contingent upon the exhaustion

by the NAMARCO of whatever remedies it may have against the Principal and same shall be valid and continuous until the obligation so guaranteed is paid in full; and 5. The Surety also waives its right to be notified of any extension of the terms of payment which the NAMARCO may give to the Principal, it being understood that were extension is given to satisfy the account, that such extension shall not extinguish the guaranty unless the same is made against the express wish of the Surety. The records show that on 8 June 1965, the marketing firm demanded from the purchaser Almeda Trading the settlement of its back accounts which, as of 15 May 1965, allegedly amounted to P16,335.09. Furnished with copy of the NAMARCO's demand- letter, the surety company thereafter also wrote to the said purchaser urging it to liquidate its unsettled accounts with the NAMARCO (Exhibit "E-1"). It appears, however, that previous to this, or on 26 March 1965, Generoso Esquillo instituted voluntary insolvency proceeding in the Court of First Instance of Laguna (Sp. Proc. No. SP-181), and by order of said court of 6 April 1965, he was declared insolvent, with listed credits amounting to P111,873.00 2 and properties valued at P39,0,00.00. In the meeting of the named creditors of the insolvent held on 14 May 1965 for the purpose of electing the assignee of his properties, the NAMARCO was represented and its contingent claim duly registered. 3 On 10 September 1965, the Manila Surety & Fidelity Co., Inc., commenced in the Court of First Instance of Manila Civil Case No. 62518 against the spouses Noemi Almeda and Generoso Esquillo, and the NAMARCO, to secure its release from liability under the bonds executed in favor of NAMARCO. The action was based on the allegation that the defendant spouses had become insolvent and that defendant NAMARCO had rescinded its agreement with them and had already demanded payment of the outstanding accounts of the couple. Defendant NAMARCO filed its answer denying the averments of the complaint and setting up, as affirmative defenses, lack of cause of action and the court's want of jurisdiction. On 16 December 1966, the court rendered judgment sustaining NAMARCO's contention that the insolvency of the debtor-principal did not discharge the surety's liability under the bond. Thus, the complaint was dismissed and plaintiff surety company was ordered to pay off the indebtedness of the defendant spouses to the NAMARCO to the extent of its (the Surety's) undertaking, plus attorneys' fees and costs. From this decision, plaintiff surety interposed the present appeal.

Plaintiff-appellant's action to secure its discharge from the suretyship was based on Article 2071 of the Civil Code, 4 Which provides the surety with certain protective remedies that may be resorted to before he has paid, but after he has become liable to do so. 5 Upon the other hand, the lower court's ruling, now on appeal, is anchored on an equally explicit provision of the Insolvency law ( Act 1956, as amended), to writ:. SEC. 68. ... No discharge (of the insolvent from his obligations) shall release, discharge or affect any person liable for the same debt, for or with the debtor, either as partner, joint contractor, indorser, surety, or otherwise. The issue posed by this appeal, therefore, is whether a surety can avail itself of the relief, specifically afforded in Article 2071 of the Civil Code and be released from its liability under the bonds, notwithstanding a prior declaration of the insolvency of the debtorprincipal in an insolvency proceeding. We see no reversible error in the decision appealed. There is no question that under the bonds posted in favor of the NAMARCO in this case, the surety company assumed to make immediate payment to said firm of any due and unsettled accounts of the debtor-principal, even without demand and notice of the debtor's non-payment, the surety, in fact, agreeing that its liability to the creditor shall be direct, without benefit of exhaustion of the debtor's properties, and to remain valid and continuous until the guaranteed obligation is fully satisfied. In short, appellant secured to the creditor not just the payment by the debtor-principal of his accounts, but the payment itself of such accounts. Clearly, a contract of suretyship was thus created, the appellant becoming the insurer, not merely of the debtor's solvency or ability to pay, but of the debt itself. 6 Under the Civil Code, with the debtor's insolvency having been judicially recognized, herein appellant's resort to the courts to be released from the undertaking thus assumed would have been appropriate. 7 Nevertheless, the guarantor's action for release can only be exercised against the principal debtor and not against the creditor, as is apparent from the precise terms of the legal provision. "The guarantor" (says Article 2071 of the Civil Code of the Philippines) "even before having paid, may proceed against the principal debtor -----------------to obtain a release from the guaranty ---------------." The juridical rule grants no cause of action against the creditor for a release of the guaranty, before payment of the credit, for a plain reason: the creditor is not compellable to release the guaranty (which is a property right) against his will. For, the release of the guarantor

imports an extinction of his obligation to the creditor; it connotes, therefore, either a remission or a novation by subrogation, and either operation requires the creditor's assent for its validity (See Article 1270 and Article 1301). Especially should this be the case where the principal debtor has become insolvent, for the purpose of a guaranty is exactly to protect the creditor against such a contingency. In what manner, then, can the article operate? Where the debtor can not make full payment, the release of the guarantor can only be obtained with the assent of the creditor, by persuading the latter to accept an equally safe security, either another suitable guaranty or else a pledge or mortgage. Absent the creditor's consent, the principal debtor may only proceed to protect the demanding guarantor by a counterbond or counter guaranty, as is authorized by the codal precept (Article 2071 in fine). To this effect is the opinion of the Spanish commentator, Scaevola, in his explanations to Article 1843 of the Spanish Civil Code (from which Article 2071 of our Code is derived). Says Scaevola: Como se prestaran tales garantias al fiador? Lo contesta el aludido parrafo final del Articulo 1843. Se hara por uno de estos dos modos: ora consiguiendo el deudor que el acreedor abandone libremente aquella fianza, lo cual ocurrira dandole el deudor otra garantia analoga, ya por razon de la persona fiadora, ya ofreciendole el deudor al mismo fiador, pero continuando este como tal, una garantia que lo ponga a cubierto de los procedimientos del acreedor y del peligro de insolvencia del deudor. (Scaevola Codigo Civil, 2d Ed., Vol. 28, pp. 651652). The appellant's troubles are compounded by the fact that when the complaint for release from suretyship was filed in the Manila court on 10 September 1965, the insolvency case in the Laguna court was already pending and the debtor-principal Generoso Esquillo had been judicially declared an insolvent. By the time the appellant sued, therefore, the insolvency court had already acquired jurisdiction over all the debtor's properties and of all claims by and against him, to the exclusion of any other court. 8 In the circumstances, the lawful recourse of the guarantor of an obligation of the insolvent would be to file a contingent claim in the insolvency proceeding, if his rights as such guarantor or surety are not to be barred by the subsequent discharge of the insolvent debtor from all his liabilities. 9 In the case at bar, it is true that the guaranteed claim of NAMARCO was registered or filed in the insolvency proceeding. But appellant can not utilize this fact in support of its petition for release from the assumed undertaking. For one thing, it is almost a certainty that

creditor NAMARCO can not secure full satisfaction of its credit out of the debtor's properties brought into the insolvency proceeding. Considering that under the contract of suretyship, which remains valid and subsisting, the entire obligation may even be demanded directly against the surety itself, the creditor's act in resorting first to the properties of the insolvent debtor is to the surety's advantage At least, the latter would be answerable only for whatever amount may remain not covered or unsatisfied by the disposition of the insolvent's properties, 1 0 with the right to go against debtor-principal after it has made the necessary payment to the creditor. For another, the fact that the debtor- principal may be discharged from all his outstanding obligations in the insolvency case would not benefit the surety, as to relieve it of its liability under the surety agreement. That is so provided in Section 68 of the Insolvency Act which shall be controlling in the case. Finally, even supposing that the present action is not blocked by the insolvency proceedings because it does not aim at reducing the insolvent's assets, but only at having the suretyship substituted by other equivalent security, still it is difficult to see how the principal debtor, with his business, property and assets impounded by the insolvency court, can obtain other securities with which to replace the guaranty given by the plaintiff-appellant. The action at bar would seem, under the circumstances, destined to end in futility. WHEREFORE, with the modification that appellant's liability shall be limited to the payment of whatever amount may remain due to the appellee NAMARCO and is unsatisfied in the insolvency proceeding, but not to exceed the amount of the surety's undertaking under the bonds, the decision appealed from is affirmed in all other respects. Costs against appellant surety company. Concepcion, C.J., Dizon Makalintal, Zaldivar, Castro, Fernando, Teehankee, Barredo and Villamor, JJ., concur. 4 "ART. 2071. The guarantor, even before having paid, may proceed against the principal debtor; (1) When he is sued for the payment; (2) In case of insolvency of the principal debtor; (3) When the debtor has bound himself to relieve him from the guaranty within a specified period, and this period has expired; (4) When the debt has become demandable, by reason of the expiration of the period for payment; (5) After the lapse of ten years, when the principal obligation has no fixed period for its maturity, unless it be of such nature that it cannot be extinguished except within a period longer than ten years; (6) If there are reasonable grounds to fear that the principal debtor intend, to abscond;

(7) If the principal debtor is in imminent danger of becoming insolvent. In all these cases, the action of the guarantor is to obtain release from the guaranty, or to demand a security that shall protect him from any proceedings by the creditor and from the danger of insolvency of the debtor. G.R. No. L-12333 February 28, 1959 ASSOCIATED INSURANCE & SURETY CO., INC., plaintiffappellant, vs. BACOLOD-MURCIA MILLING CO., INC., ET AL., defendantsappellees. Castillo and Fineza for appellant. Hilado and Hilado for appellee Bacolod-Murcia Milling Co., Inc. BAUTIUSTA ANGELO, J.: Plaintiff brought this action before the Court of First Instance of Manila to secure the cancellation of certain surety bonds executed by it in favor of defendant Bacolod-Murcia Milling Co., Inc. or, in the alternative, to order defendants Sixto R. Ruiz and Raymundo D. Dizon to pay to plaintiff the amount of P2,956.60, plus interest thereon, for ultimate delivery to their co-defendant and to order defendants to pay plaintiff's attorney's fees and costs. The complaint alleges that defendants Sixto R. Ruiz obtained two crop loans in the aggregate amount of P11,626.00 from defendant Bacolod-Murcia Milling Co., Inc., a corporation duly organized under the laws of the Philippines, subject to the condition that he shall post surety bonds to guarantee the payment of 25% of said crop loans; that in compliance with said condition, plaintiff, also a corporation, executed in favor of the milling corporation two surety bonds in the aggregate amount of P2,956.50 for the purpose above-mentioned; that said bonds were executed subject to the following conditions: (1) the creditor shall apply the share of the debtor in the harvest of the crops for which the loans were granted to the liquidation of said loans and no part thereof shall be applied to other indebtedness until the loans have been fully liquidated; (2) the creditor shall not grant any additional loan to the debtor in excess of the latter's share in the crops covered by the bonds without the prior written consent of the surety; and (3) the liability of the surety will terminate upon complete payment of the indebtedness guaranteed by the bonds; that defendant milling company failed to comply with conditions 1 and 2 mentioned above when it granted to the debtor loans in excess of the latter's share in the harvest of the crops covered by the bonds without the written consent of plaintiff, and when it failed to notify plaintiff of the

amount the debtor has actually availed himself of the crop loans obtained by him, thereby depriving plaintiff of its right to be apprised of the loan actually obtained, this notice being necessary to enable plaintiff to take steps to protect its interest; and that in view of the violations of the conditions above-mentioned, plaintiff is deemed to have been relieved of its liability under the bonds. The complaint, as an alternative cause of action, also alleges that defendant Sixto R. Ruiz, as debtor, and defendant Raymundo D. Dizon, as surety, executed an indemnity agreement in favor of plaintiff to indemnify the latter for executed the two surety bonds in favor of the milling company mentioned in the preceding paragraph; that defendant milling company notified plaintiff that the debtor has an standing account with said defendant in the amount of P15,285.72 and demanded that it pay its share thereof in the amount of P2,956.50 as agreed upon in the surety bonds, and that in the event plaintiff is compelled pay to the defendant milling company said amount of P2,956.50, plaintiff would have a valid cause of action against debtor and his surety for the recovery of said amount under the provisions of the indemnity agreement. Defendant milling company filed a motion to dismiss on the ground that the complaint fails to state a cause of action against it for the following reasons: there is no allegation in the complaint that the plaintiff, as a surety, has paid the obligation it guaranteed, or has been required to pay the same by said defendant. And granting arguendo that the allegations in the complaint regarding breach of the conditions of the surety bonds are true, the same would only be matters of defense which plaintiff could put up should it be made to pay its obligation under the bonds of defendant milling company. Despite the opposition of plaintiff to this motion to dismiss, the court granted the same in a brief order as follows: "Defendants' motion to dismiss on the ground that plaintiff's complaint states no cause of action being meritorious, the same is granted. This case is hereby dismissed, with costs against the defendants." Hence this appeal. There is merit in the appeal. While the order of the lower court does not state the reasons why it granted the motion to dismiss, for the same is very laconic, it may however be inferred from its tenor that it agree to the grounds set forth by defendant milling company in its motion. The reasons advanced for the dismissal of the case are that plaintiff, being a surety of the debtor who obtained two crops loan from the milling company, has not yet incurred any plaintiff under its bonds because the complaint contains no allegations that it has voluntarily paid the obligation or has been made to pay the same to the company in accordance with the terms of the bonds. It is contended that the allegations of the complaint concerning breach of the principal conditions of the bonds on the part of

defendant milling company are mere matters of defense which plaintiff could put up when demand for payment is made upon it by the milling company. And these arguments were found by the lower court to be meritorious. With this we disagree. The purpose of the action is not dispute the validity of any demand for payment that may have been made upon plaintiff by defendant company on the strength of its liability under the bonds but rather to ask for its release from its liability under the bonds for certain breach of its conditions committed by the milling company, and it is for the reason that the action was brought against the milling company. It is true that, as an alternative action, the debtor and the other surety were also included to exact liability from them under the indemnity agreement, but that is an action distinct and separate from that alleged against the milling company and as such it cannot in any way affect the relation of the latter to the plaintiff. We find therefore immaterial or unnecessary to allege in the complaint that plaintiff has either paid or been required to pay its obligation under the bonds by the creditor considering the nature of the main cause of action. It is sufficient if it alleges therein, as it actually does, that conditions agreed upon in the bonds had been violated. We therefore conclude that the complaint states a valid cause of action insofar as the milling company is concerned. The order appealed from is set aside. The case is remanded to the lower court for further proceedings, with costs against the appellees. Bengzon, Padilla, Montemayor, Reyes, A., Labrador, Concepcion and Endencia, JJ., concur. G.R. No. L-32116 April 2l, 1981 RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., petitioners, vs. THE COURT OF APPEALS and MAXIMA CASTRO, respondents. DE CASTRO, * J.: This is a petition for review by way of certiorari of the decision 1 of the Court of Appeals in CA-G.R. No. 39760-R entitled "Maxima Castro, plaintiff-appellee, versus Severino Valencia, et al., defendants; Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes, defendants-appellants," which affirmed in toto the decision of the Court of First Instance of Manila in favor of plaintiffappellee, the herein private respondent Maxima Castro. On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia, went to the Rural Bank of Caloocan to apply for an industrial loan. It was Severino Valencia who arranged

everything about the loan with the bank and who supplied to the latter the personal data required for Castro's loan application. On December 11, 1959, after the bank approved the loan for the amount of P3,000.00, Castro, accompanied by the Valencia spouses, signed a promissory note corresponding to her loan in favor of the bank. On the same day, December 11, 1959, the Valencia spouses obtained from the bank an equal amount of loan for P3,000.00. They signed a promissory note (Exhibit "2") corresponding to their loan in favor of the bank and had Castro affixed thereon her signature as co-maker. The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and lot of 150 square meters, covered by Transfer Certificate of Title No. 7419 of the Office of the Register of Deeds of Manila. On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio Magsambol, sent a notice of sheriff's sale addressed to Castro, announcing that her property covered by T.C.T. No. 7419 would be sold at public auction on March 10, 1961 to satisfy the obligation covering the two promissory notes plus interest and attorney's fees. Upon request by Castro and the Valencias and with conformity of the bank, the auction sale that was scheduled for March 10, 1961 was postponed for April 10, 1961. But when April 10, 1961 was subsequently declared a special holiday, the sheriff of Manila sold the property covered by T.C.T. No. 7419 at a public auction sale that was held on April 11, 1961, which was the next succeeding business day following the special holiday. Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff on February 13, 1961, when she learned for the first time that the mortgage contract (Exhibit "6") which was an encumbrance on her property was for P6.000.00 and not for P3,000.00 and that she was made to sign as co-maker of the promissory note (Exhibit "2") without her being informed of this. On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against petitioners Bank and Desiderio, the Spouses Valencia, Basilio Magsambol and Arsenio Reyes as defendants in Civil Case No. 46698 before the Court of First Instance of Manila upon the charge, amongst others, that thru mistake on her part or fraud on the part of Valencias she was induced to sign as co-maker of a promissory note (Exhibit "2") and to constitute a mortgage on her house and lot to secure the questioned note. At the time of filing her complaint, respondent Castro deposited the amount of P3,383.00 with the court a quo in full payment of her personal loan plus interest.

In her amended complaint, Castro prayed, amongst other, for the annulment as far as she is concerned of the promissory note (Exhibit "2") and mortgage (Exhibit "6") insofar as it exceeds P3,000.00; for the discharge of her personal obligation with the bank by reason of a deposit of P3,383.00 with the court a quo upon the filing of her complaint; for the annulment of the foreclosure sale of her property covered by T.C.T. No. 7419 in favor of Arsenio Reyes; and for the award in her favor of attorney's fees, damages and cost. In their answers, petitioners interposed counterclaims and prayed for the dismissal of said complaint, with damages, attorney's fees and costs. 2 The pertinent facts arrived from the stipulation of facts entered into by the parties as stated by respondent Court of Appeals are as follows: Spawning the present litigation are the facts contained in the following stipulation of facts submitted by the parties themselves: 1. That the capacity and addresses of all the parties in this case are admitted . 2. That the plaintiff was the registered owner of a residential house and lot located at Nos. 1268-1270 Carola Street, Sampaloc, Manila, containing an area of one hundred fifty (150) square meters, more or less, covered by T.C.T. No. 7419 of the Office of the Register of Deeds of Manila; 3. That the signatures of the plaintiff appearing on the following documents are genuine: a) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 7, 1959 in the amount of P3,000.00 attached as Annex A of this partial stipulation of facts; b) Promissory Note dated December 11, 1959 signed by the plaintiff in favor of the Rural Bank of Caloocan for the amount of P3,000.00 as per Annex B of this partial stipulation of facts; c) Application for Industrial Loan with the Rural Bank of Caloocan, dated December 11, 1959, signed only by the defendants, Severino Valencia and Catalina Valencia, attached as Annex C, of this partial stipulation of facts; d) Promissory note in favor of the Rural Bank of Caloocan, dated December 11, 1959 for the amount of P3000.00, signed by the spouses Severino Valencia and Catalina Valencia as borrowers, and

plaintiff Maxima Castro, as a co-maker, attached as Annex D of this partial stipulation of facts; e) Real estate mortgage dated December 11, 1959 executed by plaintiff Maxima Castro, in favor of the Rural Bank of Caloocan, to secure the obligation of P6,000.00 attached herein as Annex E of this partial stipulation of facts; All the parties herein expressly reserved their right to present any evidence they may desire on the circumstances regarding the execution of the abovementioned documents. 4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff, Basilio Magsambol, sent a notice of sheriff's sale, address to the plaintiff, dated February 13, 1961, announcing that plaintiff's property covered by TCT No. 7419 of the Register of Deeds of the City of Manila, would be sold at public auction on March 10, 1961 to satisfy the total obligation of P5,728.50, plus interest, attorney's fees, etc., as evidenced by the Notice of Sheriff's Sale and Notice of Extrajudicial Auction Sale of the Mortgaged property, attached herewith as Annexes F and F-1, respectively, of this stipulation of facts; 5. That upon the request of the plaintiff and defendants-spouses Severino Valencia and Catalina Valencia, and with the conformity of the Rural Bank of Caloocan, the Sheriff of Manila postponed the auction sale scheduled for March 10, 1961 for thirty (30) days and the sheriff re-set the auction sale for April 10, 1961; 6. That April 10, 1961 was declared a special public holiday; (Note: No. 7 is omitted upon agreement of the parties.) 8. That on April 11, 1961, the Sheriff of Manila, sold at public auction plaintiff's property covered by T.C.T. No. 7419 and defendant, Arsenio Reyes, was the highest bidder and the corresponding certificate of sale was issued to him as per Annex G of this partial stipulation of facts; 9. That on April 16, 1962, the defendant Arsenio Reyes, executed an Affidavit of Consolidation of Ownership, a copy of which is hereto attached as Annex H of this partial stipulation of facts; 10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated executed the final deed of sale in favor of the defendant, Arsenio Reyes, in the amount of

P7,000.00, a copy of which is attached as Annex I of this partial stipulation of facts; 11. That the Register of Deeds of the City of Manila issued the Transfer Certificate of Title No. 67297 in favor of the defendant, Arsenio Reyes, in lieu of Transfer Certificate of Title No. 7419 which was in the name of plaintiff, Maxima Castro, which was cancelled; 12. That after defendant, Arsenio Reyes, had consolidated his title to the property as per T.C.T. No. 67299, plaintiff filed a notice of lis pendens with the Register of Deeds of Manila and the same was annotated in the back of T.C.T. No. 67299 as per Annex J of this partial stipulation of facts; and 13. That the parties hereby reserved their rights to present additional evidence on matters not covered by this partial stipulation of facts. WHEREFORE, it is respectfully prayed that the foregoing partial stipulation of facts be approved and admitted by this Honorable Court. As for the evidence presented during the trial, We quote from the decision of the Court of Appeals the statement thereof, as follows: In addition to the foregoing stipulation of facts, plaintiff claims she is a 70-year old widow who cannot read and write the English language; that she can speak the Pampango dialect only; that she has only finished second grade (t.s.n., p. 4, December 11, 1964); that in December 1959, she needed money in the amount of P3,000.00 to invest in the business of the defendant spouses Valencia, who accompanied her to the defendant bank for the purpose of securing a loan of P3,000.00; that while at the defendant bank, an employee handed to her several forms already prepared which she was asked to sign on the places indicated, with no one explaining to her the nature and contents of the documents; that she did not even receive a copy thereof; that she was given a check in the amount of P2,882.85 which she delivered to defendant spouses; that sometime in February 1961, she received a letter from the Acting Deputy Sheriff of Manila, regarding the extrajudicial foreclosure sale of her property; that it was then when she learned for the first time that the mortgage indebtedness secured by the mortgage on her property was P6,000.00 and not P3,000.00; that upon

investigation of her lawyer, it was found that the papers she was made to sign were: (a) Application for a loan of P3,000.00 dated December 7, 1959 (Exh. B-1 and Exh. 1); (b) Promissory note dated December 11, 1959 for the said loan of P3,000.00 (Exh- B-2); (c) Promissory note dated December 11, 1959 for P3,000.00 with the defendants Valencia spouses as borrowers and appellee as co-maker (Exh. B-4 or Exh. 2). The auction sale set for March 10, 1961 was postponed co April 10, 1961 upon the request of defendant spouses Valencia who needed more time within which to pay their loan of P3,000.00 with the defendant bank; plaintiff claims that when she filed the complaint she deposited with the Clerk of Court the sum of P3,383.00 in full payment of her loan of P3,000.00 with the defendant bank, plus interest at the rate of 12% per annum up to April 3, 1961 (Exh. D). As additional evidence for the defendant bank, its manager declared that sometime in December, 1959, plaintiff was brought to the Office of the Bank by an employee- (t.s.n., p 4, January 27, 1966). She wept, there to inquire if she could get a loan from the bank. The claims he asked the amount and the purpose of the loan and the security to he given and plaintiff said she would need P3.000.00 to be invested in a drugstore in which she was a partner (t.s.n., p. 811. She offered as security for the loan her lot and house at Carola St., Sampaloc, Manila, which was promptly investigated by the defendant bank's inspector. Then a few days later, plaintiff came back to the bank with the wife of defendant Valencia A date was allegedly set for plaintiff and the defendant spouses for the processing of their application, but on the day fixed, plaintiff came without the defendant spouses. She signed the application and the other papers pertinent to the loan after she was interviewed by the manager of the defendant. After the application of plaintiff was made, defendant spouses had their application for a loan also prepared and signed (see Exh. 13). In his interview of plaintiff and defendant spouses, the manager of the bank was able to gather that plaintiff was in joint venture with the defendant spouses wherein she

agreed to invest P3,000.00 as additional capital in the laboratory owned by said spouses (t.s.n., pp. 1617) 3 The Court of Appeals, upon evaluation of the evidence, affirmed in toto the decision of the Court of First Instance of Manila, the dispositive portion of which reads: FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment and: (1) Declares that the promissory note, Exhibit '2', is invalid as against plaintiff herein; (2) Declares that the contract of mortgage, Exhibit '6', is null and void, in so far as the amount thereof exceeds the sum of P3,000.00 representing the principal obligation of plaintiff, plus the interest thereon at 12% per annum; (3) Annuls the extrajudicial foreclosure sale at public auction of the mortgaged property held on April 11, 1961, as well as all the process and actuations made in pursuance of or in implementation thereto; (4) Holds that the total unpaid obligation of plaintiff to defendant Rural Bank of Caloocan, Inc., is only the amount of P3,000.00, plus the interest thereon at 12% per annum, as of April 3, 1961, and orders that plaintiff's deposit of P3,383.00 in the Office of the Clerk of Court be applied to the payment thereof; (5) Orders defendant Rural Bank of Caloocan, Inc. to return to defendant Arsenio Reyes the purchase price the latter paid for the mortgaged property at the public auction, as well as reimburse him of all the expenses he has incurred relative to the sale thereof; (6) Orders defendants spouses Severino D. Valencia and Catalina Valencia to pay defendant Rural Bank of Caloocan, Inc. the amount of P3,000.00 plus the corresponding 12% interest thereon per annum from December 11, 1960 until fully paid; and Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and spouses Severino D. Valencia and Catalina Valencia to pay plaintiff, jointly and severally, the sum of P600.00 by way of attorney's fees, as well as costs. In view of the conclusion that the court has thus reached, the counterclaims of defendant Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes are hereby dismissed, as a corollary The Court further denies the motion of defendant Arsenio Reyes for an Order requiring Maxima Castro

to deposit rentals filed on November 16, 1963, resolution of which was held in abeyance pending final determination of the case on the merits, also as a consequence of the conclusion aforesaid. 4 Petitioners Bank and Jose Desiderio moved for the reconsideration 5 of respondent court's decision. The motion having been denied, 6 they now come before this Court in the instant petition, with the following Assignment of Errors, to wit: I THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL ANNULMENT OF THE PROMISSORY NOTE, EXHIBIT 2, AND THE MORTGAGE, EXHIBIT 6, INSOFAR AS THEY AFFECT RESPONDENT MAXIMA CASTRO VISA-VIS PETITIONER BANK DESPITE THE TOTAL ABSENCE OF EITHER ALLEGATION IN THE COMPLAINT OR COMPETENT PROOF IN THE EVIDENCE OF ANY FRAUD OR OTHER UNLAWFUL CONDUCT COMMITTED OR PARTICIPATED IN BY PETITIONERS IN PROCURING THE EXECUTION OF SAID CONTRACTS FROM RESPONDENT CASTRO. II THE COURT OF APPEALS ERRED IN IMPUTING UPON AND CONSIDERING PREJUDICIALLY AGAINST PETITIONERS, AS BASIS FOR THE PARTIAL ANNULMENT OF THE CONTRACTS AFORESAID ITS FINDING OF FRAUD PERPETRATED BY THE VALENCIA SPOUSES UPON RESPONDENT CASTRO IN UTTER VIOLATION OF THE RES INTER ALIOS ACTA RULE. III THE COURT OF APPEAL ERRED IN NOT HOLDING THAT, UNDER THE FACTS FOUND BY IT, RESPONDENT CASTRO IS UNDER ESTOPPEL TO IMPUGN THE REGULARITY AND VALIDITY OF HER QUESTIONED TRANSACTION WITH PETITIONER BANK. IV THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN PETITIONERS AND RESPONDENT CASTRO, THE LATTER SHOULD SUFFER THE CONSEQUENCES OF THE FRAUD PERPETRATED BY THE VALENCIA SPOUSES, IN AS MUCH AS IT WAS THRU RESPONDENT CASTRO'S NEGLIGENCE OR ACQUIESCENSE IF NOT ACTUAL CONNIVANCE THAT THE PERPETRATION OF SAID FRAUD WAS MADE POSSIBLE. V

THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF THE DEPOSIT BY RESPONDENT CASTRO OF P3,383.00 WITH THE COURT BELOW AS A TENDER AND CONSIGNATION OF PAYMENT SUFFICIENT TO DISCHARGE SAID RESPONDENT FROM HER OBLIGATION WITH PETITIONER BANK. VI THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID AND BINDING UPON RESPONDENT CASTRO THE HOLDING OF THE SALE ON FORECLOSURE ON THE BUSINESS DAY NEXT FOLLOWING THE ORIGINALLY SCHEDULED DATE THEREFOR WHICH WAS DECLARED A HOLIDAY WITHOUT NECESSITY OF FURTHER NOTICE THEREOF. The issue raised in the first three (3) assignment of errors is whether or not respondent court correctly affirmed the lower court in declaring the promissory note (Exhibit 2) invalid insofar as they affect respondent Castro vis-a-vis petitioner bank, and the mortgage contract (Exhibit 6) valid up to the amount of P3,000.00 only. Respondent court declared that the consent of Castro to the promissory note (Exhibit 2) where she signed as co-maker with the Valencias as principal borrowers and her acquiescence to the mortgage contract (Exhibit 6) where she encumbered her property to secure the amount of P6,000.00 was obtained by fraud perpetrated on her by the Valencias who had abused her confidence, taking advantage of her old age and ignorance of her financial need. Respondent court added that "the mandate of fair play decrees that she should be relieved of her obligation under the contract" pursuant to Articles 24 7 and 1332 8 of the Civil Code. The decision in effect relieved Castro of any liability to the promissory note (Exhibit 2) and the mortgage contract (Exhibit 6) was deemed valid up to the amount of P3,000.00 only which was equivalent to her personal loan to the bank. Petitioners argued that since the Valencias were solely declared in the decision to be responsible for the fraud against Castro, in the light of the res inter alios acta rule, a finding of fraud perpetrated by the spouses against Castro cannot be taken to operate prejudicially against the bank. Petitioners concluded that respondent court erred in not giving effect to the promissory note (Exhibit 2) insofar as they affect Castro and the bank and in declaring that the mortgage contract (Exhibit 6) was valid only to the extent of Castro's personal loan of P3,000.00. The records of the case reveal that respondent court's findings of fraud against the Valencias is well supported by evidence. Moreover, the findings of fact by respondent court in the matter is

deemed final. 9 The decision declared the Valencias solely responsible for the defraudation of Castro. Petitioners' contention that the decision was silent regarding the participation of the bank in the fraud is, therefore, correct. We cannot agree with the contention of petitioners that the bank was defrauded by the Valencias. For one, no claim was made on this in the lower court. For another, petitioners did not submit proof to support its contention. At any rate, We observe that while the Valencias defrauded Castro by making her sign the promissory note (Exhibit 2) and the mortgage contract (Exhibit 6), they also misrepresented to the bank Castro's personal qualifications in order to secure its consent to the loan. This must be the reason which prompted the bank to contend that it was defrauded by the Valencias. But to reiterate, We cannot agree with the contention for reasons above-mentioned. However, if the contention deserves any consideration at all, it is in indicating the admission of petitioners that the bank committed mistake in giving its consent to the contracts. Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the Valencias both Castro and the bank committed mistake in giving their consents to the contracts. In other words, substantial mistake vitiated their consents given. For if Castro had been aware of what she signed and the bank of the true qualifications of the loan applicants, it is evident that they would not have given their consents to the contracts. Pursuant to Article 1342 of the Civil Code which provides: Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such misrepresentation has created substantial mistake and the same is mutual. We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and the mortgage contract (Exhibit 6) binding on Castro beyond the amount of P3,000.00, for while the contracts may not be invalidated insofar as they affect the bank and Castro on the ground of fraud because the bank was not a participant thereto, such may however be invalidated on the ground of substantial mistake mutually committed by them as a consequence of the fraud and misrepresentation inflicted by the Valencias. Thus, in the case of Hill vs. Veloso, 10 this Court declared that a contract may be annulled on the ground of vitiated consent if deceit by a third person, even without connivance or complicity with one of the contracting parties, resulted in mutual error on the part of the parties to the contract. Petitioners argued that the amended complaint fails to contain even a general averment of fraud or mistake, and its mention in

the prayer is definitely not a substantial compliance with the requirement of Section 5, Rule 8 of the Rules of Court. The records of the case, however, will show that the amended complaint contained a particular averment of fraud against the Valencias in full compliance with the provision of the Rules of Court. Although, the amended complaint made no mention of mistake being incurred in by the bank and Castro, such mention is not essential in order that the promissory note (Exhibit 2) may be declared of no binding effect between them and the mortgage (Exhibit 6) valid up to the amount of P3,000.00 only. The reason is that the mistake they mutually suffered was a mere consequence of the fraud perpetrated by the Valencias against them. Thus, the fraud particularly averred in the complaint, having been proven, is deemed sufficient basis for the declaration of the promissory note (Exhibit 2) invalid insofar as it affects Castro vis-a-vis the bank, and the mortgage contract (Exhibit 6) valid only up to the amount of P3,000.00. The second issue raised in the fourth assignment of errors is who between Castro and the bank should suffer the consequences of the fraud perpetrated by the Valencias. In attributing to Castro an consequences of the loss, petitioners argue that it was her negligence or acquiescence if not her actual connivance that made the fraud possible. Petitioners' argument utterly disregards the findings of respondent Court of Appeals wherein petitioners' negligence in the contracts has been aptly demonstrated, to wit: A witness for the defendant bank, Rodolfo Desiderio claims he had subjected the plaintiff-appellee to several interviews. If this were true why is it that her age was placed at 61 instead of 70; why was she described in the application (Exh. B-1-9) as drug manufacturer when in fact she was not; why was it placed in the application that she has income of P20,000.00 when according to plaintiff-appellee, she his not even given such kind of information -the true fact being that she was being paid P1.20 per picul of the sugarcane production in her hacienda and 500 cavans on the palay production. 11 From the foregoing, it is evident that the bank was as much , guilty as Castro was, of negligence in giving its consent to the contracts. It apparently relied on representations made by the Valencia spouses when it should have directly obtained the needed data from Castro who was the acknowledged owner of the property offered as collateral. Moreover, considering Castro's personal circumstances her lack of education, ignorance and old age she cannot be considered utterly neglectful for having been defrauded.

On the contrary, it is demanded of petitioners to exercise the highest order of care and prudence in its business dealings with the Valencias considering that it is engaged in a banking business a business affected with public interest. It should have ascertained Castro's awareness of what she was signing or made her understand what obligations she was assuming, considering that she was giving accommodation to, without any consideration from the Valencia spouses. Petitioners further argue that Castro's act of holding the Valencias as her agent led the bank to believe that they were authorized to speak and bind her. She cannot now be permitted to deny the authority of the Valencias to act as her agent for one who clothes another with apparent authority as her agent is not permitted to deny such authority. The authority of the Valencias was only to follow-up Castro's loan application with the bank. They were not authorized to borrow for her. This is apparent from the fact that Castro went to the Bank to sign the promissory note for her loan of P3,000.00. If her act had been understood by the Bank to be a grant of an authority to the Valencia to borrow in her behalf, it should have required a special power of attorney executed by Castro in their favor. Since the bank did not, We can rightly assume that it did not entertain the notion, that the Valencia spouses were in any manner acting as an agent of Castro. When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced by a promissory note (Exhibit 2) and mortgaged (Exhibit 6) Castro's property to secure said loan, the Valencias acted for their own behalf. Considering however that for the loan in which the Valencias appeared as principal borrowers, it was the property of Castro that was being mortgaged to secure said loan, the Bank should have exercised due care and prudence by making proper inquiry if Castro's consent to the mortgage was without any taint or defect. The possibility of her not knowing that she signed the promissory note (Exhibit 2) as co-maker with the Valencias and that her property was mortgaged to secure the two loans instead of her own personal loan only, in view of her personal circumstances ignorance, lack of education and old age should have placed the Bank on prudent inquiry to protect its interest and that of the public it serves. With the recent occurrence of events that have supposedly affected adversely our banking system, attributable to laxity in the conduct of bank business by its officials, the need of extreme caution and prudence by said officials and employees in the discharge of their functions cannot be overemphasized. Question is, likewise, raised as to the propriety of respondent court's decision which declared that Castro's consignation in court

of the amount of P3,383.00 was validly made. It is contended that the consignation was made without prior offer or tender of payment to the Bank, and it therefore, not valid. In holding that there is a substantial compliance with the provision of Article 1256 of the Civil Code, respondent court considered the fact that the Bank was holding Castro liable for the sum of P6,000.00 plus 12% interest per annum, while the amount consigned was only P3,000.00 plus 12% interest; that at the time of consignation, the Bank had long foreclosed the mortgage extrajudicially and the sale of the mortgage property had already been scheduled for April 10, 1961 for non-payment of the obligation, and that despite the fact that the Bank already knew of the deposit made by Castro because the receipt of the deposit was attached to the record of the case, said Bank had not made any claim of such deposit, and that therefore, Castro was right in thinking that it was futile and useless for her to make previous offer and tender of payment directly to the Bank only in the aforesaid amount of P3,000.00 plus 12% interest. Under the foregoing circumstances, the consignation made by Castro was valid. if not under the strict provision of the law, under the more liberal considerations of equity. The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale at public auction of the mortgaged property that was held on April 11, 1961. Petitioners contended that the public auction sale that was held on April 11, 1961 which was the next business day after the scheduled date of the sale on April 10, 1961, a special public holiday, was permissible and valid pursuant to the provisions of Section 31 of the Revised Administrative Code which ordains: Pretermission of holiday. Where the day, or the last day, for doing any act required or permitted by law falls on a holiday, the act may be done on the next succeeding business day. Respondent court ruled that the aforesaid sale is null and void, it not having been carried out in accordance with Section 9 of Act No. 3135, which provides: Section 9. Notice shall be given by posting notices of the sale for not less than twenty days in at least three public places of the municipality or city where the property is situated, and if such property is worth more than four hundred pesos, such notice shall also be published once a week for at least three consecutive weeks in a newspaper of general circulation in the municipality or city. We agree with respondent court. The pretermission of a holiday applies only "where the day, or the last day for doing any act required or permitted by law falls on a holiday," or when the last

day of a given period for doing an act falls on a holiday. It does not apply to a day fixed by an office or officer of the government for an act to be done, as distinguished from a period of time within which an act should be done, which may be on any day within that specified period. For example, if a party is required by law to file his answer to a complaint within fifteen (15) days from receipt of the summons and the last day falls on a holiday, the last day is deemed moved to the next succeeding business day. But, if the court fixes the trial of a case on a certain day but the said date is subsequently declared a public holiday, the trial thereof is not automatically transferred to the next succeeding business day. Since April 10, 1961 was not the day or the last day set by law for the extrajudicial foreclosure sale, nor the last day of a given period but a date fixed by the deputy sheriff, the aforesaid sale cannot legally be made on the next succeeding business day without the notices of the sale on that day being posted as prescribed in Section 9, Act No. 3135. WHEREFORE, finding no reversible error in the judgment under review, We affirm the same in toto. No pronouncement as to cost. SO ORDERED. Teehankee (Acting, C.J.) Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ., concur. G.R. No. L-17072 October 31, 1961 CRISTINA MARCELO VDA. DE BAUTISTA, plaintiff-appellee, vs. BRIGIDA MARCOS, ET AL., defendants-appellants. Aladin B. Bermudez for defendants-appellants. Cube and Fajardo for plaintiff-appellee. REYES, J.B.L., J.: The main question in this appeal is whether or not a mortgagee may foreclose a mortgage on a piece of land covered by a free patent where the mortgage was executed before the patent was issued and is sought to be foreclosed within five years from its issuance. The facts of the case appear to be as follows: On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of P2,000 from plaintiff Cristina Marcel Vda. de Bautista and to secure payment thereof conveyed to the latter by way of mortgage a two (2)-hectare portion of an unregistered parcel of land situated in Sta. Ignacia, Tarlac. The deed of mortgage, Exhibit "A", provided that it was to last for three years, that possession of the land mortgaged was to be turned over to the mortgagee by way of usufruct, but with no obligation on her part to apply the harvests to the principal obligation; that said mortgage would be released only upon payment of the principal loan of P2,000 without

any interest; and that the mortgagor promised to defend and warrant the mortgagee's rights over the land mortgaged. Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in behalf of the heirs of her deceased mother Victoriana Cainglet (who are Brigida herself and her three sisters), an application for the issuance of a free patent over the land in question, on the strength of the cultivation and occupation of said land by them and their predecessor since July, 1915. As a result, Free Patent No. V-64358 was issued to the applicants on January 25, 1957, and on February 22, 1957, it was registered in their names under Original Certificate of Title No. P-888 of the office of Register of Deeds for the province of Tarlac. Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having remained unpaid up to 1959, the latter, on March 4, 1959, filed the present action against Brigida and her husband (Civil Case No. 3382) in the court below for the payment thereof, or in default of the debtors to pay, for the foreclosure of her mortgage on the land give as security. Defendants moved to dismiss the action, pointing out that the land in question is covered by a free patent and could not, therefore, under the Public Land Law, be taken within five years from the issuance of the patent for the payment of any debts of the patentees contracted prior to the expiration of said five-year period; but the lower court denied the motion to dismiss on the ground that the law cited does not apply because the mortgage sought to be foreclosed was executed before the patent was issued. Defendants then filed their answer, reiterating the defense invoked in their motion to dismiss, and alleging as well that the real contract between the parties was an antichresis and not a mortgage. Pre-trial of the case followed, after which the lower court rendered judgment finding the mortgage valid to the extent of the mortgagor's pro-indiviso share of 15,333 square meters in the land in question, on the theory that the Public Land Law does not apply in this case because the mortgage in question was executed before a patent was issued over the land in question; that the agreement of the parties could not be antichresis because the deed Exhibit "A" clearly shows a mortgage with usufruct in favor of the mortgagee; and ordered the payment of the mortgage loan of P2,000 to plaintiff or, upon defendant's failure to do so, the foreclosure of plaintiff's mortgage on defendant Brigida Marcos' undivided share in the land in question. From this judgment, defendants Brigida Marcos and her husband Osmondo Apolocio appealed to this Court. There is merit in the appeal. The right of plaintiff-appellee to foreclose her mortgage on the land in question depends not so much on whether she could take said land within the prohibitive period of five years from the issuance of

defendants' patent for the satisfaction of the indebtedness in question, but on whether the deed of mortgage Exhibit "A" is at all valid and enforceable, since the land mortgaged was apparently still part of the public domain when the deed of mortgage was constituted. As it is an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of the thing mortgaged (Art. 2085), the mortgage here in question is void and ineffective because at the time it was constituted, the mortgagor was not yet the owner of the land mortgaged and could not, for that reason, encumber the same to the plaintiff-appellee. Nor could the subsequent acquisition by the mortgagor of title over said land through the issuance of a free patent validate and legalize the deed of mortgage under the doctrine of estoppel (cf. Art. 1434, New Civil Code,1 since upon the issuance of said patient, the land in question was thereby brought under the operation of the Public Land Law that prohibits the taking of said land for the satisfaction of debts contracted prior to the expiration of five years from the date of the issuance of the patent (sec. 118, C.A. No. 141). This prohibition should include not only debts contracted during the five-year period immediately preceding the issuance of the patent but also those contracted before such issuance, if the purpose and policy of the law, which is "to preserve and keep in the family of the homesteader that portion of public land which the State has gratuitously given to him" (Pascua v. Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v. Roman Catholic Church of Midsayap, G.R. L6088, Feb. 24, 1954), is to be upheld. The invalidity of the mortgage Exhibit "A" does not, however, imply the concomitant invalidity of the collate agreement in the same deed of mortgage whereby possession of the land mortgaged was transferred to plaintiff-appellee in usufruct, without any obligation on her part to account for its harvests or deduct them from defendants' indebtedness of P2,000. Defendant Brigida Marcos, who, together with her sisters, was in possession of said land by herself and through her deceased mother before her since 1915, had possessory rights over the same even before title vested in her as co-owner by the issuance of the free patent to her and her sisters, and these possessory right she could validly transfer and convey to plaintiff-appellee, as she did in the deed of mortgage Exhibit "A". The latter, upon the other hand, believing her mortgagor to be the owner of the land mortgaged and not being aware of any flaw which invalidated her mode of acquisition, was a possessor in good faith (Art. 526, N.C.C.), and as such had the right to all the fruits received during the entire period of her possession in good faith (Art. 544, N.C.C.). She is, therefore, entitled to the full payment of her credit of P2,000 from defendants, without any

obligation to account for the fruits or benefits obtained by her from the land in question. WHEREFORE, the judgment appealed from is reversed insofar as it orders the foreclosure of the mortgage in question, but affirmed in all other respects. Costs again defendants-appellants. Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Paredes and De Leon, JJ., concur. Barrera, J., took no part. Footnotes 1 Art. 1434, N.C.C. provides that "When a person who is not the owner of a thing sells or alienates and delivers it, and later the seller or grantor acquires title thereto, such title passes by operation of law to the buyer or grantee."