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CREDIT TRANSACTIONS CASES NOVEMBER 14, 2015

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G.R. No. 143826
1

Cases
August 28, 2003

HEIRS OF IGNACIA AGUILAR-REYES, Petitioners,


vs.
Spouses CIPRIANO MIJARES and FLORENTINA MIJARES, Respondents.
453 SCRA 283 or G.R. No. 153802. March 11, 2005

Pages

3-9

10-13

HOMEOWNERS SAVINGS & LOAN BANK, Petitioner,


vs.
MIGUELA C. DAILO, Respondents.
-OR2

14-20

G.R. No. 125172 June 26, 1998


Spouses ANTONIO and LUZVIMINDA GUIANG, petitioners,
vs.
COURT OF APPEALS and GILDA COPUZ, respondents.
*Per notes Guiang vs. CA 453 SCRA 283 d aq sure kun hain it tuod hn case Title
or case number.
G.R. No. 158040
April 14, 2008

SPOUSES ONESIFORO and ROSARIO ALINAS, petitioner,


vs.
SPOUSES VICTOR and ELENA ALINAS, respondents.
G.R. No. 150197 July 28, 2005

21-27

PRUDENTIAL BANK, Petitioner,


vs.
DON A. ALVIAR and GEORGIA B. ALVIAR, Respondents.
G.R. No. 126158 September 23, 1997

28-33

PHILIPPINE BANK OF COMMUNICATIONS, petitioner,


vs.
THE COURT OF APPEALS, HON. PEDRO T. SANTIAGO, as Judge, RTC of
Quezon City Branch 101, FALCON GARMENTS CORPORATION, QUALITY
LABELS, INC., ROBERT SY doing business under the name and style Jobert
Printing Services; EUGENIO POA, MAGIN TABUSO, MAKILITO MAHINAY, EFREN
CACHERO, CESAR M. TORIO and EFREN C. GUMBAC, respondents.

34-41

*Per notes Phil Bank of Communications vs CA 323 Phil 297 waray gumawas ha
net gn based ko nala hn case title and year.
G.R. No. 121158 December 5, 1996
6

42-48
CHINA BANKING CORPORATION, ATTYS. REYNALDO M. CABUSORA and
Page 1 of 79

RENATO C. TAGUIAM, petitioners,


vs.
COURT OF APPEALS, HON. PEDRO T. SANTIAGO, SPS. SO CHING and
CRISTINA SO, and NATIVE WEST INTERNATIONAL TRADING
CORP., respondents.
*Per notes Chinabank vs CA 333 Phil 158 waray gumawas ha net gn based ko
nala hn case title and year.
G.R. No. 186560
November 17, 2010
7

GOVERNMENT SERVICE INSURANCE SYSTEM, Petitioner,


vs.
FERNANDO P. DE LEON, Respondent.
G.R. No. 97412 July 12, 1994
EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY,
INC., respondents.
G.R. No. 190755
November 24, 2010
LAND BANK OF THE PHILIPPINES, Petitioner,
vs.
ALFREDO ONG, Respondent.
G.R. No. 176143
November 09, 2009

10 MIGUEL P. SORIANO, JR. AND JULIETA B. SORIANO, Petitioner,


vs.
BANK OF THE PHILIPPINE ISLANDS, Respondent.
G.R. No. 168782
October 10, 2008
11

SPOUSES JOVENAL TORING and CECILIA ESCALONA-TORING, petitioners,


vs.
SPOUSES ROSALIE GANZON-OLAN and GILBERT OLAN, and ROWENA
OLAN, respondents.

Page 2 of 79

49-56

57-65

66-74

75-76

77-79

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 143826

August 28, 2003

HEIRS OF IGNACIA AGUILAR-REYES, Petitioners,


vs.
Spouses CIPRIANO MIJARES and FLORENTINA MIJARES, Respondents.
DECISION
YNARES-SANTIAGO, J.:
Under the regime of the Civil Code, the alienation or encumbrance of a conjugal real property requires the
consent of the wife. The absence of such consent renders the entire transaction 1 merely voidable and not
void.2The wife may, during the marriage and within ten years from the transaction questioned, bring an action
for the annulment of the contract entered into by her husband without her consent.3
Assailed in this petition for review on certiorari are the January 26, 2000 Decision4 and June 19, 2000,
Resolution5 of the Court of Appeals in CA-G.R. No. 28464 which declared respondents as purchasers in good
faith and set aside the May 31, 1990 and June 29, 1990 Orders of the Regional Trial Court of Quezon City,
Branch 101, in Civil Case No. Q-48018.
The controversy stemmed from a dispute over Lot No. 4349-B-2,6 approximately 396 square meters,
previously covered by Transfer Certificate of Title (TCT) No. 205445, located in Balintawak, Quezon City and
registered in the name of Spouses Vicente Reyes and Ignacia Aguilar-Reyes.7 Said lot and the apartments
built thereon were part of the spouses conjugal properties having been purchased using conjugal funds from
their garments business.8
Vicente and Ignacia were married in 1960, but had been separated de facto since 1974.9 Sometime in 1984,
Ignacia learned that on March 1, 1983, Vicente sold Lot No. 4349-B-2 to respondent spouses Cipriano and
Florentina Mijares for P40,000.00.10 As a consequence thereof, TCT No. 205445 was cancelled and TCT No.
306087 was issued on April 19, 1983 in the name of respondent spouses. 11 She likewise found out that
Vicente filed a petition for administration and appointment of guardian with the Metropolitan Trial Court of
Quezon City, Branch XXI. Vicente misrepresented therein that his wife, Ignacia, died on March 22, 1982, and
that he and their 5 minor children were her only heirs. 12 On September 29, 1983, the court appointed Vicente
as the guardian of their minor children.13 Subsequently, in its Order dated October 14, 1983, the court
authorized Vicente to sell the estate of Ignacia.14
On August 9, 1984, Ignacia, through her counsel, sent a letter to respondent spouses demanding the return of
her share in the lot. Failing to settle the matter amicably, Ignacia filed on June 4, 1996 a complaint15 for
annulment of sale against respondent spouses. The complaint was thereafter amended to include Vicente
Reyes as one of the defendants.16
In their answer, respondent spouses claimed that they are purchasers in good faith and that the sale was valid
because it was duly approved by the court.17 Vicente Reyes, on the other hand, contended that what he sold to
the spouses was only his share in Lot No. 4349-B-2, excluding the share of his wife, and that he never
represented that the latter was already dead.18 He likewise testified that respondent spouses, through the
counsel they provided him, took advantage of his illiteracy by filing a petition for the issuance of letters of
administration and appointment of guardian without his knowledge.19
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On February 15, 1990, the court a quo rendered a decision declaring the sale of Lot No. 4349-B-2 void with
respect to the share of Ignacia. It held that the purchase price of the lot was P110,000.00 and ordered Vicente
to return thereof or P55,000.00 to respondent spouses. The dispositive portion of the said decision, readsWHEREFORE, premises above considered, judgment is hereby rendered declaring the subject Deed of
Absolute Sale, dated March [1,] 1983 signed by and between defendants Vicente Reyes and defendant
Cipriano Mijares NULL AND VOID WITH RESPECT TO ONE-HALF (1/2) OF THE SAID PROPERTY;
The Register of Deeds of Quezon City is hereby ordered to cancel TCT No. 306083 (sic) in the names of
defendant spouses Cipriano Mijares and Florentina Mijares and to issue a new TCT in the name of the plaintiff
Ignacia Aguilar-Reyes as owner in fee simple of one-half (1/2) of said property and the other half in the names
of defendant spouses Cipriano Mijares and Florentin[a] Mijares, upon payment of the required fees therefore;
Said defendant spouses Mijares are also ordered to allow plaintiff the use and exercise of rights, as well as
obligations, pertinent to her one-half (1/2) ownership of the subject property;
Defendant Vicente Reyes is hereby ordered to reimburse P55,000.00 with legal rate of interest from the
execution of the subject Deed of Absolute Sale on March 1, 1983, to the defendant spouses Cipriano Mijares
and Florentina Mijares which corresponds to the one-half (1/2) of the actual purchase price by the said Mijares
but is annulled in this decision (sic);
Defendant Vicente Reyes is hereby further ordered to pay plaintiff the amount of P50,000.00 by way of moral
and exemplary damages, plus costs of this suit.
SO ORDERED.20
Ignacia filed a motion for modification of the decision praying that the sale be declared void in its entirety and
that the respondents be ordered to reimburse to her the rentals they collected on the apartments built on Lot
No. 4349-B-2 computed from March 1, 1983.1wphi1
On May 31, 1990, the trial court modified its decision by declaring the sale void in its entirety and ordering
Vicente Reyes to reimburse respondent spouses the purchase price of P110,000, thus
WHEREFORE, premises considered, judgment is hereby rendered declaring the subject Deed of Absolute
Sale, dated March 1, 1983 signed by and between defendants Vicente Reyes and defendant Cipriano Mijares
as nulland void ab initio, in view of the absence of the wifes conformity to said transaction.
Consequent thereto, the Register of Deeds for Quezon City is hereby ordered to cancel TCT No. 306083 (sic)
in the name of Cipriano Mijares and Florentin[a] Mijares and issue a new TCT in the name of the plaintiff and
defendant Ignacia Aguilar-Reyes and Vicente Reyes as owners in fee simple, upon payment of required fees
therefore.
Defendant Vicente Reyes is hereby ordered to pay the amount of one hundred ten thousand pesos
(P110,000.00) with legal rate of interest at 12% per annum from the execution of the subject Deed of Absolute
Sale on March 1, 1983.
Further, defendant Vicente Reyes is ordered to pay the amount of P50,000.00 by way of moral and exemplary
damages, plus costs of this suit.
SO ORDERED.21
On motion22 of Ignacia, the court issued an Order dated June 29, 1990 amending the dispositive portion of the
May 31, 1990 decision by correcting the Transfer Certificate of Title of Lot No. 4349-B-2, in the name of
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Cipriano Mijares and Florentina Mijares, from TCT No. 306083 to TCT No. 306087; and directing the Register
of Deeds of Quezon City to issue a new title in the name of Ignacia Aguilar-Reyes and Vicente Reyes. The
Order likewise specified that Vicente Reyes should pay Ignacia Aguilar-Reyes the amount of P50,000.00 as
moral and exemplary damages.23
Both Ignacia Aguilar-Reyes and respondent spouses appealed the decision to the Court of Appeals. 24 Pending
the appeal, Ignacia died and she was substituted by her compulsory heirs. 25
Petitioners contended that they are entitled to reimbursement of the rentals collected on the apartment built on
Lot No. 4349-B-2, while respondent spouses claimed that they are buyers in good faith. On January 26, 2000,
the Court of Appeals reversed and set aside the decision of the trial court. It ruled that notwithstanding the
absence of Ignacias consent to the sale, the same must be held valid in favor of respondents because they
were innocent purchasers for value.26 The decretal potion of the appellate courts decision states
WHEREFORE, premises considered, the Decision appealed from and the Orders dated May 31, 1990 and
June 29, 1990, are SET ASIDE and in lieu thereof a new one is rendered
1. Declaring the Deed of Absolute Sale dated March 1, 1983 executed by Vicente Reyes in favor of spouses
Cipriano and [Florentina] Mijares valid and lawful;
2. Ordering Vicente Reyes to pay spouses Mijares the amount of P30,000.00 as attorneys fees and legal
expenses; and
3. Ordering Vicente Reyes to pay spouses Mijares P50,000.00 as moral damages.
No pronouncement as to costs.
SO ORDERED.27
Undaunted by the denial of their motion for reconsideration,28 petitioners filed the instant petition contending
that the assailed sale of Lot No. 4392-B-2 should be annulled because respondent spouses were not
purchasers in good faith.
The issues for resolution are as follows: (1) What is the status of the sale of Lot No. 4349-B-2 to respondent
spouses? (2) Assuming that the sale is annullable, should it be annulled in its entirety or only with respect to
the share of Ignacia? (3) Are respondent spouses purchasers in good faith?
Articles 166 and 173 of the Civil Code,29 the governing laws at the time the assailed sale was contracted,
provide:
Art.166. Unless the wife has been declared a non compos mentis or a spendthrift, or is under civil interdiction
or is confined in a leprosarium, the husband cannot alienate or encumber any real property of the conjugal
partnership without the wifes consent. If she refuses unreasonably to give her consent, the court may compel
her to grant the same
Art. 173. The wife may, during the marriage and within ten years from the transaction questioned, ask the
courts for the annulment of any contract of the husband entered into without her consent, when such consent
is required, or any act or contract of the husband which tends to defraud her or impair her interest in the
conjugal partnership property. Should the wife fail to exercise this right, she or her heirs after the dissolution of
the marriage, may demand the value of property fraudulently alienated by the husband.
Pursuant to the foregoing provisions, the husband could not alienate or encumber any conjugal real property
without the consent, express or implied, of the wife otherwise, the contract is voidable. Indeed, in several
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cases30the Court had ruled that such alienation or encumbrance by the husband is void. The better view,
however, is to consider the transaction as merely voidable and not void. 31 This is consistent with Article 173 of
the Civil Code pursuant to which the wife could, during the marriage and within 10 years from the questioned
transaction, seek its annulment.32
In the case of Heirs of Christina Ayuste v. Court of Appeals,33 it was categorically held that
There is no ambiguity in the wording of the law. A sale of real property of the conjugal partnership made by the
husband without the consent of his wife is voidable. The action for annulment must be brought during the
marriage and within ten years from the questioned transaction by the wife. Where the law speaks in clear and
categorical language, there is no room for interpretation there is room only for application.34
Likewise, in Spouses Guiang v. Court of Appeals,35 the Court quoted with approval the ruling of the trial court
that under the Civil Code, the encumbrance or alienation of a conjugal real property by the husband absent the
wifes consent, is voidable and not void. Thus
Under Article 166 of the Civil Code, the husband cannot generally alienate or encumber any real property of
the conjugal partnership without the wifes consent. The alienation or encumbrance if so made however is not
null and void. It is merely voidable. The offended wife may bring an action to annul the said alienation or
encumbrance. Thus, the provision of Article 173 of the Civil Code of the Philippines, to wit:
Art. 173. The wife may, during the marriage and within ten years from the transaction questioned, ask the
courts for the annulment of any contract of the husband entered into without her consent, when such consent
is required, or any act or contract of the husband which tends to defraud her or impair her interest in the
conjugal partnership property. Should the wife fail to exercise this right, she or her heirs after the dissolution of
the marriage, may demand the value of property fraudulently alienated by the husband.
This particular provision giving the wife ten (10) years x x x during [the] marriage to annul the alienation or
encumbrance was not carried over to the Family Code. It is thus clear that any alienation or encumbrance
made after August 3, 1988 when the Family Code took effect by the husband of the conjugal partnership
property without the consent of the wife is null and void
In the case at bar, there is no dispute that Lot No. 4349-B-2, is a conjugal property having been purchased
using the conjugal funds of the spouses during the subsistence of their marriage. It is beyond cavil therefore
that the sale of said lot to respondent spouses without the knowledge and consent of Ignacia is voidable. Her
action to annul the March 1, 1983 sale which was filed on June 4, 1986, before her demise is perfectly within
the 10 year prescriptive period under Article 173 of the Civil Code. Even if we reckon the period from
November 25, 1978 which was the date when Vicente and the respondent spouses entered into a contract
concerning Lot No. 4349-B-2, Ignacias action would still be within the prescribed period.
Anent the second issue, the trial court correctly annulled the voidable sale of Lot No. 4349-B-2 in its entirety.
InBucoy v. Paulino,36 a case involving the annulment of sale with assumption of mortgages executed by the
husband without the consent of the wife, it was held that the alienation or encumbrance must be annulled in its
entirety and not only insofar as the share of the wife in the conjugal property is concerned. Although the
transaction in the said case was declared void and not merely voidable, the rationale for the annulment of the
whole transaction is the same thus
The plain meaning attached to the plain language of the law is that the contract, in its entirety, executed by the
husband without the wife's consent, may be annulled by the wife. Had Congress intended to limit such
annulment in so far as the contract shall "prejudice" the wife, such limitation should have been spelled out in
the statute. It is not the legitimate concern of this Court to recast the law. As Mr. Justice Jose B. L. Reyes of
this Court and Judge Ricardo C. Puno of the Court of First Instance correctly stated, "[t]he rule (in the first
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sentence of Article 173) revokes Baello vs. Villanueva, 54 Phil. 213 and Coque vs. Navas Sioca, 45 Phil. 430,"
in which cases annulment was held to refer only to the extent of the one-half interest of the wife
The necessity to strike down the contract of July 5, 1963 as a whole, not merely as to the share of the wife, is
not without its basis in the common-sense rule. To be underscored here is that upon the provisions of Articles
161, 162 and 163 of the Civil Code, the conjugal partnership is liable for many obligations while the conjugal
partnership exists. Not only that. The conjugal property is even subject to the payment of debts contracted by
either spouse before the marriage, as those for the payment of fines and indemnities imposed upon them after
the responsibilities in Article 161 have been covered (Article 163, par. 3), if it turns out that the spouse who is
bound thereby, "should have no exclusive property or if it should be insufficient." These are considerations that
go beyond the mere equitable share of the wife in the property. These are reasons enough for the husband to
be stopped from disposing of the conjugal property without the consent of the wife. Even more fundamental is
the fact that the nullity is decreed by the Code not on the basis of prejudice but lack of consent of an
indispensable party to the contract under Article 166.37
With respect to the third issue, the Court finds that respondent spouses are not purchasers in good faith. A
purchaser in good faith is one who buys property of another, without notice that some other person has a right
to, or interest in, such property and pays full and fair price for the same, at the time of such purchase, or before
he has notice of the claim or interest of some other persons in the property. He buys the property with the
belief that the person from whom he receives the thing was the owner and could convey title to the property. A
purchaser cannot close his eyes to facts which should put a reasonable man on his guard and still claim he
acted in good faith.38
In the instant case, there existed circumstances that should have placed respondent spouses on guard. The
death certificate of Ignacia, shows that she died on March 22, 1982. The same death certificate, however,
reveals that (1) it was issued by the Office of the Civil Registrar of Lubao Pampanga on March 10, 1982; (2)
the alleged death of Ignacia was reported to the Office of the Civil Registrar on March 4, 1982; and (3) her
burial or cremation would be on March 8, 1982.39 These obvious flaws in the death certificate should have
prompted respondents to investigate further, especially so that respondent Florentina Mijares admitted on
cross examination that she asked for the death certificate of Ignacia because she was suspicious that Ignacia
was still alive.40 Moreover, respondent spouses had all the opportunity to verify the claim of Vicente that he is a
widower because it was their lawyer, Atty. Rodriguito S. Saet, who represented Vicente in the special
proceedings before the Metropolitan Trial Court.
Neither can respondent spouses rely on the alleged court approval of the sale. Note that the Order issued by
the Metropolitan Trial Court of Quezon City, Branch XXXI, appointing Vicente as guardian of his 5 minor
children, as well as the Order authorizing him to sell the estate of Ignacia were issued only on September 29,
1983 and October 14, 1983, respectively. On the other hand, the sale of the entire Lot No. 4349-B-2 to
respondent spouses appears to have been made not on March 1, 1983, but even as early as November 25,
1978. In the "Agreement" dated November 25, 1978, Vicente in consideration of the amount of P110,000.00,
sold to Cipriano Mijares Lot No. 4349-B-2 on installment basis, with the first installment due on or before July
31, 1979.41 This was followed by a "Memorandum of Understanding" executed on July 30, 1979, by Vicente
and Cipriano (1) acknowledging Ciprianos receipt of Vicentes down payment in the amount of P50,000.00;
and (2) authorizing Florentina Mijares to collect rentals. 42 On July 14, 1981, Vicente and Cipriano executed
another "Memorandum of Agreement," stating, among other, that out of the purchase price of P110,000.00
Vicente had remaining balance of P19,000.00.43 Clearly therefore, the special proceedings before the
Metropolitan Trial Court of Quezon City, Branch XXXI, could not have been the basis of respondent spouses
claim of good faith because the sale of Lot No. 4349-B-2 occurred prior thereto.
Respondent spouses cannot deny knowledge that at the time of the sale in 1978, Vicente was married to
Ignacia and that the latter did not give her conformity to the sale. This is so because the 1978 "Agreement"
described Vicente as "married" but the conformity of his wife to the sale did not appear in the deed. Obviously,
the execution of another deed of sale in 1983 over the same Lot No. 4349-B-2, after the alleged death of
Ignacia on March 22, 1982, as well as the institution of the special proceedings were, intended to correct the
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absence of Ignacias consent to the sale. Even assuming that respondent spouses believed in good faith that
Ignacia really died on March 22, 1982, after they purchased the lot, the fact remains that the sale of Lot No.
4349-B-2 prior to Ignacias alleged demise was without her consent and therefore subject to annulment. The
October 14, 1983 order authorizing the sale of the estate of Ignacia, could not have validated the sale of Lot
No. 4349-B-2 because said order was issued on the assumption that Ignacia was already dead and that the
sale dated March 1, 1983 was never categorically approved in the said order.
The fact that the 5 minor children44 of Vicente represented by the latter, signed the March 1, 1983 deed of sale
of Lot No. 4349-B-2 will not estop them from assailing the validity thereof. Not only were they too young at that
time to understand the repercussions of the sale, they likewise had no right to sell the property of their mother
who, when they signed the deed, was very much alive.
If a voidable contract is annulled, the restoration of what has been given is proper. The relationship between
parties in any contract even if subsequently annulled must always be characterized and punctuated by good
faith and fair dealing. Hence, for the sake of justice and equity, and in consonance with the salutary principle of
non-enrichment at anothers expense, the Court sustains the trial courts order directing Vicente to refund to
respondent spouses the amount of P110,000.00 which they have paid as purchase price of Lot No. 4349-B2.45The court a quo correctly found that the subject of the sale was the entire Lot No. 4349-B-2 and that the
consideration thereof is not P40,000.00 as stated in the March 1, 1983 deed of sale, but P110,000.00 as
evidenced by the (1) "Agreement" dated November 25, 1978 as well as the July 30, 1979 "Memorandum of
Understanding" and the July 14, 1981 "Memorandum of Agreement" which served as receipts of the
installment payments made by respondent Cipriano Mijares; and (2) the receipt duly signed by Vicente Reyes
acknowledging receipt of the amount of P110,000.00 from respondent spouses as payment of the sale of the
controverted lot.46
The trial court, however, erred in imposing 12% interest per annum on the amount due the respondents.
InEastern Shipping Lines, Inc. v. Court of Appeals,47 it was held that interest on obligations not constituting a
loan or forbearance of money is six percent (6%) annually. If the purchase price could be established with
certainty at the time of the filing of the complaint, the six percent (6%) interest should be computed from the
date the complaint was filed until finality of the decision. In Lui v. Loy,48 involving a suit for reconveyance and
annulment of title filed by the first buyer against the seller and the second buyer, the Court, ruling in favor of
the first buyer and annulling the second sale, ordered the seller to refund to the second buyer (who was not a
purchaser in good faith) the purchase price of the lots. It was held therein that the 6% interest should be
computed from the date of the filing of the complaint by the first buyer. After the judgment becomes final and
executory until the obligation is satisfied, the amount due shall earn interest at 12% per year, the interim period
being deemed equivalent to a forbearance of credit.49
Accordingly, the amount of P110,000.00 due the respondent spouses which could be determined with certainty
at the time of the filing of the complaint shall earn 6% interest per annum from June 4, 1986 until the finality of
this decision. If the adjudged principal and the interest (or any part thereof) remain unpaid thereafter, the
interest rate shall be twelve percent (12%) per annum computed from the time the judgment becomes final and
executory until it is fully satisfied.
Petitioners prayer for payment of rentals should be denied. Other than the allegation of Ignacia in her
Sinumpaang Salaysay that the apartments could be rented at P1,000.00 a month, no other evidence was
presented to substantiate her claim. In awarding rentals which are in the nature of actual damages, the Court
cannot rely on mere assertions, speculations, conjectures or guesswork but must depend on competent proof
and on the best evidence obtainable regarding the actual amount of loss.50 None, having been presented in the
case at bar, petitioners claim for rentals must be denied.
While as a general rule, a party who has not appealed is not entitled to affirmative relief other than the ones
granted in the decision of the court below, law and jurisprudence authorize a tribunal to consider errors,
although unassigned, if they involve (1) errors affecting the lower courts jurisdiction over the subject matter, (2)
plain errors not specified, and (3) clerical errors.51 In this case, though defendant Vicente Reyes did not
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appeal, the "plain error" committed by the court a quo as to the award of moral and exemplary damages must
be corrected. These awards cannot be lumped together as was done by the trial court. 52 Moral and exemplary
damages are different in nature, and require separate determination. Moral damages are awarded where the
claimant experienced physical suffering, mental anguish, fright, serious anxiety, besmirched reputation,
wounded feelings, moral shock, social humiliation, and similar injury as a result of the act complained of. 53 The
award of exemplary damages, on the other hand, is warranted when moral, temperate, liquidated, or
compensatory damages were likewise awarded by the court.54
Hence, the trial courts award of "P50,000.00 by way of moral and exemplary damages" should be modified.
Vicente Reyes should be ordered to pay the amounts of P25,000.00 as moral damages and P25,000.00 as
exemplary damages. Since Vicente Reyes was among the heirs substituted to the late Ignacia Aguilar-Reyes,
payment of moral and exemplary damages must be made by Vicente to his children, petitioners in this case.
WHEREFORE, in view of all the foregoing, the petition is PARTIALLY GRANTED. The January 26, 2000
Decision and June 19, 2002, Resolution of the Court of Appeals in CA-G.R. No. 28464 are REVERSED and
SET ASIDE. The May 31, 1990 Order of the Regional Trial Court of Quezon City, Branch 101, in Civil Case
No. Q-48018, which annulled the March 1, 1983 Deed of Absolute Sale over Lot No. 4349-B-2, and ordered
the Register of Deeds of Quezon City to cancel TCT No. 306087 in the name of respondent spouses Cipriano
Mijares and Florentina Mijares covering the same property; as well as the June 29, 1990 Order correcting the
typographical errors in the order dated March 1, 1983, are REINSTATED, with the following modifications
(1) The Register of Deeds of Quezon City is ordered to issue a new certificate of title over Lot No.
4349-B-2, in the name of petitioners as co-owners thereof;
(2) Vicente Reyes is ordered to reimburse the respondent spouses the amount of P110,000.00 as
purchase price of Lot No. 4349-B-2, with interest at 6% per annum from June 4, 1986, until finality of
this decision. After this decision becomes final, interest at the rate of 12% per annum on the principal
and interest (or any part thereof) shall be imposed until full payment.
(3) Defendant Vicente Reyes is ordered to pay the heirs of the late Ignacia Aguilar-Reyes, the amounts
of P25,000.00 as moral damages and P25,000.00 as exemplary damages.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Vitug, Carpio, and Azcuna, JJ., concur.

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SECOND DIVISION
G.R. No. 153802. March 11, 2005
HOMEOWNERS SAVINGS & LOAN BANK, Petitioner,
vs.
MIGUELA C. DAILO, Respondents.
DECISION
TINGA, J.:
This is a petition for review on certiorari under Rule 45 of the Revised Rules of Court, assailing the Decision1 of
the Court of Appeals in CA-G.R. CV No. 59986 rendered on June 3, 2002, which affirmed with modification the
October 18, 1997 Decision2 of the Regional Trial Court, Branch 29, San Pablo City, Laguna in Civil Case No.
SP-4748 (97).
The following factual antecedents are undisputed.
Respondent Miguela C. Dailo and Marcelino Dailo, Jr. were married on August 8, 1967. During their marriage,
the spouses purchased a house and lot situated at Barangay San Francisco, San Pablo City from a certain
Sandra Dalida. The subject property was declared for tax assessment purposes under Assessment of Real
Property No. 94-051-2802. The Deed of Absolute Sale, however, was executed only in favor of the late
Marcelino Dailo, Jr. as vendee thereof to the exclusion of his wife. 3
On December 1, 1993, Marcelino Dailo, Jr. executed a Special Power of Attorney (SPA) in favor of one Lilibeth
Gesmundo, authorizing the latter to obtain a loan from petitioner Homeowners Savings and Loan Bank to be
secured by the spouses Dailos house and lot in San Pablo City. Pursuant to the SPA, Gesmundo obtained a
loan in the amount of P300,000.00 from petitioner. As security therefor, Gesmundo executed on the same day
a Real Estate Mortgage constituted on the subject property in favor of petitioner. The abovementioned
transactions, including the execution of the SPA in favor of Gesmundo, took place without the knowledge and
consent of respondent.4
Upon maturity, the loan remained outstanding. As a result, petitioner instituted extrajudicial foreclosure
proceedings on the mortgaged property. After the extrajudicial sale thereof, a Certificate of Sale was issued in
favor of petitioner as the highest bidder. After the lapse of one year without the property being redeemed,
petitioner, through its vice-president, consolidated the ownership thereof by executing on June 6, 1996 an
Affidavit of Consolidation of Ownership and a Deed of Absolute Sale. 5
In the meantime, Marcelino Dailo, Jr. died on December 20, 1995. In one of her visits to the subject property,
respondent learned that petitioner had already employed a certain Roldan Brion to clean its premises and that
her car, a Ford sedan, was razed because Brion allowed a boy to play with fire within the premises.
Claiming that she had no knowledge of the mortgage constituted on the subject property, which was conjugal
in nature, respondent instituted with the Regional Trial Court, Branch 29, San Pablo City, Civil Case No. SP2222 (97) for Nullity of Real Estate Mortgage and Certificate of Sale, Affidavit of Consolidation of Ownership,
Deed of Sale, Reconveyance with Prayer for Preliminary Injunction and Damages against petitioner. In the
latters Answer with Counterclaim, petitioner prayed for the dismissal of the complaint on the ground that the
property in question was the exclusive property of the late Marcelino Dailo, Jr.
After trial on the merits, the trial court rendered a Decision on October 18, 1997. The dispositive portion thereof
reads as follows:
Page 10 of 79

WHEREFORE, the plaintiff having proved by the preponderance of evidence the allegations of the Complaint,
the Court finds for the plaintiff and hereby orders:
ON THE FIRST CAUSE OF ACTION:
1. The declaration of the following documents as null and void:
(a) The Deed of Real Estate Mortgage dated December 1, 1993 executed before Notary Public Romulo Urrea
and his notarial register entered as Doc. No. 212; Page No. 44, Book No. XXI, Series of 1993.
(b) The Certificate of Sale executed by Notary Public Reynaldo Alcantara on April 20, 1995.
(c) The Affidavit of Consolidation of Ownership executed by the defendant
(c) The Affidavit of Consolidation of Ownership executed by the defendant over the residential lot located at
Brgy. San Francisco, San Pablo City, covered by ARP No. 95-091-1236 entered as Doc. No. 406; Page No.
83, Book No. III, Series of 1996 of Notary Public Octavio M. Zayas.
(d) The assessment of real property No. 95-051-1236.
2. The defendant is ordered to reconvey the property subject of this complaint to the plaintiff.
ON THE SECOND CAUSE OF ACTION
1. The defendant to pay the plaintiff the sum of P40,000.00 representing the value of the car which was
burned.
ON BOTH CAUSES OF ACTION
1. The defendant to pay the plaintiff the sum of P25,000.00 as attorneys fees;
2. The defendant to pay plaintiff P25,000.00 as moral damages;
3. The defendant to pay the plaintiff the sum of P10,000.00 as exemplary damages;
4. To pay the cost of the suit.
The counterclaim is dismissed.
SO ORDERED.6
Upon elevation of the case to the Court of Appeals, the appellate court affirmed the trial courts finding that the
subject property was conjugal in nature, in the absence of clear and convincing evidence to rebut the
presumption that the subject property acquired during the marriage of spouses Dailo belongs to their conjugal
partnership.7The appellate court declared as void the mortgage on the subject property because it was
constituted without the knowledge and consent of respondent, in accordance with Article 124 of the Family
Code. Thus, it upheld the trial courts order to reconvey the subject property to respondent. 8 With respect to the
damage to respondents car, the appellate court found petitioner to be liable therefor because it is responsible
for the consequences of the acts or omissions of the person it hired to accomplish the assigned task. 9 All told,
the appellate court affirmed the trial courts Decision, but deleted the award for damages and attorneys fees
for lack of basis.10
Page 11 of 79

Hence, this petition, raising the following issues for this Courts consideration:
1. WHETHER OR NOT THE MORTGAGE CONSTITUTED BY THE LATE MARCELINO DAILO, JR. ON THE
SUBJECT PROPERTY AS CO-OWNER THEREOF IS VALID AS TO HIS UNDIVIDED SHARE.
2. WHETHER OR NOT THE CONJUGAL PARTNERSHIP IS LIABLE FOR THE PAYMENT OF THE LOAN
OBTAINED BY THE LATE MARCELINO DAILO, JR. THE SAME HAVING REDOUNDED TO THE BENEFIT
OF THE FAMILY.11
First, petitioner takes issue with the legal provision applicable to the factual milieu of this case. It contends that
Article 124 of the Family Code should be construed in relation to Article 493 of the Civil Code, which states:
ART. 493. Each co-owner shall have the full ownership of his part and of the fruits and benefits pertaining
thereto, and he may therefore alienate, assign or mortgage it, and even substitute another person in its
enjoyment, except when personal rights are involved. But the effect of the alienation or the mortgage, with
respect to the co-owners, shall be limited to the portion which may be allotted to him in the division upon the
termination of the co-ownership.
Article 124 of the Family Code provides in part:
ART. 124. The administration and enjoyment of the conjugal partnership property shall belong to both spouses
jointly. . . .
In the event that one spouse is incapacitated or otherwise unable to participate in the administration of the
conjugal properties, the other spouse may assume sole powers of administration. These powers do not include
the powers of disposition or encumbrance which must have the authority of the court or the written consent of
the other spouse. In the absence of such authority or consent, the disposition or encumbrance shall be void. . .
.
Petitioner argues that although Article 124 of the Family Code requires the consent of the other spouse to the
mortgage of conjugal properties, the framers of the law could not have intended to curtail the right of a spouse
from exercising full ownership over the portion of the conjugal property pertaining to him under the concept of
co-ownership.12 Thus, petitioner would have this Court uphold the validity of the mortgage to the extent of the
late Marcelino Dailo, Jr.s share in the conjugal partnership.
In Guiang v. Court of Appeals,13 it was held that the sale of a conjugal property requires the consent of both the
husband and wife.14 In applying Article 124 of the Family Code, this Court declared that the absence of the
consent of one renders the entire sale null and void, including the portion of the conjugal property pertaining to
the husband who contracted the sale. The same principle in Guiang squarely applies to the instant case. As
shall be discussed next, there is no legal basis to construe Article 493 of the Civil Code as an exception to
Article 124 of the Family Code.
Respondent and the late Marcelino Dailo, Jr. were married on August 8, 1967. In the absence of a marriage
settlement, the system of relative community or conjugal partnership of gains governed the property relations
between respondent and her late husband.15 With the effectivity of the Family Code on August 3, 1988,
Chapter 4 on Conjugal Partnership of Gains in the Family Code was made applicable to conjugal partnership
of gains already established before its effectivity unless vested rights have already been acquired under the
Civil Code or other laws.16
The rules on co-ownership do not even apply to the property relations of respondent and the late Marcelino
Dailo, Jr. even in a suppletory manner. The regime of conjugal partnership of gains is a special type of
partnership, where the husband and wife place in a common fund the proceeds, products, fruits and income
from their separate properties and those acquired by either or both spouses through their efforts or by
Page 12 of 79

chance.17 Unlike the absolute community of property wherein the rules on co-ownership apply in a suppletory
manner,18 the conjugal partnership shall be governed by the rules on contract of partnership in all that is not in
conflict with what is expressly determined in the chapter (on conjugal partnership of gains) or by the spouses in
their marriage settlements.19 Thus, the property relations of respondent and her late husband shall be
governed, foremost, by Chapter 4 on Conjugal Partnership of Gains of the Family Code and, suppletorily, by
the rules on partnership under the Civil Code. In case of conflict, the former prevails because the Civil Code
provisions on partnership apply only when the Family Code is silent on the matter.
The basic and established fact is that during his lifetime, without the knowledge and consent of his wife,
Marcelino Dailo, Jr. constituted a real estate mortgage on the subject property, which formed part of their
conjugal partnership. By express provision of Article 124 of the Family Code, in the absence of (court) authority
or written consent of the other spouse, any disposition or encumbrance of the conjugal property shall be void.
The aforequoted provision does not qualify with respect to the share of the spouse who makes the disposition
or encumbrance in the same manner that the rule on co-ownership under Article 493 of the Civil Code does.
Where the law does not distinguish, courts should not distinguish. 20 Thus, both the trial court and the appellate
court are correct in declaring the nullity of the real estate mortgage on the subject property for lack of
respondents consent.
Second, petitioner imposes the liability for the payment of the principal obligation obtained by the late
Marcelino Dailo, Jr. on the conjugal partnership to the extent that it redounded to the benefit of the family. 21
Under Article 121 of the Family Code, "[T]he conjugal partnership shall be liable for: . . . (3) Debts and
obligations contracted by either spouse without the consent of the other to the extent that the family may have
been benefited; . . . ." For the subject property to be held liable, the obligation contracted by the late Marcelino
Dailo, Jr. must have redounded to the benefit of the conjugal partnership. There must be the requisite showing
then of some advantage which clearly accrued to the welfare of the spouses. Certainly, to make a conjugal
partnership respond for a liability that should appertain to the husband alone is to defeat and frustrate the
avowed objective of the new Civil Code to show the utmost concern for the solidarity and well-being of the
family as a unit.22
The burden of proof that the debt was contracted for the benefit of the conjugal partnership of gains lies with
the creditor-party litigant claiming as such.23 Ei incumbit probatio qui dicit, non qui negat (he who asserts, not
he who denies, must prove).24 Petitioners sweeping conclusion that the loan obtained by the late Marcelino
Dailo, Jr. to finance the construction of housing units without a doubt redounded to the benefit of his family,
without adducing adequate proof, does not persuade this Court. Other than petitioners bare allegation, there is
nothing from the records of the case to compel a finding that, indeed, the loan obtained by the late Marcelino
Dailo, Jr. redounded to the benefit of the family. Consequently, the conjugal partnership cannot be held liable
for the payment of the principal obligation.
In addition, a perusal of the records of the case reveals that during the trial, petitioner vigorously asserted that
the subject property was the exclusive property of the late Marcelino Dailo, Jr. Nowhere in the answer filed with
the trial court was it alleged that the proceeds of the loan redounded to the benefit of the family. Even on
appeal, petitioner never claimed that the family benefited from the proceeds of the loan. When a party adopts a
certain theory in the court below, he will not be permitted to change his theory on appeal, for to permit him to
do so would not only be unfair to the other party but it would also be offensive to the basic rules of fair play,
justice and due process.25 A party may change his legal theory on appeal only when the factual bases thereof
would not require presentation of any further evidence by the adverse party in order to enable it to properly
meet the issue raised in the new theory.26
WHEREFORE, the petition is DENIED. Costs against petitioner.
SO ORDERED.
Page 13 of 79

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 125172 June 26, 1998


Spouses ANTONIO and LUZVIMINDA GUIANG, petitioners,
vs.
COURT OF APPEALS and GILDA COPUZ, respondents.

PANGANIBAN, J.:
The sale of a conjugal property requires the consent of both the husband and the wife. The absence of the
consent of one renders the sale null and void, while the vitiation thereof makes it merely voidable. Only in the
latter case can ratification cure the defect.
The Case
These were the principles that guided the Court in deciding this petition for review of the Decision 1 dated
January 30, 1996 and the Resolution 2 dated May 28, 1996, promulgated by the Court of Appeals in CA-GR
CV No. 41758, affirming the Decision of the lower court and denying reconsideration, respectively.
On May 28, 1990, Private Respondent Gilda Corpuz filed an Amended Complainant 3 against her husband
Judie Corpuz and Petitioner-Spouses Antonio and Luzviminda Guiang. The said Complaint sought the
declaration of a certain deed of sale, which involved the conjugal property of private respondent and her
husband, null and void. The case was raffled to the Regional Trial Court of Koronadal, South Cotabato, Branch
25. In due course, the trial court rendered a Decision 4 dated September 9, 1992, disposing as follow: 5
ACCORDINGLY, judgment is rendered for the plaintiff and against the defendants,
1. Declaring both the Deed of Transfer of Rights dated March 1, 1990 (Exh. "A") and the
"amicable settlement" dated March 16, 1990 (Exh. "B") as null void and of no effect;
2. Recognizing as lawful and valid the ownership and possession of plaintiff Gilda Corpuz over
the remaining one-half portion of Lot 9, Block 8, (LRC) Psd-165409 which has been the subject
of the Deed of Transfer of Rights (Exh. "A");
3. Ordering plaintiff Gilda Corpuz to reimburse defendants Luzviminda Guiang the amount of
NINE THOUSAND (P9,000.00) PESOS corresponding to the payment made by defendants
Guiangs to Manuel Callejo for the unpaid balance of the account of plaintiff in favor of Manuel
Callejo, and another sum of P379.62 representing one-half of the amount of realty taxes paid by
defendants Guiangs on Lot 9, Block 8, (LRC) Psd-165409, both with legal interests thereon
computed from the finality of the decision.
No pronouncement as to costs in view of the factual circumstances of the case.

Page 14 of 79

Dissatisfied, petitioners-spouses filed an appeal with the Court of Appeals. Respondent Court, in its challenged
Decision, ruled as follow: 6
WHEREFORE, the appealed of the lower court in Civil Case No. 204 is hereby AFFIRMED by
this Court. No costs considering plaintiff-appellee's failure to file her brief despite notice.
Reconsideration was similarly denied by the same court in its assailed Resolution: 7
Finding that the issues raised in defendants-appellants motion for reconsideration of Our
decision in this case of January 30, 1996, to be a mere rehash of the same issues which we
have already passed upon in the said decision, and there [being] no cogent reason to disturb
the same, this Court RESOLVED to DENY the instant motion for reconsideration for lack of
merit.
The Facts
The facts of this case are simple. Over the objection of private respondent and while she was in Manila
seeking employment, her husband sold to the petitioners-spouses one half of their conjugal peoperty,
consisting of their residence and the lot on which it stood. The circumstances of this sale are set forth in the
Decision of Respondent Court, which quoted from the Decision of the trial court as follows: 8
1. Plaintiff Gilda Corpuz and defendant Judie Corpuz are legally married spouses. They were
married on December 24, 1968 in Bacolod City, before a judge. This is admitted by defendantsspouses Antonio and Luzviminda Guiang in their answer, and also admitted by defendant Judie
Corpuz when he testified in court (tsn. p. 3, June 9, 1992), although the latter says that they
were married in 1967. The couple have three children, namely: Junie 18 years old, Harriet
17 years of age, and Jodie or Joji, the youngest, who was 15 years of age in August, 1990 when
her mother testified in court.
Sometime on February 14, 1983, the couple Gilda and Judie Corpuz, with plaintiff-wife Gilda
Corpuz as vendee, bought a 421 sq. meter lot located in Barangay Gen. Paulino Santos (Bo. 1),
Koronadal, South Cotabato, and particularly known as Lot 9, Block 8, (LRC) Psd-165409 from
Manuel Callejo who signed as vendor through a conditional deed of sale for a total
consideration of P14,735.00. The consideration was payable in installment, with right of
cancellation in favor of vendor should vendee fail to pay three successive installments (Exh. "2",
tsn p. 6, February 14, 1990).
2. Sometime on April 22, 1988, the couple Gilda and Judie Corpuz sold one-half portion of their
Lot No. 9, Block 8, (LRC) Psd-165409 to the defendants-spouses Antonio and Luzviminda
Guiang. The latter have since then occupied the one-half portion [and] built their house thereon
(tsn. p. 4, May 22, 1992). They are thus adjoining neighbors of the Corpuzes.
3. Plaintiff Gilda Corpuz left for Manila sometime in June 1989. She was trying to look for work
abroad, in [the] Middle East. Unfortunately, she became a victim of an unscrupulous illegal
recruiter. She was not able to go abroad. She stayed for sometime in Manila however, coming
back to Koronadal, South Cotabato, . . . on March 11, 1990. Plaintiff's departure for Manila to
look for work in the Middle East was with the consent of her husband Judie Corpuz (tsn. p. 16,
Aug. 12, 1990; p. 10 Sept. 6, 1991).
After his wife's departure for Manila, defendant Judie Corpuz seldom went home to the conjugal
dwelling. He stayed most of the time at his place of work at Samahang Nayon Building, a hotel,
restaurant, and a cooperative. Daughter Herriet Corpuz went to school at King's College, Bo. 1,
Koronadal, South Cotabato, but she was at the same time working as household help of, and
Page 15 of 79

staying at, the house of Mr. Panes. Her brother Junie was not working. Her younger sister Jodie
(Jojie) was going to school. Her mother sometimes sent them money (tsn. p. 14, Sept. 6, 1991.)
Sometime in January 1990, Harriet Corpuz learned that her father intended to sell the remaining
one-half portion including their house, of their homelot to defendants Guiangs. She wrote a
letter to her mother informing her. She [Gilda Corpuz] replied that she was objecting to the sale.
Harriet, however, did not inform her father about this; but instead gave the letter to Mrs.
Luzviminda Guiang so that she [Guiang] would advise her father (tsn. pp. 16-17, Sept. 6, 1991).
4. However, in the absence of his wife Gilda Corpuz, defendant Judie Corpuz pushed through
the sale of the remaining one-half portion of Lot 9, Block 8, (LRC) Psd-165409. On March 1,
1990, he sold to defendant Luzviminda Guiang thru a document known as "Deed of Transfer of
Rights" (Exh. "A") the remaining one-half portion of their lot and the house standing thereon for
a total consideration of P30,000.00 of which P5,000.00 was to be paid in June, 1990. Transferor
Judie Corpuz's children Junie and Harriet signed the document as witness.
Four (4) days after March 1, 1990 or on March 5, 1990, obviously to cure whatever defect in
defendant Judie Corpuz's title over the lot transferred, defendant Luzviminda Guiang as vendee
executed another agreement over Lot 9, Block 8, (LRC) Psd-165408 (Exh. "3"), this time with
Manuela Jimenez Callejo, a widow of the original registered owner from whom the couple Judie
and Gilda Corpuz originally bought the lot (Exh. "2"), who signed as vendor for a consideration
of P9,000.00. Defendant Judie Corpuz signed as a witness to the sale (Exh. "3-A"). The new
sale (Exh. "3") describes the lot sold as Lot 8, Block 9, (LRC) Psd-165408 but it is obvious from
the mass of evidence that the correct lot is Lot 8, Block 9, (LRC) Psd-165409, the very lot earlier
sold to the couple Gilda and Judie Corpuz.
5. Sometimes on March 11, 1990, plaintiff returned home. She found her children staying with
other households. Only Junie was staying in their house. Harriet and Joji were with Mr. Panes.
Gilda gathered her children together and stayed at their house. Her husband was nowhere to be
found. She was informed by her children that their father had a wife already.
6. For staying in their house sold by her husband, plaintiff was complained against by defendant
Luzviminda Guiang and her husband Antonio Guiang before the Barangay authorities of
Barangay General Paulino Santos (Bo. 1), Koronadal, South Cotabato, for trespassing (tsn. p.
34, Aug. 17, 1990). The case was docketed by the barangay authorities as Barangay Case No.
38 for "trespassing". On March 16, 1990, the parties thereat signed a document known as
"amicable settlement". In full, the settlement provides for, to wit:
That respondent, Mrs. Gilda Corpuz and her three children, namely: Junie, Hariet
and Judie to leave voluntarily the house of Mr. and Mrs. Antonio Guiang, where
they are presently boarding without any charge, on or before April 7, 1990.
FAIL NOT UNDER THE PENALTY OF THE LAW.
Believing that she had received the shorter end of the bargain, plaintiff to the Barangay Captain
of Barangay Paulino Santos to question her signature on the amicable settlement. She was
referred however to the Office-In-Charge at the time, a certain Mr. de la Cruz. The latter in turn
told her that he could not do anything on the matter (tsn. p. 31, Aug. 17, 1990).
This particular point not rebutted. The Barangay Captain who testified did not deny that Mrs.
Gilda Corpuz approached him for the annulment of the settlement. He merely said he forgot
whether Mrs. Corpuz had approached him (tsn. p. 13, Sept. 26, 1990). We thus conclude that
Page 16 of 79

Mrs. Corpuz really approached the Barangay Captain for the annulment of the settlement.
Annulment not having been made, plaintiff stayed put in her house and lot.
7. Defendant-spouses Guiang followed thru the amicable settlement with a motion for the
execution of the amicable settlement, filing the same with the Municipal Trial Court of
Koronadal, South Cotabato. The proceedings [are] still pending before the said court, with the
filing of the instant suit.
8. As a consequence of the sale, the spouses Guiang spent P600.00 for the preparation of the
Deed of Transfer of Rights, Exh. "A", P9,000.00 as the amount they paid to Mrs. Manuela
Callejo, having assumed the remaining obligation of the Corpuzes to Mrs. Callejo (Exh. "3");
P100.00 for the preparation of Exhibit "3"; a total of P759.62 basic tax and special education
fund on the lot; P127.50 as the total documentary stamp tax on the various documents; P535.72
for the capital gains tax; P22.50 as transfer tax; a standard fee of P17.00; certification fee of
P5.00. These expenses particularly the taxes and other expenses towards the transfer of the
title to the spouses Guiangs were incurred for the whole Lot 9, Block 8, (LRC) Psd-165409.
Ruling of Respondent Court
Respondent Court found no reversible error in the trial court's ruling that any alienation or encumbrance by the
husband of the conjugal propety without the consent of his wife is null and void as provided under Article 124
of the Family Code. It also rejected petitioners' contention that the "amicable sttlement" ratified said
sale, citing Article 1409 of the Code which expressly bars ratification of the contracts specified therein,
particularly those "prohibited or declared void by law."
Hence, this petition. 9
The Issues
In their Memorandum, petitioners assign to public respondent the following errors:

10

I
Whether or not the assailed Deed of Transfer of Rights was validly executed.
II
Whether or not the Cour of Appeals erred in not declairing as voidable contract under Art. 1390
of the Civil Code the impugned Deed of Transfer of Rights which was validly ratified thru the
execution of the "amicable settlement" by the contending parties.
III
Whether or not the Court of Appeals erred in not setting aside the findings of the Court a
quo which recognized as lawful and valid the ownership and possession of private respondent
over the remaining one half (1/2) portion of the properly.
In a nutshell, petitioners-spouses contend that (1) the contract of sale (Deed of Transfer of Rights) was merely
voidable, and (2) such contract was ratified by private respondent when she entered into an amicable sttlement
with them.
This Court's Ruling
Page 17 of 79

The petition is bereft of merit.


First Issue: Void or Voidable Contract?
Petitioners insist that the questioned Deed of Transfer of Rights was validly executed by the parties-litigants in
good faith and for valuable consideration. The absence of private respondent's consent merely rendered the
Deed voidable under Article 1390 of the Civil Code, which provides:
Art. 1390. The following contracts are voidable or annullable, even though there may have been
no damage to the contracting parties:
xxx xxx xxx
(2) Those where the consent is vitiated by mistake, violence, intimidation, undue influence or
fraud.
These contracts are binding, unless they are annulled by a proper action in court. They are
susceptible of ratification.(n)
The error in petitioners' contention is evident. Article 1390, par. 2, refers to contracts visited by vices of
consent,i.e., contracts which were entered into by a person whose consent was obtained and vitiated through
mistake, violence, intimidation, undue influence or fraud. In this instance, private respondent's consent to the
contract of sale of their conjugal property was totally inexistent or absent. Gilda Corpuz, on direct examination,
testified thus:11
Q Now, on March 1, 1990, could you still recall where you were?
A I was still in Manila during that time.
xxx xxx xxx
ATTY. FUENTES:
Q When did you come back to Koronadal, South Cotabato?
A That was on March 11, 1990, Ma'am.
Q Now, when you arrived at Koronadal, was there any problem which arose
concerning the ownership of your residential house at Callejo Subdivision?
A When I arrived here in Koronadal, there was a problem which arose regarding
my residential house and lot because it was sold by my husband without my
knowledge.
This being the case, said contract properly falls within the ambit of Article 124 of the Family Code, which was
correctly applied by the teo lower court:
Art. 124. The administration and enjoyment of the conjugal partnerhip properly shall belong to
both spouses jointly. In case of disgreement, the husband's decision shall prevail, subject
recourse to the court by the wife for proper remedy, which must be availed of within five years
from the date of the contract implementing such decision.
Page 18 of 79

In the event that one spouse is incapacitated or otherwise unable to participate in the
administration of the conjugal properties, the other spouse may assume sole powers of
administration. These powers do not include the powers of disposition or encumbrance which
must have the authority of the court or the written consent of the other spouse. In the absence
of such authority or consent, the disposition or encumbrance shall be void. However, the
transaction shall be construed as a continuing offer on the part of the consenting spouse and
the third person, and may be perfected as a binding contract upon the acceptance by the other
spouse or authorization by the court before the offer is withdrawn by either or both offerors.
(165a) (Emphasis supplied)
Comparing said law with its equivalent provision in the Civil Code, the trial court adroitly explained the
amendatory effect of the above provision in this wise: 12
The legal provision is clear. The disposition or encumbrance is void. It becomes still clearer if
we compare the same with the equivalent provision of the Civil Code of the Philippines. Under
Article 166 of the Civil Code, the husband cannot generally alienate or encumber any real
property of the conjugal partnershit without the wife's consent. The alienation or encumbrance if
so made however is not null and void. It is merely voidable. The offended wife may bring an
action to annul the said alienation or encumbrance. Thus the provision of Article 173 of the Civil
Code of the Philippines, to wit:
Art. 173. The wife may, during the marriage and within ten years from the
transaction questioned, ask the courts for the annulment of any contract of the
husband entered into without her consent, when such consent is required, or any
act or contract of the husband which tends to defraud her or impair her interest in
the conjugal partnership property. Should the wife fail to exercise this right, she
or her heirs after the dissolution of the marriage, may demand the value of
property fraudulently alienated by the husband.(n)
This particular provision giving the wife ten (10) years . . . during [the] marriage to annul the
alienation or encumbrance was not carried over to the Family Code. It is thus clear that any
alienation or encumbrance made after August 3, 1988 when the Family Code took effect by the
husband of the conjugal partnership property without the consent of the wife is null and void.
Furthermore, it must be noted that the fraud and the intimidation referred to by petitioners were perpetrated in
the execution of the document embodying the amicable settlement. Gilda Corpuz alleged during trial that
barangay authorities made her sign said document through misrepresentation and
coercion. 13 In any event, its execution does not alter the void character of the deed of sale between the
husband and the petitioners-spouses, as will be discussed later. The fact remains that such contract was
entered into without the wife's consent.
In sum, the nullity of the contract of sale is premised on the absence of private respondent's consent. To
constitute a valid contract, the Civil Code requires the concurrence of the following elements: (1) cause, (2)
object, and (3) consent, 14 the last element being indubitably absent in the case at bar.
Second Issue: Amicable Settlement
Insisting that the contract of sale was merely voidable, petitioners aver that it was duly ratified by the
contending parties through the "amicable settlement" they executed on March 16, 1990 in Barangay Case No.
38.
The position is not well taken. The trial and the appellate courts have resolved this issue in favor of the private
respondent. The trial court correctly held: 15
Page 19 of 79

By the specific provision of the law [Art. 1390, Civil Code] therefore, the Deed to Transfer of
Rights (Exh. "A") cannot be ratified, even by an "amicable settlement". The participation by
some barangay authorities in the "amicable settlement" cannot otherwise validate an invalid act.
Moreover, it cannot be denied that the "amicable settlement (Exh. "B") entered into by plaintiff
Gilda Corpuz and defendent spouses Guiang is a contract. It is a direct offshoot of the Deed of
Transfer of Rights (Exh. "A"). By express provision of law, such a contract is also void. Thus, the
legal provision, to wit:
Art. 1422. Acontract which is the direct result of a previous illegal contract, is also
void and inexistent. (Civil Code of the Philippines).
In summation therefore, both the Deed of transfer of Rights (Exh. "A") and the "amicable
settlement" (Exh. "3") are null and void.
Doctrinally and clearly, a void contract cannot be ratified. 16
Neither can the "amicable settlement" be considered a continuing offer that was accepted and perfected by the
parties, following the last sentence of Article 124. The order of the pertinent events is clear: after the sale,
petitioners filed a complaint for trespassing against private respondent, after which the barangay authorities
secured an "amicable settlement" and petitioners filed before the MTC a motion for its execution. The
settlement, however, does not mention a continuing offer to sell the property or an acceptance of such a
continuing offer. Its tenor was to the effect that private respondent would vacate the property. By no stretch of
the imagination, can the Court interpret this document as the acceptance mentioned in Article 124.
WHEREFORE, the Court hereby DENIES the petition and AFFIRMS the challenged Decision and Resolution.
Costs against petitioners.
SO ORDERED.

Page 20 of 79

Republic of the Philippines


SUPREME COURT
Baguio City
THIRD DIVISION
G.R. No. 158040

April 14, 2008

SPOUSES ONESIFORO and ROSARIO ALINAS, petitioner,


vs.
SPOUSES VICTOR and ELENA ALINAS, respondents.
DECISION
AUSTRIA-MARTINEZ, J.:
This resolves the Petition for Review on Certiorari under Rule 45 of the Rules of Court, praying that the
Decision1of the Court of Appeals (CA) dated September 25, 2002, and the CA Resolution 2 dated March 31,
2003, denying petitioners' motion for reconsideration, be reversed and set aside.
The factual antecedents of the case are as follows.
Spouses Onesiforo and Rosario Alinas (petitioners) separated sometime in 1982, with Rosario moving to
Pagadian City and Onesiforo moving to Manila. They left behind two lots identified as Lot 896-B-9-A with a
bodega standing on it and Lot 896-B-9-B with petitioners' house. These two lots are the subject of the present
petition.
Petitioner Onesiforo Alinas (Onesiforo) and respondent Victor Alinas (Victor) are brothers. Petitioners allege
that they entrusted their properties to Victor and Elena Alinas (respondent spouses) with the agreement that
any income from rentals of the properties should be remitted to the Social Security System (SSS) and to the
Rural Bank of Oroquieta City (RBO), as such rentals were believed sufficient to pay off petitioners' loans with
said institutions. Lot 896-B-9-A with the bodega was mortgaged as security for the loan obtained from the
RBO, while Lot 896-B-9-B with the house was mortgaged to the SSS. Onesiforo alleges that he left blank
papers with his signature on them to facilitate the administration of said properties.
Sometime in 1993, petitioners discovered that their two lots were already titled in the name of respondent
spouses.
Records show that after Lot 896-B-9-A was extra-judicially foreclosed, Transfer Certificate of Title (TCT) No. T118533 covering said property was issued in the name of mortgagee RBO on November 13, 1987. On May 2,
1988, the duly authorized representative of RBO executed a Deed of Installment Sale of Bank's Acquired
Assets4conveying Lot 896-B-9-A to respondent spouses. RBO's TCT over Lot 896-B-9-A was then cancelled
and on February 22, 1989, TCT No. T-126645 covering said lot was issued in the name of respondent
spouses.
Lot 896-B-9-B was also foreclosed by the SSS and on November 17, 1986, the Ex-Oficio City Sheriff of
Ozamis City issued a Certificate of Sale6 over said property in favor of the SSS. However, pursuant to a
Special Power of Attorney7 signed by Onesiforo in favor of Victor, dated March 10, 1989, the latter was able to
redeem, on the same date, Lot 896-B-9-B from the SSS for the sum of P111,110.09. On June 19, 1989, a
Certificate of Redemption8 was issued by the SSS.
Onesiforo's signature also appears in an Absolute Deed of Sale 9 likewise dated March 10, 1989, selling Lot
896-B-9-B to respondent spouses. The records also show a notarized document dated March 10, 1989 and
Page 21 of 79

captioned Agreement10 whereby petitioner Onesiforo acknowledged that his brother Victor used his own
money to redeem Lot 896-B-9-B from the SSS and, thus, Victor became the owner of said lot. In the same
Agreeement, petitioner Onesiforo waived whatever rights, claims, and interests he or his heirs, successors and
assigns have or may have over the subject property. On March 15, 1993, by virtue of said documents, TCT No.
1739411 covering Lot 896-B-9-B was issued in the name of respondent spouses.
On June 25, 1993, petitioners filed with the Regional Trial Court (RTC) of Ozamis City a complaint for recovery
of possession and ownership of their conjugal properties with damages against respondent spouses.
After trial, the RTC rendered its Decision dated November 13, 1995, finding that:
1. Plaintiffs have not proven that they entrusted defendant spouses with the care and administration of
their properties. It was Valeria Alinas, their mother, whom plaintiff Onesiforo requested/directed to "take
care of everything and sell everything" and Teresita Nuez, his elder sister, to whom he left a "verbal"
authority to administer his properties.
2. Plaintiffs have not proven their allegation that defendant spouses agreed to pay rent of P1,500.00 a
month for the occupancy of plaintiffs' house, which rent was to be remitted to the SSS and Rural Bank
of Oroquieta to pay off plaintiffs' loan and to keep for plaintiffs the rest of the rent after the loans would
have been paid in full.
3. Plaintiff Onesiforo's allegation that defendants concocted deeds of conveyances (Exh. "M", "N" &
"O") with the use of his signatures in blank is not worthy of credence. Why his family would conspire to
rob him at a time when life had struck him with a cruel blow in the form of a failed marriage that sent
him plummeting to the depths of despair is not explained and likewise defies comprehension. That his
signatures appear exactly on the spot where they ought to be in Exhs. "M", "N" & "O" belies his
pretension that he affixed them on blank paper only for the purpose of facilitating his sister Terry's acts
of administration.
This Court, therefore, does not find that defendant spouses had schemed to obtain title to plaintiffs'
properties or enriched themselves at the expense of plaintiffs.12
with the following dispositive portion:
WHEREFORE, this Court renders judgment:
1. declaring [respondents] Victor Jr. and Elena Alinas owners of Lot 896-B-9-A with the building
(bodega) standing thereon and affirming the validity of their acquisition thereof from the Rural
Bank of Oroquieta, Inc.;
2. declaring [petitioners] Onesiforo and Rosario Alinas owners of Lot 896-B-9-B with the house
standing thereon, plaintiff Onesiforo's sale thereof to defendants spouses without the consent of
his wife being null and void and defendant spouses' redemption thereof from the SSS not
having conferred its ownership to them;
3. ordering [petitioners] to reimburse [respondents] Victor Jr. and Elena Alinas the redemption
sum ofP111,100.09, paid by them to the SSS (without interest as it shall be compensated with
the rental value of the house they occupy) within sixty days from the finality of this judgment;
4. ordering [respondents] to vacate the subject house within thirty days from receiving the
reimbursement mentioned in No. 3 above; and

Page 22 of 79

5. reinstating TCT No. T-7248 in the name of [petitioners] and cancelling TCT No. T-17394 in
the name of [respondents].
No costs.
SO ORDERED.13
Only respondent spouses appealed to the CA assailing the RTC's ruling that they acquired Lot 896-B-9-B from
the SSS by mere redemption and not by purchase. They likewise question the reimbursement by petitioners of
the redemption price without interest.
On September 25, 2002, the CA promulgated herein assailed Decision, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing disquisitions, the first paragraph of the dispositive portion of the
assailed decision is AFFIRMED and the rest MODIFIED as follows:
1. declaring [respondents] Victor Jr. and Elena Alinas owners of Lot 896-B-9-A with the building
(bodega) standing thereon and affirming the validity of their acquisition thereof from the Rural
Bank of Oroquieta, Inc.;
2. declaring Onesiforo's sale of Lot 896-B-9-B together with the house standing thereon to
[respondents] in so far as Rosario Alinas, his wife's share of one half thereof is concerned, of no
force and effect;
3. ordering [petitioners] Rosario Alinas to reimburse [respondents] the redemption amount
ofP55,550.00 with interest of 12% per annum from the time of redemption until fully paid.
4. ordering the [respondents] to convey and transfer one half portion of Lot 896-B-9-B unto
Rosario Alinas, which comprises her share on the property simultaneous to the tender of the
above redemption price, both to be accomplished within sixty (60) days from finality of this
judgment.
5. in the event of failure of [respondents] to execute the acts as specified above, [petitioner]
Rosario Alinas may proceed against them under Section 10, Rule 39 of the 1997 Rules of Civil
Procedure.
6. on the other hand, failure of [petitioner] Rosario Alinas to reimburse the redemption price
within sixty (60) days from the finality of this decision will render the conveyance and sale of her
share by her husband to [respondents], of full force and effect.
No costs.
SO ORDERED.14
Petitioners moved for reconsideration but the CA denied said motion per herein assailed Resolution dated
March 31, 2003.
Hence, the present petition on the following grounds:
The Honorable Court of Appeals abuse [sic] its discretion in disregarding the testimony of the Register
of Deeds, Atty. Nerio Nuez, who swore that the signatures appearing on various TCTs were not his
own;
Page 23 of 79

The Honorable Court of Appeals manifestly abuse [sic] its discretion in declaring the respondents to be
the owners of Lot 896-B-9-A with the building (bodega) standing thereon when they merely redeemed
the property and are therefore mere trustees of the real owners of the property;
It was pure speculation and conjecture and surmise for the Honorable Court of Appeals to impose an
obligation to reimburse upon petitioners without ordering respondents to account for the rentals of the
properties from the time they occupied the same up to the present time and thereafter credit one
against the other whichever is higher.15
The first issue raised by petitioners deserves scant consideration. By assailing the authenticity of the Registrar
of Deeds' signature on the certificates of title, they are, in effect, questioning the validity of the certificates.
Section 48 of Presidential Decree No. 1529 provides, thus:
Sec. 48. Certificate not subject to collateral attack. - A certificate of title shall not be subject to collateral
attack. It cannot be altered, modified, or cancelled except in a direct proceeding in accordance with law.
Pursuant to said provision, the Court ruled in De Pedro v. Romasan Development Corporation16 that:
It has been held that a certificate of title, once registered, should not thereafter be impugned, altered,
changed, modified, enlarged or diminished except in a direct proceeding permitted by law. x x x
The action of the petitioners against the respondents, based on the material allegations of the
complaint,is one for recovery of possession of the subject property and damages. However, such
action is not a direct, but a collateral attack of TCT No. 236044.17 (Emphasis supplied)
As in De Pedro, the complaint filed by herein petitioners with the RTC is also one for recovery of possession
and ownership. Verily, the present case is merely a collateral attack on TCT No. T-17394, which is not allowed
by law and jurisprudence.
With regard to the second issue, petitioners claim that it was the CA which declared respondent spouses
owners of Lot 896-B-9-A (with bodega) is misleading. It was the RTC which ruled that respondent spouses are
the owners of Lot 896-B-9-A and, therefore, since only the respondent spouses appealed to the CA, the issue
of ownership over Lot 896-B-9-A is not raised before the appellate court. Necessarily, the CA merely reiterated
in the dispositive portion of its decision the RTC's ruling on respondent spouses' ownership of Lot 896-B-9-A.
It is a basic principle that no modification of judgment or affirmative relief can be granted to a party who did not
appeal.18 Hence, not having appealed from the RTC Decision, petitioners can no longer seek the reversal or
modification of the trial court's ruling that respondent spouses had acquired ownership of Lot 896-B-9-A by
virtue of the sale of the lot to them by RBO.
Furthermore, the CA did not commit any reversible error in affirming the trial court's factual findings as the
records are indeed bereft of proof to support the petitioners allegations that they left the care and
administration of their properties to respondent spouses; and that there is an agreement between petitioners
and respondent spouses regarding remittance to the SSS and the RBO of rental income from their properties.
Thus, respondent spouses may not be held responsible for the non-payment of the loan with RBO and the
eventual foreclosure of petitioners' Lot 896-B-9-A.
Petitioners do not assail the validity of the foreclosure of said lot but argues that respondent spouses merely
redeemed the property from RBO. This is, however, belied by evidence on record which shows that ownership
over the lot had duly passed on to the RBO, as shown by TCT No. T-11853 registered in its name; and
subsequently, RBO sold the lot with its improvements to respondent spouses. Needless to stress, the sale was
Page 24 of 79

made after the redemption period had lapsed. The trial court, therefore, correctly held that respondent spouses
acquired their title over the lot from RBO and definitely not from petitioners.
However, with regard to Lot 896-B-9-B (with house), the Court finds it patently erroneous for the CA to have
applied the principle of equity in sustaining the validity of the sale of Onesiforos one-half share in the subject
property to respondent spouses.
Although petitioners were married before the enactment of the Family Code on August 3, 1988, the sale in
question occurred in 1989. Thus, their property relations are governed by Chapter IV on Conjugal Partnership
of Gains of the Family Code.
The CA ruling completely deviated from the clear dictate of Article 124 of the Family Code which provides:
Art. 124. The administration and enjoyment of the conjugal partnership property shall belong to both
spouses jointly. x x x
In the event that one spouse is incapacitated or otherwise unable to participate in the administration of
the conjugal properties, the other spouse may assume sole powers of administration. These powers do
not include the powers of disposition or encumbrance which must have the authority of the court or the
written consent of the other spouse. In the absence of such authority or consent the disposition or
encumbrance shall be void. x x x (Underscoring and emphasis supplied)
In Homeowners Savings & Loan Bank v. Dailo,19 the Court categorically stated thus:
In Guiang v. Court of Appeals, it was held that the sale of a conjugal property requires the consent of
both the husband and wife. In applying Article 124 of the Family Code, this Court declared that the
absence of the consent of one renders the entire sale null and void, including the portion of the
conjugal property pertaining to the husband who contracted the sale. x x x
xxxx
x x x By express provision of Article 124 of the Family Code, in the absence of (court) authority or
written consent of the other spouse, any disposition or encumbrance of the conjugal property shall be
void. 20
Thus, pursuant to Article 124 of the Family Code and jurisprudence, the sale of petitioners' conjugal property
made by petitioner Onesiforo alone is void in its entirety.
It is true that in a number of cases, this Court abstained from applying the literal import of a particular provision
of law if doing so would lead to unjust, unfair and absurd results.21
In the present case, the Court does not see how applying Article 124 of the Family Code would lead to injustice
or absurdity. It should be noted that respondent spouses were well aware that Lot 896-B-9-B is a conjugal
property of petitioners. They also knew that the disposition being made by Onesiforo is without the consent of
his wife, as they knew that petitioners had separated, and, the sale documents do not bear the signature of
petitioner Rosario. The fact that Onesiforo had to execute two documents, namely: the Absolute Deed of Sale
dated March 10, 1989 and a notarized Agreement likewise dated March 10, 1989, reveals that they had full
knowledge of the severe infirmities of the sale. As held in Heirs of Aguilar-Reyes v. Spouses Mijares,22 "a
purchaser cannot close his eyes to facts which should put a reasonable man on his guard and still claim he
acted in good faith."23 Such being the case, no injustice is being foisted on respondent spouses as they risked
transacting with Onesiforo alone despite their knowledge that the subject property is a conjugal property.
Verily, the sale of Lot 896-B-9-B to respondent spouses is entirely null and void.
Page 25 of 79

However, in consonance with the salutary principle of non-enrichment at anothers expense, the Court agrees
with the CA that petitioners should reimburse respondent spouses the redemption price paid for Lot 896-B-9-B
in the amount of P111,110.09 with legal interest from the time of filing of the complaint.
In Heirs of Aguilar-Reyes, the husband's sale of conjugal property without the consent of the wife was annulled
but the spouses were ordered to refund the purchase price to the buyers, it was ruled that an interest of
12% per annum on the purchase price to be refunded is not proper. The Court elucidated as follows:
The trial court, however, erred in imposing 12% interest per annum on the amount due the
respondents. In Eastern Shipping Lines, Inc. v. Court of Appeals, it was held that interest on obligations
not constituting a loan or forbearance of money is six percent (6%) annually. If the purchase price could
be established with certainty at the time of the filing of the complaint, the six percent (6%) interest
should be computed from the date the complaint was filed until finality of the decision. In Lui vs.
Loy, involving a suit for reconveyance and annulment of title filed by the first buyer against the seller
and the second buyer, the Court, ruling in favor of the first buyer and annulling the second sale, ordered
the seller to refund to the second buyer (who was not a purchaser in good faith) the purchase price of
the lots. It was held therein that the 6% interest should be computed from the date of the filing of the
complaint by the first buyer. After the judgment becomes final and executory until the obligation is
satisfied, the amount due shall earn interest at 12% per year, the interim period being deemed
equivalent to a forbearance of credit.
Accordingly, the amount of P110,000.00 due the respondent spouses which could be
determined with certainty at the time of the filing of the complaint shall earn 6% interest per
annum from June 4, 1986 until the finality of this decision. If the adjudged principal and the
interest (or any part thereof) remain unpaid thereafter, the interest rate shall be twelve percent
(12%) per annum computed from the time the judgment becomes final and executory until it is
fully satisfied.24
Thus, herein petitioners should reimburse respondent spouses the redemption price plus interest at the rate of
6%per annum from the date of filing of the complaint, and after the judgment becomes final and executory, the
amount due shall earn 12% interest per annum until the obligation is satisfied.
Petitioners pray that said redemption price and interest be offset or compensated against the rentals for the
house and bodega.
The records show that the testimonial evidence for rentals was only with regard to the bodega. 25 However, the
Court has affirmed the ruling of the RTC that Lot 896-B-9-A with the bodega had been validly purchased by
respondent spouses from the RBO and a TCT over said property was issued in the name of respondent
spouses on February 22, 1989. Testimonial evidence shows that the bodega was leased out by respondent
spouses only beginning January of 1990 when ownership had been transferred to them. 26 Hence, any rentals
earned from the lease of said bodega rightfully belongs to respondent spouses and cannot be offset against
petitioners' obligation to respondent spouses.
As to rentals for Lot 896-B-9-B and the house thereon, respondent Victor testified that they never agreed to
rent the house and when they finally took over the same, it was practically inhabitable and so they even
incurred expenses to repair the house.27 There is absolutely no proof of the rental value for the house,
considering the condition it was in; as well as for the lot respondent spouses are occupying.
Respondent spouses, having knowledge of the flaw in their mode of acquisition, are deemed to be possessors
in bad faith under Article 52628 of the Civil Code. However, they have a right to be refunded for necessary
expenses on the property as provided under Article 546 29 of the same Code. Unfortunately, there is no credible
proof to support respondent spouses' allegation that they spent more than P400,000.00 to repair and make the
house habitable.
Page 26 of 79

Set-off or compensation is governed by Article 1279 of the Civil Code which provides, thus:
Article 1279. In order that compensation may be proper, it is necessary:
1. That each one of the obligors be bound principally, and that he be at the time a principal creditor of
the other;
2. That both debts consist in a sum of money, or if the things due are consumable, they be of the same
kind, and also of the same quality if the latter has been stated;
3. That the two debts be due;
4. That they be liquidated and demandable;
5. That over neither of them there be any retention or controversy, commenced by third persons and
communicated in due time to the debtor.
Therefore, under paragraph 4 of the foregoing provision, compensation or set-off is allowed only if the debts of
both parties against each other is already liquidated and demandable. To liquidate means "to make the amount
of indebtedness or an obligation clear and settled in the form of money." 30 In the present case, no definite
amounts for rentals nor for expenses for repairs on subject house has been determined. Thus, in the absence
of evidence upon which to base the amount of rentals, no compensation or set-off can take place between
petitioners and respondent spouses.
While the courts are empowered to set an amount as reasonable compensation to the owners for the use of
their property, this Court cannot set such amount based on mere surmises and conjecture
WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of Appeals dated September 25,
2002 is MODIFIED to read as follows:
1. declaring respondent spouses Victor Jr. and Elena Alinas owners of Lot 896-B-9-A with the building
(bodega) standing thereon and affirming the validity of their acquisition thereof from the Rural Bank of
Oroquieta, Inc.;
2. declaring Onesiforo's sale of Lot 896-B-9-B together with the house standing thereon to respondent
spouses null and void ab initio;
3. ordering petitioners to jointly and severally reimburse respondent spouses the redemption amount
ofP111,110.09 with interest at 6% per annum from the date of filing of the complaint, until finality of this
decision. After this decision becomes final, interest at the rate of 12% per annum on the principal and
interest (or any part thereof) shall be imposed until full payment;
4. ordering the respondent spouses to convey and transfer Lot 896-B-9-B to petitioners and vacate said
premises within fifteen (15) days from finality of this Decision; and
5. in the event of failure of respondent spouses to execute the acts as specified above, petitioners may
proceed against them under Section 10, Rule 39 of the 1997 Rules of Civil Procedure.
No costs.
SO ORDERED.

Page 27 of 79

Republic of the Philippines


SUPREME COURT
SECOND DIVISION
G.R. No. 150197 July 28, 2005
PRUDENTIAL BANK, Petitioner,
vs.
DON A. ALVIAR and GEORGIA B. ALVIAR, Respondents.
DECISION
Tinga, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court. Petitioner Prudential Bank
seeks the reversal of the Decision1 of the Court of Appeals dated 27 September 2001 in CA-G.R. CV No.
59543 affirming the Decision of the Regional Trial Court (RTC) of Pasig City, Branch 160, in favor of
respondents.
Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners of a parcel of land in
San Juan, Metro Manila, covered by Transfer Certificate of Title (TCT) No. 438157 of the Register of Deeds of
Rizal. On 10 July 1975, they executed a deed of real estate mortgage in favor of petitioner Prudential Bank to
secure the payment of a loan worth P250,000.00.2 This mortgage was annotated at the back of TCT No.
438157. On 4 August 1975, respondents executed the corresponding promissory note, PN BD#75/C-252,
covering the said loan, which provides that the loan matured on 4 August 1976 at an interest rate of 12% per
annum with a 2% service charge, and that the note is secured by a real estate mortgage as
aforementioned.3 Significantly, the real estate mortgage contained the following clause:
That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the
Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal or all
of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as well as
those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and expenses or
any other obligation owing to the Mortgagee, whether direct or indirect, principal or secondary as appears in
the accounts, books and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of
mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in the list
inserted on the back of this document, and/or appended hereto, together with all the buildings and
improvements now existing or which may hereafter be erected or constructed thereon, of which the Mortgagor
declares that he/it is the absolute owner free from all liens and incumbrances. . . . 4
On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345 for P2,640,000.00,
secured by D/A SFDX #129, signifying that the loan was secured by a "hold-out" on the mortgagors foreign
currency savings account with the bank under Account No. 129, and that the mortgagors passbook is to be
surrendered to the bank until the amount secured by the "hold-out" is settled.5
On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of which the husband and
wife were President and Chairman of the Board and Vice President, 6 respectively, PN BD#76/C-430
coveringP545,000.000. As provided in the note, the loan is secured by "Clean-Phase out TOD CA 3923,"
which means that the temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be converted
into an ordinary loan in compliance with a Central Bank circular directing the discontinuance of overdrafts.7

Page 28 of 79

On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its approval of a straight loan
ofP545,000.00, the proceeds of which shall be used to liquidate the outstanding loan of P545,000.00 TOD. The
letter likewise mentioned that the securities for the loan were the deed of assignment on two promissory notes
executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U. Valencia and Co. and the
chattel mortgage on various heavy and transportation equipment.8
On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the obligations of G.B. Alviar
Realty and Development, Inc. and for the release of the real estate mortgage for the P450,000.00 loan
covering the two (2) lots located at Vam Buren and Madison Streets, North Greenhills, San Juan, Metro
Manila. The payment was acknowledged by petitioner who accordingly released the mortgage over the two
properties.9
On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the mortgage on the property covered
by TCT No. 438157. Per petitioners computation, respondents had the total obligation of P1,608,256.68,
covering the three (3) promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C-345
for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus assessed past due interests and penalty
charges. The public auction sale of the mortgaged property was set on 15 January 1980. 10
Respondents filed a complaint for damages with a prayer for the issuance of a writ of preliminary injunction
with the RTC of Pasig,11 claiming that they have paid their principal loan secured by the mortgaged property,
and thus the mortgage should not be foreclosed. For its part, petitioner averred that the payment
of P2,000,000.00 made on 6 March 1979 was not a payment made by respondents, but by G.B. Alviar Realty
and Development Inc., which has a separate loan with the bank secured by a separate mortgage. 12
On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to proceed with the extrajudicial foreclosure.13 Respondents sought reconsideration of the decision.14 On 24 August 1994, the trial court
issued an Order setting aside its earlier decision and awarded attorneys fees to respondents.15 It found that
only the P250,000.00 loan is secured by the mortgage on the land covered by TCT No. 438157. On the other
hand, the P382,680.83 loan is secured by the foreign currency deposit account of Don A. Alviar, while
the P545,000.00 obligation was an unsecured loan, being a mere conversion of the temporary overdraft of
Donalco Trading, Inc. in compliance with a Central Bank circular. According to the trial court, the "blanket
mortgage clause" relied upon by petitioner applies only to future loans obtained by the mortgagors, and not by
parties other than the said mortgagors, such as Donalco Trading, Inc., for which respondents merely signed as
officers thereof.
On appeal to the Court of Appeals, petitioner made the following assignment of errors:
I. The trial court erred in holding that the real estate mortgage covers only the promissory note BD#75/C-252
for the sum of P250,000.00.
II. The trial court erred in holding that the promissory note BD#76/C-345 for P2,640,000.00 (P382,680.83
outstanding principal balance) is not covered by the real estate mortgage by expressed agreement.
III. The trial court erred in holding that Promissory Note BD#76/C-430 for P545,000.00 is not covered by the
real estate mortgage.
IV. The trial court erred in holding that the real estate mortgage is a contract of adhesion.
V. The trial court erred in holding defendant-appellant liable to pay plaintiffs-appellees attorneys fees
forP20,000.00.16
The Court of Appeals affirmed the Order of the trial court but deleted the award of attorneys fees.17 It ruled that
while a continuing loan or credit accommodation based on only one security or mortgage is a common practice
Page 29 of 79

in financial and commercial institutions, such agreement must be clear and unequivocal. In the instant case,
the parties executed different promissory notes agreeing to a particular security for each loan. Thus, the
appellate court ruled that the extrajudicial foreclosure sale of the property for the three loans is improper.18
The Court of Appeals, however, found that respondents have not yet paid the P250,000.00 covered by PN
BD#75/C-252 since the payment of P2,000,000.00 adverted to by respondents was issued for the obligations
of G.B. Alviar Realty and Development, Inc.19
Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors raised in the Court of
Appeals as grounds herein.
Petitioner maintains that the "blanket mortgage clause" or the "dragnet clause" in the real estate mortgage
expressly covers not only the P250,000.00 under PN BD#75/C-252, but also the two other promissory notes
included in the application for extrajudicial foreclosure of real estate mortgage. 20 Thus, it claims that it acted
within the terms of the mortgage contract when it filed its petition for extrajudicial foreclosure of real estate
mortgage. Petitioner relies on the cases of Lim Julian v. Lutero,21 Tad-Y v. Philippine National
Bank,22 Quimson v. Philippine National Bank,23 C & C Commercial v. Philippine National Bank,24 Mojica v.
Court of Appeals,25 and China Banking Corporation v. Court of Appeals,26 all of which upheld the validity of
mortgage contracts securing future advancements.
Anent the Court of Appeals conclusion that the parties did not intend to include PN BD#76/C-345 in the real
estate mortgage because the same was specifically secured by a foreign currency deposit account, petitioner
states that there is no law or rule which prohibits an obligation from being covered by more than one
security.27Besides, respondents even continued to withdraw from the same foreign currency account even
while the promissory note was still outstanding, strengthening the belief that it was the real estate mortgage
that principally secured all of respondents promissory notes.28 As for PN BD#76/C-345, which the Court of
Appeals found to be exclusively secured by the Clean-Phase out TOD 3923, petitioner posits that such security
is not exclusive, as the "dragnet clause" of the real estate mortgage covers all the obligations of the
respondents.29
Moreover, petitioner insists that respondents attempt to evade foreclosure by the expediency of stating that the
promissory notes were executed by them not in their personal capacity but as corporate officers. It claims that
PN BD#76/C-430 was in fact for home construction and personal consumption of respondents. Thus, it states
that there is a need to pierce the veil of corporate fiction.30
Finally, petitioner alleges that the mortgage contract was executed by respondents with knowledge and
understanding of the "dragnet clause," being highly educated individuals, seasoned businesspersons, and
political personalities.31 There was no oppressive use of superior bargaining power in the execution of the
promissory notes and the real estate mortgage.32
For their part, respondents claim that the "dragnet clause" cannot be applied to the subsequent loans extended
to Don Alviar and Donalco Trading, Inc. since these loans are covered by separate promissory notes that
expressly provide for a different form of security. 33 They reiterate the holding of the trial court that the "blanket
mortgage clause" would apply only to loans obtained jointly by respondents, and not to loans obtained by other
parties.34Respondents also place a premium on the finding of the lower courts that the real estate mortgage
clause is a contract of adhesion and must be strictly construed against petitioner bank.35
The instant case thus poses the following issues pertaining to: (i) the validity of the "blanket mortgage clause"
or the "dragnet clause"; (ii) the coverage of the "blanket mortgage clause"; and consequently, (iii) the propriety
of seeking foreclosure of the mortgaged property for the non-payment of the three loans.
At this point, it is important to note that one of the loans sought to be included in the "blanket mortgage clause"
was obtained by respondents for Donalco Trading, Inc. Indeed, PN BD#76/C-430 was executed by
Page 30 of 79

respondents on behalf of Donalco Trading, Inc. and not in their personal capacity. Petitioner asks the Court to
pierce the veil of corporate fiction and hold respondents liable even for obligations they incurred for the
corporation. The mortgage contract states that the mortgage covers "as well as those that the Mortgagee may
extend to the Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary." Well-settled is the rule that a corporation has a
personality separate and distinct from that of its officers and stockholders. Officers of a corporation are not
personally liable for their acts as such officers unless it is shown that they have exceeded their
authority.36 However, the legal fiction that a corporation has a personality separate and distinct from
stockholders and members may be disregarded if it is used as a means to perpetuate fraud or an illegal act or
as a vehicle for the evasion of an existing obligation, the circumvention of statutes, or to confuse legitimate
issues.37 PN BD#76/C-430, being an obligation of Donalco Trading, Inc., and not of the respondents, is not
within the contemplation of the "blanket mortgage clause." Moreover, petitioner is unable to show that
respondents are hiding behind the corporate structure to evade payment of their obligations. Save for the
notation in the promissory note that the loan was for house construction and personal consumption, there is no
proof showing that the loan was indeed for respondents personal consumption. Besides, petitioner agreed to
the terms of the promissory note. If respondents were indeed the real parties to the loan, petitioner, a big, wellestablished institution of long standing that it is, should have insisted that the note be made in the name of
respondents themselves, and not to Donalco Trading Inc., and that they sign the note in their personal capacity
and not as officers of the corporation.
Now on the main issues.
A "blanket mortgage clause," also known as a "dragnet clause" in American jurisprudence, is one which is
specifically phrased to subsume all debts of past or future origins. Such clauses are "carefully scrutinized and
strictly construed."38 Mortgages of this character enable the parties to provide continuous dealings, the nature
or extent of which may not be known or anticipated at the time, and they avoid the expense and inconvenience
of executing a new security on each new transaction.39 A "dragnet clause" operates as a convenience and
accommodation to the borrowers as it makes available additional funds without their having to execute
additional security documents, thereby saving time, travel, loan closing costs, costs of extra legal services,
recording fees, et cetera.40 Indeed, it has been settled in a long line of decisions that mortgages given to
secure future advancements are valid and legal contracts,41 and the amounts named as consideration in said
contracts do not limit the amount for which the mortgage may stand as security if from the four corners of the
instrument the intent to secure future and other indebtedness can be gathered.42
The "blanket mortgage clause" in the instant case states:
That for and in consideration of certain loans, overdraft and other credit accommodations obtained from the
Mortgagee by the Mortgagor and/or ________________ hereinafter referred to, irrespective of number, as
DEBTOR, and to secure the payment of the same and those that may hereafter be obtained, the principal
or all of which is hereby fixed at Two Hundred Fifty Thousand (P250,000.00) Pesos, Philippine Currency, as
well as those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and
expenses or any other obligation owing to the Mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and records of the Mortgagee, the Mortgagor does hereby
transfer and convey by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of land
which are described in the list inserted on the back of this document, and/or appended hereto, together with all
the buildings and improvements now existing or which may hereafter be erected or constructed thereon, of
which the Mortgagor declares that he/it is the absolute owner free from all liens and incumbrances. . .
.43 (Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals, petitioner and respondents intended the real estate
mortgage to secure not only the P250,000.00 loan from the petitioner, but also future credit facilities and
advancements that may be obtained by the respondents. The terms of the above provision being clear and
unambiguous, there is neither need nor excuse to construe it otherwise.
Page 31 of 79

The cases cited by petitioner, while affirming the validity of "dragnet clauses" or "blanket mortgage clauses,"
are of a different factual milieu from the instant case. There, the subsequent loans were not covered by any
security other than that for the mortgage deeds which uniformly contained the "dragnet clause."
In the case at bar, the subsequent loans obtained by respondents were secured by other securities, thus: PN
BD#76/C-345, executed by Don Alviar was secured by a "hold-out" on his foreign currency savings account,
while PN BD#76/C-430, executed by respondents for Donalco Trading, Inc., was secured by "Clean-Phase out
TOD CA 3923" and eventually by a deed of assignment on two promissory notes executed by Bancom Realty
Corporation with Deed of Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various
heavy and transportation equipment. The matter of PN BD#76/C-430 has already been discussed. Thus, the
critical issue is whether the "blanket mortgage" clause applies even to subsequent advancements for which
other securities were intended, or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged on this question. One school advocates
that a "dragnet clause" so worded as to be broad enough to cover all other debts in addition to the one
specifically secured will be construed to cover a different debt, although such other debt is secured by another
mortgage.44The contrary thinking maintains that a mortgage with such a clause will not secure a note that
expresses on its face that it is otherwise secured as to its entirety, at least to anything other than a deficiency
after exhausting the security specified therein,45 such deficiency being an indebtedness within the meaning of
the mortgage, in the absence of a special contract excluding it from the arrangement. 46
The latter school represents the better position. The parties having conformed to the "blanket mortgage clause"
or "dragnet clause," it is reasonable to conclude that they also agreed to an implied understanding that
subsequent loans need not be secured by other securities, as the subsequent loans will be secured by the first
mortgage. In other words, the sufficiency of the first security is a corollary component of the "dragnet clause."
But of course, there is no prohibition, as in the mortgage contract in issue, against contractually requiring other
securities for the subsequent loans. Thus, when the mortgagor takes another loan for which another security
was given it could not be inferred that such loan was made in reliance solely on the original security with the
"dragnet clause," but rather, on the new security given. This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California court in the cited case made an inquiry
whether the second loan was made in reliance on the original security containing a "dragnet clause."
Accordingly, finding a different security was taken for the second loan no intent that the parties relied on the
security of the first loan could be inferred, so it was held. The rationale involved, the court said, was that the
"dragnet clause" in the first security instrument constituted a continuing offer by the borrower to secure further
loans under the security of the first security instrument, and that when the lender accepted a different security
he did not accept the offer.47
In another case, it was held that a mortgage with a "dragnet clause" is an "offer" by the mortgagor to the bank
to provide the security of the mortgage for advances of and when they were made. Thus, it was concluded that
the "offer" was not accepted by the bank when a subsequent advance was made because (1) the second note
was secured by a chattel mortgage on certain vehicles, and the clause therein stated that the note was
secured by such chattel mortgage; (2) there was no reference in the second note or chattel mortgage
indicating a connection between the real estate mortgage and the advance; (3) the mortgagor signed the real
estate mortgage by her name alone, whereas the second note and chattel mortgage were signed by the
mortgagor doing business under an assumed name; and (4) there was no allegation by the bank, and
apparently no proof, that it relied on the security of the real estate mortgage in making the advance. 48
Indeed, in some instances, it has been held that in the absence of clear, supportive evidence of a contrary
intention, a mortgage containing a "dragnet clause" will not be extended to cover future advances unless the
document evidencing the subsequent advance refers to the mortgage as providing security therefor. 49
It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged property because of
non-payment of all the three promissory notes. While the existence and validity of the "dragnet clause" cannot
Page 32 of 79

be denied, there is a need to respect the existence of the other security given for PN BD#76/C-345. The
foreclosure of the mortgaged property should only be for the P250,000.00 loan covered by PN BD#75/C-252,
and for any amount not covered by the security for the second promissory note. As held in one case, where
deeds absolute in form were executed to secure any and all kinds of indebtedness that might subsequently
become due, a balance due on a note, after exhausting the special security given for the payment of such
note, was in the absence of a special agreement to the contrary, within the protection of the mortgage,
notwithstanding the giving of the special security. 50 This is recognition that while the "dragnet clause" subsists,
the security specifically executed for subsequent loans must first be exhausted before the mortgaged property
can be resorted to.
One other crucial point. The mortgage contract, as well as the promissory notes subject of this case, is a
contract of adhesion, to which respondents only participation was the affixing of their signatures or "adhesion"
thereto.51 A contract of adhesion is one in which a party imposes a ready-made form of contract which the
other party may accept or reject, but which the latter cannot modify.52
The real estate mortgage in issue appears in a standard form, drafted and prepared solely by petitioner, and
which, according to jurisprudence must be strictly construed against the party responsible for its
preparation.53 If the parties intended that the "blanket mortgage clause" shall cover subsequent advancement
secured by separate securities, then the same should have been indicated in the mortgage contract.
Consequently, any ambiguity is to be taken contra proferentum, that is, construed against the party who
caused the ambiguity which could have avoided it by the exercise of a little more care. 54 To be more emphatic,
any ambiguity in a contract whose terms are susceptible of different interpretations must be read against the
party who drafted it,55 which is the petitioner in this case.
Even the promissory notes in issue were made on standard forms prepared by petitioner, and as such are
likewise contracts of adhesion. Being of such nature, the same should be interpreted strictly against petitioner
and with even more reason since having been accomplished by respondents in the presence of petitioners
personnel and approved by its manager, they could not have been unaware of the import and extent of such
contracts.
Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court found that
respondents have not yet paid the P250,000.00, and gave no credence to their claim that they paid the said
amount when they paid petitioner P2,000,000.00. Thus, the mortgaged property could still be properly
subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as mentioned earlier, for any
deficiency after D/A SFDX#129, security for PN BD#76/C-345, has been exhausted, subject of course to
defenses which are available to respondents.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R. CV No. 59543 is
AFFIRMED.
Costs against petitioner.
SO ORDERED.

Page 33 of 79

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 126158 September 23, 1997


PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
THE COURT OF APPEALS, HON. PEDRO T. SANTIAGO, as Judge, RTC of Quezon City Branch 101,
FALCON GARMENTS CORPORATION, QUALITY LABELS, INC., ROBERT SY doing business under the
name and style Jobert Printing Services; EUGENIO POA, MAGIN TABUSO, MAKILITO MAHINAY,
EFREN CACHERO, CESAR M. TORIO and EFREN C. GUMBAC, respondents.

MELO, J.:
Assailed and sought to be set aside in the instant petition is the decision of respondent Court of Appeals
promulgated on September 13, 1996 dismissing herein petitioner Philippine Bank of Communications' petition
forcertiorari impugning an order granting the motion for the issuance of a writ of execution pending appeal
issued by the Regional Trial Court of the National Capital Judicial Region (Branch 101, Quezon City), in Civil
Case No. Q-95-22625, entitled "Falcom Garments Corporation, et al. vs. Philippine Bank of Communications".
The antecedent facts of the case as gathered from the record are as follows:
Sometime in 1989, private respondent Falcon Garments Corporation (Falcon) opened Current Account No. 2500640-7 at the BMA Quezon City Branch of petitioner Philippine Bank of Communications (PBCom).
Subsequently, on November 27, 1992, private respondent Falcon obtained a loan from petitioner in the
principal sum of Four Million Seven Hundred Thousand Pesos (P4,700,000.00) with interest at 17% per
annum and penalty at 12% per annum in case of default. Falcon failed to pay its loan on due date and went in
default in December, 1993.
On February 9, 1995, Falcon filed a complaint with the Regional Trial Court of Quezon City against PBCom
which was docketed as Civil Case No. Q-95-22625 and raffled to Branch 78, presided over by Judge Percival
Mandap-Lopez. The complaint prayed for the restoration to Falcon's current account of alleged unauthorized
withdrawals totalling P12,729,092.78 which were made from 1990 to 1992, plus interest, damages, and
attorney's fees.
In its answer, PBCom denied liability and interposed a compulsory counterclaim in the sum of P4,700,000.00,
plus the stipulated interest and penalty, damages, and attorney's fees.
On January 2, 1996, the trial court rendered a decision against PBCom, the dispositive portion of which reads:
WHEREFORE, defendant is ordered to restore immediately to plaintiff's Current Account No. 25006407 the sum of P12,729,092.78, plus interest at the rate of 12% per annum to commence form the
date of the filing of the complaint until the said amount is fully restored and operate the said account in
accordance with the instructions of plaintiff, acting through its board of directors. And to pay plaintiffs
the following sums:
Page 34 of 79

a. P500,000.00 as exemplary damages;


b. P500,000.00 as attorney's fees; and
c. P200,000.00 as litigation expenses.
Plaintiff FALCON is ordered to pay defendant its loan at P4,700,000.00 plus interest at the rate of
12% per annum to commence from the date of filing of the complaint. All other claims and
counterclaims are dismissed for lack of merit.
(Rollo, p. 34.)
Petitioner PBCom seasonably filed a notice of appeal, while private respondent Falcon filed a Motion for
Execution Pending Appeal dated February 7, 1996. However, before Branch 78 could resolve said motion,
Judge Lopez inhibited himself and the case was re-raffled to Branch 101, presided over by Judge Pedro T.
Santiago.
Private respondent Falcon filed an Ex-Parte Manifestation and Motion dated May 7, 1996, claiming that with its
strained relations with PBCom, it was no longer practicable to bank with petitioner, and prayed that the money
judgment be not restored to its current account but instead be directly paid to it (Rollo, p. 132).
On the very same day of the filing of the motion, Judge Santiago granted the same and authorized the
issuance of a writ of execution pending appeal. The dispositive portion of said order provides:
WHEREFORE, premises considered, finding merit and justification in plaintiff''s motion, the Court
hereby grants its motion for execution pending appeal hereby ordering defendant Bank to immediately
pay plaintiff the sum of P12,2729,092.78 with 12% interest per annum and plaintiff's obligation to
defendant Bank be likewise paid by plaintiff in the amount of P4,700,000.00 with interest also at
12% per annum, as well as the other damages stated in the decision of Branch 78 dated January 2,
1996, upon a plaintiff''s bond of P5,000,000.00 conditioned to answer for whatever damages which
defendants may suffer by virtue of this Order.
(Rollo, p. 41.)
The writ was issued on May 14, 1996, and on May 16, 1996, the writ was served upon PBCom which sought
the intercession of the Court of Appeals (CA-G.R. SP No. 40636). On June 4, 1996, a writ of preliminary
injunction was issued by the Court of Appeals restraining its implementation.
On September 13, 1996, the Court of Appeals eventually upheld the validity of the writ of execution pending
appeal and forthwith dissolved the writ of preliminary injunction.
On the same day, private respondent Falcon obtained an alias writ of execution which was served upon
petitioner on that same afternoon.
On September 16, 1996, the present petition was filed, with prayer for a temporary restraining order,
preliminary writ of injunction and mandatory injunction alleging that:
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION IN
AFFIRMING THE ORDER OF JUDGE PEDRO SANTIAGO GRANTING THE ISSUANCE OF A WRIT
OF EXECUTION PENDING APPEAL CONSIDERING THAT GOOD REASONS DO NOT EXIST FOR
THE ISSUANCE OF A WRIT OF EXECUTION PENDING APPEAL UNDER SECTION 2, RULE 39 OF
THE RULES OF COURT.
Page 35 of 79

(Rollo, p. 8.)
Petitioner further avers that:
3.01 The private respondents in this case ILLEGALLY and
UNLAWFULLY implemented the writ of execution pending appeal on 13
September 1996 using anexpired writ, and an Order of the Court of
Appeals subject of this petition which was promulgated only at 10 a.m. of
13 September 1996. On that day, herein petitioner has not receive copy
of said decision which is not yet final.
3.02 PBCom and counsel became aware of the questioned Decision of
the Court of Appeals when PBCom Ayala Branch, Makati City, called up
and told them that private respondents with about 30 people, brandished
the questioned writ and decision enabling private respondents to coerced,
forced and intimidated the personnel of the said petitioner's branch
resulting in the unlawful taking of about P1.7 million . . .
3.03 Private respondents have foisted to petitioner and counsel that they
(private respondents) will again go to PBCom's other branches to "get" in
full the balance of the money judgment which is still on appeal.
(Rollo, pp. 92-93.)
Upon the above representations of petitioner duly verified by its counsel, Atty. Daniel Y. Laogan, of Laogan
Silva Baeza & Llantino Law Offices, we issued a temporary restraining order at the same time requiring private
respondents to comment.
On November 11, 1996, the Court issued a resolution, which among other things, noted petitioner's urgent
manifestation and motion dated September 17, 1996, praying that (a) counsel for private respondents be
required to explain why they claimed in their ex parte motion for issuance of an alias writ of execution pending
appeal before respondent RTC that the Court of Appeals had already dissolved the injunction one hour before
the promulgation of the Court of Appeals' decision in CA-G.R. SP No. 40636; (b) to require Judge Pedro T.
Santiago of RTC Branch 101, Quezon City, to explain why he issued the order dated September 13, 1993
granting the alias writ of execution pending appeal prior to the court's receipt of its official copy of said decision
dissolving the injunction and even before the finality of the same.
Judge Santiago submitted his explanation on December 11, 1996, which the Court noted on January 17, 1997.
With the filing of the memoranda of the parties, the petition is now ripe for resolution.
The pith of the matter before us is the existence of good reasons which would justify execution pending appeal.
In the absence of such good reasons, it is incumbent upon the reviewing court, such as the Court of Appeals,
to issue the writ of certiorari and failure to do so would constitute grave abuse of discretion on its part.
It is in this regard that we find that the Court of Appeals committed grave abuse of discretion in sustaining the
trial court.
When Judge Santiago resolved the first ex parte manifestation and motion, the applicable provision was
Section 2, Rule 39 of the former Rules of Court which provided
Sec. 2. Execution pending appeal. On motion of the prevailing party with notice to the adverse party,
the court may, in its discretion, order execution to issue, even before the expiration of the time to
Page 36 of 79

appeal, upon good reasons to be stated in a special order. If a record on appeal is filed thereafter the
motion and the special order shall be included therein.
The prevailing doctrine and principle then which continues to be the same as provided in Paragraph 2,
Section 2 of Rule 39 of the 1997 Rules of Civil Procedure is that discretionary execution is permissible only
when good reasons exist for immediately executing the judgment before finality or pending appeal or even
before the expiration of the time to appeal.
Good reasons consist of compelling circumstances justifying the immediate execution lest judgment becomes
illusory, or the prevailing party may after the lapse of time become unable to enjoy it, considering the tactics of
the adverse party who may apparently have no case except to delay. A long line of jurisprudence indicates
what constitute good reasons as contemplated by the Rules, the following being merely representative of the
same:
1. When in an intestate proceeding which has been pending for almost 29 years, one group of heirs has not yet
received the inheritance due them when the others have already received theirs, or are about to do so (Borja
vs. Encarnacion, 89 Phil 239 (1951);
2. The Advanced age of the prevailing party (Borja vs. Court of Appeals, 196 SCRA 847 [1991]; De Leon vs.
Soriano, supra);
3. When the defeated party is in imminent danger of insolvency (Hacienda Navarro vs. Sabrador, 65 Phil. 536
[1938]; Lao vs. Mencias, 21 SCRA 1021 [1967]; Santos vs. Mojica, 26 SCRA 607 [1969]; City of Manila vs.
Court of Appeals, 72 SCRA 98 [1976]; De los Reyes vs. Capulong, 122 SCRA 631 [1983]; PVTA vs. Lucero,
125 SCRA [1983]);
4. When the appeal is dilatory and the losing party intends to encumber and/or dispose of the property subject
of the case during the pendency of the appeal in order to defraud or deprive the plaintiff of proprietary rights
and defeat the ends of justice (Home Insurance Company vs. Court of Appeals, 184 SCRA 318 [1990]); and
5. Deterioration of commodities subject of litigation (Federation of United Namarco Distributors, Inc. vs.
National Marketing Corp., 4 SCRA 867 [1962]).
The supposed good reasons relied upon by Judge Santiago to justify the discretionary execution pending
appeal are spelled out in the May 7, 1996 Order, reading in relevant part as follows
This Court has given serious thoughts on the restrictive application of Section 2, Rule 39 of the Rules of
Court. Attached to the "Reply to the Opposition" filed by plaintiffs, are two public documents. As Annex
A, the original carbon copies of the summons and complaint in the case entitled Solid Bank Corporation
vs.Falcon Garment Corporation et, al., in Civil Case No. 96-76567, a case for collection of sum of
money and replevin (hereafter, referred to as Complaint). And as Annex B, the original copy of a police
blotter of the Center Police District Command, Police Station No. 2, Baler St., Quezon City (hereafter
referred to as police blotter). It is observed that the complaint filed by Solidbank against Falcon
supports the material allegations of plaintiffs in the hearing as reproduced above and as also quoted by
defendant in its opposition. The threats of impending criminal and civil cases as alleged by plaintiffs are
now proven and established to be real. The complaint shows that Falcon is now being sued for nonpayment of its loan with Solidbank. The checks issued by Falcon to Solidbank, forming part as Annexes
D, E, F, G, H and I of the complaint, bounced for being drawn against insufficient funds. Annexes J, J-1,
J-2, J-3 and J-4 also for the complaint, are written demands which carry the threat of criminal action for
violation of Batas Pambansa Blg. 22 against Falcon Garment Corporation and/or its officers by
Solidbank on February 14, 1996, seized the machineries, office and factory equipments of Falcon. The
police blotter even enumerates these machines and office equipments. With the seizure of plaintiffs'
instruments in the operation of its business, the filing of collection cases against it, the threat of criminal
Page 37 of 79

prosecution against its officers the imminent threat to its industrial peace, it is not remote that plaintiffs'
survival hangs on the balance. There is truth therefore to plaintiffs' claim that "its only hope for survival
and arresting threats of civil and criminal cases, is the immediate execution of the judgment." This
Court, also takes into consideration, that plaintiffs' ownership over the funds sought to be reinstated to
Current Account No. 25-00640-7, is not in dispute. All the circumstances enumerated by plaintiffs under
par. 3 of its motion combined with the facts established by the complaint of Solidbank against Falcon
and the police blotter, viewed from the above quoted opposition of defendant, to the mind of this Court,
constitute a sufficient evidence of good reason in support of plaintiffs' subject motion. Further and
significantly taking into consideration plaintiffs' readiness to pay defendant's counterclaim of
P4,700,000.00 by deducting the same from plaintiffs' principal account.
(Rollo, pp. 40-41.)
The above-stated order quotes the following transcribed testimony of Magin Tabuso, witness for private
respondents, thus
ATTY. MAHINAY: (on direct examination).
QUESTION:
Now, as an overall effect of the unauthorized withdrawal or transfer of account of your corporation, can
you tell what is its effect insofar as the operation of your corporation is concerned?
ANSWER:
It has great effect on the corporation as a whole because as our credit today we have an amount of
P12,000,000.00 plus and one of the prominent creditors is PBCom and also Solid Bank.
Q Do you have complete list of those creditors which you mentioned you have not paid as a result of
the unauthorized withdrawal or transfer of your account?
A Yes, we were not able to pay them as a result of those unauthorized withdrawals.
Q There are lists of your creditors in paragraph 5.3 of your complaint, are they the same creditors
you are talking about?
A Yes, sir.
Q Inasmuch as you said that these creditors were not paid, what particular action were undertaken
by these creditors against your company?
A Our credit lines from the banks and from the other creditors were closed, sir.
Q What else?
A And we were not able to serve orders of valued customers because we're not able to meet the
production due to financial difficulties.
Q Your claims of alleged illegal transfer of withdrawals, does this affect also the industrial peace of
your company?
A Yes, sir. There was a growing threat in the industrial peace of our company.
Page 38 of 79

Q How many employees are holding your staff?


A We have about 200 workers, sir.
Q What particular threat are you talking about?
A Usually these workers are dependent from our production and so they started to feel restless and
insecure sometimes and they feel demoralized, at times which led us to attack, it paralyzes the whole
operations.
(Rollo, pp. 39-40.)
The trial court concluded that the foregoing statements presented during the hearing of the motion for
execution pending appeal constitute good reasons for the discretionary execution. The Court of Appeals
agreed, but this Court is of a different persuasion and view.
The reasons relied upon are not compelling and thus can not constitute good reason.
It is significant to stress that private respondent Falcon is a juridical entity and not a natural person. Even
assuming that it was indeed in financial distress and on the verge of facing civil or even criminal suits, the
immediate execution of a judgment in its favor pending appeal cannot be justified as Falcon's situation may not
be likened to a case of a natural person who may be ill or may be of advanced age. Even the danger of
extinction of the corporation will not per se justify a discretionary execution unless there are showings of other
good reasons, such as for instance, impending insolvency of the adverse party or the appeal being patently
dilatory. But even as to the latter reason, it was noted in Aquino vs. Santiago (161 SCRA 570 [1988]), that it is
not for the trial judge to determine the merit of a decision he rendered as this is the role of the appellate court.
Hence, it is not within competence of the trial court, in resolving a motion for execution pending appeal, to rule
that the appeal is patently dilatory and rely on the same as its basis for finding good reason to grant the
motion. Only an appellate court can appreciate the dilatory intent of an appeal as an additional good reason in
upholding an order for execution pending appeal which may have been issued by the trial court for other good
reasons, or in cases where the motion for execution pending appeal is filed with the appellate court in
accordance with Section 2, paragraph (a), Rule 39 of the 1997 Rules of Court.
What is worse, only one case was actually filed against Falcon and this is the complaint for collection filed by
Solidbank. The other cases are "impending", so it is said. Other than said Solidbank case, Falcon's survival as
a body corporate can not be threatened by anticipated litigation. This notwithstanding, and even assuming that
there was a serious threat to Falcon's continued corporate existence, we hold that it is not tantamount nor even
similar to an impending death of a natural person. The material existence of a juridical person is not on the
same plain as that of human life. The survival of a juridical personality is clearly outweighed by the long
standing general policy of enforcing only final and executory judgments.
In the recent case of David vs. Court of Appeals (G.R. No. 126556, July 28, 1997), we reiterated our
pronouncement in Roxas vs. Court of Appeals (157 SCRA 370 [1988]) that
Execution pending appeal in accordance with Section 2 of Rule 39 is, of course, the exception.
Normally, execution of a judgment should not be had until and unless it has become final and executory
i.e., the right of appeal has been renounced or waived, the period for appeal has lapsed without an
appeal having been taken, or appeal having been taken, the appeal has been resolved and the records
of the case have been returned to the court of origin-in which case, execution "shall issue as a matter
of right.
On the other hand, when the period of appeal has not expired, execution of the judgment should not be
allowed, save only if there be good reasons therefor, in the court's discretion. As provided in Section 2,
Page 39 of 79

Rule 39 of the . . Rules . . , the existence of good reasons is what confers discretionary power on a
Court . . to issue a writ of execution pending appeal. The reasons allowing execution must constitute
superior circumstances demanding urgency which will outweigh the injury or damages should the losing
party secure a reversal of the judgment.
(p. 377.)
Additionally, we cannot help observing that the May 7, 1996 order of execution issued by Judge Santiago
deliberately modified and failed to conform to the dispositive portion of the January 2, 1996 decision rendered
by Judge Percival Mandap-Lopez, which is the decision Judge Santiago's order intended to execute, and that
this variance was upon express motion of Falcon (See: prayer of Falcon's Ex parte Manifestation & Motion,
Annex 2-Comment, pp. 130-132, Rollo.)
The January 2, 1996 decision ordered petitioner to "restore immediately to plaintiffs Current Account No. 2500640-7 the sum of P12,729,092.78, plus interest at the rate of 12% per annum to commence from the date of
the filing of the complaint until the said amount is fully restored, and to operate the said account in accordance
with the instructions of plaintiffs, acting through its board of directors." In contrast, the May 7, 1996 order
directed petitioner to "immediately pay the sum of P12,729,092.78," plus interest and other damages.
At first glance the order to restore private respondent's current account in the aforementioned amount and the
order to immediately pay the same amount directly to private respondent may seem to be same, for, after all,
upon restoring the said amount, what may prevent the depositor from withdrawing the entire amount?
However, after more careful and deliberate consideration, one will notice a whale of distinction between the
two aforementioned orders. For one thing, if petitioner PBCom were ordered to credit the money judgment to
Falcon's current account with its BMA Quezon City Branch and to operate said account in accordance with the
instructions of the board of directors of Falcon, once credited, release of any amount from said account may be
done only upon proper resolution of private respondent Falcon's board of directors. On the other hand, the
order dated May 7, 1996 directed the immediate payment to Falcon of the corresponding money judgment
which may thus be used or misused with or without proper instructions of Falcon's board of directors.
Besides, the harassment complained of by petitioner bank would not have happened had respondent trial court
issued a writ which faithfully conformed to the judgment sought to be enforced. If Falcon's current account
were merely credited in accord with the judgment, a simple and orderly banking procedure may just have taken
place. In fact, it would have been absolutely unnecessary to deputize anybody, other than the sheriff of the trial
court concerned, to enforce the writ ordering petitioner bank to restore the current account of private
respondent.
It is a well-settled general principle that a writ of execution must conform substantially to every essential
particular of the judgment promulgated. Execution which is not in harmony with the judgment is bereft of
validity. It must conform particularly to that ordained or decreed in the dispositive portion of the decision (GSIS
vs. Court of Appeals, 218 SCRA 233 [1993]). An order of execution which varies the tenor of the judgment or
exceeds the terms thereof is a nullity (Foremost Farms, Inc. vs. Dept. of Labor and Employment, 251 SCRA
123 [1995]; Gamboa's, Inc. vs. Court of Appeals, 72 SCRA 131 [1976]; Villoria vs. Piccio, 95 Phil. 802 [1954]).
Falcon has ignored and has remained silent in regard to PBCom's charge of harassment and irregular resort to
armed policemen and civilians with acetylene torches in the enforcement of the writ of execution pending
appeal, thus lending credence to PBCom's complaint. However, it also appears that petitioner PBCom does
not intend to pursue the administrative aspect of these alleged irregularities, its prayer in the petition being
completely silent on these points. Nevertheless, we find it necessary to exhort both private respondent and its
counsel, as well as public respondent sheriffs not to resort to such forms of harassment by using the strong
arms of the law to the prejudice of any party. Barbaric acts such as those complained of have no place in a
Page 40 of 79

civilized society. It is even more abhorrent when such acts are with the participation or at the very least the
acceptance of a member of the bar who, under his oath, has sworn to uphold the rule of law.
WHEREFORE, premises considered, the instant petition is GRANTED. The decision of the Court of Appeals
dated September 13, 1996 in CA-G.R. SP No. 40636 is hereby ANNULLED and SET ASIDE. The order of the
Regional Trial Court of the National Capital Judicial Region, Branch 101, stationed at
Quezon City, dated May 7, 1996 in Civil Case No. Q-95-22625 is likewise ANNULLED and SET ASIDE.
Accordingly, the trial court is hereby ORDERED to determine the exact amount taken by private respondent by
virtue of the writ or writs of execution issued pursuant to the annulled order dated May 7, 1996, which amount
private respondent is hereby ORDERED to return to petitioner Philippine Bank of Communications. No special
pronouncement is made as to costs.
SO ORDERED.
Narvasa, C.J., Romero, Francisco and Panganiban, JJ., concur.

Page 41 of 79

Republic of the Philippines


SUPREME COURT
Manila
THIRD DIVISION

G.R. No. 121158 December 5, 1996


CHINA BANKING CORPORATION, ATTYS. REYNALDO M. CABUSORA and RENATO C.
TAGUIAM, petitioners,
vs.
COURT OF APPEALS, HON. PEDRO T. SANTIAGO, SPS. SO CHING and CRISTINA SO, and NATIVE
WEST INTERNATIONAL TRADING CORP., respondents.

FRANCISCO, J.:p
China Banking Corporation (China Bank) extended several loans to Native West International Trading
Corporation (Native West) and to So Ching, Native West's president. Native West in turn executed promissory
notes 1 in favor of China Bank. So Ching, with the marital consent of his wife, Cristina So, additionally executed
two mortgages over their properties, viz., a real estate mortgage executed on July 27, 1989 covering a parcel
of land situated in Cubao, Quezon City, under TCT No. 277797 2, and another executed on August 10, 1989
covering a parcel of land located in Mandaluyong, under TCT No. 5363. 3 The promissory notes matured and
despite due demands by China Bank neither private respondents Native West nor So Ching paid. Pursuant to
a provision embodied in the two mortgage contracts, China Bank filed petitions for the extra-judicial foreclosure
of the mortgaged properties before Notary Public Atty. Renato E. Taguiam for TCT No. 277797, 4and Notary
Public Atty. Reynaldo M. Cabusora for TCT No. 5363, 5 copies of which were given to the spouses So Ching
and Cristina So. After due notice and publication, the notaries public scheduled the foreclosure sale of the
spouses' real estate properties on April 13, 1993. Eight days before the foreclosure sale, however, private
respondents filed a complaint 6 with the Regional Trial Court 7 for accounting with damages and with temporary
restraining order against petitioners alleging the following causes of action:
A. Defendants failed to comply with the mandates of Administrative Order No. 3 of the Supreme
Court dated October 19, 1984.
B. Defendants failed to comply with the mandates of Section 2 Presidential Decree No. 1079
dated January 28, 1977.
C. MORTGAGORS liability limited to P6,500,000.00 and P3,500,000.00 respectively in the
Mortgages Annexes A and B respectively, but the same are not included in the notice of
foreclosure.
D. Violation of Truth in Lending Act (RP Act No. 3765).
E. In all the loans granted by DEFENDANT-BANK to plaintiffs and Borrowers, the Bank charged
interests in excess of the rate allowed by the Central Bank.
F. Violation of Article 1308 of the Civil Code. 8

Page 42 of 79

On April 7, 1993, the trial court issued a temporary restraining order to enjoin the foreclosure sale.
Thereafter counsels for the respective parties agreed to file their pleadings and to submit the case,
without further hearing, for resolution. On April 28, 1993, the trial court, without passing upon the
material averments of the complaint, issued an Order granting the private respondents' prayer for the
issuance of preliminary injunction with the following proffered justification:
From the foregoing, it is quite apparent that a question of accounting poses a thorny issue as
between the litigants. Variance in the amounts involved relating to the loan agreements must be
judiciously passed upon by the Court and this is only possible if a trial on the merits could be
had as the matters appurtenant thereto are evidentiary in nature.
Under the premises, the accounting issue being evidentiary in character calls for an issuance of
a writ of preliminary injunction pending the adjudication of the case. The issuance thereof at this
particular stage of the case is merely a preventive remedy designed to protect from irreparable
injury to property or other rights plaintiff may suffer, which a court of equity may take cognizance
of by commanding acts to be done or prohibiting their commission, as in the instant suit, to
restrain notaries public Cabusora and Taguiam as well as defendant China Banking Corporation
from continuing with the auction sale of the subject properties, until further orders from this
Court.
Wherefore, premises considered, finding that the circumstances warrant the issuance of a
preliminary injunction, plaintiff's prayer is hereby GRANTED. Consequent thereto, plaintiffs are
hereby ordered to post a bond amounting to P1 (ONE) Million to answer for whatever damages
defendant may suffer as a consequence of the writ. 9
Petitioners moved for reconsideration, but it was denied in an Order dated September 23, 1993. To annul the
trial court's Orders of April 28, 1993 and September 23, 1993, petitioners elevated the case
through certiorari and prohibition 10 before public respondent Court of Appeals. 11 In a decision dated January
17, 1995, respondent Court of Appeals held that Administrative Circular No. 3 is the governing rule in extrajudicial foreclosure of mortgage, which circular petitioners however failed to follow, and with respect to the
publication of the notice of the auction sale, the provisions of P.D. No. 1079 is the applicable statute, 12 which
decree petitioners similarly failed to obey. Respondent Court of Appeals did not pass upon the other issues
and confined its additional lengthy discussion on the validity of the trial court's issuance of the preliminary
injunction, finding the same neither capricious nor whimsical exercise of judgment that could amount to grave
abuse of discretion. 13 The Court of Appeals accordingly dismissed the petition, as well as petitioners'
subsequent motion for reconsideration. 14 Hence, the instant petition under Rule 45 of the Rules of Court
reiterating the grounds raised before respondent court, to wit:
I. PETITIONER CBC'S PETITIONS TO EXTRAJUDICIALLY FORECLOSE THE REAL ESTATE
MORTGAGES OF JULY 27, 1989 AND AUGUST 10, 1989 THRU PETITIONERS-NOTARIES
PUBLIC, AND THE SCHEDULED FORECLOSURE SALE ARE VALID AND LAWFUL;
II. PRIVATE RESPONDENTS AND PETITIONER CBC HAD EXPRESSLY AGREED TO
CONSIDER THE SAME MORTGAGES AS VALID SECURITIES FOR PROMPT AND FULL
PAYMENT OF ALL AND ANY OBLIGATIONS OF THE FORMER FROM THE LATTER;
III. THE SUPPOSED VARIANCE IN THE TOTAL AMOUNT OF UNPAID LOANS IS NOT A
VALID BASIS TO ENJOIN THE FORECLOSURE OF THE QUESTIONED MORTGAGES. THE
MERE FAILURE TO PAY THE LOAN SECURED BY SAID MORTGAGES IS THE ONLY,
SINGLE REASON FOR THEIR LAWFUL FORECLOSURE;.
IV. PETITIONER BANK HAD FURNISHED PRIVATE RESPONDENTS WITH COPIES OF
DISCLOSURE STATEMENTS IN COMPLIANCE WITH THE TRUTH IN LENDING ACT, AND
Page 43 of 79

CHARGED THEM INTERESTS IN ACCORDANCE WITH LAW AND PURSUANT TO ITS


EXPRESS AGREEMENT WITH THE LATTER;
V. THE P1.0 MILLION INJUNCTION BOND REQUIRED BY THE HONORABLE COURT A
QUO ON PRIVATE RESPONDENTS IS GROSSLY AND PATENTLY INADEQUATE. 15
At the outset, the Court's attention is drawn to the fact that since the filing of this suit before the trial court, none
of the substantial issues have been resolved. To avoid and gloss over the issues raised by the parties, as what
the trial court and respondent Court of Appeals did, would unduly prolong this litigation involving a rather
simple case of foreclosure of mortgage. Undoubtedly, this will run counter to the avowed purpose of the
rules, i.e., to assist the parties in obtaining just, speedy and inexpensive determination of every action or
proceeding. 16 The Court, therefore, feels that the central issues of the case, albeit unresolved by the courts
below, should now be settled specially as they involved pure questions of law. Furthermore, the pleadings of
the respective parties on file have amply ventilated their various positions and arguments on the matter
necessitating prompt adjudication.
Now to the core issues.
As the Court sees it, the crucial issues are: (1) whether or not the loans in excess of the amounts expressly
stated in the mortgage contracts can be included as part of the loans secured by the real estate mortgages, (2)
whether or not petitioners can extra-judicially foreclose the properties subject of the mortgages, (3) whether or
not Administrative Order No. 3 should govern the extra-judicial foreclosure of the properties, and (4) whether or
not the writ of preliminary injunction issued by the trial court is valid.
Petitioners aver that the additional loans extended in favor of private respondents in excess of P6,500,000.00
and P3,500,000.00 amounts respectively stipulated in the July 27, 1989 and August 10, 1989 mortgage
contracts are also secured by the same collaterals or real estate properties, citing as bases the introductory
paragraph ("whereas clause") of the mortgage contracts, as well as the stipulations stated therein under the
first and second paragraphs. Private respondents for their part argue that the additional loans are clean loans,
relying on some isolated parts of the same introductory paragraph and first paragraph of the contracts, and
also of the third paragraph.
As both parties offered a conflicting interpretation of the contract, then judicial determination of the parties'
intention is thus, inevitable. 17 Hereunder are the pertinent identical introductory paragraphs and paragraphs 1
to 3 of the July 27, 1989 and August 10, 1989 mortgage contracts:
WHEREAS, the MORTGAGEE has granted, and may from time to time hereafter grant to the
MORTGAGOR(S)/either of them/and/or NATIVE WEST INTERNATIONAL TRADING CORP.
hereinafter called the DEBTOR(S) credit facilities not exceeding SIX MILLION FIVE HUNDRED
THOUSAND PESOS ONLY (P6,500,000.00)* Philippine currency, and the MORTGAGEE had
required the MORTGAGOR(S) to give collateral security for the payment of any and all
obligations heretofore contracted/incurred and which may thereafter be contracted/incurred by
the MORTGAGOR(S) and/or DEBTOR(S), or any one of them, in favor of the MORTGAGEE;
NOW, THEREFORE, as collateral security for the payment of the principal and interest of the
indebtedness/obligations herein referred to and the faithful performance by the
MORTGAGOR(S) of his (her, its) obligations hereunder, the MORTGAGOR(S) hereby
execute(s) a FIRST MORTGAGE, in favor of the MORTGAGEE, free from all liens and
encumbrances of any kind, that (those) certain parcel(s) of land, together with all the
buildings/machineries/equipment improvements now existing thereon, and which may hereafter
be placed thereon, described in the Schedule of mortgaged properties described hereunder
and/or which is hereto attached, marked Exhibit "A" and made a part thereof.
Page 44 of 79

1. It is agreed that this mortgage shall respond for all the obligations contracted/incurred by the
MORTGAGOR(S) and/or DEBTOR(S) or any one of them, in favor of the MORTGAGEE up to
the said sum of SIX MILLION FIVE HUNDRED THOUSAND PESOS ONLY
(P6,500,000.00)* regardless of the manner in which the said obligations may have been
contracted/incurred by the MORTGAGOR(S) and/or DEBTOR(S) whether by advances or
loans made to him (her, it) by the MORTGAGEE, by the negotiation of mercantile documents,
including trust receipts, by the execution by the MORTGAGOR(S) and/or DEBTOR(S) of money
market instruments/commercial papers, undertakings of guaranty of suretyship, or by
endorsement of negotiable instruments, or otherwise, the idea being to make this deed a
comprehensive and all embracing security that it is.
2. Payments on account of the principal and interest of the credit granted by the MORTGAGEE
to the MORTGAGOR(S) and/or DEBTOR(S) may be made from time to time, and as often as
the MORTGAGOR(S) may elect; provided, however, that in the event of such payments being
so made that the indebtedness to the MORTGAGEE may from time to time be reduced the
MORTGAGEE may make further advances and all sums whatsoever advanced by the
MORTGAGEE shall be secured by this mortgage, and partial payments of said indebtedness
from time to time shall not thereby be taken to reduce by the amount of such payments the
credit hereby secured. The said credit shall extend to any account which shall, within the said
limit of P6,500,000.00* exclusive of interest, be fluctuating and subject to increase or decrease
from time to time as the MORTGAGEE may approve, and this mortgage shall stand as security
for all indebtedness of the MORTGAGOR(S) and/or DEBTOR(S), or any one of them, at any
and all times outstanding, regardless of partial or full payments at any time or times made by the
MORTGAGOR(S) and/or DEBTOR(S).
3. It is hereby agreed that the MORTGAGEE may from time to time grant the
MORTGAGOR(S)/DEBTOR(S) credit facilities exceeding the amount secured by this mortgage,
without affecting the liability of the MORTGAGOR(S) under this mortgage up to the amount
stipulated.18
An important task in contract interpretation is the ascertainment of the intention of the contracting parties which
is accomplished by looking at the words they used to project that intention in their contract, i.e., all the words,
not just a particular word or two, and words in context, not words standing alone. 19 Indeed, Article 1374 of the
Civil Code, states that "the various stipulations of a contract shall be interpreted together, attributing to the
doubtful ones that sense which may result from all of them taken jointly." Applying the rule, we find that the
parties intent is to constitute the real estate properties as continuing securities liable for future obligations
beyond the amounts of P6.5 million and P3.5 million respectively stipulated in the July 27, 1989 and August 10,
1989 mortgage contracts. Thus, while the "whereas" clause initially provides that "the mortgagee has granted,
and may from time to time hereafter grant to the mortgagors . . . credit facilities not exceeding six million five
hundred thousand pesos only (P6,500,000.00)**" yet in the same clause it provides that "the mortgagee had
required the mortgagor(s) to give collateral security for the payment of any and all obligations heretofore
contracted/incurred and which may thereafter be contracted/incurred by the mortgagor(s) and/or debtor(s), or
any one of them, in favor of the mortgagee" which qualifies the initial part and shows that the collaterals or real
estate properties serve as securities for future obligations. The first paragraph which ends with the clause, "the
idea being to make this deed a comprehensive and all embracing security that it is" supports this qualification.
Similarly, the second paragraph provides that "the mortgagee may take further advances and all sums
whatsoever advanced by the mortgagee shall be secured by this mortgagee . . ." And although it was stated
that "[t]he said credit shall extend to any account which shall, within the said limit of P6,500,000.00 exclusive of
interest", this part of the second sentence is again qualified by its succeeding portion which provides that "this
mortgage shall stand as security for all indebtedness of the mortgagor(s) and/or debtor(s), or any one of them,
at any and all times outstanding . . ." Again, under the third paragraph, it is provided that "the mortgagee may
from time to time grant the mortgagor(s)/debtor(s) credit facilities exceeding the amount secured by this
mortgage . . ." The fourth paragraph, 20 in addition, states that ". . . all such withdrawals, and payments,
Page 45 of 79

whether evidenced by promissory notes or otherwise, shall be secured by this mortgage" which manifestly
shows that the parties principally intended to constitute the real estate properties as continuing securities for
additional advancements which the mortgagee may, upon application, extend. It is well settled that mortgages
given to secure future advancements or loans are valid and legal contracts, and that the amounts named as
consideration in said contracts do not limit the amount for which the mortgage may stand as security if from the
four corners of the instrument the intent to secure future and other indebtedness can be gathered. 21
Anent the second issue, we find that petitioners are entitled to foreclose the mortgages. In their complaint for
accounting with damages pending with the trial court, private respondents averred that:
8. Up to and until February, 1993, PLAINTIFF-CORPORATION had paid to the DEFENDANTBANK, the amount of THREE HUNDRED FIFTY THOUSAND (P350,000.00) Pesos, Philippine
Currency, and was willing to pay the balance in installments of FOUR HUNDRED THOUSAND
(P400,000.00) Pesos, Philippine Currency, every month, in the meantime, but the
DEFENDANT-BANK refused to accept, demanding instead SEVEN HUNDRED MILLION
(P700,000,000.00) Pesos, Philippine Currency, a month.
9. Inspite of the expressed willingness and commitment of plaintiffs to pay their obligation in a
manner which they could afford, on March 11, 1993, MORTGAGORS and DEFENDANTCORPORATION, each received a Letter of Demand from DEFENDANT-BANK, for the payment
of P28,775,615.14 exclusive of interest and penalty evidenced by 11 promissory notes enclosed
therein . . . .
10. Upon receipt of the letter, PLAINTIFF-CORPORATION through its President pleaded with
the Chairman of the Board of the DEFENDANT-BANK, through whom Defendant-Corporation
was transacting business with, to accept its offer of payment of FOUR HUNDRED THOUSAND
(P400,000.00) Pesos, Philippine Currency, a month, in the meantime, which was again refused
by the said Chairman. 22
which allegations are a clear admission that they were unable to settle to the fullest their obligation.
Foreclosure is valid where the debtors, as in this case, are in default in the payment of their
obligation. 23The essence of a contract of mortgage indebtedness is that a property has been identified
or set apart from the mass of the property of the debtor-mortgagor as security for the payment of
money or the fulfillment of an obligation to answer the amount of indebtedness, in case of default of
payment. 24 It is a settled rule that in a real estate mortgage when the obligation is not paid when due,
the mortgagee has the right to foreclose the mortgage and to have the property seized and sold in view
of applying the proceeds to the payment of the obligation. 25 In fact, aside from the mortgage contracts,
the promissory notes executed to evidence the loans also authorize the mortgagee to foreclose on the
mortgages. Thus:
. . . CHINA BANKING CORPORATION is hereby authorized to sell at public or private sales
such securities or things of value for the purpose of applying their proceeds to such
payments. 26
And while private respondents aver that they have already paid ten million pesos, an allegation which
has still to be settled before the trial court, the same cannot be utilized as a shield to enjoin the
foreclosure sale. A mortgage given to secure advancements, we repeat, is a continuing security and is
not discharged by repayment of the amount named in the mortgage, until the full amount of the
advancements are paid. 27
With respect to the third issue, we find private respondents' contention that Administrative Order No. 3 is the
governing rule in foreclosure of mortgages misplaced. The parties, we note, have stipulated that the provisions
of Act No. 3135 is the controlling law in case of foreclosure. Thus:
Page 46 of 79

17. The MORTGAGOR(S) hereby grant(s) unto the MORTGAGEE full and irrevocable power of
attorney coupled with interest, in the event of breach of any of the conditions of this mortgage,
to sell, in its discretion, the mortgaged properties at public auction, for cash and to the highest
bidder, in the Province or City where the mortgaged properties are located, before the Sheriff, or
a Notary Public, without court proceedings, after posting notices of sale for a period of twenty
days in three public places in said place; and after publication of such notice in a newspaper of
general circulation in the said place once a week, for three consecutive weeks, and the
MORTGAGEE is hereby authorized to execute the deed of sale and all such other documents
as may be necessary in the premises all in accordance with the provisions of Act No. 3135 of
the Philippine Legislature, as amended, and Section 78 of Republic Act No. 337: . .
. 28 (Emphasis supplied.)
By invoking the said Act, there is no doubt that it must "govern the manner in which the sale and
redemption shall be effected." 29 Clearly, the fundamental principle that contracts are respected as the
law between the contracting parties finds application in the present case, 30 specially where they are not
contrary to law, morals, good customs and public policy.
Moreover, Administrative Order No. 3 is a directive for executive judges and clerks of courts which, under its
preliminary paragraph, is "[i]n line with the responsibility of an Executive Judge, under Administrative Order No.
6, dated June 30, 1975, for the management of courts within his administrative area, included in which is the
task of supervising directly the work of the Clerk of Court, who is also the Ex-Oficio Sheriff, and his staff, . . . ."
Surely, a petition for foreclosure with the notary public is not within the contemplation of the aforesaid directive
as the same is not filed with the court. At any rate, Administrative Order No. 3 cannot prevail over Act No.
3135, as amended. It is an elementary principle in statutory construction that a statute is superior to an
administrative directive and the former cannot be repealed or amended by the latter.
On the last issue, we find that the issuance of the writ of injunction by the trial court unjustified. A writ of
preliminary injunction, as an ancillary or preventive remedy, may only be resorted to by a litigant to protect or
preserve his rights or interests and for no other purpose during the pendency of the principal action. 31 But
before a writ of preliminary injunction may be issued, there must be a clear showing by the complaint that there
exists a right to be protected and that the acts against which the writ is to be directed are violative of the said
right. 32 In the case at bench, we fail to see any reason why the foreclosure of the mortgages should be
enjoined. On the face of the clear admission by private respondents that they were unable to settle their
obligations which were secured by the mortgages, petitioners have a clear right to foreclose the mortgages
which is a remedy provided by law. Thus, in Caltex Philippines, Inc. v. Intermediate Appellate Court, 33 we
reiterated the rule that:
. . . where a debt is secured by a mortgage and there is a default in payment on the part of the
mortgagor, the mortgagee has a choice of one (1) or two (2) remedies, but he cannot have both.
The mortgagee may:
1) foreclosure the mortgage; or
2) file an ordinary action to collect the debt.
When the mortgagee chooses the foreclosure of the mortgage as a remedy, he enforces his lien
by the sale on foreclosure of the mortgaged property. The proceeds of the sale will be applied to
the satisfaction of the debt. With this remedy, he has a prior lien on the property. In case of a
deficiency, the mortgagee has the right to claim for the deficiency resulting from the price
obtained in the sale of the real property at public auction and the outstanding obligation at the
time of the foreclosure proceedings (Soriano v. Enriquez, 24 Phil 584; Banco de Islas Filipinas
v. Concepcion Hijos, 53 Phil 86; Banco Nacional v. Barreto, 53 Phil 101).

Page 47 of 79

On the other hand, if the mortgagee resorts to an action to collect the debt, he thereby waives
his mortgage lien. He will have no more priority over the mortgaged property. If the judgment in
the action to collect is favorable to him, and it becomes final and executory, he can enforce said
judgment by execution. He can even levy execution on the same mortgaged property, but he
will not have priority over the latter and there may be other creditors who have better lien on the
properties of the mortgagor. 34
WHEREFORE, the instant petition is hereby GRANTED. The assailed Decision, as well as the Resolution, of
the Court of Appeals dated January 17, 1995 and July 7, 1995, respectively, are hereby REVERSED and SET
ASIDE. The preliminary writ of injunction issued by the trial court is hereby NULLIFIED. This case is
REMANDED to the court of origin for further proceedings in conformity with this decision.
SO ORDERED.
Narvasa, C.J., Davide, Jr., Melo and Panganiban, JJ., concur.

Page 48 of 79

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 186560

November 17, 2010

GOVERNMENT SERVICE INSURANCE SYSTEM, Petitioner,


vs.
FERNANDO P. DE LEON, Respondent.
DECISION
NACHURA, J.:
Before this Court is a Petition for Review on Certiorari under Rule 45 of the Rules of Court. Petitioner
Government Service Insurance System (GSIS) seeks the nullification of the Decision1 dated October 28, 2008
and the Resolution2 dated February 18, 2009 of the Court of Appeals (CA) in CA-G.R. SP No. 101811.
Respondent Fernando P. de Leon retired as Chief State Prosecutor of the Department of Justice (DOJ) in
1992, after 44 years of service to the government. He applied for retirement under Republic Act (R.A.) No. 910,
invoking R.A. No. 3783, as amended by R.A. No. 4140, which provides that chief state prosecutors hold the
same rank as judges. The application was approved by GSIS. Thereafter, and for more than nine years,
respondent continuously received his retirement benefits, until 2001, when he failed to receive his monthly
pension.3
Respondent learned that GSIS cancelled the payment of his pension because the Department of Budget and
Management (DBM) informed GSIS that respondent was not qualified to retire under R.A. No. 910; that the law
was meant to apply only to justices and judges; and that having the same rank and qualification as a judge did
not entitle respondent to the retirement benefits provided thereunder. Thus, GSIS stopped the payment of
respondents monthly pension.4
Respondent wrote GSIS several letters but he received no response until November 9, 2007, when respondent
received the following letter from GSIS:
Dear Atty. De Leon:
This is in response to your request for resumption of pension benefit.
It appears that you retired under Republic Act No. 910 in 1992 from your position as Chief State Prosecutor in
the Department of Justice. From 1992 to 2001, you were receiving pension benefits under the said law.
Beginning the year 2002, the Department of Budget and Management through then Secretary Emilia T.
Boncodin already refused to release the funds for your pension benefit on the ground that Chief State
Prosecutors are not covered by R.A. 910. This conclusion was later on affirmed by Secretary Rolando G.
Andaya, Jr. in a letter dated 6 June 2006.
In view of these, you now seek to secure benefits under Republic Act No. 660 or any other applicable GSIS
law.
We regret, however, that we cannot accede to your request because you have chosen to retire and in fact
have already retired under a different law, Republic Act No. 910, more than fifteen (15) years ago. There is
nothing in the GSIS law which sanctions double retirement unless the retiree is first re-employed and qualifies
Page 49 of 79

once again to retire under GSIS law. In fact, Section 55 of Republic Act No. 8291 provides for exclusivity of
benefits which means that a retiree may choose only one retirement scheme available to him to the exclusion
of all others.
Nonetheless, we believe that the peculiarities of your case is a matter that may be jointly addressed or
threshed out by your agency, the Department of Justice, and the Department of Budget and Management.
Very truly yours,
(signed)
CECIL L. FELEO
Senior Vice President
Social Insurance Group5
Respondent then filed a petition for mandamus before the CA, praying that petitioner be compelled to continue
paying his monthly pension and to pay his unpaid monthly benefits from 2001. He also asked that GSIS and
the DBM be ordered to pay him damages.6
In the assailed October 28, 2008 Decision, the CA resolved to grant the petition, to wit:
WHEREFORE, the petition is GRANTED. The GSIS is hereby ordered to pay without delay petitioner Atty.
Fernando de Leon, his monthly adjusted pension in accordance with other applicable law not under RA 910. It
is also ordered to pay the back pensions which should also be adjusted to conform to the applicable law from
the time his pension was withheld.
SO ORDERED.7
The CA found that GSIS allowed respondent to retire under R.A. No. 910, following precedents which allowed
non-judges to retire under the said law. The CA said that it was not respondents fault that he was allowed to
avail of the benefits under R.A. No. 910; and that, even if his retirement under that law was erroneous,
respondent was, nonetheless, entitled to a monthly pension under the GSIS Act. The CA held that this was not
a case of double retirement, but merely a continuation of the payment of respondents pension benefit to which
he was clearly entitled. Since the error in the award of retirement benefits under R.A. 910 was not attributable
to respondent, it was incumbent upon GSIS to continue defraying his pension in accordance with the
appropriate law which might apply to him. It was unjust for GSIS to entirely stop the payment of respondents
monthly pension without providing any alternative sustenance to him. 8
The CA further held that, under R.A. No. 660, R.A. No. 8291, and Presidential Decree (P.D.) No. 1146,
respondent is entitled to a monthly pension for life. He cannot be penalized for the error committed by GSIS
itself. Thus, although respondent may not be qualified to receive the retirement benefits under R.A. No. 910, he
is still entitled to a monthly pension under R.A. No. 660, P.D. No. 1146, and R.A. No. 8291. 9
Petitioner GSIS is now before this Court, assailing the Decision of the CA and the Resolution denying its
motion for reconsideration.
GSIS admits that respondent received monthly pensions from August 1997 until December 2001. Thereafter,
the DBM refused to remit the funds for respondents pension on the ground that he was not entitled to retire
under R.A. No. 910 and should have retired under another law, without however specifying which law it
was.10 It appears that the DBM discontinued the payment of respondents pension on the basis of the
memorandum of the Chief Presidential Legal Counsel that Chief Prosecutors of the DOJ are not entitled to the
retirement package under R.A. No. 910.
Page 50 of 79

Because of the discontinuance of his pension, respondent sought to convert his retirement under R.A. No. 910
to one under another law administered by GSIS.11 However, this conversion was not allowed because, as
GSIS avers, R.A. No. 8291 provides that conversion of ones retirement mode on whatever ground and for
whatever reason is not allowed beyond one year from the date of retirement.
GSIS assails the CAs Decision for not specifying under which law respondents retirement benefits should be
paid, thus making it legally impossible for GSIS to comply with the directive. 12 It then raises several arguments
that challenge the validity of the appellate courts decision.
GSIS argues, first, that the CA erred in issuing a writ of mandamus despite the absence of any specific and
clear right on the part of respondent, since he could not even specify the benefits to which he is entitled and
the law under which he is making the claim.13
Second, GSIS alleges that it had refunded respondents premium payments because he opted to retire under
R.A. No. 910, which it does not administer. Thus, GSIS posits that the nexus between itself and respondent
had been severed and, therefore, the latter cannot claim benefits from GSIS anymore.14
Third, GSIS contends that the CA erred in concluding that respondent would not be unjustly enriched by the
continuation of his monthly pension because he had already benefited from having erroneously retired under
R.A. No. 910. GSIS points out that it had refunded respondents premium contributions. When the Chief
Presidential Legal Counsel concluded that respondent was not entitled to retire under R.A. No. 910, it was
implicit recognition that respondent was actually not entitled to the P1.2 million lump sum payment he received,
which he never refunded.15
Fourth, GSIS points out that the CA erred in concluding that respondent was not seeking conversion from one
retirement mode to another. It reiterates that R.A. No. 8291 expressly prohibits conversion beyond one year
from retirement. To compel GSIS to release respondents retirement benefits despite the fact that he is
disqualified to receive retirement benefits violates R.A. No. 8291, and would subject its officials to possible
charges under R.A. No. 3019, the Anti-Graft and Corrupt Practices Act.
Fifth, GSIS contends that respondent is not entitled to the retirement benefits under R.A. No. 8291 because,
when he retired in 1992, the law had not yet been enacted. The retirement laws administered by GSIS at that
time were R.A. No. 660, R.A. No. 1616, and P.D. No. 1146.
Lastly, GSIS argues that the writ of mandamus issued by the CA is not proper because it compels petitioner to
perform an act that is contrary to law.
Respondent traverses these allegations, and insists that he has a clear legal right to receive retirement
benefits under either R.A. No. 660 or P.D. No. 1146.16 He claims that he has met all the conditions for
entitlement to the benefits under either of the two laws.17 Respondent contends that the return of his
contributions does not bar him from pursuing his claims because GSIS can require him to refund the premium
contributions, or even deduct the amount returned to him from the retirement benefits he will receive. 18 He also
argues that resumption of his monthly pension will not constitute unjust enrichment because he is entitled to
the same as a matter of right for the rest of his natural life.19
Respondent accepts that, contrary to the pronouncement of the CA, he is not covered by R.A. No. 8291. He,
therefore, asks this Court to modify the CA Decision, such that instead of Section 13 of R.A. No. 8291, it
should be Section 12 of P.D. No. 1146 or Section 11 of R.A. No. 660 to be used as the basis of his right to
receive, and the adjustment of, his monthly pension.
Furthermore, respondent argues that allowing him to retire under another law does not constitute "conversion"
as contemplated in the GSIS law. He avers that his application for retirement under R.A. No. 910 was duly
approved by GSIS, endorsed by the DOJ, and implemented by the DBM for almost a decade. Thus, he should
Page 51 of 79

not be made to suffer any adverse consequences owing to the change in the interpretation of the provisions of
R.A. No. 910. Moreover, he could not have applied for conversion of his chosen retirement mode to one under
a different law within one year from approval of his retirement application, because of his firm belief that his
retirement under R.A. No. 910 was proper a belief amply supported by its approval by GSIS, the favorable
endorsement of the DOJ, and its implementation by the DBM.20
The petition is without merit.
Initially, we resolve the procedural issue.
GSIS contends that respondents petition for mandamus filed before the CA was procedurally improper
because respondent could not show a clear legal right to the relief sought.
The Court disagrees with petitioner. The CA itself acknowledged that it would not indulge in technicalities to
resolve the case, but focus instead on the substantive issues rather than on procedural
questions.21 Furthermore, courts have the discretion to relax the rules of procedure in order to protect
substantive rights and prevent manifest injustice to a party.
The Court has allowed numerous meritorious cases to proceed despite inherent procedural defects and
lapses. Rules of procedure are mere tools designed to facilitate the attainment of justice. Strict and rigid
application of rules which would result in technicalities that tend to frustrate rather than to promote substantial
justice must always be avoided.22
Besides, as will be discussed hereunder, contrary to petitioners posture, respondent has a clear legal right to
the relief prayed for. Thus, the CA acted correctly when it gave due course to respondents petition for
mandamus.
This case involves a former government official who, after honorably serving office for 44 years, was
comfortably enjoying his retirement in the relative security of a regular monthly pension, but found himself
abruptly denied the benefit and left without means of sustenance. This is a situation that obviously cries out for
the proper application of retirement laws, which are in the class of social legislation.
The inflexible rule in our jurisdiction is that social legislation must be liberally construed in favor of the
beneficiaries.23 Retirement laws, in particular, are liberally construed in favor of the retiree 24 because their
objective is to provide for the retirees sustenance and, hopefully, even comfort, when he no longer has the
capability to earn a livelihood. The liberal approach aims to achieve the humanitarian purposes of the law in
order that efficiency, security, and well-being of government employees may be enhanced.25 Indeed,
retirement laws are liberally construed and administered in favor of the persons intended to be benefited, and
all doubts are resolved in favor of the retiree to achieve their humanitarian purpose.26
In this case, as adverted to above, respondent was able to establish that he has a clear legal right to the
reinstatement of his retirement benefits.
In stopping the payment of respondents monthly pension, GSIS relied on the memorandum of the DBM,
which, in turn, was based on the Chief Presidential Legal Counsels opinion that respondent, not being a judge,
was not entitled to retire under R.A. No. 910. And because respondent had been mistakenly allowed to receive
retirement benefits under R.A. No. 910, GSIS erroneously concluded that respondent was not entitled to any
retirement benefits at all, not even under any other extant retirement law. This is flawed logic.
Respondents disqualification from receiving retirement benefits under R.A. No. 910 does not mean that he is
disqualified from receiving any retirement benefit under any other existing retirement law.

Page 52 of 79

The CA, however, incorrectly held that respondent was covered by R.A. No. 8291. R.A. No. 8291 became a
law after respondent retired from government service. Hence, petitioner and even respondent agree that it
does not apply to respondent, because the law took effect after respondents retirement.
Prior to the effectivity of R.A. No. 8291, retiring government employees who were not entitled to the benefits
under R.A. No. 910 had the option to retire under either of two laws: Commonwealth Act No. 186, as amended
by R.A. No. 660, or P.D. No. 1146.
In his Comment, respondent implicitly indicated his preference to retire under P.D. No. 1146, since this law
provides for higher benefits, and because the same was the latest law at the time of his retirement in 1992.27
Under P.D. No. 1146, to be eligible for retirement benefits, one must satisfy the following requisites:
Section 11. Conditions for Old-Age Pension.
(a) Old-age pension shall be paid to a member who:
(1) has at least fifteen years of service;
(2) is at least sixty years of age; and
(3) is separated from the service.
Respondent had complied with these requirements at the time of his retirement. GSIS does not dispute this.
Accordingly, respondent is entitled to receive the benefits provided under Section 12 of the same law, to wit:
Section 12. Old-Age Pension.
(a) A member entitled to old-age pension shall receive the basic monthly pension for life but in no case for a
period less than five years: Provided, That, the member shall have the option to convert the basic monthly
pensions for the first five years into a lump sum as defined in this Act: Provided, further, That, in case the
pensioner dies before the expiration of the five-year period, his primary beneficiaries shall be entitled to the
balance of the amount still due to him. In default of primary beneficiaries, the amount shall be paid to his legal
heirs.
To grant respondent these benefits does not equate to double retirement, as GSIS mistakenly claims. Since
respondent has been declared ineligible to retire under R.A. No. 910, GSIS should simply apply the proper
retirement law to respondents claim, in substitution of R.A. No. 910. In this way, GSIS would be faithful to its
mandate to administer retirement laws in the spirit in which they have been enacted, i.e., to provide retirees the
wherewithal to live a life of relative comfort and security after years of service to the government. Respondent
will not receive --- and GSIS is under no obligation to give him --- more than what is due him under the proper
retirement law.
It must be emphasized that P.D. No. 1146 specifically mandates that a retiree is entitled to monthly pension for
life. As this Court previously held:
Considering the mandatory salary deductions from the government employee, the government pensions do not
constitute mere gratuity but form part of compensation.
In a pension plan where employee participation is mandatory, the prevailing view is that employees have
contractual or vested rights in the pension where the pension is part of the terms of employment. The reason
for providing retirement benefits is to compensate service to the government. Retirement benefits to
government employees are part of emolument to encourage and retain qualified employees in the government
Page 53 of 79

service. Retirement benefits to government employees reward them for giving the best years of their lives in
the service of their country.
Thus, where the employee retires and meets the eligibility requirements, he acquires a vested right to benefits
that is protected by the due process clause. Retirees enjoy a protected property interest whenever they acquire
a right to immediate payment under pre-existing law. Thus, a pensioner acquires a vested right to benefits that
have become due as provided under the terms of the public employees pension statute. No law can deprive
such person of his pension rights without due process of law, that is, without notice and opportunity to be
heard.28
It must also be underscored that GSIS itself allowed respondent to retire under R.A. No. 910, following
jurisprudence laid down by this Court.
One could hardly fault respondent, though a seasoned lawyer, for relying on petitioners interpretation of the
pertinent retirement laws, considering that the latter is tasked to administer the governments retirement
system. He had the right to assume that GSIS personnel knew what they were doing.
Since the change in circumstances was through no fault of respondent, he cannot be prejudiced by the
same.1avvphi1 His right to receive monthly pension from the government cannot be jeopardized by a new
interpretation of the law.
GSIS argument that respondent has already been enormously benefited under R.A. No. 910 misses the point.
Retirement benefits are a form of reward for an employees loyalty and service to the employer, and are
intended to help the employee enjoy the remaining years of his life, lessening the burden of having to worry
about his financial support or upkeep. A pension partakes of the nature of "retained wages" of the retiree for a
dual purpose: to entice competent people to enter the government service; and to permit them to retire from
the service with relative security, not only for those who have retained their vigor, but more so for those who
have been incapacitated by illness or accident.29
Surely, giving respondent what is due him under the law is not unjust enrichment.
As to GSIS contention that what respondent seeks is conversion of his retirement mode, which is prohibited
under R.A. No. 8291, the Court agrees with the CA that this is not a case of conversion within the
contemplation of the law. The conversion under the law is one that is voluntary, a choice to be made by the
retiree. Here, respondent had no choice but to look for another law under which to claim his pension benefits
because the DBM had decided not to release the funds needed to continue payment of his monthly pension.
Respondent himself admitted that, if the DBM had not suspended the payment of his pension, he would not
have sought any other law under which to receive his benefits. The necessity to "convert" was not a voluntary
choice of respondent but a circumstance forced upon him by the government itself.
Finally, GSIS would like this Court to believe that because it has returned respondents premium contributions,
it is now legally impossible for it to comply with the CAs directive.
Given the fact that respondent is ineligible to retire under R.A. No. 910, the refund by GSIS of respondents
premium payments was erroneous. Hence, GSIS can demand the return of the erroneous payment or it may
opt to deduct the amount earlier received by respondent from the benefits which he will receive in the future.
Considering its expertise on the matter, GSIS can device a scheme that will facilitate either the reimbursement
or the deduction in the most cost-efficient and beneficial manner.
The foregoing disquisition draws even greater force from subsequent developments. While this case was
pending, the Congress enacted Republic Act No. 10071,30 the Prosecution Service Act of 2010. On April 8,
Page 54 of 79

2010, it lapsed into law without the signature of the President,31 pursuant to Article VI, Section 27(1) of the
Constitution.32
Section 24 of R.A. No. 10071 provides:
Section 24. Retroactivity. - The benefits mentioned in Sections 14 and 16 hereof shall be granted to all those
who retired prior to the effectivity of this Act.
By virtue of this express provision, respondent is covered by R.A. No. 10071. In addition, he is now entitled to
avail of the benefits provided by Section 23, that "all pension benefits of retired prosecutors of the National
Prosecution Service shall be automatically increased whenever there is an increase in the salary and
allowance of the same position from which he retired."
Respondent, as former Chief State Prosecutor, albeit the position has been renamed "Prosecutor
General,"33should enjoy the same retirement benefits as the Presiding Justice of the CA, pursuant to Section
14 of R.A. No. 10071, to wit:
Section 14. Qualifications, Rank and Appointment of the Prosecutor General. - The Prosecutor General shall
have the same qualifications for appointment, rank, category, prerogatives, salary grade and salaries,
allowances, emoluments, and other privileges, shall be subject to the same inhibitions and disqualifications,
and shall enjoy the same retirement and other benefits as those of the Presiding Justice of the Court of
Appeals and shall be appointed by the President.34
Furthermore, respondent should also benefit from the application of Section 16 of the law, which states:
Section 16. Qualifications, Ranks, and Appointments of Prosecutors, and other Prosecution Officers. x x x.
Any increase after the approval of this Act in the salaries, allowances or retirement benefits or any upgrading of
the grades or levels thereof of any or all of the Justices or Judges referred to herein to whom said emoluments
are assimilated shall apply to the corresponding prosecutors.
Lastly, and most importantly, by explicit fiat of R.A. No. 10071, members of the National Prosecution Service
have been granted the retirement benefits under R.A. No. 910, to wit:
Section 25. Applicability. - All benefits heretofore extended under Republic Act No. 910, as amended, and all
other benefits that may be extended by the way of amendment thereto shall likewise be given to the
prosecutors covered by this Act.
Hence, from the time of the effectivity of R.A. No. 10071, respondent should be entitled to receive retirement
benefits granted under R.A. No. 910.
Consequently, GSIS should compute respondents retirement benefits from the time the same were withheld
until April 7, 2010 in accordance with P.D. No. 1146; and his retirement benefits from April 8, 2010 onwards in
accordance with R.A. No. 910.
A final note. The Court is dismayed at the cavalier manner in which GSIS handled respondents claims,
keeping respondent in the dark as to the real status of his retirement benefits for so long. That the agency
tasked with administering the benefits of retired government employees could so unreasonably treat one of its
beneficiaries, one who faithfully served our people for over 40 years, is appalling. It is well to remind GSIS of
its mandate to promote the efficiency and welfare of the employees of our government, and to perform its tasks
not only with competence and proficiency but with genuine compassion and concern.

Page 55 of 79

WHEREFORE, the foregoing premises considered, the Decision dated October 28, 2008 and the Resolution
dated February 18, 2009 of the Court of Appeals in CA-G.R. SP No. 101811 are hereby AFFIRMED WITH
MODIFICATION. Government Service Insurance System is ORDERED to (1) pay respondents retirement
benefits in accordance with P.D. No. 1146, subject to deductions, if any, computed from the time the same
were withheld until April 7, 2010; and (2) pay respondents retirement benefits in accordance with R.A. No.
910, computed from April 8, 2010 onwards.
In order that respondent may not be further deprived of his monthly pension benefits, this Decision is
IMMEDIATELY EXECUTORY.
SO ORDERED.

Page 56 of 79

Republic of the Philippines


SUPREME COURT
Manila
EN BANC

G.R. No. 97412 July 12, 1994


EASTERN SHIPPING LINES, INC., petitioner,
vs.
HON. COURT OF APPEALS AND MERCANTILE INSURANCE COMPANY, INC., respondents.
Alojada & Garcia and Jimenea, Dala & Zaragoza for petitoner.
Zapa Law Office for private respondent.

VITUG, J.:
The issues, albeit not completely novel, are: (a) whether or not a claim for damage sustained on a shipment of
goods can be a solidary, or joint and several, liability of the common carrier, the arrastre operator and the
customs broker; (b) whether the payment of legal interest on an award for loss or damage is to be computed
from the time the complaint is filed or from the date the decision appealed from is rendered; and (c) whether
the applicable rate of interest, referred to above, is twelve percent (12%) or six percent (6%).
The findings of the court a quo, adopted by the Court of Appeals, on the antecedent and undisputed facts that
have led to the controversy are hereunder reproduced:
This is an action against defendants shipping company, arrastre operator and broker-forwarder
for damages sustained by a shipment while in defendants' custody, filed by the insurersubrogee who paid the consignee the value of such losses/damages.
On December 4, 1981, two fiber drums of riboflavin were shipped from Yokohama, Japan for
delivery vessel "SS EASTERN COMET" owned by defendant Eastern Shipping Lines under Bill
of Lading
No. YMA-8 (Exh. B). The shipment was insured under plaintiff's Marine Insurance Policy No.
81/01177 for P36,382,466.38.
Upon arrival of the shipment in Manila on December 12, 1981, it was discharged unto the
custody of defendant Metro Port Service, Inc. The latter excepted to one drum, said to be in bad
order, which damage was unknown to plaintiff.
On January 7, 1982 defendant Allied Brokerage Corporation received the shipment from
defendant Metro Port Service, Inc., one drum opened and without seal (per "Request for Bad
Order Survey." Exh. D).
On January 8 and 14, 1982, defendant Allied Brokerage Corporation made deliveries of the
shipment to the consignee's warehouse. The latter excepted to one drum which contained
spillages, while the rest of the contents was adulterated/fake (per "Bad Order Waybill" No.
10649, Exh. E).
Page 57 of 79

Plaintiff contended that due to the losses/damage sustained by said drum, the consignee
suffered losses totaling P19,032.95, due to the fault and negligence of defendants. Claims were
presented against defendants who failed and refused to pay the same (Exhs. H, I, J, K, L).
As a consequence of the losses sustained, plaintiff was compelled to pay the consignee
P19,032.95 under the aforestated marine insurance policy, so that it became subrogated to all
the rights of action of said consignee against defendants (per "Form of Subrogation", "Release"
and Philbanking check, Exhs. M, N, and O). (pp. 85-86, Rollo.)
There were, to be sure, other factual issues that confronted both courts. Here, the appellate court said:
Defendants filed their respective answers, traversing the material allegations of the complaint
contending that: As for defendant Eastern Shipping it alleged that the shipment was discharged
in good order from the vessel unto the custody of Metro Port Service so that any damage/losses
incurred after the shipment was incurred after the shipment was turned over to the latter, is no
longer its liability (p. 17, Record); Metroport averred that although subject shipment was
discharged unto its custody, portion of the same was already in bad order (p. 11, Record); Allied
Brokerage alleged that plaintiff has no cause of action against it, not having negligent or at fault
for the shipment was already in damage and bad order condition when received by it, but
nonetheless, it still exercised extra ordinary care and diligence in the handling/delivery of the
cargo to consignee in the same condition shipment was received by it.
From the evidence the court found the following:
The issues are:
1. Whether or not the shipment sustained losses/damages;
2. Whether or not these losses/damages were sustained while in the custody of
defendants (in whose respective custody, if determinable);
3. Whether or not defendant(s) should be held liable for the losses/damages (see
plaintiff's pre-Trial Brief, Records, p. 34; Allied's pre-Trial Brief, adopting plaintiff's
Records, p. 38).
As to the first issue, there can be no doubt that the shipment sustained
losses/damages. The two drums were shipped in good order and condition, as
clearly shown by the Bill of Lading and Commercial Invoice which do not indicate
any damages drum that was shipped (Exhs. B and C). But when on December
12, 1981 the shipment was delivered to defendant Metro Port Service, Inc., it
excepted to one drum in bad order.
Correspondingly, as to the second issue, it follows that the losses/damages were
sustained while in the respective and/or successive custody and possession of
defendants carrier (Eastern), arrastre operator (Metro Port) and broker (Allied
Brokerage). This becomes evident when the Marine Cargo Survey Report (Exh.
G), with its "Additional Survey Notes", are considered. In the latter notes, it is
stated that when the shipment was "landed on vessel" to dock of Pier # 15, South
Harbor, Manila on December 12, 1981, it was observed that "one (1) fiber drum
(was) in damaged condition, covered by the vessel's Agent's Bad Order Tally
Sheet No. 86427." The report further states that when defendant Allied
Brokerage withdrew the shipment from defendant arrastre operator's custody on
January 7, 1982, one drum was found opened without seal, cello bag partly torn
Page 58 of 79

but contents intact. Net unrecovered spillages was


15 kgs. The report went on to state that when the drums reached the consignee,
one drum was found with adulterated/faked contents. It is obvious, therefore, that
these losses/damages occurred before the shipment reached the consignee
while under the successive custodies of defendants. Under Art. 1737 of the New
Civil Code, the common carrier's duty to observe extraordinary diligence in the
vigilance of goods remains in full force and effect even if the goods are
temporarily unloaded and stored in transit in the warehouse of the carrier at the
place of destination, until the consignee has been advised and has had
reasonable opportunity to remove or dispose of the goods (Art. 1738, NCC).
Defendant Eastern Shipping's own exhibit, the "Turn-Over Survey of Bad Order
Cargoes" (Exhs. 3-Eastern) states that on December 12, 1981 one drum was
found "open".
and thus held:
WHEREFORE, PREMISES CONSIDERED, judgment is hereby rendered:
A. Ordering defendants to pay plaintiff, jointly and severally:
1. The amount of P19,032.95, with the present legal interest of 12% per
annum from October 1, 1982, the date of filing of this complaints, until fully paid
(the liability of defendant Eastern Shipping, Inc. shall not exceed US$500 per
case or the CIF value of the loss, whichever is lesser, while the liability of
defendant Metro Port Service, Inc. shall be to the extent of the actual invoice
value of each package, crate box or container in no case to exceed P5,000.00
each, pursuant to Section 6.01 of the Management Contract);
2. P3,000.00 as attorney's fees, and
3. Costs.
B. Dismissing the counterclaims and crossclaim of
defendant/cross-claimant Allied Brokerage Corporation.
SO ORDERED. (p. 207, Record).
Dissatisfied, defendant's recourse to US.
The appeal is devoid of merit.
After a careful scrutiny of the evidence on record. We find that the conclusion drawn therefrom
is correct. As there is sufficient evidence that the shipment sustained damage while in the
successive possession of appellants, and therefore they are liable to the appellee, as subrogee
for the amount it paid to the consignee. (pp. 87-89, Rollo.)
The Court of Appeals thus affirmed in toto the judgment of the court
a quo.
In this petition, Eastern Shipping Lines, Inc., the common carrier, attributes error and grave abuse of discretion
on the part of the appellate court when

Page 59 of 79

I. IT HELD PETITIONER CARRIER JOINTLY AND SEVERALLY LIABLE WITH THE


ARRASTRE OPERATOR AND CUSTOMS BROKER FOR THE CLAIM OF PRIVATE
RESPONDENT AS GRANTED IN THE QUESTIONED DECISION;
II. IT HELD THAT THE GRANT OF INTEREST ON THE CLAIM OF PRIVATE RESPONDENT
SHOULD COMMENCE FROM THE DATE OF THE FILING OF THE COMPLAINT AT THE
RATE OF TWELVE PERCENT PER ANNUM INSTEAD OF FROM THE DATE OF THE
DECISION OF THE TRIAL COURT AND ONLY AT THE RATE OF SIX PERCENT PER
ANNUM, PRIVATE RESPONDENT'S CLAIM BEING INDISPUTABLY UNLIQUIDATED.
The petition is, in part, granted.
In this decision, we have begun by saying that the questions raised by petitioner carrier are not all that novel.
Indeed, we do have a fairly good number of previous decisions this Court can merely tack to.
The common carrier's duty to observe the requisite diligence in the shipment of goods lasts from the time the
articles are surrendered to or unconditionally placed in the possession of, and received by, the carrier for
transportation until delivered to, or until the lapse of a reasonable time for their acceptance by, the person
entitled to receive them (Arts. 1736-1738, Civil Code; Ganzon vs. Court of Appeals, 161 SCRA 646; Kui Bai vs.
Dollar Steamship Lines, 52 Phil. 863). When the goods shipped either are lost or arrive in damaged condition,
a presumption arises against the carrier of its failure to observe that diligence, and there need not be an
express finding of negligence to hold it liable (Art. 1735, Civil Code; Philippine National Railways vs. Court of
Appeals, 139 SCRA 87; Metro Port Service vs. Court of Appeals, 131 SCRA 365). There are, of course,
exceptional cases when such presumption of fault is not observed but these cases, enumerated in Article
1734 1 of the Civil Code, are exclusive, not one of which can be applied to this case.
The question of charging both the carrier and the arrastre operator with the obligation of properly delivering the
goods to the consignee has, too, been passed upon by the Court. In Fireman's Fund Insurance vs. Metro Port
Services (182 SCRA 455), we have explained, in holding the carrier and the arrastre operator liable
in solidum,thus:
The legal relationship between the consignee and the arrastre operator is akin to that of a
depositor and warehouseman (Lua Kian v. Manila Railroad Co., 19 SCRA 5 [1967]. The
relationship between the consignee and the common carrier is similar to that of the consignee
and the arrastre operator (Northern Motors, Inc. v. Prince Line, et al., 107 Phil. 253 [1960]).
Since it is the duty of the ARRASTRE to take good care of the goods that are in its custody and
to deliver them in good condition to the consignee, such responsibility also devolves upon the
CARRIER. Both the ARRASTRE and the CARRIER are therefore charged with the obligation to
deliver the goods in good condition to the consignee.
We do not, of course, imply by the above pronouncement that the arrastre operator and the customs broker
are themselves always and necessarily liable solidarily with the carrier, or vice-versa, nor that attendant facts in
a given case may not vary the rule. The instant petition has been brought solely by Eastern Shipping Lines,
which, being the carrier and not having been able to rebut the presumption of fault, is, in any event, to be held
liable in this particular case. A factual finding of both the court a quo and the appellate court, we take note, is
that "there is sufficient evidence that the shipment sustained damage while in the successive possession of
appellants" (the herein petitioner among them). Accordingly, the liability imposed on Eastern Shipping Lines,
Inc., the sole petitioner in this case, is inevitable regardless of whether there are others solidarily liable with it.
It is over the issue of legal interest adjudged by the appellate court that deserves more than just a passing
remark.
Let us first see a chronological recitation of the major rulings of this Court:
Page 60 of 79

The early case of Malayan Insurance Co., Inc., vs. Manila Port
Service, 2 decided 3 on 15 May 1969, involved a suit for recovery of money arising out of short deliveries and
pilferage of goods. In this case, appellee Malayan Insurance (the plaintiff in the lower court) averred in its
complaint that the total amount of its claim for the value of the undelivered goods amounted to P3,947.20. This
demand, however, was neither established in its totality nor definitely ascertained. In the stipulation of facts
later entered into by the parties, in lieu of proof, the amount of P1,447.51 was agreed upon. The trial court
rendered judgment ordering the appellants (defendants) Manila Port Service and Manila Railroad Company to
pay appellee Malayan Insurance the sum of P1,447.51 with legal interest thereon from the date the complaint
was filed on 28 December 1962 until full payment thereof. The appellants then assailed, inter alia, the award of
legal interest. In sustaining the appellants, this Court ruled:
Interest upon an obligation which calls for the payment of money, absent a stipulation, is the
legal rate. Such interest normally is allowable from the date of demand, judicial or extrajudicial.
The trial court opted for judicial demand as the starting point.
But then upon the provisions of Article 2213 of the Civil Code, interest "cannot be recovered
upon unliquidated claims or damages, except when the demand can be established with
reasonable certainty." And as was held by this Court in Rivera vs. Perez, 4 L-6998, February 29,
1956, if the suit were for damages, "unliquidated and not known until definitely ascertained,
assessed and determined by the courts after proof (Montilla c. Corporacion de P.P. Agustinos,
25 Phil. 447; Lichauco v. Guzman,
38 Phil. 302)," then, interest "should be from the date of the decision." (Emphasis supplied)
The case of Reformina vs. Tomol, 5 rendered on 11 October 1985, was for "Recovery of Damages for Injury to
Person and Loss of Property." After trial, the lower court decreed:
WHEREFORE, judgment is hereby rendered in favor of the plaintiffs and third party defendants
and against the defendants and third party plaintiffs as follows:
Ordering defendants and third party plaintiffs Shell and Michael, Incorporated to pay jointly and
severally the following persons:
xxx xxx xxx
(g) Plaintiffs Pacita F. Reformina and Francisco Reformina the sum of P131,084.00 which is the
value of the boat F B Pacita III together with its accessories, fishing gear and equipment minus
P80,000.00 which is the value of the insurance recovered and the amount of P10,000.00 a
month as the estimated monthly loss suffered by them as a result of the fire of May 6, 1969 up
to the time they are actually paid or already the total sum of P370,000.00 as of June 4, 1972
with legal interest from the filing of the complaint until paid and to pay attorney's fees of
P5,000.00 with costs against defendants and third party plaintiffs. (Emphasis supplied.)
On appeal to the Court of Appeals, the latter modified the amount of damages awarded but sustained
the trial court in adjudging legal interest from the filing of the complaint until fully paid. When the
appellate court's decision became final, the case was remanded to the lower court for execution, and
this was when the trial court issued its assailed resolution which applied the 6% interest per
annum prescribed in Article 2209 of the Civil Code. In their petition for review on certiorari, the
petitioners contended that Central Bank Circular
No. 416, providing thus
By virtue of the authority granted to it under Section 1 of Act 2655, as amended, Monetary
Board in its Resolution No. 1622 dated July 29, 1974, has prescribed that the rate of interest for
the loan, or forbearance of any money, goods, or credits and the rate allowed in judgments, in
Page 61 of 79

the absence of express contract as to such rate of interest, shall be twelve (12%) percent per
annum. This Circular shall take effect immediately. (Emphasis found in the text)
should have, instead, been applied. This Court 6 ruled:
The judgments spoken of and referred to are judgments in litigations involving loans or
forbearance of any money, goods or credits. Any other kind of monetary judgment which has
nothing to do with, nor involving loans or forbearance of any money, goods or credits does not
fall within the coverage of the said law for it is not within the ambit of the authority granted to the
Central Bank.
xxx xxx xxx
Coming to the case at bar, the decision herein sought to be executed is one rendered in an
Action for Damages for injury to persons and loss of property and does not involve any loan,
much less forbearances of any money, goods or credits. As correctly argued by the private
respondents, the law applicable to the said case is Article 2209 of the New Civil Code which
reads
Art. 2209. If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no stipulation to
the contrary, shall be the payment of interest agreed upon, and in the absence of
stipulation, the legal interest which is six percent per annum.
The above rule was reiterated in Philippine Rabbit Bus Lines, Inc., v. Cruz, 7 promulgated on 28 July 1986. The
case was for damages occasioned by an injury to person and loss of property. The trial court awarded private
respondent Pedro Manabat actual and compensatory damages in the amount of P72,500.00 with legal interest
thereon from the filing of the complaint until fully paid. Relying on the Reformina v. Tomol case, this
Court 8 modified the interest award from 12% to 6% interest per annum but sustained the time computation
thereof, i.e., from the filing of the complaint until fully paid.
In Nakpil and Sons vs. Court of Appeals, 9 the trial court, in an action for the recovery of damages arising from
the collapse of a building, ordered,
inter alia, the "defendant United Construction Co., Inc. (one of the petitioners)
. . . to pay the plaintiff, . . . , the sum of P989,335.68 with interest at the legal rate from November 29, 1968, the
date of the filing of the complaint until full payment . . . ." Save from the modification of the amount granted by
the lower court, the Court of Appeals sustained the trial court's decision. When taken to this Court for review,
the case, on 03 October 1986, was decided, thus:
WHEREFORE, the decision appealed from is hereby MODIFIED and considering the special
and environmental circumstances of this case, we deem it reasonable to render a decision
imposing, as We do hereby impose, upon the defendant and the third-party defendants (with the
exception of Roman Ozaeta) a solidary (Art. 1723, Civil Code, Supra.
p. 10) indemnity in favor of the Philippine Bar Association of FIVE MILLION (P5,000,000.00)
Pesos to cover all damages (with the exception to attorney's fees) occasioned by the loss of the
building (including interest charges and lost rentals) and an additional ONE HUNDRED
THOUSAND (P100,000.00) Pesos as and for attorney's fees, the total sum being payable upon
the finality of this decision. Upon failure to pay on such finality, twelve (12%) per cent interest
per annum shall be imposed upon aforementioned amounts from finality until paid. Solidary
costs against the defendant and third-party defendants (Except Roman Ozaeta). (Emphasis
supplied)

Page 62 of 79

A motion for reconsideration was filed by United Construction, contending that "the interest of twelve
(12%) per cent per annum imposed on the total amount of the monetary award was in contravention of
law." The Court 10 ruled out the applicability of the Reformina and Philippine Rabbit Bus Lines cases
and, in its resolution of 15 April 1988, it explained:
There should be no dispute that the imposition of 12% interest pursuant to Central Bank Circular
No. 416 . . . is applicable only in the following: (1) loans; (2) forbearance of any money, goods or
credit; and
(3) rate allowed in judgments (judgments spoken of refer to judgments involving loans or
forbearance of any money, goods or credits. (Philippine Rabbit Bus Lines Inc. v. Cruz, 143
SCRA 160-161 [1986]; Reformina v. Tomol, Jr., 139 SCRA 260 [1985]). It is true that in the
instant case, there is neither a loan or a forbearance, but then no interest is actually imposed
provided the sums referred to in the judgment are paid upon the finality of the judgment. It is
delay in the payment of such final judgment, that will cause the imposition of the interest.
It will be noted that in the cases already adverted to, the rate of interest is imposed on the total
sum, from the filing of the complaint until paid; in other words, as part of the judgment for
damages. Clearly, they are not applicable to the instant case. (Emphasis supplied.)
The subsequent case of American Express International, Inc., vs. Intermediate Appellate Court 11 was a
petition for review on certiorari from the decision, dated 27 February 1985, of the then Intermediate Appellate
Court reducing the amount of moral and exemplary damages awarded by the trial court, to P240,000.00 and
P100,000.00, respectively, and its resolution, dated 29 April 1985, restoring the amount of damages awarded
by the trial court, i.e., P2,000,000.00 as moral damages and P400,000.00 as exemplary damages with interest
thereon at 12% per annum from notice of judgment, plus costs of suit. In a decision of 09 November 1988, this
Court, while recognizing the right of the private respondent to recover damages, held the award, however, for
moral damages by the trial court, later sustained by the IAC, to be inconceivably large. The Court 12 thus set
aside the decision of the appellate court and rendered a new one, "ordering the petitioner to pay private
respondent the sum of One Hundred Thousand (P100,000.00) Pesos as moral damages, with
six (6%) percent interest thereon computed from the finality of this decision until paid. (Emphasis supplied)
Reformina came into fore again in the 21 February 1989 case of Florendo v. Ruiz 13 which arose from a breach
of employment contract. For having been illegally dismissed, the petitioner was awarded by the trial court
moral and exemplary damages without, however, providing any legal interest thereon. When the decision was
appealed to the Court of Appeals, the latter held:
WHEREFORE, except as modified hereinabove the decision of the CFI of Negros Oriental
dated October 31, 1972 is affirmed in all respects, with the modification that defendantsappellants, except defendant-appellant Merton Munn, are ordered to pay, jointly and severally,
the amounts stated in the dispositive portion of the decision, including the sum of P1,400.00 in
concept of compensatory damages, with interest at the legal rate from the date of the filing of
the complaint until fully paid(Emphasis supplied.)
The petition for review to this Court was denied. The records were thereupon transmitted to the trial
court, and an entry of judgment was made. The writ of execution issued by the trial court directed that
only compensatory damages should earn interest at 6% per annum from the date of the filing of the
complaint. Ascribing grave abuse of discretion on the part of the trial judge, a petition
for certiorari assailed the said order. This Court said:
. . . , it is to be noted that the Court of Appeals ordered the payment of interest "at the legal
rate" from the time of the filing of the complaint. . . Said circular [Central Bank Circular No. 416]
does not apply to actions based on a breach of employment contract like the case at bar.
(Emphasis supplied)
Page 63 of 79

The Court reiterated that the 6% interest per annum on the damages should be computed from the time
the complaint was filed until the amount is fully paid.
Quite recently, the Court had another occasion to rule on the matter. National Power Corporation
vs. Angas, 14decided on 08 May 1992, involved the expropriation of certain parcels of land. After conducting a
hearing on the complaints for eminent domain, the trial court ordered the petitioner to pay the private
respondents certain sums of money as just compensation for their lands so expropriated "with legal interest
thereon . . . until fully paid." Again, in applying the 6% legal interest per annum under the Civil Code, the
Court 15 declared:
. . . , (T)he transaction involved is clearly not a loan or forbearance of money, goods or credits
but expropriation of certain parcels of land for a public purpose, the payment of which is without
stipulation regarding interest, and the interest adjudged by the trial court is in the nature of
indemnity for damages. The legal interest required to be paid on the amount of just
compensation for the properties expropriated is manifestly in the form of indemnity for damages
for the delay in the payment thereof. Therefore, since the kind of interest involved in the joint
judgment of the lower court sought to be enforced in this case is interest by way of damages,
and not by way of earnings from loans, etc. Art. 2209 of the Civil Code shall apply.
Concededly, there have been seeming variances in the above holdings. The cases can perhaps be classified
into two groups according to the similarity of the issues involved and the corresponding rulings rendered by the
court. The "first group" would consist of the cases of Reformina v. Tomol (1985), Philippine Rabbit Bus Lines
v. Cruz(1986), Florendo v. Ruiz (1989)
and National Power Corporation v. Angas (1992). In the "second group" would be Malayan Insurance
Company v.Manila Port Service (1969), Nakpil and Sons v. Court of Appeals (1988), and American Express
International v.Intermediate Appellate Court (1988).
In the "first group", the basic issue focuses on the application of either the 6% (under the Civil Code) or 12%
(under the Central Bank Circular) interest per annum. It is easily discernible in these cases that there has been
a consistent holding that the Central Bank Circular imposing the 12% interest per annum applies only to loans
or forbearance 16 of money, goods or credits, as well as to judgments involving such loan or forbearance of
money, goods or credits, and that the 6% interest under the Civil Code governs when the transaction involves
the payment of indemnities in the concept of damage arising from the breach or a delay in the performance of
obligations in general. Observe, too, that in these cases, a common time frame in the computation of the 6%
interest per annum has been applied, i.e., from the time the complaint is filed until the adjudged amount is fully
paid.
The "second group", did not alter the pronounced rule on the application of the 6% or 12% interest per
annum, 17depending on whether or not the amount involved is a loan or forbearance, on the one hand, or one
of indemnity for damage, on the other hand. Unlike, however, the "first group" which remained consistent in
holding that the running of the legal interest should be from the time of the filing of the complaint until fully paid,
the "second group" varied on the commencement of the running of the legal interest.
Malayan held that the amount awarded should bear legal interest from the date of the decision of the court a
quo,explaining that "if the suit were for damages, 'unliquidated and not known until definitely ascertained,
assessed and determined by the courts after proof,' then, interest 'should be from the date of the
decision.'" American Express International v. IAC, introduced a different time frame for reckoning the 6%
interest by ordering it to be "computed from the finality of (the) decision until paid." The Nakpil and Sons case
ruled that 12% interest per annum should be imposed from the finality of the decision until the judgment
amount is paid.
The ostensible discord is not difficult to explain. The factual circumstances may have called for different
applications, guided by the rule that the courts are vested with discretion, depending on the equities of each
Page 64 of 79

case, on the award of interest. Nonetheless, it may not be unwise, by way of clarification and reconciliation, to
suggest the following rules of thumb for future guidance.
I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts, delicts or quasi-delicts 18 is
breached, the contravenor can be held liable for damages. 19 The provisions under Title XVIII on "Damages" of
the Civil Code govern in determining the measure of recoverable damages. 20
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in
writing. 21 Furthermore, the interest due shall itself earn legal interest from the time it is judicially
demanded. 22 In the absence of stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 23 of the
Civil Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the amount
of damages awarded may be imposed at the discretion of the court 24 at the rate of 6% per annum. 25 No
interest, however, shall be adjudged on unliquidated claims or damages except when or until the demand can
be established with reasonable certainty. 26 Accordingly, where the demand is established with reasonable
certainty, the interest shall begin to run from the time the claim is made judicially or extrajudicially (Art. 1169,
Civil Code) but when such certainty cannot be so reasonably established at the time the demand is made, the
interest shall begin to run only from the date the judgment of the court is made (at which time the quantification
of damages may be deemed to have been reasonably ascertained). The actual base for the computation of
legal interest shall, in any case, be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of legal
interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum from such
finality until its satisfaction, this interim period being deemed to be by then an equivalent to a forbearance of
credit.
WHEREFORE, the petition is partly GRANTED. The appealed decision is AFFIRMED with the
MODIFICATION that the legal interest to be paid is SIX PERCENT (6%) on the amount due computed from the
decision, dated
03 February 1988, of the court a quo. A TWELVE PERCENT (12%) interest, in lieu of SIX PERCENT (6%),
shall be imposed on such amount upon finality of this decision until the payment thereof.
SO ORDERED.

Page 65 of 79

Republic of the Philippines


SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 190755

November 24, 2010

LAND BANK OF THE PHILIPPINES, Petitioner,


vs.
ALFREDO ONG, Respondent.
DECISION
VELASCO, JR., J.:
This is an appeal from the October 20, 2009 Decision of the Court of Appeals (CA) in CA-G.R. CR-CV No.
84445 entitled Alfredo Ong v. Land Bank of the Philippines, which affirmed the Decision of the Regional Trial
Court (RTC), Branch 17 in Tabaco City.
The Facts
On March 18, 1996, spouses Johnson and Evangeline Sy secured a loan from Land Bank Legazpi City in the
amount of PhP 16 million. The loan was secured by three (3) residential lots, five (5) cargo trucks, and a
warehouse. Under the loan agreement, PhP 6 million of the loan would be short-term and would mature on
February 28, 1997, while the balance of PhP 10 million would be payable in seven (7) years. The Notice of
Loan Approval dated February 22, 1996 contained an acceleration clause wherein any default in payment of
amortizations or other charges would accelerate the maturity of the loan. 1
Subsequently, however, the Spouses Sy found they could no longer pay their loan. On December 9, 1996,
they sold three (3) of their mortgaged parcels of land for PhP 150,000 to Angelina Gloria Ong, Evangelines
mother, under a Deed of Sale with Assumption of Mortgage. The relevant portion of the document 2 is quoted
as follows:
WHEREAS, we are no longer in a position to settle our obligation with the bank;
NOW THEREFORE, for and in consideration of the sum of ONE HUNDRED FIFTY THOUSAND PESOS
(P150,000.00) Philippine Currency, we hereby these presents SELL, CEDE, TRANSFER and CONVEY, by
way of sale unto ANGELINA GLORIA ONG, also of legal age, Filipino citizen, married to Alfredo Ong, and also
a resident of Tabaco, Albay, Philippines, their heirs and assigns, the above-mentioned debt with the said LAND
BANK OF THE PHILIPPINES, and by reason hereof they can make the necessary representation with the
bank for the proper restructuring of the loan with the said bank in their favor;
That as soon as our obligation has been duly settled, the bank is authorized to release the mortgage in favor of
the vendees and for this purpose VENDEES can register this instrument with the Register of Deeds for the
issuance of the titles already in their names.
IN WITNESS WHEREOF, we have hereunto affixed our signatures this 9th day of December 1996 at Tabaco,
Albay, Philippines.
(signed)
EVANGELINE O. SY

(signed)
JOHNSON B. SY
Page 66 of 79

Vendor

Vendor

Evangelines father, petitioner Alfredo Ong, later went to Land Bank to inform it about the sale and assumption
of mortgage.3 Atty. Edna Hingco, the Legazpi City Land Bank Branch Head, told Alfredo and his counsel Atty.
Ireneo de Lumen that there was nothing wrong with the agreement with the Spouses Sy but provided them
with requirements for the assumption of mortgage. They were also told that Alfredo should pay part of the
principal which was computed at PhP 750,000 and to update due or accrued interests on the promissory notes
so that Atty. Hingco could easily approve the assumption of mortgage. Two weeks later, Alfredo issued a
check for PhP 750,000 and personally gave it to Atty. Hingco. A receipt was issued for his payment. He also
submitted the other documents required by Land Bank, such as financial statements for 1994 and 1995. Atty.
Hingco then informed Alfredo that the certificate of title of the Spouses Sy would be transferred in his name but
this never materialized. No notice of transfer was sent to him.4
Alfredo later found out that his application for assumption of mortgage was not approved by Land Bank. The
bank learned from its credit investigation report that the Ongs had a real estate mortgage in the amount of PhP
18,300,000 with another bank that was past due. Alfredo claimed that this was fully paid later on. Nonetheless,
Land Bank foreclosed the mortgage of the Spouses Sy after several months. Alfredo only learned of the
foreclosure when he saw the subject mortgage properties included in a Notice of Foreclosure of Mortgage and
Auction Sale at the RTC in Tabaco, Albay. Alfredos other counsel, Atty. Madrilejos, subsequently talked to
Land Banks lawyer and was told that the PhP 750,000 he paid would be returned to him. 5
On December 12, 1997, Alfredo initiated an action for recovery of sum of money with damages against Land
Bank in Civil Case No. T-1941, as Alfredos payment was not returned by Land Bank. Alfredo maintained that
Land Banks foreclosure without informing him of the denial of his assumption of the mortgage was done in bad
faith. He argued that he was lured into believing that his payment of PhP 750,000 would cause Land Bank to
approve his assumption of the loan of the Spouses Sy and the transfer of the mortgaged properties in his and
his wifes name.6 He also claimed incurring expenses for attorneys fees of PhP 150,000, filing fee of PhP
15,000, and PhP 250,000 in moral damages.7
Testifying for Land Bank, Atty. Hingco claimed during trial that as branch manager she had no authority to
approve loans and could not assure anybody that their assumption of mortgage would be approved. She
testified that the breakdown of Alfredos payment was as follows:
PhP 101,409.59 applied to principal
216,246.56 accrued interests receivable
396,571.77 interests
18,766.10 penalties
16,805.98 accounts receivable
Total:

---------------750,000.00

According to Atty. Hingco, the bank processes an assumption of mortgage as a new loan, since the new
borrower is considered a new client. They used character, capacity, capital, collateral, and conditions in
determining who can qualify to assume a loan. Alfredos proposal to assume the loan, she explained, was
referred to a separate office, the Lending Center. 8
During cross-examination, Atty. Hingco testified that several months after Alfredo made the tender of payment,
she received word that the Lending Center rejected Alfredos loan application. She stated that it was the
Page 67 of 79

Lending Center and not her that should have informed Alfredo about the denial of his and his wifes
assumption of mortgage. She added that although she told Alfredo that the agreement between the spouses
Sy and Alfredo was valid between them and that the bank would accept payments from him, Alfredo did not
pay any further amount so the foreclosure of the loan collaterals ensued. She admitted that Alfredo demanded
the return of the PhP 750,000 but said that there was no written demand before the case against the bank was
filed in court. She said that Alfredo had made the payment of PhP 750,000 even before he applied for the
assumption of mortgage and that the bank received the said amount because the subject account was past
due and demandable; and the Deed of Assumption of Mortgage was not used as the basis for the payment. 9
The Ruling of the Trial Court
The RTC held that the contract approving the assumption of mortgage was not perfected as a result of the
credit investigation conducted on Alfredo. It noted that Alfredo was not even informed of the disapproval of the
assumption of mortgage but was just told that the accounts of the spouses Sy had matured and gone unpaid. It
ruled that under the principle of equity and justice, the bank should return the amount Alfredo had paid with
interest at 12% per annum computed from the filing of the complaint. The RTC further held that Alfredo was
entitled to attorneys fees and litigation expenses for being compelled to litigate. 10
The dispositive portion of the RTC Decision reads:
WHEREFORE, premises considered, a decision is rendered, ordering defendant bank to pay plaintiff, Alfredo
Ong the amount of P750,000.00 with interest at 12% per annum computed from Dec. 12, 1997 and attorneys
fees and litigation expenses of P50,000.00.
Costs against defendant bank.
SO ORDERED.11
The Ruling of the Appellate Court
On appeal, Land Bank faulted the trial court for (1) holding that the payment of PhP 750,000 made by Ong was
one of the requirements for the approval of his proposal to assume the mortgage of the Sy spouses; (2)
erroneously ordering Land Bank to return the amount of PhP 750,000 to Ong on the ground of its failure to
effect novation; and (3) erroneously affirming the award of PhP 50,000 to Ong as attorneys fees and litigation
expenses.
The CA affirmed the RTC Decision.12 It held that Alfredos recourse is not against the Sy spouses. According to
the appellate court, the payment of PhP 750,000 was for the approval of his assumption of mortgage and not
for payment of arrears incurred by the Sy spouses. As such, it ruled that it would be incorrect to consider
Alfredo a third person with no interest in the fulfillment of the obligation under Article 1236 of the Civil Code.
Although Land Bank was not bound by the Deed between Alfredo and the Spouses Sy, the appellate court
found that Alfredo and Land Banks active preparations for Alfredos assumption of mortgage essentially
novated the agreement.
On January 5, 2010, the CA denied Land Banks motion for reconsideration for lack of merit. Hence, Land
Bank appealed to us.
The Issues
I
Whether the Court of Appeals erred in holding that Art. 1236 of the Civil Code does not apply and in
finding that there is no novation.
Page 68 of 79

II
Whether the Court of Appeals misconstrued the evidence and the law when it affirmed the trial court
decisions ordering Land Bank to pay Ong the amount of Php750,000.00 with interest at 12% annum.
III
Whether the Court of Appeals committed reversible error when it affirmed the award of Php50,000.00 to
Ong as attorneys fees and expenses of litigation.
The Ruling of this Court
We affirm with modification the appealed decision.
Recourse is against Land Bank
Land Bank contends that Art. 1236 of the Civil Code backs their claim that Alfredo should have sought
recourse against the Spouses Sy instead of Land Bank. Art. 1236 provides:
The creditor is not bound to accept payment or performance by a third person who has no interest in the
fulfillment of the obligation, unless there is a stipulation to the contrary.
Whoever pays for another may demand from the debtor what he has paid, except that if he paid without the
knowledge or against the will of the debtor, he can recover only insofar as the payment has been beneficial to
the debtor.1avvphi1
We agree with Land Bank on this point as to the first part of paragraph 1 of Art. 1236. Land Bank was not
bound to accept Alfredos payment, since as far as the former was concerned, he did not have an interest in
the payment of the loan of the Spouses Sy. However, in the context of the second part of said paragraph,
Alfredo was not making payment to fulfill the obligation of the Spouses Sy. Alfredo made a conditional payment
so that the properties subject of the Deed of Sale with Assumption of Mortgage would be titled in his name. It is
clear from the records that Land Bank required Alfredo to make payment before his assumption of mortgage
would be approved. He was informed that the certificate of title would be transferred accordingly. He, thus,
made payment not as a debtor but as a prospective mortgagor. But the trial court stated:
[T]he contract was not perfected or consummated because of the adverse finding in the credit investigation
which led to the disapproval of the proposed assumption. There was no evidence presented that plaintiff was
informed of the disapproval. What he received was a letter dated May 22, 1997 informing him that the account
of spouses Sy had matured but there [were] no payments. This was sent even before the conduct of the credit
investigation on June 20, 1997 which led to the disapproval of the proposed assumption of the loans of
spouses Sy.13
Alfredo, as a third person, did not, therefore, have an interest in the fulfillment of the obligation of the Spouses
Sy, since his interest hinged on Land Banks approval of his application, which was denied. The circumstances
of the instant case show that the second paragraph of Art. 1236 does not apply. As Alfredo made the payment
for his own interest and not on behalf of the Spouses Sy, recourse is not against the latter. And as Alfredo was
not paying for another, he cannot demand from the debtors, the Spouses Sy, what he has paid.
Novation of the loan agreement
Land Bank also faults the CA for finding that novation applies to the instant case. It reasons that a substitution
of debtors was made without its consent; thus, it was not bound to recognize the substitution under the rules
on novation.
Page 69 of 79

On the matter of novation, Spouses Benjamin and Agrifina Lim v. M.B. Finance Corporation14 provides the
following discussion:
Novation, in its broad concept, may either be extinctive or modificatory. It is extinctive when an old obligation is
terminated by the creation of a new obligation that takes the place of the former; it is merely modificatory when
the old obligation subsists to the extent it remains compatible with the amendatory agreement. An extinctive
novation results either by changing the object or principal conditions (objective or real), or by substituting the
person of the debtor or subrogating a third person in the rights of the creditor (subjective or personal). Under
this mode, novation would have dual functions one to extinguish an existing obligation, the other to substitute
a new one in its place requiring a conflux of four essential requisites: (1) a previous valid obligation; (2) an
agreement of all parties concerned to a new contract; (3) the extinguishment of the old obligation; and (4) the
birth of a valid new obligation. x x x
In order that an obligation may be extinguished by another which substitutes the same, it is imperative that it
be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible
with each other. The test of incompatibility is whether or not the two obligations can stand together, each one
having its independent existence. x x x (Emphasis supplied.)
Furthermore, Art. 1293 of the Civil Code states:
Novation which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor. Payment by
the new debtor gives him rights mentioned in articles 1236 and 1237.
We do not agree, then, with the CA in holding that there was a novation in the contract between the parties.
Not all the elements of novation were present. Novation must be expressly consented to. Moreover, the
conflicting intention and acts of the parties underscore the absence of any express disclosure or circumstances
with which to deduce a clear and unequivocal intent by the parties to novate the old agreement. 15 Land Bank is
thus correct when it argues that there was no novation in the following:
[W]hether or not Alfredo Ong has an interest in the obligation and payment was made with the knowledge or
consent of Spouses Sy, he may still pay the obligation for the reason that even before he paid the amount of
P750,000.00 on January 31, 1997, the substitution of debtors was already perfected by and between Spouses
Sy and Spouses Ong as evidenced by a Deed of Sale with Assumption of Mortgage executed by them on
December 9, 1996. And since the substitution of debtors was made without the consent of Land Bank a
requirement which is indispensable in order to effect a novation of the obligation, it is therefore not bound to
recognize the substitution of debtors. Land Bank did not intervene in the contract between Spouses Sy and
Spouses Ong and did not expressly give its consent to this substitution. 16
Unjust enrichment
Land Bank maintains that the trial court erroneously applied the principle of equity and justice in ordering it to
return the PhP 750,000 paid by Alfredo. Alfredo was allegedly in bad faith and in estoppel. Land Bank
contends that it enjoyed the presumption of regularity and was in good faith when it accepted Alfredos tender
of PhP 750,000. It reasons that it did not unduly enrich itself at Alfredos expense during the foreclosure of the
mortgaged properties, since it tendered its bid by subtracting PhP 750,000 from the Spouses Sys outstanding
loan obligation. Alfredos recourse then, according to Land Bank, is to have his payment reimbursed by the
Spouses Sy.
We rule that Land Bank is still liable for the return of the PhP 750,000 based on the principle of unjust
enrichment. Land Bank is correct in arguing that it has no obligation as creditor to recognize Alfredo as a
person with interest in the fulfillment of the obligation. But while Land Bank is not bound to accept the
substitution of debtors in the subject real estate mortgage, it is estopped by its action of accepting Alfredos
Page 70 of 79

payment from arguing that it does not have to recognize Alfredo as the new debtor. The elements of estoppel
are:
First, the actor who usually must have knowledge, notice or suspicion of the true facts, communicates
something to another in a misleading way, either by words, conduct or silence; second, the other in fact relies,
and relies reasonably or justifiably, upon that communication; third, the other would be harmed materially if the
actor is later permitted to assert any claim inconsistent with his earlier conduct; and fourth, the actor knows,
expects or foresees that the other would act upon the information given or that a reasonable person in the
actors position would expect or foresee such action.17
By accepting Alfredos payment and keeping silent on the status of Alfredos application, Land Bank misled
Alfredo to believe that he had for all intents and purposes stepped into the shoes of the Spouses Sy.
The defense of Land Bank Legazpi City Branch Manager Atty. Hingco that it was the banks Lending Center
that should have notified Alfredo of his assumption of mortgage disapproval is unavailing. The Lending
Centers lack of notice of disapproval, the Tabaco Branchs silence on the disapproval, and the banks
subsequent actions show a failure of the bank as a whole, first, to notify Alfredo that he is not a recognized
debtor in the eyes of the bank; and second, to apprise him of how and when he could collect on the payment
that the bank no longer had a right to keep.
We turn then on the principle upon which Land Bank must return Alfredos payment. Unjust enrichment exists
"when a person unjustly retains a benefit to the loss of another, or when a person retains money or property of
another against the fundamental principles of justice, equity and good conscience." 18 There is unjust
enrichment under Art. 22 of the Civil Code when (1) a person is unjustly benefited, and (2) such benefit is
derived at the expense of or with damages to another.19
Additionally, unjust enrichment has been applied to actions called accion in rem verso. In order that the accion
in rem verso may prosper, the following conditions must concur: (1) that the defendant has been enriched; (2)
that the plaintiff has suffered a loss; (3) that the enrichment of the defendant is without just or legal ground; and
(4) that the plaintiff has no other action based on contract, quasi-contract, crime, or quasi-delict.20 The principle
of unjust enrichment essentially contemplates payment when there is no duty to pay, and the person who
receives the payment has no right to receive it.21
The principle applies to the parties in the instant case, as, Alfredo, having been deemed disqualified from
assuming the loan, had no duty to pay petitioner bank and the latter had no right to receive it.
Moreover, the Civil Code likewise requires under Art. 19 that "[e]very 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." Land Bank, however, did not even bother to inform Alfredo that it was no longer approving his
assumption of the Spouses Sys mortgage. Yet it acknowledged his interest in the loan when the branch head
of the bank wrote to tell him that his daughters loan had not been paid.22 Land Bank made Alfredo believe that
with the payment of PhP 750,000, he would be able to assume the mortgage of the Spouses Sy. The act of
receiving payment without returning it when demanded is contrary to the adage of giving someone what is due
to him. The outcome of the application would have been different had Land Bank first conducted the credit
investigation before accepting Alfredos payment. He would have been notified that his assumption of
mortgage had been disapproved; and he would not have taken the futile action of paying PhP 750,000. The
procedure Land Bank took in acting on Alfredos application cannot be said to have been fair and proper.
As to the claim that the trial court erred in applying equity to Alfredos case, we hold that Alfredo had no other
remedy to recover from Land Bank and the lower court properly exercised its equity jurisdiction in resolving the
collection suit. As we have held in one case:

Page 71 of 79

Equity, as the complement of legal jurisdiction, seeks to reach and complete justice where courts of law,
through the inflexibility of their rules and want of power to adapt their judgments to the special circumstances of
cases, are incompetent to do so. Equity regards the spirit and not the letter, the intent and not the form, the
substance rather than the circumstance, as it is variously expressed by different courts. 23
Another claim made by Land Bank is the presumption of regularity it enjoys and that it was in good faith when it
accepted Alfredos tender of PhP 750,000.
The defense of good faith fails to convince given Land Banks actions. Alfredo was not treated as a mere
prospective borrower. After he had paid PhP 750,000, he was made to sign bank documents including a
promissory note and real estate mortgage. He was assured by Atty. Hingco that the titles to the properties
covered by the Spouses Sys real estate mortgage would be transferred in his name, and upon payment of the
PhP 750,000, the account would be considered current and renewed in his name. 24
Land Bank posits as a defense that it did not unduly enrich itself at Alfredos expense during the foreclosure of
the mortgaged properties, since it tendered its bid by subtracting PhP 750,000 from the Spouses Sys
outstanding loan obligation. It is observed that this is the first time Land Bank is revealing this defense.
However, issues, arguments, theories, and causes not raised below may no longer be posed on
appeal.25 Land Banks contention, thus, cannot be entertained at this point.1avvphi1
Land Bank further questions the lower courts decision on the basis of the inconsistencies made by Alfredo on
the witness stand. It argues that Alfredo was not a credible witness and his testimony failed to overcome the
presumption of regularity in the performance of regular duties on the part of Land Bank.
This claim, however, touches on factual findings by the trial court, and we defer to these findings of the trial
court as sustained by the appellate court. These are generally binding on us. While there are exceptions to this
rule, Land Bank has not satisfactorily shown that any of them is applicable to this issue. 26 Hence, the rule that
the trial court is in a unique position to observe the demeanor of witnesses should be applied and
respected27 in the instant case.
In sum, we hold that Land Bank may not keep the PhP 750,000 paid by Alfredo as it had already foreclosed on
the mortgaged lands.
Interest and attorneys fees
As to the applicable interest rate, we reiterate the guidelines found in Eastern Shipping Lines, Inc. v. Court of
Appeals:28
II. With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate
of interest, as well as the accrual thereof, is imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money, i.e., a loan or
forbearance of money, the interest due should be that which may have been stipulated in writing.
Furthermore, the interest due shall itself earn legal interest from the time it is judicially demanded. In
the absence of stipulation, the rate of interest shall be 12% per annum to be computed from default,
i.e., from judicial or extrajudicial demand under and subject to the provisions of Article 1169 of the Civil
Code.
2. When an obligation, not constituting a loan or forbearance of money, is breached, an interest on the
amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per
annum. No interest, however, shall be adjudged on unliquidated claims or damages except when or
until the demand can be established with reasonable certainty. Accordingly, where the demand is
established with reasonable certainty, the interest shall begin to run from the time the claim is made
Page 72 of 79

judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably
established at the time the demand is made, the interest shall begin to run only from the date the
judgment of the court is made (at which time the quantification of damages may be deemed to have
been reasonably ascertained). The actual base for the computation of legal interest shall, in any case,
be on the amount finally adjudged.
3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of
legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to be by then an
equivalent to a forbearance of credit.
No evidence was presented by Alfredo that he had sent a written demand to Land Bank before he filed the
collection suit. Only the verbal agreement between the lawyers of the parties on the return of the payment was
mentioned.29 Consequently, the obligation of Land Bank to return the payment made by Alfredo upon the
formers denial of the latters application for assumption of mortgage must be reckoned from the date of judicial
demand on December 12, 1997, as correctly determined by the trial court and affirmed by the appellate court.
The next question is the propriety of the imposition of interest and the proper imposable rate of applicable
interest. The RTC granted the rate of 12% per annum which was affirmed by the CA. From the above-quoted
guidelines, however, the proper imposable interest rate is 6% per annum pursuant to Art. 2209 of the Civil
Code. Sunga-Chan v. Court of Appeals is illuminating in this regard:
In Reformina v. Tomol, Jr., the Court held that the legal interest at 12% per annum under Central Bank (CB)
Circular No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for
transactions involving payment of indemnities in the concept of damages arising from default in the
performance of obligations in general and/or for money judgment not involving a loan or forbearance of
money, goods, or credit, the governing provision is Art. 2209 of the Civil Code prescribing a yearly 6% interest.
Art. 2209 pertinently provides:
Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay,
the indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest
agreed upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.
The term "forbearance," within the context of usury law, has been described as a contractual obligation of a
lender or creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the
loan or debt then due and payable.
Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable
rate, as follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of
money, goods, or credits, as well as to judgments involving such loan or forbearance of money, goods, or
credit, while the6% per annum under Art. 2209 of the Civil Code applies "when the transaction involves
the payment of indemnities in the concept of damage arising from the breach or a delay in the
performance of obligations in general," with the application of both rates reckoned "from the time the
complaint was filed until the [adjudged] amount is fully paid." In either instance, the reckoning period for the
commencement of the running of the legal interest shall be subject to the condition "that the courts are vested
with discretion, depending on the equities of each case, on the award of interest." 30 (Emphasis supplied.)
Based on our ruling above, forbearance of money refers to the contractual obligation of the lender or creditor to
desist for a fixed period from requiring the borrower or debtor to repay the loan or debt then due and for which
12% per annum is imposed as interest in the absence of a stipulated rate. In the instant case, Alfredos
conditional payment to Land Bank does not constitute forbearance of money, since there was no agreement or
obligation for Alfredo to pay Land Bank the amount of PhP 750,000, and the obligation of Land Bank to return
Page 73 of 79

what Alfredo has conditionally paid is still in dispute and has not yet been determined. Thus, it cannot be said
that Land Banks alleged obligation has become a forbearance of money.
On the award of attorneys fees, attorneys fees and expenses of litigation were awarded because Alfredo was
compelled to litigate due to the unjust refusal of Land Bank to refund the amount he paid. There are instances
when it is just and equitable to award attorneys fees and expenses of litigation.31 Art. 2208 of the Civil Code
pertinently states:
In the absence of stipulation, attorneys fees and expenses of litigation, other than judicial costs, cannot be
recovered, except:
xxxx
(2) When the defendants act or omission has compelled the plaintiff to litigate with third persons or to incur
expenses to protect his interest.
Given that Alfredo was indeed compelled to litigate against Land Bank and incur expenses to protect his
interest, we find that the award falls under the exception above and is, thus, proper given the circumstances.
On a final note. The instant case would not have been litigated had Land Bank been more circumspect in
dealing with Alfredo. The bank chose to accept payment from Alfredo even before a credit investigation was
underway, a procedure worsened by the failure to even inform him of his credit standings impact on his
assumption of mortgage. It was, therefore, negligent to a certain degree in handling the transaction with
Alfredo. It should be remembered that the business of a bank is affected with public interest and it should
observe a higher standard of diligence when dealing with the public. 32
WHEREFORE, the appeal is DENIED. The CA Decision in CA-G.R. CR-CV No. 84445 is AFFIRMED with
MODIFICATION in that the amount of PhP 750,000 will earn interest at 6% per annum reckoned from
December 12, 1997, and the total aggregate monetary awards will in turn earn 12% per annum from the finality
of this Decision until fully paid.
SO ORDERED.

Page 74 of 79

SECOND DIVISION
[G.R. No. 176143 : November 09, 2009]
MIGUEL P. SORIANO, JR. AND JULIETA B. SORIANO V. BANK OF THE PHILIPPINE ISLANDS
Sirs/Mesdames:
Quoted hereunder, for your information, is a resolution of this Court dated 16 November 2009:
G.R. No. 176143 (Miguel P. Soriano, Jr. and Julieta B. Soriano v. Bank of the Philippine Islands).
Sometime in July 1993 petitioner Miguel P. Soriano, Jr. bought a car through a loan of P482,400.00, payable at
P10,050.00 with 3% interest per month. To secure payment, he constituted a chattel mortgage on the car. The
car dealer then assigned its rights in the chattel mortgage to Far East Bank & Trust Company (FEBTC).
On December 9, 1999 FEBTC sent a demand letter to petitioners Miguel and Julieta Soriano (the Sorianos) for
the payment of P367,126.50 that was due as of November 1999 within five days from notice or for the
surrender of the car.
Meanwhile, FEBTC merged with respondent Bank of the Philippine Islands (BPI), with the latter as the
surviving entity. On October 13, 2000 respondent BPI sent another demand letter to the Sorianos, this time for
the lesser amount of P209,241.18 representing their unpaid balance. Since the demand was unheeded, on
January 8, 2001 the bank filed a complaint for replevin and damages against the Sorianos before the
Metropolitan Trial Court (MeTC) of Manila. The bank claimed that the Sorianos defaulted in their obligations by
failing to pay the last 21 installments from November 15, 1995 to July 15, 1997 despite repeated demands.
While the Sorianos admitted in their answer that they still had unpaid installments, they claimed that they were
justified in suspending payments. They opened an automatic debit arrangement with FEBTC to cover their
monthly payments but, despite repeated requests, the bank's car loan division gave them no receipt covering
the payments made from July 1993 to March 1997. Upon the advice of the bank's branch manager, the
Sorianos suspended their payments for the period April to July 1997 pending issuance of the receipts they
needed. In December 1999 FEBTC demanded payment of P367,126.50 representing their alleged unpaid
balance. Replying to the demand, the Sorianos questioned the computation. They also asked for an itemized
statement of account but got none. They denied receiving the second demand dated October 13, 2000 for the
lesser amount of P209,241.18.
In the course of trial, respondent BPI no longer pressed for the issuance of the writ of replevin.
On November 2, 2004 the MeTC rendered a decision, ordering the Sorianos, jointly and severally, to pay
respondent BPI P209,241.18 with interest of 3% per month from October 13, 2000 until their obligation shall
have been fully paid, 10% of the total amount due as attorney's fees, and the costs of suit. [1]
On appeal, the Regional Trial Court (RTC) of Manila,[2] modified the MeTC decision.[3] It noted that based on
respondent BPI's subsidiary ledger, the Sorianos paid their monthly installments until June 21, 1996, leaving
only 13 unpaid installments. While affirming the MeTC decision, it ordered the Sorianos to pay the bank only
P130,650.00 with interest of 3% per month from October 13, 2000 until they shall have fully paid the judgment
debt.[4] On appeal by the Sorianos, the Court of Appeals affirmed the decision of the RTC, prompting them to
take recourse to this Court.
The Sorianos present the following issues before this Court: (1). whether or not they, as debtors, had the
burden of proving payment; (2) whether or not respondent bank's subsidiary ledger, a mere photocopy, is
admissible in evidence to prove non-payment of subsequent installments; and (3) whether or not the Sorianos
can be made liable to pay interest of 3% per month or 36% per annum on their unpaid balance. [5]
Page 75 of 79

One. The Sorianos assail the Court of Appeals decision for holding that they failed to discharge their burden of
proving payment of the balance of their loan.
But the Sorianos admitted in their answer to the complaint that they still had unpaid monthly installments owing
respondent bank. What they dispute, however, is the amount they have not yet paid. Respondent bank
presented its subsidiary ledger showing that the Sorianos paid their monthly installments only up to June 21,
1996, leaving 13 unpaid monthly installments from July 1996 to July 21, 1997. The Sorianos claim, on the
other hand, that they have only four unpaid installments from April 1997 to July 1997. Since the Sorianos
alleged having paid more than what respondent bank was willing to admit, it was incumbent upon them to
prove such affirmative allegation.
Jurisprudence abounds that in civil cases, the party who alleges a fact has the burden of proving it. Thus, a
party who pleads payment as a defense has the burden of proving that such payment has, in fact, been made.
When the plaintiff alleges non-payment, still, the general rule is that the burden rests on the defendant, who
has admitted the basic obligation, to prove payment rather than on the plaintiff to prove non-payment.[6] Here,
the Sorianos miserably failed in this respect. They did not present evidence of their automatic debit
arrangement with FEBTC, of the official receipts of their monthly payments, or even of their passbook. Neither
have they shown any written requests to respondent bank to furnish them with official receipts or a statement
of account.
The Court finds petitioners' reliance in Citibank, N.A. Mastercard v. Teodoro[7]misplaced. In Citibank, the bank
failed to prove that defendant owed it P24,388.36 since it presented only the photocopies of the original sales
invoices. These photocopies were inadmissible in evidence. Here, however, the bank established the
existence of the Sorianos' indebtedness both by the evidence and the admission of the parties. Indeed, the
Sorianos acknowledged that they still had unpaid monthly installments. They even adopted as their own
evidence respondent bank's subsidiary ledger that was presented to prove the unpaid balance of the loan.
Two. The Sorianos argue that respondent bank's subsidiary ledger, a mere photocopy, should not have been
given consideration since no witness who prepared and has custody of it identified it and since it was not
offered in evidence.
But the Sorianos were the very ones who offered the ledger in evidence, adopting it as their own to prove that
they already paid the monthly installments until June 21, 1996. Yet, they would now reject the ledger for not
reflecting their subsequent payments. The Court cannot allow petitioners to use the ledger where it benefits
them and to reject the same when it is adverse to them.[8] Besides, petitioners raised this issue only after the
RTC had already modified the MeTC decision.
Three. On the matter of interest, the Court has repeatedly ruled that stipulated interest rates of 3% per month
and higher are excessive, iniquitous, unconscionable and exorbitant. Such stipulations are void for being
contrary to morals, if not against the law. While Central Bank Circular No. 905-82[9]effectively removed the
ceiling on interest rates for both secured and unsecured loans, regardless of maturity, it did not grant a carte
blanch authority to lenders to raise interest rates to levels which would either enslave their borrowers or lead to
a hemorrhaging of their assets.[10] Consequently, the Court reduces such interest to 1% per month or 12% per
annum.
WHEREFORE, the Court PARTIALLY GRANTS the petition and MODIFIES the Decision dated September
26, 2006 and the Resolution dated January 2, 2007 of the Court of Appeals in CA-G.R. SP 94013, such that
petitioners Miguel and Julieta Soriano are ordered to pay, jointly and severally, respondent Bank of the
Philippine Islands (1) P130,650.00 with interest at 1% per month from October 13, 2000 until the finality of this
Decision and thereafter 12%o interest per annum until full payment; (2) an amount equivalent to 10% of the
total amount due as attorney's fees; and (3) the costs of suit.
SO ORDERED.
Page 76 of 79

Republic of the Philippines


SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 168782

October 10, 2008

SPOUSES JOVENAL TORING and CECILIA ESCALONA-TORING, petitioners,


vs.
SPOUSES ROSALIE GANZON-OLAN and GILBERT OLAN, and ROWENA OLAN, respondents.
DECISION
QUISUMBING, J.:
This petition for review on certiorari assails the Decision 1 and Resolution,2 dated March 28, 2005 and June 30,
2005, respectively, of the Court of Appeals in CA-G.R. CV No. 76831. The Court of Appeals affirmed the
Resolution3 dated June 10, 2002 of the Regional Trial Court, Branch 276, Muntinlupa City, in Civil Case No.
00-137 which had ordered petitioners to pay respondents the sum of P20,000,000 representing the total
amount of petitioners' loan and interest due.
The facts are as follows:
On September 4, 1998, petitioner Jovenal Toring obtained from respondents a loan amounting to P6,000,000
at 3% interest per month. The loan was secured by a mortgage on a parcel of land covered by Transfer
Certificate of Title No. T-27418,4 as evidenced by a Deed of Real Estate Mortgage 5 dated September 8, 1998.
On September 23, 1998, the parties executed a Deed of Absolute Sale6 conveying the mortgaged property in
favor of respondents. Subsequently, respondents gave petitioners an exclusive option to repurchase the land
forP10,000,000. This was embodied in a document denominated as an Option to Buy7 dated September 28,
1998. On this same document, respondents acknowledged receipt of a total sum of P10,000,000 as
consideration for the purchase of the land.8 The Option to Buy provided that if the option is exercised after
December 5, 1998, the purchase price shall increase at the rate of P300,000 or 3% of the purchase price every
month until September 5, 1999 and thereafter at the rate of P381,000 or 3.81% of the purchase price every
month, with the fifth of every month as the cut-off date for said increases.9
On July 28, 2000, petitioners filed a Complaint10 docketed as Civil Case No. 00-137 for reformation of
instruments, abuse of rights and damages against respondents. Petitioners prayed that the Deed of Absolute
Sale dated September 23, 1998 and Option to Buy dated September 28, 1998, be treated as an equitable
mortgage instead of a sale.
At the pre-trial, the parties made the following stipulations: (1) the principal amount of <4strike>P10,000,000
has long become overdue; (2) no payment has been made; (3) the parties had agreed on an equitable
mortgage and not a sale.11 The parties limited the issues on the amount of interest due and the time of
payment of the entire obligation. Thereafter, the court ordered the parties to submit their respective position
papers, but only respondents complied. All other claims for damages were waived by the parties. 12
On June 10, 2002, the trial court issued its Resolution, the pertinent portion of which reads:
...the document of mortgage specified the interest at 3.81% per month from the time it was obtained,
and which was now estimated to be P7,239,000.00. This sum should be added to the total loan of TEN
MILLION PESOS, . . .
Page 77 of 79

xxxx
Therefore, judgment is rendered for defendants ROSALIE GANZON OLAN and GILBERT OLAN [and]
ROWENA GANZON since the loan is not denied, directing spouses [p]laintiffs JOVENAL
TORING and CECILIA ESCALONA TORING, to pay the sum of TWENTY MILLION PESOS within
one month from receipt of this decision.
xxxx
It [i]s SO ORDERED.13 (Emphasis supplied.)
Petitioners appealed, contending that the trial court erred in awarding interest. Petitioners stress that Article
160214 of the Civil Code governing equitable mortgages provides that any money, fruits or other benefit to be
received by the vendee as rent or otherwise shall be considered as interest which shall be subject to the usury
laws. Thus, there should have been no award of interest.
On March 28, 2005, the Court of Appeals affirmed the trial court's ruling, as follows:
WHEREFORE, the June 10, 2002 Resolution of the Regional Trial Court, Branch 276, Muntinlupa City,
is hereby AFFIRMED.
SO ORDERED.15
Their motion for reconsideration having been denied, petitioners now come before us raising the sole issue:
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED A REVERSIBLE
ERROR IN DENYING PETITIONERS' APPEAL AND IN AFFIRMING THE DECISION OF [THE] TRIAL
COURT DATED JUNE 10, 2002.16
Simply put, the issue is: Did the Court of Appeals err in sustaining the trial court's ruling upholding the 3% and
3.81% stipulated monthly interest?
Petitioners contend that they are not liable to pay interest as the stipulated monthly rates of 3% and
3.81%17 are unconscionable. Petitioners further contend that the reformed instrument, i.e., the Option to Buy
dated September 28, 1998, did not mention any rate of interest chargeable to the loan but rather, an
escalation18 of the purchase price.
On the other hand, respondents maintain that petitioners are liable to pay interest based on the Deed of
Absolute Sale and Option to Buy executed by the parties. Respondents assert that the P300,000
and P381,000 differences per month as stated in the Option to Buy represents the 3% or 3.81% interest to be
charged on the loan. Respondents further assert that the 3% or 3.81% interest is not usurious since Central
Bank Circular No. 905-8219 removed the ceiling on interest rates on secured and unsecured loans.
In resolving the issue in this controversy, we have agreed to focus our attention on the basic provisions of
statutes as well as the prior decisions of this Court bearing on rates of interest on monetary obligations.
In a loan or forbearance of money, according to the Civil Code, the interest due should be that stipulated in
writing,20 and in the absence thereof, the rate shall be 12% per annum.21
The first time that the parties in this case entered into a loan transaction was on September 4, 1998 when
petitioners obtained the P6,000,000 loan from respondents. Based on the Deed of Real Estate Mortgage dated
September 8, 1998 embodying the promissory note dated September 4, 1998, the parties agreed on an
interest rate of 3% per month.
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The second and third times that the parties transacted were on September 23 and 28, 1998 when they
executed the Deed of Absolute Sale and the Option to Buy, respectively. These two documents were the
instruments reformed in Civil Case No. 00-137, where both parties agreed that the transactions embodied
therein were really that of an equitable mortgage. The stipulation in a contract sharply escalating the
repurchase price every month is for the purpose of securing the return of money invested with substantial profit
or interest.22 Undoubtedly, theP300,000 and P381,000 successive increases stated in the Option to Buy
represent the monthly interest which respondents sought to recover from petitioners.
While the parties are free to stipulate on the interest to be imposed on monetary obligations, the Court will
temper interest rates if they are unconscionable.23 Even if the Usury Law has been suspended by Central Bank
Circular No. 905-82, and parties to a loan agreement have been given wide latitude to agree on any interest
rate, we have held that stipulated interest rates are illegal if they are unconscionable. 24 Consequently, in our
view, the Court of Appeals erred in sustaining the trial court's decision upholding the stipulated interest of 3%
and 3.81%. Thus, we are unanimous now in our ruling to reduce the above stipulated interest rates to 1% per
month, in conformity with our ruling in Ruiz v. Court of Appeals.25 For as well stressed in that case:
... Nothing in the said circular [CB Circular No. 905, s. 1982] grants lenders carte blanche authority to
raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their
assets.
Undeniably, in the present case, petitioners failed to pay the principal loan on its maturity and upon demand by
respondents, as well as the interest payments thereafter. Indeed, petitioners cannot turn their backs on their
obligation; they have to comply with what is incumbent upon them. All other claims for damages having been
waived by the parties, petitioners are bound to pay respondents the principal loan of P10,000,000, plus what
we have repeatedly held as the appropriate rate of interest of 1% per month, from December 6, 1998 26 until
fully paid.
WHEREFORE, the assailed Decision and Resolution dated March 28, 2005 and June 30, 2005, respectively,
of the Court of Appeals in CA-G.R. CV No. 76831 are MODIFIED to the effect that the stipulated interest rate
of 3% or 3.81% per month on the subject equitable mortgage is hereby ordered REDUCED to 1% per month
only. No pronouncement as to costs.
SO ORDERED.

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