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1. G.R. No.

169211
March 6, 2013
STAR TWO (SPV-AMC), INC.,1 Petitioner,
vs.
PAPER CITY CORPORATION OF THE PHILIPPINES, Respondent.
DECISION
PEREZ, J.:
For review before this Court is a Petition for Review on Certiorari filed by
Rizal Commercial Banking Corporation now substituted by Star Two (SPVAMC), Inc. by virtue of Republic Act No. 9182 2 otherwise known as the
"Special Purpose Vehicle Act of 2002," assailing the 8 March 2005 Decision
and 8 August 2005 Resolution of the Special Fourth Division of the Court of
Appeals (CA) in CA-G.R. SP No. 82022 upholding the 15 August 2003 and
1 December 2003 Orders of the Valenzuela Regional Trial Court (RTC)
ruling that the subject machineries and equipments of Paper City
Corporation (Paper City) are movable properties by agreement of the parties
and cannot be considered as included in the extrajudicial foreclosure sale of
the mortgaged land and building of Paper City.3
The facts as we gathered from the records are:
Rizal Commercial Banking Corporation (RCBC), Metropolitan Bank and
Trust Co. (Metrobank) and Union Bank of the Philippines (Union Bank) are
banking corporations duly organized and existing under the laws of the
Philippines.
On the other hand, respondent Paper City is a domestic corporation engaged
in the manufacture of paper products particularly cartons, newsprint and
clay-coated paper.4
From 1990-1991, Paper City applied for and was granted the following
loans and credit accommodations in peso and dollar denominations by
RCBC: P10,000,000.00 on 8 January 1990,5 P14,000,000.00 on 19 July
1990,6P10,000,000.00 on 28 June 1991,7 and P16,615,000.00 on 28
November 1991.8 The loans were secured by four (4) Deeds of Continuing
Chattel Mortgages on its machineries and equipments found inside its paper
plants.

On 25 August 1992, a unilateral Cancellation of Deed of Continuing Chattel


Mortgage on Inventory of Merchandise/Stocks-in-Trade was executed by
RCBC through its Branch Operation Head Joey P. Singh and Asst. Vice
President Anita O. Abad over the merchandise and stocks-in-trade covered by
the continuing chattel mortgages.9
On 26 August 1992, RCBC, Metrobank and Union Bank (creditor banks with
RCBC instituted as the trustee bank) entered into a Mortgage Trust Indenture
(MTI) with Paper City. In the said MTI, Paper City acquired an additional
loan of One Hundred Seventy Million Pesos (P170,000,000.00) from the
creditor banks in addition to the previous loan from RCBC amounting
to P110,000,000.00 thereby increasing the entire loan to a total
of P280,000,000.00. The old loan of P110,000,000.00 was partly secured by
various parcels of land covered by TCT Nos. T-157743, V-13515, V-1184, V1485, V-13518 and V-13516 situated in Valenzuela City pursuant to five (5)
Deeds of Real Estate Mortgage dated 8 January 1990, 27 February 1990, 19
July 1990, 20 February 1992 and 12 March 1992. 10 The new loan obligation
of P170,000,000.00 would be secured by the same five (5) Deeds of Real
Estate Mortgage and additional real and personal properties described in an
annex to MTI, Annex "B."11 Annex "B" of the said MTI covered the
machineries and equipments of Paper City.12
The MTI was later amended on 20 November 1992 to increase the
contributions of the RCBC and Union Bank toP80,000,000.00
and P70,000,000.00, respectively. As a consequence, they executed a Deed of
Amendment to MTI13 but still included as part of the mortgaged properties by
way of a first mortgage the various machineries and equipments located in
and bolted to and/or forming part of buildings generally described as:
(omitted)
A Second Supplemental Indenture to the 26 August 1992 MTI was executed
on 7 June 1994 to increase the amount of the loan from P280,000,000.00
to P408,900,000.00 secured against the existing properties composed of land,
building, machineries and equipments and inventories described in Annexes
"A" and "B."14

Finally, a Third Supplemental Indenture to the 26 August 1992 MTI was


executed on 24 January 1995 to increase the existing loan obligation
of P408,900,000.00 to P555,000,000.00 with an additional security
composed of a newly constructed two-storey building and other
improvements, machineries and equipments located in the existing plant
site.15
Paper City was able to comply with its loan obligations until July 1997. But
economic crisis ensued which made it difficult for Paper City to meet the
terms of its obligations leading to payment defaults.16 Consequently, RCBC
filed a Petition for Extrajudicial Foreclosure Under Act No. 3135 Against
the Real Estate Mortgage executed by Paper City on 21 October
1998.17 This petition was for the extra-judicial foreclosure of eight (8)
parcels of land including all improvements thereon enumerated as TCT Nos.
V-9763, V-13515, V-13516, V-13518, V-1484, V-1485, V-6662 and V-6663
included in the MTI dated 26 August 1992, Supplemental
MTI dated 20 November 1992, Second Supplemental Indenture on the MTI
dated 7 June 1994 and Third Supplemental Indenture on the MTI dated 24
January 1995.18 Paper City then had an outstanding obligation with the
creditor banks adding up to Nine Hundred One Million Eight Hundred One
Thousand Four Hundred Eighty-Four and 10/100 Pesos (P901,801,484.10),
inclusive of interest and penalty charges.19
A Certificate of Sale was executed on 8 February 1999 certifying that the
eight (8) parcels of land with improvements thereon were sold on 27
November 1998 in the amount of Seven Hundred Two Million Three
Hundred Fifty-One Thousand Seven Hundred Ninety-Six Pesos and 28/100
(P702,351,796.28) in favor of the creditor banks RCBC, Union Bank and
Metrobank as the highest bidders.20
This foreclosure sale prompted Paper City to file a Complaint21 docketed as
Civil Case No. 164-V-99 on 15 June 1999 against the creditor banks
alleging that the extra-judicial sale of the properties and plants was null and
void due to lack of prior notice and attendance of gross and evident bad
faith on the part of the creditor banks. In the alternative, it prayed that in
case the sale is declared valid, to render the whole obligation of Paper City

as fully paid and extinguished. Also prayed for was the return
of P5,000,000.00 as excessive penalty and the payment of damages and
attorneys fees.
In the meantime, Paper City and Union Bank entered into a Compromise
Agreement which was later approved by the trial court on 19 November
2001. It was agreed that the share of Union Bank in the proceeds of the
foreclosure shall be up to 34.23% of the price and the remaining possible
liabilities of Paper City shall be condoned by the bank. Paper City likewise
waived all its claim and counter charges against Union Bank and agreed to
turn-over its proportionate share over the property within 120 days from the
date of agreement.22
On the other hand, the negotiations between the other creditor banks and
Paper City remained pending. During the interim, Paper City filed with the
trial court a Manifestation with Motion to Remove and/or Dispose Machinery
on 18 December 2002 reasoning that the machineries located inside the
foreclosed land and building were deteriorating. It posited that since the
machineries were not included in the foreclosure of the real estate mortgage,
it is appropriate that it be removed from the building and sold to a third
party.23
Acting on the said motion, the trial court, on 28 February 2003 issued an
Order denying the prayer and ruled that the machineries and equipments were
included in the annexes and form part of the MTI dated 26 August 1992 as
well as its subsequent amendments. Further, the machineries and equipments
are covered by the Certificate of Sale issued as a consequence of foreclosure,
the certificate stating that the properties described therein with improvements
thereon were sold to creditor banks to the defendants at public auction.24
Paper City filed its Motion for Reconsideration25 on 4 April 2003 which was
favorably granted by the trial court in its Order dated 15 August 2003. The
court justified the reversal of its order on the finding that the disputed
machineries and equipments are chattels by agreement of the parties through
their inclusion in the four (4) Deeds of Chattel Mortgage dated 28 January
1990, 19 July 1990, 28 June 1991 and 28 November 1991. It further ruled
that the deed of cancellation executed by RCBC on 25 August 1992 was not

valid because it was done unilaterally and without the consent of Paper City
and the cancellation only refers to the merchandise/stocks-in-trade and not
to machineries and equipments.26
RCBC in turn filed its Motion for Reconsideration to persuade the court to
reverse its 15 August 2003 Order. However, the same was denied by the trial
court through its 1 December 2003 Order reiterating the finding and
conclusion of the previous Order.27
Aggrieved, RCBC filed with the CA a Petition for Certiorari under Rule 65
to annul the Orders dated 15 August 2003 and 1 December 2003 of the trial
court,28 for the reasons that:
I. Paper City gave its conformity to consider the subject machineries and
equipment as real properties when the president and Executive Vice
President of Paper City signed the Mortgage Trust Indenture as well as its
subsequent amendments and all pages of the annexes thereto which itemized
all properties that were mortgaged.29
II. Under Section 8 of Act No. 1508, otherwise known as "The Chattel
Mortgage Law" the consent of the mortgagor (Paper City) is not required in
order to cancel a chattel mortgage. Thus the "Cancellation of Deed of
Continuing Chattel Mortgage on Inventory of Merchandise/Stocks-inTrade" dated August 25, 1992 is valid and binding on the Paper City even
assuming that it was executed unilaterally by petitioner RCBC.30
III. The four (4) Deeds of Chattel Mortgage that were attached as Annexes
"A" to "D" to the December 18, 2003 "Manifestation with Motion to
Remove and/or Dispose of Machinery" were executed from January 8, 1990
until November 28, 1991. On the other hand, the "Cancellation of Deed of
Continuing Chattel Mortgage" was executed on August 25, 1992 while the
MTI and the subsequent supplemental amendments thereto were executed
from August 26, 1992 until January 24, 1995. It is of the contention of
RCBC that Paper Citys unreasonable delay of ten
(10) years in assailing that the disputed machineries and equipments were
personal amounted to estoppel and ratification of the characterization that
the same were real properties.31

IV. The removal of the subject machineries or equipment is not among the
reliefs prayed for by the Paper City in its June 11, 1999 Complaint. The
Paper City sought the removal of the subject machineries and equipment only
when it filed its December 18, 2002 Manifestation with Motion to Remove
and/or Dispose of Machinery.32
V. Paper City did not specify in its various motions filed with the respondent
judge the subject machineries and equipment that are allegedly excluded
from the extrajudicial foreclosure sale.33
VI. The machineries and equipments mentioned in the four (4) Deeds of
Chattel Mortgage that were attached on the Manifestation with Motion to
Remove and/or Dispose of Machinery are the same machineries and
equipments included in the MTI and supplemental amendments, hence, are
treated by agreement of the parties as real properties.34
In its Comment,35 Paper City refuted the claim of RCBC that it gave its
consent to consider the machineries and equipments as real properties. It
alleged that the disputed properties remained within the purview of the
existing chattel mortgages which in fact were acknowledged by RCBC in the
MTI particularly in Section 11.07 which reads:
Section 11.07. This INDENTURE in respect of the MORTGAGE
OBLIGATIONS in the additional amount not exceeding TWO HUNDRED
TWENTY MILLION SIX HUNDRED FIFTEEN THOUSAND PESOS
(P220,615,000.00) shall be registered with the Register of Deeds of
Valenzuela, Metro Manila, apportioned based on the corresponding loanable
value of the MORTGAGED PROPERTIES, viz:
a. Real Estate Mortgage P206,815,000.00
b. Chattel Mortgage P13,800,000.0036
Paper City argued further that the subject machineries and equipments were
not included in the foreclosure of the mortgage on real properties particularly
the eight (8) parcels of land. Further, the Certificate of Sale of the Foreclosed
Property referred only to "lands and improvements" without any specification
and made no mention of the inclusion of the subject properties.37
In its Reply,38 RCBC admitted that there was indeed a provision in the MTI
mentioning a chattel mortgage in the amount of P13,800,000.00. However, it

justified that its inclusion in the MTI was merely for the purpose of
ascertaining the amount of the loan to be extended to Paper City.39 It
reiterated its position that the machineries and equipments were no longer
treated as chattels but already as real properties following the MTI.40
On 8 March 2005, the CA affirmed41 the challenged orders of the trial court.
The dispositive portion reads:
WHEREFORE, finding no grave abuse of discretion committed by public
respondent, the instant petition is hereby DISMISSED for lack of merit. The
assailed Orders dated 15 August and 2 December 2003, issued by Hon.
Judge Floro P. Alejo are hereby AFFIRMED. No costs at this instance.42
The CA relied on the "plain language of the MTIs:
Undoubtedly, nowhere from any of the MTIs executed by the parties can we
find the alleged "express" agreement adverted to by petitioner. There is no
provision in any of the parties MTI, which expressly states to the effect
that the parties shall treat the equipments and machineries as real property.
On the contrary, the plain and unambiguous language of the aforecited
MTIs, which described the same as personal properties, contradicts
petitioners claims.43
It was also ruled that the subject machineries and equipments were not
included in the extrajudicial foreclosure sale. The claim of inclusion was
contradicted by the very caption of the petition itself, "Petition for ExtraJudicial Foreclosure of Real Estate Mortgage Under Act No. 3135 As
Amended." It opined further that this inclusion was further stressed in the
Certificate of Sale which enumerated only the mortgaged real properties
bought by RCBC without the subject properties.44
RCBC sought reconsideration but its motion was denied in the CAs
Resolution dated 8 August 2005.
RCBC before this Court reiterated all the issues presented before the
appellate court:
1. Whether the unreasonable delay of ten (10) years in assailing that the
disputed machineries and equipments were personal properties amounted to
estoppel on the part of Paper City;

2. Whether the Cancellation of Deed of Continuing Mortgage dated 25


August 1992 is valid despite the fact that it was executed without the consent
of the mortgagor Paper City;
3. Whether the subsequent contracts of the parties such as Mortgage Trust
Indenture dated 26 August 1992 as well as the subsequent supplementary
amendments dated 20 November 1992, 7 June 1992, and 24 January 1995
included in its coverage of mortgaged properties the subject machineries and
equipment; and
4. Whether the subject machineries and equipments were included in the
extrajudicial foreclosure dated 21 October 1998 which in turn were sold to
the creditor banks as evidenced by the Certificate of Sale dated 8 February
1999.
We grant the petition.
By contracts, all uncontested in this case, machineries and equipments are
included in the mortgage in favor of RCBC, in the foreclosure of the
mortgage and in the consequent sale on foreclosure also in favor of petitioner.
The mortgage contracts are the original MTI of 26 August 1992 and its
amendments and supplements on 20 November 1992, 7 June 1994, and 24
January 1995. The clear agreements between RCBC and Paper City follow:
The original MTI dated 26 August 1992 states that:
MORTGAGE TRUST INDENTURE
This MORTGAGE TRUST INDENTURE, executed on this day of
August 26, 1992, by and between:
PAPER CITY CORPORATION OF THE PHILIPPINES, x x x
hereinafter referred to as the "MORTGAGOR");
-andRIZAL COMMERCIAL BANKING CORPORATION, x x x
(hereinafter referred to as the "TRUSTEE").
xxxx
WHEREAS, against the same mortgaged properties and additional
real and personal properties more particularly described in ANNEX
"B" hereof, the MORTGAGOR desires to increase their borrowings
to
TWO
HUNDRED
EIGHTY
MILLION
PESOS

(P280,000,000.00) or an increase of ONE HUNDRED SEVENTY


MILLION PESOS (P170,000,000.00) xxx from various
banks/financial institutions;
xxxx
GRANTING CLAUSE
NOW, THEREFORE, this INDENTURE witnesseth:
THAT the MORTGAGOR in consideration of the premises and of
the acceptance by the TRUSTEE of the trust hereby created, and in
order to secure the payment of the MORTGAGE OBLIGATIONS
which shall be incurred by the MORTGAGOR pursuant to the
terms hereof xxx hereby states that with the execution of this
INDENTURE it will assign, transfer and convey as it has hereby
ASSIGNED, TRANSFERRED and CONVEYED by way of a
registered first mortgage unto RCBC x x x the various parcels of
land covered by several Transfer Certificates of Title issued by the
Registry of Deeds, including the buildings and existing
improvements thereon, as well as of the machinery and equipment
more particularly described and listed that is to say, the real and
personal properties listed in Annexes "A" and "B" hereof of which
the MORTGAGOR is the lawful and registered owner.45(Emphasis
and underlining ours)
The Deed of Amendment to MTI dated 20 November 1992 expressly
provides:
NOW, THEREFORE, premises considered, the parties considered
have amended and by these presents do further amend the
Mortgage Trust Indenture dated August 26, 1992 including the Real
Estate Mortgage as follows:
xxxx
2. The Mortgage Trust Indenture and the Real Estate Mortgage are
hereby amended to include as part of the Mortgage Properties, by
way of a first mortgage and for pari-passu and pro-rata benefit of
the existing and new creditors, various machineries and equipment
owned by the Paper City, located in and bolted to and forming part

of the following, generally describes as x x x more particularly


described and listed in Annexes "A" and "B" which are attached and
made integral parts of this Amendment. The machineries and
equipment listed in Annexes "A" and "B" form part of the
improvements listed above and located on the parcels of land subject
of the Mortgage Trust Indenture and the Real Estate
Mortgage.46 (Emphasis and underlining ours)
A Second Supplemental Indenture to the 26 August 1992 MTI executed on 7
June 1994 to increase the amount of loan from P280,000,000.00
to P408,900,000.00 also contains a similar provision in this regard:
WHEREAS, the Paper City desires to increase its borrowings to be
secured by the INDENTURE from PESOS: TWO HUNDRED
EIGHTY MILLION (P280,000,000.00) to PESOS: FOUR
HUNDRED EIGHT MILLION NINE HUNDRED THOUSAND
(P408,900,000.00) or an increase of PESOS: ONE HUNDRED
TWENTY EIGHT MILLION NINE HUNDRED THOUSAND
(P128,900,000.00) x x x which represents additional loan/s granted to
the Paper City to be secured against the existing properties composed
of land, building, machineries and equipment and inventories more
particularly described in Annexes "A" and "B" of the INDENTURE x
x x.47
(Emphasis and underlining ours)
Finally, a Third Supplemental Indenture to the 26 August 1992 MTI executed
on 24 January 1995 contains a similar provision:
WHEREAS, in order to secure NEW/ADDITIONAL LOAN
OBLIGATION under the Indenture, there shall be added to the
collateral pool subject of the Indenture properties of the Paper City
composed of newly constructed two (2)-storey building, other land
improvements and machinery and equipment all of which are located
at the existing Plant Site in Valenzuela, Metro Manila and more
particularly described in Annex "A" hereof x x x.48 (Emphasis and
underlining ours)

Repeatedly, the parties stipulated that the properties mortgaged by Paper


City to RCBC are various parcels of land including the buildings and
existing improvements thereon as well as the machineries and equipments,
which as stated in the granting clause of the original mortgage, are "more
particularly described and listed that is to say, the real and personal
properties listed in Annexes A and B x x x of which the Paper
City is the lawful and registered owner." Significantly, Annexes "A" and "B"
are itemized listings of the buildings, machineries and equipments typed
single spaced in twenty-seven pages of the document made part of the
records.
As held in Gateway Electronics Corp. v. Land Bank of the Philippines, 49 the
rule in this jurisdiction is that the contracting parties may establish any
agreement, term, and condition they may deem advisable, provided they are
not contrary to law, morals or public policy. The right to enter into lawful
contracts constitutes one of the liberties guaranteed by the Constitution.
It has been explained by the Supreme Court in Norton Resources and
Development Corporation v. All Asia Bank Corporation50 in reiteration of
the ruling in Benguet Corporation v. Cabildo51 that:
x x x A court's purpose in examining a contract is to interpret the intent of
the contracting parties, as objectively manifested by them. The process of
interpreting a contract requires the court to make a preliminary inquiry as to
whether the contract before it is ambiguous. A contract provision is
ambiguous if it is susceptible of two reasonable alternative interpretations.
Where the written terms of the contract are not ambiguous and can only be
read one way, the court will interpret the contract as a matter of law. x x x
Then till now the pronouncement has been that if the language used is as
clear as day and readily understandable by any ordinary reader, there is no
need for construction.52
The case at bar is covered by the rule.
The plain language and literal interpretation of the MTIs must be applied.
The petitioner, other creditor banks and Paper City intended from the very
first execution of the indentures that the machineries and equipments
enumerated in Annexes "A" and "B" are included. Obviously, with the

continued increase in the amount of the loan, totaling hundreds of millions of


pesos, Paper City had to offer all valuable properties acceptable to the
creditor banks.
The plain and obvious inclusion in the mortgage of the machineries and
equipments of Paper City escaped the attention of the CA which, instead,
turned to another "plain language of the MTI" that "described the same as
personal properties." It was error for the CA to deduce from the "description"
exclusion from the mortgage.
1. The MTIs did not describe the equipments and machineries as personal
property. Had the CA looked into Annexes "A" and "B" which were referred
to by the phrase "real and personal properties," it could have easily noted that
the captions describing the listed properties were "Buildings," "Machineries
and Equipments," "Yard and Outside," and "Additional Machinery and
Equipment." No mention in any manner was made in the annexes about
"personal property." Notably, while "personal" appeared in the granting
clause of the original MTI, the subsequent Deed of Amendment specifically
stated that:
x x x The machineries and equipment listed in Annexes "A" and "B" form
part of the improvements listed above and located on the parcels of land
subject of the Mortgage Trust Indenture and the Real Estate Mortgage.
The word "personal" was deleted in the corresponding granting clauses in the
Deed of Amendment and in the First, Second and Third Supplemental
Indentures.
2. Law and jurisprudence provide and guide that even if not expressly so
stated, the mortgage extends to the improvements.
Article 2127 of the Civil Code provides:
Art. 2127. The mortgage extends to the natural accessions, to the
improvements, growing fruits, and the rents or income not yet received when
the obligation becomes due, and to the amount of the indemnity granted or
owing to the proprietor from the insurers of the property mortgaged, or in
virtue of expropriation for public use, with the declarations, amplifications
and limitations established by law, whether the estate remains in the

possession of the mortgagor, or it passes into the hands of a third person.


(Underlining ours)
In the early case of Bischoff v. Pomar and Cia. General de Tabacos, 53 the
Court ruled that even if the machinery in question was not included in the
mortgage expressly, Article 111 of the old Mortgage Law provides that
chattels permanently located in a building, either useful or ornamental, or
for the service of some industry even though they were placed there after
the creation of the mortgage shall be considered as mortgaged with the
estate, provided they belong to the owner of said estate. The provision of the
old Civil Code was cited. Thus:
Article 1877 provides that a mortgage includes the natural accessions,
improvements, growing fruits, and rents not collected when the obligation is
due, and the amount of the indemnities granted or due the owner by the
underwriters of the property mortgaged or by virtue of the exercise of
eminent domain by reason of public utility, with the declarations,
amplifications, and limitations established by law, in case the estate
continues in the possession of the person who mortgaged it, as well as when
it passes into the hands of a third person.54
The case of Cu Unjieng e Hijos v. Mabalacat Sugar Co. 55 relied on this
provision. The issue was whether the machineries and accessories were
included in the mortgage and the subsequent sale during public auction.
This was answered in the affirmative by the Court when it ruled that the
machineries were integral parts of said sugar central hence included
following the principle of law that the accessory follows the principal.
Further, in the case of Manahan v. Hon. Cruz,56 this Court denied the prayer
of Manahan to nullify the order of the trial court including the building in
question in the writ of possession following the public auction of the parcels
of land mortgaged to the bank. It upheld the inclusion by relying on the
principles laid upon in Bischoff v. Pomar and Cia. General de Tabacos 57 and
Cu Unjieng e Hijos v. Mabalacat Sugar Co.58
In Spouses Paderes v. Court of Appeals,59 we reiterated once more the Cu
Unjieng e Hijos ruling and approved the inclusion of machineries and
accessories installed at the time the mortgage, as well as all the buildings,

machinery and accessories belonging to the mortgagor, installed after the


constitution thereof.
3. Contrary to the finding of the CA, the Extra-Judicial Foreclosure of
Mortgage includes the machineries and equipments of respondent. While
captioned as a "Petition for Extra-Judicial Foreclosure of Real Estate
Mortgage Under Act No. 3135 As Amended," the averments state that the
petition is based on "x x x the Mortgage Trust Indenture, the Deed of
Amendment to the Mortgage Trust Indenture, the Second Supplemental
Indenture to the Mortgage Trust Indenture, and the Third Supplemental
Indenture to the Mortgage Trust Indenture (hereinafter collectively referred to
as the Indenture) duly notarized and entered as x x x."60 Noting that herein
respondent has an outstanding obligation in the total amount of Nine
Hundred One Million Eight Hundred One Thousand Four Hundred Eighty
Four and 10/100 Pesos (P901,801,484.10), the petition for foreclosure prayed
that a foreclosure proceedings "x x x on the aforesaid real properties,
including all improvements thereon covered by the real estate mortgage be
undertaken and the appropriate auction sale be conducted x x x."61
Considering that the Indenture which is the instrument of the mortgage that
was foreclosed exactly states through the Deed of Amendment that the
machineries and equipments listed in Annexes "A" and "B" form part of the
improvements listed and located on the parcels of land subject of the
mortgage, such machineries and equipments are surely part of the foreclosure
of the "real estate properties, including all improvements thereon" as prayed
for in the petition.
Indeed, the lower courts ought to have noticed the fact that the chattel
mortgages adverted to were dated 8 January 1990, 19 July 1990, 28 June
1991 and 28 November 1991. The real estate mortgages which specifically
included the machineries and equipments were subsequent to the chattel
mortgages dated 26 August 1992, 20 November 1992, 7 June 1994 and 24
January 1995. Without doubt, the real estate mortgages superseded the earlier
chattel mortgages.1wphi1

The real estate mortgage over the machineries and equipments is even in
full accord with the classification of such properties by the Civil Code of the
Philippines as immovable property. Thus:
Article 415. The following are immovable property:
(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
xxxx
(5) Machinery, receptacles, instruments or implements intended by the
owner of the tenement for an industry or works which may be carried on in
a building or on a piece of land, and which tend directly to meet the needs
of the said industry or works;
WHEREFORE, the petition is GRANTED. Accordingly, the Decision and
Resolution of the Court of Appeals dated 8 March 2005 and 8 August 2005
upholding the 15 August 2003 and 1 December 2003 Orders of the
Valenzuela Regional Trial Court are hereby REVERSED and SET ASIDE
and the original Order of the trial court dated 28 February 2003 denying the
motion of respondent to remove or dispose of machinery is hereby
REINSTATED.
SO ORDERED.

IN LIGHT OF ALL THE FOREGOING, the petition


is GRANTED. The assailed Orders of the Regional Trial Court
and the Decision of the Court of Appeals are REVERSED and
SET ASIDE. The Regional Trial Court is directed to issue an
order granting the motion of the petitioner to quash the
Amended Information.
SO ORDERED.
By way of brief background, petitioner is one of the accused in
Criminal

Case

No.

the Regional Trial Court of Makati City,

99-2425,

filed

with

Branch

150. The

Amended

Information charged the accused with theft under Article 308 of the
Revised Penal Code, committed as follows:
On or about September 10-19, 1999, or prior thereto in
Makati City, and within the jurisdiction of this Honorable
Court, the accused, conspiring and confederating together
and all of them mutually helping and aiding one another,

2. G.R. No. 155076

with intent to gain and without the knowledge and consent of

LUIS MARCOS P. LAURELPetitioner, - versus -

the Philippine Long Distance Telephone (PLDT), did then and

HON. ZEUS C. ABROGAR,

there willfully, unlawfully and feloniously take, steal and use

Presiding Judge of the Regional

the international long distance calls belonging to PLDT by

Trial Court, Makati City, Branch 150,

conducting International Simple Resale (ISR), which is a

PEOPLE OF THE PHILIPPINES & PHILIPPINE LONG DISTANCE

method of routing and completing international long distance

TELEPHONE COMPANY,

calls using lines, cables, antenae, and/or air wave frequency

Respondents.

which connect directly to the local or domestic exchange

RESOLUTION

facilities of the country where the call is destined, effectively


stealing this business from PLDT while using its facilities in

YNARES-SANTIAGO, J.:

the estimated amount of P20,370,651.92 to the damage and


prejudice of PLDT, in the said amount.

On February 27, 2006, this Courts First Division rendered judgment in


this case as follows:

CONTRARY TO LAW.[2]

PLDT further insists that the Revised Penal Code should be


Petitioner filed a Motion to Quash (with Motion to Defer

interpreted in the context of the Civil Codes definition of real and

Arraignment), on the ground that the factual allegations in the

personal property. The enumeration of real properties in Article 415 of

Amended Information do not constitute the felony of theft. The trial the Civil Code is exclusive such that all those not included therein are
court denied the Motion to Quash the Amended Information, as well

personal properties. Since Article 308 of the Revised Penal Code used

petitioners subsequent Motion for Reconsideration.

the words personal property without qualification, it follows that all


personal properties as understood in the context of the Civil Code,

Petitioners special civil action for certiorari was dismissed by may be the subject of theft under Article 308 of the Revised Penal
the Court of Appeals. Thus, petitioner filed the instant petition for Code. PLDT alleges that the international calls and business of
review with this Court.

providing telecommunication or telephone service are personal


properties capable of appropriation and can be objects of theft.

In the above-quoted Decision, this Court held that the


Amended Information does not contain material allegations charging

PLDT also argues that taking in relation to theft under the

petitioner with theft of personal property since international long

Revised Penal Code does not require asportation, the sole requisite

distance calls and the business of providing telecommunication or being that the object should be capable of appropriation. The element
telephone services are not personal properties under Article 308 of

of taking referred to in Article 308 of the Revised Penal Code means

the Revised Penal Code.

the act of depriving another of the possession and dominion of a


movable coupled with the intention, at the time of the taking, of

Respondent Philippine Long Distance Telephone Company withholding it with the character of permanency. There must be intent
(PLDT) filed a Motion for Reconsideration with Motion to Refer the to appropriate, which means to deprive the lawful owner of the
Case to the Supreme Court En Banc. It maintains that the Amended thing. Thus, the term personal properties under Article 308 of the
Information charging petitioner with theft is valid and sufficient; that Revised Penal Code is not limited to only personal properties which
it states the names of all the accused who were specifically charged

are susceptible of being severed from a mass or larger quantity and of

with the crime of theft of PLDTs international calls and business of

being transported from place to place.

providing telecommunication or telephone service on or about


September 10 to 19, 1999 in Makati City by conducting ISR or

PLDT likewise alleges that as early as the 1930s, international

International Simple Resale; that it identifies the international calls

telephone calls were in existence; hence, there is no basis for this

and business of providing telecommunication or telephone service of Courts finding that the Legislature could not have contemplated the
PLDT as the personal properties which were unlawfully taken by the theft of international telephone calls and the unlawful transmission
accused; and that it satisfies the test of sufficiency as it enabled a

and routing of electronic voice signals or impulses emanating from

person of common understanding to know the charge against him

such calls by unlawfully tampering with the telephone device as within

and the court to render judgment properly.

the coverage of the Revised Penal Code.

According to respondent, the international phone calls which


are electric currents or sets of electric impulses transmitted through

encompassing and embracing even such scenario that could not have
been easily anticipated.

a medium, and carry a pattern representing the human voice to a


receiver,

are

personal

properties

which

may

be

subject

of

According to the OSG, prosecution under Republic Act (RA) No.

theft. Article 416(3) of the Civil Code deems forces of nature (which 8484 or the Access Device Regulations Act of 1998 and RA 8792 or
includes electricity) which are brought under the control by science,

the Electronic Commerce Act of 2000does not preclude prosecution

are personal property.

under the Revised Penal Code for the crime of theft. The latter
embraces unauthorized appropriation or use of PLDTs international

In his Comment to PLDTs motion for reconsideration, petitioner

calls, service and business, for personal profit or gain, to the prejudice

Laurel claims that a telephone call is a conversation on the phone or of PLDT as owner thereof. On the other hand, the special laws punish
a

communication

carried

out

using

the

telephone. It

is

not the surreptitious and advanced technical means employed to illegally

synonymous to electric current or impulses. Hence, it may not be obtain the subject service and business. Even assuming that the
considered

as

personal

property

susceptible

of correct indictment should have been under RA 8484, the quashal of

appropriation. Petitioner claims that the analogy between generated

the information would still not be proper. The charge of theft as

electricity and telephone calls is misplaced. PLDT does not produce alleged in the Information should be taken in relation to RA 8484
or generate telephone calls. It only provides the facilities or services because it is the elements, and not the designation of the crime, that
for the transmission and switching of the calls. He also insists that control.
business is not personal property. It is not the business that is
protected but the right to carry on a business. This right is what is Considering the gravity and complexity of the novel questions of law
considered as property. Since the services of PLDT cannot be involved in this case, the Special First Division resolved to refer the
considered as property, the same may not be subject of theft.

same to the Banc.

The Office of the Solicitor General (OSG) agrees with

We resolve to grant the Motion for Reconsideration but remand

respondent PLDT that international phone calls and the business or

the case to the trial court for proper clarification of the Amended

service of providing international phone calls are subsumed in the

Information.

enumeration and definition of personal property under the Civil Code


hence, may be proper subjects of theft. It noted that the cases Article 308 of the Revised Penal Code provides:
of United States v. Genato,[3]United States v. Carlos[4] and United
[5]

States v. Tambunting,

Art. 308. Who are liable for theft. Theft is committed by

which recognized intangible properties like

any person who, with intent to gain but without violence

gas and electricity as personal properties, are deemed incorporated

against, or intimidation of persons nor force upon things,

in our penal laws. Moreover, the theft provision in the Revised Penal

shall take personal property of another without the

Code was deliberately couched in broad terms precisely to be all-

latters consent.

The elements of theft under Article 308 of the Revised Penal Cognizant of the definition given by jurisprudence and the Civil Code
Code are as follows: (1) that there be taking of personal property; (2)

of Spain to the term personal property at the time the old Penal Code

that said property belongs to another; (3) that the taking be done was being revised, still the legislature did not limit or qualify the
with intent to gain; (4) that the taking be done without the consent of

definition of personal property in the Revised Penal Code. Neither did

the owner; and (5) that the taking be accomplished without the use

it provide a restrictive definition or an exclusive enumeration of

of violence against or intimidation of persons or force upon things.

personal property in the Revised Penal Code, thereby showing its


intent

Prior to the passage of the Revised Penal Code on December 8, 1930,

to

retain

for

the

term

an

extensive

and

unqualified

interpretation. Consequently, any property which is not included in the

the definition of the term personal property in the penal code enumeration of real properties under the Civil Code and capable of
provision

on

theft

had

been

established

in

Philippine appropriation can be the subject of theft under the Revised Penal

jurisprudence. This Court, in United States v. Genato, United States v.

Code.

Carlos, and United States v. Tambunting, consistently ruled that any


personal

property,

tangible

or

intangible,

corporeal

or

incorporeal, capable of appropriation can be the object of theft.

The only requirement for a personal property to be the object of theft


under the penal code is that it be capable of appropriation. It need not
be capable of asportation, which is defined as carrying away.

Moreover, since the passage of the Revised Penal Code on December

[7]

8, 1930, the term personal property has had a generally accepted

penal code does not require asportation or carrying away.[8]

Jurisprudence is settled that to take under the theft provision of the

definition in civil law. In Article 335 of the Civil Code of Spain,


personal property is defined as anything susceptible of appropriation

To appropriate means to deprive the lawful owner of the thing. [9] The

and not included in the foregoing chapter (not real property). Thus, word take in the Revised Penal Code includes any act intended to
the term personal property in the Revised Penal Code should be transfer possession which, as held in the assailed Decision, may be
interpreted in the context of the Civil Code provisions in accordance

committed through the use of the offenders own hands, as well as any

with the rule on statutory construction that where words have been

mechanical device, such as an access device or card as in the instant

long used in a technical sense and have been judicially construed to

case. This includes controlling the destination of the property stolen to

have a certain meaning, and have been adopted by the legislature as

deprive the owner of the property, such as the use of a meter

having a certain meaning prior to a particular statute, in which they

tampering, as held in Natividad v. Court of Appeals,[10]use of a device

are used, the words used in such statute should be construed

to fraudulently obtain gas, as held in United States v. Tambunting, and

according to the sense in which they have been previously used.

[6]

In the use of a jumper to divert electricity, as held in the cases of United

fact, this Court used the Civil Code definition of personal property in States v. Genato, United States v. Carlos, and United States v.
interpreting the theft provision of the penal code in United States v.

Menagas.[11]

Carlos.
As illustrated in the above cases, appropriation of forces of nature
which are brought under control by science such as electrical energy

can be achieved by tampering with any apparatus used for


generating or measuring such forces of nature, wrongfully redirecting

It was further ruled that even without the above ordinance the acts of

such forces of nature from such apparatus, or using any device to

subtraction punished therein are covered by the provisions on theft of

fraudulently obtain such forces of nature. In the instant case, the Penal Code then in force, thus:
petitioner was charged with engaging in International Simple Resale
(ISR) or the unauthorized routing and completing of international

Even without them (ordinance), the right of the

long distance calls using lines, cables, antennae, and/or air wave

ownership of electric current is secured by articles 517 and

frequency and connecting these calls directly to the local or domestic

518 of the Penal Code; the application of these articles in

exchange facilities of the country where destined.

cases of subtraction of gas, a fluid used for lighting, and in


some respects resembling electricity, is confirmed by the rule

As early as 1910, the Court declared in Genato that ownership over

laid down in the decisions of the supreme court of Spain of

electricity (which an international long distance call consists of), as

January 20, 1887, and April 1, 1897, construing and enforcing

well as telephone service, is protected by the provisions on theft of

the provisions of articles 530 and 531 of the Penal Code of

the Penal Code. The pertinent provision of the Revised Ordinance of

that country, articles 517 and 518 of the code in force in these

the City of Manila, which was involved in the said case, reads as

islands.

follows:
The acts of subtraction include: (a) tampering with any wire, meter, or
Injury to electric apparatus; Tapping current; Evidence. No

other

apparatus

installed

or

used

for

generating,

containing,

person shall destroy, mutilate, deface, or otherwise injure or

conducting, or measuring electricity, telegraph or telephone service;

tamper with any wire, meter, or other apparatus installed or

(b) tapping or otherwise wrongfully deflecting or taking any electric

used for generating, containing, conducting, or measuring

current from such wire, meter, or other apparatus; and (c) using or

electricity, telegraph or telephone service, nor tap or

enjoying the benefits of any device by means of which one may

otherwise wrongfully deflect or take any electric current from

fraudulently obtain any current of electricity or any telegraph or

such wire, meter, or other apparatus.

telephone service.

No person shall, for any purpose whatsoever, use or enjoy

In the instant case, the act of conducting ISR operations by illegally

the benefits of any device by means of which he may

connecting various equipment or apparatus to private respondent

fraudulently obtain any current of electricity or any telegraph

PLDTs telephone system, through which petitioner is able to resell or

or telephone service; and the existence in any building

re-route international long distance calls using respondent PLDTs

premises of any such device shall, in the absence of

facilities constitutes all three acts of subtraction mentioned above.

satisfactory explanation, be deemed sufficient evidence of


such use by the persons benefiting thereby.

The business of providing telecommunication or telephone service is


likewise personal property which can be the object of theft under

Article 308 of the Revised Penal Code.Business may be appropriated

likewise not enumerated as personal property under the Civil

under Section 2 of Act No. 3952 (Bulk Sales Law), hence, could be

Code. Just

object of theft:

appropriated. Following the ruling in Strochecker v. Ramirez, business

like

interest

in

business,

however,

it

may

be

should also be classified as personal property. Since it is not included


Section 2. Any sale, transfer, mortgage, or assignment
of a stock of goods, wares, merchandise, provisions, or

in the exclusive enumeration of real properties under Article 415, it is


therefore personal property.[13]

materials otherwise than in the ordinary course of trade and


the regular prosecution of the business of the vendor,

As can be clearly gleaned from the above disquisitions,

mortgagor, transferor, or assignor, or any sale, transfer,

petitioners acts constitute theft of respondent PLDTs business and

mortgage, or assignment of all, or substantially all, of the

service, committed by means of the unlawful use of the latters

business or trade theretofore conducted by the vendor,

facilities. In

mortgagor, transferor or assignor, or all, or substantially all, of

describes the offense by making it appear that what petitioner took

the fixtures and equipment used in and about the business of

were the international long distance telephone calls, rather than

the vendor, mortgagor, transferor, or assignor, shall be

respondent PLDTs business.

this

regard,

the

Amended

Information

inaccurately

deemed to be a sale and transfer in bulk, in contemplation of


the Act. x x x.

A perusal of the records of this case readily reveals that petitioner and
respondent PLDT extensively discussed the issue of ownership of

In Strochecker v. Ramirez,

[12]

this Court stated:

telephone calls. The prosecution has taken the position that said
telephone calls belong to respondent PLDT. This is evident from its

With regard to the nature of the property thus

Comment where it defined the issue of this case as whether or not the

mortgaged which is one-half interest in the business above

unauthorized use or appropriation of PLDT international telephone

described, such interest is a personal property capable of

calls, service and facilities, for the purpose of generating personal

appropriation and not included in the enumeration of real

profit or gain that should have otherwise belonged to PLDT,

properties in article 335 of the Civil Code, and may be the

constitutes theft.[14]

subject of mortgage.
In discussing the issue of ownership, petitioner and respondent PLDT
Interest in business was not specifically enumerated as personal gave their respective explanations on how a telephone call is
property in the Civil Code in force at the time the above decision was

generated.[15] For its part, respondent PLDT explains the process of

rendered. Yet, interest in business was declared to be personal

generating a telephone call as follows:

property since it is capable of appropriation and not included in the


enumeration of real properties. Article 414 of the Civil Code provides

38. The role of telecommunication companies is not

that all things which are or may be the object of appropriation are

limited to merely providing the medium (i.e. the electric

considered either real property or personal property. Business is

current) through which the human voice/voice signal of the

caller is transmitted. Before the human voice/voice signal can

PLDT which decodes, augments and enhances the electronic

be so transmitted, a telecommunication company, using its

impulses back to the human voice/voice signal and provides

facilities, must first break down or decode the human

the medium (i.e. electric current) to enable the called party to

voice/voice signal into electronic impulses and subject the

receive the call. Without private respondent PLDTs network, the

same to further augmentation and enhancements. Only after

human voice/voice signal of the calling party will never reach

such process of conversion will the resulting electronic

the called party.[16]

impulses be transmitted by a telecommunication company,


again, through the use of its facilities. Upon reaching the
destination of the call, the telecommunication company will

In the assailed Decision, it was conceded that in making the

again break down or decode the electronic impulses back to

international phone calls, the human voice is converted into electrical

human voice/voice signal before the called party receives the

impulses or electric current which are transmitted to the party

same. In other words, a telecommunication company both

called. A telephone call, therefore, is electrical energy. It was also held

converts/reconverts

in the assailed Decision that intangible property such as electrical

the

human

voice/voice

signal

and

provides the medium for transmitting the same.

energy is capable of appropriation because it may be taken and


carried away. Electricity is personal property under Article 416 (3) of

39. Moreover, in the case of an international telephone


call, once the electronic impulses originating from a foreign

the Civil Code, which enumerates forces of nature which are brought
under control by science.[17]

telecommunication company country (i.e. Japan) reaches the


Philippines through a local telecommunication company (i.e.

Indeed, while it may be conceded that international long distance

private respondent PLDT), it is the latter which decodes,

calls, the matter alleged to be stolen in the instant case, take the form

augments and enhances the electronic impulses back to the

of electrical energy, it cannot be said that such international long

human voice/voice signal and provides the medium (i.e.

distance calls were personal properties belonging to PLDT since the

electric current) to enable the called party to receive the

latter could not have acquired ownership over such calls. PLDT merely

call. Thus, it is not true that the foreign telecommunication

encodes, augments, enhances, decodes and transmits said calls using

company provides (1) the electric current which transmits the

its complex communications infrastructure and facilities. PLDT not

human voice/voice signal of the caller and (2) the electric

being the owner of said telephone calls, then it could not validly claim

current for the called party to receive said human voice/voice

that such telephone calls were taken without its consent. It is the use

signal.

of these communications facilities without the consent of PLDT that


constitutes the crime of theft, which is the unlawful taking of the
40. Thus, contrary to petitioner Laurels assertion, once

telephone services and business.

the electronic impulses or electric current originating from a


foreign telecommunication company (i.e. Japan) reaches

Therefore, the business of providing telecommunication and

private respondent PLDTs network, it is private respondent

the telephone service are personal property under Article 308 of the

Revised Penal Code, and the act of engaging in ISR is an act of


subtraction penalized under said article. However, the Amended
Information describes the thing taken as, international long distance

BPI FAMILY BANK,Petitioner,- versus - AMADO FRANCO and COURT OF

calls, and only later mentions stealing the business from PLDT as the APPEALS,Respondents.
manner by which the gain was derived by the accused. In order to
correct this inaccuracy of description, this case must be remanded to

DECISION

the trial court and the prosecution directed to amend the Amended
Information, to clearly state that the property subject of the theft are

NACHURA, J.:

the services and business of respondent PLDT. Parenthetically, this


amendment is not necessitated by a mistake in charging the proper

Banks are exhorted to treat the accounts of their depositors with

offense, which would have called for the dismissal of the information

meticulous care and utmost fidelity. We reiterate this exhortation in

under Rule 110, Section 14 and Rule 119, Section 19 of the Revised

the case at bench.

Rules on Criminal Procedure. To be sure, the crime is properly


designated as one of theft. The purpose of the amendment is simply Before us is a Petition for Review on Certiorari seeking the reversal of
to ensure that the accused is fully and sufficiently apprised of the

the Court of Appeals (CA) Decision [1] in CA-G.R. CV No. 43424 which

nature and cause of the charge against him, and thus guaranteed of

affirmed with modification the judgment [2] of the Regional Trial Court,

his rights under the Constitution.

Branch 55, Manila (Manila RTC), in Civil Case No. 90-53295.

ACCORDINGLY,
is GRANTED. The

the

assailed

motion

Decision

dated

for

reconsideration This case has its genesis in an ostensible fraud perpetrated on the

February

27,

2006 petitioner BPI Family Bank (BPI-FB) allegedly by respondent Amado

is RECONSIDERED and SET ASIDE. The Decision of the Court of Franco (Franco) in conspiracy with other individuals,[3] some of whom
Appeals in CA-G.R. SP No. 68841 affirming the Order issued by Judge opened and maintained separate accounts with BPI-FB, San Francisco
Zeus C. Abrogar of the Regional Trial Court of Makati City, Branch

del Monte (SFDM) branch, in a series of transactions.

150, which denied the Motion to Quash (With Motion to Defer


Arraignment)

in

Criminal

Case

No.

99-2425

for

theft, On August

is AFFIRMED. The case is remanded to the trial court and the Public

15,

1989,

Tevesteco

Arrastre-Stevedoring

Co.,

Inc.

(Tevesteco) opened a savings and current account with BPI-FB. Soon

Prosecutor of Makati City is hereby DIRECTED to amend the thereafter, or on August 25, 1989, First Metro Investment Corporation
Amended Information to show that the property subject of the theft (FMIC) also opened a time deposit account with the same branch of
were services and business of the private offended party.
SO ORDERED.

BPI-FB with a deposit of P100,000,000.00, to mature one year thence.


Subsequently, on August 31, 1989, Franco opened three accounts,
namely, a current,[4] savings,[5] and time deposit,[6] with BPI-FB. The

3. G.R. No. 123498November 23, 2007

current and savings accounts were respectively funded with an initial

deposit of P500,000.00 each, while the time deposit account Case), which had been filed by BPI-FB against Franco et al.,[14] to recover
had P1,000,000.00 with a maturity date of August 31, 1990. The total the P37,455,410.54 representing Tevestecos total withdrawals from its
amount ofP2,000,000.00 used to open these accounts is traceable to

account.

a check issued by Tevesteco allegedly in consideration of Francos


introduction of Eladio Teves,[7] who was looking for a conduit bank to
facilitate Tevestecos business transactions, to Jaime Sebastian, who
was then BPI-FB SFDMs Branch Manager. In turn, the funding for
the P2,000,000.00 check was part of the P80,000,000.00 debited by
BPI-FB from FMICs time deposit account and credited to Tevestecos

Notably, the dishonored checks were issued by Franco and presented


for payment at BPI-FB prior to Francos receipt of notice that his accounts
were under garnishment.[15]In fact, at the time the Notice of Garnishment
dated September 27, 1989 was served on BPI-FB, Franco had yet to be
impleaded in the Makati case where the writ of attachment was issued.

current account pursuant to an Authority to Debit purportedly signed


by FMICs officers.
It appears, however, that the signatures of FMICs officers on the
Authority to Debit were forged.[8] On September 4, 1989, Antonio
Ong,[9] upon being shown the Authority to Debit, personally declared
his signature therein to be a forgery. Unfortunately, Tevesteco had
already effected several withdrawals from its current account (to
which had been credited the P80,000,000.00 covered by the forged
Authority

to

Debit)

amounting

to P37,455,410.54,

including

the P2,000,000.00 paid to Franco.

It was only on May 15, 1990, through the service of a copy of the Second
Amended Complaint in Civil Case No. 89-4996, that Franco was impleaded
in the Makati case.[16]Immediately, upon receipt of such copy, Franco filed a
Motion to Discharge Attachment which the Makati RTC granted on May 16,
1990. The Order Lifting the Order of Attachment was served on BPI-FB on
even date, with Franco demanding the release to him of the funds in his
savings and current accounts. Jesus Arangorin, BPI-FBs new manager, could
not forthwith comply with the demand as the funds, as previously stated, had
already been debited because of FMICs forgery claim. As such, BPI-FBs
computer at the SFDM Branch indicated that the current account record was
not on file.

On September 8, 1989, impelled by the need to protect its


interests in light of FMICs forgery claim, BPI-FB, thru its Senior VicePresident, Severino Coronacion, instructed Jesus Arangorin

[10]

to debit

Francos savings and current accounts for the amounts remaining


therein.[11] However, Francos time deposit account could not be
debited due to the capacity limitations of BPI-FBs computer. [12]

In the meantime, two checks[13] drawn by Franco against his BPI-FB current
account were dishonored upon presentment for payment, and stamped with
a notation account under garnishment. Apparently, Francos current account
was garnished by virtue of an Order of Attachment issued by the Regional
Trial Court of Makati (Makati RTC) in Civil Case No. 89-4996 (Makati

With respect to Francos savings account, it appears that Franco agreed to an


arrangement, as a favor to Sebastian, whereby P400,000.00 from his savings
account was temporarily transferred to Domingo Quiaoits savings account,
subject to its immediate return upon issuance of a certificate of deposit which
Quiaoit needed in connection with his visa application at the Taiwan
Embassy. As part of the arrangement, Sebastian retained custody of Quiaoits
savings account passbook to ensure that no withdrawal would be effected
therefrom, and to preserve Francos deposits.

On May 17, 1990, Franco pre-terminated his time deposit account. BPI-FB defined and penalized under Article 351, par. 2(a) of the Revised Penal Code.
deducted the amount of P63,189.00 from the remaining balance of the time [23] However, the civil case[24] remains under litigation and the respective
deposit account representing advance interest paid to him.
rights and liabilities of the parties have yet to be adjudicated.
These transactions spawned a number of cases, some of which we had Consequently, in light of BPI-FBs refusal to heed Francos demands to
already resolved.
unfreeze his accounts and release his deposits therein, the latter filed on June
4, 1990 with the Manila RTC the subject suit. In his complaint, Franco
FMIC filed a complaint against BPI-FB for the recovery of the amount prayed for the following reliefs: (1) the interest on the remaining
of P80,000,000.00 debited from its account.[17] The case eventually reached balance[25] of his current account which was eventually released to him on
this Court, and in BPI Family Savings Bank, Inc. v. First Metro Investment October 31, 1991; (2) the balance[26] on his savings account, plus interest
Corporation,[18] we upheld the finding of the courts below that BPI-FB thereon; (3) the advance interest[27] paid to him which had been deducted
failed to exercise the degree of diligence required by the nature of its when he pre-terminated his time deposit account; and (4) the payment of
obligation to treat the accounts of its depositors with meticulous care. Thus, actual, moral and exemplary damages, as well as attorneys fees.
BPI-FB was found liable to FMIC for the debited amount in its time
deposit. It was ordered to pay P65,332,321.99 plus interest at 17% per BPI-FB traversed this complaint, insisting that it was correct in freezing the
annum from August 29, 1989 until fully restored. In turn, the 17% shall accounts of Franco and refusing to release his deposits, claiming that it had a
itself earn interest at 12% from October 4, 1989 until fully paid.
better right to the amounts which consisted of part of the money allegedly
fraudulently withdrawn from it by Tevesteco and ending up in Francos
In a related case, Edgardo Buenaventura, Myrna Lizardo and accounts. BPI-FB asseverated that the claimed consideration
Yolanda Tica (Buenaventura, et al.),[19] recipients of a P500,000.00 check of P2,000,000.00 for the introduction facilitated by Franco between George
proceeding from the P80,000,000.00 mistakenly credited to Tevesteco, Daantos and Eladio Teves, on the one hand, and Jaime Sebastian, on the
likewise filed suit. Buenaventura et al., as in the case of Franco, were also other, spoke volumes of Francos participation in the fraudulent transaction.
prevented from effecting withdrawals[20] from their current account with
BPI-FB, Bonifacio Market, Edsa, Caloocan City Branch. Likewise, when On August 4, 1993, the Manila RTC rendered judgment, the dispositive
the case was elevated to this Court docketed as BPI Family Bank v. portion of which reads as follows:
Buenaventura,[21] we ruled that BPI-FB had no right to freeze
Buenaventura, et al.s accounts and adjudged BPI-FB liable therefor, in
WHEREFORE, in view of all the foregoing, judgment is hereby
addition to damages.
rendered in favor of [Franco] and against [BPI-FB], ordering the
latter to pay to the former the following sums:
Meanwhile, BPI-FB filed separate civil and criminal cases against those
believed to be the perpetrators of the multi-million peso scam. [22] In the
1. P76,500.00 representing the legal rate of interest on the amount
criminal case, Franco, along with the other accused, except for Manuel
of P450,000.00 from May 18, 1990 to October 31, 1991;
Bienvenida who was still at large, were acquitted of the crime of Estafa as

2. P498,973.23 representing the balance on [Francos] savings


account as of May 18, 1990, together with the interest thereon in
accordance with the banks guidelines on the payment therefor;

SO ORDERED.[29]

The counterclaim of the defendant is DISMISSED for lack of


factual and legal anchor.

In this recourse, BPI-FB ascribes error to the CA when it ruled that: (1)
Franco had a better right to the deposits in the subject accounts which are part
of the proceeds of a forged Authority to Debit; (2) Franco is entitled to
interest on his current account; (3) Franco can recover the P400,000.00
deposit in Quiaoits savings account; (4) the dishonor of Francos checks was
not legally in order; (5) BPI-FB is liable for interest on Francos time deposit,
and for moral and exemplary damages; and (6) BPI-FBs counter-claim has no
factual and legal anchor.

Costs against [BPI-FB].

The petition is partly meritorious.

SO ORDERED.[28]

We are in full accord with the common ruling of the lower courts that

3. P30,000.00 by way of attorneys fees; and


4. P10,000.00 as nominal damages.

BPI-FB cannot unilaterally freeze Francos accounts and preclude him


from withdrawing his deposits.However, contrary to the appellate

Unsatisfied with the decision, both parties filed their respective appeals
before the CA. Franco confined his appeal to the Manila RTCs denial of his
claim for moral and exemplary damages, and the diminutive award of
attorneys fees. In affirming with modification the lower courts decision, the
appellate court decreed, to wit:

courts ruling, we hold that Franco is not entitled to unearned interest


on the time deposit as well as to moral and exemplary damages.
First. On the issue of who has a better right to the deposits in Francos
accounts, BPI-FB urges us that the legal consequence of FMICs forgery
claim is that the money transferred by BPI-FB to Tevesteco is its own,

WHEREFORE, foregoing considered, the appealed decision is


hereby AFFIRMED with modification ordering [BPI-FB] to pay
[Franco] P63,189.00 representing the interest deducted from the
time deposit of plaintiff-appellant. P200,000.00 as moral damages
and P100,000.00 as exemplary damages, deleting the award of
nominal damages (in view of the award of moral and exemplary
damages) and increasing the award of attorneys fees
from P30,000.00 to P75,000.00.

and considering that it was able to recover possession of the same


when the money was redeposited by Franco, it had the right to set up
its ownership thereon and freeze Francos accounts.
BPI-FB contends that its position is not unlike that of an owner of
personal property who regains possession after it is stolen, and to
illustrate this point, BPI-FB gives the following example: where Xs
television set is stolen by Y who thereafter sells it to Z, and where Z
unwittingly entrusts possession of the TV set to X, the latter would

Cost against [BPI-FB].

have the right to keep possession of the property and preclude Z from

recovering possession thereof. To bolster its position, BPI-FB cites

is what BPI-FB did in filing the Makati Case against Franco, et al. It

Article 559 of the Civil Code, which provides:

staked its claim on the money itself which passed from one account to
another, commencing with the forged Authority to Debit.

Article 559. The possession of movable property acquired in


good faith is equivalent to a title. Nevertheless, one who has

It bears emphasizing that money bears no earmarks of peculiar

lost any movable or has been unlawfully deprived thereof,

ownership,[34] and this characteristic is all the more manifest in the

may recover it from the person in possession of the same.

instant case which involves money in a banking transaction gone


awry. Its primary function is to pass from hand to hand as a medium of

If the possessor of a movable lost or of which the owner has

exchange, without other evidence of its title. [35] Money, which had

been unlawfully deprived, has acquired it in good faith at a

passed through various transactions in the general course of banking

public sale, the owner cannot obtain its return without

business, even if of traceable origin, is no exception.

reimbursing the price paid therefor.


Thus, inasmuch as what is involved is not a specific or
determinate

personal

property,

BPI-FBs

illustrative

example,

BPI-FBs argument is unsound. To begin with, the movable property ostensibly based on Article 559, is inapplicable to the instant case.
mentioned in Article 559 of the Civil Code pertains to a specific or
determinate thing.[30] A determinate or specific thing is one that is

There is no doubt that BPI-FB owns the deposited monies in the

individualized and can be identified or distinguished from others of

accounts of Franco, but not as a legal consequence of its unauthorized

the same kind.

[31]

transfer of FMICs deposits to Tevestecos account. BPI-FB conveniently


forgets that the deposit of money in banks is governed by the Civil

In this case, the deposit in Francos accounts consists of money Code provisions on simple loan or mutuum. [36] As there is a debtorwhich, albeit characterized as a movable, is generic and fungible.
[32]

creditor relationship between a bank and its depositor, BPI-FB

The quality of being fungible depends upon the possibility of the ultimately acquired ownership of Francos deposits, but such ownership

property, because of its nature or the will of the parties, being

is coupled with a corresponding obligation to pay him an equal

substituted by others of the same kind, not having a distinct amount on demand.[37] Although BPI-FB owns the deposits in Francos
individuality.[33]

accounts, it cannot prevent him from demanding payment of BPI-FBs


obligation by drawing checks against his current account, or asking for

Significantly, while Article 559 permits an owner who has lost the release of the funds in his savings account. Thus, when Franco
or has been unlawfully deprived of a movable to recover the exact

issued checks drawn against his current account, he had every right

same thing from the current possessor, BPI-FB simply claims as creditor to expect that those checks would be honored by BPI-FB as
ownership of the equivalent amount of money, i.e., the value thereof, debtor.
which it had mistakenly debited from FMICs account and credited to
Tevestecos, and subsequently traced to Francos account. In fact, this

More importantly, BPI-FB does not have a unilateral right to

confident that the bank will deliver it as and to whomever

freeze the accounts of Franco based on its mere suspicion that the

directs. A blunder on the part of the bank, such as the

funds therein were proceeds of the multi-million peso scam Franco

dishonor of the check without good reason, can cause the

was allegedly involved in. To grant BPI-FB, or any bank for that

depositor not a little embarrassment if not also financial loss

matter, the right to take whatever action it pleases on deposits which

and perhaps even civil and criminal litigation.

it supposes are derived from shady transactions, would open the


floodgates of public distrust in the banking industry.

The point is that as a business affected with public interest


and because of the nature of its functions, the bank is under

Our pronouncement in Simex International (Manila), Inc. v.


Court of Appeals

[38]

continues to resonate, thus:

obligation to treat the accounts of its depositors with


meticulous care, always having in mind the fiduciary nature of
their relationship. x x x.

The banking system is an indispensable institution in the


modern world and plays a vital role in the economic life of
every civilized nation. Whether as mere passive entities for

Ineluctably, BPI-FB, as the trustee in the fiduciary relationship, is duty

the

active

bound to know the signatures of its customers. Having failed to detect

instruments of business and commerce, banks have become

the forgery in the Authority to Debit and in the process inadvertently

an ubiquitous presence among the people, who have come to

facilitate the FMIC-Tevesteco transfer, BPI-FB cannot now shift liability

regard them with respect and even gratitude and, most of all,

thereon to Franco and the other payees of checks issued by

confidence. Thus, even the humble wage-earner has not

Tevesteco, or prevent withdrawals from their respective accounts

hesitated to entrust his lifes savings to the bank of his

without the appropriate court writ or a favorable final judgment.

safekeeping

and

saving

of

money

or

as

choice, knowing that they will be safe in its custody and will
even earn some interest for him. The ordinary person, with

Further, it boggles the mind why BPI-FB, even without delving

equal faith, usually maintains a modest checking account for

into the authenticity of the signature in the Authority to Debit,

security and convenience in the settling of his monthly bills

effected the transfer of P80,000,000.00 from FMICs to Tevestecos

and the payment of ordinary expenses. x x x.

account, when FMICs account was a time deposit and it had already
paid advance interest to FMIC. Considering that there is as yet no

In every case, the depositor expects the bank to treat his

indubitable evidence establishing Francos participation in the forgery,

account with the utmost fidelity, whether such account

he remains an innocent party. As between him and BPI-FB, the latter,

consists only of a few hundred pesos or of millions. The bank

which made possible the present predicament, must bear the resulting

must record every single transaction accurately, down to the

loss or inconvenience.

last centavo, and as promptly as possible. This has to be


done if the account is to reflect at any given time the amount

Second. With respect to its liability for interest on Francos

of money the depositor can dispose of as he sees fit,

current account, BPI-FB argues that its non-compliance with the

Makati RTCs Order Lifting the Order of Attachment and the legal
consequences thereof, is a matter that ought to be taken up in that
court.

BPI-FB makes capital of Francos belated allegation relative to


this particular arrangement. It insists that the transaction with Quiaoit
was not specifically alleged in Francos complaint before the Manila

The argument is tenuous. We agree with the succinct holding RTC. However, it appears that BPI-FB had impliedly consented to the
of the appellate court in this respect. The Manila RTCs order to pay trial of this issue given its extensive cross-examination of Quiaoit.
interests on Francos current account arose from BPI-FBs unjustified
refusal to comply with its obligation to pay Franco pursuant to their

Section 5, Rule 10 of the Rules of Court provides:

contract of mutuum. In other words, from the time BPI-FB refused


Francos demand for the release of the deposits in his current
account, specifically, from May 17, 1990, interest at the rate of 12%
began to accrue thereon.

[39]

Section

5. Amendment

to

conform

to

or

authorize

presentation of evidence. When issues not raised by the


pleadings are tried with the express or implied consent of
the parties, they shall be treated in all respects as if they

Undeniably, the Makati RTC is vested with the authority to

had been raised in the pleadings. Such amendment of the

determine the legal consequences of BPI-FBs non-compliance with

pleadings as may be necessary to cause them to conform

the Order Lifting the Order of Attachment. However, such authority

to the evidence and to raise these issues may be made

does not preclude the Manila RTC from ruling on BPI-FBs liability to

upon motion of any party at any time, even after

Franco for payment of interest based on its continued and unjustified

judgment; but failure to amend does not affect the result

refusal to perform a contractual obligation upon demand. After all,

of the trial of these issues. If evidence is objected to at the

this was the core issue raised by Franco in his complaint before the

trial on the ground that it is now within the issues made by the

Manila RTC.

pleadings, the court may allow the pleadings to be amended and


shall do so with liberality if the presentation of the merits of the

Third. As to the award to Franco of the deposits in Quiaoits

action and the ends of substantial justice will be subserved

account, we find no reason to depart from the factual findings of both

thereby. The court may grant a continuance to enable the

the Manila RTC and the CA.

amendment to be made. (Emphasis supplied)

Noteworthy is the fact that Quiaoit himself testified that the In all, BPI-FBs argument that this case is not the right forum for Franco
deposits in his account are actually owned by Franco who simply
accommodated

Jaime

Sebastians

request

to

to recover the P400,000.00 begs the issue. To reiterate, Quiaoit,

temporarily testifying during the trial, unequivocally disclaimed ownership of the

transfer P400,000.00 from Francos savings account to Quiaoits funds in his account, and pointed to Franco as the actual owner
account.[40] His testimony cannot be characterized as hearsay as the

thereof. Clearly, Francos action for the recovery of his deposits

records reveal that he had personal knowledge of the arrangement appropriately covers the deposits in Quiaoits account.
made between Franco, Sebastian and himself.[41]

Fourth. Notwithstanding all the foregoing, BPI-FB continues to insist

Makati RTC had no authority yet to bind the deposits of Franco through

that the dishonor of Francos checks respectively dated September 11

the writ of attachment, and consequently, there was no legal basis for

and 18, 1989 was legally in order in view of the Makati RTCs BPI-FB to dishonor the checks issued by Franco.
supplemental writ of attachment issued on September 14, 1989. It
posits that as the party that applied for the writ of attachment before

Fifth. Anent the CAs finding that BPI-FB was in bad faith and as such

the Makati RTC, it need not be served with the Notice of Garnishment

liable for the advance interest it deducted from Francos time deposit

before it could place Francos accounts under garnishment.

account, and for moral as well as exemplary damages, we find it


proper to reinstate the ruling of the trial court, and allow only the

The argument is specious. In this argument, we perceive BPI-FBs


clever but transparent ploy to circumvent Section 4,

[42]

recovery of nominal damages in the amount of P10,000.00. However,

Rule 13 of the we retain the CAs award of P75,000.00 as attorneys fees.

Rules of Court. It should be noted that the strict requirement on In granting Francos prayer for interest on his time deposit account and
service of court papers upon the parties affected is designed to for moral and exemplary damages, the CA attributed bad faith to BPIcomply with the elementary requisites of due process. Franco was FB because it (1) completely disregarded its obligation to Franco; (2)
entitled, as a matter of right, to notice, if the requirements of due

misleadingly claimed that Francos deposits were under garnishment;

process are to be observed. Yet, he received a copy of the Notice of (3) misrepresented that Francos current account was not on file; and
Garnishment only on September 27, 1989, several days after the two (4) refused to return the P400,000.00 despite the fact that the
checks he issued were dishonored by BPI-FB on September 20 and

ostensible owner, Quiaoit, wanted the amount returned to Franco.

21, 1989. Verily, it was premature for BPI-FB to freeze Francos


accounts without even awaiting service of the Makati RTCs Notice of

In this regard, we are guided by Article 2201 of the Civil Code which

Garnishment on Franco.

provides:

Additionally, it should be remembered that the enforcement of a writ

Article 2201. In contracts and quasi-contracts, the damages for

of attachment cannot be made without including in the main suit the

which the obligor who acted in good faith is liable shall be

owner of the property attached by virtue thereof. Section 5, Rule 13

those that are the natural and probable consequences of the

of the Rules of Court specifically provides that no levy or attachment

breach of the obligation, and which the parties have foreseen

pursuant to the writ issued x x x shall be enforced unless it is

or could have reasonable foreseen at the time the obligation

preceded,

was constituted.

or

contemporaneously

accompanied,

by

service

of

summons, together with a copy of the complaint, the application for


attachment, on the defendant within the Philippines.

In case of fraud, bad faith, malice or wanton attitude,


the obligor shall be responsible for all damages which

Franco was impleaded as party-defendant only on May 15, 1990. The

may be reasonably attributed to the non-performance

Makati RTC had yet to acquire jurisdiction over the person of Franco

of the obligation.(Emphasis supplied.)

when BPI-FB garnished his accounts.

[43]

Effectively, therefore, the

We find, as the trial court did, that BPI-FB acted out of the impetus of

is predicated on any of the cases stated in Article 2219 of the Civil

self-protection and not out of malevolence or ill will. BPI-FB was not in Code.[49]
the corrupt state of mind contemplated in Article 2201 and should
not be held liable for all damages now being imputed to it for its

Franco could not point to, or identify any particular circumstance in

breach of obligation. For the same reason, it is not liable for the Article 2219 of the Civil Code,[50] upon which to base his claim for
unearned interest on the time deposit.

moral damages.

Bad faith does not simply connote bad judgment or negligence; it

Thus, not having acted in bad faith, BPI-FB cannot be held liable for

imports a dishonest purpose or some moral obliquity and conscious moral damages under Article 2220 of the Civil Code for breach of
doing of wrong; it partakes of the nature of fraud. [44] We have held contract.[51]
that it is a breach of a known duty through some motive of interest
or ill will.[45] In the instant case, we cannot attribute to BPI-FB fraud or

We also deny the claim for exemplary damages. Franco should show

even a motive of self-enrichment. As the trial court found, there was

that he is entitled to moral, temperate, or compensatory damages

no denial whatsoever by BPI-FB of the existence of the accounts. The

before the court may even consider the question of whether

computer-generated document which indicated that the current exemplary damages should be awarded to him. [52] As there is no basis
account was not on file resulted from the prior debit by BPI-FB of the

for the award of moral damages, neither can exemplary damages be

deposits. The remedy of freezing the account, or the garnishment, or granted.


even the outright refusal to honor any transaction thereon was
resorted to solely for the purpose of holding on to the funds as a While it is a sound policy not to set a premium on the right to litigate,
security for its intended court action, [46] and with no other goal but to

[53]

ensure the integrity of the accounts.

fees for having been compelled to go to court in order to assert his

we, however, find that Franco is entitled to reasonable attorneys

right. Thus, we affirm the CAs grant of P75,000.00 as attorneys fees.


We have had occasion to hold that in the absence of fraud or bad
faith,[47] moral damages cannot be awarded; and that the adverse Attorneys fees may be awarded when a party is compelled to litigate
result of an action does not per se make the action wrongful, or the or incur expenses to protect his interest, [54] or when the court deems it
party liable for it. One may err, but error alone is not a ground for

just and equitable.[55] In the case at bench, BPI-FB refused to unfreeze

granting such damages.[48]

the deposits of Franco despite the Makati RTCs Order Lifting the Order

An award of moral damages contemplates the existence of the of

Attachment

and

Quiaoits

unwavering

assertion

that

following requisites: (1) there must be an injury clearly sustained by

the P400,000.00 was part of Francos savings account. This refusal

the claimant, whether physical, mental or psychological; (2) there

constrained Franco to incur expenses and litigate for almost two (2)

must be a culpable act or omission factually established; (3) the decades in order to protect his interests and recover his deposits.
wrongful act or omission of the defendant is the proximate cause of Therefore,
the injury sustained by the claimant; and (4) the award for damages

this

Court

deems

it

just

and

equitable

to

grant

Franco P75,000.00 as attorneys fees. The award is reasonable in view

of the complexity of the issues and the time it has taken for this case
to be resolved.[56]
Sixth. As for the dismissal of BPI-FBs counter-claim, we uphold the
Manila RTCs ruling, as affirmed by the CA, that BPI-FB is not entitled
to recover P3,800,000.00 as actual damages. BPI-FBs alleged loss of
profit as a result of Francos suit is, as already pointed out, of its own
making. Accordingly, the denial of its counter-claim is in order.
WHEREFORE, the petition is PARTIALLY GRANTED. The Court of
Appeals

Decision

dated November

29,

1995 is AFFIRMED with

the MODIFICATION that the award of unearned interest on the time


deposit and of moral and exemplary damages is DELETED.
No pronouncement as to costs.
SO ORDERED.

4. G.R. No. L-11658


February 15, 1918
LEUNG YEE, plaintiff-appellant,
vs.
FRANK L. STRONG MACHINERY COMPANY and J. G.
WILLIAMSON, defendants-appellees.
Booram and Mahoney for appellant.
Williams, Ferrier and SyCip for appellees.
CARSON, J.:
The "Compaia Agricola Filipina" bought a considerable quantity of ricecleaning machinery company from the defendant machinery company, and
executed a chattel mortgage thereon to secure payment of the purchase
price. It included in the mortgage deed the building of strong materials in
which the machinery was installed, without any reference to the land on
which it stood. The indebtedness secured by this instrument not having been
paid when it fell due, the mortgaged property was sold by the sheriff, in
pursuance of the terms of the mortgage instrument, and was bought in by

the machinery company. The mortgage was registered in the chattel mortgage
registry, and the sale of the property to the machinery company in satisfaction
of the mortgage was annotated in the same registry on December 29, 1913.
A few weeks thereafter, on or about the 14th of January, 1914, the "Compaia
Agricola Filipina" executed a deed of sale of the land upon which the
building stood to the machinery company, but this deed of sale, although
executed in a public document, was not registered. This deed makes no
reference to the building erected on the land and would appear to have been
executed for the purpose of curing any defects which might be found to exist
in the machinery company's title to the building under the sheriff's certificate
of sale. The machinery company went into possession of the building at or
about the time when this sale took place, that is to say, the month of
December, 1913, and it has continued in possession ever since.
At or about the time when the chattel mortgage was executed in favor of the
machinery company, the mortgagor, the "Compaia Agricola Filipina"
executed another mortgage to the plaintiff upon the building, separate and
apart from the land on which it stood, to secure payment of the balance of its
indebtedness to the plaintiff under a contract for the construction of the
building. Upon the failure of the mortgagor to pay the amount of the
indebtedness secured by the mortgage, the plaintiff secured judgment for that
amount, levied execution upon the building, bought it in at the sheriff's sale
on or about the 18th of December, 1914, and had the sheriff's certificate of
the sale duly registered in the land registry of the Province of Cavite.
At the time when the execution was levied upon the building, the defendant
machinery company, which was in possession, filed with the sheriff a sworn
statement setting up its claim of title and demanding the release of the
property from the levy. Thereafter, upon demand of the sheriff, the plaintiff
executed an indemnity bond in favor of the sheriff in the sum of P12,000, in
reliance upon which the sheriff sold the property at public auction to the
plaintiff, who was the highest bidder at the sheriff's sale.
This action was instituted by the plaintiff to recover possession of the
building from the machinery company.

The trial judge, relying upon the terms of article 1473 of the Civil Code,
gave judgment in favor of the machinery company, on the ground that the
company had its title to the building registered prior to the date of registry
of the plaintiff's certificate.
Article 1473 of the Civil Code is as follows:
If the same thing should have been sold to different vendees, the ownership
shall be transfer to the person who may have the first taken possession
thereof in good faith, if it should be personal property.
Should it be real property, it shall belong to the person acquiring it who first
recorded it in the registry.
Should there be no entry, the property shall belong to the person who first
took possession of it in good faith, and, in the absence thereof, to the person
who presents the oldest title, provided there is good faith.
The registry her referred to is of course the registry of real property, and it
must be apparent that the annotation or inscription of a deed of sale of real
property in a chattel mortgage registry cannot be given the legal effect of an
inscription in the registry of real property. By its express terms, the Chattel
Mortgage Law contemplates and makes provision for mortgages of personal
property; and the sole purpose and object of the chattel mortgage registry is
to provide for the registry of "Chattel mortgages," that is to say, mortgages
of personal property executed in the manner and form prescribed in the
statute. The building of strong materials in which the rice-cleaning
machinery was installed by the "Compaia Agricola Filipina" was real
property, and the mere fact that the parties seem to have dealt with it
separate and apart from the land on which it stood in no wise changed its
character as real property. It follows that neither the original registry in the
chattel mortgage of the building and the machinery installed therein, not the
annotation in that registry of the sale of the mortgaged property, had any
effect whatever so far as the building was concerned.
We conclude that the ruling in favor of the machinery company cannot be
sustained on the ground assigned by the trial judge. We are of opinion,
however, that the judgment must be sustained on the ground that the agreed
statement of facts in the court below discloses that neither the purchase of

the building by the plaintiff nor his inscription of the sheriff's certificate of
sale in his favor was made in good faith, and that the machinery company
must be held to be the owner of the property under the third paragraph of the
above cited article of the code, it appearing that the company first took
possession of the property; and further, that the building and the land were
sold to the machinery company long prior to the date of the sheriff's sale to
the plaintiff.
It has been suggested that since the provisions of article 1473 of the Civil
Code require "good faith," in express terms, in relation to "possession" and
"title," but contain no express requirement as to "good faith" in relation to the
"inscription" of the property on the registry, it must be presumed that good
faith is not an essential requisite of registration in order that it may have the
effect contemplated in this article. We cannot agree with this contention. It
could not have been the intention of the legislator to base the preferential
right secured under this article of the code upon an inscription of title in bad
faith. Such an interpretation placed upon the language of this section would
open wide the door to fraud and collusion. The public records cannot be
converted into instruments of fraud and oppression by one who secures an
inscription therein in bad faith. The force and effect given by law to an
inscription in a public record presupposes the good faith of him who enters
such inscription; and rights created by statute, which are predicated upon an
inscription in a public registry, do not and cannot accrue under an inscription
"in bad faith," to the benefit of the person who thus makes the inscription.
Construing the second paragraph of this article of the code, the supreme court
of Spain held in its sentencia of the 13th of May, 1908, that:
This rule is always to be understood on the basis of the good faith mentioned
in the first paragraph; therefore, it having been found that the second
purchasers who record their purchase had knowledge of the previous sale, the
question is to be decided in accordance with the following paragraph. (Note
2, art. 1473, Civ. Code, Medina and Maranon [1911] edition.)
Although article 1473, in its second paragraph, provides that the title of
conveyance of ownership of the real property that is first recorded in the
registry shall have preference, this provision must always be understood on

the basis of the good faith mentioned in the first paragraph; the legislator
could not have wished to strike it out and to sanction bad faith, just to
comply with a mere formality which, in given cases, does not obtain even in
real disputes between third persons. (Note 2, art. 1473, Civ. Code, issued by
the publishers of the La Revista de los Tribunales, 13th edition.)
The agreed statement of facts clearly discloses that the plaintiff, when he
bought the building at the sheriff's sale and inscribed his title in the land
registry, was duly notified that the machinery company had bought the
building from plaintiff's judgment debtor; that it had gone into possession
long prior to the sheriff's sale; and that it was in possession at the time when
the sheriff executed his levy. The execution of an indemnity bond by the
plaintiff in favor of the sheriff, after the machinery company had filed its
sworn claim of ownership, leaves no room for doubt in this regard. Having
bought in the building at the sheriff's sale with full knowledge that at the
time of the levy and sale the building had already been sold to the
machinery company by the judgment debtor, the plaintiff cannot be said to
have been a purchaser in good faith; and of course, the subsequent
inscription of the sheriff's certificate of title must be held to have been
tainted with the same defect.
Perhaps we should make it clear that in holding that the inscription of the
sheriff's certificate of sale to the plaintiff was not made in good faith, we
should not be understood as questioning, in any way, the good faith and
genuineness of the plaintiff's claim against the "Compaia Agricola
Filipina." The truth is that both the plaintiff and the defendant company
appear to have had just and righteous claims against their common debtor.
No criticism can properly be made of the exercise of the utmost diligence by
the plaintiff in asserting and exercising his right to recover the amount of his
claim from the estate of the common debtor. We are strongly inclined to
believe that in procuring the levy of execution upon the factory building and
in buying it at the sheriff's sale, he considered that he was doing no more
than he had a right to do under all the circumstances, and it is highly
possible and even probable that he thought at that time that he would be able
to maintain his position in a contest with the machinery company. There was

no collusion on his part with the common debtor, and no thought of the
perpetration of a fraud upon the rights of another, in the ordinary sense of the
word. He may have hoped, and doubtless he did hope, that the title of the
machinery company would not stand the test of an action in a court of law;
and if later developments had confirmed his unfounded hopes, no one could
question the legality of the propriety of the course he adopted.
But it appearing that he had full knowledge of the machinery company's
claim of ownership when he executed the indemnity bond and bought in the
property at the sheriff's sale, and it appearing further that the machinery
company's claim of ownership was well founded, he cannot be said to have
been an innocent purchaser for value. He took the risk and must stand by the
consequences; and it is in this sense that we find that he was not a purchaser
in good faith.
One who purchases real estate with knowledge of a defect or lack of title in
his vendor cannot claim that he has acquired title thereto in good faith as
against the true owner of the land or of an interest therein; and the same rule
must be applied to one who has knowledge of facts which should have put
him upon such inquiry and investigation as might be necessary to acquaint
him with the defects in the title of his vendor. A purchaser cannot close his
eyes to facts which should put a reasonable man upon his guard, and then
claim that he acted in good faith under the belief that there was no defect in
the title of the vendor. His mere refusal to believe that such defect exists, or
his willful closing of his eyes to the possibility of the existence of a defect in
his vendor's title, will not make him an innocent purchaser for value, if
afterwards develops that the title was in fact defective, and it appears that he
had such notice of the defects as would have led to its discovery had he acted
with that measure of precaution which may reasonably be acquired of a
prudent man in a like situation. Good faith, or lack of it, is in its analysis a
question of intention; but in ascertaining the intention by which one is
actuated on a given occasion, we are necessarily controlled by the evidence
as to the conduct and outward acts by which alone the inward motive may,
with safety, be determined. So it is that "the honesty of intention," "the honest
lawful intent," which constitutes good faith implies a "freedom from

knowledge and circumstances which ought to put a person on inquiry," and


so it is that proof of such knowledge overcomes the presumption of good
faith in which the courts always indulge in the absence of proof to the
contrary. "Good faith, or the want of it, is not a visible, tangible fact that can
be seen or touched, but rather a state or condition of mind which can only be
judged of by actual or fancied tokens or signs." (Wilder vs. Gilman, 55 Vt.,
504, 505; Cf. Cardenas Lumber Co. vs. Shadel, 52 La. Ann., 2094-2098;
Pinkerton Bros. Co. vs. Bromley, 119 Mich., 8, 10, 17.)
We conclude that upon the grounds herein set forth the disposing part of the
decision and judgment entered in the court below should be affirmed with
costs of this instance against the appellant. So ordered.
5. G.R. No. L-50008 August 31, 1987
PRUDENTIAL BANK, petitioner,
vs.
HONORABLE DOMINGO D. PANIS, Presiding Judge of Branch III,
Court of First Instance of Zambales and Olongapo City; FERNANDO
MAGCALE & TEODULA BALUYUT-MAGCALE, respondents.
PARAS, J.:
This is a petition for review on certiorari of the November 13, 1978
Decision * of the then Court of First Instance of Zambales and Olongapo
City in Civil Case No. 2443-0 entitled "Spouses Fernando A. Magcale and
Teodula Baluyut-Magcale vs. Hon. Ramon Y. Pardo and Prudential Bank"
declaring that the deeds of real estate mortgage executed by respondent
spouses in favor of petitioner bank are null and void.
The undisputed facts of this case by stipulation of the parties are as follows:
... on November 19, 1971, plaintiffs-spouses Fernando A. Magcale and
Teodula Baluyut Magcale secured a loan in the sum of P70,000.00 from the
defendant Prudential Bank. To secure payment of this loan, plaintiffs
executed in favor of defendant on the aforesaid date a deed of Real Estate
Mortgage over the following described properties:

l. A 2-STOREY, SEMI-CONCRETE, residential building with warehouse


spaces containing a total floor area of 263 sq. meters, more or less, generally
constructed of mixed hard wood and concrete materials, under a roofing of
cor. g. i. sheets; declared and assessed in the name of FERNANDO
MAGCALE under Tax Declaration No. 21109, issued by the Assessor of
Olongapo City with an assessed value of P35,290.00. This building is the
only improvement of the lot.
2. THE PROPERTY hereby conveyed by way of MORTGAGE includes the
right of occupancy on the lot where the above property is erected, and more
particularly described and bounded, as follows:
A first class residential land Identffied as Lot No. 720, (Ts-308, Olongapo
Townsite Subdivision) Ardoin Street, East Bajac-Bajac, Olongapo City,
containing an area of 465 sq. m. more or less, declared and assessed in the
name of FERNANDO MAGCALE under Tax Duration No. 19595 issued by
the Assessor of Olongapo City with an assessed value of P1,860.00; bounded
on the
NORTH: By No. 6, Ardoin Street
SOUTH: By No. 2, Ardoin Street
EAST: By 37 Canda Street, and
WEST: By Ardoin Street.
All corners of the lot marked by conc. cylindrical monuments of the Bureau
of Lands as visible limits. ( Exhibit "A, " also Exhibit "1" for defendant).
Apart from the stipulations in the printed portion of the aforestated deed of
mortgage, there appears a rider typed at the bottom of the reverse side of the
document under the lists of the properties mortgaged which reads, as follows:
AND IT IS FURTHER AGREED that in the event the Sales Patent on the lot
applied for by the Mortgagors as herein stated is released or issued by the
Bureau of Lands, the Mortgagors hereby authorize the Register of Deeds to
hold the Registration of same until this Mortgage is cancelled, or to annotate
this encumbrance on the Title upon authority from the Secretary of
Agriculture and Natural Resources, which title with annotation, shall be
released in favor of the herein Mortgage.

From the aforequoted stipulation, it is obvious that the mortgagee


(defendant Prudential Bank) was at the outset aware of the fact that the
mortgagors (plaintiffs) have already filed a Miscellaneous Sales Application
over the lot, possessory rights over which, were mortgaged to it.
Exhibit "A" (Real Estate Mortgage) was registered under the Provisions of
Act 3344 with the Registry of Deeds of Zambales on November 23, 1971.
On May 2, 1973, plaintiffs secured an additional loan from defendant
Prudential Bank in the sum of P20,000.00. To secure payment of this
additional loan, plaintiffs executed in favor of the said defendant another
deed of Real Estate Mortgage over the same properties previously
mortgaged in Exhibit "A." (Exhibit "B;" also Exhibit "2" for defendant).
This second deed of Real Estate Mortgage was likewise registered with the
Registry of Deeds, this time in Olongapo City, on May 2,1973.
On April 24, 1973, the Secretary of Agriculture issued Miscellaneous Sales
Patent No. 4776 over the parcel of land, possessory rights over which were
mortgaged to defendant Prudential Bank, in favor of plaintiffs. On the basis
of the aforesaid Patent, and upon its transcription in the Registration Book
of the Province of Zambales, Original Certificate of Title No. P-2554 was
issued in the name of Plaintiff Fernando Magcale, by the Ex-Oficio Register
of Deeds of Zambales, on May 15, 1972.
For failure of plaintiffs to pay their obligation to defendant Bank after it
became due, and upon application of said defendant, the deeds of Real
Estate Mortgage (Exhibits "A" and "B") were extrajudicially foreclosed.
Consequent to the foreclosure was the sale of the properties therein
mortgaged to defendant as the highest bidder in a public auction sale
conducted by the defendant City Sheriff on April 12, 1978 (Exhibit "E").
The auction sale aforesaid was held despite written request from plaintiffs
through counsel dated March 29, 1978, for the defendant City Sheriff to
desist from going with the scheduled public auction sale (Exhibit "D")."
(Decision, Civil Case No. 2443-0, Rollo, pp. 29-31).
Respondent Court, in a Decision dated November 3, 1978 declared the
deeds of Real Estate Mortgage as null and void (Ibid., p. 35).

On December 14, 1978, petitioner filed a Motion for Reconsideration (Ibid.,


pp. 41-53), opposed by private respondents on January 5, 1979 (Ibid., pp. 5462), and in an Order dated January 10, 1979 (Ibid., p. 63), the Motion for
Reconsideration was denied for lack of merit. Hence, the instant petition
(Ibid., pp. 5-28).
The first Division of this Court, in a Resolution dated March 9, 1979,
resolved to require the respondents to comment (Ibid., p. 65), which order
was complied with the Resolution dated May 18,1979, (Ibid., p. 100),
petitioner filed its Reply on June 2,1979 (Ibid., pp. 101-112).
Thereafter, in the Resolution dated June 13, 1979, the petition was given due
course and the parties were required to submit simultaneously their respective
memoranda. (Ibid., p. 114).
On July 18, 1979, petitioner filed its Memorandum (Ibid., pp. 116-144),
while private respondents filed their Memorandum on August 1, 1979 (Ibid.,
pp. 146-155).
In a Resolution dated August 10, 1979, this case was considered submitted
for decision (Ibid., P. 158).
In its Memorandum, petitioner raised the following issues:
1. WHETHER OR NOT THE DEEDS OF REAL ESTATE MORTGAGE
ARE VALID; AND
2. WHETHER OR NOT THE SUPERVENING ISSUANCE IN FAVOR OF
PRIVATE RESPONDENTS OF MISCELLANEOUS SALES PATENT NO.
4776 ON APRIL 24, 1972 UNDER ACT NO. 730 AND THE COVERING
ORIGINAL CERTIFICATE OF TITLE NO. P-2554 ON MAY 15,1972
HAVE THE EFFECT OF INVALIDATING THE DEEDS OF REAL
ESTATE MORTGAGE. (Memorandum for Petitioner, Rollo, p. 122).
This petition is impressed with merit.
The pivotal issue in this case is whether or not a valid real estate mortgage
can be constituted on the building erected on the land belonging to another.
The answer is in the affirmative.
In the enumeration of properties under Article 415 of the Civil Code of the
Philippines, this Court ruled that, "it is obvious that the inclusion of
"building" separate and distinct from the land, in said provision of law can

only mean that a building is by itself an immovable property." (Lopez vs.


Orosa, Jr., et al., L-10817-18, Feb. 28, 1958; Associated Inc. and Surety Co.,
Inc. vs. Iya, et al., L-10837-38, May 30,1958).
Thus, while it is true that a mortgage of land necessarily includes, in the
absence of stipulation of the improvements thereon, buildings, still a
building by itself may be mortgaged apart from the land on which it has
been built. Such a mortgage would be still a real estate mortgage for the
building would still be considered immovable property even if dealt with
separately and apart from the land (Leung Yee vs. Strong Machinery Co., 37
Phil. 644). In the same manner, this Court has also established that
possessory rights over said properties before title is vested on the grantee,
may be validly transferred or conveyed as in a deed of mortgage (Vda. de
Bautista vs. Marcos, 3 SCRA 438 [1961]).
Coming back to the case at bar, the records show, as aforestated that the
original mortgage deed on the 2-storey semi-concrete residential building
with warehouse and on the right of occupancy on the lot where the building
was erected, was executed on November 19, 1971 and registered under the
provisions of Act 3344 with the Register of Deeds of Zambales on
November 23, 1971. Miscellaneous Sales Patent No. 4776 on the land was
issued on April 24, 1972, on the basis of which OCT No. 2554 was issued in
the name of private respondent Fernando Magcale on May 15, 1972. It is
therefore without question that the original mortgage was executed before
the issuance of the final patent and before the government was divested of
its title to the land, an event which takes effect only on the issuance of the
sales patent and its subsequent registration in the Office of the Register of
Deeds (Visayan Realty Inc. vs. Meer, 96 Phil. 515; Director of Lands vs. De
Leon, 110 Phil. 28; Director of Lands vs. Jurado, L-14702, May 23, 1961;
Pena "Law on Natural Resources", p. 49). Under the foregoing
considerations, it is evident that the mortgage executed by private
respondent on his own building which was erected on the land belonging to
the government is to all intents and purposes a valid mortgage.
As to restrictions expressly mentioned on the face of respondents' OCT No.
P-2554, it will be noted that Sections 121, 122 and 124 of the Public Land

Act, refer to land already acquired under the Public Land Act, or any
improvement thereon and therefore have no application to the assailed
mortgage in the case at bar which was executed before such eventuality.
Likewise, Section 2 of Republic Act No. 730, also a restriction appearing on
the face of private respondent's title has likewise no application in the instant
case, despite its reference to encumbrance or alienation before the patent is
issued because it refers specifically to encumbrance or alienation on the land
itself and does not mention anything regarding the improvements existing
thereon.
But it is a different matter, as regards the second mortgage executed over the
same properties on May 2, 1973 for an additional loan of P20,000.00 which
was registered with the Registry of Deeds of Olongapo City on the same date.
Relative thereto, it is evident that such mortgage executed after the issuance
of the sales patent and of the Original Certificate of Title, falls squarely under
the prohibitions stated in Sections 121, 122 and 124 of the Public Land Act
and Section 2 of Republic Act 730, and is therefore null and void.
Petitioner points out that private respondents, after physically possessing the
title for five years, voluntarily surrendered the same to the bank in 1977 in
order that the mortgaged may be annotated, without requiring the bank to get
the prior approval of the Ministry of Natural Resources beforehand, thereby
implicitly authorizing Prudential Bank to cause the annotation of said
mortgage on their title.
However, the Court, in recently ruling on violations of Section 124 which
refers to Sections 118, 120, 122 and 123 of Commonwealth Act 141, has
held:
... Nonetheless, we apply our earlier rulings because we believe that as
in pari delicto may not be invoked to defeat the policy of the State neither
may the doctrine of estoppel give a validating effect to a void contract.
Indeed, it is generally considered that as between parties to a contract,
validity cannot be given to it by estoppel if it is prohibited by law or is
against public policy (19 Am. Jur. 802). It is not within the competence of
any citizen to barter away what public policy by law was to preserve

(Gonzalo Puyat & Sons, Inc. vs. De los Amas and Alino supra). ... (Arsenal
vs. IAC, 143 SCRA 54 [1986]).
This pronouncement covers only the previous transaction already alluded to
and does not pass upon any new contract between the parties (Ibid), as in
the case at bar. It should not preclude new contracts that may be entered into
between petitioner bank and private respondents that are in accordance with
the requirements of the law. After all, private respondents themselves
declare that they are not denying the legitimacy of their debts and appear to
be open to new negotiations under the law (Comment; Rollo, pp. 95-96).
Any new transaction, however, would be subject to whatever steps the
Government may take for the reversion of the land in its favor.
PREMISES CONSIDERED, the decision of the Court of First Instance of
Zambales & Olongapo City is hereby MODIFIED, declaring that the Deed
of Real Estate Mortgage for P70,000.00 is valid but ruling that the Deed of
Real Estate Mortgage for an additional loan of P20,000.00 is null and void,
without prejudice to any appropriate action the Government may take
against private respondents.
SO ORDERED.
6.

SERGS
PRODUCTS,
INC.,
and
SERGIO
T.
GOQUIOLAY, petitioners, vs. PCI
LEASING
AND
FINANCE, INC., respondent.
DECISION
PANGANIBAN, J.:
After agreeing to a contract stipulating that a real or
immovable property be considered as personal or movable, a party
is estopped from subsequently claiming otherwise. Hence, such
property is a proper subject of a writ of replevin obtained by the
other contracting party.
The Case
Before us is a Petition for Review on Certiorari assailing the
January 6, 1999 Decision[1] of the Court of Appeals (CA)[2] in CAGR SP No. 47332 and its February 26, 1999 Resolution [3] denying

reconsideration. The decretal portion of the CA Decision reads as


follows:
WHEREFORE, premises considered, the assailed Order dated February 18,
1998 and Resolution dated March 31, 1998 in Civil Case No. Q-98-33500 are
hereby AFFIRMED. The writ of preliminary injunction issued on June 15,
1998 is hereby LIFTED.[4]
In its February 18, 1998 Order,[5] the Regional Trial Court
(RTC) of Quezon City (Branch 218) [6] issued a Writ of Seizure.
[7]
The March 18, 1998 Resolution[8] denied petitioners Motion for
Special Protective Order, praying that the deputy sheriff be enjoined
from seizing immobilized or other real properties in (petitioners)
factory in Cainta, Rizal and to return to their original place whatever
immobilized machineries or equipments he may have removed.[9]
The Facts
The undisputed facts are summarized by the Court of Appeals
as follows:[10]
On February 13, 1998, respondent PCI Leasing and Finance, Inc. (PCI
Leasing for short) filed with the RTC-QC a complaint for [a] sum of money
(Annex E), with an application for a writ of replevin docketed as Civil Case
No. Q-98-33500.
On March 6, 1998, upon an ex-parte application of PCI Leasing, respondent
judge issued a writ of replevin (Annex B) directing its sheriff to seize and
deliver the machineries and equipment to PCI Leasing after 5 days and upon
the payment of the necessary expenses.
On March 24, 1998, in implementation of said writ, the sheriff proceeded to
petitioners factory, seized one machinery with [the] word that he [would]
return for the other machineries.
On March 25, 1998, petitioners filed a motion for special protective order
(Annex C), invoking the power of the court to control the conduct of its
officers and amend and control its processes, praying for a directive for the
sheriff to defer enforcement of the writ of replevin.

This motion was opposed by PCI Leasing (Annex F), on the ground that the
properties [were] still personal and therefore still subject to seizure and a
writ of replevin.
In their Reply, petitioners asserted that the properties sought to be seized
[were] immovable as defined in Article 415 of the Civil Code, the parties
agreement to the contrary notwithstanding.They argued that to give effect to
the agreement would be prejudicial to innocent third parties. They further
stated that PCI Leasing [was] estopped from treating these machineries as
personal because the contracts in which the alleged agreement [were]
embodied [were] totally sham and farcical.
On April 6, 1998, the sheriff again sought to enforce the writ of seizure and
take possession of the remaining properties. He was able to take two more,
but was prevented by the workers from taking the rest.
On April 7, 1998, they went to [the CA] via an original action for certiorari.
Ruling of the Court of Appeals
Citing the Agreement of the parties, the appellate court held
that the subject machines were personal property, and that they had
only been leased, not owned, by petitioners. It also ruled that the
words of the contract are clear and leave no doubt upon the true
intention of the contracting parties. Observing that Petitioner
Goquiolay was an experienced businessman who was not
unfamiliar with the ways of the trade, it ruled that he should have
realized the import of the document he signed. The CA further
held:
Furthermore, to accord merit to this petition would be to preempt the trial
court in ruling upon the case below, since the merits of the whole matter are
laid down before us via a petition whose sole purpose is to inquire upon the
existence of a grave abuse of discretion on the part of the [RTC] in issuing
the assailed Order and Resolution. The issues raised herein are proper
subjects of a full-blown trial, necessitating presentation of evidence by both
parties. The contract is being enforced by one, and [its] validity is attacked
by the other a matter x x x which respondent court is in the best position to
determine.

Hence, this Petition.[11]


The Issues
In their Memorandum, petitioners submit the following issues
for our consideration:
A. Whether or not the machineries purchased and imported by SERGS
became real property by virtue of immobilization.
B. Whether or not the contract between the parties is a loan or a lease.[12]
In the main, the Court will resolve whether the said machines
are personal, not immovable, property which may be a proper
subject of a writ of replevin. As a preliminary matter, the Court will
also address briefly the procedural points raised by respondent.
The Courts Ruling
The Petition is not meritorious.
Preliminary Matter:Procedural Questions
Respondent contends that the Petition failed to indicate
expressly whether it was being filed under Rule 45 or Rule 65 of the
Rules of Court. It further alleges that the Petition erroneously
impleaded Judge Hilario Laqui as respondent.
There is no question that the present recourse is under Rule
45. This conclusion finds support in the very title of the Petition,
which is Petition for Review on Certiorari.[13]
While Judge Laqui should not have been impleaded as a
respondent,[14] substantial justice requires that such lapse by itself
should not warrant the dismissal of the present Petition. In this light,
the Court deems it proper to remove, motu proprio, the name of
Judge Laqui from the caption of the present case.
Main Issue: Nature of the Subject Machinery
Petitioners contend that the subject machines used in their
factory were not proper subjects of the Writ issued by the RTC,
because they were in fact real property. Serious policy
considerations, they argue, militate against a contrary
characterization.

Rule 60 of the Rules of Court provides that writs of replevin


are issued for the recovery of personal property only.[15] Section 3
thereof reads:
SEC. 3. Order. -- Upon the filing of such affidavit and approval of the bond,
the court shall issue an order and the corresponding writ of replevin
describing the personal property alleged to be wrongfully detained and
requiring the sheriff forthwith to take such property into his custody.
On the other hand, Article 415 of the Civil Code enumerates
immovable or real property as follows:
ART. 415. The following are immovable property:
x x x....................................x x x....................................x x x
(5) Machinery, receptacles, instruments or implements intended by the
owner of the tenement for an industry or works which may be carried on in
a building or on a piece of land, and which tend directly to meet the needs
of the said industry or works;
x x x....................................x x x....................................x x x
In the present case, the machines that were the subjects of the
Writ of Seizure were placed by petitioners in the factory built on
their own land. Indisputably, they were essential and principal
elements of their chocolate-making industry. Hence, although each
of them was movable or personal property on its own, all of them
have become immobilized by destination because they are essential
and principal elements in the industry.[16] In that sense, petitioners
are correct in arguing that the said machines are real, not personal,
property pursuant to Article 415 (5) of the Civil Code.[17]
Be that as it may, we disagree with the submission of the
petitioners that the said machines are not proper subjects of the
Writ of Seizure.
The Court has held that contracting parties may validly
stipulate that a real property be considered as personal.[18] After
agreeing to such stipulation, they are consequently estopped from
claiming otherwise. Under the principle of estoppel, a party to a

contract is ordinarily precluded from denying the truth of any


material fact found therein.
Hence, in Tumalad v. Vicencio,[19] the Court upheld the intention
of the parties to treat a house as a personal property because it had
been made the subject of a chattel mortgage.The Court ruled:
x x x. Although there is no specific statement referring to the subject house as
personal property, yet by ceding, selling or transferring a property by way of
chattel mortgage defendants-appellants could only have meant to convey the
house as chattel, or at least, intended to treat the same as such, so that they
should not now be allowed to make an inconsistent stand by claiming
otherwise.
Applying Tumalad, the Court in Makati Leasing and Finance
Corp. v. Wearever Textile Mills[20] also held that the machinery used
in a factory and essential to the industry, as in the present case, was
a proper subject of a writ of replevin because it was treated as
personal property in a contract. Pertinent portions of the Courts
ruling are reproduced hereunder:
x x x. If a house of strong materials, like what was involved in the above
Tumalad case, may be considered as personal property for purposes of
executing a chattel mortgage thereon as long as the parties to the contract so
agree and no innocent third party will be prejudiced thereby, there is
absolutely no reason why a machinery, which is movable in its nature and
becomes immobilized only by destination or purpose, may not be likewise
treated as such. This is really because one who has so agreed is estopped
from denying the existence of the chattel mortgage.
In the present case, the Lease Agreement clearly provides that
the machines in question are to be considered as personal
property. Specifically, Section 12.1 of the Agreement reads as
follows:[21]
12.1 The PROPERTY is, and shall at all times be and remain, personal
property notwithstanding that the PROPERTY or any part thereof may now
be, or hereafter become, in any manner affixed or attached to or embedded in,

or permanently resting upon, real property or any building thereon, or


attached in any manner to what is permanent.
Clearly then, petitioners are estopped from denying the
characterization of the subject machines as personal
property. Under the circumstances, they are proper subjects of the
Writ of Seizure.
It should be stressed, however, that our holding -- that the
machines should be deemed personal property pursuant to the
Lease Agreement is good only insofar as the contracting parties are
concerned.[22] Hence, while the parties are bound by the Agreement,
third persons acting in good faith are not affected by its stipulation
characterizing the subject machinery as personal.[23] In any event,
there is no showing that any specific third party would be
adversely affected.
Validity of the Lease Agreement
In their Memorandum, petitioners contend that the Agreement
is a loan and not a lease.[24] Submitting documents supposedly
showing that they own the subject machines, petitioners also argue
in their Petition that the Agreement suffers from intrinsic ambiguity
which places in serious doubt the intention of the parties and the
validity of the lease agreement itself.[25] In their Reply to
respondents Comment, they further allege that the Agreement is
invalid.[26]
These arguments are unconvincing. The validity and the nature
of the contract are the lis mota of the civil action pending before
the RTC. A resolution of these questions, therefore, is effectively a
resolution of the merits of the case. Hence, they should be threshed
out in the trial, not in the proceedings involving the issuance of the
Writ of Seizure.
Indeed, in La Tondea Distillers v. CA,[27] the Court explained
that the policy under Rule 60 was that questions involving title to
the subject property questions which petitioners are now raising
-- should be determined in the trial. In that case, the Court noted

that the remedy of defendants under Rule 60 was either to post a


counter-bond or to question the sufficiency of the plaintiffs
bond. They were not allowed, however, to invoke the title to the
subject property. The Court ruled:
In other words, the law does not allow the defendant to file a motion to
dissolve or discharge the writ of seizure (or delivery) on ground of
insufficiency of the complaint or of the grounds relied upon therefor, as in
proceedings on preliminary attachment or injunction, and thereby put at issue
the matter of the title or right of possession over the specific chattel being
replevied, the policy apparently being that said matter should be ventilated
and determined only at the trial on the merits.[28]
Besides, these questions require a determination of facts and a
presentation of evidence, both of which have no place in a petition
for certiorari in the CA under Rule 65 or in a petition for review in
this Court under Rule 45.[29]
Reliance on the Lease Agreement
It should be pointed out that the Court in this case may rely on
the Lease Agreement, for nothing on record shows that it has been
nullified or annulled. In fact, petitioners assailed it first only in the
RTC proceedings, which had ironically been instituted by
respondent. Accordingly, it must be presumed valid and binding as
the law between the parties.
Makati Leasing and Finance Corporation [30] is also instructive
on this point. In that case, the Deed of Chattel Mortgage, which
characterized the subject machinery as personal property, was also
assailed because respondent had allegedly been required to sign a
printed form of chattel mortgage which was in a blank form at the
time of signing. The Court rejected the argument and relied on the
Deed, ruling as follows:
x x x. Moreover, even granting that the charge is true, such fact alone does
not render a contract void ab initio, but can only be a ground for rendering
said contract voidable, or annullable pursuant to Article 1390 of the new
Civil Code, by a proper action in court. There is nothing on record to show

that the mortgage has been annulled. Neither is it disclosed that steps were
taken to nullify the same. x x x
Alleged Injustice Committed on the Part of Petitioners
Petitioners contend that if the Court allows these machineries
to be seized, then its workers would be out of work and thrown into
the streets.[31] They also allege that the seizure would nullify all
efforts to rehabilitate the corporation.
Petitioners arguments do not preclude the implementation of
the Writ. As earlier discussed, law and jurisprudence support its
propriety. Verily, the above-mentioned consequences, if they come
true, should not be blamed on this Court, but on the petitioners for
failing to avail themselves of the remedy under Section 5 of Rule
60, which allows the filing of a counter-bond. The provision states:
SEC. 5. Return of property. -- If the adverse party objects to the sufficiency
of the applicants bond, or of the surety or sureties thereon, he cannot
immediately require the return of the property, but if he does not so object,
he may, at any time before the delivery of the property to the applicant,
require the return thereof, by filing with the court where the action is
pending a bond executed to the applicant, in double the value of the
property as stated in the applicants affidavit for the delivery thereof to the
applicant, if such delivery be adjudged, and for the payment of such sum to
him as may be recovered against the adverse party, and by serving a copy
bond on the applicant.
WHEREFORE, the Petition is DENIED and the assailed
Decision of the Court of Appeals AFFIRMED. Costs against
petitioners.
SO ORDERED.

7. G.R. No. L-11139


April 23, 1958
SANTOS EVANGELISTA, petitioner,
vs.
ALTO SURETY & INSURANCE CO., INC., respondent.

Gonzalo D. David for petitioner.


Raul A. Aristorenas and Benjamin Relova for respondent.
CONCEPCION, J.:
This is an appeal by certiorari from a decision of the Court of Appeals.
Briefly, the facts are: On June 4, 1949, petitioner herein, Santos Evangelista,
instituted Civil Case No. 8235 of the Court of First, Instance of Manila
entitled " Santos Evangelista vs. Ricardo Rivera," for a sum of money. On the
same date, he obtained a writ of attachment, which levied upon a house, built
by Rivera on a land situated in Manila and leased to him, by filing copy of
said writ and the corresponding notice of attachment with the Office of the
Register of Deeds of Manila, on June 8, 1949. In due course, judgment was
rendered in favor of Evangelista, who, on October 8, 1951, bought the house
at public auction held in compliance with the writ of execution issued in said
case. The corresponding definite deed of sale was issued to him on October
22, 1952, upon expiration of the period of redemption. When Evangelista
sought to take possession of the house, Rivera refused to surrender it, upon
the ground that he had leased the property from the Alto Surety & Insurance
Co., Inc. respondent herein and that the latter is now the true owner of
said property. It appears that on May 10, 1952, a definite deed of sale of the
same house had been issued to respondent, as the highest bidder at an auction
sale held, on September 29, 1950, in compliance with a writ of execution
issued in Civil Case No. 6268 of the same court, entitled "Alto Surety &
Insurance Co., Inc. vs. Maximo Quiambao, Rosario Guevara and Ricardo
Rivera," in which judgment, for the sum of money, had been rendered in
favor respondent herein, as plaintiff therein. Hence, on June 13, 1953,
Evangelista instituted the present action against respondent and Ricardo
Rivera, for the purpose of establishing his (Evangelista) title over said house,
securing possession thereof, apart from recovering damages.
In its answer, respondent alleged, in substance, that it has a better right to the
house, because the sale made, and the definite deed of sale executed, in its
favor, on September 29, 1950 and May 10, 1952, respectively, precede the
sale to Evangelista (October 8, 1951) and the definite deed of sale in his
favor (October 22, 1952). It, also, made some special defenses which are

discussed hereafter. Rivera, in effect, joined forces with respondent. After


due trial, the Court of First Instance of Manila rendered judgment for
Evangelista, sentencing Rivera and respondent to deliver the house in
question to petitioner herein and to pay him, jointly and severally, forty
pesos (P40.00) a month from October, 1952, until said delivery, plus costs.
On appeal taken by respondent, this decision was reversed by the Court of
Appeals, which absolved said respondent from the complaint, upon the
ground that, although the writ of attachment in favor of Evangelista had
been filed with the Register of Deeds of Manila prior to the sale in favor of
respondent, Evangelista did not acquire thereby a preferential lien, the
attachment having been levied as if the house in question were immovable
property, although in the opinion of the Court of Appeals, it is "ostensibly a
personal property." As such, the Court of Appeals held, "the order of
attachment . . . should have been served in the manner provided in
subsection (e) of section 7 of Rule 59," of the Rules of Court, reading:
The property of the defendant shall be attached by the officer executing the
order in the following manner:
(e) Debts and credits, and other personal property not capable of manual
delivery, by leaving with the person owing such debts, or having in his
possession or under his control, such credits or other personal property, or
with, his agent, a copy of the order, and a notice that the debts owing by him
to the defendant, and the credits and other personal property in his
possession, or under his control, belonging to the defendant, are attached in
pursuance of such order. (Emphasis ours.)
However, the Court of Appeals seems to have been of the opinion, also, that
the house of Rivera should have been attached in accordance with
subsection (c) of said section 7, as "personal property capable of manual
delivery, by taking and safely keeping in his custody", for it declared that
"Evangelists could not have . . . validly purchased Ricardo Rivera's house
from the sheriff as the latter was not in possession thereof at the time he sold
it at a public auction."
Evangelista now seeks a review, by certiorari, of this decision of the Court
of Appeals. In this connection, it is not disputed that although the sale to the

respondent preceded that made to Evangelists, the latter would have a better
right if the writ of attachment, issued in his favor before the sale to the
respondent, had been properly executed or enforced. This question, in turn,
depends upon whether the house of Ricardo Rivera is real property or not. In
the affirmative case, the applicable provision would be subsection (a) of
section 7, Rule 59 of the Rules of Court, pursuant to which the attachment
should be made "by filing with the registrar of deeds a copy of the order,
together with a description of the property attached, and a notice that it is
attached, and by leaving a copy of such order, description, and notice with
the occupant of the property, if any there be."
Respondent maintains, however, and the Court of Appeals held, that Rivera's
house is personal property, the levy upon which must be made in conformity
with subsections (c) and (e) of said section 7 of Rule 59. Hence, the main
issue before us is whether a house, constructed the lessee of the land on
which it is built, should be dealt with, for purpose, of attachment, as
immovable property, or as personal property.
It is, our considered opinion that said house is not personal property, much
less a debt, credit or other personal property not capable of manual delivery,
but immovable property. As explicitly held, in Laddera vs. Hodges (48 Off.
Gaz., 5374), "a true building (not merely superimposed on the soil) is
immovable or real property, whether it is erected by the owner of the land or
by usufructuary or lessee. This is the doctrine of our Supreme Court in Leung
Yee vs. Strong Machinery Company, 37 Phil., 644. And it is amply supported
by the rulings of the French Court. . . ."
It is true that the parties to a deed of chattel mortgage may agree to consider a
house as personal property for purposes of said contract
(Luna vs. Encarnacion, * 48 Off. Gaz., 2664; Standard Oil Co. of New
York vs. Jaramillo, 44 Phil., 630; De Jesus vs. Juan Dee Co., Inc., 72 Phil.,
464). However, this view is good only insofar as thecontracting parties are
concerned. It is based, partly, upon the principle of estoppel. Neither this
principle, nor said view, is applicable to strangers to said contract. Much less
is it in point where there has been no contractwhatsoever, with respect to the

status of the house involved, as in the case at bar. Apart from this,
in Manarang vs. Ofilada (99 Phil., 108; 52 Off. Gaz., 3954), we held:
The question now before us, however, is: Does the fact that the parties
entering into a contract regarding a house gave said property the
consideration of personal property in their contract, bind the sheriff in
advertising the property's sale at public auction as personal property? It is to
be remembered that in the case at bar the action was to collect a loan
secured by a chattel mortgage on the house. It is also to be remembered that
in practice it is the judgment creditor who points out to the sheriff the
properties that the sheriff is to levy upon in execution, and the judgment
creditor in the case at bar is the party in whose favor the owner of the house
had conveyed it by way of chattel mortgage and, therefore, knew its
consideration as personal property.
These considerations notwithstanding, we hold that the rules on execution
do not allow, and, we should notinterpret them in such a way as to allow, the
special consideration that parties to a contract may have desired to impart to
real estate, for example, as personal property, when they are, not ordinarily
so. Sales on execution affect the public and third persons. The regulation
governing sales on execution are for public officials to follow. The form of
proceedings prescribed for each kind of property is suited to its character,
not to the character, which the parties have given to it or desire to give it.
When the rules speak of personal property, property which is ordinarily so
considered is meant; and when real property is spoken of, it means property
which is generally known as real property. The regulations were never
intended to suit the consideration that parties may have privately given to
the property levied upon. Enforcement of regulations would be difficult
were the convenience or agreement of private parties to determine or govern
the nature of the proceedings. We therefore hold that the mere fact that a
house was the subject of the chattel mortgage and was considered as
personal property by the parties does not make said house personal
property for purposes of the notice to be given for its sale of public auction.
This ruling is demanded by the need for a definite, orderly and well defined

regulation for official and public guidance and would prevent confusion and
misunderstanding.
We, therefore, declare that the house of mixed materials levied upon on
execution, although subject of a contract of chattel mortgage between the
owner and a third person, is real property within the purview of Rule 39,
section 16, of the Rules of Court as it has become a permanent fixture of the
land, which, is real property. (42 Am. Jur. 199-200; Leung Yee vs. Strong
Machinery Co., 37 Phil., 644; Republic vs. Ceniza, et al., 90 Phil., 544;
Ladera,, et al. vs. Hodges, et al., [C.A.] Off. Gaz. 5374.)" (Emphasis ours.)
The foregoing considerations apply, with equal force, to the conditions for
the levy of attachment, for it similarly affects the public and third persons.
It is argued, however, that, even if the house in question were immovable
property, its attachment by Evangelista was void or ineffective, because, in
the language of the Court of Appeals, "after presenting a Copy of the order of
attachment in the Office of the Register of Deeds, the person who might then
be in possession of the house, the sheriff took no pains to serve Ricardo
Rivera, or other copies thereof." This finding of the Court of Appeals is
neither conclusive upon us, nor accurate.
The Record on Appeal, annexed to the petition for Certiorari, shows that
petitioner alleged, in paragraph 3 of the complaint, that he acquired the house
in question "as a consequence of the levy of an attachment and execution of
the judgment in Civil Case No. 8235" of the Court of First Instance of
Manila. In his answer (paragraph 2), Ricardo Rivera admitted said attachment
execution of judgment. He alleged, however, by way a of special defense,
that the title of respondent "is superior to that of plaintiff because it is based
on a public instrument," whereas Evangelista relied upon a "promissory note"
which "is only a private instrument"; that said Public instrument in favor of
respondent "is superior also to the judgment in Civil Case No. 8235"; and
that plaintiff's claim against Rivera amounted only to P866, "which is much
below the real value" of said house, for which reason it would be "grossly
unjust to acquire the property for such an inadequate consideration."
Thus, Rivera impliedly admitted that his house had been attached, that the
house had been sold to Evangelista in accordance with the requisite

formalities, and that said attachment was valid, although allegedly inferior
to the rights of respondent, and the consideration for the sale to Evangelista
was claimed to be inadequate.
Respondent, in turn, denied the allegation in said paragraph 3 of the
complaint, but only " for the reasons stated in its special defenses" namely:
(1) that by virtue of the sale at public auction, and the final deed executed
by the sheriff in favor of respondent, the same became the "legitimate owner
of the house" in question; (2) that respondent "is a buyer in good faith and
for value"; (3) that respondent "took possession and control of said house";
(4) that "there was no valid attachment by the plaintiff and/or the Sheriff of
Manila of the property in question as neither took actual or constructive
possession or control of the property at any time"; and (5) "that the alleged
registration of plaintiff's attachment, certificate of sale and final deed in the
Office of Register of Deeds, Manila, if there was any, is likewise, not
valid as there is no registry of transactions covering houses erected on land
belonging to or leased from another." In this manner, respondent claimed a
better right, merely under the theory that, in case of double sale of
immovable property, the purchaser who first obtains possession in good
faith, acquires title, if the sale has not been "recorded . . . in the Registry of
Property" (Art. 1544, Civil Code of the Philippines), and that the writ of
attachment and the notice of attachment in favor of Evangelista should be
considered unregistered, "as there is no registry of transactions covering
houses erected on land belonging to or leased from another." In fact, said
article 1544 of the Civil Code of the Philippines, governing double sales,
was quoted on page 15 of the brief for respondent in the Court of Appeals,
in support of its fourth assignment of error therein, to the effect that it "has
preference or priority over the sale of the same property" to Evangelista.
In other words, there was no issue on whether copy of the writ and notice of
attachment had been served on Rivera. No evidence whatsoever, to the
effect that Rivera had not been served with copies of said writ and notice,
was introduced in the Court of First Instance. In its brief in the Court of
Appeals, respondent did not aver, or even, intimate, that no such copies
were served by the sheriff upon Rivera. Service thereof on Rivera had been

impliedly admitted by the defendants, in their respective answers, and by


their behaviour throughout the proceedings in the Court of First Instance,
and, as regards respondent, in the Court of Appeals. In fact, petitioner asserts
in his brief herein (p. 26) that copies of said writ and notice were delivered to
Rivera, simultaneously with copies of the complaint, upon service of
summons, prior to the filing of copies of said writ and notice with the register
deeds, and the truth of this assertion has not been directly and positively
challenged or denied in the brief filed before us by respondent herein. The
latter did not dare therein to go beyond making a statement for the first
time in the course of these proceedings, begun almost five (5) years ago (June
18, 1953) reproducing substantially the aforementioned finding of the
Court of Appeals and then quoting the same.
Considering, therefore, that neither the pleadings, nor the briefs in the Court
of Appeals, raised an issue on whether or not copies of the writ of attachment
and notice of attachment had been served upon Rivera; that the defendants
had impliedly admitted-in said pleadings and briefs, as well as by their
conduct during the entire proceedings, prior to the rendition of the decision
of the Court of Appeals that Rivera had received copies of said
documents; and that, for this reason, evidently, no proof was introduced
thereon, we, are of the opinion, and so hold that the finding of the Court of
Appeals to the effect that said copies had not been served upon Rivera is
based upon a misapprehension of the specific issues involved therein and
goes beyond the range of such issues, apart from being contrary to the
aforementioned admission by the parties, and that, accordingly, a grave abuse
of discretion was committed in making said finding, which is, furthermore,
inaccurate.
Wherefore, the decision of the Court of Appeals is hereby reversed, and
another one shall be entered affirming that of the Court of First Instance of
Manila, with the costs of this instance against respondent, the Alto Surety and
Insurance Co., Inc. It is so ordered.
8. G.R. No. L-40411

August 7, 1935

DAVAO SAW MILL CO., INC., plaintiff-appellant,


vs.
APRONIANO G. CASTILLO and DAVAO LIGHT & POWER CO.,
INC., defendants-appellees.
Arsenio Suazo and Jose L. Palma Gil and Pablo Lorenzo and Delfin Joven
for appellant.
J.W. Ferrier for appellees.
MALCOLM, J.:
The issue in this case, as announced in the opening sentence of the decision
in the trial court and as set forth by counsel for the parties on appeal,
involves the determination of the nature of the properties described in the
complaint. The trial judge found that those properties were personal in
nature, and as a consequence absolved the defendants from the complaint,
with costs against the plaintiff.
The Davao Saw Mill Co., Inc., is the holder of a lumber concession from the
Government of the Philippine Islands. It has operated a sawmill in
the sitio of Maa, barrio of Tigatu, municipality of Davao, Province of
Davao. However, the land upon which the business was conducted belonged
to another person. On the land the sawmill company erected a building
which housed the machinery used by it. Some of the implements thus used
were clearly personal property, the conflict concerning machines which
were placed and mounted on foundations of cement. In the contract of lease
between the sawmill company and the owner of the land there appeared the
following provision:
That on the expiration of the period agreed upon, all the improvements and
buildings introduced and erected by the party of the second part shall pass to
the exclusive ownership of the party of the first part without any obligation
on its part to pay any amount for said improvements and buildings; also, in
the event the party of the second part should leave or abandon the land
leased before the time herein stipulated, the improvements and buildings
shall likewise pass to the ownership of the party of the first part as though
the time agreed upon had expired: Provided, however, That the machineries

and accessories are not included in the improvements which will pass to the
party of the first part on the expiration or abandonment of the land leased.
In another action, wherein the Davao Light & Power Co., Inc., was the
plaintiff and the Davao, Saw, Mill Co., Inc., was the defendant, a judgment
was rendered in favor of the plaintiff in that action against the defendant in
that action; a writ of execution issued thereon, and the properties now in
question were levied upon as personalty by the sheriff. No third party claim
was filed for such properties at the time of the sales thereof as is borne out by
the record made by the plaintiff herein. Indeed the bidder, which was the
plaintiff in that action, and the defendant herein having consummated the
sale, proceeded to take possession of the machinery and other properties
described in the corresponding certificates of sale executed in its favor by the
sheriff of Davao.
As connecting up with the facts, it should further be explained that the Davao
Saw Mill Co., Inc., has on a number of occasions treated the machinery as
personal property by executing chattel mortgages in favor of third persons.
One of such persons is the appellee by assignment from the original
mortgages.
Article 334, paragraphs 1 and 5, of the Civil Code, is in point. According to
the Code, real property consists of
1. Land, buildings, roads and constructions of all kinds adhering to the soil;
xxx
xxx
xxx
5. Machinery, liquid containers, instruments or implements intended by the
owner of any building or land for use in connection with any industry or
trade being carried on therein and which are expressly adapted to meet the
requirements of such trade of industry.
Appellant emphasizes the first paragraph, and appellees the last mentioned
paragraph. We entertain no doubt that the trial judge and appellees are right
in their appreciation of the legal doctrines flowing from the facts.
In the first place, it must again be pointed out that the appellant should have
registered its protest before or at the time of the sale of this property. It must
further be pointed out that while not conclusive, the characterization of the
property as chattels by the appellant is indicative of intention and impresses

upon the property the character determined by the parties. In this connection
the decision of this court in the case of Standard Oil Co. of New Yorkvs.
Jaramillo ( [1923], 44 Phil., 630), whether obiter dicta or not, furnishes the
key to such a situation.
It is, however not necessary to spend overly must time in the resolution of
this appeal on side issues. It is machinery which is involved; moreover,
machinery not intended by the owner of any building or land for use in
connection therewith, but intended by a lessee for use in a building erected
on the land by the latter to be returned to the lessee on the expiration or
abandonment of the lease.
A similar question arose in Puerto Rico, and on appeal being taken to the
United States Supreme Court, it was held that machinery which is movable
in its nature only becomes immobilized when placed in a plant by the owner
of the property or plant, but not when so placed by a tenant, a usufructuary,
or any person having only a temporary right, unless such person acted as the
agent of the owner. In the opinion written by Chief Justice White, whose
knowledge of the Civil Law is well known, it was in part said:
To determine this question involves fixing the nature and character of the
property from the point of view of the rights of Valdes and its nature and
character from the point of view of Nevers & Callaghan as a judgment
creditor of the Altagracia Company and the rights derived by them from the
execution levied on the machinery placed by the corporation in the plant.
Following the Code Napoleon, the Porto Rican Code treats as immovable
(real) property, not only land and buildings, but also attributes immovability
in some cases to property of a movable nature, that is, personal property,
because of the destination to which it is applied. "Things," says section 334
of the Porto Rican Code, "may be immovable either by their own nature or
by their destination or the object to which they are applicable." Numerous
illustrations are given in the fifth subdivision of section 335, which is as
follows: "Machinery, vessels, instruments or implements intended by the
owner of the tenements for the industrial or works that they may carry on in
any building or upon any land and which tend directly to meet the needs of
the said industry or works." (See also Code Nap., articles 516, 518 et seq. to

and inclusive of article 534, recapitulating the things which, though in


themselves movable, may be immobilized.) So far as the subject-matter with
which we are dealing machinery placed in the plant it is plain, both
under the provisions of the Porto Rican Law and of the Code Napoleon, that
machinery which is movable in its nature only becomes immobilized when
placed in a plant by the owner of the property or plant. Such result would not
be accomplished, therefore, by the placing of machinery in a plant by a tenant
or a usufructuary or any person having only a temporary right. (Demolombe,
Tit. 9, No. 203; Aubry et Rau, Tit. 2, p. 12, Section 164; Laurent, Tit. 5, No.
447; and decisions quoted in Fuzier-Herman ed. Code Napoleon under
articles 522 et seq.) The distinction rests, as pointed out by Demolombe,
upon the fact that one only having a temporary right to the possession or
enjoyment of property is not presumed by the law to have applied movable
property belonging to him so as to deprive him of it by causing it by an act of
immobilization to become the property of another. It follows that abstractly
speaking the machinery put by the Altagracia Company in the plant
belonging to Sanchez did not lose its character of movable property and
become immovable by destination. But in the concrete immobilization took
place because of the express provisions of the lease under which the
Altagracia held, since the lease in substance required the putting in of
improved machinery, deprived the tenant of any right to charge against the
lessor the cost such machinery, and it was expressly stipulated that the
machinery so put in should become a part of the plant belonging to the owner
without compensation to the lessee. Under such conditions the tenant in
putting in the machinery was acting but as the agent of the owner in
compliance with the obligations resting upon him, and the immobilization of
the machinery which resulted arose in legal effect from the act of the owner
in giving by contract a permanent destination to the machinery.
xxx
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xxx
The machinery levied upon by Nevers & Callaghan, that is, that which was
placed in the plant by the Altagracia Company, being, as regards Nevers &
Callaghan, movable property, it follows that they had the right to levy on it
under the execution upon the judgment in their favor, and the exercise of that

right did not in a legal sense conflict with the claim of Valdes, since as to
him the property was a part of the realty which, as the result of his
obligations under the lease, he could not, for the purpose of collecting his
debt, proceed separately against. (Valdes vs. Central Altagracia [192], 225
U.S., 58.)
Finding no reversible error in the record, the judgment appealed from will
be affirmed, the costs of this instance to be paid by the appellant.
9. G.R. No. 120098
October 2, 2001
RUBY L. TSAI, petitioner,
vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and
MAMERTO R VILLALUZ, respondents.
x---------------------------------------------------------x
[G.R. No. 120109. October 2, 2001.]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS and
MAMERTO R VILLALUZ, respondents.
QUISUMBING, J.:
These consolidated cases assail the decision 1 of the Court of Appeals in CAG.R. CV No. 32986, affirming the decision2 of the Regional Trial Court of
Manila, Branch 7, in Civil Case No. 89-48265. Also assailed is respondent
court's resolution denying petitioners' motion for reconsideration.
On November 26, 1975, respondent Ever Textile Mills, Inc. (EVERTEX)
obtained a three million peso (P3,000,000.00) loan from petitioner
Philippine Bank of Communications (PBCom). As security for the loan,
EVERTEX executed in favor of PBCom, a deed of Real and Chattel
Mortgage over the lot under TCT No. 372097, where its factory stands, and
the chattels located therein as enumerated in a schedule attached to the
mortgage contract. The pertinent portions of the Real and Chattel Mortgage
are quoted below:
MORTGAGE

(REAL AND CHATTEL)


xxx
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xxx
The MORTGAGOR(S) hereby transfer(s) and convey(s), by way of First
Mortgage, to the MORTGAGEE, . . . certain parcel(s) of land, together with
all the buildings and improvements now existing or which may hereafter
exist thereon, situated in . . .
"Annex A"
(Real and Chattel Mortgage executed by Ever Textile Mills in favor of
PBCommunications continued)
LIST OF MACHINERIES & EQUIPMENT
A. Forty Eight (48) units of Vayrow Knitting Machines-Tompkins made in
Hongkong:
Serial Numbers Size of Machines
xxx
xxx
xxx
B. Sixteen (16) sets of Vayrow Knitting Machines made in Taiwan.
xxx
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xxx
C. Two (2) Circular Knitting Machines made in West Germany.
xxx
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xxx
D. Four (4) Winding Machines.
xxx
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xxx
SCHEDULE "A"
I. TCT # 372097 - RIZAL
xxx
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xxx
II. Any and all buildings and improvements now existing or hereafter to exist
on the above-mentioned lot.
III. MACHINERIES & EQUIPMENT situated, located and/or installed on
the above-mentioned lot located at . . .
(a) Forty eight sets (48) Vayrow Knitting Machines . . .
(b) Sixteen sets (16) Vayrow Knitting Machines . . .
(c) Two (2) Circular Knitting Machines . . .
(d) Two (2) Winding Machines . . .
(e) Two (2) Winding Machines . . .

IV. Any and all replacements, substitutions, additions, increases and


accretions to above properties.
xxx
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xxx3
On April 23, 1979, PBCom granted a second loan of P3,356,000.00 to
EVERTEX. The loan was secured by a Chattel Mortgage over personal
properties enumerated in a list attached thereto. These listed properties were
similar to those listed in Annex A of the first mortgage deed.
After April 23, 1979, the date of the execution of the second mortgage
mentioned above, EVERTEX purchased various machines and equipments.
On November 19, 1982, due to business reverses, EVERTEX filed
insolvency proceedings docketed as SP Proc. No. LP-3091-P before the
defunct Court of First Instance of Pasay City, Branch XXVIII. The CFI
issued an order on November 24, 1982 declaring the corporation insolvent.
All its assets were taken into the custody of the Insolvency Court, including
the collateral, real and personal, securing the two mortgages as
abovementioned.
In the meantime, upon EVERTEX's failure to meet its obligation to PBCom,
the latter commenced extrajudicial foreclosure proceedings against
EVERTEX under Act 3135, otherwise known as "An Act to Regulate the
Sale of Property under Special Powers Inserted in or Annexed to Real Estate
Mortgages" and Act 1506 or "The Chattel Mortgage Law". A Notice of
Sheriff's Sale was issued on December 1, 1982.
On December 15, 1982, the first public auction was held where petitioner
PBCom emerged as the highest bidder and a Certificate of Sale was issued
in its favor on the same date. On December 23, 1982, another public auction
was held and again, PBCom was the highest bidder. The sheriff issued a
Certificate of Sale on the same day.
On March 7, 1984, PBCom consolidated its ownership over the lot and all
the properties in it. In November 1986, it leased the entire factory premises
to petitioner Ruby L. Tsai for P50,000.00 a month. On May 3, 1988,
PBCom sold the factory, lock, stock and barrel to Tsai for P9,000,000.00,
including the contested machineries.

On March 16, 1989, EVERTEX filed a complaint for annulment of sale,


reconveyance, and damages with the Regional Trial Court against PBCom,
alleging inter alia that the extrajudicial foreclosure of subject mortgage was
in violation of the Insolvency Law. EVERTEX claimed that no rights having
been transmitted to PBCom over the assets of insolvent EVERTEX, therefore
Tsai acquired no rights over such assets sold to her, and should reconvey the
assets.
Further, EVERTEX averred that PBCom, without any legal or factual basis,
appropriated the contested properties, which were not included in the Real
and Chattel Mortgage of November 26, 1975 nor in the Chattel Mortgage of
April 23, 1979, and neither were those properties included in the Notice of
Sheriff's Sale dated December 1, 1982 and Certificate of Sale . . . dated
December 15, 1982.
The disputed properties, which were valued at P4,000,000.00, are: 14
Interlock Circular Knitting Machines, 1 Jet Drying Equipment, 1 Dryer
Equipment, 1 Raisin Equipment and 1 Heatset Equipment.
The RTC found that the lease and sale of said personal properties were
irregular and illegal because they were not duly foreclosed nor sold at the
December 15, 1982 auction sale since these were not included in the
schedules attached to the mortgage contracts. The trial court decreed:
WHEREFORE, judgment is hereby rendered in favor of plaintiff corporation
and against the defendants:
1. Ordering the annulment of the sale executed by defendant Philippine Bank
of Communications in favor of defendant Ruby L. Tsai on May 3, 1988
insofar as it affects the personal properties listed in par. 9 of the complaint,
and their return to the plaintiff corporation through its assignee, plaintiff
Mamerto R. Villaluz, for disposition by the Insolvency Court, to be done
within ten (10) days from finality of this decision;
2. Ordering the defendants to pay jointly and severally the plaintiff
corporation the sum of P5,200,000.00 as compensation for the use and
possession of the properties in question from November 1986 to February
1991 and P100,000.00 every month thereafter, with interest thereon at the
legal rate per annum until full payment;

3. Ordering the defendants to pay jointly and severally the plaintiff


corporation the sum of P50,000.00 as and for attorney's fees and expenses
of litigation;
4. Ordering the defendants to pay jointly and severally the plaintiff
corporation the sum of P200,000.00 by way of exemplary damages;
5. Ordering the dismissal of the counterclaim of the defendants; and
6. Ordering the defendants to proportionately pay the costs of suit.
SO ORDERED.4
Dissatisfied, both PBCom and Tsai appealed to the Court of Appeals, which
issued its decision dated August 31, 1994, the dispositive portion of which
reads:
WHEREFORE, except for the deletion therefrom of the award; for
exemplary damages, and reduction of the actual damages, from P100,000.00
to P20,000.00 per month, from November 1986 until subject personal
properties are restored to appellees, the judgment appealed from is hereby
AFFIRMED, in all other respects. No pronouncement as to costs.5
Motion for reconsideration of the above decision having been denied in the
resolution of April 28, 1995, PBCom and Tsai filed their separate petitions
for review with this Court.
In G.R No. 120098, petitioner Tsai ascribed the following errors to the
respondent court:
I
THE HONORABLE COURT OF APPEALS (SECOND DIVISION)
ERRED IN EFFECT MAKING A CONTRACT FOR THE PARTIES BY
TREATING THE 1981 ACQUIRED MACHINERIES AS CHATTELS
INSTEAD OF REAL PROPERTIES WITHIN THEIR EARLIER 1975
DEED OF REAL AND CHATTEL MORTGAGE OR 1979 DEED OF
CHATTEL MORTGAGE.
II
THE HONORABLE COURT OF APPEALS (SECOND DIVISION)
ERRED IN HOLDING THAT THE DISPUTED 1981 MACHINERIES
ARE NOT REAL PROPERTIES DEEMED PART OF THE MORTGAGE

DESPITE THE CLEAR IMPORT OF THE EVIDENCE AND


APPLICABLE RULINGS OF THE SUPREME COURT.
III
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED
IN DEEMING PETITIONER A PURCHASER IN BAD FAITH.
IV
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED
IN ASSESSING PETITIONER ACTUAL DAMAGES, ATTORNEY'S FEES
AND EXPENSES OF LITIGATION FOR WANT OF VALID FACTUAL
AND LEGAL BASIS.
V
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED
IN HOLDING AGAINST PETITIONER'S ARGUMENTS ON
PRESCRIPTION AND LACHES.6
In G.R. No. 120098, PBCom raised the following issues:
I.
DID THE COURT OF APPEALS VALIDLY DECREE THE
MACHINERIES LISTED UNDER PARAGRAPH 9 OF THE COMPLAINT
BELOW AS PERSONAL PROPERTY OUTSIDE OF THE 1975 DEED OF
REAL ESTATE MORTGAGE AND EXCLUDED THEM FROM THE
REAL PROPERTY EXTRAJUDICIALLY FORECLOSED BY PBCOM
DESPITE THE PROVISION IN THE 1975 DEED THAT ALL AFTERACQUIRED PROPERTIES DURING THE LIFETIME OF THE
MORTGAGE SHALL FORM PART THEREOF, AND DESPITE THE
UNDISPUTED FACT THAT SAID MACHINERIES ARE BIG AND
HEAVY, BOLTED OR CEMENTED ON THE REAL PROPERTY
MORTGAGED BY EVER TEXTILE MILLS TO PBCOM, AND WERE
ASSESSED FOR REAL ESTATE TAX PURPOSES?
II
CAN PBCOM, WHO TOOK POSSESSION OF THE MACHINERIES IN
QUESTION IN GOOD FAITH, EXTENDED CREDIT FACILITIES TO
EVER TEXTILE MILLS WHICH AS OF 1982 TOTALLED P9,547,095.28,
WHO HAD SPENT FOR MAINTENANCE AND SECURITY ON THE

DISPUTED MACHINERIES AND HAD TO PAY ALL THE BACK


TAXES OF EVER TEXTILE MILLS BE LEGALLY COMPELLED TO
RETURN TO EVER THE SAID MACHINERIES OR IN LIEU THEREOF
BE ASSESSED DAMAGES. IS THAT SITUATION TANTAMOUNT TO
A CASE OF UNJUST ENRICHMENT?7
The principal issue, in our view, is whether or not the inclusion of the
questioned properties in the foreclosed properties is proper. The secondary
issue is whether or not the sale of these properties to petitioner Ruby Tsai is
valid.
For her part, Tsai avers that the Court of Appeals in effect made a contract
for the parties by treating the 1981 acquired units of machinery as chattels
instead of real properties within their earlier 1975 deed of Real and Chattel
Mortgage or 1979 deed of Chattel Mortgage.8 Additionally, Tsai argues that
respondent court erred in holding that the disputed 1981 machineries are not
real properties.9 Finally, she contends that the Court of Appeals erred in
holding against petitioner's arguments on prescription and laches10 and in
assessing petitioner actual damages, attorney's fees and expenses of
litigation, for want of valid factual and legal basis.11
Essentially, PBCom contends that respondent court erred in affirming the
lower court's judgment decreeing that the pieces of machinery in dispute
were not duly foreclosed and could not be legally leased nor sold to Ruby
Tsai. It further argued that the Court of Appeals' pronouncement that the
pieces of machinery in question were personal properties have no factual
and legal basis. Finally, it asserts that the Court of Appeals erred in
assessing damages and attorney's fees against PBCom.
In opposition, private respondents argue that the controverted units of
machinery are not "real properties" but chattels, and, therefore, they were
not part of the foreclosed real properties, rendering the lease and the
subsequent sale thereof to Tsai a nullity.12
Considering the assigned errors and the arguments of the parties, we find the
petitions devoid of merit and ought to be denied.
Well settled is the rule that the jurisdiction of the Supreme Court in a
petition for review on certiorari under Rule 45 of the Revised Rules of

Court is limited to reviewing only errors of law, not of fact, unless the factual
findings complained of are devoid of support by the evidence on record or
the assailed judgment is based on misapprehension of facts. 13 This rule is
applied more stringently when the findings of fact of the RTC is affirmed by
the Court of Appeals.14
The following are the facts as found by the RTC and affirmed by the Court of
Appeals that are decisive of the issues: (1) the "controverted machineries" are
not covered by, or included in, either of the two mortgages, the Real Estate
and Chattel Mortgage, and the pure Chattel Mortgage; (2) the said
machineries were not included in the list of properties appended to the Notice
of Sale, and neither were they included in the Sheriff's Notice of Sale of the
foreclosed properties.15
Petitioners contend that the nature of the disputed machineries, i.e., that they
were heavy, bolted or cemented on the real property mortgaged by
EVERTEX to PBCom, make them ipso facto immovable under Article 415
(3) and (5) of the New Civil Code. This assertion, however, does not settle
the issue. Mere nuts and bolts do not foreclose the controversy. We have to
look at the parties' intent.
While it is true that the controverted properties appear to be immobile, a
perusal of the contract of Real and Chattel Mortgage executed by the parties
herein gives us a contrary indication. In the case at bar, both the trial and the
appellate courts reached the same finding that the true intention of PBCOM
and the owner, EVERTEX, is to treat machinery and equipment as chattels.
The pertinent portion of respondent appellate court's ruling is quoted below:
As stressed upon by appellees, appellant bank treated the machineries as
chattels; never as real properties. Indeed, the 1975 mortgage contract, which
was actually real and chattel mortgage, militates against appellants'
posture. It should be noted that the printed form used by appellant bank was
mainly for real estate mortgages. But reflective of the true intention of
appellant PBCOM and appellee EVERTEX was the typing in capital letters,
immediately following the printed caption of mortgage, of the phrase "real
and chattel." So also, the "machineries and equipment" in the printed form of
the bank had to be inserted in the blank space of the printed contract and

connected with the word "building" by typewritten slash marks. Now, then,
if the machineries in question were contemplated to be included in the real
estate mortgage, there would have been no necessity to ink a chattel
mortgage specifically mentioning as part III of Schedule A a listing of the
machineries covered thereby. It would have sufficed to list them as
immovables in the Deed of Real Estate Mortgage of the land and building
involved.
As regards the 1979 contract, the intention of the parties is clear and beyond
question. It refers solely tochattels. The inventory list of the mortgaged
properties is an itemization of sixty-three (63) individually described
machineries while the schedule listed only machines and 2,996,880.50
worth of finished cotton fabrics and natural cotton fabrics.16
In the absence of any showing that this conclusion is baseless, erroneous or
uncorroborated by the evidence on record, we find no compelling reason to
depart therefrom.
Too, assuming arguendo that the properties in question are immovable by
nature, nothing detracts the parties from treating it as chattels to secure an
obligation under the principle of estoppel. As far back as Navarro v. Pineda,
9 SCRA 631 (1963), an immovable may be considered a personal property
if there is a stipulation as when it is used as security in the payment of an
obligation where a chattel mortgage is executed over it, as in the case at bar.
In the instant case, the parties herein: (1) executed a contract styled as "Real
Estate Mortgage and Chattel Mortgage," instead of just "Real Estate
Mortgage" if indeed their intention is to treat all properties included therein
as immovable, and (2) attached to the said contract a separate "LIST OF
MACHINERIES & EQUIPMENT". These facts, taken together, evince the
conclusion that the parties' intention is to treat these units of machinery as
chattels. A fortiori, the contested after-acquired properties, which are of the
same description as the units enumerated under the title "LIST OF
MACHINERIES & EQUIPMENT," must also be treated as chattels.
Accordingly, we find no reversible error in the respondent appellate court's
ruling that inasmuch as the subject mortgages were intended by the parties
to involve chattels, insofar as equipment and machinery were concerned, the

Chattel Mortgage Law applies, which provides in Section 7 thereof that: "a
chattel mortgage shall be deemed to cover only the property described
therein and not like or substituted property thereafter acquired by the
mortgagor and placed in the same depository as the property originally
mortgaged, anything in the mortgage to the contrary notwithstanding."
And, since the disputed machineries were acquired in 1981 and could not
have been involved in the 1975 or 1979 chattel mortgages, it was
consequently an error on the part of the Sheriff to include subject machineries
with the properties enumerated in said chattel mortgages.
As the auction sale of the subject properties to PBCom is void, no valid title
passed in its favor. Consequently, the sale thereof to Tsai is also a nullity
under the elementary principle of nemo dat quod non habet, one cannot give
what one does not have.17
Petitioner Tsai also argued that assuming that PBCom's title over the
contested properties is a nullity, she is nevertheless a purchaser in good faith
and for value who now has a better right than EVERTEX.
To the contrary, however, are the factual findings and conclusions of the trial
court that she is not a purchaser in good faith. Well-settled is the rule that the
person who asserts the status of a purchaser in good faith and for value has
the burden of proving such assertion.18 Petitioner Tsai failed to discharge this
burden persuasively.
Moreover, a purchaser in good faith and for value is one who buys the
property of another without notice that some other person has a right to or
interest in such property and pays a full and fair price for the same, at the
time of purchase, or before he has notice of the claims or interest of some
other person in the property.19Records reveal, however, that when Tsai
purchased the controverted properties, she knew of respondent's claim
thereon. As borne out by the records, she received the letter of respondent's
counsel, apprising her of respondent's claim, dated February 27, 1987. 20 She
replied thereto on March 9, 1987.21 Despite her knowledge of respondent's
claim, she proceeded to buy the contested units of machinery on May 3,
1988. Thus, the RTC did not err in finding that she was not a purchaser in
good faith.

Petitioner Tsai's defense of indefeasibility of Torrens Title of the lot where


the disputed properties are located is equally unavailing. This defense refers
to sale of lands and not to sale of properties situated therein. Likewise, the
mere fact that the lot where the factory and the disputed properties stand is
in PBCom's name does not automatically make PBCom the owner of
everything found therein, especially in view of EVERTEX's letter to Tsai
enunciating its claim.
Finally, petitioners' defense of prescription and laches is less than
convincing. We find no cogent reason to disturb the consistent findings of
both courts below that the case for the reconveyance of the disputed
properties was filed within the reglementary period. Here, in our view, the
doctrine of laches does not apply. Note that upon petitioners' adamant
refusal to heed EVERTEX's claim, respondent company immediately filed
an action to recover possession and ownership of the disputed properties.
There is no evidence showing any failure or neglect on its part, for an
unreasonable and unexplained length of time, to do that which, by
exercising due diligence, could or should have been done earlier. The
doctrine of stale demands would apply only where by reason of the lapse of
time, it would be inequitable to allow a party to enforce his legal rights.
Moreover, except for very strong reasons, this Court is not disposed to apply
the doctrine of laches to prejudice or defeat the rights of an owner.22
As to the award of damages, the contested damages are the actual
compensation, representing rentals for the contested units of machinery, the
exemplary damages, and attorney's fees.
As regards said actual compensation, the RTC awarded P100,000.00
corresponding to the unpaid rentals of the contested properties based on the
testimony of John Chua, who testified that the P100,000.00 was based on
the accepted practice in banking and finance, business and investments that
the rental price must take into account the cost of money used to buy them.
The Court of Appeals did not give full credence to Chua's projection and
reduced the award to P20,000.00.
Basic is the rule that to recover actual damages, the amount of loss must not
only be capable of proof but must actually be proven with reasonable degree

of certainty, premised upon competent proof or best evidence obtainable of


the actual amount thereof.23 However, the allegations of respondent company
as to the amount of unrealized rentals due them as actual damages remain
mere assertions unsupported by documents and other competent evidence. In
determining 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.24 However, we are not prepared to disregard the following dispositions
of the respondent appellate court:
. . . In the award of actual damages under scrutiny, there is nothing on record
warranting the said award of P5,200,000.00, representing monthly rental
income of P100,000.00 from November 1986 to February 1991, and the
additional award of P100,000.00 per month thereafter.
As pointed out by appellants, the testimonial evidence, consisting of the
testimonies of Jonh (sic) Chua and Mamerto Villaluz, is shy of what is
necessary to substantiate the actual damages allegedly sustained by appellees,
by way of unrealized rental income of subject machineries and equipments.
The testimony of John Cua (sic) is nothing but an opinion or projection based
on what is claimed to be a practice in business and industry. But such a
testimony cannot serve as the sole basis for assessing the actual damages
complained of. What is more, there is no showing that had appellant Tsai not
taken possession of the machineries and equipments in question, somebody
was willing and ready to rent the same for P100,000.00 a month.
xxx
xxx
xxx Then, too, even assuming arguendo that the said
machineries and equipments could have generated a rental income of
P30,000.00 a month, as projected by witness Mamerto Villaluz, the same
would have been a gross income. Therefrom should be deducted or removed,
expenses for maintenance and repairs . . . Therefore, in the determination of
the actual damages or unrealized rental income sued upon, there is a good
basis to calculate that at least four months in a year, the machineries in
dispute would have been idle due to absence of a lessee or while being
repaired. In the light of the foregoing rationalization and computation, We

believe that a net unrealized rental income of P20,000.00 a month, since


November 1986, is more realistic and fair.25
As to exemplary damages, the RTC awarded P200,000.00 to EVERTEX
which the Court of Appeals deleted. But according to the CA, there was no
clear showing that petitioners acted malevolently, wantonly and
oppressively. The evidence, however, shows otherwise.It is a requisite to
award exemplary damages that the wrongful act must be accompanied by
bad faith,26 and the guilty acted in a wanton, fraudulent, oppressive, reckless
or malevolent manner.27 As previously stressed, petitioner Tsai's act of
purchasing the controverted properties despite her knowledge of
EVERTEX's claim was oppressive and subjected the already insolvent
respondent to gross disadvantage. Petitioner PBCom also received the same
letters of Atty. Villaluz, responding thereto on March 24, 1987. 28 Thus,
PBCom's act of taking all the properties found in the factory of the
financially handicapped respondent, including those properties not covered
by or included in the mortgages, is equally oppressive and tainted with bad
faith. Thus, we are in agreement with the RTC that an award of exemplary
damages is proper.
The amount of P200,000.00 for exemplary damages is, however, excessive.
Article 2216 of the Civil Code provides that no proof of pecuniary loss is
necessary for the adjudication of exemplary damages, their assessment
being left to the discretion of the court in accordance with the circumstances
of each case.29 While the imposition of exemplary damages is justified in
this case, equity calls for its reduction. In Inhelder Corporation v. Court of
Appeals, G.R. No. L-52358, 122 SCRA 576, 585, (May 30, 1983), we laid
down the rule that judicial discretion granted to the courts in the assessment
of damages must always be exercised with balanced restraint and measured
objectivity. Thus, here the award of exemplary damages by way of example
for the public good should be reduced to P100,000.00.
By the same token, attorney's fees and other expenses of litigation may be
recovered when exemplary damages are awarded.30 In our view, RTC's
award of P50,000.00 as attorney's fees and expenses of litigation is
reasonable, given the circumstances in these cases.

WHEREFORE, the petitions are DENIED. The assailed decision and


resolution of the Court of Appeals in CA-G.R. CV No. 32986 are
AFFIRMED WITH MODIFICATIONS. Petitioners Philippine Bank of
Communications and Ruby L. Tsai are hereby ordered to pay jointly and
severally Ever Textile Mills, Inc. the following: (1) P20,000.00 per month, as
compensation for the use and possession of the properties in question from
November 198631 until subject personal properties are restored to respondent
corporation; (2) P100,000.00 by way of exemplary damages, and (3)
P50,000.00 as attorney's fees and litigation expenses. Costs against
petitioners.
SO ORDERED.
10. G.R. No. L-17870
September 29, 1962
MINDANAO BUS COMPANY, petitioner,
vs.
THE CITY ASSESSOR & TREASURER and the BOARD OF TAX
APPEALS of Cagayan de Oro City,respondents.
Binamira, Barria and Irabagon for petitioner.
Vicente E. Sabellina for respondents.
LABRADOR, J.:
This is a petition for the review of the decision of the Court of Tax Appeals in
C.T.A. Case No. 710 holding that the petitioner Mindanao Bus Company is
liable to the payment of the realty tax on its maintenance and repair
equipment hereunder referred to.
Respondent City Assessor of Cagayan de Oro City assessed at P4,400
petitioner's above-mentioned equipment. Petitioner appealed the assessment
to the respondent Board of Tax Appeals on the ground that the same are not
realty. The Board of Tax Appeals of the City sustained the city assessor, so
petitioner herein filed with the Court of Tax Appeals a petition for the review
of the assessment.
In the Court of Tax Appeals the parties submitted the following stipulation of
facts:

Petitioner and respondents, thru their respective counsels agreed to the


following stipulation of facts:
1. That petitioner is a public utility solely engaged in transporting
passengers and cargoes by motor trucks, over its authorized lines in the
Island of Mindanao, collecting rates approved by the Public Service
Commission;
2. That petitioner has its main office and shop at Cagayan de Oro City. It
maintains Branch Offices and/or stations at Iligan City, Lanao; Pagadian,
Zamboanga del Sur; Davao City and Kibawe, Bukidnon Province;
3. That the machineries sought to be assessed by the respondent as real
properties are the following:
(a) Hobart Electric Welder Machine, appearing in the attached photograph,
marked Annex "A";
(b) Storm Boring Machine, appearing in the attached photograph, marked
Annex "B";
(c) Lathe machine with motor, appearing in the attached photograph,
marked Annex "C";
(d) Black and Decker Grinder, appearing in the attached photograph,
marked Annex "D";
(e) PEMCO Hydraulic Press, appearing in the attached photograph, marked
Annex "E";
(f) Battery charger (Tungar charge machine) appearing in the attached
photograph, marked Annex "F"; and
(g) D-Engine Waukesha-M-Fuel, appearing in the attached photograph,
marked Annex "G".
4. That these machineries are sitting on cement or wooden platforms as may
be seen in the attached photographs which form part of this agreed
stipulation of facts;
5. That petitioner is the owner of the land where it maintains and operates a
garage for its TPU motor trucks; a repair shop; blacksmith and carpentry
shops, and with these machineries which are placed therein, its TPU trucks
are made; body constructed; and same are repaired in a condition to be
serviceable in the TPU land transportation business it operates;

6. That these machineries have never been or were never used as industrial
equipments to produce finished products for sale, nor to repair machineries,
parts and the like offered to the general public indiscriminately for business
or commercial purposes for which petitioner has never engaged in, to
date.1awphl.nt
The Court of Tax Appeals having sustained the respondent city assessor's
ruling, and having denied a motion for reconsideration, petitioner brought the
case to this Court assigning the following errors:
1. The Honorable Court of Tax Appeals erred in upholding respondents'
contention that the questioned assessments are valid; and that said tools,
equipments or machineries are immovable taxable real properties.
2. The Tax Court erred in its interpretation of paragraph 5 of Article 415 of
the New Civil Code, and holding that pursuant thereto the movable
equipments are taxable realties, by reason of their being intended or destined
for use in an industry.
3. The Court of Tax Appeals erred in denying petitioner's contention that the
respondent City Assessor's power to assess and levy real estate taxes on
machineries is further restricted by section 31, paragraph (c) of Republic Act
No. 521; and
4. The Tax Court erred in denying petitioner's motion for reconsideration.
Respondents contend that said equipments, tho movable, are immobilized by
destination, in accordance with paragraph 5 of Article 415 of the New Civil
Code which provides:
Art. 415. The following are immovable properties:
xxx
xxx
xxx
(5) Machinery, receptacles, instruments or implements intended by the owner
of the tenement for an industry or works which may be carried on in a
building or on a piece of land, and which tend directly to meet the needs of
the said industry or works. (Emphasis ours.)
Note that the stipulation expressly states that the equipment are placed on
wooden or cement platforms. They can be moved around and about in
petitioner's repair shop. In the case of B. H. Berkenkotter vs. Cu Unjieng, 61
Phil. 663, the Supreme Court said:

Article 344 (Now Art. 415), paragraph (5) of the Civil Code, gives the
character of real property to "machinery, liquid containers, instruments or
implements intended by the owner of any building or land for use in
connection with any industry or trade being carried on therein and which
are expressly adapted to meet the requirements of such trade or industry."
If the installation of the machinery and equipment in question in the central
of the Mabalacat Sugar Co., Inc., in lieu of the other of less capacity
existing therein, for its sugar and industry, converted them into real property
by reason of their purpose, it cannot be said that their incorporation
therewith was not permanent in character because, as essential and
principle elements of a sugar central, without them the sugar central would
be unable to function or carry on the industrial purpose for which it was
established. Inasmuch as the central is permanent in character, the necessary
machinery and equipment installed for carrying on the sugar industry for
which it has been established must necessarily be permanent. (Emphasis
ours.)
So that movable equipments to be immobilized in contemplation of the law
must first be "essential and principal elements" of an industry or works
without which such industry or works would be "unable to function or carry
on the industrial purpose for which it was established." We may here
distinguish, therefore, those movable which become immobilized by
destination because they are essential and principal elements in the industry
for those which may not be so considered immobilized because they
are merely incidental, not essential and principal. Thus, cash registers,
typewriters, etc., usually found and used in hotels, restaurants, theaters, etc.
are merely incidentals and are not and should not be considered
immobilized by destination, for these businesses can continue or carry on
their functions without these equity comments. Airline companies use
forklifts, jeep-wagons, pressure pumps, IBM machines, etc. which are
incidentals, not essentials, and thus retain their movable nature. On the other
hand, machineries of breweries used in the manufacture of liquor and soft
drinks, though movable in nature, are immobilized because they are
essential to said industries; but the delivery trucks and adding machines

which they usually own and use and are found within their industrial
compounds are merely incidental and retain their movable nature.
Similarly, the tools and equipments in question in this instant case are, by
their nature, not essential and principle municipal elements of petitioner's
business of transporting passengers and cargoes by motor trucks. They are
merely incidentals acquired as movables and used only for expediency to
facilitate and/or improve its service. Even without such tools and equipments,
its business may be carried on, as petitioner has carried on, without such
equipments, before the war. The transportation business could be carried on
without the repair or service shop if its rolling equipment is repaired or
serviced in another shop belonging to another.
The law that governs the determination of the question at issue is as follows:
Art. 415. The following are immovable property:
xxx
xxx
xxx
(5) Machinery, receptacles, instruments or implements intended by the owner
of the tenement for an industry or works which may be carried on in a
building or on a piece of land, and which tend directly to meet the needs of
the said industry or works; (Civil Code of the Phil.)
Aside from the element of essentiality the above-quoted provision also
requires that the industry or works be carried on in a building or on a piece
of land. Thus in the case of Berkenkotter vs. Cu Unjieng, supra, the
"machinery, liquid containers, and instruments or implements" are found in a
building constructed on the land. A sawmill would also be installed in a
building on land more or less permanently, and the sawing is conducted in the
land or building.
But in the case at bar the equipments in question are destined only to repair
or service the transportation business, which is not carried on in a building
or permanently on a piece of land, as demanded by the law. Said equipments
may not, therefore, be deemed real property.
Resuming what we have set forth above, we hold that the equipments in
question are not absolutely essential to the petitioner's transportation
business, and petitioner's business is not carried on in a building, tenement or

on a specified land, so said equipment may not be considered real estate


within the meaning of Article 415 (c) of the Civil Code.
WHEREFORE, the decision subject of the petition for review is hereby set
aside and the equipment in question declared not subject to assessment as
real estate for the purposes of the real estate tax. Without costs.
So ordered.
11. G.R. No. L-47943 May 31, 1982
MANILA ELECTRIC COMPANY, petitioner,
vs.
CENTRAL BOARD OF ASSESSMENT APPEALS, BOARD OF
ASSESSMENT APPEALS OF BATANGAS and PROVINCIAL
ASSESSOR OF BATANGAS, respondents.
AQUINO, J.:
This case is about the imposition of the realty tax on two oil storage tanks
installed in 1969 by Manila Electric Company on a lot in San Pascual,
Batangas which it leased in 1968 from Caltex (Phil.), Inc. The tanks are
within the Caltex refinery compound. They have a total capacity of 566,000
barrels. They are used for storing fuel oil for Meralco's power plants.
According to Meralco, the storage tanks are made of steel plates welded and
assembled on the spot. Their bottoms rest on a foundation consisting of
compacted earth as the outermost layer, a sand pad as the intermediate layer
and a two-inch thick bituminous asphalt stratum as the top layer. The
bottom of each tank is in contact with the asphalt layer,
The steel sides of the tank are directly supported underneath by a circular
wall made of concrete, eighteen inches thick, to prevent the tank from
sliding. Hence, according to Meralco, the tank is not attached to its
foundation. It is not anchored or welded to the concrete circular wall. Its
bottom plate is not attached to any part of the foundation by bolts, screws or
similar devices. The tank merely sits on its foundation. Each empty tank can
be floated by flooding its dike-inclosed location with water four feet deep.
(pp. 29-30, Rollo.)

On the other hand, according to the hearing commissioners of the Central


Board of Assessment Appeals, the area where the two tanks are located is
enclosed with earthen dikes with electric steel poles on top thereof and is
divided into two parts as the site of each tank. The foundation of the tanks is
elevated from the remaining area. On both sides of the earthen dikes are two
separate concrete steps leading to the foundation of each tank.
Tank No. 2 is supported by a concrete foundation with an asphalt lining about
an inch thick. Pipelines were installed on the sides of each tank and are
connected to the pipelines of the Manila Enterprises Industrial Corporation
whose buildings and pumping station are near Tank No. 2.
The Board concludes that while the tanks rest or sit on their foundation, the
foundation itself and the walls, dikes and steps, which are integral parts of the
tanks, are affixed to the land while the pipelines are attached to the tanks.
(pp. 60-61, Rollo.) In 1970, the municipal treasurer of Bauan, Batangas, on
the basis of an assessment made by the provincial assessor, required Meralco
to pay realty taxes on the two tanks. For the five-year period from 1970 to
1974, the tax and penalties amounted to P431,703.96 (p. 27, Rollo). The
Board required Meralco to pay the tax and penalties as a condition for
entertaining its appeal from the adverse decision of the Batangas board of
assessment appeals.
The Central Board of Assessment Appeals (composed of Acting Secretary of
Finance Pedro M. Almanzor as chairman and Secretary of Justice Vicente
Abad Santos and Secretary of Local Government and Community
Development Jose Roo as members) in its decision dated November 5, 1976
ruled that the tanks together with the foundation, walls, dikes, steps, pipelines
and other appurtenances constitute taxable improvements.
Meralco received a copy of that decision on February 28, 1977. On the
fifteenth day, it filed a motion for reconsideration which the Board denied in
its resolution of November 25, 1977, a copy of which was received by
Meralco on February 28, 1978.
On March 15, 1978, Meralco filed this special civil action of certiorari to
annul the Board's decision and resolution. It contends that the Board acted

without jurisdiction and committed a grave error of law in holding that its
storage tanks are taxable real property.
Meralco contends that the said oil storage tanks do not fall within any of the
kinds of real property enumerated in article 415 of the Civil Code and,
therefore, they cannot be categorized as realty by nature, by incorporation,
by destination nor by analogy. Stress is laid on the fact that the tanks are not
attached to the land and that they were placed on leased land, not on the
land owned by Meralco.
This is one of those highly controversial, borderline or penumbral cases on
the classification of property where strong divergent opinions are inevitable.
The issue raised by Meralco has to be resolved in the light of the provisions
of the Assessment Law, Commonwealth Act No. 470, and the Real Property
Tax Code, Presidential Decree No. 464 which took effect on June 1, 1974.
Section 2 of the Assessment Law provides that the realty tax is due "on real
property, including land, buildings, machinery, and other improvements" not
specifically exempted in section 3 thereof. This provision is reproduced with
some modification in the Real Property Tax Code which provides:
Sec. 38. Incidence of Real Property Tax. They shall be levied, assessed
and collected in all provinces, cities and municipalities an annual ad
valorem tax on real property, such as land, buildings, machinery and
other improvements affixed or attached to real property not hereinafter
specifically exempted.
The Code contains the following definition in its section 3:
k) Improvements is a valuable addition made to property or an
amelioration in its condition, amounting to more than mere repairs or
replacement of waste, costing labor or capital and intended to enhance its
value, beauty or utility or to adapt it for new or further purposes.
We hold that while the two storage tanks are not embedded in the land, they
may, nevertheless, be considered as improvements on the land, enhancing
its utility and rendering it useful to the oil industry. It is undeniable that the
two tanks have been installed with some degree of permanence as
receptacles for the considerable quantities of oil needed by Meralco for its
operations.

Oil storage tanks were held to be taxable realty in Standard Oil Co. of New
Jersey vs. Atlantic City, 15 Atl. 2nd 271.
For purposes of taxation, the term "real property" may include things which
should generally be regarded as personal property(84 C.J.S. 171, Note 8). It
is a familiar phenomenon to see things classed as real property for purposes
of taxation which on general principle might be considered personal property
(Standard Oil Co. of New York vs. Jaramillo, 44 Phil. 630, 633).
The case of Board of Assessment Appeals vs. Manila Electric Company, 119
Phil. 328, wherein Meralco's steel towers were held not to be subject to realty
tax, is not in point because in that case the steel towers were regarded as
poles and under its franchise Meralco's poles are exempt from taxation.
Moreover, the steel towers were not attached to any land or building. They
were removable from their metal frames.
Nor is there any parallelism between this case and Mindanao Bus Co. vs.
City Assessor, 116 Phil. 501, where the tools and equipment in the repair,
carpentry and blacksmith shops of a transportation company were held not
subject to realty tax because they were personal property.
WHEREFORE, the petition is dismissed. The Board's questioned decision
and resolution are affirmed. No costs.
SO ORDERED.
12. SONNY LO, petitioner, vs. KJS ECO-FORMWORK SYSTEM
PHIL., INC., respondent.
DECISION
YNARES-SANTIAGO, J.:
Respondent KJS ECO-FORMWORK System Phil., Inc. is a corporation
engaged in the sale of steel scaffoldings, while petitioner Sonny L. Lo, doing
business under the name and style Sans Enterprises, is a building
contractor. On February 22, 1990, petitioner ordered scaffolding equipments
from respondent worth P540,425.80.[1] He paid a downpayment in the amount
of P150,000.00. The balance was made payable in ten monthly installments.
Respondent delivered the scaffoldings to petitioner.[2] Petitioner was able
to pay the first two monthly installments. His business, however, encountered

financial difficulties and he was unable to settle his obligation to respondent


despite oral and written demands made against him.[3]
On October 11, 1990, petitioner and respondent executed a Deed of
Assignment,[4] whereby petitioner assigned to respondent his receivables in
the amount of P335,462.14 from Jomero Realty Corporation. Pertinent
portions of the Deed provide:
WHEREAS, the ASSIGNOR is the contractor for the construction of a
residential house located at Greenmeadow Avenue, Quezon City owned by
Jomero Realty Corporation;
WHEREAS, in the construction of the aforementioned residential house, the
ASSIGNOR purchased on account scaffolding equipments from the
ASSIGNEE payable to the latter;
WHEREAS, up to the present the ASSIGNOR has an obligation to the
ASSIGNEE for the purchase of the aforementioned scaffoldings now in the
amount of Three Hundred Thirty Five Thousand Four Hundred Sixty Two
and 14/100 Pesos (P335,462.14);
NOW, THEREFORE, for and in consideration of the sum of Three Hundred
Thirty Five Thousand Four Hundred Sixty Two and 14/100 Pesos
(P335,462.14), Philippine Currency which represents part of the
ASSIGNORs collectible from Jomero Realty Corp., said ASSIGNOR
hereby assigns, transfers and sets over unto the ASSIGNEE all collectibles
amounting to the said amount of P335, 462.14;
And the ASSIGNOR does hereby grant the ASSIGNEE, its successors and
assigns, the full power and authority to demand, collect, receive, compound,
compromise and give acquittance for the same or any part thereof, and in
the name and stead of the said ASSIGNOR;
And the ASSIGNOR does hereby agree and stipulate to and with said
ASSIGNEE, its successors and assigns that said debt is justly owing and
due to the ASSIGNOR for Jomero Realty Corporation and that said
ASSIGNOR has not done and will not cause anything to be done to
diminish or discharge said debt, or delay or to prevent the ASSIGNEE, its
successors or assigns, from collecting the same;

And the ASSIGNOR further agrees and stipulates as aforesaid that the said
ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will at
times hereafter, at the request of said ASSIGNEE, its successors or assigns, at
his cost and expense, execute and do all such further acts and deeds as shall
be reasonably necessary to effectually enable said ASSIGNEE to recover
whatever collectibles said ASSIGNOR has in accordance with the true intent
and meaning of these presents. xxx[5] (Italics supplied)
However, when respondent tried to collect the said credit from Jomero
Realty Corporation, the latter refused to honor the Deed of Assignment
because it claimed that petitioner was also indebted to it. [6] On November 26,
1990, respondent sent a letter[7] to petitioner demanding payment of his
obligation, but petitioner refused to pay claiming that his obligation had been
extinguished when they executed the Deed of Assignment.
Consequently, on January 10, 1991, respondent filed an action for
recovery of a sum of money against the petitioner before the Regional Trial
Court of Makati, Branch 147, which was docketed as Civil Case No. 91-074.
[8]

During the trial, petitioner argued that his obligation was extinguished
with the execution of the Deed of Assignment of credit. Respondent, for its
part, presented the testimony of its employee, Almeda Baaga, who testified
that Jomero Realty refused to honor the assignment of credit because it
claimed that petitioner had an outstanding indebtedness to it.
On August 25, 1994, the trial court rendered a decision [9] dismissing the
complaint on the ground that the assignment of credit extinguished the
obligation. The decretal portion thereof provides:
WHEREFORE, in view of the foregoing, the Court hereby renders judgment
in favor of the defendant and against the plaintiff, dismissing the complaint
and ordering the plaintiff to pay the defendant attorneys fees in the amount of
P25,000.00.
Respondent appealed the decision to the Court of Appeals. On April 19,
2001, the appellate court rendered a decision,[10] the dispositive portion of
which reads:

WHEREFORE, finding merit in this appeal, the court REVERSES the


appealed Decision and enters judgment ordering defendant-appellee Sonny
Lo to pay the plaintiff-appellant KJS ECO-FORMWORK SYSTEM
PHILIPPINES, INC. Three Hundred Thirty Five Thousand Four Hundred
Sixty-Two and 14/100 (P335,462.14) with legal interest of 6% per annum
from January 10, 1991 (filing of the Complaint) until fully paid and
attorneys fees equivalent to 10% of the amount due and costs of the suit.
SO ORDERED.[11]
In finding that the Deed of Assignment did not extinguish the obligation
of the petitioner to the respondent, the Court of Appeals held that (1)
petitioner failed to comply with his warranty under the Deed; (2) the object
of the Deed did not exist at the time of the transaction, rendering it void
pursuant to Article 1409 of the Civil Code; and (3) petitioner violated the
terms of the Deed of Assignment when he failed to execute and do all acts
and deeds as shall be necessary to effectually enable the respondent to
recover the collectibles.[12]
Petitioner filed a motion for reconsideration of the said decision, which
was denied by the Court of Appeals.[13]
In this petition for review, petitioner assigns the following errors:
I
THE HONORABLE COURT OF APPEALS COMMITTED A GRAVE
ERROR IN DECLARING THE DEED OF ASSIGNMENT (EXH. 4)
AS NULL AND VOID FOR LACK OF OBJECT ON THE BASIS OF
A MERE HEARSAY CLAIM.
II
THE HONORABLE COURT OF APPEALS ERRED IN
HOLDING THAT THE DEED OF ASSIGNMENT (EXH. 4) DID
NOT EXTINGUISH PETITIONERS OBLIGATION ON THE
WRONG NOTION THAT PETITIONER FAILED TO COMPLY
WITH HIS WARRANTY THEREUNDER.
III
THE HONORABLE COURT OF APPEALS ERRED IN
REVERSING THE DECISION OF THE TRIAL COURT AND IN

ORDERING PAYMENT OF INTERESTS AND ATTORNEYS


FEES.[14]
The petition is without merit.
An assignment of credit is an agreement by virtue of which the owner of
a credit, known as the assignor, by a legal cause, such as sale, dacion en
pago, exchange or donation, and without the consent of the debtor, transfers
his credit and accessory rights to another, known as the assignee, who
acquires the power to enforce it to the same extent as the assignor could
enforce it against the debtor.[15]
Corollary thereto, in dacion en pago, as a special mode of payment, the
debtor offers another thing to the creditor who accepts it as equivalent of
payment of an outstanding debt.[16] In order that there be a valid dation in
payment, the following are the requisites: (1) There must be the performance
of the prestation in lieu of payment (animo solvendi) which may consist in
the delivery of a corporeal thing or a real right or a credit against the third
person; (2) There must be some difference between the prestation due and
that which is given in substitution (aliud proalio); (3) There must be an
agreement between the creditor and debtor that the obligation is immediately
extinguished by reason of the performance of a prestation different from that
due.[17]The undertaking really partakes in one sense of the nature of sale, that
is, the creditor is really buying the thing or property of the debtor, payment
for which is to be charged against the debtors debt. As such, the vendor in
good faith shall be responsible, for the existence and legality of the credit at
the time of the sale but not for the solvency of the debtor, in specified
circumstances.[18]
Hence, it may well be that the assignment of credit, which is in the
nature of a sale of personal property,[19] produced the effects of a dation in
payment which may extinguish the obligation. [20] However, as in any other
contract of sale, the vendor or assignor is bound by certain warranties. More
specifically, the first paragraph of Article 1628 of the Civil Code provides:
The vendor in good faith shall be responsible for the existence and legality of
the credit at the time of the sale, unless it should have been sold as doubtful;
but not for the solvency of the debtor, unless it has been so expressly

stipulated or unless the insolvency was prior to the sale and of common
knowledge.
From the above provision, petitioner, as vendor or assignor, is bound to
warrant the existence and legality of the credit at the time of the sale or
assignment. When Jomero claimed that it was no longer indebted to
petitioner since the latter also had an unpaid obligation to it, it essentially
meant that its obligation to petitioner has been extinguished by
compensation.[21] In other words, respondent alleged the non-existence of
the credit and asserted its claim to petitioners warranty under the
assignment. Therefore, it behooved on petitioner to make good its warranty
and paid the obligation.
Furthermore, we find that petitioner breached his obligation under the
Deed of Assignment, to wit:
And the ASSIGNOR further agrees and stipulates as aforesaid that the said
ASSIGNOR, his heirs, executors, administrators, or assigns, shall and will
at times hereafter, at the request of said ASSIGNEE, its successors or
assigns, at his cost and expense, execute and do all such further acts and
deeds as shall be reasonably necessary to effectually enable said
ASSIGNEE to recover whatever collectibles said ASSIGNOR has in
accordance with the true intent and meaning of these presents.
[22] (underscoring ours)
Indeed, by warranting the existence of the credit, petitioner should be
deemed to have ensured the performance thereof in case the same is later
found to be inexistent. He should be held liable to pay to respondent the
amount of his indebtedness.
Hence, we affirm the decision of the Court of Appeals ordering
petitioner to pay respondent the sum of P335,462.14 with legal interest
thereon. However, we find that the award by the Court of Appeals of
attorneys fees is without factual basis. No evidence or testimony was
presented to substantiate this claim. Attorneys fees, being in the nature of
actual damages, must be duly substantiated by competent proof.
WHEREFORE, in view of the foregoing, the Decision of the Court of
Appeals dated April 19, 2001 in CA-G.R. CV No. 47713, ordering

petitioner to pay respondent the sum of P335,462.14 with legal interest of 6%


per annum from January 10, 1991 until fully paid is AFFIRMED with
MODIFICATION. Upon finality of this Decision, the rate of legal interest
shall be 12% per annum, inasmuch as the obligation shall thereafter become
equivalent to a forbearance of credit.[23] The award of attorneys fees is
DELETED for lack of evidentiary basis.
SO ORDERED.

13. WOODRIDGE SCHOOL, INC., G.R. No. 157285


and MIGUELA JIMENEZ-JAVIER,
Petitioners, Present:
-versusARB CONSTRUCTION CO., INC.,
Respondent. Promulgated:
February 16, 2007
DECISION
CORONA, J.:
Petitioners

Woodridge

School,

Inc.

(Woodridge)

and Miguela JimenezJavier come to us assailing the decision [1] dated


September 30, 2002 and resolution [2] dated February 14, 2003 of the
Court of Appeals in CAG.R. CV No. 515333 which, in turn, modified the
ruling

of

the

Regional

Trial

Court

(RTC)

of Imus, Cavite awarding P500,000 to respondent ARB Construction


Co., Inc. (ARB) as reasonable indemnity for the use of ARBs road lot.[3]

Woodridge is the usufructuary of a parcel of land covered by


Transfer Certificate of Title (TCT) No. T-363902 in the name of spouses
Ernesto
T. Matugas and Filomena U.Matugas. Its
copetitioner, Miguela JimenezJavier, is the registered owner of the adjacent lot
under TCT No. T-330688.

The reasons why this case is not one for a right


of way as an easement are not difficult to discern.
The questioned road is part and parcel of the road
network of Soldiers Hills IV, Phase II. This road was
constructed pursuant to the approved subdivision plan

On the other hand, ARB is the owner and developer of Soldiers

of Soldiers Hills IV, Phase II. As such, the road has

Hills Subdivision in Bacoor, Cavite, which is composed of four phases.

already been withdrawn from the commerce of men as

Phase I of the subdivision was already accessible from the Marcos

the ownership of which was automatically vested in the

Alvarez Avenue. To provide the same accessibility to the residents of

government

Phase II of the subdivision, ARB constructed the disputed road to link

although it is still registered in the name of the [ARB],

the two phases.

the moment the subdivision plan was approved. While it

without

need

of

any

compensation,

is not yet donated to the government [,] [it] is of no


As found by the appellate court, petitioners properties sit right
in the middle of several estates: Phase I of Soldiers Hills Subdivision

moment for donating this road to the government is a


mere formality.

in the north, a creek in the east and Green Valley Subdivision the
farther east, a road within Soldiers Hills Subdivision IV which leads to

Differently

stated,

the

government

automatically

the Marcos Alvarez Avenue in the west and Phase III of Soldiers Hills

becomes the owner of the subdivisions roads the

Subdivision in the south.

moment the subdivision plan is approved. From that


time on, the roads are withdrawn from the commerce of

Initially, petitioners offered to pay ARB P50,000 as indemnity

men even [if] the titles are still registered in the name

for the use of the road. Adamant, ARB refused the offer and fenced

of the subdivision owners and the roads are not yet

the perimeter of the road fronting the properties of petitioners. By

donated to the government. Thus, the subdivision

doing so, ARB effectively cut off petitioners access to and from the

owner can no longer sell or alienate the roads for they

public highway.

are already owned by the government; thus, even if

After failing to settle the matter amicably, petitioners jointly


filed a complaint

[4]

[petitioners] want to buy this road, and the [ARB] wants

in the RTC of Imus, Cavite to enjoin ARB from

to sell the same, this transaction cannot materialize for

depriving them of the use of the disputed subdivision road and to

the above-stated reasons. Accordingly, [ARB] cannot

seek a compulsory right of way after payment of proper indemnity.

prevent/prohibit plaintiffs from using the road as the

On November 24, 1995, the trial court rendered its decision in favor

same belongs to the government.

of petitioners:
xxx xxx xxx

WHEREFORE, [ARB] is ordered to cease and desist from

the Quezon City government and/or the Republic of the

preventing [petitioners] in using the subject road or

Philippines, without need of paying any compensation. [8]

any other road in the subdivision.


xxx xxx xxx
SO ORDERED. [5] (citations omitted)

The appellate court went on to rule that a compulsory right of way


exists in favor of petitioners as [t]here is no other existing adequate
outlet to and from [petitioners] properties to the Marcos Alvarez

ARB elevated the case to the Court of Appeals.

[6]

Finding merit in the Avenue other than the subject existing road lot designated as Lot No.

appeal, the appellate court reversed the decision of the lower court.

5827-F-1 belonging to [ARB].[9] In addition, it awarded P500,000 to

It explained that the 1991 case of White Plains Subdivision[7] did not ARB as reasonable indemnity for the use of the road lot.
apply to the present case which was decided under a different factual
milieu:

Acting on petitioners motion for reconsideration, the appellate court


justified the monetary award in this manner:
In the assailed Decision, the Court below relied on the
ruling of the Supreme Court in White Plains Association,

In

Inc. vs. Legaspi (193 SCRA 765). The ruling is not

of P500,000.00 merely as reasonable indemnity for the

applicable. In the White Plains case, the disputed area

use of the road lot, not the alienation thereof. The

was

the Quezon City

amount was based on equitable considerations foremost

Government, with the concurrence of the owner and

of which is that, while there is no alienation to speak of,

developer

Subdivision

the easement is of long-standing, that is, until a shorter

in Quezon City, for the purpose of constructing a major

and adequate outlet is established. Moreover, [ARB]

thoroughfare open to the general public. The case was

should be compensated for the wear and tear that

filed by the association of homeowners of White Plains

[petitioners] use of the road would contribute to; it is

in Quezon City when the owner-developer sought to

[ARB] which is solely to be credited for the completion of

convert the disputed lot to residential lots. The

the road lot. Going by the conservative valuation of the

Supreme Court initially held that the disputed lot was

Municipality of Bacoor, Cavite presented by [petitioners],

not longer within the commerce of men, it having been

the 4,760 sq. m. road lot would cost P1,904,000 but as

segregated for a particular purpose, that of being used

stated what is compensated is the use of the road lot not

as part of a mandatory open space reserved for public

its alienation.

specifically
of

set
the

aside
White

by

Plains

[o]ur Decision,

[w]e

awarded

the

amount

use to be improved into the widened Katipunan Road. It


was within this context that the Supreme Court held

[Petitioners] original offer cannot be considered a

that

reasonable

ownership

was

automatically

vested

in

indemnity,

there

being

knotty

legal

question involved and it is not [ARBs] fault that the


parties had to resort to the courts for a resolution.

Likewise, we hold the trial court in error when it ruled that the

[10]

subject road is public property pursuant to Section 2 of Presidential


Decree No. 1216.[16] The pertinent portion of the provision reads:

Unsatisfied with the ruling of the appellate court, petitioners

Section 2. xxx xxx xxx

filed this petition for review on certiorari insisting that ARB is not
entitled to be paid any indemnity.
Petitioners argue that the contested road lot is a property of
public dominion pursuant to Article 420 [11] of the Civil Code.
Specifically, petitioners point out that the disputed road lot falls
under the category others of similar character which is the last
clause of Article 420 (1).[12] Hence, it is a property of public dominion

Upon their completion as certified to by the Authority,


the roads, alleys, sidewalks and playgrounds shall be donated
by the owner or developer to the city or municipality and it
shall be mandatory for the local governments to accept them
provided, however, that the parks and playgrounds may be
donated to the Homeowners Association of the project with
the consent of the city or municipality concerned

which can be used by the general public without need for


compensation. Consequently, it is wrong for ARB to exclude
petitioners from using the road lot or to make them pay for the use of
the same.

The law is clear. The transfer of ownership from the subdivision


owner-developer to the local government is not automatic but requires

We disagree.

a positive act from the owner-developer before the city or municipality


can acquire dominion over the subdivision roads. Therefore, until and

In the case of Abellana, Sr. v. Court of Appeals,


held

that

the

road

lots

in

private

[13]

the Court unless the roads are donated,[17] ownership remains with the owner-

subdivision

are

developer.[18]

private property, hence, the local government should first acquire


them by donation, purchase, or expropriation, if they are to be
utilized as a public road.

[14]

Since no donation has been made in favor of any local

Otherwise, they remain to be private government and the title to the road lot is still registered in the name

properties of the owner-developer.

of ARB, the disputed property remains private.

Contrary to the position of petitioners, the use of the

This is not to say that ARB may readily exclude petitioners from

subdivision roads by the general public does not strip it of its private

passing through the property. As correctly pointed out by the Court of

character. The road is not converted into public property by mere

Appeals, the circumstances clearly make out a case of legal easement

tolerance of the subdivision owner of the publics passage through it. of right of way. It is an easement which has been imposed by law and
To repeat, the local government should first acquire them by not by the parties and it has for (its) object either public use or the
donation, purchase, or expropriation, if they are to be utilized as a interest of private persons.[19]
public road.[15]

To be entitled to a legal easement of right of way, the


following requisites must concur: (1) the dominant estate is

passage, the second paragraph of Article 649 of the Civil Code


particularly applies:

surrounded by other immovables and has no adequate outlet to a


public highway; (2) payment of proper indemnity; (3) the isolation

Art 649. xxx xxx xxx

was not due to acts of the proprietor of the dominant estate and (4)
the right of way claimed is at the point least prejudicial to
the servient estate.

[20]

Should this easement be established in such a manner


that its use may be continuous for all the needs of the
dominant estate, establishing a permanent passage,

The appellate and trial courts found that the properties of

the indemnity shall consist of the value of the land

petitioners are enclosed by other estates without any adequate

occupied and the amount of the damage caused

access to a public highway except the subject road lot which leads to

to the servient estate. xxx. (Emphasis supplied)

Marcos Alvarez Avenue.

[21]

Although it was shown that the shortest

distance from the properties to the highway is toward the east across
a creek, this alternative route does not provide an adequate outlet

On that basis, we further hold that the appellate court erred


in arbitrarily awarding indemnity for the use of the road lot.

for the students of the proposed school. This route becomes marshy
as the creek overflows during the rainy season and will endanger the
students attending the school.

The Civil Code categorically provides for the measure by which


the proper indemnity may be computed: value of the land occupied
plus the amount of the damage caused to the servient estate. Settled

All told, the only requisite left unsatisfied is the payment of is the rule in statutory construction that when the law is clear, the
proper indemnity.

function of the courts is simple application. [23] Thus, to award the


indemnity using factors different from that given by the law is a

Petitioners assert that their initial offer of P50,000 should be complete disregard of these clear statutory provisions and is evidently
sufficient compensation for the right of way. Further, they should not

arbitrary. This the Court cannot countenance. The Civil Code has

be held accountable for the increase in the value of the property

clearly laid down the parameters and we cannot depart from

since the delay was attributable to the stubborn refusal of ARB to them. Verba legis non est recedendum.
accept their offer.[22]
Having settled the legal issues, we order the remand of this
Again, we are not persuaded.

case to the trial court for reception of evidence and determination of


the limits of the property to be covered by the easement, the proper

In the case of a legal easement, Article 649 of the Civil Code

indemnity to be paid and the respective contributions of petitioners.

prescribes the parameters by which the proper indemnity may be


fixed. Since the intention of petitioners is to establish a permanent

For the guidance of the trial court, the fact that the disputed
road lot is used by the general public may be taken in consideration to

mitigate the amount of damage that theservient estate is entitled to, patent therefor, then the court shall register title in favor of the applicant to all
in the sense that the wear and tear of the subject road is not entirely lands describe in the application.
attributable to petitioners.
WHEREFORE,

this

petition

is

partially GRANTED.

The

September 30, 2002 Decision and February 14, 2003 resolution of


the

Court

of

Appeals

in

CAG.R.

CV

No.

515333

are ANNULLED and SET ASIDE in so far as petitioners are ordered


to pay an indemnity of P500,000. The case is hereby remanded to
the trial court for reception of evidence and determination of the
limits of the property to be covered by the easement, the proper
indemnity to be paid and the respective contributions of petitioners.
SO ORDERED.

14. G.R. No. L-13334


March 18, 1919
LEONCIO ZARATE, applicant-appellant,
vs.
THE DIRECTOR OF LANDS, objector-appellee.
Aurelio Cecilio for appellant.
Office of the Solicitor-General Paredes for appellee.
MALCOLM, J.:
In a decision of this Court in the case of Zarate vs. Director of Lands, now
appearing in volume 34 of the Philippine Reports, at page 416, the
dispositive part reads:
The judgment of the Court of Land Registration is hereby modified and it is
declared that the applicant has the right to register title to all of the lands
described in the application, with the exception of that portion claimed as a
homestead by Apolonio Gamido, which homestead shall be excluded from
registration by the applicant provided the Court of Land Registration shall
find that said Apolonio Gamido has obtained a patent for said land; but if
the Court of Land Registration finds that said Gamido has not yet obtained a

On the return of the record to the Court of First Instance of Nueva Ecija,
which court after the dissolution of the Court of Land Registration had
jurisdiction, an order was issued by the judge, finding that a homestead patent
had been issued to Apolonio Gamido and consequently directing the
exclusion of this portion of the land described in the main decision in
Zarate vs. Director of Lands [supra]. The applicant appeals from this order,
although his contention is not well grounded, resulting principally through an
erroneous conception of the original decision of this court as written in
English. In other words, Gamido having compiled with the express mandate
of the appellate court, his homestead should remain his property. As was said
by the United States Supreme Court in the case of St. Louis Smelting and
Refining Co. vs. Kemp ([1881]), 104 U.S., 636), "The patent of the United
States is the conveyance by which the nation passes the title to portions of the
public domain."
We are not insensible to the fact that the decision in Zarate vs. Director of
Lands [supra] announced the doctrine that "Under Act No. 926, a patent
issued under the homestead Law has all the force and effect of a Torrens title
acquired under Act No. 496; and that being the case . . . we must respect the
title so secured, provided it be a fact that the patent has been secured in any
of said homestead proceedings," and that this doctrine has been modified (or
reversed) by the later decisions of this court. (See for instance De los
Reyes vs. Razon [1918], 38 Phil., 480.) Recognition of the expression 'Law
of the Case" saves the situation.
A well-known legal principle is that when an appellate court has once
declared the law in a case, such declaration continues to be the law of that cae
even on the subsequent appeal. The rule made by an appellate court, while it
may be reversed in other cases, cannot be departed from in subsequent
proceedings in the same case. The "Law of the Case," as applied to a former
decision of an appellate court, merely expresses the practice of the courts in
refusing to reopen what has been decided. Such a rule is "necessary to en bale
an appellate court to perform its duties satisfactorily and efficiently, which

would be impossible if a question, once considered and decided by it, were


to be litigated anew in the same case upon any and every subsequent
appeal." Again, the rule is necessary as a matter of policy in order to end
litigation. "There would be no end to a suit if every obstinate litigant could,
by repeated appeals, compel a court to listen to criticism on their opinions,
or speculate of chances from changes in its members." (See Great Western
Tel. Co. vs. Burnham [1895], 162 U.S., 339, 343; Roberts vs. cooper [1857],
20 How., 467, 481; Messinger vs. Anderson [1912], 225 U.S., 436.)
The phrase "Law of the Case" is described in a decision coming from the
Supreme Court of Missouri in the following graphical language:
The general rule, nakedly and badly but, is that legal conclusions announced
on a first appeal, whether on the general law or the law as applied to the
concrete facts, not only prescribed the duty and limit the power of the trial
court to strict obedience and conformity thereto, but they become and
remain the law of the case in all after steps below or above on subsequent
appeal. The rule is grounded on convenience, experience, and reason.
Without the rule there would be no end to criticism, reagitation,
reexamination, and reformulation. In Short, there would be endless litigant
were allowed to speculate on changes in the personnel of a court, or on the
chance of our rewriting proposition once gravely ruled on solemn argument
and handed down as the law of a given case. An itch to reopen questions
foreclosed on a first appeal, would result in the foolishness of the inquisitive
youth who pulled up his corn to see how it grew. Courts are allowed, if they
so choose, to act like ordinary sensible persons. The Administration of
justice is a practical affair. The rule is a practical and a good one of frequent
and beneficial use. (Mangold vs. Bacon [1911], 237 Mo., 496, 512.)
Judgment is affirmed with costs against appellant. So ordered.
Arellano, C.J., Johnson, Carson, Street, Avancea and Moir, JJ., concur.

15. THE SECRETARY OF THE G.R. No. 167707

DEPARTMENT OF ENVIRONMENT AND NATURAL RESOURCES,


THE REGIONAL EXECUTIVE DIRECTOR, DENR-REGION VI,
REGIONAL
TECHNICAL DIRECTOR FOR LANDS, LANDS
MANAGEMENT
BUREAU, REGION
VI
PROVINCIAL ENVIRONMENT AND NATURAL
RESOURCES
OFFICER
OF
KALIBO, AKLAN,
REGISTER
OF
DEEDS, DIRECTOR
OF LAND REGISTRATION
AUTHORITY, DEPARTMENT
OF
TOURISM SECRETARY,
DIRECTOR OF PHILIPPINE TOURISM AUTHORITY,
Petitioners,
- versus MAYOR JOSE S. YAP, LIBERTAD
TALAPIAN, MILA Y. SUMNDAD, and
ANICETO YAP, in their behalf and Promulgated:
in behalf of all those similarly situated,
Respondents. October 8, 2008
x--------------------------------------------------x
DR. ORLANDO SACAY and G.R. No. 173775
WILFREDO GELITO, joined by
THE LANDOWNERS OF
BORACAY SIMILARLY
SITUATED NAMED IN A LIST,
ANNEX A OF THIS PETITION,
Petitioners,
- versus THE SECRETARY OF THE
DEPARTMENT OF ENVIRONMENT
AND NATURAL RESOURCES, THE
REGIONAL TECHNICAL
DIRECTOR FOR LANDS, LANDS

MANAGEMENT BUREAU,
REGION VI, PROVINCIAL
ENVIRONMENT AND NATURAL
RESOURCES OFFICER, KALIBO,
AKLAN,
Respondents.

reputedly a premier Philippine tourist destination.The island is also


home to 12,003 inhabitants[4] who live in the bone-shaped islands
three barangays.[5]
On April 14, 1976, the Department of Environment and Natural
Resources (DENR)

approved the National

Reservation Survey

of

Boracay

DECISION

Island,[6] which identified several lots as being occupied or claimed by


named persons.[7]

REYES, R.T., J.:

On November 10, 1978, then President Ferdinand Marcos


issued

Proclamation

No. 1801[8] declaring Boracay Island,

among

other islands, caves and peninsulas in thePhilippines, as tourist


AT stake in these consolidated cases is the right of the present

zones and marine reserves under the administration of the

occupants of Boracay Island to secure titles over their occupied Philippine Tourism Authority (PTA). President Marcos later approved
the issuance of PTACircular 3-82[9] dated September 3, 1982, to

lands.

implement Proclamation No. 1801.


There are two consolidated petitions. The first is G.R. No.
167707, a petition for review on certiorari of the Decision[1] of the
Court of Appeals (CA) affirming that

[2]

Claiming that Proclamation No. 1801 and PTA Circular No 3-82

of the Regional Trial Court precluded them from filing an application for judicial confirmation of

(RTC) in Kalibo, Aklan, which granted the petition for declaratory imperfect title or survey of land for titling purposes, respondentsrelief filed by respondents-claimants Mayor Jose Yap, et al. and claimants
ordered the survey of Boracay for titling purposes. The second is G.R. Mayor Jose S. Yap, Jr., Libertad Talapian, Mila Y. Sumndad, and Aniceto
No. 173775, a petition for prohibition, mandamus, and nullification of Yap filed a petition for declaratory relief with the RTC in Kalibo, Aklan.
Proclamation No. 1064[3] issued by President Gloria Macapagal-Arroyo
classifying Boracay into reserved forest and agricultural land.

In

their

petition,

respondents-claimants

alleged

that

Proclamation No. 1801 and PTA Circular No. 3-82 raised doubts on
The Antecedents

their right to secure titles over their occupied lands.They declared that
they themselves, or through their predecessors-in-interest, had been

G.R. No. 167707

in

open,

continuous,

exclusive,

and

notorious

possession

and

occupation in Boracay sinceJune 12, 1945, or earlier since time


Boracay Island in the Municipality of Malay, Aklan, with its immemorial. They declared their lands for tax purposes and paid
powdery white sand beaches and warm crystalline waters, is realty taxes on them.[10]

The parties also agreed that the principal issue for resolution
Respondents-claimants posited that Proclamation No. 1801 was purely legal: whether Proclamation No. 1801 posed any legal
and its implementing Circular did not place Boracay beyond the hindrance or impediment to the titling of the lands in Boracay. They
commerce of man. Since the Island was classified as a tourist zone, it decided to forego with the trial and to submit the case for resolution
was susceptible of private ownership. Under Section 48(b) of upon submission of their respective memoranda.[13]
Commonwealth Act (CA) No. 141, otherwise known as the Public Land
The RTC took judicial notice[14] that certain parcels of land

Act, they had the right to have the lots registered in their names
through judicial confirmation of imperfect titles.

in Boracay Island, more particularly Lots 1 and 30, Plan PSU-5344,


were covered by Original Certificate of Title No. 19502 (RO 2222) in

The Republic, through the Office of the Solicitor General the name of the Heirs of Ciriaco S. Tirol. These lots were involved in
(OSG), opposed the petition for declaratory relief. The OSG countered Civil Case Nos. 5222 and 5262 filed before the RTC of Kalibo, Aklan.
that Boracay Island was

an unclassified

land of

the

public

domain. It formed part of the mass of lands classified as public

[15]

The titleswere issued on

August 7, 1933.[16]

forest, which was not available for disposition pursuant to Section


3(a) of Presidential Decree (PD) No. 705 or the Revised Forestry
Code,

[11]

RTC and CA Dispositions

as amended.
On July 14, 1999, the RTC rendered a decision in favor of

The OSG maintained that respondents-claimants reliance on respondents-claimants, with a fallo reading:
PD No. 1801 and PTA Circular No. 3-82 was misplaced. Their right to
judicial confirmation of title was governed by CA No. 141 and PD No.

WHEREFORE, in view of the foregoing, the Court

705. Since Boracay Island had not been classified as alienable and

declares that Proclamation No. 1801 and PTA Circular No.

disposable,

3-82 pose no legal obstacle to the petitioners and those

whatever

possession

they

had

cannot

ripen

into

ownership.

similarly situated to acquire title to their lands in


Boracay, in accordance with the applicable laws and in

During

pre-trial,

respondents-claimants

and

the manner prescribed therein; and to have their lands

the OSG stipulated on the following facts: (1) respondents-claimants

surveyed

and

approved

by

respondent

Regional

were presently in possession of parcels of land in Boracay Island; (2)

Technical Director of Lands as the approved survey does

these parcels of land were planted with coconut trees and other

not in itself constitute a title to the land.

natural growing trees; (3) the coconut trees had heights of more or
less twenty (20) meters and were planted more or less fifty (50)

SO ORDERED.[17]

years ago; and (4) respondents-claimants declared the land they


were occupying for tax purposes.[12]

The RTC upheld respondents-claimants right to have their


occupied lands titled in their name. It ruled that neither Proclamation

No. 1801 nor PTA Circular No. 3-82 mentioned that lands in Boracay (628.96) hectares of agricultural land (alienable and disposable). The
were inalienable or could not be the subject of disposition. [18] The Proclamation likewise provided for a fifteen-meter buffer zone on each
Circular itself recognized private ownership of lands. [19] The trial court side of the centerline of roads and trails, reserved for right-of-way and
cited Sections 87[20] and 53[21] of the Public Land Act as basis for which shall form part of the area reserved for forest land protection
acknowledging private ownership of lands in Boracay and that only

purposes.

those forested areas in public lands were declared as part of the


forest reserve.[22]

On August 10, 2006, petitioners-claimants Dr. Orlando Sacay,


[27]

Wilfredo Gelito,[28] and other landowners[29] in Boracay filed with this

The OSG moved for reconsideration but its motion was denied. Court an original petition for prohibition, mandamus, and nullification
[23]

The Republic then appealed to the CA.

of

Proclamation

No.

1064.[30] They

allege that

the

Proclamation

infringed on their prior vested rights over portions of Boracay. They


On December

9,

2004,

the

appellate

court

affirmed in

toto the RTC decision, disposing as follows:

have been in continued possession of their respective lots in Boracay


since time immemorial. They have also invested billions of pesos in
developing their lands and building internationally renowned first class
resorts on their lots.[31]

WHEREFORE, in view of the foregoing premises,


judgment is hereby rendered by us DENYING the appeal
filed in this case and AFFIRMING the decision of the
lower court.[24]

Petitioners-claimants contended that there is no need for a


proclamation
classified

The

CA

held

that

respondents-claimants

could

not

reclassifying

as

neither

Boracay

mineral

nor

into

agricultural

timber

land,

land. Being
the

island

be is deemed agricultural pursuant to the Philippine Bill of 1902 and Act

prejudiced by a declaration that the lands they occupied since time

No. 926, known as the first Public Land Act. [32] Thus, their possession

immemorial were part of a forest reserve.

in the concept of owner for the required period entitled them to


judicial confirmation of imperfect title.

Again, the OSG sought reconsideration but it was similarly


denied.[25] Hence, the present petition under Rule 45.

Opposing

the

petition,

the OSG argued

that

petitioners-

claimants do not have a vested right over their occupied portions in


G.R. No. 173775

the island. Boracay is an unclassified public forest land pursuant to


Section 3(a) of PD No. 705. Being public forest, the claimed portions of

On May 22, 2006, during the pendency of G.R. No. 167707, President the island are inalienable and cannot be the subject of judicial
Gloria Macapagal-Arroyo issued Proclamation No. 1064 [26] classifying confirmation of imperfect title. It is only the executive department, not
Boracay Island into four hundred (400) hectares of reserved forest
land (protection purposes) and six hundred twenty-eight and 96/100

the courts, which has authority to reclassify lands of the public domain

into alienable and disposable lands. There is a need for a positive

OCCUPIED

PORTIONS

OF BORACAY LAND,

DESPITE

government act in order to release the lots for disposition.

THEFACT THAT THEY HAVE NOT APPLIED YET FOR


JUDICIAL CONFIRMATION OF IMPERFECT TITLE?

On November 21, 2006, this Court ordered the consolidation


of the two petitions as they principally involve the same issues on
the land classification of Boracay Island.

III.

[33]

IS THE EXECUTIVE DECLARATION OF THEIR AREAS AS


ALIENABLE AND DISPOSABLE UNDER SEC 6, CA 141 [AN]

Issues

INDISPENSABLE PRE-REQUISITE FOR PETITIONERS TO

G.R. No. 167707

OBTAIN TITLE UNDER THE TORRENS SYSTEM?

The OSG raises the lone issue of whether Proclamation No.


1801

and PTA Circular

No.

3-82

for

IS THE ISSUANCE OF PROCLAMATION 1064 ON MAY 22,

respondents, and all those similarly situated, to acquire title to their

2006, VIOLATIVE OF THE PRIOR VESTED RIGHTS TO

occupied lands in Boracay Island.

pose

any

legal

obstacle

IV.

[34]

PRIVATE

G.R. No. 173775

OWNERSHIP

OF

PETITIONERS OVER

THEIR

LANDS IN BORACAY, PROTECTED BY THE DUE PROCESS


CLAUSE OF THE CONSTITUTION OR IS PROCLAMATION

Petitioners-claimants hoist five (5) issues, namely:

1064 CONTRARY TO SEC. 8, CA 141, OR SEC. 4(a) OF RA


6657.

I.
AT THE TIME OF THE ESTABLISHED POSSESSION OF

V.

PETITIONERS IN CONCEPT OF OWNER OVER THEIR

CAN RESPONDENTS BE COMPELLED BY MANDAMUS TO

RESPECTIVE

TIME

ALLOW THE SURVEY AND TO APPROVE THE SURVEY

IMMEMORIAL OR AT THE LATEST SINCE 30 YRS. PRIOR

PLANS FOR PURPOSES OF THE APPLICATION FOR TITLING

TO THE FILING OF THE PETITION FOR DECLARATORY

OF

RELIEF ON NOV. 19, 1997, WERE THE AREAS OCCUPIED

[35]

AREAS

IN

BORACAY,

SINCE

THE

LANDS

OF

PETITIONERS

IN

BORACAY?

(Underscoring supplied)

BY THEM PUBLIC AGRICULTURAL LANDS AS DEFINED


BY LAWS THEN ON

JUDICIAL

CONFIRMATION

OF

In capsule, the main issue is whether private claimants

IMPERFECT TITLES OR PUBLIC FOREST AS DEFINED

(respondents-claimants in G.R. No. 167707 and petitioners-claimants

BY SEC. 3a, PD 705?

in G.R. No. 173775) have a right to secure titles over their occupied
portions in Boracay. The twin petitions pertain to their right, if any, to
II.

HAVE

PETITIONERS

OCCUPANTS

judicial confirmation of imperfect title under CA No. 141, as amended.


ACQUIRED

PRIOR

VESTED RIGHT OF PRIVATE OWNERSHIP OVER THEIR

They do not involve their right to secure title under other pertinent
laws.

asserted right to ownership of land and charged with the conservation


of such patrimony.[45] The doctrine has been consistently adopted

Our Ruling

under the 1935, 1973, and 1987 Constitutions.[46]


Regalian Doctrine and power of the executive
to reclassify lands of the public domain

All lands not otherwise appearing to be clearly within private


ownership are presumed to belong to the State. [47] Thus, all lands that

Private claimants rely on three (3) laws and executive acts in

have not been acquired from the government, either by purchase or

their bid for judicial confirmation of imperfect title, namely: (a) by grant, belong to the State as part of the inalienable public domain.
Philippine Bill of 1902[36] in relation to Act No. 926, later amended
and/or superseded by Act No. 2874 and CA No. 141;
Proclamation No. 1801

[38]

Proclamation No. 1064

[37]

[48]

Necessarily, it is up to the State to determine if lands of the public

(b) domain will be disposed of for private ownership. The government, as

issued by then President Marcos; and (c) the agent of the state, is possessed of the plenary power as the

[39]

issued by President Gloria Macapagal- persona in law to determine who shall be the favored recipients of

Arroyo. We shall proceed to determine their rights to apply for judicial public lands, as well as under what terms they may be granted such
confirmation of imperfect title under these laws and executive acts.

privilege, not excluding the placing of obstacles in the way of their


exercise of what otherwise would be ordinary acts of ownership.[49]

But first, a peek at the Regalian principle and the power of the
executive to reclassify lands of the public domain.

Our present land law traces its roots to the Regalian


Doctrine. Upon the Spanish conquest of the Philippines, ownership of

The 1935 Constitution classified lands of the public domain all lands, territories and possessions in thePhilippines passed to the
into

agricultural,

forest

or

timber. [40] Meanwhile,

the

1973 Spanish Crown.[50] The Regalian doctrine was first introduced in

Constitution provided the following divisions: agricultural, industrial the Philippines through the Laws of the Indies and the Royal Cedulas,
or commercial, residential, resettlement, mineral, timber or forest which laid the foundation that all lands that were not acquired from
and grazing lands, and such other classes as may be provided by the Government, either by purchase or by grant, belong to the public
law,[41] giving the government great leeway for classification. [42] Then domain.[51]
the 1987 Constitution reverted to the 1935 Constitution classification
with one addition: national parks.[43] Of these, onlyagricultural lands
may be alienated.

[44]

The Laws of the Indies was followed by the Ley Hipotecaria or

Prior to Proclamation No. 1064 of May 22, the Mortgage Law of 1893. The Spanish Mortgage Law provided for

2006, Boracay Island had never been expressly and administratively the systematic registration of titles and deeds as well as possessory
classified under any of these grand divisions. Boracay was an claims.[52]
unclassified land of the public domain.
The Royal Decree of 1894 or the Maura Law[53] partly amended
The Regalian Doctrine dictates that all lands of the public the Spanish Mortgage Law and the Laws of the Indies. It established
domain belong to the State, that the State is the source of any

possessory information as the method of legalizing possession of

vacant Crown land, under certain conditions which were set forth in
said decree.

[54]

Under Section 393 of the Maura Law, an informacion

posesoria or possessory information title,

[55]

from Spain which


lands. x x x

are

not

timber

or

mineral

[65]

(Emphasis Ours)

when duly inscribed in

the Registry of Property, is converted into a title of ownership only

On February 1, 1903, the Philippine Legislature passed Act

after the lapse of twenty (20) years of uninterrupted possession

No. 496, otherwise known as the Land Registration Act. The act

which must be actual, public, and adverse,


inscription.

[57]

[56]

from the date of its established a system of registration by which recorded title becomes

However, possessory information title had to be absolute,

indefeasible,

perfected one year after the promulgation of the Maura Law, or the Torrens system.

and

imprescriptible. This

is

known

as

[66]

until April 17, 1895. Otherwise, the lands would revert to the State.[58]
Concurrently, on October 7, 1903, the Philippine Commission
In sum, private ownership of land under the Spanish regime

passed Act No. 926, which was the first Public Land Act. The Act

could only be founded on royal concessions which took various introduced the homestead system and made provisions for judicial
forms, namely: (1) titulo real or royal grant; (2)concesion especial or and administrative confirmation of imperfect titles and for the sale or
special grant; (3) composicion con el estado or adjustment title; lease of public lands. It permitted corporations regardless of the
(4) titulo de compra or title by purchase; and (5) informacion
posesoria or possessory information title.

[59]

nationality of persons owning the controlling stock to lease or


purchase lands of the public domain. [67] Under the Act, open,
continuous, exclusive, and notorious possession and occupation of

The first law governing the disposition of public lands in agricultural lands for the next ten (10) years preceding July 26,
the Philippines under American rule was embodied in the Philippine

1904 was sufficient for judicial confirmation of imperfect title. [68]

Bill of 1902.[60] By this law, lands of the public domain in the


Philippine Islands were classified into three (3) grand divisions, to wit:
agricultural, mineral, and timber or forest lands.

[61]

On November 29, 1919, Act No. 926 was superseded by Act

The act provided No. 2874, otherwise known as the second Public Land Act. This new,

for, among others, the disposal of mineral lands by means of more comprehensive law limited the exploitation of agricultural lands
absolute grant (freehold system) and by lease (leasehold system).
[62]

to Filipinos and Americans and citizens of other countries which gave

It also provided the definition by exclusion of agricultural public Filipinos

the

same

privileges. For

judicial

confirmation

of

title,

lands.[63] Interpreting the meaning of agricultural lands under the possession and occupation en concepto dueo since time immemorial,
Philippine Bill of 1902, the Court declared in Mapa v. Insular

or since July 26, 1894, was required.[69]

Government:[64]
After

the

passage

of

the

1935

Constitution, CA

No.

141 amended Act No. 2874 on December 1, 1936. To this day, CA


x

the

No. 141, as amended, remains as the existing general law governing

phrase agricultural land as used in Act No. 926

the classification and disposition of lands of the public domain other

means those

x In

other

public

words,
lands

that

acquired

than timber and mineral lands,[70] and privately owned lands which land for agricultural or other purposes. [81] In fact, Section 8 of CA No.
reverted to the State.[71]

141 limits alienable or disposable lands only to those lands which


have been officially delimited and classified.[82]

Section 48(b) of CA No. 141 retained the requirement under


Act No. 2874 of possession and occupation of lands of the public

The burden of proof in overcoming the presumption of State

domain since time immemorial or since July 26, 1894. However, this ownership of the lands of the public domain is on the person applying
provision was superseded by Republic Act (RA) No. 1942, [72] which for registration (or claiming ownership), who must prove that the land
provided for a simple thirty-year prescriptive period for judicial subject of the application is alienable or disposable. [83] To overcome
confirmation of imperfect title. The provision was last amended this presumption, incontrovertible evidence must be established that
by PD

No.

1073,[73] which

now

provides

for

possession

and the land subject of the application (or claim) is alienable or disposable.

occupation of the land applied for since June 12, 1945, or earlier.

[84]

[74]

domain as alienable and disposable. To prove that the land subject of

There must still be a positive act declaring land of the public

an application for registration is alienable, the applicant must


The

issuance

of

PD

No. 892

[75]

on February

16, establish the existence of a positive act of the government such as a

1976 discontinued the use of Spanish titles as evidence in land


registration proceedings.

[76]

presidential proclamation or an executive order; an administrative

Under the decree, all holders of Spanish action; investigation reports of Bureau of Lands investigators; and a

titles or grants should apply for registration of their lands under Act

legislative act or a statute.[85] The applicant may also secure a

No. 496 within six (6) months from the effectivity of the decree

certification from the government that the land claimed to have been

on February 16, 1976. Thereafter, the recording of all unregistered

possessed for the required number of years is alienable and

lands

[77]

shall

be

governed

by

Section

194

of

the

Revised

disposable.[86]

Administrative Code, as amended by Act No. 3344.


In the case at bar, no such proclamation, executive order,
On June 11, 1978, Act No. 496 was amended and updated administrative action, report, statute, or certification was presented to
by PD No. 1529, known as the Property Registration Decree. It was the Court. The records are bereft of evidence showing that, prior to
enacted to codify the various laws relative to registration of property.
[78]

2006, the portions of Boracay occupied by private claimants were

It governs registration of lands under the Torrens system as well subject of a government proclamation that the land is alienable and

as unregistered lands, including chattel mortgages.[79]

disposable. Absent such well-nigh incontrovertible evidence, the Court


cannot accept the submission that lands occupied by private

positive

act

declaring

land

as

alienable

and

claimants were already open to disposition before 2006. Matters of

disposable is required. In keeping with the presumption of State land classification or reclassification cannot be assumed. They call for
ownership, the Court has time and again emphasized that there must
be a positive
proclamation,

[80]

act

of

the

government, such

as an

official

declassifying inalienable public land into disposable

proof.[87]

Ankron and De Aldecoa did not make the whole of

private ownership, citing the cases ofRamos v. Director

Boracay Island, or portions of it, agricultural lands. Private

of

claimants posit that Boracay was already an agricultural land

Philippine Islands.

pursuant

to

the

old

Philippine Islands (1919)


Government

(1909).

[89]

cases Ankron

[88]

and De

These

v.

Aldecoa

cases

were

Government
v.

of

The

decided

Lands and Ankron

Government

of

the

the

Insular

under

v.

xxxx

the

provisions of the Philippine Bill of 1902 and Act No. 926. There is a

Petitioners reliance upon Ramos v. Director of

statement in these old cases that in the absence of evidence to the

Lands and Ankron v. Government is misplaced. These

contrary, that in each case the lands are agricultural lands until the

cases were decided under the Philippine Bill of 1902 and

contrary is shown.

[90]

the first Public Land Act No. 926 enacted by the


Philippine Commission on October 7, 1926, under which

Private

claimants

reliance

on Ankron and De

Aldecoa is

there was no legal provision vesting in the Chief

misplaced. These cases did not have the effect of converting the

Executive or President of the Philippines the power to

whole of Boracay Island or portions of it into agricultural lands. It

classify lands of the public domain into mineral, timber

should be stressed that the Philippine Bill of 1902 and Act No. 926

and agricultural so that the courts then were free to

merely provided the manner through which land registration courts

make corresponding classifications in justiciable cases,

would classify lands of the public domain. Whether the land would be

or were vested with implicit power to do so, depending

classified as timber, mineral, or agricultural depended on proof

upon the preponderance of the evidence.[93]

presented in each case.


To aid the courts in resolving land registration cases under Act
Ankron and De Aldecoa were decided at a time when the No. 926, it was then necessary to devise a presumption on land
President of the Philippines had no power to classify lands of the

classification. Thus evolved the dictum inAnkron that the courts have

public domain into mineral, timber, and agricultural. At that time, the a right to presume, in the absence of evidence to the contrary, that in
courts were free to make corresponding classifications in justiciable each case the lands are agricultural lands until the contrary is shown.
cases, or were vested with implicit power to do so, depending upon
the preponderance of the evidence.

[91]

[94]

This was the Courts ruling

in Heirs of the Late Spouses Pedro S. Palanca and Soterranea Rafols


[92]

Vda. De Palanca v. Republic,

But

We

cannot

unduly

expand

the

presumption

in which it stated, through Justice in Ankron and De Aldecoa to an argument that all lands of the public

Adolfo Azcuna, viz.:

domain had been automatically reclassified as disposable and


alienable agricultural lands. By no stretch of imagination did the

x Petitioners

furthermore

insist

that

particular land need not be formally released by an act


of the Executive before it can be deemed open to

presumption convert all lands of the public domain into agricultural


lands.

If We accept the position of private claimants, the Philippine

present or future value of the forestry and of the

Bill of 1902 and Act No. 926 would have automatically made all lands

minerals. While, as we have just said, many definitions

in the Philippines, except those already classified as timber or

have been given for agriculture, forestry, and mineral

mineral land, alienable and disposable lands. That would take these

lands, and that in each case it is a question of fact, we

lands

utterly

think it is safe to say that in order to be forestry or

inconsistent with and totally repugnant to the long-entrenched

mineral land the proof must show that it is more

Regalian doctrine.

valuable for the forestry or the mineral which it contains

out

of

State

ownership

and

worse,

would

be

than it is for agricultural purposes. (Sec. 7, Act No.


The presumption in Ankron and De Aldecoa attaches only to

1148.) It is not sufficient to show that there exists some

land registration cases brought under the provisions of Act No. 926,

trees upon the land or that it bears some mineral. Land

or

and

may be classified as forestry or mineral today, and, by

administrative confirmation of imperfect titles. The presumption

reason of the exhaustion of the timber or mineral, be

applies to an applicant for judicial or administrative conformation of

classified as agricultural land tomorrow. And vice-versa,

imperfect title under Act No. 926. It certainly cannot apply to

by reason of the rapid growth of timber or the discovery

landowners, such as private claimants or their predecessors-in-

of valuable minerals, lands classified as agricultural

interest, who failed to avail themselves of the benefits of Act No.

today may be differently classified tomorrow. Each case

926. As to them, their land remained unclassified and, by virtue of

must be decided upon the proof in that particular

the Regalian doctrine, continued to be owned by the State.

case, having regard for its present or future value

more

specifically

those

cases

dealing

with

judicial

for one or the other purposes. We believe, however,


In any case, the assumption in Ankron and De Aldecoa was

considering the fact that it is a matter of public

not absolute. Land classification was, in the end, dependent on

knowledge that a majority of the lands in the Philippine

proof. If there was proof that the land was better suited for non-

Islands are agricultural lands that the courts have a right

agricultural uses, the courts could adjudge it as a mineral or timber

to presume, in the absence of evidence to the contrary,

land despite the presumption. In Ankron, this Court stated:

that in each case the lands are agricultural lands until


the contrary is shown. Whatever the land involved in

In

the

Director

of

a particular land registration case is forestry or

admitted

in

mineral land must, therefore, be a matter of

effect that whether the particular land in question

proof. Its superior value for one purpose or the

belongs to one class or another is a question of

other is a question of fact to be settled by the

fact. The mere fact that a tract of land has trees upon it

proof in each particular case. The fact that the land

or has mineral within it is not of itself sufficient to

is a manglar [mangrove swamp] is not sufficient for the

declare that one is forestry land and the other, mineral

courts to decide whether it is agricultural, forestry, or

land. There must be some proof of the extent and

mineral land. It may perchance belong to one or the

Forestry (supra),

case
the

of Jocson

vs.

Attorney-General

other of said classes of land. The Government, in the

courts were no longer authorized to determine the propertys land

first instance, under the provisions of Act No. 1148,

classification. Hence, private claimants cannot bank on Act No. 926.

may, by reservation, decide for itself what portions of


public land shall be considered forestry land, unless
private

interests

have

intervened

before

such

We

note

that

the RTC decision[99] in

G.R.

No.

mentioned Krivenko v. Register of Deeds of Manila,

[100]

167707

which was

reservation is made. In the latter case, whether the

decided in 1947 when CA No. 141, vesting the Executive with the sole

land is agricultural, forestry, or mineral, is a question of

power to classify lands of the public domain was already in

proof. Until private interests have intervened, the

effect. Krivenko cited the old cases Mapa v. Insular Government,

Government, by virtue of the terms of said Act (No.

[101]

1148), may decide for itself what portions of the public

De

Aldecoa

v.

The

Insular

Government of the Philippine Islands.

Government,[102] and Ankron

v.

[103]

domain shall be set aside and reserved as forestry or


mineral land. (Ramos vs. Director of Lands, 39 Phil.
175; Jocson vs. Director of Forestry, supra)

[95]

(Emphasis

ours)

Krivenko, however, is not controlling here because it involved a


totally different issue. The pertinent issue in Krivenko was whether
residential

lots

were

included

in

the

general

classification

of

agricultural lands; and if so, whether an alien could acquire a


Since 1919, courts were no longer free to determine the

residential lot. This Court ruled that as an alien, Krivenko was

classification of lands from the facts of each case, except those that

prohibited by the 1935 Constitution [104] from acquiring agricultural

have already became private lands.[96] Act No.2874, promulgated in land, which included residential lots. Here, the issue is whether
1919 and reproduced in Section 6 of CA No. 141, gave the Executive

unclassified lands of the public domain are automatically deemed

Department, through the President, the exclusive prerogative to agricultural.


classify or reclassify public lands into alienable or disposable, mineral
or forest.96-a Since then, courts no longer had the authority, whether
express or implied, to determine the classification of lands of the
public domain.

[97]

Notably, the definition of agricultural public lands mentioned


in Krivenko relied on the old cases decided prior to the enactment of
Act No. 2874, including Ankron and De Aldecoa.[105] As We have

Here, private claimants, unlike the Heirs of Ciriaco Tirol who already stated, those cases cannot apply here, since they were
were issued their title in 1933, [98] did not present a justiciable case decided when the Executive did not have the authority to classify
for determination by the land registration court of the propertys land

lands as agricultural, timber, or mineral.

classification. Simply put, there was no opportunity for the courts


then to resolve if the land the Boracay occupants are now claiming

Private claimants continued possession under Act No.

were agricultural lands. When Act No. 926 was supplanted by Act No. 926

does

not

create

presumption

claimants

also contend

that
that

the
their

land

is

2874 in 1919, without an application for judicial confirmation having

alienable. Private

continued

been filed by private claimants or their predecessors-in-interest, the

possession of portions of Boracay Island for the requisite period of ten

(10) years under Act No. 926 [106] ipso facto converted the island into

term public land referred to all lands of the

private ownership. Hence, they may apply for a title in their name.

public domain whose title still remained in


the government and are thrown open to

A similar argument was squarely rejected by the Court


in Collado v. Court of Appeals.

[107]

private appropriation and settlement, and

Collado, citing the separate opinion

excluded the patrimonial property of the

of now Chief Justice Reynato S. Puno inCruz v. Secretary of


Environment and Natural Resources,

107-a

government and the friar lands.

ruled:
Thus, it is plain error for petitioners to argue that

Act No. 926, the first Public Land

under

the

Philippine

Bill

of

1902

Act, was passed in pursuance of the

and Public Land Act No. 926, mere possession by

provisions of the Philippine Bill of 1902.

private individuals of lands creates the legal

The law governed the disposition of lands

presumption that the lands are alienable and

of the public domain. It prescribed rules

disposable.[108] (Emphasis Ours)

and regulations for the homesteading,


selling and leasing of portions of the

Except for lands already covered by existing titles,

public domain of the Philippine Islands,

Boracay was an unclassified land of the public domain prior to

and prescribed the terms and conditions

Proclamation

to enable persons to perfect their titles to


public

lands

in

the Islands.

It

also

provided for the issuance of patents to

No.

1064. Such

unclassified

lands

considered public forest under PD No. 705. The DENR


National

Mapping

and

Resource

Information

[109]

Authority

are

and the

[110]

certify

that Boracay Island is an unclassified land of the public domain.

certain native settlers upon public lands,


for the establishment of town sites and

PD No. 705 issued by President Marcos categorized all

sale of lots therein, for the completion of

unclassified lands of the public domain as public forest. Section 3(a) of

imperfect titles, and for the cancellation

PD No. 705 defines a public forest as a mass of lands of the public

or confirmation of Spanish concessions

domain which has not been the subject of the present system of

and grants in the Islands.In short, the

classification for the determination of which lands are needed for

Public

the

forest purpose and which are not. Applying PD No. 705, all unclassified

assumption that title to public lands in

lands, including those in Boracay Island, are ipso facto considered

the Philippine Islands remained in the

public forests. PD No. 705, however, respects titles already existing

government; and that the governments

prior to its effectivity.

Land

Act

operated

on

title to public land sprung from the Treaty


of Paris and other subsequent treaties

The Court notes that the classification of Boracay as a forest

between Spain and the United States. The

land under PD No. 705 may seem to be out of touch with the present

realities in the island. Boracay, no doubt, has been partly stripped of

the land classified as forest is released in an official

its forest cover to pave the way for commercial developments. As a

proclamation to that effect so that it may form part of

premier tourist destination for local and foreign tourists, Boracay

the disposable agricultural lands of the public domain,

appears more of a commercial island resort, rather than a forest

the rules on confirmation of imperfect title do not apply.

land.

[115]

(Emphasis supplied)

Nevertheless, that the occupants of Boracay have built multi- There is a big difference between forest as defined in a dictionary and
million peso beach resorts on the island;[111] that the island has forest or timber land as a classification of lands of the public domain
already been stripped of its forest cover; or that the implementation

as appearing in our statutes. One is descriptive of what appears on

of Proclamation No. 1064 will destroy the islands tourism industry, the land while the other is a legal status, a classification for legal
purposes.[116] At

do not negate its character as public forest.

any

rate,

the

Court

is

tasked

to

determine

the legal status ofBoracay Island, and not look into its physical
Forests, in the context of both the Public Land Act and the
Constitution

[112]

classifying

lands

of

the

public

layout. Hence, even if its forest cover has been replaced by beach

domain resorts, restaurants and other commercial establishments, it has not

into agricultural, forest or timber, mineral lands, and national

been

automatically

parks, do not necessarily refer to large tracts of wooded land or

agricultural land.

converted

from

public

forest

to

alienable

expanses covered by dense growths of trees and underbrushes.


[113]

The discussion in Heirs of Amunategui v. Director of Forestry [114] is

particularly instructive:

Private claimants cannot rely on Proclamation No. 1801


as basis for judicial confirmation of imperfect title. The
proclamation did not convert Boracay into an agricultural

A forested area classified as forest land of the

land. However, private claimants argue that Proclamation No. 1801

public domain does not lose such classification simply

issued by then President Marcos in 1978 entitles them to judicial

because loggers or settlers may have stripped it of its

confirmation of imperfect title.The Proclamation classified Boracay,

forest cover. Parcels of land classified as forest land

among other islands, as a tourist zone. Private claimants assert that,

may actually be covered with grass or planted to crops

as a tourist spot, the island is susceptible of private ownership.

by kaingin cultivators or other farmers. Forest lands do


not have to be on mountains or in out of the way

Proclamation No. 1801 or PTA Circular No. 3-82 did not convert

places.Swampy areas covered by mangrove trees, nipa

the whole of Boracay into an agricultural land. There is nothing in the

palms, and other trees growing in brackish or sea water

law or the Circular which madeBoracay Island an agricultural land. The

may

land. The

reference in Circular No. 3-82 to private lands [117] and areas declared

classification is descriptive of its legal nature or

as alienable and disposable[118] does not by itself classify the entire

status and does not have to be descriptive of

island as agricultural. Notably, Circular No. 3-82 makes reference not

also

be

classified

as

forest

what the land actually looks like. Unless and until

only to private lands and areas but also to public forested lands. Rule proclamation is aimed at administering the islands for tourism and
ecological purposes. It does not address the areas alienability.[119]

VIII, Section 3 provides:


No trees in forested private lands may be cut

More importantly, Proclamation No. 1801 covers not only

without prior authority from the PTA. All forested areas

Boracay Island, but sixty-four (64) other islands, coves, and peninsulas

in public

in the Philippines, such as Fortune and Verde Islands in Batangas, Port

lands

are

declared

forest

reserves. (Emphasis supplied)

Galera in Oriental Mindoro, Panglao and Balicasag Islands in Bohol,


Coron Island, Puerto Princesa and surrounding areas in Palawan,

Clearly,

the

reference

in

the

Circular

to

both

Camiguin Island in Cagayan de Oro, and Misamis Oriental, to name a

private and public lands merely recognizes that the island can be few. If the designation of Boracay Island as tourist zone makes it
classified by the Executive department pursuant to its powers under alienable and disposable by virtue of Proclamation No. 1801, all the
CA No. 141. In fact, Section 5 of the Circular recognizes the then

other areas mentioned would likewise be declared wide open for

Bureau of Forest Developments authority to declare areas in the

private disposition. That could not have been, and is clearly beyond,

island as alienable and disposable when it provides:

the intent of the proclamation.

Subsistence

farming,

in

areas

declared

as

It was Proclamation No. 1064 of 2006 which positively

alienable and disposable by the Bureau of Forest

declared part of Boracay as alienable and opened the same to

Development.

private ownership. Sections 6 and 7 of CA No. 141 [120] provide that it


is only the President, upon the recommendation of the proper

Therefore, Proclamation No. 1801 cannot be deemed the

department head, who has the authority to classify the lands of the

positive act needed to classify Boracay Island as alienable and public domain into alienable or disposable, timber and mineral lands.
disposable land. If President Marcos intended to classify the island as

[121]

alienable and disposable or forest, or both, he would have identified


the specific limits of each, as President Arroyo did in Proclamation
No. 1064. This was not done in Proclamation No. 1801.

In issuing Proclamation No. 1064, President Gloria MacapagalArroyo merely exercised the authority granted to her to classify lands
of

the

public

domain,

presumably

subject

to

existing

vested

The Whereas clauses of Proclamation No. 1801 also explain rights. Classification of public lands is the exclusive prerogative of the
the rationale behind the declaration of Boracay Island, together with

Executive Department, through the Office of the President. Courts

other islands, caves and peninsulas in the Philippines, as a tourist

have no authority to do so.[122] Absent such classification, the land

zone and marine reserve to be administered by the PTA to ensure the remains unclassified until released and rendered open to disposition.
concentrated efforts of the public and private sectors in the
development of the areas tourism potential with due regard for
ecological balance in the marine environment. Simply put, the

[123]

Proclamation No. 1064 classifies Boracay into 400 hectares of

suitable

for

reserved forest land and 628.96 hectares of agricultural land. The

agriculture. No reclassification of

Proclamation likewise provides for a 15-meter buffer zone on each

forest or mineral lands to agricultural

side of the center line of roads and trails, which are reserved for right

lands shall be undertaken after the

of way and which shall form part of the area reserved for forest land

approval of this Act until Congress,

protection purposes.

taking

Contrary to private claimants argument, there was nothing


invalid

or

classification

irregular,

much

less

of Boracay Island made

unconstitutional,
by

the

about

President

into

account

developmental

ecological,

and

equity

the

considerations, shall have determined

through

by law, the specific limits of the public

Proclamation No. 1064. It was within her authority to make such

domain.

classification, subject to existing vested rights.


That Boracay Island was classified as a public forest under PD
Proclamation

No.

1064

does

not

violate

the

No. 705 did not bar the Executive from later converting it into

Comprehensive Agrarian Reform Law. Private claimants further agricultural land. Boracay Island still remained an unclassified land of
assert that Proclamation No. 1064 violates the provision of the the public domain despite PD No. 705.
Comprehensive Agrarian Reform Law (CARL) or RA No. 6657 barring
conversion of public forests into agricultural lands. They claim that

In Heirs of the Late Spouses Pedro S. Palanca and Soterranea

since Boracay is a public forest under PD No. 705, President Arroyo

Rafols v. Republic,[124] the Court stated that unclassified lands are

can no longer convert it into an agricultural land without running

public forests.

afoul of Section 4(a) of RA No. 6657, thus:


SEC.

4. Scope. The

Comprehensive

Agrarian

While it is true that the land classification

Reform Law of 1988 shall cover, regardless of tenurial

map does not categorically state that the islands

arrangement and commodity produced, all public and

are

private agricultural lands as provided in Proclamation

unclassified lands leads to the same result.In the

No. 131 and Executive Order No. 229, including other

absence of the classification as mineral or timber land,

lands of the public domain suitable for agriculture.

the land remains unclassified land until released and

public

forests,

the

fact

that

they

were

rendered open to disposition.[125] (Emphasis supplied)


More specifically, the following lands are covered
by the Comprehensive Agrarian Reform Program:

Moreover, the prohibition under the CARL applies only to a


reclassification of land. If the land had never been previously

(a) All alienable and disposable lands of


the public domain devoted to or

classified, as in the case of Boracay, there can be no prohibited

reclassification under the agrarian law. We agree with the opinion of under a bona fide claim of ownership since time immemorial or
the Department of Justice[126] on this point:

from June 12, 1945; and (2) the classification of the land as alienable
and disposable land of the public domain.[128]

Indeed, the key word to the correct application


of

the

prohibition

in

Section

4(a)

is

the

word

As discussed, the Philippine Bill of 1902, Act No. 926, and

reclassification. Where there has been no previous

Proclamation No. 1801 did not convert portions of Boracay Island into

classification of public forest [referring, we repeat, to

an agricultural land. The island remained an unclassified land of the

the mass of the public domain which has not been the

public domain and, applying the Regalian doctrine, is considered State

subject of the present system of classification for

property.

purposes of determining which are needed for forest


purposes and which are not] into permanent forest or

Private claimants bid for judicial confirmation of imperfect title,

forest reserves or some other forest uses under the

relying on the Philippine Bill of 1902, Act No. 926, and Proclamation

Revised Forestry Code, there can be no reclassification

No. 1801, must fail because of the absence of the second element of

of forest lands to speak of within the meaning of

alienable and disposable land. Their entitlement to a government

Section 4(a).

grant under our present Public Land Act presupposes that the land
possessed and applied for is already alienable and disposable. This is

Thus, obviously, the prohibition in Section 4(a) of

clear from the wording of the law itself. [129] Where the land is not

the CARL against the reclassification of forest lands to

alienable and disposable, possession of the land, no matter how long,

agricultural lands without a prior law delimiting the

cannot confer ownership or possessory rights.[130]

limits of the public domain, does not, and cannot, apply


to those lands of the public domain, denominated as

Neither may private claimants apply for judicial confirmation of

public forest under the Revised Forestry Code, which

imperfect title under Proclamation No. 1064, with respect to those

have not been previously determined, or classified, as

lands which were classified as agricultural lands. Private claimants

needed for forest purposes in accordance with the

failed to prove the first element of open, continuous, exclusive, and

provisions of the Revised Forestry Code.

[127]

notorious possession of their lands in Boracay since June 12, 1945.

Private claimants are not entitled to apply for judicial

We cannot sustain the CA and RTC conclusion in the petition for

confirmation of imperfect title under CA No. 141. Neither do

declaratory relief that private claimants complied with the requisite

they have vested rights over the occupied lands under the

period of possession.

said law. There are two requisites for judicial confirmation of


imperfect or incomplete title under CA No. 141, namely: (1) open,

The tax declarations in the name of private claimants are

continuous, exclusive, and notorious possession and occupation of insufficient to prove the first element of possession. We note that the
the subject land by himself or through his predecessors-in-interest

earliest of the tax declarations in the name of private claimants were

issued in 1993. Being of recent dates, the tax declarations are not under Section 48(b) of CA No. 141, as amended, this does not denote
sufficient to convince this Court that the period of possession and their automatic ouster from the residential, commercial, and other
occupation commenced on June 12, 1945.

areas they possess now classified as agricultural. Neither will this


mean the loss of their substantial investments on their occupied

Private claimants insist that they have a vested right in


Boracay, having been in possession of the island for a long

alienable lands. Lack of title does not necessarily mean lack of right to
possess.

time. They have invested millions of pesos in developing the island


into a tourist spot. They say their continued possession and

For one thing, those with lawful possession may claim good

investments give them a vested right which cannot be unilaterally

faith as builders of improvements. They can take steps to preserve or

rescinded by Proclamation No. 1064.

protect their possession. For another, they may look into other modes
of

applying

The continued possession and considerable investment of homestead


private claimants do not automatically give them a vested right in

[131]

for

original

registration

or sales patent,

[132]

of

title,

such

as

by

subject to the conditions imposed

by law.

Boracay. Nor do these give them a right to apply for a title to the land
they are presently occupying. This Court is constitutionally bound to

More realistically, Congress may enact a law to entitle private

decide cases based on the evidence presented and the laws claimants to acquire title to their occupied lots or to exempt them
applicable. As the law and jurisprudence stand, private claimants are

from certain requirements under the present land laws. There is one

ineligible to apply for a judicial confirmation of title over their

such bill[133] now pending in the House of Representatives. Whether

occupied portions in Boracay even with their continued possession

that bill or a similar bill will become a law is for Congress to decide.

and considerable investment in the island.


In issuing Proclamation No. 1064, the government has taken
One Last Note

the step necessary to open up the island to private ownership. This


gesture may not be sufficient to appease some sectors which view the

The Court is aware that millions of pesos have been invested classification

of

the

island

partially

into

forest

reserve

as

for the development of Boracay Island, making it a by-word in the absurd. That the island is no longer overrun by trees, however, does
local and international tourism industry. The Court also notes that for not becloud the vision to protect its remaining forest cover and to
a number of years, thousands of people have called the island their strike a healthy balance between progress and ecology. Ecological
home. While the Court commiserates with private claimants plight, conservation is as important as economic progress.
We are bound to apply the law strictly and judiciously. This is the law
and it should prevail. Ito ang batas at ito ang dapat umiral.

To be sure, forest lands are fundamental to our nations


survival. Their promotion and protection are not just fancy rhetoric for

All is not lost, however, for private claimants. While they may politicians and activists. These are needs that become more urgent as
not be eligible to apply for judicial confirmation of imperfect title destruction of our environment gets prevalent and difficult to

control. As aptly observed by Justice Conrado Sanchez in 1968


in Director of Forestry v. Munoz:

[134]

The view this Court takes of the cases at bar is

2.

The

petition

for certiorari in

G.R.

No.

173775

is DISMISSED for lack of merit.


SO ORDERED.

but in adherence to public policy that should be

16. G.R. No. 191109


July 18, 2012
much, and many more have spoken, and quite often,
REPUBLIC OF THE PHILIPPINES, represented by the PHILIPPINE
about the pressing need for forest preservation,
RECLAMATION AUTHORITY (PRA),Petitioner,
conservation,
protection,
development
and
vs.
reforestation. Not without justification. For, forests
CITY OF PARANAQUE, Respondent.
constitute a vital segment of any country's natural
DECISION
resources. It is of common knowledge by now that
MENDOZA, J.:
absence of the necessary green cover on our lands
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of
produces a number of adverse or ill effects of serious
Civil Procedure, on pure questions of law, assailing the January 8, 2010
proportions.Without the trees, watersheds dry up;
Order1 of the Regional Trial Court, Branch 195, Parafiaque City (RTC),
rivers and lakes which they supply are emptied of their
which ruled that petitioner Philippine Reclamation Authority (PRA) is a
contents. The fish disappear. Denuded areas become
government-owned and controlled corporation (GOCC), a taxable entity, and,
dust bowls. As waterfalls cease to function, so will
therefore, . not exempt from payment of real property taxes. The pertinent
hydroelectric plants. With the rains, the fertile topsoil is
portion of the said order reads:
washed away; geological erosion results. With erosion
In view of the finding of this court that petitioner is not exempt from
come the dreaded floods that wreak havoc and
payment of real property taxes, respondent Paraaque City Treasurer Liberato
destruction to property crops, livestock, houses, and
M. Carabeo did not act xxx without or in excess of jurisdiction, or with grave
highways not to mention precious human lives. Indeed,
abuse of discretion amounting to lack or in excess of jurisdiction in issuing
the foregoing observations should be written down in a
the warrants of levy on the subject properties.
[135]
lumbermans decalogue.
WHEREFORE, the instant petition is dismissed. The Motion for Leave to
File and Admit Attached Supplemental Petition is denied and the
WHEREFORE, judgment is rendered as follows:
supplemental petition attached thereto is not admitted.
The Public Estates Authority (PEA) is a government corporation created by
1.
The
petition
for certiorari in G.R.
No.
167707 virtue of Presidential Decree (P.D.) No. 1084 (Creating the Public Estates
is GRANTED and the Court of Appeals Decision in CA-G.R. CV No. Authority, Defining its Powers and Functions, Providing Funds Therefor and
71118 REVERSED AND SET ASIDE.
For Other Purposes) which took effect on February 4,
1977 to provide a coordinated, economical and efficient reclamation of lands,
and the administration and operation of lands belonging to, managed and/or
followed with respect to forest lands. Many have written

operated by, the government with the object of maximizing their utilization
and hastening their development consistent with public interest.
On February 14, 1979, by virtue of Executive Order (E.O.) No. 525 issued
by then President Ferdinand Marcos, PEA was designated as the agency
primarily responsible for integrating, directing and coordinating all
reclamation projects for and on behalf of the National Government.
On October 26, 2004, then President Gloria Macapagal-Arroyo issued E.O.
No. 380 transforming PEA into PRA, which shall perform all the powers
and functions of the PEA relating to reclamation activities.
By virtue of its mandate, PRA reclaimed several portions of the foreshore
and offshore areas of Manila Bay, including those located in Paraaque City,
and was issued Original Certificates of Title (OCT Nos. 180, 202, 206, 207,
289, 557, and 559) and Transfer Certificates of Title (TCT Nos. 104628,
7312, 7309, 7311, 9685, and 9686) over the reclaimed lands.
On February 19, 2003, then Paraaque City Treasurer Liberato M. Carabeo
(Carabeo) issued Warrants of Levy on PRAs reclaimed properties
(Central Business Park and Barangay San Dionisio) located in Paraaque
City based on the assessment for delinquent real property taxes made by
then Paraaque City Assessor Soledad Medina Cue for tax years 2001 and
2002.
On March 26, 2003, PRA filed a petition for prohibition with prayer for
temporary restraining order (TRO) and/or writ of preliminary injunction
against Carabeo before the RTC.
On April 3, 2003, after due hearing, the RTC issued an order denying
PRAs petition for the issuance of a temporary restraining order.
On April 4, 2003, PRA sent a letter to Carabeo requesting the latter not to
proceed with the public auction of the subject reclaimed properties on April
7, 2003. In response, Carabeo sent a letter stating that the public auction
could not be deferred because the RTC had already denied PRAs TRO
application.
On April 25, 2003, the RTC denied PRAs prayer for the issuance of a writ
of preliminary injunction for being moot and academic considering that the

auction sale of the subject properties on April 7, 2003 had already been
consummated.
On August 3, 2009, after an exchange of several pleadings and the failure of
both parties to arrive at a compromise agreement, PRA filed a Motion for
Leave to File and Admit Attached Supplemental Petition which sought to
declare as null and void the assessment for real property taxes, the levy based
on the said assessment, the public auction sale conducted on April 7, 2003,
and the Certificates of Sale issued pursuant to the auction sale.
On January 8, 2010, the RTC rendered its decision dismissing PRAs
petition. In ruling that PRA was not exempt from payment of real property
taxes, the RTC reasoned out that it was a GOCC under Section 3 of P.D. No.
1084. It was organized as a stock corporation because it had an authorized
capital stock divided into no par value shares. In fact, PRA admitted its
corporate personality and that said properties were registered in its name as
shown by the certificates of title. Therefore, as a GOCC, local tax exemption
is withdrawn by virtue of Section 193 of Republic Act (R.A.) No. 7160 Local
Government Code (LGC) which was the prevailing law in 2001 and 2002
with respect to real property taxation. The RTC also ruled that the tax
exemption claimed by PRA under E.O. No. 654 had already been expressly
repealed by R.A. No. 7160 and that PRA failed to comply with the procedural
requirements in Section 206 thereof.
Not in conformity, PRA filed this petition for certiorari assailing the January
8, 2010 RTC Order based on the following GROUNDS
I
THE TRIAL COURT GRAVELY ERRED IN FINDING
THAT PETITIONER IS LIABLE TO PAY REAL
PROPERTY TAX ON THE SUBJECT RECLAIMED
LANDS CONSIDERING
THAT
PETITIONER
IS
AN
INCORPORATED
INSTRUMENTALITY
OF
THE
NATIONAL
GOVERNMENT AND IS, THEREFORE, EXEMPT FROM
PAYMENT OF REAL PROPERTY TAX UNDER
SECTIONS 234(A) AND 133(O) OF REPUBLIC ACT 7160

OR THE LOCAL GOVERNMENT CODE VIS--VIS


MANILA INTERNATIONAL AIRPORT AUTHORITY V.
COURT OF APPEALS.
II
THE TRIAL COURT GRAVELY ERRED IN FAILING TO
CONSIDER THAT RECLAIMED LANDS ARE PART OF
THE PUBLIC DOMAIN AND, HENCE, EXEMPT FROM
REAL PROPERTY TAX.
PRA asserts that it is not a GOCC under Section 2(13) of the Introductory
Provisions of the Administrative Code. Neither is it a GOCC under Section
16, Article XII of the 1987 Constitution because it is not required to meet
the test of economic viability. Instead, PRA is a government instrumentality
vested with corporate powers and performing an essential public service
pursuant to Section 2(10) of the Introductory Provisions of the
Administrative Code. Although it has a capital stock divided into shares, it
is not authorized to distribute dividends and allotment of surplus and profits
to its stockholders. Therefore, it may not be classified as a stock corporation
because it lacks the second requisite of a stock corporation which is the
distribution of dividends and allotment of surplus and profits to the
stockholders.
It insists that it may not be classified as a non-stock corporation because it
has no members and it is not organized for charitable, religious, educational,
professional, cultural, recreational, fraternal, literary, scientific, social, civil
service, or similar purposes, like trade, industry, agriculture and like
chambers as provided in Section 88 of the Corporation Code.
Moreover, PRA points out that it was not created to compete in the market
place as there was no competing reclamation company operated by the
private sector. Also, while PRA is vested with corporate powers under P.D.
No. 1084, such circumstance does not make it a corporation but merely an
incorporated instrumentality and that the mere fact that an incorporated
instrumentality of the National Government holds title to real property does
not make said instrumentality a GOCC. Section 48, Chapter 12, Book I of
the Administrative Code of 1987 recognizes a scenario where a piece of

land owned by the Republic is titled in the name of a department, agency or


instrumentality.
Thus, PRA insists that, as an incorporated instrumentality of the National
Government, it is exempt from payment of real property tax except when the
beneficial use of the real property is granted to a taxable person. PRA claims
that based on Section 133(o) of the LGC, local governments cannot tax the
national government which delegate to local governments the power to tax.
It explains that reclaimed lands are part of the public domain, owned by the
State, thus, exempt from the payment of real estate taxes. Reclaimed lands
retain their inherent potential as areas for public use or public service. While
the subject reclaimed lands are still in its hands, these lands remain public
lands and form part of the public domain. Hence, the assessment of real
property taxes made on said lands, as well as the levy thereon, and the public
sale thereof on April 7, 2003, including the issuance of the certificates of sale
in favor of the respondent Paraaque City, are invalid and of no force and
effect.
On the other hand, the City of Paraaque (respondent) argues that PRA since
its creation consistently represented itself to be a GOCC. PRAs very own
charter (P.D. No. 1084) declared it to be a GOCC and that it has entered into
several thousands of contracts where it represented itself to be a GOCC. In
fact, PRA admitted in its original and amended petitions and pre-trial brief
filed with the RTC of Paraaque City that it was a GOCC.
Respondent further argues that PRA is a stock corporation with an authorized
capital stock divided into 3 million no par value shares, out of which 2
million shares have been subscribed and fully paid up. Section 193 of the
LGC of 1991 has withdrawn tax exemption privileges granted to or presently
enjoyed by all persons, whether natural or juridical, including GOCCs.
Hence, since PRA is a GOCC, it is not exempt from the payment of real
property tax.
THE COURTS RULING
The Court finds merit in the petition.
Section 2(13) of the Introductory Provisions of the Administrative Code of
1987 defines a GOCC as follows:

SEC. 2. General Terms Defined. x x x x


(13) Government-owned or controlled corporation refers to any agency
organized as a stock or non-stock corporation, vested with functions relating
to public needs whether governmental or proprietary in nature, and owned
by the Government directly or through its instrumentalities either wholly, or,
where applicable as in the case of stock corporations, to the extent of at least
fifty-one
(51) percent of its capital stock: x x x.
On the other hand, Section 2(10) of the Introductory Provisions of the
Administrative Code defines a government "instrumentality" as follows:
SEC. 2. General Terms Defined. x x x x
(10) Instrumentality refers to any agency of the National Government, not
integrated within the department framework, vested with special functions
or jurisdiction by law, endowed with some if not all corporate powers,
administering special funds, and enjoying operational autonomy, usually
through a charter. x x x
From the above definitions, it is clear that a GOCC must be "organized as a
stock or non-stock corporation" while an instrumentality is vested by law
with corporate powers. Likewise, when the law makes a government
instrumentality operationally autonomous, the instrumentality remains part
of the National Government machinery although not integrated with the
department framework.
When the law vests in a government instrumentality corporate powers, the
instrumentality does not necessarily become a corporation. Unless the
government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers.
Many government instrumentalities are vested with corporate powers but
they do not become stock or non-stock corporations, which is a necessary
condition before an agency or instrumentality is deemed a GOCC.
Examples are the Mactan International Airport Authority, the Philippine
Ports Authority, the University of the Philippines, and Bangko Sentral ng
Pilipinas. All these government instrumentalities exercise corporate powers

but they are not organized as stock or non-stock corporations as required by


Section 2(13) of the Introductory Provisions of the Administrative Code.
These government instrumentalities are sometimes loosely called government
corporate entities. They are not, however, GOCCs in the strict sense as
understood under the Administrative Code, which is the governing law
defining the legal relationship and status of government entities.2
Correlatively, Section 3 of the Corporation Code defines a stock corporation
as one whose "capital stock is divided into shares and x x x authorized to
distribute to the holders of such shares dividends x x x." Section 87 thereof
defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." Further,
Section 88 provides that non-stock corporations are "organized for charitable,
religious, educational, professional, cultural, recreational, fraternal, literary,
scientific, social, civil service, or similar purposes, like trade, industry,
agriculture and like chambers."
Two requisites must concur before one may be classified as a stock
corporation, namely: (1) that it has capital stock divided into shares; and (2)
that it is authorized to distribute dividends and allotments of surplus and
profits to its stockholders. If only one requisite is present, it cannot be
properly classified as a stock corporation. As for non-stock corporations, they
must have members and must not distribute any part of their income to said
members.3
In the case at bench, PRA is not a GOCC because it is neither a stock nor a
non-stock corporation. It cannot be considered as a stock corporation because
although it has a capital stock divided into no par value shares as provided in
Section 74 of P.D. No. 1084, it is not authorized to distribute dividends,
surplus allotments or profits to stockholders. There is no provision
whatsoever in P.D. No. 1084 or in any of the subsequent executive issuances
pertaining to PRA, particularly, E.O. No. 525, 5 E.O. No. 6546 and EO No.
7987 that authorizes PRA to distribute dividends, surplus allotments or profits
to its stockholders.
PRA cannot be considered a non-stock corporation either because it does not
have members. A non-stock corporation must have members. 8 Moreover, it

was not organized for any of the purposes mentioned in Section 88 of the
Corporation Code. Specifically, it was created to manage all government
reclamation projects.
Furthermore, there is another reason why the PRA cannot be classified as a
GOCC. Section 16, Article XII of the 1987 Constitution provides as
follows:
Section 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Governmentowned or controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of
economic viability.
The fundamental provision above authorizes Congress to create GOCCs
through special charters on two conditions: 1) the GOCC must be
established for the common good; and 2) the GOCC must meet the test of
economic viability. In this case, PRA may have passed the first condition of
common good but failed the second one - economic viability. Undoubtedly,
the purpose behind the creation of PRA was not for economic or
commercial activities. Neither was it created to compete in the market place
considering that there were no other competing reclamation companies
being operated by the private sector. As mentioned earlier, PRA was created
essentially to perform a public service considering that it was primarily
responsible for a coordinated, economical and efficient reclamation,
administration and operation of lands belonging to the government with the
object of maximizing their utilization and hastening their development
consistent with the public interest. Sections 2 and 4 of P.D. No. 1084 reads,
as follows:
Section 2. Declaration of policy. It is the declared policy of the State to
provide for a coordinated, economical and efficient reclamation of lands,
and the administration and operation of lands belonging to, managed and/or
operated by the government, with the object of maximizing their utilization
and hastening their development consistent with the public interest.
Section 4. Purposes. The Authority is hereby created for the following
purposes:

(a) To reclaim land, including foreshore and submerged areas, by dredging,


filling or other means, or to acquire reclaimed land;
(b) To develop, improve, acquire, administer, deal in, subdivide, dispose,
lease and sell any and all kinds of lands, buildings, estates and other forms of
real property, owned, managed, controlled and/or operated by the
government.
(c) To provide for, operate or administer such services as may be necessary
for the efficient, economical and beneficial utilization of the above
properties.
The twin requirement of common good and economic viability was lengthily
discussed in the case of Manila International Airport Authority v. Court of
Appeals,9 the pertinent portion of which reads:
Third, the government-owned or controlled corporations created through
special charters are those that meet the two conditions prescribed in Section
16, Article XII of the Constitution.
The first condition is that the government-owned or controlled corporation
must be established for the common good. The second condition is that the
government-owned or controlled corporation must meet the test of economic
viability. Section 16, Article XII of the 1987 Constitution provides:
SEC. 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Governmentowned or controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of
economic viability.
The Constitution expressly authorizes the legislature to create "governmentowned or controlled corporations" through special charters only if these
entities are required to meet the twin conditions of common good and
economic viability. In other words, Congress has no power to create
government-owned or controlled corporations with special charters unless
they are made to comply with the two conditions of common good and
economic viability. The test of economic viability applies only to
government-owned or controlled corporations that perform economic or
commercial activities and need to compete in the market place. Being

essentially economic vehicles of the State for the common good meaning
for economic development purposes these government-owned or
controlled corporations with special charters are usually organized as stock
corporations just like ordinary private corporations.
In contrast, government instrumentalities vested with corporate powers and
performing governmental or public functions need not meet the test of
economic viability. These instrumentalities perform essential public services
for the common good, services that every modern State must provide its
citizens. These instrumentalities need not be economically viable since the
government may even subsidize their entire operations. These
instrumentalities are not the "government-owned or controlled corporations"
referred to in Section 16, Article XII of the 1987 Constitution.
Thus, the Constitution imposes no limitation when the legislature creates
government instrumentalities vested with corporate powers but performing
essential governmental or public functions. Congress has plenary authority
to create government instrumentalities vested with corporate powers
provided these instrumentalities perform essential government functions or
public services. However, when the legislature creates through special
charters corporations that perform economic or commercial activities, such
entities known as "government-owned or controlled corporations"
must meet the test of economic viability because they compete in the market
place.
This is the situation of the Land Bank of the Philippines and the
Development Bank of the Philippines and similar government-owned or
controlled corporations, which derive their incometo meet operating
expenses solely from commercial transactions in competition with the
private sector. The intent of the Constitution is to prevent the creation of
government-owned or controlled corporations that cannot survive on their
own in the market place and thus merely drain the public coffers.
Commissioner Blas F. Ople, proponent of the test of economic viability,
explained to the Constitutional Commission the purpose of this test, as
follows:

MR. OPLE: Madam President, the reason for this concern is really that when
the government creates a corporation, there is a sense in which this
corporation becomes exempt from the test of economic performance. We
know what happened in the past. If a government corporation loses, then it
makes its claim upon the taxpayers' money through new equity infusions
from the government and what is always invoked is the common good. That
is the reason why this year, out of a budget of P115 billion for the entire
government, about P28 billion of this will go into equity infusions to support
a few government financial institutions. And this is all taxpayers' money
which could have been relocated to agrarian reform, to social services like
health and education, to augment the salaries of grossly underpaid public
employees. And yet this is all going down the drain.
Therefore, when we insert the phrase "ECONOMIC VIABILITY" together
with the "common good," this becomes a restraint on future enthusiasts for
state capitalism to excuse themselves from the responsibility of meeting the
market test so that they become viable. And so, Madam President, I reiterate,
for the committee's consideration and I am glad that I am joined in this
proposal by Commissioner Foz, the insertion of the standard of
"ECONOMIC VIABILITY OR THE ECONOMIC TEST," together with the
common good.1wphi1
Father Joaquin G. Bernas, a leading member of the Constitutional
Commission, explains in his textbook The 1987 Constitution of the Republic
of the Philippines: A Commentary:
The second sentence was added by the 1986 Constitutional Commission. The
significant addition, however, is the phrase "in the interest of the common
good and subject to the test of economic viability." The addition includes the
ideas that they must show capacity to function efficiently in business and that
they should not go into activities which the private sector can do better.
Moreover, economic viability is more than financial viability but also
includes capability to make profit and generate benefits not quantifiable in
financial terms.
Clearly, the test of economic viability does not apply to government entities
vested with corporate powers and performing essential public services. The

State is obligated to render essential public services regardless of the


economic viability of providing such service. The non-economic viability of
rendering such essential public service does not excuse the State from
withholding such essential services from the public.
However, government-owned or controlled corporations with special
charters, organized essentially for economic or commercial objectives, must
meet the test of economic viability. These are the government-owned or
controlled corporations that are usually organized under their special
charters as stock corporations, like the Land Bank of the Philippines and the
Development Bank of the Philippines. These are the government-owned or
controlled corporations, along with government-owned or controlled
corporations organized under the Corporation Code, that fall under the
definition of "government-owned or controlled corporations" in Section
2(10) of the Administrative Code. [Emphases supplied]
This Court is convinced that PRA is not a GOCC either under Section 2(3)
of the Introductory Provisions of the Administrative Code or under Section
16, Article XII of the 1987 Constitution. The facts, the evidence on record
and jurisprudence on the issue support the position that PRA was not
organized either as a stock or a non-stock corporation. Neither was it created
by Congress to operate commercially and compete in the private market.
Instead, PRA is a government instrumentality vested with corporate powers
and performing an essential public service pursuant to Section 2(10) of the
Introductory Provisions of the Administrative Code. Being an incorporated
government instrumentality, it is exempt from payment of real property tax.
Clearly, respondent has no valid or legal basis in taxing the subject
reclaimed lands managed by PRA. On the other hand, Section 234(a) of the
LGC, in relation to its Section 133(o), exempts PRA from paying realty
taxes and protects it from the taxing powers of local government units.
Sections 234(a) and 133(o) of the LGC provide, as follows:
SEC. 234. Exemptions from Real Property Tax The following are
exempted from payment of the real property tax:

(a) Real property owned by the Republic of the Philippines or any of its
political subdivisions except when the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person.
xxxx
SEC. 133. Common Limitations on the Taxing Powers of Local Government
Units. Unless otherwise provided herein, the exercise of the taxing powers
of provinces, cities, municipalities, and barangays shall not extend to the levy
of the following:
xxxx
(o) Taxes, fees or charges of any kinds on the National Government, its
agencies and instrumentalities, and local government units. [Emphasis
supplied]
It is clear from Section 234 that real property owned by the Republic of the
Philippines (the Republic) is exempt from real property tax unless the
beneficial use thereof has been granted to a taxable person. In this case, there
is no proof that PRA granted the beneficial use of the subject reclaimed lands
to a taxable entity. There is no showing on record either that PRA leased the
subject reclaimed properties to a private taxable entity.
This exemption should be read in relation to Section 133(o) of the same
Code, which prohibits local governments from imposing "taxes, fees or
charges of any kind on the National Government, its agencies and
instrumentalities x x x." The Administrative Code allows real property owned
by the Republic to be titled in the name of agencies or instrumentalities of the
national government. Such real properties remain owned by the Republic and
continue to be exempt from real estate tax.
Indeed, the Republic grants the beneficial use of its real property to an
agency or instrumentality of the national government. This happens when the
title of the real property is transferred to an agency or instrumentality even as
the Republic remains the owner of the real property. Such arrangement does
not result in the loss of the tax exemption, unless "the beneficial use thereof
has been granted, for consideration or otherwise, to a taxable person."10
The rationale behind Section 133(o) has also been explained in the case of
the Manila International Airport Authority,11 to wit:

Section 133(o) recognizes the basic principle that local governments cannot
tax the national government, which historically merely delegated to local
governments the power to tax. While the 1987 Constitution now includes
taxation as one of the powers of local governments, local governments may
only exercise such power "subject to such guidelines and limitations as the
Congress may provide."
When local governments invoke the power to tax on national government
instrumentalities, such power is construed strictly against local
governments. The rule is that a tax is never presumed and there must be
clear language in the law imposing the tax. Any doubt whether a person,
article or activity is taxable is resolved against taxation. This rule applies
with greater force when local governments seek to tax national government
instrumentalities.
Another rule is that a tax exemption is strictly construed against the
taxpayer claiming the exemption. However, when Congress grants an
exemption to a national government instrumentality from local taxation,
such exemption is construed liberally in favor of the national government
instrumentality. As this Court declared in Maceda v. Macaraig, Jr.:
The reason for the rule does not apply in the case of exemptions running to
the benefit of the government itself or its agencies. In such case the practical
effect of an exemption is merely to reduce the amount of money that has to
be handled by government in the course of its operations. For these reasons,
provisions granting exemptions to government agencies may be construed
liberally, in favor of non tax-liability of such agencies.
There is, moreover, no point in national and local governments taxing each
other, unless a sound and compelling policy requires such transfer of public
funds from one government pocket to another.
There is also no reason for local governments to tax national government
instrumentalities for rendering essential public services to inhabitants of
local governments. The only exception is when the legislature clearly
intended to tax government instrumentalities for the delivery of essential
public services for sound and compelling policy considerations. There must
be express language in the law empowering local governments to tax

national government instrumentalities. Any doubt whether such power exists


is resolved against local governments.
Thus, Section 133 of the Local Government Code states that "unless
otherwise provided" in the Code, local governments cannot tax national
government instrumentalities. As this Court held in Basco v. Philippine
Amusements and Gaming Corporation:
The states have no power by taxation or otherwise, to retard, impede, burden
or in any manner control the operation of constitutional laws enacted by
Congress to carry into execution the powers vested in the federal
government. (MC Culloch v. Maryland, 4 Wheat 316, 4 L Ed. 579)
This doctrine emanates from the "supremacy" of the National Government
over local governments.
"Justice Holmes, speaking for the Supreme Court, made reference to the
entire absence of power on the part of the States to touch, in that way
(taxation) at least, the instrumentalities of the United States (Johnson v.
Maryland, 254 US 51) and it can be agreed that no state or political
subdivision can regulate a federal instrumentality in such a way as to prevent
it from consummating its federal responsibilities, or even to seriously burden
it in the accomplishment of them." (Antieau, Modern Constitutional Law,
Vol. 2, p. 140, emphasis supplied)
Otherwise, mere creatures of the State can defeat National policies thru
extermination of what local authorities may perceive to be undesirable
activities or enterprise using the power to tax as "a tool for regulation." (U.S.
v. Sanchez, 340 US 42)
The power to tax which was called by Justice Marshall as the "power to
destroy" (McCulloch v. Maryland, supra) cannot be allowed to defeat an
instrumentality or creation of the very entity which has the inherent power to
wield it. [Emphases supplied]
The Court agrees with PRA that the subject reclaimed lands are still part of
the public domain, owned by the State and, therefore, exempt from payment
of real estate taxes.
Section 2, Article XII of the 1987 Constitution reads in part, as follows:

Section 2. All lands of the public domain, waters, minerals, coal, petroleum,
and other mineral oils, all forces of potential energy, fisheries, forests or
timber, wildlife, flora and fauna, and other natural resources are owned by
the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and
utilization of natural resources shall be under the full control and
supervision of the State. The State may directly undertake such activities, or
it may enter into co-production, joint venture, or production-sharing
agreements with Filipino citizens, or corporations or associations at least 60
per centum of whose capital is owned by such citizens. Such agreements
may be for a period not exceeding twenty-five years, renewable for not
more than twenty-five years, and under such terms and conditions as may
provided by law. In cases of water rights for irrigation, water supply,
fisheries, or industrial uses other than the development of waterpower,
beneficial use may be the measure and limit of the grant.
Similarly, Article 420 of the Civil Code enumerates properties belonging to
the State:
Art. 420. The following things are property of public dominion:
(1) Those intended for public use, such as roads, canals, rivers, torrents,
ports and bridges constructed by the State, banks, shores, roadsteads, and
others of similar character;
(2) Those which belong to the State, without being for public use, and are
intended for some public service or for the development of the national
wealth. [Emphases supplied]
Here, the subject lands are reclaimed lands, specifically portions of the
foreshore and offshore areas of Manila Bay. As such, these lands remain
public lands and form part of the public domain. In the case of Chavez v.
Public Estates Authority and AMARI Coastal Development
Corporation,12 the Court held that foreshore and submerged areas irrefutably
belonged to the public domain and were inalienable unless reclaimed,
classified as alienable lands open to disposition and further declared no
longer needed for public service. The fact that alienable lands of the public
domain were transferred to the PEA (now PRA) and issued land patents or

certificates of title in PEAs name did not automatically make such lands
private. This Court also held therein that reclaimed lands retained their
inherent potential as areas for public use or public service.
As the central implementing agency tasked to undertake reclamation projects
nationwide, with authority to sell reclaimed lands, PEA took the place of
DENR as the government agency charged with leasing or selling reclaimed
lands of the public domain. The reclaimed lands being leased or sold by PEA
are not private lands, in the same manner that DENR, when it disposes of
other alienable lands, does not dispose of private lands but alienable lands of
the public domain. Only when qualified private parties acquire these lands
will the lands become private lands. In the hands of the government agency
tasked and authorized to dispose of alienable of disposable lands of the public
domain, these lands are still public, not private lands.
Furthermore, PEA's charter expressly states that PEA "shall hold lands of the
public domain" as well as "any and all kinds of lands." PEA can hold both
lands of the public domain and private lands. Thus, the mere fact that
alienable lands of the public domain like the Freedom Islands are transferred
to PEA and issued land patents or certificates of title in PEA's name does not
automatically make such lands private.13
Likewise, it is worthy to mention Section 14, Chapter 4, Title I, Book III of
the Administrative Code of 1987, thus:
SEC 14. Power to Reserve Lands of the Public and Private Dominion of the
Government.(1)The President shall have the power to reserve for settlement or public use,
and for specific public purposes, any of the lands of the public domain, the
use of which is not otherwise directed by law. The reserved land shall
thereafter remain subject to the specific public purpose indicated until
otherwise provided by law or proclamation.
Reclaimed lands such as the subject lands in issue are reserved lands for
public use. They are properties of public dominion. The ownership of such
lands remains with the State unless they are withdrawn by law or presidential
proclamation from public use.

Under Section 2, Article XII of the 1987 Constitution, the foreshore and Promulgated:April 29, 2009
submerged areas of Manila Bay are part of the "lands of the public domain,
DECISION
waters x x x and other natural resources" and consequently "owned by the
State." As such, foreshore and submerged areas "shall not be alienated,"
unless they are classified as "agricultural lands" of the public domain. The TINGA, J.:
mere reclamation of these areas by PEA does not convert these inalienable
One main reason why the informal sector has not become
natural resources of the State into alienable or disposable lands of the public
formal is that from Indonesia to Brazil, 90 percent of the
domain. There must be a law or presidential proclamation officially
informal lands are not titled and registered. This is a
classifying these reclaimed lands as alienable or disposable and open to
generalized phenomenon in the so-called Third World.
disposition or concession. Moreover, these reclaimed lands cannot be
And it has many consequences.
classified as alienable or disposable if the law has reserved them for some
xxx
public or quasi-public use.
As the Court has repeatedly ruled, properties of public dominion are not
subject to execution or foreclosure sale.14 Thus, the assessment, levy and
The question is: How is it that so many governments,
foreclosure made on the subject reclaimed lands by respondent, as well as
from Suharto's in Indonesia to Fujimori's in Peru, have wanted
the issuances of certificates of title in favor of respondent, are without basis.
to title these people and have not been able to do so
WHEREFORE, the petition is GRANTED. The January 8, 2010 Order of
effectively? One reason is that none of the state systems
the Regional Trial Court, Branch 195, Paraaque City, is REVERSED and
in Asia or Latin America can gather proof of informal titles.
SET ASIDE. All reclaimed properties owned by the Philippine Reclamation
In Peru, the informals have means of proving property
Authority are hereby declared EXEMPT from real estate taxes. All real
ownership to each other which are not the same means
estate tax assessments, including the final notices of real estate tax
developed by the Spanish legal system. The informals have
delinquencies, issued by the City of Paraaque on the subject reclaimed
their own papers, their own forms of agreements, and their own
properties; the assailed auction sale, dated April 7, 2003; and the
systems of registration, all of which are very clearly stated in
Certificates of Sale subsequently issued by the Paraaque City Treasurer in
the maps which they use for their own informal business
favor of the City of Paraaque, are all declared VOID.
transactions.
SO ORDERED.
If you take a walk through the countryside,
from Indonesia to Peru, and you walk by field after field--in
17. G.R. No. 179987
each field a different dog is going to bark at you. Even dogs
know what private property is all about. The only one who does
HEIRS OF MARIO MALABANAN,
not know it is the government. The issue is that there exists a
- versus "common law" and an "informal law" which the Latin
REPUBLIC OF THE PHILIPPINES,
American formal legal system does not know how to recognize.
- Hernando De Soto[1]

documentary evidence, Malabanan himself and his witness, Aristedes


This decision inevitably affects all untitled lands currently in Velazco, testified at the hearing. Velazco testified that the property
possession of persons and entities other than the Philippine was originally belonged to a twenty-two hectare property owned by
government. The petition, while unremarkable as to the facts, was his great-grandfather, Lino Velazco. Lino had four sons Benedicto,
accepted by the Court en banc in order to provide definitive clarity to Gregorio,

Eduardo

and

Estebanthe

fourth

being

Aristedess

the applicability and scope of original registration proceedings under

grandfather. Upon Linos death, his four sons inherited the property

Sections 14(1) and 14(2) of the Property Registration Decree. In

and

doing so, the Court confronts not only the relevant provisions of the

wife, Magdalena, had become the administrator of all the properties

Public Land Act and the Civil Code, but also the reality on the ground.

inherited by the Velazco sons from their father, Lino. After the death of

The countrywide phenomenon of untitled lands, as well as the

Esteban

divided

it

among

and Magdalena,

themselves.

their

son

But

Virgilio

by

1966,

succeeded

Estebans

them

in

problem of informal settlement it has spawned, has unfortunately administering the properties, including Lot 9864-A, which originally
been treated with benign neglect. Yet our current laws are hemmed

belonged to his uncle, Eduardo Velazco. It was this property that was

in by their own circumscriptions in addressing the phenomenon. Still,

sold by Eduardo Velazco to Malabanan.[5]

the duty on our part is primarily to decide cases before us in accord


with the Constitution and the legal principles that have developed

Assistant Provincial Prosecutor Jose Velazco, Jr. did not cross-

our public land law, though our social obligations dissuade us from

examine Aristedes Velazco. He further manifested that he also [knew]

casting a blind eye on the endemic problems.

the property and I affirm the truth of the testimony given by Mr.
Velazco.[6] The Republic of the Philippines likewise did not present any

I.

evidence to controvert the application.

On 20 February 1998, Mario Malabanan filed an application for land

Among the evidence presented by Malabanan during trial was a

registration covering a parcel of land identified as Lot 9864-A, Cad- Certification


452-D, Silang Cadastre,

[2]

dated

11

June

2001,

issued

by

the

Community

situated in Barangay Tibig, Silang Cavite, Environment & Natural Resources Office, Department of Environment

and consisting of 71,324 square meters. Malabanan claimed that he and Natural Resources (CENRO-DENR), which stated that the subject
had purchased the property from Eduardo Velazco, [3] and that he and property was verified to be within the Alienable or Disposable land per
his predecessors-in-interest had been in open, notorious, and Land Classification Map No. 3013 established under Project No. 20-A
continuous adverse and peaceful possession of the land for more and approved as such under FAO 4-1656 on March 15, 1982.[7]
than thirty (30) years.
On 3 December 2002, the RTC rendered judgment in favor of
The application was raffled to the Regional Trial Court of (RTC) Cavite- Malabanan, the dispositive portion of which reads:
Tagaytay City, Branch 18. The Office of the Solicitor General (OSG)
duly designated the Assistant Provincial Prosecutor of Cavite, Jose
Velazco, Jr., to appear on behalf of the State.

[4]

Apart from presenting

WHEREFORE, this Court hereby approves this


application for registration and thus places under the

operation of Act 141, Act 496 and/or P.D. 1529,

declared

alienable and disposable only on 15 March 1982, the

otherwise known as Property Registration Law, the lands

Velazcos possession prior to that date could not be factored in the

described in Plan Csd-04-0173123-D, Lot 9864-A and

computation of the period of possession. This interpretation of the

containing an area of Seventy One Thousand Three

Court of Appeals of Section 14(1) of the Property Registration Decree

Hundred Twenty Four (71,324) Square Meters, as

was based on the Courts ruling in Republic v. Herbieto.[9]

supported by its technical description now forming part


of the record of this case, in addition to other proofs

Malabanan died while the case was pending with the Court of

adduced in the name of MARIO MALABANAN, who is of

Appeals;[10] hence, it was his heirs who appealed the decision of the

legal age, Filipino, widower, and with residence at

appellate court. Petitioners, before this Court, rely on our ruling

Munting Ilog, Silang, Cavite.

in Republic v. Naguit,[11] which was handed down just four months


prior

Once this Decision becomes final and executory,

to Herbieto.

in Herbieto cited

by

Petitioners
the

Court

suggest
of

that

Appeals

the
is

discussion

actually obiter

the corresponding decree of registration shall forthwith

dictum since the Metropolitan Trial Court therein which had directed

issue.

the registration of the property had no jurisdiction in the first place


since the requisite notice of hearing was published only after the
SO ORDERED.

hearing had already begun. Naguit, petitioners argue, remains the


controlling doctrine, especially when the property in question is
agricultural land. Therefore, with respect to agricultural lands, any

The Republic interposed an appeal to the Court of Appeals, possession prior to the declaration of the alienable property as
arguing that Malabanan had failed to prove that the property

disposable may be counted in reckoning the period of possession to

belonged to the alienable and disposable land of the public domain,

perfect title under the Public Land Act and the Property Registration

and that the RTC had erred in finding that he had been in possession Decree.
of the property in the manner and for the length of time required by
law for confirmation of imperfect title.
On 23 February 2007, the Court of Appeals rendered a

The petition was referred to the Court en banc,[12] and on 11

Decision[8] reversing the RTC and dismissing the application of November 2008, the case was heard on oral arguments. The Court
Malabanan. The appellate court held that under Section 14(1) of the

formulated the principal issues for the oral arguments, to wit:

Property Registration Decree any period of possession prior to the


classification

of

the

lots

as

alienable

and

disposable

was

1. In order that an alienable and disposable land of

inconsequential and should be excluded from the computation of the

the public domain may be registered under Section 14(1)

period of possession. Thus, the appellate court noted that since the

of Presidential Decree No. 1529, otherwise known as the

CENRO-DENR certification had verified that the property was

Property

Registration

Decree,

should

the

land

be

classified as alienable and disposable as of June 12,

registration proceedings therein was void ab initio due to lack of

1945 or is it sufficient that such classification occur at

publication of the notice of initial hearing. Petitioners further point out

any time prior to the filing of the applicant for

that in Republic v. Bibonia,[14] promulgated in June of 2007, the Court

registration provided that it is established that the

applied Naguit and adopted the same observation that the preferred

applicant has been in open, continuous, exclusive and

interpretation by the OSG of Section 14(1) was patently absurd. For its

notorious possession of the land under a bona fide claim

part, the OSG remains insistent that for Section 14(1) to apply, the

of ownership since June 12, 1945 or earlier?

land should have been classified as alienable and disposable as of 12


June 1945. Apart from Herbieto, the OSG also cites the subsequent

2. For purposes of Section 14(2) of the Property

rulings in Buenaventura v. Republic,[15] Fieldman Agricultural Trading

Registration Decree may a parcel of land classified as

v. Republic[16] and Republic v. Imperial Credit Corporation,[17] as well as

alienable and disposable be deemed private land and

the earlier case of Director of Lands v. Court of Appeals.[18]

therefore susceptible to acquisition by prescription in


accordance with the Civil Code?

With respect to Section 14(2), petitioners submit that open,


continuous, exclusive and notorious possession of an alienable land of

3. May a parcel of land established as agricultural

the public domain for more than 30 yearsipso jure converts the land

in character either because of its use or because its

into private property, thus placing it under the coverage of Section

slope is below that of forest lands be registrable under

14(2). According to them, it would not matter whether the land sought

Section 14(2) of the Property Registration Decree in

to be registered was previously classified as agricultural land of the

relation to the provisions of the Civil Code on acquisitive

public domain so long as, at the time of the application, the property

prescription?

had

already

been

converted

into

private

property

through

prescription. To bolster their argument, petitioners cite extensively


4. Are petitioners entitled to the registration of

from our 2008 ruling in Republic v. T.A.N. Properties.[19]

the subject land in their names under Section 14(1) or


Section 14(2) of the Property Registration Decree or
both?[13]

The arguments submitted by the OSG with respect to Section


14(2) are more extensive. The OSG notes that under Article 1113 of

Based on these issues, the parties formulated their respective


positions.

the Civil Code, the acquisitive prescription of properties of the State


refers to patrimonial property, while Section 14(2) speaks of private
lands. It observes that the Court has yet to decide a case that

With respect to Section 14(1), petitioners reiterate that the presented Section 14(2) as a ground for application for registration,
analysis of the Court in Naguit is the correct interpretation of the and that the 30-year possession period refers to the period of
provision. The seemingly contradictory pronouncement in Herbieto, it possession under Section 48(b) of the Public Land Act, and not the
is submitted, should be considered obiter dictum, since the land concept of prescription under the Civil Code. The OSG further submits

that, assuming that the 30-year prescriptive period can run against 1073, supplies the details and unmistakably grants that right, subject
public lands, said period should be reckoned from the time the public

to the requisites stated therein:

land was declared alienable and disposable.


Sec. 48. The following described citizens of the
Both sides likewise offer special arguments with respect to the

Philippines, occupying lands of the public domain or

particular factual circumstances surrounding the subject property

claiming to own any such land or an interest therein,

and the ownership thereof.

but whose titles have not been perfected or completed,


may apply to the Court of First Instance of the province
II.

where the land is located for confirmation of their


claims and the issuance of a certificate of title therefor,

First, we discuss Section 14(1) of the Property Registration Decree.

under the Land Registration Act, to wit:

For a full understanding of the provision, reference has to be made to


the Public Land Act.

xxx
A.

(b) Those who by themselves or through their


predecessors in interest have been in open, continuous,

Commonwealth Act No. 141, also known as the Public Land

exclusive, and notorious possession and occupation of

Act, has, since its enactment, governed the classification and

alienable and disposable lands of the public domain,

disposition of lands of the public domain. The President is authorized,

under a bona fide claim of acquisition of ownership,

from time to time, to classify the lands of the public domain into

since June 12, 1945, or earlier, immediately preceding

alienable and disposable, timber, or mineral lands.

[20]

Alienable and

the filing of the application for confirmation of title

disposable lands of the public domain are further classified according

except when prevented by war or force majeure. These

to their uses into (a) agricultural; (b) residential, commercial,

shall be conclusively presumed to have performed all

industrial, or for similar productive purposes; (c) educational,

the conditions essential to a Government grant and

charitable, or other similar purposes; or (d) reservations for town

shall be entitled to a certificate of title under the

sites and for public and quasi-public uses.[21]

provisions of this chapter.

May a private person validly seek the registration in his/her


name of alienable and disposable lands of the public domain? Section 48(b) of Com. Act No. 141 received its present wording in
Section 11 of the Public Land Act acknowledges that public lands

1977 when the law was amended by P.D. No. 1073. Two significant

suitable for agricultural purposes may be disposed of by confirmation amendments were introduced by P.D. No. 1073. First, the term
of imperfect or incomplete titles through judicial legalization. agricultural lands was changed to alienable and disposable lands of
[22]

Section 48(b) of the Public Land Act, as amended by P.D. No.

the public domain. The OSG submits that this amendment restricted

the scope of the lands that may be registered. [23] This is not actually
the case. Under Section 9 of the Public Land Act, agricultural lands

application for registration of title to land, whether personally


or through their duly authorized representatives:

are a mere subset of lands of the public domain alienable or open to


disposition. Evidently, alienable and disposable lands of the public

(1)

domain are a larger class than only agricultural lands.

those who by themselves or through


their

predecessors-in-interest

have

been in open, continuous, exclusive


Second, the length of the requisite possession was changed from

and

notorious

possession

and

possession for thirty (30) years immediately preceding the filing of

occupation of alienable and disposable

the application to possession since June 12, 1945 or earlier. The

lands of the public domain under

Court in Naguit explained:

a bona fide claim of ownership since


June 12, 1945, or earlier.

When the Public Land Act was first promulgated


in 1936, the period of possession deemed necessary to
vest the right to register their title to agricultural lands

Notwithstanding the passage of the Property Registration

of the public domain commenced from July 26, 1894.

Decree and the inclusion of Section 14(1) therein, the Public Land Act

However, this period was amended by R.A. No. 1942,

has remained in effect. Both laws commonly refer to persons or their

which provided that the bona fide claim of ownership

predecessors-in-interest who have been in open, continuous, exclusive

must have been for at least thirty (30) years. Then in

and notorious possession and occupation of alienable and disposable

1977, Section 48(b) of the Public Land Act was again

lands of the public domain under a bona fide claim of ownership

amended, this time by P.D. No. 1073, which pegged the

since June 12, 1945, or earlier. That circumstance may have led to the

reckoning date at June 12, 1945. xxx

impression that one or the other is a redundancy, or that Section 48(b)


of the Public Land Act has somehow been repealed or mooted. That is
not the case.

It bears further observation that Section 48(b) of Com. Act No, 141 is
virtually the same as Section 14(1) of the Property Registration

The opening clauses of Section 48 of the Public Land Act and

Decree. Said Decree codified the various laws relative to the Section 14 of the Property Registration Decree warrant comparison:
registration of property, including lands of the public domain. It is
Section 14(1) that operationalizes the registration of such lands of
the public domain. The provision reads:

Sec. 48 [of the Public Land Act]. The following


described citizens of the Philippines, occupying lands of
the public domain or claiming to own any such land or
an interest therein, but whose titles have not been

SECTION 14. Who may apply. The following


persons may file in the proper Court of First Instance an

perfected or completed, may apply to the Court of First


Instance of the province where the land is located for

confirmation of their claims and the issuance of a

provisions declare that it is indeed the Public Land Act that primarily

certificate of title therefor, under the Land Registration

establishes the substantive ownership of the possessor who has been

Act, to wit:

in possession of the property since 12 June 1945. In turn, Section 14(a)


of the Property Registration Decree recognizes the substantive right
xxx

granted under Section 48(b) of the Public Land Act, as well provides
the corresponding original registration procedure for the judicial

Sec. 14 [of the Property Registration Decree]. Who


may apply. The following persons may file in the proper
Court of First Instance an application for registration of title
to land, whether personally or through their duly authorized
representatives:

confirmation of an imperfect or incomplete title.


There is another limitation to the right granted under Section 48(b).
Section 47 of the Public Land Act limits the period within which one
may exercise the right to seek registration under Section 48. The
provision has been amended several times, most recently by Rep. Act

xxx

No. 9176 in 2002. It currently reads thus:

It is clear that Section 48 of the Public Land Act is more

Section 47. The persons specified in the next

descriptive of the nature of the right enjoyed by the possessor than

following section are hereby granted time, not to extend

Section 14 of the Property Registration Decree, which seems to

beyond December 31, 2020 within which to avail of the

presume the pre-existence of the right, rather than establishing the

benefits of this Chapter: Provided, That this period shall

right itself for the first time. It is proper to assert that it is the Public

apply only where the area applied for does not exceed

Land Act, as amended by P.D. No. 1073 effective 25 January 1977,

twelve (12) hectares: Provided, further, That the several

that has primarily established the right of a Filipino citizen who has

periods

been in open, continuous, exclusive, and notorious possession and

accordance with Section Forty-Five of this Act shall apply

occupation of alienable and disposable lands of the public domain,

also to the lands comprised in the provisions of this

under a bona fide claim of acquisition of ownership, since June 12,

Chapter, but this Section shall not be construed as

1945 to perfect or complete his title by applying with the proper court

prohibiting any said persons from acting under this

for the confirmation of his ownership claim and the issuance of the

Chapter at any time prior to the period fixed by the

corresponding certificate of title.

President.[24]

of

time

designated

by

the

President

in

Accordingly under the current state of the law, the substantive right
Section 48 can be viewed in conjunction with the afore-quoted granted under Section 48(b) may be availed of only until 31 December
Section 11 of the Public Land Act, which provides that public lands 2020.
suitable for agricultural purposes may be disposed of by confirmation
of imperfect or incomplete titles, and given the notion that both

B.

registration, no matter the length of unchallenged


Despite the clear text of Section 48(b) of the Public Land Act,

possession by the occupant. Such interpretation renders

as amended and Section 14(a) of the Property Registration Decree,

paragraph (1) of Section 14 virtually inoperative and

the OSG has adopted the position that for one to acquire the right to

even precludes the government from giving it effect even

seek registration of an alienable and disposable land of the public

as it decides to reclassify public agricultural lands as

domain, it is not enough that the applicant and his/her predecessors-

alienable and disposable. The unreasonableness of the

in-interest be in possession under a bona fide claim of ownership

situation would even be aggravated considering that

since 12 June 1945; the alienable and disposable character of the

before June 12, 1945, the Philippines was not yet even

property must have been declared also as of 12 June 1945. Following

considered an independent state.

the OSGs approach, all lands certified as alienable and disposable


after 12 June 1945 cannot be registered either under Section 14(1) of

Accordingly, the Court in Naguit explained:

the Property Registration Decree or Section 48(b) of the Public Land


Act as amended. The absurdity of such an implication was discussed

[T]he more reasonable interpretation of Section

in Naguit.

14(1) is that it merely requires the property sought to be


registered as already alienable and disposable at the
Petitioner suggests an interpretation that the

time the application for registration of title is filed. If the

alienable and disposable character of the land should

State, at the time the application is made, has not yet

have already been established since June 12, 1945 or

deemed it proper to release the property for alienation or

earlier. This is not borne out by the plain meaning of

disposition, the presumption is that the government is

Section 14(1). Since June 12, 1945, as used in the

still reserving the right to utilize the property; hence, the

provision, qualifies its antecedent phrase under a

need to preserve its ownership in the State irrespective

bonafide

speaking,

of the length of adverse possession even if in good faith.

qualifying words restrict or modify only the words or

However, if the property has already been classified as

phrases to which they are immediately associated, and

alienable and disposable, as it is in this case, then there

claim

of

ownership.

Generally

not those distantly or remotely located.

[25]

Ad proximum

is already an intention on the part of the State to

antecedents fiat relation nisi impediatur sentencia.

abdicate its exclusive prerogative over the property.

Besides, we are mindful of the absurdity that would


result

if we

adopt

petitioners

position.

Absent

The Court declares that the correct interpretation of Section

legislative amendment, the rule would be, adopting the

14(1)

OSGs view, that all lands of the public domain which

pronouncement in Herbieto, as pointed out in Naguit, absurdly limits

were not declared alienable or disposable before June

the application of the provision to the point of virtual inutility since it

12,

would only cover lands actually declared alienable and disposable

1945 would

not

be

susceptible

to

original

is

that

which

was

adopted

in Naguit.

The

contrary

prior to 12 June 1945, even if the current possessor is able to

Thus,

neither Herbieto nor

its

principal

discipular

establish open, continuous, exclusive and notorious possession under ruling Buenaventura has any precedental value with respect to
a bona fide claim of ownership long before that date.

Section 14(1). On the other hand, the ratio of Naguit is embedded in


Section 14(1), since it precisely involved situation wherein the

Moreover, the Naguit interpretation allows more possessors applicant had been in exclusive possession under a bona fide claim of
under a bona fide claim of ownership to avail of judicial confirmation

ownership prior to 12 June 1945. The Courts interpretation of Section

of their imperfect titles than what would be feasible under Herbieto. 14(1) therein was decisive to the resolution of the case. Any doubt as
This

balancing

fact

is

significant,

especially

considering

our

to which between Naguit or Herbieto provides the final word of the

forthcoming discussion on the scope and reach of Section 14(2) of Court on Section 14(1) is now settled in favor of Naguit.
the Property Registration Decree.
We noted in Naguit that it should be distinguished from Bracewell v.
Petitioners make the salient observation that the contradictory

Court of Appeals[27] since in the latter, the application for registration

passages from Herbieto are obiter dicta since the land registration had been filed before the land was declared alienable or disposable.
proceedings therein is void ab initio in the first place due to lack of The dissent though pronounces Bracewell as the better rule between
the requisite publication of the notice of initial hearing. There is no

the

two.

Yet

two

need to explicitly overturn Herbieto, as it suffices that the Courts esteemed Justice

years

Consuelo
[28]

after Bracewell,

Ynares-Santiago,

its ponente,

penned

the

the
ruling

acknowledgment that the particular line of argument used therein

in Republic v. Ceniza,

which involved a claim of possession that

concerning Section 14(1) is indeed obiter.

extended back to 1927 over a public domain land that was declared

It may be noted that in the subsequent case of Buenaventura, the alienable and disposable only in 1980. Ceniza cited Bracewell, quoted
Court, citing Herbieto, again stated that [a]ny period of possession prior to extensively from it, and following the mindset of the dissent, the
the date when the [s]ubject [property was] classified as alienable and attempt at registration in Cenizashould have failed. Not so.
disposable is inconsequential and should be excluded from the computation
To prove that the land subject of an application for
of the period of possession That statement, in the context of Section 14(1),
registration is alienable, an applicant must establish the
is certainly erroneous. Nonetheless, the passage as cited
existence of a positive act of the government such as a
in Buenaventura should again be considered as obiter. The application
presidential proclamation or an executive order; an
therein was ultimately granted, citing Section 14(2). The evidence submitted
administrative action; investigation reports of Bureau of
by petitioners therein did not establish any mode of possession on their part
Lands investigators; and a legislative act or a statute.
prior to 1948, thereby precluding the application of Section 14(1). It is not
even apparent from the decision whether petitioners therein had claimed
In this case, private respondents presented a
entitlement to original registration following Section 14(1), their position
certification dated November 25, 1994, issued by
being that they had been in exclusive possession under a bona fide claim of
Eduardo M. Inting, the Community Environment and
ownership for over fifty (50) years, but not before 12 June 1945.
[26]

Natural

Resources

Officer

in

the

Department

of

Environment and Natural Resources Office in Cebu City,

subject land even before the year 1927. As a rule, we

stating that the lots involved were "found to be within

are bound by the factual findings of the Court of

the

Appeals. Although there are exceptions, petitioner did

alienable

and

disposable

(sic)

Block-I,

Land

Classification Project No. 32-A, per map 2962 4-I555

not show that this is one of them.[29]

dated December 9, 1980." This is sufficient evidence to


show the real character of the land subject of private

Why did the Court in Ceniza, through the same eminent member who

respondents

certification

authored Bracewell, sanction the registration under Section 48(b) of

enjoys a presumption of regularity in the absence of

public domain lands declared alienable or disposable thirty-five (35)

contradictory evidence, which is true in this case. Worth

years and 180 days after 12 June 1945? The telling difference is that

noting also was the observation of the Court of Appeals

in Ceniza, the application for registration was filed nearly six (6)

stating that:

years after the land had been declared alienable or disposable, while

application.

Further,

the

in Bracewell, the application was filed nine (9) years before the land
[n]o opposition was filed by the

was declared alienable or disposable. That crucial difference was

Bureaus of Lands and Forestry to contest

also stressed in Naguit to contradistinguish it from Bracewell, a

the application of appellees on the ground

difference which the dissent seeks to belittle.

that the property still forms part of the


public domain. Nor is there any showing

III.

that the lots in question are forestal


land....

We next ascertain the correct framework of analysis with respect to


Section 14(2). The provision reads:

Thus, while the Court of Appeals erred in ruling


that mere possession of public land for the period
required by law would entitle its occupant to a
confirmation of imperfect title, it did not err in ruling in
favor of private respondents as far as the first
requirement in Section 48(b) of the Public Land Act is
concerned, for they were able to overcome the burden

SECTION 14. Who may apply. The following persons


may file in the proper Court of First Instance an application
for registration of title to land, whether personally or through
their duly authorized representatives:

of proving the alienability of the land subject of their

xxx

application.
As correctly found by the Court of Appeals,

(2)

Those who have acquired ownership

private respondents were able to prove their open,

over

private

lands

by

prescription

continuous, exclusive and notorious possession of the

under the provisions of existing laws.

Naguit did not involve the application of Section 14(2), unlike in this
The Court in Naguit offered the following discussion concerning case where petitioners have based their registration bid primarily on
Section 14(2), which we did even then recognize, and still do, to that provision, and where the evidence definitively establishes their
be an obiter dictum, but we nonetheless refer to it as material for claim of possession only as far back as 1948. It is in this case that we
further discussion, thus:

can properly appreciate the nuances of the provision.

Did the enactment of the Property Registration

A.

Decree and the amendatory P.D. No. 1073 preclude the


application for registration of alienable lands of the

The obiter in Naguit cited the Civil Code provisions on prescription as

public domain, possession over which commenced only

the possible basis for application for original registration under Section

after June 12, 1945? It did not, considering Section 14(2)

14(2). Specifically, it is Article 1113 which provides legal foundation

of the Property Registration Decree, which governs and

for the application. It reads:

authorizes the application of those who have acquired

All things which are within the commerce of men are


susceptible of prescription, unless otherwise provided. Property
of the State or any of its subdivisions not patrimonial in
character shall not be the object of prescription.

ownership of private lands by prescription under the


provisions of existing laws.
Prescription is one of the modes of acquiring
ownership

under

the

Civil

Code.[[30]]

There

is

consistent jurisprudential rule that properties classified


as alienable public land may be converted into private

It is clear under the Civil Code that where lands of the public domain

property by reason of open, continuous and exclusive

are patrimonial in character, they are susceptible to acquisitive

possession of at least thirty (30) years.[

[31]

] With such

prescription. On the other hand, among the public domain lands that

conversion, such property may now fall within the

are not susceptible to acquisitive prescription are timber lands and

contemplation of private lands under Section 14(2), and

mineral lands. The Constitution itself proscribes private ownership of

thus susceptible to registration by those who have

timber or mineral lands.

acquired ownership through prescription. Thus, even if


possession of the alienable public land commenced on a

There are in fact several provisions in the Civil Code concerning

date later than June 12, 1945, and such possession

the acquisition of real property through prescription. Ownership of real

being been open, continuous and exclusive, then the

property may be acquired by ordinary prescription of ten (10) years,

possessor may have the right to register the land by

[32]

or

virtue of Section 14(2) of the Property Registration

[33]

Ordinary acquisitive prescription requires possession in good faith,

Decree.

[34]

as well as just title.[35]

through

extraordinary

prescription

of

thirty

(30)

years.

of their claims and the issuance of a certificate of title


When Section 14(2) of the Property Registration Decree

therefor, under the Land Registration Act, to wit:

explicitly provides that persons who have acquired ownership over


private lands by prescription under the provisions of existing laws, it

xxx

xxx

xxx

unmistakably refers to the Civil Code as a valid basis for the


registration of lands. The Civil Code is the only existing law that

(b) Those who by themselves or through their

specifically allows the acquisition by prescription of private lands,

predecessors in interest have been in open, continuous,

including patrimonial property belonging to the State. Thus, the

exclusive and notorious possession and occupation of

critical question that needs affirmation is whether Section 14(2) does

agricultural lands of the public domain, under a bona

encompass

patrimonial

fide claim of acquisition of ownership, for at least

property of the State, which a private person has acquired through

thirty years immediately preceding the filing of

prescription.

the application for confirmation of title, except

original

registration

proceedings

over

when prevented by war or force majeure. These shall be


The Naguit obiter had adverted to a frequently reiterated

conclusively presumed to have performed all the

jurisprudence holding that properties classified as alienable public

conditions essential to a Government grant and shall be

land may be converted into private property by reason of open,

entitled to a certificate of title under the provisions of

continuous and exclusive possession of at least thirty (30) years.

this Chapter. (emphasis supplied)[37]

[36]

Yet if we ascertain the source of the thirty-year period, additional

complexities relating to Section 14(2) and to how exactly it operates


would emerge. For there are in fact two distinct origins of the
thirty (30)-year rule.

This provision was repealed in 1977 with the enactment of P.D.


1073, which made the date 12 June 1945 the reckoning point for the
first time. Nonetheless, applications for registration filed prior to 1977

The first source is Rep. Act No. 1942, enacted in 1957, which could have invoked the 30-year rule introduced by Rep. Act No. 1942.
amended Section 48(b) of the Public Land Act by granting the right to
seek original registration of alienable public lands through possession
in the concept of an owner for at least thirty years.

The second source is Section 14(2) of P.D. 1529 itself, at least


by implication, as it applies the rules on prescription under the Civil
Code, particularly Article 1113 in relation to Article 1137. Note that

The

the

there are two kinds of prescription under the Civil Codeordinary

Philippines, occupying lands of the public domain or

acquisitive prescription and extraordinary acquisitive prescription,

claiming to own any such lands or an interest therein,

which, under Article 1137, is completed through uninterrupted adverse

but

possession for thirty years, without need of title or of good faith.

whose

following-described

titles

have

not

citizens

been

of

perfected

or

completed, may apply to the Court of First Instance of


the province where the land is located for confirmation

Obviously, the first source of the thirty (30)-year period

Unlike Section 14(1), Section 14(2) explicitly refers to the

rule, Rep. Act No. 1942, became unavailable after 1977. At present, principles on prescription under existing laws. Accordingly, we are
the only legal basis for the thirty (30)-year period is the law on impelled to apply the civil law concept of prescription, as set forth in
prescription under the Civil Code, as mandated under Section 14(2). the Civil Code, in our interpretation of Section 14(2). There is no
However, there is a material difference between how the thirty (30)- similar demand on our part in the case of Section 14(1).
year rule operated under Rep. Act No. 1942 and how it did under the
Civil Code.

The critical qualification under Article 1113 of the Civil Code is


thus: [p]roperty of the State or any of its subdivisions not patrimonial

Section 48(b) of the Public Land Act, as amended by Rep. Act in character shall not be the object of prescription. The identification
No. 1942, did not refer to or call into application the Civil Code what consists of patrimonial property is provided by Articles 420 and
provisions on prescription. It merely set forth a requisite thirty-year 421, which we quote in full:
possession

period

immediately

preceding

the

application

for

confirmation of title, without any qualification as to whether the

Art. 420. The following things are property of public

property should be declared alienable at the beginning of, and

dominion:

continue as such, throughout the entire thirty-(30) years. There is


neither statutory nor jurisprudential basis to assert Rep. Act No. 1942
had mandated such a requirement,

[38]

similar to our earlier finding

(1) Those intended for public use, such as roads,


canals,

rivers,

torrents,

ports

and

bridges

with respect to the present language of Section 48(b), which now

constructed by the State, banks, shores, roadsteads,

sets 12 June 1945 as the point of reference.

and others of similar character;

Then, with the repeal of Rep. Act No. 1942, the thirty-year

(2) Those which belong to the State, without being

possession period as basis for original registration became Section

for public use, and are intended for some public

14(2) of the Property Registration Decree, which entitled those who

service or for the development of the national

have acquired ownership over private lands by prescription under the

wealth.

provisions of existing laws to apply for original registration. Again, the


thirty-year

period

is

derived

from

the

rule

on

extraordinary

Art. 421. All other property of the State, which is not

prescription under Article 1137 of the Civil Code. At the same time,

of the character stated in the preceding article, is

Section 14(2) puts into operation the entire regime of prescription

patrimonial property

under the Civil Code, a fact which does not hold true with respect to
Section 14(1).

It is clear that property of public dominion, which generally includes


property belonging to the State, cannot be the object of prescription
B.

or, indeed, be subject of the commerce of man. [39] Lands of the public
domain, whether declared alienable and disposable or not, are

property of public dominion and thus insusceptible to acquisition by

patrimonial. Without such express declaration, the property,

prescription.

even if classified as alienable or disposable, remains property


of the public dominion, pursuant to Article 420(2), and thus

Let us now explore the effects under the Civil Code of a declaration

incapable of acquisition by prescription. It is only when such

by the President or any duly authorized government officer of

alienable and disposable lands are expressly declared by the

alienability and disposability of lands of the public domain. Would State to be no longer intended for public service or for the
such lands so declared alienable and disposable be converted, under

development of the national wealth that the period of

the Civil Code, from property of the public dominion into patrimonial acquisitive prescription can begin to run. Such declaration
property?

After

all,

by

connotative

definition,

alienable

and shall be in the form of a law duly enacted by Congress or a

disposable lands may be the object of the commerce of man; Article

Presidential Proclamation in cases where the President is duly

1113 provides that all things within the commerce of man are authorized by law.
susceptible to prescription; and the same provision further provides
that patrimonial property of the State may be acquired by
prescription.

It is comprehensible with ease that this reading of Section 14(2)


of the Property Registration Decree limits its scope and reach and thus
affects the registrability even of lands already declared alienable and

Nonetheless, Article 422 of the Civil Code states that disposable to the detriment of the bona fide possessors or occupants
[p]roperty of public dominion, when no longer intended for public use

claiming title to the lands. Yet this interpretation is in accord with the

or for public service, shall form part of the patrimonial property of the Regalian doctrine and its concomitant assumption that all lands
State. It is this provision that controls how public dominion property

owned by the State, although declared alienable or disposable, remain

may be converted into patrimonial property susceptible to acquisition as such and ought to be used only by the Government.
by prescription. After all, Article 420 (2) makes clear that those
property which belong to the State, without being for public use, and

Recourse does not lie with this Court in the matter. The duty of

are intended for some public service or for the development of the

the Court is to apply the Constitution and the laws in accordance with

national wealth are public dominion property. For as long as the their language and intent. The remedy is to change the law, which is
property belongs to the State, although already classified as

the province of the legislative branch. Congress can very well be

alienable or disposable, it remains property of the public dominion if

entreated to amend Section 14(2) of the Property Registration Decree

when it is intended for some public service or for the development of

and

the national wealth.

requirements for judicial confirmation of imperfect or incomplete

pertinent

provisions

of

the

Civil

Code

to

liberalize

the

titles.
Accordingly, there must be an express declaration by
the State that the public dominion property is no longer

The operation of the foregoing interpretation can be illustrated

intended for public service or the development of the by an actual example. Republic Act No. 7227, entitled An Act
national wealth or that the property has been converted into

Accelerating The Conversion Of Military Reservations Into Other

Productive Uses, etc., is more commonly known as the BCDA

patrimonial be reckoned in counting the prescriptive period in favor of

law. Section 2 of the law authorizes the sale of certain military the possessors? We rule in the negative.
reservations and portions of military camps in Metro Manila,
including Fort Bonifacio and

Villamor

Air

Base. For

purposes

of The limitation imposed by Article 1113 dissuades us from ruling that

effecting the sale of the military camps, the law mandates the the period of possession before the public domain land becomes
President to transfer such military lands to the Bases Conversion patrimonial may be counted for the purpose of completing the
Development Authority (BCDA)[40] which in turn is authorized to own, prescriptive period. Possession of public dominion property before it
hold and/or administer them.[41] The President is authorized to sell becomes patrimonial cannot be the object of prescription according to
portions of the military camps, in whole or in part.[42] Accordingly, the the Civil Code. As the application for registration under Section 14(2)
BCDA law itself declares that the military lands subject thereof are falls wholly within the framework of prescription under the Civil Code,
alienable and disposable pursuant to the provisions of existing laws
and regulations governing sales of government properties.

[43]

there is no way that possession during the time that the land was still
classified as public dominion property can be counted to meet the
requisites of acquisitive prescription and justify registration.

From the moment the BCDA law was enacted the subject
military lands have become alienable and disposable. However, said

Are we being inconsistent in applying divergent rules for

lands did not become patrimonial, as the BCDA law itself expressly

Section 14(1) and Section 14(2)? There is no inconsistency. Section

makes the reservation that these lands are to be sold in order to

14(1) mandates registration on the basis ofpossession, while

raise funds for the conversion of the former American bases

Section

at Clark and Subic.

[44]

14(2)

entitles

registration

on

the

basis

Such purpose can be tied to either public of prescription. Registration under Section 14(1) is extended

service or the development of national wealth under Article 420(2).

under the aegis of the Property Registration Decree and the

Thus, at that time, the lands remained property of the public

Public Land Act while registration under Section 14(2) is made

dominion under Article 420(2), notwithstanding their status as

available both by the Property Registration Decree and the

alienable and disposable. It is upon their sale as authorized under the

Civil Code.

BCDA law to a private person or entity that such lands become


private property and cease to be property of the public dominion.

In the same manner, we can distinguish between the thirty-year


period under Section 48(b) of the Public Land Act, as amended by Rep.

C.

Act No. 1472, and the thirty-year period available through Section
14(2) of the Property Registration Decree in relation to Article 1137 of

Should public domain lands become patrimonial because they the Civil Code. The period under the former speaks of a thirtyare declared as such in a duly enacted law or duly promulgated

year period of possession, while the period under the latter

proclamation that they are no longer intended for public service or

concerns

a thirty-year

period

of

extraordinary

for the development of the national wealth, would the period of prescription. Registration under Section 48(b) of the Public
possession prior to the conversion of such public dominion into Land Act as amended by Rep. Act No. 1472 is based on thirty

years of possession alone without regard to the Civil Code,

through possession of ten (10) years. There is nothing in the Civil

while the registration under Section 14(2) of the Property Code that bars a person from acquiring patrimonial property of the
Registration Decree is founded on extraordinary prescription State through ordinary acquisitive prescription, nor is there any
under the Civil Code.

apparent reason to impose such a rule. At the same time, there are
indispensable requisitesgood faith and just title. The ascertainment of

It may be asked why the principles of prescription under the Civil

good faith involves the application of Articles 526, 527, and 528, as

Code should not apply as well to Section 14(1). Notwithstanding the

well as Article 1127 of the Civil Code, [45] provisions that more or less

vaunted status of the Civil Code, it ultimately is just one of numerous

speak for themselves.

statutes, neither superior nor inferior to other statutes such as the


Property Registration Decree. The legislative branch is not bound to

On the other hand, the concept of just title requires some

adhere to the framework set forth by the Civil Code when it enacts

clarification. Under Article 1129, there is just title for the purposes of

subsequent legislation. Section 14(2) manifests a clear intent to

prescription when the adverse claimant came into possession of the

interrelate the registration allowed under that provision with the Civil

property through one of the modes recognized by law for the

Code, but no such intent exists with respect to Section 14(1).

acquisition of ownership or other real rights, but the grantor was not
the owner or could not transmit any right. Dr. Tolentino explains:

IV.
Just title is an act which has for its purpose the
One of the keys to understanding the framework we set forth today is

transmission

of

ownership,

and

which

would

have

seeing how our land registration procedures correlate with our law on

actually transferred ownership if the grantor had been

prescription, which, under the Civil Code, is one of the modes for

the owner. This vice or defect is the one cured by

acquiring ownership over property.

prescription. Examples: sale with delivery, exchange,


donation, succession, and dacion in payment.[46]

The Civil Code makes it clear that patrimonial property of the State The OSG submits that the requirement of just title necessarily
may be acquired by private persons through prescription. This is precludes the applicability of ordinary acquisitive prescription to
brought about by Article 1113, which states that [a]ll things which

patrimonial property. The major premise for the argument is that the

are within the commerce of man are susceptible to prescription, and State, as the owner and grantor, could not transmit ownership to the
that [p]roperty of the State or any of its subdivisions not patrimonial possessor before the completion of the required period of possession.
in character shall not be the object of prescription.

[47]

It is evident that the OSG erred when it assumed that the grantor

referred to in Article 1129 is the State. The grantor is the one from
There are two modes of prescription through which immovables may

whom the person invoking ordinary acquisitive prescription derived

be acquired under the Civil Code. The first is ordinary acquisitive the title, whether by sale, exchange, donation, succession or any
prescription, which, under Article 1117, requires possession in good
faith and with just title; and, under Article 1134, is completed

other mode of the acquisition of ownership or other real rights.

Earlier, we made it clear that, whether under ordinary property of persons who have completed the prescriptive periods
prescription or extraordinary prescription, the period of possession ordained therein. The gap was finally closed with the adoption of the
preceding the classification of public dominion lands as patrimonial

Property Registration Decree in 1977, with Section 14(2) thereof

cannot be counted for the purpose of computing prescription. But expressly authorizing original registration in favor of persons who
after the property has been become patrimonial, the period of

have acquired ownership over private lands by prescription under the

prescription begins to run in favor of the possessor. Once the

provisions of existing laws, that is, the Civil Code as of now.

requisite period has been completed, two legal events ensue: (1) the
patrimonial property is ipso jure converted into private land; and (2)

V.

the person in possession for the periods prescribed under the Civil
Code acquires ownership of the property by operation of the Civil

We synthesize the doctrines laid down in this case, as follows:

Code.
(1) In connection with Section 14(1) of the Property Registration
It is evident that once the possessor automatically becomes

Decree, Section 48(b) of the Public Land Act recognizes and confirms

the owner of the converted patrimonial property, the ideal next step that those who by themselves or through their predecessors in
is the registration of the property under theTorrens system. It should interest have been in open, continuous, exclusive, and notorious
be remembered that registration of property is not a mode of

possession and occupation of alienable and disposable lands of the

acquisition of ownership, but merely a mode of confirmation of

public domain, under a bona fide claim of acquisition of ownership,

ownership.

[48]

since June 12, 1945 have acquired ownership of, and registrable title
to, such lands based on the length and quality of their possession.

Looking back at the registration regime prior to the adoption


of the Property Registration Decree in 1977, it is apparent that the

(a) Since Section 48(b) merely requires possession since

registration system then did not fully accommodate the acquisition of

12 June 1945 and does not require that the lands should have

ownership of patrimonial property under the Civil Code. What the

been alienable and disposable during the entire period of

system accommodated was the confirmation of imperfect title

possession,

brought about by the completion of a period of possession ordained

confirmation of his title thereto as soon as it is declared

under the Public Land Act (either 30 years following Rep. Act No.

alienable and disposable, subject to the timeframe imposed by

1942, or since 12 June 1945 following P.D. No. 1073).

Section 47 of the Public Land Act.[51]

the

possessor

is

entitled

to

secure

judicial

The Land Registration Act[49] was noticeably silent on the

(b) The right to register granted under Section 48(b) of

requisites for alienable public lands acquired through ordinary

the Public Land Act is further confirmed by Section 14(1) of the

prescription under the Civil Code, though it arguably did not preclude

Property Registration Decree.

such registration.

[50]

Still, the gap was lamentable, considering that

the Civil Code, by itself, establishes ownership over the patrimonial

(2) In complying with Section 14(2) of the Property Registration It is clear that the evidence of petitioners is insufficient to establish
Decree, consider that under the Civil Code, prescription is recognized that Malabanan has acquired ownership over the subject property
as a mode of acquiring ownership of patrimonial property. However, under Section 48(b) of the Public Land Act. There is no substantive
public domain lands become only patrimonial property not only with

evidence

to

establish

that

Malabanan

or

petitioners

as

his

a declaration that these are alienable or disposable. There must also predecessors-in-interest have been in possession of the property since
be an express government manifestation that the property is already
patrimonial

or

no

longer

retained

for

public

service

or

12 June 1945 or earlier. The earliest that petitioners can date back

the their possession, according to their own evidencethe Tax Declarations

development of national wealth, under Article 422 of the Civil Code.

they presented in particularis to the year 1948. Thus, they cannot

And only when the property has become patrimonial can the

avail themselves of registration under Section 14(1) of the Property

prescriptive period for the acquisition of property of the public Registration Decree.
dominion begin to run.
(a) Patrimonial property is private property of the Neither can petitioners properly invoke Section 14(2) as basis for
government. The person acquires ownership of patrimonial registration. While the subject property was declared as alienable or
property by prescription under the Civil Code is entitled to disposable in 1982, there is no competent evidence that is no longer
secure registration thereof under Section 14(2) of the Property

intended for public use service or for the development of the national

Registration Decree.

evidence, conformably with Article 422 of the Civil Code. The


classification of the subject property as alienable and disposable land

(b) There are two kinds of prescription by which

of the public domain does not change its status as property of the

patrimonial property may be acquired, one ordinary and other public dominion under Article 420(2) of the Civil Code. Thus, it is
extraordinary.

Under

ordinary

acquisitive

prescription,

a insusceptible to acquisition by prescription.

person acquires ownership of a patrimonial property through


possession for at least ten (10) years, in good faith and with

VI.

just title. Under extraordinary acquisitive prescription, a


persons uninterrupted adverse possession of patrimonial

A final word. The Court is comfortable with the correctness of

property for at least thirty (30) years, regardless of good faith

the

legal

doctrines

established

in

this

decision.

Nonetheless,

or just title, ripens into ownership.

discomfiture over the implications of todays ruling cannot be


discounted. For, every untitled property that is occupied in the country

B.

will be affected by this ruling. The social implications cannot be


dismissed lightly, and the Court would be abdicating its social

We now apply the above-stated doctrines to the case at bar.

responsibility to the Filipino people if we simply levied the law without


comment.

The informal settlement of public lands, whether declared alienable


or not, is a phenomenon tied to long-standing habit and cultural
acquiescence,

and

is

common

among

the

Ones sense of security over land rights infuses into every

so-called Third aspect of well-being not only of that individual, but also to the persons

World countries. This paradigm powerfully evokes the disconnect family. Once that sense of security is deprived, life and livelihood are
between a legal system and the reality on the ground. The law so far put on stasis. It is for the political branches to bring welcome closure
has been unable to bridge that gap. Alternative means of acquisition
of

these

public domain lands, such as through homestead or

to the long pestering problem.

free

patent, have

WHEREFORE, the Petition is DENIED. The Decision of the Court of


Appeals dated 23 February 2007 and Resolution dated 2 October
2007 are AFFIRMED. No pronouncement as to costs.

proven unattractive due to limitations imposed on the grantee in the


encumbrance or alienation of said properties.[52] Judicial confirmation SO ORDERED.
of imperfect title has emerged as the most viable, if not the most
attractive means to regularize the informal settlement of alienable or
disposable lands of the public domain, yet even that system, as
revealed in this decision, has considerable limits.
There are millions upon millions of Filipinos who have individually or
exclusively held residential lands on which they have lived and raised
their families. Many more have tilled and made productive idle lands
of the State with their hands. They have been regarded for
generation by their families and their communities as common law
owners. There is much to be said about the virtues of according them
legitimate states. Yet such virtues are not for the Court to translate
into positive law, as the law itself considered such lands as property
of the public dominion. It could only be up to Congress to set forth a
new phase of land reform to sensibly regularize and formalize the
settlement of such lands which in legal theory are lands of the public
domain before the problem becomes insoluble. This could be
accomplished, to cite two examples, by liberalizing the standards for
judicial confirmation of imperfect title, or amending the Civil Code
itself to ease the requisites for the conversion of public dominion
property into patrimonial.