G.R. No.

L-46240
November 3, 1939
MARGARITA QUINTOS and ANGEL A. ANSALDO, plaintiffs-appellants,
vs.
BECK, defendant-appellee.
Mauricio Carlos for appellants.Felipe Buencamino, Jr. for appellee.
IMPERIAL, J.:
The plaintiff brought this action to compel the defendant to return her certain
furniture which she lent him for his use. She appealed from the judgment of the
Court of First Instance of Manila which ordered that the defendant return to her
the three has heaters and the four electric lamps found in the possession of the
Sheriff of said city, that she call for the other furniture from the said sheriff of
Manila at her own expense, and that the fees which the Sheriff may charge for
the deposit of the furniture be paid pro rata by both parties, without
pronouncement as to the costs.
The defendant was a tenant of the plaintiff and as such occupied the latter's
house on M. H. del Pilar street, No. 1175. On January 14, 1936, upon the
novation of the contract of lease between the plaintiff and the defendant, the
former gratuitously granted to the latter the use of the furniture described in the
third paragraph of the stipulation of facts, subject to the condition that the
defendant would return them to the plaintiff upon the latter's demand. The plaintiff
sold the property to Maria Lopez and Rosario Lopez and on September 14, 1936,
these three notified the defendant of the conveyance, giving him sixty days to
vacate the premises under one of the clauses of the contract of lease. There
after the plaintiff required the defendant to return all the furniture transferred to
him for them in the house where they were found. On
November 5, 1936,
the defendant, through another person, wrote to the plaintiff reiterating that she
may call for the furniture in the ground floor of the house. On the 7th of the same
month, the defendant wrote another letter to the plaintiff informing her that he
could not give up the three gas heaters and the four electric lamps because he
would use them until the 15th of the same month when the lease in due to expire.
The plaintiff refused to get the furniture in view of the fact that the defendant had
declined to make delivery of all of them. On
November 15th, before
vacating the house, the defendant deposited with the Sheriff all the furniture
belonging to the plaintiff and they are now on deposit in the warehouse situated
at No. 1521, Rizal Avenue, in the custody of the said sheriff.
In their seven assigned errors the plaintiffs contend that the trial court incorrectly
applied the law: in holding that they violated the contract by not calling for all the
furniture on November 5, 1936, when the defendant placed them at their
disposal; in not ordering the defendant to pay them the value of the furniture in
case they are not delivered; in holding that they should get all the furniture from
the Sheriff at their expenses; in ordering them to pay-half of the expenses
claimed by the Sheriff for the deposit of the furniture; in ruling that both parties
should pay their respective legal expenses or the costs; and in denying pay their
respective legal expenses or the costs; and in denying the motions for
reconsideration and new trial. To dispose of the case, it is only necessary to

decide whether the defendant complied with his obligation to return the furniture
upon the plaintiff's demand; whether the latter is bound to bear the deposit fees
thereof, and whether she is entitled to the costs of litigation.lawphi1.net
The contract entered into between the parties is one of commadatum, because
under it the plaintiff gratuitously granted the use of the furniture to the defendant,
reserving for herself the ownership thereof; by this contract the defendant bound
himself to return the furniture to the plaintiff, upon the latters demand (clause 7 of
the contract, Exhibit A; articles 1740, paragraph 1, and 1741 of the Civil Code).
The obligation voluntarily assumed by the defendant to return the furniture upon
the plaintiff's demand, means that he should return all of them to the plaintiff at
the latter's residence or house. The defendant did not comply with this obligation
when he merely placed them at the disposal of the plaintiff, retaining for his
benefit the three gas heaters and the four eletric lamps. The provisions of article
1169 of the Civil Code cited by counsel for the parties are not squarely
applicable. The trial court, therefore, erred when it came to the legal conclusion
that the plaintiff failed to comply with her obligation to get the furniture when they
were offered to her.
As the defendant had voluntarily undertaken to return all the furniture to the
plaintiff, upon the latter's demand, the Court could not legally compel her to bear
the expenses occasioned by the deposit of the furniture at the defendant's
behest. The latter, as bailee, was not entitled to place the furniture on deposit;
nor was the plaintiff under a duty to accept the offer to return the furniture,
because the defendant wanted to retain the three gas heaters and the four
electric lamps.
As to the value of the furniture, we do not believe that the plaintiff is entitled to
the payment thereof by the defendant in case of his inability to return some of the
furniture because under paragraph 6 of the stipulation of facts, the defendant has
neither agreed to nor admitted the correctness of the said value. Should the
defendant fail to deliver some of the furniture, the value thereof should be latter
determined by the trial Court through evidence which the parties may desire to
present.
The costs in both instances should be borne by the defendant because the
plaintiff is the prevailing party (section 487 of the Code of Civil Procedure). The
defendant was the one who breached the contract of commodatum, and without
any reason he refused to return and deliver all the furniture upon the plaintiff's
demand. In these circumstances, it is just and equitable that he pay the legal
expenses and other judicial costs which the plaintiff would not have otherwise
defrayed.
The appealed judgment is modified and the defendant is ordered to return and
deliver to the plaintiff, in the residence to return and deliver to the plaintiff, in the
residence or house of the latter, all the furniture described in paragraph 3 of the
stipulation of facts Exhibit A. The expenses which may be occasioned by the
delivery to and deposit of the furniture with the Sheriff shall be for the account of
the defendant. the defendant shall pay the costs in both instances. So ordered.
Avancea, C.J., Villa-Real, Laurel, Concepcion and Moran, JJ., concur.

G.R. No. L-17474

October 25, 1962
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
JOSE V. BAGTAS, defendant,
FELICIDAD M. BAGTAS, Administratrix of the Intestate Estate left by the
late Jose V. Bagtas, petitioner-appellant.
D. T. Reyes, Liaison and Associates for petitioner-appellant.Office of the Solicitor
General for plaintiff-appellee.
PADILLA, J.:
The Court of Appeals certified this case to this Court because only questions of
law are raised.
On 8 May 1948 Jose V. Bagtas borrowed from the Republic of the Philippines
through the Bureau of Animal Industry three bulls: a Red Sindhi with a book value
of P1,176.46, a Bhagnari, of P1,320.56 and a Sahiniwal, of P744.46, for a period
of one year from 8 May 1948 to 7 May 1949 for breeding purposes subject to a
government charge of breeding fee of 10% of the book value of the bulls. Upon
the expiration on 7 May 1949 of the contract, the borrower asked for a renewal
for another period of one year. However, the Secretary of Agriculture and Natural
Resources approved a renewal thereof of only one bull for another year from 8
May 1949 to 7 May 1950 and requested the return of the other two. On 25 March
1950 Jose V. Bagtas wrote to the Director of Animal Industry that he would pay
the value of the three bulls. On 17 October 1950 he reiterated his desire to buy
them at a value with a deduction of yearly depreciation to be approved by the
Auditor General. On 19 October 1950 the Director of Animal Industry advised him
that the book value of the three bulls could not be reduced and that they either be
returned or their book value paid not later than 31 October 1950. Jose V. Bagtas
failed to pay the book value of the three bulls or to return them. So, on 20
December 1950 in the Court of First Instance of Manila the Republic of the
Philippines commenced an action against him praying that he be ordered to
return the three bulls loaned to him or to pay their book value in the total sum of
P3,241.45 and the unpaid breeding fee in the sum of P199.62, both with
interests, and costs; and that other just and equitable relief be granted in (civil
No. 12818).
On 5 July 1951 Jose V. Bagtas, through counsel Navarro, Rosete and Manalo,
answered that because of the bad peace and order situation in Cagayan Valley,
particularly in the barrio of Baggao, and of the pending appeal he had taken to
the Secretary of Agriculture and Natural Resources and the President of the
Philippines from the refusal by the Director of Animal Industry to deduct from the
book value of the bulls corresponding yearly depreciation of 8% from the date of
acquisition, to which depreciation the Auditor General did not object, he could not
return the animals nor pay their value and prayed for the dismissal of the
complaint.
After hearing, on 30 July 1956 the trial court render judgment
. . . sentencing the latter (defendant) to pay the sum of P3,625.09 the total value
of the three bulls plus the breeding fees in the amount of P626.17 with interest on
both sums of (at) the legal rate from the filing of this complaint and costs.

On 9 October 1958 the plaintiff moved ex parte for a writ of execution which the
court granted on 18 October and issued on 11 November 1958. On 2 December
1958 granted an ex-parte motion filed by the plaintiff on November 1958 for the
appointment of a special sheriff to serve the writ outside Manila. Of this order
appointing a special sheriff, on 6 December 1958, Felicidad M. Bagtas, the
surviving spouse of the defendant Jose Bagtas who died on 23 October 1951
and as administratrix of his estate, was notified. On 7 January 1959 she file a
motion alleging that on 26 June 1952 the two bull Sindhi and Bhagnari were
returned to the Bureau Animal of Industry and that sometime in November 1958
the third bull, the Sahiniwal, died from gunshot wound inflicted during a Huk raid
on Hacienda Felicidad Intal, and praying that the writ of execution be quashed
and that a writ of preliminary injunction be issued. On 31 January 1959 the
plaintiff objected to her motion. On 6 February 1959 she filed a reply thereto. On
the same day, 6 February, the Court denied her motion. Hence, this appeal
certified by the Court of Appeals to this Court as stated at the beginning of this
opinion.
It is true that on 26 June 1952 Jose M. Bagtas, Jr., son of the appellant by the
late defendant, returned the Sindhi and Bhagnari bulls to Roman Remorin,
Superintendent of the NVB Station, Bureau of Animal Industry, Bayombong,
Nueva Vizcaya, as evidenced by a memorandum receipt signed by the latter
(Exhibit 2). That is why in its objection of 31 January 1959 to the appellant's
motion to quash the writ of execution the appellee prays "that another writ of
execution in the sum of P859.53 be issued against the estate of defendant
deceased Jose V. Bagtas." She cannot be held liable for the two bulls which
already had been returned to and received by the appellee.
The appellant contends that the Sahiniwal bull was accidentally killed during a
raid by the Huk in November 1953 upon the surrounding barrios of Hacienda
Felicidad Intal, Baggao, Cagayan, where the animal was kept, and that as such
death was due to force majeure she is relieved from the duty of returning the bull
or paying its value to the appellee. The contention is without merit. The loan by
the appellee to the late defendant Jose V. Bagtas of the three bulls for breeding
purposes for a period of one year from 8 May 1948 to 7 May 1949, later on
renewed for another year as regards one bull, was subject to the payment by the
borrower of breeding fee of 10% of the book value of the bulls. The appellant
contends that the contract was commodatum and that, for that reason, as the
appellee retained ownership or title to the bull it should suffer its loss due to force
majeure. A contract of commodatum is essentially gratuitous.1 If the breeding fee
be considered a compensation, then the contract would be a lease of the bull.
Under article 1671 of the Civil Code the lessee would be subject to the
responsibilities of a possessor in bad faith, because she had continued
possession of the bull after the expiry of the contract. And even if the contract be
commodatum, still the appellant is liable, because article 1942 of the Civil Code
provides that a bailee in a contract of commodatum
. . . is liable for loss of the things, even if it should be through a fortuitous event:
(2) If he keeps it longer than the period stipulated . . .
(3) If the thing loaned has been delivered with appraisal of its value, unless there

is a stipulation exempting the bailee from responsibility in case of a fortuitous

event;
The original period of the loan was from 8 May 1948 to 7 May 1949. The loan of
one bull was renewed for another period of one year to end on 8 May 1950. But
the appellant kept and used the bull until November 1953 when during a Huk raid
it was killed by stray bullets. Furthermore, when lent and delivered to the
deceased husband of the appellant the bulls had each an appraised book value,
to with: the Sindhi, at P1,176.46, the Bhagnari at P1,320.56 and the Sahiniwal at
P744.46. It was not stipulated that in case of loss of the bull due to fortuitous
event the late husband of the appellant would be exempt from liability.
The appellant's contention that the demand or prayer by the appellee for the
return of the bull or the payment of its value being a money claim should be
presented or filed in the intestate proceedings of the defendant who died on 23
October 1951, is not altogether without merit. However, the claim that his civil
personality having ceased to exist the trial court lost jurisdiction over the case
against him, is untenable, because section 17 of Rule 3 of the Rules of Court
provides that
After a party dies and the claim is not thereby extinguished, the court shall order,
upon proper notice, the legal representative of the deceased to appear and to be
substituted for the deceased, within a period of thirty (30) days, or within such
time as may be granted. . . .
and after the defendant's death on 23 October 1951 his counsel failed to comply
with section 16 of Rule 3 which provides that
Whenever a party to a pending case dies . . . it shall be the duty of his attorney to
inform the court promptly of such death . . . and to give the name and residence
of the executory administrator, guardian, or other legal representative of the
deceased . . . .
The notice by the probate court and its publication in the Voz de Manila that
Felicidad M. Bagtas had been issue letters of administration of the estate of the
late Jose Bagtas and that "all persons having claims for monopoly against the
deceased Jose V. Bagtas, arising from contract express or implied, whether the
same be due, not due, or contingent, for funeral expenses and expenses of the
last sickness of the said decedent, and judgment for monopoly against him, to file
said claims with the Clerk of this Court at the City Hall Bldg., Highway 54,
Quezon City, within six (6) months from the date of the first publication of this
order, serving a copy thereof upon the aforementioned Felicidad M. Bagtas, the
appointed administratrix of the estate of the said deceased," is not a notice to the
court and the appellee who were to be notified of the defendant's death in
accordance with the above-quoted rule, and there was no reason for such failure
to notify, because the attorney who appeared for the defendant was the same
who represented the administratrix in the special proceedings instituted for the
administration and settlement of his estate. The appellee or its attorney or
representative could not be expected to know of the death of the defendant or of
the administration proceedings of his estate instituted in another court that if the
attorney for the deceased defendant did not notify the plaintiff or its attorney of
such death as required by the rule.

As the appellant already had returned the two bulls to the appellee, the estate of
the late defendant is only liable for the sum of P859.63, the value of the bull
which has not been returned to the appellee, because it was killed while in the
custody of the administratrix of his estate. This is the amount prayed for by the
appellee in its objection on 31 January 1959 to the motion filed on 7 January
1959 by the appellant for the quashing of the writ of execution.
Special proceedings for the administration and settlement of the estate of the
deceased Jose V. Bagtas having been instituted in the Court of First Instance of
Rizal (Q-200), the money judgment rendered in favor of the appellee cannot be
enforced by means of a writ of execution but must be presented to the probate
court for payment by the appellant, the administratrix appointed by the court.
ACCORDINGLY, the writ of execution appealed from is set aside, without
pronouncement as to costs.
Bengzon, C.J., Bautista Angelo, Labrador, Concepcion, Reyes, J.B.L., Paredes,
Dizon, Regala and Makalintal, JJ., concur.
Barrera, J., concurs in the result.
G.R. No. L-24968 April 27, 1972
SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiffappellee.
Jesus A. Avancea and Hilario G. Orsolino for defendant-appellant.
MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was
rendered on June 28, 1965 sentencing defendant Development Bank of the
Philippines (DBP) to pay actual and consequential damages to plaintiff Saura
Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the
legal rate from the date the complaint was filed and attorney's fees in the amount
of P5,000.00. The present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the
Rehabilitation Finance Corporation (RFC), before its conversion into DBP, for an
industrial loan of P500,000.00, to be used as follows: P250,000.00 for the
construction of a factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill machinery
and equipment; and P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already
been purchased by Saura on the strength of a letter of credit extended by the
Prudential Bank and Trust Co., and arrived in Davao City in July 1953; and that
to secure its release without first paying the draft, Saura, Inc. executed a trust
receipt in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan
application for P500,000.00, to be secured by a first mortgage on the factory
building to be constructed, the land site thereof, and the machinery and
equipment to be installed. Among the other terms spelled out in the resolution

were the following:

1. That the proceeds of the loan shall be utilized exclusively for the following
purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and
Gregoria Estabillo and China Engineers, Ltd. shall sign the promissory notes
jointly with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance
Corporation, subject to availability of funds, and as the construction of the factory
buildings progresses, to be certified to by an appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day
before, however, evidently having otherwise been informed of its approval,
Saura, Inc. wrote a letter to RFC, requesting a modification of the terms laid
down by it, namely: that in lieu of having China Engineers, Ltd. (which was willing
to assume liability only to the extent of its stock subscription with Saura, Inc.)
sign as co-maker on the corresponding promissory notes, Saura, Inc. would put
up a bond for P123,500.00, an amount equivalent to such subscription; and that
Maria S. Roca would be substituted for Inocencia Arellano as one of the other comakers, having acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954,
designating of the members of its Board of Governors, for certain reasons stated
in the resolution, "to reexamine all the aspects of this approved loan ... with
special reference as to the advisability of financing this particular project based
on present conditions obtaining in the operations of jute mills, and to submit his
findings thereon at the next meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again
agreed to act as co-signer for the loan, and asked that the necessary documents
be prepared in accordance with the terms and conditions specified in Resolution
No. 145. In connection with the reexamination of the project to be financed with
the loan applied for, as stated in Resolution No. 736, the parties named their
respective committees of engineers and technical men to meet with each other
and undertake the necessary studies, although in appointing its own committee
Saura, Inc. made the observation that the same "should not be taken as an
acquiescence on (its) part to novate, or accept new conditions to, the agreement
already) entered into," referring to its acceptance of the terms and conditions
mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with
F.R. Halling, representing China Engineers, Ltd., as one of the co-signers; and
the corresponding deed of mortgage, which was duly registered on the following
April 17.
It appears, however, that despite the formal execution of the loan agreement the
reexamination contemplated in Resolution No. 736 proceeded. In a meeting of

the RFC Board of Governors on June 10, 1954, at which Ramon Saura,
President of Saura, Inc., was present, it was decided to reduce the loan from
P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co.,
Inc. under Resolution No. 145, C.S., from P500,000.00 to P300,000.00. Pursuant
to Bd. Res. No. 736, c.s., authorizing the re-examination of all the various
aspects of the loan granted the Saura Import & Export Co. under Resolution No.
145, c.s., for the purpose of financing the manufacture of jute sacks in Davao,
with special reference as to the advisability of financing this particular project
based on present conditions obtaining in the operation of jute mills, and after
having heard Ramon E. Saura and after extensive discussion on the subject the
Board, upon recommendation of the Chairman, RESOLVED that the loan granted
the Saura Import & Export Co. be REDUCED from P500,000 to P300,000 and
that releases up to P100,000 may be authorized as may be necessary from time
to time to place the factory in actual operation: PROVIDED that all terms and
conditions of Resolution No. 145, c.s., not inconsistent herewith, shall remain in
full force and effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the
promissory note for China Engineers Ltd. jointly and severally with the other RFC
that his company no longer to of the loan and therefore considered the same as
cancelled as far as it was concerned. A follow-up letter dated July 2 requested
RFC that the registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of
P500,000.00 be granted. The request was denied by RFC, which added in its
letter-reply that it was "constrained to consider as cancelled the loan of
P300,000.00 ... in view of a notification ... from the China Engineers Ltd.,
expressing their desire to consider the loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and
informed RFC that China Engineers, Ltd. "will at any time reinstate their signature
as co-signer of the note if RFC releases to us the P500,000.00 originally
approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to
the original amount of P500,000.00, "it appearing that China Engineers, Ltd. is
now willing to sign the promissory notes jointly with the borrower-corporation,"
but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw
materials, the Department of Agriculture and Natural Resources shall certify to
the following:
1. That the raw materials needed by the borrower-corporation to carry out its
operation are available in the immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately
for the requirements of the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated
December 22, 1954, wherein it was explained that the certification by the
Department of Agriculture and Natural Resources was required "as the intention
of the original approval (of the loan) is to develop the manufacture of sacks on

the basis of locally available raw materials." This point is important, and sheds
light on the subsequent actuations of the parties. Saura, Inc. does not deny that
the factory he was building in Davao was for the manufacture of bags from local
raw materials. The cover page of its brochure (Exh. M) describes the project as a
"Joint venture by and between the Mindanao Industry Corporation and the Saura
Import and Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to
manufacture copra and corn bags, runners, floor mattings, carpets, draperies; out
of 100% local raw materials, principal kenaf." The explanatory note on page 1 of
the same brochure states that, the venture "is the first serious attempt in this
country to use 100% locally grown raw materials notably kenaf which is presently
grown commercially in theIsland of Mindanao where the proposed jutemill is
located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan
application in the first place, and to require, in its Resolution No. 9083, a
certification from the Department of Agriculture and Natural Resources as to the
availability of local raw materials to provide adequately for the requirements of
the factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter
of January 21, 1955: (1) stating that according to a special study made by the
Bureau of Forestry "kenaf will not be available in sufficient quantity this year or
probably even next year;" (2) requesting "assurances (from RFC) that my
company and associates will be able to bring in sufficient jute materials as may
be necessary for the full operation of the jute mill;" and (3) asking that releases of
the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equipment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the opening of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding the release of
your loan under consideration of P500,000. As stated in our letter of December
22, 1954, the releases of the loan, if revived, are proposed to be made from time
to time, subject to availability of funds towards the end that the sack factory shall
be placed in actual operating status. We shall be able to act on your request for
revised purpose and manner of releases upon re-appraisal of the securities

offered for the loan.

With respect to our requirement that the Department of Agriculture and Natural
Resources certify that the raw materials needed are available in the immediate
vicinity and that there is prospect of increased production thereof to provide
adequately the requirements of the factory, we wish to reiterate that the basis of
the original approval is to develop the manufacture of sacks on the basis of the
locally available raw materials. Your statement that you will have to rely on the
importation of jute and your request that we give you assurance that your
company will be able to bring in sufficient jute materials as may be necessary for
the operation of your factory, would not be in line with our principle in approving
the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not
pursue the matter further. Instead, it requested RFC to cancel the mortgage, and
so, on June 17, 1955 RFC executed the corresponding deed of cancellation and
delivered it to Ramon F. Saura himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of
a mortgage contract, executed on August 6, 1954, over the same property in
favor of the Prudential Bank and Trust Co., under which contract Saura, Inc. had
up to December 31 of the same year within which to pay its obligation on the
trust receipt heretofore mentioned. It appears further that for failure to pay the
said obligation the Prudential Bank and Trust Co. sued Saura, Inc. on May 15,
1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was
cancelled at the request of Saura, Inc., the latter commenced the present suit for
damages, alleging failure of RFC (as predecessor of the defendant DBP) to
comply with its obligation to release the proceeds of the loan applied for and
approved, thereby preventing the plaintiff from completing or paying contractual
commitments it had entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a
perfected contract between the parties and that the defendant was guilty of
breach thereof. The defendant pleaded below, and reiterates in this appeal: (1)
that the plaintiff's cause of action had prescribed, or that its claim had been
waived or abandoned; (2) that there was no perfected contract; and (3) that
assuming there was, the plaintiff itself did not comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in
Article 1934 of the Civil Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of commodatum
or simple loan is binding upon the parties, but the commodatum or simple loan
itself shall not be perferted until the delivery of the object of the contract.
There was undoubtedly offer and acceptance in this case: the application of
Saura, Inc. for a loan of P500,000.00 was approved by resolution of the
defendant, and the corresponding mortgage was executed and registered. But
this fact alone falls short of resolving the basic claim that the defendant failed to
fulfill its obligation and the plaintiff is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the
assumption that the factory to be constructed would utilize locally grown raw

materials, principally kenaf. There is no serious dispute about this. It was in line
with such assumption that when RFC, by Resolution No. 9083 approved on
December 17, 1954, restored the loan to the original amount of P500,000.00. it
imposed two conditions, to wit: "(1) that the raw materials needed by the
borrower-corporation to carry out its operation are available in the immediate
vicinity; and (2) that there is prospect of increased production thereof to provide
adequately for the requirements of the factory." The imposition of those
conditions was by no means a deviation from the terms of the agreement, but
rather a step in its implementation. There was nothing in said conditions that
contradicted the terms laid down in RFC Resolution No. 145, passed on January
7, 1954, namely "that the proceeds of the loan shall be utilized exclusively for
the following purposes: for construction of factory building P250,000.00; for
payment of the balance of purchase price of machinery and equipment
P240,900.00; for working capital P9,100.00." Evidently Saura, Inc. realized
that it could not meet the conditions required by RFC, and so wrote its letter of
January 21, 1955, stating that local jute "will not be able in sufficient quantity this
year or probably next year," and asking that out of the loan agreed upon the sum
of P67,586.09 be released "for raw materials and labor." This was a deviation
from the terms laid down in Resolution No. 145 and embodied in the mortgage
contract, implying as it did a diversion of part of the proceeds of the loan to
purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the
negotiations which had been going on for the implementation of the agreement
reached an impasse. Saura, Inc. obviously was in no position to comply with
RFC's conditions. So instead of doing so and insisting that the loan be released
as agreed upon, Saura, Inc. asked that the mortgage be cancelled, which was
done on June 15, 1955. The action thus taken by both parties was in the nature
cf mutual desistance what Manresa terms "mutuo disenso" 1 which is a
mode of extinguishing obligations. It is a concept that derives from the principle
that since mutual agreement can create a contract, mutual disagreement by the
parties can cause its extinguishment. 2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest
against any alleged breach of contract by RFC, or even point out that the latter's
stand was legally unjustified. Its request for cancellation of the mortgage carried
no reservation of whatever rights it believed it might have against RFC for the
latter's non-compliance. In 1962 it even applied with DBP for another loan to
finance a rice and corn project, which application was disapproved. It was only in
1964, nine years after the loan agreement had been cancelled at its own request,
that Saura, Inc. brought this action for damages.All these circumstances
demonstrate beyond doubt that the said agreement had been extinguished by
mutual desistance and that on the initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and
resolve the other issues raised in the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint
dismissed, with costs against the plaintiff-appellee.
Reyes, J.B.L., Actg. C.J., Zaldivar, Castro, Fernando, Teehankee, Barredo and

Antonio, JJ., concur.

Makasiar, J., took no part.
G.R. No. L-66653 June 19, 1986
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
BURROUGHS LIMITED AND THE COURT OF TAX APPEALS, respondents.
Sycip, Salazar, Feliciano & Hernandez Law Office for private respondent.
PARAS, J.:
Petition for certiorari to review and set aside the Decision dated June 27, 1983 of
respondent Court of Tax Appeals in its C.T.A. Case No. 3204, entitled "Burroughs
Limited vs. Commissioner of Internal Revenue" which ordered petitioner
Commissioner of Internal Revenue to grant in favor of private respondent
Burroughs Limited, tax credit in the sum of P172,058.90, representing
erroneously overpaid branch profit remittance tax.
Burroughs Limited is a foreign corporation authorized to engage in trade or
business in the Philippines through a branch office located at De la Rosa corner
Esteban Streets, Legaspi Village, Makati, Metro Manila.
Sometime in March 1979, said branch office applied with the Central Bank for
authority to remit to its parent company abroad, branch profit amounting to
P7,647,058.00. Thus, on March 14, 1979, it paid the 15% branch profit
remittance tax, pursuant to Sec. 24 (b) (2) (ii) and remitted to its head office the
amount of P6,499,999.30 computed as follows:
Amount applied for remittance................................ P7,647,058.00
Deduct: 15% branch profit
remittance tax ..............................................1,147,058.70
Net amount actually remitted.................................. P6,499,999.30
Claiming that the 15% profit remittance tax should have been computed on the
basis of the amount actually remitted (P6,499,999.30) and not on the amount
before profit remittance tax (P7,647,058.00), private respondent filed on
December 24, 1980, a written claim for the refund or tax credit of the amount of
P172,058.90 representing alleged overpaid branch profit remittance tax,
computed as follows:
Profits actually remitted .........................................P6,499,999.30
Remittance tax rate .......................................................15%
Branch profit remittance taxdue thereon ......................................................P 974,999.89
Branch profit remittance
tax paid .............................................................Pl,147,058.70
Less: Branch profit remittance
tax as above computed................................................. 974,999.89
Total amount refundable........................................... P172,058.81
On February 24, 1981, private respondent filed with respondent court, a petition
for review, docketed as C.T.A. Case No. 3204 for the recovery of the abovementioned amount of P172,058.81.

On June 27, 1983, respondent court rendered its Decision, the dispositive portion
of which reads
ACCORDINGLY, respondent Commission of Internal Revenue is hereby ordered
to grant a tax credit in favor of petitioner Burroughs Limited the amount of P
172,058.90. Without pronouncement as to costs.
SO ORDERED.
Unable to obtain a reconsideration from the aforesaid decision, petitioner filed the
instant petition before this Court with the prayers as herein earlier stated upon
the sole issue of whether the tax base upon which the 15% branch profit
remittance tax shall be imposed under the provisions of section 24(b) of the Tax
Code, as amended, is the amount applied for remittance on the profit actually
remitted after deducting the 15% profit remittance tax. Stated differently is private
respondent Burroughs Limited legally entitled to a refund of the aforementioned
amount of P172,058.90.
We rule in the affirmative. The pertinent provision of the National Revenue Code
is Sec. 24 (b) (2) (ii) which states:
Sec. 24. Rates of tax on corporations....
(b) Tax on foreign corporations. ...
(2) (ii) Tax on branch profits remittances. Any profit remitted abroad by a branch
to its head office shall be subject to a tax of fifteen per cent (15 %) ...
In a Bureau of Internal Revenue ruling dated January 21, 1980 by then Acting
Commissioner of Internal Revenue Hon. Efren I. Plana the aforequoted provision
had been interpreted to mean that "the tax base upon which the 15% branch
profit remittance tax ... shall be imposed...(is) the profit actually remitted abroad
and not on the total branch profits out of which the remittance is to be made. "
The said ruling is hereinbelow quoted as follows:
In reply to your letter of November 3, 1978, relative to your query as to the tax
base upon which the 15% branch profits remittance tax provided for under
Section 24 (b) (2) of the 1977 Tax Code shall be imposed, please be advised that
the 15% branch profit tax shall be imposed on the branch profits actually remitted
abroad and not on the total branch profits out of which the remittance is to be
made.
Please be guided accordingly.
Applying, therefore, the aforequoted ruling, the claim of private respondent that it
made an overpayment in the amount of P172,058.90 which is the difference
between the remittance tax actually paid of Pl,147,058.70 and the remittance tax
that should have been paid of P974,999,89, computed as follows
Profits actually remitted......................................... P6,499,999.30
Remittance tax rate.............................................................. 15%
Remittance tax due................................................... P974,999.89
is well-taken. As correctly held by respondent Court in its assailed decisionRespondent concedes at least that in his ruling dated January 21, 1980 he held
that under Section 24 (b) (2) of the Tax Code the 15% branch profit remittance
tax shall be imposed on the profit actually remitted abroad and not on the total
branch profit out of which the remittance is to be made. Based on such ruling
petitioner should have paid only the amount of P974,999.89 in remittance tax

computed by taking the 15% of the profits of P6,499,999.89 in remittance tax

actually remitted to its head office in the United States, instead of Pl,147,058.70,
on its net profits of P7,647,058.00. Undoubtedly, petitioner has overpaid its
branch profit remittance tax in the amount of P172,058.90.
Petitioner contends that respondent is no longer entitled to a refund because
Memorandum Circular No. 8-82 dated March 17, 1982 had revoked and/or
repealed the BIR ruling of January 21, 1980. The said memorandum circular
states
Considering that the 15% branch profit remittance tax is imposed and collected at
source, necessarily the tax base should be the amount actually applied for by the
branch with the Central Bank of the Philippines as profit to be remitted abroad.
Petitioner's aforesaid contention is without merit. What is applicable in the case
at bar is still the Revenue Ruling of January 21, 1980 because private
respondent Burroughs Limited paid the branch profit remittance tax in question
on March 14, 1979. Memorandum Circular No. 8-82 dated March 17, 1982
cannot be given retroactive effect in the light of Section 327 of the National
Internal Revenue Code which providesSec. 327. Non-retroactivity of rulings. Any revocation, modification, or reversal of
any of the rules and regulations promulgated in accordance with the preceding
section or any of the rulings or circulars promulgated by the Commissioner shag
not be given retroactive application if the revocation, modification, or reversal will
be prejudicial to the taxpayer except in the following cases (a) where the
taxpayer deliberately misstates or omits material facts from his return or in any
document required of him by the Bureau of Internal Revenue; (b) where the facts
subsequently gathered by the Bureau of Internal Revenue are materially different
from the facts on which the ruling is based, or (c) where the taxpayer acted in
bad faith. (ABS-CBN Broadcasting Corp. v. CTA, 108 SCRA 151-152)
The prejudice that would result to private respondent Burroughs Limited by a
retroactive application of Memorandum Circular No. 8-82 is beyond question for it
would be deprived of the substantial amount of P172,058.90. And, insofar as the
enumerated exceptions are concerned, admittedly, Burroughs Limited does not
fall under any of them.
WHEREFORE, the assailed decision of respondent Court of Tax Appeals is
hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Feria, Fernan, Alampay and Gutierrez, Jr., JJ., concur.
G.R. No. 133632
February 15, 2002
BPI INVESTMENT CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and ALS MANAGEMENT & DEVELOPMENT
CORPORATION, respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the
Court of Appeals and its resolution dated April 21, 1998, in CA-G.R. CV No.

38887. The appellate court affirmed the judgment of the Regional Trial Court of
Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of mortgage
by petitioner BPI Investment Corporation (BPIIC for brevity) against private
respondents ALS Management and Development Corporation and Antonio K.
Litonjua,1 consolidated with (b) Civil Case No. 52093, for damages with prayer for
the issuance of a writ of preliminary injunction by the private respondents against
said petitioner.
The trial court had held that private respondents were not in default in the
payment of their monthly amortization, hence, the extrajudicial foreclosure
conducted by BPIIC was premature and made in bad faith. It awarded private
respondents the amount of P300,000 for moral damages, P50,000 for exemplary
damages, and P50,000 for attorneys fees and expenses for litigation. It likewise
dismissed the foreclosure suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala
Investment and Development Corporation (AIDC), the predecessor of petitioner
BPIIC, for the construction of a house on his lot in New Alabang Village,
Muntinlupa. Said house and lot were mortgaged to AIDC to secure the loan.
Sometime in 1980, Roa sold the house and lot to private respondents ALS and
Antonio Litonjua for P850,000. They paid P350,000 in cash and assumed the
P500,000 balance of Roas indebtedness with AIDC. The latter, however, was not
willing to extend the old interest rate to private respondents and proposed to
grant them a new loan of P500,000 to be applied to Roas debt and secured by
the same property, at an interest rate of 20% per annum and service fee of 1%
per annum on the outstanding principal balance payable within ten years in equal
monthly amortization of P9,996.58 and penalty interest at the rate of 21% per
annum per day from the date the amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed
containing the above stipulations with the provision that payment of the monthly
amortization shall commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying
BPIIC the sum of P190,601.35. This reduced Roas principal balance to
P457,204.90 which, in turn, was liquidated when BPIIC applied thereto the
proceeds of private respondents loan of P500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87,
purporting to be what was left of their loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against private
respondents on the ground that they failed to pay the mortgage indebtedness
which from May 1, 1981 to June 30, 1984, amounted to Four Hundred Seventy
Five Thousand Five Hundred Eighty Five and 31/100 Pesos (P475,585.31). A
notice of sheriffs sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against
BPIIC. They alleged, among others, that they were not in arrears in their
payment, but in fact made an overpayment as of June 30, 1984. They maintained
that they should not be made to pay amortization before the actual release of the
P500,000 loan in August and September 1982. Further, out of the P500,000 loan,

only the total amount of P464,351.77 was released to private respondents.

Hence, applying the effects of legal compensation, the balance of P35,648.23
should be applied to the initial monthly amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos.
11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and
Development Corporation and Antonio K. Litonjua and against BPI Investment
Corporation, holding that the amount of loan granted by BPI to ALS and Litonjua
was only in the principal sum of P464,351.77, with interest at 20% plus service
charge of 1% per annum, payable on equal monthly and successive
amortizations at P9,283.83 for ten (10) years or one hundred twenty (120)
months. The amortization schedule attached as Annex "A" to the "Deed of
Mortgage" is correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages
when BPI caused their publication in a newspaper of general circulation as
defaulting debtors, and therefore orders BPI to pay ALS and Litonjua the
following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorneys fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being
premature.
Costs against BPI.
SO ORDERED.2
Both parties appealed to the Court of Appeals. However, private respondents
appeal was dismissed for non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the
dispositive portion reads:
WHEREFORE, finding no error in the appealed decision the same is hereby
AFFIRMED in toto.
SO ORDERED.3
In its decision, the Court of Appeals reasoned that a simple loan is perfected only
upon the delivery of the object of the contract. The contract of loan between
BPIIC and ALS & Litonjua was perfected only on September 13, 1982, the date
when BPIIC released the purported balance of the P500,000 loan after deducting
therefrom the value of Roas indebtedness. Thus, payment of the monthly
amortization should commence only a month after the said date, as can be
inferred from the stipulations in the contract. This, despite the express agreement
of the parties that payment shall commence on May 1, 1981. From October 1982
to June 1984, the total amortization due was only P194,960.43. Evidence
showed that private respondents had an overpayment, because as of June 1984,
they already paid a total amount of P201,791.96. Therefore, there was no basis
for BPIIC to extrajudicially foreclose the mortgage and cause the publication in
newspapers concerning private respondents delinquency in the payment of their
loan. This fact constituted sufficient ground for moral damages in favor of private
respondents.

The motion for reconsideration filed by petitioner BPIIC was likewise denied,
hence this petition, where BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL
CONTRACT IN THE LIGHT OF THE RULE LAID DOWN IN BONNEVIE VS.
COURT OF APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND
EXEMPLARY DAMAGES AND ATTORNEYS FEES IN THE FACE OF
IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE RULE LAID
DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA
707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling
that because a simple loan is perfected upon the delivery of the object of the
contract, the loan contract in this case was perfected only on September 13,
1982. Petitioner claims that a contract of loan is a consensual contract, and a
loan contract is perfected at the time the contract of mortgage is executed
conformably with our ruling in Bonnevie v. Court of Appeals, 125 SCRA 122. In
the present case, the loan contract was perfected on March 31, 1981, the date
when the mortgage deed was executed, hence, the amortization and interests on
the loan should be computed from said date.
Petitioner also argues that while the documents showed that the loan was
released only on August 1982, the loan was actually released on March 31,
1981, when BPIIC issued a cancellation of mortgage of Frank Roas loan. This
finds support in the registration on March 31, 1981 of the Deed of Absolute Sale
executed by Roa in favor of ALS, transferring the title of the property to ALS, and
ALS executing the Mortgage Deed in favor of BPIIC. Moreover, petitioner claims,
the delay in the release of the loan should be attributed to private respondents.
As BPIIC only agreed to extend a P500,000 loan, private respondents were
required to reduce Frank Roas loan below said amount. According to petitioner,
private respondents were only able to do so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the
Civil Code,4 a simple loan is perfected upon the delivery of the object of the
contract, hence a real contract. In this case, even though the loan contract was
signed on March 31, 1981, it was perfected only on September 13, 1982, when
the full loan was released to private respondents. They submit that petitioner
misread Bonnevie. To give meaning to Article 1934, according to private
respondents, Bonnevie must be construed to mean that the contract to extend
the loan was perfected on March 31, 1981 but the contract of loan itself was only
perfected upon the delivery of the full loan to private respondents on September
13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan
contract was perfected on March 31, 1981, and their payment did not start a
month thereafter, still no default took place. According to private respondents, a
perfected loan agreement imposes reciprocal obligations, where the obligation or
promise of each party is the consideration of the other party. In this case, the
consideration for BPIIC in entering into the loan contract is the promise of private
respondents to pay the monthly amortization. For the latter, it is the promise of

BPIIC to deliver the money. In reciprocal obligations, neither party incurs in delay
if the other does not comply or is not ready to comply in a proper manner with
what is incumbent upon him. Therefore, private respondents conclude, they did
not incur in delay when they did not commence paying the monthly amortization
on May 1, 1981, as it was only on September 13, 1982 when petitioner fully
complied with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract
but a real contract. It is perfected only upon the delivery of the object of the
contract.5 Petitioner misapplied Bonnevie. The contract in Bonnevie declared by
this Court as a perfected consensual contract falls under the first clause of Article
1934, Civil Code. It is an accepted promise to deliver something by way of simple
loan.
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines, 44
SCRA 445, petitioner applied for a loan of P500,000 with respondent bank. The
latter approved the application through a board resolution. Thereafter, the
corresponding mortgage was executed and registered. However, because of acts
attributable to petitioner, the loan was not released. Later, petitioner instituted an
action for damages. We recognized in this case, a perfected consensual contract
which under normal circumstances could have made the bank liable for not
releasing the loan. However, since the fault was attributable to petitioner therein,
the court did not award it damages.
A perfected consensual contract, as shown above, can give rise to an action for
damages. However, said contract does not constitute the real contract of loan
which requires the delivery of the object of the contract for its perfection and
which gives rise to obligations only on the part of the borrower.6
In the present case, the loan contract between BPI, on the one hand, and ALS
and Litonjua, on the other, was perfected only on September 13, 1982, the date
of the second release of the loan. Following the intentions of the parties on the
commencement of the monthly amortization, as found by the Court of Appeals,
private respondents obligation to pay commenced only on October 13, 1982, a
month after the perfection of the contract.7
We also agree with private respondents that a contract of loan involves a
reciprocal obligation, wherein the obligation or promise of each party is the
consideration for that of the other.8 As averred by private respondents, the
promise of BPIIC to extend and deliver the loan is upon the consideration that
ALS and Litonjua shall pay the monthly amortization commencing on May 1,
1981, one month after the supposed release of the loan. It is a basic principle in
reciprocal obligations that neither party incurs in delay, if the other does not
comply or is not ready to comply in a proper manner with what is incumbent upon
him.9 Only when a party has performed his part of the contract can he demand
that the other party also fulfills his own obligation and if the latter fails, default
sets in. Consequently, petitioner could only demand for the payment of the
monthly amortization after September 13, 1982 for it was only then when it
complied with its obligation under the loan contract. Therefore, in computing the
amount due as of the date when BPIIC extrajudicially caused the foreclosure of
the mortgage, the starting date is October 13, 1982 and not May 1, 1981.

Other points raised by petitioner in connection with the first issue, such as the
date of actual release of the loan and whether private respondents were the
cause of the delay in the release of the loan, are factual. Since petitioner has not
shown that the instant case is one of the exceptions to the basic rule that only
questions of law can be raised in a petition for review under Rule 45 of the Rules
of Court,10 factual matters need not tarry us now. On these points we are bound
by the findings of the appellate and trial courts.
On the second issue, petitioner claims that it should not be held liable for moral
and exemplary damages for it did not act maliciously when it initiated the
foreclosure proceedings. It merely exercised its right under the mortgage contract
because
private
respondents
were
irregular
in
their
monthly
amortization.1wphi1 It invoked our ruling in Social Security System vs. Court of
Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded
by the Court of Appeals "the negligence of the appellant is not so gross as to
warrant moral and temperate damages," except that, said Court reduced those
damages by only P5,000.00 instead of eliminating them. Neither can we agree
with the findings of both the Trial Court and respondent Court that the SSS had
acted maliciously or in bad faith. The SSS was of the belief that it was acting in
the legitimate exercise of its right under the mortgage contract in the face of
irregular payments made by private respondents and placed reliance on the
automatic acceleration clause in the contract. The filing alone of the foreclosure
application should not be a ground for an award of moral damages in the same
way that a clearly unfounded civil action is not among the grounds for moral
damages.
Private respondents counter that BPIIC was guilty of bad faith and should be
liable for said damages because it insisted on the payment of amortization on the
loan even before it was released. Further, it did not make the corresponding
deduction in the monthly amortization to conform to the actual amount of loan
released, and it immediately initiated foreclosure proceedings when private
respondents failed to make timely payment.
But as admitted by private respondents themselves, they were irregular in their
payment of monthly amortization. Conformably with our ruling in SSS, we can not
properly declare BPIIC in bad faith. Consequently, we should rule out the award
of moral and exemplary damages.11
However, in our view, BPIIC was negligent in relying merely on the entries found
in the deed of mortgage, without checking and correspondingly adjusting its
records on the amount actually released to private respondents and the date
when it was released. Such negligence resulted in damage to private
respondents, for which an award of nominal damages should be given in
recognition of their rights which were violated by BPIIC. 12 For this purpose, the
amount of P25,000 is sufficient.
Lastly, as in SSS where we awarded attorneys fees because private
respondents were compelled to litigate, we sustain the award of P50,000 in favor
of private respondents as attorneys fees.
WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals

and its resolution dated April 21, 1998, are AFFIRMED WITH MODIFICATION as
to the award of damages. The award of moral and exemplary damages in favor
of private respondents is DELETED, but the award to them of attorneys fees in
the amount of P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay
private respondents P25,000 as nominal damages. Costs against petitioner.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Buena, and De Leon, Jr., JJ., concur.
G.R. No. 115324
February 19, 2003
PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL
BANK), petitioner,
vs.
HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision1 of the Court of Appeals
dated June 25, 1991 in CA-G.R. CV No. 11791 and of its Resolution 2 dated May
5, 1994, denying the motion for reconsideration of said decision filed by petitioner
Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor
and friend Angeles Sanchez to help her friend and townmate, Col. Arturo
Doronilla, in incorporating his business, the Sterela Marketing and Services
("Sterela" for brevity). Specifically, Sanchez asked private respondent to deposit
in a bank a certain amount of money in the bank account of Sterela for purposes
of its incorporation. She assured private respondent that he could withdraw his
money from said account within a months time. Private respondent asked
Sanchez to bring Doronilla to their house so that they could discuss Sanchezs
request.3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella
Dumagpi, Doronillas private secretary, met and discussed the matter. Thereafter,
relying on the assurances and representations of Sanchez and Doronilla, private
respondent issued a check in the amount of Two Hundred Thousand Pesos
(P200,000.00) in favor of Sterela. Private respondent instructed his wife, Mrs.
Inocencia Vives, to accompany Doronilla and Sanchez in opening a savings
account in the name of Sterela in the Buendia, Makati branch of Producers Bank
of the Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went to the
bank to deposit the check. They had with them an authorization letter from
Doronilla authorizing Sanchez and her companions, "in coordination with Mr.
Rufo Atienza," to open an account for Sterela Marketing Services in the amount
of P200,000.00. In opening the account, the authorized signatories were
Inocencia Vives and/or Angeles Sanchez. A passbook for Savings Account No.
10-1567 was thereafter issued to Mrs. Vives. 4
Subsequently, private respondent learned that Sterela was no longer holding
office in the address previously given to him. Alarmed, he and his wife went to
the Bank to verify if their money was still intact. The bank manager referred them
to Mr. Rufo Atienza, the assistant manager, who informed them that part of the

money in Savings Account No. 10-1567 had been withdrawn by Doronilla, and
that only P90,000.00 remained therein. He likewise told them that Mrs. Vives
could not withdraw said remaining amount because it had to answer for some
postdated checks issued by Doronilla. According to Atienza, after Mrs. Vives and
Sanchez opened Savings Account No. 10-1567, Doronilla opened Current
Account No. 10-0320 for Sterela and authorized the Bank to debit Savings
Account No. 10-1567 for the amounts necessary to cover overdrawings in
Current Account No. 10-0320. In opening said current account, Sterela, through
Doronilla, obtained a loan of P175,000.00 from the Bank. To cover payment
thereof, Doronilla issued three postdated checks, all of which were dishonored.
Atienza also said that Doronilla could assign or withdraw the money in Savings
Account No. 10-1567 because he was the sole proprietor of Sterela. 5
Private respondent tried to get in touch with Doronilla through Sanchez. On June
29, 1979, he received a letter from Doronilla, assuring him that his money was
intact and would be returned to him. On August 13, 1979, Doronilla issued a
postdated check for Two Hundred Twelve Thousand Pesos (P212,000.00) in
favor of private respondent. However, upon presentment thereof by private
respondent to the drawee bank, the check was dishonored. Doronilla requested
private respondent to present the same check on September 15, 1979 but when
the latter presented the check, it was again dishonored. 6
Private respondent referred the matter to a lawyer, who made a written demand
upon Doronilla for the return of his clients money. Doronilla issued another check
for P212,000.00 in private respondents favor but the check was again
dishonored for insufficiency of funds.7
Private respondent instituted an action for recovery of sum of money in the
Regional Trial Court (RTC) in Pasig, Metro Manila against Doronilla, Sanchez,
Dumagpi and petitioner. The case was docketed as Civil Case No. 44485. He
also filed criminal actions against Doronilla, Sanchez and Dumagpi in the RTC.
However, Sanchez passed away on March 16, 1985 while the case was pending
before the trial court. On October 3, 1995, the RTC of Pasig, Branch 157,
promulgated its Decision in Civil Case No. 44485, the dispositive portion of which
reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing
defendants Arturo J. Doronila, Estrella Dumagpi and Producers Bank of the
Philippines to pay plaintiff Franklin Vives jointly and severally
(a) the amount of P200,000.00, representing the money deposited, with interest
at the legal rate from the filing of the complaint until the same is fully paid;
(b) the sum of P50,000.00 for moral damages and a similar amount for
exemplary damages;
(c) the amount of P40,000.00 for attorneys fees; and
(d) the costs of the suit.
SO ORDERED.8
Petitioner appealed the trial courts decision to the Court of Appeals. In its
Decision dated June 25, 1991, the appellate court affirmed in toto the decision of
the RTC.9 It likewise denied with finality petitioners motion for reconsideration in
its Resolution dated May 5, 1994.10

On June 30, 1994, petitioner filed the present petition, arguing that
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE
TRANSACTION
BETWEEN
THE
DEFENDANT
DORONILLA
AND
RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT
ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT
PETITIONERS BANK MANAGER, MR. RUFO ATIENZA, CONNIVED WITH
THE OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be
PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER
SHOULD BE HELD LIABLE UNDER THE PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE
RECORDS OF THE REGIONAL TRIAL COURT AND AFFIRMING THE
JUDGMENT APPEALED FROM, AS THE FINDINGS OF THE REGIONAL TRIAL
COURT WERE BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE
CITED DECISION IN SALUDARES VS. MARTINEZ, 29 SCRA 745,
UPHOLDING THE LIABILITY OF AN EMPLOYER FOR ACTS COMMITTED BY
AN EMPLOYEE IS APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE
DECISION OF THE LOWER COURT THAT HEREIN PETITIONER BANK IS
JOINTLY AND SEVERALLY LIABLE WITH THE OTHER DEFENDANTS FOR
THE AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT
DEPOSIT, P50,000.00 FOR MORAL DAMAGES, P50,000.00 FOR EXEMPLARY
DAMAGES, P40,000.00 FOR ATTORNEYS FEES AND THE COSTS OF SUIT.11
Private respondent filed his Comment on September 23, 1994. Petitioner filed its
Reply thereto on September 25, 1995. The Court then required private
respondent to submit a rejoinder to the reply. However, said rejoinder was filed
only on April 21, 1997, due to petitioners delay in furnishing private respondent
with copy of the reply12 and several substitutions of counsel on the part of private
respondent.13 On January 17, 2001, the Court resolved to give due course to the
petition and required the parties to submit their respective memoranda. 14
Petitioner filed its memorandum on April 16, 2001 while private respondent
submitted his memorandum on March 22, 2001.
Petitioner contends that the transaction between private respondent and
Doronilla is a simple loan (mutuum) since all the elements of a mutuum are
present: first, what was delivered by private respondent to Doronilla was money,
a consumable thing; and second, the transaction was onerous as Doronilla was
obliged to pay interest, as evidenced by the check issued by Doronilla in the
amount of P212,000.00, or P12,000 more than what private respondent
deposited in Sterelas bank account. 15 Moreover, the fact that private respondent
sued his good friend Sanchez for his failure to recover his money from Doronilla

shows that the transaction was not merely gratuitous but "had a business angle"
to it. Hence, petitioner argues that it cannot be held liable for the return of private
respondents P200,000.00 because it is not privy to the transaction between the
latter and Doronilla.16
It argues further that petitioners Assistant Manager, Mr. Rufo Atienza, could not
be faulted for allowing Doronilla to withdraw from the savings account of Sterela
since the latter was the sole proprietor of said company. Petitioner asserts that
Doronillas May 8, 1979 letter addressed to the bank, authorizing Mrs. Vives and
Sanchez to open a savings account for Sterela, did not contain any authorization
for these two to withdraw from said account. Hence, the authority to withdraw
therefrom remained exclusively with Doronilla, who was the sole proprietor of
Sterela, and who alone had legal title to the savings account. 17 Petitioner points
out that no evidence other than the testimonies of private respondent and Mrs.
Vives was presented during trial to prove that private respondent deposited his
P200,000.00 in Sterelas account for purposes of its incorporation. 18 Hence,
petitioner should not be held liable for allowing Doronilla to withdraw from
Sterelas savings account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in affirming the trial courts
decision since the findings of fact therein were not accord with the evidence
presented by petitioner during trial to prove that the transaction between private
respondent and Doronilla was a mutuum, and that it committed no wrong in
allowing Doronilla to withdraw from Sterelas savings account. 19
Finally, petitioner claims that since there is no wrongful act or omission on its
part, it is not liable for the actual damages suffered by private respondent, and
neither may it be held liable for moral and exemplary damages as well as
attorneys fees.20
Private respondent, on the other hand, argues that the transaction between him
and Doronilla is not a mutuum but an accommodation, 21 since he did not actually
part with the ownership of his P200,000.00 and in fact asked his wife to deposit
said amount in the account of Sterela so that a certification can be issued to the
effect that Sterela had sufficient funds for purposes of its incorporation but at the
same time, he retained some degree of control over his money through his wife
who was made a signatory to the savings account and in whose possession the
savings account passbook was given.22
He likewise asserts that the trial court did not err in finding that petitioner,
Atienzas employer, is liable for the return of his money. He insists that Atienza,
petitioners assistant manager, connived with Doronilla in defrauding private
respondent since it was Atienza who facilitated the opening of Sterelas current
account three days after Mrs. Vives and Sanchez opened a savings account with
petitioner for said company, as well as the approval of the authority to debit
Sterelas savings account to cover any overdrawings in its current account. 23
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in
a petition for review filed with this Court. The Court has repeatedly held that it is
not its function to analyze and weigh all over again the evidence presented by
the parties during trial.24 The Courts jurisdiction is in principle limited to reviewing

errors of law that might have been committed by the Court of Appeals. 25
Moreover, factual findings of courts, when adopted and confirmed by the Court of
Appeals, are final and conclusive on this Court unless these findings are not
supported by the evidence on record. 26 There is no showing of any
misapprehension of facts on the part of the Court of Appeals in the case at bar
that would require this Court to review and overturn the factual findings of that
court, especially since the conclusions of fact of the Court of Appeals and the trial
court are not only consistent but are also amply supported by the evidence on
record.
No error was committed by the Court of Appeals when it ruled that the
transaction between private respondent and Doronilla was a commodatum and
not a mutuum. A circumspect examination of the records reveals that the
transaction between them was a commodatum. Article 1933 of the Civil Code
distinguishes between the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something
not consumable so that the latter may use the same for a certain time and return
it, in which case the contract is called a commodatum; or money or other
consumable thing, upon the condition that the same amount of the same kind
and quality shall be paid, in which case the contract is simply called a loan or
mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in
simple loan, ownership passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a
consumable thing, such as money, the contract would be a mutuum. However,
there are some instances where a commodatum may have for its object a
consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the
contract is not the consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when
the intention of the parties is to lend consumable goods and to have the very
same goods returned at the end of the period agreed upon, the loan is a
commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial
consideration in determining the actual character of a contract. 27 In case of doubt,
the contemporaneous and subsequent acts of the parties shall be considered in
such determination.28
As correctly pointed out by both the Court of Appeals and the trial court, the
evidence shows that private respondent agreed to deposit his money in the
savings account of Sterela specifically for the purpose of making it appear "that
said firm had sufficient capitalization for incorporation, with the promise that the
amount shall be returned within thirty (30) days." 29 Private respondent merely
"accommodated" Doronilla by lending his money without consideration, as a
favor to his good friend Sanchez. It was however clear to the parties to the
transaction that the money would not be removed from Sterelas savings account

and would be returned to private respondent after thirty (30) days.

Doronillas attempts to return to private respondent the amount of P200,000.00
which the latter deposited in Sterelas account together with an additional
P12,000.00, allegedly representing interest on the mutuum, did not convert the
transaction from a commodatum into a mutuum because such was not the intent
of the parties and because the additional P12,000.00 corresponds to the fruits of
the lending of the P200,000.00. Article 1935 of the Civil Code expressly states
that "[t]he bailee in commodatum acquires the use of the thing loaned but not its
fruits." Hence, it was only proper for Doronilla to remit to private respondent the
interest accruing to the latters money deposited with petitioner.
Neither does the Court agree with petitioners contention that it is not solidarily
liable for the return of private respondents money because it was not privy to the
transaction between Doronilla and private respondent. The nature of said
transaction, that is, whether it is a mutuum or a commodatum, has no bearing on
the question of petitioners liability for the return of private respondents money
because the factual circumstances of the case clearly show that petitioner,
through its employee Mr. Atienza, was partly responsible for the loss of private
respondents money and is liable for its restitution.
Petitioners rules for savings deposits written on the passbook it issued Mrs.
Vives on behalf of Sterela for Savings Account No. 10-1567 expressly states that

"2. Deposits and withdrawals must be made by the depositor personally or upon
his written authority duly authenticated, and neither a deposit nor a withdrawal
will be permitted except upon the production of the depositor savings bank book
in which will be entered by the Bank the amount deposited or withdrawn." 30
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza,
the Assistant Branch Manager for the Buendia Branch of petitioner, to withdraw
therefrom even without presenting the passbook (which Atienza very well knew
was in the possession of Mrs. Vives), not just once, but several times. Both the
Court of Appeals and the trial court found that Atienza allowed said withdrawals
because he was party to Doronillas "scheme" of defrauding private respondent:
XXX
But the scheme could not have been executed successfully without the
knowledge, help and cooperation of Rufo Atienza, assistant manager and cashier
of the Makati (Buendia) branch of the defendant bank. Indeed, the evidence
indicates that Atienza had not only facilitated the commission of the fraud but he
likewise helped in devising the means by which it can be done in such manner as
to make it appear that the transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendants Buendia branch precisely
because Atienza was a key officer therein. The records show that plaintiff had
suggested that the P200,000.00 be deposited in his bank, the Manila Banking
Corporation, but Doronilla and Dumagpi insisted that it must be in defendants
branch in Makati for "it will be easier for them to get a certification". In fact before
he was introduced to plaintiff, Doronilla had already prepared a letter addressed
to the Buendia branch manager authorizing Angeles B. Sanchez and company to
open a savings account for Sterela in the amount of P200,000.00, as "per

coordination with Mr. Rufo Atienza, Assistant Manager of the Bank x x x" (Exh. 1).
This is a clear manifestation that the other defendants had been in consultation
with Atienza from the inception of the scheme. Significantly, there were
testimonies and admission that Atienza is the brother-in-law of a certain Romeo
Mirasol, a friend and business associate of Doronilla.1awphi1.nt
Then there is the matter of the ownership of the fund. Because of the
"coordination" between Doronilla and Atienza, the latter knew before hand that
the money deposited did not belong to Doronilla nor to Sterela. Aside from such
foreknowledge, he was explicitly told by Inocencia Vives that the money
belonged to her and her husband and the deposit was merely to accommodate
Doronilla. Atienza even declared that the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records
disclose that the only ones empowered to withdraw the same were Inocencia
Vives and Angeles B. Sanchez. In the signature card pertaining to this account
(Exh. J), the authorized signatories were Inocencia Vives &/or Angeles B.
Sanchez. Atienza stated that it is the usual banking procedure that withdrawals of
savings deposits could only be made by persons whose authorized signatures
are in the signature cards on file with the bank. He, however, said that this
procedure was not followed here because Sterela was owned by Doronilla. He
explained that Doronilla had the full authority to withdraw by virtue of such
ownership. The Court is not inclined to agree with Atienza. In the first place, he
was all the time aware that the money came from Vives and did not belong to
Sterela. He was also told by Mrs. Vives that they were only accommodating
Doronilla so that a certification can be issued to the effect that Sterela had a
deposit of so much amount to be sued in the incorporation of the firm. In the
second place, the signature of Doronilla was not authorized in so far as that
account is concerned inasmuch as he had not signed the signature card provided
by the bank whenever a deposit is opened. In the third place, neither Mrs. Vives
nor Sanchez had given Doronilla the authority to withdraw.
Moreover, the transfer of fund was done without the passbook having been
presented. It is an accepted practice that whenever a withdrawal is made in a
savings deposit, the bank requires the presentation of the passbook. In this case,
such recognized practice was dispensed with. The transfer from the savings
account to the current account was without the submission of the passbook
which Atienza had given to Mrs. Vives. Instead, it was made to appear in a
certification signed by Estrella Dumagpi that a duplicate passbook was issued to
Sterela because the original passbook had been surrendered to the Makati
branch in view of a loan accommodation assigning the savings account (Exh. C).
Atienza, who undoubtedly had a hand in the execution of this certification, was
aware that the contents of the same are not true. He knew that the passbook was
in the hands of Mrs. Vives for he was the one who gave it to her. Besides, as
assistant manager of the branch and the bank official servicing the savings and
current accounts in question, he also was aware that the original passbook was
never surrendered. He was also cognizant that Estrella Dumagpi was not among
those authorized to withdraw so her certification had no effect whatsoever.
The circumstance surrounding the opening of the current account also

demonstrate that Atienzas active participation in the perpetration of the fraud and
deception that caused the loss. The records indicate that this account was
opened three days later after the P200,000.00 was deposited. In spite of his
disclaimer, the Court believes that Atienza was mindful and posted regarding the
opening of the current account considering that Doronilla was all the while in
"coordination" with him. That it was he who facilitated the approval of the
authority to debit the savings account to cover any overdrawings in the current
account (Exh. 2) is not hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject
of this case. x x x.31
Under Article 2180 of the Civil Code, employers shall be held primarily and
solidarily liable for damages caused by their employees acting within the scope
of their assigned tasks. To hold the employer liable under this provision, it must
be shown that an employer-employee relationship exists, and that the employee
was acting within the scope of his assigned task when the act complained of was
committed.32 Case law in the United States of America has it that a corporation
that entrusts a general duty to its employee is responsible to the injured party for
damages flowing from the employees wrongful act done in the course of his
general authority, even though in doing such act, the employee may have failed
in its duty to the employer and disobeyed the latters instructions. 33
There is no dispute that Atienza was an employee of petitioner. Furthermore,
petitioner did not deny that Atienza was acting within the scope of his authority as
Assistant Branch Manager when he assisted Doronilla in withdrawing funds from
Sterelas Savings Account No. 10-1567, in which account private respondents
money was deposited, and in transferring the money withdrawn to Sterelas
Current Account with petitioner. Atienzas acts of helping Doronilla, a customer of
the petitioner, were obviously done in furtherance of petitioners interests 34 even
though in the process, Atienza violated some of petitioners rules such as those
stipulated in its savings account passbook. 35 It was established that the transfer
of funds from Sterelas savings account to its current account could not have
been accomplished by Doronilla without the invaluable assistance of Atienza, and
that it was their connivance which was the cause of private respondents loss.
The foregoing shows that the Court of Appeals correctly held that under Article
2180 of the Civil Code, petitioner is liable for private respondents loss and is
solidarily liable with Doronilla and Dumagpi for the return of the P200,000.00
since it is clear that petitioner failed to prove that it exercised due diligence to
prevent the unauthorized withdrawals from Sterelas savings account, and that it
was not negligent in the selection and supervision of Atienza. Accordingly, no
error was committed by the appellate court in the award of actual, moral and
exemplary damages, attorneys fees and costs of suit to private respondent.
WHEREFORE, the petition is hereby DENIED. The assailed Decision and
Resolution of the Court of Appeals are AFFIRMED.
SO ORDERED.
Bellosillo, (Chairman), Mendoza, Quisumbing and Austria-Martinez, JJ., concur.
G.R. No. 146364

June 3, 2004

COLITO T. PAJUYO, petitioner,

vs.
COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review1 of the 21 June 2000 Decision2 and 14
December 2000 Resolution of the Court of Appeals in CA-G.R. SP No. 43129.
The Court of Appeals set aside the 11 November 1996 decision 3 of the Regional
Trial Court of Quezon City, Branch 81, 4 affirming the 15 December 1995 decision 5
of the Metropolitan Trial Court of Quezon City, Branch 31. 6
The Antecedents
In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid P400 to a certain Pedro
Perez for the rights over a 250-square meter lot in Barrio Payatas, Quezon City.
Pajuyo then constructed a house made of light materials on the lot. Pajuyo and
his family lived in the house from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra
("Guevarra") executed a Kasunduan or agreement. Pajuyo, as owner of the
house, allowed Guevarra to live in the house for free provided Guevarra would
maintain the cleanliness and orderliness of the house. Guevarra promised that
he would voluntarily vacate the premises on Pajuyos demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and
demanded that Guevarra vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court
of Quezon City, Branch 31 ("MTC").
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of
possession over the lot where the house stands because the lot is within the 150
hectares set aside by Proclamation No. 137 for socialized housing. Guevarra
pointed out that from December 1985 to September 1994, Pajuyo did not show
up or communicate with him. Guevarra insisted that neither he nor Pajuyo has
valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The
dispositive portion of the MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the
plaintiff and against defendant, ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person or
persons claiming any right under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (P300.00) monthly as
reasonable compensation for the use of the premises starting from the last
demand;
C) pay plaintiff the sum of P3,000.00 as and by way of attorneys fees; and
D) pay the cost of suit.
SO ORDERED.7
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City,
Branch 81 ("RTC").
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive

portion of the RTC decision reads:

WHEREFORE, premises considered, the Court finds no reversible error in the
decision appealed from, being in accord with the law and evidence presented,
and the same is hereby affirmed en toto.
SO ORDERED.8
Guevarra received the RTC decision on 29 November 1996. Guevarra had only
until 14 December 1996 to file his appeal with the Court of Appeals. Instead of
filing his appeal with the Court of Appeals, Guevarra filed with the Supreme Court
a "Motion for Extension of Time to File Appeal by Certiorari Based on Rule 42"
("motion for extension"). Guevarra theorized that his appeal raised pure
questions of law. The Receiving Clerk of the Supreme Court received the motion
for extension on 13 December 1996 or one day before the right to appeal
expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme
Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution 9
referring the motion for extension to the Court of Appeals which has concurrent
jurisdiction over the case. The case presented no special and important matter
for the Supreme Court to take cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a
Resolution10 granting the motion for extension conditioned on the timeliness of
the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on
Guevaras petition for review. On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC
decision. The dispositive portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in
Civil Case No. Q-96-26943 is REVERSED and SET ASIDE; and it is hereby
declared that the ejectment case filed against defendant-appellant is without
factual and legal basis.
SO ORDERED.11
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that
the Court of Appeals should have dismissed outright Guevarras petition for
review because it was filed out of time. Moreover, it was Guevarras counsel and
not Guevarra who signed the certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying
Pajuyos motion for reconsideration. The dispositive portion of the resolution
reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby
DENIED. No costs.
SO ORDERED.12
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra
is the house and not the lot. Pajuyo is the owner of the house, and he allowed
Guevarra to use the house only by tolerance. Thus, Guevarras refusal to vacate
the house on Pajuyos demand made Guevarras continued possession of the

house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant
relationship between Pajuyo and Guevarra. The terms of the Kasunduan bound
Guevarra to return possession of the house on demand.
The RTC rejected Guevarras claim of a better right under Proclamation No. 137,
the Revised National Government Center Housing Project Code of Policies and
other pertinent laws. In an ejectment suit, the RTC has no power to decide
Guevarras rights under these laws. The RTC declared that in an ejectment case,
the only issue for resolution is material or physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo
and Guevarra illegally occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter.
Perez had no right or title over the lot because it is public land. The assignment
of rights between Perez and Pajuyo, and the Kasunduan between Pajuyo and
Guevarra, did not have any legal effect. Pajuyo and Guevarra are in pari delicto
or in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that the
Kasunduan between Pajuyo and Guevarra created a legal tie akin to that of a
landlord and tenant relationship. The Court of Appeals ruled that the Kasunduan
is not a lease contract but a commodatum because the agreement is not for a
price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the
appellate court held that Guevarra has a better right over the property under
Proclamation No. 137. President Corazon C. Aquino ("President Aquino") issued
Proclamation No. 137 on 7 September 1987. At that time, Guevarra was in
physical possession of the property. Under Article VI of the Code of Policies
Beneficiary Selection and Disposition of Homelots and Structures in the National
Housing Project ("the Code"), the actual occupant or caretaker of the lot shall
have first priority as beneficiary of the project. The Court of Appeals concluded
that Guevarra is first in the hierarchy of priority.
In denying Pajuyos motion for reconsideration, the appellate court debunked
Pajuyos claim that Guevarra filed his motion for extension beyond the period to
appeal.
The Court of Appeals pointed out that Guevarras motion for extension filed
before the Supreme Court was stamped "13 December 1996 at 4:09 PM" by the
Supreme Courts Receiving Clerk. The Court of Appeals concluded that the
motion for extension bore a date, contrary to Pajuyos claim that the motion for
extension was undated. Guevarra filed the motion for extension on time on 13
December 1996 since he filed the motion one day before the expiration of the
reglementary period on 14 December 1996. Thus, the motion for extension
properly complied with the condition imposed by the Court of Appeals in its 28
January 1997 Resolution. The Court of Appeals explained that the thirty-day
extension to file the petition for review was deemed granted because of such
compliance.

The Court of Appeals rejected Pajuyos argument that the appellate court should
have dismissed the petition for review because it was Guevarras counsel and
not Guevarra who signed the certification against forum-shopping. The Court of
Appeals pointed out that Pajuyo did not raise this issue in his Comment. The
Court of Appeals held that Pajuyo could not now seek the dismissal of the case
after he had extensively argued on the merits of the case. This technicality, the
appellate court opined, was clearly an afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY
AND DISCRETION TANTAMOUNT TO LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondents Motion for an
Extension of thirty days to file petition for review at the time when there was no
more period to extend as the decision of the Regional Trial Court had already
become final and executory.
2) in giving due course, instead of dismissing, private respondents Petition for
Review even though the certification against forum-shopping was signed only by
counsel instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact
a commodatum, instead of a Contract of Lease as found by the Metropolitan Trial
Court and in holding that "the ejectment case filed against defendant-appellant is
without legal and factual basis".
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil
Case No. Q-96-26943 and in holding that the parties are in pari delicto being
both squatters, therefore, illegal occupants of the contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies
of the National Government Center Housing Project instead of deciding the same
under the Kasunduan voluntarily executed by the parties, the terms and
conditions of which are the laws between themselves.13
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in
the substantive issues Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright
Guevarras petition for review because the RTC decision had already become
final and executory when the appellate court acted on Guevarras motion for
extension to file the petition. Pajuyo points out that Guevarra had only one day
before the expiry of his period to appeal the RTC decision. Instead of filing the
petition for review with the Court of Appeals, Guevarra filed with this Court an
undated motion for extension of 30 days to file a petition for review. This Court
merely referred the motion to the Court of Appeals. Pajuyo believes that the filing
of the motion for extension with this Court did not toll the running of the period to
perfect the appeal. Hence, when the Court of Appeals received the motion, the
period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction

are appealable to the Court of Appeals by petition for review in cases involving
questions of fact or mixed questions of fact and law. 14 Decisions of the regional
trial courts involving pure questions of law are appealable directly to this Court by
petition for review.15 These modes of appeal are now embodied in Section 2,
Rule 41 of the 1997 Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of
law. Guevarra thus filed his motion for extension to file petition for review before
this Court on 14 December 1996. On 3 January 1997, Guevarra then filed his
petition for review with this Court. A perusal of Guevarras petition for review
gives the impression that the issues he raised were pure questions of law. There
is a question of law when the doubt or difference is on what the law is on a
certain state of facts.16 There is a question of fact when the doubt or difference is
on the truth or falsity of the facts alleged. 17
In his petition for review before this Court, Guevarra no longer disputed the facts.
Guevarras petition for review raised these questions: (1) Do ejectment cases
pertain only to possession of a structure, and not the lot on which the structure
stands? (2) Does a suit by a squatter against a fellow squatter constitute a valid
case for ejectment? (3) Should a Presidential Proclamation governing the lot on
which a squatters structure stands be considered in an ejectment suit filed by the
owner of the structure?
These questions call for the evaluation of the rights of the parties under the law
on ejectment and the Presidential Proclamation. At first glance, the questions
Guevarra raised appeared purely legal. However, some factual questions still
have to be resolved because they have a bearing on the legal questions raised in
the petition for review. These factual matters refer to the metes and bounds of
the disputed property and the application of Guevarra as beneficiary of
Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition
for review. In Lacsamana v. Second Special Cases Division of the
Intermediate Appellate Court,18 we declared that the Court of Appeals could
grant extension of time in appeals by petition for review. In Liboro v. Court of
Appeals,19 we clarified that the prohibition against granting an extension of time
applies only in a case where ordinary appeal is perfected by a mere notice of
appeal. The prohibition does not apply in a petition for review where the pleading
needs verification. A petition for review, unlike an ordinary appeal, requires
preparation and research to present a persuasive position. 20 The drafting of the
petition for review entails more time and effort than filing a notice of appeal. 21
Hence, the Court of Appeals may allow an extension of time to file a petition for
review.
In the more recent case of Commissioner of Internal Revenue v. Court of
Appeals,22 we held that Liboros clarification of Lacsamana is consistent with
the Revised Internal Rules of the Court of Appeals and Supreme Court Circular
No. 1-91. They all allow an extension of time for filing petitions for review with the
Court of Appeals. The extension, however, should be limited to only fifteen days
save in exceptionally meritorious cases where the Court of Appeals may grant a
longer period.

A judgment becomes "final and executory" by operation of law. Finality of

judgment becomes a fact on the lapse of the reglementary period to appeal if no
appeal is perfected.23 The RTC decision could not have gained finality because
the Court of Appeals granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved
Guevarras motion for extension. The Court of Appeals gave due course to the
motion for extension because it complied with the condition set by the appellate
court in its resolution dated 28 January 1997. The resolution stated that the Court
of Appeals would only give due course to the motion for extension if filed on time.
The motion for extension met this condition.
The material dates to consider in determining the timeliness of the filing of the
motion for extension are (1) the date of receipt of the judgment or final order or
resolution subject of the petition, and (2) the date of filing of the motion for
extension.24 It is the date of the filing of the motion or pleading, and not the date
of execution, that determines the timeliness of the filing of that motion or
pleading. Thus, even if the motion for extension bears no date, the date of filing
stamped on it is the reckoning point for determining the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision.
Guevarra filed his motion for extension before this Court on 13 December 1996,
the date stamped by this Courts Receiving Clerk on the motion for extension.
Clearly, Guevarra filed the motion for extension exactly one day before the lapse
of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarras appeal on
technical grounds, Pajuyo did not ask the appellate court to deny the motion for
extension and dismiss the petition for review at the earliest opportunity. Instead,
Pajuyo vigorously discussed the merits of the case. It was only when the Court of
Appeals ruled in Guevarras favor that Pajuyo raised the procedural issues
against Guevarras petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an
adverse decision on the merits, is estopped from attacking the jurisdiction of the
court.25 Estoppel sets in not because the judgment of the court is a valid and
conclusive adjudication, but because the practice of attacking the courts
jurisdiction after voluntarily submitting to it is against public policy.26
In his Comment before the Court of Appeals, Pajuyo also failed to discuss
Guevarras failure to sign the certification against forum shopping. Instead,
Pajuyo harped on Guevarras counsel signing the verification, claiming that the
counsels verification is insufficient since it is based only on "mere information."
A partys failure to sign the certification against forum shopping is different from
the partys failure to sign personally the verification. The certificate of non-forum
shopping must be signed by the party, and not by counsel. 27 The certification of
counsel renders the petition defective. 28
On the other hand, the requirement on verification of a pleading is a formal and
not a jurisdictional requisite. 29 It is intended simply to secure an assurance that
what are alleged in the pleading are true and correct and not the product of the
imagination or a matter of speculation, and that the pleading is filed in good
faith.30 The party need not sign the verification. A partys representative, lawyer or

any person who personally knows the truth of the facts alleged in the pleading
may sign the verification.31
We agree with the Court of Appeals that the issue on the certificate against forum
shopping was merely an afterthought. Pajuyo did not call the Court of Appeals
attention to this defect at the early stage of the proceedings. Pajuyo raised this
procedural issue too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of
Jurisdiction to Resolve the Issue of Possession
Settled is the rule that the defendants claim of ownership of the disputed
property will not divest the inferior court of its jurisdiction over the ejectment
case.32 Even if the pleadings raise the issue of ownership, the court may pass on
such issue to determine only the question of possession, especially if the
ownership is inseparably linked with the possession. 33 The adjudication on the
issue of ownership is only provisional and will not bar an action between the
same parties involving title to the land. 34 This doctrine is a necessary
consequence of the nature of the two summary actions of ejectment, forcible
entry and unlawful detainer, where the only issue for adjudication is the physical
or material possession over the real property.35
In this case, what Guevarra raised before the courts was that he and Pajuyo are
not the owners of the contested property and that they are mere squatters. Will
the defense that the parties to the ejectment case are not the owners of the
disputed lot allow the courts to renounce their jurisdiction over the case? The
Court of Appeals believed so and held that it would just leave the parties where
they are since they are in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an
action for recovery of possession. The parties cannot present evidence to prove
ownership or right to legal possession except to prove the nature of the
possession when necessary to resolve the issue of physical possession. 36 The
same is true when the defendant asserts the absence of title over the property.
The absence of title over the contested lot is not a ground for the courts to
withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who
is entitled to the physical possession of the premises, that is, to the possession
de facto and not to the possession de jure.37 It does not even matter if a partys
title to the property is questionable, 38 or when both parties intruded into public
land and their applications to own the land have yet to be approved by the proper
government agency.39 Regardless of the actual condition of the title to the
property, the party in peaceable quiet possession shall not be thrown out by a
strong hand, violence or terror.40 Neither is the unlawful withholding of property
allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even
against the owner himself.41 Whatever may be the character of his possession, if
he has in his favor prior possession in time, he has the security that entitles him
to remain on the property until a person with a better right lawfully ejects him. 42 To
repeat, the only issue that the court has to settle in an ejectment suit is the right

to physical possession.
In Pitargue v. Sorilla,43 the government owned the land in dispute. The
government did not authorize either the plaintiff or the defendant in the case of
forcible entry case to occupy the land. The plaintiff had prior possession and had
already introduced improvements on the public land. The plaintiff had a pending
application for the land with the Bureau of Lands when the defendant ousted him
from possession. The plaintiff filed the action of forcible entry against the
defendant. The government was not a party in the case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of
possession because while the application of the plaintiff was still pending, title
remained with the government, and the Bureau of Public Lands had jurisdiction
over the case. We disagreed with the defendant. We ruled that courts have
jurisdiction to entertain ejectment suits even before the resolution of the
application. The plaintiff, by priority of his application and of his entry, acquired
prior physical possession over the public land applied for as against other private
claimants. That prior physical possession enjoys legal protection against other
private claimants because only a court can take away such physical possession
in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue44 as
squatters, strictly speaking, their entry into the disputed land was illegal. Both the
plaintiff and defendant entered the public land without the owners permission.
Title to the land remained with the government because it had not awarded to
anyone ownership of the contested public land. Both the plaintiff and the
defendant were in effect squatting on government property. Yet, we upheld the
courts jurisdiction to resolve the issue of possession even if the plaintiff and the
defendant in the ejectment case did not have any title over the contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical
possession because of the public need to preserve the basic policy behind the
summary actions of forcible entry and unlawful detainer. The underlying
philosophy behind ejectment suits is to prevent breach of the peace and criminal
disorder and to compel the party out of possession to respect and resort to the
law alone to obtain what he claims is his. 45 The party deprived of possession
must not take the law into his own hands.46 Ejectment proceedings are summary
in nature so the authorities can settle speedily actions to recover possession
because of the overriding need to quell social disturbances. 47
We further explained in Pitargue the greater interest that is at stake in actions for
recovery of possession. We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take
cognizance of possessory actions involving these public lands before final award
is made by the Lands Department, and before title is given any of the conflicting
claimants? It is one of utmost importance, as there are public lands everywhere
and there are thousands of settlers, especially in newly opened regions. It also
involves a matter of policy, as it requires the determination of the respective
authorities and functions of two coordinate branches of the Government in
connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the

old, which was in force in this country before the American occupation, or in the
new, we have a possessory action, the aim and purpose of which is the recovery
of the physical possession of real property, irrespective of the question as to who
has the title thereto. Under the Spanish Civil Code we had the accion interdictal,
a summary proceeding which could be brought within one year from
dispossession (Roman Catholic Bishop of Cebu vs. Mangaron, 6 Phil. 286, 291);
and as early as October 1, 1901, upon the enactment of the Code of Civil
Procedure (Act No. 190 of the Philippine Commission) we implanted the common
law action of forcible entry (section 80 of Act No. 190), the object of which has
been stated by this Court to be "to prevent breaches of the peace and
criminal disorder which would ensue from the withdrawal of the remedy,
and the reasonable hope such withdrawal would create that some
advantage must accrue to those persons who, believing themselves
entitled to the possession of property, resort to force to gain possession
rather than to some appropriate action in the court to assert their claims."
(Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) So before the
enactment of the first Public Land Act (Act No. 926) the action of forcible entry
was already available in the courts of the country. So the question to be resolved
is, Did the Legislature intend, when it vested the power and authority to alienate
and dispose of the public lands in the Lands Department, to exclude the courts
from entertaining the possessory action of forcible entry between rival claimants
or occupants of any land before award thereof to any of the parties? Did
Congress intend that the lands applied for, or all public lands for that matter, be
removed from the jurisdiction of the judicial Branch of the Government, so that
any troubles arising therefrom, or any breaches of the peace or disorders caused
by rival claimants, could be inquired into only by the Lands Department to the
exclusion of the courts? The answer to this question seems to us evident. The
Lands Department does not have the means to police public lands; neither does
it have the means to prevent disorders arising therefrom, or contain breaches of
the peace among settlers; or to pass promptly upon conflicts of possession.
Then its power is clearly limited to disposition and alienation, and while it
may decide conflicts of possession in order to make proper award, the
settlement of conflicts of possession which is recognized in the court
herein has another ultimate purpose, i.e., the protection of actual
possessors and occupants with a view to the prevention of breaches of the
peace. The power to dispose and alienate could not have been intended to
include the power to prevent or settle disorders or breaches of the peace
among rival settlers or claimants prior to the final award. As to this,
therefore, the corresponding branches of the Government must continue to
exercise power and jurisdiction within the limits of their respective functions. The
vesting of the Lands Department with authority to administer, dispose, and
alienate public lands, therefore, must not be understood as depriving the
other branches of the Government of the exercise of the respective
functions or powers thereon, such as the authority to stop disorders and
quell breaches of the peace by the police, the authority on the part of the
courts to take jurisdiction over possessory actions arising therefrom not

involving, directly or indirectly, alienation and disposition.

Our attention has been called to a principle enunciated in American courts to the
effect that courts have no jurisdiction to determine the rights of claimants to
public lands, and that until the disposition of the land has passed from the control
of the Federal Government, the courts will not interfere with the administration of
matters concerning the same. (50 C. J. 1093-1094.) We have no quarrel with this
principle. The determination of the respective rights of rival claimants to public
lands is different from the determination of who has the actual physical
possession or occupation with a view to protecting the same and preventing
disorder and breaches of the peace. A judgment of the court ordering restitution
of the possession of a parcel of land to the actual occupant, who has been
deprived thereof by another through the use of force or in any other illegal
manner, can never be "prejudicial interference" with the disposition or alienation
of public lands. On the other hand, if courts were deprived of jurisdiction of
cases involving conflicts of possession, that threat of judicial action
against breaches of the peace committed on public lands would be
eliminated, and a state of lawlessness would probably be produced
between applicants, occupants or squatters, where force or might, not right
or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts of
possession between rivals or conflicting applicants or claimants would be no
other than that of forcible entry. This action, both in England and the United
States and in our jurisdiction, is a summary and expeditious remedy whereby one
in peaceful and quiet possession may recover the possession of which he has
been deprived by a stronger hand, by violence or terror; its ultimate object being
to prevent breach of the peace and criminal disorder. (Supia and Batioco vs.
Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere
possession as a fact, of physical possession, not a legal possession. (Mediran
vs. Villanueva, 37 Phil. 752.) The title or right to possession is never in issue in
an action of forcible entry; as a matter of fact, evidence thereof is expressly
banned, except to prove the nature of the possession. (Second 4, Rule 72, Rules
of Court.) With this nature of the action in mind, by no stretch of the imagination
can conclusion be arrived at that the use of the remedy in the courts of justice
would constitute an interference with the alienation, disposition, and control of
public lands. To limit ourselves to the case at bar can it be pretended at all that its
result would in any way interfere with the manner of the alienation or disposition
of the land contested? On the contrary, it would facilitate adjudication, for the
question of priority of possession having been decided in a final manner by the
courts, said question need no longer waste the time of the land officers making
the adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code 48 embody the principle of pari delicto.
We explained the principle of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ex dolo malo non eritur actio
and in pari delicto potior est conditio defedentis. The law will not aid either party

to an illegal agreement. It leaves the parties where it finds them. 49

The application of the pari delicto principle is not absolute, as there are
exceptions to its application. One of these exceptions is where the application of
the pari delicto rule would violate well-established public policy.50
In Drilon v. Gaurana,51 we reiterated the basic policy behind the summary
actions of forcible entry and unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is
that, regardless of the actual condition of the title to the property, the party in
peaceable quiet possession shall not be turned out by strong hand, violence or
terror. In affording this remedy of restitution the object of the statute is to prevent
breaches of the peace and criminal disorder which would ensue from the
withdrawal of the remedy, and the reasonable hope such withdrawal would
create that some advantage must accrue to those persons who, believing
themselves entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the courts to assert their
claims. This is the philosophy at the foundation of all these actions of forcible
entry and detainer which are designed to compel the party out of possession to
respect and resort to the law alone to obtain what he claims is his. 52
Clearly, the application of the principle of pari delicto to a case of ejectment
between squatters is fraught with danger. To shut out relief to squatters on the
ground of pari delicto would openly invite mayhem and lawlessness. A squatter
would oust another squatter from possession of the lot that the latter had illegally
occupied, emboldened by the knowledge that the courts would leave them where
they are. Nothing would then stand in the way of the ousted squatter from reclaiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or
actions for recovery of possession seek to prevent. 53 Even the owner who has
title over the disputed property cannot take the law into his own hands to regain
possession of his property. The owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment
suit are squatters. The determination of priority and superiority of possession is a
serious and urgent matter that cannot be left to the squatters to decide. To do so
would make squatters receive better treatment under the law. The law restrains
property owners from taking the law into their own hands. However, the principle
of pari delicto as applied by the Court of Appeals would give squatters free rein to
dispossess fellow squatters or violently retake possession of properties usurped
from them. Courts should not leave squatters to their own devices in cases
involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment.
The Court of Appeals refused to rule on the issue of physical possession.
Nevertheless, the appellate court held that the pivotal issue in this case is who
between Pajuyo and Guevarra has the "priority right as beneficiary of the
contested land under Proclamation No. 137." 54 According to the Court of Appeals,
Guevarra enjoys preferential right under Proclamation No. 137 because Article VI
of the Code declares that the actual occupant or caretaker is the one qualified to

apply for socialized housing.

The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of
a relocation site under Proclamation No. 137. Proclamation No. 137 laid down
the metes and bounds of the land that it declared open for disposition to bona
fide residents.
The records do not show that the contested lot is within the land specified by
Proclamation No. 137. Guevarra had the burden to prove that the disputed lot is
within the coverage of Proclamation No. 137. He failed to do so.
Second. The Court of Appeals should not have given credence to Guevarras
unsubstantiated claim that he is the beneficiary of Proclamation No. 137.
Guevarra merely alleged that in the survey the project administrator conducted,
he and not Pajuyo appeared as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation
No. 137. Pajuyo allowed Guevarra to occupy the disputed property in 1985.
President Aquino signed Proclamation No. 137 into law on 11 March 1986.
Pajuyo made his earliest demand for Guevarra to vacate the property in
September 1994.
During the time that Guevarra temporarily held the property up to the time that
Proclamation No. 137 allegedly segregated the disputed lot, Guevarra never
applied as beneficiary of Proclamation No. 137. Even when Guevarra already
knew that Pajuyo was reclaiming possession of the property, Guevarra did not
take any step to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of
Proclamation No. 137 and Guevarra has a pending application over the lot,
courts should still assume jurisdiction and resolve the issue of possession.
However, the jurisdiction of the courts would be limited to the issue of physical
possession only.
In Pitargue,55 we ruled that courts have jurisdiction over possessory actions
involving public land to determine the issue of physical possession. The
determination of the respective rights of rival claimants to public land is, however,
distinct from the determination of who has the actual physical possession or who
has a better right of physical possession. 56 The administrative disposition and
alienation of public lands should be threshed out in the proper government
agency.57
The Court of Appeals determination of Pajuyo and Guevarras rights under
Proclamation No. 137 was premature. Pajuyo and Guevarra were at most merely
potential beneficiaries of the law. Courts should not preempt the decision of the
administrative agency mandated by law to determine the qualifications of
applicants for the acquisition of public lands. Instead, courts should expeditiously
resolve the issue of physical possession in ejectment cases to prevent disorder
and breaches of peace.58
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyos prior possession of the lot and ownership of
the house built on it. Guevarra expressly admitted the existence and due
execution of the Kasunduan. The Kasunduan reads:

Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon

City, ay nagbibigay pahintulot kay G. Eddie Guevarra, na pansamantalang
manirahan sa nasabing bahay at lote ng "walang bayad." Kaugnay nito,
kailangang panatilihin nila ang kalinisan at kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, silay kusang aalis ng
walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and
lot free of rent, but Guevarra was under obligation to maintain the premises in
good condition. Guevarra promised to vacate the premises on Pajuyos demand
but Guevarra broke his promise and refused to heed Pajuyos demand to vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the
withholding by a person from another of the possession of real property to which
the latter is entitled after the expiration or termination of the formers right to hold
possession under a contract, express or implied.59
Where the plaintiff allows the defendant to use his property by tolerance without
any contract, the defendant is necessarily bound by an implied promise that he
will vacate on demand, failing which, an action for unlawful detainer will lie. 60 The
defendants refusal to comply with the demand makes his continued possession
of the property unlawful.61 The status of the defendant in such a case is similar to
that of a lessee or tenant whose term of lease has expired but whose occupancy
continues by tolerance of the owner.62
This principle should apply with greater force in cases where a contract
embodies the permission or tolerance to use the property. The Kasunduan
expressly articulated Pajuyos forbearance. Pajuyo did not require Guevarra to
pay any rent but only to maintain the house and lot in good condition. Guevarra
expressly vowed in the Kasunduan that he would vacate the property on
demand. Guevarras refusal to comply with Pajuyos demand to vacate made
Guevarras continued possession of the property unlawful.
We do not subscribe to the Court of Appeals theory that the Kasunduan is one of
commodatum.
In a contract of commodatum, one of the parties delivers to another something
not consumable so that the latter may use the same for a certain time and return
it.63 An essential feature of commodatum is that it is gratuitous. Another feature of
commodatum is that the use of the thing belonging to another is for a certain
period.64 Thus, the bailor cannot demand the return of the thing loaned until after
expiration of the period stipulated, or after accomplishment of the use for which
the commodatum is constituted.65 If the bailor should have urgent need of the
thing, he may demand its return for temporary use. 66 If the use of the thing is
merely tolerated by the bailor, he can demand the return of the thing at will, in
which case the contractual relation is called a precarium. 67 Under the Civil Code,
precarium is a kind of commodatum.68
The Kasunduan reveals that the accommodation accorded by Pajuyo to
Guevarra was not essentially gratuitous. While the Kasunduan did not require
Guevarra to pay rent, it obligated him to maintain the property in good condition.
The imposition of this obligation makes the Kasunduan a contract different from a
commodatum. The effects of the Kasunduan are also different from that of a

commodatum. Case law on ejectment has treated relationship based on

tolerance as one that is akin to a landlord-tenant relationship where the
withdrawal of permission would result in the termination of the lease. 69 The
tenants withholding of the property would then be unlawful. This is settled
jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of
commodatum, Guevarra as bailee would still have the duty to turn over
possession of the property to Pajuyo, the bailor. The obligation to deliver or to
return the thing received attaches to contracts for safekeeping, or contracts of
commission, administration and commodatum.70 These contracts certainly
involve the obligation to deliver or return the thing received. 71
Guevarra turned his back on the Kasunduan on the sole ground that like him,
Pajuyo is also a squatter. Squatters, Guevarra pointed out, cannot enter into a
contract involving the land they illegally occupy. Guevarra insists that the contract
is void.
Guevarra should know that there must be honor even between squatters.
Guevarra freely entered into the Kasunduan. Guevarra cannot now impugn the
Kasunduan after he had benefited from it. The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and
Guevarra has a right to physical possession of the contested property. The
Kasunduan is the undeniable evidence of Guevarras recognition of Pajuyos
better right of physical possession. Guevarra is clearly a possessor in bad faith.
The absence of a contract would not yield a different result, as there would still
be an implied promise to vacate.
Guevarra contends that there is "a pernicious evil that is sought to be avoided,
and that is allowing an absentee squatter who (sic) makes (sic) a profit out of his
illegal act."72 Guevarra bases his argument on the preferential right given to the
actual occupant or caretaker under Proclamation No. 137 on socialized housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra
stayed in the property without paying any rent. There is also no proof that Pajuyo
is a professional squatter who rents out usurped properties to other squatters.
Moreover, it is for the proper government agency to decide who between Pajuyo
and Guevarra qualifies for socialized housing. The only issue that we are
addressing is physical possession.
Prior possession is not always a condition sine qua non in ejectment.73 This is
one of the distinctions between forcible entry and unlawful detainer. 74 In forcible
entry, the plaintiff is deprived of physical possession of his land or building by
means of force, intimidation, threat, strategy or stealth. Thus, he must allege and
prove prior possession.75 But in unlawful detainer, the defendant unlawfully
withholds possession after the expiration or termination of his right to possess
under any contract, express or implied. In such a case, prior physical possession
is not required.76
Pajuyos withdrawal of his permission to Guevarra terminated the Kasunduan.
Guevarras transient right to possess the property ended as well. Moreover, it
was Pajuyo who was in actual possession of the property because Guevarra had

to seek Pajuyos permission to temporarily hold the property and Guevarra had to
follow the conditions set by Pajuyo in the Kasunduan. Control over the property
still rested with Pajuyo and this is evidence of actual possession.
Pajuyos absence did not affect his actual possession of the disputed property.
Possession in the eyes of the law does not mean that a man has to have his feet
on every square meter of the ground before he is deemed in possession. 77 One
may acquire possession not only by physical occupation, but also by the fact that
a thing is subject to the action of ones will. 78 Actual or physical occupation is not
always necessary.79
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that "squatters
and intruders who clandestinely enter into titled government property cannot, by
such act, acquire any legal right to said property." 80 We made this declaration
because the person who had title or who had the right to legal possession over
the disputed property was a party in the ejectment suit and that party instituted
the case against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the
ejectment case. This case is between squatters. Had the government
participated in this case, the courts could have evicted the contending squatters,
Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in
this case, we cannot evict on our own the parties. Such a ruling would
discourage squatters from seeking the aid of the courts in settling the issue of
physical possession. Stripping both the plaintiff and the defendant of possession
just because they are squatters would have the same dangerous implications as
the application of the principle of pari delicto. Squatters would then rather settle
the issue of physical possession among themselves than seek relief from the
courts if the plaintiff and defendant in the ejectment case would both stand to
lose possession of the disputed property. This would subvert the policy
underlying actions for recovery of possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled
to remain on the property until a person who has title or a better right lawfully
ejects him. Guevarra is certainly not that person. The ruling in this case,
however, does not preclude Pajuyo and Guevarra from introducing evidence and
presenting arguments before the proper administrative agency to establish any
right to which they may be entitled under the law.81
In no way should our ruling in this case be interpreted to condone squatting. The
ruling on the issue of physical possession does not affect title to the property nor
constitute a binding and conclusive adjudication on the merits on the issue of
ownership.82 The owner can still go to court to recover lawfully the property from
the person who holds the property without legal title. Our ruling here does not
diminish the power of government agencies, including local governments, to
condemn, abate, remove or demolish illegal or unauthorized structures in
accordance with existing laws.
Attorneys Fees and Rentals
The MTC and RTC failed to justify the award of P3,000 attorneys fees to Pajuyo.

Attorneys fees as part of damages are awarded only in the instances

enumerated in Article 2208 of the Civil Code. 83 Thus, the award of attorneys fees
is the exception rather than the rule. 84 Attorneys fees are not awarded every time
a party prevails in a suit because of the policy that no premium should be placed
on the right to litigate. 85 We therefore delete the attorneys fees awarded to
Pajuyo.
We sustain the P300 monthly rentals the MTC and RTC assessed against
Guevarra. Guevarra did not dispute this factual finding of the two courts. We find
the amount reasonable compensation to Pajuyo. The P300 monthly rental is
counted from the last demand to vacate, which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and
Resolution dated 14 December 2000 of the Court of Appeals in CA-G.R. SP No.
43129 are SET ASIDE. The Decision dated 11 November 1996 of the Regional
Trial Court of Quezon City, Branch 81 in Civil Case No. Q-96-26943, affirming the
Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon City,
Branch 31 in Civil Case No. 12432, is REINSTATED with MODIFICATION. The
award of attorneys fees is deleted. No costs.
SO ORDERED.
Davide, Jr., Panganiban, Ynares-Santiago, and Azcuna, JJ., concur.
G.R. No. 154878
March 16, 2007
CAROLYN M. GARCIA, Petitioner,
vs.
RICA MARIE S. THIO, Respondent.
DECISION
CORONA, J.:
Assailed in this petition for review on certiorari 1 are the June 19, 2002 decision 2
and August 20, 2002 resolution 3 of the Court of Appeals (CA) in CA-G.R. CV No.
56577 which set aside the February 28, 1997 decision of the Regional Trial Court
(RTC) of Makati City, Branch 58.
Sometime in February 1995, respondent Rica Marie S. Thio received from
petitioner Carolyn M. Garcia a crossed check 4 dated February 24, 1995 in the
amount of US$100,000 payable to the order of a certain Marilou Santiago. 5
Thereafter, petitioner received from respondent every month (specifically, on
March 24, April 26, June 26 and July 26, all in 1995) the amount of US$3,000 6
and P76,5007 on July 26,8 August 26, September 26 and October 26, 1995.
In June 1995, respondent received from petitioner another crossed check 9 dated
June 29, 1995 in the amount of P500,000, also payable to the order of Marilou
Santiago.10 Consequently, petitioner received from respondent the amount of
P20,000 every month on August 5, September 5, October 5 and November 5,
1995.11
According to petitioner, respondent failed to pay the principal amounts of the
loans (US$100,000 and P500,000) when they fell due. Thus, on February 22,
1996, petitioner filed a complaint for sum of money and damages in the RTC of
Makati City, Branch 58 against respondent, seeking to collect the sums of
US$100,000, with interest thereon at 3% a month from October 26, 1995 and

P500,000, with interest thereon at 4% a month from November 5, 1995, plus

attorneys fees and actual damages.12
Petitioner alleged that on February 24, 1995, respondent borrowed from her the
amount of US$100,000 with interest thereon at the rate of 3% per month, which
loan would mature on October 26, 1995. 13 The amount of this loan was covered
by the first check. On June 29, 1995, respondent again borrowed the amount of
P500,000 at an agreed monthly interest of 4%, the maturity date of which was on
November 5, 1995.14 The amount of this loan was covered by the second check.
For both loans, no promissory note was executed since petitioner and
respondent were close friends at the time. 15 Respondent paid the stipulated
monthly interest for both loans but on their maturity dates, she failed to pay the
principal amounts despite repeated demands.161awphi1.nt
Respondent denied that she contracted the two loans with petitioner and
countered that it was Marilou Santiago to whom petitioner lent the money. She
claimed she was merely asked by petitioner to give the crossed checks to
Santiago.17 She issued the checks for P76,000 and P20,000 not as payment of
interest but to accommodate petitioners request that respondent use her own
checks instead of Santiagos.18
In a decision dated February 28, 1997, the RTC ruled in favor of petitioner. 19 It
found that respondent borrowed from petitioner the amounts of US$100,000 with
monthly interest of 3% and P500,000 at a monthly interest of 4%:20
WHEREFORE, finding preponderance of evidence to sustain the instant
complaint, judgment is hereby rendered in favor of [petitioner], sentencing
[respondent] to pay the former the amount of:
1. [US$100,000.00] or its peso equivalent with interest thereon at 3% per month
from October 26, 1995 until fully paid;
2. P500,000.00 with interest thereon at 4% per month from November 5, 1995
until fully paid.
3. P100,000.00 as and for attorneys fees; and
4. P50,000.00 as and for actual damages.
For lack of merit, [respondents] counterclaim is perforce dismissed.
With costs against [respondent].
IT IS SO ORDERED.21
On appeal, the CA reversed the decision of the RTC and ruled that there was no
contract of loan between the parties:
A perusal of the record of the case shows that [petitioner] failed to substantiate
her claim that [respondent] indeed borrowed money from her. There is nothing
in the record that shows that [respondent] received money from
[petitioner]. What is evident is the fact that [respondent] received a MetroBank
[crossed] check dated February 24, 1995 in the sum of US$100,000.00, payable
to the order of Marilou Santiago and a CityTrust [crossed] check dated June 29,
1995 in the amount of P500,000.00, again payable to the order of Marilou
Santiago, both of which were issued by [petitioner]. The checks received by
[respondent], being crossed, may not be encashed but only deposited in
the bank by the payee thereof, that is, by Marilou Santiago herself.
It must be noted that crossing a check has the following effects: (a) the check

may not be encashed but only deposited in the bank; (b) the check may be
negotiated only onceto one who has an account with the bank; (c) and the act
of crossing the check serves as warning to the holder that the check has been
issued for a definite purpose so that he must inquire if he has received the check
pursuant to that purpose, otherwise, he is not a holder in due course.
Consequently, the receipt of the [crossed] check by [respondent] is not the
issuance and delivery to the payee in contemplation of law since the latter is not
the person who could take the checks as a holder, i.e., as a payee or indorsee
thereof, with intent to transfer title thereto. Neither could she be deemed as an
agent of Marilou Santiago with respect to the checks because she was merely
facilitating the transactions between the former and [petitioner].
With the foregoing circumstances, it may be fairly inferred that there were really
no contracts of loan that existed between the parties. x x x (emphasis supplied) 22
Hence this petition.23
As a rule, only questions of law may be raised in a petition for review on certiorari
under Rule 45 of the Rules of Court. However, this case falls under one of the
exceptions, i.e., when the factual findings of the CA (which held that there were
no contracts of loan between petitioner and respondent) and the RTC (which
held that there were contracts of loan) are contradictory.24
The petition is impressed with merit.
A loan is a real contract, not consensual, and as such is perfected only upon the
delivery of the object of the contract. 25 This is evident in Art. 1934 of the Civil
Code which provides:
An accepted promise to deliver something by way of commodatum or simple loan
is binding upon the parties, but the commodatum or simple loan itself shall not
be perfected until the delivery of the object of the contract. (Emphasis
supplied)
Upon delivery of the object of the contract of loan (in this case the money
received by the debtor when the checks were encashed) the debtor acquires
ownership of such money or loan proceeds and is bound to pay the creditor an
equal amount.26
It is undisputed that the checks were delivered to respondent. However, these
checks were crossed and payable not to the order of respondent but to the order
of a certain Marilou Santiago. Thus the main question to be answered is: who
borrowed money from petitioner respondent or Santiago?
Petitioner insists that it was upon respondents instruction that both checks were
made payable to Santiago. 27 She maintains that it was also upon respondents
instruction that both checks were delivered to her (respondent) so that she could,
in turn, deliver the same to Santiago. 28 Furthermore, she argues that once
respondent received the checks, the latter had possession and control of them
such that she had the choice to either forward them to Santiago (who was
already her debtor), to retain them or to return them to petitioner.29
We agree with petitioner. Delivery is the act by which the res or substance
thereof is placed within the actual or constructive possession or control of
another.30 Although respondent did not physically receive the proceeds of the
checks, these instruments were placed in her control and possession under an

arrangement whereby she actually re-lent the amounts to Santiago.

Several factors support this conclusion.
First, respondent admitted that petitioner did not personally know Santiago. 31 It
was highly improbable that petitioner would grant two loans to a complete
stranger without requiring as much as promissory notes or any written
acknowledgment of the debt considering that the amounts involved were quite
big. Respondent, on the other hand, already had transactions with Santiago at
that time.32
Second, Leticia Ruiz, a friend of both petitioner and respondent (and whose
name appeared in both parties list of witnesses) testified that respondents plan
was for petitioner to lend her money at a monthly interest rate of 3%, after which
respondent would lend the same amount to Santiago at a higher rate of 5% and
realize a profit of 2%.33 This explained why respondent instructed petitioner to
make the checks payable to Santiago. Respondent has not shown any reason
why Ruiz testimony should not be believed.
Third, for the US$100,000 loan, respondent admitted issuing her own checks in
the amount of P76,000 each (peso equivalent of US$3,000) for eight months to
cover the monthly interest. For the P500,000 loan, she also issued her own
checks in the amount of P20,000 each for four months.34 According to
respondent, she merely accommodated petitioners request for her to issue her
own checks to cover the interest payments since petitioner was not personally
acquainted with Santiago.35 She claimed, however, that Santiago would replace
the checks with cash.36 Her explanation is simply incredible. It is difficult to
believe that respondent would put herself in a position where she would be
compelled to pay interest, from her own funds, for loans she allegedly did not
contract. We declared in one case that:
In the assessment of the testimonies of witnesses, this Court is guided by the
rule that for evidence to be believed, it must not only proceed from the mouth of a
credible witness, but must be credible in itself such as the common experience of
mankind can approve as probable under the circumstances. We have no test of
the truth of human testimony except its conformity to our knowledge, observation,
and experience. Whatever is repugnant to these belongs to the miraculous, and
is outside of juridical cognizance.37
Fourth, in the petition for insolvency sworn to and filed by Santiago, it was
respondent, not petitioner, who was listed as one of her (Santiagos) creditors. 38
Last, respondent inexplicably never presented Santiago as a witness to
corroborate her story.39 The presumption is that "evidence willfully suppressed
would be adverse if produced." 40 Respondent was not able to overturn this
presumption.
We hold that the CA committed reversible error when it ruled that respondent did
not borrow the amounts of US$100,000 and P500,000 from petitioner. We
instead agree with the ruling of the RTC making respondent liable for the
principal amounts of the loans.
We do not, however, agree that respondent is liable for the 3% and 4% monthly
interest for the US$100,000 and P500,000 loans respectively. There was no
written proof of the interest payable except for the verbal agreement that the

loans would earn 3% and 4% interest per month. Article 1956 of the Civil Code
provides that "[n]o interest shall be due unless it has been expressly stipulated in
writing."
Be that as it may, while there can be no stipulated interest, there can be legal
interest pursuant to Article 2209 of the Civil Code. It is well-settled that:
When the obligation is breached, and it consists in the payment of a sum of
money, i.e., a loan or forbearance of money, the interest due should be that
which may have been stipulated in writing. Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of
stipulation, the rate of interest shall be 12% per annum to be computed from
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 1169 of the Civil Code. 41
Hence, respondent is liable for the payment of legal interest per annum to be
computed from November 21, 1995, the date when she received petitioners
demand letter.42 From the finality of the decision until it is fully paid, the amount
due shall earn interest at 12% per annum, the interim period being deemed
equivalent to a forbearance of credit.43
The award of actual damages in the amount of P50,000 and P100,000 attorneys
fees is deleted since the RTC decision did not explain the factual bases for these
damages.
WHEREFORE, the petition is hereby GRANTED and the June 19, 2002 decision
and August 20, 2002 resolution of the Court of Appeals in CA-G.R. CV No. 56577
are REVERSED and SET ASIDE. The February 28, 1997 decision of the
Regional Trial Court in Civil Case No. 96-266 is AFFIRMED with the
MODIFICATION that respondent is directed to pay petitioner the amounts of
US$100,000 and P500,000 at 12% per annum interest from November 21, 1995
until the finality of the decision. The total amount due as of the date of finality will
earn interest of 12% per annum until fully paid. The award of actual damages
and attorneys fees is deleted.
SO ORDERED.
RENATO C. CORONA
Associate Justice
G.R. Nos. 173654-765
August 28, 2008
PEOPLE OF THE PHILIPPINES, petitioner,
vs.
TERESITA PUIG and ROMEO PORRAS, respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review under Rule 45 of the Revised Rules of Court with
petitioner People of the Philippines, represented by the Office of the Solicitor
General, praying for the reversal of the Orders dated 30 January 2006 and 9
June 2006 of the Regional Trial Court (RTC) of the 6 th Judicial Region, Branch
68, Dumangas, Iloilo, dismissing the 112 cases of Qualified Theft filed against
respondents Teresita Puig and Romeo Porras, and denying petitioners Motion
for Reconsideration, in Criminal Cases No. 05-3054 to 05-3165.

The following are the factual antecedents:

On 7 November 2005, the Iloilo Provincial Prosecutors Office filed before Branch
68 of the RTC in Dumangas, Iloilo, 112 cases of Qualified Theft against
respondents Teresita Puig (Puig) and Romeo Porras (Porras) who were the
Cashier and Bookkeeper, respectively, of private complainant Rural Bank of
Pototan, Inc. The cases were docketed as Criminal Cases No. 05-3054 to 053165.
The allegations in the Informations 1 filed before the RTC were uniform and proforma, except for the amounts, date and time of commission, to wit:
INFORMATION
That on or about the 1st day of August, 2002, in the Municipality of Pototan,
Province of Iloilo, Philippines, and within the jurisdiction of this Honorable Court,
above-named [respondents], conspiring, confederating, and helping one another,
with grave abuse of confidence, being the Cashier and Bookkeeper of the
Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent
of the management of the Bank and with intent of gain, did then and there
willfully, unlawfully and feloniously take, steal and carry away the sum of
FIFTEEN THOUSAND PESOS (P15,000.00), Philippine Currency, to the damage
and prejudice of the said bank in the aforesaid amount.
After perusing the Informations in these cases, the trial court did not find the
existence of probable cause that would have necessitated the issuance of a
warrant of arrest based on the following grounds:
(1) the element of taking without the consent of the owners was missing on
the ground that it is the depositors-clients, and not the Bank, which filed the
complaint in these cases, who are the owners of the money allegedly taken by
respondents and hence, are the real parties-in-interest; and
(2) the Informations are bereft of the phrase alleging "dependence,
guardianship or vigilance between the respondents and the offended party
that would have created a high degree of confidence between them which
the respondents could have abused."
It added that allowing the 112 cases for Qualified Theft filed against the
respondents to push through would be violative of the right of the respondents
under Section 14(2), Article III of the 1987 Constitution which states that in all
criminal prosecutions, the accused shall enjoy the right to be informed of the
nature and cause of the accusation against him. Following Section 6, Rule 112 of
the Revised Rules of Criminal Procedure, the RTC dismissed the cases on 30
January 2006 and refused to issue a warrant of arrest against Puig and Porras.
A Motion for Reconsideration2 was filed on 17 April 2006, by the petitioner.
On 9 June 2006, an Order 3 denying petitioners Motion for Reconsideration was
issued by the RTC, finding as follows:
Accordingly, the prosecutions Motion for Reconsideration should be, as it hereby,
DENIED. The Order dated January 30, 2006 STANDS in all respects.
Petitioner went directly to this Court via Petition for Review on Certiorari under
Rule 45, raising the sole legal issue of:
WHETHER OR NOT THE 112 INFORMATIONS FOR QUALIFIED THEFT
SUFFICIENTLY ALLEGE THE ELEMENT OF TAKING WITHOUT THE

CONSENT OF THE OWNER, AND THE QUALIFYING CIRCUMSTANCE OF

GRAVE ABUSE OF CONFIDENCE.
Petitioner prays that judgment be rendered annulling and setting aside the
Orders dated 30 January 2006 and 9 June 2006 issued by the trial court, and
that it be directed to proceed with Criminal Cases No. 05-3054 to 05-3165.
Petitioner explains that under Article 1980 of the New Civil Code, "fixed, savings,
and current deposits of money in banks and similar institutions shall be governed
by the provisions concerning simple loans." Corollary thereto, Article 1953 of the
same Code provides that "a person who receives a loan of money or any other
fungible thing acquires the ownership thereof, and is bound to pay to the creditor
an equal amount of the same kind and quality." Thus, it posits that the depositors
who place their money with the bank are considered creditors of the bank. The
bank acquires ownership of the money deposited by its clients, making the
money taken by respondents as belonging to the bank.
Petitioner also insists that the Informations sufficiently allege all the elements of
the crime of qualified theft, citing that a perusal of the Informations will show that
they specifically allege that the respondents were the Cashier and Bookkeeper of
the Rural Bank of Pototan, Inc., respectively, and that they took various amounts
of money with grave abuse of confidence, and without the knowledge and
consent of the bank, to the damage and prejudice of the bank.
Parenthetically, respondents raise procedural issues. They challenge the petition
on the ground that a Petition for Review on Certiorari via Rule 45 is the wrong
mode of appeal because a finding of probable cause for the issuance of a
warrant of arrest presupposes evaluation of facts and circumstances, which is
not proper under said Rule.
Respondents further claim that the Department of Justice (DOJ), through the
Secretary of Justice, is the principal party to file a Petition for Review on
Certiorari, considering that the incident was indorsed by the DOJ.
We find merit in the petition.
The dismissal by the RTC of the criminal cases was allegedly due to insufficiency
of the Informations and, therefore, because of this defect, there is no basis for
the existence of probable cause which will justify the issuance of the warrant of
arrest. Petitioner assails the dismissal contending that the Informations for
Qualified Theft sufficiently state facts which constitute (a) the qualifying
circumstance of grave abuse of confidence; and (b) the element of taking, with
intent to gain and without the consent of the owner, which is the Bank.
In determining the existence of probable cause to issue a warrant of arrest, the
RTC judge found the allegations in the Information inadequate. He ruled that the
Information failed to state facts constituting the qualifying circumstance of grave
abuse of confidence and the element of taking without the consent of the owner,
since the owner of the money is not the Bank, but the depositors therein. He also
cites People v. Koc Song,4 in which this Court held:
There must be allegation in the information and proof of a relation, by reason of
dependence, guardianship or vigilance, between the respondents and the
offended party that has created a high degree of confidence between them,
which the respondents abused.

At this point, it needs stressing that the RTC Judge based his conclusion that
there was no probable cause simply on the insufficiency of the allegations in the
Informations concerning the facts constitutive of the elements of the offense
charged. This, therefore, makes the issue of sufficiency of the allegations in the
Informations the focal point of discussion.
Qualified Theft, as defined and punished under Article 310 of the Revised Penal
Code, is committed as follows, viz:
ART. 310. Qualified Theft. The crime of theft shall be punished by the penalties
next higher by two degrees than those respectively specified in the next
preceding article, if committed by a domestic servant, or with grave abuse of
confidence, or if the property stolen is motor vehicle, mail matter or large cattle or
consists of coconuts taken from the premises of a plantation, fish taken from a
fishpond or fishery or if property is taken on the occasion of fire, earthquake,
typhoon, volcanic eruption, or any other calamity, vehicular accident or civil
disturbance. (Emphasis supplied.)
Theft, as defined in Article 308 of the Revised Penal Code, requires the physical
taking of anothers property without violence or intimidation against persons or
force upon things. The elements of the crime under this Article are:
1. Intent to gain;
2. Unlawful taking;
3. Personal property belonging to another;
4. Absence of violence or intimidation against persons or force upon things.
To fall under the crime of Qualified Theft, the following elements must concur:
1. Taking of personal property;
2. That the said property belongs to another;
3. That the said taking be done with intent to gain;
4. That it be done without the owners consent;
5. That it be accomplished without the use of violence or intimidation against
persons, nor of force upon things;
6. That it be done with grave abuse of confidence.
On the sufficiency of the Information, Section 6, Rule 110 of the Rules of Court
requires, inter alia, that the information must state the acts or omissions
complained of as constitutive of the offense.
On the manner of how the Information should be worded, Section 9, Rule 110 of
the Rules of Court, is enlightening:
Section 9. Cause of the accusation. The acts or omissions complained of as
constituting the offense and the qualifying and aggravating circumstances must
be stated in ordinary and concise language and not necessarily in the language
used in the statute but in terms sufficient to enable a person of common
understanding to know what offense is being charged as well as its qualifying
and aggravating circumstances and for the court to pronounce judgment.
It is evident that the Information need not use the exact language of the statute in
alleging the acts or omissions complained of as constituting the offense. The test
is whether it enables a person of common understanding to know the charge
against him, and the court to render judgment properly.5
The portion of the Information relevant to this discussion reads:

A]bove-named [respondents], conspiring, confederating, and helping one another, with grave abuse of confidence, being the Cashier
and Bookkeeper of the Rural Bank of Pototan, Inc., Pototan, Iloilo, without the knowledge and/or consent of the management of the Bank x
x x.

It is beyond doubt that tellers, Cashiers, Bookkeepers and other employees of a

Bank who come into possession of the monies deposited therein enjoy the
confidence reposed in them by their employer. Banks, on the other hand, where
monies are deposited, are considered the owners thereof. This is very clear not
only from the express provisions of the law, but from established jurisprudence.
The relationship between banks and depositors has been held to be that of
creditor and debtor. Articles 1953 and 1980 of the New Civil Code, as
appropriately pointed out by petitioner, provide as follows:
Article 1953. A person who receives a loan of money or any other fungible thing
acquires the ownership thereof, and is bound to pay to the creditor an equal
amount of the same kind and quality.
Article 1980. Fixed, savings, and current deposits of money in banks and similar
institutions shall be governed by the provisions concerning loan.
In a long line of cases involving Qualified Theft, this Court has firmly established
the nature of possession by the Bank of the money deposits therein, and the
duties being performed by its employees who have custody of the money or have
come into possession of it. The Court has consistently considered the allegations
in the Information that such employees acted with grave abuse of confidence, to
the damage and prejudice of the Bank, without particularly referring to it as owner
of the money deposits, as sufficient to make out a case of Qualified Theft. For a
graphic illustration, we cite Roque v. People,6 where the accused teller was
convicted for Qualified Theft based on this Information:
That on or about the 16th day of November, 1989, in the municipality of
Floridablanca, province of Pampanga, Philippines and within the jurisdiction of
his Honorable Court, the above-named accused ASUNCION GALANG ROQUE,
being then employed as teller of the Basa Air Base Savings and Loan
Association Inc. (BABSLA) with office address at Basa Air Base, Floridablanca,
Pampanga, and as such was authorized and reposed with the responsibility to
receive and collect capital contributions from its member/contributors of said
corporation, and having collected and received in her capacity as teller of the
BABSLA the sum of TEN THOUSAND PESOS (P10,000.00), said accused, with
intent of gain, with grave abuse of confidence and without the knowledge
and consent of said corporation, did then and there willfully, unlawfully and
feloniously take, steal and carry away the amount of P10,000.00, Philippine
currency, by making it appear that a certain depositor by the name of Antonio
Salazar withdrew from his Savings Account No. 1359, when in truth and in fact
said Antonio Salazar did not withdr[a]w the said amount of P10,000.00 to the
damage and prejudice of BABSLA in the total amount of P10,000.00, Philippine
currency.
In convicting the therein appellant, the Court held that:
[S]ince the teller occupies a position of confidence, and the bank places money
in the tellers possession due to the confidence reposed on the teller, the felony
of qualified theft would be committed. 7

Also in People v. Sison,8 the Branch Operations Officer was convicted of the
crime of Qualified Theft based on the Information as herein cited:
That in or about and during the period compressed between January 24, 1992
and February 13, 1992, both dates inclusive, in the City of Manila, Philippines,
the said accused did then and there wilfully, unlawfully and feloniously, with intent
of gain and without the knowledge and consent of the owner thereof, take, steal
and carry away the following, to wit:
Cash money amounting to P6,000,000.00 in different denominations belonging to
the PHILIPPINE COMMERCIAL INTERNATIONAL BANK (PCIBank for brevity),
Luneta Branch, Manila represented by its Branch Manager, HELEN U. FARGAS,
to the damage and prejudice of the said owner in the aforesaid amount of
P6,000,000.00, Philippine Currency.
That in the commission of the said offense, herein accused acted with grave
abuse of confidence and unfaithfulness, he being the Branch Operation Officer of
the said complainant and as such he had free access to the place where the said
amount of money was kept.
The judgment of conviction elaborated thus:
The crime perpetuated by appellant against his employer, the Philippine
Commercial and Industrial Bank (PCIB), is Qualified Theft. Appellant could not
have committed the crime had he not been holding the position of Luneta Branch
Operation Officer which gave him not only sole access to the bank vault xxx. The
management of the PCIB reposed its trust and confidence in the appellant as its
Luneta Branch Operation Officer, and it was this trust and confidence which he
exploited to enrich himself to the damage and prejudice of PCIB x x x. 9
From another end, People v. Locson,10 in addition to People v. Sison,
described the nature of possession by the Bank. The money in this case was in
the possession of the defendant as receiving teller of the bank, and the
possession of the defendant was the possession of the Bank. The Court held
therein that when the defendant, with grave abuse of confidence, removed the
money and appropriated it to his own use without the consent of the Bank, there
was taking as contemplated in the crime of Qualified Theft. 11
Conspicuously, in all of the foregoing cases, where the Informations merely
alleged the positions of the respondents; that the crime was committed with
grave abuse of confidence, with intent to gain and without the knowledge and
consent of the Bank, without necessarily stating the phrase being assiduously
insisted upon by respondents, "of a relation by reason of dependence,
guardianship or vigilance, between the respondents and the offended party
that has created a high degree of confidence between them, which
respondents abused,"12 and without employing the word "owner" in lieu of the
"Bank" were considered to have satisfied the test of sufficiency of allegations.
As regards the respondents who were employed as Cashier and Bookkeeper of
the Bank in this case, there is even no reason to quibble on the allegation in the
Informations that they acted with grave abuse of confidence. In fact, the
Information which alleged grave abuse of confidence by accused herein is even
more precise, as this is exactly the requirement of the law in qualifying the crime
of Theft.

In summary, the Bank acquires ownership of the money deposited by its clients;
and the employees of the Bank, who are entrusted with the possession of money
of the Bank due to the confidence reposed in them, occupy positions of
confidence. The Informations, therefore, sufficiently allege all the essential
elements constituting the crime of Qualified Theft.
On the theory of the defense that the DOJ is the principal party who may file the
instant petition, the ruling in Mobilia Products, Inc. v. Hajime Umezawa 13 is
instructive. The Court thus enunciated:
In a criminal case in which the offended party is the State, the interest of the
private complainant or the offended party is limited to the civil liability arising
therefrom. Hence, if a criminal case is dismissed by the trial court or if there is an
acquittal, a reconsideration of the order of dismissal or acquittal may be
undertaken, whenever legally feasible, insofar as the criminal aspect thereof is
concerned and may be made only by the public prosecutor; or in the case of an
appeal, by the State only, through the OSG. x x x.
On the alleged wrong mode of appeal by petitioner, suffice it to state that the rule
is well-settled that in appeals by certiorari under Rule 45 of the Rules of Court,
only errors of law may be raised, 14 and herein petitioner certainly raised a
question of law.
As an aside, even if we go beyond the allegations of the Informations in these
cases, a closer look at the records of the preliminary investigation conducted will
show that, indeed, probable cause exists for the indictment of herein
respondents. Pursuant to Section 6, Rule 112 of the Rules of Court, the judge
shall issue a warrant of arrest only upon a finding of probable cause after
personally evaluating the resolution of the prosecutor and its supporting
evidence. Soliven v. Makasiar,15 as reiterated in Allado v. Driokno,16 explained
that probable cause for the issuance of a warrant of arrest is the existence of
such facts and circumstances that would lead a reasonably discreet and prudent
person to believe that an offense has been committed by the person sought to be
arrested.17 The records reasonably indicate that the respondents may have,
indeed, committed the offense charged.
Before closing, let it be stated that while it is truly imperative upon the fiscal or
the judge, as the case may be, to relieve the respondents from the pain of going
through a trial once it is ascertained that no probable cause exists to form a
sufficient belief as to the guilt of the respondents, conversely, it is also equally
imperative upon the judge to proceed with the case upon a showing that there is
a prima facie case against the respondents.
WHEREFORE, premises considered, the Petition for Review on Certiorari is
hereby GRANTED. The Orders dated 30 January 2006 and 9 June 2006 of the
RTC dismissing Criminal Cases No. 05-3054 to 05-3165 are REVERSED and
SET ASIDE. Let the corresponding Warrants of Arrest issue against herein
respondents TERESITA PUIG and ROMEO PORRAS. The RTC Judge of Branch
68, in Dumangas, Iloilo, is directed to proceed with the trial of Criminal Cases No.
05-3054 to 05-3165, inclusive, with reasonable dispatch. No pronouncement as
to costs.
SO ORDERED.

Ynares-Santiago, Chairperson, Austria-Martinez, Reyes, Leonardo-de Castro *,

JJ., concur.
G.R. No. 174269
May 8, 2009
POLO S. PANTALEON, Petitioner,
vs.
AMERICAN EXPRESS INTERNATIONAL, INC., Respondent.
DECISION
TINGA, J.:
The petitioner, lawyer Polo Pantaleon, his wife Julialinda, daughter Anna Regina
and son Adrian Roberto, joined an escorted tour of Western Europe organized by
Trafalgar Tours of Europe, Ltd., in October of 1991. The tour group arrived in
Amsterdam in the afternoon of 25 October 1991, the second to the last day of the
tour. As the group had arrived late in the city, they failed to engage in any sightseeing. Instead, it was agreed upon that they would start early the next day to
see the entire city before ending the tour.
The following day, the last day of the tour, the group arrived at the Coster
Diamond House in Amsterdam around 10 minutes before 9:00 a.m. The group
had agreed that the visit to Coster should end by 9:30 a.m. to allow enough time
to take in a guided city tour of Amsterdam. The group was ushered into Coster
shortly before 9:00 a.m., and listened to a lecture on the art of diamond polishing
that lasted for around ten minutes. 1 Afterwards, the group was led to the stores
showroom to allow them to select items for purchase. Mrs. Pantaleon had
already planned to purchase even before the tour began a 2.5 karat diamond
brilliant cut, and she found a diamond close enough in approximation that she
decided to buy.2 Mrs. Pantaleon also selected for purchase a pendant and a
chain,3 all of which totaled U.S. $13,826.00.
To pay for these purchases, Pantaleon presented his American Express credit
card together with his passport to the Coster sales clerk. This occurred at around
9:15 a.m., or 15 minutes before the tour group was slated to depart from the
store. The sales clerk took the cards imprint, and asked Pantaleon to sign the
charge slip. The charge purchase was then referred electronically to
respondents Amsterdam office at 9:20 a.m.
Ten minutes later, the store clerk informed Pantaleon that his AmexCard had not
yet been approved. His son, who had already boarded the tour bus, soon
returned to Coster and informed the other members of the Pantaleon family that
the entire tour group was waiting for them. As it was already 9:40 a.m., and he
was already worried about further inconveniencing the tour group, Pantaleon
asked the store clerk to cancel the sale. The store manager though asked plaintiff
to wait a few more minutes. After 15 minutes, the store manager informed
Pantaleon that respondent had demanded bank references. Pantaleon supplied
the names of his depositary banks, then instructed his daughter to return to the
bus and apologize to the tour group for the delay.
At around 10:00 a.m, or around 45 minutes after Pantaleon had presented his
AmexCard, and 30 minutes after the tour group was supposed to have left the
store, Coster decided to release the items even without respondents approval of

the purchase. The spouses Pantaleon returned to the bus. It is alleged that their
offers of apology were met by their tourmates with stony silence. 4 The tour
groups visible irritation was aggravated when the tour guide announced that the
city tour of Amsterdam was to be canceled due to lack of remaining time, as they
had to catch a 3:00 p.m. ferry at Calais, Belgium to London. 5 Mrs. Pantaleon
ended up weeping, while her husband had to take a tranquilizer to calm his
nerves.
It later emerged that Pantaleons purchase was first transmitted for approval to
respondents Amsterdam office at 9:20 a.m., Amsterdam time, then referred to
respondents Manila office at 9:33 a.m, then finally approved at 10:19 a.m.,
Amsterdam time.6 The Approval Code was transmitted to respondents
Amsterdam office at 10:38 a.m., several minutes after petitioner had already left
Coster, and 78 minutes from the time the purchases were electronically
transmitted by the jewelry store to respondents Amsterdam office.
After the star-crossed tour had ended, the Pantaleon family proceeded to the
United States before returning to Manila on 12 November 1992. While in the
United States, Pantaleon continued to use his AmEx card, several times without
hassle or delay, but with two other incidents similar to the Amsterdam brouhaha.
On 30 October 1991, Pantaleon purchased golf equipment amounting to US
$1,475.00 using his AmEx card, but he cancelled his credit card purchase and
borrowed money instead from a friend, after more than 30 minutes had
transpired without the purchase having been approved. On 3 November 1991,
Pantaleon used the card to purchase childrens shoes worth $87.00 at a store in
Boston, and it took 20 minutes before this transaction was approved by
respondent.
On 4 March 1992, after coming back to Manila, Pantaleon sent a letter 7 through
counsel to the respondent, demanding an apology for the "inconvenience,
humiliation and embarrassment he and his family thereby suffered" for
respondents refusal to provide credit authorization for the aforementioned
purchases.8 In response, respondent sent a letter dated 24 March 1992, 9 stating
among others that the delay in authorizing the purchase from Coster was
attributable to the circumstance that the charged purchase of US $13,826.00
"was out of the usual charge purchase pattern established." 10 Since respondent
refused to accede to Pantaleons demand for an apology, the aggrieved
cardholder instituted an action for damages with the Regional Trial Court (RTC)
of Makati City, Branch 145.11 Pantaleon prayed that he be awarded
P2,000,000.00, as moral damages; P500,000.00, as exemplary damages;
P100,000.00, as attorneys fees; and P50,000.00 as litigation expenses.12
On 5 August 1996, the Makati City RTC rendered a decision 13 in favor of
Pantaleon, awarding him P500,000.00 as moral damages, P300,000.00 as
exemplary damages, P100,000.00 as attorneys fees, and P85,233.01 as
expenses of litigation. Respondent filed a Notice of Appeal, while Pantaleon
moved for partial reconsideration, praying that the trial court award the increased
amount of moral and exemplary damages he had prayed for. 14 The RTC denied
Pantaleons motion for partial reconsideration, and thereafter gave due course to
respondents Notice of Appeal.15

On 18 August 2006, the Court of Appeals rendered a decision 16 reversing the

award of damages in favor of Pantaleon, holding that respondent had not
breached its obligations to petitioner. Hence, this petition.
The key question is whether respondent, in connection with the aforementioned
transactions, had committed a breach of its obligations to Pantaleon. In addition,
Pantaleon submits that even assuming that respondent had not been in breach
of its obligations, it still remained liable for damages under Article 21 of the Civil
Code.
The RTC had concluded, based on the testimonial representations of Pantaleon
and respondents credit authorizer, Edgardo Jaurigue, that the normal approval
time for purchases was "a matter of seconds." Based on that standard,
respondent had been in clear delay with respect to the three subject transactions.
As it appears, the Court of Appeals conceded that there had been delay on the
part of respondent in approving the purchases. However, it made two critical
conclusions in favor of respondent. First, the appellate court ruled that the delay
was not attended by bad faith, malice, or gross negligence. Second, it ruled that
respondent "had exercised diligent efforts to effect the approval" of the
purchases, which were "not in accordance with the charge pattern" petitioner had
established for himself, as exemplified by the fact that at Coster, he was "making
his very first single charge purchase of US$13,826," and "the record of
[petitioner]s past spending with [respondent] at the time does not favorably
support his ability to pay for such purchase."17
On the premise that there was an obligation on the part of respondent "to
approve or disapprove with dispatch the charge purchase," petitioner argues that
the failure to timely approve or disapprove the purchase constituted mora
solvendi on the part of respondent in the performance of its obligation. For its
part, respondent characterizes the depiction by petitioner of its obligation to him
as "to approve purchases instantaneously or in a matter of seconds."
Petitioner correctly cites that under mora solvendi, the three requisites for a
finding of default are that the obligation is demandable and liquidated; the debtor
delays performance; and the creditor judicially or extrajudicially requires the
debtors performance.18 Petitioner asserts that the Court of Appeals had wrongly
applied the principle of mora accipiendi, which relates to delay on the part of the
obligee in accepting the performance of the obligation by the obligor. The
requisites of mora accipiendi are: an offer of performance by the debtor who has
the required capacity; the offer must be to comply with the prestation as it should
be performed; and the creditor refuses the performance without just cause. 19 The
error of the appellate court, argues petitioner, is in relying on the invocation by
respondent of "just cause" for the delay, since while just cause is determinative of
mora accipiendi, it is not so with the case of mora solvendi.
We can see the possible source of confusion as to which type of mora to
appreciate. Generally, the relationship between a credit card provider and its card
holders is that of creditor-debtor,20 with the card company as the creditor
extending loans and credit to the card holder, who as debtor is obliged to repay
the creditor. This relationship already takes exception to the general rule that as
between a bank and its depositors, the bank is deemed as the debtor while the

depositor is considered as the creditor.21 Petitioner is asking us, not baselessly, to

again shift perspectives and again see the credit card company as the
debtor/obligor, insofar as it has the obligation to the customer as creditor/obligee
to act promptly on its purchases on credit.
Ultimately, petitioners perspective appears more sensible than if we were to still
regard respondent as the creditor in the context of this cause of action. If there
was delay on the part of respondent in its normal role as creditor to the
cardholder, such delay would not have been in the acceptance of the
performance of the debtors obligation (i.e., the repayment of the debt), but it
would be delay in the extension of the credit in the first place. Such delay would
not fall under mora accipiendi, which contemplates that the obligation of the
debtor, such as the actual purchases on credit, has already been constituted.
Herein, the establishment of the debt itself (purchases on credit of the jewelry)
had not yet been perfected, as it remained pending the approval or consent of
the respondent credit card company.
Still, in order for us to appreciate that respondent was in mora solvendi, we will
have to first recognize that there was indeed an obligation on the part of
respondent to act on petitioners purchases with "timely dispatch," or for the
purposes of this case, within a period significantly less than the one hour it
apparently took before the purchase at Coster was finally approved.
The findings of the trial court, to our mind, amply established that the tardiness
on the part of respondent in acting on petitioners purchase at Coster did
constitute culpable delay on its part in complying with its obligation to act
promptly on its customers purchase request, whether such action be favorable
or unfavorable. We quote the trial court, thus:
As to the first issue, both parties have testified that normal approval time for
purchases was a matter of seconds.
Plaintiff testified that his personal experience with the use of the card was that
except for the three charge purchases subject of this case, approvals of his
charge purchases were always obtained in a matter of seconds.
Defendants credit authorizer Edgardo Jaurique likewise testified:
Q. You also testified that on normal occasions, the normal approval time for
charges would be 3 to 4 seconds?
A. Yes, Maam.
Both parties likewise presented evidence that the processing and approval of
plaintiffs charge purchase at the Coster Diamond House was way beyond the
normal approval time of a "matter of seconds".
Plaintiff testified that he presented his AmexCard to the sales clerk at Coster, at
9:15 a.m. and by the time he had to leave the store at 10:05 a.m., no approval
had yet been received. In fact, the Credit Authorization System (CAS) record of
defendant at Phoenix Amex shows that defendants Amsterdam office received
the request to approve plaintiffs charge purchase at 9:20 a.m., Amsterdam time
or 01:20, Phoenix time, and that the defendant relayed its approval to Coster at
10:38 a.m., Amsterdam time, or 2:38, Phoenix time, or a total time lapse of one
hour and [18] minutes. And even then, the approval was conditional as it directed
in computerese [sic] "Positive Identification of Card holder necessary further

charges require bank information due to high exposure. By Jack Manila."

The delay in the processing is apparent to be undue as shown from the frantic
successive queries of Amexco Amsterdam which reads: "US$13,826.
Cardmember buying jewels. ID seen. Advise how long will this take?" They were
sent at 01:33, 01:37, 01:40, 01:45, 01:52 and 02:08, all times Phoenix. Manila
Amexco could be unaware of the need for speed in resolving the charge
purchase referred to it, yet it sat on its hand, unconcerned.
xxx
To repeat, the Credit Authorization System (CAS) record on the Amsterdam
transaction shows how Amexco Netherlands viewed the delay as unusually
frustrating. In sequence expressed in Phoenix time from 01:20 when the charge
purchased was referred for authorization, defendants own record shows:
01:22 the authorization is referred to Manila Amexco
01:32 Netherlands gives information that the identification of the cardmember
has been presented and he is buying jewelries worth US $13,826.
01:33 Netherlands asks "How long will this take?"
02:08 Netherlands is still asking "How long will this take?"
The Court is convinced that defendants delay constitute[s] breach of its
contractual obligation to act on his use of the card abroad "with special
handling."22 (Citations omitted)
xxx
Notwithstanding the popular notion that credit card purchases are approved
"within seconds," there really is no strict, legally determinative point of
demarcation on how long must it take for a credit card company to approve or
disapprove a customers purchase, much less one specifically contracted upon
by the parties. Yet this is one of those instances when "youd know it when youd
see it," and one hour appears to be an awfully long, patently unreasonable length
of time to approve or disapprove a credit card purchase. It is long enough time
for the customer to walk to a bank a kilometer away, withdraw money over the
counter, and return to the store.
Notably, petitioner frames the obligation of respondent as "to approve or
disapprove" the purchase "in timely dispatch," and not "to approve the purchase
instantaneously or within seconds." Certainly, had respondent disapproved
petitioners purchase "within seconds" or within a timely manner, this particular
action would have never seen the light of day. Petitioner and his family would
have returned to the bus without delay internally humiliated perhaps over the
rejection of his card yet spared the shame of being held accountable by newlymade friends for making them miss the chance to tour the city of Amsterdam.
We do not wish do dispute that respondent has the right, if not the obligation, to
verify whether the credit it is extending upon on a particular purchase was indeed
contracted by the cardholder, and that the cardholder is within his means to make
such transaction. The culpable failure of respondent herein is not the failure to
timely approve petitioners purchase, but the more elemental failure to timely act
on the same, whether favorably or unfavorably. Even assuming that respondents
credit authorizers did not have sufficient basis on hand to make a judgment, we
see no reason why respondent could not have promptly informed petitioner the

reason for the delay, and duly advised him that resolving the same could take
some time. In that way, petitioner would have had informed basis on whether or
not to pursue the transaction at Coster, given the attending circumstances.
Instead, petitioner was left uncomfortably dangling in the chilly autumn winds in a
foreign land and soon forced to confront the wrath of foreign folk.
Moral damages avail in cases of breach of contract where the defendant acted
fraudulently or in bad faith, and the court should find that under the
circumstances, such damages are due. The findings of the trial court are ample
in establishing the bad faith and unjustified neglect of respondent, attributable in
particular to the "dilly-dallying" of respondents Manila credit authorizer, Edgardo
Jaurique.23 Wrote the trial court:
While it is true that the Cardmembership Agreement, which defendant prepared,
is silent as to the amount of time it should take defendant to grant authorization
for a charge purchase, defendant acknowledged that the normal time for
approval should only be three to four seconds. Specially so with cards used
abroad which requires "special handling", meaning with priority. Otherwise, the
object of credit or charge cards would be lost; it would be so inconvenient to use
that buyers and consumers would be better off carrying bundles of currency or
travellers checks, which can be delivered and accepted quickly. Such right was
not accorded to plaintiff in the instances complained off for reasons known only to
defendant at that time. This, to the Courts mind, amounts to a wanton and
deliberate refusal to comply with its contractual obligations, or at least abuse of
its rights, under the contract.24
xxx
The delay committed by defendant was clearly attended by unjustified neglect
and bad faith, since it alleges to have consumed more than one hour to simply go
over plaintiffs past credit history with defendant, his payment record and his
credit and bank references, when all such data are already stored and readily
available from its computer. This Court also takes note of the fact that there is
nothing in plaintiffs billing history that would warrant the imprudent suspension of
action by defendant in processing the purchase. Defendants witness Jaurique
admits:
Q. But did you discover that he did not have any outstanding account?
A. Nothing in arrears at that time.
Q. You were well aware of this fact on this very date?
A. Yes, sir.
Mr. Jaurique further testified that there were no "delinquencies" in plaintiffs
account.25
It should be emphasized that the reason why petitioner is entitled to damages is
not simply because respondent incurred delay, but because the delay, for which
culpability lies under Article 1170, led to the particular injuries under Article 2217
of the Civil Code for which moral damages are remunerative. 26 Moral damages
do not avail to soothe the plaints of the simply impatient, so this decision should
not be cause for relief for those who time the length of their credit card
transactions with a stopwatch. The somewhat unusual attending circumstances
to the purchase at Coster that there was a deadline for the completion of that

purchase by petitioner before any delay would redound to the injury of his several
traveling companions gave rise to the moral shock, mental anguish, serious
anxiety, wounded feelings and social humiliation sustained by the petitioner, as
concluded by the RTC.27 Those circumstances are fairly unusual, and should not
give rise to a general entitlement for damages under a more mundane set of
facts.
We sustain the amount of moral damages awarded to petitioner by the RTC.
There is no hard-and-fast rule in determining what would be a fair and
reasonable amount of moral damages, since each case must be governed by its
own peculiar facts, however, it must be commensurate to the loss or injury
suffered.28 Petitioners original prayer for P5,000,000.00 for moral damages is
excessive under the circumstances, and the amount awarded by the trial court of
P500,000.00 in moral damages more seemly.1avvphi1
Likewise, we deem exemplary damages available under the circumstances, and
the amount of P300,000.00 appropriate. There is similarly no cause though to
disturb the determined award of P100,000.00 as attorneys fees, and P85,233.01
as expenses of litigation.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of
Appeals is REVERSED and SET ASIDE. The Decision of the Regional Trial
Court of Makati, Branch 145 in Civil Case No. 92-1665 is hereby REINSTATED.
Costs against respondent.
SO ORDERED.
DANTE O. TINGA
Associate Justice
G.R. No. L-32644
October 4, 1930
CU UNJIENG E HIJOS, plaintiff-appelle,
vs.
THE MABALACAT SUGAR CO., ET AL., defendants.
THE MABALACAT SUGAR CO., appellant.
Romeo Mercado for appellant. Araneta and Zaragoza for plaintiff-appellee.
Duran and Lim for defendant-appellee Siuliong and Co.
STREET, J.:
This action was instituted in the Court of First Instance of Pampanga by Cu
Unjieng e Hijos, for the purpose of recovering from the Mabalacat Sugar
Company an indebtedness amounting to more than P163,00, with interest, and to
foreclose a mortgage given by the debtor to secure the same, as well as to
recover stipulated attorney's fee and the sum of P1,206, paid by the plaintiff for
insurance upon the mortgaged property, with incidental relief. In the complaint
Siuliong & Co., Inc., was joined as defendant, as a surety of the Mabalacat Sugar
Company, and as having a third mortgage on the mortgaged property. The
Philippine National Bank was also joined by reason of its interest as second
mortgagee of the land covered by the mortgage to the plaintiff. After the cause
had been brought to issue by the answers of the several defendants, the cause

was heard and judgment rendered, the dispositive portion of the decision being
as follows:
Por las consideraciones expuestas, el Juzgado condena a The Mabalacat Sugar
Company a pagar a la demandante la suma de P163,534.73, con sus intereses
de 12 por ciento al ano, compuestos mensualmente desde el 1. de mayo de
1929. Tambien se le condena a pagar a dicha demandante la suma de P2,412
por las primas de seguros abonadas por esta, con sus intereses de 12 por ciento
al ano, compuestos tambien mensualmente desde el 15 de mayo de 1928, mas
la de P7,500 por honorarios de abogados y las costas del juicio. Y si esta deuda
no se pagare dentro del plazo de tres meses, se ejecutaran los bienes
hipotecados de acuerdo con la ley.
Si del producto de la venta hubiese algun remanente, este se destinara al pago
del credito del Banco Nacional, o sea de P32,704.69, con sus intereses de 9 por
ciento al ano desde el 7 de junio de 1929, sin perjuicio de la orden de ejecucion
que pudiera expedirse en el asundo No. 26435 del Juzgado de Primera Instancia
de Manila.
Se condena ademas a The Mabalacat Sugar Company al pago de la suma de
P3,205.78 reclamada por Siuliong & Co., con sus intereses de 9 por ciento al
ano desde el 29 de julio de 1926 hasta su completo pago, ordenandola que rinda
cuentas del azucar por ella producido y pague la comision correspondiente bajo
la base de 5 por ciento de su valor, descontandose, desde luego, las cantidades
ya pagadas.
Se absuelve de la demanda de Cu Unjieng e Hijos a Siuliong & Co., Inc.1awph!
l.net
From this judgment the defendant, the Mabalacat Sugar Company, appealed.
The first point assigned as error has relation to the question whether the action
was prematurely stated. In this connection we note that the mortgage executed
by the Mabalacat Sugar Company contains, in paragraph 5, a provision to the
effect that non-compliance on the part of the mortgage debtor with any of the
obligations assumed in virtue of this contract will cause the entire debt to become
due and give occasion for the foreclosure of the mortgage. The debtor party
failed to comply with the obligation, imposed upon it in the mortgage, to pay the
mortgage debt in the stipulated installments at the time specified in the contract.
It results that the creditor was justified in treating the entire mortgage debt as
having been accelerated by such failure of the debtor in paying the installments.
It appears, however, that on or about October 20, 1928, the mortgage creditor,
Cu Unjieng e Hijos, agreed to extend the time for payment of the mortgage
indebtedness until June 30, 1929, with certain interim payments to be made upon
specified dates prior to the contemplated final liquidation of the whole
indebtedness. But the debtor party failed to make the interim payments due on
February 25, 1929, March 25, 1929, and April 25, 1929, and failed altogether to
pay the balance due, according to the terms of this extension, on June 30, 1929.
Notwithstanding the failure of the debtor to comply with the terms of this
extension, it is insisted for the appellant that this agreement for the extension of
the time of payment had the effect of abrogating the stipulation of the original
contract with respect to the acceleration of the maturity of the debt by non-

compliance with the terms of the mortgage. As the trial court pointed out, this
contention is untenable. The agreement to extend the time of payment was
voluntary and without consideration so far as the creditor is concerned; and the
failure of the debtor to comply with the terms of the extension justified the creditor
in treating it as of no effect. The first error is therefore without merit.
The second error is directed to the propriety of the interest charges made by the
plaintiff in estimating the amount of the indebtedness. In this connection we note
that, under the second clause of the mortgage, interest should be calculated
upon the indebtedness at the rate of 12 per cent per annum. In the same clause,
but in a separate paragraph, there is another provision with respect to the
payment of interest expressed in Spanish in the following words:
Los intereses seran pagados mensualmente a fin de cada mes, computados
teniendo en cuenta el capital del prestamo aun no pagado.
Translated into English this provision reads substantially as follows: "Interest, to
be computed upon the still unpaid capital of the loan, shall be paid monthly, at
the end of each month."
It is well settled that, under article 1109 of the Civil Code, as well as under
section 5 of the Usury Law (Act No. 2655), the parties may stipulate that interest
shall be compounded; and rests for the computation of compound interest can
certainly be made monthly, as well as quarterly, semiannually, or annually. But in
the absence of express stipulation for the accumulation of compound interest, no
interest can be collected upon interest until the debt is judicially claimed, and
then the rate at which interest upon accrued interest must be computed is fixed
at 6 per cent per annum.
In the present case, however, the language which we have quoted above does
not justify the charging of interest upon interest, so far as interest on the capital is
concerned. The provision quoted merely requires the debtor to pay interest
monthly at the end of each month, such interest to be computed upon the capital
of the loan not already paid. Clearly this provision does not justify the charging of
compound interest upon the interest accruing upon the capital monthly. It is true
that in subsections (a), (b) and (c) of article IV of the mortgage, it is stipulated
that the interest can be thus computed upon sums which the creditor would have
to pay out (a) to maintain insurance upon the mortgaged property, (b) to pay the
land tax upon the same property, and (c) upon disbursements that might be
made by the mortgagee to maintain the property in good condition. But the chief
thing is that interest cannot be thus accumulated on unpaid interest accruing
upon the capital of the debt.
The trial court was of the opinion that interest could be so charged, because of
the Exhibit 1 of the Mabalacat Sugar Company, which the court considered as an
interpretation by the parties to the contract and a recognition by the debtor of the
propriety of compounding the interest earned by the capital. But the exhibit
referred to is merely a receipt showing that the sum of P256.28 was, on March
19, 1928, paid by the debtor to the plaintiff as interest upon interest. But where
interest is improperly charged, at an unlawful rate, the mere voluntary payment of
it to the creditor by the debtor is not binding. Such payment, in the case before
us, was usurious, being in excess of 12 per cent which is allowed to be charged,

under section 2 of the Usury Law, when a debt is secured by mortgage upon real
property. The Exhibit 1 therefore adds no support to the contention of the plaintiff
that interest upon interest can be accumulated in the manner adopter by the
creditor in this case. The point here ruled is in exact conformity with the decision
of this court in Bachrach Garage and Taxicab Co. vs. Golingco (39 Phil., 192),
where this court held that interest cannot be allowed in the absence of
stipulation, or in default thereof, except when the debt is judicially claimed; and
when the debt is judicially claimed, the interest upon the interest can only be
computed at the rate of 6 per cent per annum.
It results that the appellant's second assignment of error is well taken, and the
compound interest must be eliminated from the judgment. With respect to the
amount improperly charged, we accept the estimate submitted by the president
and manager of the Mabalacat Sugar Company, who says that the amount
improperly included in the computation made by the plaintiff's bookkeeper is
P879.84, in addition to the amount of P256.28 covered by Exhibit 1 of the
Mabalacat Sugar Company. But the plaintiff creditor had the right to charge
interest, in the manner adopted by it, upon insurance premiums which it had paid
out; and if any discrepancy of importance is discoverable by the plaintiff in the
result here reached, it will be at liberty to submit a revised computation in this
court, upon motion for reconsideration, wherein interest shall be computed in
accordance with this opinion, that is to say, that no accumulation of interest will
be permitted at monthly intervals, as regards the capital of the debt, but such
unpaid interest shall draw interest at the rate of 6 per cent from the date of the
institution of the action.
In the third assignment of error the appellant complains, as excessive, of the
attorney's fees allowed by the court in accordance with stipulation in the
mortgage. The allowance made on the principal debt was around 4 per cent, and
about the same upon the fee allowed to the bank. Under the circumstances we
think the debtor has no just cause for complaint upon this score.
The fourth assignment of error complains of the failure of the trial court to permit
an amendment to be filed by the debtor to its answer, the application therefore
having been made on the day when the cause had been set for trial, with notice
that the period was non-extendible. The point was a matter in the discretion of
the court, and no abuse of discretion is shown.
From what has been stated, it follows that the appealed judgment must be
modified by deducting the sum of P1,136.12 from the principal debt, so that the
amount of said indebtedness shall be P162,398.61, with interest at 12 per cent
per annum, from May 1, 1929. In other respects the judgment will be affirmed,
and it is so ordered, with cost against the appellant.
Avancea, C.J., Malcolm, Villamor, Ostrand, Johns, Romualdez and Villa-Real,
JJ., concur.
G.R. No. L-47878
July 24, 1942
GIL JARDENIL, plaintiff-appellant,
vs.
HEFTI SOLAS (alias HEPTI SOLAS, JEPTI SOLAS), defendant-appellee.

Eleuterio J. Gustilo for appellant.Jose C. Robles for appellee.

MORAN, J.:
This is an action for foreclosure of mortgage. The only question raised in this
appeal is: Is defendant-appellee bound to pay the stipulated interest only up to
the date of maturity as fixed in the promissory note, or up to the date payment is
effected? This question is, in our opinion controlled by the express stipulation of
the parties.
Paragraph 4 of the mortgage deed recites:
Que en consideracion a dicha suma aun por pagar de DOS MIL
CUATROCIENTOS PESOS (P2,4000.00), moneda filipina, que el Sr. Hepti Solas
se compromete a pagar al Sr. Jardenil en o antes del dia treintaiuno (31) de
marzo de mil novecientos treintaicuarto (1934), con los intereses de dicha suma
al tipo de doce por ciento (12%) anual a partir desde fecha hasta el dia de su
vencimiento o sea treintaiuno (31) de marzo de mil novecientos treintaicuatro
(1934), por la presente, el Sr. Hepti Solas cede y traspasa, por via de primera
hipoteca, a favor del Sr. Jardenil, sus herederos y causahabientes, la parcela de
terreno descrita en el parrafo primero (1.) de esta escritura.
Defendant-appellee has, therefore, clearly agreed to pay interest only up to the
date of maturity, or until March 31, 1934. As the contract is silent as to whether
after that date, in the event of non-payment, the debtor would continue to pay
interest, we cannot in law, indulge in any presumption as to such interest;
otherwise, we would be imposing upon the debtor an obligation that the parties
have not chosen to agree upon. Article 1755 of the Civil Code provides that
"interest shall be due only when it has been expressly stipulated." (Emphasis
supplied.)
A writing must be interpreted according to the legal meaning of its language
(section 286, Act No. 190, now section 58, Rule 123), and only when the wording
of the written instrument appears to be contrary to the evident intention of the
parties that such intention must prevail. (Article 1281, Civil Code.) There is
nothing in the mortgage deed to show that the terms employed by the parties
thereto are at war with their evident intent. On the contrary the act of the
mortgage of granting to the mortgagor on the same date of execution of the deed
of mortgage, an extension of one year from the date of maturity within which to
make payment, without making any mention of any interest which the mortgagor
should pay during the additional period (see Exhibit B attached to the complaint),
indicates that the true intention of the parties was that no interest should be paid
during the period of grace. What reason the parties may have therefor, we need
not here seek to explore.
Neither has either of the parties shown that, by mutual mistake, the deed of
mortgage fails to express their agreement, for if such mistake existed, plaintiff
would have undoubtedly adduced evidence to establish it and asked that the
deed be reformed accordingly, under the parcel-evidence rule.
We hold therefore, that as the contract is clear and unmistakable and the terms
employed therein have not been shown to belie or otherwise fail to express the
true intention of the parties and that the deed has not been assailed on the
ground of mutual mistake which would require its reformation, same should be

given its full force and effect. When a party sues on a written contract and no
attempt is made to show any vice therein, he cannot be allowed to lay any claim
more than what its clear stipulations accord. His omission, to which the law
attaches a definite warning as an in the instant case, cannot by the courts be
arbitrarily supplied by what their own notions of justice or equity may dictate.
Plaintiff is, therefore, entitled only to the stipulated interest of 12 per cent on the
loan of P2, 400 from November 8, 1932 to March 31, 1934. And it being a fact
that extra judicial demands have been made which we may assume to have
been so made on the expiration of the year of grace, he shall be entitled to legal
interest upon the principal and the accrued interest from April 1, 1935, until full
payment.
Thus modified judgment is affirmed, with costs against appellant.
Yulo, C.J., Ozaeta and Bocobo, JJ., concur.
G.R. No. 160533
January 12, 2005
FIRST FIL-SIN LENDING CORPORATION, petitioner,
vs.
GLORIA D. PADILLO, respondent.
DECISION
YNARES-SANTIAGO, J.:
Before us is a petition for review under Rule 45 of the Rules of Court, seeking a
reversal of the Court of Appeals decision in CA-G.R. CV No. 75183 1 dated
October 16, 2003, which reversed and set aside the decision of the Regional
Trial Court of Manila, Branch 21 in Civil Case No. 00-96235.
On July 22, 1997, respondent Gloria D. Padillo obtained a P500,000.00 loan from
petitioner First Fil-Sin Lending Corp. On September 7, 1997, respondent
obtained another P500,000.00 loan from petitioner. In both instances, respondent
executed a promissory note and disclosure statement. 2
For the first loan, respondent made 13 monthly interest payments of P22,500.00
each before she settled the P500,000.00 outstanding principal obligation on
February 2, 1999. As regards the second loan, respondent made 11 monthly
interest payments of P25,000.00 each before paying the principal loan of
P500,000.00 on February 2, 1999. 3 In sum, respondent paid a total of
P792,500.00 for the first loan and P775,000.00 for the second loan.
On January 27, 2000, respondent filed an action for sum of money against herein
petitioner before the Regional Trial Court of Manila. Alleging that she only agreed
to pay interest at the rates of 4.5% and 5% per annum, respectively, for the two
loans, and not 4.5% and 5% per month, respondent sought to recover the
amounts she allegedly paid in excess of her actual obligations.
On October 12, 2001,4 the trial court dismissed respondents complaint, and on
the counterclaim, ordered her to pay petitioner P311,125.00 with legal interest
from February 3, 1999 until fully paid plus 10% of the amount due as attorneys
fees and costs of the suit. 5 The trial court ruled that by issuing checks
representing interest payments at 4.5% and 5% monthly interest rates,
respondent is now estopped from questioning the provisions of the promissory
notes.

On appeal, the Court of Appeals (CA) reversed and set aside the decision of the
court a quo, the dispositive portion of which reads:
IN VIEW OF ALL THE FOREGOING, the appealed decision is REVERSED and
SET ASIDE and a new one entered: (1) ordering First Fil-Sin Lending
Corporation to return the amount of P114,000.00 to Gloria D. Padillo, and (2)
deleting the award of attorneys fees in favor of appellee. Other claims and
counterclaims are dismissed for lack of sufficient causes. No pronouncement as
to cost.
SO ORDERED.6
The appellate court ruled that, based on the disclosure statements executed by
respondent, the interest rates should be imposed on a monthly basis but only for
the 3-month term of the loan.l^vvphi1.net Thereafter, the legal interest rate will
apply. The CA also found the penalty charges pegged at 1% per day of delay
highly unconscionable as it would translate to 365% per annum. Thus, it was
reduced to 1% per month or 12% per annum.
Hence, the instant petition on the following assignment of errors:
I
THE COURT OF APPEALS ERRED IN FINDING THAT THE APPLICABLE
INTEREST SHOULD BE THE LEGAL INTEREST OF TWELVE PER CENT
(12%) PER ANNUM DESPITE THE CLEAR AGREEMENT OF THE PARTIES
ON ANOTHER APPLICABLE RATE.
II
THE COURT OF APPEALS ERRED IN IMPOSING A PENALTY COMPUTED AT
THE RATE OF TWELVE PER CENT (12%) PER ANNUM DESPITE THE CLEAR
AGREEMENT OF THE PARTIES ON ANOTHER APPLICABLE RATE.
III
THE COURT OF APPEALS ERRED IN DELETING THE ATTORNEYS FEES
AWARDED BY THE REGIONAL TRIAL COURT.7
Petitioner maintains that the trial court and the CA are correct in ruling that the
interest rates are to be imposed on a monthly and not on a per annum basis.
However, it insists that the 4.5% and 5% monthly interest shall be imposed until
the outstanding obligations have been fully paid.
As to the penalty charges, petitioner argues that the 12% per annum penalty
imposed by the CA in lieu of the 1% per day as agreed upon by the parties
violates their freedom to stipulate terms and conditions as they may deem
proper.
Petitioner finally contends that the CA erred in deleting the trial courts award of
attorneys fees arguing that the same is anchored on sound and legal ground.
Respondent, on the other hand, avers that the interest on the loans is per annum
as expressly stated in the promissory notes and disclosure statements. The
provision as to annual interest rate is clear and requires no room for
interpretation. Respondent asserts that any ambiguity in the promissory notes
and disclosure statements should not favor petitioner since the loan documents
were prepared by the latter.1awphi1.nt
We agree with respondent.
Perusal of the promissory notes and the disclosure statements pertinent to the

July 22, 1997 and September 7, 1997 loan obligations of respondent clearly and
unambiguously provide for interest rates of 4.5% per annum and 5% per annum,
respectively. Nowhere was it stated that the interest rates shall be applied on a
monthly basis.
Thus, when the terms of the agreement are clear and explicit that they do not
justify an attempt to read into it any alleged intention of the parties, the terms are
to be understood literally just as they appear on the face of the contract. 8 It is
only in instances when the language of a contract is ambiguous or obscure that
courts ought to apply certain established rules of construction in order to
ascertain the supposed intent of the parties.l^vvphi1.net However, these rules will
not be used to make a new contract for the parties or to rewrite the old one, even
if the contract is inequitable or harsh. They are applied by the court merely to
resolve doubts and ambiguities within the framework of the agreement. 9
The lower court and the CA mistook the Loan Transactions Summary for the
Disclosure Statement. The former was prepared exclusively by petitioner and
merely summarizes the payments made by respondent and the income earned
by petitioner. There was no mention of any interest rates and having been
prepared exclusively by petitioner, the same is self serving. On the contrary, the
Disclosure Statements were signed by both parties and categorically stated that
interest rates were to be imposed annually, not monthly.
As such, since the terms and conditions contained in the promissory notes and
disclosure statements are clear and unambiguous, the same must be given full
force and effect. The expressed intention of the parties as laid down on the loan
documents controls.1a\^/phi1.net
Also, reformation cannot be resorted to as the documents have not been
assailed on the ground of mutual mistake. When a party sues on a written
contract and no attempt is made to show any vice therein, he cannot be allowed
to lay claim for more than what its clear stipulations accord. His omission cannot
be arbitrarily supplied by the courts by what their own notions of justice or equity
may dictate.10
Notably, petitioner even admitted that it was solely responsible for the
preparation of the loan documents, and that it failed to correct the pro forma note
"p.a." to "per month".11 Since the mistake is exclusively attributed to petitioner, the
same should be charged against it. This unilateral mistake cannot be taken
against respondent who merely affixed her signature on the pro forma loan
agreements. As between two parties to a written agreement, the party who gave
rise to the mistake or error in the provisions of the same is estopped from
asserting a contrary intention to that contained therein. The checks issued by
respondent do not clearly and convincingly prove that the real intent of the
parties is to apply the interest rates on a monthly basis. Absent any proof of vice
of consent, the promissory notes and disclosure statements remain the best
evidence to ascertain the real intent of the parties.1a\^/phi1.net
The same promissory note provides that "x x x any and all remaining amount due
on the principal upon maturity hereof shall earn interest at the rate of _____ from
date of maturity until fully paid." The CA thus properly imposed the legal interest
of 12% per annum from the time the loans matured until the same has been fully

paid on February 2, 1999. As decreed in Eastern Shipping Lines, Inc. v. Court of

Appeals,12 "in the absence of stipulation, the rate of interest shall be 12% per
annum to be computed from default."
As regards the penalty charges, we agree with the CA in ruling that the 1%
penalty per day of delay is highly unconscionable. Applying Article 1229 of the
Civil Code, courts shall equitably reduce the penalty when the principal obligation
has been partly or irregularly complied with, or if it is iniquitous or
unconscionable.
With regard to the attorneys fees, the CA correctly deleted the award in favor of
petitioner since the trial courts decision does not reveal any explicit basis for
such an award. Attorneys fees are not automatically awarded to every winning
litigant.l^vvphi1.net It must be shown that any of the instances enumerated under
Art. 220813 of the Civil Code exists to justify the award thereof. 14 Not one of such
instances exists here. Besides, by filing the complaint, respondent was merely
asserting her rights which, after due deliberations, proved to be lawful, proper
and valid.
WHEREFORE, in view of the foregoing, the October 16, 2003 decision of the
Court of Appeals in CA-G.R. CV No. 75183 is AFFIRMED with the
MODIFICATION that the interest rates on the July 22, 1997 and September 7,
1997 loan obligations of respondent Gloria D. Padillo from petitioner First Fil-Sin
Lending Corporation be imposed and computed on a per annum basis, and upon
their respective maturities, the interest rate of 12% per annum shall be imposed
until full payment. In addition, the penalty at the rate of 12% per annum shall be
imposed on the outstanding obligations from date of default until full payment.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, Carpio, and Azcuna, JJ., concur.
G.R. No. 155223
April 4, 2007
BOBIE ROSE V. FRIAS, represented by her Attorney-in-fact, MARIE F.
FUJITA, Petitioner,
vs.
FLORA SAN DIEGO-SISON, Respondent.
DECISION
AUSTRIA-MARTINEZ, J.:
Before us is a Petition for Review on Certiorari filed by Bobie Rose V. Frias
represented by her Attorney-in-fact, Marie Regine F. Fujita (petitioner) seeking to
annul the Decision1 dated June 18, 2002 and the Resolution 2 dated September
11, 2002 of the Court of Appeals (CA) in CA-G.R. CV No. 52839.
Petitioner is the owner of a house and lot located at No. 589 Batangas East,
Ayala Alabang, Muntinlupa, Metro Manila, which she acquired from Island
Masters Realty and Development Corporation (IMRDC) by virtue of a Deed of
Sale dated Nov. 16, 1990. 3 The property is covered by TCT No. 168173 of the
Register of Deeds of Makati in the name of IMRDC.4
On December 7, 1990, petitioner, as the FIRST PARTY, and Dra. Flora San
Diego-Sison (respondent), as the SECOND PARTY, entered into a Memorandum
of Agreement5 over the property with the following terms:

NOW, THEREFORE, for and in consideration of the sum of THREE MILLION

PESOS (P3,000,000.00) receipt of which is hereby acknowledged by the FIRST
PARTY from the SECOND PARTY, the parties have agreed as follows:
1. That the SECOND PARTY has a period of Six (6) months from the date of the
execution of this contract within which to notify the FIRST PARTY of her intention
to purchase the aforementioned parcel of land together within (sic) the
improvements thereon at the price of SIX MILLION FOUR HUNDRED
THOUSAND PESOS (P6,400,000.00). Upon notice to the FIRST PARTY of the
SECOND PARTYs intention to purchase the same, the latter has a period of
another six months within which to pay the remaining balance of P3.4 million.
2. That prior to the six months period given to the SECOND PARTY within which
to decide whether or not to purchase the above-mentioned property, the FIRST
PARTY may still offer the said property to other persons who may be interested
to buy the same provided that the amount of P3,000,000.00 given to the FIRST
PARTY BY THE SECOND PARTY shall be paid to the latter including interest
based on prevailing compounded bank interest plus the amount of the sale in
excess of P7,000,000.00 should the property be sold at a price more than P7
million.
3. That in case the FIRST PARTY has no other buyer within the first six months
from the execution of this contract, no interest shall be charged by the SECOND
PARTY on the P3 million however, in the event that on the sixth month the
SECOND PARTY would decide not to purchase the aforementioned property, the
FIRST PARTY has a period of another six months within which to pay the sum of
P3 million pesos provided that the said amount shall earn compounded bank
interest for the last six months only. Under this circumstance, the amount of P3
million given by the SECOND PARTY shall be treated as [a] loan and the
property shall be considered as the security for the mortgage which can be
enforced in accordance with law.
x x x x.6
Petitioner received from respondent two million pesos in cash and one million
pesos in a post-dated check dated February 28, 1990, instead of 1991, which
rendered said check stale.7 Petitioner then gave respondent TCT No. 168173 in
the name of IMRDC and the Deed of Absolute Sale over the property between
petitioner and IMRDC.
Respondent decided not to purchase the property and notified petitioner through
a letter8 dated March 20, 1991, which petitioner received only on June 11, 1991, 9
reminding petitioner of their agreement that the amount of two million pesos
which petitioner received from respondent should be considered as a loan
payable within six months. Petitioner subsequently failed to pay respondent the
amount of two million pesos.
On April 1, 1993, respondent filed with the Regional Trial Court (RTC) of Manila,
a complaint10 for sum of money with preliminary attachment against petitioner.
The case was docketed as Civil Case No. 93-65367 and raffled to Branch 30.
Respondent alleged the foregoing facts and in addition thereto averred that
petitioner tried to deprive her of the security for the loan by making a false
report11 of the loss of her owners copy of TCT No. 168173 to the Tagig Police

Station on June 3, 1991, executing an affidavit of loss and by filing a petition 12 for
the issuance of a new owners duplicate copy of said title with the RTC of Makati,
Branch 142; that the petition was granted in an Order 13 dated August 31, 1991;
that said Order was subsequently set aside in an Order dated April 10, 1992 14
where the RTC Makati granted respondents petition for relief from judgment due
to the fact that respondent is in possession of the owners duplicate copy of TCT
No. 168173, and ordered the provincial public prosecutor to conduct an
investigation of petitioner for perjury and false testimony. Respondent prayed for
the ex-parte issuance of a writ of preliminary attachment and payment of two
million pesos with interest at 36% per annum from December 7, 1991,
P100,000.00 moral, corrective and exemplary damages and P200,000.00 for
attorneys fees.
In an Order dated April 6, 1993, the Executive Judge of the RTC of Manila issued
a writ of preliminary attachment upon the filing of a bond in the amount of two
million pesos.15
Petitioner filed an Amended Answer 16 alleging that the Memorandum of
Agreement was conceived and arranged by her lawyer, Atty. Carmelita Lozada,
who is also respondents lawyer; that she was asked to sign the agreement
without being given the chance to read the same; that the title to the property and
the Deed of Sale between her and the IMRDC were entrusted to Atty. Lozada for
safekeeping and were never turned over to respondent as there was no
consummated sale yet; that out of the two million pesos cash paid, Atty. Lozada
took the one million pesos which has not been returned, thus petitioner had filed
a civil case against her; that she was never informed of respondents decision not
to purchase the property within the six month period fixed in the agreement; that
when she demanded the return of TCT No. 168173 and the Deed of Sale
between her and the IMRDC from Atty. Lozada, the latter gave her these
documents in a brown envelope on May 5, 1991 which her secretary placed in
her attache case; that the envelope together with her other personal things were
lost when her car was forcibly opened the following day; that she sought the help
of Atty. Lozada who advised her to secure a police report, to execute an affidavit
of loss and to get the services of another lawyer to file a petition for the issuance
of an owners duplicate copy; that the petition for the issuance of a new owners
duplicate copy was filed on her behalf without her knowledge and neither did she
sign the petition nor testify in court as falsely claimed for she was abroad; that
she was a victim of the manipulations of Atty. Lozada and respondent as shown
by the filing of criminal charges for perjury and false testimony against her; that
no interest could be due as there was no valid mortgage over the property as the
principal obligation is vitiated with fraud and deception. She prayed for the
dismissal of the complaint, counter-claim for damages and attorneys fees.
Trial on the merits ensued. On January 31, 1996, the RTC issued a decision, 17
the dispositive portion of which reads:
WHEREFORE, judgment is hereby RENDERED:
1) Ordering defendant to pay plaintiff the sum of P2 Million plus interest thereon
at the rate of thirty two (32%) per cent per annum beginning December 7, 1991
until fully paid.

2) Ordering defendant to pay plaintiff the sum of P70,000.00 representing

premiums paid by plaintiff on the attachment bond with legal interest thereon
counted from the date of this decision until fully paid.
3) Ordering defendant to pay plaintiff the sum of P100,000.00 by way of moral,
corrective and exemplary damages.
4) Ordering defendant to pay plaintiff attorneys fees of P100,000.00 plus cost of
litigation.18
The RTC found that petitioner was under obligation to pay respondent the
amount of two million pesos with compounded interest pursuant to their
Memorandum of Agreement; that the fraudulent scheme employed by petitioner
to deprive respondent of her only security to her loaned money when petitioner
executed an affidavit of loss and instituted a petition for the issuance of an
owners duplicate title knowing the same was in respondents possession,
entitled respondent to moral damages; and that petitioners bare denial cannot be
accorded credence because her testimony and that of her witness did not appear
to be credible.
The RTC further found that petitioner admitted that she received from respondent
the two million pesos in cash but the fact that petitioner gave the one million
pesos to Atty. Lozada was without respondents knowledge thus it is not binding
on respondent; that respondent had also proven that in 1993, she initially paid
the sum of P30,000.00 as premium for the issuance of the attachment bond,
P20,000.00 for its renewal in 1994, and P20,000.00 for the renewal in 1995, thus
plaintiff should be reimbursed considering that she was compelled to go to court
and ask for a writ of preliminary attachment to protect her rights under the
agreement.
Petitioner filed her appeal with the CA. In a Decision dated June 18, 2002, the
CA affirmed the RTC decision with modification, the dispositive portion of which
reads:
WHEREFORE, premises considered, the decision appealed from is MODIFIED
in the sense that the rate of interest is reduced from 32% to 25% per annum,
effective June 7, 1991 until fully paid.19
The CA found that: petitioner gave the one million pesos to Atty. Lozada partly as
her commission and partly as a loan; respondent did not replace the mistakenly
dated check of one million pesos because she had decided not to buy the
property and petitioner knew of her decision as early as April 1991; the award of
moral damages was warranted since even granting petitioner had no hand in the
filing of the petition for the issuance of an owners copy, she executed an affidavit
of loss of TCT No. 168173 when she knew all along that said title was in
respondents possession; petitioners claim that she thought the title was lost
when the brown envelope given to her by Atty. Lozada was stolen from her car
was hollow; that such deceitful conduct caused respondent serious anxiety and
emotional distress.
The CA concluded that there was no basis for petitioner to say that the interest
should be charged for six months only and no more; that a loan always bears
interest otherwise it is not a loan; that interest should commence on June 7,
199120 with compounded bank interest prevailing at the time the two million was

considered as a loan which was in June 1991; that the bank interest rate for
loans secured by a real estate mortgage in 1991 ranged from 25% to 32% per
annum as certified to by Prudential Bank, 21 that in fairness to petitioner, the rate
to be charged should be 25% only.
Petitioners motion for reconsideration was denied by the CA in a Resolution
dated September 11, 2002.
Hence the instant Petition for Review on Certiorari filed by petitioner raising the
following issues:
(A) WHETHER OR NOT THE COMPOUNDED BANK INTEREST SHOULD BE
LIMITED TO SIX (6) MONTHS AS CONTAINED IN THE MEMORANDUM OF
AGREEMENT.
(B) WHETHER OR NOT THE RESPONDENT IS ENTITLED TO MORAL
DAMAGES.
(C) WHETHER OR NOT THE GRANT OF CORRECTIVE AND EXEMPLARY
DAMAGES AND ATTORNEYS FEES IS PROPER EVEN IF NOT MENTIONED
IN THE TEXT OF THE DECISION.22
Petitioner contends that the interest, whether at 32% per annum awarded by the
trial court or at 25% per annum as modified by the CA which should run from
June 7, 1991 until fully paid, is contrary to the parties Memorandum of
Agreement; that the agreement provides that if respondent would decide not to
purchase the property, petitioner has the period of another six months to pay the
loan with compounded bank interest for the last six months only; that the CAs
ruling that a loan always bears interest otherwise it is not a loan is contrary to Art.
1956 of the New Civil Code which provides that no interest shall be due unless it
has been expressly stipulated in writing.
We are not persuaded.
While the CAs conclusion, that a loan always bears interest otherwise it is not a
loan, is flawed since a simple loan may be gratuitous or with a stipulation to pay
interest,23 we find no error committed by the CA in awarding a 25% interest per
annum on the two-million peso loan even beyond the second six months
stipulated period.
The Memorandum of Agreement executed between the petitioner and
respondent on December 7, 1990 is the law between the parties. In resolving an
issue based upon a contract, we must first examine the contract itself, especially
the provisions thereof which are relevant to the controversy.24 The general rule is
that if the terms of an agreement are clear and leave no doubt as to the intention
of the contracting parties, the literal meaning of its stipulations shall prevail. 25 It is
further required that the various stipulations of a contract shall be interpreted
together, attributing to the doubtful ones that sense which may result from all of
them taken jointly.26
In this case, the phrase "for the last six months only" should be taken in the
context of the entire agreement. We agree with and adopt the CAs interpretation
of the phrase in this wise:
Their agreement speaks of two (2) periods of six months each. The first sixmonth period was given to plaintiff-appellee (respondent) to make up her mind
whether or not to purchase defendant-appellants (petitioner's) property. The

second six-month period was given to defendant-appellant to pay the P2 million

loan in the event that plaintiff-appellee decided not to buy the subject property in
which case interest will be charged "for the last six months only", referring to the
second six-month period. This means that no interest will be charged for the first
six-month period while appellee was making up her mind whether to buy the
property, but only for the second period of six months after appellee had decided
not to buy the property. This is the meaning of the phrase "for the last six months
only". Certainly, there is nothing in their agreement that suggests that interest will
be charged for six months only even if it takes defendant-appellant an eternity to
pay the loan.27
The agreement that the amount given shall bear compounded bank interest for
the last six months only, i.e., referring to the second six-month period, does not
mean that interest will no longer be charged after the second six-month period
since such stipulation was made on the logical and reasonable expectation that
such amount would be paid within the date stipulated. Considering that petitioner
failed to pay the amount given which under the Memorandum of Agreement shall
be considered as a loan, the monetary interest for the last six months continued
to accrue until actual payment of the loaned amount.
The payment of regular interest constitutes the price or cost of the use of money
and thus, until the principal sum due is returned to the creditor, regular interest
continues to accrue since the debtor continues to use such principal amount. 28 It
has been held that for a debtor to continue in possession of the principal of the
loan and to continue to use the same after maturity of the loan without payment
of the monetary interest, would constitute unjust enrichment on the part of the
debtor at the expense of the creditor.29
Petitioner and respondent stipulated that the loaned amount shall earn
compounded bank interests, and per the certification issued by Prudential Bank,
the interest rate for loans in 1991 ranged from 25% to 32% per annum. The CA
reduced the interest rate to 25% instead of the 32% awarded by the trial court
which petitioner no longer assailed.1awphi1.nt
In Bautista v. Pilar Development Corp.,30 we upheld the validity of a 21% per
annum interest on a P142,326.43 loan. In Garcia v. Court of Appeals,31 we
sustained the agreement of the parties to a 24% per annum interest on an
P8,649,250.00 loan. Thus, the interest rate of 25% per annum awarded by the
CA to a P2 million loan is fair and reasonable.
Petitioner next claims that moral damages were awarded on the erroneous
finding that she used a fraudulent scheme to deprive respondent of her security
for the loan; that such finding is baseless since petitioner was acquitted in the
case for perjury and false testimony filed by respondent against her.
We are not persuaded.
Article 31 of the Civil Code provides that when the civil action is based on an
obligation not arising from the act or omission complained of as a felony, such
civil action may proceed independently of the criminal proceedings and
regardless of the result of the latter.32
While petitioner was acquitted in the false testimony and perjury cases filed by
respondent against her, those actions are entirely distinct from the collection of

sum of money with damages filed by respondent against petitioner.

We agree with the findings of the trial court and the CA that petitioners act of
trying to deprive respondent of the security of her loan by executing an affidavit
of loss of the title and instituting a petition for the issuance of a new owners
duplicate copy of TCT No. 168173 entitles respondent to moral
damages.1a\^/phi1.net Moral damages may be awarded in culpa contractual or
breach of contract cases when the defendant acted fraudulently or in bad faith.
Bad faith does not simply connote bad judgment or negligence; it imports a
dishonest purpose or some moral obliquity and conscious doing of wrong. It
partakes of the nature of fraud.33
The Memorandum of Agreement provides that in the event that respondent opts
not to buy the property, the money given by respondent to petitioner shall be
treated as a loan and the property shall be considered as the security for the
mortgage. It was testified to by respondent that after they executed the
agreement on December 7, 1990, petitioner gave her the owners copy of the title
to the property, the Deed of Sale between petitioner and IMRDC, the certificate of
occupancy, and the certificate of the Secretary of the IMRDC who signed the
Deed of Sale.34 However, notwithstanding that all those documents were in
respondents possession, petitioner executed an affidavit of loss that the owners
copy of the title and the Deed of Sale were lost.
Although petitioner testified that her execution of the affidavit of loss was due to
the fact that she was of the belief that since she had demanded from Atty.
Lozada the return of the title, she thought that the brown envelope with markings
which Atty. Lozada gave her on May 5, 1991 already contained the title and the
Deed of Sale as those documents were in the same brown envelope which she
gave to Atty. Lozada prior to the transaction with respondent. 35 Such statement
remained a bare statement. It was not proven at all since Atty. Lozada had not
taken the stand to corroborate her claim. In fact, even petitioners own witness,
Benilda Ynfante (Ynfante), was not able to establish petitioner's claim that the
title was returned by Atty. Lozada in view of Ynfante's testimony that after the
brown envelope was given to petitioner, the latter passed it on to her and she
placed it in petitioners attach case 36 and did not bother to look at the
envelope.37
It is clear therefrom that petitioners execution of the affidavit of loss became the
basis of the filing of the petition with the RTC for the issuance of new owners
duplicate copy of TCT No. 168173. Petitioners actuation would have deprived
respondent of the security for her loan were it not for respondents timely filing of
a petition for relief whereby the RTC set aside its previous order granting the
issuance of new title. Thus, the award of moral damages is in order.
The entitlement to moral damages having been established, the award of
exemplary damages is proper.38 Exemplary damages may be imposed upon
petitioner by way of example or correction for the public good. 39 The RTC
awarded the amount of P100,000.00 as moral and exemplary damages. While
the award of moral and exemplary damages in an aggregate amount may not be
the usual way of awarding said damages, 40 no error has been committed by CA.
There is no question that respondent is entitled to moral and exemplary

damages.
Petitioner argues that the CA erred in awarding attorneys fees because the trial
courts decision did not explain the findings of facts and law to justify the award of
attorneys fees as the same was mentioned only in the dispositive portion of the
RTC decision.
We agree.
Article 220841 of the New Civil Code enumerates the instances where such may
be awarded and, in all cases, it must be reasonable, just and equitable if the
same were to be granted. 42 Attorney's fees as part of damages are not meant to
enrich the winning party at the expense of the losing litigant. They are not
awarded every time a party prevails in a suit because of the policy that no
premium should be placed on the right to litigate. 43 The award of attorney's fees
is the exception rather than the general rule. As such, it is necessary for the trial
court to make findings of facts and law that would bring the case within the
exception and justify the grant of such award. The matter of attorney's fees
cannot be mentioned only in the dispositive portion of the decision. 44 They must
be clearly explained and justified by the trial court in the body of its decision. On
appeal, the CA is precluded from supplementing the bases for awarding
attorneys fees when the trial court failed to discuss in its Decision the reasons
for awarding the same. Consequently, the award of attorney's fees should be
deleted.
WHEREFORE, in view of all the foregoing, the Decision dated June 18, 2002
and the Resolution dated September 11, 2002 of the Court of Appeals in CA-G.R.
CV No. 52839 are AFFIRMED with MODIFICATION that the award of attorneys
fees is DELETED.
No pronouncement as to costs.
SO ORDERED.
MA. ALICIA AUSTRIA-MARTINEZ
Associate Justice
G.R. No. 173227
January 20, 2009
SEBASTIAN SIGA-AN, Petitioner,
vs.
ALICIA VILLANUEVA, Respondent.
DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition1 for Review on Certiorari under Rule 45 of the Rules of
Court seeking to set aside the Decision,2 dated 16 December 2005, and
Resolution,3 dated 19 June 2006 of the Court of Appeals in CA-G.R. CV No.
71814, which affirmed in toto the Decision,4 dated 26 January 2001, of the Las
Pinas City Regional Trial Court, Branch 255, in Civil Case No. LP-98-0068.
The facts gathered from the records are as follows:
On 30 March 1998, respondent Alicia Villanueva filed a complaint 5 for sum of
money against petitioner Sebastian Siga-an before the Las Pinas City Regional
Trial Court (RTC), Branch 255, docketed as Civil Case No. LP-98-0068.
Respondent alleged that she was a businesswoman engaged in supplying office

materials and equipments to the Philippine Navy Office (PNO) located at Fort
Bonifacio, Taguig City, while petitioner was a military officer and comptroller of
the PNO from 1991 to 1996.
Respondent claimed that sometime in 1992, petitioner approached her inside the
PNO and offered to loan her the amount of P540,000.00. Since she needed
capital for her business transactions with the PNO, she accepted petitioners
proposal. The loan agreement was not reduced in writing. Also, there was no
stipulation as to the payment of interest for the loan. 6
On 31 August 1993, respondent issued a check worth P500,000.00 to petitioner
as partial payment of the loan. On 31 October 1993, she issued another check in
the amount of P200,000.00 to petitioner as payment of the remaining balance of
the loan. Petitioner told her that since she paid a total amount of P700,000.00 for
the P540,000.00 worth of loan, the excess amount of P160,000.00 would be
applied as interest for the loan. Not satisfied with the amount applied as interest,
petitioner pestered her to pay additional interest. Petitioner threatened to block or
disapprove her transactions with the PNO if she would not comply with his
demand. As all her transactions with the PNO were subject to the approval of
petitioner as comptroller of the PNO, and fearing that petitioner might block or
unduly influence the payment of her vouchers in the PNO, she conceded. Thus,
she paid additional amounts in cash and checks as interests for the loan. She
asked petitioner for receipt for the payments but petitioner told her that it was not
necessary as there was mutual trust and confidence between them. According to
her computation, the total amount she paid to petitioner for the loan and interest
accumulated to P1,200,000.00.7
Thereafter, respondent consulted a lawyer regarding the propriety of paying
interest on the loan despite absence of agreement to that effect. Her lawyer told
her that petitioner could not validly collect interest on the loan because there was
no agreement between her and petitioner regarding payment of interest. Since
she paid petitioner a total amount of P1,200,000.00 for the P540,000.00 worth of
loan, and upon being advised by her lawyer that she made overpayment to
petitioner, she sent a demand letter to petitioner asking for the return of the
excess amount of P660,000.00. Petitioner, despite receipt of the demand letter,
ignored her claim for reimbursement.8
Respondent prayed that the RTC render judgment ordering petitioner to pay
respondent (1) P660,000.00 plus legal interest from the time of demand; (2)
P300,000.00 as moral damages; (3) P50,000.00 as exemplary damages; and (4)
an amount equivalent to 25% of P660,000.00 as attorneys fees.9
In his answer10 to the complaint, petitioner denied that he offered a loan to
respondent. He averred that in 1992, respondent approached and asked him if
he could grant her a loan, as she needed money to finance her business venture
with the PNO. At first, he was reluctant to deal with respondent, because the
latter had a spotty record as a supplier of the PNO. However, since respondent
was an acquaintance of his officemate, he agreed to grant her a loan.
Respondent paid the loan in full.11
Subsequently, respondent again asked him to give her a loan. As respondent had
been able to pay the previous loan in full, he agreed to grant her another loan.

Later, respondent requested him to restructure the payment of the loan because
she could not give full payment on the due date. He acceded to her request.
Thereafter, respondent pleaded for another restructuring of the payment of the
loan. This time he rejected her plea. Thus, respondent proposed to execute a
promissory note wherein she would acknowledge her obligation to him, inclusive
of interest, and that she would issue several postdated checks to guarantee the
payment of her obligation. Upon his approval of respondents request for
restructuring of the loan, respondent executed a promissory note dated 12
September 1994 wherein she admitted having borrowed an amount of
P1,240,000.00, inclusive of interest, from petitioner and that she would pay said
amount in March 1995. Respondent also issued to him six postdated checks
amounting to P1,240,000.00 as guarantee of compliance with her obligation.
Subsequently, he presented the six checks for encashment but only one check
was honored. He demanded that respondent settle her obligation, but the latter
failed to do so. Hence, he filed criminal cases for Violation of the Bouncing
Checks Law (Batas Pambansa Blg. 22) against respondent. The cases were
assigned to the Metropolitan Trial Court of Makati City, Branch 65 (MeTC). 12
Petitioner insisted that there was no overpayment because respondent admitted
in the latters promissory note that her monetary obligation as of 12 September
1994 amounted to P1,240,000.00 inclusive of interests. He argued that
respondent was already estopped from complaining that she should not have
paid any interest, because she was given several times to settle her obligation
but failed to do so. He maintained that to rule in favor of respondent is
tantamount to concluding that the loan was given interest-free. Based on the
foregoing averments, he asked the RTC to dismiss respondents complaint.
After trial, the RTC rendered a Decision on 26 January 2001 holding that
respondent made an overpayment of her loan obligation to petitioner and that the
latter should refund the excess amount to the former. It ratiocinated that
respondents obligation was only to pay the loaned amount of P540,000.00, and
that the alleged interests due should not be included in the computation of
respondents total monetary debt because there was no agreement between
them regarding payment of interest. It concluded that since respondent made an
excess payment to petitioner in the amount of P660,000.00 through mistake,
petitioner should return the said amount to respondent pursuant to the principle
of solutio indebiti.13
The RTC also ruled that petitioner should pay moral damages for the sleepless
nights and wounded feelings experienced by respondent. Further, petitioner
should pay exemplary damages by way of example or correction for the public
good, plus attorneys fees and costs of suit.
The dispositive portion of the RTC Decision reads:
WHEREFORE, in view of the foregoing evidence and in the light of the provisions
of law and jurisprudence on the matter, judgment is hereby rendered in favor of
the plaintiff and against the defendant as follows:
(1) Ordering defendant to pay plaintiff the amount of P660,000.00 plus legal
interest of 12% per annum computed from 3 March 1998 until the amount is paid
in full;

(2) Ordering defendant to pay plaintiff the amount of P300,000.00 as moral

damages;
(3) Ordering defendant to pay plaintiff the amount of P50,000.00 as exemplary
damages;
(4) Ordering defendant to pay plaintiff the amount equivalent to 25% of
P660,000.00 as attorneys fees; and
(5) Ordering defendant to pay the costs of suit.14
Petitioner appealed to the Court of Appeals. On 16 December 2005, the
appellate court promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the foregoing considered, the instant appeal is hereby DENIED
and the assailed decision [is] AFFIRMED in toto.15
Petitioner filed a motion for reconsideration of the appellate courts decision but
this was denied.16 Hence, petitioner lodged the instant petition before us
assigning the following errors:
I.
THE RTC AND THE COURT OF APPEALS ERRED IN RULING THAT NO
INTEREST WAS DUE TO PETITIONER;
II.
THE RTC AND THE COURT OF APPEALS ERRED IN APPLYING THE
PRINCIPLE OF SOLUTIO INDEBITI.17
Interest is a compensation fixed by the parties for the use or forbearance of
money. This is referred to as monetary interest. Interest may also be imposed by
law or by courts as penalty or indemnity for damages. This is called
compensatory interest.18 The right to interest arises only by virtue of a contract or
by virtue of damages for delay or failure to pay the principal loan on which
interest is demanded.19
Article 1956 of the Civil Code, which refers to monetary interest, 20 specifically
mandates that no interest shall be due unless it has been expressly stipulated in
writing. As can be gleaned from the foregoing provision, payment of monetary
interest is allowed only if: (1) there was an express stipulation for the payment of
interest; and (2) the agreement for the payment of interest was reduced in
writing. The concurrence of the two conditions is required for the payment of
monetary interest. Thus, we have held that collection of interest without any
stipulation therefor in writing is prohibited by law.21
It appears that petitioner and respondent did not agree on the payment of interest
for the loan. Neither was there convincing proof of written agreement between
the two regarding the payment of interest. Respondent testified that although she
accepted petitioners offer of loan amounting to P540,000.00, there was,
nonetheless, no verbal or written agreement for her to pay interest on the loan. 22
Petitioner presented a handwritten promissory note dated 12 September 1994 23
wherein respondent purportedly admitted owing petitioner "capital and interest."
Respondent, however, explained that it was petitioner who made a promissory
note and she was told to copy it in her own handwriting; that all her transactions
with the PNO were subject to the approval of petitioner as comptroller of the
PNO; that petitioner threatened to disapprove her transactions with the PNO if
she would not pay interest; that being unaware of the law on interest and fearing

that petitioner would make good of his threats if she would not obey his
instruction to copy the promissory note, she copied the promissory note in her
own handwriting; and that such was the same promissory note presented by
petitioner as alleged proof of their written agreement on interest. 24 Petitioner did
not rebut the foregoing testimony. It is evident that respondent did not really
consent to the payment of interest for the loan and that she was merely tricked
and coerced by petitioner to pay interest. Hence, it cannot be gainfully said that
such promissory note pertains to an express stipulation of interest or written
agreement of interest on the loan between petitioner and respondent.
Petitioner, nevertheless, claims that both the RTC and the Court of Appeals
found that he and respondent agreed on the payment of 7% rate of interest on
the loan; that the agreed 7% rate of interest was duly admitted by respondent in
her testimony in the Batas Pambansa Blg. 22 cases he filed against respondent;
that despite such judicial admission by respondent, the RTC and the Court of
Appeals, citing Article 1956 of the Civil Code, still held that no interest was due
him since the agreement on interest was not reduced in writing; that the
application of Article 1956 of the Civil Code should not be absolute, and an
exception to the application of such provision should be made when the borrower
admits that a specific rate of interest was agreed upon as in the present case;
and that it would be unfair to allow respondent to pay only the loan when the
latter very well knew and even admitted in the Batas Pambansa Blg. 22 cases
that there was an agreed 7% rate of interest on the loan. 25
We have carefully examined the RTC Decision and found that the RTC did not
make a ruling therein that petitioner and respondent agreed on the payment of
interest at the rate of 7% for the loan. The RTC clearly stated that although
petitioner and respondent entered into a valid oral contract of loan amounting to
P540,000.00, they, nonetheless, never intended the payment of interest
thereon.26 While the Court of Appeals mentioned in its Decision that it concurred
in the RTCs ruling that petitioner and respondent agreed on a certain rate of
interest as regards the loan, we consider this as merely an inadvertence
because, as earlier elucidated, both the RTC and the Court of Appeals ruled that
petitioner is not entitled to the payment of interest on the loan. The rule is that
factual findings of the trial court deserve great weight and respect especially
when affirmed by the appellate court.27 We found no compelling reason to disturb
the ruling of both courts.
Petitioners reliance on respondents alleged admission in the Batas Pambansa
Blg. 22 cases that they had agreed on the payment of interest at the rate of 7%
deserves scant consideration. In the said case, respondent merely testified that
after paying the total amount of loan, petitioner ordered her to pay interest. 28
Respondent did not categorically declare in the same case that she and
respondent made an express stipulation in writing as regards payment of interest
at the rate of 7%. As earlier discussed, monetary interest is due only if there was
an express stipulation in writing for the payment of interest.
There are instances in which an interest may be imposed even in the absence of
express stipulation, verbal or written, regarding payment of interest. Article 2209
of the Civil Code states that if the obligation consists in the payment of a sum of

money, and the debtor incurs delay, a legal interest of 12% per annum may be
imposed as indemnity for damages if no stipulation on the payment of interest
was agreed upon. Likewise, Article 2212 of the Civil Code provides that interest
due shall earn legal interest from the time it is judicially demanded, although the
obligation may be silent on this point.
All the same, the interest under these two instances may be imposed only as a
penalty or damages for breach of contractual obligations. It cannot be charged as
a compensation for the use or forbearance of money. In other words, the two
instances apply only to compensatory interest and not to monetary interest. 29 The
case at bar involves petitioners claim for monetary interest.
Further, said compensatory interest is not chargeable in the instant case because
it was not duly proven that respondent defaulted in paying the loan. Also, as
earlier found, no interest was due on the loan because there was no written
agreement as regards payment of interest.
Apropos the second assigned error, petitioner argues that the principle of solutio
indebiti does not apply to the instant case. Thus, he cannot be compelled to
return the alleged excess amount paid by respondent as interest. 30
Under Article 1960 of the Civil Code, if the borrower of loan pays interest when
there has been no stipulation therefor, the provisions of the Civil Code
concerning solutio indebiti shall be applied. Article 2154 of the Civil Code
explains the principle of solutio indebiti. Said provision provides that if something
is received when there is no right to demand it, and it was unduly delivered
through mistake, the obligation to return it arises. In such a case, a creditordebtor relationship is created under a quasi-contract whereby the payor becomes
the creditor who then has the right to demand the return of payment made by
mistake, and the person who has no right to receive such payment becomes
obligated to return the same. The quasi-contract of solutio indebiti harks back to
the ancient principle that no one shall enrich himself unjustly at the expense of
another.31 The principle of solutio indebiti applies where (1) a payment is made
when there exists no binding relation between the payor, who has no duty to pay,
and the person who received the payment; and (2) the payment is made through
mistake, and not through liberality or some other cause. 32 We have held that the
principle of solutio indebiti applies in case of erroneous payment of undue
interest.33
It was duly established that respondent paid interest to petitioner. Respondent
was under no duty to make such payment because there was no express
stipulation in writing to that effect. There was no binding relation between
petitioner and respondent as regards the payment of interest. The payment was
clearly a mistake. Since petitioner received something when there was no right to
demand it, he has an obligation to return it.
We shall now determine the propriety of the monetary award and damages
imposed by the RTC and the Court of Appeals.
Records show that respondent received a loan amounting to P540,000.00 from
petitioner.34 Respondent issued two checks with a total worth of P700,000.00 in
favor of petitioner as payment of the loan. 35 These checks were subsequently
encashed by petitioner.36 Obviously, there was an excess of P160,000.00 in the

payment for the loan. Petitioner claims that the excess of P160,000.00 serves as
interest on the loan to which he was entitled. Aside from issuing the said two
checks, respondent also paid cash in the total amount of P175,000.00 to
petitioner as interest.37 Although no receipts reflecting the same were presented
because petitioner refused to issue such to respondent, petitioner, nonetheless,
admitted in his Reply-Affidavit38 in the Batas Pambansa Blg. 22 cases that
respondent paid him a total amount of P175,000.00 cash in addition to the two
checks. Section 26 Rule 130 of the Rules of Evidence provides that the
declaration of a party as to a relevant fact may be given in evidence against him.
Aside from the amounts of P160,000.00 and P175,000.00 paid as interest, no
other proof of additional payment as interest was presented by respondent. Since
we have previously found that petitioner is not entitled to payment of interest and
that the principle of solutio indebiti applies to the instant case, petitioner should
return to respondent the excess amount of P160,000.00 and P175,000.00 or the
total amount of P335,000.00. Accordingly, the reimbursable amount to
respondent fixed by the RTC and the Court of Appeals should be reduced from
P660,000.00 to P335,000.00.
As earlier stated, petitioner filed five (5) criminal cases for violation of Batas
Pambansa Blg. 22 against respondent. In the said cases, the MeTC found
respondent guilty of violating Batas Pambansa Blg. 22 for issuing five dishonored
checks to petitioner. Nonetheless, respondents conviction therein does not affect
our ruling in the instant case. The two checks, subject matter of this case, totaling
P700,000.00 which respondent claimed as payment of the P540,000.00 worth of
loan, were not among the five checks found to be dishonored or bounced in the
five criminal cases. Further, the MeTC found that respondent made an
overpayment of the loan by reason of the interest which the latter paid to
petitioner.39
Article 2217 of the Civil Code provides that moral damages may be recovered if
the party underwent physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation and
similar injury. Respondent testified that she experienced sleepless nights and
wounded feelings when petitioner refused to return the amount paid as interest
despite her repeated demands. Hence, the award of moral damages is justified.
However, its corresponding amount of P300,000.00, as fixed by the RTC and the
Court of Appeals, is exorbitant and should be equitably reduced. Article 2216 of
the Civil Code instructs that assessment of damages is left to the discretion of
the court according to the circumstances of each case. This discretion is limited
by the principle that the amount awarded should not be palpably excessive as to
indicate that it was the result of prejudice or corruption on the part of the trial
court.40 To our mind, the amount of P150,000.00 as moral damages is fair,
reasonable, and proportionate to the injury suffered by respondent.
Article 2232 of the Civil Code states that in a quasi-contract, such as solutio
indebiti, exemplary damages may be imposed if the defendant acted in an
oppressive manner. Petitioner acted oppressively when he pestered respondent
to pay interest and threatened to block her transactions with the PNO if she
would not pay interest. This forced respondent to pay interest despite lack of

agreement thereto. Thus, the award of exemplary damages is appropriate. The

amount of P50,000.00 imposed as exemplary damages by the RTC and the
Court is fitting so as to deter petitioner and other lenders from committing similar
and other serious wrongdoings.41
Jurisprudence instructs that in awarding attorneys fees, the trial court must state
the factual, legal or equitable justification for awarding the same. 42 In the case
under consideration, the RTC stated in its Decision that the award of attorneys
fees equivalent to 25% of the amount paid as interest by respondent to petitioner
is reasonable and moderate considering the extent of work rendered by
respondents lawyer in the instant case and the fact that it dragged on for several
years.43 Further, respondent testified that she agreed to compensate her lawyer
handling the instant case such amount. 44 The award, therefore, of attorneys fees
and its amount equivalent to 25% of the amount paid as interest by respondent to
petitioner is proper.
Finally, the RTC and the Court of Appeals imposed a 12% rate of legal interest on
the amount refundable to respondent computed from 3 March 1998 until its full
payment. This is erroneous.
We held in Eastern Shipping Lines, Inc. v. Court of Appeals, 45 that when an
obligation, not constituting a loan or forbearance of money is breached, an
interest on the amount of damages awarded may be imposed at the rate of 6%
per annum. We further declared that when the judgment of the court awarding a
sum of money becomes final and executory, the rate of legal interest, whether it
is a loan/forbearance of money or not, shall be 12% per annum from such finality
until its satisfaction, this interim period being deemed equivalent to a forbearance
of credit.
In the present case, petitioners obligation arose from a quasi-contract of solutio
indebiti and not from a loan or forbearance of money. Thus, an interest of 6% per
annum should be imposed on the amount to be refunded as well as on the
damages awarded and on the attorneys fees, to be computed from the time of
the extra-judicial demand on 3 March 1998, 46 up to the finality of this Decision. In
addition, the interest shall become 12% per annum from the finality of this
Decision up to its satisfaction.
WHEREFORE, the Decision of the Court of Appeals in CA-G.R. CV No. 71814,
dated 16 December 2005, is hereby AFFIRMED with the following
MODIFICATIONS: (1) the amount of P660,000.00 as refundable amount of
interest is reduced to THREE HUNDRED THIRTY FIVE THOUSAND PESOS
(P335,000.00); (2) the amount of P300,000.00 imposed as moral damages is
reduced to ONE HUNDRED FIFTY THOUSAND PESOS (P150,000.00); (3) an
interest of 6% per annum is imposed on the P335,000.00, on the damages
awarded and on the attorneys fees to be computed from the time of the extrajudicial demand on 3 March 1998 up to the finality of this Decision; and (4) an
interest of 12% per annum is also imposed from the finality of this Decision up to
its satisfaction. Costs against petitioner.
SO ORDERED.
MINITA V. CHICO-NAZARIO
Associate Justice

G.R. No. L-6913

November 21, 1913
THE ROMAN CATHOLIC BISHOP OF JARO, plaintiff-appellee,
vs.
GREGORIO DE LA PEA, administrator of the estate of Father Agustin de la
Pea, defendant-appellant.
J. Lopez Vito, for appellant.Arroyo and Horrilleno, for appellee.
MORELAND, J.:
This is an appeal by the defendant from a judgment of the Court of First Instance
of Iloilo, awarding to the plaintiff the sum of P6,641, with interest at the legal rate
from the beginning of the action.
It is established in this case that the plaintiff is the trustee of a charitable bequest
made for the construction of a leper hospital and that father Agustin de la Pea
was the duly authorized representative of the plaintiff to receive the legacy. The
defendant is the administrator of the estate of Father De la Pea.
In the year 1898 the books Father De la Pea, as trustee, showed that he had on
hand as such trustee the sum of P6,641, collected by him for the charitable
purposes aforesaid. In the same year he deposited in his personal account
P19,000 in the Hongkong and Shanghai Bank at Iloilo. Shortly thereafter and
during the war of the revolution, Father De la Pea was arrested by the military
authorities as a political prisoner, and while thus detained made an order on said
bank in favor of the United States Army officer under whose charge he then was
for the sum thus deposited in said bank. The arrest of Father De la Pea and the
confiscation of the funds in the bank were the result of the claim of the military
authorities that he was an insurgent and that the funds thus deposited had been
collected by him for revolutionary purposes. The money was taken from the bank
by the military authorities by virtue of such order, was confiscated and turned
over to the Government.
While there is considerable dispute in the case over the question whether the
P6,641 of trust funds was included in the P19,000 deposited as aforesaid,
nevertheless, a careful examination of the case leads us to the conclusion that
said trust funds were a part of the funds deposited and which were removed and
confiscated by the military authorities of the United States.
That branch of the law known in England and America as the law of trusts had no
exact counterpart in the Roman law and has none under the Spanish law. In this
jurisdiction, therefore, Father De la Pea's liability is determined by those
portions of the Civil Code which relate to obligations. (Book 4, Title 1.)
Although the Civil Code states that "a person obliged to give something is also
bound to preserve it with the diligence pertaining to a good father of a family" (art.
1094), it also provides, following the principle of the Roman law, major casus est,
cui humana infirmitas resistere non potest, that "no one shall be liable for events
which could not be foreseen, or which having been foreseen were inevitable, with
the exception of the cases expressly mentioned in the law or those in which the
obligation so declares." (Art. 1105.)
By placing the money in the bank and mixing it with his personal funds De la

Pea did not thereby assume an obligation different from that under which he
would have lain if such deposit had not been made, nor did he thereby make
himself liable to repay the money at all hazards. If the had been forcibly taken
from his pocket or from his house by the military forces of one of the combatants
during a state of war, it is clear that under the provisions of the Civil Code he
would have been exempt from responsibility. The fact that he placed the trust
fund in the bank in his personal account does not add to his responsibility. Such
deposit did not make him a debtor who must respond at all hazards.
We do not enter into a discussion for the purpose of determining whether he
acted more or less negligently by depositing the money in the bank than he
would if he had left it in his home; or whether he was more or less negligent by
depositing the money in his personal account than he would have been if he had
deposited it in a separate account as trustee. We regard such discussion as
substantially fruitless, inasmuch as the precise question is not one of negligence.
There was no law prohibiting him from depositing it as he did and there was no
law which changed his responsibility be reason of the deposit. While it may be
true that one who is under obligation to do or give a thing is in duty bound, when
he sees events approaching the results of which will be dangerous to his trust, to
take all reasonable means and measures to escape or, if unavoidable, to temper
the effects of those events, we do not feel constrained to hold that, in choosing
between two means equally legal, he is culpably negligent in selecting one
whereas he would not have been if he had selected the other.
The court, therefore, finds and declares that the money which is the subject
matter of this action was deposited by Father De la Pea in the Hongkong and
Shanghai Banking Corporation of Iloilo; that said money was forcibly taken from
the bank by the armed forces of the United States during the war of the
insurrection; and that said Father De la Pea was not responsible for its loss.
The judgment is therefore reversed, and it is decreed that the plaintiff shall take
nothing by his complaint.
Arellano, C.J., Torres and Carson, JJ., concur.
G.R. No. L-66826 August 19, 1988
BANK OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and ZSHORNACK respondents.
Pacis & Reyes Law Office for petitioner.
Ernesto T. Zshornack, Jr. for private respondent.
CORTES, J.:
The original parties to this case were Rizaldy T. Zshornack and the Commercial
Bank and Trust Company of the Philippines [hereafter referred to as
"COMTRUST."] In 1980, the Bank of the Philippine Islands (hereafter referred to
as BPI absorbed COMTRUST through a corporate merger, and was substituted
as party to the case.
Rizaldy Zshornack initiated proceedings on June 28,1976 by filing in the Court of
First Instance of Rizal Caloocan City a complaint against COMTRUST alleging

four causes of action. Except for the third cause of action, the CFI ruled in favor
of Zshornack. The bank appealed to the Intermediate Appellate Court which
modified the CFI decision absolving the bank from liability on the fourth cause of
action. The pertinent portions of the judgment, as modified, read:
IN VIEW OF THE FOREGOING, the Court renders judgment as follows:
1. Ordering the defendant COMTRUST to restore to the dollar savings account of
plaintiff (No. 25-4109) the amount of U.S $1,000.00 as of October 27, 1975 to
earn interest together with the remaining balance of the said account at the rate
fixed by the bank for dollar deposits under Central Bank Circular 343;
2. Ordering defendant COMTRUST to return to the plaintiff the amount of U.S.
$3,000.00 immediately upon the finality of this decision, without interest for the
reason that the said amount was merely held in custody for safekeeping, but was
not actually deposited with the defendant COMTRUST because being cash
currency, it cannot by law be deposited with plaintiffs dollar account and
defendant's only obligation is to return the same to plaintiff upon demand;
xxx xxx xxx
5. Ordering defendant COMTRUST to pay plaintiff in the amount of P8,000.00 as
damages in the concept of litigation expenses and attorney's fees suffered by
plaintiff as a result of the failure of the defendant bank to restore to his (plaintiffs)
account the amount of U.S. $1,000.00 and to return to him (plaintiff) the U.S.
$3,000.00 cash left for safekeeping.
Costs against defendant COMTRUST.
SO ORDERED. [Rollo, pp. 47-48.]
Undaunted, the bank comes to this Court praying that it be totally absolved from
any liability to Zshornack. The latter not having appealed the Court of Appeals
decision, the issues facing this Court are limited to the bank's liability with regard
to the first and second causes of action and its liability for damages.
1. We first consider the first cause of action, On the dates material to this case,
Rizaldy Zshornack and his wife, Shirley Gorospe, maintained in COMTRUST,
Quezon City Branch, a dollar savings account and a peso current account.
On October 27, 1975, an application for a dollar draft was accomplished by
Virgilio V. Garcia, Assistant Branch Manager of COMTRUST Quezon City,
payable to a certain Leovigilda D. Dizon in the amount of $1,000.00. In the
application, Garcia indicated that the amount was to be charged to Dollar
Savings Acct. No. 25-4109, the savings account of the Zshornacks; the charges
for commission, documentary stamp tax and others totalling P17.46 were to be
charged to Current Acct. No. 210465-29, again, the current account of the
Zshornacks. There was no indication of the name of the purchaser of the dollar
draft.
On the same date, October 27,1975, COMTRUST, under the signature of Virgilio
V. Garcia, issued a check payable to the order of Leovigilda D. Dizon in the sum
of US $1,000 drawn on the Chase Manhattan Bank, New York, with an indication
that it was to be charged to Dollar Savings Acct. No. 25-4109.
When Zshornack noticed the withdrawal of US$1,000.00 from his account, he
demanded an explanation from the bank. In answer, COMTRUST claimed that
the peso value of the withdrawal was given to Atty. Ernesto Zshornack, Jr.,

brother of Rizaldy, on October 27, 1975 when he (Ernesto) encashed with

COMTRUST a cashier's check for P8,450.00 issued by the Manila Banking
Corporation payable to Ernesto.
Upon consideration of the foregoing facts, this Court finds no reason to disturb
the ruling of both the trial court and the Appellate Court on the first cause of
action. Petitioner must be held liable for the unauthorized withdrawal of
US$1,000.00 from private respondent's dollar account.
In its desperate attempt to justify its act of withdrawing from its depositor's
savings account, the bank has adopted inconsistent theories. First, it still
maintains that the peso value of the amount withdrawn was given to Atty. Ernesto
Zshornack, Jr. when the latter encashed the Manilabank Cashier's Check. At the
same time, the bank claims that the withdrawal was made pursuant to an
agreement where Zshornack allegedly authorized the bank to withdraw from his
dollar savings account such amount which, when converted to pesos, would be
needed to fund his peso current account. If indeed the peso equivalent of the
amount withdrawn from the dollar account was credited to the peso current
account, why did the bank still have to pay Ernesto?
At any rate, both explanations are unavailing. With regard to the first explanation,
petitioner bank has not shown how the transaction involving the cashier's check
is related to the transaction involving the dollar draft in favor of Dizon financed by
the withdrawal from Rizaldy's dollar account. The two transactions appear
entirely independent of each other. Moreover, Ernesto Zshornack, Jr., possesses
a personality distinct and separate from Rizaldy Zshornack. Payment made to
Ernesto cannot be considered payment to Rizaldy.
As to the second explanation, even if we assume that there was such an
agreement, the evidence do not show that the withdrawal was made pursuant to
it. Instead, the record reveals that the amount withdrawn was used to finance a
dollar draft in favor of Leovigilda D. Dizon, and not to fund the current account of
the Zshornacks. There is no proof whatsoever that peso Current Account No.
210-465-29 was ever credited with the peso equivalent of the US$1,000.00
withdrawn on October 27, 1975 from Dollar Savings Account No. 25-4109.
2. As for the second cause of action, the complaint filed with the trial court
alleged that on December 8, 1975, Zshornack entrusted to COMTRUST, thru
Garcia, US $3,000.00 cash (popularly known as greenbacks) for safekeeping,
and that the agreement was embodied in a document, a copy of which was
attached to and made part of the complaint. The document reads:
Makati Cable Address:
Philippines "COMTRUST"
COMMERCIAL BANK AND TRUST COMPANY
of the Philippines
Quezon City Branch
December 8, 1975
MR. RIZALDY T. ZSHORNACK
&/OR MRS SHIRLEY E. ZSHORNACK
Sir/Madam:
We acknowledged (sic) having received from you today the sum of US

DOLLARS: THREE THOUSAND ONLY (US$3,000.00) for safekeeping.

Received by:
(Sgd.) VIRGILIO V. GARCIA
It was also alleged in the complaint that despite demands, the bank refused to
return the money.
In its answer, COMTRUST averred that the US$3,000 was credited to
Zshornack's peso current account at prevailing conversion rates.
It must be emphasized that COMTRUST did not deny specifically under oath the
authenticity and due execution of the above instrument.
During trial, it was established that on December 8, 1975 Zshornack indeed
delivered to the bank US $3,000 for safekeeping. When he requested the return
of the money on May 10, 1976, COMTRUST explained that the sum was
disposed of in this manner: US$2,000.00 was sold on December 29, 1975 and
the peso proceeds amounting to P14,920.00 were deposited to Zshornack's
current account per deposit slip accomplished by Garcia; the remaining
US$1,000.00 was sold on February 3, 1976 and the peso proceeds amounting to
P8,350.00 were deposited to his current account per deposit slip also
accomplished by Garcia.
Aside from asserting that the US$3,000.00 was properly credited to Zshornack's
current account at prevailing conversion rates, BPI now posits another ground to
defeat private respondent's claim. It now argues that the contract embodied in
the document is the contract of depositum (as defined in Article 1962, New Civil
Code), which banks do not enter into. The bank alleges that Garcia exceeded his
powers when he entered into the transaction. Hence, it is claimed, the bank
cannot be liable under the contract, and the obligation is purely personal to
Garcia.
Before we go into the nature of the contract entered into, an important point
which arises on the pleadings, must be considered.
The second cause of action is based on a document purporting to be signed by
COMTRUST, a copy of which document was attached to the complaint. In short,
the second cause of action was based on an actionable document. It was
therefore incumbent upon the bank to specifically deny under oath the due
execution of the document, as prescribed under Rule 8, Section 8, if it desired:
(1) to question the authority of Garcia to bind the corporation; and (2) to deny its
capacity to enter into such contract. [See, E.B. Merchant v. International Banking
Corporation, 6 Phil. 314 (1906).] No sworn answer denying the due execution of
the document in question, or questioning the authority of Garcia to bind the bank,
or denying the bank's capacity to enter into the contract, was ever filed. Hence,
the bank is deemed to have admitted not only Garcia's authority, but also the
bank's power, to enter into the contract in question.
In the past, this Court had occasion to explain the reason behind this procedural
requirement.
The reason for the rule enunciated in the foregoing authorities will, we think, be
readily appreciated. In dealing with corporations the public at large is bound to
rely to a large extent upon outward appearances. If a man is found acting for a
corporation with the external indicia of authority, any person, not having notice of

want of authority, may usually rely upon those appearances; and if it be found
that the directors had permitted the agent to exercise that authority and thereby
held him out as a person competent to bind the corporation, or had acquiesced in
a contract and retained the benefit supposed to have been conferred by it, the
corporation will be bound, notwithstanding the actual authority may never have
been granted
... Whether a particular officer actually possesses the authority which he
assumes to exercise is frequently known to very few, and the proof of it usually is
not readily accessible to the stranger who deals with the corporation on the faith
of the ostensible authority exercised by some of the corporate officers. It is
therefore reasonable, in a case where an officer of a corporation has made a
contract in its name, that the corporation should be required, if it denies his
authority, to state such defense in its answer. By this means the plaintiff is
apprised of the fact that the agent's authority is contested; and he is given an
opportunity to adduce evidence showing either that the authority existed or that
the contract was ratified and approved. [Ramirez v. Orientalist Co. and
Fernandez, 38 Phil. 634, 645- 646 (1918).]
Petitioner's argument must also be rejected for another reason. The practical
effect of absolving a corporation from liability every time an officer enters into a
contract which is beyond corporate powers, even without the proper allegation or
proof that the corporation has not authorized nor ratified the officer's act, is to
cast corporations in so perfect a mold that transgressions and wrongs by such
artificial beings become impossible [Bissell v. Michigan Southern and N.I.R. Cos
22 N.Y 258 (1860).] "To say that a corporation has no right to do unauthorized
acts is only to put forth a very plain truism but to say that such bodies have no
power or capacity to err is to impute to them an excellence which does not
belong to any created existence with which we are acquainted. The distinction
between power and right is no more to be lost sight of in respect to artificial than
in respect to natural persons." [Ibid.]
Having determined that Garcia's act of entering into the contract binds the
corporation, we now determine the correct nature of the contract, and its legal
consequences, including its enforceability.
The document which embodies the contract states that the US$3,000.00 was
received by the bank for safekeeping. The subsequent acts of the parties also
show that the intent of the parties was really for the bank to safely keep the
dollars and to return it to Zshornack at a later time, Thus, Zshornack demanded
the return of the money on May 10, 1976, or over five months later.
The above arrangement is that contract defined under Article 1962, New Civil
Code, which reads:
Art. 1962. A deposit is constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it and of returning the
same. If the safekeeping of the thing delivered is not the principal purpose of the
contract, there is no deposit but some other contract.
Note that the object of the contract between Zshornack and COMTRUST was
foreign exchange. Hence, the transaction was covered by Central Bank Circular
No. 20, Restrictions on Gold and Foreign Exchange Transactions, promulgated

on December 9, 1949, which was in force at the time the parties entered into the
transaction involved in this case. The circular provides:
xxx xxx xxx
2. Transactions in the assets described below and all dealings in them of
whatever nature, including, where applicable their exportation and importation,
shall NOT be effected, except with respect to deposit accounts included in subparagraphs (b) and (c) of this paragraph, when such deposit accounts are owned
by and in the name of, banks.
(a) Any and all assets, provided they are held through, in, or with banks or
banking institutions located in the Philippines, including money, checks, drafts,
bullions bank drafts, deposit accounts (demand, time and savings), all debts,
indebtedness or obligations, financial brokers and investment houses, notes,
debentures, stocks, bonds, coupons, bank acceptances, mortgages, pledges,
liens or other rights in the nature of security, expressed in foreign currencies, or if
payable abroad, irrespective of the currency in which they are expressed, and
belonging to any person, firm, partnership, association, branch office, agency,
company or other unincorporated body or corporation residing or located within
the Philippines;
(b) Any and all assets of the kinds included and/or described in subparagraph (a)
above, whether or not held through, in, or with banks or banking institutions, and
existent within the Philippines, which belong to any person, firm, partnership,
association, branch office, agency, company or other unincorporated body or
corporation not residing or located within the Philippines;
(c) Any and all assets existent within the Philippines including money, checks,
drafts, bullions, bank drafts, all debts, indebtedness or obligations, financial
securities commonly dealt in by bankers, brokers and investment houses, notes,
debentures, stock, bonds, coupons, bank acceptances, mortgages, pledges,
liens or other rights in the nature of security expressed in foreign currencies, or if
payable abroad, irrespective of the currency in which they are expressed, and
belonging to any person, firm, partnership, association, branch office, agency,
company or other unincorporated body or corporation residing or located within
the Philippines.
xxx xxx xxx
4. (a) All receipts of foreign exchange shall be sold daily to the Central Bank by
those authorized to deal in foreign exchange. All receipts of foreign exchange by
any person, firm, partnership, association, branch office, agency, company or
other unincorporated body or corporation shall be sold to the authorized agents
of the Central Bank by the recipients within one business day following the
receipt of such foreign exchange. Any person, firm, partnership, association,
branch office, agency, company or other unincorporated body or corporation,
residing or located within the Philippines, who acquires on and after the date of
this Circular foreign exchange shall not, unless licensed by the Central Bank,
dispose of such foreign exchange in whole or in part, nor receive less than its full
value, nor delay taking ownership thereof except as such delay is customary;
Provided, further, That within one day upon taking ownership, or receiving
payment, of foreign exchange the aforementioned persons and entities shall sell

such foreign exchange to designated agents of the Central Bank.

xxx xxx xxx
8. Strict observance of the provisions of this Circular is enjoined; and any person,
firm or corporation, foreign or domestic, who being bound to the observance
thereof, or of such other rules, regulations or directives as may hereafter be
issued in implementation of this Circular, shall fail or refuse to comply with, or
abide by, or shall violate the same, shall be subject to the penal sanctions
provided in the Central Bank Act.
xxx xxx xxx
Paragraph 4 (a) above was modified by Section 6 of Central Bank Circular No.
281, Regulations on Foreign Exchange, promulgated on November 26, 1969 by
limiting its coverage to Philippine residents only. Section 6 provides:
SEC. 6. All receipts of foreign exchange by any resident person, firm, company
or corporation shall be sold to authorized agents of the Central Bank by the
recipients within one business day following the receipt of such foreign
exchange. Any resident person, firm, company or corporation residing or located
within the Philippines, who acquires foreign exchange shall not, unless
authorized by the Central Bank, dispose of such foreign exchange in whole or in
part, nor receive less than its full value, nor delay taking ownership thereof
except as such delay is customary; Provided, That, within one business day upon
taking ownership or receiving payment of foreign exchange the aforementioned
persons and entities shall sell such foreign exchange to the authorized agents of
the Central Bank.
As earlier stated, the document and the subsequent acts of the parties show that
they intended the bank to safekeep the foreign exchange, and return it later to
Zshornack, who alleged in his complaint that he is a Philippine resident. The
parties did not intended to sell the US dollars to the Central Bank within one
business day from receipt. Otherwise, the contract of depositum would never
have been entered into at all.
Since the mere safekeeping of the greenbacks, without selling them to the
Central Bank within one business day from receipt, is a transaction which is not
authorized by CB Circular No. 20, it must be considered as one which falls under
the general class of prohibited transactions. Hence, pursuant to Article 5 of the
Civil Code, it is void, having been executed against the provisions of a
mandatory/prohibitory law. More importantly, it affords neither of the parties a
cause of action against the other. "When the nullity proceeds from the illegality of
the cause or object of the contract, and the act constitutes a criminal offense,
both parties being in pari delicto, they shall have no cause of action against each
other. . ." [Art. 1411, New Civil Code.] The only remedy is one on behalf of the
State to prosecute the parties for violating the law.
We thus rule that Zshornack cannot recover under the second cause of action.
3. Lastly, we find the P8,000.00 awarded by the courts a quo as damages in the
concept of litigation expenses and attorney's fees to be reasonable. The award is
sustained.
WHEREFORE, the decision appealed from is hereby MODIFIED. Petitioner is
ordered to restore to the dollar savings account of private respondent the amount

of US$1,000.00 as of October 27, 1975 to earn interest at the rate fixed by the
bank for dollar savings deposits. Petitioner is further ordered to pay private
respondent the amount of P8,000.00 as damages. The other causes of action of
private respondent are ordered dismissed.
SO ORDERED.
G.R. No. 90027 March 3, 1993
CA AGRO-INDUSTRIAL DEVELOPMENT CORP., petitioner,
vs.
THE HONORABLE COURT OF APPEALS and SECURITY BANK AND TRUST
COMPANY, respondents.
Dolorfino & Dominguez Law Offices for petitioner.
Danilo B. Banares for private respondent.
DAVIDE, JR., J.:
Is the contractual relation between a commercial bank and another party in a
contract of rent of a safety deposit box with respect to its contents placed by the
latter one of bailor and bailee or one of lessor and lessee?
This is the crux of the present controversy.
On 3 July 1979, petitioner (through its President, Sergio Aguirre) and the
spouses Ramon and Paula Pugao entered into an agreement whereby the
former purchased from the latter two (2) parcels of land for a consideration of
P350,625.00. Of this amount, P75,725.00 was paid as downpayment while the
balance was covered by three (3) postdated checks. Among the terms and
conditions of the agreement embodied in a Memorandum of True and Actual
Agreement of Sale of Land were that the titles to the lots shall be transferred to
the petitioner upon full payment of the purchase price and that the owner's copies
of the certificates of titles thereto, Transfer Certificates of Title (TCT) Nos. 284655
and 292434, shall be deposited in a safety deposit box of any bank. The same
could be withdrawn only upon the joint signatures of a representative of the
petitioner and the Pugaos upon full payment of the purchase price. Petitioner,
through Sergio Aguirre, and the Pugaos then rented Safety Deposit Box No.
1448 of private respondent Security Bank and Trust Company, a domestic
banking corporation hereinafter referred to as the respondent Bank. For this
purpose, both signed a contract of lease (Exhibit "2") which contains, inter alia,
the following conditions:
13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no liability in connection therewith.
1

After the execution of the contract, two (2) renter's keys were given to the renters
one to Aguirre (for the petitioner) and the other to the Pugaos. A guard key
remained in the possession of the respondent Bank. The safety deposit box has
two (2) keyholes, one for the guard key and the other for the renter's key, and
can be opened only with the use of both keys. Petitioner claims that the

certificates of title were placed inside the said box.

Thereafter, a certain Mrs. Margarita Ramos offered to buy from the petitioner the
two (2) lots at a price of P225.00 per square meter which, as petitioner alleged in
its complaint, translates to a profit of P100.00 per square meter or a total of
P280,500.00 for the entire property. Mrs. Ramos demanded the execution of a
deed of sale which necessarily entailed the production of the certificates of title.
In view thereof, Aguirre, accompanied by the Pugaos, then proceeded to the
respondent Bank on 4 October 1979 to open the safety deposit box and get the
certificates of title. However, when opened in the presence of the Bank's
representative, the box yielded no such certificates. Because of the delay in the
reconstitution of the title, Mrs. Ramos withdrew her earlier offer to purchase the
lots; as a consequence thereof, the petitioner allegedly failed to realize the
expected profit of P280,500.00. Hence, the latter filed on 1 September 1980 a
complaint 2 for damages against the respondent Bank with the Court of First
Instance (now Regional Trial Court) of Pasig, Metro Manila which docketed the
same as Civil Case No. 38382.
In its Answer with Counterclaim, 3 respondent Bank alleged that the petitioner has
no cause of action because of paragraphs 13 and 14 of the contract of lease
(Exhibit "2"); corollarily, loss of any of the items or articles contained in the box
could not give rise to an action against it. It then interposed a counterclaim for
exemplary damages as well as attorney's fees in the amount of P20,000.00.
Petitioner subsequently filed an answer to the counterclaim. 4
In due course, the trial court, now designated as Branch 161 of the Regional Trial
Court (RTC) of Pasig, Metro Manila, rendered a decision 5 adverse to the
petitioner on 8 December 1986, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered dismissing
plaintiff's complaint.
On defendant's counterclaim, judgment is hereby rendered ordering plaintiff to
pay defendant the amount of FIVE THOUSAND (P5,000.00) PESOS as
attorney's fees.
With costs against plaintiff. 6
The unfavorable verdict is based on the trial court's conclusion that under
paragraphs 13 and 14 of the contract of lease, the Bank has no liability for the
loss of the certificates of title. The court declared that the said provisions are
binding on the parties.
Its motion for reconsideration 7 having been denied, petitioner appealed from the
adverse decision to the respondent Court of Appeals which docketed the appeal
as CA-G.R. CV No. 15150. Petitioner urged the respondent Court to reverse the
challenged decision because the trial court erred in (a) absolving the respondent
Bank from liability from the loss, (b) not declaring as null and void, for being
contrary to law, public order and public policy, the provisions in the contract for
lease of the safety deposit box absolving the Bank from any liability for loss, (c)
not concluding that in this jurisdiction, as well as under American jurisprudence,
the liability of the Bank is settled and (d) awarding attorney's fees to the Bank
and denying the petitioner's prayer for nominal and exemplary damages and
attorney's fees. 8

In its Decision promulgated on 4 July 1989, 9 respondent Court affirmed the

appealed decision principally on the theory that the contract (Exhibit "2")
executed by the petitioner and respondent Bank is in the nature of a contract of
lease by virtue of which the petitioner and its co-renter were given control over
the safety deposit box and its contents while the Bank retained no right to open
the said box because it had neither the possession nor control over it and its
contents. As such, the contract is governed by Article 1643 of the Civil Code 10
which provides:
Art. 1643. In the lease of things, one of the parties binds himself to give to
another the enjoyment or use of a thing for a price certain, and for a period which
may be definite or indefinite. However, no lease for more than ninety-nine years
shall be valid.
It invoked Tolentino vs. Gonzales 11 which held that the owner of the property
loses his control over the property leased during the period of the contract and
Article 1975 of the Civil Code which provides:
Art. 1975. The depositary holding certificates, bonds, securities or instruments
which earn interest shall be bound to collect the latter when it becomes due, and
to take such steps as may be necessary in order that the securities may preserve
their value and the rights corresponding to them according to law.
The above provision shall not apply to contracts for the rent of safety deposit
boxes.
and then concluded that "[c]learly, the defendant-appellee is not under any duty
to maintain the contents of the box. The stipulation absolving the defendantappellee from liability is in accordance with the nature of the contract of lease
and cannot be regarded as contrary to law, public order and public policy." 12 The
appellate court was quick to add, however, that under the contract of lease of the
safety deposit box, respondent Bank is not completely free from liability as it may
still be made answerable in case unauthorized persons enter into the vault area
or when the rented box is forced open. Thus, as expressly provided for in
stipulation number 8 of the contract in question:
8. The Bank shall use due diligence that no unauthorized person shall be
admitted to any rented safe and beyond this, the Bank will not be responsible for
the contents of any safe rented from it. 13
Its motion for reconsideration 14 having been denied in the respondent Court's
Resolution of 28 August 1989, 15 petitioner took this recourse under Rule 45 of
the Rules of Court and urges Us to review and set aside the respondent Court's
ruling. Petitioner avers that both the respondent Court and the trial court (a) did
not properly and legally apply the correct law in this case, (b) acted with grave
abuse of discretion or in excess of jurisdiction amounting to lack thereof and (c)
set a precedent that is contrary to, or is a departure from precedents adhered to
and affirmed by decisions of this Court and precepts in American jurisprudence
adopted in the Philippines. It reiterates the arguments it had raised in its motion
to reconsider the trial court's decision, the brief submitted to the respondent
Court and the motion to reconsider the latter's decision. In a nutshell, petitioner
maintains that regardless of nomenclature, the contract for the rent of the safety
deposit box (Exhibit "2") is actually a contract of deposit governed by Title XII,

Book IV of the Civil Code of the

Philippines. 16 Accordingly, it is claimed that the respondent Bank is liable for the
loss of the certificates of title pursuant to Article 1972 of the said Code which
provides:
Art. 1972. The depositary is obliged to keep the thing safely and to return it, when
required, to the depositor, or to his heirs and successors, or to the person who
may have been designated in the contract. His responsibility, with regard to the
safekeeping and the loss of the thing, shall be governed by the provisions of Title
I of this Book.
If the deposit is gratuitous, this fact shall be taken into account in determining the
degree of care that the depositary must observe.
Petitioner then quotes a passage from American Jurisprudence 17 which is
supposed to expound on the prevailing rule in the United States, to wit:
The prevailing rule appears to be that where a safe-deposit company leases a
safe-deposit box or safe and the lessee takes possession of the box or safe and
places therein his securities or other valuables, the relation of bailee and bail or
is created between the parties to the transaction as to such securities or other
valuables; the fact that the
safe-deposit company does not know, and that it is not expected that it shall
know, the character or description of the property which is deposited in such
safe-deposit box or safe does not change that relation. That access to the
contents of the safe-deposit box can be had only by the use of a key retained by
the lessee ( whether it is the sole key or one to be used in connection with one
retained by the lessor) does not operate to alter the foregoing rule. The argument
that there is not, in such a case, a delivery of exclusive possession and control to
the deposit company, and that therefore the situation is entirely different from that
of ordinary bailment, has been generally rejected by the courts, usually on the
ground that as possession must be either in the depositor or in the company, it
should reasonably be considered as in the latter rather than in the former, since
the company is, by the nature of the contract, given absolute control of access to
the property, and the depositor cannot gain access thereto without the consent
and active participation of the company. . . . (citations omitted).
and a segment from Words and Phrases 18 which states that a contract for the
rental of a bank safety deposit box in consideration of a fixed amount at stated
periods is a bailment for hire.
Petitioner further argues that conditions 13 and 14 of the questioned contract are
contrary to law and public policy and should be declared null and void. In support
thereof, it cites Article 1306 of the Civil Code which provides that parties to a
contract may establish such stipulations, clauses, terms and conditions as they
may deem convenient, provided they are not contrary to law, morals, good
customs, public order or public policy.
After the respondent Bank filed its comment, this Court gave due course to the
petition and required the parties to simultaneously submit their respective
Memoranda.
The petition is partly meritorious.
We agree with the petitioner's contention that the contract for the rent of the

safety deposit box is not an ordinary contract of lease as defined in Article 1643
of the Civil Code. However, We do not fully subscribe to its view that the same is
a contract of deposit that is to be strictly governed by the provisions in the Civil
Code on deposit; 19 the contract in the case at bar is a special kind of deposit. It
cannot be characterized as an ordinary contract of lease under Article 1643
because the full and absolute possession and control of the safety deposit box
was not given to the joint renters the petitioner and the Pugaos. The guard key
of the box remained with the respondent Bank; without this key, neither of the
renters could open the box. On the other hand, the respondent Bank could not
likewise open the box without the renter's key. In this case, the said key had a
duplicate which was made so that both renters could have access to the box.
Hence, the authorities cited by the respondent Court 20 on this point do not apply.
Neither could Article 1975, also relied upon by the respondent Court, be invoked
as an argument against the deposit theory. Obviously, the first paragraph of such
provision cannot apply to a depositary of certificates, bonds, securities or
instruments which earn interest if such documents are kept in a rented safety
deposit box. It is clear that the depositary cannot open the box without the renter
being present.
We observe, however, that the deposit theory itself does not altogether find
unanimous support even in American jurisprudence. We agree with the petitioner
that under the latter, the prevailing rule is that the relation between a bank renting
out safe-deposit boxes and its customer with respect to the contents of the box is
that of a bail or and bailee, the bailment being for hire and mutual benefit. 21 This
is just the prevailing view because:
There is, however, some support for the view that the relationship in question
might be more properly characterized as that of landlord and tenant, or lessor
and lessee. It has also been suggested that it should be characterized as that of
licensor and licensee. The relation between a bank, safe-deposit company, or
storage company, and the renter of a safe-deposit box therein, is often described
as contractual, express or implied, oral or written, in whole or in part. But there is
apparently no jurisdiction in which any rule other than that applicable to bailments
governs questions of the liability and rights of the parties in respect of loss of the
contents of safe-deposit boxes. 22 (citations omitted)
In the context of our laws which authorize banking institutions to rent out safety
deposit boxes, it is clear that in this jurisdiction, the prevailing rule in the United
States has been adopted. Section 72 of the General Banking Act 23 pertinently
provides:
Sec. 72. In addition to the operations specifically authorized elsewhere in this
Act, banking institutions other than building and loan associations may perform
the following services:
(a) Receive in custody funds, documents, and valuable objects, and rent safety
deposit boxes for the safeguarding of such effects.
xxx xxx xxx
The banks shall perform the services permitted under subsections (a), (b) and (c)
of this section as depositories or as agents. . . . 24 (emphasis supplied)
Note that the primary function is still found within the parameters of a contract of

deposit, i.e., the receiving in custody of funds, documents and other valuable
objects for safekeeping. The renting out of the safety deposit boxes is not
independent from, but related to or in conjunction with, this principal function. A
contract of deposit may be entered into orally or in writing 25 and, pursuant to
Article 1306 of the Civil Code, the parties thereto may establish such stipulations,
clauses, terms and conditions as they may deem convenient, provided they are
not contrary to law, morals, good customs, public order or public policy. The
depositary's responsibility for the safekeeping of the objects deposited in the
case at bar is governed by Title I, Book IV of the Civil Code. Accordingly, the
depositary would be liable if, in performing its obligation, it is found guilty of fraud,
negligence, delay or contravention of the tenor of the agreement. 26 In the
absence of any stipulation prescribing the degree of diligence required, that of a
good father of a family is to be observed. 27 Hence, any stipulation exempting the
depositary from any liability arising from the loss of the thing deposited on
account of fraud, negligence or delay would be void for being contrary to law and
public policy. In the instant case, petitioner maintains that conditions 13 and 14 of
the questioned contract of lease of the safety deposit box, which read:
13. The bank is not a depositary of the contents of the safe and it has neither the
possession nor control of the same.
14. The bank has no interest whatsoever in said contents, except herein
expressly provided, and it assumes absolutely no liability in connection therewith.
28

are void as they are contrary to law and public policy. We find Ourselves in
agreement with this proposition for indeed, said provisions are inconsistent with
the respondent Bank's responsibility as a depositary under Section 72(a) of the
General Banking Act. Both exempt the latter from any liability except as
contemplated in condition 8 thereof which limits its duty to exercise reasonable
diligence only with respect to who shall be admitted to any rented safe, to wit:
8. The Bank shall use due diligence that no unauthorized person shall be
admitted to any rented safe and beyond this, the Bank will not be responsible for
the contents of any safe rented from it. 29
Furthermore, condition 13 stands on a wrong premise and is contrary to the
actual practice of the Bank. It is not correct to assert that the Bank has neither
the possession nor control of the contents of the box since in fact, the safety
deposit box itself is located in its premises and is under its absolute control;
moreover, the respondent Bank keeps the guard key to the said box. As stated
earlier, renters cannot open their respective boxes unless the Bank cooperates
by presenting and using this guard key. Clearly then, to the extent above stated,
the foregoing conditions in the contract in question are void and ineffective. It has
been said:
With respect to property deposited in a safe-deposit box by a customer of a safedeposit company, the parties, since the relation is a contractual one, may by
special contract define their respective duties or provide for increasing or limiting
the liability of the deposit company, provided such contract is not in violation of
law or public policy. It must clearly appear that there actually was such a special
contract, however, in order to vary the ordinary obligations implied by law from

the relationship of the parties; liability of the deposit company will not be enlarged
or restricted by words of doubtful meaning. The company, in renting
safe-deposit boxes, cannot exempt itself from liability for loss of the contents by
its own fraud or negligence or that of its agents or servants, and if a provision of
the contract may be construed as an attempt to do so, it will be held ineffective
for the purpose. Although it has been held that the lessor of a safe-deposit box
cannot limit its liability for loss of the contents thereof through its own negligence,
the view has been taken that such a lessor may limits its liability to some extent
by agreement or stipulation. 30 (citations omitted)
Thus, we reach the same conclusion which the Court of Appeals arrived at, that
is, that the petition should be dismissed, but on grounds quite different from
those relied upon by the Court of Appeals. In the instant case, the respondent
Bank's exoneration cannot, contrary to the holding of the Court of Appeals, be
based on or proceed from a characterization of the impugned contract as a
contract of lease, but rather on the fact that no competent proof was presented to
show that respondent Bank was aware of the agreement between the petitioner
and the Pugaos to the effect that the certificates of title were withdrawable from
the safety deposit box only upon both parties' joint signatures, and that no
evidence was submitted to reveal that the loss of the certificates of title was due
to the fraud or negligence of the respondent Bank. This in turn flows from this
Court's determination that the contract involved was one of deposit. Since both
the petitioner and the Pugaos agreed that each should have one (1) renter's key,
it was obvious that either of them could ask the Bank for access to the safety
deposit box and, with the use of such key and the Bank's own guard key, could
open the said box, without the other renter being present.
Since, however, the petitioner cannot be blamed for the filing of the complaint
and no bad faith on its part had been established, the trial court erred in
condemning the petitioner to pay the respondent Bank attorney's fees. To this
extent, the Decision (dispositive portion) of public respondent Court of Appeals
must be modified.
WHEREFORE, the Petition for Review is partially GRANTED by deleting the
award for attorney's fees from the 4 July 1989 Decision of the respondent Court
of Appeals in CA-G.R. CV No. 15150. As modified, and subject to the
pronouncement We made above on the nature of the relationship between the
parties in a contract of lease of safety deposit boxes, the dispositive portion of
the said Decision is hereby AFFIRMED and the instant Petition for Review is
otherwise DENIED for lack of merit.
No pronouncement as to costs.
SO ORDERED.
G.R. No. 126780
February 17, 2005
YHT REALTY CORPORATION, ERLINDA LAINEZ and ANICIA PAYAM,
petitioners,
vs.
THE COURT OF APPEALS and MAURICE McLOUGHLIN, respondents.
DECISION

TINGA, J.:
The primary question of interest before this Court is the only legal issue in the
case: It is whether a hotel may evade liability for the loss of items left with it for
safekeeping by its guests, by having these guests execute written waivers
holding the establishment or its employees free from blame for such loss in light
of Article 2003 of the Civil Code which voids such waivers.
Before this Court is a Rule 45 petition for review of the Decision1 dated 19
October 1995 of the Court of Appeals which affirmed the Decision2 dated 16
December 1991 of the Regional Trial Court (RTC), Branch 13, of Manila, finding
YHT Realty Corporation, Brunhilda Mata-Tan (Tan), Erlinda Lainez (Lainez) and
Anicia Payam (Payam) jointly and solidarily liable for damages in an action filed
by Maurice McLoughlin (McLoughlin) for the loss of his American and Australian
dollars deposited in the safety deposit box of Tropicana Copacabana Apartment
Hotel, owned and operated by YHT Realty Corporation.
The factual backdrop of the case follow.
Private respondent McLoughlin, an Australian businessman-philanthropist, used
to stay at Sheraton Hotel during his trips to the Philippines prior to 1984 when he
met Tan. Tan befriended McLoughlin by showing him around, introducing him to
important people, accompanying him in visiting impoverished street children and
assisting him in buying gifts for the children and in distributing the same to
charitable institutions for poor children. Tan convinced McLoughlin to transfer
from Sheraton Hotel to Tropicana where Lainez, Payam and Danilo Lopez were
employed. Lopez served as manager of the hotel while Lainez and Payam had
custody of the keys for the safety deposit boxes of Tropicana. Tan took care of
McLoughlin's booking at the Tropicana where he started staying during his trips
to the Philippines from December 1984 to September 1987. 3
On 30 October 1987, McLoughlin arrived from Australia and registered with
Tropicana. He rented a safety deposit box as it was his practice to rent a safety
deposit box every time he registered at Tropicana in previous trips. As a tourist,
McLoughlin was aware of the procedure observed by Tropicana relative to its
safety deposit boxes. The safety deposit box could only be opened through the
use of two keys, one of which is given to the registered guest, and the other
remaining in the possession of the management of the hotel. When a registered
guest wished to open his safety deposit box, he alone could personally request
the management who then would assign one of its employees to accompany the
guest and assist him in opening the safety deposit box with the two keys. 4
McLoughlin allegedly placed the following in his safety deposit box: Fifteen
Thousand US Dollars (US$15,000.00) which he placed in two envelopes, one
envelope containing Ten Thousand US Dollars (US$10,000.00) and the other
envelope Five Thousand US Dollars (US$5,000.00); Ten Thousand Australian
Dollars (AUS$10,000.00) which he also placed in another envelope; two (2) other
envelopes containing letters and credit cards; two (2) bankbooks; and a
checkbook, arranged side by side inside the safety deposit box. 5
On 12 December 1987, before leaving for a brief trip to Hongkong, McLoughlin
opened his safety deposit box with his key and with the key of the management
and took therefrom the envelope containing Five Thousand US Dollars

(US$5,000.00), the envelope containing Ten Thousand Australian Dollars

(AUS$10,000.00), his passports and his credit cards. 6 McLoughlin left the other
items in the box as he did not check out of his room at the Tropicana during his
short visit to Hongkong. When he arrived in Hongkong, he opened the envelope
which contained Five Thousand US Dollars (US$5,000.00) and discovered upon
counting that only Three Thousand US Dollars (US$3,000.00) were enclosed
therein.7 Since he had no idea whether somebody else had tampered with his
safety deposit box, he thought that it was just a result of bad accounting since he
did not spend anything from that envelope.8
After returning to Manila, he checked out of Tropicana on 18 December 1987 and
left for Australia. When he arrived in Australia, he discovered that the envelope
with Ten Thousand US Dollars (US$10,000.00) was short of Five Thousand US
Dollars (US$5,000). He also noticed that the jewelry which he bought in
Hongkong and stored in the safety deposit box upon his return to Tropicana was
likewise missing, except for a diamond bracelet. 9
When McLoughlin came back to the Philippines on 4 April 1988, he asked Lainez
if some money and/or jewelry which he had lost were found and returned to her
or to the management. However, Lainez told him that no one in the hotel found
such things and none were turned over to the management. He again registered
at Tropicana and rented a safety deposit box. He placed therein one (1) envelope
containing Fifteen Thousand US Dollars (US$15,000.00), another envelope
containing Ten Thousand Australian Dollars (AUS$10,000.00) and other
envelopes containing his traveling papers/documents. On 16 April 1988,
McLoughlin requested Lainez and Payam to open his safety deposit box. He
noticed that in the envelope containing Fifteen Thousand US Dollars
(US$15,000.00), Two Thousand US Dollars (US$2,000.00) were missing and in
the envelope previously containing Ten Thousand Australian Dollars
(AUS$10,000.00), Four Thousand Five Hundred Australian Dollars
(AUS$4,500.00) were missing.10
When McLoughlin discovered the loss, he immediately confronted Lainez and
Payam who admitted that Tan opened the safety deposit box with the key
assigned to him.11 McLoughlin went up to his room where Tan was staying and
confronted her. Tan admitted that she had stolen McLoughlin's key and was able
to open the safety deposit box with the assistance of Lopez, Payam and Lainez. 12
Lopez also told McLoughlin that Tan stole the key assigned to McLoughlin while
the latter was asleep.13
McLoughlin requested the management for an investigation of the incident.
Lopez got in touch with Tan and arranged for a meeting with the police and
McLoughlin. When the police did not arrive, Lopez and Tan went to the room of
McLoughlin at Tropicana and thereat, Lopez wrote on a piece of paper a
promissory note dated 21 April 1988. The promissory note reads as follows:
I promise to pay Mr. Maurice McLoughlin the amount of AUS$4,000.00 and
US$2,000.00 or its equivalent in Philippine currency on or before May 5, 1988. 14
Lopez requested Tan to sign the promissory note which the latter did and Lopez
also signed as a witness. Despite the execution of promissory note by Tan,
McLoughlin insisted that it must be the hotel who must assume responsibility for

the loss he suffered. However, Lopez refused to accept the responsibility relying
on the conditions for renting the safety deposit box entitled "Undertaking For the
Use Of Safety Deposit Box,"15 specifically paragraphs (2) and (4) thereof, to wit:
2. To release and hold free and blameless TROPICANA APARTMENT HOTEL
from any liability arising from any loss in the contents and/or use of the said
deposit box for any cause whatsoever, including but not limited to the
presentation or use thereof by any other person should the key be lost;
...
4. To return the key and execute the RELEASE in favor of TROPICANA
APARTMENT HOTEL upon giving up the use of the box.16
On 17 May 1988, McLoughlin went back to Australia and he consulted his
lawyers as to the validity of the abovementioned stipulations. They opined that
the stipulations are void for being violative of universal hotel practices and
customs. His lawyers prepared a letter dated 30 May 1988 which was signed by
McLoughlin and sent to President Corazon Aquino. 17 The Office of the President
referred the letter to the Department of Justice (DOJ) which forwarded the same
to the Western Police District (WPD).18
After receiving a copy of the indorsement in Australia, McLoughlin came to the
Philippines and registered again as a hotel guest of Tropicana. McLoughlin went
to Malacaang to follow up on his letter but he was instructed to go to the DOJ.
The DOJ directed him to proceed to the WPD for documentation. But McLoughlin
went back to Australia as he had an urgent business matter to attend to.
For several times, McLoughlin left for Australia to attend to his business and
came back to the Philippines to follow up on his letter to the President but he
failed to obtain any concrete assistance.19
McLoughlin left again for Australia and upon his return to the Philippines on 25
August 1989 to pursue his claims against petitioners, the WPD conducted an
investigation which resulted in the preparation of an affidavit which was
forwarded to the Manila City Fiscal's Office. Said affidavit became the basis of
preliminary investigation. However, McLoughlin left again for Australia without
receiving the notice of the hearing on 24 November 1989. Thus, the case at the
Fiscal's Office was dismissed for failure to prosecute. Mcloughlin requested the
reinstatement of the criminal charge for theft. In the meantime, McLoughlin and
his lawyers wrote letters of demand to those having responsibility to pay the
damage. Then he left again for Australia.
Upon his return on 22 October 1990, he registered at the Echelon Towers at
Malate, Manila. Meetings were held between McLoughlin and his lawyer which
resulted to the filing of a complaint for damages on 3 December 1990 against
YHT Realty Corporation, Lopez, Lainez, Payam and Tan (defendants) for the loss
of McLoughlin's money which was discovered on 16 April 1988. After filing the
complaint, McLoughlin left again for Australia to attend to an urgent business
matter. Tan and Lopez, however, were not served with summons, and trial
proceeded with only Lainez, Payam and YHT Realty Corporation as defendants.
After defendants had filed their Pre-Trial Brief admitting that they had previously
allowed and assisted Tan to open the safety deposit box, McLoughlin filed an
Amended/Supplemental Complaint20 dated 10 June 1991 which included another

incident of loss of money and jewelry in the safety deposit box rented by
McLoughlin in the same hotel which took place prior to 16 April 1988. 21 The trial
court admitted the Amended/Supplemental Complaint.
During the trial of the case, McLoughlin had been in and out of the country to
attend to urgent business in Australia, and while staying in the Philippines to
attend the hearing, he incurred expenses for hotel bills, airfare and other
transportation expenses, long distance calls to Australia, Meralco power
expenses, and expenses for food and maintenance, among others. 22
After trial, the RTC of Manila rendered judgment in favor of McLoughlin, the
dispositive portion of which reads:
WHEREFORE, above premises considered, judgment is hereby rendered by this
Court in favor of plaintiff and against the defendants, to wit:
1. Ordering defendants, jointly and severally, to pay plaintiff the sum of
US$11,400.00 or its equivalent in Philippine Currency of P342,000.00, more or
less, and the sum of AUS$4,500.00 or its equivalent in Philippine Currency of
P99,000.00, or a total of P441,000.00, more or less, with 12% interest from April
16 1988 until said amount has been paid to plaintiff (Item 1, Exhibit CC);
2. Ordering defendants, jointly and severally to pay plaintiff the sum of
P3,674,238.00 as actual and consequential damages arising from the loss of his
Australian and American dollars and jewelries complained against and in
prosecuting his claim and rights administratively and judicially (Items II, III, IV, V,
VI, VII, VIII, and IX, Exh. "CC");
3. Ordering defendants, jointly and severally, to pay plaintiff the sum of
P500,000.00 as moral damages (Item X, Exh. "CC");
4. Ordering defendants, jointly and severally, to pay plaintiff the sum of
P350,000.00 as exemplary damages (Item XI, Exh. "CC");
5. And ordering defendants, jointly and severally, to pay litigation expenses in the
sum of P200,000.00 (Item XII, Exh. "CC");
6. Ordering defendants, jointly and severally, to pay plaintiff the sum of
P200,000.00 as attorney's fees, and a fee of P3,000.00 for every appearance;
and
7. Plus costs of suit.
SO ORDERED.23
The trial court found that McLoughlin's allegations as to the fact of loss and as to
the amount of money he lost were sufficiently shown by his direct and
straightforward manner of testifying in court and found him to be credible and
worthy of belief as it was established that McLoughlin's money, kept in
Tropicana's safety deposit box, was taken by Tan without McLoughlin's consent.
The taking was effected through the use of the master key which was in the
possession of the management. Payam and Lainez allowed Tan to use the
master key without authority from McLoughlin. The trial court added that if
McLoughlin had not lost his dollars, he would not have gone through the trouble
and personal inconvenience of seeking aid and assistance from the Office of the
President, DOJ, police authorities and the City Fiscal's Office in his desire to
recover his losses from the hotel management and Tan. 24
As regards the loss of Seven Thousand US Dollars (US$7,000.00) and jewelry

worth approximately One Thousand Two Hundred US Dollars (US$1,200.00)

which allegedly occurred during his stay at Tropicana previous to 4 April 1988, no
claim was made by McLoughlin for such losses in his complaint dated 21
November 1990 because he was not sure how they were lost and who the
responsible persons were. But considering the admission of the defendants in
their pre-trial brief that on three previous occasions they allowed Tan to open the
box, the trial court opined that it was logical and reasonable to presume that his
personal assets consisting of Seven Thousand US Dollars (US$7,000.00) and
jewelry were taken by Tan from the safety deposit box without McLoughlin's
consent through the cooperation of Payam and Lainez. 25
The trial court also found that defendants acted with gross negligence in the
performance and exercise of their duties and obligations as innkeepers and were
therefore liable to answer for the losses incurred by McLoughlin. 26
Moreover, the trial court ruled that paragraphs (2) and (4) of the "Undertaking For
The Use Of Safety Deposit Box" are not valid for being contrary to the express
mandate of Article 2003 of the New Civil Code and against public policy. 27 Thus,
there being fraud or wanton conduct on the part of defendants, they should be
responsible for all damages which may be attributed to the non-performance of
their contractual obligations.28
The Court of Appeals affirmed the disquisitions made by the lower court except
as to the amount of damages awarded. The decretal text of the appellate court's
decision reads:
THE FOREGOING CONSIDERED, the appealed Decision is hereby AFFIRMED
but modified as follows:
The appellants are directed jointly and severally to pay the plaintiff/appellee the
following amounts:
1) P153,200.00 representing the peso equivalent of US$2,000.00 and
AUS$4,500.00;
2) P308,880.80, representing the peso value for the air fares from Sidney [sic] to
Manila and back for a total of eleven (11) trips;
3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana
Apartment Hotel;
4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon
Tower;
5) One-half of P179,863.20 or P89,931.60 for the taxi xxx transportation from the
residence to Sidney [sic] Airport and from MIA to the hotel here in Manila, for the
eleven (11) trips;
6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
7) One-half of P356,400.00 or P178,000.00 representing expenses for food and
maintenance;
8) P50,000.00 for moral damages;
9) P10,000.00 as exemplary damages; and
10) P200,000 representing attorney's fees.
With costs.
SO ORDERED.29
Unperturbed, YHT Realty Corporation, Lainez and Payam went to this Court in

this appeal by certiorari.

Petitioners submit for resolution by this Court the following issues: (a) whether
the appellate court's conclusion on the alleged prior existence and subsequent
loss of the subject money and jewelry is supported by the evidence on record; (b)
whether the finding of gross negligence on the part of petitioners in the
performance of their duties as innkeepers is supported by the evidence on
record; (c) whether the "Undertaking For The Use of Safety Deposit Box"
admittedly executed by private respondent is null and void; and (d) whether the
damages awarded to private respondent, as well as the amounts thereof, are
proper under the circumstances.30
The petition is devoid of merit.
It is worthy of note that the thrust of Rule 45 is the resolution only of questions of
law and any peripheral factual question addressed to this Court is beyond the
bounds of this mode of review.
Petitioners point out that the evidence on record is insufficient to prove the fact of
prior existence of the dollars and the jewelry which had been lost while deposited
in the safety deposit boxes of Tropicana, the basis of the trial court and the
appellate court being the sole testimony of McLoughlin as to the contents thereof.
Likewise, petitioners dispute the finding of gross negligence on their part as not
supported by the evidence on record.
We are not persuaded.l^vvphi1.net We adhere to the findings of the trial court as
affirmed by the appellate court that the fact of loss was established by the
credible testimony in open court by McLoughlin. Such findings are factual and
therefore beyond the ambit of the present petition.1awphi1.nt
The trial court had the occasion to observe the demeanor of McLoughlin while
testifying which reflected the veracity of the facts testified to by him. On this
score, we give full credence to the appreciation of testimonial evidence by the
trial court especially if what is at issue is the credibility of the witness. The oftrepeated principle is that where the credibility of a witness is an issue, the
established rule is that great respect is accorded to the evaluation of the
credibility of witnesses by the trial court. 31 The trial court is in the best position to
assess the credibility of witnesses and their testimonies because of its unique
opportunity to observe the witnesses firsthand and note their demeanor, conduct
and attitude under grilling examination.32
We are also not impressed by petitioners' argument that the finding of gross
negligence by the lower court as affirmed by the appellate court is not supported
by evidence. The evidence reveals that two keys are required to open the safety
deposit boxes of Tropicana. One key is assigned to the guest while the other
remains in the possession of the management. If the guest desires to open his
safety deposit box, he must request the management for the other key to open
the same. In other words, the guest alone cannot open the safety deposit box
without the assistance of the management or its employees. With more reason
that access to the safety deposit box should be denied if the one requesting for
the opening of the safety deposit box is a stranger. Thus, in case of loss of any
item deposited in the safety deposit box, it is inevitable to conclude that the
management had at least a hand in the consummation of the taking, unless the

reason for the loss is force majeure.

Noteworthy is the fact that Payam and Lainez, who were employees of
Tropicana, had custody of the master key of the management when the loss took
place. In fact, they even admitted that they assisted Tan on three separate
occasions in opening McLoughlin's safety deposit box. 33 This only proves that
Tropicana had prior knowledge that a person aside from the registered guest had
access to the safety deposit box. Yet the management failed to notify McLoughlin
of the incident and waited for him to discover the taking before it disclosed the
matter to him. Therefore, Tropicana should be held responsible for the damage
suffered by McLoughlin by reason of the negligence of its employees.
The management should have guarded against the occurrence of this incident
considering that Payam admitted in open court that she assisted Tan three times
in opening the safety deposit box of McLoughlin at around 6:30 A.M. to 7:30 A.M.
while the latter was still asleep.34 In light of the circumstances surrounding this
case, it is undeniable that without the acquiescence of the employees of
Tropicana to the opening of the safety deposit box, the loss of McLoughlin's
money could and should have been avoided.
The management contends, however, that McLoughlin, by his act, made its
employees believe that Tan was his spouse for she was always with him most of
the time. The evidence on record, however, is bereft of any showing that
McLoughlin introduced Tan to the management as his wife. Such an inference
from the act of McLoughlin will not exculpate the petitioners from liability in the
absence of any showing that he made the management believe that Tan was his
wife or was duly authorized to have access to the safety deposit box. Mere close
companionship and intimacy are not enough to warrant such conclusion
considering that what is involved in the instant case is the very safety of
McLoughlin's deposit. If only petitioners exercised due diligence in taking care of
McLoughlin's safety deposit box, they should have confronted him as to his
relationship with Tan considering that the latter had been observed opening
McLoughlin's safety deposit box a number of times at the early hours of the
morning. Tan's acts should have prompted the management to investigate her
relationship with McLoughlin. Then, petitioners would have exercised due
diligence required of them. Failure to do so warrants the conclusion that the
management had been remiss in complying with the obligations imposed upon
hotel-keepers under the law.
Under Article 1170 of the New Civil Code, those who, in the performance of their
obligations, are guilty of negligence, are liable for damages. As to who shall bear
the burden of paying damages, Article 2180, paragraph (4) of the same Code
provides that the owners and managers of an establishment or enterprise are
likewise responsible for damages caused by their employees in the service of the
branches in which the latter are employed or on the occasion of their functions.
Also, this Court has ruled that if an employee is found negligent, it is presumed
that the employer was negligent in selecting and/or supervising him for it is hard
for the victim to prove the negligence of such employer.35 Thus, given the fact
that the loss of McLoughlin's money was consummated through the negligence
of Tropicana's employees in allowing Tan to open the safety deposit box without

the guest's consent, both the assisting employees and YHT Realty Corporation
itself, as owner and operator of Tropicana, should be held solidarily liable
pursuant to Article 2193.36
The issue of whether the "Undertaking For The Use of Safety Deposit Box"
executed by McLoughlin is tainted with nullity presents a legal question
appropriate for resolution in this petition. Notably, both the trial court and the
appellate court found the same to be null and void. We find no reason to reverse
their common conclusion. Article 2003 is controlling, thus:
Art. 2003. The hotel-keeper cannot free himself from responsibility by posting
notices to the effect that he is not liable for the articles brought by the guest. Any
stipulation between the hotel-keeper and the guest whereby the responsibility of
the former as set forth in Articles 1998 to 2001 37 is suppressed or diminished
shall be void.
Article 2003 was incorporated in the New Civil Code as an expression of public
policy precisely to apply to situations such as that presented in this case. The
hotel business like the common carrier's business is imbued with public interest.
Catering to the public, hotelkeepers are bound to provide not only lodging for
hotel guests and security to their persons and belongings. The twin duty
constitutes the essence of the business. The law in turn does not allow such duty
to the public to be negated or diluted by any contrary stipulation in so-called
"undertakings" that ordinarily appear in prepared forms imposed by hotel keepers
on guests for their signature.
In an early case,38 the Court of Appeals through its then Presiding Justice (later
Associate Justice of the Court) Jose P. Bengzon, ruled that to hold hotelkeepers
or innkeeper liable for the effects of their guests, it is not necessary that they be
actually delivered to the innkeepers or their employees. It is enough that such
effects are within the hotel or inn. 39 With greater reason should the liability of the
hotelkeeper be enforced when the missing items are taken without the guest's
knowledge and consent from a safety deposit box provided by the hotel itself, as
in this case.
Paragraphs (2) and (4) of the "undertaking" manifestly contravene Article 2003 of
the New Civil Code for they allow Tropicana to be released from liability arising
from any loss in the contents and/or use of the safety deposit box for any cause
whatsoever.40 Evidently, the undertaking was intended to bar any claim against
Tropicana for any loss of the contents of the safety deposit box whether or not
negligence was incurred by Tropicana or its employees. The New Civil Code is
explicit that the responsibility of the hotel-keeper shall extend to loss of, or injury
to, the personal property of the guests even if caused by servants or employees
of the keepers of hotels or inns as well as by strangers, except as it may proceed
from any force majeure.41 It is the loss through force majeure that may spare the
hotel-keeper from liability. In the case at bar, there is no showing that the act of
the thief or robber was done with the use of arms or through an irresistible force
to qualify the same as force majeure.42
Petitioners likewise anchor their defense on Article 2002 43 which exempts the
hotel-keeper from liability if the loss is due to the acts of his guest, his family, or
visitors. Even a cursory reading of the provision would lead us to reject

petitioners' contention. The justification they raise would render nugatory the
public interest sought to be protected by the provision. What if the negligence of
the employer or its employees facilitated the consummation of a crime committed
by the registered guest's relatives or visitor? Should the law exculpate the hotel
from liability since the loss was due to the act of the visitor of the registered guest
of the hotel? Hence, this provision presupposes that the hotel-keeper is not guilty
of concurrent negligence or has not contributed in any degree to the occurrence
of the loss. A depositary is not responsible for the loss of goods by theft, unless
his actionable negligence contributes to the loss. 44
In the case at bar, the responsibility of securing the safety deposit box was
shared not only by the guest himself but also by the management since two keys
are necessary to open the safety deposit box. Without the assistance of hotel
employees, the loss would not have occurred. Thus, Tropicana was guilty of
concurrent negligence in allowing Tan, who was not the registered guest, to open
the safety deposit box of McLoughlin, even assuming that the latter was also
guilty of negligence in allowing another person to use his key. To rule otherwise
would result in undermining the safety of the safety deposit boxes in hotels for
the management will be given imprimatur to allow any person, under the
pretense of being a family member or a visitor of the guest, to have access to the
safety deposit box without fear of any liability that will attach thereafter in case
such person turns out to be a complete stranger. This will allow the hotel to
evade responsibility for any liability incurred by its employees in conspiracy with
the guest's relatives and visitors.
Petitioners contend that McLoughlin's case was mounted on the theory of
contract, but the trial court and the appellate court upheld the grant of the claims
of the latter on the basis of tort. 45 There is nothing anomalous in how the lower
courts decided the controversy for this Court has pronounced a jurisprudential
rule that tort liability can exist even if there are already contractual relations. The
act that breaks the contract may also be tort.46
As to damages awarded to McLoughlin, we see no reason to modify the amounts
awarded by the appellate court for the same were based on facts and law. It is
within the province of lower courts to settle factual issues such as the proper
amount of damages awarded and such finding is binding upon this Court
especially if sufficiently proven by evidence and not unconscionable or
excessive. Thus, the appellate court correctly awarded McLoughlin Two
Thousand US Dollars (US$2,000.00) and Four Thousand Five Hundred
Australian dollars (AUS$4,500.00) or their peso equivalent at the time of
payment,47 being the amounts duly proven by evidence. 48 The alleged loss that
took place prior to 16 April 1988 was not considered since the amounts alleged to
have been taken were not sufficiently established by evidence. The appellate
court also correctly awarded the sum of P308,880.80, representing the peso
value for the air fares from Sydney to Manila and back for a total of eleven (11)
trips;49 one-half of P336,207.05 or P168,103.52 representing payment to
Tropicana;50 one-half of P152,683.57 or P76,341.785 representing payment to
Echelon Tower;51 one-half of P179,863.20 or P89,931.60 for the taxi or
transportation expenses from McLoughlin's residence to Sydney Airport and from

MIA to the hotel here in Manila, for the eleven (11) trips; 52 one-half of P7,801.94
or P3,900.97 representing Meralco power expenses; 53 one-half of P356,400.00
or P178,000.00 representing expenses for food and maintenance. 54
The amount of P50,000.00 for moral damages is reasonable. Although trial
courts are given discretion to determine the amount of moral damages, the
appellate court may modify or change the amount awarded when it is palpably
and scandalously excessive.l^vvphi1.net Moral damages are not intended to
enrich a complainant at the expense of a defendant.l^vvphi1.net They are
awarded only to enable the injured party to obtain means, diversion or
amusements that will serve to alleviate the moral suffering he has undergone, by
reason of defendants' culpable action.55
The awards of P10,000.00 as exemplary damages and P200,000.00
representing attorney's fees are likewise sustained.
WHEREFORE, foregoing premises considered, the Decision of the Court of
Appeals dated 19 October 1995 is hereby AFFIRMED. Petitioners are directed,
jointly and severally, to pay private respondent the following amounts:
(1) US$2,000.00 and AUS$4,500.00 or their peso equivalent at the time of
payment;
(2) P308,880.80, representing the peso value for the air fares from Sydney to
Manila and back for a total of eleven (11) trips;
(3) One-half of P336,207.05 or P168,103.52 representing payment to Tropicana
Copacabana Apartment Hotel;
(4) One-half of P152,683.57 or P76,341.785 representing payment to Echelon
Tower;
(5) One-half of P179,863.20 or P89,931.60 for the taxi or transportation expense
from McLoughlin's residence to Sydney Airport and from MIA to the hotel here in
Manila, for the eleven (11) trips;
(6) One-half of P7,801.94 or P3,900.97 representing Meralco power expenses;
(7) One-half of P356,400.00 or P178,200.00 representing expenses for food and
maintenance;
(8) P50,000.00 for moral damages;
(9) P10,000.00 as exemplary damages; and
(10) P200,000 representing attorney's fees.
With costs.
SO ORDERED.
[G.R. No. 160544. February 21, 2005]
TRIPLE-V vs. FILIPINO MERCHANTS
THIRD DIVISION
Gentlemen:
Quoted hereunder, for your information, is a resolution of this Court dated FEB
21 2005.
G.R. No. 160544 (Triple-V Food Services, Inc. vs. Filipino Merchants Insurance
Company, Inc.)
Assailed in this petition for review on certiorari is the decision [1]cralaw dated
October 21, 2003 of the Court of Appeals in CA-G.R. CV No. 71223, affirming an

earlier decision of the Regional Trial Court at Makati City, Branch 148, in its Civil
Case No. 98-838, an action for damages thereat filed by respondent Filipino
Merchants Insurance, Company, Inc., against the herein petitioner, Triple-V Food
Services, Inc.
On March 2, 1997, at around 2:15 o'clock in the afternoon, a certain Mary JoAnne De Asis (De Asis) dined at petitioner's Kamayan Restaurant at 15 West
Avenue, Quezon City. De Asis was using a Mitsubishi Galant Super Saloon
Model 1995 with plate number UBU 955, assigned to her by her employer Crispa
Textile Inc. (Crispa). On said date, De Asis availed of the valet parking service of
petitioner and entrusted her car key to petitioner's valet counter. A corresponding
parking ticket was issued as receipt for the car. The car was then parked by
petitioner's valet attendant, a certain Madridano, at the designated parking area.
Few minutes later, Madridano noticed that the car was not in its parking slot and
its key no longer in the box where valet attendants usually keep the keys of cars
entrusted to them. The car was never recovered. Thereafter, Crispa filed a claim
against its insurer, herein respondent Filipino Merchants Insurance Company,
Inc. (FMICI). Having indemnified Crispa in the amount of P669.500 for the loss of
the subject vehicle, FMICI, as subrogee to Crispa's rights, filed with the RTC at
Makati City an action for damages against petitioner Triple-V Food Services, Inc.,
thereat docketed as Civil Case No. 98-838 which was raffled to Branch 148.
In its answer, petitioner argued that the complaint failed to aver facts to support
the allegations of recklessness and negligence committed in the safekeeping and
custody of the subject vehicle, claiming that it and its employees wasted no time
in ascertaining the loss of the car and in informing De Asis of the discovery of the
loss. Petitioner further argued that in accepting the complimentary valet parking
service, De Asis received a parking ticket whereunder it is so provided that
"[Management and staff will not be responsible for any loss of or damage
incurred on the vehicle nor of valuables contained therein", a provision which, to
petitioner's mind, is an explicit waiver of any right to claim indemnity for the loss
of the car; and that De Asis knowingly assumed the risk of loss when she allowed
petitioner to park her vehicle, adding that its valet parking service did not include
extending a contract of insurance or warranty for the loss of the vehicle.
During trial, petitioner challenged FMICI's subrogation to Crispa's right to file a
claim for the loss of the car, arguing that theft is not a risk insured against under
FMICI's Insurance Policy No. PC-5975 for the subject vehicle.
In a decision dated June 22, 2001, the trial court rendered judgment for
respondent FMICI, thus:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the
plaintiff (FMICI) and against the defendant Triple V (herein petitioner) and the
latter is hereby ordered to pay plaintiff the following:
1. The amount of P669,500.00, representing actual damages plus compounded
(sic);
2. The amount of P30,000.00 as acceptance fee plus the amount equal to 25%
of the total amount due as attorney's fees;
3. The amount of P50,000.00 as exemplary damages;
4. Plus, cost of suit.

Defendant Triple V is not therefore precluded from taking appropriate action

against defendant Armando Madridano.
SO ORDERED.
Obviously displeased, petitioner appealed to the Court of Appeals reiterating its
argument that it was not a depositary of the subject car and that it exercised due
diligence and prudence in the safe keeping of the vehicle, in handling the carnapping incident and in the supervision of its employees. It further argued that
there was no valid subrogation of rights between Crispa and respondent FMICI.
In a decision dated October 21, 2003, [2]cralaw the Court of Appeals dismissed
petitioner's appeal and affirmed the appealed decision of the trial court, thus:
WHEREFORE, based on the foregoing premises, the instant appeal is hereby
DISMISSED. Accordingly, the assailed June 22, 2001 Decision of the RTC of
Makati City - Branch 148 in Civil Case No. 98-838 is AFFIRMED.
SO ORDERED.
In so dismissing the appeal and affirming the appealed decision, the appellate
court agreed with the findings and conclusions of the trial court that: (a) petitioner
was a depositary of the subject vehicle; (b) petitioner was negligent in its duties
as a depositary thereof and as an employer of the valet attendant; and (c) there
was a valid subrogation of rights between Crispa and respondent FMICI.
Hence, petitioner's present recourse.
We agree with the two (2) courts below.
When De Asis entrusted the car in question to petitioners valet attendant while
eating at petitioner's Kamayan Restaurant, the former expected the car's safe
return at the end of her meal. Thus, petitioner was constituted as a depositary of
the same car. Petitioner cannot evade liability by arguing that neither a contract
of deposit nor that of insurance, guaranty or surety for the loss of the car was
constituted when De Asis availed of its free valet parking service.
In a contract of deposit, a person receives an object belonging to another with
the obligation of safely keeping it and returning the same. [3]cralaw A deposit may
be constituted even without any consideration. It is not necessary that the
depositary receives a fee before it becomes obligated to keep the item entrusted
for safekeeping and to return it later to the depositor.
Specious is petitioner's insistence that the valet parking claim stub it issued to De
Asis contains a clear exclusion of its liability and operates as an explicit waiver by
the customer of any right to claim indemnity for any loss of or damage to the
vehicle.
The parking claim stub embodying the terms and conditions of the parking,
including that of relieving petitioner from any loss or damage to the car, is
essentially a contract of adhesion, drafted and prepared as it is by the petitioner
alone with no participation whatsoever on the part of the customers, like De Asis,
who merely adheres to the printed stipulations therein appearing. While contracts
of adhesion are not void in themselves, yet this Court will not hesitate to rule out
blind adherence thereto if they prove to be one-sided under the attendant facts
and circumstances.[4]cralaw
Hence, and as aptly pointed out by the Court of Appeals, petitioner must not be
allowed to use its parking claim stub's exclusionary stipulation as a shield from

any responsibility for any loss or damage to vehicles or to the valuables

contained therein. Here, it is evident that De Asis deposited the car in question
with the petitioner as part of the latter's enticement for customers by providing
them a safe parking space within the vicinity of its restaurant. In a very real
sense, a safe parking space is an added attraction to petitioner's restaurant
business because customers are thereby somehow assured that their vehicle are
safely kept, rather than parking them elsewhere at their own risk. Having
entrusted the subject car to petitioner's valet attendant, customer De Asis, like all
of petitioner's customers, fully expects the security of her car while at petitioner's
premises/designated parking areas and its safe return at the end of her visit at
petitioner's restaurant.
Petitioner's argument that there was no valid subrogation of rights between
Crispa and FMICI because theft was not a risk insured against under FMICI's
Insurance Policy No. PC-5975 holds no water.
Insurance Policy No. PC-5975 which respondent FMICI issued to Crispa
contains, among others things, the following item: "Insured's Estimate of Value of
Scheduled Vehicle- P800.000".[5]cralaw On the basis of such item, the trial court
concluded that the coverage includes a full comprehensive insurance of the
vehicle in case of damage or loss. Besides, Crispa paid a premium of P10,304 to
cover theft. This is clearly shown in the breakdown of premiums in the same
policy.[6]cralaw Thus, having indemnified CRISPA for the stolen car, FMICI, as
correctly ruled by the trial court and the Court of Appeals, was properly
subrogated to Crispa's rights against petitioner, pursuant to Article 2207 of the
New Civil Code[7].
Anent the trial court's findings of negligence on the part of the petitioner, which
findings were affirmed by the appellate court, we have consistently ruled that
findings of facts of trial courts, more so when affirmed, as here, by the Court of
Appeals, are conclusive on this Court unless the trial court itself ignored,
overlooked or misconstrued facts and circumstances which, if considered,
warrant a reversal of the outcome of the case. [8]cralaw This is not so in the case
at bar. For, we have ourselves reviewed the records and find no justification to
deviate from the trial court's findings.
WHEREFORE, petition is hereby DENIED DUE COURSE.
SO ORDERED.
G.R. No. 159912
August 17, 2007
UNITED COCONUT PLANTERS BANK, Petitioner,
vs.
SPOUSES SAMUEL and ODETTE BELUSO, Respondents.
DECISION
CHICO-NAZARIO, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
which seeks to annul the Court of Appeals Decision 1 dated 21 January 2003 and
its Resolution2 dated 9 September 2003 in CA-G.R. CV No. 67318. The assailed
Court of Appeals Decision and Resolution affirmed in turn the Decision 3 dated 23
March 2000 and Order4 dated 8 May 2000 of the Regional Trial Court (RTC),

Branch 65 of Makati City, in Civil Case No. 99-314, declaring void the interest
rate provided in the promissory notes executed by the respondents Spouses
Samuel and Odette Beluso (spouses Beluso) in favor of petitioner United
Coconut Planters Bank (UCPB).
The procedural and factual antecedents of this case are as follows:
On 16 April 1996, UCPB granted the spouses Beluso a Promissory Notes Line
under a Credit Agreement whereby the latter could avail from the former credit of
up to a maximum amount of P1.2 Million pesos for a term ending on 30 April
1997. The spouses Beluso constituted, other than their promissory notes, a real
estate mortgage over parcels of land in Roxas City, covered by Transfer
Certificates of Title No. T-31539 and T-27828, as additional security for the
obligation. The Credit Agreement was subsequently amended to increase the
amount of the Promissory Notes Line to a maximum of P2.35 Million pesos and
to extend the term thereof to 28 February 1998.
The spouses Beluso availed themselves of the credit line under the following
Promissory Notes:
PN #

Date of PN

Maturity Date

Amount Secur

8314-96-00083-3

29 April 1996

27 August 1996

P 700,000

8314-96-00085-0

2 May 1996

30 August 1996

P 500,000

8314-96-000292-2

20 November 1996

20 March 1997

P 800,000

The three promissory notes were renewed several times. On 30 April 1997, the
payment of the principal and interest of the latter two promissory notes were
debited from the spouses Belusos account with UCPB; yet, a consolidated loan
for P1.3 Million was again released to the spouses Beluso under one promissory
note with a due date of 28 February 1998.
To completely avail themselves of the P2.35 Million credit line extended to them
by UCPB, the spouses Beluso executed two more promissory notes for a total of
P350,000.00:
PN #

Date of PN

Maturity Date

Amount Secur

97-00363-1

11 December 1997

28 February 1998

P 200,000

98-00002-4

2 January 1998

28 February 1998

P 150,000

However, the spouses Beluso alleged that the amounts covered by these last two
promissory notes were never released or credited to their account and, thus,
claimed that the principal indebtedness was only P2 Million.
In any case, UCPB applied interest rates on the different promissory notes
ranging from 18% to 34%. From 1996 to February 1998 the spouses Beluso
were able to pay the total sum of P763,692.03.
From 28 February 1998 to 10 June 1998, UCPB continued to charge interest and
penalty on the obligations of the spouses Beluso, as follows:
PN #

Amount Secured

Interest

Penalty

Total

97-00363-1

P 200,000

31%

36%

P 225,313.24

97-00366-6

P 700,000

30.17%
(7 days)

32.786%
(102 days)

P 795,294.72

97-00368-2

P 1,300,000

28%
(2 days)

30.41%
(102 days)

P 1,462,124.

98-00002-4

P 150,000

33%
(102 days)

36%

P 170,034.71

The spouses Beluso, however, failed to make any payment of the foregoing
amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total
obligation of P2,932,543.00 plus 25% attorneys fees, but the spouses Beluso
failed to comply therewith. On 28 December 1998, UCPB foreclosed the
properties mortgaged by the spouses Beluso to secure their credit line, which, by
that time, already ballooned to P3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for Annulment,
Accounting and Damages against UCPB with the RTC of Makati City.
On 23 March 2000, the RTC ruled in favor of the spouses Beluso, disposing of
the case as follows:
PREMISES CONSIDERED, judgment is hereby rendered declaring the interest
rate used by [UCPB] void and the foreclosure and Sheriffs Certificate of Sale
void. [UCPB] is hereby ordered to return to [the spouses Beluso] the properties
subject of the foreclosure; to pay [the spouses Beluso] the amount of P50,000.00
by way of attorneys fees; and to pay the costs of suit. [The spouses Beluso] are
hereby ordered to pay [UCPB] the sum of P1,560,308.00.5
On 8 May 2000, the RTC denied UCPBs Motion for Reconsideration, 6 prompting
UCPB to appeal the RTC Decision with the Court of Appeals. The Court of
Appeals affirmed the RTC Decision, to wit:
WHEREFORE, premises considered, the decision dated March 23, 2000 of the
Regional Trial Court, Branch 65, Makati City in Civil Case No. 99-314 is hereby
AFFIRMED subject to the modification that defendant-appellant UCPB is not
liable for attorneys fees or the costs of suit.7
On 9 September 2003, the Court of Appeals denied UCPBs Motion for
Reconsideration for lack of merit. UCPB thus filed the present petition, submitting
the following issues for our resolution:
I
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION
OF THE TRIAL COURT WHICH DECLARED VOID THE PROVISION ON
INTEREST RATE AGREED UPON BETWEEN PETITIONER AND
RESPONDENTS
II
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE

COMPUTATION BY THE TRIAL COURT OF RESPONDENTS INDEBTEDNESS

AND ORDERED RESPONDENTS TO PAY PETITIONER THE AMOUNT OF
ONLY ONE MILLION FIVE HUNDRED SIXTY THOUSAND THREE HUNDRED
EIGHT PESOS (P1,560,308.00)
III
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION
OF THE TRIAL COURT WHICH ANNULLED THE FORECLOSURE BY
PETITIONER OF THE SUBJECT PROPERTIES DUE TO AN ALLEGED
"INCORRECT COMPUTATION" OF RESPONDENTS INDEBTEDNESS
IV
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT AFFIRMED THE DECISION
OF THE TRIAL COURT WHICH FOUND PETITIONER LIABLE FOR VIOLATION
OF THE TRUTH IN LENDING ACT
V
WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
SERIOUS AND REVERSIBLE ERROR WHEN IT FAILED TO ORDER THE
DISMISSAL OF THE CASE BECAUSE THE RESPONDENTS ARE GUILTY OF
FORUM SHOPPING8
Validity of the Interest Rates
The Court of Appeals held that the imposition of interest in the following provision
found in the promissory notes of the spouses Beluso is void, as the interest rates
and the bases therefor were determined solely by petitioner UCPB:
FOR VALUE RECEIVED, I, and/or We, on or before due date, SPS. SAMUEL
AND ODETTE BELUSO (BORROWER), jointly and severally promise to pay to
UNITED COCONUT PLANTERS BANK (LENDER) or order at UCPB Bldg.,
Makati Avenue, Makati City, Philippines, the sum of ______________ PESOS,
(P_____), Philippine Currency, with interest thereon at the rate indicative of DBD
retail rate or as determined by the Branch Head.9
UCPB asserts that this is a reversible error, and claims that while the interest rate
was not numerically quantified in the face of the promissory notes, it was
nonetheless categorically fixed, at the time of execution thereof, at the "rate
indicative of the DBD retail rate." UCPB contends that said provision must be
read with another stipulation in the promissory notes subjecting to review the
interest rate as fixed:
The interest rate shall be subject to review and may be increased or decreased
by the LENDER considering among others the prevailing financial and monetary
conditions; or the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with
the BORROWER.10
In this regard, UCPB avers that these are valid reference rates akin to a
"prevailing rate" or "prime rate" allowed by this Court in Polotan v. Court of
Appeals.11 Furthermore, UCPB argues that even if the proviso "as determined by
the branch head" is considered void, such a declaration would not ipso facto

render the connecting clause "indicative of DBD retail rate" void in view of the
separability clause of the Credit Agreement, which reads:
Section 9.08 Separability Clause. If any one or more of the provisions contained
in this AGREEMENT, or documents executed in connection herewith shall be
declared invalid, illegal or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions hereof shall not in any way be affected
or impaired.12
According to UCPB, the imposition of the questioned interest rates did not
infringe on the principle of mutuality of contracts, because the spouses Beluso
had the liberty to choose whether or not to renew their credit line at the new
interest rates pegged by petitioner.13 UCPB also claims that assuming there was
any defect in the mutuality of the contract at the time of its inception, such defect
was cured by the subsequent conduct of the spouses Beluso in availing
themselves of the credit line from April 1996 to February 1998 without airing any
protest with respect to the interest rates imposed by UCPB. According to UCPB,
therefore, the spouses Beluso are in estoppel. 14
We agree with the Court of Appeals, and find no merit in the contentions of
UCPB.
Article 1308 of the Civil Code provides:
Art. 1308. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.
We applied this provision in Philippine National Bank v. Court of Appeals, 15 where
we held:
In order that obligations arising from contracts may have the force of law
between the parties, there must be mutuality between the parties based on their
essential equality. A contract containing a condition which makes its fulfillment
dependent exclusively upon the uncontrolled will of one of the contracting parties,
is void (Garcia vs. Rita Legarda, Inc., 21 SCRA 555). Hence, even assuming that
the P1.8 million loan agreement between the PNB and the private respondent
gave the PNB a license (although in fact there was none) to increase the interest
rate at will during the term of the loan, that license would have been null and void
for being violative of the principle of mutuality essential in contracts. It would
have invested the loan agreement with the character of a contract of adhesion,
where the parties do not bargain on equal footing, the weaker party's (the debtor)
participation being reduced to the alternative "to take it or leave it" (Qua vs. Law
Union & Rock Insurance Co., 95 Phil. 85). Such a contract is a veritable trap for
the weaker party whom the courts of justice must protect against abuse and
imposition.
The provision stating that the interest shall be at the "rate indicative of DBD retail
rate or as determined by the Branch Head" is indeed dependent solely on the will
of petitioner UCPB. Under such provision, petitioner UCPB has two choices on
what the interest rate shall be: (1) a rate indicative of the DBD retail rate; or (2) a
rate as determined by the Branch Head. As UCPB is given this choice, the rate
should be categorically determinable in both choices. If either of these two
choices presents an opportunity for UCPB to fix the rate at will, the bank can
easily choose such an option, thus making the entire interest rate provision

violative of the principle of mutuality of contracts.

Not just one, but rather both, of these choices are dependent solely on the will of
UCPB. Clearly, a rate "as determined by the Branch Head" gives the latter
unfettered discretion on what the rate may be. The Branch Head may choose
any rate he or she desires. As regards the rate "indicative of the DBD retail rate,"
the same cannot be considered as valid for being akin to a "prevailing rate" or
"prime rate" allowed by this Court in Polotan. The interest rate in Polotan reads:
The Cardholder agrees to pay interest per annum at 3% plus the prime rate of
Security Bank and Trust Company. x x x.16
In this provision in Polotan, there is a fixed margin over the reference rate: 3%.
Thus, the parties can easily determine the interest rate by applying simple
arithmetic. On the other hand, the provision in the case at bar does not specify
any margin above or below the DBD retail rate. UCPB can peg the interest at any
percentage above or below the DBD retail rate, again giving it unfettered
discretion in determining the interest rate.
The stipulation in the promissory notes subjecting the interest rate to review does
not render the imposition by UCPB of interest rates on the obligations of the
spouses Beluso valid. According to said stipulation:
The interest rate shall be subject to review and may be increased or decreased
by the LENDER considering among others the prevailing financial and monetary
conditions; or the rate of interest and charges which other banks or financial
institutions charge or offer to charge for similar accommodations; and/or the
resulting profitability to the LENDER after due consideration of all dealings with
the BORROWER.17
It should be pointed out that the authority to review the interest rate was given
UCPB alone as the lender. Moreover, UCPB may apply the considerations
enumerated in this provision as it wishes. As worded in the above provision,
UCPB may give as much weight as it desires to each of the following
considerations: (1) the prevailing financial and monetary condition; (2) the rate of
interest and charges which other banks or financial institutions charge or offer to
charge for similar accommodations; and/or (3) the resulting profitability to the
LENDER (UCPB) after due consideration of all dealings with the BORROWER
(the spouses Beluso). Again, as in the case of the interest rate provision, there is
no fixed margin above or below these considerations.
In view of the foregoing, the Separability Clause cannot save either of the two
options of UCPB as to the interest to be imposed, as both options violate the
principle of mutuality of contracts.
UCPB likewise failed to convince us that the spouses Beluso were in estoppel.
Estoppel cannot be predicated on an illegal act. As between the parties to a
contract, validity cannot be given to it by estoppel if it is prohibited by law or is
against public policy.18
The interest rate provisions in the case at bar are illegal not only because of the
provisions of the Civil Code on mutuality of contracts, but also, as shall be
discussed later, because they violate the Truth in Lending Act. Not disclosing the
true finance charges in connection with the extensions of credit is, furthermore, a
form of deception which we cannot countenance. It is against the policy of the

State as stated in the Truth in Lending Act:

Sec. 2. Declaration of Policy. It is hereby declared to be the policy of the State
to protect its citizens from a lack of awareness of the true cost of credit to the
user by assuring a full disclosure of such cost with a view of preventing the
uninformed use of credit to the detriment of the national economy.19
Moreover, while the spouses Beluso indeed agreed to renew the credit line, the
offending provisions are found in the promissory notes themselves, not in the
credit line. In fixing the interest rates in the promissory notes to cover the
renewed credit line, UCPB still reserved to itself the same two options (1) a rate
indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head.
Error in Computation
UCPB asserts that while both the RTC and the Court of Appeals voided the
interest rates imposed by UCPB, both failed to include in their computation of the
outstanding obligation of the spouses Beluso the legal rate of interest of 12% per
annum. Furthermore, the penalty charges were also deleted in the decisions of
the RTC and the Court of Appeals. Section 2.04, Article II on "Interest and other
Bank Charges" of the subject Credit Agreement, provides:
Section 2.04 Penalty Charges. In addition to the interest provided for in Section
2.01 of this ARTICLE, any principal obligation of the CLIENT hereunder which is
not paid when due shall be subject to a penalty charge of one percent (1%) of the
amount of such obligation per month computed from due date until the obligation
is paid in full. If the bank accelerates teh (sic) payment of availments hereunder
pursuant to ARTICLE VIII hereof, the penalty charge shall be used on the total
principal amount outstanding and unpaid computed from the date of acceleration
until the obligation is paid in full.20
Paragraph 4 of the promissory notes also states:
In case of non-payment of this Promissory Note (Note) at maturity, I/We, jointly
and severally, agree to pay an additional sum equivalent to twenty-five percent
(25%) of the total due on the Note as attorneys fee, aside from the expenses
and costs of collection whether actually incurred or not, and a penalty charge of
one percent (1%) per month on the total amount due and unpaid from date of
default until fully paid.21
Petitioner further claims that it is likewise entitled to attorneys fees, pursuant to
Section 9.06 of the Credit Agreement, thus:
If the BANK shall require the services of counsel for the enforcement of its rights
under this AGREEMENT, the Note(s), the collaterals and other related
documents, the BANK shall be entitled to recover attorneys fees equivalent to
not less than twenty-five percent (25%) of the total amounts due and outstanding
exclusive of costs and other expenses. 22
Another alleged computational error pointed out by UCPB is the negation of the
Compounding Interest agreed upon by the parties under Section 2.02 of the
Credit Agreement:
Section 2.02 Compounding Interest. Interest not paid when due shall form part of
the principal and shall be subject to the same interest rate as herein stipulated. 23
and paragraph 3 of the subject promissory notes:
Interest not paid when due shall be added to, and become part of the principal

and shall likewise bear interest at the same rate. 24

UCPB lastly avers that the application of the spouses Belusos payments in the
disputed computation does not reflect the parties agreement.1avvphi1 The RTC
deducted the payment made by the spouses Beluso amounting to P763,693.00
from the principal of P2,350,000.00. This was allegedly inconsistent with the
Credit Agreement, as well as with the agreement of the parties as to the facts of
the case. In paragraph 7 of the spouses Belusos Manifestation and Motion on
Proposed Stipulation of Facts and Issues vis--vis UCPBs Manifestation, the
parties agreed that the amount of P763,693.00 was applied to the interest and
not to the principal, in accord with Section 3.03, Article II of the Credit Agreement
on "Order of the Application of Payments," which provides:
Section 3.03 Application of Payment. Payments made by the CLIENT shall be
applied in accordance with the following order of preference:
1. Accounts receivable and other out-of-pocket expenses
2. Front-end Fee, Origination Fee, Attorneys Fee and other expenses of
collection;
3. Penalty charges;
4. Past due interest;
5. Principal amortization/Payment in arrears;
6. Advance interest;
7. Outstanding balance; and
8. All other obligations of CLIENT to the BANK, if any.25
Thus, according to UCPB, the interest charges, penalty charges, and attorneys
fees had been erroneously excluded by the RTC and the Court of Appeals from
the computation of the total amount due and demandable from spouses Beluso.
The spouses Belusos defense as to all these issues is that the demand made by
UCPB is for a considerably bigger amount and, therefore, the demand should be
considered void. There being no valid demand, according to the spouses Beluso,
there would be no default, and therefore the interests and penalties would not
commence to run. As it was likewise improper to foreclose the mortgaged
properties or file a case against the spouses Beluso, attorneys fees were not
warranted.
We agree with UCPB on this score. Default commences upon judicial or
extrajudicial demand.26 The excess amount in such a demand does not nullify the
demand itself, which is valid with respect to the proper amount. A contrary ruling
would put commercial transactions in disarray, as validity of demands would be
dependent on the exactness of the computations thereof, which are too often
contested.
There being a valid demand on the part of UCPB, albeit excessive, the spouses
Beluso are considered in default with respect to the proper amount and,
therefore, the interests and the penalties began to run at that point.
As regards the award of 12% legal interest in favor of petitioner, the RTC actually
recognized that said legal interest should be imposed, thus: "There being no valid
stipulation as to interest, the legal rate of interest shall be charged." 27 It seems
that the RTC inadvertently overlooked its non-inclusion in its computation.
The spouses Beluso had even originally asked for the RTC to impose this legal

rate of interest in both the body and the prayer of its petition with the RTC:
12. Since the provision on the fixing of the rate of interest by the sole will of the
respondent Bank is null and void, only the legal rate of interest which is 12% per
annum can be legally charged and imposed by the bank, which would amount to
only about P599,000.00 since 1996 up to August 31, 1998.
xxxx
WHEREFORE, in view of the foregoing, petiitoners pray for judgment or order:
xxxx
2. By way of example for the public good against the Banks taking unfair
advantage of the weaker party to their contract, declaring the legal rate of 12%
per annum, as the imposable rate of interest up to February 28, 1999 on the loan
of 2.350 million.28
All these show that the spouses Beluso had acknowledged before the RTC their
obligation to pay a 12% legal interest on their loans. When the RTC failed to
include the 12% legal interest in its computation, however, the spouses Beluso
merely defended in the appellate courts this non-inclusion, as the same was
beneficial to them. We see, however, sufficient basis to impose a 12% legal
interest in favor of petitioner in the case at bar, as what we have voided is merely
the stipulated rate of interest and not the stipulation that the loan shall earn
interest.
We must likewise uphold the contract stipulation providing the compounding of
interest. The provisions in the Credit Agreement and in the promissory notes
providing for the compounding of interest were neither nullified by the RTC or the
Court of Appeals, nor assailed by the spouses Beluso in their petition with the
RTC. The compounding of interests has furthermore been declared by this Court
to be legal. We have held in Tan v. Court of Appeals,29 that:
Without prejudice to the provisions of Article 2212, interest due and unpaid shall
not earn interest. However, the contracting parties may by stipulation capitalize
the interest due and unpaid, which as added principal, shall earn new interest.
As regards the imposition of penalties, however, although we are likewise
upholding the imposition thereof in the contract, we find the rate iniquitous. Like
in the case of grossly excessive interests, the penalty stipulated in the contract
may also be reduced by the courts if it is iniquitous or unconscionable. 30
We find the penalty imposed by UCPB, ranging from 30.41% to 36%, to be
iniquitous considering the fact that this penalty is already over and above the
compounded interest likewise imposed in the contract. If a 36% interest in itself
has been declared unconscionable by this Court, 31 what more a 30.41% to 36%
penalty, over and above the payment of compounded interest? UCPB itself must
have realized this, as it gave us a sample computation of the spouses Belusos
obligation if both the interest and the penalty charge are reduced to 12%.
As regards the attorneys fees, the spouses Beluso can actually be liable therefor
even if there had been no demand. Filing a case in court is the judicial demand
referred to in Article 116932 of the Civil Code, which would put the obligor in delay.
The RTC, however, also held UCPB liable for attorneys fees in this case, as the
spouses Beluso were forced to litigate the issue on the illegality of the interest
rate provision of the promissory notes. The award of attorneys fees, it must be

recalled, falls under the sound discretion of the court. 33 Since both parties were
forced to litigate to protect their respective rights, and both are entitled to the
award of attorneys fees from the other, practical reasons dictate that we set off
or compensate both parties liabilities for attorneys fees. Therefore, instead of
awarding attorneys fees in favor of petitioner, we shall merely affirm the deletion
of the award of attorneys fees to the spouses Beluso.
In sum, we hold that spouses Beluso should still be held liable for a compounded
legal interest of 12% per annum and a penalty charge of 12% per annum. We
also hold that, instead of awarding attorneys fees in favor of petitioner, we shall
merely affirm the deletion of the award of attorneys fees to the spouses Beluso.
Annulment of the Foreclosure Sale
Properties of spouses Beluso had been foreclosed, titles to which had already
been consolidated on 19 February 2001 and 20 March 2001 in the name of
UCPB, as the spouses Beluso failed to exercise their right of redemption which
expired on 25 March 2000. The RTC, however, annulled the foreclosure of
mortgage based on an alleged incorrect computation of the spouses Belusos
indebtedness.
UCPB alleges that none of the grounds for the annulment of a foreclosure sale
are present in the case at bar. Furthermore, the annulment of the foreclosure
proceedings and the certificates of sale were mooted by the subsequent
issuance of new certificates of title in the name of said bank. UCPB claims that
the spouses Belusos action for annulment of foreclosure constitutes a collateral
attack on its certificates of title, an act proscribed by Section 48 of Presidential
Decree No. 1529, otherwise known as the Property Registration Decree, which
provides:
Section 48. Certificate not subject to collateral attack. A certificate of title shall
not be subject to collateral attack. It cannot be altered, modified or cancelled
except in a direct proceeding in accordance with law.
The spouses Beluso retort that since they had the right to refuse payment of an
excessive demand on their account, they cannot be said to be in default for
refusing to pay the same. Consequently, according to the spouses Beluso, the
"enforcement of such illegal and overcharged demand through foreclosure of
mortgage" should be voided.
We agree with UCPB and affirm the validity of the foreclosure proceedings. Since
we already found that a valid demand was made by UCPB upon the spouses
Beluso, despite being excessive, the spouses Beluso are considered in default
with respect to the proper amount of their obligation to UCPB and, thus, the
property they mortgaged to secure such amounts may be foreclosed.
Consequently, proceeds of the foreclosure sale should be applied to the extent of
the amounts to which UCPB is rightfully entitled.
As argued by UCPB, none of the grounds for the annulment of a foreclosure sale
are present in this case. The grounds for the proper annulment of the foreclosure
sale are the following: (1) that there was fraud, collusion, accident, mutual
mistake, breach of trust or misconduct by the purchaser; (2) that the sale had not
been fairly and regularly conducted; or (3) that the price was inadequate and the
inadequacy was so great as to shock the conscience of the court. 34

Liability for Violation of Truth in Lending Act

The RTC, affirmed by the Court of Appeals, imposed a fine of P26,000.00 for
UCPBs alleged violation of Republic Act No. 3765, otherwise known as the Truth
in Lending Act.
UCPB challenges this imposition, on the argument that Section 6(a) of the Truth
in Lending Act which mandates the filing of an action to recover such penalty
must be made under the following circumstances:
Section 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation
issued thereunder shall be liable to such person in the amount of P100 or in an
amount equal to twice the finance charge required by such creditor in connection
with such transaction, whichever is greater, except that such liability shall not
exceed P2,000 on any credit transaction. Action to recover such penalty may be
brought by such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. x x x (Emphasis ours.)
According to UCPB, the Court of Appeals even stated that "[a]dmittedly the
original complaint did not explicitly allege a violation of the Truth in Lending Act
and no action to formally admit the amended petition [which expressly alleges
violation of the Truth in Lending Act] was made either by [respondents] spouses
Beluso and the lower court. x x x."35
UCPB further claims that the action to recover the penalty for the violation of the
Truth in Lending Act had been barred by the one-year prescriptive period
provided for in the Act. UCPB asserts that per the records of the case, the latest
of the subject promissory notes had been executed on 2 January 1998, but the
original petition of the spouses Beluso was filed before the RTC on 9 February
1999, which was after the expiration of the period to file the same on 2 January
1999.
On the matter of allegation of the violation of the Truth in Lending Act, the Court
of Appeals ruled:
Admittedly the original complaint did not explicitly allege a violation of the Truth
in Lending Act and no action to formally admit the amended petition was made
either by [respondents] spouses Beluso and the lower court. In such
transactions, the debtor and the lending institutions do not deal on an equal
footing and this law was intended to protect the public from hidden or
undisclosed charges on their loan obligations, requiring a full disclosure thereof
by the lender. We find that its infringement may be inferred or implied from
allegations that when [respondents] spouses Beluso executed the promissory
notes, the interest rate chargeable thereon were left blank. Thus, [petitioner]
UCPB failed to discharge its duty to disclose in full to [respondents] Spouses
Beluso the charges applicable on their loans. 36
We agree with the Court of Appeals. The allegations in the complaint, much more
than the title thereof, are controlling. Other than that stated by the Court of
Appeals, we find that the allegation of violation of the Truth in Lending Act can
also be inferred from the same allegation in the complaint we discussed earlier:
b.) In unilaterally imposing an increased interest rates (sic) respondent bank has
relied on the provision of their promissory note granting respondent bank the

power to unilaterally fix the interest rates, which rate was not determined in the
promissory note but was left solely to the will of the Branch Head of the
respondent Bank, x x x.37
The allegation that the promissory notes grant UCPB the power to unilaterally fix
the interest rates certainly also means that the promissory notes do not contain a
"clear statement in writing" of "(6) the finance charge expressed in terms of
pesos and centavos; and (7) the percentage that the finance charge bears to the
amount to be financed expressed as a simple annual rate on the outstanding
unpaid balance of the obligation." 38 Furthermore, the spouses Belusos prayer
"for such other reliefs just and equitable in the premises" should be deemed to
include the civil penalty provided for in Section 6(a) of the Truth in Lending Act.
UCPBs contention that this action to recover the penalty for the violation of the
Truth in Lending Act has already prescribed is likewise without merit. The penalty
for the violation of the act is P100 or an amount equal to twice the finance charge
required by such creditor in connection with such transaction, whichever is
greater, except that such liability shall not exceed P2,000.00 on any credit
transaction.39 As this penalty depends on the finance charge required of the
borrower, the borrowers cause of action would only accrue when such finance
charge is required. In the case at bar, the date of the demand for payment of the
finance charge is 2 September 1998, while the foreclosure was made on 28
December 1998. The filing of the case on 9 February 1999 is therefore within the
one-year prescriptive period.
UCPB argues that a violation of the Truth in Lending Act, being a criminal
offense, cannot be inferred nor implied from the allegations made in the
complaint.40 Pertinent provisions of the Act read:
Sec. 6. (a) Any creditor who in connection with any credit transaction fails to
disclose to any person any information in violation of this Act or any regulation
issued thereunder shall be liable to such person in the amount of P100 or in an
amount equal to twice the finance charge required by such creditor in connection
with such transaction, whichever is the greater, except that such liability shall not
exceed P2,000 on any credit transaction. Action to recover such penalty may be
brought by such person within one year from the date of the occurrence of the
violation, in any court of competent jurisdiction. In any action under this
subsection in which any person is entitled to a recovery, the creditor shall be
liable for reasonable attorneys fees and court costs as determined by the court.
xxxx
(c) Any person who willfully violates any provision of this Act or any regulation
issued thereunder shall be fined by not less than P1,000 or more than P5,000 or
imprisonment for not less than 6 months, nor more than one year or both.
As can be gleaned from Section 6(a) and (c) of the Truth in Lending Act, the
violation of the said Act gives rise to both criminal and civil liabilities. Section 6(c)
considers a criminal offense the willful violation of the Act, imposing the penalty
therefor of fine, imprisonment or both. Section 6(a), on the other hand, clearly
provides for a civil cause of action for failure to disclose any information of the
required information to any person in violation of the Act. The penalty therefor is
an amount of P100 or in an amount equal to twice the finance charge required by

the creditor in connection with such transaction, whichever is greater, except that
the liability shall not exceed P2,000.00 on any credit transaction. The action to
recover such penalty may be instituted by the aggrieved private person
separately and independently from the criminal case for the same offense.
In the case at bar, therefore, the civil action to recover the penalty under Section
6(a) of the Truth in Lending Act had been jointly instituted with (1) the action to
declare the interests in the promissory notes void, and (2) the action to declare
the foreclosure void. This joinder is allowed under Rule 2, Section 5 of the Rules
of Court, which provides:
SEC. 5. Joinder of causes of action.A party may in one pleading assert, in the
alternative or otherwise, as many causes of action as he may have against an
opposing party, subject to the following conditions:
(a) The party joining the causes of action shall comply with the rules on joinder of
parties;
(b) The joinder shall not include special civil actions or actions governed by
special rules;
(c) Where the causes of action are between the same parties but pertain to
different venues or jurisdictions, the joinder may be allowed in the Regional Trial
Court provided one of the causes of action falls within the jurisdiction of said
court and the venue lies therein; and
(d) Where the claims in all the causes of action are principally for recovery of
money, the aggregate amount claimed shall be the test of jurisdiction.
In attacking the RTCs disposition on the violation of the Truth in Lending Act
since the same was not alleged in the complaint, UCPB is actually asserting a
violation of due process. Indeed, due process mandates that a defendant should
be sufficiently apprised of the matters he or she would be defending himself or
herself against. However, in the 1 July 1999 pre-trial brief filed by the spouses
Beluso before the RTC, the claim for civil sanctions for violation of the Truth in
Lending Act was expressly alleged, thus:
Moreover, since from the start, respondent bank violated the Truth in Lending Act
in not informing the borrower in writing before the execution of the Promissory
Notes of the interest rate expressed as a percentage of the total loan, the
respondent bank instead is liable to pay petitioners double the amount the bank
is charging petitioners by way of sanction for its violation. 41
In the same pre-trial brief, the spouses Beluso also expressly raised the following
issue:
b.) Does the expression indicative rate of DBD retail (sic) comply with the Truth in
Lending Act provision to express the interest rate as a simple annual percentage
of the loan?42
These assertions are so clear and unequivocal that any attempt of UCPB to feign
ignorance of the assertion of this issue in this case as to prevent it from putting
up a defense thereto is plainly hogwash.
Petitioner further posits that it is the Metropolitan Trial Court which has
jurisdiction to try and adjudicate the alleged violation of the Truth in Lending Act,
considering that the present action allegedly involved a single credit transaction
as there was only one Promissory Note Line.

We disagree. We have already ruled that the action to recover the penalty under
Section 6(a) of the Truth in Lending Act had been jointly instituted with (1) the
action to declare the interests in the promissory notes void, and (2) the action to
declare the foreclosure void. There had been no question that the above actions
belong to the jurisdiction of the RTC. Subsection (c) of the above-quoted Section
5 of the Rules of Court on Joinder of Causes of Action provides:
(c) Where the causes of action are between the same parties but pertain to
different venues or jurisdictions, the joinder may be allowed in the Regional Trial
Court provided one of the causes of action falls within the jurisdiction of said
court and the venue lies therein.
Furthermore, opening a credit line does not create a credit transaction of loan or
mutuum, since the former is merely a preparatory contract to the contract of loan
or mutuum. Under such credit line, the bank is merely obliged, for the
considerations specified therefor, to lend to the other party amounts not
exceeding the limit provided. The credit transaction thus occurred not when the
credit line was opened, but rather when the credit line was availed of. In the case
at bar, the violation of the Truth in Lending Act allegedly occurred not when the
parties executed the Credit Agreement, where no interest rate was mentioned,
but when the parties executed the promissory notes, where the allegedly
offending interest rate was stipulated.
UCPB further argues that since the spouses Beluso were duly given copies of
the subject promissory notes after their execution, then they were duly notified of
the terms thereof, in substantial compliance with the Truth in Lending Act.
Once more, we disagree. Section 4 of the Truth in Lending Act clearly provides
that the disclosure statement must be furnished prior to the consummation of the
transaction:
SEC. 4. Any creditor shall furnish to each person to whom credit is extended,
prior to the consummation of the transaction, a clear statement in writing setting
forth, to the extent applicable and in accordance with rules and regulations
prescribed by the Board, the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2)
(4) the charges, individually itemized, which are paid or to be paid by such
person in connection with the transaction but which are not incident to the
extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the
obligation.
The rationale of this provision is to protect users of credit from a lack of
awareness of the true cost thereof, proceeding from the experience that banks
are able to conceal such true cost by hidden charges, uncertainty of interest
rates, deduction of interests from the loaned amount, and the like. The law
thereby seeks to protect debtors by permitting them to fully appreciate the true

cost of their loan, to enable them to give full consent to the contract, and to
properly evaluate their options in arriving at business decisions. Upholding
UCPBs claim of substantial compliance would defeat these purposes of the
Truth in Lending Act. The belated discovery of the true cost of credit will too often
not be able to reverse the ill effects of an already consummated business
decision.
In addition, the promissory notes, the copies of which were presented to the
spouses Beluso after execution, are not sufficient notification from UCPB. As
earlier discussed, the interest rate provision therein does not sufficiently indicate
with particularity the interest rate to be applied to the loan covered by said
promissory notes.
Forum Shopping
UCPB had earlier moved to dismiss the petition (originally Case No. 99-314 in
RTC, Makati City) on the ground that the spouses Beluso instituted another case
(Civil Case No. V-7227) before the RTC of Roxas City, involving the same parties
and issues. UCPB claims that while Civil Case No. V-7227 initially appears to be
a different action, as it prayed for the issuance of a temporary restraining order
and/or injunction to stop foreclosure of spouses Belusos properties, it poses
issues which are similar to those of the present case. 43 To prove its point, UCPB
cited the spouses Belusos Amended Petition in Civil Case No. V-7227, which
contains similar allegations as those in the present case. The RTC of Makati
denied UCPBs Motion to Dismiss Case No. 99-314 for lack of merit. Petitioner
UCPB raised the same issue with the Court of Appeals, and is raising the same
issue with us now.
The spouses Beluso claim that the issue in Civil Case No. V-7227 before the
RTC of Roxas City, a Petition for Injunction Against Foreclosure, is the propriety
of the foreclosure before the true account of spouses Beluso is determined. On
the other hand, the issue in Case No. 99-314 before the RTC of Makati City is
the validity of the interest rate provision. The spouses Beluso claim that Civil
Case No. V-7227 has become moot because, before the RTC of Roxas City
could act on the restraining order, UCPB proceeded with the foreclosure and
auction sale. As the act sought to be restrained by Civil Case No. V-7227 has
already been accomplished, the spouses Beluso had to file a different action, that
of Annulment of the Foreclosure Sale, Case No. 99-314 with the RTC, Makati
City.
Even if we assume for the sake of argument, however, that only one cause of
action is involved in the two civil actions, namely, the violation of the right of the
spouses Beluso not to have their property foreclosed for an amount they do not
owe, the Rules of Court nevertheless allows the filing of the second action. Civil
Case No. V-7227 was dismissed by the RTC of Roxas City before the filing of
Case No. 99-314 with the RTC of Makati City, since the venue of litigation as
provided for in the Credit Agreement is in Makati City.
Rule 16, Section 5 bars the refiling of an action previously dismissed only in the
following instances:
SEC. 5. Effect of dismissal.Subject to the right of appeal, an order granting a
motion to dismiss based on paragraphs (f), (h) and (i) of section 1 hereof shall

bar the refiling of the same action or claim. (n)

Improper venue as a ground for the dismissal of an action is found in paragraph
(c) of Section 1, not in paragraphs (f), (h) and (i):
SECTION 1. Grounds.Within the time for but before filing the answer to the
complaint or pleading asserting a claim, a motion to dismiss may be made on
any of the following grounds:
(a) That the court has no jurisdiction over the person of the defending party;
(b) That the court has no jurisdiction over the subject matter of the claim;
(c) That venue is improperly laid;
(d) That the plaintiff has no legal capacity to sue;
(e) That there is another action pending between the same parties for the same
cause;
(f) That the cause of action is barred by a prior judgment or by the statute of
limitations;
(g) That the pleading asserting the claim states no cause of action;
(h) That the claim or demand set forth in the plaintiffs pleading has been paid,
waived, abandoned, or otherwise extinguished;
(i) That the claim on which the action is founded is unenforceable under the
provisions of the statute of frauds; and
(j) That a condition precedent for filing the claim has not been complied with. 44
(Emphases supplied.)
When an action is dismissed on the motion of the other party, it is only when the
ground for the dismissal of an action is found in paragraphs (f), (h) and (i) that the
action cannot be refiled. As regards all the other grounds, the complainant is
allowed to file same action, but should take care that, this time, it is filed with the
proper court or after the accomplishment of the erstwhile absent condition
precedent, as the case may be.
UCPB, however, brings to the attention of this Court a Motion for Reconsideration
filed by the spouses Beluso on 15 January 1999 with the RTC of Roxas City,
which Motion had not yet been ruled upon when the spouses Beluso filed Civil
Case No. 99-314 with the RTC of Makati. Hence, there were allegedly two
pending actions between the same parties on the same issue at the time of the
filing of Civil Case No. 99-314 on 9 February 1999 with the RTC of Makati. This
will still not change our findings. It is indeed the general rule that in cases where
there are two pending actions between the same parties on the same issue, it
should be the later case that should be dismissed. However, this rule is not
absolute. According to this Court in Allied Banking Corporation v. Court of
Appeals45 :
In these cases, it is evident that the first action was filed in anticipation of the
filing of the later action and the purpose is to preempt the later suit or provide a
basis for seeking the dismissal of the second action.
Even if this is not the purpose for the filing of the first action, it may nevertheless
be dismissed if the later action is the more appropriate vehicle for the ventilation
of the issues between the parties. Thus, in Ramos v. Peralta, it was held:
[T]he rule on litis pendentia does not require that the later case should yield to
the earlier case. What is required merely is that there be another pending action,

not a prior pending action. Considering the broader scope of inquiry involved in
Civil Case No. 4102 and the location of the property involved, no error was
committed by the lower court in deferring to the Bataan court's jurisdiction.
Given, therefore, the pendency of two actions, the following are the relevant
considerations in determining which action should be dismissed: (1) the date of
filing, with preference generally given to the first action filed to be retained; (2)
whether the action sought to be dismissed was filed merely to preempt the later
action or to anticipate its filing and lay the basis for its dismissal; and (3) whether
the action is the appropriate vehicle for litigating the issues between the parties.
In the case at bar, Civil Case No. V-7227 before the RTC of Roxas City was an
action for injunction against a foreclosure sale that has already been held, while
Civil Case No. 99-314 before the RTC of Makati City includes an action for the
annulment of said foreclosure, an action certainly more proper in view of the
execution of the foreclosure sale. The former case was improperly filed in Roxas
City, while the latter was filed in Makati City, the proper venue of the action as
mandated by the Credit Agreement. It is evident, therefore, that Civil Case No.
99-314 is the more appropriate vehicle for litigating the issues between the
parties, as compared to Civil Case No. V-7227. Thus, we rule that the RTC of
Makati City was not in error in not dismissing Civil Case No. 99-314.
WHEREFORE, the Decision of the Court of Appeals is hereby AFFIRMED with
the following MODIFICATIONS:
1. In addition to the sum of P2,350,000.00 as determined by the courts a quo,
respondent spouses Samuel and Odette Beluso are also liable for the following
amounts:
a. Penalty of 12% per annum on the amount due 46 from the date of demand; and
b. Compounded legal interest of 12% per annum on the amount due 47 from date
of demand;
2. The following amounts shall be deducted from the liability of the spouses
Samuel and Odette Beluso:
a. Payments made by the spouses in the amount of P763,692.00. These
payments shall be applied to the date of actual payment of the following in the
order that they are listed, to wit:
i. penalty charges due and demandable as of the time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
b. Penalty under Republic Act No. 3765 in the amount of P26,000.00. This
amount shall be deducted from the liability of the spouses Samuel and Odette
Beluso on 9 February 1999 to the following in the order that they are listed, to wit:
i. penalty charges due and demandable as of time of payment;
ii. interest due and demandable as of the time of payment;
iii. principal amortization/payment in arrears as of the time of payment;
iv. outstanding balance.
3. The foreclosure of mortgage is hereby declared VALID. Consequently, the
amounts which the Regional Trial Court and the Court of Appeals ordered
respondents to pay, as modified in this Decision, shall be deducted from the

proceeds of the foreclosure sale.

SO ORDERED.
G.R. No. L-16666
April 10, 1922
ROMULO MACHETTI, plaintiff-appelle,
vs.
HOSPICIO DE SAN JOSE, defendant-appellee, and
FIDELITY & SURETY COMPANY OF THE PHILIPPINE ISLANDS, defendantappellant
Ross and Laurence and Wolfson & Scwarzkopf for appellant.Gabriel La O for
appellee Hospicio de San Jose.No appearance for the other appellee.
OSTRAND, J.:
It appears from the evidence that on July 17, 1916, one Romulo Machetti, by a
written agreement undertook to construct a building on Calle Rosario in the city
of Manila for the Hospicio de San Jose, the contract price being P64,000. One of
the conditions of the agreement was that the contractor should obtain the
"guarantee" of the Fidelity and Surety Company of the Philippine Islands to the
amount of P128,800 and the following endorsement in the English language
appears upon the contract:
MANILA, July 15, 1916.
For value received we hereby guarantee compliance with the terms and
conditions as outlined in the above contract.
FIDELITY AND SURETY COMPANY OF THE PHILIPPINE ISLANDS.
(Sgd) OTTO VORSTER,
Vice-President.
Machetti constructed the building under the supervision of architects representing
the Hospicio de San Jose and, as the work progressed, payments were made to
him from time to time upon the recommendation of the architects, until the entire
contract price, with the exception of the sum of the P4,978.08, was paid.
Subsequently it was found that the work had not been carried out in accordance
with the specifications which formed part of the contract and that the
workmanship was not of the standard required, and the Hospicio de San Jose
therefore answered the complaint and presented a counterclaim for damages for
the partial noncompliance with the terms of the agreement abovementioned, in
the total sum of P71,350. After issue was thus joined, Machetti, on petition of his
creditors, was, on February 27, 1918, declared insolvent and on March 4, 1918,
an order was entered suspending the proceeding in the present case in
accordance with section 60 of the Insolvency Law, Act No. 1956.
The Hospicio de San Jose on January 29, 1919, filed a motion asking that the
Fidelity and Surety Company be made cross-defendant to the exclusion of
Machetti and that the proceedings be continued as to said company, but still
remain suspended as to Machetti. This motion was granted and on February 7,
1920, the Hospicio filed a complaint against the Fidelity and Surety Company
asking for a judgement for P12,800 against the company upon its guaranty. After
trial, the Court of First Instance rendered judgment against the Fidelity and

Surety Company for P12,800 in accordance with the complaint. The case is now
before this court upon appeal by the Fidelity and Surety Company form said
judgment.
As will be seen, the original action which Machetti was the plaintiff and the
Hospicio de San Jose defendant, has been converted into an action in which the
Hospicio de San Jose is plaintiff and the Fidelity and Surety Company, the
original plaintiff's guarantor, is the defendant, Machetti having been practically
eliminated from the case.
But in this instance the guarantor's case is even stronger than that of an ordinary
surety. The contract of guaranty is written in the English language and the terms
employed must of course be given the signification which ordinarily attaches to
them in that language. In English the term "guarantor" implies an undertaking of
guaranty, as distinguished from suretyship. It is very true that notwithstanding the
use of the words "guarantee" or "guaranty" circumstances may be shown which
convert the contract into one of suretyship but such circumstances do not exist in
the present case; on the contrary it appear affirmatively that the contract is the
guarantor's separate undertaking in which the principal does not join, that its
rests on a separate consideration moving from the principal and that although it
is written in continuation of the contract for the construction of the building, it is a
collateral undertaking separate and distinct from the latter. All of these
circumstances are distinguishing features of contracts of guaranty.
Now, while a surety undertakes to pay if the principal does not pay, the guarantor
only binds himself to pay if the principal cannot pay. The one is the insurer of the
debt, the other an insurer of the solvency of the debtor. (Saint vs. Wheeler &
Wilson Mfg. Co., 95 Ala., 362; Campbell, vs. Sherman, 151 Pa. St., 70; Castellvi
de Higgins and Higgins vs. Sellner, 41 Phil., 142; ;U.S. vs. Varadero de la Quinta,
40 Phil., 48.) This latter liability is what the Fidelity and Surety Company
assumed in the present case. The undertaking is perhaps not exactly that of a
fianza under the Civil Code, but is a perfectly valid contract and must be given
the legal effect if ordinarily carries. The Fidelity and Surety Company having
bound itself to pay only the event its principal, Machetti, cannot pay it follows that
it cannot be compelled to pay until it is shown that Machetti is unable to pay.
Such ability may be proven by the return of a writ of execution unsatisfied or by
other means, but is not sufficiently established by the mere fact that he has been
declared insolvent in insolvency proceedings under our statutes, in which the
extent of the insolvent's inability to pay is not determined until the final liquidation
of his estate.
The judgment appealed from is therefore reversed without costs and without
prejudice to such right of action as the cross-complainant, the Hospicio de San
Jose, may have after exhausting its remedy against the plaintiff Machetti. So
ordered.
G.R. No. L-32542 November 26, 1970
THE COMMISSIONER OF CUSTOMS and THE COLLECTOR OF CUSTOMS
for the Port of Manila, petitioners,
vs.

HON. FEDERICO C. ALIKPALA, in his capacity as Judge of the Court of

First Instance of Manila, Branch XXII, GONZALO SY and TOMAS Y. DE
LEON, respondents.
Office of the Solicitor General Felix Q. Antonio, Acting Assistant Solicitor General
Crispin V. Bautista and Solicitor Pedro A. Ramirez for petitioners.
Jesus G. Barrera and De Santos, Delfino and Balgos for respondents.
MAKALINTAL, J.:
The Commissioner of Customs and the Collector of Customs for the port of
Manila have come to this Court on a petition for certiorari and prohibition with
preliminary injunction, to declare null and void and set aside certain orders of
respondent Court of First Instance of Manila, Judge Federico C. Alikpala
presiding, in Civil Case No. 80655 entitled "Gonzalo Sy, doing business under
the name and style of Gonzalo Sy Trading, and Tomas Y. de Leon, doing
business under the name and style of T. Y. de Leon Enterprises, petitioners, vs.
The Commissioner of Customs and the Collector of Customs, respondents." That
case was a petition for injunction with a prayer for a writ of preliminary injunction.
The basic order complained of is that issued on August 26, 1970, which recites
the essential pertinent facts of the case and is reproduced as follows:
On August 11, 1970, the petitioners filed an action wherein it was prayed that the
Commissioner of Customs and the Collector of Customs be restrained from
carrying out the seizure and scheduled auction sale of the fruits they imported
from abroad and that the said cargo be released to them under the surety bonds
which they have already submitted to respondent Collector of Customs.
On August 13, 1970, the Court issued an order setting the hearing of the petition
for the issuance of a writ of preliminary injunction on August 19, 1970, and
restraining the respondents, their agents, representatives and attorneys in the
meantime from carrying out the scheduled auction sale of the fruits imported by
the petitioners, until further orders from the Court.
The respondents filed a motion to dissolve the restraining order and an
opposition to the issuance of a writ of preliminary injunction invoking several
grounds in support thereof.
It appears that the Collector of Customs of the port of Manila issued several
warrants of seizure and detention against the cargo of the petitioners consisting
of apples, lemons, oranges and grapes, on the ground that they were imported in
violation of Central Bank circulars in relation to Section 2530-F of the Tariff and
Customs Code. In due time, the petitioners were notified of the seizure, but
before they could be heard, respondent Collector of Customs issued a notice of
sale of the imported fruits which was scheduled for sale on August 10, 1970.
The petitioners filed with the Court of Tax Appeals a petition seeking a review of
the action taken by the Collector of Customs of Manila who ordered the seizure
of the imported fresh fruits, with a prayer that pending final determination of the
case, a writ of preliminary injunction be issued restraining the Commissioner of
Customs and Collector of Customs from carrying out the seizure. On August 12,
1970, said Court, however, denied the petition on the ground that it had no
jurisdiction over the subject matter thereof and to grant the writ of preliminary

injunction.
Counsel for the respondents admitted that the petitioners have not been heard
on the seizure proceedings and the imported cargo have already been advertised
for sale and the same would have been sold had not this Court issued a
restraining order. The first question submitted for resolution is whether the Court
has jurisdiction over the subject matter of the petition and to issue the ancillary
remedy prayed for.
The question involved herein is not whether the imported fruits are subject to
seizure but whether the respondent Collector of Customs of Manila acted in
accordance with law in scheduling the sale thereof without first giving the
petitioners an opportunity to be heard. In short, the question presented for
resolution is whether there was observance of due process and in the case of
Nadeco vs. Collector of Customs (G.R. No. L-19180, Oct. 31, 1963) the Supreme
Court in effect held that the Court of First Instance has jurisdiction over the
subject matter of the action.
The provision of Tariff and Customs Code relied upon by the respondents in
issuing the warrants of seizure is Section 2530-F (which declares that articles of
prohibited importation are subject to forfeiture) in relation to circulars issued by
the Central Bank of the Philippines beginning March 10, 1970 prohibiting the
issuance of release certificates on no-dollar imports.
Section 2301 of the Tariff and Customs Code, however, provides that upon
making any seizure, the Collector shall issue a warrant for the detention of the
property, but if the owner or importer desires to secure the release of the property
for legitimate use, said official may surrender it upon the filing of a sufficient
bond, in an amount to be fixed by him, conditioned for the payment of the
appraised value of the articles and/or any fine, expenses and costs which may be
adjudged in the case.
The Tariff and Customs Code further requires the Collector to give the owner or
importer of the property written notice of the seizure and an opportunity to be
heard in relation thereto (Section 2303) and that properties under seizure shall
not be sold except after liability to sale shall have been established by proper
administrative or judicial proceedings in conformity with the provisions of said
Code.
Evidently, the respondent Collector of Customs should not have ordered the sale
at public auction of the imported fruits until after the petitioners have been given
an opportunity to be heard. Moreover, they availed of the remedy granted them
by Section 2301, which respondent Collector of Customs granted but required
the submission of a cash instead of a surety bond.
The statute under consideration (Section 2301, Tariff and Customs Code) merely
provided that the release would be upon the filing of a sufficient "bond." The
petitioners affirmed that they presented to respondent Collector of Customs
surety bonds conditioned for the payment of the appraised value of the imported
fruits and/or any fine, expenses and costs which may be adjudged in the case.
The attention of the petitioners have not been called by the respondent Collector
of Customs to the "insufficiency" of the bonds nor did he raise any question as to
the solvency of the bonding company.

On the basis of the foregoing facts, the Court finds that the petitioners are
entitled to the relief prayed for. The imported goods are perishable in nature and
unless immediate relief is granted to petitioners, irreparable damage may be
caused to them and in the event petitioners' contention would be upheld, the
judgment that may be subsequently rendered would become ineffectual.
WHEREFORE, upon filing of a bond in the sum of P500, subject to the approval
of the Court, let a writ of preliminary injunction be issued enjoining the
respondents, their agents, representatives and any other person acting in their
behalf from proceeding with the seizure and sale at public auction of the imported
fruits, until further orders from this Court. The respondents are further directed to
release immediately the imported goods to the custody of the petitioners on the
strength of the surety bonds filed by them unless the respondents file with this
Court their objection to the sufficiency of said bonds, which should be done within
twenty-four (24) hours from notice of a copy of this order.
SO ORDERED.
On September 23, 1970 this Court gave, due course to the present petition and
resolved to issue a restraining order "enjoining respondent Judge from executing
his order dated August 26, 1970 ... insofar as it directed the petitioners herein
from releasing to the custody of the respondents the imported goods in question."
In due time the respondents filed their answer to the petition and subsequently
both parties submitted their respective memorandum in lieu of oral argument.
Three grounds are relied upon in the petition for the issuance of the writ prayed
for, namely:
1. Respondent Court has no jurisdiction over the subject matter of the case; it
follows that it does not have the authority to grant the writ of preliminary
injunction ordering the release of the imported fruits in question.
2. Assuming, ad arguendo, that it has jurisdiction over the subject matter of the
case, respondent Court acted with grave abuse of discretion amounting to lack of
jurisdiction in granting the writ of preliminary injunction despite the fact that the
respondents' complaint states no cause of action upon which the grant of
injunction may be predicated.
3. Respondent Court gravely abused its discretion amounting to black of
jurisdiction in insisting on the sufficiency of the bonds filed by petitioners,
undertaken by the Communications Insurance Co., Inc. in the total amount of
P513,865.46, (P513,866.06), despite the fact that its writing capacity is
P50,465.52 only.
For a proper understanding and resolution of the issues it is necessary to state
the facts in greater detail, as they appear from the pleadings and memoranda
submitted by the parties as well as from the different documents attached thereto
and marked as annexes.
We first take up the case of Gonzalo Sy Trading. On Nov. 19, 1968 this firm was
authorized by the Central Bank, under Monetary Board Revolution No. 2038, to
import fresh fruits from Japan to the extent of $350,000.00, on a no-dollar basis
and without letters of credit. As of November 1969 the amount of $144,306.15
had been used. On October 30 of that year Gonzalo Sy Trading asked the
Central Bank for an amendment of the terms of the aforesaid resolution so that

the importations authorized under it could be procured not only from Japan but
from other sources as well. On November 19, 1969 the Deputy Governor of the
Central Bank denied the request, and pointed out that Monetary Board
Resolution No. 2038 was intended only for the Christmas season of 1968 and did
not extend through 1969. Two days thereafter, however, or on November 21, the
Director of the Foreign Exchange Department of the Central Bank wrote the
Prudential Bank and Trust Company in connection with the release certificates so
far issued by it covering the no-dollar importations of fresh fruits by its client,
Gonzalo Sy Trading, and noting that only $144,306.15 had been used out of the
total amount of $350,000.00, authorized the Prudential Bank and Trust Company
to "continue to issue release certificates to cover the No-Dollar importations of
fresh fruits by your client, subject to the same terms and conditions imposed by
the Monetary Board under the above-mentioned resolution." Pursuant to such
authority Gonzalo Sy Trading continued importing fresh fruits, until by the
beginning of June 1970 the total amount already used was $314,142.51, leaving
a balance of $35,857.49.
On June 3, 1970, Gonzalo Sy Trading wrote a letter to the Central Bank, making
reference to a previous letter of May 27 requesting permission to utilize the said
balance to pay for two shipments of fresh fruits coming on June 4 and 6,
respectively. This request was denied by the Central Bank in its letter of June 10,
1970. On the following June 16 warrants of seizure and detention were issued by
the Collector of Customs after the customs duties, taxes and other charges had
been paid by the importer.
With respect to respondent Tomas T. de Leon, it appears that on many occasions
in the past he had always been allowed by the Central Bank to import fresh fruits
on a dollar co-assignment basis. The 1968 imports alone were valued at over
half a million dollars. The corresponding release certificates were invariably
authorized by said bank after the arrival of the shipments in the Philippines. On
November 20, 1969 De Leon filed the customary application with the bank for the
issuance of a "no-dollar import permit" to cover consignments of fruits from
suppliers abroad. Pending action on said application, orders were placed and the
shipments arrived during the months of May through July 1970, and the customs
duties, taxes and other charges were also paid by the importer. As in the case of
Gonzalo Sy Trading however, the said shipments were seized by the Collector of
Customs.
On July 30, 1970 the Collector of Customs issued a notice of auction sale of the
goods under seizure to be held on the following August 12 and every day
thereafter until terminated. On July 31 counsel for both importers wrote a letter to
the Collector requesting that they be allowed to file sufficient bonds for the
release of the goods, without prejudice to their right to contest the validity of
seizure. On the same date the Collector granted the request by means of a
handwritten marginal notation on the letter itself, provided "duty and taxes have
already been paid." This condition had been previously met, and so the
corresponding surety bonds were filed, in the aggregate amount of P513,865.46.
Their approval was requested in another letter dated August 10, 1970, but the
Collector of Customs thereupon required a cash bond instead, as indicated in a

similar marginal notation on this second letter.

On the same date August 10 the two importers filed a petition with the
Court of Tax Appeals to stop the sale at public auction of the fruit shipments in
question, with a prayer for preliminary injunction until the final determination of
the validity of the seizure proceedings. The said Court, however, by resolution
dated August 12, 1970, dismissed the petition on the ground of lack of
jurisdiction, stating that neither the Collector of Customs nor the Commissioner of
Customs had yet rendered any decision from which an appeal could be taken
pursuant to Section 7 of Republic Act, No. 1125. Evidently anticipating such a
ruling and considering the urgency of the matter, the importers went to the Court
of First Instance on a petition for injunction, wherein the resolution reproduced in
the beginning of this decision was thereafter promulgated after hearing.
That there must be some forum to which a party may apply for relief from an
alleged violation or denial of his rights is a legal principle from which there can be
no dissent. Otherwise the rule of law would be defeated. The choice in this case
was between the Court of Tax Appeals and the Court of First Instance. Recourse
to the former was sought and denied. The Tax Court held that it could not issue
the preliminary injunction prayed for except in the exercise of its appellate
jurisdiction, and no appeal had been taken since no appealable decision had
been rendered. The ruling appears to find support in the decisions of this Court,
thus:
... Nowhere does the law expressly vest in the Court of Tax Appeals original
jurisdiction to issue writs of prohibition or injunction independently of, and apart
from, an appealed case. The writ of prohibition or injunction that it may issue
under the provisions of section 11, Republic Act No. 1125, to suspend the
collection of taxes, is merely ancillary to and in furtherance of its appellate
jurisdiction in the cases mentioned in section 7 of the Act. The power to issue the
writ exists only in cases appealed to it. This is reflected in the explanatory note of
the bill (House No. 175), creating the Court of Tax Appeal. (Coll. of Int. Rev. v.
Yuseco, G.R. No. L-12518, Oct. 28, 1961.)
Respondent Court of First Instance assumed jurisdiction over the petition before
it on the ground that "the question presented for resolution (was) whether there
was absence of due process," citing our decision in Nadeco vs. Collector of
Customs, G.R. No.
L-19180, Oct. 31, 1969. The said Court found: "Counsel for the respondents
admitted that the petitioners have not been heard on the seizure proceedings
and the imported cargo have already been advertised for sale and some would
have been sold had not this Court issued a restraining order." Due notice and
hearing, besides being an inherent element of due process, is provided for in
Section 2303 of the Tariff and Customs Code, which requires the Collector to give
the owner or importer of the property written notice of the seizure and an
opportunity to be heard in relation to the delinquency which was the occasion for
such seizure, as well as in Section 2601, which directs that seized property, other
than contraband, shall be subject to sale after liability to sale shall have been
established by proper administrative or judicial proceedings in conformity with the
provisions of said Code.

In view of the foregoing, we hold that respondent Court of First Instance had
jurisdiction to take cognizance of the petition for injunction before it. The remedy
prayed for was one in equity, which the petitioner below tried to seek in the Court
of Tax Appeals, but was denied on the ground that no appealable decision had
yet been rendered by the Collector and the Commissioner of Customs. The
jurisdiction of respondent Court was not invoked to determine the validity of the
seizure proceedings, which are pending before the Collector of Customs and
regarding which an appeal could be eventually taken only to the Tax Court, but
rather to stop the projected auction sale of the goods in question and secure the
release thereof under surety bond, without prejudice to the main issue
concerning the validity of the seizure. Such relief is interlocutory in nature, and is
sanctioned by Section 2301 of the Tariff and Customs Code, which provides that
"upon making any seizure the Collector shall issue a warrant for the detention of
the property; but if the owner or importer desires to secure the release of the
property for legitimate use, the Collector may surrender it upon the filing of a
sufficient bond, in an amount to be fixed by him, conditioned for payment of the
appraised value of the article and/or any fine, expenses and costs which may be
adjudged in the case."
The really basic issue before us is whether or not respondent Court gravely
abused its discretion in issuing the orders complained of, particularly that dated
August 26, 1970. For the resolution of this issue we need not pass squarely upon
the question of whether the importations in question are prohibited by law within
the meaning of the proviso in Section 2301 of the Tariff and Customs Code which
says that such prohibited importation may not be released under bond. That
question is involved and should properly be decided in the seizure proceedings.
For purposes of the equitable remedy of injunction granted by respondent Court,
however, as well, as of the petition for certiorari and prohibition before us, it is
sufficient to note, first, that there is no clear showing that the importations subject
of seizure are prohibited by law; and second, that the Collector of Customs has in
fact agreed in the beginning to release the importations provided surety bonds
were filed, although he subsequently required a cash bond instead.
The warrants of seizure were issued in view of Central Bank Circulars Nos. 294
and 295, promulgated on March 10 and 20, 1970, respectively, which provide
that "no-dollar imports not covered by Circular No. 247 shall not be issued any
release certificates and shall be referred to the Central Bank for official
transmittal to the Bureau of Customs for appropriate seizure proceedings."
Evidently, in the opinion of the Collector of Customs himself, even in the light of
those circulars there exists no legal impediment to the release of the subject
importations under bond, otherwise he would not have agreed thereto, although
he changed his requirement from surety bond to cash. In any case, as pointed
out by private respondents, the said importations had been ordered before
Central Bank Circulars 294 and 295 were promulgated, and since the orders
were made in accordance with previous practice there could be no bad faith or
intent to violate those circulars.
The options presented in this case are few and clearcut: (1) to sell the imported
fresh fruits at public auction, as the petitioners due insist; (2) to release them to

the private respondents upon the filing of sufficient surety bonds, as respondent
Court has directed; and (3) to require the private respondents to file a cash bond
instead.
We fail to see what good it would do either the Government or the private
respondents to have the fruits sold at public auction. The Government's interest,
ultimately, is in the proceeds which may be realized from such sale, in the event
the fruits are declared forfeited in the seizure proceedings. By now a
considerable portion thereof must have deteriorated, and the rest will in all
probability not command the same prices as before. Besides, as pointed out by
the respondents and this has not been denied the Commissioner of
Customs has been quoted by a newspaper on September 29, 1970, to the effect
that "seized items worth hundreds of thousands of pesos could not be disposed
of because of the unrealistic bids received by the Bureau of Customs when the
goods were offered for sale at public auction. ... Some of the offers were not even
enough to pay the import taxes and customs duties due on the articles." To sell
the goods at public auction, therefore, cannot but entail great loss either to the
Government or to the importers.
On the other hand the filing of sufficient bond would serve the purpose
envisaged, that is, protect the interest of the Government in the value of the
imported goods should they be finally declared forfeited, while at the same time
avoiding needless damage or prejudice to the importers should the forfeiture fail.
The release on bond, it may be repeated, is expressly authorized by Section
2301 of the Tariff and Customs Code.
But the petitioners would have the private respondents put up cash, alleging that
it may be difficult to realize upon a surety bond if it is allowed. We do not believe
this reason is justified. In the first place, a bond, when required by law, is
commonly understood to mean an undertaking that is sufficiently secured, and
not cash or currency. According to the respondents this is the established
practice in the Bureau of Customs, and this statement has not been denied. Of
course whatever surety bonds are submitted by the importers are subject to any
objections by the Collector of Customs as to their sufficiency or as to the
solvency of the bondsman. In the second place, to require the private
respondents here to put up cash in the sum of P513,865.46 is prohibitive and
unrealistic, and amounts to an arbitrary exercise of discretion under the
circumstances of this case, assuming that the matter is discretionary.
We note, however, that the bonds offered by the respondents are all subscribed
by the same bonding company, namely, the Communications Insurance Co., Inc.,
which has a net worth of only P504,655.15 and a maximum writing capacity of
P50,465.52, on the basis of its financial statement as of December 31, 1969,
according to a letter of the Acting Insurance Commissioner dated August 28,
1970. The figure given by the petitioners in their objection to the sufficiency of the
bonds before respondent court is P596,342.51 in reference to the net worth of
said company. In any case the petitioners have expressed doubts as to whether
the bondsman can satisfy a liability of P513,865.46, which is the aggregate
amount of the bonds submitted. The objection on this ground has been brushed
aside by the lower court in its order of September 8, 1970, since the private

respondents "have shown that the bonding company obtained reinsurance on

part of their liability for those bonds." But it appears, as manifested by said
respondents themselves, that only two of the bonds submitted by them, in the
respective amounts of P94,647.80 and P78,981.24, are covered by reinsurance,
leaving more than P340,000.00 not reinsured. In view thereof, it is incumbent
upon the respondents to either cause of sufficient portion of the other bonds
submitted by it to be covered by reinsurance or to put up other surety bonds
acceptable to the Collector of Customs, the same to be justified before
respondent Court in case of dispute.
WHEREFORE, subject to the condition stated in the preceding paragraph, the
writ prayed for is denied, the petition dismissed, and the restraining order issued
by this Court hereby lifted. No pronouncement as to costs.
G.R. No. L-26473 February 29, 1972
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
PAL-FOX LUMBER CO., INC. AND FAR EASTERN SURETY & INSURANCE
COMPANY, INC., defendants, FAR EASTERN SURETY & INSURANCE CO.,
INC., defendant-appellant; FAR EASTERN SURETY & INSURANCE CO.,
INC., third-party plaintiff-appellant, vs. GASPAR PALANCA & JOSEPH LEE,
third-party defendants.
MAKALINTAL, J.:p
Claiming that the Pal-Fox Lumber Co., Inc. was indebted to the Bureau of
Internal Revenue for forest charges and surcharges amounting to P11,851.56,
and that the Far Eastern Surety & Insurance Co., Inc. was jointly and severally
liable with the lumber company for the payment of said forest charges up to
P5,000.00 on account of a forestry bond which the surety company executed in
favor of the plaintiff on November 27, 1946, guaranteeing faithful compliance by
the principal with all the provisions of the Forest Law and National Internal
Revenue Code, as well as the "prompt and complete payment of all charges
lawfully accruing on the forest products cut or gathered by (Pal-Fox Lumber Co.,
Inc.), and of all fines and penalties imposed in accordance with the provisions of
law," the plaintiff commenced suit before the Court of First Instance of Manila
(Civil Case No. 32386) seeking to recover, jointly and severally, from Pal-Fox
Lumber Co., Inc. and the Far Eastern Surety & Insurance Co., Inc. the sum of
P5,000.00 plus interest from the filing of the complaint, and from the Pal-Fox
Lumber Co., Inc. alone the balance of P6,841.56 plus legal interest.
The Far Eastern Surety & Insurance Co., Inc. filed its answer with a cross-claim
against its co-defendant Pal-Fox Lumber Co., Inc. which, due to the latter's
failure to file an answer despite valid service of summons, was subsequently
declared in default. With leave of court, the surety company later filed a thirdparty complaint against certain persons based on a separate indemnity
agreement wherein said third-party defendants appear to have bound
themselves to indemnify the surety company for all damages it may suffer by
reason of the execution of the forestry bond. In time, these third-party defendants

were similarly declared in default.

After trial, the court a quo rendered a decision the dispositive portion of which
reads: .
WHEREFORE, judgment is hereby rendered ordering defendants to pay to
plaintiff, jointly and severally, the sum of P5,000.00, with legal interest thereon
from the filing of the complaint until fully paid, and defendant Pal-Fox Lumber
Co., Inc. to pay to plaintiff the further sum of P6,841.56, with legal interest
thereon from the filing of the complaint until fully paid, plus costs; and likewise
ordering cross-defendant Pal-Fox Lumber Co., Inc. and third-party defendants
Gaspar G. Palanca and Joseph Lee to pay to defendant Far Eastern Surety &
Insurance Co., Inc., jointly and severally, any amount which the latter may pay to
plaintiff under his judgment, plus premium in the amount of P3,750.00 and
stipulated attorney's fees and interest at the rate of 15% and 12% per annum,
respectively, on the total amount due, the said interest to be compounded
quarterly from November 22, 1946, until fully paid.
Unable to secure, in a motion for reconsideration, a judgment absolving it from
any and all liability under Forestry Bond No. 7004, the surety company appealed
to the Court of Appeals (CA-G.R. No. 31338-R) which Court subsequently
certified the case here on a finding that the appeal involves only questions of law,
to wit: .
The first legal point which arises in connection with said exhibits is: What is the
probative value of documents which were admitted only as part of the testimony
of the witness who identified them? Do they constitute evidence of the truth of
their contents or not? In other words, are they evidence of demands for payment
considering that Mr. Zalita merely testified that said exhibits are certified copies of
records and documents now in the possession of the Record Control Section of
the Bureau of Internal Revenue?
The next issue to resolve is who has the burden of proving that the claim of the
plaintiff is not yet paid?
xxx xxx xxx
In the third assigned error, appellant raises the question of prescription of
action. ..." (Court of Appeals resolution prom. on August 15, 1966 in CA-G.R. No.
31338-R, pp. 6-7).
During the pendency of this case before this Court, certain pertinent
developments have come about which practically render the resolution of
appellant's assigned errors unnecessary. Thus in a manifestation filed on
February 10, 1967 the surety company expressed its willingness to pay the sum
of P5,000.00 under its forestry bond anytime "that an order is issued (by this
Court) directing the defendant surety to so pay according to this manifestation."
In a resolution dated February 22, 1967 this Court granted appellant surety
company's plea, thereby allowing it to pay the Republic of the Philippines the
sum of P5,000.00, in full payment of its liability under Forestry Bond No. 7004,
and dismissing the case insofar as said appellant was concerned.
On March 27, 1967 the plaintiff moved for reconsideration, pointing out that the
surety company's correct liability under the appealed decision was P5,000.00
plus legal interest from the filing of the complaint. In other words, the plaintiff

would want the surety company to pay the legal interest adjudged by the trial
court before the case may finally be considered dismissed insofar as appellant
surety was concerned. Despite the opposition registered by the surety company
this Court resolved on May 10, 1967 "... to MODIFY the resolution of February
22, 1967 in that the appellant Far Eastern Surety and Insurance Co., Inc. is
further ordered to pay the Republic of the Philippines interest on the P5,000.00 at
the rate of 6% per annum computed from April 24, 1957 when the complaint was
filed until October 3, 1966 when the appellant offered to pay the appellee the
sum of P5,000.00 in settlement of its obligation but which offer was ignored by
the appellee; PROVIDED, that in case the appellant fails or refuses to pay the
interest herein stated the case against him would not be considered dismissed,
thereby leaving the matter on the liability of said appellant to pay interest subject
to future orders by this Court along with the other matters that may be resolved in
this case." .
As things stand now, the contending parties are one in conceding that the
decisive issue for determination, in view of the surety company's willingness to
pay the amount of P5,000.00 under its forestry bond, is its liability for the
payment of legal interest thereon. 1 The said company's denial of liability for such
interest is based on the stipulation in the bond that it was bound to the plaintiff "in
the sum of P5,000.00." .
Judgment must go to the plaintiff. In the case of National Marketing Corporation
vs. Marquez, et al., L-25553, January 31, 1969, (26 SCRA 722, 726), this Court
resolved a similar question as follows: .
On the third and last issue (on whether the surety's liability can exceed the
amount of its bond), it is enough to remark that while the guarantee was for the
original amount of the debt of Gabino Marquez, the amount of the judgment by
the trial court in no way violates the rights of the surety. The judgment on the
principal was only for P10,000.00, while the remaining P9,990.91 represent the
moratory interest due on account of the failure to pay the principal obligation from
and after the same had fallen due, and default had taken place. Appellant surety
was fully aware that the obligation earned interest, since the note was annexed
to its contract, Exhibit "C". The contract of guaranty executed by the appellant
Company nowhere excludes this interest, and Article 2055, paragraph 2, of the
Civil Code of the Philippines is clearly applicable.
If it (the guaranty) be simple or indefinite, it shall comprise not only the principal
obligation but also all its accessories, including judicial costs, provided with
respect to the latter, that the guarantor shall only be liable for those costs
incurred after he has been judicially required to pay." (Emphasis supplied)" .
WHEREFORE, the decision appealed from is affirmed, with the modification that
the appellant should pay the interest adjudged in said decision up to the date of
payment of the principal sum of P5,000.00. No pronouncement as to costs.
G.R. No. L-31789 June 29, 1972
ANTONIO R. BANZON and ROSA BALMACEDA, petitioners,
vs.
HON. FERNANDO CRUZ, Spouses PEDRO CARDENAS and LEONILA
BALUYOT and ASSOCIATED INSURANCE & SURETY COMPANY, INC.

represented by INSURANCE COMMISSIONER in her capacity as

LIQUIDATOR OF ASSOCIATED INSURANCE & SURETY COMPANY, INC.,
respondents.
L. T. Castillo for petitioners.
Dakila F. Castro & Associates for respondents spouses Pedro Cardenas and
Leonila Baluyot.
Feliberto V. Castillo for respondent Associated Insurance & Surety Co., Inc.
Office of the Solicitor General Felix Q. Antonio, Assistant Solicitor General
Dominador L. Quiroz and Solicitor Lolita O. Galang for respondent Insurance
Commissioner, etc.
TEEHANKEE, J.:p
An original action to enjoin respondent court from forcing a writ of possession
and order of demolition over one of two Caloocan City lots originally owned by
petitioners- spouses pending the outcome of their suit for reconveyance of said
lots from private respondents.
Sometime in 1952, Maximo Sta. Maria obtained crop loans from the Philippine
National Bank (hereinafter referred as the bank). Respondent Associated
Insurance & Surety Co., Inc. (hereinafter referred to as Associated) acted as
surety of Sta. Maria, filing surety bonds in favor of the bank to answer for prompt
repayment of the loans. Petitioner Antonio R. Banzon and Emilio Ma. Naval in
turn acted as indemnitors of Associated and were obligated to indemnify and hold
harmless Associated from any liability thus acting as surety of the loan. Sta.
Maria failed to pay his obligations to the bank, which accordingly demanded
payment from Associated as surety.
Instead of paying the bank, Associated filed a complaint dated November 19,
1956 with the Court of First Instance of Manila 1 against debtor Sta. Maria and
indemnitors Banzon and Naval, alleging that the outstanding obligations of Sta.
Maria with the bank guaranteed by it amounted to P6,100.00, P9,346.44 and
P14,811.32, or a total of P30,257.86, excluding interest. On December 11, 1957,
the said court rendered judgment ordering Sta. Maria, Banzon and Naval "to pay
jointly and severally unto plaintiff for the benefit of the Philippine National Bank"
the amounts mentioned above, with interest thereon at 12% per annum, P593.76
for premiums and documentary stamps due, and 15% attorney's fees, "the 15%
and the interest to be paid for the benefit only of the plaintiff."
What happened thereafter is narrated in the decision of this Court rendered on
November 29, 1968 in the appeal instituted by petitioner Banzon and his spouse,
co- petitioner Rosa Balmaceda, from a subsequent action of Associated in the
Court of First Instance of Rizal wherein the Rizal court ordered Banzon to
surrender for cancellation his owner's duplicates of titles to his two Caloocan City
lots which had been levied upon and purchased at the execution sale by
Associated in supposed satisfaction of the Manila court's judgment, docketed as
Case L-23971 of this Court, entitled Associated Ins. & Surety Co. Inc. plaintiffappellee vs. Antonio Banzon and Rosa Balmaceda, defendants-appellants, 2 as
follows:
As the above decision 3 became final and executory, the corresponding writ of

execution was issued and levy was made upon the properties of the judgment
debtor Antonio R. Banzon covered by Transfer Certificates of Title Nos. 39685
and 53759 issued in his name by the Register of Deeds of Rizal. The first
covered a parcel of land containing an area of 650 square meters situated in
Barrio Calaanan, Caloocan, Rizal, and the second, another parcel of 650 square
meters situated in the same barrio of the same municipality. After the
proceedings required by law in connection with execution sales, the aforesaid
properties were sold, the judgment creditor, Associated Insurance and Surety
Co., Inc., having been the highest bidder, for the total sum of P41,000.00. The
Sheriff of Rizal issued in its favor the corresponding certificate of sale dated June
27, 1957, which was duly registered on June 30, 1959. As the period of
redemption expired on June 20, 1960 without the judgment debtor or any proper
party having exercised it, the judgment creditor and purchaser obtained in due
time the corresponding final certificate of sale, which was likewise duly
registered.
In view of the foregoing, herein petitioner-appellee made demands upon Antonio
R. Banzon to deliver to it the owner's duplicate of Certificate of Title Nos. 39685
and 53759 mentioned heretofore, but the latter refused to do so. As a result it
filed in the Court of First Instance of Rizal in Case No. 3885, G.L.R.O. Record
No. 11267, a petition for an order directing Antonio R. Banzon to present his
owner's duplicate of Certificae of Title Nos. 89685 and 53759 to the Register of
Deeds of Rizal for cancellation, and for another order directing the Register of
Deeds of Rizal to cancel said duplicates and to issue new transfer certificates of
title covering the properties in the name of petitioner.
Banzon filed his opposition to the petition claiming mainly that (1) the decision of
the Court of First Instance of Manila in Civil Case No. 31237 was void as far as
he was concerned because he had never been summoned in connection
therewith, an that (2) the levy and sale of the properties covered by the petition
were likewise void because they were conjugal properties belonging to him and
his wife, Rosa Balmaceda.
After a hearing on the motion and opposition mentioned above, the lower court,
on February 7, 1961, rendered a decision whose dispositive portion is as follows:
"In view of the foregoing, judgment is hereby rendered in favor of the petitioner
granting the relief prayed for. The oppositors are hereby ordered to surrender to
the Register of Deeds of Rizal the Certificate of Title in question for cancellation
and let a new one be issued in the name of the petitioner."
In this appeal interposed by them, the Banzons seek a reversal of the above
decision upon the same grounds relied upon in their opposition filed in the lower
court. 4
This Court in its decision of November 29, 1968 affirmed the decision of the trial
court, relying upon the lower court's findings on Banzon's failure to substantiate
his claims which "would amount to a deprivation of (Banzon's) property without
due process of law" had he but discharged his burden of proof, thus:
With respect to appellant's contention that Antonio R. Banzon had not been duly
served with summons in connection with Civil Case No. 31237 of the Court of
First Instance of Manila, it is enough for us to quote here the pertinent portions of

the well-considered decision of the lower court

"With respect to the first contention of oppositors, the latter in effect contends that
not having been served by summons, Antonio Banzon never became a party
defendant to the aforesaid civil case and hence not bound by any judgment
rendered therein. It is erroneous on the part of the petitioner to contend that the
objection as to lack of jurisdiction on the defendant's person has been waived for
said waiver applies only when summons has been served although defectively,
such as one not served by the proper officer. If the contention of the oppositor
were true, that is, no summons was ever served upon him and that he was
completely unaware of the proceedings in the civil case aforementioned, the
properties in question could not be levied upon for that would amount to a
deprivation of oppositor's property without due process of law.
"The burden, however, rests upon the oppositors to prove that there was in fact
no service of summons and this, the court believes, the oppositors have failed to
substantiate with sufficient evidence. It is a fundamental rule that the regularity of
all official actions and proceedings will be presumed until the contrary is proved.
In said civil case No. 31237, the records show, particularly the answer and the
motion to dismiss, that the proceedings were conducted by counsel in behalf of
all the defendants therein including the oppositor, Antonio Banzon. The
presumption therefore, of the regularity of the proceedings as against said
defendant will be maintained including the fact that either summons was duly
served or that the defendant Banzon voluntarily appeared in court without such
summons. It is therefore incumbent upon the oppositors to rebut this presumption
with competent and proper evidence such as the return made by the sheriff who
served the summons in question. This, however, the oppositors have not met.
"Moreover, the circumstances of the case all the more bear out the strength of
this presumption when it considered that the oppositor Antonio Banzon received
a notice of execution and levy of these properties and notice of the sale of the
same at public auction. Had the oppositors have been prejudiced by being
deprived of due process, they should have filed either a third party claim upon
the property levied or an injunction proceeding to prevent its sale at public
auction, nor would they have allowed the consummation of the sale and the
lapse of one year within which the redemption would have been exercised.
These facts gravely militate against the merits of the opposition, not only insofar
as it strengthens the aforesaid presumption of regularity, but also insofar as they
are indicative of the fact that the properties levied upon are not conjugal property
or even if they were that the debt involved was one which redound to the benefit
of the family for which the conjugal partnership may be held liable."
Appellants' second contention namely, that the properties now in question are
their conjugal properties, is belied by the record before us which shows that
Transfer Certificate of Title Nos. 39685 and 53759 were issued in the name of
Antonio R. Banzon. Moreover, there is no sufficient evidence in the record to
show that the properties were acquired during appellants' marriage.
IN VIEW OF ALL THE FOREGOING, the decision appealed from is hereby
affirmed, with costs. 5
It has now been exposed that notwithstanding the judgment of December 11,

1957 obtained from the Manila court by Associated and executed by it against
petitioner Banzon as indemnitor " for the benefit of the Philippine National Bank,"
and which judgment it obtained and executed on the representation to the said
court that the bank was exacting payment from it as surety of the debtor Sta.
Maria's loans, and that it was therefore enforcing Banzon's undertaking as
indemnitor in turn to indemnify it, that it never discharged its liability as surety to
the bank nor ever made any payment to the bank, whether in money or property,
to discharge Sta. Maria's outstanding obligations as guaranteed by it.
As will be shown later, this suit of Associated against Banzon as indemnitor and
the execution against him of the judgment obtained in trust "for the benefit of the
PhiIippine National Bank" were absolutely premature and uncalled for, since
Article 2071 of the Civil Code permits the surety, even before having paid, to
proceed only "against the principal debtor ... (4) when the debt has become
demandable, by reason of the expiration of the period for payment" and that "the
action of the guarantor is to obtain release from the guaranty, or to demand a
security that shall protect him from any proceedings by the creditor and from the
danger of insolvency of the debtor."
In fact, since the bank failed to exact payment from Associated as surety of the
debtor Maximo Sta. Maria's matured obligations, the bank itself filed on February
10, 1961, its own complaint with the Court of First Instance of Pampanga against
principal debtor Maximo Sta. Maria, his six brothers and sisters (who had
executed a special power of attorney in Sta. Maria's favor to mortgage a 16hectare parcel of land jointly owned by all of them as security also for the bank's
loans), and Associated itself, surety, as defendants, for the collection of the
outstanding obligations due from the principal debtor, Maximo Sta. Maria.
After trial, the court ordered all the defendants jointly and severally to pay the
bank the outstanding amounts due on the crop loans to Sta. Maria, which as of
that much later date, August 20, 1963, amounted only to P6,100.00 and
P9,346.44 or a total of P15,446.44, exclusive of interests. It should be noted
therefore, that the debtor Sta. Maria had been making payments all along to the
bank on account of his crop loans so much so that by 1963, the total principal
due and amount outstanding thereon amounted only to P15,446.44. This
amounts to practically one-half of the advance judgment for the total amount of
P30,257.86, excluding interests, obtained by Associated six (6) years earlier in
1957 against Banzon " for the benefit of the Philippine National Bank" allegedly
as the amount due from Sta. Maria and which Associated as surety would have
to pay the bank, and which as it turns out, Associated never paid to the bank.
These facts and figures are of record in this Court's decision of August 29, 1969,
in Philippine National Bank vs. Sta. Maria, et al.," wherein it is further recorded
that "(D)efendant Maximo Sta. Maria and his surety, defendant Associated
Insurance & Surety Co., Inc. who did not resist the action, did not appeal the
judgment (sentencing all defendants jointly and severally to pay the bank the
above referred to principal amount of P15,446.44, excluding interests)."
This Court sustained the appeal taken by the debtor Maximo Sta. Maria's
brothers and sisters, and reversed the lower court's judgment against them, as
follows:

... This appeal has been taken by his six brothers and sisters, defendantsappellants who reiterate in their brief their main contention in their Answer to the
complaint that under the special power of attorney, Exh. E, they had not given
their brother, Maximo, the authority to borrow money but only to mortgage the
real estate jointly owned by them; and that if they are liable at all, their liability
should not go beyond the value of the property which they had authorized to be
given as security for the loans obtained by Maximo. In their answer, defendantsappellants had further contended that they did not benefit whatsoever from the
loans, and that the plaintiff bank's only recourse against them is to foreclose on
the property which they had authorized Maximo to mortgage.
We find the appeal of defendants-appellants, except for defendant Valeriana Sta.
Maria who had executed another special power of attorney, Exh. E-1, expressly
authorizing Maximo to borrow money on her behalf, to be well taken.
1. Plaintiff bank has not made out a cause of action against defendantsappellants (except Valeriana), so as to hold them liable for the unpaid balances
of the loans obtained by Maximo under the chattel mortgages executed by him in
his own name alone.
xxx xxx xxx
6. Finally, as to the 10% award of attorney's fees, this Court believes that
considering the resources of plaintiff bank and the fact that the principal debtor,
Maximo Sta. Maria, had not contested the suit, an award of five (5%) per cent of
the balance due on the principal, exclusive of interests, i.e., a balance of
P6,100.00 on the first cause of action and a balance of P9,846.44 on the second
cause of action, per the bank's statements of August 20, 1968, (Exhs. Q-1 and
BB-1 respectively) should be sufficient.
WHEREFORE, the judgment of the trial court against defendant-appellants
Emeteria, Teofilo, Quintin, Rosario and Leonila, all surnamed Sta. Maria is
hereby reversed and set aside, with costs in both instances against plaintiff. The
judgment against defendant-appellant Valeriana Sta. Maria is modified in that her
liability is held to be joint and not solidary, and the award of attorney's fees is
reduced as set forth in the preceding paragraph, without costs in this instance.
The bank thus collected directly from its debtor Sta. Maria the amounts owing to
it, with Associated never having put in one centavo. Per the bank's letter dated
February 20, 1970 to Associated, it informed Associated that the amounts of its
judgment credit against judgment defendants in the aforementioned case
terminated by this Court's decision of August 29, 1969, "had already been
satisfied as of February 16, 1970 by virtue of the payment made by and thru the
Provincial Sheriff of Bataan on the proceeds of the extra-judicial sale of the
mortgaged properties of defendants Sta. Marias," in view of which "we (Philippine
National Bank) have now released the Associated Insurance & Surety Co., Inc.
of its joint obligation with Maximo Sta. Maria et al. in the aforementioned case." 7
This should have put an end to the matter and Banzon's two lots therefore
restored fully to his ownership, but for certain complications involving the
intervention of the other private respondents, the spouses Pedro Cardenas and
Leonila Baluyot, and Associated's own unjustifiable actions, as shall presently be
seen.

According to the Banzons' petition at bar, sometime in 1965, even before

ownership over the two parcels of land belonging to the Banzons could be
consolidated in the name of Associated (since the judgment was " for the benefit
of the Philippine National Bank" and it had not discharged its surety's liability to
the bank), Associated "in clear collusion and confederation with (respondent)
Pedro Cardenas, allowed and permitted the latter to execute and levy one of the
two parcels of land (that covered by T.C.T. No. 39685-Rizal, Lot 6, Block No. 176
of subdivision plan Psd-2896, G.L.R.O. Rec. No. 11267) for a judgment debt of
P5,100.00 (of Associated in favor of Cardenas) 8 notwithstanding that the
property in question was worth P130,000.00 more or less, and further
notwithstanding the fact that said respondent (Associated) knew the property was
merely being held in trust by it for the benefit of the Philippine National Bank and
therefore, not being the legal owner thereof, it cannot validly dispose of it in any
manner." 9 Respondent Cardenas being allegedly the lone bidder in the auction
sale for execution of his P5,100.00-judgment against Associated was awarded
the property in full satisfaction of his judgment, and eventually succeeded in
having Banzon's title cancelled and a new one, T.C.T. No. 8567-Caloocan City
issued thereto in his name, notwithstanding that Associated's right thereto was
still sub-judice in Associated vs. Banzon, to be resolved much later yet by this
Court's decision of November 29, 1968. Associated made no move to question or
challenge this action of Cardenas, notwithstanding an order for its liquidation and
dissolution issued on December 31, 1965 by the Court of First Instance of Manila
and eventually affirmed by this Court per resolution of June 20, 1968 in G.R. No.
L-38934. Nor did Associated make any effort to resist execution on said property
of Banzon's, knowing as it did that its interest in said property was impressed
with a trust character since the clear tenor and intent of the judgment granted
against Banzon nominally in its favor but expressly " for the benefit of the
Philippine National Bank" was to make the execution and operation of the
judgment contingent or conditioned upon Associated's being made or compelled
to pay the bank, which contingency never materialized.
The Cardenas spouses thereafter filed with the Court of First Instance of Rizal,
Caloocan City Branch XII, Reg. Case No. C-211 (LRC Case No. 112167) entitled
"Pedro Cardenas, et al., petitioners vs. Antonio Banzon, et al., respondents," to
secure possession from the Banzons of the lot covered by T.C.T. No. 8567. A writ
of possession was issued in said case on May 21, 1965, but the enforcement
thereof was held in abeyance in view of the filing with the same court of Civil
Case No. C-531 entitled "Antonio Banzon, et al. vs. Pedro Cardenas and Leonila
Baluyot, Associated Insurance and Surety Co., Inc. and Benito Macrohon."
Banzon's complaint in Civil Case No. C-531 was, however, dismissed on August
6, 1969, on the ground that "the matter of the legality of the transfer of ownership
of the property in question from the plaintiff to the Associated Insurance & Surety
Co., Inc., has been upheld by the Supreme Court in its decision promulgated on
November 29, 1968, and consequently the transfer to the spouses Pedro
Cardenas and Leonila Baluyot must perforce be considered also as valid and
legal."
Consequently, respondent Cardenas filed a motion on October 13, 1969, in Case

No. C-211 for the issuance of an alias writ of possession; this was granted on
October 23, 1969. The alias writ was served on Banzon, who refused to vacate
the premises and to remove the improvements thereon. In view of this, an order
was issued on December 9, 1969, for the issuance of a writ of demolition, but its
enforcement was held in abeyance because a temporary restraining order, later
changed to a writ of preliminary injunction, was issued by the Court of Appeals on
December 13, 1969, in view of the filing by the Banzons with the said appellate
court of a petition for injunction. 10
On February 28, 1970 the Court of Appeals rendered judgment dismissing the
petition because it found the same to be allegedly "merely a device to prevent the
execution of a final judgment by the filing of a new suit based upon the same
grounds which have already been interposed and passed upon in the case where
the final judgment had already been rendered ... ." Cardenas thereafter filed a
motion for the enforcement of the order of demolition and writ of possession
previously issued in Reg. Case No. C-211. On March 13, 1970, Judge Fernando
A. Cruz of the Court of First Instance of Rizal, Caloocan City Branch XII, issued
an order granting the motion. 11
On March 13, 1970, the Banzons having learned of the bank's release of
Associated as of February 20,1970, supra, accordingly filed a complaint for
reconveyance and damages with the Court of First Instance of Manila against
respondents Associated and the Cardenas spouses. 12 In their complaint, the
Banzons impute bad faith, collusion and confederation between Associated and
the Cardenases with regard to the latter's prematurely obtaining T.C.T. No. 8567
covering one of Banzon's lots in their name. The Banzons therein alleged for the
first time their new cause of action based on the subsequent development that
the Philippine National Bank had collected directly on February 16, 1970 from the
principal debtor Sta. Maria the loan guaranteed by Associated (which amounted
only to a principal of P15,446.44 as of August, 1963, excluding interests or just
one-half of the premature judgment for P30,257.88 excluding interests obtained
by Associated six (6) years earlier in 1957 against Banzon in trust and for the
benefit of the bank allegedly as the amount owed by Sta. Maria and to be
discharged by Associated, which Associated never discharged); 12a and that the
bank, per its letter of February 20, 1970 had therefore absolutely released
Associated of any liability on its surety undertaking. 12b The Banzons therefore
prayed for the return and reconveyance of their two parcels of land covered by
T.C.T. No. 8567 (in Cardenas' name) and No. 53759 (still in Banzon's name), in
discharge of Associated's implied trust not to unjustly enrich itself and appropriate
Banzon's properties at absolutely no cost to itself.
On March 16, 1970, the Sheriff of Caloocan City served upon the Banzons copy
of the aforesaid order giving them until March 20, 1970, within which to deliver
possession of the parcel of land covered by T.C.T. No. 8567, and to remove the
improvements thereon; otherwise, the said sheriff would proceed to enforce the
same.
Petitioners Banzons therefore came to this Court on March 20, 1970, by means
of the present petition for injunction. At petitioners' instance, the Court on March
24, 1970 restrained respondents and their representatives from enforcing the

questioned writ of execution and order of demolition, and respondent Associated

from disposing in any manner of its alleged rights and interests over the two lots
in question.
Respondents Cardenas spouses filed in due course their Answer dated April 2,
1970, admitting in effect the antecedents of the case as recited above, citing
even this Court's decision of November 29, 1968 in Associated vs. Banzon,
supra, which affirmed the money judgment in favor of Associated " for the benefit
of the Philippine National Bank" 13 but alleging that ownership to one parcel (Lot
6, Block 176 covered by T.C.T. No. 8567) "has already absolutely and irrevocably
vested in herein respondent Pedro Cardenas." 14 Said respondents further
averred that "there is no longer anything that may be restrained," since per the
sheriff's return of March 23, 1970, he enforced on said date respondent court's
writ of possession and demolition order and demolished all the improvements
erected in the premises. 15
To this petitioners countered that "the special deputy sheriff of Rizal did succeed
in demolishing the building erected on that lot in question. This he did
notwithstanding the fact that he has been duly informed by petitioner Banzon of
the existence of a restraining order in this case. However, after accomplishing his
purpose, he and his men left the premises." 16
Most relevant, however, was a pleading entitled "Explanation and Manifestation"
dated April 25, 1970 filed by Atty. Feliberto Castillo, as former counsel for
Associated "in the interest of justice and in the name of truth and as an officer of
the Court," wherein with respect to the summons for Associated received by his
law office, he manifests:
3. That he is entertaining a serious doubt whether he could still represent the
Associated Insurance & Surety Co., Inc. in view of the fact that in Civil Case No.
56995 of the Court of First Instance of Manila, entitled "Republic of the
Philippines, represented by the Insurance Commissioner vs. Associated
Insurance Surety Co., Inc." the said Court of First Instance of Manila ordered the
liquidation and dissolution of this surety company, which was appealed to the
Court of Appeals, CA-G. R. No. 37985-R but affirmed the decision of the Court of
First Instance of Manila in a decision promulgated on January 3, 1968, which
was appealed again by the Associated Insurance & Surety Co., Inc to the
Honorable Tribunal, G.R. No. L-29834, also affirming the decision of the Court of
Appeals by denying the petition for writ of certiorari in its resolution of June 20,
1968, and therefore, since then, the decision of the Court of First Instance of
Manila ordering the liquidation and dissolution of the Associate Insurance &
Surety Co., Inc. became final and executory, an thereafter, the Insurance
Commissioner demanded the surrender of books, documents and other papers
of this surety company, an as a matter of fact, books, documents and other
papers salvaged were already surrendered to the Insurance Commissioner for
liquidation of this company, so that by virtue thereof, the Insurance
Commissioner being the liquidator appointed by the court to liquidate the
Associated Insurance & Surety Co., Inc., is now the legal representative of this
surety company to whom a copy of this paper will be furnished." 17
In his "Explanation and Manifestation," Atty. Castillo further states that his law

office was the counsel for Associated in the cases involved in these proceedings,
viz., Civil Case No. 31237 of the Court of First Instance of Manila, Case No.
3885, G.L.R.O. Record No. 11267 of the Court of First Instance of Rizal, for
consolidation in Associated's favor of T.C.T. No. 29685-Rizal and T.C.T. No.
53759-Rizal, and in G.R. No. L-23971 of the Supreme Court, Associated vs.
Banzon, supra, affirming on November 29, 1968 the Rizal court's judgment for
consolidation; and
That since Associated was ordered liquidated and dissolved by the Manila
court of first instance in Civil Case No. 56995, as affirmed by the Court of
Appeals in CA-G.R. No. 37985-R, which became final upon this Court's denial of
review per its resolution of June 20, 1968 in G.R. No. L-28934, the Insurance
Commissioner as the appointed liquidator of Associated is the legal
representative thereof who may duly act for Associated and upon whom
summons should be served;
That even before the promulgation of the Supreme Court decision on
November 29, 1968 in Associated vs. Banzon he, as counsel for Associated,
never attempted to secure new titles for his said client, considering that its
ownership over the parcel of land covered by them was then "still sub judice;"
That even after the promulgation of the said Supreme Court decision, he
never attempted to secure new titles for his client, because by that time
Associated had already been ordered dissolved and liquidated, hence, to be
represented in all instances by the Insurance Commissioner as liquidator;
That he wonders how respondent Pedro Cardenas was able to secure T.C.T.
No. 8567 (formerly T.C.T. No. 39685-Rizal) in his name in 1965, when
Associated, which really owed Cardenas a certain sum, could only secure new
titles over the parcels of land after not before November 29, 1968, when
the Supreme Court's decision in G.R. No. L-23971 was promulgated; and that in
his opinion, the issuance to respondent Cardenas of T.C.T. No. 8567 was
"fraudulent and irregular for being without basis when the same was issued, so
that the register of deeds of Caloocan City committed some sort of mistakes or
negligence in issuing this title to respondent Pedro Cardenas, and as such, this
T.C.T. No. 8567 is null and void and without force and effect and calls for an
investigation of the guilty parties responsible for the issuance of this T.C.T. No.
8567 in the name of respondent Pedro Cardenas, who might have committed
some falsifications;" (for indeed how could Cardenas cause title to said lot to be
transferred to Associated for him in turn levy against it for his P5,100.00
judgment against Associated when Associated's case against Banzon for such
transfer and consolidation of title was then still pending appeal before this Court,
and Associated's judgment against Banzon was one of trust, expressly therein
declared to be "for the benefit of the Philippine National Bank?") 18 and
That "anybody who will attempt to offer the said parcel of land for sale would
be committing a crime as the position of the same belongs exclusively to the
Insurance Commissioner who is the liquidator of the Associated Instance &
Security Co., Inc.; consequently, the petitioner should not entertain any worry as
said parcel of land is not being disposed of not only because the power to sell the
same exclusively belongs to the Insurance Commissioner but also because the

Associated Insurance & Surety Co., has no titles yet over these parcels of land
as it did not attempt to secure any even before and after the promulgation of the
decision of the Honorable Tribunal in G.R. No. 23971 in view of the
circumstances earlier explained."
On May 11, 1970, we issued summons on the Insurance Commissioner as
liquidator of Associated to answer the petition. In her answer filed on May 29,
1970, the Acting Insurance Commissioner through the Solicitor General
disclaimed knowledge of practically all the allegations of the petition for lack of
knowledge or information sufficient to form a belief as to their truth, manifesting
that she first learned of the material facts averred in the petition when she
received copy of Atty. Castillo's "Explanation and Manifestation", because the
records and documents pertinent to this case were not among those surrendered
to her, and affirming she is the liquidator of Associated by virtue of the Manila
court's order dated December 31, 1965 of liquidation and dissolution of said
corporation, as follows:
3. That the herein Acting Insurance Commissioner is liquidator of Associated
Insurance & Surety Co., Inc. by virtue of an order of liquidation and dissolution of
said corporation dated December 31, 1965, by the Court of First Instance of
Manila in Civil Case No. 56995, which decision was affirmed on appeal by the
Court of Appeals in its decision (CA-G.R. No. 37895) dated January 3, 1968,
which decision was again affirmed on appeal by this Honorable Tribunal when it
denied the petition for a writ of certiorari in its Resolution of June 20, 1968 (G.R.
No. L-38934) and which on July 9, 1968, became final and executory;
4. That by virtue of the aforesaid decision, the Insurance Commissioner as
liquidator of Associated Insurance & Surety Co., Inc., is vested by authority of
law with the title to all of the property, contracts, and rights of action of said
corporation as of the date of the order of liquidation (Sec. 175-C, par. 3 of the
Insurance Act, as amended);
5. That any subsequent sale or disposition of the property of said corporation
without the knowledge and consent of the herein Acting Insurance Commissioner
and approval but the Liquidation Court is contrary to law and null and void;
6. That after the aforesaid order of liquidation and dissolution became final and
executory, the Acting Insurance Commissioner demanded for the surrender of all
the books, documents and properties of Associated Insurance & Surety Co., Inc.
However, the records and documents pertinent to the above-entitled case were
not among those surrendered to the Insurance Commissioner and it was only
upon receipt of the "Explanation and Manifestation" of Atty. Feliberto Castillo,
dated April 25, 1970, and the present "Petition" that she came to know for the
first time of the alleged facts averred in this case." 19
A "Motion to Dissolve Temporary Restraining Order and to Dismiss Petition" was
filed on February 12, 1971, by respondents spouses Cardenas and Baluyot.
They contend that the restraining order issued by this Court should be dissolved,
and the petition itself, insofar as they are concerned, be dismissed, because the
petition is predicated on petitioners' complaint for reconveyance and damages in
Civil Case No. 79244 before Branch VIII of the Court of First Instance of Manila,
and the said court issued an order on October 28, 1970, dismissing the said

complaint with respect to defendants therein Cardenas and Baluyot, which

dismissal was not appealed and became final and executory on January 5, 1971,
per entry of judgment attached to the motion. Consequently, according to these
respondents, the temporary restraining order issued by this Court enjoining the
enforcement of the writ of execution and the order of demolition in Reg. Case No.
C-211 of the Court of First Instance of Rizal, has become inoperative and without
any legal basis, the present petition has lost its legal basis, and petitioners have
no more cause of action against respondents Cardenas and Baluyot. The said
order of dismissal of the complaint against these respondents was issued
pursuant to Section 5, Rule 16 of the Rules of Court, after a preliminary hearing
on the affirmative defenses of bar by prior judgment and lack of cause of action
set up by said respondents in their answer, with the lower court opinion that
petitioners' action was already barred by the prior judgments of this Court of
November 29, 1968 in Associated vs. Banzon and of the Court of Appeals of
February 28, 1970 in Banzon vs. Hon. Fernando Cruz, supra. 20
The Solicitor General filed on March 29, 1971 on behalf of the Insurance
Commissioner as liquidator of Associated a strong opposition to the motion to
dissolve the restraining order and dismiss the petition. 21 The commissionerliquidator after complaining that "she is still demanding for the surrender of all the
books, documents and properties of Associated" and that "it was only upon
receipt on March 11, 1971 of the voluminous records of the cases handled by
counsel Feliberto V. Castillo for (Associated) that (her) undersigned counsel have
verified and confirmed the truth of the status of the different cases," contends
inter alia as follows:
18. That, however, during the pendency of the aforesaid appeal of petitioner
Antonio R. Banzon with this Honorable Tribunal and while the case was still subjudice, particularly on February 8, 1964, the herein respondent Pedro Cardenas
as winning party in a case entitled "Pedro Cardenas vs. Victoria Vda. de Tengco
and Pablo Tuazon," Civil Case No. 36174, Court of First Instance of Manila, and
where the Associated Insurance and Surety Co., Inc. was surety for the
defendants therein, executed and levied upon one of the parcels of lands
involved in the aforesaid appeal. Ultimately, Pedro Cardenas was able to acquire
the land in question (Lot No. 6, Block No. 176, then covered by T.C.T. No. 39685)
as highest bidder, for the judgment debt of defendants in said action, plus
incidental expenses for the sum of P5,100.00 only;
19. That subsequently thereafter, said respondents Cardenas, thru some scheme
and devise, succeeded in having the title of said parcel of land transferred in their
names under T.C.T. No. 8567, Registry of Deeds of Caloocan City, on May 5,
1965, at a time when the Associated Insurance & Surety Co., Inc. had not yet
earned the authority to consolidate in its name said property, as the case was
then pending with this Honorable Tribunal. As alleged in paragraph 18 hereof, the
question of consolidation was resolved by this Honorable Tribunal on February
28, 1968; 21a
20. That by the nature of the decision in Civil Case No. 31237, CFI, Manila, as
alleged in paragraph 15 hereof, the property or sums of money recovered from
defendants therein shall be reserved for the benefit of the Philippine National

Bank for the purpose of paying the principal debtor's (Maximo Sta. Maria's)
obligation therein, and consequently, the Associated Insurance & Surety Co., Inc.
shall hold the property in question or the sums recovered in said action, in trust
and for the purpose of paying the aforesaid obligation of Maximo Sta. Maria. 22
21. That the Associated Insurance & Surety Co., Inc. failed to pay from its own
funds under its surety undertaking, nor from funds realized from the property
levied upon by virtue of the decision in Civil Case No. 31237, CFI, Manila, but on
the other hand, the principal debtor Sta. Maria paid his own obligation the
Philippine National Bank thus, releasing it (Associated Insurance & Surety Co.,
Inc.) from its obligation under the suretyship undertaking with respect to said
obligation of Maximo Sta. Maria, and similarly herein petitioner Antonio R.
Banzon was released from this obligation as co-indemnitor in said undertaking;
22. That in fairness to petitioners Antonio R. Banzon and Rosa Balmaceda, the
two parcels of land executed and levied upon by virtue of the decision in Civil
Case No. 31237, Court of First Instance of Manila, deserve to be reconveyed to
them;
23. That one of the lots involved, namely, Lot No. 6, Block No. 176 covered by
T.C.T. No. 8567, Registry of Deeds of Caloocan City, in the names of the present
respondents Pedro Cardenas and Leonila Baluyot, being one of the two parcels
of lands levied upon in Civil Case No. 31237 but transferred to respondents
under dubious circumstances and patently unauthorized by law, should be
ordered reconveyed to the Associated Insurance Co., Inc. through the Insurance
Commissioner for the purpose stated in the next preceding paragraph, as the
transaction on the transfer of said parcel of land to them is null and void from the
very beginning." 23
Petitioners likewise oppose the motion of the Cardenases. They contend that the
present petition is not solely predicated on their complaint for reconveyance and
damages in Civil Case No. 79244 for, as admitted by the Insurance
Commissioner, they are entitled to the reconveyance of the lot covered by T.C.T.
No. 8567 and for contribution or indemnification for damages which they may
recover from Associated; that respondents Cardenases secured said title
fraudulently and irregularly without any legal basis, hence, said title having been
anomalously issued, is null and void and without force and effect, and, that, as
stated by Insurance Commissioner-liquidator, in fairness and justice to
petitioners, the two parcels of land levied in favor of Associated by virtue of the
decision on Civil Case No. 31237 should be reconveyed to them; and that to
dissolve the temporary restraining order and to dismiss the present petition would
leave petitioners without a legal remedy.
In a minute resolution dated April 19, 1971, the Court denied the said motion of
respondents Cardenas and Baluyot "to dissolve temporary restraining order and
to dismiss petition."
1. The immediate objectives of this petition are: (a) to enjoin respondent Judge
Fernando Cruz of the Court First Instance of Rizal, Caloocan City Branch, and
respondents Pedro Cardenas and Leonila Baluyot, and their representatives,
from enforcing the writ of execution and of demolition issued by said respondent
Judge in Reg. Case No. C-211 in relation to the lot covered by T.C.T. No 8567;

and (b) to enjoin respondent Associated from disposing its alleged rights and
interests in the two lots covered by T.C.T. No. 8567 and T.C.T. No. 53759, the
injunction in both cases to be made effective during the pendency of the
reconveyance case, Civil Case No. 79244, filed by petitioners as plaintiffs before
the Manila court of first instance.
The real and substantive objectives of the petition are to seek the rightful
restoration and reconveyance to petitioners Banzons of their two Caloocan city
lots, covered by T.C.T. No. 53759 (still in Banzon's name, but on the back
whereof is annotated the sheriff's final deed of sale in favor of Associated) and by
T.C.T. No. 8567 (in the name of respondents Cardenases) on the fundamental
ground that Associated's levy in execution of said lots was in trust for the benefit
of the Philippine National Bank for the purpose of paying the bank the loan
obligation of Maximo Sta. Maria which Associated had guaranteed as surety and
against which liability Banzon in turn as indemnitor had undertaken to indemnify
and hold harmless Associated.
Now, the basic 1957 judgment of the Manila court sentencing Banzon to pay
Associated a total of P30,257.86 excluding interest, " for the benefit of the
Philippine National Bank" expressly made of record the said court's intent and
disposition that the execution and operation of its judgment against Banzon were
contingent and conditioned upon Associated as plaintiff-surety actually paying or
being made or compelled to pay the bank-creditor an equivalent amount as
guaranteed by it. That this is so is made more evident when we consider the
provisions of Article 2071 of the Civil Code which permit the surety to file such an
advance suit against the principal debtor (not against an indemnitor such as
Banzon) only to obtain release from the guaranty or security against the danger
of the debtor's insolvency. Where the debtor directly discharged his loan
obligation to the bank which in turn released Associated from its suretyship
liability without Associated having incurred a centavo of liability, it is indisputable
that Associated in turn would necessarily release Banzon as indemnitor and the
basic 1957 judgment would be inoperable and unenforceable against Banzon.
When Associated nevertheless prematurely and contary to the intent and
condition of the basic 1957 judgment levied in execution on the two Caloocan
City lots of Banzon the interest it acquired was clearly impressed with a trust
character. Such acquisition of Banzon's properties by Associated was effected, if
not through fraud 23a on Associated's part, certainly through mistake 23b and
there Associated was "by force of law, considered a trustee of implied trust for the
benefit of the person from whom the property comes" by virtue of Article 1456 of
the Code 23c since Associated not having paid nor having been compelled to
pay the bank had no right in law or equity to so execute the judgment against
Banzon as indemnitor. Had there been no fraudulent concealment or suppression
of the fact of such non-payment by Associated or a mistaken notion just assumed
without factual basis that Associted had paid the bank and was thus entitled to
enforce its judgement against Banzon as indemnitor, the writ for execution of the
judgment against Banzon's properties would not been issued. 23d
Furthermore, Associated's conduct, upon being sued by the Philippine National
Bank directly with the principal debtor Sta. Maria for collection of the debt 23e and

sentenced by the Pampanga court of first instance in 1963 (which it did not
appeal) to pay the debt in the much lesser amount of only P15,446.44, excluding
interests, in not so discharging its liability notwithstanding that it had already
executed its 1957 judgment against Banzon as indemnitor and taken in execution
Banzon's two properties, was indeed rank fraud. Associated therefore stands
legally bound by force of law to now discharge its implied trust and return
Banzon's properties to him as their true and rightful owner.
The obligation imposed upon Associated as implied trustee to so restore
Banzon's properties becomes even more compelling when it is considered that in
the premature execution sale by virtue of the basic 1957 judgment, Associated
ostensibly was the highest bidder therefor applying its purported judgment credit
of P41,000.00 when in law such judgment was not subject to execution since the
condition of Associated as surety being made to pay the bank to make the
judgment operable and enforceable had not materialized and in fact Associated
not having paid anything to the bank did not possess such purported judgment
credit of P41,000.00, nor did it put out a single centavo for which it could hold
Banzon answerable and therefore take Banzon's properties in execution and
satisfaction thereof. Actually, as already indicated above, the principal debt of the
bank's debtor, when directly collected by the bank six (6) years later, amounted
merely to 1/2 the amount or P15,446.44 as of August, 1963, excluding interests.
23
f As already stated above, Associated did not pay even this much lesser
amount, notwithstanding the Pampanga court's judgment against it in the suit
directly filed by the bank.
Finally, it would be an outrage on simple justice and iniquitous unjust enrichment
if a surety such as Associated, after taking title in execution to the indemnitor's
properties in order to protect or reimburse itself from liability to the creditor for the
debt guaranteed by it, were to be allowed to retain ownership of the properties
even though it did not incur or discharge its liability at all, since it succeeded in
evading payment to the creditor who thereafter collect the debt directly from the
debtor. Thus, the law (Article 1456, Civil Code) impresses properties thus
acquired with trust character and constitutes the erring surety as "trustee of an
implied trust for the benefit of the person from who the property comes," in this
case, Banzon as the true and rightful owner of the properties.
2. As Cardenas in levying in turn for satisfaction of his P5,100.00 judgment
against Associated on one of Banzon's lots acquired only whatever interest
Associated had in the lot, and with the knowledge that Associated's basic 1957
judgment against Banzon was "for the benefit of the Philippine National Bank"
and hence Associated's interest in the Banzon properties was impressed with a
trust character, subject to the obligation of Associated as implied trustee to return
the properties to Banzon, the trust character of the lot titled by Cardenas
necessarily passed to him. Cardenas could not claim actual or absolute
ownership of the lot so titled but could only hold the same as trustee, like
Associated as his causante or predecessor.
The respondents Cardenases' pleadings of record should clearly that they were
fully aware of these vital antecedents and premises of the suits between
Associated and the Banzons. In their memorandum, they cite the Manila court of

first instance's basic decision in Civil Case No. 31237 "condemning defendants
to pay jointly and severally upon (sic) plaintiff (Associated) but for the benefit of
the Philippine National Bank" 24 the several amounts sought by Associated, as
surety, totalling P30,257.86. As far as their own claim against Associated is
concerned, they likewise recite in their memorandum that:
On April 29, 1959, then Judge (now Justice) Jesus Perez of the Court of First
Instance of Manila rendered a decision in Civil Case No. 36194, entitled "Pedro
Cardenas vs. Victoria Vda. de Tengco, et al." ordering the defendants, including
Associated Insurance & Surety Co., Inc., as surety, to pay certain sums of money
to Pedro Cardenas. The liability of the Associated Insurance & Surety Co., Inc.,
was affirmed by the Court of Appeals in a Decision promulgated on October 30,
1963, in CA-G.R. No. 25227-R. Consequently, pursuant to a Writ of Execution
issued on February 8, 1964, the City Sheriff of Caloocan sold on March 23, 1964
at a public auction to Pedro Cardenas, the highest and only bidder, all the "rights,
interests, claims and title" of the judgment-debtor Associated Insurance & Surety
Co. Inc., over the property plus the improvements thereon covered by Transfer
Certificate of Title No. 39685 (one on the properties acquired from Antonio
Banzon). The property not having been redeemed within the one year period, a
Deed of Absolute Sale was issued in favor of Pedro Cardenas on April 2, 1965.
On April 23, 1965, Pedro Cardenas filed a petition with the Court of First Instance
of Rizal, Branch XII, Caloocan City, in Registration Case No. C-211 (LRC Rec.
No. 11267), entitled "Pedro Cardenas, Petitioner," for the issuance of a new
transfer certificate of title over the property in question and to declare null and
void the one previously issued. On May 5, 1965, a Transfer Certificate of Title
was issued by the Register of Deeds of Caloocan City in the name of Pedro
Cardenas pursuant to the order of the court in aforecited Registration Case No.
C-211, dated May 3, 1965, as amended. 25
It is obvious that since what Cardenas acquired in his execution for his P5,100.00
judgment against Associated was only "all the rights, interests, claims and title of
the judgment-debtor (Associated) over the property ... (one of the properties
acquired from Antonio Banzon)" and Associated's rights, if they could be so
denominated, over Banzon's properties were merely those of a trustee, supra,
and Cardenas thereby acquired no absolute "rights, interests, claim and title" at
all but Associated's obligation as trustee to restore Banzon's lawful properties to
him.
3. As a point of law, even though under Associated's suretyship agreement
guaranteeing Sta. Maria's crop loans with the bank, it was permitted, supposedly
for its protection, to proceed judicially against the principal debtor and
indemnitors even prior to the surety's making payment to the creditor bank,
Article 2071 of the Civil Code regulates such relations and provides that in such
cases, the surety's right is against the principal debtor and that "in all these
cases, the action of the guarantor is to obtain release from the guaranty, or to
demand a security that shall protect him from any proceedings by the creditor
and from the danger of insolvency of the debtor."
Associated thus did not even have any valid cause of action against Banzon as
its indemnitor, but could proceed only against Sta. Maria as the principal debtor.

And even as against such principal debtor, it could not prematurely demand
payment even before it had paid the creditor, its action being limited only for the
purpose of obtaining release from the guaranty or a security against an eventual
insolvency of the debtor. As was emphasized by Mr. Justice Reyes for the Court
in General Indemnity Co., Inc. vs. Alvarez, 26 while a guarantor may under Article
2071 of the Civil Code proceed against the principal debtor, even before having
paid, when the debt has become demandable, "(T)he last paragraph of this same
article, however, provides that in such instance, the only action the guarantor can
file against the debtor is 'to obtain release from the guaranty, or to demand a
security that shall protect him from any proceeding by the creditor and from the
danger of insolvency of the debtor.' An action by the guarantor against the
principal debtor for payment, before the former has paid the creditor, is
premature."
4. The realization of the Banzon's rightful objectives in law and equity as thus
restated has somewhat been hampered and beclouded by the ineptitude and
sorry neglect with which they and/or their counsel have pursued their remedies in
the various suits brought by them. To cite the latest instance, the pending suit
filed by them in the Manila court of first instance, Civil Case No. 79244, is from
the record the first real case that they have properly filed for reconveyance of
their two Caloocan City lots based on their new cause of action that with the
debtor's direct payment to the bank, Associated had been released as surety and
Banzon consequently likewise released as Associated's indemnitor, and therefore
Associated in discharge of the implied trust under which it executed the basic
1957 judgment " for the benefit of the Philippine National Bank" against Banzon
was now called upon to discharge such trust and reconvey and restore Banzon's
properties to him.
Yet Banzon filed no appeal from the Manila Court's dismissal of his complaint
against the Cardenas spouses for reconveyance of the lot wrongfully titled by the
latter on the lower court's mistaken concept that this Court's decision of
November 29, 1968 in Associated vs. Banzon, supra, constituted res judicata
and apparently allowed such dismissal to become final. In reality, since
Associated never had to pay the bank, Banzon's two lots, which had been levied
upon prematurely under Associated's judgment against Banzon and were
therefore held by it in implied trust for Banzon by force of law, "deserve to be
reconveyed to them" in the very words of the insurance commissioner, who
alone and officially represents and acts for Associated as liquidator.
As manifested by Associated's former counsel even when Associated was acting
on its own unauthorizedly and in violation of law, since an order for its liquidation
and dissolution had already been issued by the Manila court since December 31,
1965, he, as Associated's counsel, never attempted to transfer Banzon's titles to
Associated since the question was sub-judice before this Court and resolved only
per its decision in Associated vs. Banzon of November 29, 1968, as of which
time, this Court had already previously affirmed on June 20,1968 in G.R. No. L28934, the Manila court's dissolution and liquidation order against Associated
thus removing all doubt that only the Insurance Commissioner as liquidator could
act in any and all matters for Associated. 27

5. Under Sec. 175-C, paragraph 3 of the Insurance Act as amended, 28 the

Insurance Commissioner as liquidator of Associated was vested by authority of
law with the title to all of the property, contracts and rights of action of Associated
as of the date of the judicial order of liquidation, and any sale or disposition of
Associated's properties or rights without the knowledge and consent of the
insurance commissioner as liquidator and without the approval by the liquidation
court is contrary to law and null and void.
Accordingly, petitioners Banzons are, as against their and their counsel's neglect
and inattention, nevertheless saved from the otherwise fatal consequences of the
invoked final dismissal of their complaint against the Cardenases in Civil Case
No. 79244 of the Manila court for recovery of the lot wrongfully titled in the
Cardenases' name per T.C.T. No. 8567. Since in all the litigations subsequent to
Associated's prematurely obtaining in the Manila court of first instance in Civil
Case 31237 the basic 1957 judgment as surety against Banzon as a mere
indemnitor to cover the principal debtor Sta. Maria's demandable loans to the
bank and thereafter levying in execution on Banzon's two Caloocan City lots,
notwithstanding that such judgment was expressly held to be in trust and for the
benefit of the bank, the insurance commissioner, as liquidator of Associated and
therefore an indispensable party was never impleaded and therefore there could
be no final determination of said actions. Under Rule 3, section 7, indispensable
parties must always be joined either as plaintiffs or defendants, for the court
cannot proceed without them, and hence all judgments and proceedings held
after the liquidation and dissolution order against Associated became void for
lack of an indispensable party in the person of the insurance commissionerliquidator. The insurance commissioner as liquidator of Associated by authority of
law was indisputably an indispensable party with such an interest in the
controversies affecting the judgment for Associated (against Banzon) and against
Associated (in favor of Cardenas) that a final decree would necessarily affect its
rights (administered by the Commissioner in the public interest and for the
public's protection) so that the courts could not proceed therein without the
commissioner-liquidator's official presence.
6. The wrongful dismissal by the Manila court of the Banzons' reconveyance suit,
Civil Case No. 79244, as against the Cardenases thus does not produce what
would otherwise have been fatal consequences due to the Banzons' failure to
appeal from such dismissal.
Their reconveyance case as against Associated as principal defendant remains
pending in court. And the insurance commissioner as liquidator of Associated,
now that she is fully aware of the status of these antecedent cases after she
finally received on March 11, 1971 the voluminous records thereof which had
hitherto not been surrendered to her office despite demands therefor, is called
upon to appear for Associated in the said case, if she has not as yet been duly
impleaded as such liquidator. With the insurance commissioner, as liquidator of
Associated and an indispensable party now in the case, the said reconveyance
suit may now proceed anew and the Cardenas spouses caused by the liquidator
to be duly impleaded anew for they are also indispensable parties insofar as the
insurance commissioner-liquidator's claim on behalf of Associated to the lot

covered by T.C.T. No. 8567 issued in their name is concerned. Herein petitioners
seek principally in the said case the reconveyance to them by Associated of their
two parcels of land covered by T.C.T. No. 8567 and T.C.T. No. 53759, as
acquired in execution by Associated, and thereafter, with respect to the lot
covered by T.C.T. No. 8567, by the Cardenases, by virtue of the trust character
impressed upon them and Associated's duty as implied trustee to restore said
properties to the Banzons.
Considering that the insurance commissioner herself , who now legally can alone
represent Associated as liquidator, has herein recognized such trust character
and has expressed the belief that the said lot, no less than the other lot covered
by T.C.T. No. 8567, should, in justice to petitioners, be reconveyed to them on
account, among others, of petitioner Banzon's release from his obligation as
indemnitor by virtue of the principal debtor's subsequent payment of his
obligation with the Philippine National Bank which likewise released Associated
from any liability as surety, the present petition should therefore be granted in the
interest of justice and equity so as to enable the insurance commissionerliquidator in due course to discharge the trust of reconveying Banzons' properties
to them.
7. The circumstances that respondents Cardenases, insofar as the lot wrongfully
claimed by them, caused the Caloocan City special deputy sheriff to enforce on
March 23, 1970 respondent court's challenged order of demolition and writ of
possession on the very day that this Court ordered the issuance of a restraining
order against the enforcement of said challenged order and writ, and
notwithstanding that said sheriff was duly advised by Banzon of the petition at
bar having been filed on March 20, 1970, does not make the restraining order in
any manner moot. The Court does not look with favor upon parties "racing to
beat an injunction or restraining order" which they have reason to believe might
be forthcoming from the Court by virtue of the filing and pendency of the
appropriate petition therefor. Where the restraining order or preliminary injunction
are found to have been properly issued, as in the case at bar, mandatory writs
shall be issued by the Court to restore matters to the status quo ante. 29
In the case at bar, with the insurance commissioner as liquidator of Associated,
recognizing through the Solicitor General that the Banzons' two lots wrongfully
taken from them by Associated's premature actions should be reconveyed to
them, there is established a clear and indubitable showing on the record that the
petitioners are entitled to a writ restoring the status quo ante. A mandatory writ
shall therefore issue commanding respondent court to forthwith restore
petitioners to their possession of Lot 6, Block 176, covered by T.C.T. 8567 from
which they have been removed by enforcement of said respondent court's
enjoined order of demolition and writ of possession dated March 13, 1970, Annex
"F" of the petition. As to petitioners' building thereon claimed to be worth
P10,000.00 (but countered by Cardenas to be a "mere barong-barong" 30),
respondent court shall at Banzon's petition cause respondents Cardenases to
restore the demolished building or pay Banzon the determined value thereof. As
to the fruits of possession of the land, with Cardenas acknowledging that he has
been leasing the same to a third person at P200.00 a month, 31 respondents

Cardenases shall forthwith pay to petitioners Banzons the whole amount of

rentals so received by them to the time that possession of the lot is effectively
restored to petitioners. By the very nature of this mandatory writ, the same shall
be immediately executory upon promulgation of this decision.
WHEREFORE, the petition for a permanent injunction, during the pendency of
Civil Case No. 79244 of the Court of First Instance of Manila against the
disposition in any manner of the two parcels of land subject of said case other
than their reconveyance to petitioners as the true and rightful owners thereof as
expressly recognized by the insurance commissioner as liquidator of Associated
is hereby granted. In lieu of the permanent injunction against enforcement of
respondent court's order dated March 13, 1970 in Case No. C-211 thereof
ordering the delivery of possession of the property covered by T.C.T. No. 8567 to
respondents Cardenases and demolition of petitioners Banzons' improvements
thereon, (which were prematurely carried out by respondent court's sheriff on
March 23, 1970) a writ of mandatory injunction commanding respondent court to
forthwith restore the status ante quo and to restore petitioners Banzons to full
possession of the property and enjoyment of the fruits and rentals thereof under
the terms and conditions stated in the next preceding paragraph is hereby
issued, which shall be immediately executory upon promulgation of this decision.
With costs against respondents Pedro Cardenas and Leonila Baluyot.
This decision is without prejudice to such civil and criminal liability as the officers
of the defunct Associated Insurance & Surety Co., Inc. may have incurred by
virtue of their acts of commission and omission which have resuited in grave
prejudice and damage to petitioners as well as to the public interest, as in the
suppression from and non-surrender to the Insurance Commissioner as liquidator
of the records of the relevant antecedent cases, and in the possible
misrepresentation to the courts therein that Associated had duly discharged to
the bank its liability as surety and could therefore lawfully levy on the properties
of Banzon as indemnitor, which would have resulted in the respondents' unjust
enrichment at Banzon's expense. The insurance commissioner is directed to
conduct the corresponding investigation for the purpose of filing such criminal
and other appropriate actions as may be warranted against the responsible
parties. So ordered.
G.R. No. 103066 April 25, 1996
WILLEX PLASTIC INDUSTRIES, CORPORATION, petitioner,
vs.
HON. COURT OF APPEALS and INTERNATIONAL CORPORATE BANK,
respondents.
MENDOZA, J.:p
This is a petition for review on certiorari of the decision 1 of the Court of Appeals
in C.A.-G.R. CV No. 19094, affirming the decision of the Regional Trial Court of
the National Capital Judicial Region, Branch XLV, Manila, which ordered
petitioner Willex Plastic Industries Corporation and the Inter-Resin Industrial
Corporation, jointly and severally, to pay private respondent International

Corporate Bank certain sums of money, and the appellate court's resolution of
October 17, 1989 denying petitioner's motion for reconsideration.
The facts are as follows:
Sometime in 1978, Inter-Resin Industrial Corporation opened a letter of credit
with the Manila Banking Corporation. To secure payment of the credit
accomodation, Inter-Resin Industrial and the Investment and Underwriting
Corporation of the Philippines (IUCP) executed two documents, both entitled
"Continuing Surety Agreement" and dated December 1, 1978, whereby they
bound themselves solidarily to pay Manilabank "obligations of every kind, on
which the [Inter-Resin Industrial] may now be indebted or hereafter become
indebted to the [Manilabank]." The two agreements (Exhs. J and K) are the same
in all respects, except as to the limit of liability of the surety, the first surety
agreement being limited to US$333,830.00, while the second one is limited to
US$334,087.00.
On April 2, 1979, Inter-Resin Industrial, together with Willex Plastic Industries
Corp., executed a "Continuing Guaranty" in favor of IUCP whereby "For and in
consideration of the sum or sums obtained and/or to be obtained by Inter-Resin
Industrial Corporation" from IUCP, Inter-Resin Industrial and Willex Plastic jointly
and severally guaranteed "the prompt and punctual payment at maturity of the
NOTE/S issued by the DEBTOR/S . . . to the extent of the aggregate principal
sum of FIVE MILLION PESOS (P5,000,000.00) Philippine Currency and such
interests, charges and penalties as hereafter may be specified."
On January 7, 1981, following demand upon it, IUCP paid to Manilabank the sum
of P4,334,280.61 representing Inter-Resin Industrial's outstanding obligation.
(Exh. M-1) On February 23 and 24, 1981, Atrium Capital Corp., which in the
meantime had succeeded IUCP, demanded from Inter-Resin Industrial and Willex
Plastic the payment of what it (IUCP) had paid to Manilabank. As neither one of
the sureties paid, Atrium filed this case in the court below against Inter-Resin
Industrial and Willex Plastic.
On August 11, 1982, Inter-Resin Industrial paid Interbank, which had in turn
succeeded Atrium, the sum of P687,600.00 representing the proceeds of its fire
insurance policy for the destruction of its properties.
In its answer, Inter-Resin Industrial admitted that the "Continuing Guaranty" was
intended to secure payment to Atrium of the amount of P4,334,280.61 which the
latter had paid to Manilabank. It claimed, however, that it had already fully paid its
obligation to Atrium Capital.
On the other hand, Willex Plastic denied the material allegations of the complaint
and interposed the following Special Affirmative Defenses:
(a) Assuming arguendo that main defendant is indebted to plaintiff, the former's
liability is extinguished due to the accidental fire that destroyed its premises,
which liability is covered by sufficient insurance assigned to plaintiff;
(b) Again, assuming arguendo, that the main defendant is indebted to plaintiff, its
account is now very much lesser than those stated in the complaint because of
some payments made by the former;
(c) The complaint states no cause of action against WILLEX;
(d) WLLLEX is only a guarantor of the principal obliger, and thus, its liability is

only secondary to that of the principal;

(e) Plaintiff failed to exhaust the ultimate remedy in pursuing its claim against the
principal obliger;
(f) Plaintiff has no personality to sue.
On April 29, 1986, Interbank was substituted as plaintiff in the action. The case
then proceeded to trial.
On March 4, 1988, the trial court declared Inter-Resin Industrial to have waived
the right to present evidence for its failure to appear at the hearing despite due
notice. On the other hand, Willex Plastic rested its case without presenting any
evidence. Thereafter Interbank and Willex Plastic submitted their respective
memoranda.
On April 5, 1988, the trial court rendered judgment, ordering Inter-Resin Industrial
and Willex Plastic jointly and severally to pay to Interbank the following amounts:
(a) P3, 646,780.61, representing their indebtedness to the plaintiff, with interest
of 17% per annum from August 11, 1982, when Inter-Resin Industrial paid
P687,500.00 to the plaintiff, until full payment of the said amount;
(b) Liquidated damages equivalent to 178 of the amount due; and
(c) Attorney's fees and expenses of litigation equivalent to 208 of the total amount
due.
Inter-Resin Industrial and Willex Plastic appealed to the Court of Appeals. Willex
Plastic filed its brief, while Inter-Resin Industrial presented a "Motion to Conduct
Hearing and to Receive Evidence to Resolve Factual Issues and to Defer Filing
of the Appellant's Brief." After its motion was denied, Inter-Resin Industrial did not
file its brief anymore.
On February 22, 1991, the Court of Appeals rendered a decision affirming the
ruling of the trial court.
Willex Plastic filed a motion for reconsideration praying that it be allowed to
present evidence to show that Inter-Resin Industrial had already paid its
obligation to Interbank, but its motion was denied on December 6, 1991:
The motion is denied for lack of merit. We denied defendant-appellant InterResin Industrial's motion for reception of evidence because the situation or
situations in which we could exercise the power under BP 129 did not exist.
Movant here has not presented any argument which would show otherwise.
Hence, this petition by Willex Plastic for the review of the decision of February
22, 1991 and the resolution of December 6, 1991 of the Court of Appeals.
Petitioner raises a number of issues.
[1] The main issue raised is whether under the "Continuing Guaranty" signed on
April 2, 1979 petitioner Willex Plastic may be held jointly and severally liable with
Inter-Resin Industrial for the amount paid by Interbank to Manilabank.
As already stated, the amount had been paid by Interbank's predecessor-ininterest, Atrium Capital, to Manilabank pursuant to the "Continuing Surety
Agreements" made on December 1, 1978. In denying liability to Interbank for the
amount, Willex Plastic argues that under the "Continuing Guaranty," its liability is
for sums obtained by Inter-Resin Industrial from Interbank, not for sums paid by
the latter to Manilabank for the account of Inter-Resin Industrial. In support of this
contention Willex Plastic cites the following portion of the "Continuing Guaranty":

For and in consideration of the sums obtained and/or to be obtained by INTERRESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S,
from you and/or your principal/s as may be evidenced by promissory note/s,
checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter
referred to as the NOTE/S), I/We hereby jointly and severally and unconditionally
guarantee unto you and/or your principal/s, successor/s and assigns the prompt
and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in
your and/or your principal/s, successor/s and assigns favor to the extent of the
aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine
Currency, and such interests, charges and penalties as may hereinafter be
specified.
The contention is untenable. What Willex Plastic has overlooked is the fact that
evidence aliunde was introduced in the trial court to explain that it was actually to
secure payment to Interbank (formerly IUCP) of amounts paid by the latter to
Manilabank that the "Continuing Guaranty" was executed. In its complaint below,
Interbank's predecessor-in-interest, Atrium Capital, alleged:
5. to secure the guarantee made by plaintiff of the credit accommodation granted
to defendant IRIC [Inter-Resin Industrial] by Manilabank, the plaintiff required
defendant IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor
and a Continuing Guaranty which was signed by the other defendant WPIC
[Willex Plastic].
In its answer, Inter-Resin Industrial admitted this allegation although it claimed
that it had already paid its obligation in its entirety. On the other hand, Willex
Plastic, while denying the allegation in question, merely did so "for lack of
knowledge or information of the same." But, at the hearing of the case on
September 16, 1986, when asked by the trial judge whether Willex Plastic had
not filed a crossclaim against Inter-Resin Industrial, Willex Plastic's counsel
replied in the negative and manifested that "the plaintiff in this case [Interbank] is
the guarantor and my client [Willex Plastic] only signed as a guarantor to the
guarantee." 2
For its part Interbank adduced evidence to show that the "Continuing Guaranty"
had been made to guarantee payment of amounts made by it to Manilabank and
not of any sums given by it as loan to Inter-Resin Industrial. Interbank's witness
testified under cross examination by counsel for Willex Plastic that Willex
"guaranteed the exposure/of whatever exposure of ACP [Atrium Capital] will later
be made because of the guarantee to Manila Banking Corporation." 3
It has been held that explanatory evidence may be received to show the
circumstances under which a document has been made and to what debt it
relates. 4 At all events, Willex Plastic cannot now claim that its liability is limited to
any amount which Interbank, as creditor, might give directly to Inter-Resin
Industrial as debtor because, by failing to object to the parol evidence presented,
Willex Plastic waived the protection of the parol evidence rule. 5
Accordingly, the trial court found that it was "to secure the guarantee made by
plaintiff of the credit accommodation granted to defendant IRIC [Inter-Resin
Industrial] by Manilabank, [that] the plaintiff required defendant IRIC to execute a
chattel mortgage in its favor and a Continuing Guaranty which was signed by the

defendant Willex Plastic Industries Corporation." 6

Similarly, the Court of Appeals found it to be an undisputed fact that "to secure
the guarantee undertaken by plaintiff-appellee [Interbank] of the credit
accommodation granted to Inter-Resin Industrial by Manilabank, plaintiff-appellee
required defendant-appellants to sign a Continuing Guaranty." These factual
findings of the trial court and of the Court of Appeals are binding on us not only
because of the rule that on appeal to the Supreme Court such findings are
entitled to great weight and respect but also because our own examination of the
record of the trial court confirms these findings of the two courts. 7
Nor does the record show any other transaction under which Inter-Resin
Industrial may have obtained sums of money from Interbank. It can reasonably
be assumed that Inter-Resin Industrial and Willex Plastic intended to indemnify
Interbank for amounts which it may have paid Manilabank on behalf of InterResin Industrial.
Indeed, in its Petition for Review in this Court, Willex Plastic admitted that it was
"to secure the aforesaid guarantee, that INTERBANK required principal debtor
IRIC [Inter-Resin Industrial] to execute a chattel mortgage in its favor, and so a
"Continuing Guaranty" was executed on April 2, 1979 by WILLEX PLASTIC
INDUSTRIES CORPORATION (WILLEX for brevity) in favor of INTERBANK for
and in consideration of the loan obtained by IRIC [Inter-Resin Industrial]."
[2] Willex Plastic argues that the "Continuing Guaranty," being an accessory
contract, cannot legally exist because of the absence of a valid principal
obligation. 8 Its contention is based on the fact that it is not a party either to the
"Continuing Surety Agreement" or to the loan agreement between Manilabank
and Interbank Industrial.
Put in another way the consideration necessary to support a surety obligation
need not pass directly to the surety, a consideration moving to the principal alone
being sufficient. For a "guarantor or surety is bound by the same consideration
that makes the contract effective between the principal parties thereto. It is never
necessary that a guarantor or surety should receive any part or benefit, if such
there be, accruing to his principal." 9 In an analogous case, 10 this Court held:
At the time the loan of P100,000.00 was obtained from petitioner by Daicor, for
the purpose of having an additional capital for buying and selling coco-shell
charcoal and importation of activated carbon, the comprehensive surety
agreement was admittedly in full force and effect. The loan was, therefore,
covered by the said agreement, and private respondent, even if he did not sign
the promissory note, is liable by virtue of the surety agreement. The only
condition that would make him liable thereunder is that the Borrower "is or may
become liable as maker, endorser, acceptor or otherwise." There is no doubt that
Daicor is liable on the promissory note evidencing the indebtedness.
The surety agreement which was earlier signed by Enrique Go, Sr. and private
respondent, is an accessory obligation, it being dependent upon a principal one
which, in this case is the loan obtained by Daicor as evidenced by a promissory
note.
[3] Willex Plastic contends that the "Continuing Guaranty" cannot be retroactivelt
applied so as to secure payments made by Interbank under the two "Continuing

Surety Agreements." Willex Plastic invokes the ruling in El Vencedor v. Canlas 11

and Dio v. Court of Appeals 12 in support of its contention that a contract of
suretyship or guaranty should be applied prospectively.
The cases cited are, however, distinguishable from the present case. In El
Vencedor v. Canlas we held that a contract of suretyship "is not retrospective and
no liability attaches for defaults occurring before it is entered into unless an intent
to be so liable is indicated." There we found nothing in the contract to show that
the paries intended the surety bonds to answer for the debts contracted previous
to the execution of the bonds. In contrast, in this case, the parties to the
"Continuing Guaranty" clearly provided that the guaranty would cover "sums
obtained and/or to be obtained" by Inter-Resin Industrial from Interbank.
On the other hand, in Dio v. Court of Appeals the issue was whether the
sureties could be held liable for an obligation contracted after the execution of the
continuing surety agreement. It was held that by its very nature a continuing
suretyship contemplates a future course of dealing. "It is prospective in its
operation and is generally intended to provide security with respect to future
transactions." By no means, however, was it meant in that case that in all
instances a contrast of guaranty or suretyship should be prospective in
application.
Indeed, as we also held in Bank of the Philippine Islands v. Foerster, 13 although
a contract of suretyship is ordinarily not to be construed as retrospective, in the
end the intention of the parties as revealed by the evidence is controlling. What
was said there 14 applies mutatis mutandis to the case at bar:
In our opinion, the appealed judgment is erroneous. It is very true that bonds or
other contracts of suretyship are ordinarily not to be construed as retrospective,
but that rule must yield to the intention of the contracting parties as revealed by
the evidence, and does not interfere with the use of the ordinary tests and
canons of interpretation which apply in regard to other contracts.
In the present case the circumstances so clearly indicate that the bond given by
Echevarria was intended to cover all of the indebtedness of the Arrocera upon its
current account with the plaintiff Bank that we cannot possibly adopt the view of
the court below in regard to the effect of the bond.
[4] Willex Plastic says that in any event it cannot be proceeded against without
first exhausting all property of Inter-Resin Industrial. Willex Plastic thus claims the
benefit of excussion. The Civil Code provides, however:
Art. 2059. This excussion shall not take place:
(1) If the guarantor has expressly renounced it;
(2) If he has bound himself solidarily with the debtor;
The pertinent portion of the "Continuing Guaranty" executed by Willex Plastic and
Inter-Resin Industrial in favor of IUCP (now Interbank) reads:
If default be made in the payment of the NOTE/s herein guaranteed you and/or
your principal/s may directly proceed against Me/Us without first proceeding
against and exhausting DEBTOR/s properties in the same manner as if all such
liabilities constituted My/Our direct and primary obligations. (emphasis supplied)
This stipulation embodies an express renunciation of the right of excussion. In
addition, Willex Plastic bound itself solidarily liable with Inter-Resin Industrial

under the same agreement:

For and in consideration of the sums obtained and/or to be obtained by INTERRESIN INDUSTRIAL CORPORATION, hereinafter referred to as the DEBTOR/S,
from you and/or your principal/s as may be evidenced by promissory note/s,
checks, bills receivable/s and/or other evidence/s of indebtedness (hereinafter
referred to as the NOTE/S), I/We hereby jointly and severally and unconditionally
guarantee unto you and/or your principal/s, successor/s and assigns the prompt
and punctual payment at maturity of the NOTE/S issued by the DEBTOR/S in
your and/or your principal/s, successor/s and assigns favor to the extent of the
aggregate principal sum of FIVE MILLION PESOS (P5,000,000.00), Philippine
Currency, and such interests, charges and penalties as may hereinafter he
specified.
[5] Finally it is contended that Inter-Resin Industrial had already paid its
indebtedness to Interbank and that Willex Plastic should have been allowed by
the Court of Appeals to adduce evidence to prove this. Suffice it to say that InterResin Industrial had been given generous opportunity to present its evidence but
it failed to make use of the same. On the otherhand, Willex Plastic rested its case
without presenting evidence.
The reception of evidence of Inter-Resin Industrial was set on January 29, 1987,
but because of its failure to appear on that date, the hearing was reset on March
12, 26 and April 2, 1987.
On March 12, 1987 Inter-Resin Industrial again failed to appear. Upon motion of
Willex Plastic, the hearings on March 12 and 26, 1987 were cancelled and "reset
for the last time" on April 2 and 30, 1987.
On April 2, 1987, Inter-Resin Industrial again failed to appear. Accordingly the
trial court issued the following order:
Considering that, as shown by the records, the Court had exerted every earnest
effort to cause the service of notice or subpoena on the defendant Inter-Resin
Industrial but to no avail, even with the assistance of the defendant Willex the
defendant Inter-Resin Industrial is hereby deemed to have waived the right to
present its evidence.
On the other hand, Willex Plastic announced it was resting its case without
presenting any evidence.
Upon motion of Inter-Resin Industrial, however, the trial court reconsidered its
order and set the hearing anew on July 23, 1987. But Inter-Resin Industrial again
moved for the postponement of the hearing be postponed to August 11, 1987.
The hearing was, therefore, reset on September 8 and 22, 1987 but the hearings
were reset on October 13, 1987, this time upon motion of Interbank. To give
Interbank time to comment on a motion filed by Inter-Resin Industrial, the
reception of evidence for Inter-Resin Industrial was again reset on November 17,
26 and December 11, 1987. However, Inter-Resin Industrial again moved for the
postponement of the hearing. Accordingly the hearing was reset on November 26
and December 11, 1987, with warning that the hearings were intransferrable.
Again, the reception of evidence for Inter-Resin Industrial was reset on January
22, 1988 and February 5, 1988 upon motion of its counsel. As Inter-Resin
Industrial still failed to present its evidence, it was declared to have waived its

evidence.
To give Inter-Resin Industrial a last opportunity to present its evidence, however,
the hearing was postponed to March 4, 1988. Again Inter-Resin Industrial's
counsel did not appear. The trial court, therefore, finally declared Inter-Resin
Industrial to have waived the right to present its evidence. On the other hand,
Willex Plastic, as before, manifested that it was not presenting evidence and
requested instead for time to file a memorandum.
There is therefore no basis for the plea made by Willex Plastic that it be given the
opportunity of showing that Inter-Resin Industrial has already paid its obligation
to Interbank.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, with costs
against the petitioner.
SO ORDERED.
G.R. No. 127405
October 4, 2000
MARJORIE TOCAO and WILLIAM T. BELO, petitioners,
vs.
COURT OF APPEALS and NENITA A. ANAY, respondents.
DECISION
YNARES-SANTIAGO, J.:
This is a petition for review of the Decision of the Court of Appeals in CA-G.R. CV
No. 41616,1 affirming the Decision of the Regional Trial Court of Makati, Branch
140, in Civil Case No. 88-509.2
Fresh from her stint as marketing adviser of Technolux in Bangkok, Thailand,
private respondent Nenita A. Anay met petitioner William T. Belo, then the vicepresident for operations of Ultra Clean Water Purifier, through her former
employer in Bangkok. Belo introduced Anay to petitioner Marjorie Tocao, who
conveyed her desire to enter into a joint venture with her for the importation and
local distribution of kitchen cookwares. Belo volunteered to finance the joint
venture and assigned to Anay the job of marketing the product considering her
experience and established relationship with West Bend Company, a
manufacturer of kitchen wares in Wisconsin, U.S.A. Under the joint venture, Belo
acted as capitalist, Tocao as president and general manager, and Anay as head
of the marketing department and later, vice-president for sales. Anay organized
the administrative staff and sales force while Tocao hired and fired employees,
determined commissions and/or salaries of the employees, and assigned them to
different branches. The parties agreed that Belos name should not appear in any
documents relating to their transactions with West Bend Company. Instead, they
agreed to use Anays name in securing distributorship of cookware from that
company. The parties agreed further that Anay would be entitled to: (1) ten
percent (10%) of the annual net profits of the business; (2) overriding
commission of six percent (6%) of the overall weekly production; (3) thirty
percent (30%) of the sales she would make; and (4) two percent (2%) for her
demonstration services. The agreement was not reduced to writing on the
strength of Belos assurances that he was sincere, dependable and honest when
it came to financial commitments.

Anay having secured the distributorship of cookware products from the West
Bend Company and organized the administrative staff and the sales force, the
cookware business took off successfully. They operated under the name of
Geminesse Enterprise, a sole proprietorship registered in Marjorie Tocaos name,
with office at 712 Rufino Building, Ayala Avenue, Makati City. Belo made good his
monetary commitments to Anay. Thereafter, Roger Muencheberg of West Bend
Company invited Anay to the distributor/dealer meeting in West Bend, Wisconsin,
U.S.A., from July 19 to 21, 1987 and to the southwestern regional convention in
Pismo Beach, California, U.S.A., from July 25-26, 1987. Anay accepted the
invitation with the consent of Marjorie Tocao who, as president and general
manager of Geminesse Enterprise, even wrote a letter to the Visa Section of the
U.S. Embassy in Manila on July 13, 1987. A portion of the letter reads:
"Ms. Nenita D. Anay (sic), who has been patronizing and supporting West Bend
Co. for twenty (20) years now, acquired the distributorship of Royal Queen
cookware for Geminesse Enterprise, is the Vice President Sales Marketing and a
business partner of our company, will attend in response to the invitation." (Italics
supplied.)3
Anay arrived from the U.S.A. in mid-August 1987, and immediately undertook the
task of saving the business on account of the unsatisfactory sales record in the
Makati and Cubao offices. On August 31, 1987, she received a plaque of
appreciation from the administrative and sales people through Marjorie Tocao 4 for
her excellent job performance. On October 7, 1987, in the presence of Anay,
Belo signed a memo5 entitling her to a thirty-seven percent (37%) commission for
her personal sales "up Dec 31/87." Belo explained to her that said commission
was apart from her ten percent (10%) share in the profits. On October 9, 1987,
Anay learned that Marjorie Tocao had signed a letter 6 addressed to the Cubao
sales office to the effect that she was no longer the vice-president of Geminesse
Enterprise. The following day, October 10, she received a note from Lina T. Cruz,
marketing manager, that Marjorie Tocao had barred her from holding office and
conducting demonstrations in both Makati and Cubao offices. 7 Anay attempted to
contact Belo. She wrote him twice to demand her overriding commission for the
period of January 8, 1988 to February 5, 1988 and the audit of the company to
determine her share in the net profits. When her letters were not answered, Anay
consulted her lawyer, who, in turn, wrote Belo a letter. Still, that letter was not
answered.
Anay still received her five percent (5%) overriding commission up to December
1987. The following year, 1988, she did not receive the same commission
although the company netted a gross sales of P13,300,360.00.
On April 5, 1988, Nenita A. Anay filed Civil Case No. 88-509, a complaint for sum
of money with damages8 against Marjorie D. Tocao and William Belo before the
Regional Trial Court of Makati, Branch 140.
In her complaint, Anay prayed that defendants be ordered to pay her, jointly and
severally, the following: (1) P32,00.00 as unpaid overriding commission from
January 8, 1988 to February 5, 1988; (2) P100,000.00 as moral damages, and
(3) P100,000.00 as exemplary damages. The plaintiff also prayed for an audit of
the finances of Geminesse Enterprise from the inception of its business operation

until she was "illegally dismissed" to determine her ten percent (10%) share in
the net profits. She further prayed that she be paid the five percent (5%)
"overriding commission" on the remaining 150 West Bend cookware sets before
her "dismissal."
In their answer,9 Marjorie Tocao and Belo asserted that the "alleged agreement"
with Anay that was "neither reduced in writing, nor ratified," was "either
unenforceable or void or inexistent." As far as Belo was concerned, his only role
was to introduce Anay to Marjorie Tocao. There could not have been a
partnership because, as Anay herself admitted, Geminesse Enterprise was the
sole proprietorship of Marjorie Tocao. Because Anay merely acted as marketing
demonstrator of Geminesse Enterprise for an agreed remuneration, and her
complaint referred to either her compensation or dismissal, such complaint
should have been lodged with the Department of Labor and not with the regular
court.
Petitioners (defendants therein) further alleged that Anay filed the complaint on
account of "ill-will and resentment" because Marjorie Tocao did not allow her to
"lord it over in the Geminesse Enterprise." Anay had acted like she owned the
enterprise because of her experience and expertise. Hence, petitioners were the
ones who suffered actual damages "including unreturned and unaccounted
stocks of Geminesse Enterprise," and "serious anxiety, besmirched reputation in
the business world, and various damages not less than P500,000.00." They also
alleged that, to "vindicate their names," they had to hire counsel for a fee of
P23,000.00.
At the pre-trial conference, the issues were limited to: (a) whether or not the
plaintiff was an employee or partner of Marjorie Tocao and Belo, and (b) whether
or not the parties are entitled to damages.10
In their defense, Belo denied that Anay was supposed to receive a share in the
profit of the business. He, however, admitted that the two had agreed that Anay
would receive a three to four percent (3-4%) share in the gross sales of the
cookware. He denied contributing capital to the business or receiving a share in
its profits as he merely served as a guarantor of Marjorie Tocao, who was new in
the business. He attended and/or presided over business meetings of the
venture in his capacity as a guarantor but he never participated in decisionmaking. He claimed that he wrote the memo granting the plaintiff thirty-seven
percent (37%) commission upon her dismissal from the business venture at the
request of Tocao, because Anay had no other income.
For her part, Marjorie Tocao denied having entered into an oral partnership
agreement with Anay. However, she admitted that Anay was an expert in the
cookware business and hence, they agreed to grant her the following
commissions: thirty-seven percent (37%) on personal sales; five percent (5%) on
gross sales; two percent (2%) on product demonstrations, and two percent (2%)
for recruitment of personnel. Marjorie denied that they agreed on a ten percent
(10%) commission on the net profits. Marjorie claimed that she got the capital for
the business out of the sale of the sewing machines used in her garments
business and from Peter Lo, a Singaporean friend-financier who loaned her the
funds with interest. Because she treated Anay as her "co-equal," Marjorie

received the same amounts of commissions as her. However, Anay failed to

account for stocks valued at P200,000.00.
On April 22, 1993, the trial court rendered a decision the dispositive part of which
is as follows:
"WHEREFORE, in view of the foregoing, judgment is hereby rendered:
1. Ordering defendants to submit to the Court a formal account as to the
partnership affairs for the years 1987 and 1988 pursuant to Art. 1809 of the Civil
Code in order to determine the ten percent (10%) share of plaintiff in the net
profits of the cookware business;
2. Ordering defendants to pay five percent (5%) overriding commission for the
one hundred and fifty (150) cookware sets available for disposition when plaintiff
was wrongfully excluded from the partnership by defendants;
3. Ordering defendants to pay plaintiff overriding commission on the total
production which for the period covering January 8, 1988 to February 5, 1988
amounted to P32,000.00;
4. Ordering defendants to pay P100,000.00 as moral damages and P100,000.00
as exemplary damages, and
5. Ordering defendants to pay P50,000.00 as attorneys fees and P20,000.00 as
costs of suit.
SO ORDERED."
The trial court held that there was indeed an "oral partnership agreement
between the plaintiff and the defendants," based on the following: (a) there was
an intention to create a partnership; (b) a common fund was established through
contributions consisting of money and industry, and (c) there was a joint interest
in the profits. The testimony of Elizabeth Bantilan, Anays cousin and the
administrative officer of Geminesse Enterprise from August 21, 1986 until it was
absorbed by Royal International, Inc., buttressed the fact that a partnership
existed between the parties. The letter of Roger Muencheberg of West Bend
Company stating that he awarded the distributorship to Anay and Marjorie Tocao
because he was convinced that with Marjories financial contribution and Anays
experience, the combination of the two would be invaluable to the partnership,
also supported that conclusion. Belos claim that he was merely a "guarantor"
has no basis since there was no written evidence thereof as required by Article
2055 of the Civil Code. Moreover, his acts of attending and/or presiding over
meetings of Geminesse Enterprise plus his issuance of a memo giving Anay 37%
commission on personal sales belied this. On the contrary, it demonstrated his
involvement as a partner in the business.
The trial court further held that the payment of commissions did not preclude the
existence of the partnership inasmuch as such practice is often resorted to in
business circles as an impetus to bigger sales volume. It did not matter that the
agreement was not in writing because Article 1771 of the Civil Code provides that
a partnership may be "constituted in any form." The fact that Geminesse
Enterprise was registered in Marjorie Tocaos name is not determinative of
whether or not the business was managed and operated by a sole proprietor or a
partnership. What was registered with the Bureau of Domestic Trade was merely
the business name or style of Geminesse Enterprise.

The trial court finally held that a partner who is excluded wrongfully from a
partnership is an innocent partner. Hence, the guilty partner must give him his
due upon the dissolution of the partnership as well as damages or share in the
profits "realized from the appropriation of the partnership business and goodwill."
An innocent partner thus possesses "pecuniary interest in every existing contract
that was incomplete and in the trade name of the co-partnership and assets at
the time he was wrongfully expelled."
Petitioners appeal to the Court of Appeals 11 was dismissed, but the amount of
damages awarded by the trial court were reduced to P50,000.00 for moral
damages and P50,000.00 as exemplary damages. Their Motion for
Reconsideration was denied by the Court of Appeals for lack of merit. 12
Petitioners Belo and Marjorie Tocao are now before this Court on a petition for
review on certiorari, asserting that there was no business partnership between
them and herein private respondent Nenita A. Anay who is, therefore, not entitled
to the damages awarded to her by the Court of Appeals.
Petitioners Tocao and Belo contend that the Court of Appeals erroneously held
that a partnership existed between them and private respondent Anay because
Geminesse Enterprise "came into being" exactly a year before the "alleged
partnership" was formed, and that it was very unlikely that petitioner Belo would
invest the sum of P2,500,000.00 with petitioner Tocao contributing nothing,
without any "memorandum whatsoever regarding the alleged partnership." 13
The issue of whether or not a partnership exists is a factual matter which are
within the exclusive domain of both the trial and appellate courts. This Court
cannot set aside factual findings of such courts absent any showing that there is
no evidence to support the conclusion drawn by the court a quo.14 In this case,
both the trial court and the Court of Appeals are one in ruling that petitioners and
private respondent established a business partnership. This Court finds no
reason to rule otherwise.
To be considered a juridical personality, a partnership must fulfill these requisites:
(1) two or more persons bind themselves to contribute money, property or
industry to a common fund; and (2) intention on the part of the partners to divide
the profits among themselves.15 It may be constituted in any form; a public
instrument is necessary only where immovable property or real rights are
contributed thereto.16 This implies that since a contract of partnership is
consensual, an oral contract of partnership is as good as a written one. Where no
immovable property or real rights are involved, what matters is that the parties
have complied with the requisites of a partnership. The fact that there appears to
be no record in the Securities and Exchange Commission of a public instrument
embodying the partnership agreement pursuant to Article 1772 of the Civil Code 17
did not cause the nullification of the partnership. The pertinent provision of the
Civil Code on the matter states:
Art. 1768. The partnership has a juridical personality separate and distinct from
that of each of the partners, even in case of failure to comply with the
requirements of article 1772, first paragraph.
Petitioners admit that private respondent had the expertise to engage in the
business of distributorship of cookware. Private respondent contributed such

expertise to the partnership and hence, under the law, she was the industrial or
managing partner. It was through her reputation with the West Bend Company
that the partnership was able to open the business of distributorship of that
companys cookware products; it was through the same efforts that the business
was propelled to financial success. Petitioner Tocao herself admitted private
respondents indispensable role in putting up the business when, upon being
asked if private respondent held the positions of marketing manager and vicepresident for sales, she testified thus:
"A: No, sir at the start she was the marketing manager because there were no
one to sell yet, its only me there then her and then two (2) people, so about four
(4). Now, after that when she recruited already Oscar Abella and Lina Torda-Cruz
these two (2) people were given the designation of marketing managers of which
definitely Nita as superior to them would be the Vice President." 18
By the set-up of the business, third persons were made to believe that a
partnership had indeed been forged between petitioners and private
respondents. Thus, the communication dated June 4, 1986 of Missy Jagler of
West Bend Company to Roger Muencheberg of the same company states:
"Marge Tocao is president of Geminesse Enterprises. Geminesse will finance the
operations. Marge does not have cookware experience. Nita Anay has started to
gather former managers, Lina Torda and Dory Vista. She has also gathered
former demonstrators, Betty Bantilan, Eloisa Lamela, Menchu Javier. They will
continue to gather other key people and build up the organization. All they need
is the finance and the products to sell." 19
On the other hand, petitioner Belos denial that he financed the partnership rings
hollow in the face of the established fact that he presided over meetings
regarding matters affecting the operation of the business. Moreover, his having
authorized in writing on October 7, 1987, on a stationery of his own business
firm, Wilcon Builders Supply, that private respondent should receive thirty-seven
(37%) of the proceeds of her personal sales, could not be interpreted otherwise
than that he had a proprietary interest in the business. His claim that he was
merely a guarantor is belied by that personal act of proprietorship in the
business. Moreover, if he was indeed a guarantor of future debts of petitioner
Tocao under Article 2053 of the Civil Code, 20 he should have presented
documentary evidence therefor. While Article 2055 of the Civil Code simply
provides that guaranty must be "express," Article 1403, the Statute of Frauds,
requires that "a special promise to answer for the debt, default or miscarriage of
another" be in writing.21
Petitioner Tocao, a former ramp model, 22 was also a capitalist in the partnership.
She claimed that she herself financed the business. Her and petitioner Belos
roles as both capitalists to the partnership with private respondent are buttressed
by petitioner Tocaos admissions that petitioner Belo was her boyfriend and that
the partnership was not their only business venture together. They also
established a firm that they called "Wiji," the combination of petitioner Belos first
name, William, and her nickname, Jiji. 23 The special relationship between them
dovetails with petitioner Belos claim that he was acting in behalf of petitioner
Tocao. Significantly, in the early stage of the business operation, petitioners

requested West Bend Company to allow them to "utilize their banking and trading
facilities in Singapore" in the matter of importation and payment of the cookware
products.24 The inevitable conclusion, therefore, was that petitioners merged their
respective capital and infused the amount into the partnership of distributing
cookware with private respondent as the managing partner.
The business venture operated under Geminesse Enterprise did not result in an
employer-employee relationship between petitioners and private respondent.
While it is true that the receipt of a percentage of net profits constitutes only
prima facie evidence that the recipient is a partner in the business, 25 the evidence
in the case at bar controverts an employer-employee relationship between the
parties. In the first place, private respondent had a voice in the management of
the affairs of the cookware distributorship, 26 including selection of people who
would constitute the administrative staff and the sales force. Secondly, petitioner
Tocaos admissions militate against an employer-employee relationship. She
admitted that, like her who owned Geminesse Enterprise, 27 private respondent
received only commissions and transportation and representation allowances 28
and not a fixed salary.29 Petitioner Tocao testified:
"Q: Of course. Now, I am showing to you certain documents already marked as
Exhs. X and Y. Please go over this. Exh. Y is denominated `Cubao overrides
8-21-87 with ending August 21, 1987, will you please go over this and tell the
Honorable Court whether you ever came across this document and know of your
own knowledge the amount --A: Yes, sir this is what I am talking about earlier. Thats the one I am telling you
earlier a certain percentage for promotions, advertising, incentive.
Q: I see. Now, this promotion, advertising, incentive, there is a figure here and
words which I quote: Overrides Marjorie Ann Tocao P21,410.50 this means that
you have received this amount?
A: Oh yes, sir.
Q: I see. And, by way of amplification this is what you are saying as one
representing commission, representation, advertising and promotion?
A: Yes, sir.
Q: I see. Below your name is the words and figure and I quote Nita D. Anay
P21,410.50, what is this?
A: Thats her overriding commission.
Q: Overriding commission, I see. Of course, you are telling this Honorable Court
that there being the same P21,410.50 is merely by coincidence?
A: No, sir, I made it a point that we were equal because the way I look at her
kasi, you know in a sense because of her expertise in the business she is vital to
my business. So, as part of the incentive I offer her the same thing.
Q: So, in short you are saying that this you have shared together, I mean having
gotten from the company P21,140.50 is your way of indicating that you were
treating her as an equal?
A: As an equal.
Q: As an equal, I see. You were treating her as an equal?
A: Yes, sir.
Q: I am calling again your attention to Exh. Y Overrides Makati the other one is

--A: That is the same thing, sir.

Q: With ending August 21, words and figure Overrides Marjorie Ann Tocao
P15,314.25 the amount there you will acknowledge you have received that?
A: Yes, sir.
Q: Again in concept of commission, representation, promotion, etc.?
A: Yes, sir.
Q: Okey. Below your name is the name of Nita Anay P15,314.25 that is also an
indication that she received the same amount?
A: Yes, sir.
Q: And, as in your previous statement it is not by coincidence that these two (2)
are the same?
A: No, sir.
Q: It is again in concept of you treating Miss Anay as your equal?
A: Yes, sir." (Italics supplied.)30
If indeed petitioner Tocao was private respondents employer, it is difficult to
believe that they shall receive the same income in the business. In a partnership,
each partner must share in the profits and losses of the venture, except that the
industrial partner shall not be liable for the losses. 31 As an industrial partner,
private respondent had the right to demand for a formal accounting of the
business and to receive her share in the net profit. 32
The fact that the cookware distributorship was operated under the name of
Geminesse Enterprise, a sole proprietorship, is of no moment. What was
registered with the Bureau of Domestic Trade on August 19, 1987 was merely the
name of that enterprise.33 While it is true that in her undated application for
renewal of registration of that firm name, petitioner Tocao indicated that it would
be engaged in retail of "kitchenwares, cookwares, utensils, skillet," 34 she also
admitted that the enterprise was only "60% to 70% for the cookware business,"
while 20% to 30% of its business activity was devoted to the sale of water
sterilizer or purifier.35 Indubitably then, the business name Geminesse Enterprise
was used only for practical reasons - it was utilized as the common name for
petitioner Tocaos various business activities, which included the distributorship of
cookware.
Petitioners underscore the fact that the Court of Appeals did not return the
"unaccounted and unremitted stocks of Geminesse Enterprise amounting to
P208,250.00."36 Obviously a ploy to offset the damages awarded to private
respondent, that claim, more than anything else, proves the existence of a
partnership between them. In Idos v. Court of Appeals, this Court said:
"The best evidence of the existence of the partnership, which was not yet
terminated (though in the winding up stage), were the unsold goods and
uncollected receivables, which were presented to the trial court. Since the
partnership has not been terminated, the petitioner and private complainant
remained as co-partners. x x x."37
It is not surprising then that, even after private respondent had been
unceremoniously booted out of the partnership in October 1987, she still received
her overriding commission until December 1987.

Undoubtedly, petitioner Tocao unilaterally excluded private respondent from the

partnership to reap for herself and/or for petitioner Belo financial gains resulting
from private respondents efforts to make the business venture a success. Thus,
as petitioner Tocao became adept in the business operation, she started to
assert herself to the extent that she would even shout at private respondent in
front of other people.38 Her instruction to Lina Torda Cruz, marketing manager,
not to allow private respondent to hold office in both the Makati and Cubao sales
offices concretely spoke of her perception that private respondent was no longer
necessary in the business operation, 39 and resulted in a falling out between the
two. However, a mere falling out or misunderstanding between partners does not
convert the partnership into a sham organization. 40 The partnership exists until
dissolved under the law. Since the partnership created by petitioners and private
respondent has no fixed term and is therefore a partnership at will predicated on
their mutual desire and consent, it may be dissolved by the will of a partner.
Thus:
"x x x. The right to choose with whom a person wishes to associate himself is the
very foundation and essence of that partnership. Its continued existence is, in
turn, dependent on the constancy of that mutual resolve, along with each
partners capability to give it, and the absence of cause for dissolution provided
by the law itself. Verily, any one of the partners may, at his sole pleasure, dictate
a dissolution of the partnership at will. He must, however, act in good faith, not
that the attendance of bad faith can prevent the dissolution of the partnership but
that it can result in a liability for damages." 41
An unjustified dissolution by a partner can subject him to action for damages
because by the mutual agency that arises in a partnership, the doctrine of
delectus personae allows the partners to have the power, although not
necessarily the right to dissolve the partnership.42
In this case, petitioner Tocaos unilateral exclusion of private respondent from the
partnership is shown by her memo to the Cubao office plainly stating that private
respondent was, as of October 9, 1987, no longer the vice-president for sales of
Geminesse Enterprise.43 By that memo, petitioner Tocao effected her own
withdrawal from the partnership and considered herself as having ceased to be
associated with the partnership in the carrying on of the business. Nevertheless,
the partnership was not terminated thereby; it continues until the winding up of
the business.44
The winding up of partnership affairs has not yet been undertaken by the
partnership.1wphi1 This is manifest in petitioners claim for stocks that had been
entrusted to private respondent in the pursuit of the partnership business.
The determination of the amount of damages commensurate with the factual
findings upon which it is based is primarily the task of the trial court. 45 The Court
of Appeals may modify that amount only when its factual findings are
diametrically opposed to that of the lower court, 46 or the award is palpably or
scandalously and unreasonably excessive. 47 However, exemplary damages that
are awarded "by way of example or correction for the public good," 48 should be
reduced to P50,000.00, the amount correctly awarded by the Court of Appeals.
Concomitantly, the award of moral damages of P100,000.00 was excessive and

should be likewise reduced to P50,000.00. Similarly, attorneys fees that should

be granted on account of the award of exemplary damages and petitioners
evident bad faith in refusing to satisfy private respondents plainly valid, just and
demandable claims,49 appear to have been excessively granted by the trial court
and should therefore be reduced to P25,000.00.
WHEREFORE, the instant petition for review on certiorari is DENIED. The
partnership among petitioners and private respondent is ordered dissolved, and
the parties are ordered to effect the winding up and liquidation of the partnership
pursuant to the pertinent provisions of the Civil Code. This case is remanded to
the Regional Trial Court for proper proceedings relative to said dissolution. The
appealed decisions of the Regional Trial Court and the Court of Appeals are
AFFIRMED with MODIFICATIONS, as follows --1. Petitioners are ordered to submit to the Regional Trial Court a formal account
of the partnership affairs for the years 1987 and 1988, pursuant to Article 1809 of
the Civil Code, in order to determine private respondents ten percent (10%)
share in the net profits of the partnership;
2. Petitioners are ordered, jointly and severally, to pay private respondent five
percent (5%) overriding commission for the one hundred and fifty (150) cookware
sets available for disposition since the time private respondent was wrongfully
excluded from the partnership by petitioners;
3. Petitioners are ordered, jointly and severally, to pay private respondent
overriding commission on the total production which, for the period covering
January 8, 1988 to February 5, 1988, amounted to P32,000.00;
4. Petitioners are ordered, jointly and severally, to pay private respondent moral
damages in the amount of P50,000.00, exemplary damages in the amount of
P50,000.00 and attorneys fees in the amount of P25,000.00.
SO ORDERED.
G.R. No. 138544
October 3, 2000
SECURITY BANK AND TRUST COMPANY, Inc., petitioner,
vs.
RODOLFO M. CUENCA, respondent.
DECISION
PANGANIBAN, J.:
Being an onerous undertaking, a surety agreement is strictly construed against
the creditor, and every doubt is resolved in favor of the solidary debtor. The
fundamental rules of fair play require the creditor to obtain the consent of the
surety to any material alteration in the principal loan agreement, or at least to
notify it thereof. Hence, petitioner bank cannot hold herein respondent liable for
loans obtained in excess of the amount or beyond the period stipulated in the
original agreement, absent any clear stipulation showing that the latter waived his
right to be notified thereof, or to give consent thereto. This is especially true
where, as in this case, respondent was no longer the principal officer or major
stockholder of the corporate debtor at the time the later obligations were
incurred. He was thus no longer in a position to compel the debtor to pay the
creditor and had no more reason to bind himself anew to the subsequent

obligations.
The Case
This is the main principle used in denying the present Petition for Review under
Rule 45 of the Rules of Court. Petitioner assails the December 22, 1998
Decision1 of the Court of Appeals (CA) in CA-GR CV No. 56203, the dispositive
portion of which reads as follows:
"WHEREFORE, the judgment appealed from is hereby amended in the sense
that defendant-appellant Rodolfo M. Cuenca [herein respondent] is RELEASED
from liability to pay any amount stated in the judgment.
"Furthermore, [Respondent] Rodolfo M. Cuencas counterclaim is hereby
DISMISSED for lack of merit.
"In all other respect[s], the decision appealed from is AFFIRMED."2
Also challenged is the April 14, 1999 CA Resolution, 3 which denied petitioners
Motion for Reconsideration.
Modified by the CA was the March 6, 1997 Decision 4 of the Regional Trial Court
(RTC) of Makati City (Branch 66) in Civil Case No. 93-1925, which disposed as
follows:
"WHEREFORE, judgment is hereby rendered ordering defendants Sta. Ines
Melale Corporation and Rodolfo M. Cuenca to pay, jointly and severally, plaintiff
Security Bank & Trust Company the sum of P39,129,124.73 representing the
balance of the loan as of May 10, 1994 plus 12% interest per annum until fully
paid, and the sum of P100,000.00 as attorneys fees and litigation expenses and
to pay the costs.
SO ORDERED."
The Facts
The facts are narrated by the Court of Appeals as follows: 5
"The antecedent material and relevant facts are that defendant-appellant Sta.
Ines Melale (Sta. Ines) is a corporation engaged in logging operations. It was a
holder of a Timber License Agreement issued by the Department of Environment
and Natural Resources (DENR).
"On 10 November 1980, [Petitioner] Security Bank and Trust Co. granted
appellant Sta. Ines Melale Corporation [SIMC] a credit line in the amount of
[e]ight [m]llion [p]esos (P8,000,000.00) to assist the latter in meeting the
additional capitalization requirements of its logging operations.
"The Credit Approval Memorandum expressly stated that the P8M Credit Loan
Facility shall be effective until 30 November 1981:
JOINT CONDITIONS:
1. Against Chattel Mortgage on logging trucks and/or inventories (except logs)
valued at 200% of the lines plus JSS of Rodolfo M. Cuenca.
2. Submission of an appropriate Board Resolution authorizing the borrowings,
indicating therein the companys duly authorized signatory/ies;
3. Reasonable/compensating deposit balances in current account shall be
maintained at all times; in this connection, a Makati account shall be opened prior
to availment on lines;
4. Lines shall expire on November 30, 1981; and
5. The bank reserves the right to amend any of the aforementioned terms and

conditions upon written notice to the Borrower. (Emphasis supplied.)

"To secure the payment of the amounts drawn by appellant SIMC from the
above-mentioned credit line, SIMC executed a Chattel Mortgage dated 23
December 1980 (Exhibit A) over some of its machinery and equipment in favor
of [Petitioner] SBTC. As additional security for the payment of the loan,
[Respondent] Rodolfo M. Cuenca executed an Indemnity Agreement dated 17
December 1980 (Exhibit B) in favor of [Petitioner] SBTC whereby he solidarily
bound himself with SIMC as follows:
xxx
xxx
xxx
Rodolfo M. Cuenca x x x hereby binds himself x x x jointly and severally with
the client (SIMC) in favor of the bank for the payment, upon demand and without
the benefit of excussion of whatever amount x x x the client may be indebted to
the bank x x x by virtue of aforesaid credit accommodation(s) including the
substitutions, renewals, extensions, increases, amendments, conversions
and revivals of the aforesaid credit accommodation(s) x x x . (Emphasis
supplied).
"On 26 November 1981, four (4) days prior to the expiration of the period of
effectivity of the P8M-Credit Loan Facility, appellant SIMC made a first drawdown
from its credit line with [Petitioner] SBTC in the amount of [s]ix [m]illion [o]ne
[h]undred [t]housand [p]esos (P6,100,000.00). To cover said drawdown, SIMC
duly executed promissory Note No. TD/TLS-3599-81 for said amount (Exhibit
C).
"Sometime in 1985, [Respondent] Cuenca resigned as President and Chairman
of the Board of Directors of defendant-appellant Sta. Ines. Subsequently, the
shareholdings of [Respondent] Cuenca in defendant-appellant Sta. Ines were
sold at a public auction relative to Civil Case No. 18021 entitled Adolfo A. Angala
vs. Universal Holdings, Inc. and Rodolfo M. Cuenca. Said shares were bought
by Adolfo Angala who was the highest bidder during the public auction.
"Subsequently, appellant SIMC repeatedly availed of its credit line and obtained
six (6) other loan[s] from [Petitioner] SBTC in the aggregate amount of [s]ix
[m]illion [t]hree [h]undred [s]ixty-[n]ine [t]housand [n]ineteen and 50/100 [p]esos
(P6,369,019.50). Accordingly, SIMC executed Promissory Notes Nos.
DLS/74/760/85, DLS/74773/85, DLS/74/78/85, DLS/74/760/85 DLS/74/12/86,
and DLS/74/47/86 to cover the amounts of the abovementioned additional loans
against the credit line.
"Appellant SIMC, however, encountered difficulty 6 in making the amortization
payments on its loans and requested [Petitioner] SBTC for a complete
restructuring of its indebtedness. SBTC accommodated appellant SIMCs request
and signified its approval in a letter dated 18 February 1988 (Exhibit G) wherein
SBTC and defendant-appellant Sta. Ines, without notice to or the prior consent of
[Respondent] Cuenca, agreed to restructure the past due obligations of
defendant-appellant Sta. Ines. [Petitioner] Security Bank agreed to extend to
defendant-appellant Sta. Ines the following loans:
a. Term loan in the amount of [e]ight [m]illion [e]ight [h]undred [t]housand [p]esos
(P8,800,000.00), to be applied to liquidate the principal portion of defendantappellant Sta. Ines[] total outstanding indebtedness to [Petitioner] Security Bank

(cf. P. 1 of Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca,

Expediente, et Vol I, pp. 33 to 34) and
b. Term loan in the amount of [t]hree [m]illion [f]our [h]undred [t]housand [p]esos
(P3,400,000.00), to be applied to liquidate the past due interest and penalty
portion of the indebtedness of defendant-appellant Sta. Ines to [Petitioner]
Security Bank (cf. Exhibit G, Expediente, at Vol. II, p. 336; Exhibit 5-B-Cuenca,
Expediente, at Vol. II, p. 33 to 34).
"It should be pointed out that in restructuring defendant-appellant Sta. Ines
obligations to [Petitioner] Security Bank, Promissory Note No. TD-TLS-3599-81
in the amount of [s]ix [m]illion [o]ne [h]undred [t]housand [p]esos
(P6,100,000.00), which was the only loan incurred prior to the expiration of the
P8M-Credit Loan Facility on 30 November 1981 and the only one covered by the
Indemnity Agreement dated 19 December 1980 (Exhibit 3-Cuenca, Expediente,
at Vol. II, p. 331), was not segregated from, but was instead lumped together
with, the other loans, i.e., Promissory Notes Nos. DLS/74/12/86, DLS/74/28/86
and DLS/74/47/86 (Exhibits D, E, and F, Expediente, at Vol. II, pp. 333 to 335)
obtained by defendant-appellant Sta. Ines which were not secured by said
Indemnity Agreement.
"Pursuant to the agreement to restructure its past due obligations to [Petitioner]
Security Bank, defendant-appellant Sta. Ines thus executed the following
promissory notes, both dated 09 March 1988 in favor of [Petitioner] Security
Bank:
PROMISSORY NOTE NO.

AMOUNT

RL/74/596/88

P8,800,000.00

RL/74/597/88

P3,400,000.00

TOTAL

P12,200,000.00

(Exhibits H and I, Expediente, at Vol. II, pp. 338 to 343).

"To formalize their agreement to restructure the loan obligations of defendantappellant Sta. Ines, [Petitioner] Security Bank and defendant-appellant Sta. Ines
executed a Loan Agreement dated 31 October 1989 (Exhibit 5-Cuenca,
Expediente, at Vol. I, pp. 33 to 41). Section 1.01 of the said Loan Agreement
dated 31 October 1989 provides:
1.01 Amount - The Lender agrees to grant loan to the Borrower in the aggregate
amount of TWELVE MILLION TWO HUNDRED THOUSAND PESOS
(P12,200,000.00), Philippines [c]urrency (the Loan). The loan shall be released
in two (2) tranches of P8,800,000.00 for the first tranche (the First Loan) and
P3,400,000.00 for the second tranche (the Second Loan) to be applied in the
manner and for the purpose stipulated hereinbelow.
1.02. Purpose - The First Loan shall be applied to liquidate the principal portion
of the Borrowers present total outstanding indebtedness to the Lender (the
indebtedness) while the Second Loan shall be applied to liquidate the past due
interest and penalty portion of the Indebtedness. (Underscoring supplied.) (cf. p.
1 of Exhibit 5-Cuenca, Expediente, at Vol. I, p. 33)

"From 08 April 1988 to 02 December 1988, defendant-appellant Sta. Ines made

further payments to [Petitioner] Security Bank in the amount of [o]ne [m]illion
[s]even [h]undred [f]ifty-[s]even [t]housand [p]esos (P1,757,000.00) (Exhibits 8,
9-P-SIMC up to 9-GG-SIMC, Expediente, at Vol. II, pp. 38, 70 to 165)
"Appellant SIMC defaulted in the payment of its restructured loan obligations to
[Petitioner] SBTC despite demands made upon appellant SIMC and CUENCA,
the last of which were made through separate letters dated 5 June 1991 (Exhibit
K) and 27 June 1991 (Exhibit L), respectively.
"Appellants individually and collectively refused to pay the [Petitioner] SBTC.
Thus, SBTC filed a complaint for collection of sum of money on 14 June 1993,
resulting after trial on the merits in a decision by the court a quo, x x x from which
[Respondent] Cuenca appealed."
Ruling of the Court of Appeals
In releasing Respondent Cuenca from liability, the CA ruled that the 1989 Loan
Agreement had novated the 1980 credit accommodation earlier granted by the
bank to Sta. Ines. Accordingly, such novation extinguished the Indemnity
Agreement, by which Cuenca, who was then the Board chairman and president
of Sta. Ines, had bound himself solidarily liable for the payment of the loans
secured by that credit accommodation. It noted that the 1989 Loan Agreement
had been executed without notice to, much less consent from, Cuenca who at
the time was no longer a stockholder of the corporation.
The appellate court also noted that the Credit Approval Memorandum had
specified that the credit accommodation was for a total amount of P8 million, and
that its expiry date was November 30, 1981. Hence, it ruled that Cuenca was
liable only for loans obtained prior to November 30, 1981, and only for an amount
not exceeding P8 million.
It further held that the restructuring of Sta. Ines obligation under the 1989 Loan
Agreement was tantamount to a grant of an extension of time to the debtor
without the consent of the surety. Under Article 2079 of the Civil Code, such
extension extinguished the surety.
The CA also opined that the surety was entitled to notice, in case the bank and
Sta. Ines decided to materially alter or modify the principal obligation after the
expiry date of the credit accommodation.
Hence, this recourse to this Court.7
The Issues
In its Memorandum, petitioner submits the following for our consideration: 8
"A. Whether or not the Honorable Court of Appeals erred in releasing
Respondent Cuenca from liability as surety under the Indemnity Agreement for
the payment of the principal amount of twelve million two hundred thousand
pesos (P12,200,000.00) under Promissory Note No. RL/74/596/88 dated 9 March
1988 and Promissory Note No. RL/74/597/88 dated 9 March 1988, plus
stipulated interests, penalties and other charges due thereon;
i. Whether or not the Honorable Court of Appeals erred in ruling that Respondent
Cuencas liability under the Indemnity Agreement covered only availments on
SIMCs credit line to the extent of eight million pesos (P8,000,000.00) and made
on or before 30 November 1981;

ii. Whether or not the Honorable Court of Appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit accommodation
was tantamount to an extension granted to SIMC without Respondent Cuencas
consent, thus extinguishing his liability under the Indemnity Agreement pursuant
to Article 2079 of the Civil Code;
iii. Whether or not the Honorable Court of appeals erred in ruling that the
restructuring of SIMCs indebtedness under the P8 million credit accommodation
constituted a novation of the principal obligation, thus extinguishing Respondent
Cuencas liability under the indemnity agreement;
B. Whether or not Respondent Cuencas liability under the Indemnity Agreement
was extinguished by the payments made by SIMC;
C. Whether or not petitioners Motion for Reconsideration was pro-forma;
D. Whether or not service of the Petition by registered mail sufficiently complied
with Section 11, Rule 13 of the 1997 Rules of Civil Procedure."
Distilling the foregoing, the Court will resolve the following issues: (a) whether the
1989 Loan Agreement novated the original credit accommodation and Cuencas
liability under the Indemnity Agreement; and (b) whether Cuenca waived his right
to be notified of and to give consent to any substitution, renewal, extension,
increase, amendment, conversion or revival of the said credit accommodation. As
preliminary matters, the procedural questions raised by respondent will also be
addressed.
The Courts Ruling
The Petition has no merit.
Preliminary Matters: Procedural Questions
Motion for Reconsideration Not Pro Forma
Respondent contends that petitioners Motion for Reconsideration of the CA
Decision, in merely rehashing the arguments already passed upon by the
appellate court, was pro forma; that as such, it did not toll the period for filing the
present Petition for Review.9 Consequently, the Petition was filed out of time.10
We disagree. A motion for reconsideration is not pro forma just because it
reiterated the arguments earlier passed upon and rejected by the appellate court.
The Court has explained that a movant may raise the same arguments, precisely
to convince the court that its ruling was erroneous. 11
Moreover, there is no clear showing of intent on the part of petitioner to delay the
proceedings. In Marikina Valley Development Corporation v. Flojo, 12 the Court
explained that a pro forma motion had no other purpose than to gain time and to
delay or impede the proceedings. Hence, "where the circumstances of a case do
not show an intent on the part of the movant merely to delay the proceedings, our
Court has refused to characterize the motion as simply pro forma." It held:
"We note finally that because the doctrine relating to pro forma motions for
reconsideration impacts upon the reality and substance of the statutory right of
appeal, that doctrine should be applied reasonably, rather than literally. The right
to appeal, where it exists, is an important and valuable right. Public policy would
be better served by according the appellate court an effective opportunity to
review the decision of the trial court on the merits, rather than by aborting the
right to appeal by a literal application of the procedural rules relating to pro forma

motions for reconsideration."

Service by Registered Mail Sufficiently Explained
Section 11, Rule 13 of the 1997 Rules of Court, provides as follows:
"SEC. 11. Priorities in modes of service and filing. -- Whenever practicable, the
service and filing of pleadings and other papers shall be done personally. Except
with respect to papers emanating from the court, a resort to other modes must be
accompanied by a written explanation why the service or filing was not done
personally. A violation of this Rule may be cause to consider the paper as not
filed."
Respondent maintains that the present Petition for Review does not contain a
sufficient written explanation why it was served by registered mail.
We do not think so. The Court held in Solar Entertainment v. Ricafort 13 that the
aforecited rule was mandatory, and that "only when personal service or filing is
not practicable may resort to other modes be had, which must then be
accompanied by a written explanation as to why personal service or filing was
not practicable to begin with."
In this case, the Petition does state that it was served on the respective counsels
of Sta. Ines and Cuenca "by registered mail in lieu of personal service due to
limitations in time and distance."14 This explanation sufficiently shows that
personal service was not practicable. In any event, we find no adequate reason
to reject the contention of petitioner and thereby deprive it of the opportunity to
fully argue its cause.
First Issue: Original Obligation Extinguished by Novation
An obligation may be extinguished by novation, pursuant to Article 1292 of the
Civil Code, which reads as follows:
"ART. 1292. In order that an obligation may be extinguished by another which
substitute the same, it is imperative that it be so declared in unequivocal terms,
or that the old and the new obligations be on every point incompatible with each
other."
Novation of a contract is never presumed. It has been held that "[i]n the absence
of an express agreement, novation takes place only when the old and the new
obligations are incompatible on every point." 15 Indeed, the following requisites
must be established: (1) there is a previous valid obligation; (2) the parties
concerned agree to a new contract; (3) the old contract is extinguished; and (4)
there is a valid new contract.16
Petitioner contends that there was no absolute incompatibility between the old
and the new obligations, and that the latter did not extinguish the earlier one. It
further argues that the 1989 Agreement did not change the original loan in
respect to the parties involved or the obligations incurred. It adds that the terms
of the 1989 Contract were "not more onerous." 17 Since the original credit
accomodation was not extinguished, it concludes that Cuenca is still liable under
the Indemnity Agreement.
We reject these contentions. Clearly, the requisites of novation are present in this
case. The 1989 Loan Agreement extinguished the obligation 18 obtained under the
1980 credit accomodation. This is evident from its explicit provision to "liquidate"
the principal and the interest of the earlier indebtedness, as the following shows:

"1.02. Purpose. The First Loan shall be applied to liquidate the principal portion
of the Borrowers present total outstanding Indebtedness to the Lender (the
"Indebtedness") while the Second Loan shall be applied to liquidate the past due
interest and penalty portion of the Indebtedness." 19 (Italics supplied.)
The testimony of an officer20 of the bank that the proceeds of the 1989 Loan
Agreement were used "to pay-off" the original indebtedness serves to strengthen
this ruling.21
Furthermore, several incompatibilities between the 1989 Agreement and the
1980 original obligation demonstrate that the two cannot coexist. While the 1980
credit accommodation had stipulated that the amount of loan was not to exceed
P8 million,22 the 1989 Agreement provided that the loan was P12.2 million. The
periods for payment were also different.
Likewise, the later contract contained conditions, "positive covenants" and
"negative covenants" not found in the earlier obligation. As an example of a
positive covenant, Sta. Ines undertook "from time to time and upon request by
the Lender, [to] perform such further acts and/or execute and deliver such
additional documents and writings as may be necessary or proper to effectively
carry out the provisions and purposes of this Loan Agreement." 23 Likewise, SIMC
agreed that it would not create any mortgage or encumbrance on any asset
owned or hereafter acquired, nor would it participate in any merger or
consolidation.24
Since the 1989 Loan Agreement had extinguished the original credit
accommodation, the Indemnity Agreement, an accessory obligation, was
necessarily extinguished also, pursuant to Article 1296 of the Civil Code, which
provides:
"ART. 1296. When the principal obligation is extinguished in consequence of a
novation, accessory obligations may subsist only insofar as they may benefit
third persons who did not give their consent."
Alleged Extension
Petitioner insists that the 1989 Loan Agreement was a mere renewal or extension
of the P8 million original accommodation; it was not a novation. 25
This argument must be rejected. To begin with, the 1989 Loan Agreement
expressly stipulated that its purpose was to "liquidate," not to renew or extend,
the outstanding indebtedness. Moreover, respondent did not sign or consent to
the 1989 Loan Agreement, which had allegedly extended the original P8 million
credit facility. Hence, his obligation as a surety should be deemed extinguished,
pursuant to Article 2079 of the Civil Code, which specifically states that "[a]n
extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty. x x x." In an earlier case, 26 the Court
explained the rationale of this provision in this wise:
"The theory behind Article 2079 is that an extension of time given to the principal
debtor by the creditor without the suretys consent would deprive the surety of his
right to pay the creditor and to be immediately subrogated to the creditors
remedies against the principal debtor upon the maturity date. The surety is said
to be entitled to protect himself against the contingency of the principal debtor or
the indemnitors becoming insolvent during the extended period."

Binding Nature of the Credit Approval Memorandum

As noted earlier, the appellate court relied on the provisions of the Credit
Approval Memorandum in holding that the credit accommodation was only for P8
million, and that it was for a period of one year ending on November 30, 1981.
Petitioner objects to the appellate courts reliance on that document, contending
that it was not a binding agreement because it was not signed by the parties. It
adds that it was merely for its internal use.
We disagree. It was petitioner itself which presented the said document to prove
the accommodation. Attached to the Complaint as Annex A was a copy thereof
"evidencing the accommodation."27 Moreover, in its Petition before this Court, it
alluded to the Credit Approval Memorandum in this wise:
"4.1 On 10 November 1980, Sta. Ines Melale Corporation ("SIMC") was granted
by the Bank a credit line in the aggregate amount of Eight Million Pesos
(P8,000,000.00) to assist SIMC in meeting the additional capitalization
requirements for its logging operations. For this purpose, the Bank issued a
Credit Approval Memorandum dated 10 November 1980."
Clearly, respondent is estopped from denying the terms and conditions of the P8
million credit accommodation as contained in the very document it presented to
the courts. Indeed, it cannot take advantage of that document by agreeing to be
bound only by those portions that are favorable to it, while denying those that are
disadvantageous.
Second Issue: Alleged Waiver of Consent
Pursuing another course, petitioner contends that Respondent Cuenca "impliedly
gave his consent to any modification of the credit accommodation or otherwise
waived his right to be notified of, or to give consent to, the same." 28 Respondents
consent or waiver thereof is allegedly found in the Indemnity Agreement, in which
he held himself liable for the "credit accommodation including [its] substitutions,
renewals, extensions, increases, amendments, conversions and revival." It
explains that the novation of the original credit accommodation by the 1989 Loan
Agreement is merely its "renewal," which "connotes cessation of an old contract
and birth of another one x x x." 29
At the outset, we should emphasize that an essential alteration in the terms of
the Loan Agreement without the consent of the surety extinguishes the latters
obligation. As the Court held in National Bank v. Veraguth, 30 "[i]t is fundamental in
the law of suretyship that any agreement between the creditor and the principal
debtor which essentially varies the terms of the principal contract, without the
consent of the surety, will release the surety from liability."
In this case, petitioners assertion - that respondent consented to the alterations
in the credit accommodation -- finds no support in the text of the Indemnity
Agreement, which is reproduced hereunder:
"Rodolfo M. Cuenca of legal age, with postal address c/o Sta. Ines Malale Forest
Products Corp., Alco Bldg., 391 Buendia Avenue Ext., Makati Metro Manila for
and in consideration of the credit accommodation in the total amount of eight
million pesos (P8,000,000.00) granted by the SECURITY BANK AND TRUST
COMPANY, a commercial bank duly organized and existing under and by virtue
of the laws of the Philippine, 6778 Ayala Avenue, Makati, Metro Manila

hereinafter referred to as the BANK in favor of STA. INES MELALE FOREST

PRODUCTS CORP., x x x ---- hereinafter referred to as the CLIENT, with the
stipulated interests and charges thereon, evidenced by that/those certain
PROMISSORY NOTE[(S)], made, executed and delivered by the CLIENT in
favor of the BANK hereby bind(s) himself/themselves jointly and severally with
the CLIENT in favor of the BANK for the payment , upon demand and without
benefit of excussion of whatever amount or amounts the CLIENT may be
indebted to the BANK under and by virtue of aforesaid credit accommodation(s)
including the substitutions, renewals, extensions, increases, amendment,
conversions and revivals of the aforesaid credit accommodation(s), as well as of
the amount or amounts of such other obligations that the CLIENT may owe the
BANK, whether direct or indirect, principal or secondary, as appears in the
accounts, books and records of the BANK, plus interest and expenses arising
from any agreement or agreements that may have heretofore been made, or may
hereafter be executed by and between the parties thereto, including the
substitutions, renewals, extensions, increases, amendments, conversions and
revivals of the aforesaid credit accommodation(s), and further bind(s)
himself/themselves with the CLIENT in favor of the BANK for the faithful
compliance of all the terms and conditions contained in the aforesaid credit
accommodation(s), all of which are incorporated herein and made part hereof by
reference."
While respondent held himself liable for the credit accommodation or any
modification thereof, such clause should be understood in the context of the P8
million limit and the November 30, 1981 term. It did not give the bank or Sta. Ines
any license to modify the nature and scope of the original credit accommodation,
without informing or getting the consent of respondent who was solidarily liable.
Taking the banks submission to the extreme, respondent (or his successors)
would be liable for loans even amounting to, say, P100 billion obtained 100 years
after the expiration of the credit accommodation, on the ground that he
consented to all alterations and extensions thereof.
Indeed, it has been held that a contract of surety "cannot extend to more than
what is stipulated. It is strictly construed against the creditor, every doubt being
resolved against enlarging the liability of the surety." 31 Likewise, the Court has
ruled that "it is a well-settled legal principle that if there is any doubt on the terms
and conditions of the surety agreement, the doubt should be resolved in favor of
the surety x x x. Ambiguous contracts are construed against the party who
caused the ambiguity."32 In the absence of an unequivocal provision that
respondent waived his right to be notified of or to give consent to any alteration of
the credit accommodation, we cannot sustain petitioners view that there was
such a waiver.
It should also be observed that the Credit Approval Memorandum clearly shows
that the bank did not have absolute authority to unilaterally change the terms of
the loan accommodation. Indeed, it may do so only upon notice to the borrower,
pursuant to this condition:
"5. The Bank reserves the right to amend any of the aforementioned terms and
conditions upon written notice to the Borrower." 33

We reject petitioners submission that only Sta. Ines as the borrower, not
respondent, was entitled to be notified of any modification in the original loan
accommodation.34 Following the banks reasoning, such modification would not
be valid as to Sta. Ines if no notice were given; but would still be valid as to
respondent to whom no notice need be given. The latters liability would thus be
more burdensome than that of the former. Such untenable theory is contrary to
the principle that a surety cannot assume an obligation more onerous than that of
the principal.35
The present controversy must be distinguished from Philamgen v. Mutuc,36 in
which the Court sustained a stipulation whereby the surety consented to be
bound not only for the specified period, "but to any extension thereafter made, an
extension x x x that could be had without his having to be notified."
In that case, the surety agreement contained this unequivocal stipulation: "It is
hereby further agreed that in case of any extension of renewal of the bond, we
equally bind ourselves to the Company under the same terms and conditions as
herein provided without the necessity of executing another indemnity agreement
for the purpose and that we hereby equally waive our right to be notified of any
renewal or extension of the bond which may be granted under this indemnity
agreement."
In the present case, there is no such express stipulation.1wphi1 At most, the
alleged basis of respondents waiver is vague and uncertain. It confers no clear
authorization on the bank or Sta. Ines to modify or extend the original obligation
without the consent of the surety or notice thereto.
Continuing Surety
Contending that the Indemnity Agreement was in the nature of a continuing
surety, petitioner maintains that there was no need for respondent to execute
another surety contract to secure the 1989 Loan Agreement.
This argument is incorrect. That the Indemnity Agreement is a continuing surety
does not authorize the bank to extend the scope of the principal obligation
inordinately.37 In Dino v. CA,38 the Court held that "a continuing guaranty is one
which covers all transactions, including those arising in the future, which are
within the description or contemplation of the contract of guaranty, until the
expiration or termination thereof."
To repeat, in the present case, the Indemnity Agreement was subject to the two
limitations of the credit accommodation: (1) that the obligation should not exceed
P8 million, and (2) that the accommodation should expire not later than
November 30, 1981. Hence, it was a continuing surety only in regard to loans
obtained on or before the aforementioned expiry date and not exceeding the total
of P8 million.
Accordingly, the surety of Cuenca secured only the first loan of P6.1 million
obtained on November 26, 1991. It did not secure the subsequent loans,
purportedly under the 1980 credit accommodation, that were obtained in 1986.
Certainly, he could not have guaranteed the 1989 Loan Agreement, which was
executed after November 30, 1981 and which exceeded the stipulated P8 million
ceiling.
Petitioner, however, cites the Dino ruling in which the Court found the surety

liable for the loan obtained after the payment of the original one, which was
covered by a continuing surety agreement. At the risk of being repetitious, we
hold that in Dino, the surety Agreement specifically provided that "each
suretyship is a continuing one which shall remain in full force and effect until this
bank is notified of its revocation." Since the bank had not been notified of such
revocation, the surety was held liable even for the subsequent obligations of the
principal borrower.
No similar provision is found in the present case. On the contrary, respondents
liability was confined to the 1980 credit accommodation, the amount and the
expiry date of which were set down in the Credit Approval Memorandum.
Special Nature of the JSS
It is a common banking practice to require the JSS ("joint and solidary signature")
of a major stockholder or corporate officer, as an additional security for loans
granted to corporations. There are at least two reasons for this. First, in case of
default, the creditors recourse, which is normally limited to the corporate
properties under the veil of separate corporate personality, would extend to the
personal assets of the surety. Second, such surety would be compelled to ensure
that the loan would be used for the purpose agreed upon, and that it would be
paid by the corporation.
Following this practice, it was therefore logical and reasonable for the bank to
have required the JSS of respondent, who was the chairman and president of
Sta. Ines in 1980 when the credit accommodation was granted. There was no
reason or logic, however, for the bank or Sta. Ines to assume that he would still
agree to act as surety in the 1989 Loan Agreement, because at that time, he was
no longer an officer or a stockholder of the debtor-corporation. Verily, he was not
in a position then to ensure the payment of the obligation. Neither did he have
any reason to bind himself further to a bigger and more onerous obligation.
Indeed, the stipulation in the 1989 Loan Agreement providing for the surety of
respondent, without even informing him, smacks of negligence on the part of the
bank and bad faith on that of the principal debtor. Since that Loan Agreement
constituted a new indebtedness, the old loan having been already liquidated, the
spirit of fair play should have impelled Sta. Ines to ask somebody else to act as a
surety for the new loan.
In the same vein, a little prudence should have impelled the bank to insist on the
JSS of one who was in a position to ensure the payment of the loan. Even a
perfunctory attempt at credit investigation would have revealed that respondent
was no longer connected with the corporation at the time. As it is, the bank is
now relying on an unclear Indemnity Agreement in order to collect an obligation
that could have been secured by a fairly obtained surety. For its defeat in this
litigation, the bank has only itself to blame.
In sum, we hold that the 1989 Loan Agreement extinguished by novation the
obligation under the 1980 P8 million credit accommodation. Hence, the Indemnity
Agreement, which had been an accessory to the 1980 credit accommodation,
was also extinguished. Furthermore, we reject petitioners submission that
respondent waived his right to be notified of, or to give consent to, any
modification or extension of the 1980 credit accommodation.

In this light, we find no more need to resolve the issue of whether the loan
obtained before the expiry date of the credit accommodation has been paid.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED.
Costs against petitioner.
SO ORDERED.
G.R. No. 136603
January 18, 2002
EMILIO Y. TAEDO, petitioner,
vs.
ALLIED BANKING CORPORATION, respondent.
PARDO, J.:
Appeal via certiorari from the decision of the Court of Appeals 1 reversing the
ruling of the trial court and holding petitioner liable solidarily with defendant
Cheng Ban Yek Co., Inc. for all items of the money judgment and costs of suit.
The Facts
The facts, as found by the Court of Appeals, are as follows:
"Appeal by both the plaintiff Allied Banking Corporation and the defendant Cheng
Ban Yek & Co., Inc. from the Order, as summary judgment, of the Regional Trial
Court (Branch XLIV, Manila), the decretal part whereof reads:
"WHEREFORE, and in view of the foregoing considerations, summary judgment
is hereby rendered in favor of the plaintiff, Allied Banking Corporation, and
against defendant Cheng Ban Yek and Co., Inc. as follows:
"1. On the first cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P2,000,000.00, plus interest thereon at 14% per annum, 2% per annum as
service charge, and penalty charge of 1% per month from February 11, 1981 until
fully paid;
"2. On the second cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P2,500,000.00, plus interest thereon at 14% per annum, service charge of 2%
per annum, and penalty charge of 1 % per month, from February 3, 1981 until
fully paid;
"3. On the third cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P1,000,000.00 plus interest thereon at 14% per annum, service charge of 2% per
annum, and penalty charge of 1 % per month, from February 12, 1981 until fully
paid;
"4. On the fourth cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P1,000,000.00 plus interest thereon at 14% per annum, service charge of 2% per
annum, and penalty charge of 1 % per month, from February 12, 1981 until fully
paid;
"5. On the fifth cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P1,000,000.00 plus interest thereon at 14% per annum, service charge of 2% per
annum, and penalty charge of 1% per month, from February 12, 1981 until fully

paid;
"6. On the sixth cause of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P1,000,000.00 plus interest thereon at 14% per annum, service charge of 2% per
annum, and penalty charge of 1% per month, from February 12, 1981 until fully
paid;
"7. On the seventh cause of action:
" Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum of
P1,500,000.00 plus interest thereon at 14% per annum, service charge of 2% per
annum, and penalty charge of 1% per month, from February 12, 1981 until fully
paid;
"8. On all the causes of action:
"Ordering the defendant Cheng Ban Yek Co., Inc. to pay plaintiff the sum
equivalent to 25% of the amount due and demandable as and for attorneys fees;
"9. Declaring the "Continuing Guaranty" as having been extinguished after
plaintiff branded it as a "worthless security" and preferred to avail, as it did avail,
of the provisional remedy of attachment; and declaring defendants Alfredo Ching
and Emilio Taedo relieved of their obligation under the said continuing
Guaranty; and
"10. Ordering the defendant Cheng Ban Yek Co., Inc. to pay the costs of suit.
"SO ORDERED."2
"The foregoing summary judgment has its roots in a complaint with preliminary
attachment filed by plaintiff bank to recover sums of money from defendant
corporation on its seven past due promissory notes with principal amounts
totaling P10,000,000.00, from defendants Alfredo Ching and Emilio Taedo under
a Continuing Guaranty providing for joint and several liability relative to the said
promissory notes. The preliminary attachment sought was granted upon the
required bond and was thereafter maintained despite defendant corporations
efforts to have it discharged.
"The appeal of plaintiff bank is limited to paragraph 9 of the summary judgment
(supra, p. 3) which declared defendants Aldredo Ching and Emilio Taedo as free
from any liability under the Continuing Guaranty since their respective liabilities
thereunder became extinguished when plaintiff bank in its pleading branded the
Continuing Guaranty as "worthless security".
"On the other hand, defendant corporations appeal is an attack on the summary
nature of the proceeding adopted by the lower court since, according to
defendant corporation, there was a petition for suspension of payment filed by it
with the Securities and Exchange Commission which, although dismissed, was
duly appealed to the Court of Appeals.
"xxx
"Defendant corporations petition for suspension of payment was dismissed by
the Securities and Exchange Commission for lack of quorum. At the creditors
meeting called and accordingly held to approve the corporations petition for
suspension of payment, out of outstanding liabilities of P237,718,426.00, only the
creditors representing P110,355,607.37 thereof attended. This was far short of
the three-fifths quorum unqualifiedly required by law which should have been

P142,631,055.60 (Act No. 1956, Sec. 8) x x x ." 3

On October 16, 1984, the trial court rendered a summary judgment, as quoted
above.4
Both plaintiff Allied Banking Corporation and the defendant Cheng Ban Yek &
Co., Inc. appealed from the summary judgment to the Court of Appeals. 5
On March 27, 1990, the Court of Appeals promulgated a decision, the dispositive
portion of which reads:
"WHEREFORE, the Order appealed from is in part REVERSED and MODIFIED
by deleting paragraph 9 from the dispositive portion thereof, and declaring the
defendants Alfredo Ching and Emilio Taedo solidarily liable with defendant
Cheng Ban Yek Co., Inc. for all items of the money judgment set forth in
paragraphs one 91) to eight (8) inclusive, and paragraph ten (10), of said
dispositive portion. The Order is AFFIRMED in its other aspects. No costs in this
instance.
"SO ORDERED."6
On April 11, 1990, petitioner Emilio Y. Taedo filed a motion for reconsideration of
the decision, contending that while the case was pending before the Court of
Appeals the Allied Bank and Cheng Ban Yek & Co., Inc. agreed to extend the
time of payment of the indebtedness, without the consent of petitioner, thereby
relieving him of his obligation as guarantor or surety of such obligation. 7
On November 27, 1998, the Court of Appeals denied the motion for lack of merit. 8
Hence, this appeal.9
The Issues
The basic issues raised are (a) whether the execution by the respondent Bank of
the Fourth Amendatory Agreement extinguished petitioners obligations as surety,
and (b) whether the "continuing guarantee" executed by the petitioner is a
contract of (surety) adhesion.10
The Courts Ruling
We find the petition without merit.
Resolving the first issue, we note that the amendatory agreement between the
respondent Allied Banking Corporation and Cheng Ban Yek & Co., Inc. extended
the maturity of the promissory notes without notice or consent of the petitioner as
surety of the obligations. However, the "continuing guarantee" executed by the
petitioner provided that he consents and agrees that the bank may, at any time or
from time to time extend or change the time of payments and/or the manner,
place or terms of payment of all such instruments, loans, advances, credits or
other obligations guaranteed by the surety. Hence, the extensions of the loans
did not release the surety.11
As to the second issue, even if the "continuing guarantee" were considered as
one of adhesion, we find the contract of "surety" valid because petitioner was
"free to reject it entirely". 12 Petitioner was a stockholder and officer of Cheng Ban
Yek and Co., Inc. and it was common business and banking practice to require
"sureties" to guarantee corporate obligations.
The Fallo
IN VIEW WHEREOF, the Court DENIES the petition and AFFIRMS the decision
of the Court of Appeals.13

No costs in this instance.

SO ORDERED.
G.R. No. 119800
November 12, 2003
FILIPINAS TEXTILE MILLS, INC. and BERNARDINO VILLANUEVA,
Petitioners,
vs.
COURT OF APPEALS and STATE INVESTMENT HOUSE, INC. Respondents.
DECISION
Tinga, J.:
Before this Court is a Petition for Review on Certiorari assailing the Decision1 and
Resolution2 of the Court of Appeals dated June 16, 1994 and April 19, 1995,
respectively, affirming the Decision3 of the Regional Trial Court dated July 23,
1990 which found the petitioners Filipinas Textile Mills, Inc. ("Filtex") and
Bernardino Villanueva ("Villanueva") jointly and severally liable to respondent
State Investment House, Inc. ("SIHI") for the amount of P7,868,881.11.
The antecedent facts are as follows:
On December 6, 1985, SIHI instituted a Complaint4 for the collection of the sum
of P3,118,949.75, with interest, penalties, exemplary damages, attorneys fees
and costs of suit against herein petitioners Filtex and Villanueva.
In its Complaint, SIHI alleged that sometime in 1983, Filtex applied for domestic
letters of credit to finance the purchase of various raw materials for its textile
business. Finding the application to be in order, SIHI issued on various dates
domestic letters of credit5 authorizing Indo-Philippine Textile Mills, Inc. ("IndoPhil"), Texfiber Corporation ("Texfiber"), and Philippine Polyamide Industrial
Corporation ("Polyamide") "to value" on SIHI such drafts as may be drawn by
said corporations against Filtex for an aggregate amount not exceeding
P3,737,988.05.
Filtex used these domestic letters of credit to cover its purchase of various textile
materials from Indo-Phil, Texfiber and Polyamide. Upon the sale and delivery of
the merchandise, Indo-Phil, Texfiber and Polyamide issued several sight drafts 6
on various dates with an aggregate value of P3,736,276.71 payable to the order
of SIHI, which were duly accepted by Filtex. Subsequently, the sight drafts were
negotiated to and acquired in due course by SIHI which paid the value thereof to
Indo-Phil, Texfiber and Polyamide for the account of Filtex.
Allegedly by way of inducement upon SIHI to issue the aforesaid domestic letters
of credit and "to value" the sight drafts issued by Indo-Phil, Texfiber and
Polyamide, Villanueva executed a comprehensive surety agreement 7 on
November 9, 1982, whereby he guaranteed, jointly and severally with Filtex, the
full and punctual payment at maturity to SIHI of all the indebtedness of Filtex.
The essence of the comprehensive surety agreement was that it shall be a
continuing surety until such time that the total outstanding obligation of Filtex to
SIHI had been fully settled.
In order to ensure the payment of the sight drafts aforementioned, Filtex
executed and issued to SIHI several trust receipts 8 of various dates, which were
later extended with the issuance of replacement trust receipts all dated June 22,

1984, covering the merchandise sold. Under the trust receipts, Filtex agreed to
hold the merchandise in trust for SIHI, with liberty to sell the same for SIHI's
account but without authority to make any other disposition of the said goods.
Filtex likewise agreed to hand the proceeds, as soon as received, to SIHI "to
apply" against any indebtedness of the former to the latter. Filtex also agreed to
pay SIHI interest at the rate of 25% per annum from the time of release of the
amount to Indo-Phil, Texfiber and Polyamide until the same is fully paid, subject
to SIHI's option to reduce the interest rate. Furthermore, in case of delay in the
payment at maturity of the aggregate amount of the sight drafts negotiated to
SIHI, said amount shall be subject to two percent (2%) per month penalty charge
payable from the date of default until the amount is fully paid.
Because of Filtex's failure to pay its outstanding obligation despite demand, SIHI
filed a Complaint on December 6, 1985 praying that the petitioners be ordered to
pay, jointly and severally, the principal amount of P3,118,949.75, plus interest
and penalties, attorney's fees, exemplary damages, costs of suit and other
litigation expenses.
In its Answer with Counterclaim,9 Filtex interposed special and affirmative
defenses, i.e., the provisions of the trust receipts, as well as the comprehensive
surety agreement, do not reflect the true will and intention of the parties, full
payment of the obligation, and lack of cause of action. For his part, Villanueva
interposed the same special and affirmative defenses and added that the
comprehensive surety agreement is null and void and damages and attorney's
fees are not legally demandable. 10 The petitioners, however, failed to specifically
deny under oath the genuineness and due execution of the actionable
documents upon which the Complaint was based.
On July 23, 1990, the Regional Trial Court of Manila rendered judgment 11 holding
Filtex and Villanueva jointly and severally liable to SIHI. Dissatisfied, Filtex and
Villanueva filed an Appeal,12 primarily contending that they have fully paid their
indebtedness to SIHI and asserting that the letters of credit, sight drafts, trust
receipts and comprehensive surety agreement upon which the Complaint is
based are inadmissible in evidence supposedly because of non-payment of
documentary stamp taxes as required by the Internal Revenue Code. 13
In its assailed Decision, the Court of Appeals debunked the petitioners'
contention that the letters of credit, sight drafts, trust receipts and comprehensive
surety agreement are inadmissible in evidence ruling that the petitioners had "in
effect, admitted the genuineness and due execution of said documents because
of their failure to have their answers placed under oath, the complaint being
based on actionable documents in line with Section 7, Rule 8 of the Rules of
Court."14 The appellate court also ruled that there remained an unpaid balance as
of January 31, 1989 of P868,881.11 for which Filtex and Villanueva are solidarily
liable.15
The appellate court denied the petitioners' Motion for Reconsideration16 in its
Resolution,17 ruling that the petitioners failed to raise new and substantial matters
that would warrant the reversal of its Decision. However, due to certain
typographical oversights, the Court of Appeals modified its Decision and stated
that the correct unpaid balance as of January 31, 1989 was actually

P7,868,881.11, excluding litigation and other miscellaneous expenses and filing

fees.18
In asking this Court to reverse and set aside the aforementioned Decision and
Resolution of the Court of Appeals, the petitioners argued that the appellate court
should not have admitted in evidence the letters of credit, sight drafts, trust
receipts and comprehensive surety agreement for lack of the requisite
documentary stamps thereon. They hypothesized that their implied admission of
the genuineness and due execution of these documents for failure to specifically
deny the same under oath should not be equated with an admission in evidence
of the documents and an admission of their obligation. They also maintained that
they have fully paid the obligation and, in fact, have made an excess payment in
the amount of P415,722.53. In addition, Villanueva asserted that the
comprehensive surety agreement which he executed is null and void,
inadmissible in evidence and contains material alterations. Thus, he claimed that
he should not be held solidarily liable with Filtex.
Traversing the allegations in the instant petition, SIHI stated in its Comment19 that
in their respective answers to the complaint, the petitioners expressly admitted
the due execution of the letters of credit, sight drafts and trust receipts and their
obligation arising from these documents. Having done so, they could no longer
question the admissibility of these documents. Moreover, their allegation of
inadmissibility of these documents is inconsistent with their defense of full
payment. SIHI also reasoned that the documentary stamps, assuming they are
required, are for the sole account of Filtex not only because the letters of credit
were issued at its instance and application but also because it was the issuer and
acceptor of the trust receipts and sight drafts, respectively. As regards the
petitioners' allegation of full payment, SIHI stressed that the appellate court had
already resolved this issue in its favor by ruling that there remained an unpaid
balance of P7,868,881.11 as of January 31, 1989 for which the petitioners were
held solidarily liable. Besides, by quoting substantial portions of their appellants'
Brief in the instant petition, the petitioners merely repeated the issues that have
already been passed upon by the appellate court. Finally, SIHI asserted the
validity and admissibility of the comprehensive surety agreement.
The threshold issue in this case is whether or not the letters of credit, sight drafts,
trust receipts and comprehensive surety agreement are admissible in evidence
despite the absence of documentary stamps thereon as required by the Internal
Revenue Code.20
We rule in the affirmative. As correctly noted by the respondent, the Answer with
Counterclaim21 and Answer,22 of Filtex and Villanueva, respectively, did not
contain any specific denial under oath of the letters of credit, sight drafts, trust
receipts and comprehensive surety agreement upon which SIHI's Complaint23
was based, thus giving rise to the implied admission of the genuineness and due
execution of these documents. Under Sec. 8, Rule 8 of the Rules of Court, when
an action or defense is founded upon a written instrument, copied in or attached
to the corresponding pleading as provided in the preceding section, the
genuineness and due execution of the instrument shall be deemed admitted
unless the adverse party, under oath, specifically denies them, and sets forth

what he claims to be the facts.

In Benguet Exploration, Inc. vs. Court of Appeals,24 this Court ruled that the
admission of the genuineness and due execution of a document means that the
party whose signature it bears admits that he voluntarily signed the document or
it was signed by another for him and with his authority; that at the time it was
signed it was in words and figures exactly as set out in the pleading of the party
relying upon it; that the document was delivered; and that any formalities
required by law, such as a seal, an acknowledgment, or revenue stamp, which it
lacks, are waived by him.
Moreover, under Section 173 of the Internal Revenue Code the liability for
payment of the stamp taxes is imposed on "the person making, signing, issuing,
accepting, or transferring" the document. As correctly pointed out by SIHI, Filtex
was the issuer and acceptor of the trust receipts and sight drafts, respectively,
while the letters of credit were issued upon its application. On the other hand,
Villanueva signed the comprehensive surety agreement. Thus, being among the
parties obliged to pay the documentary stamp taxes, the petitioners are estopped
from claiming that the documents are inadmissible in evidence for non-payment
thereof.
Interestingly, the petitioners questioned the admissibility of these documents
rather belatedly, at the appeal stage even. Their respective answers 25 to SIHI's
Complaint were silent on this point. The rule is well-settled that points of law,
theories, issues and arguments not adequately brought to the attention of the trial
court need not, and ordinarily will not, be considered by a reviewing court as they
cannot be raised for the first time on appeal because this would be offensive to
the basic rules of fair play, justice and due process.26
Hence, the petitioners can no longer dispute the admissibility of the letters of
credit, sight drafts, trust receipts and comprehensive surety agreement. However,
this does not preclude the petitioners from impugning these documents by
evidence of fraud, mistake, compromise, payment, statute of limitations, estoppel
and want of consideration.27
This brings us to the petitioners' contention that they have already fully paid their
obligation to SIHI and have, in fact, overpaid by P415,722.53. This matter is
purely a factual issue. In Fortune Motors (Phils.) Corporation vs. Court of
Appeals,28 it was held that "the jurisdiction of this Court in cases brought before it
from the Court of Appeals under Rule 45 of the Rules of Court is limited to
reviewing or revising errors of law. It is not the function of this Court to analyze or
weigh evidence all over again unless there is a showing that the findings of the
lower court are totally devoid of support or are glaringly erroneous as to
constitute serious abuse of discretion. Factual findings of the Court of Appeals
are conclusive on the parties and carry even more weight when said court affirms
the factual findings of the trial court."29
It should be noted that the issue of overpayment as well as the proof presented
by the petitioners on this point merely rehash those submitted before the Court of
Appeals. The appellate court affirmed the trial court and passed upon this issue
by exhaustively detailing the amounts paid as guaranty deposit, the payments
made and the balance due for every trust receipt. This Court shall not depart

from the findings of the trial court and the appellate court, supported by the
preponderance of evidence and unsatisfactorily refuted by the petitioners, as
they are.
As a final issue, Villanueva contended that the comprehensive surety agreement
is null and void for lack of consent of Filtex and SIHI. He also alleged that SIHI
materially altered the terms and conditions of the comprehensive surety
agreement by granting Filtex an extension of the period for payment thereby
releasing him from his obligation as surety. We find these contentions specious.
In the first place, the consent of Filtex to the surety may be assumed from the
fact that Villanueva was the signatory to the sight drafts and trust receipts on
behalf of Filtex.30 Moreover, in its Answer with Counterclaim,31 Filtex admitted the
execution of the comprehensive surety agreement with the only qualification that
it was not a means to induce SIHI to issue the domestic letters of credit. Clearly,
had Filtex not consented to the comprehensive surety agreement, it could have
easily objected to its validity and specifically denied the same. SIHI's consent to
the surety is also understood from the fact that it demanded payment from both
Filtex and Villanueva.
As regards the purported material alteration of the terms and conditions of the
comprehensive surety agreement, we rule that the extension of time granted to
Filtex to pay its obligation did not release Villanueva from his liability. As this
Court held in Palmares vs. Court of Appeals:32
"The neglect of the creditor to sue the principal at the time the debt falls due does
not discharge the surety, even if such delay continues until the principal becomes
insolvent
The raison d'etre for the rule is that there is nothing to prevent the creditor from
proceeding against the principal at any time. At any rate, if the surety is
dissatisfied with the degree of activity displayed by the creditor in the pursuit of
his principal, he may pay the debt himself and become subrogated to all the
rights and remedies of the creditor.
It may not be amiss to add that leniency shown to a debtor in default, by delay
permitted by the creditor without change in the time when the debt might be
demanded, does not constitute an extension of the time of payment, which would
release the surety. In order to constitute an extension discharging the surety, it
should appear that the extension was for a definite period, pursuant to an
enforceable agreement between the principal and the creditor, and that it was
made without the consent of the surety or with a reservation of rights with respect
to him. The contract must be one which precludes the creditor from, or at least
hinders him in, enforcing the principal contract within the period during which he
could otherwise have enforced it, and precludes the surety from paying the
debt."33
Lastly, with regard to Villanueva's assertion that the 25% annual interest to be
paid by Filtex in case it failed to pay the amount released to suppliers was
inserted by SIHI without his consent, suffice it to say that the trust receipts
bearing the alleged insertion of the 25% annual fee are countersigned by him.
His pretension of lack of knowledge and consent thereto is obviously contrived.
In view of the foregoing, we find the instant petition bereft of merit.1wphi1

WHEREFORE, premises considered, the petition is DENIED and the assailed

Decision and Resolution of the Court of Appeals concurring with the decision of
the trial court are hereby AFFIRMED. Costs against the petitioners.
SO ORDERED.
G.R. No. 160466
January 17, 2005
SPOUSES ALFREDO and SUSANA ONG, petitioners,
vs.
PHILIPPINE COMMERCIAL INTERNATIONAL BANK, respondent.
DECISION
PUNO, J.:
This is a petition for review on certiorari under Rule 45 of the Rules of Court to
set aside the Decision of the Court of Appeals in CA-G.R. SP No. 39255, dated
February 17, 2003, affirming the decision of the trial court denying petitioners
motion to dismiss.
The facts: Baliwag Mahogany Corporation (BMC) is a domestic corporation
engaged in the manufacture and export of finished wood products. Petitionersspouses Alfredo and Susana Ong are its President and Treasurer, respectively.
On April 20, 1992, respondent Philippine Commercial International Bank (now
Equitable-Philippine Commercial International Bank or E-PCIB) filed a case for
collection of a sum of money1 against petitioners-spouses. Respondent bank
sought to hold petitioners-spouses liable as sureties on the three (3) promissory
notes they issued to secure some of BMCs loans, totalling five million pesos
(P5,000,000.00).
The complaint alleged that in 1991, BMC needed additional capital for its
business and applied for various loans, amounting to a total of five million pesos,
with the respondent bank. Petitioners-spouses acted as sureties for these loans
and issued three (3) promissory notes for the purpose. Under the terms of the
notes, it was stipulated that respondent bank may consider debtor BMC in default
and demand payment of the remaining balance of the loan upon the levy,
attachment or garnishment of any of its properties, or upon BMCs insolvency, or
if it is declared to be in a state of suspension of payments. Respondent bank
granted BMCs loan applications.
On November 22, 1991, BMC filed a petition for rehabilitation and suspension of
payments with the Securities and Exchange Commission (SEC) after its
properties were attached by creditors. Respondent bank considered debtor BMC
in default of its obligations and sought to collect payment thereof from petitionersspouses as sureties. In due time, petitioners-spouses filed their
Answer.1awphi1.nt
On October 13, 1992, a Memorandum of Agreement (MOA) 2 was executed by
debtor BMC, the petitioners-spouses as President and Treasurer of BMC, and
the consortium of creditor banks of BMC (of which respondent bank is included).
The MOA took effect upon its approval by the SEC on November 27, 1992. 3
Thereafter, petitioners-spouses moved to dismiss 4 the complaint. They
argued that as the SEC declared the principal debtor BMC in a state of
suspension of payments and, under the MOA, the creditor banks, including

respondent bank, agreed to temporarily suspend any pending civil action against
the debtor BMC, the benefits of the MOA should be extended to petitionersspouses who acted as BMCs sureties in their contracts of loan with respondent
bank. Petitioners-spouses averred that respondent bank is barred from pursuing
its collection case filed against them.
The trial court denied the motion to dismiss. Petitioners-spouses appealed to
the Court of Appeals which affirmed the trial courts ruling that a creditor can
proceed against petitioners-spouses as surety independently of its right to
proceed against the principal debtor BMC.
Hence this appeal.
Petitioners-spouses claim that the collection case filed against them by
respondent bank should be dismissed for three (3) reasons: First, the MOA
provided that during its effectivity, there shall be a suspension of filing or pursuing
of collection cases against the BMC and this provision should benefit petitioners
as sureties. Second, principal debtor BMC has been placed under suspension of
payment of debts by the SEC; petitioners contend that it would prejudice them if
the principal debtor BMC would enjoy the suspension of payment of its debts
while petitioners, who acted only as sureties for some of BMCs debts, would be
compelled to make the payment; petitioners add that compelling them to pay is
contrary to Article 2063 of the Civil Code which provides that a compromise
between the creditor and principal debtor benefits the guarantor and should not
prejudice the latter. Lastly, petitioners rely on Article 2081 of the Civil Code
which provides that: "the guarantor may set up against the creditor all the
defenses which pertain to the principal debtor and are inherent in the debt; but
not those which are purely personal to the debtor." Petitioners aver that if the
principal debtor BMC can set up the defense of suspension of payment of debts
and filing of collection suits against respondent bank, petitioners as sureties
should likewise be allowed to avail of these defenses.
We find no merit in petitioners contentions.
Reliance of petitioners-spouses on Articles 2063 and 2081 of the Civil Code
is misplaced as these provisions refer to contracts of guaranty. They do not
apply to suretyship contracts. Petitioners-spouses are not guarantors but
sureties of BMCs debts. There is a sea of difference in the rights and liabilities of
a guarantor and a surety. A guarantor insures the solvency of the debtor
while a surety is an insurer of the debt itself. A contract of guaranty gives rise
to a subsidiary obligation on the part of the guarantor. It is only after the
creditor has proceeded against the properties of the principal debtor and the debt
remains unsatisfied that a guarantor can be held liable to answer for any unpaid
amount. This is the principle of excussion. In a suretyship contract, however, the
benefit of excussion is not available to the surety as he is principally liable
for the payment of the debt. As the surety insures the debt itself, he obligates
himself to pay the debt if the principal debtor will not pay, regardless of whether
or not the latter is financially capable to fulfill his obligation. Thus, a creditor can
go directly against the surety although the principal debtor is solvent and is able
to pay or no prior demand is made on the principal debtor. A surety is directly,
equally and absolutely bound with the principal debtor for the payment of

the debt and is deemed as an original promissor and debtor from the
beginning.5
Under the suretyship contract entered into by petitioners-spouses with
respondent bank, the former obligated themselves to be solidarily bound with the
principal debtor BMC for the payment of its debts to respondent bank amounting
to five million pesos (P5,000,000.00). Under Article 1216 of the Civil Code,6
respondent bank as creditor may proceed against petitioners-spouses as
sureties despite the execution of the MOA which provided for the suspension of
payment and filing of collection suits against BMC. Respondent banks right to
collect payment from the surety exists independently of its right to proceed
directly against the principal debtor. In fact, the creditor bank may go against the
surety alone without prior demand for payment on the principal debtor.7
The provisions of the MOA regarding the suspension of payments by BMC
and the non-filing of collection suits by the creditor banks pertain only to
the property of the principal debtor BMC. Firstly, in the rehabilitation
receivership filed by BMC, only the properties of BMC were mentioned in the
petition with the SEC.8 Secondly, there is nothing in the MOA that involves the
liabilities of the sureties whose properties are separate and distinct from that of
the debtor BMC. Lastly, it bears to stress that the MOA executed by BMC and
signed by the creditor-banks was approved by the SEC whose jurisdiction is
limited only to corporations and corporate assets. It has no jurisdiction over the
properties of BMCs officers or sureties.1awphi1.nt
Clearly, the collection suit filed by respondent bank against petitioners-spouses
as sureties can prosper. The trial courts denial of petitioners motion to dismiss
was proper.
IN VIEW WHEREOF, the petition is DISMISSED for lack of merit. No
pronouncement as to costs.
SO ORDERED.
G.R. No. L-23663
October 17, 1925
JOSEFA LAPLANA, as administratrix of the estate of Ana Maria Alcantara,
plaintiff-appellant,
vs.
MARIANO GARCHITORENA CHEREAU and ANDREE GARCHITORENA
CHEREAU, defendants-appellants.
Antonio V. Herrero for plaintiff-appellant. Crossfield and O'Brien and Isidro
Santiago for defendants-appellants.
STREET, J.:
This action was instituted on December 27, 1921, in the Court of First Instance of
Camarines Sur by Josefa Laplana, as administratrix of the estate of Ana Maria
Alcantara, against Mariano Garchitorena Chereau and Andree Garchitorena
Chereau, for the purpose of compelling them to execute a mortgage on certain
real property and to recover the indebtedness secured by said mortgage. In
connection with this complaint the plaintiff asked for an order for the preventive

annotation of her right to be secured by said mortgage, in the registry of titles, for
the purpose of securing the benefit of lis pendens, contingent upon the outcome
of the litigation. This order was granted. Upon hearing the cause the trial judge
ignored the prayer for the creation of a formal mortgage but gave judgment for
the plaintiff to recover the amount sued for, consisting of the sum of P24,902.86,
with interest from July 2, 1921, and an additional sum of P2,000 to cover
expenses of litigation and attorneys' fees. From this judgment the plaintiff
appealed in respect to the action of the court in refusing to require the
defendants to execute the mortgage, and the defendants appealed in respect to
the order requiring them to pay to the plaintiff the amounts stated.
Omitting a long series of historical antecedents not necessary to the
determination of the case, the facts are briefly these: On July 2, 1921, the
defendant Mariano Garchitorena, acting under competent power of attorney from
his sister, Andree Garchitorena, executed a public document in the City of
Manila, on behalf both of himself and his said sister, admitting that the two were
indebted to the plaintiff, Josefa Laplana as administratrix of Ana Maria Alcantara
in the amount of P24,902.86 as of the date of June 30, immediately preceding. In
the same document the said Mariano Garchitorena obligated himself and sister
to pay said sum within one year from July 1, of the same year with interest at the
rate of one per centum per month, payable within the first fifteen days of each
month beginning with the succeeding August.
In the same document it was declared that the obligors in this contract, Mariano
and Andree Garchitorena, were the owners of a large estate, known as the
Hacienda Salvacion, located in the barrio of Hignaroy, municipality of Tigaon,
Ambos Camarines, for the registration of which proceedings were then pending
in the Court of First Instance of said province; and it was agreed that as soon as
they should obtain a Torrens title to the said hacienda a second mortgage upon
the same would be executed by Mariano Garchitorena, acting in his own behalf
and as attorney in fact of his sister, to secure said debt. Finally, it was declared
that the mortgage to be executed should respond not only for capital and interest
of said debt but furthermore for the sum of P2,000 agreed upon for costs and
expenses, including the attorney's fees of the creditor in case of litigation.
It appears that in the official survey made for the purposes of the registration
proceedings the Hacienda Salvacion was divided into three parcels, consisting,
respectively, of about 452.81, 176, and 103.52 hectares all of which were subject
to a first mortgage in favor of the Philippine National Bank for the sum of
P15,000. Of these three parcels the lot No. 2 was the first to be registered, and
when the certificate of title issued, the defendant, Mariano Garchitorena, instead
of constituting a second mortgage thereon in favor of the estate of Ana Maria
Alcantara, mortgaged the lot on November 28, 1921, to one Bartolome M. Martin,
to secure a loan for the sum of P11,000, received on that date by said
Garchitorena. Three days thereafter the plaintiff instituted the present action for
the purpose, as already stated, of compelling the defendants to execute a
mortgage and to recover the amount claimed in the complaint. It will be noted
that the action was brought before the date of the maturity of the debt as fixed in
the contract, but the plaintiff insists that the act of Mariano Garchitorena in

mortgaging lot No. 2 to a stranger constitutes a diminution of the value of the

security which he had contracted to give to the plaintiff and, under No. 3 of article
1129 of the Civil Code, confers on the creditor the right to treat the whole debt as
due. The trial court considered this contention to be well founded, a conclusion in
which we agree. The contention of the defendants that the action was
prematurely brought is therefore not well founded.
By the terms of the contract of July 2, 1921, it was explicitly agreed that a
mortgage should be created in favor of the plaintiff upon the Hacienda Salvacion
as soon as a Torrens title should be secured, and the defendants were obligated
to execute a mortgage in favor of the plaintiff immediately upon obtaining a title to
any part thereof, in preference to any creditor other than the Philippine National
Bank which had a first mortgage for P15,000 on the estate. It is pretended by the
defendants that the intention was that the mortgage should be created when a
Torrens title should be obtained to the whole hacienda, and that the obligation to
execute a mortgage did not arise when a certificate of title had been obtained to
one lot only of the three constituting the hacienda. We consider this suggestion
an untenable evasion of the spirit of the agreement, and it is obvious that the
creation of a second mortgage in favor of Martin was in violation of the stipulation
to execute a second mortgage on the property to the plaintiff.
As already stated, while giving judgment for the debt, the trial court at first failed
to make any pronouncement with reference to the right of the plaintiff to have
said mortgage executed. In the motion dated September 13, 1924, the attorney
for the plaintiff asked the court to make a proper provision in the judgment for the
execution by the defendants of the second mortgage in favor of the plaintiff on
the hacienda. In reply to this motion the trial judge made its order of December
24, 1924, in which said motion was denied on the ground that the two causes of
action, namely, to enforce the execution of the mortgage; and to recover
judgment for the indebtedness, were mutually inconsistent and that both species
of relief could not properly be granted. We are of the opinion that this ruling was
erroneous. It is true that a promise to constitute a mortgage gives rise only to a
personal obligation between the contracting parties (art. 1862, Civ. Code) and
creates no real right in the property, but the agreement to constitute the mortgage
is lawful and such stipulation can be enforced by the creditor, being in no wise
inconsistent with the right to recover the indebtedness. But a court of equity
never requires an unnecessary thing and in this case all of the rights if the
creditor will be adequately protected by declaring that the indebtedness
recognized by Mariano Garchitorena in the document of July 2, 1921, constitutes
a lien in the nature of a mortgage upon the Hacienda Salvacion, it appearing that
the registration of the whole has been effected. It is a maxim of jurisprudence
that "equity regards that as done which ought to be done," and in obedience to
this precept, as between the parties to this record, the property must be
considered to be subject to the same lien as if the mortgage which had been
agreed to be made had been actually executed. (1 Pom., Eq. Jur., secs. 363377.) It is our opinion, therefore that there is merit in the plaintiff's appeal, though
the remedy to be conceded is not precisely the compelling of the defendants to
execute the mortgage a declaration of the existence of the lien being sufficient.

We note the in the brief of the defendants, as appellees, it is insisted the

plaintiff's appeal was not perfected in time, with the result that this court has no
jurisdiction to entertain the appeal. This contention is not well founded. In this
connection we note that the original judgment was rendered by the trial court on
August 27, 1924, and notice of this decision was served on the attorney for the
appellant on September 5, 1924. On September 13 said attorney presented his
motion, asking the court to amplify the judgment and in particular to pass upon
the rights of the plaintiff to compel the defendants to execute a mortgage in favor
of the plaintiff. The court kept this motion under consideration until December 24,
1924, when the motion was overruled. The submission of this petition to the court
had the effect of suspending the running of the time for the taking of the
necessary steps for appeal; and if this period be deducted, it will be found that all
of the steps looking towards the perfection of the appeal were taken within due
time and in the manner necessary to give this court jurisdiction over the cause.
The contention of the defendant-appellees that the appeal of the plaintiff should
not be entertained is therefore ill-founded. 1awph!l.net
In the third fourth and fifth errors assigned in the brief of the defendants, as
appellants, an effort is made to demonstrates that the true amount of the
defendants indebtedness to the plaintiff is not more than P8,000, with interest at
twelve per centum per annum from October 20, 1920, and that the document of
July 2, 1921 admitting indebtedness to the extent of P24,902.86 was obtained
from Mariano Garchitorena by fraud and deceit. We have examined the
considerations in support of this contention and find the same to have been so
completely refuted in the able opinion of the trial court that we find it unnecessary
to comment further, adopting the conclusion of the appealed decision upon this
point.
We note that during the pendency of this litigation Carmen Garchitorena
Alcantara was declared, in the proceedings over the estate of her mother, Ana
Maria Alcantara, to be the latter's heir and entitled to succeed to the right of
action in this case, for which reason the said Carmen Garchitorena Alcantara
was substituted as party plaintiff by order of the court of August 2, 1922, since
which date the litigation has proceeded in her own name and right.
For the reasons states the decision which is the subject of appeal will be affirmed
in so far as it requires the defendants jointly and severally to pay to the present
plaintiff, Carmen Garchitorena Alcantara, the sum of P24,902.86, with yearly
interest at twelve per centum from July 2, 1921 until paid plus the further sum of
P2,000 as costs, expenses and attorney's fees, and said decision will be
modified by adding thereto a pronouncement that the aforesaid indebtedness
constitutes a lien upon the Hacienda Salvacion consisting of the three lots
described in the complaint, and a duly certified copy of the dispositive part of this
decision will be certified to the register of deeds of Camarines Sur, in order that
the existence of this lien may be noted in the proper certificates of title, to which
end the defendants are enjoined to produce before said register the owner's
duplicates. No express pronouncement will be made as to costs.
G.R. No. L-17072

October 31, 1961

CRISTINA MARCELO VDA. DE BAUTISTA, plaintiff-appellee,

vs.
BRIGIDA MARCOS, ET AL., defendants-appellants.
Aladin B. Bermudez for defendants-appellants.Cube and Fajardo for plaintiffappellee.
REYES, J.B.L., J.:
The main question in this appeal is whether or not a mortgagee may foreclose a
mortgage on a piece of land covered by a free patent where the mortgage was
executed before the patent was issued and is sought to be foreclosed within five
years from its issuance.
The facts of the case appear to be as follows:
On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of
P2,000 from plaintiff Cristina Marcel Vda. de Bautista and to secure payment
thereof conveyed to the latter by way of mortgage a two (2)-hectare portion of an
unregistered parcel of land situated in Sta. Ignacia, Tarlac. The deed of
mortgage, Exhibit "A", provided that it was to last for three years, that possession
of the land mortgaged was to be turned over to the mortgagee by way of
usufruct, but with no obligation on her part to apply the harvests to the principal
obligation; that said mortgage would be released only upon payment of the
principal loan of P2,000 without any interest; and that the mortgagor promised to
defend and warrant the mortgagee's rights over the land mortgaged.
Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in behalf of the
heirs of her deceased mother Victoriana Cainglet (who are Brigida herself and
her three sisters), an application for the issuance of a free patent over the land in
question, on the strength of the cultivation and occupation of said land by them
and their predecessor since July, 1915. As a result, Free Patent No. V-64358 was
issued to the applicants on January 25, 1957, and on February 22, 1957, it was
registered in their names under Original Certificate of Title No. P-888 of the office
of Register of Deeds for the province of Tarlac.
Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having remained
unpaid up to 1959, the latter, on March 4, 1959, filed the present action against
Brigida and her husband (Civil Case No. 3382) in the court below for the
payment thereof, or in default of the debtors to pay, for the foreclosure of her
mortgage on the land give as security. Defendants moved to dismiss the action,
pointing out that the land in question is covered by a free patent and could not,
therefore, under the Public Land Law, be taken within five years from the
issuance of the patent for the payment of any debts of the patentees contracted
prior to the expiration of said five-year period; but the lower court denied the
motion to dismiss on the ground that the law cited does not apply because the
mortgage sought to be foreclosed was executed before the patent was issued.
Defendants then filed their answer, reiterating the defense invoked in their motion
to dismiss, and alleging as well that the real contract between the parties was an
antichresis and not a mortgage. Pre-trial of the case followed, after which the
lower court rendered judgment finding the mortgage valid to the extent of the
mortgagor's pro-indiviso share of 15,333 square meters in the land in question,
on the theory that the Public Land Law does not apply in this case because the

mortgage in question was executed before a patent was issued over the land in
question; that the agreement of the parties could not be antichresis because the
deed Exhibit "A" clearly shows a mortgage with usufruct in favor of the
mortgagee; and ordered the payment of the mortgage loan of P2,000 to plaintiff
or, upon defendant's failure to do so, the foreclosure of plaintiff's mortgage on
defendant Brigida Marcos' undivided share in the land in question. From this
judgment, defendants Brigida Marcos and her husband Osmondo Apolocio
appealed to this Court.
There is merit in the appeal.
The right of plaintiff-appellee to foreclose her mortgage on the land in question
depends not so much on whether she could take said land within the prohibitive
period of five years from the issuance of defendants' patent for the satisfaction of
the indebtedness in question, but on whether the deed of mortgage Exhibit "A" is
at all valid and enforceable, since the land mortgaged was apparently still part of
the public domain when the deed of mortgage was constituted. As it is an
essential requisite for the validity of a mortgage that the mortgagor be the
absolute owner of the thing mortgaged (Art. 2085), the mortgage here in question
is void and ineffective because at the time it was constituted, the mortgagor was
not yet the owner of the land mortgaged and could not, for that reason, encumber
the same to the plaintiff-appellee. Nor could the subsequent acquisition by the
mortgagor of title over said land through the issuance of a free patent validate
and legalize the deed of mortgage under the doctrine of estoppel (cf. Art. 1434,
New Civil Code,1 since upon the issuance of said patient, the land in question
was thereby brought under the operation of the Public Land Law that prohibits
the taking of said land for the satisfaction of debts contracted prior to the
expiration of five years from the date of the issuance of the patent (sec. 118, C.A.
No. 141). This prohibition should include not only debts contracted during the
five-year period immediately preceding the issuance of the patent but also those
contracted before such issuance, if the purpose and policy of the law, which is "to
preserve and keep in the family of the homesteader that portion of public land
which the State has gratuitously given to him" (Pascua v. Talens, 45 O.G. No. 9
[Supp.] 413; De los Santos v. Roman Catholic Church of Midsayap, G.R. L-6088,
Feb. 24, 1954), is to be upheld.
The invalidity of the mortgage Exhibit "A" does not, however, imply the
concomitant invalidity of the collate agreement in the same deed of mortgage
whereby possession of the land mortgaged was transferred to plaintiff-appellee in
usufruct, without any obligation on her part to account for its harvests or deduct
them from defendants' indebtedness of P2,000. Defendant Brigida Marcos, who,
together with her sisters, was in possession of said land by herself and through
her deceased mother before her since 1915, had possessory rights over the
same even before title vested in her as co-owner by the issuance of the free
patent to her and her sisters, and these possessory right she could validly
transfer and convey to plaintiff-appellee, as she did in the deed of mortgage
Exhibit "A". The latter, upon the other hand, believing her mortgagor to be the
owner of the land mortgaged and not being aware of any flaw which invalidated
her mode of acquisition, was a possessor in good faith (Art. 526, N.C.C.), and as

such had the right to all the fruits received during the entire period of her
possession in good faith (Art. 544, N.C.C.). She is, therefore, entitled to the full
payment of her credit of P2,000 from defendants, without any obligation to
account for the fruits or benefits obtained by her from the land in question.
WHEREFORE, the judgment appealed from is reversed insofar as it orders the
foreclosure of the mortgage in question, but affirmed in all other respects. Costs
again defendants-appellants.
G.R. Nos. L-43673 and 43674
October 24, 1938
LICERIO LEGASPI and JULIAN SALCEDO, plaintiffs-appellants,
vs.
DAMASO CELESTIAL, defendant-appellee.
Ambrosio Santos and Calixto M. Legaspi for appellants. Juan S. Rustia for
appellee.
VILLA-REAL, J.:
The plaintiffs Licerio Legaspi and Julian Salcedo appeal to this court from the
judgment rendered by the Court of First Instance of Cavite in civil cases Nos.
3025 and 3037 of said court, the dispositive part of which reads as follows:
Wherefore, judgment is rendered by this court holding that both the so-called
instrument of mortgage Exhibit A and the instrument Exhibit C-1 are really
contracts of antichresis and, consequently, the plaintiffs should render to the
defendant an account of the 65 salt beds, which are the subject matter of the two
cases, as soon this decision becomes final, taking into consideration the sums
already paid by the defendant to the plaintiffs.
The writ of preliminary attachment issued in civil case No. 3037 is set aside,
without costs in both cases. It is so ordered.
In support of their appeal, the appellants assign the following alleged errors as
committed by the court a quo in its judgment in question, to wit:
1. The court erred in holding that both the instrument of mortgage Exhibit A and
the instrument Exhibit C-1 are really contracts of antichresis.
2. The court likewise erred in ordering the plaintiffs to render to the defendant an
account of the fruits produced by the 65 salt beds, which are the subject matter
of both cases.
3. Lastly, the court erred in not absolving the plaintiffs from the counterclaim and
cross-complaint filed by the defendant, with the costs to the latter.
On January 17, 1935, the plaintiffs brought an action against the defendant
Damaso Celestial in the justice of the peace court of Kawit, Cavite, praying that
judgment be rendered, ordering said defendant to pay to the abovenamed
plaintiffs the sum of P556.160, plus the corresponding legal interest thereon from
the date of the filing of the complaint, until fully paid, and the costs.
The defendant, answering the complaint, admitted the essential facts alleged
therein, stating that he was disposed to pay what he should appear still to be
indebted and, by way of counterclaim and cross-complaint, claimed that, the
contract entered into between him and the plaintiffs being an antichresis, the
latter were bound to render an account of the products of the five salt beds, the

total production of which was from 300 to 350 cavans of salt at P1 a cavan.
After due trial of the case, the justice of the peace court of Kawit, Cavite, on
February 5, 1935, rendered judgment in said case, the dispositive part of which
reads as follows:
Premises considered, judgment hereby rendered ordering the defendant to pay
the herein plaintiffs the sum of P556.60 with interest at the legal rate from
January 17, 1935, and to pay the costs of suit. It is so ordered.
From the foregoing judgment, the defendant appealed to the Court of First
Instance of Cavite.
On January 30, 1935, the same plaintiffs filed a complaint in civil case No. 3025
of said Court of First Instance, praying that the same defendant Damaso
Celestial be ordered to pay them the sum of P7,637, with the legal interest
thereon from the date of the filing of the complaint, until fully paid, and the costs
of the suit, and that, upon his failure to do so, the mortgage constituted by said
defendant in their favor to secure the payment of the loan in question be ordered
foreclosed.lwphi1.nt
The defendant, answering the complaint, admitted the material facts alleged
therein as well as the conditions set forth in the documents Exhibit "A" attached
thereto, stating that he had never refused to pay any balance of the debt
resulting after a rendition of accounts by the plaintiffs and a liquidation; and by
way of counterclaim and cross-complaint, alleged that the sixty-five salt beds
administered by the plaintiffs, by virtue of the above-stated documents, yielded a
net produced of a about 6,500 cavans of salt every six months at P1 a cavan;
that the plaintiffs should render to the defendant an account of said products so
that they may be applied to the payment of his loan or debt; that the approximate
total value of half of the number of cavans of salt reaped and availed of by the
plaintiffs from the sixty-five salt beds administered by them during three years
and eleven months, that is, from February 23, 1931, to February 8, 1935, the
date of the filing of the answer, was P13,000; that after deducting from said
P13,000 the total amount of the defendant's debt to the plaintiffs under the
above-stated contracts, that is, P8,193.60, there would still remain a balance in
favor of the defendant in the sum of P4,806.40, which he is entitled to collect
from the plaintiffs. He prayed that judgment be rendered, ordering the plaintiffs to
render an account of their administration and to pay jointly and severally the sum
of P4,806.40, with the legal interest thereon, plus the damages that would result
if the contract of mortgage already perfected with Melchor de Lara should be
frustrated and should he fail to find another to execute said contract of mortgage
in the sum of P25,000.
The plaintiffs, replying to the special defense and cross-complaint, denied each
and every one of the facts alleged therein, stating that the salt gathered from the
60 salt beds mentioned in the complaint was for the exclusive use, benefit and
enjoyment of the plaintiffs who, under the provisions of Exhibit A and the intention
of the parties, were not obliged to submit to the defendant a liquidation of the salt
produced and gathered, in order that the same may be deducted from the
principal.
On February 25, 1935, the parties to civil case No. 3025 submitted the following

stipulation to the court, to wit:

Come now the parties to this case, assisted by their respective attorney, and
respectfully submit the following stipulation:
1. That, aside from this case, the same plaintiffs had instituted against the same
defendant in the justice of the peace court of Kawit, Cavite, civil case No. 165, for
the recovery of the sum of P556.60 representing a loan made by the plaintiffs on
a portion of the same parcel of land which is the subject matter of the mortgage
in this case before this Honorable Court of First Instance, as evidenced by
another notarial document dated August 13, 1932. And in this stipulation, said
case shall be understood to be consolidated with the present one.
2. That the defendants agrees and is disposed to make immediate delivery to the
plaintiffs of the total amount of P8,193.60, without prejudice to his right to
prosecute the case in connection with his contention of their administration. In
must render to him an account of their administration. In consideration hereof,
the plaintiffs, in turn, agree and bind themselves now to secure the amount in
question, or the receipt thereof, for the due compliance with the judgment to be
rendered by the court on said rendition of accounts, with sufficient property of
their own worth not less than the 14th instant,; and likewise forthwith to respect,
turn over and restore now, as they hereby do so, to the defendant or his
assignees, the conclusive possession, administration, benefit and use of the
mortgaged property in question, particularly the sixty-five salt beds administered
by said plaintiffs to date.
Wherefore, both parties sign this stipulation and pray this honorable court to
render its decision in accordance herewith, upon acting on the motion of the
defendant, dated February 7, 1935.
Cavite, Cavite, February 9, 1935.
In view of the foregoing stipulation, the court a quo rendered contracts entered
into between the plaintiffs Licerio Legaspi and Julian Salcedo, on the one hand,
and Damaso Celestial, on the other hand, appearing in the instruments Exhibits A
and C-1 are of mortgage or antichresis.
The contracts Exhibit C-1, entitled "Contract of Antichresis", contains the
following stipulation:
That during the existence of this Contract, the Party of the SECOND PART
(Licerio Legaspi and Julian Salcedo) or their representative shall administer and
enjoy the benefits and fruits gathered and harvested thereon; and that the Party
of the FIRST PART (Damaso Celestial) shall give and turn over to the Party of
the SECOND PART the administration and to possession of the said 5 salt beds
during the term of this contract.
In the contract Exhibit A, the parties stipulated the following:
(a) The term of this mortgage is three (3) years to be counted from February 23,
1931, and should the party of the first part, after the expiration of this term, fail to
pay to the party of the second part the amount of this mortgage, this contract
shall subsist in full force and effect and continue the debt or amount of the
mortgage is fully paid.
(b) During the term of the mortgage, the party of the second part of the
mortgagees shall administer or take charge of the work and harvest of the 60 salt

beds and pay for the maintenance of the croppers and defray the expenses for
the improvement thereof; and the party of the first part shall turn over to the party
of the second part the administration of the sixty salt beds mortgaged for the
duration of the stipulation contract.
(c) The crop from the sixty salt beds shall be shared equally by the croppers and
the party of the second part, after deducting the expenses paid by the party of
the second part during each harvest period and throughout the existence of this
mortgage.
It should be noted that the contract Exhibit C-1 is entitled "Contract of Artichresis"
while the contract Exhibit A is entitled "Contract of Mortgage". Both in the contract
Exhibit C-1 and in the contract Exhibit A, the defendant Damaso Calestial, as
debtor, agrees to turn over to the plaintiffs, as creditors, the possession of the
salt beds so that the latter, after paying the expenses for the production,
administration and harvest of the salt with one-half of the produce, may keep the
other half of the use, benefit and enjoyment. It is not stipulated that the net
produce of the salt beds shall first be applied to the payment of the interest, if
any, and afterwards to that of the principal of their credit. Both contracts merely
provide that the creditors shall keep one-half of the products. Therefore, they are
not contracts of antichresis, as defined by article 1881 of the Civil Code. In a
contract of mortgage, the mortgagor, as a general rule, retains the possession of
the property mortgaged as security for the payment of the sum of money
borrowed from the mortgagee, and pays the latter a certain per cent thereof as
interest on his principal by way of compensation for his sacrifice in depriving
himself of the use of said money and the enjoyment of its fruits, in order to give
them to the mortgagor. Inasmuch as it is not an essential requisite of the contract
of mortgage that the property mortgaged remain in the possession of the
mortgagor (article 1857 of the Civil Code), the latter may deliver said property to
the mortgagee, without thereby altering the nature of the contract. It not being an
essential requisite of said contract of mortgage that the principal of the mortgage
credit bear interest, or that the interest, as compensation for the use of the
principal and enjoyment of its fruits, be in the form of a certain per cent thereof,
such interest may be in the form of fruits of the property mortgage, without the
contract's longing thereby its character of a mortgage contract. It is stipulated in
the contracts under consideration that, during the term thereof and while the total
amount of the loan remains unpaid by the debtor, the salt beds constituted as
security for the payment of said loan, shall be administered by the creditors who
shall destine one-half of the products thereof for the maintenance and support of
the croppers and the improvements of the property, keeping the other half for
themselves. It appears, therefore, that the debtor, instead of paying a certain per
cent of the principal of the loan as compensation for the sacrifice made by the
creditors in depriving themselves of the use of their principal and the enjoyment
of its fruits, so as to give them to the debtor, has delivered to them the property
constituted as a security for the payment of the loan, so that they may administer
and use it, enjoying its fruits, by way of compensation for their said sacrifice in
lending said debtor their money. Therefore, the contracts, which are the subject
matter of this action, have all the essential requsites of a mortgage, enumerated

in article 1857 of the Civil Code and, consequently, are mortgage contracts.
With respects to the second assignment of alleged error, this court, having
arrived at the conclusion that the contracts entered into between the plaintiffs and
the defendant are contracts of mortgage and not of antichresis, finds the same to
be well founded.
This court likewise finds the third assignment of alleged error to be well founded.
From the foregoing considerations, this court is of the opinion and so holds, that
when a contracts of loan with security does not stipulate the payment of interest
but provides for the delivery to the creditor by the debtor of the real property
constituted as security for the payment thereof, in order that the creditor may
administer the same and avail himself of its fruits, without stating that said fruits
are to be applied to the payment of interest, if any, and afterwards to that of the
principal of the credit, the contract shall be considered to be one of mortgage and
not of antichresis.
Wherefore, the appealed judgment is reversed, and the defendant's debt to the
plaintiffs is declared paid and the deeds of security executed by both parties
cancelled, dismissing the counterclaim and cross-complained filed by said
defendant and appellee Damaso Celestial, with costs to the latter. So ordered.
G.R. No. 125055 October 30, 1998
A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS and SPOUSES ROMULO S.A. JAVILLONAR and
ERLINDA P. JAVILLONAR, respondents.
MENDOZA, J.:
This is a petition for review on certiorari of the decision rendered on February 29,
1996 by the Court of Appeals 1 reversing, in toto, the decision of the Regional
Trial Court of Pasig City in Civil Case No. 62290, as well as the appellate court's
resolution of May 7, 1996 denying reconsideration.
Petitioner A. Francisco Realty and Development Corporation granted a loan of
P7.5 Million to private respondents, the spouses Romulo and Erlinda Javillonar,
in consideration of which the latter executed the following documents: (a) a
promissory note, dated November 27, 1991, stating an interest charge of 4% per
month for six months; (b) a deed of mortgage over realty covered by TCT No.
58748, together with the improvements thereon; and (c) an undated deed of sale
of the mortgaged property in favor of the mortgagee, petitioner A. Francisco
Realty. 2
The interest on the said loan was to be paid in four installments: half of the total
amount agreed upon (P900,000.00) to be paid in advance through a deduction
from the proceeds of the loan, while the balance to be paid monthly by means of
checks post-dated March 27, April 27, and May 27, 1992. The promissory note
expressly provided that upon "failure of the MORTGAGOR (private respondents)
to pay the interest without prior arrangement with the MORTGAGEE (petitioner),
full possession of the property will be transferred and the deed of sale will be
registered. 3 For this purpose, the owner's duplicate of TCT No. 58748 was

delivered to petitioner A. Francisco Realty.

Petitioner claims that private respondents failed to pay the interest and, as a
consequence, it registered the sale of the land in its favor on February 21, 1992.
As a result, TCT No. 58748 was cancelled and in lieu thereof TCT No. PT-85569
was issued in the name of petitioner A. Francisco Realty. 4
Private respondents subsequently obtained an additional loan of P2.5 Million
from petitioner on March 13, 1992 for which they signed a promissory note which
reads:
PROMISSORY NOTE
For value received I promise to pay A. FRANCISCO REALTY AND
DEVELOPMENT CORPORATION, the additional sum of Two Million Five
Hundred Thousand Pesos (P2,500,000.00) on or before April 27, 1992, with
interest at the rate of four percent (4%) a month until fully paid and if after the
said date this note and/or the other promissory note of P7.5 Million remains
unpaid and/or unsettled, without any need for prior demand or notification, I
promise to vacate voluntarily and willfully and/or allow A.FRANCISCO REALTY
AND DEVELOPMENT CORPORATION to appropriate and occupy for their
exclusive use the real property located at 56 Dragonfly, Valle Verde VI, Pasig,
Metro Manila. 5
Petitioner demanded possession of the mortgaged realty and the payment of 4%
monthly interest from May 1992, plus surcharges. As respondent spouses
refused to vacate, petitioner filed the present action for possession before the
Regional Trial Court in Pasig City. 6
In their answer, respondents admitted liability on the loan but alleged that it was
not their intent to sell the realty as the undated deed of sale was executed by
them merely as an additional security for the payment of their loan. Furthermore,
they claimed that they were not notified of the registration of the sale in favor of
petitioner A. Francisco Realty and that there was no interest then unpaid as they
had in fact been paying interest even subsequent to the registration of the sale.
As an alternative defense, respondents contended that the complaint was
actually for ejectment and, therefore, the Regional Trial Court had no jurisdiction
to try the case. As counterclaim, respondents sought the cancellation of TCT No.
PT-85569 as secured by petitioner and the issuance of a new title evidencing
their ownership of the property. 7
On December 19, 1992, the Regional Trial Court rendered a decision, the
dispositive portion of which reads as follows:
WHEREFORE, prescinding from the foregoing considerations, judgment is
hereby rendered declaring as legal and valid, the right of ownership of A.
Francisco Realty Find Development Corporation, over the property subject of this
case and now registered in its name as owner thereof, under TCT No. 85569 of
the Register of Deeds of Rizal, situated at No. 56 Dragonfly Street, Valle Verde
VI, Pasig, Metro Manila.
Consequently, defendants are hereby ordered to cease and desist from further
committing acts of dispossession or from withholding possession from plaintiff of
the said property as herein described and specified.
Claim for damages in all its forms, however, including attorney's fees, are hereby

denied, no competent proofs having been adduced on record, in support thereof.

8

Respondent spouses appealed to the Court of Appeals which reversed the

decision of the trial court and dismissed the complaint against them. The
appellate court ruled that the Regional Trial Court had no jurisdiction over the
case because it was actually an action for unlawful detainer which is exclusively
cognizable by municipal trial courts. Furthermore, it ruled that, even presuming
jurisdiction of the trial court, the deed of sale was void for being in fact a pactum
commissorium which is prohibited by Art. 2088 of the Civil Code.
Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of
Appeals denied the motion in its resolution, dated May 7, 1996. Hence, this
petition for review on certiorari raising the following issues:
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE
REGIONAL TRIAL COURT HAD NO JURISDICTION OVER THE COMPLAINT
FILED BY THE PETITIONER.
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE
CONTRACTUAL DOCUMENTS SUBJECT OF THE INSTANT CASE ARE
CONSTITUTIVE OF PACTUM COMMISSORIUM AS DEFINED UNDER
ARTICLE 2088 OF THE CIVIL CODE OF THE PHILIPPINES.
On the first issue, the appellate court stated:
Ostensibly, the cause of action in the complaint indicates a case for unlawful
detainer, as contra-distinguished from accion publiciana. As contemplated by
Rule 70 of the Rules of Court, an action for unlawful detainer which falls under
the exclusive jurisdiction of the Metropolitan or Municipal Trial Courts, is defined
as withholding from by a person from another for not more than one year, the
possession of the land or building to which the latter is entitled after the
expiration or termination of the supposed rights to hold possession by virtue of a
contract, express or implied. (Tenorio vs. Gamboa, 81 Phil. 54; Dikit vs.
Dicaciano, 89 Phil. 44). If no action is initiated for forcible entry or unlawful
detainer within the expiration of the 1 year period, the case may still be filed
under the plenary action to recover possession by accion publiciana before the
Court of First Instance (now the Regional Trial Court) (Medina vs. Valdellon, 63
SCRA 278). In plain language, the case at bar is a legitimate ejectment case filed
within the 1 year period from the jurisdictional demand to vacate. Thus, the
Regional Trial Court has no jurisdiction over the case. Accordingly, under Section
33 of B.P. Blg. 129 Municipal Trial Courts are vested with the exclusive original
jurisdiction over forcible entry and unlawful detainer case. (Sen Po Ek Marketing
Corp. vs. CA, 212 SCRA 154 [1990]) 9
We think the appellate court is in error. What really distinguishes an action for
unlawful detainer from a possessory action (accion publiciana) and from a
reivindicatory action (accion reivindicatoria) is that the first is limited to the
question of possession de facto.
An unlawful detainer suit (accion interdictal) together with forcible entry are the
two forms of an ejectment suit that may be filed to recover possession of real
property. Aside from the summary action of ejectment, accion publiciana or the
plenary action to recover the right of possession and accion reivindicatoria or the

action to recover ownership which includes recovery of possession, make up the

three kinds of actions to judicially recover possession.
Illegal detainer consists in withholding by a person from another of the
possession of a land or building to which the latter is entitled after the expiration
or termination of the former's right to hold possession by virtue of a contract,
express or implied. An ejectment suit is brought before the proper inferior court to
recover physical possession only or possession de facto and not possession de
jure, where dispossession has lasted for not more than one year. Forcible entry
and unlawful detainer are quieting processes and the one-year time bar to the
suit is in pursuance of the summary nature of the action. The use of summary
procedure in ejectment cases is intended to provide an expeditious means of
protecting actual possession or right to possession of the property. They are not
processes to determine the actual title to an estate. If at all, inferior courts are
empowered to rule on the question of ownership raised by the defendant in such
suits, only to resolve the issue of possession. Its determination on the ownership
issue is, however, not conclusive. 10
The allegations in both the original and the amended complaints of petitioner
before the trial court clearly raise issues involving more than the question of
possession, to wit: (a) the validity of the Transfer of ownership to petitioner; (b)
the alleged new liability of private respondents for P400,000.00 a month from the
time petitioner made its demand on them to vacate; and (c) the alleged
continuing liability of private respondents under both loans to pay interest and
surcharges on such. As petitioner A. Francisco Realty alleged in its amended
complaint:
5. To secure the payment of the sum of 7.5 Million together with the monthly
interest, the defendant spouses agreed to execute a Deed of Mortgage over the
property with the express condition that if and when they fail to pay monthly
interest or any infringement thereof they agreed to convert the mortgage into a
Deed of Absolute Sale in favor of the plaintiff by executing Deed of Sale thereto,
copy of which is hereto attached and incorporated herein as Annex "A";
6. That in order to authorize the Register of Deeds into registering the Absolute
Sale and transfer to the plaintiff, defendant delivered unto the plaintiff the said
Deed of Sale together with the original owner's copy of Transfer Certificate of
Title No. 58748 of the Registry of Rizal, copy of which is hereto attached and
made an integral part herein as Annex "B";
7. That defendant spouses later secured from the plaintiff an additional loan of
P2.5 Million with the same condition as aforementioned with 4% monthly interest;
8. That defendants spouses failed to pay the stipulated monthly interest and as
per agreement of the parties, plaintiff recorded and registered the Absolute Deed
of Sale in its favor on and was issued Transfer Certificate of Title No. PT-85569,
copy of which is hereto attached and incorporated herein as Annex "C";
9. That upon registration and transfer of the Transfer Certificate of Title in the
name of the plaintiff, copy of which is hereto attached and incorporated herein as
Annex "C", plaintiff demanded the surrender of the possession of the abovedescribed parcel of land together with the improvements thereon, but defendants
failed and refused to surrender the same to the plaintiff without justifiable reasons

thereto; Neither did the defendants pay the interest of 4% a month from May,
1992 plus surcharges up to the present;
10. That it was the understanding of the parties that if and when the defendants
shall fail to pay the interest due and that the Deed of Sale be registered in favor
of plaintiff, the defendants shall pay a monthly rental of P400,000.00 a month
until they vacate the premises, and that if they still fail to pay as they are still
failing to pay the amount of P400,000.00 a month as rentals and/or interest, the
plaintiff shall take physical possession of the said property; 11
It is therefore clear from the foregoing that petitioner A. Francisco Realty raised
issues which involved more than a simple claim for the immediate possession of
the subject property. Such issues range across the full scope of rights of the
respective parties under their contractual arrangements. As held in an analogous
case:
The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace
of Hagonoy, Bulacan extended far beyond the issues generally involved in
unlawful detainer suits. The litigants therein did not raise merely the question of
who among them was entitled to the possession of the fishpond of Federico
Suntay. For all judicial purposes, they likewise prayed of the court to rule on their
respective rights under the various contractual documents their respective
deeds of lease, the deed of assignment and the promissory note upon which
they predicate their claims to the possession of the said fishpond. In other words,
they gave the court no alternative but to rule on the validity or nullity of the above
documents. Clearly, the case was converted into the determination of the nature
of the proceedings from a mere detainer suit to one that is "incapable of
pecuniary estimation" and thus beyond the legitimate authority of the Justice of
the Peace Court to rule on. 12
Nor can it be said that the compulsory counterclaim filed by respondent spouses
challenging the title of petitioner A. Francisco Realty was merely a collateral
attack which would bar a ruling here on the validity of the said title.
A counterclaim is considered a complaint, only this time, it is the original
defendant who becomes the plaintiff (Valisno v. Plan, 143 SCRA 502 (1986). It
stands on the same footing and is to be tested by the same rules as if it were an
independent action. Hence, the same rules on jurisdiction in an independent
action apply to a counterclaim (Vivar v. Vivar, 8 SCRA 847 (1963); Calo v. Ajar
International, Inc. v. 22 SCRA 996 (1968); Javier v. Intermediate Appellate Court,
171 SCRA 605 (1989); Quiason, Philippine Courts and Their Jurisdictions, 1993
ed., p. 203). 13
On the second issue, the Court of Appeals held that, even "on the assumption
that the trial court has jurisdiction over the instant case," petitioner's action could
not succeed because the deed of sale on which it was based was void, being in
the nature of a pactum commissorium prohibited by Art. 2088 of the Civil Code
which provides:
Art. 2088. The creditor cannot appropriate the things given by way to pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.
With respect to this question, the ruling of the appellate court should be affirmed.
Petitioner denies, however, that the promissory notes contain a pactum

commissorium. It contends that

What is envisioned by Article 2088 of the Civil Code of the Philippines is a
provision in the deed of mortgage providing for the automatic conveyance of the
mortgaged property in case of the failure of the debtor to pay the loan (Tan v.
West Coast Life Assurance Co., 54 Phil. 361). A pactum commissorium is a
forfeiture clause in a deed of mortgage (Hechanova v. Adil, 144 SCRA 450;
Montevergen v. Court of Appeals, 112 SCRA 641; Report of the Code
Commission, 156).
Thus, before Article 2088 can find application herein, the subject deed of
mortgage must be scrutinized to determine if it contains such a provision giving
the creditor the right "to appropriate the things given by way of mortgage without
following the procedure prescribed by law for the foreclosure of the mortgage"
(Ranjo v. Salmon, 15 Phil. 436). IN SHORT, THE PROSCRIBED STIPULATION
SHOULD BE FOUND IN THE MORTGAGE DEED ITSELF. 14
The contention is patently without merit. To sustain the theory of petitioner would
be to allow a subversion of the prohibition in Art. 2088.
In Nakpil v. Intermediate Appellate Court, 15 which involved the violation of a
constructive trust, no deed of mortgage was expressly executed between the
parties in that case: Nevertheless, this Court ruled that an agreement whereby
property held in trust was ceded to the trustee upon failure of the beneficiary to
pay his debt to the former as secured by the said property was void for being a
pactum commissorium. Itwas there held:
The arrangement entered into between the parties, whereby Pulong Maulap was
to be "considered sold to him (respondent) . . ." in case petitioner fails to
reimburse Valdes, must then be construed as tantamount to a pactum
commissorium which is expressly prohibited by Art. 2088 of the Civil Code. For,
there was to be automatic appropriation of the property by Valdez in the event of
failure of petitioner to pay the value of the advances. Thus, contrary to
respondent's manifestations, all the elements of a pactum commissorium were
present: there was a creditor-debtor relationship between the parties; the
property was used as security for the loan; and, there was automatic
appropriation by respondent of Pulong Maulap in case of default of petitioner. 16
Similarly, the Court has struck down such stipulations as contained in deeds of
sale purporting to be pacto de retro sales but found actually to be equitable
mortgages.
It has been consistently held that the presence of even one of the circumstances
enumerated in Art. 1602 of the New Civil Code is sufficient to declare a contract
of sale with right to repurchase an equitable mortgage. This is so because pacto
de retro sales with the stringent and onerous effects that accompany them are
not favored. In case of doubt, a contract purporting to be a sale with the right to
repurchase shall be construed as an equitable mortgage.
Petitioner, to prove her claim, cannot rely on the stipulation in the contract
providing that complete and absolute title shall be vested on the vendee should
the vendors fail to redeem the property on the specified date. Such stipulation
that the ownership of the property would automatically pass to the vendee in
case no redemption was effected within the stipulated period is void for being a

pactum commissorium which enables the mortgagee to acquire ownership of the

mortgaged property without need of foreclosure. Its insertion in the contract is an
avowal of the intention to mortgage rather that to sell the property. 17
Indeed, in Reyes v. Sierra 18 this Court categorically ruled that a mortgagee's
mere act of registering the mortgaged property in his own name upon the
mortgagor's failure to redeem the property amounted to the exercise of the
privilege of a mortgagee in a pactum commissorium.
Obviously, from the nature of the transaction, applicant's a predecessor-ininterest is a mere mortgagee, and ownership of the thing mortgaged is retained
by Basilia Beltran, the mortgagor. The mortgagee, however, may recover the
loan, although the mortgage document evidencing the loan was nonregistrable
being a purely private instrument. Failure of mortgagor to redeem the property
does not automatically vest ownership of the property to the mortgagee, which
would grant the latter the right to appropriate the thing mortgaged or dispose of it.
This violates the provision of Article 2088 of the New Civil Code, which reads:
The creditor cannot appropriate the things given by way of pledge or mortgage,
or dispose by them. Any stipulation to the contrary is null and void.
The act of applicant in registering the property in his own name upon mortgagor's
failure to redeem the property would to a pactum commissorium which is against
good morals and public policy. 19
Thus, in the case at bar, the stipulations in the promissory notes providing that,
upon failure of respondent spouses to pay interest, ownership of the property
would be automatically transferred to petitioner A. Francisco Realty and the deed
of sale in its favor would be registered, are in substance a pactum
commissorium. They embody the two elements of pactum commissorium as laid
down in Uy Tong v. Court of Appeals, 20 to wit:
The prohibition on pactum commissorium stipulations is provided for by Article
2088 of the Civil Code:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgagee, or dispose of the same. Any stipulation to the contrary is null and
void.
The aforequoted provision furnishes the two elements for pactum commissorium
to exist: (1) that there should be a pledge or mortgage wherein a property is
pledged or mortgaged by way of security for the payment of the principal
obligation; and (2) that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or mortgaged in the event of
non-payment of the principal obligation within the stipulated period. 21
The subject transaction being void, the registration of the deed of sale, by virtue
of which petitioner A. Francisco Realty was able to obtain TCT No. PT-85569
covering the subject lot, must also be declared void, as prayed for by
respondents in their counterclaim.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it
dismissed petitioner's complaint against respondent spouses on the ground that
the stipulations in the promissory notes are void for being a pactum
commissorium, but REVERSED insofar as it ruled that the trial court had no
jurisdiction over this case. The Register of Deeds of Pasig City is hereby

ORDERED to CANCEL TCT No. PT-85569 issued to petitioner and ISSUE a new
one in the name of respondent spouses.
SO ORDERED.
G.R. No. 134330
March 1, 2001
SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, petitioners,
vs.
PHILIPPINE NATIONAL BANK and SPOUSES MARCOS and ARSENIA
ESLABON, respondents.
DE LEON, JR., J.:
Before us is a petition for review on certiorari of the Decision 1 and Resolution2 in
CA-G.R. No. 53865 of the Court of Appeals 3 dated May 21, 1998 and June 29,
1998, respectively, which modified the Decision 4 dated April 30, 1996 of the
Regional Trial Court of Roxas City, Branch 19 in a suit 5 for Declaration of Nullity
of the Contract of Mortgage.
The facts are as follows:
Eduarda Belo owned an agricultural land with an area of six hundred sixty one
thousand two hundred eighty eight (661,288) square meters located in Timpas,
Panitan, Capiz, covered and described in Transfer Certificate of Title (TCT for
brevity) No. T-7493. She leased a portion of the said tract of land to respondents
spouses Marcos and Arsenia Eslabon in connection with the said spouses' sugar
plantation business. The lease contract was effective for a period of seven (7)
years at the rental rate of Seven Thousand Pesos (P7,000.00) per year.
To finance their business venture, respondents spouses Eslabon obtained a loan
from respondent Philippine National Bank (PNB for brevity) secured by a real
estate mortgage on their own four (4) residential houses located in Roxas City,
as well as on the agricultural land owned by Eduarda Belo. The assent of
Eduarda Belo to the mortgage was acquired through a special power of attorney
which she executed in favor of respondent Marcos Eslabon on June 15, 1982.
Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation,
extrajudicial foreclosure proceedings against the mortgaged properties were
instituted by respondent PNB. At the auction sale on June 10, 1991, respondent
PNB was the highest bidder of the foreclosed properties at Four Hundred Forty
Seven Thousand Six Hundred Thirty Two Pesos (P447,632.00).
In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of
the sale at public auction of her agricultural land on June 10, 1991 as well as the
registration of the Certificate of Sheriff's Sale in its favor on July 1, 1991, and the
one-year period to redeem the land.
Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses
Enrique and Florencia Belo under a deed of absolute sale of proprietary and
redemption rights.
Before the expiration of the redemption period, petitioners spouses Belo
tendered payment for the redemption of the agricultural land in the amount of
Four Hundred Eighty Four Thousand Four Hundred Eighty Two Pesos and Ninety
Six Centavos (P484,482.96), which includes the bid price of respondent PNB,
plus interest and expenses as provided under Act No. 3135.

However, respondent PNB rejected the tender of payment of petitioners spouses

Belo. It contended that the redemption price should be the total claim of the bank
on the date of the auction sale and custody of property plus charges accrued and
interests amounting to Two Million Seven Hundred Seventy Nine Thousand Nine
Hundred Seventy Eight and Seventy Two Centavos (P2,779,978.72). 6 Petitioners
spouses disagreed and refused to pay the said total claim of respondent PNB.
On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court
of Roxas City, Civil Case No. V-6182 which is an action for declaration of nullity
of mortgage, with an alternative cause of action, in the event that the
accommodation mortgage be held to be valid, to compel respondent PNB to
accept the redemption price tendered by petitioners spouses Belo which is based
on the winning bid price of respondent PNB in the extrajudicial foreclosure in the
amount of Four Hundred Forty Seven Thousand Six Hundred Thirty Two Pesos
(P447,632.00) plus interest and expenses.
In its Answer, respondent PNB raised, among others, the following defenses, to
wit:
xxx
xxx
xxx
77. In all loan contracts granted and mortgage contracts executed under the
1975 Revised Charter (PD 694, as amended), the proper rate of interest to be
charged during the redemption period is the rate specified in the mortgage
contract based on Sec. 25 7 of PD 694 and the mortgage contract which
incorporates by reference the provisions of the PNB Charters. Additionally, under
Sec. 78 of the General Banking Act (RA No. 337, as amended) made applicable
to PNB pursuant to Sec. 38 of PD No. 694, the rate of interest collectible during
the redemption period is the rate specified in the mortgage contract.
78. Since plaintiffs failed to tender and pay the required amount for redemption of
the property under the provisions of the General Banking Act, no redemption was
validly effected;8
xxx
xxx
xxx
After trial on the merits, the trial court rendered its Decision dated April 30, 1996
granting the alternative cause of action of spouses Belo, the decretal portion of
which reads:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor
of plaintiffs Spouses Enrique M. Belo and Florencia G. Belo and against
defendants Philippine National Bank and Spouses Marcos and Arsenia Eslabon:
1. Making the injunction issued by the court permanent, insofar as the property of
Eduarda Belo covered by Transfer Certificate of Title No. T-7493 is concerned;
2. Ordering defendant Philippine National Bank to allow plaintiff Enrique M. Belo
to redeem only Eduarda Belo's property situated in Brgy. Timpas, Panitan, Capiz,
and covered by Transfer Certificate of Title No. T-7493 by paying only its bid
price of P447,632.00, plus interest and other charges provided for in Section 30,
Rule 39 of the Rules of Court, less the loan value, as originally appraised by said
defendant Bank, of the foreclosed four (4) residential lots of defendants Spouses
Marcos and Arsenia Eslabon; and
3. Dismissing for lack of merit the respective counterclaims of defendants
Philippine National Bank and spouses Marcos and Arsenia Eslabon.

With costs against defendants.

SO ORDERED.9
Dissatisfied with the foregoing judgment of the trial court, respondent PNB
appealed to the Court of Appeals. In its Decision rendered on May 21, 1998, the
appellate court, while upholding the decision of the trial court on the validity of the
real estate mortgage on Eduarda Belo's property, the extrajudicial foreclosure
and the public auction sale, modified the trial court's finding on the appropriate
redemption price by ruling that the petitioners spouses Belo should pay the entire
amount due to PNB under the mortgage deed at the time of the foreclosure sale
plus interest, costs and expenses.10
Petitioners spouses Belo sought reconsideration 11 of the said Decision but the
same was denied by the appellate court in its Resolution promulgated on June
29, 1998, ratiocinating, thus:
Once more, the Court shies away from declaring the nullity of the mortgage
contract obligating Eduarda Belo as co-mortgagor, considering that it has not
been sufficiently established that Eduarda Belo's assent to the special power of
attorney and to the mortgage contract was tainted by any vitiating cause.
Moreover, in tendering an offer to redeem the property (Exhibit "20", p. 602
Record) after its extrajudicial foreclosure, she has thereby admitted the validity of
the mortgage, as well as the transactions leading to its inception. Eduarda Belo,
and the appellees as mere assignees of Eduarda's right to redeem the property,
are therefore estopped from questioning the efficacy of the mortgage and its
subsequent foreclosure.12
The appellate court further declared that petitioners spouses Belo are obligated
to pay the total bank's claim representing the redemption price for the foreclosed
properties, as provided by Section 25 of P.D No. 694, holding that:
On the other hand, the court's ruling that the appellees, being the assignee of the
right of repurchase of Eduarda Belo, were bound by the redemption price as
provided by Section 25 of P.D. 694, stands. The attack on the constitutionality of
Section 25 of P.D. 694 cannot be allowed, as the High Court, in previous
instances, (Dulay v. Carriaga, 123 SCRA 794 [1983]; Philippine National Bank v.
Remigio, 231 SCRA 362 [1994]) has regarded the said provision of law with
respect, using the same in determining the proper redemption price in
foreclosure of mortgages involving the PNB as mortgagee.
The terms of the said provision are quite clear and leave no room for
qualification, as the appellees would have us rule. The said rule, as amended,
makes no specific distinction as to assignees or transferees of the mortgagor of
his redemptive right. In the absence of such distinction by the law, the Court
cannot make a distinction. As admitted assignees of Eduarda Belo's right of
redemption, the appellees succeed to the precise right of Eduarda including all
conditions attendant to such right.
Moreover, the indivisible character of a contract of mortgage (Article 2089, Civil
Code) will extend to apply in the redemption stage of the mortgage.
As we have previously remarked, Section 25 of P.D. 694 is a sanctioned
deviation from the rule embodied in Rule 39, Section 30 of the Rules of Court,
and is a special protection given to government lending institutions, particularly,

the Philippine National Bank. (Dulay v. Carriaga, supra)13

Hence, the instant petition.
During the oral argument, petitioners, through counsel, Atty. Enrique M. Belo,
agreed to limit the assignment of errors to the following:
xxx
xxx
xxx
II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL
COURT ON THE BASIS OF THE ASSIGNMENT OF ERRORS ALLEGED BY
PETITIONERS IN THEIR BRIEF:
(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY EDUARDA
BELO IN FAVOR OF RESPONDENT ESLABON WAS NULL AND VOID:
(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY RESPONDENT
MARCOS ESLABON UNDER SAID INVALID SPECIAL POWER OF ATTORNEY
IS ALSO NULL AND VOID;
III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT
PNB ACTED IN BAD FAITH AND CONNIVED WITH RESPONDENTSDEBTORS ESLABONS TO OBTAIN THE CONSENT OF EDUARDA BELO,
PETITIONERS' PREDECESSOR, THROUGH FRAUD.
IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT
PNB WAS NEGLIGENT IN THE PERFORMANCE OF ITS DUTY AS
COMMERCIAL MONEY LENDER.
V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA BELO,
PETITIONERS' PREDECESSOR, HAD WAIVED THE RIGHT TO QUESTION
THE LEGALITY OF THE ACCOMMODATION MORTGAGE.
VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT BY
HOLDING THAT ON REDEMPTION, PETITIONERS SHOULD PAY THE
ENTIRE CLAIM OF PNB AGAINST RESPONDENTS-DEBTORS ESLABONS.
VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT SHOULD
PETITIONERS DECIDE TO PAY THE ENTIRE CLAIM OF RESPONDENT PNB
AGAINST THE RESPONDENTS-DEBTORS ESLABONS, PETITIONERS SHALL
SUCCEED TO ALL THE RIGHTS OF RESPONDENT PNB WITH THE RIGHT
TO REIMBURSEMENT BY RESPONDENTS-DEBTORS ESLABONS.
VIII. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT SHOULD
PETITIONERS DECIDE NOT TO EXERCISE THEIR RIGHT OF REDEMPTION,
PETITIONERS SHALL BE ENTITLED TO THE VALUE OF THEIR
IMPROVEMENTS MADE IN GOOD FAITH AND FOR THE REAL ESTATE TAX
DUE PRIOR TO THE FORECLOSURE SALE.14
Petitioners challenge the appreciation of the facts of the appellate court, pointing
out the following facts which the appellate court allegedly failed to fully interpret
and appreciate:
1. That respondent PNB in its Answer admitted that Eduarda Belo was merely an
accommodation mortgagor and that she has no personal liability to respondent
PNB.
xxx
xxx
xxx
2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. "D") used to
bind Eduarda Belo as accommodation mortgagor authorized the agent Eslabons
to borrow and mortgage her agricultural land for her (Eduarda Belo) use and

benefit. Instead, said PNB SPA Form No. 74 was used by debtors Eslabons and
PNB to bind Eduarda Belo as accommodation mortgagor for the crop loan
extended by PNB to the Eslabons.
3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo in blank,
without specifying the amount of the loan to be granted by respondent PNB to
the respondents-debtors Eslabons upon assurance by the PNB manager that the
SPA was merely a formality and that the bank will not lend beyond the value of
the four (4) [Roxas City] residential lots located in Roxas City mortgaged by
respondents-debtors Eslabons (see Exhibit "D"; Eduarda Belo's deposition,
Exhibit "V", pp. 7 to 24).
4. That PNB did not advise Eduarda Belo of the amount of the loan granted to
the Eslabons, did not make demands upon her for payment, did not advise her of
Eslabons' default. The pre-auction sale notice intended for Eduarda Belo was
addressed and delivered to the address of the debtors Eslabons residence at
Baybay Roxas City, not to the Belo Family House which is the residence of
Eduarda Belo located in the heart of Roxas City. The trial court stated in its
Decision that the PNB witness Miss Ignacio "admitted that through oversight, no
demand letters were sent to Eduarda Belo, the accommodation mortgagor" (see
p. 7, RTC Decision).
xxx
xxx
xxx
5. As an agreed fact stated in the Pre-Trial Order of the Regional Trial Court, the
loan which was unpaid at the time of the extrajudicial foreclosure sale was only
P789,897.00.
xxx
xxx
xxx
6. That herein petitioners Spouses Belo in making the tender to redeem Eduarda
Belo's agricultural land expressly reserved the right to question the legality of the
accommodation mortgage in the event that said tender to redeem was rejected
by PNB (Exh. "I").15
Petitioners present basically two (2) issues before this Court. First, whether or
not the Special Power of Attorney (SPA for brevity), the real estate mortgage
contract, the foreclosure proceedings and the subsequent auction sale involving
Eduarda Belo's property are valid. Second, assuming they are valid, whether or
not the petitioners are required to pay, as redemption price, the entire claim of
respondent PNB in the amount of P2,779,978.72 as of the date of the public
auction sale on June 10, 1991.
On the first issue, the petitioners contend that the SPA is void for the reason that
the amount for which the spouses Eslabon are authorized to borrow from
respondent bank was unlimited; and that, while the SPA states that the amount
loaned is for the benefit of Eduarda Belo, it was in fact used for the benefit of the
respondents spouses Eslabon. For the said reasons petitioners contend that the
mortgage contract lacks valid consent, object and consideration; that it violates a
concept in the law of agency which provides that the contract entered into by the
agent must always be for the benefit of the principal; and, that it does not express
the true intent of the parties.
The subject SPA, the real estate mortgage contract, the foreclosure proceedings
and the subsequent auction sale of Eduarda Belo's property are valid and legal.

First, the validity of the SPA and the mortgage contract cannot anymore be
assailed due to petitioners' failure to appeal the same after the trial court
rendered its decision affirming their validity. After the trial court rendered its
decision granting petitioners their alternative cause of action, i.e., that they can
redeem the subject property on the basis of the winning bid price of respondent
PNB, petitioners did not anymore bother to appeal that decision on their first
cause of action. If they felt aggrieved by the trial court's decision upholding the
validity of the said two (2) documents, then they should have also partially
appealed therefrom but they did not. It is an abuse of legal remedies for
petitioners to belatedly pursue a claim that was settled with finality due to their
own shortcoming. As held in Caliguia v. National Labor Relations Commission,16
where a party did not appeal from the Labor Arbiter's decision denying claims for
actual, moral and exemplary damages and instead moved for immediate
execution, the decision then became final as to him and by asking for its
execution, he was estopped from relitigating his claims for damages.
Second, well-entrenched is the rule that the findings of trial courts which are
factual in nature, especially when affirmed by the Court of Appeals, deserve to
be respected and affirmed by the Supreme Court, provided it is supported by
substantial evidence. 17 The finding of facts of the trial court to the effect that
Eduarda Belo was not induced by the manager of respondent PNB but instead
that she freely consented to the execution of the SPA is given the highest respect
as it was affirmed by the appellate court. In the case at bar, the burden of proof
was on the petitioners to prove or show that there was alleged inducement and
misrepresentation by the manager of respondent PNB and the spouses Eslabon.
Their allegation that Eduarda Belo only agreed to sign the SPA after she was
assured that the spouses Eslabon would not borrow more than the value of their
own four (4) residential lots in Roxas City was properly objected to by respondent
PNB.18 Also their contention that Eduarda Belo signed the SPA in blank was
properly objected to by respondent PNB on the ground that the best evidence
was the SPA. There is also no proof to sustain petitioners' allegation that
respondent PNB acted in bad faith and connived with the debtors, respondents
spouses Eslabon, to obtain Eduarda Belo's consent to the mortgage through
fraud. Eduarda Belo very well knew that the respondents spouses Eslabon would
use her property as additional mortgage collateral for loans inasmuch as the
mortgage contract states that "the consideration of this mortgage is hereby
initially fixed at P229,000.00."19 The mortgage contract sufficiently apprises
Eduarda Belo that the respondents spouses Eslabon can apply for more loans
with her property as continuing additional security. If she found the said provision
questionable, she should have complained immediately. Instead, almost ten (10)
years had passed before she and the petitioners sought the annulment of the
said contracts.
Third, after having gone through the records, this Court finds that the courts a
quo did not err in holding that the SPA executed by Eduarda Belo in favor of the
respondents spouses Eslabon and the Real Estate Mortgage executed by the
respondents spouses in favor of respondent PNB are valid. It is stipulated in
paragraph three (3) of the SPA that Eduarda Belo appointed the Eslabon

spouses "to make, sign, execute and deliver any contract of mortgage or any
other documents of whatever nature or kind . . . which may be necessary or
proper in connection with the loan herein mentioned, or with any loan which my
attorney-in-fact may contract personally in his own name . . . 20 This portion of the
SPA is quite relevant to the case at bar. This was the main reason why the SPA
was executed in the first place inasmuch as Eduarda Belo consented to have her
land mortgaged for the benefit of the respondents spouses Eslabon. The SPA
was not meant to make her a co-obligor to the principal contract of loan between
respondent PNB, as lender, and the spouses Eslabon, as borrowers. The
accommodation real estate mortgage over her property, which was executed in
favor of respondent PNB by the respondents spouses Eslabon, in their capacity
as her attorneys-in-fact by virtue of her SPA, is merely an accessory contract.
Eduarda Belo consented to be an accommodation mortgagor in the sense that
she signed the SPA to authorize respondents spouses Eslabons to execute a
mortgage on her land. Petitioners themselves even acknowledged that the
relation created by the SPA and the mortgage contract was merely that of
mortgagor-mortgagee relationship. The SPA form of the PNB was utilized to
authorize the spouses Eslabon to mortgage Eduarda Belo's land as additional
collateral of the Eslabon spouses' loan from respondent PNB. Thus, the
petitioners' contention that the SPA is void is untenable. Besides, Eduarda Belo
benefited, in signing the SPA, in the sense that she was able to collect the rentals
on her leased property from the Eslabons.21
An accommodation mortgage is not necessarily void simply because the
accommodation mortgagor did not benefit from the same. The validity of an
accommodation mortgage is allowed under Article 2085 of the New Civil Code
which provides that "(t)hird persons who are not parties to the principal obligation
may secure the latter by pledging or mortgaging their own property." An
accommodation mortgagor, ordinarily, is not himself a recipient of the loan,
otherwise that would be contrary to his designation as such. It is not always
necessary that the accommodation mortgagor be appraised beforehand of the
entire amount of the loan nor should it first be determined before the execution of
the SPA for it has been held that:
"(real) mortgages given to secure future advancements are valid and legal
contracts; that the amounts named as consideration in said contract do not limit
the amount for which the mortgage may stand as security if from the four corners
of the instrument the intent to secure future and other indebtedness can be
gathered. A mortgage given to secure advancements is a continuing security and
is not discharged by repayment of the amount named in the mortgage, until the
full amount of the advancements are paid." 22
Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed
to respondent PNB manifesting her intent to redeem the property is a waiver of
her right to question the validity of the SPA and the mortgage contract as well as
the foreclosure and the sale of her subject property. Petitioners claim that her
letter was not an offer to redeem as it was merely a declaration of her intention to
redeem. Respondent PNB's answer to her letter would have carried certain legal
effects. Had respondent PNB accepted her letter-offer, it would have surely

bound the bank into accepting the redemption price offered by Eduarda Belo. If it
was her opinion that her SPA and the mortgage contract were null and void, she
would not have manifested her intent to redeem but instead questioned their
validity before a court of justice. Her offer was a recognition on her part that the
said contracts are valid and produced legal effects. Inasmuch as Eduarda Belo is
estopped from questioning the validity of the contracts, her assignees who are
the petitioners in the instant case, are likewise estopped from disputing the
validity of her SPA, the accommodation real estate mortgage contract, the
foreclosure proceedings, the auction sale and the Sheriff's Certificate of Sale.
The second issue pertains to the applicable law on redemption to the case at bar.
Respondent PNB maintains that Section 25 of Presidential Decree No. 694
should apply, thus:
SECTION 25. Right of redemption of foreclosed property Right of possession
during redemption period. Within one year from the registration of the
foreclosure sale of real estate, the mortgagor shall have the right to redeem the
property by paying all claims of the Bank against him on the date of the sale
including all the costs and other expenses incurred by reason of the foreclosure
sale and custody of the property as well as charges and accrued interests. 23
Additionally, respondent bank seeks the application to the case at bar of Section
78 of the General Banking Act, as amended by P.D. No. 1828, which states that

. . . In the event of foreclosure, whether judicially or extrajudicially, of any

mortgage on real estate which is security for any loan granted before the
passage of this Act or under the provisions of this Act, the mortgagor or debtor
whose real property has been sold at public auction, judicially or extrajudicially,
for the full or partial payment of an obligation to any bank, banking or credit
institution, within the purview of this Act shall have the right, within one year after
the sale of the real estate as a result of the foreclosure of the respective
mortgage, to redeem the property by paying the amount fixed by the court in the
order of execution, or the amount due under the mortgage deed, as the case
may be, with interest thereon at the rate specified in the mortgage, and all the
costs, and judicial and other expenses incurred by the bank or institution
concerned by reason of the execution and sale and as a result of the custody of
said property less the income received from the property.24
On the other hand, petitioners assert that only the amount of the winning bidder's
purchase together with the interest thereon and on all other related expenses
should be paid as redemption price in accordance with Section 6 of Act No. 3135
which provides that:
SECTION 6. In all cases in which an extrajudicial sale is made under the special
power hereinbefore referred to, the debtor, his successor in interest or any
judicial creditor or judgment creditor of said debtor, or any person having a lien
on the property subsequent to the mortgage or deed of trust under which the
property is sold, may redeem the same at any time within the term of one year
from and after the date of the sale; and such redemption shall be governed by
the provisions of sections four hundred and sixty-four to four hundred and sixty
six, inclusive, of the Code of Civil Procedure 25 , in so far as these are not

inconsistent with the provisions of this Act.

Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that:
SECTION 28. Time and manner of, and amounts payable on, successive
redemptions; notice to be given and filed. The judgment obligor, or
redemptioner, may redeem the property from the purchaser, at any time within
one (1) year from the date of the registration of the certificate of sale, by paying
the purchaser the amount of his purchase, within one per centum per month
interest thereon in addition, up to the time of redemption, together with the
amount of any assessments or taxes which the purchaser may have paid thereon
after purchase, and interest on such last named amount at the same rate; and if
the purchaser be also a creditor having a prior lien to that of the redemptioner,
other than the judgment under which such purchase was made, the amount of
such other lien, with interest. (Italic supplied)
xxx
xxx
xxx
This Court finds the petitioners' position on that issue to be meritorious.
There is no doubt that Eduarda Belo, assignor of the petitioners, is an
accommodation mortgagor. The Pre-trial Order and respondent PNB's brief
contain a declaration of this fact. The dispute between the parties is whether
Section 25 of P.D. No. 694 applies to an accommodation mortgagor, or her
assignees. The said legal provision does not make a distinction between a
debtor-mortgagor and an accommodation mortgagor as it uses the broad term
"mortgagor". The appellate court thus ruled that the provision applies even to an
accommodation mortgagor inasmuch as the law does not make any distinction.
We disagree. Where a word used in a statute has both a restricted and a general
meaning, the general must prevail over the restricted unless the nature of the
subject matter or the context in which it is employed clearly indicates that the
limited sense is intended.26 It is presumed that the legislature intended
exceptions to its language which would avoid absurd consequences of this
character.27 In the case at bar, the qualification to the general rule applies. The
same provision of Section 25 of P.D. No. 694 provides that "the mortgagor shall
have the right to redeem the property by paying all claims of the Bank against
him". From said provision can be deduced that the mortgagor referred to by that
law is one from whom the bank has a claim in the form of outstanding or unpaid
loan; he is also called a borrower or debtor-mortgagor. On the other hand,
respondent PNB has no claim against accommodation mortgagor Eduarda Belo
inasmuch as she only mortgaged her property to accommodate the Eslabon
spouses who are the loan borrowers of the PNB. The principal contract is the
contract of loan between the Eslabon spouses, as borrowers/debtors, and the
PNB as lender. The accommodation real estate mortgage (which secures the
loan) is only an accessory contract. It is our view and we hold that the term
"mortgagor" in Section 25 of P.D. No. 694 pertains only to a debtor-mortgagor
and not to an accommodation mortgagor.
It is well settled that courts are not to give a statute a meaning that would lead to
absurdities. If the words of a statute are susceptible of more than one meaning,
the absurdity of the result of one construction is a strong argument against its
adoption, and in favor of such sensible interpretation. 28 We test a law by its result.

A law should not be interpreted so as not to cause an injustice. There are laws
which are generally valid but may seem arbitrary when applied in a particular
case because of its peculiar circumstances. We are not bound to apply them in
slavish obedience to their language.29
The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is
unfair and unjust to accommodation mortgagors and their assignees. Forcing an
accommodation mortgagor like Eduarda Belo to pay for what the principal
debtors (Eslabon spouses) owe to respondent bank is to punish her for the
accommodation and generosity she accorded to the Eslabon spouses who were
then hard pressed for additional collateral needed to secure their bank loan.
Respondents PNB and spouses Eslabons very well knew that she merely
consented to be a mere accommodation mortgagor.
The circumstances of the case at bar also provide for ample reason why
petitioners cannot be made to pay the entire liability of the principal debtors,
Eslabon spouses, to respondent PNB.
The trial court found that respondent PNB's application for extrajudicial
foreclosure and public auction sale of Eduarda Belo's mortgaged property 30 was
filed under Act No. 3135, as amended by P.D. No. 385. The notice of extrajudicial
sale, the Certificate of Sheriff's Sale, and the letter it sent to Eduarda Belo did not
mention P. D. No. 694 as the basis for redemption. As aptly ruled by the trial
court
In fairness to these mortgagors, their successors-in-interest, or innocent
purchasers for value of their redemption rights, PNB should have at least advised
them that redemption would be governed by its Revised Charter or PD 69, and
not by Act 3135 and the Rules of Court, as commonly practiced . . . This practice
of defendant Bank is manifestly unfair and unjust to these redemptioners who are
caught by surprise and usually taken aback by the enormous claims of the Bank
not shown in the Notice of Extrajudicial Sale or the Certificate of Sheriff's Sale as
in this case.31
Moreover, the mortgage contract explicitly provides that ". . . the mortgagee may
immediately foreclose this mortgage judicially in accordance with the Rules of
Court or extrajudicially in accordance with Act No. 3135, as amended and
Presidential Decree No. 385 . . . 32 Since the mortgage contract in this case is in
the nature of a contract of adhesion as it was prepared solely by respondent, it
has to be interpreted in favor of petitioners. The respondent bank however tries
to renege on this contractual commitment by seeking refuge in the 1989 case of
Sy v. Court of Appeals33 wherein this Court ruled that the redemption price is
equal to the total amount of indebtedness to the bank's claim inasmuch as
Section 78 of the General Banking Act is an amendment to Section 6 of Act No.
3135, despite the fact that the extrajudicial foreclosure procedure followed by the
PNB was explicitly under or in accordance with Act No. 3135.
In the 1996 case of China Banking Corporation v. Court of Appeals,34 where the
parties also stipulated that Act No. 3135 is the controlling law in case of
foreclosure, this Court ruled that;
By invoking the said Act, there is no doubt that it must "govern the manner in
which the sale and redemption shall be effected." Clearly, the fundamental

principle that contracts are respected as the law between the contracting parties
finds application in the present case, specially where they are not contrary to law,
morals, good customs and public policy.35
More importantly, the ruling pronounced in Sy v. Court of Appeals and other
cases,36 that the General Banking Act and P.D. No. 694 shall prevail over Act No.
3135 with respect to the redemption price, does not apply here inasmuch as in
the said cases the redemptioners were the debtors themselves or their
assignees, and not an accommodation mortgagor or the latter's assignees such
as in the case at bar. In the said cases, the debtor-mortgagors were required to
pay as redemption price their entire liability to the bank inasmuch as they were
obligated to pay their loan which is a principal obligation in the first place. On the
other hand, accommodation mortgagors as such are not in anyway liable for the
payment of the loan or principal obligation of the debtor/borrower The liability of
the accommodation mortgagors extends only up to the loan value of their
mortgaged property and not to the entire loan itself. Hence, it is only just that they
be allowed to redeem their mortgaged property by paying only the winning bid
price thereof (plus interest thereon) at the public auction sale.
One wonders why respondent PNB invokes Act No. 3135 in its contracts without
qualification and yet in the end appears to disregard the same when it finds its
provisions unfavorable to it. This is unfair to the other contracting party who in
good faith believes that respondent PNB would comply with the contractual
agreement.
It is therefore our view and we hold that Section 78 of the General Banking Act,
as amended by P.D. No. 1828, is inapplicable to accommodation mortgagors in
the redemption of their mortgaged properties.
While the petitioners, as assignees of Eduarda Belo, are not required to pay the
entire claim of respondent PNB against the principal debtors, spouses Eslabon,
they can only exercise their right of redemption with respect to the parcel of land
belonging to Eduarda Belo, the accommodation mortgagor. Thus, they have to
pay the bid price less the corresponding loan value of the foreclosed four (4)
residential lots of the spouses Eslabon.
The respondent PNB contends that to allow petitioners to redeem only the
property belonging to their assignor, Eduarda Belo, would violate the principle of
indivisibility of mortgage contracts. We disagree.
Article 2089 of the Civil Code of the Philippines, provides that:
A pledge or mortgage is indivisible, even though the debt may be divided among
the successors in interest of the debtor or of the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as the debt is not
completely satisfied.
Neither can the creditor's heir who received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of the other heirs who have not
been paid.
From these provisions is excepted the case in which, there being several things
given in mortgage or pledge, each one of them guarantees only a determinate
portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specially answerable
is satisfied.
There is no dispute that the mortgage on the four (4) parcels of land by the
Eslabon spouses and the other mortgage on the property of Eduarda Belo both
secure the loan obligation of respondents spouses Eslabon to respondent PNB.
However, we are not persuaded by the contention of the respondent PNB that
the indivisibility concept applies to the right of redemption of an accommodation
mortgagor and her assignees. The jurisprudence in Philippine National Bank v.
Agudelo37 is enlightening to the case at bar, to wit:
xxx
xxx
xxx
However, Paz Agudelo y Gonzaga (the principal) . . . gave her consent to the lien
on lot No. 878 . . . . This acknowledgment, however, does not extend to lots Nos.
207 and 61 . . . inasmuch as, although it is true that a mortgage is indivisible as
to the contracting parties and as to their successors in interest (Article 1860, Civil
code), it is not so with respect to a third person who did not take part in the
constitution thereof either personally or through an agent x x x. Therefore, the
only liability of the defendant-appellant Paz Agudelo y Gonzaga is that which
arises from the aforesaid acknowledgment but only with respect to the lien and
not to the principal obligation secured by the mortgage acknowledged by her to
have been constituted on said lot No. 878 . . . . Such liability is not direct but a
subsidiary one.38
xxx
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xxx
Wherefore, it is hereby held that the liability contracted by the aforesaid
defendant-appellant Paz Agudelo y Gonzaga is merely subsidiary to that of
Mauro A. Garrucho (the agent), limited to lot No. 87.
xxx
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xxx
From the wording of the law, indivisibility arises only when there is a debt, that is,
there is a debtor-creditor relationship. But, this relationship is wanting in the case
at bar in the sense that petitioners are assignees of an accommodation
mortgagor and not of a debtor-mortgagor. Hence, it is fair and logical to allow the
petitioners to redeem only the property belonging to their assignor, Eduarda Belo.
With respect to the four (4) parcels of residential land belonging to the Eslabon
spouses, petitioners being total strangers to said lots lack legal personality
to redeem the same. Fair play and justice demand that the respondent PNB's
interest of recovering its entire bank claim should not be at the expense of
petitioners, as assignees of Eduarda Belo, who is not indebted to it. Besides, the
letter39 sent by respondent PNB to Eduarda Belo states that "your (Belo)
mortgaged property/ies with PNB covered by TCT # T-7493 was/were sold at
public auction . . . .". It further states that "You (Belo) have, therefore, one year
from July 1, 1991 within which to redeem your mortgaged property/ies, should
you desire to redeem it." Respondent PNB never mentioned that she was bound
to redeem the entire mortgaged properties including the four (4) residential
properties of the spouses Eslabon. The letter was explicit in mentioning Eduarda
Belo's property only. From the said statement, there is then an admission on the
part of respondent PNB that redemption only extends to the subject property of

Eduarda Belo for the reason that the notice of the sale limited the redemption to
said property.
WHEREFORE, the petition is partially granted in that the petitioners are hereby
allowed to redeem only the property, covered and described in Transfer
Certificate of Title No. T-7493-Capiz registered in the name of Eduarda Belo, by
paying only the bid price less the corresponding loan value of the foreclosed four
(4) residential lots of the respondents spouses Marcos and Arsenia Eslabon,
consistent with the Decision of the Regional Trial Court of Roxas City in Civil
Case No. V-6182.
SO ORDERED.
G.R. No. L-19227
February 17, 1968
DIOSDADO YULIONGSIU, plaintiff-appellant,
vs.
PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.
Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant.
Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee.
BENGZON, J.P., J.:
Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels,
namely: The M/S Surigao, valued at P109,925.78 and the M/S Don Dino, valued
at P63,000.00, and operated the FS-203, valued at P210,672.24, which was
purchased by him from the Philippine Shipping Commission, by installment or on
account. As of January or February, 1943, plaintiff had paid to the Philippine
Shipping Commission only the sum of P76,500 and the balance of the purchase
price was payable at P50,000 a year, due on or before the end of the current
year. 2
On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant
Philippine National Bank, Cebu Branch. To guarantee its payment, plaintiff
pledged the M/S Surigao, M/S Don Dino and its equity in the FS-203 to the
defendant bank, as evidenced by the pledge contract, Exhibit "A" & "1-Bank",
executed on the same day and duly registered with the office of the Collector of
Customs for the Port of Cebu. 3
Subsequently, plaintiff effected partial payment of the loan in the sum of
P20,000. The remaining balance was renewed by the execution of two (2)
promissory notes in the bank's favor. The first note, dated December 18, 1947,
for P20,000, was due on April 16, 1948 while the second, dated February 26,
1948, for P10,000, was due on June 25, 1948. These two notes were never paid
at all by plaintiff on their respective due dates. 4
On April 6, 1948, the bank filed criminal charges against plaintiff and two
other accused for estafa thru falsification of commercial documents, because
plaintiff had, as last indorsee, deposited with defendant bank, from March 11 to
March 31, 1948, seven Bank of the Philippine Islands checks totalling P184,000.
The drawer thereof one of the co-accused had no funds in the drawee
bank. However, in connivance with one employee of defendant bank, plaintiff was
able to withdraw the amount credited to him before the discovery of the

defraudation on April 2, 1948. Plaintiff and his co-accused were convicted by the
trial court and sentenced to indemnify the defendant bank in the sum of
P184,000. On appeal, the conviction was affirmed by the Court of Appeals on
October 31, 1950. The corresponding writ of execution issued to implement the
order for indemnification was returned unsatisfied as plaintiff was totally
insolvent. 5
Meanwhile, together with the institution of the criminal action, defendant
bank took physical possession of three pledged vessels while they were at the
Port of Cebu, and on April 29, 1948, after the first note fell due and was not paid,
the Cebu Branch Manager of defendant bank, acting as attorney-in-fact of
plaintiff pursuant to the terms of the pledge contract, executed a document of
sale, Exhibit "4", transferring the two pledged vessels and plaintiff's equity in FS203, to defendant bank for P30,042.72. 6
The FS-203 was subsequently surrendered by the defendant bank to the
Philippine Shipping Commission which rescinded the sale to plaintiff on
September 8, 1948, for failure to pay the remaining installments on the purchase
price thereof. 7 The other two boats, the M/S Surigao and the M/S Don Dino were
sold by defendant bank to third parties on March 15, 1951.
On July 19, 1948, plaintiff commenced action in the Court of First Instance
of Cebu to recover the three vessels or their value and damages from defendant
bank. The latter filed its answer, with a counterclaim for P202,000 plus P5,000
damages. After issues were joined, a pretrial was held resulting in a partial
stipulation of facts dated October 2, 1958, reciting most of the facts abovenarrated. During the course of the trial, defendant amended its answer reducing
its claim from P202,000 to P8,846.01, 8 but increasing its alleged damages to
P35,000.
The lower court rendered its decision on February 13, 1960 ruling: (a) that
the bank's taking of physical possession of the vessels on April 6, 1948 was
justified by the pledge contract, Exhibit "A" & "1-Bank" and the law; (b) that the
private sale of the pledged vessels by defendant bank to itself without notice to
the plaintiff-pledgor as stipulated in the pledge contract was likewise valid; and
(c) that the defendant bank should pay to plaintiff the sums of P1,153.99 and
P8,000, as his remaining account balance, or set-off these sums against the
indemnity which plaintiff was ordered to pay to it in the criminal cases.
When his motion for reconsideration and new trial was denied, plaintiff
brought the appeal to Us, the amount involved being more than P200,000.00.
In support of the first assignment of error, plaintiff-appellant would have
this Court hold that Exhibit "A" & "1-Bank" is a chattel mortgage contract so that
the creditor defendant could not take possession of the chattels object thereof
until after there has been default. The submission is without merit. The parties
stipulated as a fact that Exhibit "A" & "1-Bank" is a pledge contract
3. That a credit line of P50,000.00 was extended to the plaintiff by the
defendant Bank, and the plaintiff obtained and received from the said Bank the
sum of P50,000.00, and in order to guarantee the payment of this loan, the
pledge contract, Exhibit "A" & Exhibit "1-Bank", was executed and duly registered
with the Office of the Collector of Customs for the Port of Cebu on the date

appearing therein; (Emphasis supplied)1wph1.t

Necessarily, this judicial admission binds the plaintiff. Without any showing
that this was made thru palpable mistake, no amount of rationalization can offset
it. 9
The defendant bank as pledgee was therefore entitled to the actual
possession of the vessels. While it is true that plaintiff continued operating the
vessels after the pledge contract was entered into, his possession was expressly
made "subject to the order of the pledgee." 10 The provision of Art. 2110 of the
present Civil Code 11 being new cannot apply to the pledge contract here
which was entered into on June 30, 1947. On the other hand, there is an
authority supporting the proposition that the pledgee can temporarily entrust the
physical possession of the chattels pledged to the pledgor without invalidating
the pledge. In such a case, the pledgor is regarded as holding the pledged
property merely as trustee for the pledgee. 12
Plaintiff-appellant would also urge Us to rule that constructive delivery is
insufficient to make pledge effective. He points to Betita v. Ganzon, 49 Phil. 87
which ruled that there has to be actual delivery of the chattels pledged. But then
there is also Banco Espaol-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic
delivery would suffice. An examination of the peculiar nature of the things
pledged in the two cases will readily dispel the apparent contradiction between
the two rulings. In Betita v. Ganzon, the objects pledged carabaos were
easily capable of actual, manual delivery unto the pledgee. In Banco EspaolFilipino v. Peterson, the objects pledged goods contained in a warehouse
were hardly capable of actual, manual delivery in the sense that it was
impractical as a whole for the particular transaction and would have been an
unreasonable requirement. Thus, for purposes of showing the transfer of control
to the pledgee, delivery to him of the keys to the warehouse sufficed. In other
words, the type of delivery will depend upon the nature and the peculiar
circumstances of each case. The parties here agreed that the vessels be
delivered by the "pledgor to the pledgor who shall hold said property subject to
the order of the pledgee." Considering the circumstances of this case and the
nature of the objects pledged, i.e., vessels used in maritime business, such
delivery is sufficient.
Since the defendant bank was, pursuant to the terms of pledge contract, in
full control of the vessels thru the plaintiff, the former could take actual
possession at any time during the life of the pledge to make more effective its
security. Its taking of the vessels therefore on April 6, 1948, was not unlawful. Nor
was it unjustified considering that plaintiff had just defrauded the defendant bank
in the huge sum of P184,000.
The stand We have taken is not without precedent. The Supreme Court of
Spain, in a similar case involving Art. 1863 of the old Civil Code, 13 has ruled: 14
Que si bien la naturaleza del contrato de prenda consiste en pasar las
cosas a poder del acreedor o de un tercero y no quedar en la del deudor, como
ha sucedido en el caso de autos, es lo cierto que todas las partes interesadas, o
sean acreedor, deudor y Sociedad, convinieron que continuaran los coches en
poder del deudor para no suspender el trafico, y el derecho de no uso de la

prenda pertenence al deudor, y el de dejar la cosa bajo su responsabilidad al

acreedor, y ambos convinieron por creerlo util para las partes contratantes, y
estas no reclaman perjuicios no se infringio, entre otros este articulo.
In the second assignment of error imputed to the lower court plaintiffappellant attacks the validity of the private sale of the pledged vessels in favor of
the defendant bank itself. It is contended first, that the cases holding that the
statutory requirements as to public sales with prior notice in connection with
foreclosure proceedings are waivable, are no longer authoritative in view of the
passage of Act 3135, as amended; second, that the charter of defendant bank
does not allow it to buy the property object of foreclosure in case of private sales;
and third, that the price obtained at the sale is unconscionable.
There is no merit in the claims. The rulings in Philippine National Bank v.
De Poli, 44 Phil. 763 and El Hogar Filipino v. Paredes, 45 Phil. 178 are still
authoritative despite the passage of Act 3135. This law refers only, and is limited,
to foreclosure of real estate mortgages. 15 So, whatever formalities there are in
Act 3135 do not apply to pledge. Regarding the bank's authority to be the
purchaser in the foreclosure sale, Sec. 33 of Act 2612, as amended by Acts 2747
and 2938 only states that if the sale is public, the bank could purchase the whole
or part of the property sold " free from any right of redemption on the part of the
mortgagor or pledgor." This even argues against plaintiff's case since the import
thereof is this if the sale were private and the bank became the purchaser, the
mortgagor or pledgor could redeem the property. Hence, plaintiff could have
recovered the vessels by exercising this right of redemption. He is the only one to
blame for not doing so.
Regarding the third contention, on the assumption that the purchase price
was unconscionable, plaintiff's remedy was to have set aside the sale. He did not
avail of this. Moreover, as pointed out by the lower court, plaintiff had at the time
an obligation to return the P184,000 fraudulently taken by him from defendant
bank.
The last assignment of error has to do with the damages allegedly suffered
by plaintiff-appellant by virtue of the taking of the vessels. But in view of the
results reached above, there is no more need to discuss the same.
On the whole, We cannot say the lower court erred in disposing of the
case as it did. Plaintiff-appellant was not all-too-innocent as he would have Us
believe. He did defraud the defendant bank first. If the latter countered with the
seizure and sale of the pledged vessels pursuant to the pledge contract, it was
only to protect its interests after plaintiff had defaulted in the payment of the first
promissory note. Plaintiff-appellant did not come to court with clean hands.
WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs
against plaintiff-appellant. So ordered.
G.R. No. L-6342
January 26, 1954
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
LAUREANO ATENDIDO, defendants-appellant.
Nicolas Fernandez for appellee.Gaudencio L. Atendido for appellant.

BAUTISTA, ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Nueva Ecija
which orders the defendant to pay to the plaintiff the sum of P3,000, with interest
thereon at the rate of 6% per annum from June 26, 1940, and the costs of action.
On June 26, 1940, Laureano Atendido obtained from the Philippine National
Bank a loan of P3,000 payable in 120 days with interests at 6% per annum from
the date of maturity. To guarantee the payment of the obligation the borrower
pledged to the bank 2,000 cavanes of palay which were then deposited in the
warehouse of Cheng Siong Lam & Co. in San Miguel, Bulacan, and to that effect
the borrower endorsed in favor of the bank the corresponding warehouse receipt.
Before the maturity of the loan, the 2,000 cavanes of palay disappeared for
unknown reasons in the warehouse. When the loan matured the borrower failed
to pay either the principal or the interest and so the present action was instituted.
Defendant set up a special defense and a counterclaim. As regards the former,
defendant claimed that the warehouse receipt covering the palay which was
given as security having been endorsed in blank in favor of the bank, and the
palay having been lost or disappeared, he thereby became relieved of liability.
And, by way of counterclaim, defendant claimed that, as a corollary to his theory,
he is entitled to an indemnity which represents the difference between the value
of the palay lost and the amount of his obligation.
The case was submitted on an agreed statements of facts and thereupon the
court rendered judgment as stated in the early part of this decision.
Defendant took the case on appeal to the Court of Appeals but later it was
certified to this Court on the ground that the question involved is purely one of
law.
The only issue involved in this appeal is whether the surrender of the warehouse
receipt covering the 2,000 cavanes of palay given as a security, endorsed in
blank, to appellee, has the effect of transferring their title or ownership to said
appellee, or it should be considered merely as a guarantee to secure the
payment of the obligation of appellant.
In upholding the view of appellee, the lower court said: "The surrendering of
warehouse receipt No. S-1719 covering the 2,000 cavanes of palay by the
defendant in favor of the plaintiff was not that of a final transfer of that warehouse
receipt but merely as a guarantee to the fulfillment of the original obligation of
P3,000.00. In other word, plaintiff corporation had no right to dispose (of) the
warehouse receipt until after the maturity of the promissory note Exhibit A.
Moreover, the 2,000 cavanes of palay were not in the first place in the actual
possession of plaintiff corporation, although symbolically speaking the delivery of
the warehouse receipt was actually done to the bank."
We hold this finding to be correct not only because it is in line with the nature of a
contract of pledge as defined by law (Articles 1857, 1858 & 1863, Old Civil
Code), but is supported by the stipulations embodied in the contract signed by
appellant when he secured the loan from the appellee. There is no question that
the 2,000 cavanes of palay covered by the warehouse receipt were given to
appellee only as a guarantee to secure the fulfillment by appellant of his
obligation. This clearly appears in the contract Exhibit A wherein it is expressly

stated that said 2,000 cavanes of palay were given as a collateral security. The
delivery of said palay being merely by way of security, it follows that by the very
nature of the transaction its ownership remains with the pledgor subject only to
foreclose in case of non-fulfillment of the obligation. By this we mean that if the
obligation is not paid upon maturity the most that the pledgee can do is to sell the
property and apply the proceeds to the payment of the obligation and to return
the balance, if any, to the pledgor (Article 1872, Old Civil Code). This is the
essence of this contract, for, according to law, a pledgee cannot become the
owner of, nor appropriate to himself, the thing given in pledge (Article 1859, Old
Civil Code). If by the contract of pledge the pledgor continues to be the owner of
the thing pledged during the pendency of the obligation, it stands to reason that
in case of loss of the property, the loss should be borne by the pledgor. The fact
that the warehouse receipt covering the palay was delivered, endorsed in blank,
to the bank does not alter the situation, the purpose of such endorsement being
merely to transfer the juridical possession of the property to the pledgee and to
forestall any possible disposition thereof on the part of the pledgor. This is true
notwithstanding the provisions to the contrary of the Warehouse Receipt Law.
In case recently decided by this Court (Martinez vs. Philippine National Bank, 93
Phil., 765) which involves a similar transaction, this Court held:
In conclusion, we hold that where a warehouse receipt or quedan is transferred
or endorsed to a creditor only to secure the payment of a loan or debt, the
transferee or endorsee does not automatically become the owner of the goods
covered by the warehouse receipt or quedan but he merely retains the right to
keep and with the consent of the owner to sell them so as to satisfy the obligation
from the proceeds of the sale, this for the simple reason that the transaction
involved is not a sale but only a mortgage or pledge, and that if the property
covered by the quedans or warehouse receipts is lost without the fault or
negligence of the mortgagee or pledgee or the transferee or endorsee of the
warehouse receipt or quedan, then said goods are to be regarded as lost on
account of the real owner, mortgagor or pledgor.
Wherefore, the decision appealed from is affirmed, with costs against appellant.
G.R. No. 97753 August 10, 1992
CALTEX (PHILIPPINES), INC., petitioner,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY,
respondents.
Bito, Lozada, Ortega & Castillo for petitioners.
Nepomuceno, Hofilea & Guingona for private.
REGALADO, J.:
This petition for review on certiorari impugns and seeks the reversal of the
decision promulgated by respondent court on March 8, 1991 in CA-G.R. CV No.
23615 1 affirming with modifications, the earlier decision of the Regional Trial
Court of Manila, Branch XLII, 2 which dismissed the complaint filed therein by
herein petitioner against respondent bank.

The undisputed background of this case, as found by the court a quo and
adopted by respondent court, appears of record:
1. On various dates, defendant, a commercial banking institution, through its
Sucat Branch issued 280 certificates of time deposit (CTDs) in favor of one Angel
dela Cruz who deposited with herein defendant the aggregate amount of
P1,120,000.00, as follows: (Joint Partial Stipulation of Facts and Statement of
Issues, Original Records, p. 207; Defendant's Exhibits 1 to 280);
CTD CTD
Dates Serial Nos. Quantity Amount
22 Feb. 82 90101 to 90120 20 P80,000
26 Feb. 82 74602 to 74691 90 360,000
2 Mar. 82 74701 to 74740 40 160,000
4 Mar. 82 90127 to 90146 20 80,000
5 Mar. 82 74797 to 94800 4 16,000
5 Mar. 82 89965 to 89986 22 88,000
5 Mar. 82 70147 to 90150 4 16,000
8 Mar. 82 90001 to 90020 20 80,000
9 Mar. 82 90023 to 90050 28 112,000
9 Mar. 82 89991 to 90000 10 40,000
9 Mar. 82 90251 to 90272 22 88,000

Total 280 P1,120,000
===== ========
2. Angel dela Cruz delivered the said certificates of time (CTDs) to herein plaintiff
in connection with his purchased of fuel products from the latter (Original Record,
p. 208).
3. Sometime in March 1982, Angel dela Cruz informed Mr. Timoteo Tiangco, the
Sucat Branch Manger, that he lost all the certificates of time deposit in dispute.
Mr. Tiangco advised said depositor to execute and submit a notarized Affidavit of
Loss, as required by defendant bank's procedure, if he desired replacement of
said lost CTDs (TSN, February 9, 1987, pp. 48-50).
4. On March 18, 1982, Angel dela Cruz executed and delivered to defendant
bank the required Affidavit of Loss (Defendant's Exhibit 281). On the basis of said
affidavit of loss, 280 replacement CTDs were issued in favor of said depositor
(Defendant's Exhibits 282-561).
5. On March 25, 1982, Angel dela Cruz negotiated and obtained a loan from
defendant bank in the amount of Eight Hundred Seventy Five Thousand Pesos
(P875,000.00). On the same date, said depositor executed a notarized Deed of
Assignment of Time Deposit (Exhibit 562) which stated, among others, that he
(de la Cruz) surrenders to defendant bank "full control of the indicated time
deposits from and after date" of the assignment and further authorizes said bank
to pre-terminate, set-off and "apply the said time deposits to the payment of
whatever amount or amounts may be due" on the loan upon its maturity (TSN,
February 9, 1987, pp. 60-62).
6. Sometime in November, 1982, Mr. Aranas, Credit Manager of plaintiff Caltex
(Phils.) Inc., went to the defendant bank's Sucat branch and presented for

verification the CTDs declared lost by Angel dela Cruz alleging that the same
were delivered to herein plaintiff "as security for purchases made with Caltex
Philippines, Inc." by said depositor (TSN, February 9, 1987, pp. 54-68).
7. On November 26, 1982, defendant received a letter (Defendant's Exhibit 563)
from herein plaintiff formally informing it of its possession of the CTDs in question
and of its decision to pre-terminate the same.
8. On December 8, 1982, plaintiff was requested by herein defendant to furnish
the former "a copy of the document evidencing the guarantee agreement with Mr.
Angel dela Cruz" as well as "the details of Mr. Angel dela Cruz" obligation against
which plaintiff proposed to apply the time deposits (Defendant's Exhibit 564).
9. No copy of the requested documents was furnished herein defendant.
10. Accordingly, defendant bank rejected the plaintiff's demand and claim for
payment of the value of the CTDs in a letter dated February 7, 1983 (Defendant's
Exhibit 566).
11. In April 1983, the loan of Angel dela Cruz with the defendant bank matured
and fell due and on August 5, 1983, the latter set-off and applied the time
deposits in question to the payment of the matured loan (TSN, February 9, 1987,
pp. 130-131).
12. In view of the foregoing, plaintiff filed the instant complaint, praying that
defendant bank be ordered to pay it the aggregate value of the certificates of
time deposit of P1,120,000.00 plus accrued interest and compounded interest
therein at 16% per annum, moral and exemplary damages as well as attorney's
fees.
After trial, the court a quo rendered its decision dismissing the instant complaint.
3

On appeal, as earlier stated, respondent court affirmed the lower court's

dismissal of the complaint, hence this petition wherein petitioner faults
respondent court in ruling (1) that the subject certificates of deposit are nonnegotiable despite being clearly negotiable instruments; (2) that petitioner did not
become a holder in due course of the said certificates of deposit; and (3) in
disregarding the pertinent provisions of the Code of Commerce relating to lost
instruments payable to bearer. 4
The instant petition is bereft of merit.
A sample text of the certificates of time deposit is reproduced below to provide a
better understanding of the issues involved in this recourse.
SECURITY BANK
AND TRUST COMPANY6778 Ayala Ave., Makati No. 90101
Metro Manila, Philippines
SUCAT OFFICEP 4,000.00
CERTIFICATE OF DEPOSIT
Rate 16%
Date of Maturity FEB. 23, 1984 FEB 22, 1982, 19____
This is to Certify that B E A R E R has deposited in this Bank the sum of PESOS:
FOUR THOUSAND ONLY, SECURITY BANK SUCAT OFFICE P4,000 & 00 CTS
Pesos, Philippine Currency, repayable to said depositor 731 days. after date,
upon presentation and surrender of this certificate, with interest at the rate of

16% per cent per annum.

(Sgd. Illegible) (Sgd. Illegible)

AUTHORIZED SIGNATURES 5
Respondent court ruled that the CTDs in question are non-negotiable
instruments, nationalizing as follows:
. . . While it may be true that the word "bearer" appears rather boldly in the CTDs
issued, it is important to note that after the word "BEARER" stamped on the
space provided supposedly for the name of the depositor, the words "has
deposited" a certain amount follows. The document further provides that the
amount deposited shall be "repayable to said depositor" on the period indicated.
Therefore, the text of the instrument(s) themselves manifest with clarity that they
are payable, not to whoever purports to be the "bearer" but only to the specified
person indicated therein, the depositor. In effect, the appellee bank
acknowledges its depositor Angel dela Cruz as the person who made the deposit
and further engages itself to pay said depositor the amount indicated thereon at
the stipulated date. 6
We disagree with these findings and conclusions, and hereby hold that the CTDs
in question are negotiable instruments. Section 1 Act No. 2031, otherwise known
as the Negotiable Instruments Law, enumerates the requisites for an instrument
to become negotiable, viz:
(a) It must be in writing and signed by the maker or drawer;
(b) Must contain an unconditional promise or order to pay a sum certain in
money;
(c) Must be payable on demand, or at a fixed or determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he must be named or
otherwise indicated therein with reasonable certainty.
The CTDs in question undoubtedly meet the requirements of the law for
negotiability. The parties' bone of contention is with regard to requisite (d) set
forth above. It is noted that Mr. Timoteo P. Tiangco, Security Bank's Branch
Manager way back in 1982, testified in open court that the depositor reffered to in
the CTDs is no other than Mr. Angel de la Cruz.
xxx xxx xxx
Atty. Calida:
q In other words Mr. Witness, you are saying that per books of the bank, the
depositor referred (sic) in these certificates states that it was Angel dela Cruz?
witness:
a Yes, your Honor, and we have the record to show that Angel dela Cruz was the
one who cause (sic) the amount.
Atty. Calida:
q And no other person or entity or company, Mr. Witness?
witness:
a None, your Honor. 7
xxx xxx xxx
Atty. Calida:

q Mr. Witness, who is the depositor identified in all of these certificates of time
deposit insofar as the bank is concerned?
witness:
a Angel dela Cruz is the depositor. 8
xxx xxx xxx
On this score, the accepted rule is that the negotiability or non-negotiability of an
instrument is determined from the writing, that is, from the face of the instrument
itself. 9 In the construction of a bill or note, the intention of the parties is to control,
if it can be legally ascertained. 10 While the writing may be read in the light of
surrounding circumstances in order to more perfectly understand the intent and
meaning of the parties, yet as they have constituted the writing to be the only
outward and visible expression of their meaning, no other words are to be added
to it or substituted in its stead. The duty of the court in such case is to ascertain,
not what the parties may have secretly intended as contradistinguished from
what their words express, but what is the meaning of the words they have used.
What the parties meant must be determined by what they said. 11
Contrary to what respondent court held, the CTDs are negotiable instruments.
The documents provide that the amounts deposited shall be repayable to the
depositor. And who, according to the document, is the depositor? It is the
"bearer." The documents do not say that the depositor is Angel de la Cruz and
that the amounts deposited are repayable specifically to him. Rather, the
amounts are to be repayable to the bearer of the documents or, for that matter,
whosoever may be the bearer at the time of presentment.
If it was really the intention of respondent bank to pay the amount to Angel de la
Cruz only, it could have with facility so expressed that fact in clear and
categorical terms in the documents, instead of having the word "BEARER"
stamped on the space provided for the name of the depositor in each CTD. On
the wordings of the documents, therefore, the amounts deposited are repayable
to whoever may be the bearer thereof. Thus, petitioner's aforesaid witness
merely declared that Angel de la Cruz is the depositor "insofar as the bank is
concerned," but obviously other parties not privy to the transaction between them
would not be in a position to know that the depositor is not the bearer stated in
the CTDs. Hence, the situation would require any party dealing with the CTDs to
go behind the plain import of what is written thereon to unravel the agreement of
the parties thereto through facts aliunde. This need for resort to extrinsic
evidence is what is sought to be avoided by the Negotiable Instruments Law and
calls for the application of the elementary rule that the interpretation of obscure
words or stipulations in a contract shall not favor the party who caused the
obscurity. 12
The next query is whether petitioner can rightfully recover on the CTDs. This
time, the answer is in the negative. The records reveal that Angel de la Cruz,
whom petitioner chose not to implead in this suit for reasons of its own, delivered
the CTDs amounting to P1,120,000.00 to petitioner without informing respondent
bank thereof at any time. Unfortunately for petitioner, although the CTDs are
bearer instruments, a valid negotiation thereof for the true purpose and
agreement between it and De la Cruz, as ultimately ascertained, requires both

delivery and indorsement. For, although petitioner seeks to deflect this fact, the
CTDs were in reality delivered to it as a security for De la Cruz' purchases of its
fuel products. Any doubt as to whether the CTDs were delivered as payment for
the fuel products or as a security has been dissipated and resolved in favor of the
latter by petitioner's own authorized and responsible representative himself.
In a letter dated November 26, 1982 addressed to respondent Security Bank,
J.Q. Aranas, Jr., Caltex Credit Manager, wrote: ". . . These certificates of deposit
were negotiated to us by Mr. Angel dela Cruz to guarantee his purchases of fuel
products" (Emphasis ours.) 13 This admission is conclusive upon petitioner, its
protestations notwithstanding. Under the doctrine of estoppel, an admission or
representation is rendered conclusive upon the person making it, and cannot be
denied or disproved as against the person relying thereon. 14 A party may not go
back on his own acts and representations to the prejudice of the other party who
relied upon them. 15 In the law of evidence, whenever a party has, by his own
declaration, act, or omission, intentionally and deliberately led another to believe
a particular thing true, and to act upon such belief, he cannot, in any litigation
arising out of such declaration, act, or omission, be permitted to falsify it. 16
If it were true that the CTDs were delivered as payment and not as security,
petitioner's credit manager could have easily said so, instead of using the words
"to guarantee" in the letter aforequoted. Besides, when respondent bank, as
defendant in the court below, moved for a bill of particularity therein 17 praying,
among others, that petitioner, as plaintiff, be required to aver with sufficient
definiteness or particularity (a) the due date or dates of payment of the alleged
indebtedness of Angel de la Cruz to plaintiff and (b) whether or not it issued a
receipt showing that the CTDs were delivered to it by De la Cruz as payment of
the latter's alleged indebtedness to it, plaintiff corporation opposed the motion. 18
Had it produced the receipt prayed for, it could have proved, if such truly was the
fact, that the CTDs were delivered as payment and not as security. Having
opposed the motion, petitioner now labors under the presumption that evidence
willfully suppressed would be adverse if produced. 19
Under the foregoing circumstances, this disquisition in Intergrated Realty
Corporation, et al. vs. Philippine National Bank, et al. 20 is apropos:
. . . Adverting again to the Court's pronouncements in Lopez, supra, we quote
therefrom:
The character of the transaction between the parties is to be determined by their
intention, regardless of what language was used or what the form of the transfer
was. If it was intended to secure the payment of money, it must be construed as
a pledge; but if there was some other intention, it is not a pledge. However, even
though a transfer, if regarded by itself, appears to have been absolute, its object
and character might still be qualified and explained by contemporaneous writing
declaring it to have been a deposit of the property as collateral security. It has
been said that a transfer of property by the debtor to a creditor, even if sufficient
on its face to make an absolute conveyance, should be treated as a pledge if the
debt continues in inexistence and is not discharged by the transfer, and that
accordingly the use of the terms ordinarily importing conveyance of absolute
ownership will not be given that effect in such a transaction if they are also

commonly used in pledges and mortgages and therefore do not unqualifiedly

indicate a transfer of absolute ownership, in the absence of clear and
unambiguous language or other circumstances excluding an intent to pledge.
Petitioner's insistence that the CTDs were negotiated to it begs the question.
Under the Negotiable Instruments Law, an instrument is negotiated when it is
transferred from one person to another in such a manner as to constitute the
transferee the holder thereof, 21 and a holder may be the payee or indorsee of a
bill or note, who is in possession of it, or the bearer thereof. 22 In the present
case, however, there was no negotiation in the sense of a transfer of the legal
title to the CTDs in favor of petitioner in which situation, for obvious reasons,
mere delivery of the bearer CTDs would have sufficed. Here, the delivery thereof
only as security for the purchases of Angel de la Cruz (and we even disregard
the fact that the amount involved was not disclosed) could at the most constitute
petitioner only as a holder for value by reason of his lien. Accordingly, a
negotiation for such purpose cannot be effected by mere delivery of the
instrument since, necessarily, the terms thereof and the subsequent disposition
of such security, in the event of non-payment of the principal obligation, must be
contractually provided for.
The pertinent law on this point is that where the holder has a lien on the
instrument arising from contract, he is deemed a holder for value to the extent of
his lien. 23 As such holder of collateral security, he would be a pledgee but the
requirements therefor and the effects thereof, not being provided for by the
Negotiable Instruments Law, shall be governed by the Civil Code provisions on
pledge of incorporeal rights, 24 which inceptively provide:
Art. 2095. Incorporeal rights, evidenced by negotiable instruments, . . . may also
be pledged. The instrument proving the right pledged shall be delivered to the
creditor, and if negotiable, must be indorsed.
Art. 2096. A pledge shall not take effect against third persons if a description of
the thing pledged and the date of the pledge do not appear in a public
instrument.
Aside from the fact that the CTDs were only delivered but not indorsed, the
factual findings of respondent court quoted at the start of this opinion show that
petitioner failed to produce any document evidencing any contract of pledge or
guarantee agreement between it and Angel de la Cruz. 25 Consequently, the mere
delivery of the CTDs did not legally vest in petitioner any right effective against
and binding upon respondent bank. The requirement under Article 2096
aforementioned is not a mere rule of adjective law prescribing the mode whereby
proof may be made of the date of a pledge contract, but a rule of substantive law
prescribing a condition without which the execution of a pledge contract cannot
affect third persons adversely. 26
On the other hand, the assignment of the CTDs made by Angel de la Cruz in
favor of respondent bank was embodied in a public instrument. 27 With regard to
this other mode of transfer, the Civil Code specifically declares:
Art. 1625. An assignment of credit, right or action shall produce no effect as
against third persons, unless it appears in a public instrument, or the instrument
is recorded in the Registry of Property in case the assignment involves real

property.
Respondent bank duly complied with this statutory requirement. Contrarily,
petitioner, whether as purchaser, assignee or lien holder of the CTDs, neither
proved the amount of its credit or the extent of its lien nor the execution of any
public instrument which could affect or bind private respondent. Necessarily,
therefore, as between petitioner and respondent bank, the latter has definitely the
better right over the CTDs in question.
Finally, petitioner faults respondent court for refusing to delve into the question of
whether or not private respondent observed the requirements of the law in the
case of lost negotiable instruments and the issuance of replacement certificates
therefor, on the ground that petitioner failed to raised that issue in the lower court.
28

On this matter, we uphold respondent court's finding that the aspect of alleged
negligence of private respondent was not included in the stipulation of the parties
and in the statement of issues submitted by them to the trial court. 29 The issues
agreed upon by them for resolution in this case are:
1. Whether or not the CTDs as worded are negotiable instruments.
2. Whether or not defendant could legally apply the amount covered by the CTDs
against the depositor's loan by virtue of the assignment (Annex "C").
3. Whether or not there was legal compensation or set off involving the amount
covered by the CTDs and the depositor's outstanding account with defendant, if
any.
4. Whether or not plaintiff could compel defendant to preterminate the CTDs
before the maturity date provided therein.
5. Whether or not plaintiff is entitled to the proceeds of the CTDs.
6. Whether or not the parties can recover damages, attorney's fees and litigation
expenses from each other.
As respondent court correctly observed, with appropriate citation of some
doctrinal authorities, the foregoing enumeration does not include the issue of
negligence on the part of respondent bank. An issue raised for the first time on
appeal and not raised timely in the proceedings in the lower court is barred by
estoppel. 30 Questions raised on appeal must be within the issues framed by the
parties and, consequently, issues not raised in the trial court cannot be raised for
the first time on appeal. 31
Pre-trial is primarily intended to make certain that all issues necessary to the
disposition of a case are properly raised. Thus, to obviate the element of
surprise, parties are expected to disclose at a pre-trial conference all issues of
law and fact which they intend to raise at the trial, except such as may involve
privileged or impeaching matters. The determination of issues at a pre-trial
conference bars the consideration of other questions on appeal. 32
To accept petitioner's suggestion that respondent bank's supposed negligence
may be considered encompassed by the issues on its right to preterminate and
receive the proceeds of the CTDs would be tantamount to saying that petitioner
could raise on appeal any issue. We agree with private respondent that the broad
ultimate issue of petitioner's entitlement to the proceeds of the questioned
certificates can be premised on a multitude of other legal reasons and causes of

action, of which respondent bank's supposed negligence is only one. Hence,

petitioner's submission, if accepted, would render a pre-trial delimitation of issues
a useless exercise. 33
Still, even assuming arguendo that said issue of negligence was raised in the
court below, petitioner still cannot have the odds in its favor. A close scrutiny of
the provisions of the Code of Commerce laying down the rules to be followed in
case of lost instruments payable to bearer, which it invokes, will reveal that said
provisions, even assuming their applicability to the CTDs in the case at bar, are
merely permissive and not mandatory. The very first article cited by petitioner
speaks for itself.
Art 548. The dispossessed owner, no matter for what cause it may be, may apply
to the judge or court of competent jurisdiction, asking that the principal, interest
or dividends due or about to become due, be not paid a third person, as well as
in order to prevent the ownership of the instrument that a duplicate be issued
him. (Emphasis ours.)
xxx xxx xxx
The use of the word "may" in said provision shows that it is not mandatory but
discretionary on the part of the "dispossessed owner" to apply to the judge or
court of competent jurisdiction for the issuance of a duplicate of the lost
instrument. Where the provision reads "may," this word shows that it is not
mandatory but discretional. 34 The word "may" is usually permissive, not
mandatory. 35 It is an auxiliary verb indicating liberty, opportunity, permission and
possibility. 36
Moreover, as correctly analyzed by private respondent, 37 Articles 548 to 558 of
the Code of Commerce, on which petitioner seeks to anchor respondent bank's
supposed negligence, merely established, on the one hand, a right of recourse in
favor of a dispossessed owner or holder of a bearer instrument so that he may
obtain a duplicate of the same, and, on the other, an option in favor of the party
liable thereon who, for some valid ground, may elect to refuse to issue a
replacement of the instrument. Significantly, none of the provisions cited by
petitioner categorically restricts or prohibits the issuance a duplicate or
replacement instrument sans compliance with the procedure outlined therein,
and none establishes a mandatory precedent requirement therefor.
WHEREFORE, on the modified premises above set forth, the petition is DENIED
and the appealed decision is hereby AFFIRMED.
SO ORDERED.
G.R. No. L-18500
October 2, 1922
FILOMENA SARMIENTO and her husband EUSEBIO M. VILLASEOR,
plaintiffs-appellants,
vs.
GLICERIO JAVELLANA, defendant-appellant.
Montinola, Montinola and Hontiveros for plaintiffs-appellants. J. M. Arroyo and
Fisher and DeWitt for defendant-appellant.
AVANCEA, J.:
On August 28, 1991, the defendant loaned the plaintiffs the sum of P1,500 with

interest at the rate of 25 per cent per annum for the term of one year. To
guarantee this loan, the plaintiffs pledged a large medal with a diamond in the
center and surrounded with ten diamonds, a pair of diamond earrings, a small
comb with twenty-two diamonds, and two diamond rings, which the contracting
parties appraised at P4,000. This loan is evidenced by two documents (Exhibits A
and 1) wherein the amount appears to be P1,875, which includes the 25 per cent
interest on the sum of P1,500 for the term of one year.
The plaintiffs allege that at the maturity of this loan, August 31, 1912, the plaintiff
Eusebio M. Villaseor, being unable to pay the loan, obtained from the defendant
an extension, with the condition that the loan was to continue, drawing interest at
the rate of 25 per cent per annum, so long as the security given was sufficient to
cover the capital and the accrued interest. In the month of August, 1919, the
plaintiff Eusebio M. Villaseor, in company with Carlos M. Dreyfus, went to the
house of the defendant and offered to pay the loan and redeem the jewels, taking
with him, for this purpose, the sum of P11,000, but the defendant then informed
them that the time for the redemption had already elapsed. The plaintiffs renewed
their offer to redeem the jewelry by paying the loan, but met with the same reply.
These facts are proven by the testimony of the plaintiffs, corroborated by Carlos
M. Dreyfus.
The plaintiffs now bring this action to compel the defendant to return the jewels
pledged, or their value, upon the payment by them of the sum they owe the
defendant, with the interest thereon.
The defendant alleges, in his defense, that upon the maturity of the loan, August
31, 1912, he requested the plaintiff, Eusebio M. Villaseor, to secure the money,
pay the loan and redeem the jewels, as he needed money to purchase a certain
piece of land; that one month thereafter, the plaintiff, Filomena Sarmiento, went
to his house and offered to sell him the jewels pledged for P3,000; that the
defendant then told her to come back on the next day, as he was to see his
brother, Catalino Javellana, and ask him if he wanted to take the jewels for that
sum; that on the next day the plaintiff, Filomena Sarmiento, went back to the
house of the defendant who then paid her the sum of P1,125, which was the
balance remaining of the P3,000 after deducting the plaintiff's loan.
It appearing that the defendant possessed these jewels originally, as a pledge to
secure the payment of a loan stated in writing, the mere testimony of the
defendant to the effect that later they were sold to him by the plaintiff, Filomena
Sarmiento, against the positive testimony of the latter that she did not make any
such sale, requires a strong corroboration to be accepted. We do not find the
testimony of Jose Sison to be of sufficient value as such corroboration. This
witness testified to having been in the house of the defendant when Filomena
went there to offer to sell the defendant the jewels, as well as on the third day
when she returned to receive the price. According to this witness, he happened
to be in the house of the defendant, having gone there to solicit a loan, and also
accidentally remained in the house of the defendant for three days, and that that
was how he happened to witness the offer to sell, as well as the receipt of the
price on the third day. But not only do we find that the defendant has not
sufficiently established, by his evidence, the fact of the purchase of the jewels,

but also that there is a circumstance tending to show the contrary, which is the
fact that up to the trial of this cause the defendant continued in possession of the
documents, Exhibits A and 1, evidencing the loan and the pledge. If the
defendant really bought these jewels, its seems natural that Filomena would
have demanded the surrender of the documents evidencing the loan and the
pledge, and the defendant would have returned them to plaintiff.
Our conclusion is that the jewels pledged to defendant were not sold to him
afterwards.
Another point on which evidence was introduced by both parties is as to the
value of the jewels in the event that they were not returned by the defendant. In
view of the evidence of record, we accept the value of P12,000 fixed by the trial
court.
From the foregoing it follows that, as the jewels in question were in the
possession of the defendant to secure the payment of a loan of P1,500, with
interest thereon at the rate of 25 per cent per annum from Augusts 31, 1911, to
August 31, 1912, and the defendant having subsequently extended the term of
the loan indefinitely, and so long as the value of the jewels pledged was sufficient
to secure the payment of the capital and the accrued interest, the defendant is
bound to return the jewels or their value (P12,000) to plaintiffs, and the plaintiffs
have the right to demand the same upon the payment by them of the sum of
P1,5000, plus the interest thereon at the rate of 25 per cent per annum from
August 28, 1911.
The judgment appealed from being in accordance with this findings, the same is
affirmed without special pronouncement as to costs. So ordered.
Araullo, C.J., Street, Malcolm, Villamor, Ostrand and Romualdez, JJ., concur.
RESOLUTION
April 4, 1923
AVANCEA, J.:
The defendant contends that the plaintiffs' action for the recovery of the jewels
pledged has prescribed. Without deciding whether or not the action to recover
the thing pledged may prescribe in any case, it not being necessary for the
purposes of this opinion, but supposing that it may, still the defendant's
contention is untenable. In the document evidencing the loan in question there is
stated: "I transfer by way of pledge the following jewels." That this is a valid
contract of pledge there can be no question. As a matter of fact the defendant
does not question it, but take s it for granted. However, it is contended that the
obligation of the defendant to return the jewels pledged must be considered as
not stated in writing, for this obligation is not expressly mentioned in the
document. But if this contract of pledge is in writing, it must necessarily be
admitted that the action to enforce the right, which constitutes the essence of this
contract, is covered by a written contract. The duty of the creditor to return the
thing pledged in case the principal obligation is fulfilled is essential in all contracts
of pledge. This constitutes, precisely, the consideration of the debtor in this
accessory contract, so that if this obligation of the creditor to return to thing
pledged, and the right of the debtor to demand the return thereof, are eliminated,
the contract would not be a contract of pledge. It would be a donation.

If the right of the plaintiffs to recover the thing pledged is covered by a written
contract, the time for the prescription of this action is ten years, according to
section 43 of the Code of Civil Procedure.
The defendant contends that the time of prescription of the action of the plaintiffs
to recover the thing pledged must be computed from August 28, 1911, the date of
the making of the contract of loan secured by this pledge. The term of this loan is
one year. However, it is contended that the action of the plaintiff to recover the
thing pledged accrued on the very date of the making of the contract, inasmuch
as from that date they could have recovered the same by paying the loan even
before the expiration of the period fixed for payment. This view is contrary to law.
Whenever a term for the performance of an obligation is fixed, it is presumed to
have been established for the benefit of the creditor as well as that of the debtor,
unless from its tenor or from other circumstances it should appear that the term
was established for the benefit of one or the other only (art. 1128 of the Civil
Code.) In this case it does not appear, either from any circumstance, or from the
tenor of the contract, that the term of one year allowed the plaintiffs to pay the
debt was established in their favor only. Hence it must be presumed to have
been established for the benefit of the defendant also. And it must be so, for this
is a case of a loan, with interest, wherein the term benefits the plaintiffs by the
use of the money, as well as the defendant by the interest. This being so, the
plaintiffs had no right to pay the loan before the lapse of one year, without the
consent of the defendant, because such a payment in advance would have
deprived the latter of the benefit of the stipulated interest. It follows from this that
appellant is in error when he contents that the plaintiffs could have paid the loan
and recovered the thing pledged from the date of the execution of the contract
and, therefore, his theory that the action of the plaintiffs to recover the thing
pledged accrued from the date of the execution of the contract is not tenable.
1awph!l.net
It must, therefore, be admitted that the action of the plaintiffs for the recovery of
the thing pledged did not accrue until August 31, 1912, when the term fixed for
the loan expired. Computing the time from that date to that of the filing of the
complaint in this cause, October 9, 1920, it appears that the ten years fixed by
the law for the prescription of the action have not yet elapsed.
On the other hand, the contract of loan with pledge is in writing and the action of
the defendant for the recovery of the loan does not prescribe until after ten years.
It is unjust to hold that the action of the plaintiffs for the recovery of the thing
pledged, after the payment of the loan, has already prescribed while the action of
the defendant for the recovery of the loan has not yet prescribed. The result of
this would be that the defendant might have collected the loan and at the same
time kept the thing pledged.
The motion for reconsideration is denied.
G.R. No. L-21069
October 26, 1967
MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee,
vs.
RODOLFO R. VELAYO, defendant-appellant.

Villaluz Law Office for plaintiff-appellee. Rodolfo R. Velayo for and in his own
behalf as defendant-appellant.
REYES, J.B.L., J.:
Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case
No. 49435) sentencing appellant Rodolfo Velayo to pay appellee Manila Surety &
Fidelity Co., Inc. the sum of P2,565.00 with interest at 12-% per annum from
July 13, 1954; P120.93 as premiums with interest at the same rate from June 13,
1954: attorneys' fees in an amount equivalent to 15% of the total award, and the
costs.
Hub of the controversy are the applicability and extinctive effect of Article 2115 of
the Civil Code of the Philippines (1950).
The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon
request of Rodolfo Velayo, executed a bond for P2,800.00 for the dissolution of a
writ of attachment obtained by one Jovita Granados in a suit against Rodolfo
Velayo in the Court of First Instance of Manila. Velayo undertook to pay the
surety company an annual premium of P112.00; to indemnify the Company for
any damage and loss of whatsoever kind and nature that it shall or may suffer, as
well as reimburse the same for all money it should pay or become liable to pay
under the bond including costs and attorneys' fees.
As "collateral security and by way of pledge" Velayo also delivered four pieces of
jewelry to the Surety Company "for the latter's further protection", with power to
sell the same in case the surety paid or become obligated to pay any amount of
money in connection with said bond, applying the proceeds to the payment of
any amounts it paid or will be liable to pay, and turning the balance, if any, to the
persons entitled thereto, after deducting legal expenses and costs (Rec. App. pp.
12-15).
Judgment having been rendered in favor of Jovita Granados and against Rodolfo
Velayo, and execution having been returned unsatisfied, the surety company was
forced to pay P2,800.00 that it later sought to recoup from Velayo; and upon the
latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing
therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to
pay the balance, the surety company brought suit in the Municipal Court. Velayo
countered with a claim that the sale of the pledged jewelry extinguished any
further liability on his part under Article 2115 of the 1950 Civil Code, which
recites:
Art. 2115. The sale of the thing pledged shall extinguish the principal obligation,
whether or not the proceeds of the sale are equal to the amount of the principal
obligation, interest and expenses in a proper case. If the price of the sale is more
than said amount, the debtor shall not be entitled to the excess, unless it is
otherwise agreed. If the price of the sale is less, neither shall the creditor be
entitled to recover the deficiency, notwithstanding any stipulation to the contrary.
The Municipal Court disallowed Velayo's claims and rendered judgment against
him. Appealed to the Court of First Instance, the defense was once more
overruled, and the case decided in the terms set down at the start of this opinion.
Thereupon, Velayo resorted to this Court on appeal.
The core of the appealed decision is the following portion thereof (Rec. Appeal

pp. 71-72):
It is thus crystal clear that the main agreement between the parties is the
Indemnity Agreement and if the pieces of jewelry mentioned by the defendant
were delivered to the plaintiff, it was merely as an added protection to the latter.
There was no understanding that, should the same be sold at public auction and
the value thereof should be short of the undertaking, the defendant would have
no further liability to the plaintiff. On the contrary, the last portion of the said
agreement specifies that in case the said collateral should diminish in value, the
plaintiff may demand additional securities. This stipulation is incompatible with
the idea of pledge as a principal agreement. In this case, the status of the pledge
is nothing more nor less than that of a mortgage given as a collateral for the
principal obligation in which the creditor is entitled to a deficiency judgment for
the balance should the collateral not command the price equal to the
undertaking.
It appearing that the collateral given by the defendant in favor of the plaintiff to
secure this obligation has already been sold for only the amount of P235.00, the
liability of the defendant should be limited to the difference between the amounts
of P2,800.00 and P235.00 or P2,565.00.
We agree with the appellant that the above quoted reasoning of the appealed
decision is unsound. The accessory character is of the essence of pledge and
mortgage. As stated in Article 2085 of the 1950 Civil Code, an essential requisite
of these contracts is that they be constituted to secure the fulfillment of a
principal obligation, which in the present case is Velayo's undertaking to
indemnify the surety company for any disbursements made on account of its
attachment counterbond. Hence, the fact that the pledge is not the principal
agreement is of no significance nor is it an obstacle to the application of Article
2115 of the Civil Code.
The reviewed decision further assumes that the extinctive effect of the sale of the
pledged chattels must be derived from stipulation. This is incorrect, because
Article 2115, in its last portion, clearly establishes that the extinction of the
principal obligation supervenes by operation of imperative law that the parties
cannot override:
If the price of the sale is less, neither shall the creditor be entitled to recover the
deficiency notwithstanding any stipulation to the contrary.
The provision is clear and unmistakable, and its effect can not be evaded. By
electing to sell the articles pledged, instead of suing on the principal obligation,
the creditor has waived any other remedy, and must abide by the results of the
sale. No deficiency is recoverable.
It is well to note that the rule of Article 2115 is by no means unique. It is but an
extension of the legal prescription contained in Article 1484(3) of the same Code,
concerning the effect of a foreclosure of a chattel mortgage constituted to secure
the price of the personal property sold in installments, and which originated in Act
4110 promulgated by the Philippine Legislature in 1933.
WHEREFORE, the decision under appeal is modified and the defendant
absolved from the complaint, except as to his liability for the 1954 premium in the

sum of P120.93, and interest at 12-1/2% per annum from June 13, 1954. In this
respect the decision of the Court below is affirmed. No costs. So ordered.
G.R. No. L-22001
November 4, 1924
CHINA BANKING CORPORATION, in substitution of Filipinas Compania de
Seguros, plaintiffs-appellee,
vs.
FAUSTINO LICHAUCO, ET AL., defendants-appellants.
Jose A. Espiritu for appellants. Feria and La O and P. J. Sevilla for appellee.
AVANCEA, J.:
The dispositive part of the judgment appealed from is literally as follows:
For all of the foregoing it is adjudged and decreed that the defendant Faustino
Lichauco be, as is hereby, sentenced to pay the plaintiff the sum of P21,500, with
interest at 12 per cent per year from September 13, 1922 until full payment
thereof, and in addition, interest at 6 per cent per annum from the filing of the
complaint upon P1,935, interest of the sum claimed for 9 months prior to the filing
of the complaint, and of such sums as subsequently have become or may
become due, from their respective dates of maturity until the payment of said
interest; he is further sentenced to pay the sum of P14,200 as fees of plaintiff's
attorney, expenses and troubles caused by the litigation for the collection of said
sum of P21,500, with interest thereon; and all the defendants are sentenced to
pay the sum of P50,000 with interest at the rate of 12 per cent per annum from
September 5, 1921, capitalized monthly to earn the same interest as the
principal, until full payments thereof, and in addition 5 per cent of P50,000 and
the interest due at the time of the filing of the complaint, as costs of suit and other
expenses of whatever kind, including attorney's fees, incurred by the plaintiff for
the recovery of said sum, and it is ordered that the payment of all these amounts
be made within three months from the date of the judgment and that in case of
nonpayment of all these amounts within the aforesaid period, the mortgaged
property be sold for the payment of the amount or amounts not paid.
The judgment appealed from contains a complete and exact statement of all the
facts from which the liability of the defendants arose.
There is no question in this appeal but that the defendant Faustino Lichauco
owes the plaintiff the sum of P21,500, with interest thereon at the rate of 12 per
cent per year from September 13, 1922. Nor is there about the fact that, at the
filing of the herein complaint, Faustino Lichauco owed the sum of P1,935, as
interest for the preceding nine months. But it is alleged that the lower court erred
in allowing legal interest at the rate of 6 per cent from the filing of the complaint
upon this sum of P1,935, the amount of interest due on that date. This is no error.
Article 1109 of the Civil Code expressly provides that interest due shall earn legal
interest from the date payment thereof is judicially demanded, although the
obligation may be silent on the matter.
As to the part of the judgment sentencing all the defendants to pay the plaintiff
the sum of P50,000, it is necessary to take into account the previous transactions

that gave rise to this liability of the defendants. Lichauco & Company, Inc., owed
the plaintiff a large sum by way of loan. On September 5, 1921, Faustino
Lichauco and his wife Luisa F. de Lichauco executed a document (Exhibit C) in
favor of the plaintiff whereby they secured with a mortgage upon the property
described in the document the payment of a part of this loan in the amount of
P50,000 with interest at 9 per cent per year. It was agreed that in case of nonfulfillment of the contract, this mortgage would stand as security also for the
payment of all the costs of the suit and expenses of any kind, including attorney's
fees, which by way of liquidated damages are fixed at 5 per cent of the principal.
It is stated lastly in this document that if Faustino Lichauco and Luisa F. de
Lichauco should fail to pay this amount of P50,000, the mortgage shall be in full
force and effect.
On the 20th of December, 1922, Lichauco & Co., Inc., Faustino Lichauco, and
Luisa F. de Lichauco executed another document (Exhibit D) in which, among the
other things, they ratified the former mortgage and stated that the payment of the
P50,000 shall continue to be secured in the same manner and with the same
property, and shall earn interest at 12 per cent per year from October 20, 1920.
1awphil.net
The appellants argue in this court that the obligation of Faustino Lichauco and
Luisa F. de Lichauco lacked consideration, because what they guaranteed with
this mortgage was a debt of Lichauco & Co., Inc. This contention does not find
support in law. As a mortgage is an accessory contract, its consideration is the
very consideration of the principal contract, from which it receives its life, and
without which it cannot exist as an independent contract, although, as in the
instant case, it may secure an obligation incurred by another (art. 1857 of the
Civil Code). That this amount of P50,000 is to earn interest, and that 5 per cent
must be paid in addition for judicial expenses and attorney's fees, was expressly
stipulated in the contract. The trial court, however, fixed this interest at 12 per
cent from September 5, 1921, which we believe is an error. In the contract of
December 20, 1922, it was stipulated that from October 20, 1920, the interest
must be 12 per cent. Undoubtedly a clerical error was committed in the writing of
this date, inasmuch as then Faustino Lichauco and Luisa F. de Lichauco had not
executed the mortgage yet. The lower court held that this date must be
September 5, 1921, but this view is groundless, since in the contract of
September 5, 1921, this interest was fixed at 9 per cent. This date must,
therefore, be construed to be the date of the second contract, December 20,
1922, as it cannot be presumed that the parties ever intended to make it effective
from a former date.
For the foregoing, it being understood that the defendants must pay interest at 9
per cent from September 5, 1921, and 12 per cent from December 20, 1922, the
judgment appealed from is affirmed in all other respects, without special
pronouncement as to costs. So ordered.
G.R. No. L-21953
March 28, 1969
ENCARNACION GATIOAN, plaintiff-appellee,
vs.

SIXTO GAFFUD ET AL., defendants,

PHILIPPINE NATIONAL BANK, defendant-appellant.
Felix Fernandez for plaintiff-appellee. Tomas Besa and Jose B. Galang for
defendant-appellant.
BARREDO, J.:
Appeal from the Court of First Instance of Isabela.
The facts as found by the said court are as follows:
The land in question was originally registered in the name of Rufina Permison
under Original Certificate of Title No. L-3432, dated December 18, 1935 on the
basis of a free patent. In the year 1948, Permison sold it to Sibreno Novesteras,
who in turn, conveyed it to appellee Encarnacion Gatioan on April 1, 1949.
Through the initiative of appellee, the said Original Certificate of Title No. L-3432
in the name of Rufina Permison was cancelled on June 3, 1949 and in lieu
thereof Transfer Certificate of Title No. T-1212 was issued in favor of appellee.
On June 12, 1950, appellee obtained a loan in the amount of P900.00 from the
appellant, Philippine National, Bank, and as security therefor, mortgaged the land
described in TCT No. T-1212. Said mortgage was duly inscribed at the back of
the title but was cancelled when it was fully paid on June 3, 1953. Using the
same land and title as collateral, appellee acquired another loan in the sum of
P1,100.00 from the same bank on May 3, 1954. The annotated incumbrance
covering this second loan was upon its being paid released on June 28, 1956.
On July 18, 1957, appellee secured, a third loan from the same bank, this time
for a bigger amount P2,800,00. Again, she remortgaged the same land and
title. This third loan appears as Entry No. 8511 at the back of TCT No. T-1212.
The third loan not yet paid, she secured an additional loan of P3,170.00 from the
same bank on July 30, 1957, for which she, however, gave as collateral, another
parcel of land covered by TCT No. T-4807. The deed of mortgage covering the
last amount was jointly and severally execution by appellee and the other
registered co-owners appearing in the last mentioned title.
On August 12, 1960, appellee paid P2,800.00, plus interest, in full payment of
the last loan secured by mortgage on the land covered by TCT No. T-1212, as
per receipt No. 402272-B. Partial payment was also given for the other joint
obligation secured with the joint deed of mortgage on the other land. Despite
these payments, appellant executed no instrument releasing or discharging the
incumbrance on TCT No. T-1212.
In the meantime, on January 23, 1956, the defendant spouses Sixto Gaffud and
Villamora Logan procured a free patent covering the identical parcel of land
described in TCT No. T-1212 of appellee, on the basis of which Original
Certificate of Title No. P-6038 was issued in their favor. On May 15, 1956 and
January 8, 1957, they also obtained two loans from appellant Bank in the sum of
P1,400.00 and P300.00, respectively, and as collateral for both, they mortgaged
the said land covered by OCT No. P-6038. Without paying these two obligations,
a consolidated mortgage in the sum of P2,300.00 was executed by them on June
17, 1957, for which they gave as security in addition to the land described in OCT
No. P-6038, another parcel of land described in Original Certificate of Title No.
3137, also in their names.

Subsequently, the Secretary of Agriculture and Natural Resources compared

the technical descriptions, areas, lot numbers and cadastral numbers of the land
described in TCT No. T-1212 with that covered by OCT No. P-6088, and
convinced that both titles covered the same identical land, he recommended the
cancellation of the latter.lwphi1.et
On May 16, 1962, because of the existence of OCT No. P-6038 in the name of
the defendant spouses Gaffud and Logan, containing an annotation of the
aforementioned consolidated mortgage in favor of the appellant Bank, and the
annotation on TCT No. T-1212 of the mortgage incumbrance covering the
already paid loan of P2,800.00 to the appellee, which appellant Bank refused to
have cancelled, appellee filed the complaint for quieting of title in this case.
The above facts were found by the lower court from the stipulations submitted
by the parties, except defendant spouses Gaffud and Logan who were declared
in default. No oral evidence was presented by any of the parties.
From a judgment favorable to the plaintiff thus:
WHEREFORE, the Court renders judgment:
(a) Declaring null and void ab initio the patent and certificate of title No. P-6038
issued in the name of the defendant spouses Sixto Gaffud and Villamora Logan;
(b) Ordering the Register of Deeds of Isabela to cancel, upon payment of the
fees, original certificate of title No. P-6038 in the name of said spouses and
ordering the Philippine National Bank to surrender to the Register of Deeds of
Isabela the owner's duplicate certificate of said title for its cancellation;
(c) Declaring the real estate mortgage executed by the defendant spouses Sixto
Gaffud and Villamora Logan in favor of the Bank, recorded on OCT P-6038 null
and void and unenforceable as against the herein plaintiff, and ordering its
cancellation, without prejudice of the Bank's right to collect from the said
spouses;
(d) Dismissing the complaint and its prayer, to order the defendant bank to
immediately cancel or release the mortgage recorded on Transfer Certificate of
Title No. T-1212 in the name of the plaintiff, unless the other joint obligation
secured with the joint deed of mortgage executed by the herein plaintiff together
with her co-debtors has been full paid; and
(e) The court hereby sentences the defendant spouses Sixto Gaffud and
Villamora Logan to pay to the plaintiff as actual or compensatory and exemplary
or corrective damages, and attorney's fees, the total amount of ONE
THOUSAND FIVE HUNDRED PESOS (P1,500.00), and to pay the costs.
only the appellant Bank has come to Us on appeal on a sole question of law
related to paragraphs (a), (b) and (c) thereof. (See Notice of Appeal, p. 90,
Record on Appeal.)
Appellant does not, however, impugn the lower court's ruling in declaring null
and void and cancelling OCT No. P-6038 in favor of the defendant spouses
Gaffud and Logan; it only insists that the lower court should have declared it an
innocent mortgagee in good faith and for value as regards the mortgages
executed in its favor by said defendant spouses and duly annotated on their
abovementioned OCT P-6038 and that consequently, the said mortgage
annotations should be carried over to and considered as incumbrances on the

land covered by TCT No. T-1212 of appellee which, as already stated, is the
identical land covered by OCT P-6038 of the Gaffuds. We find no merit,
whatsoever, in this contention, because the point raised was already passed
upon by this Court in no uncertain terms in Legarda v. Saleeby, 31 Phil. 590, way
back on October 2, 1915 and in subsequent cases of similar nature. 1 We
unhesitatingly affirm the judgment of the lower court.
Indeed, upon the facts found by the trial court as above stated, there can be no
question that the decision of this Court in Legarda v. Saleeby, supra, is controlling
herein. Therein this Court held:
We find statutory provisions which, upon first reading, seem to cast some doubt
upon the rule that the vendee acquires the interest of the vendor only. Sections
38, 56, and 112 of Act No. 496 indicate that the vendee may acquire rights and
be protected against the defenses which the vendor would not. Said sections
speak of available rights in favor of third parties which are cut off by virtue of the
sale of the land to an "innocent purchaser". That is to say, persons who had had
a right or interest in land wrongfully included in an original certificate would be
unable to enforce such rights against an "innocent purchaser", by virtue of the
provisions of said sections. In the present case Teus had his land, including the
wall, registered in his name. He subsequently sold the same to appellee an
"innocent purchaser", as the phrase is used in said sections? May those who
have been deprived of their land by reason of a mistake in the original certificate
in favor of Teus be deprived of their right to the same, by virtue of the sale by him
to the appellee? Suppose the appellants had sold their lot, including the wall, to
an "innocent purchaser", would such purchaser be included in the phrase
"innocent purchaser", as the same is used in said sections? Under these
examples there would be two innocent purchasers of the same land, if said
sections are to be applied. Which of the two innocent purchasers, if they are both
to be regarded as innocent purchasers, should be protected under the provisions
of said sections? These questions indicate to difficulty with which we are met in
giving meaning and effect to the phrase "innocent purchaser", in said sections.
May the purchaser of the land which has been included in a "second original
certificate" ever be regarded as an "innocent purchaser", as against the rights or
interest of the owner of the first original certificate, his heirs, assigns or vendee?
The first original certificate is recorded in the public registry. It is never issued
until it is recorded. The record is notice to all the world. All persons are charged
with the knowledge of what it contains. All persons dealing with the land so
recorded or any portion of it, must be charged with notice of whatever it contains.
The purchaser is charged with notice of every fact shown by the record and is
presumed to know every fact which the record discloses. This rule is so well
established that it is scarcely necessary to cite authorities in its support
(Northwestern National Bank v. Freeman, 171 U.S. 620, 629; Delvin on Real
Estate, sections 710, 710-[a]).
When a conveyance has been properly recorded such record is constructive
notice of its contents and all interests, legal and equitable, included therein.
(Grandin v. Anderson, 15 Ohio State, 286, 289; Orvis v. Newell 17 Conn. 97;
Buchanan v. International Bank, 78 111. 500; Youngs v. Wilson, 27 N.Y. 351;

McCabe v. Grey, 20 Cal. 509; Montefiore v. Browne, 7 House of Lords Cases,

341.)
Under the rule of notice, it is presumed that the purchaser has examined every
instrument of record affecting the title. Such presumption is irrebutable. He is
charged with notice of every fact shown by the record and is presumed to know
every fact which an examination of the record would have disclosed. This
presumption cannot be overcome by proof of innocence or good faith. Otherwise
the very purpose and object of the law requiring a record would be destroyed.
Such presumption cannot be defeated by proof of want of knowledge of what the
record contains any more than one may be permitted to show that he was
ignorant of the provisions of the law. The rule that all persons must take notice of
the facts which the public record contains is a rule of law. The rule must be
absolute. Any variation would lead to endless confusion and useless litigation.
While there is no statutory provision in force here requiring that original deeds of
conveyance of real property, be recorded, yet there is a rule requiring mortgages
to be recorded. (Arts. 1875 and 606 of the Civil Code.) The record of a mortgage
is indispensable to its validity. (Art. 1875.) In the face of that statute, would the
courts allow a mortgage to be valid which had not been recorded, upon the plea
of ignorance of the statutory provision, when third parties were interested? May a
purchaser of land, subsequent to the recorded mortgage, plead ignorance of its
existence, and by reason of such ignorance have the land released from such
lien? Could a purchaser of land, after the recorded mortgage, be relieved from
the mortgage lien by the plea that he was a bona fide purchaser? May there be a
bona fide purchaser of said land, bona fide in the sense that he had no
knowledge of the existence of the mortgage? We believe the rule that all persons
must take notice of what the public record contains is just as obligatory upon all
persons as the rule that all men must know the law: that no one can plead
ignorance of the law. The fact that all men know the law is contrary to the
presumption. The conduct of men, at times, shows clearly that they do not know
the law. The rule, however, is mandatory and obligatory, notwithstanding. It would
be just as logical to allow the plea of ignorance of the law of affecting a contract
as to allow the defense of ignorance of the existence and contents of a public
record.
In view, therefore, of the foregoing rules of law, may the purchaser of land from
the owner of the second original certificate be an "innocent purchaser" when a
part or all of such land had theretofore been registered in the name of another,
not the vendor? We are of the opinion that said sections 38, 55, and 112 should
not be applied to such purchasers. We do not believe that the phrase "innocent
purchaser" should be applied to such a purchaser. He cannot be regarded as an
"innocent purchaser" because of the facts contained in the record of the first
original certificate. The rule should not be applied to the purchaser of a parcel of
land the vendor of which is not the owner of the original certificate, or his
successors. He, in no sense, can be an "innocent purchaser" of the portion of the
land included in another earlier original certificate. The rule of notice of what the
record contains precludes the idea of innocence. By reason of the prior registry
there cannot be an innocent purchaser of land included in a prior original

certificate and in a name other than that of the vendor, or his successors. In order
to minimize the difficulties we think this is the safer rule to establish. We believe
the phrase "innocent purchaser", used in said sections, should be limited only to
cases where unregistered land has been wrongfully included in a certificate
under the torrens system. When land is once brought under the torrens system,
the record of the original certificate and all subsequent transfers thereof is notice
to all the world. That being the rule, could Teus even be regarded as the holder in
good faith of that part of the land included in his certificate which had theretofore
been included in the original certificate of the appellants? We think not. Suppose,
for example, that Teus had never had his lot registered under the torrens system.
Suppose he had sold his lot to the appellee and included in his deed of transfer
the very strip of land now in question. Could his vendee be regarded as an
"innocent purchaser" of said strip? Certainly not. The record of the original
certificate of the appellants precludes the possibility. Has the appellee gained any
right by reason of the registration of the strip of land in the name of his vendor?
Applying the rule of notice resulting from the record of the title of the appellants,
the question must be answered in the negative. We are of the opinion that the
rules are more in harmony with the purpose of Act No. 496 than the rule
contended for by the appellee. We believe that the purchaser from the owner of
the later certificate, and his successors, should be required to resort to his
vendor for damages, in case of a mistake like the present, rather than to molest
the holder of the first certificate who has been guilty of no negligence. The holder
of the first original certificate and his successors should be permitted to secure in
their title against one who had acquired rights in conflict therewith and who had
full and complete knowledge of their rights. The purchaser of land included in the
second original certificate, by reason of the facts contained in the public record
and the knowledge with which he is charged and by reason of his negligence
should suffer the loss, if any, resulting from such purchaser case rather than he
who has obtained the first certificate and who was innocent of any act of
negligence. (31 Phil. 590, 599-603)
Moreover, it is a matter of judicial notice that before a bank grants a loan on the
security of land, it first undertakes a careful examination of the title of the
applicant as well as a physical and on-the-spot investigation of the land itself
offered as security. Undoubtedly, had herein appellant Bank taken such a step
which is demanded by the most ordinary prudence, it would have easily
discovered the flaw in the title of the defendant spouses; and if it did not conduct
such examination and investigation, it must be held to be guilty of gross
negligence in granting them the loans in question. In either case, appellant Bank
cannot be considered as a mortgagee in good faith within the contemplation of
the law. 2
A more factual approach would lead to the same result. From the stipulated
facts, it can be seen that prior to the execution of the mortgage between
appellant and the defendant spouses, the appellee had been mortgaging the land
described in TCT No. T-1212 to it. She did this first in the year 1950 for a loan of
P900.00, and again in 1954 for a loan of P1,100.00. In both instances, the
appellant Bank had possession of, or at least, must have examined appellee's

title, TCT No. T-1212, wherein appear clearly the technical description, exact
area, lot number and cadastral number of the land covered by said title. In other
words, by the time the defendant spouses offered OCT P-6038, in their names,
for scrutiny in connection with their own application for loan with appellant, the
latter was charged with the notice of the identity of the technical descriptions,
areas, lot numbers and cadastral numbers of the lands purportedly covered by
the two titles and was in a position to know, if it did not have such knowledge
actually, that they referred to one and the same lot. Under the circumstances,
appellant had absolutely no excuse for approving the application of the defendant
spouses and giving the loans in question. To appellant, therefore, fittingly applies
the following pronouncement of this Court:
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 it afterwards develops that the title was in fact
defective, and it appears that he had such notice of the defect as would have led
to its discovery had be acted with that measure of precaution which may
reasonably be required of a prudent man in a like situation..... (Dayao v. Diez,
supra; citing the case of Leung Yee v. Strong Machinery. Co., 37 Phil; 644.)
Anyway, appellant Bank is not without any remedy. It appears that, defendant
spouses have another land covered by OCT 3137 which is also mortgaged to it
and which perhaps may yet be sufficient to cover the loans in question. In any
event, again, the following ruling of this Court in the recent case of De Villa v.
Trinidad, G.R. No. L-24918, March 20, 1968, applies to appellant:
We have laid the rule that where two certificates of title around issued to
different persons covering the same land in whole or in part, the earlier in date
must prevail as between original parties and in case of successive registrations
where more than one certificate is issued over the land, the person holding under
the prior certificate is entitled to the land as against the person who rely on the
second certificate. The purchaser from the owner of the later certificate and his
successors, should resort to his vendor for redress, rather than molest the holder
of the first certificate and his successors, who should be permitted to resort
secure in their title. (Citing Legarda v. Saleeby, 31 Phil. 590) [Emphasis supplied]
The recourse to the cases of Blanco, et al. v. Esquierdo, G.R. No. L-15182,
December 28, 1960 and Director of Lands v. Abache, 73 Phil. 606, made by
appellant in its brief is obviously unavailing. The factual settings of those cases
are entirely different from the one before Us now. In the case of Abache, what
happened was that the land which one Santiago Imperial and his mother claimed
during the cadastral proceedings was adjudicated by the cadastral court in its

decision to other parties, the Adornados, who had never made any claim thereto,
and when the Imperials asked later on, after the decree and title had been
issued, for the annulment of such title in the name of said non-claimants, it
appeared that the latter had already mortgaged the land to one Luis Meneses.
This Court decreed that although the title of the Adornados was void and the
Imperials were entitled to the issuance of the title in their favor, the mortgage in
favor of Meneses constituted a valid lien over the land; the remedy of the
Imperials was to go against the Assurance Fund. Thus, in that case, there was
nothing in the title itself which could indicate to Meneses that there was a flaw in
the title of the Adornados, because the error was committed by the court in the
proceedings and not in the issuance of the title, hence it contained on its face no
circumstances of suspicion at all, from any point of view, unlike in the present
case wherein an examination of the title of the defendant spouses was sufficient
to put appellant on notice that the land described therein was identical with the
land it had previously dealt with under another title in the name of somebody
else.
The same is true with the other cited case of Blanco, et al. v. Esquierdo, supra.
The pertinent portions of said decision are as follows:
That the certificate of title issued in the name of Fructuosa Esquierdo is a nullity,
the same having been secured thru fraud, is not here in question. The only
question for determine nation is whether the defendant bank is entitled to the
protection accorded to "innocent purchasers for value", which phrase, according
to sec. 38 of the Land Registration Law, includes an innocent mortgagee for
value. The question, in our opinion, must be answered in the affirmative.
The trial court, in the decision complained of, made no finding that the
defendant mortgagee bank was a party to the fraudulent transfer of the land to
Fructuosa Esquierdo. Indeed, there is nothing alleged in the complaint which
may implicate said defendant mortgagee in the fraud, or justify a finding that it
acted in bad faith. On the other hand, the certificate of title was in the name of
the mortgagor Fructuosa Esquierdo when the land was mortgaged by her to the
defendant bank. Such being the case, the said defendant bank, as mortgagee,
had the right to rely on what appeared in the certificate and, in the absence of
anything to excite suspicion, was under no obligation to look beyond the
certificate and investigate the title of the mortgagor appearing on the face of said
certificate. (De Lara, et al., vs. Ayroso, 50 Off. Gaz. 4838; Joaquin vs. Madrid, et
al., G.R. No. L-13551, January 30, 1960.) Being thus an innocent mortgagee for
value, its right or lien upon the land mortgaged must be respected and protected,
even if the mortgagor obtained her title thereto thru fraud. The remedy of the
persons prejudiced is to bring an action for damages against those causing the
fraud, and if the latter are insolvent, an action against the Treasurer of the
Philippines may be filed for the recovery of damages against the Assurance
Fund. (De la Cruz vs. Fabie, 35 Phil. 144; Blondeau vs. Nena, 61 Phil. 625;
Sumira, et al. vs. Vistan, et al., 74 Phil. 138; Raymundo et al., vs. Mayon Realty
Corp., et al., 54 Off. Gaz. 4954; Avecilla vs. Yatco, et al., 54 Off. Gaz. 6415.)
In this connection, it will be noted that the deceased Maximiano Blanco died
way back in 1930 and the certificate of title pursuant to his homestead application

was issued in the name of his heirs sometime in 1934. Plaintiffs, however, took
no steps for the settlement of their late brother's estate and instead merely took
possession of the land in question jointly with Fructuosa Esquierdo. They also
appear to have entrusted the owner's certificate to said Fructuosa Esquierdo thus
making it possible for her to fraudulently secure a transfer certificate of title in her
name. This should be emphasized, for in several cases it is what impelled this
Court to apply the principle of equity that "as between two innocent persons, one
of whom must suffer the consequences of a breach of trust, the one who. made it
possible by his act of confidence must bear the loss". (De Lara, et al. vs. Ayroso
supra.)
Again, it is clear that in that case, the title examined by the bank had no
indication, whatsoever, of any, defect in it, unlike, as already stated, in this case.
By no means of reasoning, therefore, can anyone ever say that the case cited
and relied upon by appellant could have modified the doctrine in Legarda v.
Saleeby, supra, and the other cases wherein it was reiterated. In fact, no mention
at all is made by appellant of the Legarda v. Saleeby case in its brief by way of
explaining way said appellant had to bring this case on appeal to Us in the face
of the said decision which explained clearly and in detail the law on the point
appellant now urges before Us. We are thus persuaded that appellant paid little
heed to the merit or lack of merit of this appeal which We find to be frivolous.
WHEREFORE, as appellant has not appealed from the judgment of the lower
court insofar as paragraphs (d) and (e) thereof are concerned, said paragraphs
stand, and the rest of said judgment is hereby affirmed. Double costs against
appellant in this instance.
G.R. No. 138053 May 31, 2000
CORNELIO M. ISAGUIRRE, petitioner,
vs.
FELICITAS DE LARA, respondent.
GONZAGA-REYES, J.:
In this petition for review on certiorari under Rule 45 of the 1997 Revised Rules
of Civil Procedure, petitioner Cornelio M. Isaguirre assails the October 5, 1998
decision1 of the Court of Appeals2 and its Resolution promulgated on March 5,
1999.
The antecedent facts of the present case are as follows:
Alejandro de Lara was the original applicant-claimant for a Miscellaneous Sales
Application over a parcel of land identified as portion of Lot 502, Guianga
Cadastre, filed with the Bureau of Lands on January 17, 1942 and with an area of
2,324 square meters. Upon his death, Alejandro de Lara was succeeded by his
wife respondent Felicitas de Lara, as claimant. On November 19, 1954, the
Undersecretary of Agriculture and Natural Resources amended the sales
application to cover only 1,600 square meters. Then, on November 3, 1961, by
virtue of a decision rendered by the Secretary of Agriculture and Natural
Resources dated November 19, 1954, a subdivision survey was made and the
area was further reduced to 1,000 square meters. On this lot stands a two-story

residential-commercial apartment declared for taxation purposes under TD

43927 in the name of respondent's sons Apolonio and Rodolfo, both
surnamed de Lara.
Sometime in 1953, respondent obtained several loans from the Philippine
National Bank. When she encountered financial difficulties, respondent
approached petitioner Cornelio M. Isaguirre, who was married to her niece, for
assistance. On February 10, 1960, a document denominated as "Deed of Sale
and Special Cession of Rights and Interests" was executed by respondent and
petitioner, whereby the former sold a 250 square meter portion of Lot No. 502,
together with the two-story commercial and residential structure standing
thereon, in favor of petitioner, for and in consideration of the sum of P5,000.
Sometime in May, 1968, Apolonio and Rodolfo de Lara filed a complaint against
petitioner for recovery of ownership and possession of the two-story building. 3
However, the case was dismissed for lack of jurisdiction.
On August 21, 1969, petitioner filed a sales application over the subject property
on the basis of the deed of sale. His application was approved on January 17,
1984, resulting in the issuance of Original Certificate of Title No. P-11566 on
February 13, 1984, in the name of petitioner. Meanwhile, the sales application of
respondent over the entire 1,000 square meters of subject property (including the
250 square meter portion claimed by petitioner) was also given due course,
resulting in the issuance of Original Certificate of Title No. P-13038 on June 19,
1989, in the name of respondent. 4
Due to the overlapping of titles, petitioner filed an action for quieting of title and
damages with the Regional Trial Court of Davao City against respondent on May
17, 1990. The case was docketed as Civil Case No. 20124-90. After trial on the
merits, the trial court rendered judgment on October 19, 1992, in favor of
petitioner, declaring him to be the lawful owner of the disputed property.
However, the Court of Appeals reversed the trial court's decision, holding that the
transaction entered into by the parties, as evidenced by their contract, was an
equitable mortgage, not a sale.5 The appellate court's decision was based on the
inadequacy of the consideration agreed upon by the parties, on its finding that
the payment of a large portion of the "purchase price" was made after the
execution of the deed of sale in several installments of minimal amounts; and
finally, on the fact that petitioner did not take steps to confirm his rights or to
obtain title over the property for several years after the execution of the deed of
sale. As a consequence of its decision, the appellate court also declared Original
Certificate of Title No. P-11566 issued in favor of petitioner to be null and void.
On July 8, 1996, in a case docketed as G.R. No. 120832, this Court affirmed the
decision of the Court of Appeals and on September 11, 1996, we denied
petitioner's motion for reconsideration.
On May 5, 1997, respondent filed a motion for execution with the trial court,
praying for the immediate delivery of possession of the subject property, which
motion was granted on August 18, 1997. On February 3, 1998, respondent
moved for a writ of possession, invoking our ruling in G.R. No. 120832. Petitioner
opposed the motion, asserting that he had the right of retention over the property
until payment of the loan and the value of the improvements he had introduced

on the property. On March 12, 1998, the trial court granted respondent's motion
for writ of possession. Petitioner's motion for reconsideration was denied by the
trial court on May 21, 1998. Consequently, a writ of possession dated June 16,
1998, together with the Sheriff's Notice to Vacate dated July 7, 1998, were
served upon petitioner.
Petitioner filed with the Court of Appeals a special civil action for certiorari and
prohibition with prayer for a temporary restraining order or preliminary injunction
to annul and set aside the March 12, 1998 and May 21, 1998 orders of the trial
court, including the writ of possession dated June 16, 1998 and the sheriff's
notice to vacate dated July 7, 1998.6
The appellate court summarized the issues involved in the case as follows: (1)
whether or not the mortgagee in an equitable mortgage has the right to retain
possession of the property pending actual payment to him of the amount of
indebtedness by the mortgagor; and (b) whether or not petitioner can be
considered a builder in good faith with respect to the improvements he made on
the property before the transaction was declared to be an equitable mortgage.
The Court of Appeals held that petitioner was not entitled to retain possession of
the subject property. It said that
. . . the mortgagee merely has to annotate his claim at the back of the certificate
of title in order to protect his rights against third persons and thereby secure the
debt. There is therefore no necessity for him to actually possess the property.
Neither should a mortgagee in an equitable mortgage fear that the contract relied
upon is not registered and hence, may not operate as a mortgage to justify its
foreclosure. In Feliza Zubiri v. Lucio Quijano, 74 Phil 47, it was ruled "that when a
contract . . . is held as an equitable mortgage, the same shall be given effect as if
it had complied with the formal requisites of mortgage. . . . by its very nature the
lien thereby created ought not to be defeated by requiring compliance with the
formalities necessary to the validity of a voluntary real estate mortgage, as long
as the land remains in the hands of the petitioner (mortgagor) and the rights of
innocent parties are not affected.
Proceeding from the foregoing, petitioner's imagined fears that his lien would be
lost by surrendering possession are unfounded.
In the same vein, there is nothing to stop the mortgagor de Lara from acquiring
possession of the property pending actual payment of the indebtedness to
petitioner. This does not in anyway endanger the petitioner's right to security
since, as pointed out by private respondents, the petitioner can always have the
equitable mortgage annotated in the Certificate of Title of private respondent and
pursue the legal remedies for the collection of the alleged debt secured by the
mortgage. In this case, the remedy would be to foreclose the mortgage upon
failure to pay the debt within the required period.
It is unfortunate however, that the Court of Appeals, in declaring the transaction
to be an equitable mortgage failed to specify in its Decision the period of time
within which the private respondent could settle her account, since such period
serves as the reckoning point by which foreclosure could ensue. As it is,
petitioner is now in a dilemma as to how he could enforce his rights as a
mortgagee. . . .

Hence, this Court, once and for all resolves the matter by requiring the trial court
to determine the amount of total indebtedness and the period within which
payment shall be made.
Petitioner's claims that he was a builder in good faith and entitled to
reimbursement for the improvements he introduced upon the property were
rejected by the Court of Appeals. It held that petitioner knew, or at least had an
inkling, that there was a defect or flaw in his mode of acquisition. Nevertheless,
the appellate court declared petitioner to have the following rights:
. . . He is entitled to reimbursement for the necessary expenses which he may
have incurred over the property, in accordance with Art. 526 and Art. 452 of the
Civil Code. Moreover, considering that the transaction was merely an equitable
mortgage, then he is entitled to payment of the amount of indebtedness plus
interest, and in the event of non-payment to foreclose the mortgage. Meanwhile,
pending receipt of the total amount of debt, private respondent is entitled to
possession over the disputed property.
The case was finally disposed of by the appellate court in the following manner:
WHERFORE, the Petition is hereby DISMISSED, and this case is ordered
remanded to the Regional Trial Court of Davao City for further proceedings, as
follows:
1) The trial court shall determine
a) The period within which the mortgagor must pay his total amount of
indebtedness.
b) The total amount of indebtedness owing the petitioner-mortgagee plus interest
computed from the time when the judgment declaring the contract to be an
equitable mortgage became final.
c) The necessary expenses incurred by petitioner over the property.7
On March 5, 1999, petitioner's motion for reconsideration was denied by the
appellate court.8 Hence, the present appeal wherein petitioner makes the
following assignment of errors:
A. THE HONORABLE COURT OF APPEALS ERRED IN NOT RULING THAT
THE RTC ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR WITH
GRAVE ABUSE OF DISCRETION AMOUNTING TO LACK OR EXCESS OF
JURISDICTION IN ISSUING A WRIT OF POSSESSION IN FAVOR OF
RESPONDENT.
A.1 The RTC patently exceeded the scope of its authority and acted with grave
abuse of discretion in ordering the immediate delivery of possession of the
Property to respondent as said order exceeded the parameters of the final and
executory decision and constituted a variance thereof.
B. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER IS NOT ENTITLED TO THE POSSESSION OF THE PROPERTY
PRIOR TO THE PAYMENT OF RESPONDENT'S MORTGAGE LOAN.
C. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT
PETITIONER WAS NOT A BUILDER IN GOOD FAITH.
D. THE HONORABLE COURT OF APPEALS ERRED IN RULING THAT
PETITIONER IS ENTITLED TO INTEREST COMPUTED ONLY FROM THE
TIME WHEN THE JUDGMENT DECLARING THE CONTRACT TO BE AN

EQUITABLE MORTGAGE BECAME FINAL.9

Basically, petitioner claims that he is entitled to retain possession of the subject
property until payment of the loan and the value of the necessary and useful
improvements he made upon such property. 10 According to petitioner, neither the
Court of Appeals' decision in G.R. CV No. 42065 nor this Court's decision in G.R.
No. 120832 ordered immediate delivery of possession of the subject property to
respondent.
The dispositive portion of the March 31, 1995 decision of the Court of Appeals in
G.R. CV No. 42065, which was affirmed by this Court, provides that
IN VIEW OF ALL THE FOREGOING, the judgment appealed from is REVERSED
and SET ASIDE and a new one entered: (1) dismissing the complaint; (2)
declaring the "Document of Sale and Special Cession of Rights and Interests"
(Exhibit B) dated February 10, 1960, to be an equitable mortgage not a sale; (3)
upholding the validity of OCT No. P-13038 in the name of Felicitas de Lara; and
(3) declaring null and void OCT No. P-11566 in the name of plaintiff Cornelio
Isaguirre. All other counterclaims for damages are likewise dismissed. Costs
against the appellee. 11
Petitioner argues that the abovementioned decision merely settled the following
matters: (1) that the transaction between petitioner and respondent was not a
sale but an equitable mortgage; (2) that OCT No. P-13038 in the name of
respondent is valid; and (3) that OCT No. P-11566 in the name of petitioner is
null and void. Since the aforementioned decision did not direct the immediate
ouster of petitioner from the subject property and the delivery thereof to
respondent, the issuance of the writ of possession by the trial court on June 16,
1998 constituted an unwarranted modification or addition to the final and
executory decision of this Court in G.R. No. 120832. 12
We do not agree with petitioner's contentions. On the contrary, the March 31,
1995 decision of the appellate court, which was affirmed by this Court on July 8,
1996, served as more than adequate basis for the issuance of the writ of
possession in favor of respondent since these decisions affirmed respondent's
title over the subject property. As the sole owner, respondent has the right to
enjoy her property, without any other limitations than those established by
law. 1 Corollary to such right, respondent also has the right to exclude from the
possession of her property any other person to whom she has not transmitted
such property. 14
It is true that, in some instances, the actual possessor has some valid rights over
the property enforceable even against the owner thereof, such as in the case of a
tenant or lessee. 15 Petitioner anchors his own claim to possession upon his
declared status as a mortgagee. In his Memorandum, he argues that
4.8 It was respondent who asserted that her transfer of the Property to petitioner
was by way of an equitable mortgage and not by sale. After her assertion was
sustained by the Courts, respondent cannot now ignore or disregard the legal
effects of such judicial declaration regarding the nature of the transaction.
xxx xxx xxx
4.13 Having delivered possession of the Property to petitioner as part of the
constitution of the equitable mortgage thereon, respondent is not entitled to the

return of the Property unless and until the mortgage loan is discharged by full
payment thereof. Petitioner's right as mortgagee to retain possession of the
Property so long as the mortgage loan remains unpaid is further supported by the
rule that a mortgage may not be extinguished even though then mortgagordebtor may have made partial payments on the mortgage loan:
Art. 2089. A pledge or mortgage is indivisible, even though the debt may be
divided among the successors in interest of the debtor or the creditor.
Therefore, the debtor's heir who has paid a part of the debt cannot ask for the
proportionate extinguishment of the pledge or mortgage as long as the debt is
not completely satisfied.
Neither can the creditor's heir who has received his share of the debt return the
pledge or cancel the mortgage, to the prejudice of the other heirs who have not
been paid. (Emphasis supplied.)
xxx xxx xxx
4.14 To require petitioner to deliver possession of the Property to respondent
prior to the full payment of the latter's mortgage loan would be equivalent to the
cancellation of the mortgage. Such effective cancellation would render
petitioner's rights ineffectual and nugatory and would constitute unwarranted
judicial interference.
xxx xxx xxx
4.16 The fact of the present case show that respondent delivered possession of
the Property to petitioner upon the execution of the Deed of Absolute Sale and
Special Cession of Rights and Interest dated 10 February 1960. Hence, transfer
of possession of the Property to petitioner was an essential part of whatever
agreement the parties entered into, which, in this case, the Supreme Court
affirmed to be an equitable mortgage.
xxx xxx xxx
4.19 Petitioner does not have the mistaken notion that the mortgagee must be in
actual possession of the mortgaged property in order to secure the debt.
However, in this particular case, the delivery of possession of the Property was
an integral part of the contract between petitioner and respondent. After all, it was
supposed to be a contract of sale. If delivery was not part of the agreement
entered into by the parties in 1960, why did respondent surrender possession
thereof to petitioner in the first place?
4.20 Now that the Courts have ruled that the transaction was not a sale but a
mortgage, petitioner's entitlement to the possession of the Property should be
deemed as one of the provisions of the mortgage, considering that at the time the
contract was entered into, possession of the Property was likewise delivered to
petitioner. Thus, until respondent has fully paid her mortgage loan, petitioner
should be allowed to retain possession of the subject property. 16
Petitioner's position lacks sufficient legal and factual moorings.
A mortgage is a contract entered into in order to secure the fulfillment of a
principal obligation. 17 It is constituted by recording the document in which it
appears with the proper Registry of Property, although, even if it is not recorded,
the mortgage is nevertheless binding between the parties. 18 Thus, the only right
granted by law in favor of the mortgagee is to demand the execution and the

recording of the document in which the mortgage is formalized. 19 As a general

rule, the mortgagor retains possession of the mortgaged property since a
mortgage is merely a lien and title to the property does not pass to the
mortgagee. 20 However, even though a mortgagee does not have possession of
the property, there is no impairment of his security since the mortgage directly
and immediately subjects the property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the obligation for whose security it was
constituted. 21 If the debtor is unable to pay his debt, the mortgage creditor may
institute an action to foreclose the mortgage, whether judicially or extrajudicially,
whereby the mortgaged property will then be sold at a public auction and the
proceeds therefrom given to the creditor to the extent necessary to discharge the
mortgage loan. Apparently, petitioner's contention that "[t]o require [him] . . . to
deliver possession of the Property to respondent prior to the full payment of the
latter's mortgage loan would be equivalent to the cancellation of the mortgage" is
without basis. Regardless of its possessor, the mortgaged property may still be
sold, with the prescribed formalities, in the event of the debtor's default in the
payment of his loan obligation.
Moreover, this Court cannot find any justification in the records to uphold
petitioner's contention that respondent delivered possession of the subject
property upon the execution of the "Deed of Sale and Special Cession of Rights
and Interests" on February 10, 1960 and that the transfer of possession to
petitioner must therefore be considered an essential part of the agreement
between the parties. This self-serving assertion of petitioner was directly
contradicted by respondent in her pleadings. 22 Furthermore, nowhere in the
Court of Appeals' decisions promulgated on March 31, 1995 (G.R. CV No.
42065) and on October 5, 1998 (G.R. SP No. 48310), or in our own decision
promulgated on July 8, 1996 (G.R. No. 120832) was it ever established that the
mortgaged properties were delivered by respondent to petitioner.
In Alvano v. Batoon, 2 this Court held that "[a] simple mortgage does not give the
mortgagee a right to the possession of the property unless the mortgage should
contain some special provision to that effect." Regrettably for petitioner, he has
not presented any evidence, other than his own gratuitous statements, to prove
that the real intention of the parties was to allow him to enjoy possession of the
mortgaged property until full payment of the loan.
Therefore, we hold that the trial court correctly issued the writ of possession in
favor of respondent. Such writ was but a necessary consequence of this Court's
ruling in G.R. No. 120832 affirming the validity of the original certificate of title
(OCT No. P-13038) in the name of respondent Felicitas de Lara, while at the
same time nullifying the original certificate of title (OCT No. P-11566) in the name
of petitioner Cornelio Isaguirre. Possession is an essential attribute of ownership;
thus, it would be redundant for respondent to go back to court simply to establish
her right to possess subject property. Contrary to petitioner's claims, the issuance
of the writ of possession by the trial court did not constitute an unwarranted
modification of our decision in G.R. No. 120832, but rather, was a necessary
complement thereto. 24 It bears stressing that a judgment is not confined to what
appears upon the face of the decision, but also those necessarily included

therein or necessary thereto. 25

With regard to the improvements made on the mortgaged property, we confirm
the Court of Appeals' characterization of petitioner as a possessor in bad faith.
Based on the factual findings of the appellate court, it is evident that petitioner
knew from the very beginning that there was really no sale and that he held
respondent's property as mere security for the payment of the loan obligation.
Therefore, petitioner may claim reimbursement only for necessary expenses;
however, he is not entitled to reimbursement for any useful
expenses 26 which he may have incurred. 27
Finally, as correctly pointed out by the Court of Appeals, this case should be
remanded to the Regional Trial Court of Davao City for a determination of the
total amount of the loan, the necessary expenses incurred by petitioner, and the
period within which respondent must pay such amount. 28 However, no interest is
due on the loan since there has been no express stipulation in writing. 29
WHEREFORE, the assailed Decision of the Court of Appeals dated October 5,
1998 and its Resolution dated March 5, 1999 are hereby AFFIRMED.
Respondent is entitled to delivery of possession of the subject property. This
case is hereby REMANDED to the trial court for determination of the amount of
the loan, the necessary expenses incurred by petitioner and the period within
which the respondent must pay the same.
SO ORDERED.
G.R. No. 112160
February 28, 2000
OSMUNDO S. CANLAS and ANGELINA CANLAS, petitioner,
vs.
COURT OF APPEALS, ASIAN SAVINGS BANK, MAXIMO C. CONTRARES
and VICENTE MAOSCA, respondents.
PURISIMA, J.:
At bar is a Petition for Review on Certiorari under Rule 45 of the Rules of Court,
seeking to review and set aside the Decision 1 of the Court of Appeals in CA-G.R.
CV No. 25242, which reversed the Decision 2 of Branch 59 of the Regional Trial
Court of Makati City in Civil Case No. M-028; the dispositive portion of which
reads:
WHEREFORE, the decision appealed from is hereby REVERSED and SET
ASIDE and a new one is hereby entered DISMISSING the complaint of the
spouses Osmundo and Angelina Canlas. On the counterclaim of defendant Asian
Savings Bank, the plaintiffs Canlas spouses are hereby ordered to pay the
defendant Asian Savings Bank the amount of P50,000.00 as moral and
exemplary damages, plus P15,000.00 as and for attorney's fees.
With costs against appellees.
SO ORDERED.3
The facts that matter:
Sometime in August, 1982, the petitioner, Osmundo S. Canlas, and private
respondent, Vicente Maosca, decided to venture in business and to raise the
capital needed therefor. The former then executed a Special Power of Attorney
authorizing the latter to mortgage two parcels of land situated in San Dionisio,

(BF Homes) Paranaque, Metro Manila, each lot with semi-concrete residential
house existing thereon, and respectively covered by Transfer Certificate of Title
No. 54366 in his (Osmundo's) name and Transfer Certificate of Title No. S-78498
in the name of his wife Angelina Canlas.
Subsequently, Osmundo Canlas agreed to sell the said parcels of land to Vicente
Maosca, for and in consideration of P850,000.00, P500,000.00 of which
payable within one week, and the balance of P350,000.00 to serve as his
(Osmundo's) investment in the business. Thus, Osmundo Canlas delivered to
Vicente Maosca the transfer certificates of title of the parcels of land involved.
Vicente Maosca, as his part of the transaction, issued two postdated checks in
favor of Osmundo Canlas in the amounts of P40,000.00 and P460,000.00,
respectively, but it turned out that the check covering the bigger amount was not
sufficiently funded.4
On September 3, 1982, Vicente Maosca was able to mortgage the same
parcels of land for P100,000.00 to a certain Attorney Manuel Magno, with the
help of impostors who misrepresented themselves as the spouses, Osmundo
Canlas and Angelina Canlas.5
On September 29, 1982, private respondent Vicente Maosca was granted a
loan by the respondent Asian Savings Bank (ASB) in the amount of P500,000.00,
with the use of subject parcels of land as security, and with the involvement of
the same impostors who again introduced themselves as the Canlas spouses. 6
When the loan it extended was not paid, respondent bank extrajudicially
foreclosed the mortgage.
On January 15, 1983, Osmundo Canlas wrote a letter informing the respondent
bank that the execution of subject mortgage over the two parcels of land in
question was without their (Canlas spouses) authority, and request that steps be
taken to annul and/or revoke the questioned mortgage. On January 18, 1983,
petitioner Osmundo Canlas also wrote the office of Sheriff Maximo O. Contreras,
asking that the auction sale scheduled on February 3, 1983 be cancelled or held
in abeyance. But respondents Maximo C. Contreras and Asian Savings Bank
refused to heed petitioner Canlas' stance and proceeded with the scheduled
auction sale.7
Consequently, on February 3, 1983 the herein petitioners instituted the present
case for annulment of deed of real estate mortgage with prayer for the issuance
of a writ of preliminary injunction; and on May 23, 1983, the trial court issued an
Order restraining the respondent sheriff from issuing the corresponding
Certificate of Sheriff's Sale.8
For failure to file his answer, despite several motions for extension of time for the
filing thereof, Vicente Maosca was declared in default. 9
On June 1, 1989, the lower court a quo came out with a decision annulling
subject deed of mortgage and disposing, thus:
Premises considered, judgment is hereby rendered as follows.1wphi1.nt
1. Declaring the deed of real estate mortgage (Exhibit "L") involving the
properties of the plaintiffs as null and void;
2. Declaring the public auction sale conducted by the defendant Sheriff, involving
the same properties as illegal and without binding effect;

3. Ordering the defendants, jointly and severally, to pay the plaintiffs the sum of
P20,000.00 representing attorney's fees;
4. On defendant ASB's crossclaim: ordering the cross-defendant Vicente
Maosca to pay the defendant ASB the sum of P350,000.00, representing the
amount which he received as proceeds of the loan secured by the void
mortgage, plus interest at the legal rate, starting February 3, 1983, the date when
the original complaint was filed, until the amount is fully paid;
5. With costs against the defendants.
SO ORDERED.10
From such Decision below, Asian Savings Bank appealed to the Court of
Appeals, which handed down the assailed judgment of reversal, dated
September 30, 1983, in CA-G.R. CV No. 25242. Dissatisfied therewith, the
petitioners found their way to this Court via the present Petition; theorizing that:
I
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE
MORTGAGE OF THE PROPERTIES SUBJECT OF THIS CASE WAS VALID.
II
RESPONDENT COURT OF APPEALS ERRED IN HIOLDING THAT
PETITIONERS ARE NOT ENTITLED TO RELIEF BECAUSE THEY WERE
NEGLIGENT AND THEREFORE MUST BEAR THE LOSS.
III
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT
RESPONDENT ASB EXERCISED DUE DILIGENCE IN GRANTING THE LOAN
APPLICATION OF RESPONDENT.
IV
RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT
RESPONDENT ASB DID NOT ACT WITH BAD FAITH IN PROCEEDING WITH
THE FORECLOSURE SALE OF THE PROPERTIES.
V
RESPONDENT COURT OF APPEALS ERRED IN AWARDING RESPONDENT
ASB MORAL DAMAGES.11
The Petition is impressed with merit.
Art. 1173 of the Civil Code, provides:
Art. 1173. The fault or negligence of the obligor consist in the omission of that
diligence which is required by the nature of the obligation and corresponds with
the circumstances of the persons, of the time and of the place. When negligence
shows bad faith, the provisions of articles 1171 and 2201, paragraph 2, shall
apply.
If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be
required. (1104)
The degree of diligence required of banks is more than that of a good father of a
family;12 in keeping with their responsibility to exercise the necessary care and
prudence in dealing even on a registered or titled property. The business of a
bank is affected with public interest, holding in trust the money of the depositors,
which bank deposits the bank should guard against loss due to negligence or

bad faith, by reason of which the bank would be denied the protective mantle of
the land registration law, accorded only to purchasers or mortgagees for value
and in good faith.13
In the case under consideration, from the evidence on hand it can be gleaned
unerringly that respondent bank did not observe the requisite diligence in
ascertaining or verifying the real identity of the couple who introduced
themselves as the spouses Osmundo Canlas and Angelina Canlas. It is worthy to
note that not even a single identification card was exhibited by the said impostors
to show their true identity; and yet, the bank acted on their representations simply
on the basis of the residence certificates bearing signatures which tended to
match the signatures affixed on a previous deed of mortgage to a certain Atty.
Magno, covering the same parcels of land in question. Felizado Mangubat,
Assistant Vice President of Asian Savings Bank, thus testified inter alia:
xxx
xxx
xxx
Q:
According to you, the basis for your having recommended for the
approval of MANASCO's (sic) loan particularly that one involving the property of
plaintiff in this case, the spouses OSMUNDO CANLAS and ANGELINA CANLAS,
the basis for such approval was that according to you all the signatures and other
things taken into account matches with that of the document previously executed
by the spouses CANLAS?
Q:
That is the only basis for accepting the signature on the mortgage, the
basis for the recommendation of the approval of the loan are the financial
statement of MAOSCA?
A:
Yes; among others the signature and TAX Account Number, Residence
Certificate appearing on the previous loan executed by the spouses CANLAS, I
am referring to EXHIBIT 5, mortgage to ATTY. MAGNO, those were made the
basis.
A:
That is just the basis of accepting the signature, because at that time
the loan have been approved already on the basis of the financial statement of
the client the Bank Statement. Wneh (sic) it was approved we have to base it on
the Financial statement of the client, the signatures were accepted only for the
purpose of signing the mortgage not for the approval, we don't (sic) approve
loans on the signature.
ATTY. CLAROS:
Would you agree that as part of ascertaining the identify of the parties particularly
the mortgage, you don't consider also the signature, the Residence Certificate,
the particular address of the parties involved.
A:
I think the question defers (sic) from what you asked a while ago.
Q:
Among others?
A:
We have to accept the signature on the basis of the other signatures
given to us it being a public instrument.
ATTY. CARLOS:
You mean to say the criteria of ascertaining the identity of the mortgagor does not
depend so much on the signature on the residence certificate they have
presented.
A:
We have to accept that.

xxx
xxx
xxx
A:
We accepted the signature on the basis of the mortgage in favor of
ATTY. MAGNO duly notarized which I have been reiterrting (sic) entitled to full
faith considering that it is a public instrument.
ATTY. CARLOS:
What other requirement did you take into account in ascertaining the
identification of the parties particularly the mortgagor in this case.
A:
Residence Certificate.
Q:
Is that all, is that the only requirement?
A:
We requested for others but they could not produce, and because they
presented to us the Residence Certificate which matches on the signature on the
Residence Certificate in favor of Atty. Magno. 14
Evidently, the efforts exerted by the bank to verify the identity of the couple
posing as Osmundo Canlas and Angelina Canlas fell short of the responsibility of
the bank to observe more than the diligence of a good father of a family. The
negligence of respondent bank was magnified by the fact that the previous deed
of mortgage (which was used as the basis for checking the genuineness of the
signatures of the supposed Canlas spouses) did not bear the tax account
number of the spouses,15 as well as the Community Tax Certificate of Angelina
Canlas.16 But such fact notwithstanding, the bank did not require the impostors to
submit additional proof of their true identity.
Under the doctrine of last clear chance, which is applicable here, the respondent
bank must suffer the resulting loss. In essence, the doctrine of last clear chance
is to the effect that where both parties are negligent but the negligent act of one
is appreciably later in point of time than that of the other, or where it is impossible
to determine whose fault or negligence brought about the occurrence of the
incident, the one who had the last clear opportunity to avoid the impending harm
but failed to do so, is chargeable with the consequences arising therefrom.
Stated differently, the rule is that the antecedent negligence of a person does not
preclude recovery of damages caused by the supervening negligence of the
latter, who had the last fair chance to prevent the impending harm by the
exercise of due diligence.17
Assuming that Osmundo Canlas was negligent in giving Vicente Maosca the
opportunity to perpetrate the fraud, by entrusting to latter the owner's copy of the
transfer certificates of title of subject parcels of land, it cannot be denied that the
bank had the last clear chance to prevent the fraud, by the simple expedient of
faithfully complying with the requirements for banks to ascertain the identity of
the persons transacting with them.
For not observing the degree of diligence required of banking institutions, whose
business is impressed with public interest, respondent Asian Savings Bank has
to bear the loss sued upon.
In ruling for respondent bank, the Court of Appeals concluded that the petitioner
Osmundo Canlas was a party to the fraudulent scheme of Maosca and
therefore, estopped from impugning the validity of subject deed of mortgage;
ratiocinating thus:
xxx
xxx
xxx

Thus, armed with the titles and the special power of attorney, Maosca went to
the defendant bank and applied for a loan. And when Maosca came over to the
bank to submit additional documents pertinent to his loan application, Osmundo
Canlas was with him, together with a certain Rogelio Viray. At that time,
Osmundo Canlas was introduced to the bank personnel as "Leonardo Rey".
When he was introduced as "Leonardo Rey" for the first time Osmundo should
have corrected Maosca right away. But he did not. Instead, he even allowed
Maosca to avail of his (Osmundo's) membership privileges at the Metropolitan
Club when Maosca invited two officers of the defendant bank to a luncheon
meeting which Osmundo also attended. And during that meeting, Osmundo did
not say who he really is, but even let Maosca introduced him again as
"Leonardo Rey", which all the more indicates that he connived with Maosca in
deceiving the defendant bank.
Finally after the loan was finally approved, Osmundo accompanied Maosca to
the bank when the loan was released. At that time, a manger's check for
P200,000.00 was issued in the name of Oscar Motorworks, which Osmundo
admits he owns and operates.
Collectively, the foregoing circumstances cannot but conjure to a single
conclusion that Osmundo active participated in the loan application of defendant
Asian Savings Bank, which culminated in his receiving a portion of the process
thereof:18
A meticulous and painstaking scrutiny of the Records on hand, reveals, however,
that the findings arrived at by the Court of Appeals are barren of any sustainable
basis. For instance, the execution of the deeds of mortgages constituted by
Maosca on subject pieces of property of petitioners were made possible not by
the Special Power of Attorney executed by Osmundo Canlas in favor of Maosca
but through the use of impostors who misrepresented themselves as the spouses
Angelina Canlas and Osmundo Canlas. It cannot be said therefore, that the
petitioners authorized Vicente Maosca to constitute the mortgage on their
parcels of land.
What is more, Osmundo Canlas was introduced as "Leonardo Rey" by Vicente
Maosca, only on the occasion of the luncheon meeting at the Metropolitan
Club.19 Thereat, the failure of Osmundo Canlas to rectify Maosca's
misrepresentations could not be taken as a fraudulent act. As well explained by
the former, he just did not want to embarrass Maosca, so that he waited for the
end of the meeting to correct Maosca.20
Then, too, Osmundo Canlas recounted that during the said luncheon meeting,
they did not talk about the security or collateral for the loan of Maosca with
ASB.21 So also, Mrs. Josefina Rojo, who was the Account Officer of Asian
Savings Bank when Maosca applied for subject loan, corroborated the
testimony of Osmundo Canlas, she testified:
xxx
xxx
xxx
QUESTION:
Now could you please describe out the lunch conference at
the Metro Club in Makati?
ANSWER:
Mr. Mangubat, Mr. Maosca and I did not discuss with respect
to the loan application and discuss primarily his business.

xxx
xxx
xxx
QUESTION:
So, what is the main topic of your discussion during the
meeting?
ANSWER:
The main topic war then, about his business although, Mr.
Leonardo Rey, who actually turned out as Mr. Canlas, supplier of Mr. Maosca.
QUESTION:
I see . . . other than the business of Mr. Maosca, were there
any other topic discussed?
ANSWER:
YES.
QUESTION:
And what was the topic:
ANSWER:
General Economy then.
xxx
xxx
x x x22
Verily, Osmundo Canlas was left unaware of the illicit plan of Maosca,
explaining thus why he (Osmundo) did not bother to correct what Maosca
misrepresented and to assert ownership over the two parcels of land in question.
Not only that; while it is true that Osmundo Canlas was with Vicente Maosca
when the latter submitted the documents needed for his loan application, and
when the check of P200,000.00 was released, the former did not know that the
collateral used by Maosca for the said loan were their (Canlas spouses')
properties. Osmundo happened to be with Maosca at the time because he
wanted to make sure that Maosca would make good his promise to pay the
balance of the purchase price of the said lots out of the proceeds of the loan. 23
The receipt by Osmundo Canlas of the P200,000.00 check from ASB could not
estop him from assailing the validity of the mortgage because the said amount
was in payment of the parcels of land he sold to Maosca. 24
What is decisively clear on record is that Maosca managed to keep Osmundo
Canlas uninformed of his (Maosca's) intention to use the parcels of land of the
Canlas spouses as security for the loan obtained from Asian Savings Bank.
Since Vicente Maosca showed Osmundo Canlas several certificates of title of
lots which, according to Maosca were the collaterals, Osmundo Canlas was
confident that their (Canlases') parcels of land were not involved in the loan
transactions with the Asian Savings Bank. 25 Under the attendant facts and
circumstances, Osmundo Canlas was undoubtedly negligent, which negligence
made them (petitioners) undeserving of an award of attorney's fees.
Settled is the rule that a contract of mortgage must be constituted only by the
absolute owner on the property mortgaged; 26 a mortgage, constituted by an
impostor is void.27 Considering that it was established indubitably that the
contract of mortgage sued upon was entered into and signed by impostors who
misrepresented themselves as the spouses Osmundo Canlas and Angelina
Canlas, the Court is of the ineluctible conclusion and finding that subject contract
of mortgage is a complete nullity.
WHEREFORE, the Petition is GRANTED and the Decision of the Court of
Appeals, dated September 30, 1993, in CA-G.R. CV No. 25242 SET ASIDE. The
Decision of Branch 59 of the Regional Trial Court of Makati City in Civil Case No.
M-028 is hereby REINSTATED. No pronouncement as to costs.
SO ORDERED.1wphi1.nt

G.R. No. L-13683

March 28, 1960
PAZ SAMANILLA, petitioner-appellee,
vs.
CENEN A. CAJUCOM, ET AL., respondents-appellants.
R. M. Ordiz de Guzman, L. P. de Guzman, Jr. and Lorenzo de Guzman, Sr. for
appellee.Agustin C. Bagasao for appellants.
REYES, J.B.L., J.:
Appeal interposed by respondents Cenen A. Cajucom and Jose A. Cajucom from
the order of the Court of First Instance of Nueva Ecija in Land Registration Case
No. 210, G.L.R.O. Rec. No. N-6010, requiring them to surrender Original
Certificate of Title No. O-966 within ten days either to the Register of Deeds or to
the Court for the annotation of a mortgage executed by them in favor of petitioner
Paz Samanilla.
The case arose out of a petition presented by appellee Samanilla in said
registration case alleging that respondents Cajucom had executed in her favor,
on December 20, 1955, a real estate mortgage over their rights and participation
on the parcel of land covered by Original Certificate of Title No. O-966 to secure
a loan of P10,000.00; that sometime in February, 1956, respondents borrowed
the title from her on the excuse that they needed it to segregate from the land the
portion claimed by other persons; and that thereafter, petitioner asked for the
return of the title so that she could register her mortgage, but respondents
refused. Attached to the petition were the deed of mortgage and the affidavits of
petitioner and a certain Antonio G. Javier, who allegedly was the one who
borrowed the title from petitioner in behalf of respondents.
Respondents opposed the petition, claiming that the mortgage in question was
void ab initio for want of consideration, and that the issues should be litigated in
an ordinary civil action. The opposition notwithstanding, the lower court entered
an order on June 12, 1956 finding the petition well-taken and ordering
respondents to surrender their title either to the Register of Deeds or to the
Court. From this order, respondents appealed to the Court of Appeals, which
forwarded the case to us for raising purely question of law.
The appeal has no merit. Appellants' sole objection to the registration of the deed
of mortgage is that the same was executed without any consideration. But there
is a legal presumption of sufficient cause or consideration supporting a contract,
even if such cause is not stated therein (Art. 1354, New Civil Code; Rule 123,
sec. 69 [r], Rules of Court). This presumption appellants cannot overcome by a
simple assertion of lack of consideration. Especially may not the presumption be
so lightly set aside when the contract itself states that consideration was given,
and the same has been reduced into a public instrument with all due formalities
and solemnities as in this case. As held by this Court.
Once a mortgage has been signed in due form, the mortgagee is entitled to its
registration as a matter of right. By executing the mortgage the mortgagor is
understood to have given his consent to its registration, and he cannot be

permitted to revoke it unilaterally. The validity and fulfillment of contracts cannot

be left to the will of one of the contracting parties (Article 1254 of the Civil Code)."
(Gonzales vs. Basa, Jr., et al., 73 Phil., 704)
To overcome the presumption of consideration, appellants must show the alleged
lack of consideration of the mortgage by preponderance of evidence in a proper
action.
Appellants assert that they cannot be compelled to surrender their title for
registration of the mortgage in question until they are given an opportunity to
show its invalidity in an ordinary civil action, because registration is an essential
element of a real estate mortgage and the surrender of their title would complete
this requirement of registration. The argument is fallacious, for a mortgage,
whether registered or not, is binding between the parties, registration being
necessary only to make the same valid against third persons (Art. 2125, New
Civil Code). In other words, registration only operates as a notice of the mortgage
to others, but neither adds to its validity nor convert an invalid mortgage into a
valid one between the parties. Appellants still have the right to show that the
mortgage in question is invalid for lack of consideration in an ordinary action and
there ask for the avoidance of the deed and the cancellation of its registration.
But until such action is filed and decided, it would be too dangerous to the rights
of the mortgagee to deny registration of her mortgage, because her rights can so
easily be defeated by a transfer or conveyance of the mortgaged property to an
innocent third person. In Gurbax Singh Pabla & Co., et al. vs. Reyes, et al., 92
Phil., 177; 48 Off. Gaz., 4365, this Court had the occasion to rule that "if the
purpose of registration is merely to give notice, the questions regarding the effect
or invalidity of instruments are expected to be decided after, not before,
registration. It must follow as a necessary consequence that registration must
first be allowed and validity or effect litigated afterwards".
Appellants cite the case of Government of the Philippine Islands vs. Payva, 44
Phil., 629. However, the appellee correctly points out that the same is
inapplicable to this case because the only question raised and decide therein
was whether an order of the registration court requiring the holder of a duplicate
certificate of title for the purpose of annotating an attachment, lien, or adverse
claim under sec. 72 of Act 496 is appealable or not, and we held that it was,
because it resolves important questions as to the respective rights of the parties.
It should be remembered that the Land Registration Court may summarily pass
upon the validity of adverse claims sought to be registered under sections 72 and
110 of the Land Registration Act, if all the parties agree to submit the precise
question to the court (see Gurbax Singh Pabla Co. vs. Reyes, supra); and when
it is thus submitted, the losing party may appeal the court's ruling, as held in the
Payva case. But appellants herein, by opposing appellee's petition on the ground
that their defense of invalidity o the mortgage sought to be registered is
contentious and should be litigated in a separate action, precisely refused to
submit said question to the Land Registration Court. The court, then, acted
correctly in ordering the recording without passing upon the validity of the
mortgage in question.

The order appealed from is affirmed, without prejudice to appellants' right to bring
a separate action to question the validity of the mortgage in question and ask for
the cancellation of its registration. Costs against appellants.
G.R. No. L-26371
September 30, 1969
MOBIL OIL PHILIPPINES, INC., plaintiff-appellant,
vs.
RUTH R. DIOCARES, ET AL., defendants-appellees.
Faylona, Berroya, Norte and Associates for plaintiff-appellant.Vivencio G. Ibrado
Jr. for defendants-appellees.
FERNANDO, J.:
It may very well be, as noted by jurists of repute, that to stress the element of a
promise as the basis of contracts is to acknowledge the influence of natural law. 1
Nonetheless, it does not admit of doubt that whether under the civil law or the
common law, the existence of a contract is unthinkable without one's word being
plighted. So the New Civil Code provides: "A contract is a meeting of minds
between two persons whereby one binds himself, with respect to the other, to
give something or to render some service." 2 So it is likewise under American law.
Thus: "A contract is a promise or a set of promises for the breach of which the
law gives a remedy, or the performance of which the law in some way recognizes
as a duty." 3
The law may go further and require that certain formalities be executed. Thus, for
a mortgage to be validly constituted, "it is indispensable, ..., that the document in
which it appears be recorded in the Registry of Property." The same codal
provision goes on: "If the instrument is not recorded, the mortgage is
nevertheless binding between the parties." 4
The question before us in this appeal from a lower court decision, one we have to
pass upon for the first time, is the effect, if any, to be given to a mortgage
contract admittedly not registered, only the parties being involved in the suit. The
lower court was of the opinion that while it "created a personal obligation [it] did
not establish a real estate mortgage." 5 It did not decree foreclosure therefor.
Plaintiff-appellant appealed. We view the matter differently and reverse the lower
court.
The case for the plaintiff, Mobil Oil Philippines, Inc., now appellant, was
summarized in the lower court order of February 25, 1966, subject of this appeal.
Thus: "In its complaint plaintiff alleged that on Feb. 9, 1965 defendants Ruth R.
Diocares and Lope T. Diocares entered into a contract of loan and real estate
mortgage wherein the plaintiff extended to the said defendants a loan of
P45,000.00; that said defendants also agreed to buy from the plaintiff on cash
basis their petroleum requirements in an amount of not less than 50,000 liters per
month; that the said defendants will pay to the plaintiff 9-1/2% per annum on the
diminishing balance of the amount of their loan; that the defendants will repay the
said loan in monthly installments of P950.88 for a period of five (5) years from
February 9, 1965; that to secure the performance of the foregoing obligation they
executed a first mortgage on two parcels of land covered by Transfer Certificates

of Title Nos. T-27136 and T-27946, both issued by the Register of Deeds of
Bacolod City. The agreement further provided that in case of failure of the
defendants to pay any of the installments due and purchase their petroleum
requirements in the minimum amount of 50,000 liters per month from the plaintiff,
the latter has the right to foreclose the mortgage or recover the payment of the
entire obligation or its remaining unpaid balance; that in case of foreclosure the
plaintiff shall be entitled to 12% of the indebtedness as damages and attorney's
fees. A copy of the loan and real estate mortgage contract executed between the
plaintiff and the defendants is attached to the complaint and made a part thereof.
The complaint further alleges that the defendant paid only the amount of
P1,901.76 to the plaintiff, thus leaving a balance of P43,098.24, excluding
interest, on their indebtedness. The said defendants also failed to buy on cash
basis the minimum amount of petroleum which they agreed to purchase from the
plaintiff. The plaintiff, therefore, prayed that the defendants be ordered to pay the
amount of P43,098.24, with interest at 9-1/2% per annum from the date it fell
due, and in default of such payment that the mortgaged properties be sold and
the proceeds applied to the payment of defendants' obligation." 6
Defendants, Ruth R. Diocares and Lope T. Diocares, now appellees, admitted
their indebtedness as set forth above, denying merely the alleged refusal to pay,
the truth, according to them, being that they sought for an extension of time to do
so, inasmuch as they were not in a position to comply with their obligation. They
further set forth that they did request plaintiff to furnish them with the statement of
accounts with the view of paying the same on installment basis, which request
was, however, turned down by the plaintiff.
Then came a motion from the plaintiff for a judgment on the pleadings, which
motion was favorably acted on by the lower court. As was stated in the order
appealed from: "The answer of the defendants dated October 21, 1965 did not
raise any issue. On the contrary, said answer admitted the material allegations of
the complaint. The plaintiff is entitled to a judgment on the pleadings." 7
As to why the foreclosure sought by plaintiff was denied, the lower court order on
appeal reads thus: "The Court cannot, however, order the foreclosure of the
mortgage of properties, as prayed for, because there is no allegation in the
complaint nor does it appear from the copy of the loan and real estate mortgage
contract attached to the complaint that the mortgage had been registered. The
said loan agreement although binding among the parties merely created a
personal obligation but did not establish a real estate mortgage. The document
should have been registered. (Art. 2125, Civil Code of the Phil.)" 8 The dispositive
portion is thus limited to ordering defendants "to pay the plaintiff the account of
P43,098.24, with interest at the rate of 9-1/2% per annum from the date of the
filing of the complaint until fully paid, plus the amount of P2,000.00 as attorneys'
fees, and the costs of the suit." 9
Hence this appeal, plaintiff-appellant assigning as errors the holding of the lower
court that no real estate mortgage was established and its consequent refusal to
order the foreclosure of the mortgaged properties. As set forth at the outset, we
find the appeal meritorious. The lower court should not have held that no real
estate mortgage was established and should have ordered its foreclosure.

The lower court predicated its inability to order the foreclosure in view of the
categorical nature of the opening sentence of the governing article 10 that it is
indispensable, "in order that a mortgage may be validly constituted, that the
document in which it appears be recorded in the Registry of Property." Note that
it ignored the succeeding sentence: "If the instrument is not recorded, the
mortgage is nevertheless binding between the parties." Its conclusion, however,
is that what was thus created was merely "a personal obligation but did not
establish a real estate mortgage."
Such a conclusion does not commend itself for approval. The codal provision is
clear and explicit. Even if the instrument were not recorded, "the mortgage is
nevertheless binding between the parties." The law cannot be any clearer. Effect
must be given to it as written. The mortgage subsists; the parties are bound. As
between them, the mere fact that there is as yet no compliance with the
requirement that it be recorded cannot be a bar to foreclosure.1awphl.nt
A contrary conclusion would manifest less than full respect to what the codal
provision ordains. The liability of the mortgagor is therein explicitly recognized. To
hold, as the lower court did, that no foreclosure would lie under the
circumstances would be to render the provision in question nugatory. That we are
not allowed to do. What the law requires in unambiguous language must be lived
up to. No interpretation is needed, only its application, the undisputed facts
calling for it. 11
Moreover to rule as the lower court did would be to show less than fealty to the
purpose that animated the legislators in giving expression to their will that the
failure of the instrument to be recorded does not result in the mortgage being any
the less "binding between the parties." In the language of the Report of the Code
Commission: "In article [2125] an additional provision is made that if the
instrument of mortgage is not recorded, the mortgage is nevertheless binding
between the parties." 12 We are not free to adopt then an interpretation, even
assuming that the codal provision lacks the forthrightness and clarity that this
particular norm does and, therefore, requires construction, that would frustrate or
nullify such legislative objective.
Nor is the reason difficult to discern why such an exception should be made to
the rule that is indispensable for a mortgage to be validly constituted that it be
recorded. Equity so demands, and justice is served. There is thus full
acknowledgment of the binding effect of a promise, which must be lived up to,
otherwise the freedom a contracting party is supposed to possess becomes
meaningless. It could be said of course that to allow foreclosure in the absence
of such a formality is to offend against the demands of jural symmetry. What is
"indispensable" may be dispense with. Such an objection is far from fatal. This
would not be the first time when logic yields to what is fair and what is just. To
such an overmastering requirement, law is not immune.
WHEREFORE, the lower court order of February 25, 1966 is affirmed with the
modification that in default of the payment of the above amount of P43,028.94
with interests at the rate of 9-1/2% per annum from the date of the filing of the
complaint, that the mortgage be foreclosed with the properties subject thereof

being sold and the proceeds of the sale applied to the payment of the amounts
due the plaintiff in accordance with law. With costs against defendants-appellees.
G.R. No. 147788
March 19, 2002
EDILBERTO CRUZ and SIMPLICIO CRUZ, petitioners,
vs.
BANCOM FINANCE CORPORATION (NOW UNION BANK OF THE
PHILIPPINES), respondent.
DECISION
PANGANIBAN, J.:
An absolutely simulated contract of sale is void ab initio and transfers no
ownership right. The purported buyer, not being the owner, cannot validly
mortgage the subject property. Consequently, neither does the buyer at the
foreclosure sale acquire any title thereto.
Statement of the Case
Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of
Court, assailing the March 30, 2001 Decision 1 of the Court of Appeals (CA) in
CA-GR No. 58346. The decretal portion of the challenged Decision reads as
follows:
"WHEREFORE, upon the premises, the assailed Decision is REVERSED and
SET ASIDE. A new one is rendered declaring BANCOMs right to the subject
land as a purchaser in good faith and for value, and ordering the cancellation of
the Notice of Lis Pendens on TCT No. 248262-Bulacan. Without pronouncement
as to costs."2
The Facts
The factual antecedents of the case are summarized by the Court of Appeals
thus:
"Brothers Rev. Fr. Edilberto Cruz and Simplicio Cruz, plaintiffs herein, were the
registered owners of a 339,335 square meter or 33.9335 hectare parcel of
agricultural land together with improvements located in Barangay Pulang Yantoc,
Angat, Bulacan covered by TCT No. 19587. Sometime in May 1978, defendant
Norma Sulit, after being introduced by Candelaria Sanchez to Fr. Cruz, offered to
purchase the land. Plaintiffs asking price for the land was P700,000.00, but
Norma only had P25,000.00 which Fr. Cruz accepted as earnest money with the
agreement that titles would be transferred to Norma upon payment of the
balance of P675,000.00. Norma failed to pay the balance and proposed [to] Fr.
Cruz to transfer the property to her but the latter refused, obviously because he
had no reason to trust Norma. But capitalizing on the close relationship of
Candelaria Sanchez with the plaintiffs, Norma succeeded in having the plaintiffs
execute a document of sale of the land in favor of Candelaria who would then
obtain a bank loan in her name using the plaintiffs land as collateral. On the
same day, Candelaria executed another Deed of Absolute Sale over the land in
favor of Norma. In both documents, it appeared that the consideration for the
sale of the land was only P150,000.00. Pursuant to the sale, Norma was able to
effect the transfer of the title to the land in her name under TCT No. T-248262.
"Evidence shows that aside from the P150,000.00, Candelaria undertook to pay

the plaintiffs the amount of P655,000.00 representing the balance of the actual
price of the land. In a Special Agreement dated September 1, 1978, Norma
assumed Candelarias obligation, stipulating to pay the plaintiffs the said amount
within six months on pain of fine or penalty in case of non-fulfillment. Unknown to
the plaintiffs, Norma managed to obtain a loan from Bancom in the amount of
P569,000.00 secured by a mortgage over the land now titled in her name.
"On account of Normas failure to pay the amount stipulated in the Special
Agreement and her subsequent disappearance from her usual address, plaintiffs
were prompted to file the herein complaint for the reconveyance of the land.
"Norma filed an Answer on February 11, 1980 but failed to appear in court and
was eventually declared in default. On May 20, 1980, Bancom filed a motion for
leave to intervene which was granted by the trial court. In its Answer in
Intervention, Bancom claimed priority as mortgagee in good faith; and that its
contract of mortgage with Norma had been executed before the annotation of
plaintiffs interest in the title.
"Meanwhile in the middle of 1980, Norma defaulted in her payment to the Bank
and her mortgage was foreclosed. At the subsequent auction sale, Bancom was
declared the highest bidder and was issued the corresponding certificate of sale
over the land.
"On January 25, 1996, the trial court rendered the herein assailed Decision in
favor of the plaintiffs. It ruled that the contract of sale between plaintiffs and
Candelaria was absolutely simulated. Consequently, the second contract of sale,
that is, between Candelaria and Norma, produced no legal effect. As for Bancom,
the trial court held that the Bank was not a mortgagee in good faith thus it can not
claim priority of rights over plaintiffs property." 3
Ruling of the Court of Appeals
In reversing the RTC, the CA held that the Deeds of Sale were valid and binding,
not simulated. Thus, the Contract of Mortgage between Sulit and respondent was
likewise valid.
Petitioners, the CA ruled, intended to be bound by the Contracts of Sale and
Mortgage, because they "did not seek to annul the same but instead executed a
special agreement to enforce payment of the balance of the price in the amount
of P665,000.00."4
Furthermore, it upheld respondent as a "mortgagee in good faith;" ergo, it had a
preferential right to the land.
Hence, this Petition.5
Issues
In their Memorandum, petitioners raise the following issues for this Courts
consideration:
I
"Whether or not the Honorable Court of Appeals seriously erred when it held that
the petitioners intended to enter into a sale of the property in question and that
the declarations of Petitioner Fr. Edilberto Cruz in Court belied the court a quos
finding that the Deeds of Sale in question were absolute simulations.
II
"Whether or not the Honorable Court of Appeals gravely erred when it ruled that

respondent bank was a mortgagee in good faith, despite the fact that respondent
Bancom was in truth and in fact a mortgagee in bad faith over the subject
property.
III
"Whether or not the Honorable Court of Appeals seriously erred when it ruled that
the face of the title [to] the property did not disclose any irregularity that would
arouse suspicion by respondent bank as to the condition of the subject land
despite the fact that questions and circumstances abound which would render
respondent bank not a mortgagee in good faith, and that the case of Sunshine
Finance Investment Corporation vs. Intermediate Appellate Court applies to the
instant case.
IV
"Whether or not the Honorable Court of Appeals gravely erred when it ruled that
respondent bank possesses a preferential right over petitioners on the subject
land as a mortgagee in good faith."6
The above issues can be summed up into two: (1) the validity of the Deeds of
Sale and Mortgage and (2) the good faith of the mortgagee.
This Courts Ruling
The Petition is meritorious.
First Issue:
Validity of the Sale and the Mortgage
Petitioners claim that the Deed of Sale 7 they executed with Sanchez, as well as
the Deed of Sale8 executed between Sanchez and Sulit, was absolutely
simulated; hence, null and void. On the other hand, echoing the appellate court,
respondent contends that petitioners intended to be bound by those Deeds, and
that the real estate mortgage over the subject property was valid.
As a general rule, when the terms of a contract are clear and unambiguous about
the intention of the contracting parties, the literal meaning of its stipulations shall
control. But if the words appear to contravene the evident intention of the parties,
the latter shall prevail over the former.9 The real nature of a contract may be
determined from the express terms of the agreement, as well as from the
contemporaneous and subsequent acts of the parties thereto. 10
On the other hand, simulation takes place when the parties do not really want the
contract they have executed to produce the legal effects expressed by its
wordings.11 Simulation or vices of declaration may be either absolute or relative.
Article 1345 of the Civil Code distinguishes an absolute simulation from a relative
one while Article 1346 discusses their effects, as follows:
"Art. 1345. Simulation of a contract may be absolute or relative. The former takes
place when the parties do not intend to be bound at all; the latter when the
parties conceal their true agreement.
"Art. 1346. An absolutely simulated contract is void. A relative simulation, when it
does not prejudice a third person and is not intended for any purpose contrary to
law, morals, good customs, public order or public policy binds the parties to their
agreement."
In Rongavilla v. Court of Appeals,12 we held that a deed of sale, in which the
stated consideration had not in fact been paid, was "a false contract"; that is "void

ab initio." Furthermore, Ocejo v. Flores,13 ruled that "a contract of purchase and
sale is null and void and produces no effect whatsoever where it appears that
[the] same is without cause or consideration which should have been the motive
thereof, or the purchase price which appears thereon as paid but which in fact
has never been paid by the purchaser to the vendor."
Although the Deed of Sale14 between petitioners and Sanchez stipulated a
consideration of P150,000, there was actually no exchange of money between
them. Petitioner Edilberto Cruz narrated how the transaction came about:
"ATTY. CABRERA:
Q Why did you execute the deed of sale in favor of Candelaria Sanchez since it
was Norma Sulit with whom you are transacting?
A Because Norma Sulit made the promise to Mrs. Candelaria Sanchez that upon
acquiring the title from us, they can borrow money from the Bank. So it is a way
of acquiring the title from us, sir.
Q. This deed of sale marked Exhibit D which you just identified, stipulates a
consideration of P150,000.00. The question, Father, is - did you receive the
P150,000.00?
ATTY. AGRAVANTE
Objection, your Honor, the document is the best evidence.
ATTY. CABRERA
This is an action to annul a certain contract.
COURT
He received the consideration stated in the contract. The witness may answer.
WITNESS
A Not a single centavo we received from Candelaria Sanchez as if it is nominal,
sir.
ATTY. CABRERA
Q If you did not receive this P150,000.00 stated in this deed of sale that you and
your brother executed from Candelaria Sanchez, did you receive the said amount
from Norma Sulit or anybody else for that matter?
A Not a single centavo, sir."15
His claim was corroborated by Sanchez. She likewise said that the Deed of
Sale16 she executed with Sulit, for which she did not receive any consideration
was only for the purpose of placing the title to the property in the latters name.
She testified as follows:
"Q And so you transferred the property in favor of Norma Sulit?
A Yes, sir.
Q I am showing to you this document which has already been marked when the
representative of the Register of Deeds produced the pertinent documents before
the court as Exhibit "C", is this that document that you executed transferring the
property in the name of Norma Sulit?
A Yes, sir, this is it.
Q There is a consideration of P150,000.00 stated in this Exhibit "C", were you
paid by Norma Sulit the amount of P150,000.00 appearing in this Exhibit "C"?
ATTY BUYCO:
The question is leading, Your Honor.

COURT:
Witness may answer.
A No amount was given, sir. We prepared this document to transfer the title [to]
her name only."17
Respondent never offered any evidence to refute the foregoing testimonies. 18 On
the contrary, it even admitted that the stipulated consideration of P150,000 in the
two Deeds of Sale had never been actually paid by Sanchez to petitioners; 19
neither by Sulit to the former.20
Another telling sign of simulation was the complete absence of any attempt on
the part of the buyers -- Sanchez and Sulit -- to assert their alleged rights of
ownership over the subject property.21 This fact was confirmed by respondent
which, however, tried to justify the non-occupancy of the land by Sanchez and
Sulit. Supposedly, because the two failed to pay the purchase price of the land,
they could not force petitioners to vacate it. 22
The records clearly show that the two Deeds of Absolute Sale were executed
over the same property on the same date, June 21, 1978. Six days thereafter, on
June 27, 1978, it was mortgaged by Sulit to Federal Insurance Company for
P500,000. The mortgage was cancelled when she again mortgaged the property
to respondent for P569,000 on August 22, 1979. It is also undisputed that
petitioners did not receive any portion of the proceeds of the loan.
Clearly, the Deeds of Sale were executed merely to facilitate the use of the
property as collateral to secure a loan from a bank. 23 Being merely a subterfuge,
these agreements could not have been the source of any consideration for the
supposed sales.24 Indeed, the execution of the two documents on the same day
sustains the position of petitioners that the Contracts of Sale were absolutely
simulated, and that they received no consideration therefor.25
The failure of Sulit to take possession of the property purportedly sold to her was
a clear badge of simulation that rendered the whole transaction void and without
force and effect, pursuant to Article 1409 26 of the Civil Code.27 The fact that she
was able to secure a Certificate of Title to the subject property in her name did
not vest her with ownership over it.28 A simulated deed of sale has no legal effect;
consequently any transfer certificate of title (TCT) issued in consequence thereof
should be cancelled.29 A simulated contract is not a recognized mode of acquiring
ownership.30
Second Issue:
Good Faith of Mortgagee
Petitioners argue that respondent was not a mortgagee in good faith because, at
the time it registered the real estate mortgage over the subject property, their
adverse claim and notice of lis pendens had already been annotated on the TCT
(on October 30, 1979 and December 10, 1979, respectively). On the other hand,
respondent maintains that petitioners were the ones in bad faith, because they
already had knowledge of the existence of the mortgage over the property when
they caused the annotation of their adverse claim and notice of lis pendens.
As a general rule, every person dealing with registered land may safely rely on
the correctness of the certificate of title and is no longer required to look behind
the certificate in order to determine the actual owner.31 To do so would be

contrary to the evident purpose of Section 39 of Act 496 which we quote

hereunder:
"Sec. 39. Every person receiving a certificate of title in pursuance of a decree of
registration, and every subsequent purchaser of registered land who takes a
certificate of title for value in good faith shall hold the same free of all
encumbrances except those noted on said certificate, and any of the following
encumbrances which may be subsisting, namely:
"First. Liens, claims, or rights arising or existing under the laws or Constitution of
the United States or of the Philippine Islands which the statutes of the Philippine
Islands cannot require to appear of record in the Registry.
"Second. Taxes within two years after the same became due and payable.
"Third. Any public highway, way, private way established by law, or any
Government irrigation canal or lateral thereof, where the certificate of title does
not state that the boundaries of such highway, way, or irrigation canal or lateral
thereof, have been determined.
"But if there are easements or other rights appurtenant to a parcel of registered
land which for any reason have failed to be registered, such easements or rights
shall remain so appurtenant notwithstanding such failure, and shall be held to
pass with the land until cut off or extinguished by the registration of the servient
estate, or in any other manner."
This rule is, however, subject to the right of a person deprived of land through
fraud to bring an action for reconveyance, provided the rights of innocent
purchasers for value and in good faith are not prejudiced. An innocent purchaser
for value or any equivalent phrase shall be deemed, under Section 38 of the
same Act,32 to include an innocent lessee, mortgagee or any other encumbrancer
for value.33
Respondent claims that, being an innocent mortgagee, it should not be required
to conduct an exhaustive investigation on the history of the mortgagors title
before it could extend a loan.34
Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As
such, unlike private individuals, it is expected to exercise greater care and
prudence in its dealings, including those involving registered lands. 35 A banking
institution is expected to exercise due diligence before entering into a mortgage
contract.36 The ascertainment of the status or condition of a property offered to it
as security for a loan must be a standard and indispensable part of its
operations.37
In Rural Bank of Compostela v. CA,38 we held that a bank that failed to observe
due diligence was not a mortgagee in good faith. In the words of the ponencia:
"x x x [T]he rule that persons dealing with registered lands can rely solely on the
certificate of title does not apply to banks.
"Banks, indeed, should exercise more care and prudence in dealing even with
registered lands, than private individuals, for their business is one affected with
public interest, keeping in trust money belonging to their depositors, which they
should guard against loss by not committing any act of negligence which
amounts to lack of good faith by which they would be denied the protective
mantle of the land registration statute, Act [No.] 496, extended only to purchasers

for value and in good faith, as well as to mortgagees of the same character and
description." (Citations omitted)
Recently, in Adriano v. Pangilinan,39 we said that the due diligence required of
banks extended even to persons regularly engaged in the business of lending
money secured by real estate mortgages.
The evidence before us indicates that respondent bank was not a mortgagee in
good faith.40 First, at the time the property was mortgaged to it, it failed to
conduct an ocular inspection.41 Judicial notice is taken of the standard practice
for banks before they approve a loan: to send representatives to the premises of
the land offered as collateral and to investigate the ownership thereof. 42 As
correctly observed by the RTC, respondent, before constituting the mortgage
over the subject property, should have taken into consideration the following
questions:
"1) Was the price of P150,000.00 for a 33.9 hectare agricultural parcel of land not
too cheap even in 1978?
"2) Why did Candelaria Sanchez sell the property at the same price of
P150,000.00 to Norma Sulit on the same date, June 21, 1978 when she
supposedly acquired it from the plaintiffs?
"3) Being agricultural land, didnt it occur to the intervenors that there would be
tenants to be compensated or who might pose as obstacles to the mortgagees
exercise of acts of dominion?
"4) In an area as big as that property, [why] did they not verify if there were
squatters?
"5) What benefits or prospects thereof could the ultimate owner expect out of the
property?
"Verily, the foregoing circumstances should have been looked into, for if either or
both companies did, they could have discovered that possession of the land was
neither with Candelaria nor with Norma." 43
Respondent was clearly wanting in the observance of the necessary precautions
to ascertain the flaws in the title of Sulit and to examine the condition of the
property she sought to mortgage.44 It should not have simply relied on the face of
the Certificate of Title to the property, as its ancillary function of investing funds
required a greater degree of diligence. 45 Considering the substantial loan
involved at the time, it should have exercised more caution. 46
Moreover, the subject property, being situated in Bulacan, could have been easily
and conveniently inspected by respondent. A person who deliberately ignores a
significant fact that would create suspicion in an otherwise reasonable person is
not an innocent purchaser for value.47
Second, respondent was already aware that there was an adverse claim and
notice of lis pendens annotated on the Certificate of Title when it registered the
mortgage on March 14, 1980. Unless duly registered, a mortgage does not affect
third parties like herein petitioners, as provided under Section 51 of PD NO.
1529,48 which we reproduce hereunder:
"SEC. 51. Conveyance and other dealings by registered owner. - An owner of
registered land may convey, mortgage, lease, charge or otherwise deal with the
same in accordance with existing laws. He may use such forms of deeds,

mortgages, leases or other voluntary instruments [as] are sufficient in law. But no
deed, mortgage, lease, or other voluntary instrument except a will, purporting to
convey or affect registered land, shall take effect as a conveyance or bind the
land, but shall operate only as a contract between the parties and as evidence of
authority to the clerk or register of deeds to make registration.
"The act of registration shall be the operative act to convey and affect the land,
and in all cases under this Act the registration shall be made in the office of the
register of deeds for the province or city, where the land lies."
True, registration is not the operative act for a mortgage to be binding between
the parties.1wphi1 But to third persons, it is indispensible. 49 In the present case,
the adverse claim and the notice of lis pendens were annotated on the title on
October 30, 1979 and December 10, 1979, respectively; the real estate mortgage
over the subject property was registered by respondent only on March 14, 1980.
Settled in this jurisdiction is the doctrine that a prior registration of a lien creates a
preference.50 Even a subsequent registration of the prior mortgage will not
diminish this preference, which retroacts to the date of the annotation of the
notice of lis pendens and the adverse claim.51 Thus, respondents failure to
register the real estate mortgage52 prior to these annotations, resulted in the
mortgage being binding only between it and the mortgagor, Sulit. Petitioners,
being third parties to the mortgage, were not bound by it. 53 Contrary to
respondents claim that petitioners were in bad faith because they already had
knowledge of the existence of the mortgage in favor of respondent when they
caused the aforesaid annotations, petitioner Edilberto Cruz said that they only
knew of this mortgage when respondent intervened in the RTC proceedings. 54
On the question of who has a preferential right over the property, the longstanding rule, as provided by Article 2085 55 of the Civil Code, 56 is that only the
absolute owner of the property can constitute a valid mortgage on it. In case of
foreclosure, a sale would result in the transmission only of whatever rights the
seller had over of the thing sold.57
In the instant case, the two Deeds of Sale were absolutely simulated; hence, null
and void.58 Thus, they did not convey any rights that could ripen into valid titles. 59
Necessarily, the subsequent real estate mortgage constituted by Sulit in favor of
respondent was also null and void, because the former was not the owner
thereof. There being no valid real estate mortgage, there could also be no valid
foreclosure or valid auction sale, either. At bottom, respondent cannot be
considered either as a mortgagee or as a purchaser in good faith. This being so,
petitioners would be in the same position as they were before they executed the
simulated Deed of Sale in favor of Sanchez. They are still the owners of the
property.60
WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE.
The Decision of the RTC of Bulacan, (Branch 21) dated January 25, 1996 is
REINSTATED. No costs.
SO ORDERED.
G.R. No. 98334 May 8, 1992
MANUEL D. MEDIDA, Deputy Sheriff of the Province of Cebu, CITY

SAVINGS BANK (formerly Cebu City Savings and Loan Association, Inc.)
and TEOTIMO ABELLANA, petitioners,
vs.
COURT OF APPEALS and SPS. ANDRES DOLINO and PASCUALA DOLINO,
respondents.
Gines N. Abellana for petitioners.
Dionisio U. Flores for private respondents.
REGALADO, J.:
The core issue in this case is whether or not a mortgagor, whose property has
been extrajudicially foreclosed and sold at the corresponding foreclosure sale,
may validly execute a mortgage contract over the same property in favor of a
third party during the period of redemption.
The present appeal by certiorari assails the decision 1 of respondent Court of
Appeals in CA-G.R. CV No. 12678 where it answered the question posed by the
foregoing issue in the negative and modified the decision 2 of the then Court of
First Instance of Cebu in Civil Case No. R-18616 wherein the validity of said
subsequent mortgage was assumed and the case was otherwise disposed of on
other grounds.
The facts which gave rise to the institution of the aforesaid civil case in the trial
court, as found by respondent Court of Appeals, are as follows:
On October 10, 1974 plaintiff spouses, alarmed of losing their right of redemption
over lot 4731 of the Cebu City Cadastre and embraced under TCT No. 14272
from Mr. Juan Gandioncho, purchaser of the aforesaid lot at the foreclosure sale
of the previous mortgage in favor of Cebu City Development Bank, went to
Teotimo Abellana, president of defendant Association, to obtain a loan of
P30,000.00. Prior thereto or on October 3, 1974, their son Teofredo Dolino filed a
similar loan application for Twenty-Five Thousand (P25,000.00) Pesos with lot
No. 4731 offered as security for the Thirty Thousand (P30,000.00) Pesos loan
from defendant association. Subsequently, they executed a promissory note in
favor of defendant association. Both documents indicated that the principal
obligation is for Thirty Thousand (P30,000.00) Pesos payable in one year with
interest at twelve (12%) percent per annum.
When the loan became due and demandable without plaintiff paying the same,
defendant association caused the extrajudicial foreclosure of the mortgage on
March 16, 1976. After the posting and publication requirements were complied
with, the land was sold at public auction on April 19, 1976 to defendant
association being the highest bidder. The certificate of sale was issued on April
20, 1976 and registered on May 10, 1976 with the Register of Deeds of Cebu.
On May 24, 1971 (sic, 1977), no redemption having been effected by plaintiff,
TCT No. 14272 was cancelled and in lieu thereof TCT No. 68041 was issued in
the name of defendant association. 3
xxx xxx xxx
On October 18, 1979, private respondents filed the aforestated Civil Case No. R18616 in the court a quo for the annulment of the sale at public auction
conducted on April 19, 1976, as well as the corresponding certificate of sale

issued pursuant thereto.

In their complaint, private respondents, as plaintiffs therein, assailed the validity
of the extrajudicial foreclosure sale of their property, claiming that the same was
held in violation of Act No. 3135, as amended, and prayed, inter alia, for the
cancellation of Transfer Certificate of Title No. 68041 issued in favor of therein
defendant City Savings and Loan Association, Inc., now known as City Savings
Bank and one of the petitioners herein.
In its answer, the defendant association therein denied the material allegations of
the complaint and averred, among others, that the present private respondent
spouses may still avail of their right of redemption over the land in question.
On January 12, 1983, after trial on the merits, the court below rendered judgment
upholding the validity of the loan and the real estate mortgage, but annulling the
extrajudicial foreclosure sale inasmuch as the same failed to comply with the
notice requirements in Act No. 3135, as amended, under the following dispositive
part:
WHEREFORE, the foregoing premises considered and upon the view taken by
the Court of this case, judgment is hereby rendered, as follows:
1. Declaring ineffective the extrajudicial foreclosure of the mortgage over Lot No.
4731 of the Cadastral Survey of Cebu;
2. Ordering the cancellation of Transfer Certificate of Title No. 68041 of the
Registry of Deeds of the City of Cebu in the name of defendant Cebu City
Savings and Loan Association, Inc. the corresponding issuance of a new transfer
certificate to contain all the annotations made in TCT No. 14272 of the plaintiffs
Pascuala Sabellano, married to Andres Dolino;
3. Ordering the plaintiffs aforenamed to pay the defendant Cebu City Savings
and Loan Association, Inc. the unpaid balance of the loan, plus interest; and
reimbursing said defendant the value of any necessary and useful expenditures
on the property after deducting any income derived by said defendant from the
property.
For this purpose, defendant Association is given 15 days from receipt hereof
within which to submit its statement of the amount due it from the plaintiffs
Dolino, with notice to them. The payment to be made by the plaintiffs shall be
within ninety (90) days from their receipt of the order approving the amount due
the defendant Cebu City Savings and Loan Association, Inc.
No award of damages or costs to either party.
SO ORDERED. 4
Not satisfied therewith, herein private respondents interposed a partial appeal to
respondent court with respect to the second and third paragraphs of the
aforequoted decretal portion, contending that the lower court erred in (1)
declaring that the mortgage executed by the therein plaintiff spouses Dolino is
valid; (2) permitting therein Cebu City Savings and Loan Association, Inc. to
collect interest after the same foreclosure proceedings and auction sale which
are null and void from the beginning; (3) not ordering the forfeiture of the capital
or balance of the loan with usurious interest; and (4) not sentencing therein
defendant to pay damages and attorney's fees to plaintiffs. 5
On September 28, 1990, respondent Court of Appeals promulgated its decision

modifying the decision of the lower court, with this adjudication:

WHEREFORE, PREMISES CONSIDERED, the decision appealed from is
hereby MODIFIED declaring as void and ineffective the real estate mortgage
executed by plaintiffs in favor of defendant association. With this modification, the
decision is AFFIRMED in other respects. 6
Herein petitioners then filed a motion for reconsideration which was denied by
respondent court in its resolution dated March 5, 1991, hence the present petition
which, in synthesis, postulates that respondent court erred in declaring the real
estate mortgage void, and also impugns the judgment of the trial court declaring
ineffective the extrajudicial foreclosure of said mortgage and ordering the
cancellation of Transfer Certificate of Title No. 68041 issued in favor of the
predecessor of petitioner bank. 7
The first submission assailing the judgment of respondent Court of Appeals is
meritorious.
Said respondent court declared the real estate mortgage in question null and
void for the reason that the mortgagor spouses, at the time when the said
mortgage was executed, were no longer the owners of the lot, having supposedly
lost the same when the lot was sold to a purchaser in the foreclosure sale under
the prior mortgage. This holding cannot be sustained.
Preliminarily, the issue of ownership of the mortgaged property was never
alleged in the complaint nor was the same raised during the trial, hence that
issue should not have been taken cognizance of by the Court of Appeals. An
issue which was neither averred in the complaint nor ventilated during the trial in
the court below cannot be raised for the first time on appeal as it would be
offensive to the basic rule of fair play, justice and due process. 8
Nonetheless, since respondent Court took cognizance thereof and, in fact,
anchored its modificatory judgment on its ratiocination of that issue, we are
inclined to liberalize the rule so that we can in turn pass upon the correctness of
its conclusion. We may consider such procedure as analogous to the rule that an
unassigned error closely related to an error properly assigned, or upon which the
determination of the question properly assigned is dependent, may be
considered by an appellate court. 9 We adopt this approach since, after all, both
lower courts agreed upon the invalidity of the extrajudicial foreclosure but differed
only on the matter of the validity of the real estate mortgage upon which the
extrajudicial foreclosure was based.
In arriving at its conclusion, respondent court placed full reliance on what
obviously is an obiter dictum laid down in the course of the disquisition in Dizon
vs. Gaborro, et al. which we shall analyze. 10 For, as explicitly stated therein by
the Court, "(t)he basic issue to be resolved in this case is whether the 'Deed of
Sale with Assumption of Mortgage' and the 'Option to Purchase Real Estate,' two
instruments executed by and between petitioner Jose P. Dizon and Alfredo G.
Gaborro (defendant below) on the same day, October 6, 1959, constitute in truth
and in fact an absolute sale of the three parcels of land therein described or
merely an equitable mortgage or conveyance thereof by way of security for
reimbursement or repayment by petitioner Jose P. Dizon of any and all sums
which may have been paid to the Development Bank of the Philippines and the

Philippine National Bank by Alfredo G. Gaborro . . . ." Said documents were

executed by the parties and the payments were made by Gaborro for the debt of
Dizon to said banks after the Development Bank of the Philippines had
foreclosed the mortgage executed by Dizon and during the period of redemption
after the foreclosure sale of the mortgaged property to said creditor bank.
The trial court held that the true agreement between the parties therein was that
Gaborro would assume and pay the indebtedness of Dizon to the banks and, in
consideration thereof, Gaborro was given the possession and enjoyment of the
properties in question until Dizon shall have reimbursed him for the amount paid
to the creditor banks. Accordingly, the trial court ordered the reformation of the
documents to the extent indicated and such particular relief was affirmed by the
Court of Appeals. This Court held that the agreement between the parties is one
of those innominate contracts under Article 1307 of the Civil Code whereby the
parties agreed "to give and to do" certain rights and obligations, but partaking of
the nature of antichresis.
Hence, on appeal to this Court, the judgment of the Court of Appeals in that case
was affirmed but with the following pronouncements:
The two instruments sought to be reformed in this case appear to stipulate rights
and obligations between the parties thereto pertaining to and involving parcels of
land that had already been foreclosed and sold extrajudicially, and purchased by
the mortgage creditor, a third party. It becomes, therefore, necessary, to
determine the legality of said rights and obligations arising from the foreclosure
and sale proceedings not only between the two contracting parties to the
instruments executed between them but also in so far as the agreement affects
the rights of the third party, the purchaser Bank.
xxx xxx xxx
Under the Revised Rules of Court, Rule 39, Section 33, the judgment debtor
remains in possession of the property foreclosed and sold, during the period of
redemption. If the judgment debtor is in possession of the property sold, he is
entitled to retain it, and receive the fruits, the purchaser not being entitled to such
possession. (Riosa vs. Verzosa, 26 Phil. 86; Velasco vs. Rosenberg's, Inc., 32
Phil. 72; Pabico vs. Pauco, 43 Phil. 572; Power vs. PNB, 54 Phil. 54; Gorospe vs.
Gochangco, L-12735, Oct. 30, 1959).
xxx xxx xxx
Upon foreclosure and sale, the purchaser is entitled to a certificate of sale
executed by the sheriff. (Section 27, Revised Rules of Court). After the
termination of the period of redemption and no redemption having been made,
the purchaser is entitled to a deed of conveyance and to the possession of the
properties. (Section 35, Revised Rules of Court). The weight of authority is to the
effect that the purchaser of land sold at public auction under a writ of execution
has only an inchoate right to the property, subject to be defeated and terminated
within the period of 12 months from the date of sale, by a redemption on the part
of the owner. Therefore, the judgment debtor in possession of the property is
entitled to remain therein during the period for redemption. (Riosa vs. Verzosa,
26 Phil. 86, 89; Gonzales vs. Calimbas, 51 Phil. 355).
In the case before Us, after the extrajudicial foreclosure and sale of his

properties, petitioner Dizon retained the right to redeem the lands, the
possession, use and enjoyment of the same during the period of redemption. And
these are the only rights that Dizon could legally transfer, cede and convey unto
respondent Gaborro under the instrument captioned Deed of Sale with
Assumption of Mortgage (Exh. A-Stipulation), likewise the same rights that said
respondent could acquire in consideration of the latter's promise to pay and
assume the loan of petitioner Dizon with DBP and PNB.
Such an instrument cannot be legally considered a real and unconditional sale of
the parcels of land, firstly, because there was absolutely no money consideration
therefor, as admittedly stipulated, the sum of P131,831.91 mentioned in the
document as the consideration "receipt of which was acknowledged" was not
actually paid; and, secondly, because the properties had already been previously
sold by the sheriff at the foreclosure sale, thereby divesting the petitioner of his
full right as owner thereof to dispose and sell the lands. (Emphasis ours.)
It was apparently the second reason stated by the Court in said case which was
relied upon by respondent court in the present case on which to premise its
conclusion. Yet, as demonstrated by the relevant excerpts above quoted, not only
was that obiter therein unnecessary since evidently no sale was concluded, but
even inaccurate, if not inconsistent, when considered in the context of the
discussion in its entirety. If, as admitted, the purchaser at the foreclosure sale
merely acquired an inchoate right to the property which could ripen into
ownership only upon the lapse of the redemption period without his credit having
been discharged, it is illogical to hold that during that same period of twelve
months the mortgagor was "divested" of his ownership, since the absurd result
would be that the land will consequently be without an owner although it remains
registered in the name of the mortgagor.
That is why the discussion in said case carefully and felicitously states that what
is divested from the mortgagor is only his "full right as owner thereof to dispose
(of) and sell the lands," in effect, merely clarifying that the mortgagor does not
have the unconditional power to absolutely sell the land since the same is
encumbered by a lien of a third person which, if unsatisfied, could result in a
consolidation of ownership in the lienholder but only after the lapse of the period
of redemption. Even on that score, it may plausibly be argued that what is
delimited is not the mortgagor's jus dispodendi, as an attribute of ownership, but
merely the rights conferred by such act of disposal which may correspondingly
be restricted.
At any rate, even the foregoing considerations and arguments would have no
application in the case at bar and need not here be resolved since what is
presently involved is a mortgage, not a sale, to petitioner bank. Such mortgage
does not involve a transfer, cession or conveyance of the property but only
constitutes a lien thereon. There is no obstacle to the legal creation of such a lien
even after the auction sale of the property but during the redemption period,
since no distinction is made between a mortgage constituted over the property
before or after the auction sale thereof.
Thus, a redemptioner is defined as a creditor having a lien by attachment,
judgment or mortgage on the property sold, or on some part thereof, subsequent

to the judgment under which the property was sold. 11 Of course, while in
extrajudicial foreclosure the sale contemplated is not under a judgment but the
proceeding pursuant to which the mortgaged property was sold, a subsequent
mortgage could nevertheless be legally constituted thereafter with the
subsequent mortgagee becoming and acquiring the rights of a redemptioner,
aside from his right against the mortgagor.
In either case, what bears attention is that since the mortgagor remains as the
absolute owner of the property during the redemption period and has the free
disposal of his property, there would be compliance with the requisites of Article
2085 of the Civil Code for the constitution of another mortgage on the property.
To hold otherwise would create the inequitable situation wherein the mortgagor
would be deprived of the opportunity, which may be his last recourse, to raise
funds wherewith to timely redeem his property through another mortgage
thereon.
Coming back to the present controversy, it is undisputed that the real estate
mortgage in favor of petitioner bank was executed by respondent spouses during
the period of redemption. We reiterate that during said period it cannot be said
that the mortgagor is no longer the owner of the foreclosed property since the
rule up to now is that the right of a purchaser at a foreclosure sale is merely
inchoate until after the period of redemption has expired without the right being
exercised. 12 The title to land sold under mortgage foreclosure remains in the
mortgagor or his grantee until the expiration of the redemption period and
conveyance by the master's deed. 13 To repeat, the rule has always been that it is
only upon the expiration of the redemption period, without the judgment debtor
having made use of his right of redemption, that the ownership of the land sold
becomes consolidated in the purchaser. 14
Parenthetically, therefore, what actually is effected where redemption is
seasonably exercised by the judgment or mortgage debtor is not the recovery of
ownership of his land, which ownership he never lost, but the elimination from his
title thereto of the lien created by the levy on attachment or judgment or the
registration of a mortgage thereon. The American rule is similarly to the effect
that the redemption of property sold under a foreclosure sale defeats the
inchoate right of the purchaser and restores the property to the same condition
as if no sale had been attempted. Further, it does not give to the mortgagor a
new title, but merely restores to him the title freed of the encumbrance of the lien
foreclosed. 15
We cannot rule on the plaint of petitioners that the trial court erred in declaring
ineffective the extrajudicial foreclosure and the sale of the property to petitioner
bank. The court below spelled out at length in its decision the facts which it
considered as violative of the provisions of Act No. 3135, as amended, by reason
of which it nullified the extrajudicial foreclosure proceeding and its effects. Such
findings and ruling of the trial court are already final and binding on petitioners
and can no longer be modified, petitioners having failed to appeal therefrom.
An appellee who has not himself appealed cannot obtain from the appellate court
any affirmative relief other than the ones granted in the decision of the court
below. 16 He cannot impugn the correctness of a judgment not appealed from by

him. He cannot assign such errors as are designed to have the judgment
modified. All that said appellee can do is to make a counter-assignment of errors
or to argue on issues raised at the trial only for the purpose of sustaining the
judgment in his favor, even on grounds not included in the decision of the court a
quo nor raised in the appellant's assignment of errors or arguments. 17
WHEREFORE, the decision of respondent Court of Appeals, insofar as it
modifies the judgment of the trial court, is REVERSED and SET ASIDE. The
judgment of said trial court in Civil Case No. R-18616, dated January 12, 1983, is
hereby REINSTATED.
SO ORDERED.
G.R. No. 118342 January 5, 1998
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.
COURT OF APPEALS and LYDIA CUBA, respondents.
G.R. No. 118367 January 5, 1998
LYDIA P. CUBA, petitioner,
vs.
COURT OF APPEALS, DEVELOPMENT BANK OF THE PHILIPPINES and
AGRIPINA P. CAPERAL, respondents.
DAVIDE, JR., J.:
These two consolidated cases stemmed from a complaint 1 filed against the
Development Bank of the Philippines (hereafter DBP) and Agripina Caperal filed
by Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial Court of
Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity
of DBP's appropriation of CUBA's rights, title, and interests over a 44-hectares
fishpond located in Bolinao, Pangasinan, for being violative of Article 2088 of the
Civil Code; (2) the annulment of the Deed of Conditional Sale executed in her
favor by DBP; (3) the annulment of DBP's sale of the subject fishpond to Caperal;
(4) the restoration of her rights, title, and interests over the fishpond; and (5) the
recovery of damages, attorney's fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of their respective
pleadings, the trial court conducted a pre-trial where CUBA and DBP agreed on
the following facts, which were embodied in the pre-trial order: 2
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083
(new) dated May 13, 1974 from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the
Philippines in the amounts of P109,000.00; P109,000.00; and P98,700.00 under
the terms stated in the Promissory Notes dated September 6, 1974; August 11,
1975; and April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights;
4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance
with the terms of the Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant

DBP appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond
in question;
6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia
Cuba over the fishpond in question, defendant DBP, in turn, executed a Deed of
Conditional Sale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the
same fishpond in question;
7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to
the Manager DBP, Dagupan City dated November 6, 1979 and December 20,
1979. DBP thereafter accepted the offer to repurchase in a letter addressed to
plaintiff dated February 1, 1982;
8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia
Cuba, a new Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was
issued by the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only,
excluding her husband;
9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of
Conditional Sale;
10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of
Conditional Sale, she entered with the DBP a temporary arrangement whereby in
consideration for the deferment of the Notarial Rescission of Deed of Conditional
Sale, plaintiff Lydia Cuba promised to make certain payments as stated in
temporary Arrangement dated February 23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated
March 13, 1984, and which was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the
Leasehold Rights of the fishpond in question;
13. That after defendant DBP took possession of the Leasehold Rights over the
fishpond in question, DBP advertised in the SUNDAY PUNCH the public bidding
dated June 24, 1984, to dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of
defendant Agripina Caperal on August 16, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No.
2083-A on December 28, 1984 by the Ministry of Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the
pre-trial order. 3
Trial was thereafter had on other matters.
The principal issue presented was whether the act of DBP in appropriating to
itself CUBA's leasehold rights over the fishpond in question without foreclosure
proceedings was contrary to Article 2088 of the Civil Code and, therefore, invalid.
CUBA insisted on an affirmative resolution. DBP stressed that it merely exercised
its contractual right under the Assignments of Leasehold Rights, which was not a
contract of mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBP's taking
possession and ownership of the property without foreclosure was plainly
violative of Article 2088 of the Civil Code which provides as follows:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.

It disagreed with DBP's stand that the Assignments of Leasehold Rights were not
contracts of mortgage because (1) they were given as security for loans, (2)
although the "fishpond land" in question is still a public land, CUBA's leasehold
rights and interest thereon are alienable rights which can be the proper subject of
a mortgage; and (3) the intention of the contracting parties to treat the
Assignment of Leasehold Rights as a mortgage was obvious and unmistakable;
hence, upon CUBA's default, DBP's only right was to foreclose the Assignment in
accordance with law.
The trial court also declared invalid condition no. 12 of the Assignment of
Leasehold Rights for being a clear case of pactum commissorium expressly
prohibited and declared null and void by Article 2088 of the Civil Code. It then
concluded that since DBP never acquired lawful ownership of CUBA's leasehold
rights, all acts of ownership and possession by the said bank were void.
Accordingly, the Deed of Conditional Sale in favor of CUBA, the notarial
rescission of such sale, and the Deed of Conditional Sale in favor of defendant
Caperal, as well as the Assignment of Leasehold Rights executed by Caperal in
favor of DBP, were also void and ineffective.
As to damages, the trial court found "ample evidence on record" that in 1984 the
representatives of DBP ejected CUBA and her caretakers not only from the
fishpond area but also from the adjoining big house; and that when CUBA's son
and caretaker went there on 15 September 1985, they found the said house
unoccupied and destroyed and CUBA's personal belongings, machineries,
equipment, tools, and other articles used in fishpond operation which were kept
in the house were missing. The missing items were valued at about P550,000. It
further found that when CUBA and her men were ejected by DBP for the first time
in 1979, CUBA had stocked the fishpond with 250,000 pieces of bangus fish
(milkfish), all of which died because the DBP representatives prevented CUBA's
men from feeding the fish. At the conservative price of P3.00 per fish, the gross
value would have been P690,000, and after deducting 25% of said value as
reasonable allowance for the cost of feeds, CUBA suffered a loss of P517,500. It
then set the aggregate of the actual damages sustained by CUBA at P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely
representing to the Bureau of Fisheries that it had foreclosed its mortgage on
CUBA's leasehold rights. Such representation induced the said Bureau to
terminate CUBA's leasehold rights and to approve the Deed of Conditional Sale
in favor of CUBA. And considering that by reason of her unlawful ejectment by
DBP, CUBA "suffered moral shock, degradation, social humiliation, and serious
anxieties for which she became sick and had to be hospitalized" the trial court
found her entitled to moral and exemplary damages. The trial court also held that
CUBA was entitled to P100,000 attorney's fees in view of the considerable
expenses she incurred for lawyers' fees and in view of the finding that she was
entitled to exemplary damages.
In its decision of 31 January 1990, 4 the trial court disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. DECLARING null and void and without any legal effect the act of defendant
Development Bank of the Philippines in appropriating for its own interest, without

any judicial or extra-judicial foreclosure, plaintiff's leasehold rights and interest

over the fishpond land in question under her Fishpond Lease Agreement No.
2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and
between the defendant Development Bank of the Philippines and plaintiff (Exh. E
and Exh. 1) and the acts of notarial rescission of the Development Bank of the
Philippines relative to said sale (Exhs. 16 and 26) as void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and
between the Development Bank of the Philippines and defendant Agripina
Caperal (Exh. F and Exh. 21), the Fishpond Lease Agreement No. 2083-A dated
December 28, 1984 of defendant Agripina Caperal (Exh. 23) and the Assignment
of Leasehold Rights dated February 12, 1985 executed by defendant Agripina
Caperal in favor of the defendant Development Bank of the Philippines (Exh. 24)
as void ab initio;
4. ORDERING defendant Development Bank of the Philippines and defendant
Agripina Caperal, jointly and severally, to restore to plaintiff the latter's leasehold
rights and interests and right of possession over the fishpond land in question,
without prejudice to the right of defendant Development Bank of the Philippines
to foreclose the securities given by plaintiff;
5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff
the following amounts:
a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED
PESOS (P1,067,500.00), as and for actual damages;
b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral
damages;
c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary
damages;
d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as and
for attorney's fees;
6. And ORDERING defendant Development Bank of the Philippines to reimburse
and pay to defendant Agripina Caperal the sum of ONE MILLION FIVE
HUNDRED THIRTY-TWO THOUSAND SIX HUNDRED TEN PESOS AND
SEVENTY-FIVE CENTAVOS (P1,532,610.75) representing the amounts paid by
defendant Agripina Caperal to defendant Development Bank of the Philippines
under their Deed of Conditional Sale.
CUBA and DBP interposed separate appeals from the decision to the Court of
Appeals. The former sought an increase in the amount of damages, while the
latter questioned the findings of fact and law of the lower court.
In its decision 5 of 25 May 1994, the Court of Appeals ruled that (1) the trial court
erred in declaring that the deed of assignment was null and void and that
defendant Caperal could not validly acquire the leasehold rights from DBP; (2)
contrary to the claim of DBP, the assignment was not a cession under Article
1255 of the Civil Code because DBP appeared to be the sole creditor to CUBA
cession presupposes plurality of debts and creditors; (3) the deeds of
assignment represented the voluntary act of CUBA in assigning her property
rights in payment of her debts, which amounted to a novation of the promissory

notes executed by CUBA in favor of DBP; (4) CUBA was estopped from
questioning the assignment of the leasehold rights, since she agreed to
repurchase the said rights under a deed of conditional sale; and (5) condition no.
12 of the deed of assignment was an express authority from CUBA for DBP to
sell whatever right she had over the fishpond. It also ruled that CUBA was not
entitled to loss of profits for lack of evidence, but agreed with the trial court as to
the actual damages of P1,067,500. It, however, deleted the amount of exemplary
damages and reduced the award of moral damages from P100,000 to P50,000
and attorney's fees, from P100,000 to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in
appropriating Cuba's leasehold rights and interest under Fishpond Lease
Agreement No. 2083; (2) the deeds of assignment executed by Cuba in favor of
DBP; (3) the deed of conditional sale between CUBA and DBP; and (4) the deed
of conditional sale between DBP and Caperal, the Fishpond Lease Agreement in
favor of Caperal, and the assignment of leasehold rights executed by Caperal in
favor of DBP. It then ordered DBP to turn over possession of the property to
Caperal as lawful holder of the leasehold rights and to pay CUBA the following
amounts: (a) P1,067,500 as actual damages; P50,000 as moral damages; and
P50,000 as attorney's fees.
Since their motions for reconsideration were denied, 6 DBP and CUBA filed
separate petitions for review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral
damages and attorney's fees in favor of CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the
Court of Appeals erred (1) in not holding that the questioned deed of assignment
was a pactum commissorium contrary to Article 2088 of the Civil Code; (b) in
holding that the deed of assignment effected a novation of the promissory notes;
(c) in holding that CUBA was estopped from questioning the validity of the deed
of assignment when she agreed to repurchase her leasehold rights under a deed
of conditional sale; and (d) in reducing the amounts of moral damages and
attorney's fees, in deleting the award of exemplary damages, and in not
increasing the amount of damages.
We agree with CUBA that the assignment of leasehold rights was a mortgage
contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling
P335,000, each of which was covered by a promissory note. In all of these notes,
there was a provision that: "In the event of foreclosure of the mortgage securing
this notes, I/We further bind myself/ourselves, jointly and severally, to pay the
deficiency, if any." 7
Simultaneous with the execution of the notes was the execution of "Assignments
of Leasehold Rights" 8 where CUBA assigned her leasehold rights and interest on
a 44-hectare fishpond, together with the improvements thereon. As pointed out
by CUBA, the deeds of assignment constantly referred to the assignor (CUBA)
as "borrower"; the assigned rights, as mortgaged properties; and the instrument
itself, as mortgage contract. Moreover, under condition no. 22 of the deed, it was
provided that "failure to comply with the terms and condition of any of the loans

shall cause all other loans to become due and demandable and all mortgages
shall be foreclosed." And, condition no. 33 provided that if "foreclosure is actually
accomplished, the usual 10% attorney's fees and 10% liquidated damages of the
total obligation shall be imposed." There is, therefore, no shred of doubt that a
mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was
by way of security for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of
Assignment of her Leasehold Rights.
In People's Bank & Trust Co. vs. Odom, 9 this Court had the occasion to rule that
an assignment to guarantee an obligation is in effect a mortgage.
We find no merit in DBP's contention that the assignment novated the promissory
notes in that the obligation to pay a sum of money the loans (under the
promissory notes) was substituted by the assignment of the rights over the
fishpond (under the deed of assignment). As correctly pointed out by CUBA, the
said assignment merely complemented or supplemented the notes; both could
stand together. The former was only an accessory to the latter. Contrary to DBP's
submission, the obligation to pay a sum of money remained, and the assignment
merely served as security for the loans covered by the promissory notes.
Significantly, both the deeds of assignment and the promissory notes were
executed on the same dates the loans were granted. Also, the last paragraph of
the assignment stated: "The assignor further reiterates and states all terms,
covenants, and conditions stipulated in the promissory note or notes covering the
proceeds of this loan, making said promissory note or notes, to all intent and
purposes, an integral part hereof."
Neither did the assignment amount to payment by cession under Article 1255 of
the Civil Code for the plain and simple reason that there was only one creditor,
the DBP. Article 1255 contemplates the existence of two or more creditors and
involves the assignment of all the debtor's property.
Nor did the assignment constitute dation in payment under Article 1245 of the
civil Code, which reads: "Dation in payment, whereby property is alienated to the
creditor in satisfaction of a debt in money, shall be governed by the law on sales."
It bears stressing that the assignment, being in its essence a mortgage, was but
a security and not a satisfaction of indebtedness. 10
We do not, however, buy CUBA's argument that condition no. 12 of the deed of
assignment constituted pactum commissorium. Said condition reads:
12. That effective upon the breach of any condition of this assignment, the
Assignor hereby appoints the Assignee his Attorney-in-fact with full power and
authority to take actual possession of the property above-described, together
with all improvements thereon, subject to the approval of the Secretary of
Agriculture and Natural Resources, to lease the same or any portion thereof and
collect rentals, to make repairs or improvements thereon and pay the same, to
sell or otherwise dispose of whatever rights the Assignor has or might have over
said property and/or its improvements and perform any other act which the
Assignee may deem convenient to protect its interest. All expenses advanced by
the Assignee in connection with purpose above indicated which shall bear the

same rate of interest aforementioned are also guaranteed by this Assignment.

Any amount received from rents, administration, sale or disposal of said property
may be supplied by the Assignee to the payment of repairs, improvements,
taxes, assessments and other incidental expenses and obligations and the
balance, if any, to the payment of interest and then on the capital of the
indebtedness secured hereby. If after disposal or sale of said property and upon
application of total amounts received there shall remain a deficiency, said
Assignor hereby binds himself to pay the same to the Assignee upon demand,
together with all interest thereon until fully paid. The power herein granted shall
not be revoked as long as the Assignor is indebted to the Assignee and all acts
that may be executed by the Assignee by virtue of said power are hereby ratified.
The elements of pactum commissorium are as follows: (1) there should be a
property mortgaged by way of security for the payment of the principal obligation,
and (2) there should be a stipulation for automatic appropriation by the creditor of
the thing mortgaged in case of non-payment of the principal obligation within the
stipulated period. 11
Condition no. 12 did not provide that the ownership over the leasehold rights
would automatically pass to DBP upon CUBA's failure to pay the loan on time. It
merely provided for the appointment of DBP as attorney-in-fact with authority,
among other things, to sell or otherwise dispose of the said real rights, in case of
default by CUBA, and to apply the proceeds to the payment of the loan. This
provision is a standard condition in mortgage contracts and is in conformity with
Article 2087 of the Civil Code, which authorizes the mortgagee to foreclose the
mortgage and alienate the mortgaged property for the payment of the principal
obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of
assignment. As admitted by it during the pre-trial, it had "[w]ithout foreclosure
proceedings, whether judicial or extrajudicial, . . . appropriated the [l]easehold
[r]ights of plaintiff Lydia Cuba over the fishpond in question." Its contention that it
limited itself to mere administration by posting caretakers is further belied by the
deed of conditional sale it executed in favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its
favor by the herein vendees [Cuba spouses] the former acquired all the right and
interest of the latter over the above-described property;
xxx xxx xxx
The title to the real estate property [sic] and all improvements thereon shall
remain in the name of the Vendor until after the purchase price, advances and
interest shall have been fully paid. (Emphasis supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated and
taken ownership of CUBA's leasehold rights merely on the strength of the deed
of assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify
its act of appropriating the leasehold rights. As stated earlier, condition no. 12 did
not provide that CUBA's default would operate to vest in DBP ownership of the
said rights. Besides, an assignment to guarantee an obligation, as in the present
case, is virtually a mortgage and not an absolute conveyance of title which

confers ownership on the assignee. 12

At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of
Article 2088 of the Civil Code, which forbids a credit or from appropriating, or
disposing of, the thing given as security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from
DBP did not estop her from questioning DBP's act of appropriation. Estoppel is
unavailing in this case. As held by this Court in some cases, 13 estoppel cannot
give validity to an act that is prohibited by law or against public policy. Hence, the
appropriation of the leasehold rights, being contrary to Article 2088 of the Civil
Code and to public policy, cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA,
DBP should have foreclosed the mortgage, as has been stipulated in condition
no. 22 of the deed of assignment. But, as admitted by DBP, there was no such
foreclosure. Yet, in its letter dated 26 October 1979, addressed to the Minister of
Agriculture and Natural Resources and coursed through the Director of the
Bureau of Fisheries and Aquatic Resources, DBP declared that it "had foreclosed
the mortgage and enforced the assignment of leasehold rights on March 21,
1979 for failure of said spouses [Cuba spouces] to pay their loan amortizations."
14
This only goes to show that DBP was aware of the necessity of foreclosure
proceedings.
In view of the false representation of DBP that it had already foreclosed the
mortgage, the Bureau of Fisheries cancelled CUBA's original lease permit,
approved the deed of conditional sale, and issued a new permit in favor of
CUBA. Said acts which were predicated on such false representation, as well as
the subsequent acts emanating from DBP's appropriation of the leasehold rights,
should therefore be set aside. To validate these acts would open the floodgates
to circumvention of Article 2088 of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not
hesitated to nullify the consequent auction sale for failure to comply with the
requirements laid down by law, such as Act No. 3135, as amended. 15 With more
reason that the sale of property given as security for the payment of a debt be set
aside if there was no prior fore closure proceeding.
Hence, DBP should render an accounting of the income derived from the
operation of the fishpond in question and apply the said income in accordance
with condition no. 12 of the deed of assignment which provided: "Any amount
received from rents, administration, . . . may be applied to the payment of repairs,
improvements, taxes, assessment, and other incidental expenses and obligations
and the balance, if any, to the payment of interest and then on the capital of the
indebtedness. . ."
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly
proved. Such compensation is referred to as actual or compensatory damages.
Actual or compensatory damages cannot be presumed, but must be proved with
reasonable degree of certainty. 16 A court cannot rely on speculations,

conjectures, or guesswork as to the fact and amount of damages, but must

depend upon competent proof that they have been suffered by the injured party
and on the best obtainable evidence of the actual amount thereof. 17 It must point
out specific facts which could afford a basis for measuring whatever
compensatory or actual damages are borne. 18
In the present case, the trial court awarded in favor of CUBA P1,067,500 as
actual damages consisting of P550,000 which represented the value of the
alleged lost articles of CUBA and P517,500 which represented the value of the
230,000 pieces of bangus allegedly stocked in 1979 when DBP first ejected
CUBA from the fishpond and the adjoining house. This award was affirmed by the
Court of Appeals.
We find that the alleged loss of personal belongings and equipment was not
proved by clear evidence. Other than the testimony of CUBA and her caretaker,
there was no proof as to the existence of those items before DBP took over the
fishpond in question. As pointed out by DBP, there was not "inventory of the
alleged lost items before the loss which is normal in a project which sometimes, if
not most often, is left to the care of other persons." Neither was a single receipt
or record of acquisition presented.
Curiously, in her complaint dated 17 May 1985, CUBA included "losses of
property" as among the damages resulting from DBP's take-over of the fishpond.
Yet, it was only in September 1985 when her son and a caretaker went to the
fishpond and the adjoining house that she came to know of the alleged loss of
several articles. Such claim for "losses of property," having been made before
knowledge of the alleged actual loss, was therefore speculative. The alleged loss
could have been a mere afterthought or subterfuge to justify her claim for actual
damages.
With regard to the award of P517,000 representing the value of the alleged
230,000 pieces of bangus which died when DBP took possession of the fishpond
in March 1979, the same was not called for. Such loss was not duly proved;
besides, the claim therefor was delayed unreasonably. From 1979 until after the
filing of her complaint in court in May 1985, CUBA did not bring to the attention of
DBP the alleged loss. In fact, in her letter dated 24 October 1979, 19 she declared:
1. That from February to May 1978, I was then seriously ill in Manila and within
the same period I neglected the management and supervision of the cultivation
and harvest of the produce of the aforesaid fishpond thereby resulting to the
irreparable loss in the produce of the same in the amount of about P500,000.00
to my great damage and prejudice due to fraudulent acts of some of my fishpond
workers.
Nowhere in the said letter, which was written seven months after DBP took
possession of the fishpond, did CUBA intimate that upon DBP's take-over there
was a total of 230,000 pieces of bangus, but all of which died because of DBP's
representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of
sufficient basis.
In view, however, of DBP's act of appropriating CUBA's leasehold rights which
was contrary to law and public policy, as well as its false representation to the

then Ministry of Agriculture and Natural Resources that it had "foreclosed the
mortgage," an award of moral damages in the amount of P50,000 is in order
conformably with Article 2219(10), in relation to Article 21, of the Civil Code.
Exemplary or corrective damages in the amount of P25,000 should likewise be
awarded by way of example or correction for the public good. 20 There being an
award of exemplary damages, attorney's fees are also recoverable. 21
WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV
No. 26535 is hereby REVERSED, except as to the award of P50,000 as moral
damages, which is hereby sustained. The 31 January 1990 Decision of the
Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is
MODIFIED setting aside the finding that condition no. 12 of the deed of
assignment constituted pactum commissorium and the award of actual damages;
and by reducing the amounts of moral damages from P100,000 to P50,000; the
exemplary damages, from P50,000 to P25,000; and the attorney's fees, from
P100,000 to P20,000. The Development Bank of the Philippines is hereby
ordered to render an accounting of the income derived from the operation of the
fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income
statement of DBP, as well as the statement of the account of Lydia P. Cuba, and
for the determination of each party's financial obligation to one another.
SO ORDERED.
G.R. No. 150197 July 28, 2005
PRUDENTIAL BANK, Petitioner,
vs.
DON A. ALVIAR and GEORGIA B. ALVIAR, Respondents.
DECISION
Tinga, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of
Court. Petitioner Prudential Bank seeks the reversal of the Decision1 of the Court
of Appeals dated 27 September 2001 in CA-G.R. CV No. 59543 affirming the
Decision of the Regional Trial Court (RTC) of Pasig City, Branch 160, in favor of
respondents.
Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered
owners of a parcel of land in San Juan, Metro Manila, covered by Transfer
Certificate of Title (TCT) No. 438157 of the Register of Deeds of Rizal. On 10
July 1975, they executed a deed of real estate mortgage in favor of petitioner
Prudential Bank to secure the payment of a loan worth P250,000.00.2 This
mortgage was annotated at the back of TCT No. 438157. On 4 August 1975,
respondents executed the corresponding promissory note, PN BD#75/C-252,
covering the said loan, which provides that the loan matured on 4 August 1976 at
an interest rate of 12% per annum with a 2% service charge, and that the note is
secured by a real estate mortgage as aforementioned. 3 Significantly, the real
estate mortgage contained the following clause:
That for and in consideration of certain loans, overdraft and other credit
accommodations obtained from the Mortgagee by the Mortgagor and/or

________________ hereinafter referred to, irrespective of number, as DEBTOR,

and to secure the payment of the same and those that may hereafter be
obtained, the principal or all of which is hereby fixed at Two Hundred Fifty
Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest and
expenses or any other obligation owing to the Mortgagee, whether direct or
indirect, principal or secondary as appears in the accounts, books and records of
the Mortgagee, the Mortgagor does hereby transfer and convey by way of
mortgage unto the Mortgagee, its successors or assigns, the parcels of land
which are described in the list inserted on the back of this document, and/or
appended hereto, together with all the buildings and improvements now existing
or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and
incumbrances. . . .4
On 22 October 1976, Don Alviar executed another promissory note, PN
BD#76/C-345 for P2,640,000.00, secured by D/A SFDX #129, signifying that the
loan was secured by a "hold-out" on the mortgagors foreign currency savings
account with the bank under Account No. 129, and that the mortgagors
passbook is to be surrendered to the bank until the amount secured by the "holdout" is settled.5
On 27 December 1976, respondent spouses executed for Donalco Trading, Inc.,
of which the husband and wife were President and Chairman of the Board and
Vice President,6 respectively, PN BD#76/C-430 covering P545,000.000. As
provided in the note, the loan is secured by "Clean-Phase out TOD CA 3923,"
which means that the temporary overdraft incurred by Donalco Trading, Inc. with
petitioner is to be converted into an ordinary loan in compliance with a Central
Bank circular directing the discontinuance of overdrafts. 7
On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of
its approval of a straight loan of P545,000.00, the proceeds of which shall be
used to liquidate the outstanding loan of P545,000.00 TOD. The letter likewise
mentioned that the securities for the loan were the deed of assignment on two
promissory notes executed by Bancom Realty Corporation with Deed of
Guarantee in favor of A.U. Valencia and Co. and the chattel mortgage on various
heavy and transportation equipment. 8
On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to
the obligations of G.B. Alviar Realty and Development, Inc. and for the release of
the real estate mortgage for the P450,000.00 loan covering the two (2) lots
located at Vam Buren and Madison Streets, North Greenhills, San Juan, Metro
Manila. The payment was acknowledged by petitioner who accordingly released
the mortgage over the two properties.9
On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the
mortgage on the property covered by TCT No. 438157. Per petitioners
computation, respondents had the total obligation of P1,608,256.68, covering the
three (3) promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN
BD#76/C-345 for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus
assessed past due interests and penalty charges. The public auction sale of the

mortgaged property was set on 15 January 1980. 10

Respondents filed a complaint for damages with a prayer for the issuance of a
writ of preliminary injunction with the RTC of Pasig, 11 claiming that they have paid
their principal loan secured by the mortgaged property, and thus the mortgage
should not be foreclosed. For its part, petitioner averred that the payment of
P2,000,000.00 made on 6 March 1979 was not a payment made by respondents,
but by G.B. Alviar Realty and Development Inc., which has a separate loan with
the bank secured by a separate mortgage.12
On 15 March 1994, the trial court dismissed the complaint and ordered the
Sheriff to proceed with the extra-judicial foreclosure. 13 Respondents sought
reconsideration of the decision. 14 On 24 August 1994, the trial court issued an
Order setting aside its earlier decision and awarded attorneys fees to
respondents.15 It found that only the P250,000.00 loan is secured by the
mortgage on the land covered by TCT No. 438157. On the other hand, the
P382,680.83 loan is secured by the foreign currency deposit account of Don A.
Alviar, while the P545,000.00 obligation was an unsecured loan, being a mere
conversion of the temporary overdraft of Donalco Trading, Inc. in compliance with
a Central Bank circular. According to the trial court, the "blanket mortgage
clause" relied upon by petitioner applies only to future loans obtained by the
mortgagors, and not by parties other than the said mortgagors, such as Donalco
Trading, Inc., for which respondents merely signed as officers thereof.
On appeal to the Court of Appeals, petitioner made the following assignment of
errors:
I. The trial court erred in holding that the real estate mortgage covers only the
promissory note BD#75/C-252 for the sum of P250,000.00.
II. The trial court erred in holding that the promissory note BD#76/C-345 for
P2,640,000.00 (P382,680.83 outstanding principal balance) is not covered by the
real estate mortgage by expressed agreement.
III. The trial court erred in holding that Promissory Note BD#76/C-430 for
P545,000.00 is not covered by the real estate mortgage.
IV. The trial court erred in holding that the real estate mortgage is a contract of
adhesion.
V. The trial court erred in holding defendant-appellant liable to pay plaintiffsappellees attorneys fees for P20,000.00.16
The Court of Appeals affirmed the Order of the trial court but deleted the award of
attorneys fees.17 It ruled that while a continuing loan or credit accommodation
based on only one security or mortgage is a common practice in financial and
commercial institutions, such agreement must be clear and unequivocal. In the
instant case, the parties executed different promissory notes agreeing to a
particular security for each loan. Thus, the appellate court ruled that the
extrajudicial foreclosure sale of the property for the three loans is improper.18
The Court of Appeals, however, found that respondents have not yet paid the
P250,000.00 covered by PN BD#75/C-252 since the payment of P2,000,000.00
adverted to by respondents was issued for the obligations of G.B. Alviar Realty
and Development, Inc.19
Aggrieved, petitioner filed the instant petition, reiterating the assignment of errors

raised in the Court of Appeals as grounds herein.

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

At this point, it is important to note that one of the loans sought to be included in
the "blanket mortgage clause" was obtained by respondents for Donalco Trading,
Inc. Indeed, PN BD#76/C-430 was executed by respondents on behalf of
Donalco Trading, Inc. and not in their personal capacity. Petitioner asks the Court
to pierce the veil of corporate fiction and hold respondents liable even for
obligations they incurred for the corporation. The mortgage contract states that
the mortgage covers "as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and expenses or any other
obligation owing to the Mortgagee, whether direct or indirect, principal or
secondary." Well-settled is the rule that a corporation has a personality separate
and distinct from that of its officers and stockholders. Officers of a corporation are
not personally liable for their acts as such officers unless it is shown that they
have exceeded their authority.36 However, the legal fiction that a corporation has
a personality separate and distinct from stockholders and members may be
disregarded if it is used as a means to perpetuate fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of statutes, or
to confuse legitimate issues.37 PN BD#76/C-430, being an obligation of Donalco
Trading, Inc., and not of the respondents, is not within the contemplation of the
"blanket mortgage clause." Moreover, petitioner is unable to show that
respondents are hiding behind the corporate structure to evade payment of their
obligations. Save for the notation in the promissory note that the loan was for
house construction and personal consumption, there is no proof showing that the
loan was indeed for respondents personal consumption. Besides, petitioner
agreed to the terms of the promissory note. If respondents were indeed the real
parties to the loan, petitioner, a big, well-established institution of long standing
that it is, should have insisted that the note be made in the name of respondents
themselves, and not to Donalco Trading Inc., and that they sign the note in their
personal capacity and not as officers of the corporation.
Now on the main issues.
A "blanket mortgage clause," also known as a "dragnet clause" in American
jurisprudence, is one which is specifically phrased to subsume all debts of past or
future origins. Such clauses are "carefully scrutinized and strictly construed." 38
Mortgages of this character enable the parties to provide continuous dealings,
the nature or extent of which may not be known or anticipated at the time, and
they avoid the expense and inconvenience of executing a new security on each
new transaction.39 A "dragnet clause" operates as a convenience and
accommodation to the borrowers as it makes available additional funds without
their having to execute additional security documents, thereby saving time,
travel, loan closing costs, costs of extra legal services, recording fees, et cetera.40
Indeed, it has been settled in a long line of decisions that mortgages given to
secure future advancements are valid and legal contracts, 41 and the amounts
named as consideration in said contracts do not limit the amount for which the
mortgage may stand as security if from the four corners of the instrument the
intent to secure future and other indebtedness can be gathered. 42
The "blanket mortgage clause" in the instant case states:
That for and in consideration of certain loans, overdraft and other credit

accommodations obtained from the Mortgagee by the Mortgagor and/or

________________ hereinafter referred to, irrespective of number, as DEBTOR,
and to secure the payment of the same and those that may hereafter be
obtained, the principal or all of which is hereby fixed at Two Hundred Fifty
Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest
and expenses or any other obligation owing to the Mortgagee, whether
direct or indirect, principal or secondary as appears in the accounts, books
and records of the Mortgagee, the Mortgagor does hereby transfer and convey
by way of mortgage unto the Mortgagee, its successors or assigns, the parcels of
land which are described in the list inserted on the back of this document, and/or
appended hereto, together with all the buildings and improvements now existing
or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and
incumbrances. . . .43 (Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals, petitioner and respondents
intended the real estate mortgage to secure not only the P250,000.00 loan from
the petitioner, but also future credit facilities and advancements that may be
obtained by the respondents. The terms of the above provision being clear and
unambiguous, there is neither need nor excuse to construe it otherwise.
The cases cited by petitioner, while affirming the validity of "dragnet clauses" or
"blanket mortgage clauses," are of a different factual milieu from the instant case.
There, the subsequent loans were not covered by any security other than that for
the mortgage deeds which uniformly contained the "dragnet clause."
In the case at bar, the subsequent loans obtained by respondents were secured
by other securities, thus: PN BD#76/C-345, executed by Don Alviar was secured
by a "hold-out" on his foreign currency savings account, while PN BD#76/C-430,
executed by respondents for Donalco Trading, Inc., was secured by "CleanPhase out TOD CA 3923" and eventually by a deed of assignment on two
promissory notes executed by Bancom Realty Corporation with Deed of
Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on
various heavy and transportation equipment. The matter of PN BD#76/C-430 has
already been discussed. Thus, the critical issue is whether the "blanket
mortgage" clause applies even to subsequent advancements for which other
securities were intended, or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged on this
question. One school advocates that a "dragnet clause" so worded as to be
broad enough to cover all other debts in addition to the one specifically secured
will be construed to cover a different debt, although such other debt is secured by
another mortgage.44 The contrary thinking maintains that a mortgage with such a
clause will not secure a note that expresses on its face that it is otherwise
secured as to its entirety, at least to anything other than a deficiency after
exhausting the security specified therein, 45 such deficiency being an
indebtedness within the meaning of the mortgage, in the absence of a special
contract excluding it from the arrangement. 46
The latter school represents the better position. The parties having conformed to

the "blanket mortgage clause" or "dragnet clause," it is reasonable to conclude

that they also agreed to an implied understanding that subsequent loans need
not be secured by other securities, as the subsequent loans will be secured by
the first mortgage. In other words, the sufficiency of the first security is a corollary
component of the "dragnet clause." But of course, there is no prohibition, as in
the mortgage contract in issue, against contractually requiring other securities for
the subsequent loans. Thus, when the mortgagor takes another loan for which
another security was given it could not be inferred that such loan was made in
reliance solely on the original security with the "dragnet clause," but rather, on
the new security given. This is the "reliance on the security test."
Hence, based on the "reliance on the security test," the California court in the
cited case made an inquiry whether the second loan was made in reliance on the
original security containing a "dragnet clause." Accordingly, finding a different
security was taken for the second loan no intent that the parties relied on the
security of the first loan could be inferred, so it was held. The rationale involved,
the court said, was that the "dragnet clause" in the first security instrument
constituted a continuing offer by the borrower to secure further loans under the
security of the first security instrument, and that when the lender accepted a
different security he did not accept the offer.47
In another case, it was held that a mortgage with a "dragnet clause" is an "offer"
by the mortgagor to the bank to provide the security of the mortgage for
advances of and when they were made. Thus, it was concluded that the "offer"
was not accepted by the bank when a subsequent advance was made because
(1) the second note was secured by a chattel mortgage on certain vehicles, and
the clause therein stated that the note was secured by such chattel mortgage; (2)
there was no reference in the second note or chattel mortgage indicating a
connection between the real estate mortgage and the advance; (3) the mortgagor
signed the real estate mortgage by her name alone, whereas the second note
and chattel mortgage were signed by the mortgagor doing business under an
assumed name; and (4) there was no allegation by the bank, and apparently no
proof, that it relied on the security of the real estate mortgage in making the
advance.48
Indeed, in some instances, it has been held that in the absence of clear,
supportive evidence of a contrary intention, a mortgage containing a "dragnet
clause" will not be extended to cover future advances unless the document
evidencing the subsequent advance refers to the mortgage as providing security
therefor.49
It was therefore improper for petitioner in this case to seek foreclosure of the
mortgaged property because of non-payment of all the three promissory notes.
While the existence and validity of the "dragnet clause" cannot be denied, there
is a need to respect the existence of the other security given for PN BD#76/C345. The foreclosure of the mortgaged property should only be for the
P250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered
by the security for the second promissory note. As held in one case, where deeds
absolute in form were executed to secure any and all kinds of indebtedness that
might subsequently become due, a balance due on a note, after exhausting the

special security given for the payment of such note, was in the absence of a
special agreement to the contrary, within the protection of the mortgage,
notwithstanding the giving of the special security.50 This is recognition that while
the "dragnet clause" subsists, the security specifically executed for subsequent
loans must first be exhausted before the mortgaged property can be resorted to.
One other crucial point. The mortgage contract, as well as the promissory notes
subject of this case, is a contract of adhesion, to which respondents only
participation was the affixing of their signatures or "adhesion" thereto. 51 A contract
of adhesion is one in which a party imposes a ready-made form of contract which
the other party may accept or reject, but which the latter cannot modify.52
The real estate mortgage in issue appears in a standard form, drafted and
prepared solely by petitioner, and which, according to jurisprudence must be
strictly construed against the party responsible for its preparation. 53 If the parties
intended that the "blanket mortgage clause" shall cover subsequent
advancement secured by separate securities, then the same should have been
indicated in the mortgage contract. Consequently, any ambiguity is to be taken
contra proferentum, that is, construed against the party who caused the
ambiguity which could have avoided it by the exercise of a little more care. 54 To
be more emphatic, any ambiguity in a contract whose terms are susceptible of
different interpretations must be read against the party who drafted it, 55 which is
the petitioner in this case.
Even the promissory notes in issue were made on standard forms prepared by
petitioner, and as such are likewise contracts of adhesion. Being of such nature,
the same should be interpreted strictly against petitioner and with even more
reason since having been accomplished by respondents in the presence of
petitioners personnel and approved by its manager, they could not have been
unaware of the import and extent of such contracts.
Petitioner, however, is not without recourse. Both the Court of Appeals and the
trial court found that respondents have not yet paid the P250,000.00, and gave
no credence to their claim that they paid the said amount when they paid
petitioner P2,000,000.00. Thus, the mortgaged property could still be properly
subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as
mentioned earlier, for any deficiency after D/A SFDX#129, security for PN
BD#76/C-345, has been exhausted, subject of course to defenses which are
available to respondents.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in
CA-G.R. CV No. 59543 is AFFIRMED.
Costs against petitioner.
SO ORDERED.
G.R. No. 34385
September 21, 1931
ALEJANDRA TORRES, ET AL., plaintiff-appellees,
vs.
FRANCISCO LIMJAP, Special Administrator of the estate of the deceased
Jose B. Henson, defendant-appellant.

x---------------------------------------------------------x
G.R. No. 34386
September 21, 1931
SABINA VERGARA VDA. DE TORRES, ET AL., plaintiffs-appellees,
vs.
FRANCISCO LIMJAP, Special Administration of the estate of the deceased
Jose B. Henson, defendant-appellant.
Duran, Lim and Tuason for appellant.Guevara, Francisco and Recto for
appellees.
JOHNSON, J.:
These two actions were commenced in the Court of First Instance of Manila on
April 16, 1930, for the purpose of securing from the defendant the possession of
two drug stores located in the City of Manila, covered by two chattel mortgages
executed by the deceased Jose B. Henson in favor of the plaintiffs.
In the first case the plaintiffs alleged that Jose B. Henson, in his lifetime,
executed in their favor a chattel mortgage (Exhibit A) on his drug store at Nos.
101-103 Calle Rosario, known as Farmacia Henson, to secure a loan of P7,000,
although it was made to appear in the instrument that the loan was for P20,000.
In the second case the plaintiffs alleged that they were the heirs of the late Don
Florentino Torres; and that Jose B. Henson, in his lifetime, executed in favor of
Don Florentino Torres a chattel mortgage (also Exhibit A) on his three drug stores
known as Henson's Pharmacy, Farmacia Henson and Botica Hensonina, to
secure a loan of P50,000, which was later reduced to P26,000, and for which,
Henson's Pharmacy at Nos. 71-73 Escolta, remained as the only security by
agreement of the parties.
In both cases the plaintiffs alleged that the defendant violated the terms of the
mortgage and that, in consequence thereof they became entitled to the
possession of the chattels and to foreclose their mortgages thereon. Upon the
petition of the plaintiffs and after the filing of the necessary bonds, the court
issued in each case an order directing the sheriff of the City of Manila to take
immediate possession of said drug stores.
The defendant filed practically the same answer to both complaints. He denied
generally and specifically the plaintiffs' allegations, and set up the following
special defenses:
(1) That the chattel mortgages (Exhibit A, in G.R. No. 34385 and Exhibit A, in
G.R. No. 34286) are null and void for lack of sufficient particularity in the
description of the property mortgaged; and
(2) That the chattels which the plaintiffs sought to recover were not the same
property described in the mortgage.
The defendant also filed a counterclaim for damages in the sum of P20,000 in
the first case and P100,000 in the second case.
Upon the issue thus raised by the pleadings, the two causes were tried together
by agreement of the parties. After hearing the evidence adduced during the trial
and on July 17, 1930, the Honorable Mariano Albert, judge, in a very carefully
prepared opinion, arrived at the conclusion (a) that the defendant defaulted in the
payment of interest on the loans secured by the mortgages, in violation of the
terms thereof; (b) that by reason of said failure said mortgages became due, and

(c) that the plaintiffs, as mortgagees, were entitled to the possession of the drug
stores Farmacia Henson at Nos. 101-103 Calle Rosario and Henson's Pharmacy
at Nos. 71-73 Escolta. Accordingly, a judgment was rendered in favor of the
plaintiffs and against the defendant, confirming the attachment of said drug
stores by the sheriff of the City of Manila and the delivery thereof to the plaintiffs.
The dispositive part of the decision reads as follows:
En virtud de todo lo expuesto, el Juzgado dicta sentencia confirmado en todas
sus partes los ordenes de fechas 16 y 17 de abril de presente ano, dictadas en
las causas Nos. 37096 y 37097, respectivamente, y declara definitiva la entrega
hecha a los demandantes por el Sheriff de Manila de las boticas en cuestion. Se
condena en costas al demandado en ambas causas.
From the judgment the defendant appealed, and now makes the following
assignments of error:
I. The lower court erred in failing to make a finding on the question of the
sufficiency of the description of the chattels mortgaged and in failing to hold that
the chattel mortgages were null and void for lack of particularity in the description
of the chattels mortgaged.
II. The lower court erred in refusing to allow the defendant to introduce evidence
tending to show that the stock of merchandise found in the two drug stores was
not in existence or owned by the mortgagor at the time of the execution of the
mortgages in question.
III. The lower court erred in holding that the administrator of the deceased is now
estopped from contesting the validity of the mortgages in question.
IV. The lower court erred in failing to make a finding on the counterclaims of the
defendant.
With reference to the first assignment of error, we deem it unnecessary to
discuss the question therein raised, inasmuch as according to our view on the
question of estoppel, as we shall hereinafter set forth in our discussion of the
third assignment of error, the defendant is estopped from questioning the validity
of these chattel mortgages.
In his second assignment of error the appellant attacks the validity of the
stipulation in said mortgages authorizing the mortgagor to sell the goods covered
thereby and to replace them with other goods thereafter acquired. He insists that
a stipulation authorizing the disposal and substitution of the chattels mortgaged
does not operate to extend the mortgage to after-acquired property, and that
such stipulation is in contravention of the express provision of the last paragraph
of section 7 Act No. 1508, which reads as follows:
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.
In order to give a correct construction to the above-quoted provision of our
Chattel Mortgage Law (Act No. 1508), the spirit and intent of the law must first be
ascertained. When said Act was placed on our statute books by the United
States Philippine Commission on July 2, 1906, the primary aim of that lawmaking body was undoubtedly to promote business and trade in these Islands

and to give impetus to the economic development of the country. Bearing this in
mind, it could not have been the intention of the Philippine Commission to apply
the provision of section 7 above quoted to stores open to the public for retail
business, where the goods are constantly sold and substituted with new stock,
such as drug stores, grocery stores, dry-goods stores, etc. If said provision were
intended to apply to this class of business, it would be practically impossible to
constitute a mortgage on such stores without closing them, contrary to the very
spirit about a handicap to trade and business, would restrain the circulation of
capital, and would defeat the purpose for which the law was enacted, to wit, the
promotion of business and the economic development of the country.
In the interpretation and construction of a statute the intent of the law-maker
should always be ascertained and given effect, and courts will not follow the
letter of a statute when it leads away from the true intent and purpose of the
Legislature and to conclusions inconsistent with the spirit of the Act. On this
subject, Sutherland, the foremost authority on statutory construction, says:
The Intent of Statute is the Law. If a statute is valid it is to have effect
according to the purpose and intent of the lawmaker. The intent is the vital part,
the essence of the law, and the primary rule of construction is to ascertain and
give effect to that intent. The intention of the legislature in enacting a law is the
law itself, and must be enforced when ascertained, although it may not be
consistent with the strict letter of the statute. Courts will not follow the letter of a
statute when it leads away from the true intent and purpose of the legislature and
to conclusions inconsistent with the general purpose of the act. Intent is the spirit
which gives life to a legislative enactment. In construing statutes the proper
course is to start out and follow the true intent of the legislature and to adopt that
sense which harmonizes best with the content and promotes in the fullest
manner the apparent policy and objects of the legislature. (Vol. II Sutherland,
Statutory Construction, pp. 693-695.)
A stipulation in the mortgage, extending its scope and effect to after-acquired
property, is valid and binding
. . . where the after-acquired property is in renewal of, or in substitution for, goods
on hand when the mortgage was executed, or is purchased with the proceeds of
the sale of such goods, etc. (11 C.J., p. 436.)
Cobbey, a well-known authority on Chattel Mortgages, recognizes the validity of
stipulations relating to after-acquired and substituted chattels. His views are
based on the decisions of the supreme courts of several states of the Union. He
says: "A mortgage may, by express stipulations, be drawn to cover goods put in
stock in place of others sold out from time to time. A mortgage may be made to
include future acquisitions of goods to be added to the original stock mortgaged,
but the mortgage must expressly provide that such future acquisitions shall be
held as included in the mortgage. ... Where a mortgage covering the stock in
trade, furniture, and fixtures in the mortgagor's store provides that "all goods,
stock in trade, furniture, and fixtures hereafter purchased by the mortgagor shall
be included in and covered by the mortgage," the mortgage covers all afteracquired property of the classes mentioned, and, upon foreclosure, such property
may be taken and sold by the mortgagee the same as the property in possession

of the mortgagor at the time the mortgage was executed." (Vol. I, Cobbey on
Chattel Mortgages, sec. 361, pp. 474, 475.)
In harmony with the foregoing, we are of the opinion (a) that the provision of the
last paragraph of section 7 of Act No. 1508 is not applicable to drug stores,
bazaars and all other stores in the nature of a revolving and floating business; (b)
that the stipulation in the chattel mortgages in question, extending their effect to
after-acquired property, is valid and binding; and (c) that the lower court
committed no error in not permitting the defendant-appellant to introduce
evidence tending to show that the goods seized by the sheriff were in the nature
of after-acquired property.
With reference to the third assignment of error, we agree with the lower court
that, from the facts of record, the defendant-appellant is estopped from
contenting the validity of the mortgages in question. This feature of the case has
been very ably and fully discussed by the lower court in its decision, and said
discussion is made, by reference, a part of this opinion.
As to the fourth assignment of error regarding the counterclaims of the
defendant-appellant, it may be said that in view of the conclusions reached by
the lower court, which are sustained by this court, the lower court committed no
error in not making any express finding as to said counterclaims. As a matter of
form, however, the counter-claims should have been dismissed, but as the trial
court decided both cases in favor of the plaintiffs and confirmed and ratified the
orders directing the sheriff to take possession of the chattels on behalf of the
plaintiffs, there was, in effect, a dismissal of the defendant's counterclaims.
For all of the foregoing, we are of the opinion and so hold that the judgment
appealed from is in accordance with the facts and the law, and the same should
be and is hereby affirmed, with costs. So ordered.
G.R. No. L-30173 September 30, 1971
GAVINO A. TUMALAD and GENEROSA R. TUMALAD, plaintiffs-appellees,
vs.
ALBERTA VICENCIO and EMILIANO SIMEON, defendants-appellants.
Castillo & Suck for plaintiffs-appellees.
Jose Q. Calingo for defendants-appellants.
REYES, J.B.L., J.:
Case certified to this Court by the Court of Appeals (CA-G.R. No. 27824-R) for
the reason that only questions of law are involved.
This case was originally commenced by defendants-appellants in the municipal
court of Manila in Civil Case No. 43073, for ejectment. Having lost therein,
defendants-appellants appealed to the court a quo (Civil Case No. 30993) which
also rendered a decision against them, the dispositive portion of which follows:
WHEREFORE, the court hereby renders judgment in favor of the plaintiffs and
against the defendants, ordering the latter to pay jointly and severally the former
a monthly rent of P200.00 on the house, subject-matter of this action, from March
27, 1956, to January 14, 1967, with interest at the legal rate from April 18, 1956,
the filing of the complaint, until fully paid, plus attorney's fees in the sum of

P300.00 and to pay the costs.

It appears on the records that on 1 September 1955 defendants-appellants
executed a chattel mortgage in favor of plaintiffs-appellees over their house of
strong materials located at No. 550 Int. 3, Quezon Boulevard, Quiapo, Manila,
over Lot Nos. 6-B and 7-B, Block No. 2554, which were being rented from
Madrigal & Company, Inc. The mortgage was registered in the Registry of Deeds
of Manila on 2 September 1955. The herein mortgage was executed to
guarantee a loan of P4,800.00 received from plaintiffs-appellees, payable within
one year at 12% per annum. The mode of payment was P150.00 monthly,
starting September, 1955, up to July 1956, and the lump sum of P3,150 was
payable on or before August, 1956. It was also agreed that default in the
payment of any of the amortizations, would cause the remaining unpaid balance
to becomeimmediately due and Payable and
the Chattel Mortgage will be enforceable in accordance with the provisions of
Special Act No. 3135, and for this purpose, the Sheriff of the City of Manila or any
of his deputies is hereby empowered and authorized to sell all the Mortgagor's
property after the necessary publication in order to settle the financial debts of
P4,800.00, plus 12% yearly interest, and attorney's fees... 2
When defendants-appellants defaulted in paying, the mortgage was
extrajudicially foreclosed, and on 27 March 1956, the house was sold at public
auction pursuant to the said contract. As highest bidder, plaintiffs-appellees were
issued the corresponding certificate of sale. 3 Thereafter, on 18 April 1956,
plaintiffs-appellant commenced Civil Case No. 43073 in the municipal court of
Manila, praying, among other things, that the house be vacated and its
possession surrendered to them, and for defendants-appellants to pay rent of
P200.00 monthly from 27 March 1956 up to the time the possession is
surrendered. 4 On 21 September 1956, the municipal court rendered its decision

... ordering the defendants to vacate the premises described in the complaint;
ordering further to pay monthly the amount of P200.00 from March 27, 1956, until
such (time that) the premises is (sic) completely vacated; plus attorney's fees of
P100.00 and the costs of the suit. 5
Defendants-appellants, in their answers in both the municipal court and court a
quo impugned the legality of the chattel mortgage, claiming that they are still the
owners of the house; but they waived the right to introduce evidence, oral or
documentary. Instead, they relied on their memoranda in support of their motion
to dismiss, predicated mainly on the grounds that: (a) the municipal court did not
have jurisdiction to try and decide the case because (1) the issue involved, is
ownership, and (2) there was no allegation of prior possession; and (b) failure to
prove prior demand pursuant to Section 2, Rule 72, of the Rules of Court. 6
During the pendency of the appeal to the Court of First Instance, defendantsappellants failed to deposit the rent for November, 1956 within the first 10 days of
December, 1956 as ordered in the decision of the municipal court. As a result,
the court granted plaintiffs-appellees' motion for execution, and it was actually
issued on 24 January 1957. However, the judgment regarding the surrender of
possession to plaintiffs-appellees could not be executed because the subject

house had been already demolished on 14 January 1957 pursuant to the order of
the court in a separate civil case (No. 25816) for ejectment against the present
defendants for non-payment of rentals on the land on which the house was
constructed.
The motion of plaintiffs for dismissal of the appeal, execution of the supersedeas
bond and withdrawal of deposited rentals was denied for the reason that the
liability therefor was disclaimed and was still being litigated, and under Section 8,
Rule 72, rentals deposited had to be held until final disposition of the appeal. 7
On 7 October 1957, the appellate court of First Instance rendered its decision,
the dispositive portion of which is quoted earlier. The said decision was appealed
by defendants to the Court of Appeals which, in turn, certified the appeal to this
Court. Plaintiffs-appellees failed to file a brief and this appeal was submitted for
decision without it.
Defendants-appellants submitted numerous assignments of error which can be
condensed into two questions, namely: .
(a) Whether the municipal court from which the case originated had jurisdiction to
adjudicate the same;
(b) Whether the defendants are, under the law, legally bound to pay rentals to the
plaintiffs during the period of one (1) year provided by law for the redemption of
the extrajudicially foreclosed house.
We will consider these questions seriatim.
(a) Defendants-appellants mortgagors question the jurisdiction of the municipal
court from which the case originated, and consequently, the appellate jurisdiction
of the Court of First Instance a quo, on the theory that the chattel mortgage is
void ab initio; whence it would follow that the extrajudicial foreclosure, and
necessarily the consequent auction sale, are also void. Thus, the ownership of
the house still remained with defendants-appellants who are entitled to
possession and not plaintiffs-appellees. Therefore, it is argued by defendantsappellants, the issue of ownership will have to be adjudicated first in order to
determine possession. lt is contended further that ownership being in issue, it is
the Court of First Instance which has jurisdiction and not the municipal court.
Defendants-appellants predicate their theory of nullity of the chattel mortgage on
two grounds, which are: (a) that, their signatures on the chattel mortgage were
obtained through fraud, deceit, or trickery; and (b) that the subject matter of the
mortgage is a house of strong materials, and, being an immovable, it can only be
the subject of a real estate mortgage and not a chattel mortgage.
On the charge of fraud, deceit or trickery, the Court of First Instance found
defendants-appellants' contentions as not supported by evidence and
accordingly dismissed the charge, 8 confirming the earlier finding of the municipal
court that "the defense of ownership as well as the allegations of fraud and deceit
... are mere allegations." 9
It has been held in Supia and Batiaco vs. Quintero and Ayala 10 that "the answer
is a mere statement of the facts which the party filing it expects to prove, but it is
not evidence; 11 and further, that when the question to be determined is one of
title, the Court is given the authority to proceed with the hearing of the cause until
this fact is clearly established. In the case of Sy vs. Dalman, 12 wherein the

defendant was also a successful bidder in an auction sale, it was likewise held by
this Court that in detainer cases the aim of ownership "is a matter of defense and
raises an issue of fact which should be determined from the evidence at the trial."
What determines jurisdiction are the allegations or averments in the complaint
and the relief asked for. 13
Moreover, even granting that the charge is true, fraud or deceit does not render a
contract void ab initio, and can only be a ground for rendering the contract
voidable or annullable pursuant to Article 1390 of the New Civil Code, by a
proper action in court. 14 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. Hence, defendants-appellants' claim of ownership on the basis of a
voidable contract which has not been voided fails.
It is claimed in the alternative by defendants-appellants that even if there was no
fraud, deceit or trickery, the chattel mortgage was still null and void ab initio
because only personal properties can be subject of a chattel mortgage. The rule
about the status of buildings as immovable property is stated in Lopez vs. Orosa,
Jr. and Plaza Theatre Inc., 15 cited in Associated Insurance Surety Co., Inc. vs.
Iya, et al. 16 to the effect that
... it is obvious that the inclusion of the building, separate and distinct from the
land, in the enumeration of what may constitute real properties (art. 415, New
Civil Code) could only mean one thing that a building is by itself an immovable
property irrespective of whether or not said structure and the land on which it is
adhered to belong to the same owner.
Certain deviations, however, have been allowed for various reasons. In the case
of Manarang and Manarang vs. Ofilada, 17 this Court stated that "it is undeniable
that the parties to a contract may by agreement treat as personal property that
which by nature would be real property", citing Standard Oil Company of New
York vs. Jaramillo. 18 In the latter case, the mortgagor conveyed and transferred
to the mortgagee by way of mortgage "the following described personal
property." 19 The "personal property" consisted of leasehold rights and a building.
Again, in the case of Luna vs. Encarnacion, 20 the subject of the contract
designated as Chattel Mortgage was a house of mixed materials, and this Court
hold therein that it was a valid Chattel mortgage because it was so expressly
designated and specifically that the property given as security "is a house of
mixed materials, which by its very nature is considered personal property." In the
later case of Navarro vs. Pineda, 21 this Court stated that
The view that parties to a deed of chattel mortgage may agree to consider a
house as personal property for the purposes of said contract, "is good only
insofar as the contracting parties are concerned. It is based, partly, upon the
principle of estoppel" (Evangelista vs. Alto Surety, No. L-11139, 23 April 1958). In
a case, a mortgaged house built on a rented land was held to be a personal
property, not only because the deed of mortgage considered it as such, but also
because it did not form part of the land (Evangelists vs. Abad, [CA]; 36 O.G.
2913), for it is now settled that an object placed on land by one who had only a
temporary right to the same, such as the lessee or usufructuary, does not
become immobilized by attachment (Valdez vs. Central Altagracia, 222 U.S. 58,

cited in Davao Sawmill Co., Inc. vs. Castillo, et al., 61 Phil. 709). Hence, if a
house belonging to a person stands on a rented land belonging to another
person, it may be mortgaged as a personal property as so stipulated in the
document of mortgage. (Evangelista vs. Abad, Supra.) It should be noted,
however that the principle is predicated on statements by the owner declaring his
house to be a chattel, a conduct that may conceivably estop him from
subsequently claiming otherwise. (Ladera vs. C.N. Hodges, [CA] 48 O.G. 5374):
22

In the contract now before Us, the house on rented land is not only expressly
designated as Chattel Mortgage; it specifically provides that "the mortgagor ...
voluntarily CEDES, SELLS and TRANSFERS by way of Chattel Mortgage 23 the
property together with its leasehold rights over the lot on which it is constructed
and participation ..." 24 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. Moreover, the subject house stood on a rented lot to which
defendats-appellants merely had a temporary right as lessee, and although this
can not in itself alone determine the status of the property, it does so when
combined with other factors to sustain the interpretation that the parties,
particularly the mortgagors, intended to treat the house as personalty. Finally
unlike in the Iya cases, Lopez vs. Orosa, Jr. and Plaza Theatre, Inc. 25 and Leung
Yee vs. F. L. Strong Machinery and Williamson, 26 wherein third persons assailed
the validity of the chattel mortgage, 27 it is the defendants-appellants themselves,
as debtors-mortgagors, who are attacking the validity of the chattel mortgage in
this case. The doctrine of estoppel therefore applies to the herein defendantsappellants, having treated the subject house as personalty.
(b) Turning to the question of possession and rentals of the premises in question.
The Court of First Instance noted in its decision that nearly a year after the
foreclosure sale the mortgaged house had been demolished on 14 and 15
January 1957 by virtue of a decision obtained by the lessor of the land on which
the house stood. For this reason, the said court limited itself to sentencing the
erstwhile mortgagors to pay plaintiffs a monthly rent of P200.00 from 27 March
1956 (when the chattel mortgage was foreclosed and the house sold) until 14
January 1957 (when it was torn down by the Sheriff), plus P300.00 attorney's
fees.
Appellants mortgagors question this award, claiming that they were entitled to
remain in possession without any obligation to pay rent during the one year
redemption period after the foreclosure sale, i.e., until 27 March 1957. On this
issue, We must rule for the appellants.
Chattel mortgages are covered and regulated by the Chattel Mortgage Law, Act
No. 1508. 28 Section 14 of this Act allows the mortgagee to have the property
mortgaged sold at public auction through a public officer in almost the same
manner as that allowed by Act No. 3135, as amended by Act No. 4118, provided
that the requirements of the law relative to notice and registration are complied

with. 29 In the instant case, the parties specifically stipulated that "the chattel
mortgage will be enforceable in accordance with the provisions of Special Act
No. 3135 ... ." 30 (Emphasis supplied).
Section 6 of the Act referred to 31 provides that the debtor-mortgagor
(defendants-appellants herein) may, at any time within one year from and after
the date of the auction sale, redeem the property sold at the extra judicial
foreclosure sale. Section 7 of the same Act 32 allows the purchaser of the
property to obtain from the court the possession during the period of redemption:
but the same provision expressly requires the filing of a petition with the proper
Court of First Instance and the furnishing of a bond. It is only upon filing of the
proper motion and the approval of the corresponding bond that the order for a
writ of possession issues as a matter of course. No discretion is left to the court.
33
In the absence of such a compliance, as in the instant case, the purchaser can
not claim possession during the period of redemption as a matter of right. In such
a case, the governing provision is Section 34, Rule 39, of the Revised Rules of
Court 34 which also applies to properties purchased in extrajudicial foreclosure
proceedings. 35 Construing the said section, this Court stated in the aforestated
case of Reyes vs. Hamada.
In other words, before the expiration of the 1-year period within which the
judgment-debtor or mortgagor may redeem the property, the purchaser thereof is
not entitled, as a matter of right, to possession of the same. Thus, while it is true
that the Rules of Court allow the purchaser to receive the rentals if the purchased
property is occupied by tenants, he is, nevertheless, accountable to the
judgment-debtor or mortgagor as the case may be, for the amount so received
and the same will be duly credited against the redemption price when the said
debtor or mortgagor effects the redemption. Differently stated, the rentals
receivable from tenants, although they may be collected by the purchaser during
the redemption period, do not belong to the latter but still pertain to the debtor of
mortgagor. The rationale for the Rule, it seems, is to secure for the benefit of the
debtor or mortgagor, the payment of the redemption amount and the consequent
return to him of his properties sold at public auction. (Emphasis supplied)
The Hamada case reiterates the previous ruling in Chan vs. Espe. 36
Since the defendants-appellants were occupying the house at the time of the
auction sale, they are entitled to remain in possession during the period of
redemption or within one year from and after 27 March 1956, the date of the
auction sale, and to collect the rents or profits during the said period.
It will be noted further that in the case at bar the period of redemption had not yet
expired when action was instituted in the court of origin, and that plaintiffsappellees did not choose to take possession under Section 7, Act No. 3135, as
amended, which is the law selected by the parties to govern the extrajudicial
foreclosure of the chattel mortgage. Neither was there an allegation to that effect.
Since plaintiffs-appellees' right to possess was not yet born at the filing of the
complaint, there could be no violation or breach thereof. Wherefore, the original
complaint stated no cause of action and was prematurely filed. For this reason,
the same should be ordered dismissed, even if there was no assignment of error
to that effect. The Supreme Court is clothed with ample authority to review

palpable errors not assigned as such if it finds that their consideration is

necessary in arriving at a just decision of the cases. 37
It follows that the court below erred in requiring the mortgagors to pay rents for
the year following the foreclosure sale, as well as attorney's fees.
FOR THE FOREGOING REASONS, the decision appealed from is reversed and
another one entered, dismissing the complaint. With costs against plaintiffsappellees.
G.R. No. 97130
June 19, 1991
FRANCISCO N. DY, JR., Substituted by his Estate Rep. by ROSARIO
PEREZ-DY, Administratrix, petitioner,
vs.
COURT OF APPEALS and FERTILIZER MARKETING COMPANY OF THE
PHILIPPINES, respondents.
Loreta F. Sablaya for petitioner.Rayala & Associates for private respondent.
GRIO-AQUINO, J.:
This is a petition for review of the Court of Appeals' decision dated December 11,
1990, which affirmed in toto the decision of the Regional Trial Court of Makati
dated July 18, 1988, which ordered the petitioner to pay the private respondent
the sum of P337,120.00 plus interest of 12% per annum, attorney's fees and
costs.
Private respondent Fertilizer Marketing Company of the Philippines filed an
action to collect from Francisco Dy, Jr. (now deceased) and the Francisco Dy, Jr.
Trading Corporation the sum of P337,120.00 as unpaid balance on their
purchase of fertilizers on credit from the private respondent.
The defendants were declared in default on August 15, 1983 for failure to answer
the complaint within the reglementary period. Private respondent was thereafter
allowed to present its evidence ex parte before the Branch Clerk of Court.
Subsequently, the defendants filed a motion to admit their answer, but it was
denied by the court. They filed a motion for reconsideration; it was granted; the
order of default was set aside; their answer was admitted; and they were allowed
to present their evidence without retaking the plaintiff s evidence.
On the date set for the reception of their evidence, the defendants failed to
appear despite due notice, so, judgment was rendered by the trial court against
them on January 4, 1984.
On appeal to the Court of Appeals, the judgment by default was set aside and the
case was remanded to the lower court for pre-trial and trial on the merits (ACG.R. CV No. 03747, p. 46, Rollo).
At the pre-trial conference on November 12, 1987, the plaintiff and defendant
Francisco Dy, Jr. appeared, but there was no appearance for the defendant
trading corporation, so it was declared in default again and the plaintiff was
allowed to present its evidence ex parte before the Branch Clerk of Court.
However, in that same pre-trial conference the parties agreed that the evidence
previously presented by the plaintiff shall remain on record for purposes of the
continuation of the trial, subject to cross-examination in open court, and, that the

presentation of the affidavits in question and answer form will constitute the direct
testimony of the defendant's witnesses likewise subject to cross-examination of
the adverse counsel.
On motion for reconsideration, the order of default against the corporation was
lifted. A second motion for reconsideration was filed by the defendants on
January 22, 1988 to set aside the agreement for trial by affidavits but it was
denied by the court.
On the date of the hearing set on April 25, 1988, the defendants failed to appear
to present their evidence despite due notice, hence, they were deemed to have
waived the presentation of their evidence. The case was submitted for decision
upon the plaintiffs evidence.
On July 18, 1988, the trial court rendered a decision (mentioned earlier) for the
plaintiff and against the defendants. The latter appealed to the Court of Appeals
(CA-G.R. CV No. 23540) alleging that the court a quo erred (1) in reinstating the
nullified proceedings on August 19, 1983 before the Branch Clerk of Court; (2) in
denying her procedural due process; and (3) in awarding damages against her.
During the pendency of the appeal, Francisco Dy, Jr. passed away on June 20,
1989. His wife, Rosario Perez-Dy, as judicial administratrix of his estate,
prosecuted the appeal (Azarraga vs. Cortes, 9 Phil. 698).
On December 11, 1990, the Court of Appeals dismissed the appeal (CA-G.R. CV
No. 23540) for lack of merit.
In this petition for review of that decision, the petitioner reiterates the same
issues that she raised in the Court of Appeals.
With regard to the validity of the proceedings before the Branch Clerk of Court,
we agree with the observations of the Court of Appeals that:
Appellant is now estopped from questioning the retention of the proceedings held
on August 19, 1983 before the Branch Clerk of Court since her husband agreed
to the same during the pre-trial conference held on November 12, 1987.
Agreements reached at the pre-trial conference and embodied in the pre-trial
order shall control the subsequent course of the trial and should not be disturbed
unless there could be manifest injustice.
The agreement is not unjust to appellant. Aside from appellant having the right to
adduce evidence on her behalf, the parties agreed that the evidence presented
by appellee before the Branch Clerk of Court would be retained, with appellant
having the right to cross-examine appellee's witnesses.
xxx
xxx
xxx
The agreement of the parties as contained in the pre-trial order is not invalid. The
parties are authorized by the Rules of Court to consider "[s]uch other matters as
may aid in the prompt disposition of the action." An authority believes this
includes "agreement on certain matters so that witnesses need not and will not
be called." Undoubtedly, the procedure agreed upon by the parties in this case
would have greatly accelerated the trial and the decision therein, which, at the,
time of the pre-trial conference, had been pending for three years and had
already gone up on appeal to this Court. (pp. 27-28, Rollo.)
The presentation of the plaintiff's evidence before the Branch Clerk of Court was
not void. The Supreme Court, in the case of Continental Bank vs. Tiangco, et al.

(94 SCRA 715) departing from its contrary statement in the Lim Tan Hu case (66
SCRA 425), declared that a decision based on evidence heard by a deputy clerk
of court as commissioner is valid and enforceable because it was rendered by a
court of competent jurisdiction, was not impaired by extrinsic fraud, nor by lack of
due process, and there was no showing that the private respondents were
prejudiced by such a procedure, or that the commissioner committed any mistake
or abuse of discretion, or that the proceedings were vitiated by collusion and
collateral fraud. That ruling applies four square to this case.
The practice of designating the clerk of court as a commissioner to receive
evidence in the event of the non-appearance of the defendant and its counsel, is
not irregular and is sanctioned by Rule 33 of the Rules of Court on trial by
commissioner (J.M. Tuazon, Inc. vs. Dela Rosa, 18 SCRA 591; Wassmer vs.
Velez, 12 SCRA 648).
The petitioner was not denied due process. As pointed out by the appellate court:
. . . Appellant retained her right to present evidence on her behalf and the
opportunity to cross-examine the witnesses already presented by appellee. At
any rate, if appellant believes that her right to procedural due process had been
curtailed, the same was due to a voluntary waiver by her husband. (p. 28, Rollo)
WHEREFORE, the petition for review is denied for lack of merit. Costs against
the petitioners.
SO ORDERED.
G.R. No. 110048 November 19, 1999
SERVICEWIDE SPECIALISTS, INC., petitioner,
vs.
COURT OF APPEALS, HILDA TEE, & ALBERTO M. VILLAFRANCA,
respondents.
PURISIMA, J.:
This is a petition for review on certiorari under Rule 45 of Decision of the Court of
Appeals 1 in CA-G.R. CV No. 19571, affirming the judgment of the Regional Trial
Court of Manila, Branch XX, dismissing Civil Case No. 84-25763 for replevin and
damages.
The litigation involves a motor vehicle, a Colt Galant, 4-door Sedan automobile,
with Motor No. 2E-08927, Serial No. A112A-5297, Model No. 1976.
The appellate court culled the facts that matter as follows: 2
On May 14, 1976, Leticia L. Laus of Quezon City purchased on credit a Colt
Galant . . . from Fortune Motors (Phils.) Corporation. On the same date, she
executed a promissory note for the amount of P56,028.00, inclusive of interest at
12% per annum, payable within a period of 48 months starting August, 1976 at a
monthly installment of P1,167.25 due and demandable on the 17th day of each
month (Exhibit "A", pp. 144, Orig. Records,). It was agreed upon, among others,
that in case of default in the payment of any installment the total principal sum,
together with the interest, shall become immediately due and payable (Exhibit
"A"; p. 144, Orig. Records). As a security for the promissory note, a chattel
mortgage was constituted over the said motor vehicle (Exhibit "B", ibid.), with a

deed of assignment incorporated therein such that the credit and mortgage rights
were assigned by Fortune Motors Corp. in favor of Filinvest Credit Corporation
with the consent of the mortgagor-debtor Leticia Laus (Exhibits "B-1" and "B-2",
p. 147, ibid.). The vehicle was then registered in the name of Leticia L. Laus with
the chattel mortgage annotated on said certificate. (Exhibit "H"; p. 154, ibid.)
On September 25, 1978, Filinvest Credit Corporation in turn assigned the credit
in favor of Servicewide Specialists, Inc. (Servicewide, for brevity) transferring
unto the latter all its rights under the promissory note and the chattel mortgage
(Exhibit "B-3", p. 149, ibid.) with the corresponding notice of assignment sent to
the registered car owner (Exhibit "C"; p. 150, ibid.).
On April 18, 1977, Leticia Laus failed to pay the monthly installments for that
month. The installments for the succeeding 17 months were not likewise fully
paid, hence on September 25, 1978, pursuant to the provisions of the promissory
note, Servicewide demanded payment of the entire outstanding balance of
P46,775.24 inclusive of interests (Exhibits "D" and "E"; pp. 151-152, ibid.).
Despite said formal demand, Leticia Laus failed to pay all the monthly
installments due until July 18, 1980.
On July 25, 1984, Servicewide sent a statement of account to Leticia Laus and
demanded payment of the amount of P86,613.32 representing the outstanding
balance plus interests up to July 25, 1985, attorney's fees, liquidated damages,
estimated repossession expense, and bonding fee (Exhibit "F"; p. 153, ibid.)
As a result of the failure of Leticia Laus to settle her obligation, or at least to
surrender possession of the motor vehicle for the purpose of foreclosure,
Servicewide instituted a complaint for replevin, impleading Hilda Tee and John
Dee in whose custody the vehicle was believed to be at the time of the filing of
the suit.
In its complaint, plaintiff alleged that it had superior lien over the mortgaged
vehicle; that it is lawfully entitled to the possession of the same together with all
its accessories and equipments; (sic) that Hilda Tee was wrongfully detaining the
motor vehicle for the purpose of defeating its mortgage lien; and that a sufficient
bond had been filed in court. (Complaint with Annexes, pp. 1-13, ibid.). On July
30, 1984, the court approved the replevin bond (p. 20, ibid.)
On August 1, 1984, Alberto Villafranca filed a third party claim contending that he
is the absolute owner of the subject motor vehicle duly evidenced by the Bureau
of Land Transportation's Certificate of Registration issued in his name on June
22, 1984; that he acquired the said mother vehicle from a certain Remedios D.
Yang under a Deed of Sale dated May 16, 1984; that he acquired the same free
from all lien and emcumbrances; and that on July 30, 1984, the said automobile
was taken from his residence by Deputy Sheriff Bernardo Bernabe pursuant to
the seizure order issued by the court a quo.
Upon motion of the plaintiff below, Alberto Villafranca was substituted as
defendant. Summons was served upon him. (pp. 55-56, ibid).
On March 20, 1985, Alberto Villafranca moved for the dismissal of the complaint
on the ground that there is another action pending between the same parties
before the Regional Trial Court of Makati, Branch 140, docketed as Civil Case
No. 8310, involving the seizure of subject motor vehicle and the indemnity bond

posted by Servicewide (Motion to Dismiss with Annexes; pp. 57-110, ibid.) On

March 28, 1985, the court granted the aforesaid motion (p. 122, ibid.), but
subsequently the order of dismissal was reconsidered and set aside (pp. 135136, ibid.). For failure to file his Answer as required by the court a quo, Alberto
Villafranca was declared in default and plaintiff's evidence was received ex parte.
On December 27, 1985, the lower court rendered a decision dismissing the
complaint for insufficiency of evidence. Its motion for reconsideration of said
decision having been denied, . . . .
In its appeal to the Court of Appeals, petitioner theorized that a suit for replevin
aimed at the foreclosure of a chattel is an action quasi in rem, and does not
require the inclusion of the principal obligor in the Complaint. However, the
appellate court affirmed the decision of the lower Court; ratiocinating, thus:
A cursory reading, however, of the Promissory Note dated May 14, 1976 in favor
of Fortune Motors (Phils.) Corp. in the sum of P56,028.00 (Annex "A" of
Complaint, p. 7, Original Records) and the Chattel Mortgage of the same date
(Annex "B" of Complaint; pp. 8-9, ibid.) will disclose that the maker and
mortgagor respectively are one and the same person: Leticia Laus. In fact,
plaintiff-appellant admits in paragraphs (sic) nos. 2 and 3 of its Complaint that the
aforesaid public documents (Annexes "A" and "B" thereof) were executed by
Leticia Laus, who, for reasons not explained, was never impleaded. In the case
under consideration, plaintiff-appellant's main case is for judicial foreclosure of
the chattel mortgage against Hilda Tee and John Doe who was later substituted
by appellee Alberto Villafranca. But as there is no privity of contract, not even a
causal link, between plaintiff-appellant Servicewide Specialists, Inc. and
defendant-appellee Alberto Villafranca, the court a quo committed no reversible
error when it dismissed the case for insufficiency of evidence against Hilda Tee
and Alberto Villafranca since the evidence adduced pointed to Leticia Laus as the
party liable for the obligation sued upon (p. 2, RTC Decision). 3
Petitioner presented a Motion for Reconsideration but in its Resolution 4 of May
10, 1993, the Court of Appeals denied the same, taking notice of another case
"pending between the same parties . . . relating to the very chattel mortgage of
the motor vehicle in litigation."
Hence, the present petition for review on certiorari under Rule 45. Essentially, the
sole issue here is: Whether or not a case for replevin may be pursued against the
defendant, Alberto Villafranca, without impleading the absconding debtormortgagor?
Rule 60 of the Revised Rules of Court requires that an applicant for replevin must
show that he "is the owner of the property claimed, particularly describing it, or is
entitled to the possession thereof." 5 Where the right of the plaintiff to the
possession of the specified property is so conceded or evident, the action need
only be maintained against him who so possesses the property. In rem action est
per quam rem nostram quae ab alio possidetur petimus, et semper adversus
eum est qui rem possidet. 6
Citing Northern Motors, Inc. vs. Herrera, 7 the Court said in the case of BA
Finance (which is of similar import with the present case):
There can be no question that persons having a special right of property in the

goods the recovery of which is sought, such as a chattel mortgagee, may

maintain an action for replevin therefor. Where the mortgage authorizes the
mortgagee to take possession of the property on default, he may maintain an
action to recover possession of the mortgaged chattels from the mortgagor or
from any person in whose hands he may find them. 8
Thus, in default of the mortgagor, the mortgagee is thereby constituted as
attorney-in-fact of the mortgagor, enabling such mortgagee to act for and in
behalf of the owner. That the defendant is not privy to the chattel mortgage
should be inconsequential. By the fact that the object of replevin is traced to his
possession, one properly can be a defendant in an action for replevin. It is here
assumed that the plaintiff's right to possess the thing is not or cannot be
disputed. 9 (Emphasis supplied)
However, in case the right of possession on the part of the plaintiff, or his
authority to claim such possession or that of his principal, is put to great doubt (a
contending party may contest the legal bases for plaintiffs cause of action or an
adverse and independent claim of ownership or right of possession may be
raised by that party), it could become essential to have other persons involved
and impleaded for a complete determination and resolution of the controversy. 10
In the case under scrutiny, it is not disputed that there is an adverse and
independent claim of ownership by the respondent as evinced by the existence
of a pending case before the Court of Appeals involving subject motor vehicle
between the same parties herein. 11 Its resolution is a factual matter, the province
of which properly lies in the lower Court and not in the Supreme Court, in the
guise of a petition for review on certiorari. For it is basic that under Rule 45, this
Court only entertains questions of law, and rare are the exceptions and the
present case does not appear to be one of them.
In a suit for replevin, a clear right of possession must be established. (Emphasis
supplied) A foreclosure under a chattel mortgage may properly be commenced
only once there is default on the part of the mortgagor of his obligation secured
by the mortgage. The replevin in this case has been resorted to in order to pave
the way for the foreclosure of what is covered by the chattel mortgage. The
conditions essential for such foreclosure would be to show, firstly, the existence
of the chattel mortgage and, secondly, the default of the mortgagor. These
requirements must be shown because the validity of the plaintiffs exercise of the
right of foreclosure is inevitably dependent thereon. 12
Since the mortgagee's right of possession is conditioned upon the actual fact of
default which itself may be controverted, the inclusion of other parties, like the
debtor or the mortgagor himself, may be required in order to allow a full and
conclusive determination of the case. When the mortgagee seeks a replevin in
order to effect the eventual foreclosure of the mortgage, it is not only the
existence of, but also the mortgagor's default on, the chattel mortgage that,
among other things, can properly uphold the right to replevy the property. The
burden to establish a valid justification for such action lies with the plaintiff. An
adverse possessor, who is not the mortgagor, cannot just be deprived of his
possession, let alone be bound by the terms of the chattel mortgage contract,
simply because the mortgagee brings up an action for replevin. 13

Leticia Laus, being an indispensable party, should have been impleaded in the
complaint for replevin and damages. An indispensable party is one whose
interest will be affected by the court's action in the litigation, and without whom no
final determination of the case can be had. The party's interest in the subject
matter of the suit and in the relief sought are so inextricably intertwined with the
other parties that his legal presence as a party to the proceeding is an absolute
necessity. In his absence, there cannot be a resolution of the dispute of the
parties before the Court which is effective, complete, or equitable.
Conversely, a party is not indispensable to the suit if his interest in the
controversy or subject matter is distinct and divisible from the interest of the other
parties and will not necessarily be prejudiced by a judgment which does
complete justice to the parties in Court. He is not indispensable if his presence
would merely complete relief between him and those already parties to the action
or will simply avoid multiple litigation. 14 Without the presence of indispensable
parties to a suit or proceeding, a judgment of a Court cannot attain real finality. 15
That petitioner could not locate the mortgagor, Leticia Laus, is no excuse for
resorting to a procedural short-cut. It could have properly availed of substituted
service of summons under the Revised Rules of Court. 16 If it deemed such a
mode to be unavailing, it could have proceeded in accordance with Section 14 of
the same Rule. 17 Indeed, petitioner had other proper remedies, it could have
resorted to but failed to avail of. For instance, it could have properly impleaded
the mortgagor. Such failure is fatal to petitioner's cause.
With the foregoing disquisition and conclusion, the other issues raised by
petitioner need not be passed upon.
WHEREFORE, the Petition is DENIED and the Decision of the Court of Appeals
in CA-G.R. CV No. 19571 AFFIRMED. No pronouncement as to costs.
SO ORDERED.
G.R. No. 150673
February 28, 2003
SUPERLINES TRANSPORTATION COMPANY, INC., and MANOLET LAVIDES,
petitioners,
vs.
ICC LEASING & FINANCING CORPORATION, respondent.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari under Rule 45 of the 1997 Rules of Civil
Procedure, as amended, of the Decision1 of the Court of Appeals in CA-G.R. No.
65126 reversing on appeal the Decision 2 of Branch 142 of the Regional Trial
Court of Makati City in Civil Case No. 97-816.
The Antecedents
In 1995, Superlines Transportation Co., Inc. (Superlines, for brevity) decided to
acquire five new buses from the Diamond Motors Corporation for the price of
P10,873,582.00. However, Superlines lacked financial resources for the purpose.
By virtue of a board resolution, Superlines authorized its President and General
Manager, Manolet Lavides, a graduate of the Ateneo de Manila School of Law
and a businessman for twenty years, to look for and negotiate with a financing

corporation for a loan for the purchase of said buses.

Lavides negotiated with ICC Leasing & Financing Corporation (ICC, for brevity)
through the latters Assistant Vice-President for Operations Aida F. Albano, for a
financial scheme for the planned purchase. ICC agreed to finance the purchase
of the new buses via a loan and proposed a three-year term for the payment
thereof at a fixed interest rate of 22% per annum. The new buses to be
purchased were to be used by Superlines as security for the loan. ICC required
Superlines to submit certificates of registration of the said buses under the name
of Superlines before the appropriate document was executed by the parties and
their transactions consummated. On October 19, 1995, Diamond Motors
Corporation sold to Superlines five new buses under Vehicle Invoice Nos. 9225
to 9229.3 Superlines, through Lavides, acknowledged receipt of the buses.
On November 22, 1995, the vehicle invoices were filed with the Land
Transportation Office which then issued certificates of registration covering the
five buses under the name of Superlines. 4 With the buses now registered under
its name, Superlines, through Lavides, executed two documents, namely: a deed
of chattel mortgage over the said buses as security for the purchase price of the
buses in the amount of P13,114,287.005 loaned by ICC to Superlines, which
deed was annotated on the face of said certificates of registration, and a
promissory note in favor of ICC binding and obliging itself to pay to the latter the
amount of P10,873,582.00 in monthly installments of P415,290.00, the first
installment to start on December 23, 1995, with interest thereon at the rate of
22% per annum until full payment of said amount 6 in favor of Superlines and ICC
covenanted in said deed that:
Effective upon the breach of any condition of this mortgage, and in case of loss
or damage of the mortgaged property/ies and in addition to the remedies herein
stipulated, the MORTGAGEE is hereby appointed attorney-in-fact of the
MORTGAGOR with full power and authority, by the use of force if necessary, to
take actual possession of the mortgaged property/ies without the necessity of
any judicial order or any other permission or power, to remove, sell or dispose of
the mortgaged property/ies, and collect rents therefor, to execute bill of sale,
lease or agreements that may be deemed convenient; to make repairs or
improvements in the mortgaged property/ies and pay the same and perform any
other act which the MORTGAGEE may deem convenient for the proper
administration of the mortgaged property/ies; and to file, prove, justify, prosecute,
compromise or settle insurance claims with the insurance company, without the
participation of the MORTGAGOR, under such terms and conditions as the
Mortgagee as attorney-in-fact may consider fair and reasonable. The payment of
any expenses advanced by the MORTGAGEE or its assigns in connection with
the purpose indicated herein is also guaranteed by this mortgage. Any amount
received from the sale, disposal or administration abovementioned may be
executed by the MORTGAGEE by virtue of this power and applied to the
satisfaction of the obligations hereby secured, which act is hereby ratified.
The MORTGAGEE shall have the option of selling the property/ies either at
public or private sale at the municipality or at the capital of the province where it
may be situated at the time; or at any municipality where the MORTGAGEE may

have a branch, office, or at Metro Manila, the MORTGAGOR hereby waiving all
rights to any notice of such sale.
The MORTGAGOR hereby expressly waives the term of thirty (30) days or any
other term granted or which may hereafter be granted him/it by law as the period
which must elapse before the MORTGAGEE or its assigns shall be entitled to
foreclose this mortgage, it being expressly understood and agreed that the
MORTGAGEE may foreclose this mortgage at any time after the breach of any
condition hereof.
It is further agreed that in case of the sale at public auction under foreclosure
proceedings of the property/ies herein mortgaged, or of any part thereof, the
MORTGAGEE shall be entitled to bid for the properties so sold, or for any part
thereof, to buy the same, or any part thereof, and to have the amount of his/its
bid applied to the payment of the obligations secured by this mortgage without
requiring payment in cash of the amount of such bid.
The remedies of the MORTGAGEE under the powers hereby conferred upon
him/it shall be and are in addition to and cumulative with such right of action as
the said MORTGAGEE or the assigns may have in accordance with the present
or any future laws of the Philippines.7
Superlines and Lavides executed a Continuing Guaranty to pay jointly and
severally in favor of ICC the amount of P13,114,285.00.8 ICC drew and delivered
to Superlines Metrobank Check No. 0661909113, dated November 23, 1995,
payable to the account of Superlines in the amount of P10,873,582.00,9
representing the net proceeds of the loan. The latter acknowledged receipt of the
check in Cash Voucher No. 0.0769. 10 Superlines remitted the said check to
Diamond Motors Corporation in full payment of the purchase price of the new
buses.
After paying only seven monthly amortizations for the period of December 1995
to June 1996, Superlines defaulted in the payment of its obligation to ICC. 11 On
April 2, 1997, ICC wrote Superlines demanding full payment of its outstanding
obligation, which as of March 31, 1997 amounted to P12,606,020.55.12 However,
Superlines failed to heed said demand.
ICC filed a complaint13 for collection of sum of money with prayer for a writ of
replevin on April 21, 1997 with Branch 142 of the Regional Trial Court of Makati
City against Superlines and Lavides. The case was entitled "ICC Leasing &
Finance Corporation vs. Superlines Transportation Co., Inc., et al." and docketed
as Civil Case No. 97-816. ICC alleged, by way of alternative cause of action,
that:
xxx xxx xxx
13. In the event that the Plaintiff fails to locate and/or seize the above-described
mortgaged vehicles from Defendant, its agents and/or assigns, or any such
person other than said Defendant or its representatives, Defendant is obligated
to pay Plaintiff the sum of P12,072,895.59, and an amount equivalent to 5% of
the total amount due from Defendant as and for attorneys fees, plus expenses of
collection, the costs of suit and cost of Replevin Bond.
ICC prayed that after due proceedings, judgment be rendered in its favor, thus:
WHEREFORE, it is respectfully prayed that:

1. A Writ of Replevin be issued, ordering the Court Sheriff and/or any of his
deputies, to seize from Defendant, its agents and/or assigns, or any such person
other than said Defendant or its representatives in possession thereof at present,
the above-described vehicles wherever they may be found, to take and keep the
same in custody and, to dispose of them in accordance with Section 6, Rule 60
of the Revised Rules of Court.
2. Judgment be rendered in favor of the Plaintiff and against the Defendant, as
follows:
a) Declaring that Plaintiff is entitled to the possession of the subject properties in
accordance with the terms and conditions of the Chattel Mortgage;
b) Ordering Defendant, in case the amount realized from the sale of the
mortgaged properties shall be insufficient to cover its total indebtedness, to pay
the Plaintiff the deficiency;
c) Ordering Defendant to pay Plaintiff the expenses of litigation and costs of suit,
including the costs of the Replevin Bond, plus the stipulated attorneys fees.
As to the
ALTERNATIVE CAUSE OF ACTION
Ordering Defendants to pay the outstanding principal balance of P12,072,895.59,
to pay the costs of suit, expenses of litigation and the costs of the Replevin Bond,
plus an amount equivalent to 5% of the total amount due as and for attorneys
fees.
In the meantime, the trial court issued a writ of seizure for the five mortgaged
buses.14 On May 29, 1997, the sheriff took possession of the five buses in
compliance with the writ of seizure issued by the trial court. 15 Thereafter, ICC
instituted extra-judicial foreclosure proceedings over the subject buses. An
auction sale was held on July 2, 1997. ICC offered a bid of P7,200,000.00 for the
motor vehicles and was declared the winning bidder, resulting in a deficiency of
P5,406,029.55. In addition, ICC incurred necessary expenses in the amount of
P920,524.62. Superlines thus still owed ICC the amount of P6,326,556.17.
In their Answer with Counterclaim, Superlines and Lavides asserted that the real
agreement of the parties was one of financing a sale of personal property, the
prices for which shall be payable on installments. Relying on Article 1484(3) of
the Civil Code, Superlines and Lavides claimed that since the chattel mortgage
on subject buses was already foreclosed by ICC, the latter had no further action
against Superlines and Lavides for the unpaid balance of the price. They
interposed compulsory damages in the total amount of P750,000.00 excluding
costs of suit.
Leonardo Serrano, Jr., the Executive Vice-President and Chief Operations Officer
of ICC, testified that the transaction forged by ICC and Superlines was an
amortized commercial loan and not a consumer loan, because under the latter
transaction, ICC should have paid the price of the purchase of its customers
(Superlines) directly to the suppliers. However, ICC did not do business directly
with Diamond Motors Corporation; it transacted directly with Superlines. ICC
remitted the purchase price of the buses directly to Superlines and not to
Diamond Motors Corporation. ICC had no contract with Diamond Motors
Corporation.

On the other hand, Lavides testified that he and ICCs Assistant Vice-President
for Operations Aida Albano agreed on a consumer loan for the financing of the
purchase of the buses, with ICC as the vendor, and Superlines as the vendee, of
said buses; and that ICC had a special arrangement with Diamond Motors
Corporation on the purchase by Superlines of the buses.
On June 1, 1999, the trial court rendered a decision ordering the dismissal of the
case and for ICC to pay damages and litigation expenses to Superlines and
Lavides, the decretal portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered
DISMISSING the instant complaint and ORDERING plaintiff to pay defendants
the following:
1. The sum of P150,000.00 as and for attorneys fees;
2. The sum of P300,000.00 as moderate damages;
3. The sum of P50,000.00 as litigation expenses and
4. The costs of suit.
SO ORDERED.16
The trial court found that, as testified to by Lavides, ICC and Superlines forged a
consumer loan agreement and not an amortized commercial loan. It further
declared that, as testified to by Lavides, there was a special arrangement for the
purchase by ICC of said buses. The trial court finally stated that Superlines
purchased the buses from ICC, the purchase price therefor payable in monthly
installments. ICC appealed the trial courts decision to the Court of Appeals. On
July 30, 2001, the appellate court rendered a decision reversing the decision of
the RTC and ordering Superlines and Lavides to pay the deficiency claim of ICC.
The decretal portion thereof reads:
In view of the foregoing, it is Our conclusion that plaintiff-appellant is entitled to
the deficiency claim of P5,376,543.96 (Exh. "F-1", p. 155 Record), plus costs of
P71,807.22 for the Replevin Bond (Exh. "H", p. 156, Record) and attorneys fees
of P508,000.00 (Exh. "G", p. 156, Record).
WHEREFORE, the appealed Decision is REVERSED and SET ASIDE and a new
one is rendered ordering defendants to pay jointly and severally the sum of
P5,956,351.18 to the plaintiff.
SO ORDERED.17
The Court of Appeals stated that ICC and Superlines entered into an amortized
commercial loan agreement with ICC as creditor-mortgagee and Superlines as
debtor-mortgagor, and ordered Superlines and Lavides to pay to ICC jointly and
severally the sum of P5,956,351.18 as deficiency.18
It further declared that it was Diamond Motors Corporation and not ICC which
sold the subject buses to Superlines. It held that no evidence had been
presented by Superlines to show that ICC bought the said buses from Diamond
Motors Corporation under a special arrangement and that ICC sold the buses to
Superlines. The appellate court also ruled that Article 1484(3) is applicable only
where there is vendor-vendee relationship between the parties and since ICC did
not sell the buses to Superlines, the latter cannot invoke said law.
Hence, this petition.
Petitioners contend that the appellate court committed serious errors of law

and/or grave abuse of discretion amounting to excess or lack of jurisdiction:

1. In concluding that Article 1484 (3) of the Civil Code is inapplicable to the
instant transaction between the parties, and in holding that said transaction was
an "amortized commercial loan", the same being patently contrary to the
unrebutted evidence as well as the admissions of the respondents sole witness
that the parties may "verbally" agree as regards the financial scheme applied for
and that the chattel mortgage, promissory note and other documents executed in
the case of a "commercial loan" are no different from those documents executed
in the case of a "consumer loan".
2. In concluding that the respondent is in any event entitled to deficiency
judgment as it is deemed to have chosen the remedy of exacting fulfillment of the
obligation under paragraph (1) of Article 1484 of the Civil Code, the same being
patently contrary to incontestable fact that what respondent availed of in the
instant case is foreclosure of the chattel mortgage and not the alternative prayer
contained in the relief portion of its complaint. 19
Anent the first assignment of error, petitioners aver that the findings of the Court
of Appeals that the transaction forged by petitioners and private respondent was
an amortized commercial loan and not a consumer loan are belied by the
evidence on record, more specifically the testimony of Lavides and that of
respondents witness Leonardo Serrano, Jr. The Promissory Note and Chattel
Mortgage executed by petitioner Superlines and the Continuing Guaranty
executed by both petitioners are not conclusive of the nature of the transaction
concluded by them, private respondent and Diamond Motors Corporation.
Petitioners further claim that the appellate court also ignored the unrebutted
testimony of Lavides that respondent and Diamond Motors Corporation forged a
special arrangement under which the latter will expedite the issuance of the
certificates of registration over the buses under the name of Superlines.
Petitioners also argue that the word "vendee" in Article 1484(3) of the New Civil
Code is used in its generic term, and hence, it may mean an assignee or a
mortgagee such as respondent.
For its part, respondent contends that the findings and conclusions of the Court
of Appeals were buttressed by the documentary and testimonial evidence on
record which should prevail over those of the trial court:
We do not agree with the lower court that Art. 1484 (3) of the New Civil Code is
applicable to the instant case. DIAMOND is the seller of the five units of buses
and not the plaintiff. No convincing evidence, except the self-serving testimony of
defendant Manolet Lavides, was presented to prove that there was an internal
arrangement between the plaintiff, as financing agent, and Diamond, as seller of
the buses. In fact, defendant Lavides admitted under oath that DIAMOND and
plaintiff did not enter into transaction over the sale of the buses (TSN, February
26, 1999, p. 12). The conclusion of the lower court that the parties entered into a
financing scheme covered by Article 1484 (3) of the New Civil Code is therefore
unsubstantiated.
The evidence shows that the transaction between the parties was an "amortized
commercial loan" to be paid in installments. Defendants failed to prove that a
"special arrangement" regarding the nature of the transaction was agreed upon

between the plaintiff and the defendants. Aida Albano, plaintiffs employee who
allegedly agreed with the request of defendant Manolet Lavides for a special
arrangement, was not presented. It bears emphasizing that whoever alleges
fraud or mistake affecting a transaction must substantiate his allegation, since it
is presumed that a person takes ordinary care of his concerns and private
transactions have been fair and regular (Mangahas vs. CA, 304 SCRA 375). If
indeed defendant Manolet Lavides, a law graduate from a prestigious law school
(TSN, February 26, 1999, p. 3) and a successful businessman for twenty (20)
years ...., who admits to having meticulously examined the subject documents ...
intended a financing scheme covered by Art. 1484 of the New Civil Code, he
should have objected to the contents of the documents and incorporated therein
his true intent.20
At the core of petitioners case is their claim that the findings of facts of the Court
of Appeals and its conclusions anchored thereon are belied by the evidence on
record in contrast to those of the trial court. It bears stressing, however, that in a
petition for review on certiorari, only questions of law may be raised in said
petition. The jurisdiction of this Court in cases brought to it from the Court of
Appeals is confined to reviewing and reversing the errors of law ascribed to it,
findings of facts being conclusive on this Court. The Court is not tasked to
calibrate and assess the probative weight of evidence adduced by the parties
during trial all over again.21 In those instances where the findings of facts of the
trial court and its conclusions anchored on said findings are inconsistent with
those of the Court of Appeals, this Court does not automatically delve into the
record to determine which of the discordant findings and conclusions should
prevail and to resolve the disputed facts for itself. This Court is tasked to merely
determine which of the findings of the two tribunals are conformable to the facts
at hand.22 So long as the findings of facts of the Court of Appeals are consistent
with or are not palpably contrary to the evidence on record, this Court shall
decline to embark on a review on the probative weight of the evidence of the
parties. Indeed, in Tan vs. Lim,23 this Court, citing its ruling in Hermo vs. Court of
Appeals,24 held that it is the findings of the Court of Appeals and not those of the
trial court which are final and conclusive on this Court. The rule is not without
exception. This Court may review the findings of facts of the Court of Appeals
and its conclusions based thereon if the inference made by the appellate court
from its findings of facts is manifestly erroneous, absurd or impossible, or when
the judgment of the said court is premised on a misappreciation of facts. 25
In this case, the findings of facts of the Court of Appeals and its conclusions
anchored thereon are in terra firma, buttressed as they are by the evidence on
record. The Court of Appeals correctly ruled that the findings of facts, deductions,
and conclusions of the trial court are not warranted by the evidence on record.
Petitioners failed to adduce a preponderance of evidence to prove that
respondents and Diamond Motors Corporation entered into a special
arrangement relative to the issuance of certificates of registration over the buses
under the name of petitioner Superlines. Petitioners were also unable to prove
that respondent purchased from Diamond Motors Corporation the new buses. In
contrast, the vehicle invoices of Diamond Motors Corporation 26 irrefragably show

that it sold the said buses to petitioner Superlines. The net proceeds of the loan
were remitted by respondent to petitioner Superlines and the latter remitted the
same to Diamond Motors Corporation in payment of the purchase price of the
buses. In fine, respondent and Diamond Motors Corporation had no direct
business transactions relative to the purchase of the buses and the payment of
the purchase price thereof.
As aptly observed by the Court of Appeals, petitioner Lavides is a graduate of the
Ateneo de Manila University School of Law. He had been in business for twenty
years or so. It is incredible that petitioner Superlines through petitioner Lavides
never required respondent and Diamond Motors Corporation to execute a deed
evidencing their special agreement or arrangement if indeed they had one.
The trial court indulged in a non sequitur when it quoted part of the testimony of
Leonardo Serrano, Jr. out of context and used it as anchor for its finding that
respondent and Diamond Motors Corporation forged a special arrangement. The
testimony of Leonardo Serrano, Jr. is as follows:
ATTY. FABIE
Q Now, on page 12 of the transcript of stenographic notes of October 9, 1998, to
the question of Atty. Agcaoili, the question is this and I quote:
Q - Now, after that visit to the office of Superlines Inc. in Atimonan, Quezon what
other circumstances or events transpired in connection with the evaluation or
approval of the loan of the defendants Superlines?"
And your answer was this:
A - The regular paper requirements, meaning the way the loan proposal and the
approval report inclusive of credit showing credit checking was presented for
approval by our Executive Committee."
ATTY. FABIE
What is this regular papers requirement you are referring to, Mr. Witness?
WITNESS
A Those papers that are presented to the Executive Committee, Sir.
ATTY. FABIE
Q Papers that are presented to the Executive Committee?
WITNESS
A This will include evaluation report of the corporations financial statement credit
checking from his creditors and this will include evidence of the collaterals being
presented for the loan, Sir.
ATTY. FABIE
Q In this particular case of Superlines Transportation Company, those
requirements were complied with, Mr. Witness?
WITNESS
A Yes, Sir.
ATTY. FABIE
Q By way, in consumer loan, these papers are practically the same, am I correct,
Mr. Witness?
WITNESS
A In consumer loan, sometimes we have additional requirements, Sir.
ATTY. FABIE

Q What is that, Mr. Witness?

WITNESS
A Because they are individual applicants, we require them to submit their
certificate of employment with the corresponding amount of their salary, Sir.
ATTY. FABIE
Q You mean to say that consumer loan are specifically for individual and entities
are not supposed to apply in consumer loans, is that what you mean, Mr.
Witness?
WITNESS
A As a matter of practice, we classify them as consumer loan, loans for
individuals, Sir.
ATTY. FABIE
Q For individuals only?
WITNESS
A Yes, sir.
ATTY. FABIE
Q So, you did not extend consumer loans to corporations other than individuals,
Mr. Witness?
WITNESS
A For companies or corporations, we classified them as commercial loan already,
Sir.
ATTY. FABIE
Q Although the scheme adopted on both loans are the same or would be the
same, Mr. Witness?
WITNESS
A In consumer loan, Sir, usually it is for purposes of buying a car or a motor
vehicle, Sir.
ATTY. FABIE
Q That is the normal practice, Mr. Witness?
WITNESS
A Yes, Sir. That is the normal practice.
ATTY. FABIE
Q But arrangement can be made by your company regarding the nature of the
transaction, am I correct? Specific arrangement?
WITNESS
A What do you mean?
ATTY. FABIE
Q That you may depart from certain requirements between your company and
the applicant? Mr. Witness?
WITNESS
A When the company ......
ATTY. FABIE
Q In special cases?
WITNESS
A When the company is presented with a loan proposal, we require them to
submit documents depending on the loan proposal, Sir.

ATTY. FABIE
Q Now, did Superlines Transportation Company or Mr. Lavides present to you a
loan proposal and where is that now, Mr. Witness?
WITNESS
A The loan proposal of Mr. Lavides, Mr. Witness?
ATTY. FABIE
Q Yes, in writing?
WITNESS
A No, not in writing?
ATTY. FABIE
Q No written loan proposal, Mr. Witness?
WITNESS
A It was verbally told to us the purpose of his loan, Sir.
ATTY. FABIE
Q Now, is that normal in your corporation, Mr. Witness?
WITNESS
A In the practice?
ATTY. FABIE
Q I am asking you whether that is normal in your corporation that you do not
require any written loan proposal from the applicants, Mr. Witness?
WITNESS
A We do not, Sir.
ATTY. FABIE
Q Even in consumer loan, Mr. Witness?
WITNESS
A We only require when the consumer or individual is applying. Then we require
him to submit the application form.
ATTY. FABIE
Q So, there is an application form, Mr. Witness?
WITNESS
A For consumer loan, yes.
ATTY. FABIE
Q And in commercial loan, you dont require the applicant to submit a written loan
proposal, Mr. Witness?
WITNESS
A As a matter of (loan) marketing consideration, anybody who wants ....
ATTY. FABIE
Q I am asking you whether that is normal in your operation like Superlines?
WITNESS
A This .....
ATTY. AGCAOILI
Already answered, Your Honor.
ATTY. FABIE
I am asking him now to specific, Your Honor.
COURT
Witness may answer.

WITNESS
A That is not normal. Sorry. That is normal. We do not require them. That is the
regular practice.
ATTY. FABIE
Q And why not?
ATTY. AGCAOILI
Objection, misleading. It was already answered that that was the normal practice,
Your Honor.
ATTY. FABIE
Q Why do you not require the applicants to submit papers or written loan
proposal, Mr. Witness?
WITNESS
A Because in our business marketing consideration, we finance companies after
evaluation of a particular account and if this account is credit worthy, we
sometimes do away with it, Sir.
ATTY. FABIE
Q So, what is normal is that you ask for written loan proposal and what is
sometimes not normal is that you do not require them to submit any loan
proposal, Mr. Witness?
WITNESS
A We....
ATTY. AGCAOILI
I think counsel is already (arguing) with the witness, Your Honor. The question
has been asked several times and the witness consistently answered in the
same fashion.
ATTY. FABIE
The Court will know ....
COURT
The answer he gave was that with marketing considerations, we do not require
papers in consumer loan because the client is credit worthy risk. Sometimes we
do not require submission of papers anymore. That is the answer. Alright,
proceed.
ATTY. FABIE
I think that is all for the witness, Your Honor.27
Leonardo Serrano, Jr. never testified that respondent and Diamond Motors
Corporation had a special arrangement relative to the registration of the new
buses. The mere admission of the witness that respondent in the course of its
business transactions allowed special arrangements does not constitute proof
that it in fact had a special arrangement with Diamond Motors Corporation
relative to the registration of the new buses.
The evidence on record shows that under the Promissory Note, Chattel Mortgage
and Continuing Guaranty, respondent was the creditor-mortgagee of petitioner
Superlines and not the vendor of the new buses. Hence, petitioners cannot find
refuge in Article 1484(3) of the New Civil Code. As correctly held by the Court of
Appeals, what should apply was the Chattel Mortgage executed by petitioner
Superlines and respondent in relation to the Chattel Mortgage Law. 28 This Court

had consistently ruled that if in an extra-judicial foreclosure of a chattel mortgage

a deficiency exists, an independent civil action may be instituted for the recovery
of said deficiency. To deny the mortgagee the right to maintain an action to
recover the deficiency after foreclosure of the chattel mortgage would be to
overlook the fact that the chattel mortgage is only given as security and not as
payment for the debt in case of failure of payment. 29 Both the Chattel Mortgage
Law and Act 3135 governing extra-judicial foreclosure of real estate mortgage, do
not contain any provision, expressly or impliedly, precluding the mortgagee from
recovering deficiency of the principal obligation.
In a case of recent vintage, this Court held that if the proceeds of the sale are
insufficient to cover the debt in an extra-judicial foreclosure of the mortgage, the
mortgagee is still entitled to claim the deficiency from the debtor:
To begin with, it is settled that if the proceeds of the sale are insufficient to cover
the debt in an extrajudicial foreclosure of the mortgage, the mortgagee is entitled
to claim the deficiency from the debtor. For when the legislature intends to deny
the right of a creditor to sue for any deficiency resulting from foreclosure of
security given to guarantee an obligation it expressly provides as in the case of
pledges [Civil Code, Art. 2115] and in chattel mortgages, while silent as to the
mortgagees right to recover, does not, on the other hand, prohibit recovery of
deficiency. Accordingly, it has been held that a deficiency claim arising from the
extrajudicial foreclosure is allowed.30
In the case of PAMECA Wood Treatment Plant, Inc. vs. Court of Appeals,31 this
Court declared that under Section 14 of the Chattel Mortgage Law, the mortgagor
is entitled to recover the balance of the proceeds, upon satisfaction of the
principal obligation and costs, thus there is a corollary obligation on the part of
the debtor-mortgagor to pay the deficiency in case of a reduction in the price at
public auction.
In fine then, the Court of Appeals correctly ruled that respondent is entitled to a
deficiency judgment against the petitioners.
IN LIGHT OF THE FOREGOING, the petition is DENIED. The Decision of the
Court of Appeals dated July 30, 2001 appealed from is AFFIRMED in toto. With
costs against petitioners.
SO ORDERED.
G.R. No. 147950
December 11, 2003
CALIFORNIA BUS LINES, INC., petitioner,
vs.
STATE INVESTMENT HOUSE, INC., respondent.
DECISION
QUISUMBING, J.:
In this petition for review, California Bus Lines, Inc., assails the decision, 1 dated
April 17, 2001, of the Court of Appeals in CA-G.R. CV No. 52667, reversing the
judgment2, dated June 3, 1993, of the Regional Trial Court of Manila, Branch 13,
in Civil Case No. 84-28505 entitled State Investment House, Inc. v. California
Bus Lines, Inc., for collection of a sum of money. The Court of Appeals held
petitioner California Bus Lines, Inc., liable for the value of five promissory notes

assigned to respondent State Investment House, Inc.

The facts, as culled from the records, are as follows:
Sometime in 1979, Delta Motors CorporationM.A.N. Division (Delta) applied for
financial assistance from respondent State Investment House, Inc. (hereafter
SIHI), a domestic corporation engaged in the business of quasi-banking. SIHI
agreed to extend a credit line to Delta for P25,000,000.00 in three separate credit
agreements dated May 11, June 19, and August 22, 1979. 3 On several
occasions, Delta availed of the credit line by discounting with SIHI some of its
receivables, which evidence actual sales of Deltas vehicles. Delta eventually
became indebted to SIHI to the tune of P24,010,269.32.4
Meanwhile, from April 1979 to May 1980, petitioner California Bus Lines, Inc.
(hereafter CBLI), purchased on installment basis 35 units of M.A.N. Diesel Buses
and two (2) units of M.A.N. Diesel Conversion Engines from Delta. To secure the
payment of the purchase price of the 35 buses, CBLI and its president, Mr.
Dionisio O. Llamas, executed sixteen (16) promissory notes in favor of Delta on
January 23 and April 25, 1980.5 In each promissory note, CBLI promised to pay
Delta or order, P2,314,000 payable in 60 monthly installments starting August 31,
1980, with interest at 14% per annum. CBLI further promised to pay the holder of
the said notes 25% of the amount due on the same as attorneys fees and
expenses of collection, whether actually incurred or not, in case of judicial
proceedings to enforce collection. In addition to the notes, CBLI executed chattel
mortgages over the 35 buses in Deltas favor.
When CBLI defaulted on all payments due, it entered into a restructuring
agreement with Delta on October 7, 1981, to cover its overdue obligations under
the promissory notes.6 The restructuring agreement provided for a new schedule
of payments of CBLIs past due installments, extending the period to pay, and
stipulating daily remittance instead of the previously agreed monthly remittance
of payments. In case of default, Delta would have the authority to take over the
management and operations of CBLI until CBLI and/or its president, Mr. Dionisio
Llamas, remitted and/or updated CBLIs past due account. CBLI and Delta also
increased the interest rate to 16% p.a. and added a documentation fee of 2%
p.a. and a 4% p.a. restructuring fee.
On December 23, 1981, Delta executed a Continuing Deed of Assignment of
Receivables7 in favor of SIHI as security for the payment of its obligations to SIHI
per the credit agreements. In view of Deltas failure to pay, the loan agreements
were restructured under a Memorandum of Agreement dated March 31, 1982. 8
Delta obligated itself to pay a fixed monthly amortization of P400,000 to SIHI and
to discount with SIHI P8,000,000 worth of receivables with the understanding that
SIHI shall apply the proceeds against Deltas overdue accounts.
CBLI continued having trouble meeting its obligations to Delta. This prompted
Delta to threaten CBLI with the enforcement of the management takeover clause.
To pre-empt the take-over, CBLI filed on May 3, 1982, a complaint for injunction 9,
docketed as Civil Case No. 0023-P, with the Court of First Instance of Rizal,
Pasay City, (now Regional Trial Court of Pasay City). In due time, Delta filed its
amended answer with applications for the issuance of a writ of preliminary
mandatory injunction to enforce the management takeover clause and a writ of

preliminary attachment over the buses it sold to CBLI. 10 On December 27, 1982,11
the trial court granted Deltas prayer for issuance of a writ of preliminary
mandatory injunction and preliminary attachment on account of the fraudulent
disposition by CBLI of its assets.
On September 15, 1983, pursuant to the Memorandum of Agreement, Delta
executed a Deed of Sale12 assigning to SIHI five (5) of the sixteen (16)
promissory notes13 from California Bus Lines, Inc. At the time of assignment,
these five promissory notes, identified and numbered as 80-53, 80-54, 80-55, 8056, and 80-57, had a total value of P16,152,819.80 inclusive of interest at 14%
per annum.
SIHI subsequently sent a demand letter dated December 13, 1983, 14 to CBLI
requiring CBLI to remit the payments due on the five promissory notes directly to
it. CBLI replied informing SIHI of Civil Case No. 0023-P and of the fact that Delta
had taken over its management and operations.15
As regards Deltas remaining obligation to SIHI, Delta offered its available bus
units, valued at P27,067,162.22, as payment in kind. 16 On December 29, 1983,
SIHI accepted Deltas offer, and Delta transferred the ownership of its available
buses to SIHI, which in turn acknowledged full payment of Deltas remaining
obligation.17 When SIHI was unable to take possession of the buses, SIHI filed a
petition for recovery of possession with prayer for issuance of a writ of replevin
before the RTC of Manila, Branch 6, docketed as Civil Case No. 84-23019. The
Manila RTC issued a writ of replevin and SIHI was able to take possession of 17
bus units belonging to Delta. SIHI applied the proceeds from the sale of the said
17 buses amounting to P12,870,526.98 to Deltas outstanding obligation. Deltas
obligation to SIHI was thus reduced to P20,061,898.97. On December 5, 1984,
Branch 6 of the RTC of Manila rendered judgment in Civil Case No. 84-23019
ordering Delta to pay SIHI this amount.
Thereafter, Delta and CBLI entered into a compromise agreement on July 24,
1984,18 in Civil Case No. 0023-P, the injunction case before the RTC of Pasay.
CBLI agreed that Delta would exercise its right to extrajudicially foreclose on the
chattel mortgages over the 35 bus units. The RTC of Pasay approved this
compromise agreement the following day, July 25, 1984. 19 Following this, CBLI
vehemently refused to pay SIHI the value of the five promissory notes,
contending that the compromise agreement was in full settlement of all its
obligations to Delta including its obligations under the promissory notes.
On December 26, 1984, SIHI filed a complaint, docketed as Civil Case No. 8428505, against CBLI in the Regional Trial Court of Manila, Branch 34, to collect
on the five (5) promissory notes with interest at 14% p.a. SIHI also prayed for the
issuance of a writ of preliminary attachment against the properties of CBLI. 20
On December 28, 1984, Delta filed a petition for extrajudicial foreclosure of
chattel mortgages pursuant to its compromise agreement with CBLI. On January
2, 1985, Delta filed in the RTC of Pasay a motion for execution of the judgment
based on the compromise agreement. 21 The RTC of Pasay granted this motion
the following day.22
In view of Deltas petition and motion for execution per the judgment of
compromise, the RTC of Manila granted in Civil Case No. 84-28505 SIHIs

application for preliminary attachment on January 4, 1985. 23 Consequently, SIHI

was able to attach and physically take possession of thirty-two (32) buses
belonging to CBLI.24 However, acting on CBLIs motion to quash the writ of
preliminary attachment, the same court resolved on January 15, 1986, 25 to
discharge the writ of preliminary attachment. SIHI assailed the discharge of the
writ before the Intermediate Appellate Court (now Court of Appeals) in a petition
for certiorari and prohibition, docketed as CA-G.R. SP No. 08378. On July 31,
1987, the Court of Appeals granted SIHIs petition in CA-GR SP No. 08378 and
ruled that the writ of preliminary attachment issued by Branch 34 of the RTC
Manila in Civil Case No. 84-28505 should stay.26 The decision of the Court of
Appeals attained finality on August 22, 1987. 27
Meanwhile, pursuant to the January 3, 1985 Order of the RTC of Pasay, the
sheriff of Pasay City conducted a public auction and issued a certificate of
sheriffs sale to Delta on April 2, 1987, attesting to the fact that Delta bought 14 of
the 35 buses for P3,920,000.28 On April 7, 1987, the sheriff of Manila, by virtue of
the writ of execution dated March 27, 1987, issued by Branch 6 of the RTC of
Manila in Civil Case No. 84-23019, sold the same 14 buses at public auction in
partial satisfaction of the judgment SIHI obtained against Delta in Civil Case No.
84-23019.
Sometime in May 1987, Civil Case No. 84-28505 was raffled to Branch 13 of the
RTC of Manila in view of the retirement of the presiding judge of Branch 34.
Subsequently, SIHI moved to sell the sixteen (16) buses of CBLI which had
previously been attached by the sheriff in Civil Case No. 84-28505 pursuant to
the January 4, 1985, Order of the RTC of Manila. 29 SIHIs motion was granted on
December 16, 1987.30 On November 29, 1988, however, SIHI filed an urgent exparte motion to amend this order claiming that through inadvertence and
excusable negligence of its new counsel, it made a mistake in the list of buses in
the Motion to Sell Attached Properties it had earlier filed. 31 SIHI explained that 14
of the buses listed had already been sold to Delta on April 2, 1987, by virtue of
the January 3, 1985 Order of the RTC of Pasay, and that two of the buses listed
had been released to third party, claimant Pilipinas Bank, by Order dated
September 16, 198732 of Branch 13 of the RTC of Manila.
CBLI opposed SIHIs motion to allow the sale of the 16 buses. On May 3, 1989, 33
Branch 13 of the RTC of Manila denied SIHIs urgent motion to allow the sale of
the 16 buses listed in its motion to amend. The trial court ruled that the best
interest of the parties might be better served by denying further sales of the
buses and to go direct to the trial of the case on the merits. 34
After trial, judgment was rendered in Civil Case No. 84-28505 on June 3, 1993,
discharging CBLI from liability on the five promissory notes. The trial court
likewise favorably ruled on CBLIs compulsory counterclaim. The trial court
directed SIHI to return the 16 buses or to pay CBLI P4,000,000 representing the
value of the seized buses, with interest at 12% p.a. to begin from January 11,
1985, the date SIHI seized the buses, until payment is made. In ruling against
SIHI, the trial court held that the restructuring agreement dated October 7, 1981,
between Delta and CBLI novated the five promissory notes; hence, at the time
Delta assigned the five promissory notes to SIHI, the notes were already merged

in the restructuring agreement and cannot be enforced against CBLI.

SIHI appealed the decision to the Court of Appeals. The case was docketed as
CA-G.R. CV No. 52667. On April 17, 2001, the Court of Appeals decided CAG.R. CV No. 52667 in this manner:
WHEREFORE, based on the foregoing premises and finding the appeal to be
meritorious, We find defendant-appellee CBLI liable for the value of the five (5)
promissory notes subject of the complaint a quo less the proceeds from the
attached sixteen (16) buses. The award of attorneys fees and costs is
eliminated. The appealed decision is hereby REVERSED. No costs.
SO ORDERED.35
Hence, this appeal where CBLI contends that
I. THE COURT OF APPEALS ERRED IN DECLARING THAT THE
RESTRUCTURING AGREEMENT BETWEEN DELTA AND THE PETITIONER
DID NOT SUBSTANTIALLY NOVATE THE TERMS OF THE FIVE PROMISSORY
NOTES.
II. THE COURT OF APPEALS ERRED IN HOLDING THAT THE COMPROMISE
AGREEMENT BETWEEN DELTA AND THE PETITIONER IN THE PASAY CITY
CASE DID NOT SUPERSEDE AND DISCHARGE THE PROMISSORY NOTES.
III. THE COURT OF APPEALS ERRED IN UPHOLDING THE CONTINUING
VALIDITY OF THE PRELIMINARY ATTACHMENT AND EXONERATING THE
RESPONDENT OF MALEFACTIONS IN PRESERVING AND ASSERTING ITS
RIGHTS THEREUNDER.36
Essentially, the issues are (1) whether the Restructuring Agreement dated
October 7, 1981, between petitioner CBLI and Delta Motors, Corp. novated the
five promissory notes Delta Motors, Corp. assigned to respondent SIHI, and (2)
whether the compromise agreement in Civil Case No. 0023-P superseded and/or
discharged the subject five promissory notes. The issues being interrelated, they
shall be jointly discussed.
CBLI first contends that the Restructuring Agreement did not merely change the
incidental elements of the obligation under all sixteen (16) promissory notes, but
it also increased the obligations of CBLI with the addition of new obligations that
were incompatible with the old obligations in the said notes. 37 CBLI adds that
even if the restructuring agreement did not totally extinguish the obligations
under the sixteen (16) promissory notes, the July 24, 1984, compromise
agreement executed in Civil Case No. 0023-P did. 38 CBLI cites paragraph 5 of
the compromise agreement which states that the agreement between it and CBLI
was in "full and final settlement, adjudication and termination of all their rights
and obligations as of the date of (the) agreement, and of the issues in (the)
case." According to CBLI, inasmuch as the five promissory notes were subject
matters of the Civil Case No. 0023-P, the decision approving the compromise
agreement operated as res judicata in the present case. 39
Novation has been defined as the extinguishment of an obligation by the
substitution or change of the obligation by a subsequent one which terminates
the first, either by changing the object or principal conditions, or by substituting
the person of the debtor, or subrogating a third person in the rights of the
creditor.40

Novation, in its broad concept, may either be extinctive or modificatory. 41 It is

extinctive when an old obligation is terminated by the creation of a new obligation
that takes the place of the former; it is merely modificatory when the old
obligation subsists to the extent it remains compatible with the amendatory
agreement.42 An extinctive novation results either by changing the object or
principal conditions (objective or real), or by substituting the person of the debtor
or subrogating a third person in the rights of the creditor (subjective or
personal).43 Novation has two functions: one to extinguish an existing obligation,
the other to substitute a new one in its place. 44 For novation to take place, four
essential requisites have to be met, namely, (1) a previous valid obligation; (2) an
agreement of all parties concerned to a new contract; (3) the extinguishment of
the old obligation; and (4) the birth of a valid new obligation. 45
Novation is never presumed,46 and the animus novandi, whether totally or
partially, must appear by express agreement of the parties, or by their acts that
are too clear and unequivocal to be mistaken.47
The extinguishment of the old obligation by the new one is a necessary element
of novation which may be effected either expressly or impliedly.48 The term
"expressly" means that the contracting parties incontrovertibly disclose that their
object in executing the new contract is to extinguish the old one. 49 Upon the other
hand, no specific form is required for an implied novation, and all that is
prescribed by law would be an incompatibility between the two contracts. 50 While
there is really no hard and fast rule to determine what might constitute to be a
sufficient change that can bring about novation, the touchstone for contrariety,
however, would be an irreconcilable incompatibility between the old and the new
obligations.
There are two ways which could indicate, in fine, the presence of novation and
thereby produce the effect of extinguishing an obligation by another which
substitutes the same. The first is when novation has been explicitly stated and
declared in unequivocal terms. The second is when the old and the new
obligations are incompatible on every point. The test of incompatibility is whether
the two obligations can stand together, each one having its independent
existence.51 If they cannot, they are incompatible and the latter obligation novates
the first.52 Corollarily, changes that breed incompatibility must be essential in
nature and not merely accidental. The incompatibility must take place in any of
the essential elements of the obligation, such as its object, cause or principal
conditions thereof; otherwise, the change would be merely modificatory in nature
and insufficient to extinguish the original obligation. 53
The necessity to prove the foregoing by clear and convincing evidence is
accentuated where the obligation of the debtor invoking the defense of novation
has already matured.54
With respect to obligations to pay a sum of money, this Court has consistently
applied the well-settled rule that the obligation is not novated by an instrument
that expressly recognizes the old, changes only the terms of payment, and adds
other obligations not incompatible with the old ones, or where the new contract
merely supplements the old one.55
In Inchausti & Co. v. Yulo56 this Court held that an obligation to pay a sum of

money is not novated in a new instrument wherein the old is ratified, by changing
only the term of payment and adding other obligations not incompatible with the
old one. In Tible v. Aquino57 and Pascual v. Lacsamana58 this Court declared that
it is well settled that a mere extension of payment and the addition of another
obligation not incompatible with the old one is not a novation thereof.
In this case, the attendant facts do not make out a case of novation. The
restructuring agreement between Delta and CBLI executed on October 7, 1981,
shows that the parties did not expressly stipulate that the restructuring
agreement novated the promissory notes. Absent an unequivocal declaration of
extinguishment of the pre-existing obligation, only a showing of complete
incompatibility between the old and the new obligation would sustain a finding of
novation by implication.59 However, our review of its terms yields no
incompatibility between the promissory notes and the restructuring agreement.
The five promissory notes, which Delta assigned to SIHI on September 13, 1983,
contained the following common stipulations:
1. They were payable in 60 monthly installments up to July 31, 1985;
2. Interest: 14% per annum;
3. Failure to pay any of the installments would render the entire remaining
balance due and payable at the option of the holder of the notes;
4. In case of judicial collection on the notes, the maker (CBLI) and co-maker (its
president, Mr. Dionisio O. Llamas, Jr) were solidarily liable of attorneys fees and
expenses of 25% of the amount due in addition to the costs of suit.
The restructuring agreement, for its part, had the following provisions:
WHEREAS, CBL and LLAMAS admit their past due installment on the following
promissory notes:
a. PN Nos. 16 to 26 (11 units)
Past Due as of September 30, 1981 P1,411,434.00
b. PN Nos. 52 to 57 (24 units)
Past Due as of September 30, 1981 P1,105,353.00
WHEREAS, the parties agreed to restructure the above-mentioned past due
installments under the following terms and conditions:
a. PN Nos. 16 to 26 (11 units) 37 months
PN Nos. 52 to 57 (24 units) 46 months
b. Interest Rate: 16% per annum
c. Documentation Fee: 2% per annum
d. Penalty previously incurred and Restructuring fee: 4% p.a.
e. Mode of Payment: Daily Remittance
NOW, THEREFORE, for and in consideration of the foregoing premises, the
parties hereby agree and covenant as follows:
1. That the past due installment referred to above plus the current and/or falling
due amortization as of October 1, 1981 for Promissory Notes Nos. 16 to 26 and
52 to 57 shall be paid by CBL and/or LLAMAS in accordance with the following
schedule of payments:
Daily payments of P11,000.00 from<>October 1 to December 31, 1981
Daily payments of P12,000.00 from<>January 1, 1982 to March 31, 1982
Daily payments of P13,000.00 from<>April 1, 1982 to June 30, 1982

Daily payments of P14,000.00 from<>July 1, 1982 to September 30, 1982

Daily payments of P15,000.00 from<>October 1, 1982 to December 31, 1982
Daily payments of P16,000.00 from<>January 1, 1983 to June 30, 1983
Daily payments of P17,000.00 from<>July 1, 1983
2. CBL or LLAMAS shall remit to DMC on or before 11:00 a.m. everyday the daily
cash payments due to DMC in accordance with the schedule in paragraph 1.
DMC may send a collector to receive the amount due at CBLs premises. All
delayed remittances shall be charged additional 2% penalty interest per month.
3. All payments shall be applied to amortizations and penalties due in
accordance with paragraph of the restructured past due installments above
mentioned and PN Nos. 16 to 26 and 52 to 57.
4. DMC may at anytime assign and/or send its representatives to monitor the
operations of CBL pertaining to the financial and field operations and service and
maintenance matters of M.A.N. units. Records needed by the DMC
representatives in monitoring said operations shall be made available by CBL
and LLAMAS.
5. Within thirty (30) days after the end of the terms of the PN Nos. 16 to 26 and
52 to 57, CBL or LLAMAS shall remit in lump sum whatever balance is left after
deducting all payments made from what is due and payable to DMC in
accordance with paragraph 1 of this agreement and PN Nos. 16 to 26 and 52 to
57.
6. In the event that CBL and LLAMAS fail to remit the daily remittance agreed
upon and the total accumulated unremitted amount has reached and (sic)
equivalent of Sixty (60) days, DMC and Silverio shall exercise any or all of the
following options:
(a) The whole sum remaining then unpaid plus 2% penalty per month and 16%
interest per annum on total past due installments will immediately become due
and payable. In the event of judicial proceedings to enforce collection, CBL and
LLAMAS will pay to DMC an additional sum equivalent to 25% of the amount due
for attorneys fees and expenses of collection, whether actually incurred or not, in
addition to the cost of suit;
(b) To enforce in accordance with law, their rights under the Chattel Mortgage
over various M.A.N. Diesel bus with Nos. CU 80-39, 80-40, 80-41, 80-42, 80-43,
80-44 and 80-15, and/or
(c) To take over management and operations of CBL until such time that CBL
and/or LLAMAS have remitted and/or updated their past due account with DMC.
7. DMC and SILVERIO shall insure to CBL continuous supply of spare parts for
the M.A.N. Diesel Buses and shall make available to CBL at the price prevailing
at the time of purchase, an inventory of spare parts consisting of at least ninety
(90%) percent of the needs of CBL based on a moving 6-month requirement to
be prepared and submitted by CBL, and acceptable to DMC, within the first week
of each month.
8. Except as otherwise modified in this Agreement, the terms and conditions
stipulated in PN Nos. 16 to 26 and 52 to 57 shall continue to govern the
relationship between the parties and that the Chattel Mortgage over various
M.A.N. Diesel Buses with Nos. CM No. 80-39, 80-40, 80-41, 80-42, 80-43, 80-44

and CM No. 80-15 as well as the Deed of Pledge executed by Mr. Llamas shall
continue to secure the obligation until full payment.
9. DMC and SILVERIO undertake to recall or withdraw its previous request to
Notary Public Alberto G. Doller and to instruct him not to proceed with the public
auction sale of the shares of stock of CBL subject-matter of the Deed of Pledge
of Shares. LLAMAS, on the other hand, undertakes to move for the immediate
dismissal of Civil Case No. 9460-P entitled "Dionisio O. Llamas vs. Alberto G.
Doller, et al.", Court of First Instance of Pasay, Branch XXIX. 60
It is clear from the foregoing that the restructuring agreement, instead of
containing provisions "absolutely incompatible" with the obligations of the
judgment, expressly ratifies such obligations in paragraph 8 and contains
provisions for satisfying them. There was no change in the object of the prior
obligations. The restructuring agreement merely provided for a new schedule of
payments and additional security in paragraph 6 (c) giving Delta authority to take
over the management and operations of CBLI in case CBLI fails to pay
installments equivalent to 60 days. Where the parties to the new obligation
expressly recognize the continuing existence and validity of the old one, there
can be no novation.61 Moreover, this Court has ruled that an agreement
subsequently executed between a seller and a buyer that provided for a different
schedule and manner of payment, to restructure the mode of payments by the
buyer so that it could settle its outstanding obligation in spite of its delinquency in
payment, is not tantamount to novation. 62
The addition of other obligations likewise did not extinguish the promissory notes.
In Young v. CA63, this Court ruled that a change in the incidental elements of, or
an addition of such element to, an obligation, unless otherwise expressed by the
parties will not result in its extinguishment.
In fine, the restructuring agreement can stand together with the promissory
notes.
Neither is there merit in CBLIs argument that the compromise agreement dated
July 24, 1984, in Civil Case No. 0023-P superseded and/or discharged the five
promissory notes. Both Delta and CBLI cannot deny that the five promissory
notes were no longer subject of Civil Case No. 0023-P when they entered into
the compromise agreement on July 24, 1984.
Having previously assigned the five promissory notes to SIHI, Delta had no more
right to compromise the same. Deltas limited authority to collect for SIHI
stipulated in the September 13, 1985, Deed of Sale cannot be construed to
include the power to compromise CBLIs obligations in the said promissory notes.
An authority to compromise, by express provision of Article 1878 64 of the Civil
Code, requires a special power of attorney, which is not present in this case.
Incidentally, Deltas authority to collect in behalf of SIHI was, by express provision
of the Continuing Deed of Assignment,65 automatically revoked when SIHI opted
to collect directly from CBLI.
As regards CBLI, SIHIs demand letter dated December 13, 1983, requiring CBLI
to remit the payments directly to SIHI effectively revoked Deltas limited right to
collect in behalf of SIHI. This should have dispelled CBLIs erroneous notion that
Delta was acting in behalf of SIHI, with authority to compromise the five

promissory notes.
But more importantly, the compromise agreement itself provided that it covered
the rights and obligations only of Delta and CBLI and that it did not refer to, nor
cover the rights of, SIHI as the new creditor of CBLI in the subject promissory
notes. CBLI and Delta stipulated in paragraph 5 of the agreement that:
5. This COMPROMISE AGREEMENT constitutes the entire understanding by
and between the plaintiffs and the defendants as well as their lawyers, and
operates as full and final settlement, adjudication and termination of all their
rights and obligations as of the date of this agreement, and of the issues in this
case.66
Even in the absence of such a provision, the compromise agreement still cannot
bind SIHI under the settled rule that a compromise agreement determines the
rights and obligations of only the parties to it. 67 Therefore, we hold that the
compromise agreement covered the rights and obligations only of Delta and
CBLI and only with respect to the eleven (11) other promissory notes that
remained with Delta.
CBLI next maintains that SIHI is estopped from questioning the compromise
agreement because SIHI failed to intervene in Civil Case No. 0023-P after CBLI
informed it of the takeover by Delta of CBLIs management and operations and
the resultant impossibility for CBLI to comply with its obligations in the subject
promissory notes. CBLI also adds that SIHIs failure to intervene in Civil Case
No. 0023-P is proof that Delta continued to act in SIHIs behalf in effecting
collection under the notes.
The contention is untenable. As a result of the assignment, Delta relinquished all
its rights to the subject promissory notes in favor of SIHI. This had the effect of
separating the five promissory notes from the 16 promissory notes subject of
Civil Case No. 0023-P. From that time, CBLIs obligations to SIHI embodied in the
five promissory notes became separate and distinct from CBLIs obligations in
eleven (11) other promissory notes that remained with Delta. Thus, any breach of
these independent obligations gives rise to a separate cause of action in favor of
SIHI against CBLI. Considering that Deltas assignment to SIHI of these five
promissory notes had the effect of removing the said notes from Civil Case No.
0023-P, there was no reason for SIHI to intervene in the said case. SIHI did not
have any interest to protect in Civil Case No. 0023-P.
Moreover, intervention is not mandatory, but only optional and permissive. 68
Notably, Section 2,69 Rule 12 of the then 1988 Revised Rules of Procedure uses
the word may in defining the right to intervene. The present rules maintain the
permissive nature of intervention in Section 1, Rule 19 of the 1997 Rules of Civil
Procedure, which provides as follows:
SEC. 1. Who may intervene.A person who has a legal interest in the matter in
litigation, or in the success of either of the parties, or an interest against both, or
is so situated as to be adversely affected by a distribution or other disposition of
property in the custody of the court or of an officer thereof may, with leave of
court, be allowed to intervene in the action. The court shall consider whether or
not the intervention will unduly delay or prejudice the adjudication of the rights of
the original parties, and whether or not the intervenor's rights may be fully

protected in a separate proceeding. 70

Also, recall that Delta transferred the five promissory notes to SIHI on September
13, 1983 while Civil Case No. 0023-P was pending. Then as now, the rule in case
of transfer of interest pendente lite is that the action may be continued by or
against the original party unless the court, upon motion, directs the person to
whom the interest is transferred to be substituted in the action or joined with the
original party.71 The non-inclusion of a necessary party does not prevent the court
from proceeding in the action, and the judgment rendered therein shall be without
prejudice to the rights of such necessary party.72
In light of the foregoing, SIHIs refusal to intervene in Civil Case No. 0023-P in
another court does not amount to an estoppel that may prevent SIHI from
instituting a separate and independent action of its own. 73 This is especially so
since it does not appear that a separate proceeding would be inadequate to
protect fully SIHIs rights.74 Indeed, SIHIs refusal to intervene is precisely
because it considered that its rights would be better protected in a separate and
independent suit.
The judgment on compromise in Civil Case No. 0023-P did not operate as res
judicata to prevent SIHI from prosecuting its claims in the present case. As
previously discussed, the compromise agreement and the judgment on
compromise in Civil Case No. 0023-P covered only Delta and CBLI and their
respective rights under the 11 promissory notes not assigned to SIHI. In contrast,
the instant case involves SIHI and CBLI and the five promissory notes. There
being no identity of parties and subject matter, there is no res judicata.
CBLI maintains, however, that in any event, recovery under the subject
promissory notes is no longer allowed by Article 1484(3) 75 of the Civil Code,
which prohibits a creditor from suing for the deficiency after it has foreclosed on
the chattel mortgages. SIHI, being the successor-in-interest of Delta, is no longer
allowed to recover on the promissory notes given as security for the purchase
price of the 35 buses because Delta had already extrajudicially foreclosed on the
chattel mortgages over the said buses on April 2, 1987.
This claim is likewise untenable.
Article 1484(3) finds no application in the present case. The extrajudicial
foreclosure of the chattel mortgages Delta effected cannot prejudice SIHIs rights.
As stated earlier, the assignment of the five notes operated to create a separate
and independent obligation on the part of CBLI to SIHI, distinct and separate
from CBLIs obligations to Delta. And since there was a previous revocation of
Deltas authority to collect for SIHI, Delta was no longer SIHIs collecting agent.
CBLI, in turn, knew of the assignment and Deltas lack of authority to
compromise the subject notes, yet it readily agreed to the foreclosure. To
sanction CBLIs argument and to apply Article 1484 (3) to this case would work
injustice to SIHI by depriving it of its right to collect against CBLI who has not
paid its obligations.
That SIHI later on levied on execution and acquired in the ensuing public sale in
Civil Case No. 84-23019 the buses Delta earlier extrajudicially foreclosed on April
2, 1987, in Civil Case No. 0023-P, did not operate to render the compromise
agreement and the foreclosure binding on SIHI. At the time SIHI effected the levy

on execution to satisfy its judgment credit against Delta in Civil Case No. 8423019, the said buses already pertained to Delta by virtue of the April 2, 1987
auction sale. CBLI no longer had any interest in the said buses.1wphi1 Under
the circumstances, we cannot see how SIHIs belated acquisition of the
foreclosed buses operates to hold the compromise agreementand
consequently Article 1484(3)applicable to SIHI as CBLI contends. CBLIs last
contention must, therefore, fail. We hold that the writ of execution to enforce the
judgment of compromise in Civil Case No. 0023-P and the foreclosure sale of
April 2, 1987, done pursuant to the said writ of execution affected only the eleven
(11) other promissory notes covered by the compromise agreement and the
judgment on compromise in Civil Case No. 0023-P.
In support of its third assignment of error, CBLI maintains that there was no basis
for SIHIs application for a writ of preliminary attachment. 76 According to CBLI, it
committed no fraud in contracting its obligation under the five promissory notes
because it was financially sound when it issued the said notes on April 25,
1980.77 CBLI also asserts that at no time did it falsely represent to SIHI that it
would be able to pay its obligations under the five promissory notes. 78 According
to CBLI, it was not guilty of fraudulent concealment, removal, or disposal, or of
fraudulent intent to conceal, remove, or dispose of its properties to defraud its
creditors;79 and that SIHIs bare allegations on this matter were insufficient for the
preliminary attachment of CBLIs properties.80
The question whether the attachment of the sixteen (16) buses was valid and in
accordance with law, however, has already been resolved with finality by the
Court of Appeals in CA-G.R. SP No. 08376. In its July 31, 1987, decision, the
Court of Appeals upheld the legality of the writ of preliminary attachment SIHI
obtained and ruled that the trial court judge acted with grave abuse of discretion
in discharging the writ of attachment despite the clear presence of a determined
scheme on the part of CBLI to dispose of its property. Considering that the said
Court of Appeals decision has already attained finality on August 22, 1987, there
exists no reason to resolve this question anew. Reasons of public policy, judicial
orderliness, economy and judicial time and the interests of litigants as well as the
peace and order of society, all require that stability be accorded the solemn and
final judgments of courts or tribunals of competent jurisdiction. 81
Finally, in the light of the justness of SIHIs claim against CBLI, we cannot sustain
CBLIs contention that the Court of Appeals erred in dismissing its counterclaim
for lost income and the value of the 16 buses over which SIHI obtained a writ of
preliminary attachment. Where the party who requested the attachment acted in
good faith and without malice, the claim for damages resulting from the
attachment of property cannot be sustained.82
WHEREFORE, the decision dated April 17, 2001, of the Court of Appeals in CAG.R. CV No. 52667 is AFFIRMED. Petitioner California Bus Lines, Inc., is
ORDERED to pay respondent State Investment House, Inc., the value of the five
(5) promissory notes subject of the complaint in Civil Case No. 84-28505 less the
proceeds from the sale of the attached sixteen (16) buses. No pronouncement as
to costs.
SO ORDERED.

G.R. No. L-31816

February 15, 1930
RECAREDO F. PANDO, plaintiff-appellee,
vs.
ANTONIO GIMENEZ, ET AL., defendants.
ANTONIO GIMENEZ, appellant.
Harvey and O'Brien and Eugenio Angeles for appellant.Antonio Sanz for
appellee.
ROMUALDEZ, J.:
This action was instituted for the purpose of foreclosing a mortgage executed by
defendant Antonio Gimenez. Massy Teague was also impleaded for having
purchased at public auction one of the mortgaged properties.
The answer of the defendant Teague set up a general denial and a special
defense, which are not involved in this appeal.
Defendant Antonio Gimenez also filed a general denial, and raised four special
defenses in his answer, to wit:
As a first special defense said defendant alleges:
1. That on the 27th day of October, 1924, said defendant Gimenez was indebted
to the plaintiff in the sum of P8,000, and to secure the payment of the said
amount duly made, executed and delivered a real estate mortgage in favor of the
said plaintiff over the properties and leasehold rights mentioned in paragraph VIII
of the plaintiff's complaint, and which contract of mortgage is evidenced by the
document, Exhibit A attached to the complaint.
2. That owing to the fact that said defendant was leaving the City of Manila in
order to attend to his business in the Province of Cagayan, and at the special
instance and request of the herein plaintiff, said defendant gave to the plaintiff the
full control, and complete and absolute administration of the building and the
parcel of land on which said building was erected, situated in Santa Mesa,
District of Santa Mesa, mortgaged to the plaintiff, under the condition that said
plaintiff would attend to the administration, care and preservation of the said
building and the property leased from the Hacienda Tuason on which said
building was erected, the payment of the premium on the insurance of this
building, the payment of the taxes might become due on the said building, the
payment to the lessor Hacienda Tuason of the rents of the leased property, and
to collect the rents from the tenants of the said building.
3. That the rents that would be collected from the said building, the plaintiff would
apply the same to the payment of all the expenses necessary for the
preservation and maintenance of the said building, the rents of the leased
property, and the balance to be applied in payment on account of the interest that
may become due in favor of the plaintiff under the mortgage.
4. That in accordance with this agreement, the defendant gave, and the plaintiff
took absolute control and possession and entered in the full administration of the
said building and land since October 27, 1924, and up to the present time.
5. That in the course of the administration by the plaintiff of the said building and
land leased from the Hacienda Tuason, said plaintiff failed and neglected to pay

to the government of the City of Manila taxes due for several years on the said
building and has also failed and neglected to pay to the lessor Hacienda Tuason
the rents due for several years on the land leased and on which said building
was erected.
6. That by reason of this failure, neglect and abandonment by the plaintiff to pay
the taxes due on the said building, the City of Manila, on November 23, 1926,
sold at public auction the said building was sold for the sum of P244.50, and was
bought by the other defendant Massy Teague, and since that time the said
building was lost to the defendant Gimenez.
7. That by reason of the failure, neglect and abandonment of the plaintiff to pay
the Hacienda Tuason the rents due for several years on the leased property on
which the building in question is erected, the said lessor cancelled the contract of
lease of the defendant Gimenez, and has brought a suit against the said
defendant Gimenez for desahucio in the municipal court of the City of Manila.
As a second special defense, alleges that the building which was sold to the
defendant Massy Teague is worth P11,000, and the leasehold right of the
defendant which was cancelled by the Hacienda Tuason as above stated is worth
P3,000.
As a third special defense, alleges that by reason of the negligence, failure and
abandonment of the plaintiff to properly administer the building and land in
question and to pay the taxes due to the government and the rents due the
lessor Hacienda Tuason, and as a result of which the defendant Gimenez has
been deprived of the building, and his leasehold right was cancelled, said
defendant has suffered irreparable damages in the sum of P14,000.
And as a fourth special defense and by way of counter-claim and set-off against
the claim of the said plaintiff, the defendant Gimenez alleges that he reproduces
herein the first three special defenses heretofore mentioned, and that by reason
of the negligent acts committed by the plaintiff in the administration of the said
building and land which caused irreparable damage and prejudice to the
defendant Gimenez, said defendant has suffered damages in the sum of
P14,000.
Wherefore, the defendant Gimenez by the undersigned attorneys, respectfully
prays the court to render judgment in his favor and against the plaintiff,
condemning the latter to pay the former the sum of fourteen thousand pesos
(P14,000), as damages suffered by the defendant Gimenez; and that should this
court find that the said defendant Gimenez is liable to pay to plaintiff any sum of
money under the mortgage, that this amount of P14,000 be set-off against the
amount that might rightfully be found by the court to be due and owing by the
defendant Gimenez to plaintiff, and that should there be a difference in favor of
the defendant Gimenez that the plaintiff be condemned to pay to the said
defendant Gimenez the amount of such difference and for the costs of this
action; and also asks for such other and further relief as may be proper and
equitable under the premises. (Pages 23, 24, 25, 26 and 27, Bill of Exceptions.)
After trial, the Court of First Instance of Manila rendered a decision, dismissing
the counterclaim presented by the defendant Antonio Gimenez, the dispositive
part of which reads as follows:

For the foregoing considerations, the court renders judgment, ordering Antonio
Gimenez to pay Recaredo Pando eight thousand pesos (P8,000), Philippine
currency, with annual interest at twelve per centum from June 1, 1928, until fully
paid; two thousand three hundred and forty-four pesos and sixty centavos
(P2,344.60) as accrued interest with legal interest thereon from the date of the
complaint, May 19, 1928, until fully paid; and eight hundred pesos (P800) as the
stipulated attorney's fees, and the costs; all of said sums to be paid within three
months from the date hereof.
Defendant Massy Teague is hereby authorized to pay to the plaintiff the amounts
set forth in the preceding paragraph, if he so desires, in order to obtain the
cancellation of the plaintiff's mortgage, and to acquire the properties of defendant
Gimenez free of all liens and encumbrances, within the same three-month period
from the date hereof.
In case neither of the defendants pay to the plaintiff the foregoing amounts within
the period named, the mortgaged properties shall be sold at public auction in
accordance with the law, and from the proceeds of the sale, the aggregate sum
of the aforementioned amounts shall be paid to the plaintiff, and the balance, if
any, delivered to defendant Massy Teague, the present owner of the mortgaged
property. (Pages 40 and 41, Bill of Exceptions.)
Antonio Gimenez, defendant, appealed from this decision and now makes the
following assignments of error:
I. The lower court erred in not finding that, after the execution of the contract of
mortgage, Exhibit A, and just before the time said mortgage matured, the
appellee and the appellant entered into an agreement by virtue of which:
(a) The appellee assumed and took over the general administration
(administracion directa) of the house No. 655 Santa Mesa, Manila, with the right
to collect the rents of the said house;
(b) But with the duty and obligation, that said appellee should pay the taxes
owing or accruing on the said house to the City of Manila;
(c) Should pay the rentals owing or accruing on the land occupied by said house
to the owners of said land the "Hacienda de Santa Mesa y Diliman", in
accordance with the terms of the contract of lease; and
(d) Should pay all other expenses necessary for the proper preservation and
maintenance of said house, such as repairs and so forth, including the premium
of the policy of insurance thereon and that the balance of said rents should be
applied by him toward the liquidation of interest accruing under the mortgage.
II. The lower court erred in not finding that the appellee violated his duty by
neglecting and failing to pay the taxes on the house No. 655 Santa Mesa, to the
Government of the City of Manila, which became due during the years 1925 and
1926, while said house was under his general administration, and that by reason
of that failure to pay said taxes, said house was sold by public auction by the City
of Manila to satisfy said taxes, and finally adjudicated to the defendant Massy
Teague, the immediate consequence thereof being the loss to the appellant of all
his rights, legal and equitable in the said house.
III. The lower court erred in not finding that the appellant had suffered damages
for the loss of his said house No. 655 Santa Mesa, and that the appellee should

be responsible to the appellant for all damages suffered by him.

IV. The lower court erred in not finding that the appellee violated his duty by
neglecting and failing to pay the rentals for the land occupied by said house No.
655 Santa Mesa, to the owners thereof, which rentals became due during the
years 1925, 1926, 1927 and 1928, while the said land and house were under his
general administration, and that by reason of that failure to pay said rentals, the
owners of the land cancelled the contract of lease of the appellant, the immediate
consequence thereof being that the appellant lost all his rights, use and
enjoyment of said land for the remaining unexpired period of 26 years.
V. The lower court erred in not finding that the appellant had suffered damages
for the loss of his leasehold right, the improvements on the land and the use and
enjoyment of said land for the remaining unexpired period of 26 years, and that
the appellee should be responsible to the appellant for all damages suffered by
him.
VI. The lower court erred in not rendering judgment in favor of the appellant and
against the appellee on the counterclaim for the damages suffered by the
appellant for the total amount proven.
VII. The lower court erred in not granting the motion for new trial.
In order to secure the payment of P8,000 which the defendant Gimenez owed
the plaintiff, he mortgaged the house at No. 655 Santa Mesa, Manila, and the
leasehold right on the lot upon which it stands (Exhibit A). It was agreed between
them that the plaintiff would collect the rents of said house, in order to apply them
to the payment of interest on the amount of the indebtedness. This was payable
on October 27, 1925, but, in spite of nonpayment, the creditor, who is the plaintiff
herein, did not foreclose the mortgage.
For default in the payment of taxes for the years 1925 and 1926, the house was
on November 23, 1926 sold at public auction, and, for failure to exercise the right
of legal redemption, the City of Manila, the attachment creditor and vendor of the
property, executed a final deed of sale in favor of the purchaser, the other
defendant Massy Teague. Furthermore, for default in the payment of the rents
due on the lot of said house for the years 1925 to 1928, the Santa Mesa estate,
the lessor of said land, cancelled the lease on July 13, 1928, pursuant to the
terms of the contract.
The appellant Gimenez contends that the plaintiff was responsible for the
delinquency in the payment of both the tax on the house and the rent of the lot,
which caused him the loss of the said house and the leasehold right on the lot,
because the plaintiff was at that time in charge of the administration of the
premises with the obligation to attend to the payment of the tax and the rents.
The plaintiff denied that he had such obligation, alleging that his duties were
confined to the collection of the rents of the house in order to apply them to the
payment of the interest on the mortgage.
Such was in fact the original agreement; but the appellant asserts that it was
modified by the letter Exhibit 1, quoted below:
MANILA, October 29, 1925
Mr. ANTONIO GIMENEZ
A. Luna, San Juan del Monte

ESTEEMED DON ANTONIO: Yesterday Mrs. Xaudaro came to pay me the rents
for the months of July and August, and forty pesos on account of September,
saying that she did not pay the balance of the rent for that month and the rent for
the whole of October, because your wife had demanded the delivery of the
difference, or P90. I am surprised at such a procedure, since you yourself
authorized me one year ago to collect the rent from Mr. Xaudaro, and I have
done so up to date.
Mrs. Xaudaro has also informed me that, upon your demand, they would leave
the chalet next month and it appears that this, too, was done using me as a
shield, which is another surprise to me.
I believe, Mr. Gimenez, that the best thing would be for you to turn over the
chalet to me, since the period has expired, so that I may take direct charge of the
administration of the premises.
Yours very truly,
(Sgd.) R. PANDO
(Page 63, record.)
The appellant testified further, that when he turned over the administration of the
property to the plaintiff, it was agreed that the plaintiff "would keep the property in
good condition of repair, pay the insurance and other expenses inherent in the
preservation of the building, such as land taxes," and "would pay the rents of the
land upon which the property is situated" (transcript of the stenographic notes,
page 6). These points have not been contradicted by the plaintiff.
Taking into account the language of the letter Exhibit 1 and the appellant's
unimpeached testimony, we are constrained to hold that it has been proved by a
preponderance of evidence, that even though at first the plaintiff had only
undertaken to collect the rents of the house, later on, towards the end of October,
1925, he assumed the obligation to pay both the tax on the house, and the rent
of the lot.
As to the consideration contained in the judgment appealed from to the effect
that, in view of the reduction of the rent of the house in May, 1926, the plaintiff
would not have accepted the administration under the conditions alleged by the
defendant-appellant, it must be remembered that the plaintiff took over such
complete administration months before such reduction of rents, and it does not
appear that the reduction was foreseen.
From all these circumstances it follows that the administration of the property in
question assumed by the plaintiff toward the end of October, 1925 is antichretic
in character, and therefore justice and equity demand that application be here
made of the Civil Code provisions touching the obligations of the antichretic
creditor, to wit:
The creditor is obliged to pay the taxes and charges which burden the estate, in
the absence of an agreement to the contrary.
He shall also be obliged to pay any expenses necessary for its preservation and
repair.
Any sums he may expend for such purposes shall be chargeable against the
fruits. (Art. 1882, Civil Code.)

These obligations arise from the very nature of the covenant, and are correlated
with the plaintiff's acquired right to take charge of the property and collect the
fruits for himself. Hence, the illustrious Manresa, explains the basis of this article
1882 in the following terms:
The right which the creditor acquires by virtue of antichresis to enjoy the fruits of
the property delivered to him, carries two obligations which are a necessary
consequence of the contract, because they arise from its very nature.
And the plaintiff having failed in his obligation to pay the tax on the house and the
rent of the lot, he is by law required to pay indemnity for damages (article 1101,
Civil Code).
Considering the evidence of record as to the value and condition of the house
and the improvements made by the appellant upon said lot, as well as the other
circumstances of the case the total amount of the damages sustained by said
appellant must be fixed at P5,000.
Wherefore, the judgment appealed from is modified, and it is held that the
appellant, Antonio Gimenez, is entitled to recover from the plaintiff the sum of
P5,000 and it is so ordered; and the judgment appealed from is hereby affirmed
in all respects consistent with the present decision, without express
pronouncement of costs.
G.R. No. L-45963
October 12, 1939
CARLOS PARDO DE TAVERA and CARMEN PARDO DE TAVERA MANZANO,
plaintiffs-appellants,
vs.
EL HOGAR FILIPINO, INC., defendant-appellee.
TAVERA-LUNA, INC., defendant-appellant;
VICENTE MADRIGAL, defendant-appellee.
Carlos P. de Tavera and E. Voltaire Garcia for plaintiffs and appellants.Pedro
Sabido and Jose Avancea for defendant and appellant.Camus and Zavalla for
appellee El Hogar Filipino.Vicente Madrigal in his own behalf.
MORAN, J.:
On January 17, 1931, defendant corporation, Tavera-Luna Inc., for the purpose
of constructing the Crystal Arcade building on its premises at Escolta, Manila. To
secure this loan, the corporation executed a first mortgage on said premises and
on the building proposed to be erected thereon. On February 11, 1932, TaveraLuna, Inc., secured from El Hogar Filipino an additional loan of P300,000 with the
same security executed for the original loan. The Tavera-Luna, Inc., thereafter,
defaulted in the payment of the monthly amortizations on the loan: whereupon, El
Hogar Filipino foreclosed the mortgage proceeded with the extra-judicial sale of
the Crystal Arcade building, at which it was the highest bidder for P1,363,555.36.
One day before the expiration of the period of redemption, Carlos Pardo de
Tavera and Carmen Pardo de Tavera Manzano, in their capacity as stockholders
of the Tavera-Luna, Inc., and El Hogar Filipino, Inc., to annul the two secured
loans as well as extra-judicial sale made in favor of the latter. Vicente Madrigal
was included as party defendant because of his having signed the second

contract of loans aforementioned. From the judgment dismissing the complaint

and cross-complaint, plaintiffs and cross-complainant took the present appeal.
The most important question raised by appellant is whether or not the two
secured loans are null and void. It is contended that they are, on the ground that
the Crystal Arcade building, given as security form the loans, is a public building.
This contention is predicated upon section 171 of the Corporation Law which
reads as follows:
It shall be unlawful for any building and loan association to make any loan after
the date when this Act, as amended, shall become effective upon property that is
able for use only as a manufacturing plant, theater, public hall, church, convent,
school, club, hotel, garage, or other public building. To facilitate the investment of
the idle funds of a building and loan association, however, the Bank
Commissioner, with the approval of the Secretary of Finance, may, in special
instances. waive the provisions of this paragraph.
We find it unnecessary to determine, in the instant case, whether the Crystal
Arcade is or is not a public building, for, even if it is, the loan are valid. It may be
said, in passing the evidence is sufficient to show that the Secretary of Finance
and the Bank Commissioner had knowledge of the loans and of the security
given therefor, and that they have impliedly approved the same. On the other
hand, under the legal provision above quoted, a loan given on a property which
may be considered as a public building, is not, in itself, null and void. It is
unlawful to make loans on that kind of security, but the law does not declare the
loan, once made, to be null and void. The unlawful taking of the security may
constitute a misuser of the powers conferred upon the corporation by its charter,
for which it may be made to answer in an action for ouster or dissolution; but
certainly the stockholders and depositors of the corporation should not be
punished with a loss of the money loaned nor the borrower be rewarded with it.
As held by the Supreme Court of the United States, in a similar case:
The statute does not declare such a security void. If congress so meant, it would
have been easy to say so; and it is hardly to be believed that this would not have
been done, instead of leaving the question to be settled by the uncertain result of
litigation and judicial decision . . ..
We cannot believe it was meant that stockholders, and perhaps depositors and
other creditors, should be punished and the borrower rewarded, by giving
success to this defense whenever the offensive fact shall occur. The impending
danger of a judgment of ouster and dissolution was, we think, the check, and
none other contemplated by congress.
That has been always the punishment prescribed for the wanton violation of a
charter, and it may be made to follow whenever the proper public authority shall
see fit to invoke its application. . . . (Union Nat. Bank of St. Louis vs. Matthews,
98 U.S., 621; 25 L. ed., 188.) In the same case it has been likewise held that:
Where it is a simple question of authority to contract, arising either on a question
of regularity of organization or of power conferred by the charter, a party who has
had the benefit of the agreement cannot he permitted, in an action founded upon
it, to question its validity.
Fletcher on this matter says:

There is a direct conflict in the decisions as to the effect of a charter or statutory

prohibition against discounting or lending money on certain securities. If the
statute expressly declares that securities taken in violation of the prohibition shall
be void, such securities cannot be enforced. Some courts have gone further and
have held that the mere fact of prohibition renders them unenforceable; but this
construction is not supported by the weight of authority. The better opinion is that
where the charter of a corporation or some other statute prohibits it from lending
money on certain kinds of security, but does not declare that prohibited securities
taken by it shall be void, they are not void, and may be enforced by it. The taking
of such security is a misuser of the powers conferred upon the corporation by its
charter, for which the state may enforce a forfeiture, but the misuser cannot be
set up by the borrower to prevent the corporation from enforcing the security. In
case of a state statute prohibiting savings banks from lending their funds on the
security of names alone, it has been held that a savings bank may enforce
payment of a promissory note taken for money loaned in violation of the statute.
(Vol. 7, Fletcher Cyc. Corp., sec. 3616, pp. 744, 745.)
It is contended that the contracts in question are not of mortgage, but of
antichresis. The distinction, however, is immaterial, for even if the contracts are
of antichresis, the extra-judicial foreclosure of the security is valid. Stipulations in
a contract of antichresis for the extra-judicial foreclosure of the security may be
allowed in the same manner as they are allowed in contracts of mortgage and of
pledge. (El Hogar Filipino vs. Paredes, 45 Phil., 178; Peterson vs. Azada, 8 Phil.,
432, 437.)lwphi1.nt
Appellants contend that El Hogar Filipino has been given the possession and
administration of the Crystal Arcade building, so that it may apply the rentals
thereof to the payment of interest and the capital owed by Tavera-Luna, Inc., and
that due to the negligence of El Hogar Filipino, no rental sufficient to cover the
monthly amortizations on the debt had been realized therefrom. The alleged
negligence is made to consist in the failure of El Hogar Filipino to advertise the
rooms of the Crystal Arcade building for rent and to employ agents to solicit and
attract tenants. But the evidence presented to this effect has been sufficiently
contradicted by the evidence adduced by the defendant-appellant. Besides, it
appears that El Hogar Filipino appointed Jose V. Ramirez as its representative in
the management and administration of the Crystal Arcade building, and the
appointment was made in agreement with Tavera-Luna, Inc. The ability of
Ramirez to do the work entrusted to him is not disputed. As a matter of fact,
Ramirez, during his management of the building, was a stockholder and director
of the Tavera-Luna, Inc., and was serving that corporation as its secretary and
treasurer. Under all these circumstances, we see no reason to disturb the
findings of the lower court.
Judgment is affirmed, with costs against appellants.
G.R. No. L-14938
January 28, 1961
MAGDALENA C. DE BARRETO, ET AL., plaintiffs-appellants,
vs.
JOSE G. VILLANUEVA, ET AL., defendants-appellees.

Bausa, Ampil & Suarez for plaintiffs-appellants.Esteban Ocampo for defendantsappellees.

GUTIERREZ DAVID, J.:
On May 10, 1948, Rosario Cruzado, for herself and as administratix of the
intestate estate of her deceased husband Pedro Cruzado in Special Proceedings
No. 4959 of the Court of First Instance of Manila, obtained from the defunct
Rehabilitation Finance Corporation (hereinafter referred to as the RFC a loan in
the amount of P11,000.00. To secure payment thereof, she mortgaged the land
then covered by Transfer Certificate of Title No. 61358 issued in her name and
that of her deceased. husband. As she failed to pay certain installments on the
loan, the mortgage was foreclosed and the RFC acquired the property for
P11,000.00, subject to her rights as mortgagor to re-purchase the same. On July
26, 1951, upon her application, the land was sold back to her conditionally for the
amount of P14,269.03, payable in seven years.
About two years thereafter, or on February 13, 1953 Rosario Cruzado, as
guardian of her minor children in Special Proceedings No. 14198 of the Court of
First Instance of Manila, was authorized by the court, to sell with the previous
consent of the RFC the land in question together with the improvements thereon
for a sum not less than P19,000. Pursuant to such authority and with the consent
of the RFC, she sold to Pura L. Villanueva for P19,000.00 "all their rights,
interest,' title and dominion and over the herein described parcel of land together
with the existing improvements thereon, including one use and an annex thereon;
free from all charges and encumbrances, , with the exception of the sum of
P11,009.52, is stipulated interest thereon, which the vendor, is still presently
obligated to the RFC and which the vendee herein now assumes to pay to the
RFC under the same terms and conditions specified in that deed of sale dated
July 26, 1951." Having paid in advance the sum of P500.00, Pura L. Villanueva,
the vendee, in consideration of the aforesaid sale, executed in favor of the
vendor Rosario Cruzado a promissory note dated March 9, 1953, undertaking to
pay the balance of P17,500.00 in monthly installments. On April 22, 1953, she
made an additional payment of P5,500.00 on the promissory note. She was,
subsequently, able to secure in her name Transfer Certificate of Title No. 32526
covering the house and lot above referred to, and on July 10, 1953, she
mortgaged the said property to Magdalena C. Barretto as security for a loan the
amount of P30,000.00.
As said Pura L. Villanueva had failed to pay the remaining installments on the
unpaid balance of P12,000.00 her promissory note for the sale of the property in
question, a complaint for the recovery of the same from her and her husband
was filed on September 21, 1963 by Rosario Cruzado in her own right and in her
capacity as judicial guardian of her minor children. Pending trial of the case, a
lien was constituted upon the property in the nature of a levy in attachment in
favor of the Cruzados said lien being annotated at the back of Transfer Certificate
of Title No. 32526. After trial, decision was rendered ordering Pura Villanueva
and her husband, jointly and severally, to pay Rosario Cruzado the sum of
P12,000.00, with legal interest thereon from the date of the filing of the complaint
until fully paid plus the sum of P1,500.00 as attorney's fees.

Pura Villanueva having, likewise, failed to pay her indebtedness of P30,000.00 to

Magdalena C. Barretto, the latter, jointly with her husband, instituted against the
Villanueva spouses an action for foreclosure of mortgage, impleading Rosario
Cruzado and her children as parties defendants. On November 11, 1956,
decision was rendered in the case absolving the Cruzados from the complaint
and sentencing the Villanuevas to pay the Barrettos, jointly and severally, the
sum of P30,000.00, with interest thereon at the rate of 12% per annum from
January 11, 1954 plus the sum of P4,000.00 as attorney's fees. Upon the finality
of this decision, the Barrettos filed a motion for the issuance of a writ of execution
which was granted by the lower court on July 31, 1958. On August 14, 1958, the
Cruzados filed their "Vendor's Lien" in the amount of P12,000.00, plus legal
interest, over the real property subject of the foreclosure suit, the said amount
representing the unpaid balance of the purchase price of the said property.
Giving due course to the line, the court on August 18, 1958 ordered the same
annotated in Transfer Certificate of Title No. 32526 of the Registry of Deeds of
Manila, decreeing that should the realty in question be sold at public auction in
the foreclosure proceedings, the Cruzados shall be credited with their pro-rata
share in the proceeds thereof, "pursuant to the provision of articles 2248 and
2249 of the new Civil Code in relation to Article 2242, paragraph 2 of the same
Code." The Barrettos filed a motion for reconsideration on September 12, 1958,
but on that same date, the sheriff of Manila, acting in pursuance of the order of
the court granting the writ of execution, sold at public auction the property in
question. As highest bidder, the Barrettos themselves acquired the properties for
the sum of P49,000.00.
On October 4, 1958, 'the Court of First Instance issued an order confirming the
aforesaid sale and directing the Register of Deeds of the City of Manila to issue
to the Barrettos the corresponding certificate of title, subject, however, to the
order of August 18, 1958 concerning,. the vendor's lien. On the same date, the
motion of the Barettos seeking reconsideration of the order of the court giving
due course to the said vendor's lien was denied. From this last order, the Barretto
spouses interposed the present appeal.
The appeal is devoid of merit.
In claiming that the decision of the Court, of First Instance of Manila in Civil Case
No. 20075 . awarding the amount of P12,000.00 in favor of Rosario Cruzado and
her minor children . cannot constitute a basis for the vendor's lien filed by the
appellee Rosario Cruzado, appellants allege that the action in said civil case was
merely to recover the balance of a promissory note. But while, apparently, the
action was to recover the remaining obligation of promissor Pura Villanueva on
the note, the fact remains that Rosario P. Cruzado as guardian of her minor
children, was an unpaid vendor., of the realty in question, and the promissory
note, was, precisely, for the unpaid balance of the price of the property bought by,
said Pura Villanueva.
Article 2242 of the new Civil, Code enumerates the claims, mortgage and liens
that constitute an encumbrance on specific immovable property, and among
them are: .
(2) For the unpaid price of real property sold, upon the immovable sold; and

(5) Mortgage credits recorded in the Registry of Property."

Article 2249 of the same Code provides that "if there are two or more credits with
respect to the same specific real property or real rights, they shall be satisfied
pro-rata after the payment of the taxes and assessment upon the immovable
property or real rights.
Application of the above-quoted provisions to the case at bar would mean that
the herein appellee Rosario Cruzado as an unpaid vendor of the property in
question has the right to share pro-rata with the appellants the proceeds of the
foreclosure sale.
The appellants, however, argue that inasmuch as the unpaid vendor's lien in this
case was not registered, it should not prejudice the said appellants' registered
rights over the property. There is nothing to this argument. Note must be taken of
the fact that article 2242 of the new Civil Code enumerating the preferred claims,
mortgages and liens on immovables, specifically requires that . unlike the unpaid
price of real property sold . mortgage credits, in order to be given preference,
should be recorded in the Registry of Property. If the legislative intent was to
impose the same requirement in the case of the vendor's lien, or the unpaid price
of real property sold, the lawmakers could have easily inserted the same
qualification which now modifies the mortgage credits. The law, however, does
not make any distinction between registered and unregistered vendor's lien,
which only goes to show that any lien of that kind enjoys the preferred credit
status.
Appellants also argue that to give the unrecorded vendor's lien the same
standing as the registered mortgage credit would be to nullify the principle in land
registration system that prior unrecorded interests cannot prejudice persons who
subsequently acquire interests over the same property. The Land Registration
Act itself, however, respects without reserve or qualification the paramount rights
of lien holders on real property. Thus, section 70 of that Act provides that .
Registered land, and ownership therein shall in all respects be subject to the
same burdens and incidents attached by law to unregistered land. Nothing
contained in this Act shall in any way be construed to relieve registered land or
the owners thereof from any rights incident to the relation of husband and wife, or
from liability to attachment on mesne process or levy, on execution, or from
liability to any lien of any description established by law on land and the buildings
thereon, or the interest of the owners of such land or buildings, or to change the
laws of descent, or the rights of partition between co-owners, joint tenants and
other co-tenants or the right to take the same by eminent domain, or to relieve
such land from liability to be appropriated in any lawful manner for the payment
of debts, or to change or affect in any other way any other rights or liabilities
created by law and applicable to unregistered land, except as otherwise
expressly provided in this Act or in the amendments thereof, (Emphasis supplied)
As to the point made that the articles of the Civil Code on concurrence and
preference of credits are applicable only to the insolvent debtor, suffice it to say
that nothing in the law shows any such limitation. If we are to interpret this portion
of the Code as intended only for insolvency cases, then other creditor-debtor
relationships where there are concurrence of credits would be left without any

rules to govern them, and it would render purposeless the special laws an
insolvency.
Premises considered, the order appealed from is hereby affirmed. Costs against
the appellants.
Bengzon, Padilla, Bautista Angelo, Labrador, Paredes and Dizon, JJ., concur.
Concepcion, Reyes, J.B.L. and Barrera, JJ., concur in the result.
RESOLUTION ON MOTION TO RECONSIDER
December 29, 1962
REYES, J.B.L., J.:
Appellants, spouses Barretto, have filed a motion vigorously urging, for reason to
be discussed in the course of this resolution, that our decision of 28 January
1961 be reconsidered and set aside, and a new one entered declaring that their
right as mortgagees remain superior to the unrecorded claim of herein appellee
for the balance of the purchase price of her rights, title, and interests in the
mortgaged property.
It will be recalled that, with Court authority, Rosario Cruzado sold all her right,
title, and interest and that of her children in the house and lot herein involved to
Pura I. Villanueva for P19,000.00. The purchaser paid Pl,500 in advance, and
executed a promissory note for the balance of P17,506.00. However, the buyer
could only pay P5,500 On account of the note, for which reason the vendor
obtained judgment for the unpaid balance. In the meantime, the buyer Villanueva
was able to secure a clean certificate of title (No. 32626), and mortgaged the
property to appellant Magdalena C. Barretto, married to Jose C. Barretto, to
secure a loan of P30,000.03, said mortgage having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter
foreclosed the mortgage in her favor, obtained judgment, and upon its becoming
final asked for execution on 31 July 1958. On 14 August 1958, Cruzado filed a
motion for recognition for her "vendor's lien" in the amount of Pl2,000.00, plus
legal interest, invoking Articles 2242, 2243, and 2249 of the new Civil Code. After
hearing, the court below ordered the "lien" annotated on the back of Certificate of
Title No. 32526, with the proviso that in case of sale under the foreclosure decree
the vendor's lien and the mortgage credit of appellant Barretto should be paid pro
rata from the proceeds. Our original decision affirmed this order of the Court of
First Instance of Manila.
Appellants insist that:
(1) The vendor's lien, under Articles 2242 and 2243 of the new, Civil Code of the
Philippines, can only become effective in the event of insolvency of the vendee,
which has not been proved to exist in the instant case; and .
(2) That the appellee Cruzado is not a true vendor of the foreclosed property. We
have given protracted and mature consideration to the facts and law of this case,
and have reached the conclusion that our original decision must be reconsidered
and set aside, for the following reasons:
A. The previous decision failed to take fully into account the radical changes
introduced by the Civil Code of the Philippines into the system of priorities among

creditors ordained by the Civil Code of 1889.

Pursuant to the former Code, conflicts among creditors entitled to preference as
to specific real property under Article 1923 were to be resolved according to an
order of priorities established by Article 1927, whereby one class of creditors
could exclude the creditors of lower order until the claims of the former were fully
satisfied out of the proceeds of the sale of the real property subject of the
preference, and could even exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines however, only taxes enjoy a
similar absolute preference. All the remaining thirteen classes of preferred
creditors under Article 2242 enjoy no priority among themselves, but must be
paid pro-rata i.e., in proportion to the amount of the respective credits. Thus,
Article 2249 provides:
If there are two or more credits with respect to the same specific real property or
real rights, they, shall be satisfied pro-rata after the payment of the taxes and
assessments upon the immovable property or real rights."
But in order to make this prorating fully effective, the preferred creditors
enumerated in Nos. 2 to 14 of Article 2242 (or such of their, as have credits
outstanding) must necessarily be convened, and the import of their claims
ascertained. It is thus apparent that the full, application (of Articles 2249 and
2242 demands that there must be first some proceedings where the claims of all
the preferred creditors may be bindingly adjudicated, such as insolvency, the
settlement of decedents estate under Rule 87 of the Rules of Court, or other
liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that
The claims or credits enumerated in the two preceding articles" shall be
considered as mortgages or pledges of real or personal property, or liens within
the purview of legal provisions governing insolvency . . . (Emphasis supplied),
And the rule is further clarified in he Report of the Code Commission, as follows:
The question as to whether the Civil Code and the insolvency Law can be
harmonized is settled by this Article (2243). The preferences named in Articles
2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the
Insolvency Law." (Emphasis supplied) .
Thus, it becomes evident that one preferred creditor's third-party claim to the
proceeds of a foreclosure sale (as in the case now before us) is not the
proceeding contemplated by law for the enforcement of preferences under Article
2242, unless the claimant were enforcing a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes, a dispute between two creditors will not
enable the Court to ascertain the pro-rata dividend corresponding to each,
because the rights of the other creditors likewise" enjoying preference under
Article 2242 can not be ascertained. Wherefore, the order of the Court of First
Instance of Manila now appealed from, decreeing that the proceeds of the
foreclosure sale be apportioned only between appellant and appellee, is
incorrect, and must be reversed.
In the absence of insolvency proceedings (or other equivalent general liquidation
of the debtor's estate), the conflict between the parties now before us must be
decided pursuant to the well established principle concerning registered lands;

that a purchaser in good faith and for value (as the appellant concededly is)
takes registered property free from liens and encumbrances other than statutory
liens and those recorded in the certificate of title. There being no insolvency or
liquidation, the claim of the appellee, as unpaid vendor, did not require the
character and rank of a statutory lien co-equal to the mortgagee's recorded
encumbrance, and must remain subordinate to the latter.
We are understandably loathed (absent a clear precept of law so commanding)
to adopt a rule that would undermine the faith and credit to be accorded to
registered Torrens titles and nullify the beneficient objectives sought to be
obtained by the Land Registration Act. No argument is needed to stress that if a
person dealing with registered land were to be held to take it in every instance
subject to all the fourteen preferred claims enumerate in Article 2242 of the new
Civil Code, even if the existence and import thereof can not be ascertained from
the records, all confidence in Torrens titles would be destroyed, and credit
transactions on the faith of such titles would be hampered, if not prevented, with
incalculable results. Loans on real estate security would become aleatory and
risky transactions, for no, prospective lender could accurately estimate the
hidden liens on the property offered as security, unless he indulged in
complicated, tedious investigations, . The logical result might well be a
contraction of credit unforeseeable proportions that could lead to economic
disaster.
Upon the other hand, it does not appear excessively burdensome to require the
privileged creditors to cause their claims to be recorded in the books of the
Register of deeds should they desire to protect their rights even outside of
insolvency or liquidation proceedings.
B. The close study of the facts disclosed by the records lasts strong doubt on the
proposition that appellees Cruzados should be regarded as unpaid vendors of
the property( land, buildings, and improvements ) involved in the case at bar so
as to be entitled to preference under Article 2242. The record on appeal,
specially the final decision of the Court of First Instance of Manila in the suit of
the ,Cruzados against Villanueva, clearly establishes that after her husband's
death, and with due court authority, Rosario Cruzado, for herself and as
administratrix of her husband's state, mortgaged the property to the
Rehabilitation Finance Corporation (RFC) to secure payment of a loan of
P11,000, installments, but that the debtor failed to pay some of the installments;
wherefore the RFC, on 24 August 1949, foreclosed the mortgage, and acquired
the property, subject to the debtor's right to redeem or repurchase the said
property; and that on 25 September 1950, the RFC consolidated its ownership,
and the certificate of title of the Cruzados was cancelled and a new certificate
issued in the name of the RFC.
While on 26 July 1951 the RFC did execute a deed selling back the property to
the erstwhile mortgagors and former owners Cruzados in installments, subject to
the condition (among others) that the title to the property and its improvements
"shall remain in the name of Corporation (RFC) until after said purchase price,
advances and interests shall have been fully paid", as of 27 September 1952,
Cruzado had only paid a total of P1,360, and had defaulted on six monthly

amortizations; for which reason the RFC rescinded the sale, and forfeited the
payments made, in accordance with the terms of the contract of 26 July 1951.
It was only on 10 March 1953 that the Cruzados sold to Pura L. Villanueva all
"their rights, title, interest and dominion on and over" the property, lot, house, and
improvements for P19,000.00, the buyer undertaking to assume payment of the
obligation to the RFC, and by resolution of 30 April 1953, the RFC approved "the
transfer of the rights and interest of Rosario P. Cruzado and her children in their
property herein above-described in favor of Pura L. Villanueva"; and on 7 May
1953 the RFC executed a deed of absolute sale of the property to said party, who
had fully paid the price of P14,269.03. Thereupon, the spouses Villanueva
obtained a new Transfer Certificate of Title No. 32526 in their name.
On 10 July 1953, the Villanuevas mortgaged the property to the spouses
Barretto, appellants herein.
It is clear from the facts above-stated that ownership of the property had passed
to the Rehabilitation Finance Corporation since 1950, when it consolidated its
purchase at the foreclosure sale and obtained a certificate of title in its corporate
name. The subsequent contract of resale in favor of the Cruzados did not revest
ownership in them, since they failed to comply with its terms and conditions, and
the contract itself provided that the title should remain in the name of the RFC
until the price was fully paid.
Therefore, when after defaulting in their payments due under the resale contract
with the RFC the appellants Cruzados sold to Villanueva "their rights, title,
interest and dominion" to the property, they merely assigned whatever rights or
claims they might still have thereto; the ownership of the property rested with the
RFC. The sale from Cruzado to Villanueva, therefore, was not so much a sale of
the land and its improvements as it was a quit-claim deed in favor of Villanueva.
In law, the operative sale was that from the RFC to the latter, and it was the RFC
that should be regarded as the true vendor of the property. At the most, the
Cruzados transferred to Villanueva an option to acquire the property, but not the
property itself, and their credit, therefore, can not legally constitute a vendor's lien
on the corpus of that property that should stand on an equal footing with the
mortgaged credit held by appellant Barretto.
In view of the foregoing, the previous decision of this Court, promulgated on 28
January 1961, is hereby reconsidered and set aside, and a new one entered
reversing the judgment appealed from and declaring the appellants Barretto
entitled to full satisfaction of their mortgaged credit out of the proceeds of the
foreclosure sale in the hands of the Sheriff of the City of Manila. No costs.
G.R. No. 105827
January 31, 2000
J.L. BERNARDO CONSTRUCTION, represented by attorneys-in-fact
Santiago R. Sugay, Edwin A. Sugay and Fernando S.A. Erana, SANTIAGO
R. SUGAY, EDWIN A. SUGAY and FERNANDO S. A. ERANA, petitioners,
vs.
COURT OF APPEALS and MAYOR JOSE L. SALONGA, respondents.
GONZAGA-REYES, J.:
This petition for certiorari under Rule 65 seeks to annul and set aside the

following:
1. Decision dated February 6, 1992 issued by the Eleventh Division of the Court
of Appeals in CA-G.R. No. 26336 which nullified the order of the Regional Trial
Court of Cabanatuan City in Civil Case No. 1016-AF granting plaintiffs
(petitioners herein) a writ of attachment and a contractor's lien upon the San
Antonio Public Market; and
2. Resolution dated June 10, 1992 issued by the former Eleventh Division of the
Court of Appeals in CA-G.R. No. 26336 denying the motions for reconsideration
filed by both parties.
The factual antecedents of this case, as culled from the pleadings, are as follows:
Sometime in 1990, the municipal government of San Antonio, Nueva Ecija
approved the construction of the San Antonio Public Market. The construction of
the market was to be funded by the Economic Support Fund Secretariat (ESFS),
a government agency working with the USAID. Under ESFS' "grant-loan-equity"
financing program, the funding for the market would be composed of a (a) grant
from ESFS, (b) loan extended by ESFS to the Municipality of San Antonio, and
(c) equity or counterpart funds from the Municpality.
It is claimed by petitioners Santiago R. Sugay, Edwin A. Sugay, Fernando S.A.
Erana and J.L. Bernardo Construction, a single proprietorship owned by Juanito
L. Bernardo, that they entered into a business venture for the purpose of
participating in the bidding for the public market. It was agreed by petitioners that
Santiago Sugay would take the lead role and be responsible for the preparation
and submission of the bid documents, financing the entire project, providing and
utilizing his own equipment, providing the necessary labor, supplies and
materials and making the necessary representations and doing the liaison work
with the concerned government agencies.
On April 20, 1990, J.L. Bernardo Construction, thru petitioner Santiago Sugay,
submitted its bid together with other qualified bidders. After evaluating the bids,
the municipal pre-qualification bids and awards committee, headed by
respondent Jose L. Salonga (then incumbent municipal mayor of San Antonio) as
Chairman, awarded the contract to petitioners. On June 8, 1990, a Construction
Agreement was entered into by the Municipality of San Antonio thru respondent
Salonga and petitioner J.L. Bernardo Construction.
It is claimed by petitioners that under this Construction Agreement, the
Municipality agreed to assume the expenses for the demolition, clearing and site
filling of the construction site in the amount of P1,150,000 and, in addition, to
provide cash equity of P767,305.99 to be remitted directly to petitioners.
Petitioners allege that, although the whole amount of the cash equity became
due, the Municipality refused to pay the same, despite repeated demands and
notwithstanding that the public market was more than ninety-eight percent (98%)
complete as of July 20, 1991. Furthermore, petitioners maintain that Salonga
induced them to advance the expenses for the demolition, clearing and site filling
work by making representations that the Municipality had the financial capability
to reimburse them later on. However, petitioners claim that they have not been
reimbursed for their expenses.1
On July 31, 1991, J.L. Bernardo Construction, Santiago Sugay, Edwin Sugay and

Fernando Erana, with the latter three bringing the case in their own personal
capacities and also in representation of J.L. Bernardo Construction, filed a
complaint for breach of contract, specific performance, and collection of a sum of
money, with prayer for preliminary attachment and enforcement of contractor's
lien against the Municipality of San Antonio, Nueva Ecija and Salonga, in his
personal and official capacity as municipal mayor. After defendants filed their
answer, the Regional Trial Court held hearings on the ancillary remedies prayed
for by plaintiffs.2
On September 5, 1991, the Regional Trial Court issued the writ of preliminary
attachment prayed for by plaintiffs. It also granted J.L. Bernardo Construction the
right to maintain possession of the public market and to operate the same. The
dispositive portion of the decision provides:
IN VIEW OF THE FOREGOING DISQUISITION, the Court finds the auxiliary
reliefs of attachment prayed for by the plaintiffs to be well-taken and the same is
hereby GRANTED. Conformably thereto, let a writ of preliminary attachment be
issued upon the filing by the plaintiffs of a bond in the amount of P2,653,576.84
to answer for costs and damages which the defendants may suffer should the
Court finally adjudged (sic) that the plaintiffs are not entitled to the said
attachment, and thereafter, the Deputy Sheriff of this court is hereby ordered to
attach the properties of the defendants JOSE LAPUZ SALONGA and the
MUNICIPALITY OF SAN ANTONIO, NUEVA ECIJA which are not exempt from
execution.
CORROLARILY, the Court grants the plaintiffs J.L. BERNARDO
CONSTRUCTION, represented by SANTIAGO R. SUGAY, EDWIN A. SUGAY
and FERNANDO S.A. ERANA, the authority to hold on to the possession of the
public market in question and to open and operate the same based on fair and
reasonable guidelines and other mechanics of operation to be submitted by
plaintiffs within fifteen (15) days from their receipt of this Order which shall be
subject to Court's approval and to deposit the income they may derive therefrom
to the Provincial Treasurer of Nueva Ecija after deducting the necessary
expenses for the operation and management of said market, subject to further
orders from this Court.
SO ORDERED.
The trial court gave credence to plaintiffs' claims that defendants were guilty of
fraud in incurring their contractual obligations as evidenced by the complaint and
the affidavits of plaintiffs Santiago Sugay and Erana. The court ruled that
defendants' acts of ". . . obtaining property, credit or services by false
representations as to material facts made by the defendant to the plaintiff with
intent to deceive constitutes fraud warranting attachment" and that ". . . a debt is
considered fradulently contracted if at the time of contracting it, the debtor
entertained an intention not to pay."
With regards to the contractor's lien, the trial court held that since plaintiffs have
not been reimbursed for the cash equity and for the demolition, clearing and site
filling expenses, they stand in the position of an unpaid contractor and as such
are entitled, pursuant to articles 2242 and 2243 of the Civil Code, to a lien in the
amount of P2,653,576.84 (as of August 1, 1991), excluding the other claimed

damages, attorney's fees and litigation expenses, upon the public market which
they constructed. It was explained that, although the usual way of enforcing a lien
is by a decree for the sale of the property and the application of the proceeds to
the payment of the debt secured by it, it is more practical and reasonable to
permit plaintiffs to operate the public market and to apply to their claims the
income derived therefrom, in the form of rentals and goodwill from the
prospective stallholders of the market, as prayed for by plaintiffs.
The trial court made short shrift of defendants' argument that the case was not
instituted in the name of the real parties-in-interest. It explained that the plaintiff
in the cause of action for money claims for unpaid cash equity and demolition
and site filling expenses is J.L. Bernardo Construction, while the plaintiffs in the
claim for damages for violation of their rights under the Civil Code provisions on
human relations are plaintiffs Santiago Sugay, Edwin Sugay and Erana. 3
The defendants moved for reconsideration of the trial court's order, to which the
plaintiffs filed an opposition. On October 10, 1991 the motion was denied. The
following day, the trial court approved the guidelines for the operation of the San
Antonio Public Market filed by plaintiffs.
Respondent Salonga filed a motion for the approval of his counterbond which
was treated by the trial court in its October 29, 1991 order as a motion to fix
counterbond and for which it scheduled a hearing on November 19, 1991.
On October 21, 1991, during the pendency of his motion, respondent Salonga
filed with the Court of Appeals a petition for certiorari under Rule 65 with prayer
for a writ of preliminary injunction and temporary restraining order which case
was docketed as CA-G.R. SP No. 26336. 4 Petitioners opposed the petition,
claming that respondent had in fact a plain, speedy and adequate remedy as
evidenced by the filing of a motion to approve counter-bond with the trial court. 5
On February 6, 1992, the Court of Appeals reversed the trial court's decision and
ruled in favor of Salonga. The dispositive portion of its decision states
FOR ALL THE FOREGOING, the petition is hereby granted as follows:
1. The respondent judge's ORDER dated September 5, 1991 for the issuance of
a writ of attachment and for the enforcement of a contractor's lien, is hereby
NULLIFIED and SET ASIDE; the writ of attachment issued pursuant thereto and
the proceedings conducted by the Sheriffs assigned to implement the same are,
as a consequence, also hereby NULLIFIED and SET ASIDE;
2. The respondent judge's ORDER dated October 11, 1991 further enforcing the
contractor's lien and approving the guidelines for the operation of the San
Antonio Public Market is also NULLIFIED and SET ASIDE.
Petitioner's prayers for the dismissal of Civil Case No. 1016 (now pending before
respondent judge) and for his deletion from said case as defendant in his private
capacity are, however, DENIED.
The respondent judge may now proceed to hearing of Civil Case No. 1016 on the
merits.
SO ORDERED.
The appellate court reasoned that since the Construction Agreement was only
between Juanito Bernardo and the Municipality of San Antonio, and since there is
no sworn statement by Juanito Bernardo alleging that he had been deceived or

misled by Mayor Salonga or the Municipality of San Antonio, it is apparent that

the applicant has not proven that the defendants are guilty of inceptive fraud in
contracting the debt or incurring the obligation, pursuant to Rule 57 of the Rules
of Court, and therefore, the writ of attachment should be struck down for having
been improvidently and irregularly issued.
The filing of a motion for the approval of counter-bond by defendants did not,
according to the Court of Appeals, render the petition for certiorari premature.
The appellate court held that such motion could not cure the defect in the
issuance of the writ of attachment and that, moreover, the defendants' motion
was filed by them "without prejudice to the petition for certiorari."
As to the contractor's lien, the appellate court ruled that Articles 2242 of the Civil
Code finds application only in the context of insolvency proceedings, as
expressly stated in Article 2243. Even if it is conceded that plaintiffs are entitled
to retain possession of the market under its contractor's lien, the appellate court
held that the same right cannot be expanded to include the right to use the
building. Therefore, the trial court's grant of authority to plaintiffs to operate the
San Antonio Public Market amounts to a grave abuse of discretion.
With regard to the allegations of defendants that plaintiffs are not the proper
parties, the Court of Appeals ruled that such issue should be assigned as an
error by defendants later on should the outcome of the case be adverse to the
latter.6
Petitioners are now before this Court assailing the appellate court's decision. In
their petition, they make the following assignment of errors:
1. THE DECISION IS CONTRARY TO LAW IN THAT THE COURT OF APPEALS
OVERLOOKED
AND/OR
DISREGARDED
THE
FUNDAMENTAL
REQUIREMENT AND ESTABLISHED SUPREME COURT DECISIONS IN
ACTIONS FOR CERTIORARI CONSIDERING THAT THE FILING OF THE
PETITION BY RESPONDENT SALONGA WITH THE COURT OF APPEALS IS
OBVIOUSLY PREMATURE AND IMPROPER SINCE THERE ADMITTEDLY
EXISTS A PLAIN, SPEEDY AND ADEQUATE REMEDY AVAILABLE TO
RESPONDENT SALONGA WHICH IS HIS UNRESOLVED "MOTION TO
APPROVE COUNTERBOND" PENDING WITH THE TRIAL COURT.
2. IN COMPLETE DISREGARD OF ESTABLISHED JURISPRUDENCE, THE
COURT
OF
APPEALS
HAS
SKIRTED
AND/OR
FAILED
TO
CONSIDER/DISREGARDED THE EQUALLY CRUCIAL ISSUE THAT THE
QUESTIONED ORDERS ARE CLEARLY AND ADMITTEDLY INTERLOCUTORY
IN NATURE AND THEREFORE THEY CANNOT BE THE PROPER SUBJECT
OF AN ACTION FOR CERTIORARI; PROOF THAT THE ORDERS ASSAILED
BY RESPONDENT SALONGA ARE INTERLOCUTORY IN CHARACTER IS THE
DISPOSITIVE PORTION OF THE DECISION WHEN THE COURT OF APPEALS
SAID "THE RESPONDENT JUDGE MAY NOW PROCEED TO HEARING OF
SAID CIVIL CASE NO. 1016 ON THE MERITS"; PETITION FILED BY
RESPONDENT SALONGA WITH THE COURT OF APPEALS SHOULD HAVE
BEEN DISMISSED OUTRIGHTLY AS SOUGHT BY HEREIN PETITIONERS IN
THEIR VARIOUS UNACTED PLEADINGS.
3. THE DECISION IS BASED ON FINDINGS OF FACTS AND CONCLUSIONS

WHICH ARE NOT ONLY GROSSLY ERRONEOUS BUT ARE SQUARELY

CONTRADICTED BY THE EVIDENCE ON RECORD.
4. THE COURT OF APPEALS HAS CLEARLY MAISAPPRECIATED, MISREAD
AND DISREGARDED HEREIN PETITIONERS' CAUSES OF ACTION AGAINST
RESPONDENT SALONGA AND HIS CO-RESPONDENT MUNICIPALITY OF
SAN ANTONIO, NUEVA ECIJA.
5. THE COURT OF APPEALS HAS MADE ERRONEOUS AND
CONTRADICTORY CONCLUSIONS AND FINDINGS ON THE ISSUE OF "REAL
PARTY IN INTEREST" IN COMPLETE DISREGARD OF THE POWERS AND
AUTHORITY GRANTED BY JUANITO L. BERNARDO CONSTRUCTION TO
HEREIN PETITIONERS.
6. THE COURT OF APPEALS HAS SKIRTED THE IMPORTANT ISSUE OF
"AGENCY COUPLED WITH AN INTEREST."
7. THE COURT OF APPEALS WENT BEYOND THE ISSUES OF THE
CERTIORARI CASE AND ITS FINDINGS AND CONCLUSIONS ON ISSUES
NOT RELATED TO THE CASE FOR CERTIORARI ARE CONTRARY TO THE
PLEADINGS AND DO NOT CONFORM TO THE EVIDENCE ON RECORD.
8. THE COURT OF APPEALS HAS LIKEWISE DISREGARDED THE PRECEPT
THAT CONCLUSIONS AND FINDINGS OF FACT OF THE TRIAL COURT ARE
ENTITLED TO GREAT WEIGHT ON APPEAL AND SHOULD NOT BE
DISTURBED SINCE THERE IS NO STRONG AND COGENT REASON
WHATSOVER TO OVERCOME THE WELL-WRITTEN AND DETAILED AND
ESTABLISHED FACTUAL FINDINGS OF THE TRIAL COURT.
9. PETITIONERS HAVE STRONG REASONS TO BELIEVE THAT THE
DECISION OF THE COURT OF APPEALS WAS ISSUED WITH SERIOUS
INJUSTICE AND AGAINST THE TENETS OF FAIR PLAY SINCE THE
DECISION HAD BEEN KNOWN TO AS IT WAS OPENLY AND PUBLICLY
ANNOUNCED BY RESPONDENT SALONGA LONG BEFORE IT WAS
"PROMULGATED" BY THE COURT OF APPEALS.
The various issues raised by petitioners may be restated in a more summary
manner as
1. Whether or not the Court of Appeals correctly assumed jurisdiction over the
petition for certiorari filed by respondents herein assailing the trial court's
interlocutory orders granting the writ of attachment and the contractor's lien?
2. Whether or not the Court of Appeals committed reversible errors of law in its
decision?
A petition for certiorari may be filed in case a tribunal, board or officer exercising
judicial or quasi-judicial functions has acted without or in excess of jurisdiction, or
with grave abuse of discretion amounting to lack or excess of jurisdiction, and
there is no appeal, or any plain, speedy, and adequate remedy in the ordinary
course of law.7
The office of a writ of certiorari is restricted to truly extraordinary cases wherein
the act of the lower court or quasi-judicial body is wholly void. 8 We held in a
recent case that certiorari may be issued "only where it is clearly shown that
there is a patent and gross abuse of discretion as to amount to an evasion of
positive duty or to virtual refusal to perform a duty enjoined by law, or to act at all

in contemplation of law, as where the power is exercised in an arbitrary and

despotic manner by reason of passion or personal hostility." 9
As a general rule, an interlocutory order is not appealable until after the rendition
of the judgment on the merits for a contrary rule would delay the administration of
justice and unduly burden the courts. 10 However, we have held that certiorari is
an appropriate remedy to assail an interlocutory order (1) when the tribunal
issued such order without or in excess of jurisdiction or with grave abuse of
discretion and (2) when the assailed interlocutory order is patently erroneous and
the remedy of appeal would not afford adequate and expeditious relief. 11
We hold that the petition for certiorari filed by Salonga and the Municipality with
the Court of Appeals questioning the writ of attachment issued by the trial court
should not have been given due course for they still had recourse to a plain,
speedy and adequate remedy the filing of a motion to fix the counter-bond,
which they in fact filed with the trial court, the grant of which would effectively
prevent the issuance of the writ of attachment. Moreover, they could also have
filed a motion to discharge the attachment for having been improperly or
irregularly issued or enforced, or that the bond is insufficient, or that the
attachment is excessive.12 With such remedies still available to the Municipality
and Salonga, the filing of a petition for certiorari with the Court of Appeals insofar
as it questions the order of attachment was clearly premature.
However, with regards to the contractor's lien, we uphold the appellate court's
ruling reversing the trial court's grant of a contractor's lien in favor of petitioners.
Art.'s 2241 and 2242 of the Civil Code enumerates certain credits which enjoy
preference with respect to specific personal or real property of the debtor.
Specifically, the contractor's lien claimed by petitioners is granted under the third
paragraph of Article 2242 which provides that the claims of contractors engaged
in the construction, reconstruction or repair of buildings or other works shall be
preferred with respect to the specific building or other immovable property
constructed.13
However, Article 2242 only finds application when there is a concurrence of
credits, i.e. when the same specific property of the debtor is subjected to the
claims of several creditors and the value of such property of the debtor is
insufficient to pay in full all the creditors. In such a situation, the question of
preference will arise, that is, there will be a need to determine which of the
creditors will be paid ahead of the others. 14 Fundamental tenets of due process
will dictate that this statutory lien should then only be enforced in the context of
some kind of a proceeding where the claims of all the preferred creditors may be
bindingly adjudicated, such as insolvency proceedings. 15
This is made explicit by Article 2243 which states that the claims and liens
enumerated in articles 2241 and 2242 shall be considered as mortgages or
pledges of real or personal property, or liens within the purview of legal
provisions governing insolvency.16
The action filed by petitioners in the trial court does not partake of the nature of
an insolvency proceeding. It is basically for specific performance and damages. 17
Thus, even if it is finally adjudicated that petitioners herein actually stand in the
position of unpaid contractors and are entitled to invoke the contractor's lien

granted under Article 2242, such lien cannot be enforced in the present action for
there is no way of determining whether or not there exist other preferred creditors
with claims over the San Antonio Public Market. The records do not contain any
allegation that petitioners are the only creditors with respect to such property. The
fact that no third party claims have been filed in the trial court will not bar other
creditors from subsequently bringing actions and claiming that they also have
preferred liens against the property involved. 18
Our decision herein is consistent with our ruling in Philippine Savings Bank v.
Lantin,19 wherein we also disallowed the contractor from enforcing his lien
pursuant to Article 2242 of the Civil Code in an action filed by him for the
collection of unpaid construction costs.
It not having been alleged in their pleadings that they have any rights as a
mortgagee under the contracts, petitioners may only obtain possession and use
of the public market by means of a preliminary attachment upon such property, in
the event that they obtain a favorable judgment in the trial court. Under our rules
of procedure, a writ of attachment over registered real property is enforced by the
sheriff by filing with the registry of deeds a copy of the order of attachment,
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.20 If judgment be recovered by the attaching party
and execution issue thereon, the sheriff may cause the judgment to be satisfied
by selling so much of the property as may be necessary to satisfy the judgment. 21
Only in the event that petitioners are able to purchase the property will they then
acquire possession and use of the same.
Clearly, the trial court's order of September 5, 1991 granting possession and use
of the public market to petitioners does not adhere to the procedure for
attachment laid out in the Rules of Court. In issuing such an order, the trial court
gravely abused its discretion and the appellate court's nullification of the same
should be sustained.1awp++i1
At this stage of the case, there is no need to pass upon the question of whether
or not petitioners herein are the real parties-in-interest. In the event that judgment
is rendered against Salonga and the Municipality, this issue may be assigned as
an error in their appeal from such judgment.
WHEREFORE, we UPHOLD the Court of Appeal's Decision dated February 6,
1992 in CA-G.R. SP No. 26336 insofar as it nullifies the contractor's lien granted
by the trial court in favor of petitioners in its September 5, 1991 Order.
Consequently, we also UPHOLD the appellate court's nullification of the trial
court's October 11, 1991 Order approving the guidelines for the operation of the
San Antonio Public Market. However, we REVERSE the appellate court's order
nullifying the writ of attachment granted by the trial court.1wphi1.nt
No pronouncement as to costs.
SO ORDERED.
G.R. No. 126200
August 16, 2001
DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,
vs.

HONORABLE COURT OF APPEALS and REMINGTON INDUSTRIAL SALES

CORPORATION, respondents.
KAPUNAN, J.:
Before the Court is a petition for review on certiorari under Rule 45 of the Rules
of Court, seeking a review of the Decision of the Court of Appeals dated October
6, 1995 and the Resolution of the same court dated August 29, 1996.
The facts are as follows:
Marinduque Mining-Industrial Corporation (Marinduque Mining), a corporation
engaged in the manufacture of pure and refined nickel, nickel and cobalt in mixed
sulfides; copper ore/concentrates, cement and pyrite conc., obtained from the
Philippine National Bank (PNB) various loan accommodations. To secure the
loans, Marinduque Mining executed on October 9, 1978 a Deed of Real Estate
Mortgage and Chattel Mortgage in favor of PNB. The mortgage covered all of
Marinduque Mining's real properties, located at Surigao del Norte, Sipalay,
Negros Occidental, and at Antipolo, Rizal, including the improvements thereon.
As of November 20, 1980, the loans extended by PNB amounted to P4 Billion,
exclusive of interest and charges.1
On July 13, 1981, Marinduque Mining executed in favor of PNB and the
Development Bank of the Philippines (DBP) a second Mortgage Trust
Agreement. In said agreement, Marinduque Mining mortgaged to PNB and DBP
all its real properties located at Surigao del Norte, Sipalay, Negros Occidental,
and Antipolo, Rizal, including the improvements thereon. The mortgage also
covered all of Marinduque Mining's chattels, as well as assets of whatever kind,
nature and description which Marinduque Mining may subsequently acquire in
substitution or replenishment or in addition to the properties covered by the
previous Deed of Real and Chattel Mortgage dated October 7, 1978. Apparently,
Marinduque Mining had also obtained loans totaling P2 Billion from DBP,
exclusive of interest and charges.2
On April 27, 1984, Marinduque Mining executed in favor of PNB and DBP an
Amendment to Mortgage Trust Agreement by virtue of which Marinduque Mining
mortgaged in favor of PNB and DBP all other real and personal properties and
other real rights subsequently acquired by Marinduque Mining. 3
For failure of Marinduque Mining to settle its loan obligations, PNB and DBP
instituted sometime on July and August 1984 extrajudicial foreclosure
proceedings over the mortgaged properties.
The events following the foreclosure are narrated by DBP in its petition, as
follows:
In the ensuing public auction sale conducted on August 31, 1984, PNB and DBP
emerged and were declared the highest bidders over the foreclosed real
properties, buildings, mining claims, leasehold rights together with the
improvements thereon as well as machineries [sic] and equipments [sic] of MMIC
located at Nonoc Nickel Refinery Plant at Surigao del Norte for a bid price of
P14,238,048,150.00 [and] [o]ver the foreclosed chattels of MMIC located at
Nonoc Refinery Plant at Surigao del Norte, PNB and DBP as highest bidders,
bidded for P170,577,610.00 (Exhs. "5" to "5-A", "6", "7" to "7-AA-" PNB/DBP).
For the foreclosed real properties together with all the buildings, major

machineries & equipment and other improvements of MMIC located at Antipolo,

Rizal, likewise held on August 31, 1984, were sold to PNB and DBP as highest
bidders in the sum of P1,107,167,950.00 (Exhs. "10" to "10-X"-PNB/ DBP).
At the auction sale conducted on September 7, 1984[,] over the foreclosed real
properties, buildings, & machineries/equipment of MMIC located at Sipalay,
Negros Occidental were sold to PNB and DBP, as highest bidders, in the amount
of P2,383,534,000.00 and P543,040.000.00 respectively (Exhs. "8" to "8-BB", "9"
to "90-GGGGGG"-PNB/DBP).
Finally, at the public auction sale conducted on September 18, 1984 on the
foreclosed personal properties of MMIC, the same were sold to PNB and DBP as
the highest bidder in the sum of P678,772,000.00 (Exhs. "11" and "12-QQQQQ"PNB).
PNB and DBP thereafter thru a Deed of Transfer dated August 31, 1984,
purposely, in order to ensure the continued operation of the Nickel refinery plant
and to prevent the deterioration of the assets foreclosed, assigned and
transferred to Nonoc Mining and Industrial Corporation all their rights, interest
and participation over the foreclosed properties of MMIC located at Nonoc Island,
Surigao del Norte for an initial consideration of P14,361,000,000.00 (Exh. "13"PNB).
Likewise, thru [sic] a Deed of Transfer dated June 6, 1984, PNB and DBP
assigned and transferred in favor of Maricalum Mining Corp. all its rights, interest
and participation over the foreclosed properties of MMIC at Sipalay, Negros
Occidental for an initial consideration of P325,800,000.00 (Exh. "14"-PNB/DBP).
On February 27, 1987, PNB and DBP, pursuant to Proclamation No. 50 as
amended, again assigned, transferred and conveyed to the National Government
thru [sic] the Asset Privatization Trust (APT) all its existing rights and interest over
the assets of MMIC, earlier assigned to Nonoc Mining and Industrial Corporation,
Maricalum Mining Corporation and Island Cement Corporation (Exh. "15" & "15A" PNB/DBP).4
In the meantime, between July 16, 1982 to October 4, 1983, Marinduque Mining
purchased and caused to be delivered construction materials and other
merchandise from Remington Industrial Sales Corporation (Remington) worth
P921,755.95. The purchases remained unpaid as of August 1, 1984 when
Remington filed a complaint for a sum of money and damages against
Marinduque Mining for the value of the unpaid construction materials and other
merchandise purchased by Marinduque Mining, as well as interest, attorney's
fees and the costs of suit.
On September 7, 1984, Remington's original complaint was amended to include
PNB and DBP as co-defendants in view of the foreclosure by the latter of the real
and chattel mortgages on the real and personal properties, chattels, mining
claims, machinery, equipment and other assets of Marinduque Mining. 5
On September 13, 1984, Remington filed a second amended complaint to
include as additional defendant, the Nonoc Mining and Industrial Corporation
(Nonoc Mining). Nonoc Mining is the assignee of all real and personal properties,
chattels, machinery, equipment and all other assets of Marinduque Mining at its
Nonoc Nickel Factory in Surigao del Norte.6

On March 26, 1986, Remington filed a third amended complaint including the
Maricalum Mining Corporation (Maricalum Mining) and Island Cement
Corporation (Island Cement) as co-defendants. Remington asserted that
Marinduque Mining, PNB, DBP, Nonoc Mining, Maricalum Mining and Island
Cement must be treated in law as one and the same entity by disregarding the
veil of corporate fiction since:
1. Co-defendants NMIC, Maricalum and Island Cement which are newly created
entities are practically owned wholly by defendants PNB and DBP, and managed
by their officers, aside from the fact that the aforesaid co-defendants NMIC,
Maricalum and Island Cement were organized in such a hurry and in such
suspicious circumstances by co-defendants PNB and DBP after the supposed
extrajudicial foreclosure of MMIC's assets as to make their supposed projects
assets, machineries and equipment which were originally owned by co-defendant
MMIC beyond the reach of creditors of the latter.
2. The personnel, key officers and rank-and-file workers and employees of codefendants NMIC, Maricalum and Island Cement creations of co-defendants
PNB and DBP were the personnel of co-defendant MMIC such that . . .
practically there has only been a change of name for all legal purpose and intents
3. The places of business not to mention the mining claims and project premises
of co-defendants NMIC, Maricalum and Island Cement likewise used to be the
places of business, mining claims and project premises of co-defendant MMIC as
to make the aforesaid co-defendants NMIC, Maricalum and Island Cement mere
adjuncts and subsidiaries of co-defendants PNB and DBP, and subject to their
control and management.
On top of everything, co-defendants PNB, DBP NMIC, Maricalum and Island
Cement being all corporations created by the government in the pursuit of
business ventures should not be allowed to ignore, x x x or obliterate with
impunity nay illegally, the financial obligations of x x x MMIC whose operations
co-defendants PNB and DBP had highly financed before the alleged extrajudicial
foreclosure of defendant MMIC's assets, machineries and equipment to the
extent that major policies of co-defendant MMIC were being decided upon by codefendants PNB and DBP as major financiers who were represented in its board
of directors forming part of the majority thereof which through the alleged
extrajudicial foreclosure culminated in a complete take-over by co-defendants
PNB and DBP bringing about the organization of their co-defendants NMIC,
Maricalum and Island Cement to which were transferred all the assets,
machineries and pieces of equipment of co-defendant MMIC used in its nickel
mining project in Surigao del Norte, copper mining operation in Sipalay, Negros
Occidental and cement factory in Antipolo, Rizal to the prejudice of creditors of
co-defendant MMIC such as plaintiff Remington Industrial Sales Corporation
whose stockholders, officers and rank-and-file workers in the legitimate pursuit of
its business activities, invested considerable time, sweat and private money to
supply, among others, co-defendant MMIC with some of its vital needs for its
operation, which co-defendant MMIC during the time of the transactions material
to this case became x x x co-defendants PNB and DBP's instrumentality,
business conduit, alter ego, agency (sic), subsidiary or auxiliary corporation, by

virtue of which it becomes doubly necessary to disregard the corporation fiction

that co-defendants PNB, DBP, MMIC, NMIC, Maricalum and Island Cement, six
(6) distinct and separate entities, when in fact and in law, they should be treated
as one and the same at least as far as plaintiff's transactions with co-defendant
MMIC are concerned, so as not to defeat public convenience, justify wrong,
subvert justice, protect fraud or confuse legitimate issues involving creditors such
as plaintiff, a fact which all defendants were as (sic) still are aware of during all
the time material to the transactions subject of this case. 7
On April 3, 1989, Remington filed a motion for leave to file a fourth amended
complaint impleading the Asset Privatization Trust (APT) as co-defendant. Said
fourth amended complaint was admitted by the lower court in its Order dated
April 29, 1989.
On April 10, 1990, the Regional Trial Court (RTC) rendered a decision in favor of
Remington, the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering the
defendants Marinduque Mining & Industrial Corporation, Philippine National
Bank, Development Bank of the Philippines, Nonoc Mining and Industrial
Corporation, Maricalum Mining Corporation, Island Cement Corporation and
Asset Privatization Trust to pay, jointly and severally, the sum of P920,755.95,
representing the principal obligation, including the stipulated interest as of June
22, 1984, plus ten percent (10%) surcharge per annum by way of penalty, until
the amount is fully paid; the sum equivalent to 10% of the amount due as and for
attorney's fees; and to pay the costs.8
Upon appeal by PNB, DBP, Nonoc Mining, Maricalum Mining, Island Cement and
APT, the Court of Appeals, in its Decision dated October 6, 1995, affirmed the
decision of the RTC. Petitioner filed a Motion for Reconsideration, which was
denied in the Resolution dated August 29, 1996.
Hence, this petition, DBP maintaining that Remington has no cause of action
against it or PNB, nor against their transferees, Nonoc Mining, Island Cement,
Maricalum Mining, and the APT.
On the other hand, private respondent Remington submits that the transfer of the
properties was made in fraud of creditors. The presence of fraud, according to
Remington, warrants the piercing of the corporate veil such that Marinduque
Mining and its transferees could be considered as one and the same corporation.
The transferees, therefore, are also liable for the value of Marinduque Mining's
purchases.
In Yutivo Sons Hardware vs. Court of Tax Appeals,9 cited by the Court of Appeals
in its decision,10 this Court declared:
It is an elementary and fundamental principle of corporation law that a
corporation is an entity separate and distinct from its stockholders and from other
corporations to which it may be connected. However, when the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons or in case
of two corporations, merge them into one". (Koppel [Phils.], Inc., vs. Yatco, 71
Phil. 496, citing 1 Fletcher Encyclopedia of Corporation, Permanent Ed., pp. 135136; U.S. vs. Milwaukee Refrigeration Transit Co., 142 Fed., 247, 255 per

Sanborn, J.). x x x.
In accordance with the foregoing rule, this Court has disregarded the separate
personality of the corporation where the corporate entity was used to escape
liability to third parties.11 In this case, however, we do not find any fraud on the
part of Marinduque Mining and its transferees to warrant the piercing of the
corporate veil.
It bears stressing that PNB and DBP are mandated to foreclose on the mortgage
when the past due account had incurred arrearages of more than 20% of the
total outstanding obligation. Section 1 of Presidential Decree No. 385 (The Law
on Mandatory Foreclosure) provides:
It shall be mandatory for government financial institutions, after the lapse of sixty
(60) days from the issuance of this decree, to foreclose the collateral and/or
securities for any loan, credit accommodation, and/or guarantees granted by
them whenever the arrearages on such account, including accrued interest and
other charges, amount to at least twenty percent (20%) of the total outstanding
obligations, including interest and other charges, as appearing in the books of
account and/or related records of the financial institution concerned. This shall be
without prejudice to the exercise by the government financial institution of such
rights and/or remedies available to them under their respective contracts with
their debtors, including the right to foreclose on loans, credits, accommodations
and/or guarantees on which the arrearages are less than twenty (20%) percent.
Thus, PNB and DBP did not only have a right, but the duty under said law, to
foreclose upon the subject properties. The banks had no choice but to obey the
statutory command.
The import of this mandate was lost on the Court of Appeals, which reasoned
that under Article 19 of the Civil Code, "Every person must, in the exercise of his
rights and in the performance of his duties, act with justice, give everyone his
due, and observe honesty and good faith." The appellate court, however, did not
point to any fact evidencing bad faith on the part of the Marinduque Mining and
its transferees. Indeed, it skirted the issue entirely by holding that the question of
actual fraudulent intent on the part of the interlocking directors of DBP and
Marinduque Mining was irrelevant because:
As aptly stated by the appellee in its brief, "x x x where the corporations have
directors and officers in common, there may be circumstances under which their
interest as officers in one company may disqualify them in equity from
representing both corporations in transactions between the two. Thus, where one
corporation was 'insolvent and indebted to another, it has been held that the
directors of the creditor corporation were disqualified, by reason of self-interest,
from acting as directors of the debtor corporation in the authorization of a
mortgage or deed of trust to the former to secure such indebtedness x x x" (page
105 of the Appellee's Brief). In the same manner that "x x x when the corporation
is insolvent, its directors who are its creditors can not secure to themselves any
advantage or preference over other creditors. They can not thus take advantage
of their fiduciary relation and deal directly with themselves, to the injury of others
in equal right. If they do, equity will set aside the transaction at the suit of
creditors of the corporation or their representatives, without reference to the

question of any actual fraudulent intent on the part of the directors, for the right of
the creditors does not depend upon fraud in fact, but upon the violation of the
fiduciary relation to the directors." x x x (page 106 of the Appellee's Brief)
We also concede that "x x x directors of insolvent corporation, who are creditors
of the company, can not secure to themselves any preference or advantage over
other creditors in the payment of their claims. It is not good morals or good law.
The governing body of officers thereof are charged with the duty of conducting its
affairs strictly in the interest of its existing creditors, and it would be a breach of
such trust for them to undertake to give any one of its members any advantage
over any other creditors in securing the payment of his debts in preference to all
others. When validity of these mortgages, to secure debts upon which the
directors were indorsers, was questioned by other creditors of the corporation,
they should have been classed as instruments rendered void by the legal
principle which prevents directors of an insolvent corporation from giving
themselves a preference over outside creditors. x x x" (page 106-107 of the
Appellee's Brief.)12
The Court of Appeals made reference to two principles in corporation law. The
first pertains to transactions between corporations with interlocking directors
resulting in the prejudice to one of the corporations. This rule does not apply in
this case, however, since the corporation allegedly prejudiced (Remington) is a
third party, not one of the corporations with interlocking directors (Marinduque
Mining and DBP).
The second principle invoked by respondent court involves "directors x x x who
are creditors" which is also inapplicable herein. Here, the creditor of Marinduque
Mining is DBP, not the directors of Marinduque Mining.
Neither do we discern any bad faith on the part of DBP by its creation of Nonoc
Mining, Maricalum and Island Cement. As Remington itself concedes, DBP is not
authorized by its charter to engage in the mining business. 13 The creation of the
three corporations was necessary to manage and operate the assets acquired in
the foreclosure sale lest they deteriorate from non-use and lose their value. In the
absence of any entity willing to purchase these assets from the bank, what else
would it do with these properties in the meantime? Sound business practice
required that they be utilized for the purposes for which they were intended.
Remington also asserted in its third amended complaint that the use of Nonoc
Mining, Maricalum and Island Cement of the premises of Marinduque Mining and
the hiring of the latter's officers and personnel also constitute badges of bad faith.
Assuming that the premises of Marinduque Mining were not among those
acquired by DBP in the foreclosure sale, convenience and practicality dictated
that the corporations so created occupy the premises where these assets were
found instead of relocating them. No doubt, many of these assets are heavy
equipment and it may have been impossible to move them. The same reasons of
convenience and practicality, not to mention efficiency, justified the hiring by
Nonoc Mining, Maricalum and Island Cement of Marinduque Mining's personnel
to manage and operate the properties and to maintain the continuity of the
mining operations.
To reiterate, the doctrine of piercing the veil of corporate fiction applies only when

such corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime. 14 To disregard the separate juridical personality of a
corporation, the wrongdoing must be clearly and convincingly established. It
cannot be presumed.15 In this case, the Court finds that Remington failed to
discharge its burden of proving bad faith on the part of Marinduque Mining and its
transferees in the mortgage and foreclosure of the subject properties to justify the
piercing of the corporate veil.
The Court of Appeals also held that there exists in Remington's favor a "lien" on
the unpaid purchases of Marinduque Mining, and as transferee of these
purchases, DBP should be held liable for the value thereof.
In the absence of liquidation proceedings, however, the claim of Remington
cannot be enforced against DBP. Article 2241 of the Civil Code provides:
ARTICLE 2241. With reference to specific movable property of the debtor, the
following claims or liens shall be preferred:
xxx
xxx
xxx
(3) Claims for the unpaid price of movables sold, on said movables, so long as
they are in the possession of the debtor, up to the value of the same; and if the
movable has been resold by the debtor and the price is still unpaid, the lien may
be enforced on the price; this right is not lost by the immobilization of the thing by
destination, provided it has not lost its form, substance and identity, neither is the
right lost by the sale of the thing together with other property for a lump sum,
when the price thereof can be determined proportionally;
(4) Credits guaranteed with a pledge so long as the things pledged are in the
hands of the creditor, or those guaranteed by a chattel mortgage, upon the things
pledged or mortgaged, up to the value thereof;
xxx
xxx
xxx
In Barretto vs. Villanueva,16 the Court had occasion to construe Article 2242,
governing claims or liens over specific immovable property. The facts that gave
rise to the case were summarized by this Court in its resolution as follows:
x x x Rosario Cruzado sold all her right, title, and interest and that of her children
in the house and lot herein involved to Pura L. Villanueva for P19,000.00. The
purchaser paid P1,500 in advance, and executed a promissory note for the
balance of P17,500.00. However, the buyer could only pay P5,500 on account of
the note, for which reason the vendor obtained judgment for the unpaid balance.
In the meantime, the buyer Villanueva was able to secure a clean certificate of
title (No. 32626), and mortgaged the property to appellant Magdalena C.
Barretto, married to Jose C. Baretto, to secure a loan of P30,000.03, said
mortgage having been duly recorded.
Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter
foreclosed the mortgage in her favor, obtained judgment, and upon its becoming
final asked for execution on 31 July 1958. On 14 August 1958, Cruzado filed a
motion for recognition for her "vendor's lien" in the amount of P12,000.00, plus
legal interest, invoking Articles 2242, 2243, and 2249 of the new Civil Code. After
hearing, the court below ordered the "lien" annotated on the back of Certificate of
Title No. 32526, with the proviso that in case of sale under the foreclosure decree
the vendor's lien and the mortgage credit of appellant Barretto should be paid pro

rata from the proceeds. Our original decision affirmed this order of the Court of
First Instance of Manila.
In its decision upholding the order of the lower court, the Court ratiocinated thus:
Article 2242 of the new Civil Code enumerates the claims, mortgages and liens
that constitute an encumbrance on specific immovable property, and among
them are:
"(2) For the unpaid price of real property sold, upon the immovable sold"; and
"(5) Mortgage credits recorded in the Registry of Property."
Article 2249 of the same Code provides that "if there are two or more credits with
respect to the same specific real property or real rights, they shall be satisfied
pro-rata, after the payment of the taxes and assessments upon the immovable
property or real rights."
Application of the above-quoted provisions to the case at bar would mean that
the herein appellee Rosario Cruzado as an unpaid vendor of the property in
question has the right to share pro-rata with the appellants the proceeds of the
foreclosure sale.
xxx
xxx
xxx
As to the point made that the articles of the Civil Code on concurrence and
preference of credits are applicable only to the insolvent debtor, suffice it to say
that nothing in the law shows any such limitation. If we are to interpret this portion
of the Code as intended only for insolvency cases, then other creditor-debtor
relationships where there are concurrence of credits would be left without any
rules to govern them, and it would render purposeless the special laws on
insolvency.17
Upon motion by appellants, however, the Court reconsidered its decision. Justice
J.B.L. Reyes, speaking for the Court, explained the reasons for the reversal:
A. The previous decision failed to take fully into account the radical changes
introduced by the Civil Code of the Philippines into the system of priorities among
creditors ordained by the Civil Code of 1889.
Pursuant to the former Code, conflicts among creditors entitled to preference as
to specific real property under Article 1923 were to be resolved according to an
order of priorities established by Article 1927, whereby one class of creditors
could exclude the creditors of lower order until the claims of the former were fully
satisfied out of the proceeds of the sale of the real property subject of the
preference, and could even exhaust proceeds if necessary.
Under the system of the Civil Code of the Philippines, however, only taxes enjoy
a similar absolute preference. All the remaining thirteen classes of preferred
creditors under Article 2242 enjoy no priority among themselves, but must be
paid pro rata, i.e., in proportion to the amount of the respective credits. Thus,
Article 2249 provides:
"If there are two or more credits with respect to the same specific real property or
real rights, they shall be satisfied pro rata, after the payment of the taxes and
assessments upon the immovable property or real rights."
But in order to make this prorating fully effective, the preferred creditors
enumerated in Nos. 2 to 14 of Article 2242 (or such of them as have credits
outstanding) must necessarily be convened, and the import of their claims

ascertained. It is thus apparent that the full application of Articles 2249 and 2242
demands that there must be first some proceeding where the claims of all the
preferred creditors may be bindingly adjudicated, such as insolvency, the
settlement of decedent's estate under Rule 87 of the Rules of Court, or other
liquidation proceedings of similar import.
This explains the rule of Article 2243 of the new Civil Code that
"The claims or credits enumerated in the two preceding articles shall be
considered as mortgages or pledges of real or personal property, or liens within
the purview of legal provisions governing insolvency x x x (Italics supplied).
And the rule is further clarified in the Report of the Code Commission, as follows
"The question as to whether the Civil Code and the Insolvency Law can be
harmonized is settled by this Article (2243). The preferences named in Articles
2261 and 2262 (now 2241 and 2242) are to be enforced in accordance with the
Insolvency Law." (Italics supplied)
Thus, it becomes evident that one preferred creditor's third-party claim to the
proceeds of a foreclosure sale (as in the case now before us) is not the
proceeding contemplated by law for the enforcement of preferences under Article
2242, unless the claimant were enforcing a credit for taxes that enjoy absolute
priority. If none of the claims is for taxes, a dispute between two creditors will not
enable the Court to ascertain the pro rata dividend corresponding to each,
because the rights of the other creditors likewise enjoying preference under
Article 2242 can not be ascertained. Wherefore, the order of the Court of First
Instance of Manila now appealed from, decreeing that the proceeds of the
foreclosure sale be apportioned only between appellant and appellee, is
incorrect, and must be reversed. [Emphasis supplied]
The ruling in Barretto was reiterated in Phil. Savings Bank vs. Hon. Lantin, Jr.,
etc., et al.,18 and in two cases both entitled Development Bank of the Philippines
vs. NLRC.19
Although Barretto involved specific immovable property, the ruling therein should
apply equally in this case where specific movable property is involved. As the
extrajudicial foreclosure instituted by PNB and DBP is not the liquidation
proceeding contemplated by the Civil Code, Remington cannot claim its pro rata
share from DBP.
WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals
dated October 6, 1995 and its Resolution promulgated on August 29, 1996 is
REVERSED and SET ASIDE. The original complaint filed in the Regional Trial
Court in CV Case No. 84-25858 is hereby DISMISSED.
SO ORDERED.
G.R. No. 124185-87 January 20, 1998
RUBY INDUSTRIAL CORPORATION and BENHAR INTERNATIONAL, INC.
petitioners,
vs.
COURT OF APPEALS, MIGUEL LIM, ALLIED LEASING and FINANCE
CORPORATION, and THE MANAGEMENT COMMITTEE OF RUBY
INDUSTRIAL CORPORATION, respondents.

PUNO, J.:
Petitioners seek the reversal of the Court of Appeals Decision, 1 setting aside the
Orders of the Securities and Exchange Commission (SEC), dated July 30, 1993
and October 15, 1993, which approved the Revised Rehabilitation Plan of Ruby
Industrial Corporation (RUBY) and appointed Benhar International, Inc.
(BENHAR) as member of RUBY's Management Committee.
The facts: Petitioner Ruby Industrial Corporation (RUBY) is a domestic
corporation engaged in glass manufacturing, while petitioner Benhar
International, Inc. (BENHAR) is a domestic corporation engaged in importation
and sale of vehicle spare parts. BENHAR is wholly-owned by the Yu family and
headed by Henry Yu who is also a director and majority stockholder of RUBY.
In 1983, RUBY suffered severe liquidity problems. Thus, on December 13, 1983,
it filed a Petition for Suspension of Payments with the Securities and Exchange
Commission (SEC). 2
On December 20, 1983, the SEC issued an Order 3 declaring RUBY under
suspension of payments. Pending hearing of its petition, the SEC enjoined RUBY
from disposing its property, except insofar as necessary in its ordinary
operations. It also enjoined RUBY from making payments outside of the
necessary or legitimate expenses of its business.
On August 10, 1984, the SEC Hearing Panel 4 created a management committee
5
for RUBY to: (1) undertake the management of RUBY; (2) take custody of and
control over all existing assets and liabilities of RUBY; (3) evaluate RUBY's
existing assets and liabilities, earnings and operations; (4) determine the best
way to salvage and protect the interest of its investors and creditors; and (5)
study, review and evaluate the proposed rehabilitation plan for RUBY. 6
Subsequently, at RUBY's special stockholders meeting, its majority stockholders
led by Yu Kim Giang presented the BENHAR/RUBY Rehabilitation Plan to be
submitted to SEC. Under the plan, BENHAR shall lend its P60 million credit line
in China Bank to RUBY, payable within ten (10) years. Moreover, BENHAR shall
purchase the credits of RUBY's creditors and mortgage RUBY's properties to
obtain credit facilities for RUBY. 7 Upon approval of the rehabilitation plan,
BENHAR shall control and manage RUBY'S operations. For its service, BENHAR
shall receive a management fee equivalent to 7.5% of RUBY's net sales. 8
Some 40% of the stockholders opposed the BENHAR/RUBY Plan, including
private respondent MIGUEL LIM, a minority shareholder of RUBY. Private
respondent Allied Leasing and Finance Corporation, the biggest unsecured
creditor of RUBY and chairman of the management committee, also objected to
the plan as it would transfer RUBY's assets beyond the reach and to the
prejudice of its unsecured creditors. Despite the oppositions, the majority
stockholders still submitted the BENHAR/RUBY Plan to the SEC for approval.
Upon the other hand, RUBY's minority stockholders, represented by private
respondent Lim, submitted their own rehabilitation plan (the ALTERNATIVE
PLAN) to the SEC where they proposed to: (1) pay all RUBY'S creditors without
securing any bank loan; (2) run and operate RUBY without charging
management fees; (3) buy-out the majority shares or sell their shares to the

majority stockholders; (4) rehabilitate RUBY's two plants; and (5) secure a loan at
25% interest, as against the 28% interest charged in the loan under the
BENHAR/RUBY Plan. 9
Both plans were endorsed by the SEC to RUBY's management committee for
evaluation.
On October 28, 1988, the SEC Hearing Panel approved the BENHAR/RUBY
Plan. 10 The minority stockholders, thru private respondent Lim, appealed the
approval to the SEC en banc. On November 15, 1988, the SEC en banc
temporarily enjoined the implementation of the BENHAR/RUBY Plan. On
December 20, 1988, after the expiration of the TRO, the SEC en banc granted
the writ of preliminary injunction against the enforcement of the BENHAR/RUBY
Plan. 11
Thereafter, BENHAR and Henry Yu, later joined by RUBY and Yu Kim Clang,
appealed to the Court of Appeals (CA-G.R. SP No. 16798) questioning the
issuance of the writ. Their appeal was denied. 12
BENHAR and company elevated the matter to this Court. In a minute Resolution,
13
dated February 28, 1990, we denied the petition and upheld the injunction
against the implementation of the BENHAR/RUBY Plan.
However, it appears that before the SEC Hearing Panel approved the
BENHAR/RUBY Plan on October 28, 1988, BENHAR had already implemented
part of the plan by paying off Far East Bank & Trust Company (FEBTC), one of
RUBY's secured creditors. Thus, by May 30, 1988, FEBTC had already executed
a deed of assignment of credit and mortgage rights in favor of BENHAR.
Moreover, despite the SEC en banc's TRO and injunction, BENHAR still paid
RUBY's other secured creditors who, in turn, assigned their credits in favor of
BENHAR.
Hence, RUBY's biggest unsecured creditor, Allied Leasing and Finance
Corporation, and private respondent Lim moved to nullify the deeds of
assignment executed in favor of BENHAR and cite the parties thereto in
contempt for willful violation of the December 20, 1983 SEC Order enjoining
RUBY from disposing its properties and making payments pending the hearing of
its petition for suspension of payments. Private respondents Lim and Allied
Leasing charged that in paying off FEBTC's credits, FEBTC was given undue
preference over the other creditors of RUBY.
Acting on private respondents' motions, the SEC Hearing Panel nullified the
deeds of assignment executed by RUBY's creditors in favor of BENHAR and
declared the parties thereto guilty of indirect contempt. 14
Petitioners appealed to the SEC en banc. Their appeal was denied. 15 It was
ruled that, pending approval of the BENHAR/RUBY plan, BENHAR had no
authority to pay off FEBTC, one of RUBY's creditors. In prematurely
implementing the BENHAR/RUBY plan, BENHAR defied the SEC Order
declaring RUBY under suspension of payments and directing the management
committee to preserve its assets.
Petitioners RUBY and BENHAR, joined by Henry Yu and Yu Kim Giang,
appealed to the Court of Appeals (CA-G.R. SP No. 18310). On August 29,1990,
the Court of Appeals affirmed the SEC ruling nullifying the deeds of assignment.

16

It also declared that its decision is final and executory as to RUBY and Yu Kim
Giang for their failure to file their pleadings within the reglementary period. This
Court affirmed the Court of Appeals' decision in G.R. No. 96675. 17
Earlier, on May 29, 1990, after the SEC en banc enjoined the implementation of
BENHAR/RUBY Plan, RUBY filed with the SEC en banc an ex-parte petition to
create a new management committee and to approve its revised rehabilitation
plan (Revised BENHAR/RUBY Plan). Under the revised plan, BENHAR shall
receive P34.068 Million of the P60.437 Million credit facility to be extended to
RUBY, as reimbursement for BENHAR's payment to some of RUBY's creditors.
The SEC en banc directed RUBY to submit the Revised BENHAR/RUBY Plan to
its creditors for comment and approval. The petition for the creation of a new
management committee was remanded for further proceedings to the SEC
Hearing Panel. The Alternative Plan of RUBY's minority stockholders was also
forwarded to the hearing panel for evaluation.
On April 26, 1991, over ninety (90%) percent of RUBY's creditors objected to the
Revised BENHAR/RUBY Plan and the creation of a new management
committee. Instead, they endorsed the minority stockholders' Alternative Plan.
At the hearing of the petition for the creation of a new management committee,
three (3) members of the original management committee 18 opposed the
Revised BENHAR/RUBY Plan on the following grounds:
(1) the Revised BENHAR/RUBY Plan would legitimize the entry of BENHAR, a
total stranger, to RUBY as BENHAR would become the biggest creditor of RUBY;
(2) the revised plan would put RUBY's assets beyond the reach of the unsecured
creditors and the minority stockholders; and,
(3) the revised plan was not approved by RUBY's stockholders in a meeting
called for the purpose.
However, on September 18, 1991, despite the objections of over 90% of RUBY's
creditors and three (3) members of the management committee, the SEC
Hearing Panel approved the revised plan and dissolved the existing management
committee. It also created a new management committee and appointed
BENHAR as one of its members. 19 In addition to the powers originally conferred
to the management committee under P.D. No. 902-A, the new management
committee was tasked to oversee the implementation by the Board of Directors
of the revised rehabilitation plan for RUBY.
Consequently, the original management committee, Lim, and the Allied Leasing
Corporation appealed to the SEC en banc. On July 30, 1993, the SEC En Banc
affirmed the approval of the Revised BENHAR/RUBY Plan and the creation of a
new management committee. 20 To avoid any group from controlling the
management of RUBY, the SEC appointed SEC lawyers Ruben C. Ladia and
Teresita R. Siao as additional members of the new management committee.
Further, it declared that BENHAR's membership in the new management
committee is subject to the condition that BENHAR will extend its credit facilities
to RUBY without using the latter's assets as security or collateral.
Private respondents Lim, Allied Leasing Corporation and the original
management committee moved for reconsideration. Petitioners, on the other
hand, asked the SEC to reconsider the portion of its Order prohibiting BENHAR

from utilizing RUBY's assets as collateral.

On October 15, 1993, the SEC denied private respondents' motions for
reconsideration. However, it granted petitioners' motion and allowed BENHAR to
use RUBY's assets as collateral for loans, subject to the approval of the majority
of all the members of the new management committee. 21
On appeal by private respondents, the Court of Appeals set aside 22 SEC's
approval of the Revised BENHAR/RUBY plan and remanded the case to the
SEC for further proceedings. It ruled that the revised plan circumvented its earlier
decision (CA-G.R. SP No. 18310) nullifying the deeds of assignment executed by
RUBY's creditors in favor of BENHAR. Under the revised plan, BENHAR was to
receive P34.068 Million of the P60.437 Million credit facility to be extended to
RUBY, as settlement for its advance payment to RUBY's seven (7) secured
creditors. In effect, the payments made by BENHAR under the void Deeds of
Assignment were recognized as payable to BENHAR under the revised plan.
Petitioners' motion for reconsideration was denied. 23
Hence, this petition where petitioners aver that:
I. THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR, GRAVELY
ABUSED ITS DISCRETION AND EXCEEDED ITS JURISDICTION WHEN IT
WENT AGAINST THE FACTS AS FOUND BY THE SEC AND, THEREAFTER,
SUBSTITUTED ITS JUDGMENT FOR THAT OF THE SEC.
II. THE COURT OF APPEALS COMMITTED AN ERROR REVIEWABLE ON
APPEAL AND ALSO A PROPER SUBJECT OF CERTIORARI WHEN IT
ALLOWED PRIVATE RESPONDENTS TO FILE SEPARATE PETITIONS
PREPARED BY LAWYERS REPRESENTING THEMSELVES AS BELONGING
TO DIFFERENT LAW FIRMS.
We find no merit in the petition.
Petitioners first contend that, in reversing the SEC's approval of the Revised
BENHAR/RUBY Plan, the Court of Appeals exceeded its jurisdiction and
disregarded the SEC's expertise in resolving corporate controversies.
The settled doctrine is that factual findings of an administrative agency are
accorded respect and, at times, finality for they have acquired the expertise
inasmuch as their jurisdiction is confined to specific matters. 24 Nonetheless,
these doctrines do not apply when the board or official has gone beyond his
statutory authority, exercised unconstitutional powers or clearly acted arbitrarily
and without regard to his duty or with grave abuse of discretion. 25 In Leongson
vs. Court of Appeals, 26 we held: "once the actuation of the administrative official
or administrative board or agency is tainted by a failure to abide by the command
of the law, then it is incumbent on the courts of justice to set matters right, with
this Tribunal having the last say on the matter."
We hold that the SEC acted arbitrarily when it approved the Revised
BENHAR/RUBY Plan. As found by the Court of Appeals, the plan contained
provisions which circumvented its final decision 27 in CA-G.R. SP No. 18310,
nullifying the deeds of assignment of credits and mortgages executed by RUBY's
creditors in favor of BENHAR, as well as this Court's resolution in G.R. No.
96675, affirming said Court of Appeals' decision. Specifically, the Revised
BENHAR/RUBY Plan considered as valid the advance payments made by

BENHAR in favor of some of RUBY'S creditors. The nullity of BENHAR's

unauthorized dealings with RUBY's creditors is settled. The deeds of assignment
between BENHAR and RUBY's creditors had been categorically declared void by
the SEC Hearing Panel in two (2) orders issued on January 12, 1989 and March
15, 1989. 28 The dispositive portion of the Order, dated January 12, 1989, held:
WHEREFORE, the motion for reconsideration of the Order dated October 7,
1988, insofar as it relates to the motion of Allied Leasing and Finance
Corporation to cite for contempt and to annul deed of assignment is hereby
GRANTED. . . . The Deed of Assignment of Receivables and Mortgages, Rights,
Credits and Interest Without Recourse having been executed in violation of the
Order dated December 20, 1988 is hereby declared NULL and VOID.
SO ORDERED.
The dispositive portion of the Order dated March 15, 1989, similarly provided:
WHEREFORE, Mr. Yu Kim Giang and others are hereby found guilty of indirect
contempt and a penalty of P500.00 each is hereby imposed on them. The Deed
of Assignment of Receivables and Mortgages, Rights, Credits and Interest
Without Recourse, in favor of Benhar International, Inc., by Florence Danon,
Philippine Bank of Communication, Philippine Commercial International Bank,
Philippine Trust Company and PCI Leasing and Finance Incorporated, having
been executed in violation of the Order dated December 20, 1988 are hereby
declared NULL and VOID.
These orders were upheld by the SEC en banc 29 and the Court of Appeals. 30 In
CA-GR SP No. 18310, the Court of Appeals ruled as follows:
xxx xxx xxx
1) . . . when the Deed of Assignment was executed on May 30, 1988 by and
between Ruby Industrial Corp., Benhar International Inc., and FEBTC, the
Rehabilitation Plan proposed by petitioner Ruby Industrial Corp. for Benhar
International Inc. to assume all petitioner's obligation has not been approved by
the SEC. The Rehabilitation Plan was not approved until October 28, 1988.
There was a willful and blatant violation of the SEC order dated December 1983
on the part of petitioner Ruby Industrial Corp., represented by Yu Kim Giang, by
Benhar International Inc., represented by Henry Yu and by FEBTC . . . .
2) The magnitude and coverage of the transactions involved were such that Yu
Kim Giang and the other signatories cannot feign ignorance or pretend lack of
knowledge thereto in view of the fact that they were all signatories to the
transaction and privy to all the negotiations leading to the questioned
transactions. In executing the Deeds of Assignments, the petitioners totally
disregarded the mandate contained in the SEC order not to dispose the
properties of Ruby Industrial Corp. in any manner whatsoever pending the
approval of the Rehabilitation Plan and rendered illusory the SEC efforts to
rehabilitate the petitioner corporation to the best interests of all the creditors.
3) The assignments were made without prior approval of the Management
Committee created by the SEC in an Order dated August 10, 1984. Under
Section 6, par. d, sub. par. (2) of P.D. 902-A as amended by P.D. 1799, the
Management Committee, rehabilitation receiver, board or body shall have the
power to take custody and control over all existing assets of such entities under

management notwithstanding any provision of law, articles of incorporation or bylaw to the contrary. The SEC therefore has the power and authority, through a
Management Committee composed of petitioner's creditors or through itself
directly, to declare all assignment of assets of the petitioner Corporation declared
under suspension of payments, null and void, and to conserve the same in order
to effect a fair, equitable and meaningful rehabilitation of the insolvent
corporation.
4) . . . . The acts for which petitioners were held in indirect contempt by the SEC
arose from the failure or willful refusal by petitioners to obey the lawful order of
the SEC not to dispose of any of its properties in any manner whatsoever without
authority or approval of the SEC. The execution of the Deeds of Assignment tend
to defeat or obstruct the administration of justice. Such acts are offenses against
the SEC because they are calculated to embarrass, hinder and obstruct the
tribunal in the administration of justice or lessen its authority.
In view of the foregoing conclusion which has now been reached, it is not
necessary to discuss at length or to determine other questions which are
presented on record. It is sufficient to say that the facts as established by the
evidence on records warrant a finding that petitioners are guilty of indirect
contempt. The Order of the SEC is hereby AFFIRMED. This petition is
DISMISSED with costs against the petitioners.
SO ORDERED. (emphasis ours)
Petitioners insist that the Court of Appeals did not make a categorical statement
in the dispositive portion of its decision in CA-G.R. SP No. 18310 that it was
nullifying the deeds of assignment in favor of BENHAR. Allegedly, it merely
stated that it is affirming the decision of the SEC. Petitioners cite Olac vs. Court
of Appeals 31 where we held that the dispositive portion or the fallo constitutes the
court's resolution in a given case, while the discussion in the body of the decision
merely expresses the court's opinion.
The contention has no merit. The principle laid down in Olac applies only when
there is a conflict between the dispositive part (fallo) and the opinion of the court
contained in the decision. Hence, in the execution of the court's judgment, the
fallo should be considered as the final disposition of the case before it. Such
conflict does not exist in the Court of Appeals' decision in CA-G.R. SP No. 18310.
It is crystal clear that what the Court of Appeals affirmed in CA-GR SP No. 18310
was the nullity of the deeds of assignment in favor of BENHAR. In a minute
resolution in G.R. No. 96675, we even sustained the Court of Appeals' decision in
CA-GR SP No. 18310. 32
In any event, petitioners actively participated in the proceedings before the SEC
and the Court of Appeals when private respondents sought the nullification of the
subject deeds. Petitioners are, therefore, estopped from questioning anew the
validity of the deeds of assignment executed by RUBY 's creditors in favor of
BENHAR. Petitioners should know that it is not for a party to participate in the
proceedings, submit his case for decision, accept the judgment if it is favorable to
him but attack it for any reason when it is adverse. 33
Even the SEC en banc, in its July 30, 1993 Order affirming the approval of the
Revised BENHAR/RUBY Plan, has acknowledged the invalidity of the subject

deeds of assignment. However, to justify its approval of the plan and the
appointment of BENHAR to the new management committee, it gave the lame
excuse that BENHAR became RUBY's creditor for having paid RUBY's debts.
We quote the relevant portion of the SEC's ruling, thus:
Anent the contention that BENHAR should not take an active participation in the
management of petitioner corporation, the same deserves scant consideration.
While the Deeds of Assignment executed by creditors of Ruby in favor of Benhar
were all declared null and void, the Revised Rehabilitation plan, as herein
approved by the Commission, shows that Benhar will assign its credit lines/loan
proceeds or will act as financier whereby it re-lends the contracted loan to Ruby
thereby converting Benhar as a creditor of the petitioner corporation once the
Rehabilitation Plan is implemented. In fact, as of March 31, 1990, it appears that
Benhar had made some advance payments to some creditors of Ruby further
strengthening its status as a creditor. We cannot, therefore, see any reason why
Benhar should not sit in the management team to oversee the implementation of
the Plan.
For its part, the Court of Appeals noted that the approved Revised
BENHAR/RUBY Plan gave undue preference to BENHAR. The records, indeed,
show that BENHAR's offer to lend its credit facility in favor of RUBY is
conditioned upon the payment of the amount it advanced to RUBY's creditors,
thus:
FUND SOURCING
xxx xxx xxx
1.1. Deed of Assignment of Credit Facility (or Loan Proceeds) to be executed by
Benhar in favor of Ruby, under pre-arrangement with China Banking Corporation
or by any other creditor-banks, and upon payment by Ruby of such amount
already advanced by Benhar.
In fact, BENHAR shall receive P34.068 Million out of the P60.437 Million credit
facility to be extended to RUBY for the latter's rehabilitation.
Rehabilitation contemplates a continuance of corporate life and activities in an
effort to restore and reinstate the corporation to its former position of successful
operation and solvency. 34 When a distressed company is placed under
rehabilitation, the appointment of a management committee follows to avoid
collusion between the previous management and creditors it might favor, to the
prejudice of the other creditors. All assets of a corporation under rehabilitation
receivership are held in trust for the equal benefit of all creditors to preclude one
from obtaining an advantage or preference over another by the expediency of
attachment, execution or otherwise. As between the creditors, the key phrase is
equality in equity. Once the corporation threatened by bankruptcy is taken over
by a receiver, all the creditors ought to stand on equal footing. Not any one of
them should be paid ahead of the others. This is precisely the reason for
suspending all pending claims against the corporation under receivership. 35
Parenthetically, BENHAR is a domestic corporation engaged in importing and
selling vehicle spare parts with an authorized capital stock of thirty million pesos.
Yet, it offered to lend its credit facility in the amount of sixty to eighty millions
pesos to RUBY. It is to be noted that BENHAR is not a lending or financing

corporation and lending its credit facilities, worth more than double its authorized
capitalization, is not one of the powers granted to it under its Articles of
Incorporation. Significantly, Henry Yu, a director and a majority stockholder of
RUBY is, at the same time, a stockholder of BENHAR, a corporation owned and
controlled by his family. These circumstances render the deals between
BENHAR and RUBY highly irregular.
To justify its appointment in the new management committee and to dispute that
it will become a creditor of RUBY only on account of the proposed assignment of
its credit facility to RUBY, BENHAR avers that as early as December 27, 1988, it
already lent one million pesos (P1,000,000.00) to RUBY for the latter's working
capital.
The submission deserves scant consideration. To start with, this argument was
raised by BENHAR for the first time in its motion for reconsideration before the
Court of Appeals. The settled rule is that issues not raised in the court a quo
cannot be raised for the first time on appeal in this case, in a motion for
reconsideration for being offensive to the basic rules of fair play, justice and
due process. 36
Moreover, when RUBY initiated its petition for suspension of payments with the
SEC, BENHAR was not listed as one of RUBY's creditors. BENHAR is a total
stranger to RUBY. If at all, BENHAR only served as a conduit of RUBY. As aptly
stated in the challenged Court of Appeals decision: 37
Benhar's role in the Revised Benhar/Ruby Plan, as envisioned by the majority
stockholders, is to contract the loan for Ruby and, serving the role of a financier,
relend the same to Ruby. Benhar is merely extending its credit line facility with
China Bank, under which the bank agrees to advance funds to the company
should the need arise. This is unlikely a loan in which the entire amount is made
available to the borrower so that it can be used and programmed for the benefit
of the company's financial and operational needs. Thus, it is actually China Bank
which will be the source of the funds to be relent to Ruby. Benhar will not shell
out a single centavo of its own funds. It is the assets of Ruby which will be
mortgaged in favor of Benhar. Benhar's participation will only make the
rehabilitation plan more costly and, because of the mortgage of its (Ruby's)
assets to a new creditor, will create a situation which is worse than the
present. . . . .
We need not say more.
On the second issue, petitioners charge that private respondents are guilty of
forum-shopping. It appears that the three (3) private respondents filed separate
petitions before the Court of Appeals upon receipt of the adverse ruling of the
SEC en banc. Private respondent Miguel Lim commenced CA-G. R. SP No.
32404, thru its counsel Romulo Mabanta Beunaventura Sayoc and De los
Angeles. For their part, private respondent Allied Leasing and the original
management committee of RUBY, represented by Attorney Waiter T. Young,
commenced CA-G.R. SP No. 32483 and CA-G.R. SP No. 32469, respectively. In
CA-G. R. SP No. 32483, Atty. Young signed for and in behalf of the law firm
Ocampo Quiroz Pesayco and Associates, while in CA-G.R. SP No. 32469, Atty.
Young signed for the law firm Quiroz and Young. In both petitions, he used the

same business address Allied Bank Center, 6754 Ayala Avenue, Makati City.
We hold that private respondents are not guilty of forum-shopping. In Ramos, Sr.
vs. Court of Appeals, 38 we ruled:
The private respondents can be considered to have engaged in forum shopping if
all of them, acting as one group, filed identical special civil actions in the Court of
Appeals and in this Court. There must be identity of parties or interests
represented, rights asserted and relief sought in different tribunals. In the case at
bar, two groups of private respondents appear to have acted independently of
each other when they sought relief from the appellate court. Both group sought
relief from the same tribunal.
It would not matter even if there are several divisions in the Court of Appeals.
The adverse party can always ask for the consolidation of the two cases. . . .
In the case at bar, private respondents represent different groups with different
interests the minority stockholders' group, represented by private respondent
Lim; the unsecured creditors group, Allied Leasing & Finance Corporation; and
the old management group. Each group has distinct rights to protect. In line with
our ruling in Ramos , the cases filed by private respondents should be
consolidated. In fact, BENHAR and RUBY did just that in their urgent motions
filed on December 1, 1993 and December 6, 1993, respectively, they prayed for
the consolidation of the cases before the Court of Appeals.
IN VIEW OF THE FOREGOING, the instant petition is DISMISSED for lack of
merit. The Court of Appeals' Decision, dated March 31, 1995, and its Resolution,
dated March 12, 1996, in CA-G.R. SP Nos. 32404, 42469 and 32483 are
AFFIRMED. The case is remanded to the Securities and Exchange Commission
for further proceedings. Costs against petitioners.
SO ORDERED.
G.R. No. 165675 September 30, 2005
SPOUSES EDUARDO SOBREJUANITE and FIDELA SOBREJUANITE,
Petitioners,
vs.
ASB DEVELOPMENT CORPORATION, Respondent.
DECISION
YNARES-SANTIAGO, J.:
This petition for review on certiorari assails the June 29, 2004 Decision of the
Court of Appeals in CA-G.R. SP No. 79420 which reversed and set aside the
Decision of the Office of the President; and its October 18, 2004 Resolution
denying reconsideration thereof.
The antecedent facts show that on March 7, 2001, spouses Eduardo and Fidela
Sobrejuanite (Sobrejuanite) filed a Complaint 1 for rescission of contract, refund of
payments and damages, against ASB Development Corporation (ASBDC) before
the Housing and Land Use Regulatory Board (HLURB).
Sobrejuanite alleged that they entered into a Contract to Sell with ASBDC over a
condominium unit and a parking space in the BSA Twin Tower-B Condominum
located at Bank Drive, Ortigas Center, Mandaluyong City. They averred that
despite full payment and demands, ASBDC failed to deliver the property on or

before December 1999 as agreed. They prayed for the rescission of the contract;
refund of payments amounting to P2,674,637.10; payment of moral and
exemplary damages, attorneys fees, litigation expenses, appearance fee and
costs of the suit.
ASBDC filed a motion to dismiss or suspend proceedings in view of the approval
by the Securities and Exchange Commission (SEC) on April 26, 2001 of the
rehabilitation plan of ASB Group of Companies, which includes ASBDC, and the
appointment of a rehabilitation receiver. The HLURB arbiter however denied the
motion and ordered the continuation of the proceedings.
The arbiter found that under the Contract to Sell, ASBDC should have delivered
the property to Sobrejuanite in December 1999; that the latter had fully paid their
obligations except the P50,000.00 which should be paid upon completion of the
construction; and that rescission of the contract with damages is proper.
The dispositive portion of the Decision reads:
WHEREFORE, in view of the foregoing judgment is rendered ordering the
rescission of the contracts to sell between the parties, and further ordering the
respondent [ASBDC] to pay the complainants [Sobrejuanite] the following:
a) all amortization payments by the complainants amounting to P2,674,637.10
plus 12% interest from the date of actual payment of each amortization;
b) moral damages amounting to P200,000.00;
c) exemplary damages amounting to P100,000.00;
d) attorneys fees amounting to P100,000.00;
e) litigation expenses amounting to P50,000.00.
All other claims and all counter-claims are hereby dismissed.
IT IS SO ORDERED.2
The HLURB Board of Commissioners 3 affirmed the ruling of the arbiter that the
approval of the rehabilitation plan and the appointment of a rehabilitation receiver
by the SEC did not have the effect of suspending the proceedings before the
HLURB. The board held that the HLURB could properly take cognizance of the
case since whatever monetary award that may be granted by it will be ultimately
filed as a claim before the rehabilitation receiver. The board also found that
ASBDC failed to deliver the property to Sobrejuanite within the prescribed period.
The dispositive portion of the Decision reads:
Wherefore the petition for review is denied and the decision of the office below is
affirmed. It shall be understood that all monetary awards shall still be filed as
claims before the rehabilitation receiver.4
ASBDC filed an appeal5 before the Office of the President which was dismissed 6
for lack of merit. Hence, ASBDC filed a petition 7 under Section 1, Rule 43 of the
Rules of Court before the Court of Appeals, docketed as CA-G.R. SP No. 79420.
On June 29, 2004, the Court of Appeals rendered its assailed Decision, 8 the
dispositive portion of which reads:
WHEREFORE, premises considered, the instant petition is GRANTED. The
impugned decision dated June 27, 2003 of the Office of the President is hereby
REVERSED AND SET ASIDE. No pronouncement as to costs.
SO ORDERED.9
The Court of Appeals held that the approval by the SEC of the rehabilitation plan

and the appointment of the receiver caused the suspension of the HLURB
proceedings. The appellate court noted that Sobrejuanites complaint for
rescission and damages is a claim under the contemplation of Presidential
Decree (PD) No. 902-A or the SEC Reorganization Act and A.M. No. 00-8-10-SC
or the Interim Rules of Procedure on Corporate Rehabilitation, because it sought
to enforce a pecuniary demand. Therefore, jurisdiction lies with the SEC and not
HLURB. It also ruled that ASBDC was obliged to deliver the property in
December 1999 but its financial reverses warranted the extension of the period.
Sobrejuanites motion for reconsideration was denied 10 hence the instant petition
which raises the following issues:
1. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND
GRAVELY ABUSED ITS DISCRETION IN RULING THAT THE SEC, NOT THE
HLURB, HAS JURISDICTION OVER PETITIONERS COMPLAINT, IN
CONTRAVENTION TO LAW AND THE RULING OF THIS HONORABLE COURT
IN THE ARRANZA CASE.
2. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND
GRAVELY ABUSED ITS DISCRETION WHEN IT RULED THAT THE APPROVAL
OF THE CORPORATE REHABILITATION PLAN AND THE APPOINTMENT OF A
RECEIVER HAD THE EFFECT OF SUSPENDING THE PROCEEDING IN THE
HLURB, AND THAT THE MONETARY AWARD GIVEN BY THE HLURB COULD
NOT [BE] FILED IN THE SEC FOR PROPER DISPOSITION, NOT BEING IN
ACCORDANCE WITH LAW AND JURISPRUDENCE.
3. THE COURT OF APPEALS COMMITTED REVERSIBLE ERROR AND
GRAVELY ABUSED ITS DISCRETION IN RULING THAT RESPONDENT "IS
JUSTIFIED IN EXTENDING THE AGREED DATE OF DELIVERY BY INVOKING
AS GROUND THE FINANCIAL CONSTRAINTS IT EXPERIENCED," BEING
CONTRARY TO LAW AND IN EEFECT AN UNLAWFUL NOVATION OF THE
AGREEMENT OF THE DATE OF DELIVERY ENTERED INTO BY
PETITIONERS AND RESPONDENT.11
The petition lacks merit.
Section 6(c) of PD No. 902-A empowers the SEC:
c) To appoint one or more receivers of the property, real and personal, which is
the subject of the action pending before the Commission whenever necessary
in order to preserve the rights of the parties-litigants and/or protect the interest of
the investing public and creditors: Provided, finally, That upon appointment of
a management committee, rehabilitation receiver, board or body, pursuant to this
Decree, all actions for claims against corporations, partnerships or
associations under management or receivership pending before any court,
tribunal, board or body shall be suspended accordingly. [Emphasis added]
The purpose for the suspension of the proceedings is to prevent a creditor from
obtaining an advantage or preference over another and to protect and preserve
the rights of party litigants as well as the interest of the investing public or
creditors.12 Such suspension is intended to give enough breathing space for the
management committee or rehabilitation receiver to make the business viable
again, without having to divert attention and resources to litigations in various
fora.13 The suspension would enable the management committee or rehabilitation

receiver to effectively exercise its/his powers free from any judicial or extrajudicial interference that might unduly hinder or prevent the "rescue" of the debtor
company. To allow such other action to continue would only add to the burden of
the management committee or rehabilitation receiver, whose time, effort and
resources would be wasted in defending claims against the corporation instead
of being directed toward its restructuring and rehabilitation. 14
Thus, in order to resolve whether the proceedings before the HLURB should be
suspended, it is necessary to determine whether the complaint for rescission of
contract with damages is a claim within the contemplation of PD No. 902-A.
In Finasia Investments and Finance Corp. v. Court of Appeals,15 we construed
claim to refer only to debts or demands pecuniary in nature. Thus:
[T]he word claim as used in Sec. 6(c) of P.D. 902-A refers to debts or demands
of a pecuniary nature. It means "the assertion of a right to have money paid. It is
used in special proceedings like those before administrative court, on
insolvency."
The word "claim" is also defined as:
Right to payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,
equitable, secured, or unsecured; or right to an equitable remedy for breach of
performance if such breach gives rise to a right to payment, whether or not such
right to an equitable remedy is reduced to judgment, fixed, contingent, matured,
unmatured, disputed, undisputed, secured, unsecured.
In conflicts of law, a receiver may be appointed in any state which has jurisdiction
over the defendant who owes a claim.
As used in statutes requiring the presentation of claims against a decedents
estate, "claim" is generally construed to mean debts or demands of a pecuniary
nature which could have been enforced against the deceased in his lifetime and
could have been reduced to simple money judgments; and among these are
those founded upon contract.
In Arranza v. B.F. Homes, Inc.,16 claim is defined as referring to actions involving
monetary considerations.
Finasia Investments and Finance Corp. v. Court of Appeals and Arranza v. B.F.
Homes, Inc. were promulgated prior to the effectivity of the Interim Rules of
Procedure on Corporate Rehabilitation on December 15, 2000. The interim rules
define a claim as referring to all claims or demands, of whatever nature or
character against a debtor or its property, whether for money or otherwise. The
definition is all-encompassing as it refers to all actions whether for money or
otherwise. There are no distinctions or exemptions.
Incidentally, although the petition for rehabilitation with prayer for suspension of
actions and proceedings was filed before the SEC on May 2, 2000, 17 or prior to
the effectivity of the interim rules, the same would still apply pursuant to Section
1, Rule 1 thereof which provides:
Section 1. Scope These Rules shall apply to petitions for rehabilitation filed by
corporations, partnerships, and associations pursuant to Presidential Decree No.
902-A, as amended.
Clearly then, the complaint filed by Sobrejuanite is a claim as defined under the

Interim Rules of Procedure on Corporate Rehabilitation. Even under our rulings

in Finasia Investments and Finance Corp. v. Court of Appeals and Arranza v. B.F.
Homes, Inc., the complaint for rescission with damages would fall under the
category of claim considering that it is for pecuniary considerations.
In their complaint, Sobrejuanite pray for the rescission of the contract and the
refund of P2,674,637.10 representing their total payments to ASBDC;
P200,000.00 as moral damages; P100,000.00 as exemplary damages;
P100,000.00 as attorneys fees; P50,000.00 as litigation expenses; P1,500.00
per hearing as appearance fees; and costs of the suit.
In the decision of the HLURB arbiter, ASBDC was ordered to pay P2,674,637.10
plus 12% interest from the date of actual payment of each amortization,
representing the refund of all the amortization payments made by Sobrejuanite;
P200,000.00 as moral damages; P100,000.00 as exemplary damages;
P100,000.00 as attorneys fees; and P50,000.00 as litigation expenses.
As such, the HLURB arbiter should have suspended the proceedings upon the
approval by the SEC of the ASB Group of Companies rehabilitation plan and the
appointment of its rehabilitation receiver. By the suspension of the proceedings,
the receiver is allowed to fully devote his time and efforts to the rehabilitation and
restructuring of the distressed corporation.
It is well to note that even the execution of final judgments may be held in
abeyance when a corporation is under rehabilitation. 18 Hence, there is more
reason in the instant case for the HLURB arbiter to order the suspension of the
proceedings as the motion to suspend was filed soon after the institution of the
complaint. By allowing the proceedings to proceed, the HLURB arbiter unwittingly
gave undue preference to Sobrejuanite over the other creditors and claimants of
ASBDC, which is precisely the vice sought to be prevented by Section 6(c) of PD
902-A. Thus:
As between creditors, the key phrase is "equality is equity." When a corporation
threatened by bankruptcy is taken over by a receiver, all the creditors should
stand on equal footing. Not anyone of them should be given any preference by
paying one or some of them ahead of the others. This is precisely the reason for
the suspension of all pending claims against the corporation under receivership.
Instead of creditors vexing the courts with suits against the distressed firm, they
are directed to file their claims with the receiver who is a duly appointed officer of
the SEC.19
Petitioners reliance on Arranza v. B.F. Homes, Inc. 20 is misplaced. In that case,
we held that the HLURB retained its jurisdiction despite the rehabilitation
proceedings since the claim filed by the homeowners did not involve pecuniary
considerations. The claim therein was for specific performance to enforce the
homeowners rights as regards right of way, open spaces, road and perimeter
wall repairs, and security. However, it can also be deduced therefrom that if the
claim was for monetary awards, the proceedings before the HLURB should be
suspended during the rehabilitation. Thus:
No violation of the SEC order suspending payments to creditors would result as
far as petitioners complaint before the HLURB is concerned. To reiterate, what
petitioners seek to enforce are respondents obligations as a subdivision

developer. Such claims are basically not pecuniary in nature although it could
incidentally involve monetary considerations. All that petitioners claims entail is
the exercise of proper subdivision management on the part of the SEC-appointed
Board of Receivers towards the end that homeowners shall enjoy the ideal
community living that respondent portrayed they would have when they bought
real estate from it.
Neither may petitioners be considered as having "claims" against respondent
within the context of the following proviso of Section 6 (c) of P.D. No. 902-A, to
warrant suspension of the HLURB proceedings.
.
In this case, under the complaint for specific performance before the HLURB,
petitioners do not aim to enforce a pecuniary demand. Their claim for
reimbursement should be viewed in the light of respondents alleged failure to
observe its statutory and contractual obligations to provide petitioners a "decent
human settlement" and "ample opportunities for improving their quality of life."
The HLURB, not the SEC, is equipped with the expertise to deal with that
matter.21
Finally, we agree with the Court of Appeals that under the Contract to Sell,
ASBDC was obliged to deliver the property to Sobrejuanite on or before
December 1999. Nonetheless, the same was deemed extended due to the
financial reverses experienced by the company. Section 7 of the Contract to Sell
allows the developer to extend the period of delivery on account of causes
beyond its control, such as financial reverses.
WHEREFORE, the petition is DENIED. The assailed Decision of the Court of
Appeals dated June 29, 2004 in CA-G.R. SP No. 79420 and its Resolution dated
October 18, 2004, are AFFIRMED.
SO ORDERED.
G.R. Nos. 175181-82
September 14, 2007
METROPOLITAN BANK and TRUST COMPANY, INC., petitioner,
vs.
SLGT HOLDINGS, INC., DANILO A. DYLANCO and ASB DEVELOPMENT
CORPORATION, respondents.
x - - - - - - - - - - - - - - - - - - - - - - - -x
G.R. Nos. 175354 & 175387-88
September 14, 2007
UNITED COCONUT PLANTERS BANK, petitioner,
vs.
SLGT HOLDINGS, INC. and ASB DEVELOPMENT CORPORATION,
respondents.
DECISION
GARCIA, J.:
It happened before; it will likely happen again. A developer embarks on an
aggressive marketing campaign and succeeds in selling units in a yet to-be
completed condominium project. Short of funds, the developer borrows money
from a bank and, without apprising the latter of the pre-selling transactions,
mortgages the condominium complex, but also without informing the buyers of

the mortgage constitution. Saddled with debts, the developer fails to meet its part
of the bargain. The defaulting developer is soon sued by the fully-paid unit
buyers for specific performance or refund and is threatened at the same time with
a foreclosure of mortgage. Having his hands full parrying legal blows from
different directions, the developer seeks a declaration of suspension of payment,
followed by a petition for rehabilitation with suspension of action.
With a slight variation, the scenario thus depicted describes the instant case
which features respondent ASB Development Corporation (ASB, for short), as
the defaulting developer of the BSA Twin Towers Condominium Project (BSA
Towers or Project, for short) situated at Ortigas Center, Mandaluyong City, and
respondents Danilo A. Dylanco and SLGT Holdings, Inc. (Dylanco and SLGT,
respectively, hereinafter) as the unit buyers. Petitioners Metropolitan Bank and
Trust Company, Inc. (Metrobank) and United Coconut Planters Bank (UCPB) are
the lending-mortgagee banks.
And now to the case:
Before the Court are these separate petitions for review under Rule 45 of the
Rules of Court separately interposed by Metrobank and UCPB to nullify and set
aside the consolidated Decision1 and Resolution2 dated June 29, 2006, and
October 31, 2006, respectively, of the Court of Appeals (CA) in CA-G.R. SP No.
92807, CA-G.R. SP No. 92808 and CA-G.R. SP No. 92882.
The first assailed issuance affirmed the earlier Decision 3 dated October 10, 2005
of the Office of the President (OP, hereinafter), as modified in its Order 4 of
December 22, 2005, in consolidated OP Case No. 05-F-212 and OP Case No.
05-G-215. The second assailed issuance, on the other hand, denied
reconsideration of the first.
Per its Resolution5 of March 26, 2007, the Court ordered the consolidation of
these petitions.
From the petitions and the comments thereon, with their respective annexes, and
other pleadings, the Court gathers the following facts:
On October 25, 1995, Dylanco and SLGT each entered into a contract to sell with
ASB for the purchase of a unit (Unit 1106 for Dylanco and Unit 1211 for SLGT) at
BSA Towers then being developed by the latter. As stipulated, ASB will deliver the
units thus sold upon completion of the construction or before December 1999.
Relying on this and other undertakings, Dylanco and SLGT each paid in full the
contract price of their respective units. The promised completion date came and
went, but ASB failed to deliver, as the Project remained unfinished at that time.
To make matters worse, they learned that the lots on which the BSA Towers were
to be erected had been mortgaged6 to Metrobank, as the lead bank, and UCPB 7
without the prior written approval of the Housing and Land Use Regulatory Board
(HLURB).
Alarmed by this foregoing turn of events, Dylanco, on August 10, 2004, filed with
the HLURB a complaint8 for delivery of property and title and for the declaration
of nullity of mortgage. A similar complaint 9 filed by SLGT followed three (3) days
later. At this time, it appears that the ASB Group of Companies, which included
ASB, had already filed with the Securities and Exchange Commission a petition
for rehabilitation and a rehabilitation receiver had in fact been appointed.

What happened next are laid out in the OP decision adverted to above, thus:
In response to the above complaints, ASB alleged that it encountered liquidity
problems sometime in 2000 after its creditors [UCPB and Metrobank]
simultaneously demanded payments of their loans; that on May 4, 2000, the
Commission (SEC) granted its petition for rehabilitation; that it negotiated with
UCPB and Metrobank but nothing came out positive from their negotiation .
On the other hand, Metrobank claims that complainants [Dylanco and SLGT]
have no personality to ask for the nullification of the mortgage because they are
not parties to the mortgage transaction ; that the complaints must be dismissed
because of the ongoing rehabilitation of ASB; xxx that its claim against ASB,
including the mortgage to the [Project] have already been transferred to Asia
Recovery Corporation; xxx.
UCPB, for its part, denies its liability to SLGT [for lack of privity of contract]
[and] questioned the personality of SLGT to challenge the validity of the
mortgage reasoning that the latter is not party to the mortgage contract [and]
maintains that the mortgage transaction was done in good faith. Finally, it
prays for the suspension of the proceedings because of the on-going
rehabilitation of ASB.
In resolving the complaint in favor of Dylanco and SLGT, the Housing Arbiter
ruled that the mortgage constituted over the lots is invalid for lack of mortgage
clearance from the HLURB. He also rebuffed the banks request to suspend the
proceedings under Section 5 of Presidential Decree (PD) No. 902-A as the
banks are parties under receivership. xxx
The HLURB Board of Commissioners, [per its separate Decision both dated April
21, 2005] affirmed the above rulings with the modification that ASB should
cause the subdivision of the mother titles into condominium certificates of title of
Dylanco and SLGT free from all liens and encumbrances. [On June 28, 2005 the
HLURB denied the separate motions of Metrobank and UCPB for
reconsideration. (Words in brackets and emphasis added).
For perspective, the decretal portion of the HLURBs underlying decision 10 with
respect to the Dylanco case, docketed thereat as REM-A-050208-0021, reads as
follows:
WHEREFORE, the appeals are dismissed for lack of merit and the decision of
the office below is modified as follows:
1. Declaring the mortgage over the subject condominium unit in favor of
respondent [Metrobank] as null and void for violation of Section 18 of [PD] No.
957;
2. Directing respondent bank to cancel/release the mortgage on the subject
condominium unit [Unit 1106]; and accordingly, surrender/release the title thereof
to the complainant;
3. Directing respondent Bank to release to respondent ASB the transfer
certificate of title of the lots covering the BSA Twin Towers Project; directing ASB
to cause the subdivision of the mother titles into condominium certificates of tile
within 90 days and to thereafter deliver title to complainant [Dylanco] free from all
liens and encumbrances; [and]
4. Ordering respondent ASB to complete the subject condominium project as per

SEC Order dated 03 November 2004. (Words in brackets added)

On the other hand, the HLURB decision 11 on the SLGT case, docketed as REMA-050208-0020, was, on all material points, of the same tenor as in the Dylanco
case, albeit the unit involved is different and the banks referred to in SLGT are
UCPB and Metrobank.
From the HLURB resolutions in REM-A-050208-0020 and REM-A-050208-0021,
Metrobank appealed to the OP, followed by UCPBs own appeal from the
resolution in REM-A-050208-0020. Owing to the obvious similarities in both
cases, the OP had them consolidated, the Dylanco case docketed as O.P. Case
No. 05-F-212 and the SLGT case as O.P. Case No. 05-F-215.
On October 10, 2005, the OP rendered a decision 12 against Metrobank and
UCPB, disposing as follows:
WHEREFORE, premises considered, the appeals filed by Metropolitan Bank and
Trust Company and the United Coconut Planters Bank are hereby DISMISSED
for lack of merit.
SO ORDERED.
From the October 10, 2005 OP Decision, petitioner banks and SLGT interposed
their respective motions for reconsideration, SLGT excepting to that portion of
the decision declaring the mortgage contract as void only insofar as it and
Dylanco are concerned. To SLGT, the indivisibility of a mortgage contract
requires that a declaration of nullity or a validity for that matter - should cover
the entire mortgage.
On December 22, 2005, the OP issued an Order 13 acting favorably on SLGTs
motion, but denying those of Metrobank and UCPB. The fallo of the OPs Order
reads:
"WHEREFORE, the Motions for Reconsideration of [Metrobank] and [UCPB] are
hereby DENIED. With respect to the partial motion for reconsideration of SLGT
, the same is hereby GRANTED. Accordingly, the mortgage contract
executed between ASB Development Corporation and respondent banks
(Metrobank and UCPB) is hereby declared null and void in its entirety.
Respondents-appellants are hereby ordered to release to ASBDC [TCT] Nos.
9834 and 9835, and for ASBDC to cause the subdivision of the mother titles into
condominium certificates of title, and thereafter deliver to complainants [SLGT
and Dylanco] their respective condominium certificates of title free of lien and
encumbrances.
The records of the instant cases are hereby remanded to [HLURB] for its
appropriate disposition.
SO ORDERED. (Emphasis and words in brackets added)
In time, petitioner banks went to the CA on a petition for review under Rule 43 of
the Rules of Court whereat the appellate recourses were likewise consolidated
and docketed as CA-G.R. SP No. 92807, CA-G.R. SP No. 92808 and CA-G.R.
SP No. 92882.
As stated at the threshold hereof, the appellate court, in its assailed Decision 14 of
June 29, 2006, affirmed the OPs October 10, 2005 Decision as modified in its
December 22, 2005 Order, the affirmance being predicated, in gist, on the
following main premises:

1. A mortgage constituted on a condominium project without the approval of the

HLURB in violation of the prescription of Presidential Decree (PD) 957, like the
ASB-Metrobank-Trust Division mortgage contract, is void; a mortgage is
indivisible and cannot be divided into a valid and invalid parts.
2. The complaints of Dylanco and SLGT are not covered by the order issued by
the SEC suspending all actions and proceedings against ASB.
Petitioner banks separate motions for reconsideration were later denied in the
CAs equally assailed resolution15 dated October 31, 2006.
Hence, these separate petitions.
Although formulated a bit differently, the grounds and arguments advanced in
support of the petitions converge and focus on two issues, to wit:
1. The declaration of nullity of the entire mortgage constituted on the project land
site and the improvements thereon; and
2. The applicability to this case of the suspension order granted by SEC to ASB.
We DENY.
As to the first issue, it is the petitioners posture that the CA, and, before it, the
OP, erred when it declared the subject mortgage contract void in its entirety and
then directed both petitioner banks to release the mortgage on the Project.
We are not persuaded.
Both petitioners do not dispute executing the mortgage in question without the
HLURBs prior written approval and notice to both individual respondents.
Section 18 of Presidential Decree No. (PD) 957 The Subdivision and
Condominium Buyers Protective Decree provides:
SEC. 18. Mortgages. - No mortgage of any unit or lot shall be made by the
owner or developer without prior written approval of the [HLURB]. Such
approval shall not be granted unless it is shown that the proceeds of the
mortgage loan shall be used for the development of the condominium or
subdivision project . The loan value of each lot or unit covered by the mortgage
shall be determined and the buyer thereof, if any, shall be notified before the
release of the loan. The buyer may, at his option, pay his installment for the lot
or unit directly to the mortgagee who shall apply the payments to the
corresponding mortgage indebtedness secured by the particular lot or unit being
paid for . (Emphasis and word in bracket added)
There can thus be no quibbling that the project lot/s and the improvements
introduced or be introduced thereon were mortgaged in clear violation of the
aforequoted provision of PD 957. And to be sure, Dylanco and SLGT, as Project
unit buyers, were not notified of the mortgage before the release of the loan
proceeds by petitioner banks.
As it were, PD 957 aims to protect innocent subdivision lot and condominium unit
buyers against fraudulent real estate practices. Its preambulatory clauses say so
and the Court need not belabor the matter presently. Section 18, supra, of the
decree directly addresses the problem of fraud and other manipulative practices
perpetrated against buyers when the lot or unit they have contracted to acquire,
and which they religiously paid for, is mortgaged without their knowledge, let
alone their consent. The avowed purpose of PD 957 compels, as the OP
correctly stated, the reading of Section 18 as prohibitory and acts committed

contrary to it are void.16 Any less stringent construal would only accord
unscrupulous developers and their financiers unbridled discretion to follow or not
to follow PD 957 and thus defeat the very lofty purpose of that decree. It thus
stands to reason that a mortgage contract executed in breach of Section 18 of
the decree is null and void.
In Philippine National Bank v. Office of the President, 17 involving a defaulting
mortgagor-subdivision developer, a mortgagee-bank and a lot buyer, the Court
expounded on the rationale behind PD 957, as a tool to protect subdivision lot
and/or condominium unit buyers against developers and mortgaging banks, in
the following wise:
xxx [T]he unmistakable intent of the law [is] to protect innocent lot buyers from
scheming subdivision developers. As between these small lot buyers and the
gigantic financial institutions which the developers deal with, it is obvious that the
law as an instrument of social justice must favor the weak. Indeed, the
petitioner bank had at its disposal vast resources with which it could adequately
protect its loan activities, and therefore is presumed to have conducted the usual
"due diligence" checking and ascertaining the actual status, condition,
utilization and occupancy of the property offered as collateral. xxx On the other
hand, private respondents obviously were powerless to discover the attempt of
the land developer to hypothecate the property being sold to them. It was
precisely in order to deal with this kind of situation that P.D. 957 was enacted, its
very essence and intendment being to provide a protective mantle over helpless
citizens who may fall prey to the razzmatazz of what P.D. 957 termed
"unscrupulous subdivision and condominium sellers."
The Court then quoted with approval the following instructive comments of the
Solicitor General:
Verily, if P.D. 957 were to exclude from its coverage the aforecited mortgage
contract, the vigorous regulation which P.D. 957 seeks to impose on
unconscientious subdivision sellers will be translated into a feeble exercise of
police power just because the iron hand of the state cannot particularly touch
mortgage contracts badged with the unfortunate accident of having been
constituted prior to the enactment of P.D. 957. Indeed, it would be illogical in the
extreme if P.D. 957 is to be given full force and effect and yet, the fraudulent
practices and manipulations it seeks to curb. xxx
Given the foregoing perspective, the next question to be addressed turns on
whether or not the nullity extends to the entire mortgage contract.
The poser should be resolved, as the CA and OP did resolve it, in the affirmative.
This disposition stems from the basic postulate that a mortgage contract is, by
nature, indivisible.18 Consequent to this feature, a debtor cannot ask for the
release of any portion of the mortgaged property or of one or some of the several
properties mortgaged unless and until the loan thus secured has been fully paid,
notwithstanding the fact that there has been partial fulfillment of the obligation.
Hence, it is provided that the debtor who has paid a part of the debt cannot ask
for the proportionate extinguishments of the mortgage as long as the debt is not
completely satisfied.
The situation obtaining in the case at bench is within the purview of the aforesaid

rule on the indivisibility of mortgage. It may be that Section 18 of PD 957 allows

partial redemption of the mortgage in the sense that the buyer is entitled to pay
his installment for the lot or unit directly to the mortgagee so as to enable him the said buyer - to obtain title over the lot or unit after full payment thereof. Such
accommodation statutorily given to a unit/lot buyer does not, however, render the
mortgage contract also divisible. Generally, the divisibility of the principal
obligation is not affected by the indivisibility of the mortgage. The real estate
mortgage voluntarily constituted by the debtor (ASB) on the lots or units is one
and indivisible. In this case, the mortgage contract executed between ASB and
the petitioner banks is considered indivisible, that is, it cannot be divided among
the different buildings or units of the Project. Necessarily, partial extinguishment
of the mortgage cannot be allowed. In the same token, the annulment of the
mortgage is an all or nothing proposition. It cannot be divided into valid or invalid
parts. The mortgage is either valid in its entirety or not valid at all. In the present
case, there is doubtless only one mortgage to speak of. Ergo, a declaration of
nullity for violation of Section 18 of PD 957 should result to the mortgage being
nullified wholly.
It will not avail the petitioners any to feign ignorance of PD 957 requiring prior
written approval of the HLURB, they being charged with knowledge of such
requirement since granting loans secured by a real estate mortgage is an
ordinary part of their business.
Neither could they rightly claim to be mortgagees in good faith. We shall explain.
The unyielding rule is that persons dealing with property brought under the
Torrens system of land registration have the right to rely on what appears on the
certificate of title without inquiring further; 19 that in the absence of anything to
excite or arouse suspicion that should impel a reasonably cautious person to
make such further inquiry, a would-be mortgagee is without obligation to look
beyond the certificate and investigate the title of the mortgagor. Such rule,
however, does not apply to mortgagee-banks, 20 their business being one affected
with public interest, holding as they do and keeping, in trust, money pertaining to
the depositing public which they should guard with earnest. Unlike private
individuals, it behooves banks to exercise greater care and prudence in their
dealings, including those involving registered lands. 21 As we wrote in Cruz v.
Bancom Finance Corporation,22 "a banking institution is expected to exercise due
diligence before entering into a mortgage contract. The ascertainment of the
status or condition of a property offered to it as a security must be standard and
indispensable part of its operations." A bank that failed to observe due diligence
cannot be accorded the status of a bona fide mortgagee.23
Surely, petitioner banks cannot plausibly assert compliance with the due
diligence requirement exacted contextually by the situation. For, have they done
so, they could have easily discovered that there is an on-going condominium
project on the lots offered as mortgage collateral and, as such, could have
aroused their suspicion that the developer may have engaged in pre-selling, or,
with like effect, that there may be unit buyers therein, as was the case here.
Having been short in care and prudence, petitioners cannot be deemed to be
mortgagees in good faith entitled to the benefits arising from such status.

This thus brings us to the next issue of whether or not the HLURB, OP and,
necessarily, the CA reversibly erred in continuing with the resolution of this case
notwithstanding the rehabilitation proceedings before, and the appointment by,
the SEC of a receiver for ASB which, under Section 6 (c) 24 of PD 902-A, as
amended,25 necessarily suspended "all actions for claims" against distressed
corporations.
Petitioners maintain that individual respondents demands initially filed with the
HLURB partake of the nature of "claim" within the contemplation of the aforesaid
suspensive section of PD 902-A. They cite Sobrejuanite v. ASB Development
Corporation26 to drive home the idea of the encompassing reach of the word
"claim" which they deem to include any and all claims or demands of whatever
nature and character.
The Court is unable to accommodate the petitioners.
As we articulated in Arranza v. B.F. Homes, Inc.,27 the fact that respondent B.F.
Homes is under receivership does not preclude the continuance before the
HLURB of the case for specific performance of a real estate developers
obligation under PD 957. For, "[E]"ven if respondent is under receivership, its
obligations as a real estate developer under P.D. 957 are not suspended. Section
6 (C) of P.D. No. 902-A, as amended , on suspension of all actions for claims
against corporations refers solely to monetary claims." 28 Says the Court further:
xxx The appointment of a receiver does not dissolve the corporation, nor does it
interfere with the exercise of corporate rights. In this case where there appears to
be no restraints imposed upon respondent as it undergoes rehabilitation
receivership, respondent continues or should continue to perform its
contractual and statutory responsibilities to petitioners as homeowners.
xxx xxx xxx
No violation of the SEC order suspending payments to creditors would result as
far as petitioners complaint before the HLURB is concerned. To reiterate, what
petitioners seek to enforce are respondents obligation as subdivision developer
[for which the HLURB, not the SEC, is equipped with the expertise to deal with
the matter]. Such claims are basically not pecuniary in nature. 29
Arranza actually complemented the earlier case of Finasia Investments and
Finance Corporation v. CA30 where the Court defined and explained the term
"claim" in the following wise:
We agree that the word "claim" as used in Sec. 6 (c) of P.D. 902-A, as
amended, refers to debts or demands of a pecuniary nature. It means "the
assertion of a right to have money paid. It is used in special proceedings like
those before administrative court, on insolvency. Consequently, the word "claim"
Petitioners citation and undue reliance on Sobrejuanite is quite misplaced in view
of differing set of facts. In that case, the Court held that the HLURB is bereft of
jurisdiction to proceed with the case during the pendency of the rehabilitation
proceedings since the spouses Sobrejuanites claim involves pecuniary
consideration, or a claim for refund of the purchase price paid, with interest, to be
precise. Unlike the spouses Sobrejuanite in Sobrejuanite, SLGTs and Dylancos
complaints in the instant case did not seek monetary recovery or to touch the
corporate coffers of ASB ahead of others. They did not even consider themselves

as money claimants. All they ask was for the enforcement of ASBs statutory and
contractual obligations as a condominium developer. In the concrete, they
pressed for the delivery of their units free from all liens and encumbrances and
the declaration of nullity of the mortgage in question arising from the breach of
Section 18 of PD 957.
Significantly, in Sobrejuanite, the Court stated the observation, in reference to the
Arranza case, that "the proceedings before the HLURB [may] be suspended
during the rehabilitation [of the ailing corporation]" "if the claim was for monetary
awards."31
The Court is very much aware of A.M. No. 00-8-10-SC or the Interim Rules on
Corporate Rehabilitation32 which defines the term "claim" as including all claims
or demands of whatever character against a debtor or its property, whether for
money or otherwise. But as aptly explained by the CA, Section 24 33 of the interim
rules limits the coverage of the Rules on rehabilitation and consequently the rule
of suspension of action to those who stand in the category or debtors and
creditors. The relationship between the petitioner banks, as mortgagor of the
ASB property, on one hand, and respondents SLGT and Dylanco, as unit buyers,
on the other, cannot be that of a debtor-creditor as to bring the case within the
purview of the rules on corporate recovery, let alone the Sobrejuanite case. Then,
too, the vinculum that binds SLGT/Dylanco, as unit buyers and as suitors before
the HLURB, and ASB is far from being akin to that of debtor-creditor. As it were,
SLGT/Dylanco sued ASB for having constituted, in breach of PD 957, a mortgage
on the condominium project without prior HLURB approval and so much as
notifying them of the loan release for which reason they prayed for the delivery of
their units free from all liens and encumbrances. With the view we take of the
case, the complaint of individual respondents is not in the nature of "claims" that
should be covered by the suspensive effect of a rehabilitation proceeding.
Looking beyond the strictly legal issues involved in this case, however, the
pendency of the rehabilitation proceedings ought not, as stressed in the Order 34
of the OP, be invoked to defeat or deny the claim of individual respondents.
Suspending the proceedings would only perpetuate and compound the injustice
committed by ASB on SLGT and Dylanco. It would reduce to pure jargon the
beneficent provisions and render illusory the purpose of PD 957 which, to repeat,
is to protect innocent unit and lot buyers from scheming subdivision/condominium
owners/developers. As a matter of good conscience, the Court cannot allow it
under the factual and legal premises surrounding this case.
WHEREFORE, the instant petitions are DENIED and the assailed CA Decision
and Resolution are AFFIRMED.
Cost against the petitioners.
SO ORDERED.
PHILIPPINE AIRLINES, INCORPORATED, Petitioner, v. COURT OF APPEALS
AND SPOUSES MANUEL S. BUNCIO AND AURORA R. BUNCIO, MINORS
DEANNA R. BUNCIO AND NIKOLAI R. BUNCIO, ASSISTED BY THEIR
FATHER, MANUEL S. BUNCIO, AND JOSEFA REGALADO, REPRESENTED
BY HER ATTORNEY-IN-FACT, MANUEL S. BUNCIO, Respondents.

DECISION
CHICO-NAZARIO, J.:
Before Us is a Petition for Review 1 on Certiorari under Rule 45 of the Rules of
Court seeking to set aside the Decision, 2 dated 20 December 1995, of the Court
of Appeals in CA-G.R. CV No. 26921 which affirmed in toto the Decision,3 dated
2 April 1990, of the Quezon City Regional Trial Court (RTC), Branch 90, in Civil
Case No. Q-33893.
The undisputed facts are as follows:
Sometime before 2 May 1980, private respondents spouses Manuel S. Buncio
and Aurora R. Buncio purchased from petitioner Philippine Airlines, Incorporated,
two plane tickets4 for their two minor children, Deanna R. Buncio (Deanna), then
9 years of age, and Nikolai R. Buncio (Nikolai), then 8 years old. Since Deanna
and Nikolai will travel as unaccompanied minors, petitioner required private
respondents to accomplish, sign and submit to it an indemnity bond. 5 Private
respondents complied with this requirement. For the purchase of the said two
plane tickets, petitioner agreed to transport Deanna and Nikolai on 2 May 1980
from Manila to San Francisco, California, United States of America (USA),
through one of its planes, Flight 106. Petitioner also agreed that upon the arrival
of Deanna and Nikolai in San Francisco Airport on 3 May 1980, it would again
transport the two on that same day through a connecting flight from San
Francisco, California, USA, to Los Angeles, California, USA, via another airline,
United Airways 996. Deanna and Nikolai then will be met by their grandmother,
Mrs. Josefa Regalado (Mrs. Regalado), at the Los Angeles Airport on their
scheduled arrival on 3 May 1980.
On 2 May 1980, Deanna and Nikolai boarded Flight 106 in Manila.
On 3 May 1980, Deanna and Nikolai arrived at the San Francisco Airport.
However, the staff of United Airways 996 refused to take aboard Deanna and
Nikolai for their connecting flight to Los Angeles because petitioner's personnel in
San Francisco could not produce the indemnity bond accomplished and
submitted by private respondents. The said indemnity bond was lost by
petitioner's personnel during the previous stop-over of Flight 106 in Honolulu,
Hawaii. Deanna and Nikolai were then left stranded at the San Francisco Airport.
Subsequently, Mr. Edwin Strigl (Strigl), then the Lead Traffic Agent of petitioner in
San Francisco, California, USA, took Deanna and Nikolai to his residence in San
Francisco where they stayed overnight.
Meanwhile, Mrs. Regalado and several relatives waited for the arrival of Deanna
and Nikolai at the Los Angeles Airport. When United Airways 996 landed at the
Los Angeles Airport and its passengers disembarked, Mrs. Regalado sought
Deanna and Nikolai but she failed to find them. Mrs. Regalado asked a
stewardess of the United Airways 996 if Deanna and Nikolai were on board but

the stewardess told her that they had no minor passengers. Mrs. Regalado called
private respondents and informed them that Deanna and Nikolai did not arrive at
the Los Angeles Airport. Private respondents inquired about the location of
Deanna and Nikolai from petitioner's personnel, but the latter replied that they
were still verifying their whereabouts.
On the morning of 4 May 1980, Strigl took Deanna and Nikolai to San Francisco
Airport where the two boarded a Western Airlines plane bound for Los Angeles.
Later that day, Deanna and Nikolai arrived at the Los Angeles Airport where they
were met by Mrs. Regalado. Petitioner's personnel had previously informed Mrs.
Regalado of the late arrival of Deanna and Nikolai on 4 May 1980.
On 17 July 1980, private respondents, through their lawyer, sent a letter 6 to
petitioner demanding payment of 1 million pesos as damages for the gross
negligence and inefficiency of its employees in transporting Deanna and Nikolai.
Petitioner did not heed the demand.
On 20 November 1981, private respondents filed a complaint 7 for damages
against petitioner before the RTC. Private respondents impleaded Deanna,
Nikolai and Mrs. Regalado as their co-plaintiffs. Private respondents alleged that
Deanna and Nikolai were not able to take their connecting flight from San
Francisco to Los Angeles as scheduled because the required indemnity bond
was lost on account of the gross negligence and malevolent conduct of
petitioner's personnel. As a consequence thereof, Deanna and Nikolai were
stranded in San Francisco overnight, thereby exposing them to grave danger.
This dilemma caused Deanna, Nikolai, Mrs. Regalado and private respondents to
suffer serious anxiety, mental anguish, wounded feelings, and sleepless nights.
Private respondents prayed the RTC to render judgment ordering petitioner: (1)
to pay Deanna and Nikolai P100,000.00 each, or a total of P200,000.00, as
moral damages; (2) to pay private respondents P500,000.00 each, or a total of
P1,000,000,00, as moral damages; (3) to pay Mrs. Regalado P100,000.00 as
moral damages; (4) to pay Deanna, Nikolai, Mrs. Regalado and private
respondents P50,000.00 each, or a total of P250,000.00 as exemplary damages;
and (5) to pay attorney's fees equivalent to 25% of the total amount of damages
mentioned plus costs of suit.
In its answer8 to the complaint, petitioner admitted that Deanna and Nikolai were
not allowed to take their connecting flight to Los Angeles and that they were
stranded in San Francisco. Petitioner, however, denied that the loss of the
indemnity bond was caused by the gross negligence and malevolent conduct of
its personnel. Petitioner averred that it always exercised the diligence of a good
father of the family in the selection, supervision and control of its employees. In
addition, Deanna and Nikolai were personally escorted by Strigl, and the latter
exerted efforts to make the connecting flight of Deanna and Nikolai to Los
Angeles possible. Further, Deanna and Nikolai were not left unattended from the
time they were stranded in San Francisco until they boarded Western Airlines for

a connecting flight to Los Angeles. Petitioner asked the RTC to dismiss the
complaint based on the foregoing averments.

1
2
3

4
5

After trial, the RTC rendered a Decision on 2 April 1990 holding petitioner liable
for damages for breach of contract of carriage. It ruled that petitioner should pay
moral damages for its inattention and lack of care for the welfare of Deanna and
Nikolai which, in effect, amounted to bad faith, and for the agony brought by the
incident to private respondents and Mrs. Regalado. It also held that petitioner
should pay exemplary damages by way of example or correction for the public
good under Article 2229 and 2232 of the Civil Code, plus attorney's fees and
costs of suit. In sum, the RTC ordered petitioner: (1) to pay Deanna and Nikolai
P50,000.00 each as moral damages and P25,000.00 each as exemplary
damages; (2) to pay private respondent Aurora R. Buncio, as mother of Deanna
and Nikolai, P75,000.00 as moral damages; (3) to pay Mrs. Regalado, as
grandmother of Deanna and Nikolai, P30,000.00 as moral damages; and (4) to
pay an amount of P38,250.00 as attorney's fees and the costs of suit. Private
respondent Manuel S. Buncio was not awarded damages because his court
testimony was disregarded, as he failed to appear during his scheduled crossexamination. The dispositive portion of the RTC Decision reads:
ACCORDINGLY, judgment is hereby rendered:
Ordering defendant Philippines Airlines, Inc. to pay Deanna R. Buncio and
Nikolai R. Buncio the amount of P50,000.00 each as moral damages; and the
amount of P25,000.00 each as exemplary damages;
Ordering said defendant to pay the amount of P75,000.00 to Aurora R. Buncio,
mother of Deanna and Nikolai, as moral damages; and the amount of
P30,000.00 to Josefa Regalado, grandmother of Deanna and Nikolai, as moral
damages; and
Ordering said defendant to pay P38,250.00 as attorney's fees and also the costs
of the suit.9
Petitioner appealed to the Court of Appeals. On 20 December 1995, the
appellate court promulgated its Decision affirming in toto the RTC Decision, thus:
WHEREFORE, the decision appealed is hereby AFFIRMED in toto and the
instant appeal DISMISSED.10
Petitioner filed the instant petition before us assigning the following errors 11:
I.
THE COURT OF APPEALS ERRED IN SUSTAINING THE RTC AWARD OF
MORAL DAMAGES.
II.
THE COURT OF APPEALS ERRED IN SUSTAINING THE RTC AWARD OF
EXEMPLARY DAMAGES.

III.
THE COURT OF APPEALS ERRED IN SUSTAINING THE RTC AWARD OF
ATTORNEY'S FEES AND ORDER FOR PAYMENT OF COSTS.
Anent the first assigned error, petitioner maintains that moral damages may be
awarded in a breach of contract of air carriage only if the mishap results in death
of a passenger or if the carrier acted fraudulently or in bad faith, that is, by
breach of a known duty through some motive of interest or ill will, some dishonest
purpose or conscious doing of wrong; if there was no finding of fraud or bad faith
on its part; if, although it lost the indemnity bond, there was no finding that such
loss was attended by ill will, or some motive of interest, or any dishonest
purpose; and if there was no finding that the loss was deliberate, intentional or
consciously done.12
Petitioner also claims that it cannot be entirely blamed for the loss of the
indemnity bond; that during the stop-over of Flight 106 in Honolulu, Hawaii, USA,
it gave the indemnity bond to the immigration office therein as a matter of
procedure; that the indemnity bond was in the custody of the said immigration
office when Flight 106 left Honolulu, Hawaii, USA; that the said immigration office
failed to return the indemnity bond to petitioner's personnel before Flight 106 left
Honolulu, Hawaii, USA; and that even though it was negligent in overlooking the
indemnity bond, there was still no liability on its part because mere carelessness
of the carrier does not per se constitute or justify an inference of malice or bad
faith.13
When an airline issues a ticket to a passenger, confirmed for a particular flight on
a certain date, a contract of carriage arises. The passenger has every right to
expect that he be transported on that flight and on that date, and it becomes the
airline's obligation to carry him and his luggage safely to the agreed destination
without delay. If the passenger is not so transported or if in the process of
transporting, he dies or is injured, the carrier may be held liable for a breach of
contract of carriage.14
Private respondents and petitioner entered into a contract of air carriage when
the former purchased two plane tickets from the latter. Under this contract,
petitioner obliged itself (1) to transport Deanna and Nikolai, as unaccompanied
minors, on 2 May 1980 from Manila to San Francisco through one of its planes,
Flight 106; and (2) upon the arrival of Deanna and Nikolai in San Francisco
Airport on 3 May 1980, to transport them on that same day from San Francisco to
Los Angeles via a connecting flight on United Airways 996. As it was, petitioner
failed to transport Deanna and Nikolai from San Francisco to Los Angeles on the
day of their arrival at San Francisco. The staff of United Airways 996 refused to
take aboard Deanna and Nikolai for their connecting flight to Los Angeles
because petitioner's personnel in San Francisco could not produce the indemnity
bond accomplished and submitted by private respondents. Thus, Deanna and
Nikolai were stranded in San Francisco and were forced to stay there overnight.

It was only on the following day that Deanna and Nikolai were able to leave San
Francisco and arrive at Los Angeles via another airline, Western Airlines. Clearly
then, petitioner breached its contract of carriage with private respondents.
In breach of contract of air carriage, moral damages may be recovered where (1)
the mishap results in the death of a passenger; or (2) where the carrier is guilty of
fraud or bad faith; or (3) where the negligence of the carrier is so gross and
reckless as to virtually amount to bad faith.15
Gross negligence implies a want or absence of or failure to exercise even slight
care or diligence, or the entire absence of care. It evinces a thoughtless
disregard of consequences without exerting any effort to avoid them. 16
In Singson v. Court of Appeals,17 we ruled that a carrier's utter lack of care for
and sensitivity to the needs of its passengers constitutes gross negligence and is
no different from fraud, malice or bad faith. Likewise, in Philippine Airlines, Inc. v.
Court of Appeals,18 we held that a carrier's inattention to, and lack of care for, the
interest of its passengers who are entitled to its utmost consideration, particularly
as to their convenience, amount to bad faith and entitles the passenger to an
award of moral damages.
It was established in the instant case that since Deanna and Nikolai would travel
as unaccompanied minors, petitioner required private respondents to
accomplish, sign and submit to it an indemnity bond. Private respondents
complied with this requirement. Petitioner gave a copy of the indemnity bond to
one of its personnel on Flight 106, since it was required for the San FranciscoLos Angeles connecting flight of Deanna and Nikolai. Petitioner's personnel lost
the indemnity bond during the stop-over of Flight 106 in Honolulu, Hawaii. Thus,
Deanna and Nikolai were not allowed to take their connecting flight.
Evidently, petitioner was fully aware that Deanna and Nikolai would travel as
unaccompanied minors and, therefore, should be specially taken care of
considering their tender age and delicate situation. Petitioner also knew well that
the indemnity bond was required for Deanna and Nikolai to make a connecting
flight from San Francisco to Los Angeles, and that it was its duty to produce the
indemnity bond to the staff of United Airways 996 so that Deanna and Nikolai
could board the connecting flight. Yet, despite knowledge of the foregoing, it did
not exercise utmost care in handling the indemnity bond resulting in its loss in
Honolulu, Hawaii. This was the proximate cause why Deanna and Nikolai were
not allowed to take the connecting flight and were thus stranded overnight in San
Francisco. Further, petitioner discovered that the indemnity bond was lost only
when Flight 106 had already landed in San Francisco Airport and when the staff
of United Airways 996 demanded the indemnity bond. This only manifests that
petitioner did not check or verify if the indemnity bond was in its custody before
leaving Honolulu, Hawaii for San Francisco.

The foregoing circumstances reflect petitioner's utter lack of care for and
inattention to the welfare of Deanna and Nikolai as unaccompanied minor
passengers. They also indicate petitioner's failure to exercise even slight care
and diligence in handling the indemnity bond. Clearly, the negligence of petitioner
was so gross and reckless that it amounted to bad faith.
It is worth emphasizing that petitioner, as a common carrier, is bound by law to
exercise extraordinary diligence and utmost care in ensuring for the safety and
welfare of its passengers with due regard for all the circumstances. 19 The
negligent acts of petitioner signified more than inadvertence or inattention and
thus constituted a radical departure from the extraordinary standard of care
required of common carriers.
Petitioner's claim that it cannot be entirely blamed for the loss of the indemnity
bond because it gave the indemnity bond to the immigration office of Honolulu,
Hawaii, as a matter of procedure during the stop-over, and the said immigration
office failed to return the indemnity bond to petitioner's personnel before Flight
106 left Honolulu, Hawaii, deserves scant consideration. It was petitioner's
obligation to ensure that it had the indemnity bond in its custody before leaving
Honolulu, Hawaii for San Francisco. Petitioner should have asked for the
indemnity bond from the immigration office during the stop-over instead of partly
blaming the said office later on for the loss of the indemnity bond. Petitioner's
insensitivity on this matter indicates that it fell short of the extraordinary care that
the law requires of common carriers.
Petitioner, nonetheless, insists that the following circumstances negate gross
negligence on its part: (1) Strigl requested the staff of United Airways 996 to
allow Deanna and Nikolai to board the plane even without the indemnity bond;
(2) Strigl took care of the two and brought them to his house upon refusal of the
staff of the United Airways 996 to board Deanna and Nikolai; (3) private
respondent Aurora R. Buncio and Mrs. Regalado were duly informed of Deanna
and Nikolai's predicament; and (4) Deanna and Nikolai were able to make a
connecting flight via an alternative airline, Western Airlines. 20 We do not agree. It
was petitioner's duty to provide assistance to Deanna and Nikolai for the
inconveniences of delay in their transportation. These actions are deemed part of
their obligation as a common carrier, and are hardly anything to rave about. 21
Apropos the second and third assigned error, petitioner argues that it was not
liable for exemplary damages because there was no wanton, fraudulent,
reckless, oppressive, or malevolent manner on its part. Further, exemplary
damages may be awarded only if it is proven that the plaintiff is entitled to moral
damages. Petitioner contends that since there was no proof that private
respondents were entitled to moral damages, then they are also not entitled to
exemplary damages.22
Petitioner also contends that no premium should be placed on the right to litigate;

that an award of attorney's fees and order of payment of costs must be justified in
the text of the decision; that such award cannot be imposed by mere conclusion
without supporting explanation; and that the RTC decision does not provide any
justification for the award of attorney's fees and order of payment of costs. 23
Article 2232 of the Civil Code provides that exemplary damages may be awarded
in a breach of contract if the defendant acted in a wanton, fraudulent, reckless,
oppressive or malevolent manner. In addition, Article 2234 thereof states that the
plaintiff must show that he is entitled to moral damages before he can be
awarded exemplary damages.
As we have earlier found, petitioner breached its contract of carriage with private
respondents, and it acted recklessly and malevolently in transporting Deanna
and Nikolai as unaccompanied minors and in handling their indemnity bond. We
have also ascertained that private respondents are entitled to moral damages
because they have sufficiently established petitioner's gross negligence which
amounted to bad faith. This being the case, the award of exemplary damages is
warranted.
Current jurisprudence24 instructs that in awarding attorney's fees, the trial court
must state the factual, legal, or equitable justification for awarding the same,
bearing in mind that the award of attorney's fees is the exception, not the general
rule, and it is not sound public policy to place a penalty on the right to litigate; nor
should attorney's fees be awarded every time a party wins a lawsuit. The matter
of attorney's fees cannot be dealt with only in the dispositive portion of the
decision. The text of the decision must state the reason behind the award of
attorney's fees. Otherwise, its award is totally unjustified. 25
In the instant case, the award of attorney's fees was merely cited in the
dispositive portion of the RTC decision without the RTC stating any legal or
factual basis for said award. Hence, the Court of Appeals erred in sustaining the
RTC's award of attorney's fees.
Since we have already resolved that the RTC and Court of Appeals were correct
in awarding moral and exemplary damages, we shall now determine whether
their corresponding amounts were proper.
The purpose of awarding moral damages is to enable the injured party to obtain
means, diversion or amusement that will serve to alleviate the moral suffering he
has undergone by reason of defendant's culpable action. 26 On the other hand,
the aim of awarding exemplary damages is to deter serious wrongdoings. 27
Article 2216 of the Civil Code provides that assessment of damages is left to the
discretion of the court according to the circumstances of each case. This
discretion is limited by the principle that the amount awarded should not be
palpably excessive as to indicate that it was the result of prejudice or corruption

on the part of the trial court.28 Simply put, the amount of damages must be fair,
reasonable and proportionate to the injury suffered.
The RTC and the Court of Appeals ordered petitioner to pay Deanna and Nikolai
P50,000.00 each as moral damages. This amount is reasonable considering the
harrowing experience they underwent at their tender age and the danger they
were exposed to when they were stranded in San Francisco. Both of them
testified that they were afraid and were not able to eat and sleep during the time
they were stranded in San Francisco. 29 Likewise, the award of P25,000.00 each
to Deanna and Nikolai as exemplary damages is fair so as to deter petitioner and
other common carriers from committing similar or other serious wrongdoings.
Both courts also directed petitioner to pay private respondent Aurora R. Buncio
P75,000.00 as moral damages. This is equitable and proportionate considering
the serious anxiety and mental anguish she experienced as a mother when
Deanna and Nikolai were not allowed to take the connecting flight as scheduled
and the fact that they were stranded in a foreign country and in the company of
strangers. Private respondent Aurora R. Buncio testified that she was very fearful
for the lives of Deanna and Nikolai when they were stranded in San Francisco,
and that by reason thereof she suffered emotional stress and experienced upset
stomach.30 Also, the award of P30,000.00 as moral damages to Mrs. Regalado is
appropriate because of the serious anxiety and wounded feelings she felt as a
grandmother when Deanna and Nikolai, whom she was to meet for the first time,
did not arrive at the Los Angeles Airport. Mrs. Regalado testified that she was
seriously worried when Deanna and Nikolai did not arrive in Los Angeles on 3
May 1980, and she was hurt when she saw the two crying upon arriving in Los
Angeles on 4 May 1980.31 The omission of award of damages to private
respondent Manuel S. Buncio was proper for lack of basis. His court testimony
was rightly disregarded by the RTC because he failed to appear in his scheduled
cross-examination.32
On another point, we held in Eastern Shipping Lines, Inc. v. Court of Appeals,33
that when an obligation, not constituting a loan or forbearance of money is
breached, an interest on the amount of damages awarded may be imposed at
the rate of 6% per annum. We further declared that when the judgment of the
court awarding a sum of money becomes final and executory, the rate of legal
interest, whether it is a loan/forbearance of money or not, shall be 12% per
annum from such finality until its satisfaction, this interim period being deemed to
be then equivalent to a forbearance of credit.
In the instant case, petitioner's obligation arose from a contract of carriage and
not from a loan or forbearance of money. Thus, an interest of 6% per annum
should be imposed on the damages awarded, to be computed from the time of
the extra-judicial demand on 17 July 1980 up to the finality of this Decision. In
addition, the interest shall become 12% per annum from the finality of this
Decision up to its satisfaction.

Finally, the records34 show that Mrs. Regalado died on 1 March 1995 at the age
of 74, while Deanna passed away on 8 December 2003 at the age of 32. This
being the case, the foregoing award of damages plus interests in their favor
should be given to their respective heirs.
WHEREFORE, the Petition is PARTLY GRANTED. The Decision of the Court of
Appeals, dated 20 December 1995, in CA-G.R. CV No. 26921, is hereby
AFFIRMED with the following MODIFICATIONS: (1) the award of attorney's fees
is deleted; (2) an interest of 6% per annum is imposed on the damages awarded,
to be computed from 17 July 1980 up to the finality of this Decision; and (3) an
interest of 12% per annum is also imposed from the finality of this Decision up to
its satisfaction. The damages and interests granted in favor of deceased Mrs.
Regalado and deceased Deanna are hereby awarded to their respective heirs.
Costs against petitioner.
SO ORDERED.
G.R. No. 164958
January 27, 2006
SY CHIM and FELICIDAD CHAN SY, Petitioners,
vs.
SY SIY HO & SONS, INC., doing business under the name and style GUAN
YIAC HARDWARE, Respondents.
DECISION
CALLEJO, SR., J.:
The Sy Siy Ho & Sons, Inc. (hereinafter referred to as the corporation) is a
domestic corporation which was organized in the 1940s, 1 engaged primarily in
importing, buying and selling hardware, machineries, spare parts, supplies and
other allied products and merchandise to be sold exclusively on wholesale basis.
It was doing business under the name and style Guan Yiac Hardware 2 with office
at No. 453-455 T. Pinpin Street, Binondo, Manila.
The corporation was owned and controlled by Sy Chim and his children.
Sometime in 1990, a controversy ensued between Sy Chims two sons, Sy Tiong
Shiou and Sy Tiong Bio who was then the Vice President for Finance. Sy Chim
sided with Sy Tiong Shiou. The intra-corporate dispute reached the Securities
and Exchange Commission (SEC), docketed as SEC Case No. 04443.
On May 31, 1993, the stockholders of record, Sy Chim and Sy Tiong Shiou (Sy
Chim Group), on the one hand, and Sy Tiong Bio, Sy Tiong Gue, Sy Tiong Sim,
Sy Tiong Han and Sy Tiong Yan (Sy Tiong Bio Group), on the other, executed a
Compromise Agreement,3 where the latter group relinquished their shares to Sy
Chim. The parties also agreed to divide and distribute the assets and liabilities of
the corporation as follows:
(a) Mr. SY CHIM GROUP Four (4) parts, or three (3) parts Sy Chim, one (1)
part Sy Tiong Shiou.
(b) Mr. SY TIONG BIO GROUP Five (5) parts at the rate of one (1) each. 4
Some of the shares of stocks were assigned to Felicidad Chan Sy, wife of Sy
Chim. The spouses Sy Chim and Felicidad Chan Sy, and spouses Sy Tiong

Shiou and Juanita Tan Sy, and their children, Charlie, Romer and Jesse James
Tan, then became stockholders and members of the Board of Directors of the
corporation. The officers of the corporation were as follows: Sy Chim, President;
Felicidad Chan Sy, Assistant Treasurer; Sy Tiong Shiou, Vice President and
General Manager; Juanita Tan Sy (wife of Sy Tiong Shiou), Corporate Treasurer;
and Charlie Tan (son of spouses Sy Tiong Shiou), Assistant General Manager.
As of the year 2000, the corporation had a gross profit of P45,084,908.11 and
P42,954,252.32 in 2001.5 As of April 19, 2002, it had a capital stock of
P150,000,000.00, divided into 150,000 shares, with a par value of P1,000.00 per
share. The treasury stocks amounted to P70,720,000.00. It had a subscribed and
paid-up capital of 103,733 shares and P103,733,000.00 respectively. The
stockholders and the respective shareholdings were as follows:
Stockholder

No. of Shares
Subscribed

Amount Subscribed
and Paid (PHP)

SY CHIM

35,013

35,013,000

FELICIDAD CHAN SY

17,509

17,509,000

CHARLIE TAN

20,338

20,338,000

ROMER TAN

19,636

19,636,000

JESSE JAMES TAN

11,233

11,233,000

SY TIONG SHIOU

2,000

JUANITA TAN SY

2,000

103,733

PHP103,733,0006

TOTAL

After almost a decade later, another intra-corporate dispute ensued, this time
between Sy Chim and his wife, on the one hand, and their son Sy Tiong Shiou,
on the other. In a letter addressed to the corporation dated February 3, 2003,
Corporate Treasurer Juanita Tan Sy requested that she immediately be "removed
from all responsibilities and obligations pertaining to all corporate funds" of the
corporation, considering that Felicidad Chan Sy was the one who handled and
managed all deposits and funds while Sy Chim supervised all expenditures. She
further reported that Felicidad Chan Sy did not make any cash deposit to any
bank from November 1, 2002 to January 31, 2003, and that the total amount of
cash as reflected in the bank statements is far less than that reported in the
corporations financial statements and other records. She then proposed that the
Board call a special meeting to discuss these matters. 7 Thus, on March 24, 2003,
a special meeting of the board of directors was held with the spouses Sy Tiong
Shiou and Juanita Tan Sy and their sons Charlie, Romer and Jesse James Tan in
attendance. In two separate resolutions, Juanita Tan Sy was removed as
corporate treasurer and relieved of all responsibilities; the spouses Sy Chim were
held accountable for the undeposited money; and a new external auditor was

hired to make a complete audit of all books and records. 8 Banaria Banaria and
Company then submitted Financial Reports covering 2001 and 2002. 9
In a Letter10 dated April 15, 2003, Sy Tiong Shiou informed his parents of the
corporations cash balance shortage as of March 31, 2003 (as reflected in the
auditors report) and that there was also an undeposited amount of
P2,000,000.00 for the current salary and emergency funds, and they had several
postdated checks in their possession. Sy Tiong Shiou requested that the
shortage be accounted for, and that the undeposited funds be remitted. He also
requested that the postdated checks and original receipts for all disbursements of
corporate funds be turned over to Corporate Treasurer Juanita Tan Sy. The
spouses Sy Chim did not respond.
Spouses Sy Tiong Shiou and Juanita Tan Sy, their three sons held another
meeting on April 21, 2003, again without written notice to the spouses Sy Chim,
and approved a resolution11 authorizing Romer Tan to file a complaint for and in
behalf of the corporation against the said spouses in the Regional Trial Court
(RTC) of Manila. Sy Tiong Shiou was elected President of the corporation.
The complaint12 for accounting and damages against the spouses Sy Chim was
filed on May 6, 2003. The complaint alleged that Felicidad Chan Sy, as custodian
of all cash collections, had been depositing amounts less than those appearing in
the financial statements which are in the defendants custody and that no
deposits were made in the corporations account from November 1, 2002 to
January 31, 2003. Based on the accountants report, Felicidad Chan Sy failed to
account for P67,117,230.30. Plaintiff further alleged that, based on the
corporations General Information Sheet for 2003, the subscribed shares of the
corporation were as follows:
Name of Subscriber

No. of Shares
Subscribed

Amount Paid-Up

Sy Tiong Shiou

27,987

P 27,987,000.00

Juanita Tan

32,017

32,017,000.00

Charlie Tan

12,512

12,512,000.00

Romer Tan

12,079

12,079,000.00

Jesse James Tan

6,910

6,910,000.00

Sy Chim

21,539

21,539,000.00

Felicidad Chan Sy

10,771

10,771,000.00

Total

123,815

P123,815,000.0013

Plaintiff prayed that, after due proceedings, judgment be rendered in its favor, as
follows:
a. Ordering defendants to render a full, complete and true accounting of all the
amounts, proceeds and funds paid to, received and earned by the plaintiff since
1993 and to restitute to the plaintiff, jointly and severally, all such amounts,

proceeds and funds that they have misappropriated;

b. Ordering defendants to pay, jointly and severally, the plaintiff the amount of
One Million (P1,000,000.00) Pesos by way of exemplary damages, and One
Million (P1,000,000.00) Pesos by way of attorneys fees plus Five Thousand
(P5,000.00) Pesos per court appearance and litigation expenses in the amount of
not less than One Hundred Thousand (P100,000.00) Pesos;
c. Cost of suit.
Plaintiff further prays for such other reliefs [it] deems just and equitable in the
premises.14
In their answer15 to the complaint, defendants averred, inter alia, that any
unaccounted cash account and irregularities in the management of the
corporation, if any, were the full responsibility of Sy Tiong Shiou, Romer Tans
own father, since he has direct and actual management of the corporation under
the by-laws. Sy Chim, as corporate president, was a mere figurehead, who only
had general supervision over the corporations officers. Juanita Tan Sy, as
corporate treasurer, had custody of the corporations funds and should have kept
a complete and accurate record of receipts, disbursements, and other
commercial transactions of the corporation. Felicidad Chan Sy merely performed
clerical work and acted as Corporate Treasurer only in the absence of Juanita
Tan Sy and under the latters close supervision. They averred that any and all
meetings of the stockholders and members of the corporations Board of
Directors were null and void as they violated the corporate by-laws as well as the
Corporation Code. Defendants further denied executing any deed or document
authorizing the transfer of their shares, or that treasury shares had been issued
by the corporation. Assuming that treasury shares were validly issued in 2002 as
claimed in the complaint, defendants should have been allowed to exercise their
pre-emptive rights over such shares.
Defendants prayed that they be granted the following reliefs:
(1) Dismissing the instant Complaint for utter lack of merit;
(2) Ordering Plaintiff Mr. Romer S. Tan to pay the following:
(a) Three Million Pesos (PHP3,000,000.00), by way of moral damages;
(b) Three Million Pesos (PHP3,000,000.00), by way of exemplary damages;
(c) Two Million Pesos (PHP2,000,000.00), by way of attorneys fees;
(d) Costs of suit.
Other reliefs just and equitable under the premises are, likewise prayed for.16
Feeling aggrieved, the spouses Sy Chim and Felicidad Chan Sy filed a criminal
complaint in the Office of the City Prosecutor of Makati against the spouses Sy
Tiong Shiou and their children for violation of Section 74 of the Corporation Code.
In the meantime, Sy Chim, as corporate president, called for a stockholders
meeting on June 11, 2003. An amended complaint was filed on July 1, 2003,
praying for the issuance of a temporary restraining order and/or writ of
preliminary prohibitory injunction. It was alleged, among others, that on April 15,
2003, defendant Sy Chim and his other children and the siblings of Sy Tiong
Shiou, namely, Sy Yu Hui-Pabilona, Sy Tiong Gue, Sy Tiong Yan, Sy Yu San, Sy
Yu Siong, Sy Yu Bun and her son, Bryan Lim, with two armed unidentified men,
forcibly entered the office and took P6,500,000.00 in cash and postdated checks

and other important documents, including five boxes of Hennesy X.O. wine.
Since defendant Sy Chim abandoned his duties and responsibilities as president,
the board of directors elected Sy Tiong Shiou as president during a special
meeting on May 6, 2003. Sy Chim issued a Notice of Stockholders Meeting on
June 11, 2003 although he was no longer the president of the corporation. The
amended complaint further alleged that a criminal complaint for robbery was filed
against the culprits in the Office of the City Prosecutor of Manila.
The plaintiff corporation prayed for that the court grant injunctive relief, as
follows:
a. An order be issued making the preliminary injunction permanent;
b. Ordering defendants to render a full, complete and true accounting of all the
amounts, proceeds and funds paid to, received and earned by the plaintiff since
1993 and to restitute to the plaintiff, jointly and severally, all such amounts,
proceeds and funds that they have misappropriated;
c. Ordering defendants to pay, jointly and severally, the plaintiff the amount of
One Million (P1,000,000.00) Pesos by way of exemplary damages, and One
Million (P1,000,000.00) Pesos by way of attorneys fees plus Five Thousand
(P5,000.00) Pesos per court appearance and litigation expenses in the amount of
not less than One Hundred Thousand (P100,000.00) Pesos;
d. Cost of suit.
Plaintiff further prays for such other reliefs [it] deems just and equitable in the
premises.17
During the hearing of plaintiffs petition for injunctive relief, defendants submitted
the following to the court: a Joint Affidavit, 18 the Joint Supporting Affidavit19 of See
Cha and See Su Pe, and the Complaint-Affidavit 20 of Felicidad Chan Sy for
violation of Section 74 of the Corporation Code against the spouses Sy Tiong
Shiou and Juanita Tan Sy, Jolie Ross Tan, Charlie Tan, Romer Tan and Jesse
James Tan filed in the Office of the City Prosecutor.
On August 6, 2003, the RTC issued an Order 21 granting the plea for a writ of
preliminary injunction on a bond of P500,000.00, and enjoined defendant Sy
Chim or any person acting for and in his behalf from "calling or holding a
stockholders and/or Board of Directors meetings" of the corporation. This was
followed by a writ of preliminary injunction.22
On July 18, 2003, defendants filed a "Motion for Production and Inspection of
Documents"23 (all the corporate books, accounting records, financial statements
and other documents mentioned in, and pertinent to, the allegations of the
complaint), praying that they be permitted to inspect, examine and photocopy
such documents. Plaintiff opposed the motion, contending that it was premature
because defendants had not yet filed their answer to the complaint. 24 On August
5, 2003, defendants also filed a "Motion for the Appointment of an Independent
Auditor," to conduct an audit of the funds and assets of the plaintiff corporation. 25
Plaintiff did not object to the motion. 26 The RTC granted the motion on August 8,
2003 and appointed the accounting firm of Punongbayan & Araullo to conduct the
audit of the corporations books and records covering the period from 1993 to the
present. The Motion for Production and Inspection of Documents filed by the
defendants was, however, denied. Instead, the parties have been directed to

provide the accounting firm of all the books of accounts, vouchers, receipts,
purchase orders and similar other documents necessary, and warned that failure
to comply with the order will be dealt with as for contempt. The RTC also directed
plaintiff to make its records available to the accounting firm, and after completion
of the firms task, to make such records available for defendants inspection. 27
In their answer to the amended complaint, defendants averred that the meetings
of the stockholders and board of directors were null and void for having been
conducted without prior notice to them.28
Meanwhile, plaintiff moved that the court set aside its Order appointing an
independent auditor.
On August 26, 2003, defendants filed a "Motion for the Appointment of a
Management Committee,"29 thus:
3. Defendants alleged that under Article IV of the By-Laws of Sy Siy Ho & Sons,
Inc., the funds of the corporation are under the supervision, control and
administration of Sy Tiong Shiou, as the General Manager, and Sy Tiong Shious
wife, Juanita Tan, as Treasurer; and that the direction and control of the business
and operations of Guan Yiac Hardware were in the hands of the General
Manager Sy Tiong Shiou, who had the power to direct and actively manage Guan
Yiac Hardware.
4. Thus, defendants alleged that for any unaccounted difference of the
corporations account, including the PHP67,117,230.30 alleged in the Amended
Complaint, it is Sy Tiong Shiou and Juanita Tan who are at fault in view of their
powers as General Manager and Treasurer under the By-Laws of the
Corporation and in actual practice since they have active control of the day-today operations of the Corporation.
5. However, while this Honorable Court will still determine, in the course of these
proceedings, whether it is defendants Sy Chim and Felicidad Chan Sy or whether
it is Sy Tiong Shiou and Juanita Tan who are the parties responsible for the
dissipation and loss of the corporate funds and assets of Sy Siy Ho & Sons, Inc.,
the active day-to-day control and management of Sy Siy Ho & Sons, Inc. is still
under the control and supervision of Sy Tiong Shiou and Juanita Tan, especially
so since defendants had been physically ousted from their residence by Sy Tiong
Shiou and his family since 15 April 2003, and defendants have been denied
access to the corporate premises and its books and records.
6. The plaintiff itself has alleged that there has been a massive dissipation and
loss of its corporate assets and funds, and this Court is still in the process of
determining whether the General Manager, Sy Tiong Shiou, and Treasurer,
Juanita Tan, are the parties responsible for such dissipation and loss. In view of
the foregoing, until this Honorable Court resolves with finality that Sy Tiong Shiou
and his wife, Juanita Tan, are not responsible for the dissipation and loss, the
control and management of the Corporation must be transferred to an
independent party to ensure the preservation of the corporate assets.
7. While Sy Tiong Shiou and Juanita Tan remain in control of the management of
the corporation, there is imminent danger of further dissipation, loss, wastage or
destruction of the corporate funds and assets.
8. Nor can control and management of the corporation be transferred to the other

stockholders Romer Sy Tan, Jesse James Tan and Charlie Tan, or the Corporate
Secretary Jolie Ross S. Tan, who are all children of Sy Tiong Shiou and Juanita
Tan.
9. Annexes "E" and "J" of the Amended Complaint, show that Romer Sy Tan,
Jesse James Tan and Charlie Tan, and Jolie Ross S. Tan, allegedly acting as the
members of the Board of Directors and the corporate secretary of Sy Siy Ho &
Sons, Inc., took part in the actuations against defendants.
9.1 Plaintiffs annex "E" shows that Romer Sy Tan, Jesse James Tan and Charlie
Tan all signed the minutes of the purported special meeting of the board of
directors wherein, in a highly self-serving manner, Juanita Tan was declared to
have no knowledge of the deposits, disbursements and expenditures of the
plaintiff since 1993, and that all of these as well as the deposits were in the
control of the defendants. Jolie Ross Tan, on the other hand, signed the
Secretarys Certificate wherein Juanita Tan was removed of all responsibilities
pertaining to the funds of the corporation since 1993.
9.2 On the other hand, annex "J" of plaintiffs Amended Complaint shows that
Romer Sy Tan, Jesse James Tan and Charlie Tan, and Jolie Ross S. Tan all
signed the minutes of the purported special joint meeting of the board of directors
and stockholders wherein they supposedly declared defendant Sy Chim as
having abandoned his position, made Sy Tiong Shiou the President and
Chairman of the Board of Directors of the corporation, made Juanita Tan the Vice
President of the corporation, and cancelled defendant Sy Chims authority as a
signatory on the corporations bank accounts.
9.3 Romer Sy Tan is also acting as the representative of Sy Siy Ho & Sons, Inc.
in this and in another case against the defendants.
10. Hence, all of the children of Sy Tiong Shiou and Juanita Tan have taken
action against their grandparents, defendants Sy Chim and Felicidad Chan Sy.
Obviously, the entire family of Sy Tiong Shiou and Juanita Tan is acting against
the defendants. In view of the foregoing, the management and control of Sy Siy
Ho & Sons, Inc. cannot be transferred to any or all of the children of Sy Tiong
Shiou and Juanita Tan since they obviously would not protect the interests of
defendants Sy Chim and Felicidad Chan Sy as stockholders of Sy Siy Ho &
Sons, Inc.
11. Thus, there exists an urgent need for the immediate appointment of a
management committee to administer, manage and preserve the assets, funds,
properties and records of Sy Siy Ho & Sons, Inc. in order to prevent any further
dissipation, wastage and loss.30
The control and management of the corporation must be transferred pendente
lite to an independent party to ensure the preservation of the corporate assets. 31
Plaintiff opposed the motion, contending that defendants failed to allege and
establish the two requisites for the creation of a management committee under
Section 1, Rule 9 of the Interim Rules of Procedure for Intra-Corporate
Controversies (Interim Rules for brevity) under Republic Act No. 8799. It averred
that, compared to previous years under the management of Sy Tiong Shiou, the
volume of sales and importation of the corporation had considerably increased,
and that its obligation of P29,404,664.00 to Metrobank was paid, and was thus in

"current status." Plaintiff also alleged that:

8. The kind of plaintiffs business requires a special talent or managerial sagacity
that only a person who has been exposed to it for a long and continuous period
of time possesses. Sy Tiong Shiou is that kind of individual because he has been
in this kind of business for more than forty (40) years, starting as an ordinary
employee and now as President and General Manager of the plaintiff. As such,
he knows its intimate details and nuances.
9. The appointment of a management committee to manage the business affairs
of the plaintiff would not only be unwise and ill-advised. It might lead to a
disastrous consequence for all its stockholders and instead of saving the
enterprise, as defendants would claim, it will only result to its untimely demise. If
this will happen, the interest of all the stockholders as well as the welfare of its
more than seventy (70) employees, including that of their families, will be greatly
affected and jeopardized. xxx32
On September 9, 2003, defendants filed a Motion for Leave to File and ThirdParty Complaint against Sy Tiong Shiou and Juanita Tan Sy, with the following
prayer:
1. Declaring third-party defendants Sy Tiong Shiou and Juanita Tan directly and
solely liable in respect of plaintiffs claim for accounting and damages and, in the
same judgment, in the remote event that third-party plaintiffs Sy Chim and/or
Felicidad Chan Sy are adjudged liable to plaintiff, ordering Sy Tiong Shiou and
Juanita Tan to pay all amounts necessary to discharge Sy Chims and Felicidad
Chan Sys liability to plaintiff by way of indemnity or reimbursement;
2. Ordering third-party defendants to pay third-party plaintiffs the amount of
P300,000.00 as litigation expenses and attorneys fees.
Third-party plaintiffs further pray for such other reliefs as the Honorable Court
may deem just and equitable under the premises. 33
For their part, Sy Tiong Shiou and Juanita Tan Sy alleged
31. As shown, since 1993, third-party defendants Sy Tiong Shiou and Juanita Tan
have had full and complete control of the day-to-day operations and complete
custody and control of the corporate funds of Sy Siy Ho & Sons, Inc., hence, they
are the real parties-in-interest in this case.
32. As shown, third-party defendants Sy Tiong Shiou and Juanita Tan are liable
for any shortfall or unaccounted difference of cash account of Sy Siy Ho & Sons,
Inc. for the period 1993 to 2003, including the PHP67,117,230.30 alleged in
paragraph 12 of the Amended Complaint dated 30 June 2003, especially so
since third-party plaintiffs have been physically ousted from their residence by Sy
Tiong Shiou and his family since 15 April 2003, and denied access to the
corporate premises by Sy Tiong Shiou and his family as well as its books and
records.
33. Hence, third-party defendants Sy Tiong Shiou and Juanita Tan should render
a full, complete and true accounting of all the amounts, proceeds and funds paid
to, received and earned by Sy Siy Ho & Sons, Inc. since 1993, and should be
declared solely liable to Sy Siy Ho & Sons, Inc. for any shortfall or unaccounted
difference of cash account of Sy Siy Ho & Sons, Inc. for the period 1993-2003,
including the PHP67,117,230.30 alleged in paragraph 12 of the Amended

Complaint dated 30 June 2003, and in the remote event that this Honorable
Court holds Sy Chim and Felicidad Chan Sy liable to plaintiff, Sy Chim and
Felicidad Chan Sy are entitled to full indemnity and reimbursement from Sy Tiong
Shiou and Juanita Tan in respect of plaintiffs claim.34
On September 12, 2003, the RTC issued an Order 35 granting the motion for the
creation of a management committee pendente lite to be composed of three
members, one to be designated by the court as chairman, and two others to be
nominated by the parties within 10 days, failing which the court would appoint the
same. Such management committee would have the power and functions
enumerated under Section 5, Rule 9 of the Interim Rules. 36 The RTC justified the
issuance of its order on its finding that the parties were pointing accusing fingers
at each other for the unaccounted funds. According to the trial court, the question
of who should be held responsible for the unaccounted funds would only be
determined after an extensive audit of the companys books. Moreover, while the
main case is yet to be heard, the fact remains that corporate assets, funds,
properties and records were in imminent danger of further dissipation or total
loss. Thus, it would serve the best interest of the company, as well as its
stockholders and creditors, to have the corporation managed by an independent
committee exclusively accountable to the court. According to the RTC, the
corporations assets, income and properties would be protected and preserved
until the final determination of the main controversy.
The court further stated that the appointment of a receiver was justified where
pleadings requesting appointment were without qualification as to information
and belief and were not controverted by defendants. 37 It noted that sufficient
allegations of misappropriation of corporate assets were made, and that the
appointment of a receiver is justified upon a showing that one who is president,
director, managing officer and controlling stockholder has allowed himself
unauthorized salary increases, used corporate funds for his private purposes,
entrusted his duties to others, conducted a competing business and made a
secret profit by transactions between the two concerns, used employees and
equipment of the company for his own business, failed to keep complete
corporate accounts, incurred penalties for delinquent corporate taxes, and
otherwise caused waste and loss.38
On October 8, 2003, the RTC granted defendants Motion to File a Third-Party
Complaint and ordered that such complaint be admitted. 39 Third-party defendants
failed to file their answer thereon and were declared in default upon motion of the
third-party plaintiffs.
Plaintiff corporation filed a motion for reconsideration of the September 12, 2003
Order of the trial court creating a management committee. Plaintiff reiterating its
claim that defendants failed to adduce evidence to prove the twin requisites for
the creation of a management committee under Section 1, Rule 9 of the Interim
Rules.
On October 15, 2003, the trial court issued a Supplemental Order 40 directing the
president, vice president, secretary, treasurer, accountant, bookkeeper of the
corporation or any person acting on their behalf or under their instruction to allow
the parties or their duly-authorized representatives to be present during the audit.

The said officers were likewise enjoined to secure court approval before
disbursing funds in excess of P10,000.00. Finally, the officers were directed to
submit the names of the banks the corporation did business with and to indicate
the balance of its accounts. The trial court gave the said officers ten (10) days to
comply with this order and that, upon their failure to do so, would be dealt with as
for contempt and meted the appropriate penalty as warranted by the evidence.
However, Punongbayan & Araullo withdrew as independent auditor. 41 Plaintiff
filed a motion for the reconsideration of the Supplemental Order, and, thereafter,
a Manifestation and Motion,42 praying that the order of the court appointing an
independent auditor be executed. On December 11, 2003, defendants filed a
Comment/Opposition to Plaintiff Manifestation and Motion. 43 Plaintiff made a
reply thereto.
In an Order44 dated December 19, 2003, the RTC denied plaintiffs motion for
reconsideration of the Supplemental Order. The trial court designated Wencita C.
Salvador as comptroller tasked to oversee the maintenance of corporate books
of accounts, budget administration, internal control on disbursements, reporting
and interpretation of financial statements, tax administration, protection of assets,
financial evaluation and government reporting. She was also designated as a cosignatory to all checks or withdrawals of funds, to receive a monthly fee of
P50,000.00. The RTC reserved the authority to expand her authority. However, it
modified its Order dated October 15, 2003, in that its prior approval was no
longer required in the disbursement of funds, except those in excess of
P500,000.00. It further ordered plaintiff not to obtain any loan or other credit
accommodations without its prior approval, and directed plaintiffs depository
banks to be advised of its order.
The hearing for the formation of the management committee was set on January
9, 2004.45 Plaintiff filed a motion for reconsideration of the trial courts Order
dated December 19, 2003.1awphi1.net
The spouses Sy Tiong Shiou and Juanita Tan Sy filed a petition for certiorari in
the Court of Appeals (CA) assailing the October 8, 2003 and December 19, 2003
Orders of the RTC. The petition, docketed as CA-G.R. SP No. 81897 and raffled
to the appellate courts 7th Division, contained the following prayer:
1. Upon the filing of this petition, a temporary restraining order and/or writ of
preliminary injunction be issued restraining/enjoining the Honorable Respondent
JUDGE from undertaking further proceedings in Civil Case No. 03-106456 until
further orders from this Honorable Court;1avvphi1.net
2. After due proceedings, this petition be given due course and, thereafter,
judgment be rendered annulling and setting aside the assailed Orders dated
October 8, 2003 (Annex "H," supra) and the Order dated December 19, 2003
(Annex "R," supra) and striking out and quashing the Third-Party Complaint or
ordering the Honorable Respondent JUDGE to strike out and quash the ThirdParty Complaint.
Petitioners also pray for costs and for such other reliefs as just and equitable
under the premises.46
Meantime, in an Order47 dated January 27, 2004, the RTC declared that its
December 19, 2003 Order designating Wencita Salvador as comptroller was

immediately executory. She was, likewise, directed to immediately assume her

functions and ordered all the corporation officers to immediately turn over all
corporate books and records as may be required by her, and to cooperate fully.
The court designated the accounting firm of R.S. Bernaldo & Associates to
conduct the audit. The court also directed the parties to provide the firm with all
the financial books of the corporation.
In a Letter dated January 30, 2004, Salvador informed the corporation that she
was assuming the position of comptroller effective February 2, 2004.
The corporation filed an Urgent Motion 48 to lift the January 27, 2004 Order of the
RTC, but before the RTC could resolve the motion, the corporation filed a petition
for certiorari with injunctive relief in the CA, docketed as CA-G.R. SP No. 82171.
The following allegations were made:
A. THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION AND
ACTED WITHOUT OR IN EXCESS OF JURISDICTION AND VIOLATED
PETITIONERS RIGHT TO DUE PROCESS IN ISSUING THE ORDER OF 12
SEPTEMBER 2003 (Annex "F") GRANTING THE MOTION OF THE
DEFENDANTS (Private Respondents herein) FOR THE CREATION OF A
MANAGEMENT COMMITTEE PENDENTE LITE, AND IN NOT RESOLVING
BUT INSTEAD MOOTING PETITIONERS MOTION FOR RECONSIDERATION
(Annex "G") AND SUPPLEMENTAL MOTION FOR RECONSIDERATION OF
SAID ORDER (Annex "H").
B. THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION AND
ACTED WITHOUT OR IN EXCESS OF JURISDICTION AND VIOLATED
PETITIONERS
RIGHT TO
DUE
PROCESS
IN
ISSUING
THE
SUPPLEMENTARY ORDER DATED OCTOBER 15, 2003 (Annex "I"), AND IN
NOT RESOLVING BUT INSTEAD MOOTING PETITIONERS MOTION FOR
RECONSIDERATION OF SAID ORDER (Annex "J").
C. THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION AND
ACTED WITHOUT OR IN EXCESS OF JURISDICTION AND VIOLATED
PETITIONERS RIGHT TO DUE PROCESS IN ISSUING THE ORDER DATED
DECEMBER 19, 2003 (Annex "P"), AND IN NOT RESOLVING BUT INSTEAD
MOOTING PETITIONERS MOTION FOR RECONSIDERATION OF SAID
ORDER (Annex "Q").
D. THE RESPONDENT JUDGE GRAVELY ABUSED HIS DISCRETION AND
ACTED WITHOUT OR IN EXCESS OF JURISDICTION AND VIOLATED
PETITIONERS RIGHT TO DUE PROCESS IN ISSUING THE ORDER DATED
JANUARY 27, 2004 (Annex "S") AND IN NOT RESOLVING BUT INSTEAD
MOOTING PETITIONERS URGENT MOTION TO LIFT ORDER DATED
JANUARY 27, 2004 (Annex "T").49
The appellate court set the hearing on the plea for injunctive relief. 50
On June 29, 2005, the CA rendered judgment granting the petition and nullifying
the orders issued by the RTC. The fallo of the decision reads:
WHEREFORE, in view of the foregoing, the petition is GRANTED. The Orders of
September 12, 2003, October 15, 2003, December 19, 2003 and January 27,
2004, are hereby ANNULLED and SET ASIDE. The instant case is remanded to
the Regional Trial Court of

Manila, Branch 46, for further proceedings with special instructions to resolve the
same with deliberate dispatch in accordance with the rules on summary
procedure as defined by the Interim Rules of Procedure for Intra-Corporate
Controversies. No pronouncement as to cost.
SO ORDERED.51
The CA ruled that respondents failed to prove a requirement for the creation of a
management committee under Section 1, Rule 9 of the Interim Rules: that there
was imminent danger of massive dissipation, loss, wastage or destruction of
assets and other properties of the corporation. The appellate court declared that
other than the bare allegations of Sy Chim and Felicidad Chan Sy that they could
not protect their interests because of dissention among themselves on the one
hand, and members of the board of directors on the other, they failed to show
that the business operations of the corporation were paralyzed. The CA
emphasized that the creation of a management committee is for the benefit of all
the interested parties, not exclusively for the benefit of the party at whose
instance it is to be created. The appellate court stated that a simple turn over of
pertinent receipts would facilitate the accounting sought for, without resorting to
the creation of a management committee; the accuracy of the validity of the
accounting report made as basis of the complaint for accounting and damages
should then be validated during trial on the merits. Citing Jacinto v. First
Womens Credit Corporation,52 the CA ruled that the trial court abused its
discretion amounting to excess of jurisdiction in ordering the creation of a
management committee pendente lite.
The CA also ruled that the trial court abused its discretion in designating a
comptroller and an accounting firm to assess the corporations financial books
and records. The CA stated that the appointment of a comptroller was not
authorized by the Interim Rules. Thus, while Section 2, Rule 9 of the Interim
Rules allows the appointment of a receiver, there was no point in discussing the
same since the trial court committed abuse of its discretion in creating a
management committee. The CA concluded that, when the trial court created a
management committee and designated an auditing firm and a comptroller, it
thereby imposed additional burden on the corporation.
The CA likewise declared that "the order imposing a limitation of Five Hundred
Thousand Pesos (P500,000.00) disbursement without prior court approval was
likewise unnecessary and has no direct bearing to the issue involved in the case
pending before the court a quo.
Spouses Sy Chim and Felicidad Chan Sy filed a motion for the partial
reconsideration of the decision, which the appellate court denied. 53
Said spouses, now petitioners, filed the instant petition for review on certiorari,
alleging that:
I
RESPONDENT COURT OF APPEALS ERRED IN INTERPRETING SECTION 1,
RULE 9 OF THE INTERIM RULES OF PROCEDURE GOVERNING INTRACORPORATE CONTROVERSIES BECAUSE IT FAILS TO GIVE FULL FORCE
AND EFFECT TO THE PROTECTIVE POWERS OF THE COURT.
II

RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE AUDIT

AND ASSESSMENT OF THE CORPORATE BOOKS AND RECORDS OF THE
CORPORATION IS UNNECESSARY AND IS MORE THAN WHAT THE CASE
DEMANDS.
III
RESPONDENT COURT OF APPEALS ERRED IN RULING ON THE 8 AUGUST
2003 ORDER OF THE TRIAL COURT DIRECTING THE CONDUCT OF AN
AUDIT OF THE BOOKS AND RECORDS OF SY SIY HO & SONS, INC. (SSHI)
BECAUSE SUCH ORDER WAS NOT COVERED BY THE PETITION BEFORE
THE COURT OF APPEALS.
IV
RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE TRIAL
COURT HAS NO POWER AND AUTHORITY TO DESIGNATE A
COMPTROLLER AND TO MONITOR THE DISBURSEMENTS OF THE
CORPORATION.
V
RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE
APPOINTMENT OF AN AUDITING FIRM IS PREMATURE.
VI
RESPONDENT COURT OF APPEALS ERRED IN RULING THAT THE TRIAL
COURT GRAVELY ABUSED ITS DISCRETION IN ISSUING THE ASSAILED
ORDERS.54
The threshold issue is whether or not the RTC committed grave abuse of its
discretion amounting to excess or lack of jurisdiction in (a) creating a
management committee; (b) designating an independent auditor and ordering an
audit of the corporate books and records of the corporation; and (c) appointing a
comptroller; and whether the issues raised in this Court are factual in nature and
proscribed by Rule 45 of the Rules of Civil Procedure.
On the first issue, petitioners aver that the CA erred in strictly applying the
requisites under Section 1, Rule 9 of the Interim Rules regarding the creation of a
management committee. The petitioners posit that the word "and" in Section 1(1),
Rule 9 should be interpreted as "or," since a literal interpretation of the provision
would frustrate the plain intention of the Rule. They point out that the appellate
courts strict interpretation of the rule is contrary to the spirit of Presidential
Decree No. 902-A. They further assert that the RTC is empowered to act and put
a stop to misappropriation of a corporations funds and thus prevent business
operations from being paralyzed. According to the petitioners, for the Court to idly
wait and watch as assets of the corporation are plundered until the business is
paralyzed, would render inutile Section 1, Rule 9 of the Interim Rules.
Petitioners assert that at the time the complaint was filed in the trial court,
respondents abused their positions and mismanaged corporate affairs, thus
necessitating the immediate creation of a management committee.
Petitioners maintain that corporate funds have massively dissipated and would
continue as long as the management and control of the corporation remained
with respondents. In fact, respondents admitted in their complaint that there had
been massive dissipation of the funds and assets of the corporation since 1993

when they (respondents) were still corporate officers. Contrary to the ruling of the
CA, the creation of the management committee would ensure the continuity of
the corporations business operations and remove the management of the
business from the hands of those responsible for the dissipation of its assets.
Thus, petitioners insist, the interest of the corporation and its stockholders would
be preserved and protected through the creation of a management committee.
Petitioners further assert that the appointment of an independent auditing firm
would satisfy the corporations claim for a full accounting and ensure that all
books, records and documents of the corporation would be submitted to the
auditor to ensure a fair, impartial and full accounting. Such accounting would
determine the full extent of misappropriation of corporate funds, as well as the
shareholdings of its stockholders. Petitioners insist that there was a necessity for
the court to do so in order to determine the true status of corporate funds, and to
determine who should be held responsible for the alleged misappropriation.
Petitioners assert that the auditors report is of doubtful credibility as it is
inconsistent with the external auditors report (which has no indication of any
missing fund). Moreover, the appointment of an external auditor is necessitated
by time constraints and the volume of financial records to be examined.
Petitioners point out that, as gleaned from the amended complaint, the
corporation prayed for the accounting of the missing funds; the appointment of an
impartial and competent auditor to conduct the audit achieves this purpose.
Petitioners maintain that respondent corporations failure to question the trial
courts appointment of an independent auditor and accounting firm through a
motion for reconsideration effectively estopped them from assailing such orders;
instead of filing a petition for certiorari in the CA, respondent should have moved
that such orders be reconsidered.
On the issue of whether or not the trial court may designate a comptroller,
petitioners point out that although Section 1, Rule 9 of the Interim Rules does not
specifically authorize the RTC to appoint a comptroller, the same rule authorizes
such court to appoint a receiver; this latter power necessarily implies the
authority to designate a comptroller. According to petitioners, a comptroller would
exercise more limited functions and ensure that no illegitimate corporate
expenditures would be made and that all government requirements will be
complied with before the formation of a management committee.
By way of comment, respondent avers that the issues raised by petitioners are
factual, which is proscribed by Rule 45 of the Rules of Civil Procedure; whether
or not there is factual basis for the creation of a management committee under
Section 1, Rule 9 of the Interim Rules is a question of fact. The CA correctly ruled
that petitioners failed to allege and substantiate the need for the appointment of
an auditing firm, as well as the requisites for the creation of a management
committee. The Order of the trial court dated August 8, 2003 had already been
overtaken and rendered moot by the January 27, 2004 Order of the RTC which
the CA affirmed. Also, whether or not there is a need for the appointment of
comptroller and the limits of her power are questions of fact which should not be
raised in this Court.
The petition is partially granted.

Section 1, Rule 9 of the Interim Rules provides:

SECTION 1. Creation of a management committee. As an incident to any of the
cases filed under these Rules or the Interim Rules on Corporate Rehabilitation, a
party may apply for the appointment of a management committee for the
corporation, partnership or association, when there is imminent danger of:
(1) Dissipation, loss, wastage or destruction of assets or other properties; and
(2) Paralyzation of its business operations which may be prejudicial to the
interest of the minority stockholders, parties-litigants or the general public. 55
The said Rules, which took effect on April 1, 2001, was promulgated by the Court
pursuant to its power to promulgate rules concerning "pleading, practice and
procedure in all courts xxx providing for simplified and inexpensive procedure for
the speedy disposition of cases" under Section 5(5), Article VIII of the
Constitution.
We do not agree with petitioners contention that the word "and" in Section 1,
Rule 9 of the Interim Rules should be interpreted to mean "or." While it is true
that in Section 6(d) of Presidential Decree No. 902-A, 56 an applicant for the
appointment of a management committee is mandated to prove only one of the
two requisites provided therein, the Court, in Jacinto v. First Womens Credit
Corporation,57 ruled that the two requisites should be present before a
management committee may be created and a receiver appointed by the RTC:
A reading of the aforecited legal provision reveals that for a minority stockholder
to obtain the appointment of an interim management committee, he must do
more than merely make a prima facie showing of a denial of his right to share in
the concerns of the corporation; he must show that the corporate property is in
danger of being wasted and destroyed; that the business of the corporation is
being diverted from the purpose for which it has been organized; and that there is
serious paralyzation of operations all to his detriment.
The rationale for the need to establish the confluence of the two (2) requisites
under Section 1, Rule 9 by an applicant for the appointment of a management
committee is primarily based upon the fact that such committee and receiver
appointed by the court will immediately take over the management of the
corporation, partnership or association, including such power as it may deem
appropriate, and any of the powers specified in Section 5 of the Rule. 58
Indeed, upon the appointment of a receiver, the duly elected/appointed officers of
the corporation are divested of the management of such corporation in favor of
the management committee/receiver. Such transference of the corporations
management will certainly have a negative, if not crippling effect, on the
operations/affairs of the corporation not only with banks and other business
institutions including those abroad which it deals business with. A wall of
uncertainty is erected; the short and long-term plans of the management of the
corporation are disrupted, if not derailed.59
Thus, the creation and appointment of a management committee and a receiver
is an extraordinary and drastic remedy to be exercised with care and caution;
and only when the requirements under the Interim Rules are shown. It is a drastic
course for the benefit of the minority stockholders, the parties-litigants or the
general public are allowed only under pressing circumstances and, when there is

inadequacy, ineffectual or exhaustion of legal or other remedies. The power to

intervene before the legal remedy is exhausted and misused when it is exercised
in aid of such a purpose.60 The power of the court to continue a business of a
corporation, partnership or association must be exercised with the greatest care
and caution. There should be a full consideration of all the attendant facts,
including the interest of all the parties concerned.
Neither Presidential Decree No. 902-A and Republic Act No. 8799 nor the Interim
Rules of Procedure define "imminent danger." "Danger" is a general term,
including peril, jeopardy, hazard and risk; as used in the Rule, it refers to
exposure or liability to injury. "Imminent" refers to something which is threatening
to happen at once, something close at hand, something to happen upon the
instant, close although not yet happening, and on the verge of happening. 61
In the present case, petitioners failed to make a strong showing that there was an
imminent danger of dissipation, loss, wastage or destruction of assets or other
properties of respondent corporation and paralysis of its business operations
which may be prejudicial to the interest of the parties-litigants, petitioners, or the
general public. The RTC thus committed grave abuse of its discretion amounting
to excess of jurisdiction in creating a management committee and the
subsequent appointment of a comptroller.
The bone of contention between the parties is whether there was a shortage or
unaccounted funds of the corporation, including P67,117,230.30 allegedly
incurred from 1993 (when petitioner Sy Chim assumed office as President,
Felicidad Chan Sy as Assistant Treasurer, Sy Tiong Shiou as General Manager,
and Juanita Tan Sy as Corporate Treasurer); and who should be held
accountable therefor. Petitioners blame Sy Tiong Shiou and Juanita Tan Sy, while
the latter pin liability on petitioners based on the financial report of the Banaria
Banaria and Company and the claim of Juanita Tan Sy. However, these issues of
fact have yet to be determined by the trial court after due proceedings. Indeed,
petitioners admitted the following in their motion for the appointment of a
management committee:
4. Thus, defendants allege that for any unaccounted difference of the
corporations account, including the PHP67,117,230.30 alleged in the Amended
Complaint, it is Sy Tiong Shiou and Juanita Tan who are at fault in view of their
powers as General Manager and Treasurer under the By-laws of the Corporation
and in actual practice since they have active control of the day-to-day operations
of the Corporation.
5. However, while this Honorable Court will still determine, in the course of these
proceedings, whether it is defendants Sy Chim and Felicidad Chan Sy or whether
it is Sy Tiong Shiou and Juanita Tan who are the parties responsible for the
dissipation and loss of the corporate funds and assets of Sy Siy Ho & Sons, Inc.,
the active day-to-day control and management of Sy Siy Ho and Sons, Inc. is still
under the control and supervision of Sy Tiong Shiou and Juanita Tan, especially
so since defendants have been physically ousted from their residence by Sy
Tiong Shiou and his family since 15 April 2003, and defendants have been
denied access to the corporate premises and its books and records. 62
Petitioners failed to adduce a shred of evidence during the hearing of their

motion to prove their claim that there was imminent danger of dissipation, loss,
wastage or destruction of the assets or other properties of respondent ever since
Sy Tiong Shiou became president and Juanita Tan Sy continued discharging her
duties as corporate treasurer; nor is there proof that there was imminent danger
of paralyzing the business operations of the corporation.1avvphi1.net
We have reviewed the records and find that, contrary to the findings of the RTC,
there is no imminent danger of dissipation or total loss of the assets, funds,
properties and records of respondent corporation, or paralysis of business
operations. In fact, records show that there has been no slack in the business
operations of respondent corporation.
Petitioners were divested of their corporate positions, and thus stockholdings in
the corporation were reduced. Petitioners claim that Sy Tiong Shiou and Juanita
Tan Sy (third-party defendants below) and their children unlawfully ousted them
from their positions and reduced their shareholdings in the corporation. They
posit that the formers claim that they (petitioners) misappropriated the funds and
assets of respondent was designed to justify the unlawful ouster of petitioners
from the management of respondent corporation. Such claims, however, have
yet to be proven.
While the allegation that Sy Tiong Shiou and Juanita Tan Sy abused their
positions and mismanaged the affairs of respondent corporation is a distinct
possibility, petitioners failed to adduce proof thereon. Mere possibility without
proof of abusing corporate positions and dissipation of assets and properties of
the corporation is not a valid ground for the appointment of a management
committee/receiver. Petitioners even failed to adduce evidence to controvert the
following allegations of respondent:
b. A comparative breakdown of the volume of sales and importation of the plaintiff
for the years 2002 and 2003, during the watch of defendant Sy Chim as
President and during the time that Sy Tiong Shiou took over as President would
clearly show that it has tremendously increased. A copy of the comparative chart
is attached hereto as Annex "B";
c. In a certification dated August 29, 2003 issued by Amelin S. Yap, SVP, Center
Head of Metrobank, it is demonstrated that plaintiff, through the able and
competent management and leadership of Sy Tiong Shiou, has been able to
service and pay its financial obligations when it paid Fourteen Million Nine
Hundred Eleven Thousand Six Hundred Sixty-Four (P14,911,664.00) Pesos
under trust receipt obligation from the period of April 2003 up to August 2003.
Likewise, it has also paid Fourteen Million Four Hundred Ninety-Three Thousand
(P14,493,000.00) Pesos under loan obligation from the period April 2003 to
August 2003. Further, the bank certified that plaintiffs obligations are in current
status. Photocopy of the said certification is attached hereto as Annex "C";
d. On September 1, 2003, CHINABANK, through its Senior Assistant Vice
President, International Banking Group, Elaine Marissa L. Ong issued a
certification that, as per records as of August 28, 2003, plaintiffs outstanding
trust receipts amounted only to P9,462,835.90 and that these trust receipts are
not beyond 180 days. Photocopy of the said certification is attached hereto as
Annex "D";

e. Likewise, on September 1, 2003, Allied Banking Corporation, through its

Senior Assistant Vice President Florentina Garrovillo, issued a certification that,
as per records as of August 29, 2003, plaintiffs outstanding trust receipts
amounted to Seven Million Two Hundred Ninety-Four Thousand Three Hundred
Six Pesos & 77/100 (Php7,294,306.77) and that, as of that date, these trust
receipts are not beyond 180 days. Photocopy of the said certification is attached
hereto as Annex "E."

7. In contrast, during defendant Sy Chims incumbency as President, the plaintiff

could hardly pay its financial obligations with its creditor banks. In fact, it has to
ask and request for extensions. When Trust Receipt with Reference No.
014/TR/000631/02 fell due on February 7, 2003 after 180 days, defendant Sy
Chim as President of the plaintiff could not pay the same and instead asked for
an extension of 90 days or up to May 8, 2003. Photocopy of the document
showing this transaction is attached hereto as Annex "F." 63
We agree that past conduct and condition of the corporation may be considered
in determining the present situation and what the future will be. However, a
management committee or receiver will not be appointed merely because of
things done or attempted at a past time when the present situation and the
prospects for the future are not such as to warrant taking the control of the
property out of the hands of its owners. 64 The circumstances to justify the
appointment of a management committee/ receiver must be extraordinary and
something more must be shown than past misconduct and a mere apprehension
based thereon of future wrongdoing. 65 To repeat, in the absence of a strong
showing of an imminent danger of dissipation, loss, wastage or destruction of
assets or other properties of a corporation and paralysis of its business
operations, the mere apprehension of future misconduct based upon prior
mismanagement will not authorize the appointment of a management
committee/receiver.66
We also agree with the CA ruling that the RTC committed grave abuse of its
discretion in excess of its jurisdiction in appointing a comptroller and ordering her
to immediately assume office before the creation of a management committee.
However, the CA ruled that the RTC committed a grave abuse of its discretion
amounting to excess of its jurisdiction, thus:
As defined in Blacks Law Dictionary, a "comptroller" is an officer of a business,
charged with certain duties in relation to the fiscal affairs of the same, principally
to examine and audit the accounts, to keep records, and report the financial
situation from time to time. We have perused the Interim Rules of Procedure for
Intra-Corporate Controversies and nowhere in the said rules does it authorize the
designation of a comptroller. Rule 9, Section 2 of the Procedure, however,
mandates that, in the event the court finds the application for the creation of a
management committee sufficient in form and substance, the court shall issue an
order appointing a receiver of known probity, integrity and competence and
without any conflict of interest as therein defined to immediately take over the
corporation, partnership or association, specifying such powers as it may deem
appropriate under the circumstances, including any of the powers specified in

Section 5 of said Rule. We see no need to discuss whether it would have been
appropriate for the court-a-quo to appoint a receiver in view of the finding of this
Court that the creation of a management committee was done in grave abuse of
discretion.67
Indeed, the RTC committed grave abuse of its discretion in ordering the
appointment of Wencita Salvador as comptroller. We do not foreclose the power
of a management committee to appoint a comptroller under Section 5, Rule 9 of
the Interim Rules. However, with the Courts ruling that the creation of such
committee and the appointment of a receiver is without factual basis, it follows
that the appointment of a comptroller is, likewise, unnecessary.1avvphi1.net
We agree with petitioners contention that the RTC acted in the exercise of its
discretion in appointing an independent auditor. Such appointment is appropriate
and even necessary if only to limit the issues for trial and thus abbreviate the
proceedings. The ouster of petitioners as president and treasurer of respondent
and the takeover by third-party defendants and their children of the management
and control of the corporation is based on the claim of Juanita Tan Sy that
petitioner Felicidad Chan Sy had a shortage of P67,117,230.30 for 2001 and
2002 per the report of the auditing firm, Banaria Banaria & Company. Petitioners,
for their part, claim that such report is inconsistent with that of respondents
external auditor Anita Uy from 1994 to 2002 which were submitted to the Bureau
of Internal Revenue and the SEC showing that no amount was due to
stockholders. In the report of the Banaria Banaria & Company, the corporation
had retained earnings of P56,170,114.89 for the period ending December 31,
2001, whereas per report of Uy, respondent had net earnings of only
P16,252,114.89, hence, the need for an independent auditor. Moreover, such
audit would forestall any misappropriation of corporate funds and assets of
respondent corporation in the interim.
We note that petitioners prayed for the appointment of an independent auditor,
and that respondent did not even object to the motion. Consequently, the RTC
appointed the Punongbayan & Araullo firm to conduct the audit. However,
respondent made a volte face and filed its Manifestation and Motion dated
November 26, 2003 and posited that an independent auditor was not necessary
since in its complaint, it merely prayed for an accounting of the funds which were
missing based on the report of the Banaria Banaria & Company auditing firm.
We hold that an independent audit is imperative in this case so that, based on
such report, the RTC would be able to determine the veracity not only of
respondents claim that petitioners misappropriated corporate funds and assets,
but also that of petitioners who claim otherwise.
IN LIGHT OF ALL THE FOREGOING, the petition is PARTIALLY GRANTED. The
Decision of the Court of Appeals is AFFIRMED WITH THE MODIFICATION that
the Orders of the Regional Trial Court dated August 8, 2003, October 15, 2003
and January 27, 2004, relative to the appointment of R.S. Bernabe and
Associates as independent auditor, are AFFIRMED.
No costs.
SO ORDERED.

G.R. No. 156207

September 15, 2006
EQUITABLE PCI BANK (the Banking Entity into which Philippine
Commercial International Bank was merged), petitioner,
vs.
ROWENA ONG, respondent.
DECISION
CHICO-NAZARIO, J.:
On 29 November 1991, Warliza Sarande deposited in her account at Philippine
Commercial International (PCI) Bank Magsaysay Avenue, Santa Ana District,
Davao City Branch, under Account No. 8502-00347-6, a PCI Bank General
Santos City Branch, TCBT 1 Check No. 0249188 in the amount of P225,000.00.
Upon inquiry by Serande at PCI Bank on 5 December 1991 on whether TCBT
Check No. 0249188 had been cleared, she received an affirmative answer.
Relying on this assurance, she issued two checks drawn against the proceeds of
TCBT Check No. 0249188. One of these was PCI Bank Check No. 073661 dated
5 December 1991 for P132,000.00 which Sarande issued to respondent Rowena
Ong Owing to a business transaction. On the same day, Ong presented to PCI
Bank Magsaysay Avenue Branch said Check No. 073661, and instead of
encashing it, requested PCI Bank to convert the proceeds thereof into a
manager's check, which the PCI Bank obliged. Whereupon, Ong was issued PCI
Bank Manager's Check No. 10983 dated 5 December 1991 for the sum of
P132,000.00, the value of Check No. 073661.
The next day, 6 December 1991, Ong deposited PCI Bank Manager's Check No.
10983 in her account with Equitable Banking Corporation Davao City Branch. On
9 December 1991, she received a check return-slip informing her that PCI Bank
had stopped the payment of the said check on the ground of irregular issuance.
Despite several demands made by her to PCI Bank for the payment of the
amount in PCI Bank Manager's Check No. 10983, the same was met with
refusal; thus, Ong was constrained to file a Complaint for sum of money,
damages and attorney's fees against PCI Bank. 2
From PCI Bank's version, TCBT-General Santos City Check No. 0249188 was
returned on 5 December 1991 at 5:00 pm on the ground that the account against
which it was drawn was already closed. According to PCI Bank, it immediately
gave notice to Sarande and Ong about the return of Check No. 0249188 and
requested Ong to return PCI Bank Manager's Check No. 10983 inasmuch as the
return of Check No. 0249188 on the ground that the account from which it was
drawn had already been closed resulted in a failure or want of consideration for
the issuance of PCI Bank Manager's Check No. 10983. 3
After the pre-trial conference, Ong filed a motion for summary judgment. 4 Though
they were duly furnished with a copy of the motion for summary judgment, PCI
Bank and its counsel failed to appear at the scheduled hearing. 5 Neither did they
file any written comment or opposition thereto. The trial court thereafter ordered
Ong to formally offer her exhibits in writing, furnishing copies of the same to PCI
Bank which was directed to file its comment or objection. 6
Ong complied with the Order of the trial court, but PCI Bank failed to file any
comment or objection within the period given to it despite receipt of the same

order.7 The trial court then granted the motion for summary judgment and in its
Order dated 2 March 1995, it held:
IN THE LIGHT OF THE FOREGOING, the motion for summary judgment is
GRANTED, ordering defendant Philippine Commercial International Bank to pay
the plaintiff the amount of ONE HUNDRED THIRTY-TWO THOUSAND PESOS
(P132,000.00) equivalent to the amount of PCIB Manager's Check No. 10983.
Set the reception of the plaintiff's evidence with respect to the damages claimed
in the complaint.8
PCI Bank filed a Motion for Reconsideration which the trial court denied in its
Order dated 11 April 1996.9 After the reception of Ong's evidence in support of
her claim for damages, the trial court rendered its Decision 10 dated 3 May 1999
wherein it ruled:
IN LIGHT OF THE FOREGOIN CONSIDERATION, and as plaintiff has
preponderantly established by competent evidence her claims in the Complaint,
judgment in hereby rendered for the plaintiff against the defendant-bank ordering
the latter:
1. To pay the plaintiff the sum of FIFTY THOUSAND PESOS (P50,000.00) in the
concept of moral damages;
2. To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00) as
exemplary damages;
3. To pay the plaintiff the sum of THREE THOUSAND FIVE HUNDRED PESOS
(P3,500.00) representing actual expenses;
4. To pay the plaintiff the sum of TWENTY THOUSAND PESOS (P20,000.00) as
and for attorney's fee's; and
5. To pay the costs.11
From this decision, PCI Bank sought recourse before the Court of Appeals. In a
Decision12 dated 29 October 2002, the appellate court denied the appeal of PCI
Bank and affirmed the orders and decision of the trial court.
Unperturbed, PCI Bank then filed the present petition for review before this Court
and raised the following issues:
1. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A GRAVE
AND REVERSIBLE ERROR WHEN IT SUSTAINED THE LOWER COURT'S
ORDER DATED 2 MARCH 1999 GRANTING RESPONDENT'S MOTION FOR
SUMMARY JUDGMENT NOTWITHSTANDING THE GLARING FACT THAT
THERE ARE GENUINE, MATERIAL AND FACTUAL ISSUES WHICH REQUIRE
THE PRESENTATION OF EVIDENCE.
2. WHETHER OR NOT THE COURT OF APPEALS WAS IN ERROR WHEN IT
SUSTAINED THE LOWER COURT'S DECISION DATED 3 MAY 1999
GRANTING THE RELIEFS PRAYED FOR IN RESPONDENT ONG'S
COMPLAINT INSPITE OF THE FACT THAT RESPONDENT ONG WOULD BE
"UNJUSTLY ENRICHED" AT THE EXPENSE OF PETITIONER BANK, IF
PETITIONER BANK WOULD BE REQUIRED TO PAY AN UNFUNDED CHECK.
3. WHETHER OR NOT THE COURT OF APPEALS COMMITTED REVERSIBLE
ERRORS WHEN IT AFFIRMED THE COURT A QUO'S DECISIION DATED 3
MAY 1999 AWARDING DAMAGES TO RESPONDENT ONG AND HOLDING
THAT RESPONDENT ONG HAD PREPONDERANTLY ESTABLISHED BY

COMPETENT EVIDENCE HER CLAIMS IN THE COMPLAINT INSPITE OF THE

FACT THAT THE EVIDENCE ON RECORD DOES NOT JUSTIFY THE AWARD
OF DAMAGES.
4. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A
REVERSIBLE ERROR WHEN IT AFFIRMED THE LOWER COURT'S FACTUAL
FINDING IN ITS DECISION DATED 3 MAY 1999 HOLDING RESPONDENT
ONG A "HOLDER IN DUE COURSE" INSPITE OF THE FACT THAT THE
REQUISITE OF "GOOD FAITH" AND FOR VALUE IS LACKING AND DESPITE
THE ABSENCE OF A PROPER TRIAL TO DETERMINE SUCH FACTUAL
ISSUE.
5. WHETHER OR NOT THE COURT OF APPEALS COMMITTED A
REVERSIBLE ERROR WHEN IT UPHELD THE LOWER COURT'S DECISION
DATED 3 MAY 1999 DENYING PETITIONER EPCI BANK'S COUNTERCLAIM
INSPITE OF THE FACT THAT IT WAS SHOWN THAT RESPONDENT ONG'S
COMPLAINT LACKS MERIT.13
We affirm the Decision of the trial court and the Court of Appeals.
The provision on summary judgment is found in Section 1, Rule 35 of the 1997
Rules of Court:
SECTION 1. Summary judgment for claimant. A party seeking to recover upon
a claim, counterclaim, or cross-claim or to obtain a declaratory relief may, at any
time after the pleading in answer thereto has been served, move with supporting
affidavits, depositions or admissions for a summary judgment in his favor upon all
or any part thereof.
Thus, it has been held that a summary judgment is proper where, upon a motion
filed after the issues had been joined and on the basis of the pleadings and
papers filed, the court finds that there is no genuine issue as to any material fact
to except as to the amount of damages. A genuine issue has been defined as an
issue of fact which calls for the presentation of evidence, as distinguished from
an issue which is sham, fictitious, contrived and patently unsubstantial so as not
to constitute a genuine issue for trial.14
A court may grant summary judgment to settle expeditiously a case if, on motion
of either party, there appears from the pleadings, depositions, admissions, and
affidavits that no important issues of fact are involved, except the amount of
damages.15 Rule 35, Section 3, of the Rules of Court provides two requisites for
summary judgment to be proper: (1) there must be no genuine issue as to any
material fact, except for the amount of damages; and (2) the party presenting the
motion for summary judgment must be entitled to a judgment as a matter of law.16
Certainly, when the facts as pleaded appear uncontested or undisputed, then
there's no real or genuine issue or question as to the facts, and summary
judgment is called for.17
By admitting it committed an error, clearing the check of Sarande and issuing in
favor of Ong not just any check but a manager's check for that matter, PCI
Bank's liability is fixed. Under the circumstances, we find that summary judgment
was proper and a hearing would serve no purpose. That summary judgment is
appropriate was incisively expounded by the trial court when it made the
following observation:

[D]efendant-bank had certified plaintiff's PCIB Check No. 073661 and since
certification is equivalent to acceptance, defendant-bank as drawee bank is
bound on the instrument upon certification and it is immaterial to such liability in
favor of the plaintiff who is a holder in due course whether the drawer (Warliza
Sarande) had funds or not with the defendant-bank (Security vs. State Bank, 154
N.W. 282) or the drawer was indebted to the bank for more than the amount of
the check (Nat. Bank vs. Schmelz, Nat. Bank, 116 S.E. 880) as the certifying
bank as all the liabilities under Sec. 62 of the Negotiable Instruments Law which
refers to liability of acceptor (Title Guarantee vs. Emadee Realty Corp., 240 N.Y.
36).
It may be true that plaintiff's PCIB Check No. 073661 for P132,000.00 which was
paid to her by Warliza Sarande was actually not funded but since plaintiff became
a holder in due course, defendant-bank cannot interpose a defense of want or
lack of consideration because that defense is equitable or personal and cannot
prosper against a holder in due course pursuant to Section 28 of the Negotiable
Instruments Law. Therefore, when the aforementioned check was endorsed and
presented by the plaintiff and certified to and accepted by defendant-bank in the
purchase of PCIB Manager's Check No. 1983 in the amount of P132,000.00,
there was a valid consideration.18
The property of summary judgment was further explained by this Court when it
pronounced that:
The theory of summary judgment is that although an answer may on its face
appear to tender issues requiring trial yet if it is demonstrated by affidavits,
depositions, or admissions that those issues are not genuine, but sham or
fictitious, the Court is unjustified in dispensing with the trial and rendering
summary judgment for plaintiff. The court is expected to act chiefly on the basis
of the affidavits, depositions, admissions submitted by the movant, and those of
the other party in opposition thereto. The hearing contemplated (with 10-day
notice) is for the purpose of determining whether the issues are genuine or not,
not to receive evidence on the issues set up in the pleadings. A hearing is not
thus de riguer. The matter may be resolved, and usually is, on the basis of
affidavits, depositions, admissions. This is not to say that a hearing may be
regarded as a superfluity. It is not, and the Court has plenary discretion to
determine the necessity therefore.19
The second and fourth issues are inter-related and so they shall be resolved
together. The second issue has reference to PCI Bank's claim of unjust
enrichment on the part of Ong if it would be compelled to make good the
manager's check it had issued. As asserted by PCI Bank under the fourth issue,
Ong is not a holder in due course because the manager's check was drawn
against a closed account; therefore, the same was issued without consideration.
On the matter of unjust enrichment, the fundamental doctrine of unjust
enrichment is the transfer of value without just cause or consideration. The
elements of this doctrine are: enrichment on the part of the defendant;
impoverishment on the part of the plaintiff; and lack of cause. The main objective
is to prevent one to enrich himself at the expense of another. 20 It is based on the
equitable postulate that it is unjust for a person to retain benefit without paying for

it.21 It is well to stress that the check of Sarande had been cleared by the PCI
Bank for which reason the former issued the check to Ong. A check which has
been cleared and credited to the account of the creditor shall be equivalent to a
delivery to the creditor of cash in an amount equal to the amount credited to his
account.22
Having cleared the check earlier, PCI Bank, therefore, became liable to Ong and
it cannot allege want or failure of consideration between it and Sarande. Under
settled jurisprudence, Ong is a stranger as regards the transaction between PCI
Bank and Sarande.23
PCI Bank next insists that since there was no consideration for the issuance of
the manager's check, ergo, Ong is not a holder in due course. This claim is
equally without basis. Pertinent provisions of the Negotiable Instruments Law are
hereunder quoted:
SECTION 52. What constitutes a holder in due course. A holder in due course
is a holder who has taken the instrument under the following conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without notice it
had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he had no notice of any infirmity in
the instrument or defect in the title of the person negotiating it.
The same law provides further:
Sec. 24. Presumption of consideration. Every negotiable instrument is deemed
prima facie to have been issued for a valuable consideration; and every person
whose signature appears thereon to have become a party thereto for value.
Sec. 26. What constitutes holder for value. Where value has at any time been
given for the instrument, the holder is deemed a holder for value in respect to all
parties who become such prior to that time.
Sec. 28. Effect of want of consideration. Absence or failure of consideration is a
matter of defense as against any person not a holder in due course; and partial
failure of consideration is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or otherwise.
Easily discernible is that what Ong obtained from PCI Bank was not just any
ordinary check but a manager's check. A manager's check is an order of the bank
to pay, drawn upon itself, committing in effect its total resources, integrity and
honor behind its issuance. By its peculiar character and general use in
commerce, a manager's check is regarded substantially to be as good as the
money it represents.24
A manager's check stands on the same footing as a certified check. 25 The effect
of certification is found in Section 187, Negotiable Instruments Law.
Sec. 187. Certification of check; effect of. Where a check is certified by the
bank on which it is drawn, the certification is equivalent to an acceptance. 26
The effect of issuing a manager's check was incontrovertibly elucidated when we
declared that:
A manager's check is one drawn by the bank's manager upon the bank itself. It is
similar to a cashier's check both as to effect and use. A cashier's check is a

check of the bank's cashier on his own or another check. In effect, it is a bill of
exchange drawn by the cashier of a bank upon the bank itself, and accepted in
advance by the act of its issuance. It is really the bank's own check and may be
treated as a promissory note with the bank as a maker. The check becomes the
primary obligation of the bank which issues it and constitutes its written promise
to pay upon demand. The mere issuance of it is considered an acceptance
thereof. x x x.27
In the case of New Pacific Timber & Supply Co., Inc. v. Seneris 28:
[S]ince the said check had been certified by the drawee bank, by the certification,
the funds represented by the check are transferred from the credit of the maker
to that of the payee or holder, and for all intents and purposes, the latter
becomes the depositor of the drawee bank, with rights and duties of one in such
situation. Where a check is certified by the bank on which it is drawn, the
certification is equivalent to acceptance. Said certification "implies that the check
is drawn upon sufficient funds in the hands of the drawee, that they have been
set apart for its satisfaction, and that they shall be so applied whenever the check
is presented for payment. It is an understanding that the check is good then, and
shall continue good, and this agreement is as binding on the bank as its notes
circulation, a certificate of deposit payable to the order of depositor, or any other
obligation it can assume. The object of certifying a check, as regards both
parties, is to enable the holder to use it as money." When the holder procures the
check to be certified, "the check operates as an assignment of a part of the funds
to the creditors." Hence, the exception to the rule enunciated under Section 63 of
the Central Bank Act to the effect "that a check which has been cleared and
credited to the account of the creditor shall be equivalent to a delivery to the
creditor in cash in an amount equal to the amount credited to his account" shall
apply in this case x x x.
By accepting PCI Bank Check No. 073661 issued by Sarande to Ong and issuing
in turn a manager's check in exchange thereof, PCI Bank assumed the liabilities
of an acceptor under Section 62 of the Negotiable Instruments Law which states:
Sec. 62. Liability of acceptor. The acceptor by accepting the instruments
engages that he will pay it according to the tenor of his acceptance; and admits
(a) The existence of the drawer, the genuineness of his signature, and his
capacity and authority to draw the instrument; and
(b) The existence of the payee and his then capacity to indorse.
With the above jurisprudential basis, the issues on Ong being not a holder in due
course and failure or want of consideration for PCI Bank's issuance of the
manager's check is out of sync.
Section 2, of Republic Act No. 8791, The General Banking Law of 2000 decrees:
SEC. 2. Declaration of Policy. The State recognizes the vital role of banks in
providing an environment conducive to the sustained development of the national
economy and the fiduciary nature of banking that requires high standards of
integrity and performance. In furtherance thereof, the State shall promote and
maintain a stable and efficient banking and financial system that is globally
competitive, dynamic and responsive to the demands of a developing economy.
In Associated Bank v. Tan,29 it was reiterated:

"x x x the degree of diligence required of banks is more than that of a good father
of a family where the fiduciary nature of their relationship with their depositors is
concerned." Indeed, the banking business is vested with the trust and confidence
of the public; hence the "appropriate standard of diligence must be very high, if
not the highest degree of diligence."
Measured against these standards, the next question that needs to be addressed
is: Did PCI Bank exercise the requisite degree of diligence required of it? From
all indications, it did not. PCI Bank distinctly made the following uncontested
admission:
1. On 29 November 1991, one Warliza Sarande deposited to her savings account
with PCI Bank's Magsaysay Avenue Branch, TCBT-General Santos Branch
Check No. 0249188 for P225,000.00. Said check, however, was inadvertently
sent by PCI Bank through local clearing when it should have been sent
through inter-regional clearing since the check was drawn at TCBT-General
Santos City.
2. On 5 December 1991, Warliza Sarande inquired whether TCBT Check No.
0249188 had been cleared. Not having received any advice from the drawee
bank within the regular clearing period for the return of locally cleared checks,
and unaware then of the error of not having sent the check through interregional clearing, PCI Bank advised her that Check No. 024188 is treated as
cleared. x x x.30 (Emphasis supplied.)
From the foregoing, it is palpable and readily apparent that PCI Bank failed to
exercise the highest degree of care31 required of it under the law.
In the case of Philippine National Bank v. Court of Appeals,32 we declared:
The banking system has become an indispensable institution in the modern
world and plays a vital role in the economic life of every civilized society. Whether
as mere passive entities for the safe-keeping and saving of money or as active
instruments of business and commerce, banks have attained an ubiquitous
presence among the people, who have come to regard them with respect and
even gratitude and, most of all, confidence.
Having settled the other issues, we now resolve the question on the award of
moral and exemplary damages by the trial court to the respondent.
Moral damages include physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and
similar injury. Though incapable of pecuniary computation, moral damages may
be recovered if they are the proximate result of the defendant's wrongful act or
omission.33 The requisites for an award of moral damages are well-defined, thus,
firstly, evidence of besmirched reputation or physical, mental or psychological
suffering sustained by the claimant; secondly, a culpable act or omission factually
established; thirdly, proof that the wrongful act or omission of the defendant is the
proximate cause of the damages sustained by the claimant; and fourthly, that the
case is predicated on any of the instances expressed or envisioned by Article
221934 and Article 222035 of the Civil Code. All these elements are present in the
instant case.36
In the first place, by refusing to make good the manager's check it has issued,
Ong suffered embarrassment and humiliation arising from the dishonor of the

said check.37 Secondly, the culpable act of PCI Bank in having cleared the check
of Serande and issuing the manager's check to Ong is undeniable. Thirdly, the
proximate cause of the loss is attributable to PCI Bank. Proximate cause is
defined as that cause which, in natural and continuous sequence, unbroken by
any efficient intervening cause, produces the injury, and without which the result
would not have occurred.38 In this case, the proximate cause of the loss is the act
of PCI Bank in having cleared the check of Sarande and its failure to exercise
that degree of diligence required of it under the law which resulted in the loss to
Ong.
On exemplary damages, Article 2229 of the Civil Code states:
Art. 2229. Exemplary or corrective damages are imposed, by way of example or
correction for the public good, in addition to the moral, temperate, liquidated or
compensatory damages.
The law allows the grant of exemplary damages to set an example for the public
good. The banking system has become an indispensable institution in the
modern world and plays a vital role in the economic life of every civilized society.
Whether as mere passive entities for the safe-keeping and saving of money or as
active instruments of business and commerce, banks have attained an
ubiquitous presence among the people, who have come to regard them with
respect and even gratitude and most of all, confidence. For this reason, banks
should guard against injury attributable to negligence or bad faith on its part. 39
Without a doubt, it has been repeatedly emphasized that since the banking
business is impressed with public interest, of paramount importance thereto is
the trust and confidence of the public in general. Consequently, the highest
degree of diligence is expected, and high standards of integrity and performance
are even required of it. 40 Having failed in this respect, the award of exemplary
damages is warranted.
Article 2216 of the Civil Code provides:
ART. 2216. No proof of pecuniary loss is necessary in order that moral, nominal,
temperate, liquidated or exemplary damages may be adjudicated. The
assessment of such damages, except liquidated ones, is left to the discretion of
the court, according to the circumstances of each case.
Based on the above provision, the determination of the amount to be awarded
(except liquidated damages) is left to the sound discretion of the court according
to the circumstances of each case. 41 In the case before us, we find that the
award of moral damages in the amount of P50,000.00 and exemplary damages
in the amount of P20,000.00 is reasonable and justified.
With the above disquisition, there is no necessity of further discussing the last
issue on the PCI Bank's counterclaim based on the supposed lack of merit of
Ong's complaint.
WHEREFORE, premises considered, the Petition is DENIED and the Decision of
the Court of Appeals dated 29 October 2002 in CA-G.R. CV No. 65000 affirming
the Decision dated 3 may 1999, of the Regional Trial Court of Davao City, Branch
14, in Civil Case No. 21458-92, are AFFIRMED.
SO ORDERED.

FIRST DIVISION
G.R. No. 166197
February 27, 2007
METROPOLITAN BANK & TRUST COMPANY, Petitioner
vs.
ASB HOLDINGS, INC., ASB REALTY CORPORATION, ASB DEVELOPMENT
CORPORATION, ASB LAND, INC., ASB FINANCE, INC., MAKATI HOPE
CHRISTIAN SCHOOL, INC., BEL-AIR HOLDINGS CORPORATION,
WINCHESTER TRADING, INC., VYL DEVELOPMENT CORPORATION,
GERICK HOLDINGS CORPORATION, NEIGHBORHOOD HOLDINGS, INC.,
and ROSARIO S. BERNALDO, Respondents. CAMERON GRANVILLE 3
ASSET MANAGEMENT, INC., Intervenor.
DECISION
SANDOVAL-GUTIERREZ, J.:
For our resolution is the instant Petition for Review on Certiorari 1 assailing the
Decision dated August 16, 20042 of the Court of Appeals in CA-G.R. SP No.
77260 and its Resolution dated December 1, 2004.
The facts borne by the records are:
The Metropolitan Bank and Trust Company, petitioner, is a creditor bank of
respondent corporations, collectively known as the ASB Group of Companies,
owner and developer of condominium and real estate projects. Specifically, the
loans extended by petitioner bank to respondents ASB Realty Corporation and
ASB Development Corporation amounted to P523.5 million and P1.073 billion,
respectively. These loans were secured by real estate mortgages.
On May 2, 2000, the ASB Group of Companies filed with the Securities and
Exchange Commission (SEC) a Petition For Rehabilitation With Prayer For
Suspension Of Actions And Proceedings Against Petitioners, 3 pursuant to
Presidential Decree (P.D.) No. 902-A, as amended, docketed as SEC Case No.
05-00-6609. The pertinent portions of the petition allege:
6. The total assets of petitioner ASB Group of Companies, together with
petitioner ASB Allied Companies, amount to Nineteen Billion Four Hundred Ten
Million Pesos (P19,410,000,000.00).
7. The Projects were financed with loans or borrowings from bank and individual
creditors which resulted in petitioner Group of Companies having a total liability
in the amount of Twelve Billion Seven Hundred Million Pesos
(P12,700,000,000.00).
8. On account of the sudden non-renewal and/or the massive withdrawal by
creditors of their loans to petitioner ASB Holdings, Inc., coupled with the recent
developments in the country, like, among others, (i) the glut in the real estate
market; (ii) the severe drop in the sale of real properties; (iii) the depreciation of
the peso vis-a-vis the dollar; and (iv) the decreased investor confidence in the
economy, petitioner Group of Companies was unable to complete and sell some
of its projects on schedule and, hence, was unable to service its obligations as
they fell due.
9. Petitioner Group of Companies possesses sufficient property to cover its
obligations. However, petitioner Group of Companies foresees its inability to pay
its obligations within a period of one (1) year.

10. Because of the inability of the Group of Companies to pay its obligations as
they respectively fall due, its secured and non-secured creditors pressed for
payments of due and maturing obligations and threatened to initiate separate
actions against it, which will adversely affect its operations and shatter its hope in
rehabilitating itself for the benefit of its investors and creditors and the general
public.
11. There is a clear, present and imminent danger that the creditors of petitioner
Group of Companies will institute extrajudicial and judicial foreclosure
proceedings and file court actions unless restrained by this Honorable
Commission.
12. The institution of extrajudicial and judicial foreclosure proceedings and the
filing of court actions against petitioner Group of Companies will necessarily
result in the paralization of its business operation and its assets being lost,
dissipated or wasted.
13. There is, therefore, a need for the suspension of payment of all claims
against petitioner Group of Companies, in the separate and combined capacities
of its member companies, while it is working for its rehabilitation.
14. Petitioner Group of Companies has at least seven hundred twelve (712)
creditors, three hundred seventeen (317) contractors/suppliers and four hundred
ninety-two (492) condominium unit buyers, who will certainly be prejudiced by the
disruption of the operations of petitioner ASB Group of Companies which seeks
to protect the interest of the parties from any precipitate action of any person who
may only have his individual interest in mind.
15. The business of petitioner ASB Group of Companies is feasible and
profitable. Petitioner Group of Companies will eventually be able to pay all its
obligations given some changes in its management, organization, policies,
strategies, operations, or finances.
16. With the support of this Honorable Commission, petitioner Group of
Companies is confident that it will be able to embark on a sound and viable
rehabilitation plan, with a built-in debt repayment schedule through the optimal
use of their present facilities, assets and resources. Although a proposed
rehabilitation plan is attached to this petition, a detailed and comprehensive
rehabilitation proposal will be presented for the approval of this Honorable
Commission, with the foregoing salient features:
a. Servicing and eventual full repayment of all debts and liabilities, focusing on
debt restructure and possible liquidation through dacion en pago, transfer and
assignment, or outright sale of assets, in order to lighten the debt burden of
petitioner Group of Companies;
b. Forming of strategic alliances with third party investors, including joint ventures
and similar arrangements;
c. Contributing specified properties from petitioner ASB Allied Companies;
d. Streamlining the operations of petitioner ASB Group of Companies, and the
effective management of its revenues and funds towards the strengthening of its
financial and business positions; and
e. Stabilizing the operations of petitioner Group of Companies, and preparing it to
take advantage of future opportunities for growth and development.

On May 4, 2000, the Hearing Panel of the SEC Securities Investigation and
Clearing Department, finding the petition for rehabilitation sufficient in form and
substance, issued a sixty-day Suspension Order (a) suspending all actions for
claims against the ASB Group of Companies pending or still to be filed with any
court, office, board, body, or tribunal; (b) enjoining the ASB Group of Companies
from disposing of their properties in any manner, except in the ordinary course of
business, and from paying their liabilities outstanding as of the date of the filing of
the petition; and (c) appointing Atty. Monico V. Jacob as interim receiver of the
ASB Group of Companies.
On May 22, 2000, the SEC Hearing Panel issued an Order appointing Mr.
Fortunato Cruz as interim receiver of the ASB Group of Companies, replacing
Atty. Monico Jacob.
On August 18, 2000, the ASB Group of Companies submitted to the SEC for its
approval a Rehabilitation Plan,4 thus:
Metropolitan Bank and Trust Co.
Principal Amount Principal (amount) plus any interest due and unpaid as of
April 30, 2000, less any prepaid interest, without any penalties and charges.
Form of Agreement Dacion en Pago Agreement
Purpose To retire existing loans.
Tenor Immediate Dacion en Pago of related properties, subject to the approval
of the Securities and Exchange Commission (SEC).
Effective Date September 1, 2000, subject to the approval of the SEC.
Dacion En Pago
Arrangement ASB will dacion the banks equity in St. Francis Square and apply
the excess dacion value on its BSA Twin Tower loan. Further, Makati Hope,
Buendia cor. Malugay, 21 Annapolis (which is expected to be released by PNB)
and # 28 & 23 Eisenhower St., will be dacioned to Metrobank, the excess of
which will also be applied to Metrobanks exposure on BSA Twin Towers. In
return, State Condominium will be freed up and placed in the ASB creditors
asset pool. Further, Metrobank shall also undertake the completion of BSA Twin
Towers.
Outstanding Loan Balance
After Dacion En Pago None51awphi1.net
Petitioner bank, in its Comment/Opposition to the Rehabilitation Plan, 6 objected
to the above Plan, specifically the arrangement concerning the mode of payment
by respondents ASB Realty Corporation and ASB Development Corporation of
their loan obligations.
Petitioner bank claimed that the above arrangement "is not acceptable" because:
(1) it does not agree with the valuation of the properties offered for dacion; (2) the
waiver of interests, penalties and charges after April 30, 2000 is not feasible
considering that the bank continues to incur costs on the funds owed by ASB
Realty Corporation and ASB Development Corporation; and (3) since the
proposed dacion is not acceptable to the bank, there is no basis to release the
properties which serve as collateral for the loans. Petitioner thus prayed that the
Rehabilitation Plan be disapproved.
On April 26, 2001, the SEC Hearing Panel, finding petitioner banks objections

unreasonable, issued an Order7 approving the Rehabilitation Plan and appointing

Mr. Fortunato Cruz as rehabilitation receiver, thus:
PREMISES CONSIDERED, the objections to the rehabilitation plan raised by the
creditors are hereby considered unreasonable.
Accordingly, the Rehabilitation Plan submitted by petitioners is hereby
APPROVED, except those pertaining to Mr. Roxas advances, and the ASBMalayan Towers. Finally, Interim Receiver Mr. Fortunato Cruz is appointed as
Rehabilitation Receiver.
SO ORDERED.
On July 10, 2001, petitioner bank filed with the SEC En Banc a Petition for
Certiorari,8 docketed as EB-725, alleging that the SEC Hearing Panel, in
approving the Rehabilitation Plan, committed grave abuse of discretion
amounting to lack or excess of jurisdiction; and praying for the issuance of
a temporary restraining order and/or a writ of preliminary injunction to
enjoin its implementation. Subsequently, the ASB Group of Companies
filed their Opposition9 to the petition, to which petitioner bank filed its
Reply.10
In a Resolution11 dated April 15, 2003, the SEC En Banc denied petitioner
banks Petition for Certiorari and affirmed the SEC Hearing Panels Order of
April 26, 2001.
Petitioner bank then filed with the Court of Appeals a Petition for Review.12
On August 16, 2004, the appellate court rendered its Decision 13 denying due
course to the petition, thus:
WHEREFORE, finding the instant petition not impressed with merit, the
same is DENIED DUE COURSE. No pronouncement as to costs.
SO ORDERED.
Petitioner banks Motion for Reconsideration was likewise denied in a
Resolution dated December 1, 2004.14
Hence, this petition for review on certiorari.
In the meantime, or on June 1, 2006, Cameron Granville 3 Asset
Management, Inc. (Cameron Granville) filed a Motion For Intervention 15
alleging that in September of 2003, petitioner bank assigned the loans and
mortgages of ASB Realty Corporation and ASB Development Corporation
to Asset Recovery Corporation (ARC). However, pursuant to its Service
Agreement with ARC, petitioner continued to pursue its action before the
Court of Appeals in CA-G.R. SP No. 77260 and before this Court in the
instant case. On March 31, 2006, ARC in turn assigned the loans and
mortgages of the said two respondent corporations to herein intervenor,
Cameron Granville. In a Resolution dated June 5, 2006, 16 the Court granted
the motion for intervention. Accordingly, on August 28, 2006, the intervenor
filed its Petition For Intervention17 and manifested therein that it adopts as
its own petitioner banks petition and all its other pleadings. Thereafter,
respondent ASB Group of Companies filed their Comment. 18
Now to the resolution of the instant petition.
Petitioner bank contends that the Court of Appeals erred:
1. In not nullifying the SEC Resolution dated April 15, 2003 approving the

Rehabilitation Plan. Such approval illegally compels petitioner bank to

accept, through a dacion en pago arrangement, the mortgaged properties
based on ASB Group of Companies transfer values and to release part of
the collateral. This forced transfer of properties and diminution of the
banks right to enforce its lien on the mortgaged properties violate its
constitutional right against impairment of contracts and right to due
process.
2. In not finding that the Rehabilitation Plan compels petitioner bank to
waive the interests, penalties and other charges that accrued after the SEC
issued its Stay Order. Again, this is in violation of the constitutional
mandate on non-impairment of contracts and due process.
3. In not finding that only respondent ASB Holdings, Inc. suffered financial
distress as stated in the Rehabilitation Plan and, as such, the coercive
reach of the SECs Stay Order under P.D. 902-A can extend only to the
enforcement of claims against this distressed corporation. It cannot
suspend the claims and actions against its affiliate corporations.
In their Comment, respondent corporations comprising the ASB Group of
Companies prayed for the dismissal of the instant petition for being
unmeritorious.
The first two (2) assigned errors lack merit. We shall discuss them jointly
as they are closely interrelated.
We are not convinced that the approval of the Rehabilitation Plan impairs
petitioner banks lien over the mortgaged properties. Section 6 [c] of P.D.
No. 902-A provides that "upon appointment of a management committee,
rehabilitation receiver, board or body, pursuant to this Decree, all actions
for claims against corporations, partnerships or associations under
management or receivership pending before any court, tribunal, board or
body shall be suspended."
By that statutory provision, it is clear that the approval of the Rehabilitation
Plan and the appointment of a rehabilitation receiver merely suspend the
actions for claims against respondent corporations. Petitioner banks
preferred status over the unsecured creditors relative to the mortgage liens
is retained, but the enforcement of such preference is suspended. The loan
agreements between the parties have not been set aside and petitioner
bank may still enforce its preference when the assets of ASB Group of
Companies will be liquidated. Considering that the provisions of the loan
agreements are merely suspended, there is no impairment of contracts,
specifically its lien in the mortgaged properties.
As we stressed in Rizal Commercial Banking Corporation v. Intermediate
Appellate Court,19 such suspension "shall not prejudice or render
ineffective the status of a secured creditor as compared to a totally
unsecured creditor," for what P.D. No. 902-A merely provides is that all
actions for claims against the distressed corporation, partnership or
association shall be suspended. This arrangement provided by law is
intended to give the receiver a chance to rehabilitate the corporation if
there should still be a possibility for doing so, without being unnecessarily

disturbed by the creditors actions against the distressed corporation.

However, in the event that rehabilitation is no longer feasible and the
claims against the distressed corporation would eventually have to be
settled, the secured creditors, like petitioner bank, shall enjoy preference
over the unsecured creditors.
Likewise, there is no compulsion on the part of petitioner bank to accept a
dacion en pago arrangement of the mortgaged properties based on ASB
Group of Companies transfer values and to condone interests and
penalties. The Rehabilitation Plan itself, under item IV-A, explains the
dacion en pago proposal, thus:
IV. THE REVISED REHABILITATION PLAN
A. The Total Approach
It is apparent that ASBs corporate indebtedness needs to be reduced as
quickly as possible in order to prevent rapid deterioration in equity. x x x. In
order to reduce debt quickly, we must do the following:
1. Complete or sell on-going projects;
2. Invite secured creditors to complete dacion en pago transactions,
waiving all penalties; and
3. Invite unsecured creditors to purchase real estate parcels and other
assets and set-off the amount of their outstanding claim against the
purchase price.
The assets included in the above program include all real estate assets.
In order to determine the feasibility of the above, representatives of our
financial advisors met with or had discussions with most of the secured
creditors. Preliminary discussions indicate support from the secured
creditors towards the concepts of the program associated with them. The
majority of these secured creditors appear to want to complete dacion en
pago transactions based on MUTUALLY AGREED UPON TERMS. x x x. We
continue to pursue discussions with secured creditors. Based on the
program, secured creditors claims amounting to PhP5.192 billion will be
paid in full including interest up to April 30, 2000. Secured creditors have
been asked to waive all penalties and other charges. This dacion en pago
program is essential to eventually pay all creditors and rehabilitate the ASB
Group of Companies. If the dacion en pago herein contemplated does not
materialize for failure of the secured creditors to agree thereto, this
rehabilitation plan contemplates to settle the obligations (without interest,
penalties, and other related charges accruing after the date of the initial
suspension order) to secured creditors with mortgaged properties at ASB
selling prices for the general interest on the employees, creditors, unit
buyers, government, general public and the economy.
x x x.20 (Underscoring supplied)
Indeed, based on the above explanation in the Rehabilitation Plan, the
dacion en pago program and the intent of respondent ASB Group of
Companies to ask creditors to waive the interests, penalties and related
charges are not compulsory in nature. They are merely proposals for the
creditors to accept. In fact, as explained, there was already an initial

discussion on these proposals and the majority of the secured creditors

showed their desire to complete dacion en pago transactions, but they
must be "based on MUTUALLY AGREED UPON TERMS." The SEC En Banc
in its Resolution dated April 15, 2003, affirming the SEC Hearing Panels
Order of April 26, 2001 approving the Rehabilitation Plan, aptly declared:
x x x, petitioner asserts that the Rehabilitation Plan is not legally feasible
because respondents cannot dictate the terms of dacion.
We do not agree. A cursory reading of the Rehabilitation Plan debunks this
assertion. The Plan provides that dacion en pago transaction will be
effected only if the secured creditors, like petitioner, agree thereto and
under terms and conditions mutually agreeable to private respondents and
the secured creditor concerned. The dacion en pago program is essential
to eventually pay all creditors and rehabilitate private respondents. If the
dacion en pago does not materialize in case secured creditors refuse to
agree thereto, the Rehabilitation Plan contemplates to settle the obligations
to secured creditors with mortgaged properties at selling prices. This is for
the general interest of the employees, creditors, unit buyers, government,
general public, and the economy.21 (Underscoring supplied)
With respect to the third assigned error, we note that the same was not
raised by petitioner bank in its Comment/Opposition to the Rehabilitation
Plan filed with the SEC Hearing Panel. Such belated issue cannot be
considered, especially because it involves a question of fact, the resolution
of which is normally beyond the authority of this Court as it is not a trier of
facts.22
At any rate, the SEC En Banc found that the SEC Hearing Panel "acted
within its legal authority in resolving this case. Neither it overstepped its
lawful authority nor acted whimsically in approving the Rehabilitation Plan.
Hence, it cannot be faulted of grave abuse of discretion." 23 We find no
reason to disturb such finding, it being a fundamental rule that factual
findings of quasi-judicial agencies, like the SEC, which have acquired
expertise as their jurisdiction is confined to special matters such as the
subject of this case, are generally accorded great respect and even finality,
absent any showing that they arbitrarily disregarded evidence or
misapprehended evidence to such an extent as to compel a contrary
conclusion if such evidence had been properly appreciated. 24
Petitioner bank also argues that "ASB Group of Companies" is merely a
generic name used to describe collectively various companies and as
such, it is not a legal entity with juridical personality and cannot be a party
to a suit. True, "ASB Group of Companies" is merely used in this case as a
generic name, for brevity, to collectively describe the various
companies/corporations that filed a Petition For Rehabilitation with the
SEC. However, in their petition, all the respondent corporations are
individually named as petitioners, not "ASB Group of Companies."
One last word. The purpose of rehabilitation proceedings is to enable the
company to gain new lease on life and thereby allows creditors to be paid
their claims from its earnings.25 Rehabilitation contemplates a continuance

of corporate life and activities in an effort to restore and reinstate the

financially distressed corporation to its former position of successful
operation and solvency.26 This is in consonance with the States objective
to promote a wider and more meaningful equitable distribution of wealth to
protect investments and the public. 27 The approval of the Rehabilitation
Plan by the SEC Hearing Panel, affirmed by both the SEC En Banc and the
Court of Appeals, is precisely in furtherance of the rationale behind P.D. No.
902-A, as amended, which is "to effect a feasible and viable rehabilitation" 28
of ailing corporations which affect the public welfare.
WHEREFORE, we DENY the instant petition for review on certiorari. The
assailed Decision and Resolution of the Court of Appeals in CA-G.R. SP No.
77260 are AFFIRMED.
Costs against intervenor Cameron Granville.
SO ORDERED.
G.R. No. 148568
March 20, 2003
ATLANTIC ERECTORS, INC., petitioner,
vs.
HERBAL COVE REALTY CORPORATION, respondent.
PANGANIBAN, J.:
The pendency of a simple collection suit arising from the alleged nonpayment of
construction services, materials, unrealized income and damages does not justify
the annotation of a notice of lis pendens on the title to a property where
construction has been done.
Statement of the Case
Before the Court is a Petition for Review on Certiorari 1 under Rule 45 of the
Rules of Court, challenging the May 30, 2000 Decision 2 of the Court of Appeals
(CA) in CA-GR SP No. 56432. The dispositive portion of the Decision is
reproduced as follows:
"WHEREFORE, the petition is granted and the assailed November 4, 1998 and
October 22, 1999 orders annulled and set aside. The July 30, 1998 order of
respondent judge is reinstated granting the cancellation of the notices of lis
pendens subject of this petition."3
In its July 21, 2001 Resolution,4 the CA denied petitioner's Motion for
Reconsideration.
The Facts
The factual antecedents of the case are summarized by the CA in this wise:
"On June 20, 1996, [respondent] and [petitioner] entered into a Construction
Contract whereby the former agreed to construct four (4) units of [townhouses]
designated as 16-A, 16-B, 17-A and 17-B and one (1) single detached unit for an
original contract price of P15,726,745.19 which was late[r] adjusted to
P16,726,745.19 as a result of additional works. The contract period is 180 days
commencing [on] July 7, 1996 and to terminate on January 7, 1997. [Petitioner]
claimed that the said period was not followed due to reasons attributable to
[respondent], namely: suspension orders, additional works, force majeure, and
unjustifiable acts of omission or delay on the part of said [respondent].

[Respondent], however, denied such claim and instead pointed to [petitioner] as

having exceeded the 180 day contract period aggravated by defective
workmanship and utilization of materials which are not in compliance with
specifications.
xxx
xxx
xxx
"On November 21, 1997, [petitioner] filed a complaint for sum of money with
damages (Civil Case No. 97-2707) with the Regional Trial Court of Makati
entitled 'Atlantic Erectors, Incorporated vs. Herbal Cove Realty Corp. and Ernest
C. Escal[e]r'. This case was raffled to Branch 137, x x x Judge Santiago J.
Ranada presiding. In said initiatory pleading, [petitioner] AEI asked for the
following reliefs:
'AFTER DUE NOTICE AND HEARING, to order x x x defendant to:
1. Pay plaintiff the sum of P4,854,229.94 for the unpaid construction services
already rendered;
2. To x x x pay plaintiff the sum of P1,595,551.00 for the construction materials,
equipment and tools of plaintiff held by defendant;
3. To x x x pay plaintiff the sum of P2,250,000.00 for the [loss] x x x of expected
income from the construction project;
4. [T]o x x x pay plaintiff the sum of P800,000.00 for the cost of income by way of
rental from the equipment of plaintiff held by defendants;
5. To x x x pay plaintiff the sum of P5,000,000.00 for moral damages;
6. To x x x pay plaintiff the sum of P5,000,000.00 for exemplary damages;
7. To x x x pay plaintiff the sum equivalent of 25% of the total money claim plus
P200,000.00 acceptance fee and P2,500.00 per court appearance;
8. To x x x pay the cost of suit.'
"On the same day of November 21, 1997, [petitioner] filed a notice of lis pendens
for annotation of the pendency of Civil Case No. 97-707 on titles TCTs nos. T30228, 30229, 30230, 30231 and 30232. When the lots covered by said titles
were subsequently subdivided into 50 lots, the notices of lis pendens were
carried over to the titles of the subdivided lots, i.e., Transfer Certificate of Title
Nos. T-36179 to T-36226 and T-36245 to T-36246 of the Register of Deeds of
Tagaytay City.
"On January 30, 1998, [respondent] and x x x Ernest L. Escaler, filed a Motion to
Dismiss [petitioner's] Complaint for lack of jurisdiction and for failure to state a
cause of action. They claimed [that] the Makati RTC has no jurisdiction over the
subject matter of the case because the parties' Construction Contract contained
a clause requiring them to submit their dispute to arbitration.
xxx
xxx
xxx
"On March 17, 1998, [RTC Judge Ranada] dismissed the Complaint as against
[respondent] for [petitioner's] failure to comply with a condition precedent to the
filing of a court action which is the prior resort to arbitration and as against x x x
Escaler for failure of the Complaint to state a cause of action x x x.
"[Petitioner] filed a Motion for Reconsideration of the March 17, 1998 dismissal
order. [Respondent] filed its Opposition thereto.
"On April 24, 1998, [respondent] filed a Motion to Cancel Notice of Lis Pendens.
It argued that the notices of lis pendens are without basis because [petitioner's]

action is a purely personal action to collect a sum of money and recover

damages and x x x does not directly affect title to, use or possession of real
property.
"In his July 30, 1998 Order, [Judge Ranada] granted [respondent's] Motion to
Cancel Notice of Lis Pendens x x x:
"[Petitioner] filed a Motion for Reconsideration of the aforesaid July 30, 1998
Order to which [respondent] filed an Opposition.
"In a November 4, 1998 Order, [Judge Ranada,] while finding no merit in the
grounds raised by [petitioner] in its Motion for Reconsideration, reversed his July
30, 1998 Order and reinstated the notices of lis pendens, as follows:
'1. The Court finds no merit in plaintiff's contention that in dismissing the aboveentitled case for lack of jurisdiction, and at the same time granting defendant
Herbal Cove's motion to cancel notice of lis pendens, the Court [took] an
inconsistent posture. The Rules provide that prior to the transmittal of the original
record on appeal, the court may issue orders for the protection and preservation
of the rights of the parties which do not involve any matter litigated by the appeal
(3rd par., Sec. 10, Rule 41). Even as it declared itself without jurisdiction, this
Court still has power to act on incidents in this case, such as acting on motions
for reconsideration, for correction, for lifting of lis pendens, or approving appeals,
etc.
'As correctly argued by defendant Herbal Cove, a notice of lis pendens serves
only as a precautionary measure or warning to prospective buyers of a property
that there is a pending litigation involving the same.
'The Court notes that when it issued the Order of 30 July 1998 lifting the notice of
lis pendens, there was as yet no appeal filed by plaintiff. Subsequently, on 10
September 1998, after a notice of appeal was filed by plaintiff on 4 September
1998, the Branch Clerk of Court was ordered by the Court to elevate the entire
records of the above-entitled case to the Court of Appeals. It therefore results
that the above-entitled case is still pending. After a careful consideration of all
matters relevant to the lis pendens, the Court believes that justice will be better
served by setting aside the Order of 30 July 1998.'
"On November 27, 1998, [respondent] filed a Motion for Reconsideration of the
November 4, 1998 Order arguing that allowing the notice of lis pendens to
remain annotated on the titles would defeat, not serve, the ends of justice and
that equitable considerations cannot be resorted to when there is an applicable
provision of law.
xxx
xxx
xxx
"On October 22, 1999, [Judge Ranada] issued an order denying [respondent's]
Motion for Reconsideration of the November 4, 1998 Order for lack of sufficient
merit."5
Thereafter, Respondent Herbal Cove filed with the CA a Petition for Certiorari.
Ruling of the Court of Appeals
Setting aside the Orders of the RTC dated November 4, 1998 and October 22,
1999, the CA reinstated the former's July 30, 1998 Order 6 granting Herbal Cove's
Motion to Cancel the Notice of Lis Pendens. According to the appellate court, the
re-annotation of those notices was improper for want of any legal basis. It

specifically cited Section 76 of Presidential Decree No. 1529 (the Property

Registration Decree). The decree provides that the registration of such notices is
allowed only when court proceedings directly affect the title to, or the use or the
occupation of, the land or any building thereon.
The CA opined that the Complaint filed by petitioner in Civil Case No. 97-2707
was intended purely to collect a sum of money and to recover damages. The
appellate court ruled that the Complaint did not aver any ownership claim to the
subject land or any right of possession over the buildings constructed thereon. It
further declared that absent any claim on the title to the buildings or on the
possession thereof, the notices of lis pendens had no leg to stand on.
Likewise, the CA held that Judge Ranada should have maintained the notice
cancellations, which he had directed in his July 30, 1998 Order. Those notices
were no longer necessary to protect the rights of petitioner, inasmuch as it could
have procured protective relief from the Construction Industry Arbitral
Commission (CIAC), where provisional remedies were available. The CA also
mentioned petitioner's admission that there was already a pending case before
the CIAC, which in fact rendered a decision on March 11, 1999.
The appellate court further explained that the re-annotation of the Notice of Lis
Pendens was no longer warranted after the court a quo had ruled that the latter
had no jurisdiction over the case. The former held that the rationale behind the
principle of lis pendens -- to keep the subject matter of the litigation within the
power of the court until the entry of final judgment -- was no longer applicable.
The reason for such inapplicability was that the Makati RTC already declared that
it had no jurisdiction or power over the subject matter of the case.
Finally, the CA opined that petitioner's Complaint had not alleged or claimed, as
basis for the continued annotation of the Notice of Lis Pendens, the lien of
contractors and laborers under Article 2242 of the New Civil Code. Moreover,
petitioner had not even referred to any lien of whatever nature. Verily, the CA
ruled that the failure to allege and claim the contractor's lien did not warrant the
continued annotation on the property titles of Respondent Herbal Cove.
Hence, this Petition.7
The Issues
Petitioner raises the following issues for our consideration:
"I. Whether or not money claims representing cost of materials [for] and labor [on]
the houses constructed on a property [are] a proper lien for annotation of lis
pendens on the property title[.]
"II. Whether or not the trial court[,] after having declared itself without jurisdiction
to try the case[,] may still decide on [the] substantial issue of the case." 8
This Court's Ruling
The Petition has no merit.
First Issue:
Proper Basis for a Notice of Lis Pendens
Petitioner avers that its money claim on the cost of labor and materials for the
townhouses it constructed on the respondent's land is a proper lien that justifies
the annotation of a notice of lis pendens on the land titles. According to petitioner,
the money claim constitutes a lien that can be enforced to secure payment for

the said obligations. It argues that, to preserve the alleged improvement it had
made on the subject land, such annotation on the property titles of respondent is
necessary.
On the other hand, Respondent Herbal Cove argues that the annotation is bereft
of any factual or legal basis, because petitioner's Complaint 9 does not directly
affect the title to the property, or the use or the possession thereof. It also claims
that petitioner's Complaint did not assert ownership of the property or any right to
possess it. Moreover, respondent attacks as baseless the annotation of the
Notice of Lis Pendens through the enforcement of a contractor's lien under Article
2242 of the Civil Code. It points out that the said provision applies only to cases
in which there are several creditors carrying on a legal action against an
insolvent debtor.
As a general rule, the only instances in which a notice of lis pendens may be
availed of are as follows: (a) an action to recover possession of real estate; (b)
an action for partition; and (c) any other court proceedings that directly affect the
title to the land or the building thereon or the use or the occupation thereof. 10
Additionally, this Court has held that resorting to lis pendens is not necessarily
confined to cases that involve title to or possession of real property. This
annotation also applies to suits seeking to establish a right to, or an equitable
estate or interest in, a specific real property; or to enforce a lien, a charge or an
encumbrance against it.11
Apparently, petitioner proceeds on the premise that its money claim involves the
enforcement of a lien. Since the money claim is for the nonpayment of materials
and labor used in the construction of townhouses, the lien referred to would have
to be that provided under Article 2242 of the Civil Code. This provision describes
a contractor's lien over an immovable property as follows:
"Art. 2242. With reference to specific immovable property and real rights of the
debtor, the following claims, mortgages and liens shall be preferred, and shall
constitute an encumbrance on the immovable or real right:
xxx
xxx
xxx
"(3) Claims of laborers, masons, mechanics and other workmen, as well as of
architects, engineers and contractors, engaged in the construction,
reconstruction or repair of buildings, canals or other works, upon said buildings,
canals or other works;
"(4) Claims of furnishers of materials used in the construction, reconstruction, or
repair of buildings, canals or other works, upon said buildings, canals or other
works[.]" (Emphasis supplied)
However, a careful examination of petitioner's Complaint, as well as the reliefs it
seeks, reveals that no such lien or interest over the property was ever alleged.
The Complaint merely asked for the payment of construction services and
materials plus damages, without mentioning -- much less asserting -- a lien or an
encumbrance over the property. Verily, it was a purely personal action and a
simple collection case. It did not contain any material averment of any
enforceable right, interest or lien in connection with the subject property.
As it is, petitioner's money claim cannot be characterized as an action that
involves the enforcement of a lien or an encumbrance, one that would thus

warrant the annotation of the Notice of Lis Pendens. Indeed, the nature of an
action is determined by the allegations of the complaint. 12
Even assuming that petitioner had sufficiently alleged such lien or encumbrance
in its Complaint, the annotation of the Notice of Lis Pendens would still be
unjustified, because a complaint for collection and damages is not the proper
mode for the enforcement of a contractor's lien.
In J.L. Bernardo Construction v. Court of Appeals,13 the Court explained the
concept of a contractor's lien under Article 2242 of the Civil Code and the proper
mode for its enforcement as follows:
"Articles 2241 and 2242 of the Civil Code enumerates certain credits which enjoy
preference with respect to specific personal or real property of the debtor.
Specifically, the contractor's lien claimed by the petitioners is granted under the
third paragraph of Article 2242 which provides that the claims of contractors
engaged in the construction, reconstruction or repair of buildings or other works
shall be preferred with respect to the specific building or other immovable
property constructed.
"However, Article 2242 finds application when there is a concurrence of credits,
i.e., when the same specific property of the debtor is subjected to the claims of
several creditors and the value of such property of the debtor is insufficient to
pay in full all the creditors. In such a situation, the question of preference will
arise, that is, there will be a need to determine which of the creditors will be paid
ahead of the others. Fundamental tenets of due process will dictate that this
statutory lien should then only be enforced in the context of some kind of a
proceeding where the claims of all the preferred creditors may be bindingly
adjudicated, such as insolvency proceedings."14 (Emphasis supplied)
Clearly then, neither Article 2242 of the Civil Code nor the enforcement of the lien
thereunder is applicable here, because petitioner's Complaint failed to satisfy the
foregoing requirements. Nowhere does it show that respondent's property was
subject to the claims of other creditors or was insufficient to pay for all concurring
debts. Moreover, the Complaint did not pertain to insolvency proceedings or to
any other action in which the adjudication of claims of preferred creditors could
be ascertained.
Another factor negates the argument of petitioner that its money claim involves
the enforcement of a lien or the assertion of title to or possession of the subject
property: the fact that it filed its action with the RTC of Makati, which is
undisputedly bereft of any jurisdiction over respondent's property in Tagaytay
City. Certainly, actions affecting title to or possession of real property or the
assertion of any interest therein should be commenced and tried in the proper
court that has jurisdiction over the area, where the real property involved or a
portion thereof is situated.15 If petitioner really intended to assert its claim or
enforce its supposed lien, interest or right over respondent's subject properties, it
would have instituted the proper proceedings or filed a real action with the RTC
of Tagaytay City, which clearly had jurisdiction over those properties. 16
Narciso Pea, a leading authority on the subject of land titles and registration,
gives an explicit exposition on the inapplicability of the doctrine of lis pendens to
certain actions and proceedings that specifically include money claims. He

explains in this wise:

"By express provision of law, the doctrine of lis pendens does not apply to
attachments, levies of execution, or to proceedings for the probate of wills, or for
administration of the estate of deceased persons in the Court of First Instance.
Also, it is held generally that the doctrine of lis pendens has no application to a
proceeding in which the only object sought is the recovery of a money judgment,
though the title or right of possession to property be incidentally affected. It is
essential that the property be directly affected, as where the relief sought in the
action or suit includes the recovery of possession, or the enforcement of a lien, or
an adjudication between conflicting claims of title, possession, or the right of
possession to specific property, or requiring its transfer or sale" 17 (Emphasis
supplied)
Pea adds that even if a party initially avails itself of a notice of lis pendens upon
the filing of a case in court, such notice is rendered nugatory if the case turns out
to be a purely personal action. We quote him as follows:
"It may be possible also that the case when commenced may justify a resort to
lis pendens, but during the progress thereof, it develops to be purely a personal
action for damages or otherwise. In such event, the notice of lis pendens has
become functus officio."18 (Emphasis supplied)
Thus, when a complaint or an action is determined by the courts to be in
personam, the rationale for or purpose of the notice of lis pendens ceases to
exist. To be sure, this Court has expressly and categorically declared that the
annotation of a notice of lis pendens on titles to properties is not proper in cases
wherein the proceedings instituted are actions in personam.19
Second Issue:
Jurisdiction of the Trial Court
Petitioner argues that the RTC had no jurisdiction to issue the Order canceling
the Notice of Lis Pendens as well as the Order reinstating it. Supposedly, since
both Orders were issued by the trial court without jurisdiction, the annotation
made by the Register of Deeds of Tagaytay City must remain in force.
Petitioner avers that the trial court finally declared that the latter had no
jurisdiction over the case on July 27, 1998, in an Order denying the former's
Motion for Reconsideration of the March 17, 1998 Order dismissing the
Complaint. Petitioner insists that the subsequent July 30, 1998 Order cancelling
the subject Notice of Lis Pendens is void, because it was issued by a court that
had no more jurisdiction over the case.
Rule 41 of the 1997 Rules on Civil Procedure, which governs appeals from
regional trial courts, expressly provides that RTCs lose jurisdiction over a case
when an appeal is filed. The rule reads thus:
"SEC. 9. Perfection of appeal; effect thereof. -- A party's appeal by notice of
appeal is deemed perfected as to him upon the filing of the notice of appeal in
due time.
xxx
xxx
xxx
"In appeals by notice of appeal, the court loses jurisdiction over the case upon
the perfection of the appeals filed in due time and the expiration of the time to
appeal of the other parties." (Emphasis supplied)

On the basis of the foregoing rule, the trial court lost jurisdiction over the case
only on August 31, 1998, when petitioner filed its Notice of Appeal. 20 Thus, any
order issued by the RTC prior to that date should be considered valid, because
the court still had jurisdiction over the case. Accordingly, it still had the authority
or jurisdiction to issue the July 30, 1998 Order canceling the Notice of Lis
Pendens. On the other hand, the November 4, 1998 Order that set aside the July
30, 1998 Order and reinstated that Notice should be considered without force
and effect, because it was issued by the trial court after it had already lost
jurisdiction.
In any case, even if we were to adopt petitioner's theory that both the July 30,
1998 and the November 4, 1998 Orders were void for having been issued
without jurisdiction, the annotation is still improper for lack of factual and legal
bases.
As discussed previously, erroneously misplaced is the reliance of petitioner on
the premise that its money claim is an action for the enforcement of a contractor's
lien. Verily, the annotation of the Notice of Lis Pendens on the subject property
titles should not have been made in the first place. The Complaint filed before the
Makati RTC -- for the collection of a sum of money and for damages -- did not
provide sufficient legal basis for such annotation.
Finally, petitioner vehemently insists that the trial court had no jurisdiction to
cancel the Notice. Yet, the former filed before the CA an appeal, docketed as CAGR CV No. 65647,21 questioning the RTC's dismissal of the Complaint for lack of
jurisdiction. Moreover, it must be remembered that it was petitioner which had
initially invoked the jurisdiction of the trial court when the former sought a
judgment for the recovery of money and damages against respondent. Yet again,
it was also petitioner which assailed that same jurisdiction for issuing an order
unfavorable to the former's cause. Indeed, parties cannot invoke the jurisdiction
of a court to secure affirmative relief, then repudiate or question that same
jurisdiction after obtaining or failing to obtain such relief. 22
WHEREFORE, the Petition is hereby DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 152580
June 26, 2008
CONSUELO METAL CORPORATION, petitioner,
vs.
PLANTERS DEVELOPMENT BANK and ATTY. JESUSA PRADO-MANINGAS,
in her capacity as Ex-officio Sheriff of Manila, respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review1 seeking to reverse the 14 December 2001 Decision 2
and the 6 March 2002 Resolution 3 of the Court of Appeals in CA-G.R. SP No.
65069. In its 14 December 2001 Decision, the Court of Appeals dismissed
petitioner Consuelo Metal Corporations (CMC) petition for certiorari and affirmed
the 25 April 2001 Order4 of the Regional Trial Court, Branch 46, Manila (trial

court). In its 6 March 2002 Resolution, the Court of Appeals partially granted
CMCs motion for reconsideration and remanded the case to the Securities and
Exchange Commission (SEC) for further proceedings.
The Facts
On 1 April 1996, CMC filed before the SEC a petition to be declared in a state of
suspension of payment, for rehabilitation, and for the appointment of a
rehabilitation receiver or management committee under Section 5(d) of
Presidential Decree No. 902-A.5 On 2 April 1996, the SEC, finding the petition
sufficient in form and substance, declared that "all actions for claims against
CMC pending before any court, tribunal, office, board, body and/or commission
are deemed suspended immediately until further order" from the SEC. 6
In an Order dated 13 September 1999, the SEC directed the creation of a
management committee to undertake CMCs rehabilitation and reiterated the
suspension of all actions for claims against CMC.7
On 29 November 2000, upon the management committees recommendation, 8
the SEC issued an Omnibus Order directing the dissolution and liquidation of
CMC.9 The SEC also directed that "the proceedings on and implementation of
the order of liquidation be commenced at the Regional Trial Court to which this
case shall be transferred."10
Thereafter, respondent Planters Development Bank (Planters Bank), one of
CMCs creditors, commenced the extra-judicial foreclosure of CMCs real estate
mortgage. Public auctions were scheduled on 30 January 2001 and 6 February
2001.
CMC filed a motion for the issuance of a temporary restraining order and a writ of
preliminary injunction with the SEC to enjoin the foreclosure of the real estate
mortgage. On 29 January 2001, the SEC issued a temporary restraining order to
maintain the status quo and ordered the immediate transfer of the case records
to the trial court.11
The case was then transferred to the trial court. In its 25 April 2001 Order, the
trial court denied CMCs motion for issuance of a temporary restraining order.
The trial court ruled that since the SEC had already terminated and decided on
the merits CMCs petition for suspension of payment, the trial court no longer had
legal basis to act on CMCs motion.
On 28 May 2001, the trial court denied CMCs motion for reconsideration. 12 The
trial court ruled that CMCs petition for suspension of payment could not be
converted into a petition for dissolution and liquidation because they covered
different subject matters and were governed by different rules. The trial court
stated that CMCs remedy was to file a new petition for dissolution and liquidation
either with the SEC or the trial court.
CMC filed a petition for certiorari with the Court of Appeals. CMC alleged that the
trial court acted with grave abuse of discretion amounting to lack of jurisdiction
when it required CMC to file a new petition for dissolution and liquidation with
either the SEC or the trial court when the SEC clearly retained jurisdiction over
the case.
On 13 June 2001, Planters Bank extra-judicially foreclosed the real estate
mortgage.13

The Ruling of the Court of Appeals

On 14 December 2001, the Court of Appeals dismissed the petition and upheld
the 25 April 2001 Order of the trial court. The Court of Appeals held that the trial
court correctly denied CMCs motion for the issuance of a temporary restraining
order because it was only an ancillary remedy to the petition for suspension of
payment which was already terminated. The Court of Appeals added that, under
Section 121 of the Corporation Code, 14 the SEC has jurisdiction to hear CMCs
petition for dissolution and liquidation.
CMC filed a motion for reconsideration. CMC argued that it does not have to file
a new petition for dissolution and liquidation with the SEC but that the case
should just be remanded to the SEC as a continuation of its jurisdiction over the
petition for suspension of payment. CMC also asked that Planters Banks
foreclosure of the real estate mortgage be declared void.
In its 6 March 2002 Resolution, the Court of Appeals partially granted CMCs
motion for reconsideration and ordered that the case be remanded to the SEC
under Section 121 of the Corporation Code. The Court of Appeals also ruled that
since the SEC already ordered CMCs dissolution and liquidation, Planters
Banks foreclosure of the real estate mortgage was in order.
Planters Bank filed a motion for reconsideration questioning the remand of the
case to the SEC. In a resolution dated 19 July 2002, the Court of Appeals denied
the motion for reconsideration.
Not satisfied with the 6 March 2002 Resolution, CMC filed this petition for review
on certiorari.
The Issues
CMC raises the following issues:
1. Whether the present case falls under Section 121 of the Corporation Code,
which refers to the SECs jurisdiction over CMCs dissolution and liquidation, or is
only a continuation of the SECs jurisdiction over CMCs petition for suspension
of payment; and
2. Whether Planters Banks foreclosure of the real estate mortgage is valid.
The Courts Ruling
The petition has no merit.
The SEC has jurisdiction to order CMCs dissolution
but the trial court has jurisdiction over CMCs liquidation.
While CMC agrees with the ruling of the Court of Appeals that the SEC has
jurisdiction over CMCs dissolution and liquidation, CMC argues that the Court of
Appeals remanded the case to the SEC on the wrong premise that the applicable
law is Section 121 of the Corporation Code. CMC maintains that the SEC
retained jurisdiction over its dissolution and liquidation because it is only a
continuation of the SECs jurisdiction over CMCs original petition for suspension
of payment which had not been "finally disposed of as of 30 June 2000."
On the other hand, Planters Bank insists that the trial court has jurisdiction over
CMCs dissolution and liquidation. Planters Bank argues that dissolution and
liquidation are entirely new proceedings for the termination of the existence of the
corporation which are incompatible with a petition for suspension of payment
which seeks to preserve corporate existence.

Republic Act No. 8799 (RA 8799) 15 transferred to the appropriate regional trial
courts the SECs jurisdiction defined under Section 5(d) of Presidential Decree
No. 902-A. Section 5.2 of RA 8799 provides:
The Commissions jurisdiction over all cases enumerated under Sec. 5 of
Presidential Decree No. 902-A is hereby transferred to the Courts of general
jurisdiction or the appropriate Regional Trial Court: Provided, That the Supreme
Court in the exercise of its authority may designate the Regional Trial Court
branches that shall exercise jurisdiction over these cases. The Commission shall
retain jurisdiction over pending cases involving intra-corporate disputes
submitted for final resolution which should be resolved within one (1) year from
the enactment of this Code. The Commission shall retain jurisdiction over
pending suspension of payments/rehabilitation cases filed as of 30 June
2000 until finally disposed. (Emphasis supplied)
The SEC assumed jurisdiction over CMCs petition for suspension of payment
and issued a suspension order on 2 April 1996 after it found CMCs petition to be
sufficient in form and substance. While CMCs petition was still pending with the
SEC as of 30 June 2000, it was finally disposed of on 29 November 2000 when
the SEC issued its Omnibus Order directing the dissolution of CMC and the
transfer of the liquidation proceedings before the appropriate trial court. The SEC
finally disposed of CMCs petition for suspension of payment when it determined
that CMC could no longer be successfully rehabilitated.
However, the SECs jurisdiction does not extend to the liquidation of a
corporation. While the SEC has jurisdiction to order the dissolution of a
corporation,16 jurisdiction over the liquidation of the corporation now pertains to
the appropriate regional trial courts. This is the reason why the SEC, in its 29
November 2000 Omnibus Order, directed that "the proceedings on and
implementation of the order of liquidation be commenced at the Regional Trial
Court to which this case shall be transferred." This is the correct procedure
because the liquidation of a corporation requires the settlement of claims for and
against the corporation, which clearly falls under the jurisdiction of the regular
courts. The trial court is in the best position to convene all the creditors of the
corporation, ascertain their claims, and determine their preferences.
Foreclosure of real estate mortgage is valid.
CMC maintains that the foreclosure is void because it was undertaken without
the knowledge and previous consent of the liquidator and other lien holders.
CMC adds that the rules on concurrence and preference of credits should apply
in foreclosure proceedings. Assuming that Planters Bank can foreclose the
mortgage, CMC argues that the foreclosure is still void because it was conducted
in violation of Section 15, Rule 39 of the Rules of Court which states that the sale
"should not be earlier than nine oclock in the morning and not later than two
oclock in the afternoon."
On the other hand, Planters Bank argues that it has the right to foreclose the real
estate mortgage because of non-payment of the loan obligation. Planters Bank
adds that the rules on concurrence and preference of credits and the rules on
insolvency are not applicable in this case because CMC has been not been
declared insolvent and there are no insolvency proceedings against CMC.

In Rizal Commercial Banking Corporation v. Intermediate Appellate Court,17 we

held that if rehabilitation is no longer feasible and the assets of the corporation
are finally liquidated, secured creditors shall enjoy preference over unsecured
creditors, subject only to the provisions of the Civil Code on concurrence and
preference of credits. Creditors of secured obligations may pursue their security
interest or lien, or they may choose to abandon the preference and prove their
credits as ordinary claims.18
Moreover, Section 2248 of the Civil Code provides:
Those credits which enjoy preference in relation to specific real property or real
rights, exclude all others to the extent of the value of the immovable or real right
to which the preference refers.
In this case, Planters Bank, as a secured creditor, enjoys preference over a
specific mortgaged property and has a right to foreclose the mortgage under
Section 2248 of the Civil Code. The creditor-mortgagee has the right to foreclose
the mortgage over a specific real property whether or not the debtor-mortgagor is
under insolvency or liquidation proceedings. The right to foreclose such
mortgage is merely suspended upon the appointment of a management
committee or rehabilitation receiver19 or upon the issuance of a stay order by the
trial court.20 However, the creditor-mortgagee may exercise his right to foreclose
the mortgage upon the termination of the rehabilitation proceedings or upon the
lifting of the stay order.21
Foreclosure proceedings have in their favor the presumption of regularity and the
burden of evidence to rebut the same is on the party that seeks to challenge the
proceedings.22 CMCs challenge to the foreclosure proceedings has no merit. The
notice of sale clearly specified that the auction sale will be held "at 10:00 oclock
in the morning or soon thereafter, but not later than 2:00 oclock in the
afternoon."23 The Sheriffs Minutes of the Sale stated that "the foreclosure sale
was actually opened at 10:00 A.M. and commenced at 2:30 P.M." 24 There was
nothing irregular about the foreclosure proceedings.
WHEREFORE, we DENY the petition. We REINSTATE the 29 November 2000
Omnibus Order of the Securities and Exchange Commission directing the
Regional Trial Court, Branch 46, Manila to immediately undertake the liquidation
of Consuelo Metal Corporation. We AFFIRM the ruling of the Court of Appeals
that Planters Development Banks extra-judicial foreclosure of the real estate
mortgage is valid.
SO ORDERED.