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Republic of the Philippines has caused petitioner, the respondent bank is liable for
SUPREME COURT moral damages which this Court fixes at P50,000.00.
Manila
3. ID.; EXEMPLARY DAMAGES; ATTORNEY'S FEES;
SECOND DIVISION IMPOSED UPON THE BANK TO DETER REPEATING
SIMILAR ACT; CASE AT BAR. To serve as a deterrent
G.R. No. 90169. April 7, 1993. for the respondent bank from repeating similar acts and
PILAR PAGSIBIGAN, petitioner, to set an example and correction for the public good, this
vs. Court likewise awards exemplary damages. In view of its
COURT OF APPEALS and PLANTERS nature, it should be imposed in such amount as to
DEVELOPMENT BANK, respondents. sufficiently and effectively deter similar acts in the future
Juanito Cruz for petitioner. by the respondent bank and other banks, which amount
Raymundo S. Senga for private respondent. this court fixes at P20,000.00 on top of the forfeiture of
SYLLABUS whatever balance on the loan which the respondent may
actually have in its favor. Attorney's fees by way of
damages is likewise awarded for the same reason that
1. CIVIL LAW; CONTRACT OF LOAN; SUBSTANTIAL
exemplary damages is awarded and this is fixed at
PERFORMANCE BY OBLIGOR, RECOGNIZED; CASE
P10,000.00.
AT BAR. From the conduct of the respondent bank it
is clear that it neither enforced its right under the
acceleration clause nor its right to foreclose under the DECISION
mortgage contract, For more than four years, the
respondent bank made petitioner believe that it was CAMPOS, JR., J p:
applying her payment on the loan and interest just like
before when the respondent bank accepted such This is a petition for review on certiorari of the decision **
payment and issued a receipt therefor. It is bound by of the Court of Appeals in CA-G.R. CV No. 18385
estoppel to apply the same as payment for petitioner's entitled "Pilar Pagsibigan, Plaintiff-appellee vs. Planters
obligation as it did when it received previous payments Development Bank, Defendant-appellant," the decretal
on three occasions. Its act of applying said payments to portion of which reads:
accounts payable is clearly prejudicial to petitioner. We
cannot countenance this act of the bank. We hold that "WHEREFORE, the decision appealed from is hereby
the payment amounting to P8,650.00 for the balance of reversed and another one entered ordering plaintiff-
P3,558.20 as of August 26, 1978 plus the P1,000.00 it appellee Norma Manalili, to pay the deficiency of
was asked to pay on April 24, 1984 would at the very P21,391.81. No pronouncement is made as to costs.
least constitute substantial performance. Article 1234 of
the Civil Code, provides: "Article 1234. If the obligation
has been substantially performed in good faith, the "SO ORDERED." 1
obligor may recover as though there had been a strict
and complete fulfillment, less damages suffered by the The undisputed facts are summarized by the respondent
obligee." Petitioner in this case has the right to move for court as follows:
the cancellation of the mortgage and the release of the
mortgaged property, upon payment of the balance of the "Stripped of non-essentials, it appears that on August 4,
loan. Thus, aside from the fact that the respondent bank 1974, plaintiff-appellee, [petitioner, herein] through her
was estopped from enforcing its right to foreclose by daughter as attorney-in-fact, obtained an agricultural
virtue of its acceptance of the delayed payments for a loan from the Planters Development Bank (formerly
period of more than six years, the application of such Bulacan Development Bank), in the sum of P4,500.00
payment to the interest and the principal during the first secured by a mortgage over a parcel of land covered by
three payments constitutes a virtual waiver of the Transfer Certificate of Title No. T-129603 (Exhibit "A"; "A-
acceleration clause provided in the contract. We cannot 1"), which loan was later fully paid (Exhibits "B"; "B-1" to
sustain the legality of the foreclosure under the peculiar "B-3". Another loan for the same amount was obtained
facts of this case, because there is substantial from the bank on November 3, 1977 [year 1977 should
performance of the obligation on the part of petitioner. read 1976 instead] secured by the same parcel of land.
Under Article 1235 of the Civil Code, when the creditor The Promissory Note for the second loan (Exhibit "1")
accepts performance, knowing its incompleteness and stipulated that for a first payment to be made on May 3,
irregularity without protest or objection, the obligation is 1977 and payments every six months thereafter at
deemed complied with. P1,018.14 with 19% interest for unpaid amortizations.
The said Promissory Note, containing an acceleration
2. ID.; MORAL DAMAGES, WHEN AVAILABLE; CASE clause (Exhibit "1-A"), was not denied by plaintiff-
AT BAR. This Court cannot ignore the fact that the appellee [petitioner] (TSN, December 10, 1986, pp. 9-
respondent bank succeeded in taking advantage of the 10).
ignorance of petitioner in transactions such as the one
involved in the case at bar by lodging the bulk of Initial payment was made on July 6, 1978 [year 1978
petitioner's payment to account payable based on the should read 1977 instead] followed by several payments
flimsy reason that she had been in default, and then in the total amount of P11,900.00 (Exhibits "D"; "D-1" to
considering the entire debt pursuant to an acceleration "D-7"). However, only four of these payments were
clause as earning interest and penalty charges at an applied to the loan (TSN, March 16, 1987, pp. 14-16),
exorbitant rate of 19% each from the date of first default while the rest were "temporarily lodged to accounts
up to the date of foreclosure, thus bringing the obligation payable since the account was already past due" (TSN,
to an astronomical amount of P29,554.81. This indicates June 1, 1987, pp. 15-16). On the basis of a Petition for
bad faith on the part of the respondent bank. For the Extrajudicial Foreclosure of Mortgage (Exhibit "6") and
mental anguish, sleepless nights and serious anxiety this the statement of Account (Exhibit "12"), the property was
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foreclosed extrajudicially on May 7, 1984 for failure to only P25.20 to penalty. From this act of receiving
pay an outstanding balance of P29,554.81 (Exhibit "13"). delayed payment, it is clear that the respondent bank
This resulted in the property being sold to the bank for had waived its right under the acceleration clause so that
P8,163.00, and the bank thereafter claimed a deficiency instead of claiming penalty charges on the entire amount
of P21,391.81. of P4,500.00, it only computed the penalty based on the
defaulted amortization payment which is P1,018.14. If it
In the action for annulment of sale with damages and computed the penalty charge at 19% of the entire
writ of preliminary injunction instituted by plaintiff- amount of P4,500.00 which would have been due and
appellee, the lower court sustained appellee's [petitioner] demandable by virtue of the acceleration clause, the
theory of overpayment (Decision, p. 3), as against the penalty charges would be much more than P25.20.
propriety of the foreclosure." 2 [Bracketed words Ours].
This is similarly observed in payments which the
Petitioner submits the following Issues for resolution: respondent bank received on June 6, 1978 and August
26, 1978. We also noticed that in Exhibit "D-3", the
receipt which the respondent bank issued to petitioner
"1. Whether or not the foreclosure and auction sale of
for the August 26, 1978 partial payment, it waived its
the property is valid and justified under the
right under Article 1253 7 of the Civil Code on Application
circumstances; and
of Payments when it applied the payment to the principal
instead of the interest. Thus, on that date the
2. Whether or not petitioner is entitled to recover outstanding obligation of petitioner was already reduced
damages as well as attorney's fees as a result of the to P3,558.21 after she had paid a total of P2,200.00 over
foreclosure and auction sale." 3 a period of nine months from the time the loan was
obtained.
It is petitioner's contention that the bank has no right to
foreclose the mortgage, there having been full payment From this conduct of the respondent bank it is clear that
of the principal obligation. As per their computation 4 the it neither enforced its right under the acceleration clause
payment which they have made totalling P11,900.00 nor its right to foreclose under the mortgage contract,
more than sufficiently covered their total obligation with For more than four years, the respondent bank made
respect to their loan, there having been, in fact, an petitioner believe that it was applying her payment on the
overpayment of either P4,642.38 or P6,106.75 based on loan and interest just like before when the respondent
the interest rate used in the computation. Thus, the bank accepted such payment and issued a receipt
principal obligation having been extinguished by therefor. It is bound by estoppel to apply the same as
payment, the accessory obligation of mortgage is payment for petitioner's obligation as it did when it
necessarily extinguished, and the foreclosure thereof is received previous payments on three occasions. Its act
improper and not valid. of applying said payments to accounts payable is clearly
prejudicial to petitioner. We cannot countenance this act
The respondent bank on the other hand countered that of the bank.
the computation relied upon by petitioner is not in
consonance with the Promissory Note 5 which she We hold that the payment amounting to P8,650.00 for
signed because the Promissory Note contains an the balance of P3,558.20 as of August 26, 1978 8 plus
acceleration clause. Respondent bank also averred that the P1,000.00 it was asked to pay on April 24, 1984
upon petitioner's failure to pay her first installment, the would at the very least constitute substantial
entire obligation became due and demandable and its performance.
right to foreclose the mortgage has accrued. Thus, when
it foreclosed the mortgage in 1984, with the outstanding
Article 1234 of the Civil Code, provides:
obligation at P29,554.81, it was acting well within its
rights.
"Article 1234. If the obligation has been substantially
performed in good faith, the obligor may recover as
We note at this point that the respondent bank does not
though there had been a strict and complete fulfillment,
dispute the fact that petitioner had made several
less damages suffered by the obligee."
payments in an amount totalling to P11,900.00. It
likewise admits that only part of the amount tendered
was applied to the loan and the bulk of such payment Petitioner in this case has the right to move for the
was "temporarily lodged to accounts payable since the cancellation of the mortgage and the release of the
account was already past due" 6 [Emphasis Ours]. mortgaged property, upon payment of the balance of the
Petitioner assails the respondent bank for not applying loan. Definitely, it would not be in the amount demanded
her payment to the loan. Because of said act, the loan by the respondent bank, which the trial court held to be
remained outstanding when it should have been P29,554.81.
extinguished and should have also extinguished the
accessory contract of real estate mortgage. This Court, in Angeles vs. Calasanz 9 held that:

Petitioner wants Us to rule not only on the regularity or "The breach of the contract adverted to by the
legality of the foreclosure but also on its propriety in the defendants-appellants is so slight and casual when we
light of the attending circumstances. consider that apart from the initial downpayment of
P392.00 the plaintiffs-appellees had already paid the
There is no question that the respondent bank has the monthly installments for a period of almost nine (9)
right to foreclose the mortgage upon the first default of years. In other words, in only a short time, the entire
petitioner on May 3, 1977, but the records show that it obligation would have been paid. Furthermore, although
did not. When it received payment of petitioner on July 6, the principal obligation was only P3,920.00 excluding the
1977, which had been 2 months and 3 days delayed, it 7 percent interests, the plaintiffs-appellees had already
applied P154.80 to the principal, P210.00 to interest, and paid an aggregate amount of P4,533.38. To sanction the
rescission made by the defendants-appellants will work
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injustice to the plaintiffs-appellees. It would unjustly


enrich the defendants-appellants.

Article 1234 of the Civil Code which provides that:

xxx xxx xxx

also militates against the unilateral act of the defendants-


appellants in cancelling the contract."

Thus, aside from the fact that the respondent bank was
estopped from enforcing its right to foreclose by virtue of
its acceptance of the delayed payments for a period of
more than six years, the application of such payment to
the interest and the principal during the first three
payments constitutes a virtual waiver of the acceleration
clause provided in the contract. We cannot sustain the
legality of the foreclosure under the peculiar facts of this
case, because there is substantial performance of the
obligation on the part of petitioner. Under Article 1235 of
the Civil Code, when the creditor accepts performance,
knowing its incompleteness and irregularity without
protest or objection, the obligation is deemed complied
with.

This Court cannot ignore the fact that the respondent


bank succeeded in taking advantage of the ignorance of
petitioner in transactions such as the one involved in the
case at bar by lodging the bulk of petitioner's payment to
account payable based on the flimsy reason that she
had been in default, and then considering the entire debt
pursuant to an acceleration clause as earning interest
and penalty charges at an exorbitant rate of 19% each
from the date of first default up to the date of foreclosure,
thus bringing the obligation to an astronomical amount of
P29,554.81. This indicates bad faith on the part of the
respondent bank. For the mental anguish, sleepless
nights and serious anxiety this has caused petitioner, the
respondent bank is liable for moral damages which this
Court fixes at P50,000.00.

To serve as a deterrent for the respondent bank from


repeating similar acts and to set an example and
correction for the public good, this Court likewise awards
exemplary damages. In view of its nature, it should be
imposed in such amount as to sufficiently and effectively
deter similar acts in the future 10 by the respondent bank
and other banks, which amount this court fixes at
P20,000.00 on top of the forfeiture of whatever balance
on the loan which the respondent may actually have in
its favor.

This Court likewise orders the annulment of the


foreclosure sale and the reconveyance of the property
subject of the real estate mortgage pursuant to the
annotation of lis pendens in the certificate of title of the
subject property.

Attorney's fees by way of damages is likewise awarded


for the same reason that exemplary damages is awarded
and this is fixed at P10,000.00.

WHEREFORE, the appealed decision is hereby SET


ASIDE and a new one entered ordering the
reconveyance of the foreclosed property and the
payment of moral damages, exemplary damages and
attorney's fees as above specified, with costs against
private respondent Planters Development Bank.

SO ORDERED.
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Republic of the Philippines It was then that the rift between the contending
SUPREME COURT parties soon emerged. Appellee apparently felt
Manila short changed because according to him, his
total commission should be P352,500.00 which
THIRD DIVISION is five percent (5%) of the agreed price of
P7,050,000.00 paid by Times Transit
Corporation to appellants for the two (2) lots,
G.R. No. 115838 July 18, 2002
and that it was he who introduced the buyer to
appellants and unceasingly facilitated the
CONSTANTE AMOR DE CASTRO and CORAZON negotiation which ultimately led to the
AMOR DE CASTRO, petitioners, consummation of the sale. Hence, he sued
vs. below to collect the balance of P303,606.24 after
COURT OF APPEALS and FRANCISCO ARTIGO, having received P48,893.76 in
respondents. advance.1wphi1.nt

CARPIO, J.: On the other hand, appellants completely


traverse appellee's claims and essentially argue
The Case that appellee is selfishly asking for more than
what he truly deserved as commission to the
Before us is a Petition for Review on Certiorari1 seeking prejudice of other agents who were more
to annul the Decision of the Court of Appeals2 dated May instrumental in the consummation of the sale.
4, 1994 in CA-G.R. CV No. 37996, which affirmed in toto Although appellants readily concede that it was
the decision3 of the Regional Trial Court of Quezon City, appellee who first introduced Times Transit
Branch 80, in Civil Case No. Q-89-2631. The trial court Corp. to them, appellee was not designated by
disposed as follows: them as their exclusive real estate agent but that
in fact there were more or less eighteen (18)
"WHEREFORE, the Court finds defendants others whose collective efforts in the long run
Constante and Corazon Amor de Castro jointly dwarfed those of appellee's, considering that the
and solidarily liable to plaintiff the sum of: first negotiation for the sale where appellee took
active participation failed and it was these other
agents who successfully brokered in the second
a) P303,606.24 representing unpaid
negotiation. But despite this and out of
commission;
appellants' "pure liberality, beneficence and
magnanimity", appellee nevertheless was given
b) P25,000.00 for and by way of moral damages; the largest cut in the commission (P48,893.76),
although on the principle of quantum meruit he
c) P45,000.00 for and by way of attorney's fees; would have certainly been entitled to less. So
appellee should not have been heard to
d) To pay the cost of this suit. complain of getting only a pittance when he
actually got the lion's share of the commission
Quezon City, Metro Manila, December 20, and worse, he should not have been allowed to
1991." get the entire commission. Furthermore, the
purchase price for the two lots was only P3.6
million as appearing in the deed of sale and not
The Antecedent Facts P7.05 million as alleged by appellee. Thus, even
assuming that appellee is entitled to the entire
On May 29, 1989, private respondent Francisco Artigo commission, he would only be getting 5% of the
("Artigo" for brevity) sued petitioners Constante A. De P3.6 million, or P180,000.00."
Castro ("Constante" for brevity) and Corazon A. De
Castro ("Corazon" for brevity) to collect the unpaid Ruling of the Court of Appeals
balance of his broker's commission from the De
Castros.4 The Court of Appeals summarized the facts in
this wise: The Court of Appeals affirmed in toto the decision of the
trial court.
"x x x. Appellants5 were co-owners of four (4)
lots located at EDSA corner New York and First. The Court of Appeals found that Constante
Denver Streets in Cubao, Quezon City. In a authorized Artigo to act as agent in the sale of two lots in
letter dated January 24, 1984 (Exhibit "A-1, p. Cubao, Quezon City. The handwritten authorization letter
144, Records), appellee6 was authorized by signed by Constante clearly established a contract of
appellants to act as real estate broker in the sale agency between Constante and Artigo. Thus, Artigo
of these properties for the amount of sought prospective buyers and found Times Transit
P23,000,000.00, five percent (5%) of which will Corporation ("Times Transit" for brevity). Artigo facilitated
be given to the agent as commission. It was the negotiations which eventually led to the sale of the
appellee who first found Times Transit two lots. Therefore, the Court of Appeals decided that
Corporation, represented by its president Mr. Artigo is entitled to the 5% commission on the purchase
Rondaris, as prospective buyer which desired to price as provided in the contract of agency.
buy two (2) lots only, specifically lots 14 and 15.
Eventually, sometime in May of 1985, the sale of
lots 14 and 15 was consummated. Appellee
received from appellants P48,893.76 as
commission.
5

Second. The Court of Appeals ruled that Artigo's and Carmela whom Constante merely represented. The
complaint is not dismissible for failure to implead as De Castros contend that failure to implead such
indispensable parties the other co-owners of the two lots. indispensable parties is fatal to the complaint since
The Court of Appeals explained that it is not necessary Artigo, as agent of all the four co-owners, would be paid
to implead the other co-owners since the action is with funds co-owned by the four co-owners.
exclusively based on a contract of agency between
Artigo and Constante. The De Castros' contentions are devoid of legal basis.

Third. The Court of Appeals likewise declared that the An indispensable party is one whose interest will be
trial court did not err in admitting parol evidence to prove affected by the court's action in the litigation, and without
the true amount paid by Times Transit to the De Castros whom no final determination of the case can be had. 7
for the two lots. The Court of Appeals ruled that evidence The joinder of indispensable parties is mandatory and
aliunde could be presented to prove that the actual courts cannot proceed without their presence.8
purchase price was P7.05 million and not P3.6 million as Whenever it appears to the court in the course of a
appearing in the deed of sale. Evidence aliunde is proceeding that an indispensable party has not been
admissible considering that Artigo is not a party, but a joined, it is the duty of the court to stop the trial and order
mere witness in the deed of sale between the De the inclusion of such party.9
Castros and Times Transit. The Court of Appeals
explained that, "the rule that oral evidence is However, the rule on mandatory joinder of indispensable
inadmissible to vary the terms of written instruments is parties is not applicable to the instant case.
generally applied only in suits between parties to the
instrument and strangers to the contract are not bound
by it." Besides, Artigo was not suing under the deed of There is no dispute that Constante appointed Artigo in a
sale, but solely under the contract of agency. Thus, the handwritten note dated January 24, 1984 to sell the
Court of Appeals upheld the trial court's finding that the properties of the De Castros for P23 million at a 5
purchase price was P7.05 million and not P3.6 million. percent commission. The authority was on a first come,
first serve basis. The authority reads in full:
Hence, the instant petition.

The Issues "24 Jan. 84

According to petitioners, the Court of Appeals erred in -

To Whom It May Concern:


I. NOT ORDERING THE DISMISSAL OF THE
COMPLAINT FOR FAILURE TO IMPLEAD
INDISPENSABLE PARTIES-IN-INTEREST; This is to state that Mr. Francisco Artigo is
authorized as our real estate broker in
connection with the sale of our property located
II. NOT ORDERING THE DISMISSAL OF THE
at Edsa Corner New York & Denver, Cubao,
COMPLAINT ON THE GROUND THAT
Quezon City.
ARTIGO'S CLAIM HAS BEEN EXTINGUISHED
BY FULL PAYMENT, WAIVER, OR
ABANDONMENT; Asking price P 23,000,000.00 with 5%
commission as agent's fee.
III. CONSIDERING INCOMPETENT
EVIDENCE;
C.C. de Castro
IV. GIVING CREDENCE TO PATENTLY owner & representing
PERJURED TESTIMONY; co-owners

V. SANCTIONING AN AWARD OF MORAL


DAMAGES AND ATTORNEY'S FEES;
This authority is on a first-come
VI. NOT AWARDING THE DE CASTRO'S
MORAL AND EXEMPLARY DAMAGES, AND First serve basis CAC"
ATTORNEY'S FEES.
Constante signed the note as owner and as
The Court's Ruling representative of the other co-owners. Under this note, a
contract of agency was clearly constituted between
The petition is bereft of merit. Constante and Artigo. Whether Constante appointed
Artigo as agent, in Constante's individual or
representative capacity, or both, the De Castros cannot
First Issue: whether the complaint merits dismissal
seek the dismissal of the case for failure to implead the
for failure to implead other co-owners as
other co-owners as indispensable parties. The De
indispensable parties
Castros admit that the other co-owners are solidarily
liable under the contract of agency,10 citing Article
The De Castros argue that Artigo's complaint should 1915 of the Civil Code, which reads:
have been dismissed for failure to implead all the co-
owners of the two lots. The De Castros claim that Artigo
Art. 1915. If two or more persons have
always knew that the two lots were co-owned by
appointed an agent for a common transaction or
Constante and Corazon with their other siblings Jose
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undertaking, they shall be solidarily liable to the sale and entitled to a "proportionate share" in the
agent for all the consequences of the agency. commission. They assert that Artigo did absolutely
nothing during the second negotiation but to sign as a
The solidary liability of the four co-owners, however, witness in the deed of sale. He did not even prepare the
militates against the De Castros' theory that the other co- documents for the transaction as an active real estate
owners should be impleaded as indispensable parties. A broker usually does.
noted commentator explained Article 1915 thus
The De Castros' arguments are flimsy.
"The rule in this article applies even when the
appointments were made by the principals in A contract of agency which is not contrary to law, public
separate acts, provided that they are for the order, public policy, morals or good custom is a valid
same transaction. The solidarity arises from contract, and constitutes the law between the parties. 14
the common interest of the principals, and The contract of agency entered into by Constante with
not from the act of constituting the agency. Artigo is the law between them and both are bound to
By virtue of this solidarity, the agent can comply with its terms and conditions in good faith.
recover from any principal the whole
compensation and indemnity owing to him The mere fact that "other agents" intervened in the
by the others. The parties, however, may, by consummation of the sale and were paid their respective
express agreement, negate this solidary commissions cannot vary the terms of the contract of
responsibility. The solidarity does not disappear agency granting Artigo a 5 percent commission based on
by the mere partition effected by the principals the selling price. These "other agents" turned out to be
after the accomplishment of the agency. employees of Times Transit, the buyer Artigo introduced
to the De Castros. This prompted the trial court to
If the undertaking is one in which several are observe:
interested, but only some create the agency,
only the latter are solidarily liable, without "The alleged `second group' of agents came into
prejudice to the effects of negotiorum gestio with the picture only during the so-called `second
respect to the others. And if the power granted negotiation' and it is amusing to note that these
includes various transactions some of which are (sic) second group, prominent among whom are
common and others are not, only those Atty. Del Castillo and Ms. Prudencio, happened
interested in each transaction shall be liable for to be employees of Times Transit, the buyer of
it."11 the properties. And their efforts were limited to
convincing Constante to 'part away' with the
When the law expressly provides for solidarity of the properties because the redemption period of the
obligation, as in the liability of co-principals in a contract foreclosed properties is around the corner, so to
of agency, each obligor may be compelled to pay the speak. (tsn. June 6, 1991).
entire obligation.12 The agent may recover the whole
compensation from any one of the co-principals, as in xxx
this case.
To accept Constante's version of the story is to
Indeed, Article 1216 of the Civil Code provides that a open the floodgates of fraud and deceit. A seller
creditor may sue any of the solidary debtors. This article could always pretend rejection of the offer and
reads: wait for sometime for others to renew it who are
much willing to accept a commission far less
Art. 1216. The creditor may proceed against any than the original broker. The immorality in the
one of the solidary debtors or some or all of instant case easily presents itself if one has
them simultaneously. The demand made against to consider that the alleged `second group'
one of them shall not be an obstacle to those are the employees of the buyer, Times
which may subsequently be directed against the Transit and they have not bettered the offer
others, so long as the debt has not been fully secured by Mr. Artigo for P7 million.
collected.
It is to be noted also that while Constante was
Thus, the Court has ruled in Operators Incorporated vs. too particular about the unrenewed real estate
American Biscuit Co., Inc.13 that broker's license of Mr. Artigo, he did not bother
at all to inquire as to the licenses of Prudencio
"x x x solidarity does not make a solidary and Castillo. (tsn, April 11, 1991, pp. 39-40)." 15
obligor an indispensable party in a suit filed (Emphasis supplied)
by the creditor. Article 1216 of the Civil Code
says that the creditor `may proceed against In any event, we find that the 5 percent real estate
anyone of the solidary debtors or some or all of broker's commission is reasonable and within the
them simultaneously'." (Emphasis supplied) standard practice in the real estate industry for
transactions of this nature.
Second Issue: whether Artigo's claim has been
extinguished by full payment, waiver or The De Castros also contend that Artigo's inaction as
abandonment well as failure to protest estops him from recovering
more than what was actually paid him. The De Castros
The De Castros claim that Artigo was fully paid on June cite Article 1235 of the Civil Code which reads:
14, 1985, that is, Artigo was given "his proportionate
share and no longer entitled to any balance." According Art. 1235. When the obligee accepts the
to them, Artigo was just one of the agents involved in the performance, knowing its incompleteness and
7

irregularity, and without expressing any protest "Laches is recourse in equity. Equity, however,
or objection, the obligation is deemed fully is applied only in the absence, never in
complied with. contravention, of statutory law. Thus, laches,
cannot, as a rule, be used to abate a
The De Castros' reliance on Article 1235 of the Civil collection suit filed within the prescriptive
Code is misplaced. Artigo's acceptance of partial period mandated by the Civil Code."22
payment of his commission neither amounts to a waiver
of the balance nor puts him in estoppel. This is the Clearly, the De Castros' defense of laches finds no
import of Article 1235 which was explained in this wise: support in law, equity or jurisprudence.

"The word accept, as used in Article 1235 of the Third issue: whether the determination of the
Civil Code, means to take as satisfactory or purchase price was made in violation of the Rules
sufficient, or agree to an incomplete or irregular on Evidence
performance. Hence, the mere receipt of a
partial payment is not equivalent to the The De Castros want the Court to re-examine the
required acceptance of performance as probative value of the evidence adduced in the trial court
would extinguish the whole obligation."16 to determine whether the actual selling price of the two
(Emphasis supplied) lots was P7.05 million and not P3.6 million. The De
Castros contend that it is erroneous to base the 5
There is thus a clear distinction between acceptance and percent commission on a purchase price of P7.05 million
mere receipt. In this case, it is evident that Artigo merely as ordered by the trial court and the appellate court. The
received the partial payment without waiving the De Castros insist that the purchase price is P3.6 million
balance. Thus, there is no estoppel to speak of. as expressly stated in the deed of sale, the due
execution and authenticity of which was admitted during
The De Castros further argue that laches should apply the trial.
because Artigo did not file his complaint in court until
May 29, 1989, or almost four years later. Hence, Artigo's The De Castros believe that the trial and appellate courts
claim for the balance of his commission is barred by committed a mistake in considering incompetent
laches. evidence and disregarding the best evidence and parole
evidence rules. They claim that the Court of Appeals
Laches means the failure or neglect, for an erroneously affirmed sub silentio the trial court's reliance
unreasonable and unexplained length of time, to do that on the various correspondences between Constante and
which by exercising due diligence could or should have Times Transit which were mere photocopies that do not
been done earlier. It is negligence or omission to assert satisfy the best evidence rule. Further, these letters
a right within a reasonable time, warranting a covered only the first negotiations between Constante
presumption that the party entitled to assert it either has and Times Transit which failed; hence, these are
abandoned it or declined to assert it.17 immaterial in determining the final purchase price.

Artigo disputes the claim that he neglected to assert his The De Castros further argue that if there was an
rights. He was appointed as agent on January 24, 1984. undervaluation, Artigo who signed as witness benefited
The two lots were finally sold in June 1985. As found by therefrom, and being equally guilty, should be left where
the trial court, Artigo demanded in April and July of 1985 he presently stands. They likewise claim that the Court
the payment of his commission by Constante on the of Appeals erred in relying on evidence which were not
basis of the selling price of P7.05 million but there was offered for the purpose considered by the trial court.
no response from Constante.18 After it became clear that Specifically, Exhibits "B", "C", "D" and "E" were not
his demands for payment have fallen on deaf ears, offered to prove that the purchase price was P7.05
Artigo decided to sue on May 29, 1989. Million. Finally, they argue that the courts a quo erred in
giving credence to the perjured testimony of Artigo. They
want the entire testimony of Artigo rejected as a
Actions upon a written contract, such as a contract of
falsehood because he was lying when he claimed at the
agency, must be brought within ten years from the time
outset that he was a licensed real estate broker when he
the right of action accrues.19 The right of action accrues
was not.
from the moment the breach of right or duty occurs.
From this moment, the creditor can institute the action
even as the ten-year prescriptive period begins to run. 20 Whether the actual purchase price was P7.05 Million as
found by the trial court and affirmed by the Court of
Appeals, or P3.6 Million as claimed by the De Castros, is
The De Castros admit that Artigo's claim was filed within
a question of fact and not of law. Inevitably, this calls for
the ten-year prescriptive period. The De Castros,
an inquiry into the facts and evidence on record. This we
however, still maintain that Artigo's cause of action is
can not do.
barred by laches. Laches does not apply because only
four years had lapsed from the time of the sale in June
1985. Artigo made a demand in July 1985 and filed the It is not the function of this Court to re-examine the
action in court on May 29, 1989, well within the ten-year evidence submitted by the parties, or analyze or weigh
prescriptive period. This does not constitute an the evidence again.23 This Court is not the proper venue
unreasonable delay in asserting one's right. The Court to consider a factual issue as it is not a trier of facts. In
has ruled, "a delay within the prescriptive period is petitions for review on certiorari as a mode of appeal
sanctioned by law and is not considered to be a under Rule 45, a petitioner can only raise questions of
delay that would bar relief."21 In explaining that laches law. Our pronouncement in the case of Cormero vs.
applies only in the absence of a statutory prescriptive Court of Appeals24 bears reiteration:
period, the Court has stated -
"At the outset, it is evident from the errors
assigned that the petition is anchored on a plea
8

to review the factual conclusion reached by the commission based on the actual purchase price of the
respondent court. Such task however is two lots.
foreclosed by the rule that in petitions for
certiorari as a mode of appeal, like this one, only WHEREFORE, the petition is denied for lack of merit.
questions of law distinctly set forth may be The Decision of the Court of Appeals dated May 4, 1994
raised. These questions have been defined as in CA-G.R. CV No. 37996 is AFFIRMED in toto.
those that do not call for any examination of the
probative value of the evidence presented by the SO ORDERED.
parties. (Uniland Resources vs. Development
Bank of the Philippines, 200 SCRA 751 [1991]
citing Goduco vs. Court of appeals, et al., 119
Phil. 531; Hernandez vs. Court of Appeals, 149
SCRA 67). And when this court is asked to go
over the proof presented by the parties, and
analyze, assess and weigh them to ascertain if
the trial court and the appellate court were
correct in according superior credit to this or that
piece of evidence and eventually, to the totality
of the evidence of one party or the other, the
court cannot and will not do the same. (Elayda
vs. Court of Appeals, 199 SCRA 349 [1991]).
Thus, in the absence of any showing that the
findings complained of are totally devoid of
support in the record, or that they are so
glaringly erroneous as to constitute serious
abuse of discretion, such findings must stand,
for this court is not expected or required to
examine or contrast the oral and documentary
evidence submitted by the parties. (Morales vs.
Court of Appeals, 197 SCRA 391 [1991] citing
Santa Ana vs. Hernandez, 18 SCRA 973
[1966])."

We find no reason to depart from this principle. The trial


and appellate courts are in a much better position to
evaluate properly the evidence. Hence, we find no other
recourse but to affirm their finding on the actual
purchase price.1wphi1.nt

Fourth Issue: whether award of moral damages and


attorney's fees is proper

The De Castros claim that Artigo failed to prove that he


is entitled to moral damages and attorney's fees. The De
Castros, however, cite no concrete reason except to say
that they are the ones entitled to damages since the
case was filed to harass and extort money from them.

Law and jurisprudence support the award of moral


damages and attorney's fees in favor of Artigo. The
award of damages and attorney's fees is left to the
sound discretion of the court, and if such discretion is
well exercised, as in this case, it will not be disturbed on
appeal.25 Moral damages may be awarded when in a
breach of contract the defendant acted in bad faith, or in
wanton disregard of his contractual obligation.26 On the
other hand, attorney's fees are awarded in instances
where "the defendant acted in gross and evident bad
faith in refusing to satisfy the plaintiff's plainly valid, just
and demandable claim."27 There is no reason to disturb
the trial court's finding that "the defendants' lack of good
faith and unkind treatment of the plaintiff in refusing to
give his due commission deserve censure." This
warrants the award of P25,000.00 in moral damages and
P 45,000.00 in attorney's fees. The amounts are, in our
view, fair and reasonable. Having found a buyer for the
two lots, Artigo had already performed his part of the
bargain under the contract of agency. The De Castros
should have exercised fairness and good judgment in
dealing with Artigo by fulfilling their own part of the
bargain - paying Artigo his 5 percent broker's
9

thereon from plaintiffs extra-judicial


demand made by the letter of July 20,
1967;

2. On the third cause of action, to pay to


the plaintiff the amount of P18,200.00,
representing the unrealized profit of 10%
included in the contract price of
Republic of the Philippines P200,000.00 plus legal interest thereon
SUPREME COURT from July 20,1967;
Manila
3. On the fourth cause of action, to pay
EN BANC to the plaintiff the amount of P20,000.00
as and for moral damages, with legal
G.R. No. L-49188 January 30, 1990 interest thereon from July 20, 1 967;

PHILIPPINE AIRLINES, INC., petitioner, 4. On the sixth cause of action, to pay to


vs. the plaintiff the amount of P5,000.00
HON. COURT OF APPEALS, HON. JUDGE RICARDO damages as and for attorney's fee.
D. GALANO, Court of First Instance of Manila,
Branch XIII, JAIME K. DEL ROSARIO, Deputy Sheriff, Plaintiffs second and fifth causes of
Court of First Instance, Manila, and AMELIA TAN, action, and defendant's counterclaim,
respondents. are dismissed.

With costs against the defendant. (CA


Rollo, p. 18)
GUTIERREZ, JR., J.:
On July 28, 1972, the petitioner filed its appeal with the
Behind the simple issue of validity of an alias writ of Court of Appeals. The case was docketed as CA-G.R.
execution in this case is a more fundamental question. No. 51079-R.
Should the Court allow a too literal interpretation of the
Rules with an open invitation to knavery to prevail over a On February 3, 1977, the appellate court rendered its
more discerning and just approach? Should we not apply decision, the dispositive portion of which reads:
the ancient rule of statutory construction that laws are to
be interpreted by the spirit which vivifies and not by the IN VIEW WHEREOF, with the
letter which killeth? modification that PAL is condemned to
pay plaintiff the sum of P25,000.00 as
This is a petition to review on certiorari the decision of damages and P5,000.00 as attorney's
the Court of Appeals in CA-G.R. No. 07695 entitled fee, judgment is affirmed, with costs.
"Philippine Airlines, Inc. v. Hon. Judge Ricardo D. (CA Rollo, p. 29)
Galano, et al.", dismissing the petition for certiorari
against the order of the Court of First Instance of Manila Notice of judgment was sent by the Court of Appeals to
which issued an alias writ of execution against the the trial court and on dates subsequent thereto, a motion
petitioner. for reconsideration was filed by respondent Amelia Tan,
duly opposed by petitioner PAL.
The petition involving the alias writ of execution had its
beginnings on November 8, 1967, when respondent On May 23,1977, the Court of Appeals rendered its
Amelia Tan, under the name and style of Able Printing resolution denying the respondent's motion for
Press commenced a complaint for damages before the reconsideration for lack of merit.
Court of First Instance of Manila. The case was docketed
as Civil Case No. 71307, entitled Amelia Tan, et al. v. No further appeal having been taken by the parties, the
Philippine Airlines, Inc. judgment became final and executory and on May 31,
1977, judgment was correspondingly entered in the
After trial, the Court of First Instance of Manila, Branch case.
13, then presided over by the late Judge Jesus P. Morfe
rendered judgment on June 29, 1972, in favor of private The case was remanded to the trial court for execution
respondent Amelia Tan and against petitioner Philippine and on September 2,1977, respondent Amelia Tan filed a
Airlines, Inc. (PAL) as follows: motion praying for the issuance of a writ of execution of
the judgment rendered by the Court of Appeals. On
WHEREFORE, judgment is hereby October 11, 1977, the trial court, presided over by Judge
rendered, ordering the defendant Galano, issued its order of execution with the
Philippine Air Lines: corresponding writ in favor of the respondent. The writ
was duly referred to Deputy Sheriff Emilio Z. Reyes of
1. On the first cause of action, to pay to Branch 13 of the Court of First Instance of Manila for
the plaintiff the amount of P75,000.00 as enforcement.
actual damages, with legal interest
10

Four months later, on February 11, 1978, respondent Branch, Binondo, Manila, through its manager and
Amelia Tan moved for the issuance of an alias writ of garnished the petitioner's deposit in the said bank in the
execution stating that the judgment rendered by the total amount of P64,408.00 as of May 16, 1978. Hence,
lower court, and affirmed with modification by the Court this petition for certiorari filed by the Philippine Airlines,
of Appeals, remained unsatisfied. Inc., on the grounds that:

On March 1, 1978, the petitioner filed an opposition to I


the motion for the issuance of an alias writ of execution
stating that it had already fully paid its obligation to AN ALIAS WRIT OF EXECUTION CANNOT BE ISSUED
plaintiff through the deputy sheriff of the respondent WITHOUT PRIOR RETURN OF THE ORIGINAL WRIT
court, Emilio Z. Reyes, as evidenced by cash vouchers BY THE IMPLEMENTING OFFICER.
properly signed and receipted by said Emilio Z. Reyes.
II
On March 3,1978, the Court of Appeals denied the
issuance of the alias writ for being premature, ordering PAYMENT OF JUDGMENT TO THE IMPLEMENTING
the executing sheriff Emilio Z. Reyes to appear with his OFFICER AS DIRECTED IN THE WRIT OF
return and explain the reason for his failure to surrender EXECUTION CONSTITUTES SATISFACTION OF
the amounts paid to him by petitioner PAL. However, the JUDGMENT.
order could not be served upon Deputy Sheriff Reyes
who had absconded or disappeared. III

On March 28, 1978, motion for the issuance of a partial INTEREST IS NOT PAYABLE WHEN THE DECISION IS
alias writ of execution was filed by respondent Amelia SILENT AS TO THE PAYMENT THEREOF.
Tan.
IV
On April 19, 1978, respondent Amelia Tan filed a motion
to withdraw "Motion for Partial Alias Writ of Execution"
SECTION 5, RULE 39, PARTICULARLY REFERS TO
with Substitute Motion for Alias Writ of Execution. On
LEVY OF PROPERTY OF JUDGMENT DEBTOR AND
May 1, 1978, the respondent Judge issued an order
DISPOSAL OR SALE THEREOF TO SATISFY
which reads:
JUDGMENT.

As prayed for by counsel for the plaintiff,


Can an alias writ of execution be issued without a prior
the Motion to Withdraw 'Motion for
return of the original writ by the implementing officer?
Partial Alias Writ of Execution with
Substitute Motion for Alias Writ of
Execution is hereby granted, and the We rule in the affirmative and we quote the respondent
motion for partial alias writ of execution court's decision with approval:
is considered withdrawn.
The issuance of the questioned alias writ of execution
Let an Alias Writ of Execution issue under the circumstances here obtaining is justified
against the defendant for the fall because even with the absence of a Sheriffs return on
satisfaction of the judgment rendered. the original writ, the unalterable fact remains that such a
Deputy Sheriff Jaime K. del Rosario is return is incapable of being obtained (sic) because the
hereby appointed Special Sheriff for the officer who is to make the said return has absconded
enforcement thereof. (CA Rollo, p. 34) and cannot be brought to the Court despite the earlier
order of the court for him to appear for this purpose.
(Order of Feb. 21, 1978, Annex C, Petition). Obviously,
On May 18, 1978, the petitioner received a copy of the
taking cognizance of this circumstance, the order of May
first alias writ of execution issued on the same day
11, 1978 directing the issuance of an alias writ was
directing Special Sheriff Jaime K. del Rosario to levy on
therefore issued. (Annex D. Petition). The need for such
execution in the sum of P25,000.00 with legal interest
a return as a condition precedent for the issuance of an
thereon from July 20,1967 when respondent Amelia Tan
alias writ was justifiably dispensed with by the court
made an extra-judicial demand through a letter. Levy
below and its action in this regard meets with our
was also ordered for the further sum of P5,000.00
concurrence. A contrary view will produce an abhorent
awarded as attorney's fees.
situation whereby the mischief of an erring officer of the
court could be utilized to impede indefinitely the
On May 23, 1978, the petitioner filed an urgent motion to undisputed and awarded rights which a prevailing party
quash the alias writ of execution stating that no return of rightfully deserves to obtain and with dispatch. The final
the writ had as yet been made by Deputy Sheriff Emilio judgment in this case should not indeed be permitted to
Z. Reyes and that the judgment debt had already been become illusory or incapable of execution for an
fully satisfied by the petitioner as evidenced by the cash indefinite and over extended period, as had already
vouchers signed and receipted by the server of the writ transpired. (Rollo, pp. 35-36)
of execution, Deputy Sheriff Emilio Z. Reyes.
Judicium non debet esse illusorium; suum effectum
On May 26,1978, the respondent Jaime K. del Rosario habere debet (A judgment ought not to be illusory it
served a notice of garnishment on the depository bank of ought to have its proper effect).
petitioner, Far East Bank and Trust Company, Rosario
11

Indeed, technicality cannot be countenanced to defeat Payment shall be made to the person in whose favor
the execution of a judgment for execution is the fruit and the obligation has been constituted, or his successor in
end of the suit and is very aptly called the life of the law interest, or any person authorized to receive it.
(Ipekdjian Merchandising Co. v. Court of Tax Appeals, 8 (Emphasis supplied)
SCRA 59 [1963]; Commissioner of Internal Revenue v.
Visayan Electric Co., 19 SCRA 697, 698 [1967]). A Thus, payment must be made to the obligee himself or to
judgment cannot be rendered nugatory by the an agent having authority, express or implied, to receive
unreasonable application of a strict rule of procedure. the particular payment (Ulen v. Knecttle 50 Wyo 94, 58
Vested rights were never intended to rest on the [2d] 446, 111 ALR 65). Payment made to one having
requirement of a return, the office of which is merely to apparent authority to receive the money will, as a rule,
inform the court and the parties, of any and all actions be treated as though actual authority had been given for
taken under the writ of execution. Where such its receipt. Likewise, if payment is made to one who by
information can be established in some other manner, law is authorized to act for the creditor, it will work a
the absence of an executing officer's return will not discharge (Hendry v. Benlisa 37 Fla. 609, 20 SO 800,34
preclude a judgment from being treated as discharged or LRA 283). The receipt of money due on ajudgment by an
being executed through an alias writ of execution as the officer authorized by law to accept it will, therefore,
case may be. More so, as in the case at bar. Where the satisfy the debt (See 40 Am Jm 729, 25; Hendry v.
return cannot be expected to be forthcoming, to require Benlisa supra; Seattle v. Stirrat 55 Wash. 104 p. 834,24
the same would be to compel the enforcement of rights LRA [NS] 1275).
under a judgment to rest on an impossibility, thereby
allowing the total avoidance of judgment debts. So long The theory is where payment is made to a person
as a judgment is not satisfied, a plaintiff is entitled to authorized and recognized by the creditor, the payment
other writs of execution (Government of the Philippines to such a person so authorized is deemed payment to
v. Echaus and Gonzales, 71 Phil. 318). It is a well known the creditor. Under ordinary circumstances, payment by
legal maxim that he who cannot prosecute his judgment the judgment debtor in the case at bar, to the sheriff
with effect, sues his case vainly. should be valid payment to extinguish the judgment debt.

More important in the determination of the propriety of There are circumstances in this case, however, which
the trial court's issuance of an alias writ of execution is compel a different conclusion.
the issue of satisfaction of judgment.
The payment made by the petitioner to the absconding
Under the peculiar circumstances surrounding this case, sheriff was not in cash or legal tender but in checks. The
did the payment made to the absconding sheriff by checks were not payable to Amelia Tan or Able Printing
check in his name operate to satisfy the judgment debt? Press but to the absconding sheriff.
The Court rules that the plaintiff who has won her case
should not be adjudged as having sued in vain. To Did such payments extinguish the judgment debt?
decide otherwise would not only give her an empty but a
pyrrhic victory.
Article 1249 of the Civil Code provides:

It should be emphasized that under the initial judgment,


The payment of debts in money shall be made in the
Amelia Tan was found to have been wronged by PAL.
currency stipulated, and if it is not possible to deliver
such currency, then in the currency which is legal tender
She filed her complaint in 1967. in the Philippines.

After ten (10) years of protracted litigation in the Court of The delivery of promissory notes payable to order, or
First Instance and the Court of Appeals, Ms. Tan won her bills of exchange or other mercantile documents shall
case. produce the effect of payment only when they have been
cashed, or when through the fault of the creditor they
It is now 1990. have been impaired.

Almost twenty-two (22) years later, Ms. Tan has not seen In the meantime, the action derived from the original
a centavo of what the courts have solemnly declared as obligation shall be held in abeyance.
rightfully hers. Through absolutely no fault of her own,
Ms. Tan has been deprived of what, technically, she
should have been paid from the start, before 1967,
without need of her going to court to enforce her rights.
And all because PAL did not issue the checks intended
for her, in her name.

Under the peculiar circumstances of this case, the


payment to the absconding sheriff by check in his name
did not operate as a satisfaction of the judgment debt.

In general, a payment, in order to be effective to


discharge an obligation, must be made to the proper
person. Article 1240 of the Civil Code provides:
12

In the absence of an agreement, either express or judgment debtors should settle their obligations by
implied, payment means the discharge of a debt or turning over huge amounts of cash or legal tender to
obligation in money (US v. Robertson, 5 Pet. [US] 641, 8 sheriffs and other executing officers. Payment in cash
L. ed. 257) and unless the parties so agree, a debtor has would result in damage or interminable litigations each
no rights, except at his own peril, to substitute something time a sheriff with huge amounts of cash in his hands
in lieu of cash as medium of payment of his debt decides to abscond.
(Anderson v. Gill, 79 Md.. 312, 29 A 527, 25 LRA 200,47
Am. St. Rep. 402). Consequently, unless authorized to As a protective measure, therefore, the courts
do so by law or by consent of the obligee a public officer encourage the practice of payments by cheek provided
has no authority to accept anything other than money in adequate controls are instituted to prevent wrongful
payment of an obligation under a judgment being payment and illegal withdrawal or disbursement of funds.
executed. Strictly speaking, the acceptance by the sheriff If particularly big amounts are involved, escrow
of the petitioner's checks, in the case at bar, does not, arrangements with a bank and carefully supervised by
per se, operate as a discharge of the judgment debt. the court would be the safer procedure. Actual transfer of
funds takes place within the safety of bank premises.
Since a negotiable instrument is only a substitute for These practices are perfectly legal. The object is always
money and not money, the delivery of such an the safe and incorrupt execution of the judgment.
instrument does not, by itself, operate as payment (See.
189, Act 2031 on Negs. Insts.; Art. 1249, Civil Code; It is, indeed, out of the ordinary that checks intended for
Bryan Landon Co. v. American Bank, 7 Phil. 255; Tan a particular payee are made out in the name of another.
Sunco v. Santos, 9 Phil. 44; 21 R.C.L. 60, 61). A check, Making the checks payable to the judgment creditor
whether a manager's check or ordinary cheek, is not would have prevented the encashment or the taking of
legal tender, and an offer of a check in payment of a debt undue advantage by the sheriff, or any person into
is not a valid tender of payment and may be refused whose hands the checks may have fallen, whether
receipt by the obligee or creditor. Mere delivery of wrongfully or in behalf of the creditor. The issuance of
checks does not discharge the obligation under a the checks in the name of the sheriff clearly made
judgment. The obligation is not extinguished and possible the misappropriation of the funds that were
remains suspended until the payment by commercial withdrawn.
document is actually realized (Art. 1249, Civil Code, par.
3). As explained and held by the respondent court:

If bouncing checks had been issued in the name of ... [K]nowing as it does that the intended payment was
Amelia Tan and not the Sheriff's, there would have been for the private party respondent Amelia Tan, the
no payment. After dishonor of the checks, Ms. Tan could petitioner corporation, utilizing the services of its
have run after other properties of PAL. The theory is that personnel who are or should be knowledgeable about
she has received no value for what had been awarded the accepted procedures and resulting consequences of
her. Because the checks were drawn in the name of the checks drawn, nevertheless, in this instance, without
Emilio Z. Reyes, neither has she received anything. The prudence, departed from what is generally observed and
same rule should apply. done, and placed as payee in the checks the name of
the errant Sheriff and not the name of the rightful payee.
It is argued that if PAL had paid in cash to Sheriff Reyes, Petitioner thereby created a situation which permitted the
there would have been payment in full legal said Sheriff to personally encash said checks and
contemplation. The reasoning is logical but is it valid and misappropriate the proceeds thereof to his exclusive
proper? Logic has its limits in decision making. We personal benefit. For the prejudice that resulted, the
should not follow rulings to their logical extremes if in petitioner himself must bear the fault. The judicial
doing so we arrive at unjust or absurd results. guideline which we take note of states as follows:

In the first place, PAL did not pay in cash. It paid in As between two innocent persons, one of whom must
cheeks. suffer the consequence of a breach of trust, the one who
made it possible by his act of confidence must bear the
And second, payment in cash always carries with it loss. (Blondeau, et al. v. Nano, et al., L-41377, July 26,
certain cautions. Nobody hands over big amounts of 1935, 61 Phil. 625)
cash in a careless and inane manner. Mature thought is
given to the possibility of the cash being lost, of the Having failed to employ the proper safeguards to protect
bearer being waylaid or running off with what he is itself, the judgment debtor whose act made possible the
carrying for another. Payment in checks is precisely loss had but itself to blame.
intended to avoid the possibility of the money going to
the wrong party. The situation is entirely different where The attention of this Court has been called to the bad
a Sheriff seizes a car, a tractor, or a piece of land. Logic practice of a number of executing officers, of requiring
often has to give way to experience and to reality. checks in satisfaction of judgment debts to be made out
Having paid with checks, PAL should have done so in their own names. If a sheriff directs a judgment debtor
properly. to issue the checks in the sheriff's name, claiming he
must get his commission or fees, the debtor must report
Payment in money or cash to the implementing officer the sheriff immediately to the court which ordered the
may be deemed absolute payment of the judgment debt execution or to the Supreme Court for appropriate
but the Court has never, in the least bit, suggested that disciplinary action. Fees, commissions, and salaries are
13

paid through regular channels. This improper procedure Strictly speaking execution cannot be equated with
also allows such officers, who have sixty (60) days within satisfaction of a judgment. Under unusual circumstances
which to make a return, to treat the moneys as their as those obtaining in this petition, the distinction comes
personal finds and to deposit the same in their private out clearly.
accounts to earn sixty (60) days interest, before said
finds are turned over to the court or judgment creditor Execution is the process which carries into effect a
(See Balgos v. Velasco, 108 SCRA 525 [1981]). Quite as decree or judgment (Painter v. Berglund, 31 Cal. App.
easily, such officers could put up the defense that said 2d. 63, 87 P 2d 360, 363; Miller v. London, 294 Mass
checks had been issued to them in their private or 300, 1 NE 2d 198, 200; Black's Law Dictionary), whereas
personal capacity. Without a receipt evidencing payment the satisfaction of a judgment is the payment of the
of the judgment debt, the misappropriation of finds by amount of the writ, or a lawful tender thereof, or the
such officers becomes clean and complete. The practice conversion by sale of the debtor's property into an
is ingenious but evil as it unjustly enriches court amount equal to that due, and, it may be done otherwise
personnel at the expense of litigants and the proper than upon an execution (Section 47, Rule 39). Levy and
administration of justice. The temptation could be far delivery by an execution officer are not prerequisites to
greater, as proved to be in this case of the absconding the satisfaction of a judgment when the same has
sheriff. The correct and prudent thing for the petitioner already been realized in fact (Section 47, Rule 39).
was to have issued the checks in the intended payee's Execution is for the sheriff to accomplish while
name. satisfaction of the judgment is for the creditor to achieve.
Section 15, Rule 39 merely provides the sheriff with his
The pernicious effects of issuing checks in the name of a duties as executing officer including delivery of the
person other than the intended payee, without the latter's proceeds of his levy on the debtor's property to satisfy
agreement or consent, are as many as the ways that an the judgment debt. It is but to stress that the
artful mind could concoct to get around the safeguards implementing officer's duty should not stop at his receipt
provided by the law on negotiable instruments. An angry of payments but must continue until payment is delivered
litigant who loses a case, as a rule, would not want the to the obligor or creditor.
winning party to get what he won in the judgment. He
would think of ways to delay the winning party's getting Finally, we find no error in the respondent court's
what has been adjudged in his favor. We cannot pronouncement on the inclusion of interests to be
condone that practice especially in cases where the recovered under the alias writ of execution. This logically
courts and their officers are involved. We rule against the follows from our ruling that PAL is liable for both the lost
petitioner. checks and interest. The respondent court's decision in
CA-G.R. No. 51079-R does not totally supersede the trial
Anent the applicability of Section 15, Rule 39, as follows: court's judgment in Civil Case No. 71307. It merely
modified the same as to the principal amount awarded
Section 15. Execution of money judgments. The as actual damages.
officer must enforce an execution of a money judgment
by levying on all the property, real and personal of every WHEREFORE, IN VIEW OF THE FOREGOING, the
name and nature whatsoever, and which may be petition is hereby DISMISSED. The judgment of the
disposed of for value, of the judgment debtor not exempt respondent Court of Appeals is AFFIRMED and the trial
from execution, or on a sufficient amount of such court's issuance of the alias writ of execution against the
property, if they be sufficient, and selling the same, and petitioner is upheld without prejudice to any action it
paying to the judgment creditor, or his attorney, so much should take against the errant sheriff Emilio Z. Reyes.
of the proceeds as will satisfy the judgment. ... The Court Administrator is ordered to follow up the
actions taken against Emilio Z. Reyes.
the respondent court held:
SO ORDERED.
We are obliged to rule that the judgment debt cannot be
considered satisfied and therefore the orders of the
respondent judge granting the alias writ of execution
may not be pronounced as a nullity.

xxx xxx xxx

It is clear and manifest that after levy or garnishment, for


a judgment to be executed there is the requisite of
payment by the officer to the judgment creditor, or his
attorney, so much of the proceeds as will satisfy the
judgment and none such payment had been concededly
made yet by the absconding Sheriff to the private
respondent Amelia Tan. The ultimate and essential step
to complete the execution of the judgment not having
been performed by the City Sheriff, the judgment debt
legally and factually remains unsatisfied.
14

CAMPANO, as City Sheriff of Iligan City, REGISTER


OF DEEDS, Iligan City, ANGEL L. BAUTISTA and
NATIONAL STEEL CORPORATION, Respondents.

Ramon A. Gonzales and Manuel B. Imbong, for


Petitioners.

Emilio G. Abrogena and R.C. Domingo Jr. &


Associates for Angel L. Bautista.

Sycip, Salazar, Hernandez & Gatmaitan for National


Steel Corp.

SYLLABUS

1. REMEDIAL LAW; CIVIL PROCEDURE; EXECUTION


OF JUDGMENTS; VALIDITY OF TENDER OF
PAYMENT THROUGH CROSSED CHECK FOR
EXERCISE OF RIGHT OF REDEMPTION. The
central issue in this case is whether or not redemption
has been validly effected by the private respondents.
Petitioners contended that the check issued by NSC, not
being legal tender, could not be considered payment of
the redemption price. Private respondents however
contended that Article 1249 of the New Civil code is
inapplicable as it "deals with a mode of extinction of
debts" while the "right to redeem is not an obligation, nor
is it intended to discharge a pre-existing debt." Tolentino
v. Court of Appeals, besides citing Javellana, stresses
the liberality of the courts in redemption cases. On the
issue of the applicability of Article 1249 of the Civil Code
and the validity of the tender of payment through check,
this Court held: Redemption is not rendered invalid by
the fact that the said officer accepted a check for the
amount necessary to make the redemption instead of
requiring payment in money. It goes without saying that if
he had seen fit to do so, the officer could have required
payment to be made in lawful money, and he
undoubtedly, in accepting a check, placed himself in a
position where he could be liable to the purchaser at the
public auction if any damage had been suffered by the
latter as a result of the medium in which payment was
made. But this cannot affect the validity of the payment.

2. ID.; ID.; ID.; REDEMPTION WITH RESERVATION OF


RIGHT AND REMEDIES, NOT WRONG. We find
nothing wrong with Bautistas letter of March 21, 1985,
where he made his redemption of the lot covered by TCT
No. T-7625 subject to the reservation that "the same
shall not be taken to mean my acknowledgment of the
validity of the aforesaid writ of execution and sale . . . nor
. . . as waiver on my part of any of the legal rights and
remedies available to me under the circumstances." Had
he not done so, estoppel might have operated against
him. As we held in Cometa v. IAC, "redemption is an
implied admission of the regularity of the sale and would
estop the petitioner from later impugning its validity on
that ground" In questioning the writ of execution and sale
and at the same time redeeming his property, Bautista
was exercising alternative reliefs.

3. ID.; ID.; ID.; TENDER OF CHECK SUFFICIENT TO


COMPEL REDEMPTION BUT IS NOT IN ITSELF A
FIRST DIVISION PAYMENT. We are not, by this decision, sanctioning
the use of a check for the payment of obligations over
[G.R. No. 78556. April 25, 1991.] the objection of the creditor. What we are saying is that a
check may be used for the exercise of the right of
ALFARO FORTUNADO, EDITH FORTUNADO, redemption, the same being a right and not an
NESTOR FORTUNADO and RAMON A. GONZALES, obligation. The tender of a check is sufficient to compel
Petitioners, v. COURT OF APPEALS, BASILISA redemption but is not in itself a payment that relieves the
15

redemptioner from his liability to pay the redemption redemption in favor of NSC and Bautista.
price. In other words, while we hold that the private
respondents properly exercised their right of redemption, On March 25, 1985, Bautista wrote the sheriff that he
they remain liable, of course, for the payment of the would no longer effect the redemption because there
redemption price. was nothing to redeem, the auction sale being null and
void.

DECISION In an Urgent Motion dated March 27, 1985, Bautista


prayed that the sum of P296,384.43 covered by the PNB
check be delivered to and kept by the Clerk of Court of
CRUZ, J.: the Regional Trial Court of Quezon City until such time
as all incidents relative to the validity of the auction sale
conducted by the sheriff were finally resolved.
The petitioners assail the decision of the Court of
Appeals 1 denying mandamus to compel the sheriff to On March 29, 1985, the sheriff wired the petitioners
execute a final deed of sale in their favor. counsel, notifying him of the deposit of the PNB check.
The said counsel told the sheriff that he was rejecting the
On April 21, 1981, the Regional Trial Court of Quezon check because it was not legal tender and was not
City 2 rendered judgment in Civil Case No. Q-22367, intended for payment but merely for deposit, as
entitled "Alfaro Fortunado v. Angel Bautista," ordering the evidenced by Bautistas Urgent Motion of March 27,
defendant to pay damages to the plaintiff. Pursuant to 1985.
the said judgment, respondent Basilisa Campano, City
Sheriff of Iligan City, levied upon two parcels of land On April 25, 1985, the petitioner requested the sheriff to
registered in the name of Bautista located at Iligan City issue a final deed of sale over the two lots and deliver
and covered by TCT Nos. T-7625 and T-14133. The the same to them on the ground that no valid redemption
latter lot had already been purchased by respondent had been effected within the 12-month period from the
National Steel Corporation as of August 17, 1983, but registration of the sale. When the request was not
had not yet been registered in its name. granted, the petitioners filed with the respondent court a
petition for mandamus.
After due notice, these lots were sold at public auction to
the petitioners as the only bidder on April 23, 1984. They According to the petitioners, NSC and Bautista failed to
were issued a certificate of sale which was registered on comply with the provisions of the Rules of Court in
April 25, 1984. exercising their right of redemption. They invoked Article
1249 of the Civil Code, which provides that "the payment
On January 10, 1985, NSC gave notice to the sheriff of of debts in money shall be made in the currency
its intention to redeem the lot covered by TCT No. T- stipulated, and if it is not possible to deliver such
14133. The sheriff suggested that as the two lots had currency, then in the currency which is legal tender in the
been sold together for the lump sum of P267,013.00, Philippines." They argued that this provision was
both of them should be redeemed by NSC. applicable to redemption under Rule 39, Section 30, of
the Rules of Court.
On February 11, 1985, NSC filed with the trial court an
urgent motion to redeem both lots. This was opposed by They also contended that the check issued by NSC, not
the petitioners on the ground that the movant did not being legal tender, could not be considered payment of
have the personality to intervene. the redemption price. Moreover, the tender of the
redemption price was not valid as the same was
As the motion remained unresolved and the period of conditional under Bautistas letter to the sheriff dated
redemption would expire on April 18, 1985, NSC issued March 21, 1985. And even granting the validity of the
to the sheriff on March 20, 1985, PNB Check No. said tender, it was nevertheless withdrawn when on
313551 in the amount of P296,384.43 as the redemption March 27, 1985, Bautista filed his Urgent Motion to
price for the lot covered by TCT No. T-14133. The sheriff deposit the redemption money with the clerk of
acknowledged receipt of the check on the same date. court.chanrobles virtual lawlibrary

On March 21, 1985, Bautista sent the sheriff a letter The petitioners added that since there was no delivery to
bearing NSCs conformity in which he availed himself of the creditor of the redemption price, there was no
NSCs check, which was sufficient to cover the full payment within the meaning of Article 1233 of the Civil
redemption price for both lots, to redeem the other lot Code. This provides that "a debt shall not be understood
covered by TCT No. T-7625. His letter contained the to have been paid, unless the thing or service in which
following reservation:chanrob1es virtual 1aw library the obligation consists has been completely delivered or
rendered, as the case may be."cralaw virtua1aw library
This redemption is made solely for the purpose of
effecting the execution and delivery to me of the On November 10, 1986, the respondent court denied
necessary certificate of redemption and the same shall mandamus but granted injunction to restrain the
not be taken to mean my acknowledgment of the validity registration of the certificate of redemption in favor of
of the aforesaid writ of execution and sale, both of which NSC and Bautista.
I shall continue to contest, nor shall this be taken to
mean as a waiver on my part of any of the legal rights The respondent court rejected the petitioners contention
and remedies available to me under the that Article 1249 was applicable in cases of redemption
circumstances.chanrobles lawlibrary : rednad and reiterated the settled jurisprudence that "the right of
redemption is not an obligation nor is it intended to
The sheriff acknowledged receipt of the check as discharge a pre-existing debt, 3 the right of redemption
redemption money for the two parcels of land on March being in fact a privilege."cralaw virtua1aw library
21, 1985, and on March 22, 1985, issued a certificate of
16

Citing Javellana v. Mirasol, 4 the respondent court said


that "the redemption was not rendered invalid by the fact The cases cited by the petitioners do not involve
that the officer accepted a check for the amount redemption by check. The check tendered in Belisario,
necessary to make the redemption instead of requiring was in the exercise of an option to repurchase; in
payment in money." On the failure to deliver the Villanueva in connection with a pacto de retire; in
redemption price to the petitioners directly, it said that Legarda and New Pacific as payment of a mortgage
the payment of the redemption money to the sheriff was indebtedness; and in the PAL case in satisfaction of a
legally sanctioned under Rule 39, Section 31, of the judgment.
Rules of Court which provides that such payment "may
be made to the purchaser . . . or . . . to the officer who Toleration v. Court of Appeals, 12 besides citing
made the sale."cralaw virtua1aw library Javellana, stresses the liberality of the courts in
redemption cases. On the issue of the applicability of
The respondent court considered NSC "s redemption as Article 1249 of the Civil Code and the validity of the
absolute and unconditional in view of its refusal to join tender of payment through a crossed check, this Court
Bautista in contesting the validity of the sale and in held:chanrob1es virtual 1aw library
withdrawing the redemption. But Bautistas reservation in
his letter of March 21, 1980, and his repudiation of the . . . the aforequoted Article should not be applied in the
redemption made by NSC, made his own redemption in instant case . . .
officious.
To start with, the Tolentinos are not indebted to BPI their
The respondent court observed, however, that the mortgage indebtedness having been extinguished with
validity of redemption was dependent on the validity of the foreclosure and sale of the mortgaged properties.
the certificate of sale, which had to be resolved by the After said foreclosure and sale, what remains is the right
trial court. vested by law in favor of the Tolentinos to redeem the
properties within the prescribed period. This right of
On November 22, 1986, the petitioners moved for partial redemption is an absolute privilege, the exercise of
reconsideration. While their motion was pending, NSC which is entirely dependent upon the will and discretion
filed a Manifestation dated March 18, 1987, informing the of the redemptioners. There is, thus, no legal obligation
respondent court that the certificate of redemption had to exercise the right of redemption. Said right, can in no
already been registered and TCT No. T-27154 had been sense, be considered an obligation, for the Tolentinos
issued in its favor on September 12, 1985. are under no compulsion to exercise the same. Should
they choose not to exercise it, nobody can compel them
On May 8, 1987, the respondent court denied the to do so nor will such choice give rise to a cause of
petitioners motion for reconsideration. Hence, this action in favor of the purchaser at the auction sale. In
appeal by certiorari on the grounds that the Court of fact, the relationship between said purchaser and the
Appeals erred in holding inter alia that Article 1249 of the redemptioners is not even that of creditor and
New Civil Code does not apply to the payment of the debtor.chanrobles.com : virtual law library
redemption price of property sold at public auction and
that the redemption of NSC is unconditional and without On the other hand, if the redemptioners choose to
reservation. exercise their right of redemption, it is the policy of the
law to aid rather than to defeat the right of redemption. It
The central issue in this case is whether or not stands to reason therefore, that redemptions should be
redemption had been validly effected by the private looked upon with favor and where no injury is to follow, a
respondents.chanrobles law library : red liberal construction will be given to our redemption laws
as well as to the exercise of the right of redemption. In
It is contended by the private respondents that Article the instant case, the ends of justice would be better
1249 of the New Civil Code is inapplicable as it "deals served by affording the Tolentinos the opportunity to
with a mode of extinction of debts" 5 while the "right to redeem the properties in question other than the
redeem is not an obligation, nor is it intended to homestead land, in line with the policy aforesaid. . . .
discharge a pre-existing debt." 6
x x x
They rely on Javellana, where we held that "a
redemption of property sold under execution is not
rendered invalid by reason of the fact that the payment . . . And the redemption is not rendered invalid by the
to the sheriff for the purpose of redemption is effected by fact that the said officer accepted a check for the amount
means of a check for the amount due."cralaw virtua1aw necessary to make the redemption instead of requiring
library payment in money. It goes without saying that if he had
seen fit to do so, the officer could have required payment
The petitioners, on the other hand, invoke Belisario v. to be made in lawful money, and he undoubtedly, in
Natividad, 7 where it was held that "even if the check accepting a check, placed himself in a position where he
had been good, the defendant was not legally bound to could be liable to the purchaser at the public auction if
accept it because such a check does not satisfy the any damage had been suffered by the latter as a result
requirements of a legal tender." They also cite Villanueva of the medium in which payment was made. But this
v. Santos, 8 Legarda v. Miailhe, 9 New Pacific Timber cannot affect the validity of the payment. The check as a
and Supply Co., Inc. v. Seneris, 10 and Philippine Air medium of payment in commercial transactions is too
Lines v. Court of Appeals, 11 all of which, they claim, firmly established by usage to permit of any doubt upon
have overruled Javellana. this point at the present day. No importance may thus be
attached to the circumstance that a stop-payment order
The Court does not agree with these conclusions. It was issued against check the day following the deposit,
would appear from a study of the jurisprudence invoked for the same will not militate against the right of the
by the parties that the case applicable to the present Tolentinos to redeem, in the same manner that a
controversy is Javellana v. Mirasol. withdrawal of the redemption money being, deposited
17

cannot be deemed to have forfeited the right to redeem, such questions as whether respondent Go had, in fact
such redemption being optional and not compulsory. delivered the redemption money to one of the
Withal, it is not clearly shown that said stop-payment petitioners; whether or not such delivery, if there had
order was made in bad faith. . . . been one, had been made on time, and whether or not
another money judgment against respondent Go had
Although the private respondents in the case at bar did already been satisfied. In effect, the Reconveyance
not file a redemption case against petitioners, it should Case presented an alternative cause of
not be noted that private respondents NSC filed an action.chanrobles.com.ph : virtual law library
Urgent Motion for Redemption dated February 11, 1985,
and Bautista filed an Urgent Motion (To Deposit Although Bautista repudiated his redemption in his letter
Redemption Money with Quezon City Clerk of Court) of March 25, 1985, to the sheriff on the ground that the
dated March 27, 1985. The motions were well within the auction sale was illegal, he backtracked in his Urgent
redemption period. Motion dated March 27, 1985, wherein he prayed that

In the United States, it has also been held and ". . . Sheriff Basilisa Campano of Iligan City be directed
recognized that a payment by check or draft or bank bills and ordered to immediately transfer and deliver, upon his
or currency which is not legal tender is effective if the encashment of PNB Check No. A-313551, the aforesaid
officer accepts such payment. 13 If in good faith the sum of P296,384.43 deposited to her by the National
redemptioner pays, and the officer receives before the Steel Corporation, through the authority of defendant, to
expiration of the time of redemption, an ordinary the Clerk of Court, Regional Trial Court of Quezon City,
bankers check, the payment is regarded as sufficient. 14 to remain thereat until the validity of the questioned
orders and or decision in the above entitled case are
resolved with finality or until further orders from the
We find nothing wrong with Bautistas letter of March 21, Honorable Court.
1985, where he made his redemption of the lot covered
by TCT No. T-7625 subject to the reservation that "the It is further prayed that the aforesaid amount be
same shall not be taken to mean my acknowledgment of considered as sufficient redemption price if it shall finally
the validity of the aforesaid writ of execution and sale . . . be adjudged that plaintiffs are entitled thereto; otherwise,
nor . . . as waiver on my part of any of the legal rights the said amount shall be returned and delivered back to
and remedies available to me under the circumstances." herein defendant.
Had he not done so, estoppel might have operated
against him. As we held in Cometa v. IAC, 15 x x x
"redemption is an implied admission of the regularity of
the sale and would stop the petitioner from later
impugning its validity on that ground." In questioning the Finally, the petitioners pray that we rule on the validity of
writ of execution and sale and at the same time the certificate of sale assailed by Bautista on the ground
redeeming his property, Bautista was exercising that it covers more than one lot and does not indicate the
alternative reliefs. price paid for each parcel. They contend that Bautista
has not shown that the parcel of land would have been
In Javellana, it was contended that the position of Luis sold for a better price had they been offered separately
Mirasol as a litigant in the prior appeal was inconsistent and that he had not asked that they be sold by parcels.
with his position as litigant in the redemption case and They also maintain that since we have the main
that he was estopped from now claiming as jurisdiction to determine the validity of the redemption,
redemptioner the property which he had earlier claimed we likewise have ancillary jurisdiction to rule on the
as owner. The Court held:chanrob1es virtual 1aw library validity of the sale.

We are unable to see any force in the suggestions; as The facts surrounding the sale are not before us. In
the positions occupied by this litigant are based upon response to a query from this Court regarding the status
alternative rather than upon opposed pretension. No one of CC No. Q22367, the clerk of the trial court replied that
can question the right of a litigant to claim property as the records of that court were totally burned during the
owner and to seek in the same proceeding alternative fire which razed the Quezon City Hall on June 11, 1988.
relief founded upon some secondary right. The right of Apart from the circumstance that we are not a trier of
redemption, for instance, is always considered facts, the facts we are asked to try are not at hand.
compatible with ownership, and one who fails to obtain
relief in the sense of absolute owner may successfully We are not, by this decision, sanctioning the use of a
assert the other right. That which a litigant may do in any check for the payment of obligations over the objection
one case can of course be done in two different of the creditor. What we are saying is that a check may
proceedings. be used for the exercise of the right of redemption, the
same being a right and not an obligation. The tender of a
We reiterated that same view in Ybaez v. CA, 16 check is sufficient to compel redemption but is not in
thus:chanrob1es virtual 1aw library itself a payment that relieves the redemptioner from his
liability to pay the redemption price. In other words, while
Nor are the causes of action in the two (2) cases we hold that the private respondents properly exercised
inconsistent with one another. As aptly pointed out by the their right or redemption, they remain liable of course, for
respondent Appellate Court, there are issues in the the payment of the redemption price.
Reconveyance Case that are set apart from the question
of the validity of the auction sale, which is the subject of WHEREFORE, the appealed decision is AFFIRMED,
inquiry in the Annulment Suit. The latter case alleged with the modification that the redemption made by Angel
irregularities in the conduct of the public auction sale. . . . L. Bautista was also unconditional like that of the
National Steel Corporation. Accordingly, the petition is
On the other hand, the issues raised in the DENIED, with costs against the petitioners.
Reconveyance Case call for a separate determination of
18

G.R. No. 105188 January 23, 1998


SO ORDERED
MYRON C. PAPA, Administrator of the Testate Estate
of Angela M. Butte, petitioner,
vs.
A.U. VALENCIA and CO. INC., FELIX PEARROYO,
SPS. ARSENIO B. REYES & AMANDA SANTOS, and
DELFIN JAO, respondents.

KAPUNAN, J.:

In this petition for review on certiorari under Rule 45 of


the Rules of Court, petitioner Myron C. Papa seeks to
reverse and set aside 1) the Decision dated 27 January
1992 of the Court of Appeals which affirmed with
modification the decision of the trial court; and 2) the
Resolution dated 22 April 1992 of the same court, which
denied petitioner's motion for reconsideration of the
above decision.

The antecedent facts of this case are as follows:

Sometime in June 1982, herein private respondents A.U.


Valencia and Co., Inc. (hereinafter referred to as
respondent Valencia, for brevity) and Felix Pearroyo
(hereinafter called respondent Pearroyo), filed with the
Regional Trial Court of Pasig, Branch 151, a complaint
for specific performance against herein petitioner Myron
C. Papa, in his capacity as administrator of the Testate
Estate of one Angela M. Butte.

The complaint alleged that on 15 June 1973, petitioner


Myron C. Papa, acting as attorney-in-fact of Angela M.
Butte, sold to respondent Pearroyo, through respondent
Valencia, a parcel of land, consisting of 286.60 square
meters, located at corner Retiro and Cadiz Streets, La
Loma, Quezon City, and covered by Transfer Certificate
of Title No. 28993 of the Register of Deeds of Quezon
City; that prior to the alleged sale, the said property,
together with several other parcels of land likewise
owned by Angela M. Butte, had been mortgaged by her
to the Associated Banking Corporation (now Associated
Citizens Bank); that after the alleged sale, but before the
title to the subject property had been released, Angela
M. Butte passed away; that despite representations
made by herein respondents to the bank to release the
title to the property sold to respondent Pearroyo, the
bank refused to release it unless and until all the
mortgaged properties of the late Angela M. Butte were
also redeemed; that in order to protect his rights and
interests over the property, respondent Pearroyo
caused the annotation on the title of an adverse claim as
evidenced by Entry No. P.E.-6118/T-28993, inscribed on
18 January 1997.

The complaint further alleged that it was only upon the


release of the title to the property, sometime in April
Republic of the Philippines
1977, that respondents Valencia and Pearroyo
SUPREME COURT
discovered that the mortgage rights of the bank had
Manila
been assigned to one Tomas L. Parpana (now
deceased), as special administrator of the Estate of
FIRST DIVISION
Ramon Papa, Jr., on 12 April 1977; that since then,
herein petitioner had been collecting monthly rentals in
the amount of P800.00 from the tenants of the property,
19

knowing that said property had already been sold to at public auction the City Treasurer of Quezon City to the
private respondents on 15 June 1973; that despite respondent Reyes spouses on 21 January 1980 for the
repeated demands from said respondents, petitioner sum of P14,000.00; that the one-year period of
refused and failed to deliver the title to the property. redemption had expired; that respondents Valencia and
Thereupon, respondents Valencia and Pearroyo filed a Pearroyo had sued petitioner Papa as administrator of
complaint for specific performance, praying that the estate of Angela M. Butte, for the delivery of the title
petitioner be ordered to deliver to respondent Pearroyo to the property; that the same aforenamed respondents
the title to the subject property (TCT 28993); to turn over had acknowledged that the price paid by them was
to the latter the sum of P72,000.00 as accrued rentals as insufficient, and that they were willing to add a
of April 1982, and the monthly rental of P800.00 until the reasonable amount or a minimum of P55,000.00 to the
property is delivered to respondent Pearroyo; to pay price upon delivery of the property, considering that the
respondents the sum of P20,000.00 as attorney's fees; same was estimated to be worth P143,000.00; that
and to pay the costs of the suit. petitioner was willing to reimburse respondents Reyes
spouses whatever amount they might have paid for
In his Answer, petitioner admitted that the lot had been taxes and other charges, since the subject property was
mortgaged to the Associated Banking Corporation (now still registered in the name of the late Angela M. Butte;
Associated Citizens Bank). He contended, however, that that it was inequitable to allow respondent Reyes
the complaint did not state a cause of action; that the spouses to acquire property estimated to be worth
real property in interest was the Testate Estate of Angela P143,000.00, for a measly sum of P14,000.00. Petitioner
M. Butte, which should have been joined as a party prayed that judgment be rendered canceling the tax sale
defendant; that the case amounted to a claim against the to respondent Reyes spouses; restoring the subject
Estate of Angela M. Butte and should have been filed in property to him upon payment by him to said respondent
Special Proceedings No. A-17910 before the Probate Reyes spouses of the amount of P14,000.00, plus legal
Court in Quezon City; and that, if as alleged in the interest; and, ordering respondents Valencia and
complaint, the property had been assigned to Tomas L. Pearroyo to pay him at least P55,000.00 plus
Parpana, as special administrator of the Estate of everything they might have to pay the Reyes spouses in
Ramon Papa, Jr., said estate should be impleaded. recovering the property.
Petitioner, likewise, claimed that he could not recall in
detail the transaction which allegedly occurred in 1973; Respondent Reyes spouses in their Answer raised the
that he did not have TCT No. 28993 in his possession; defense of prescription of petitioner's right to redeem the
that he could not be held personally liable as he signed property.
the deed merely as attorney-in-fact of said Angela M.
Butte. Finally, petitioner asseverated that as a result of At the trial, only respondent Pearroyo testified. All the
the filing of the case, he was compelled to hire the other parties only submitted documentary proof.
services of counsel for a fee of P20,000.00 for which
respondents should be held liable. On 29 June 1987, the trial court rendered a decision, the
dispositive portion of which reads:
Upon his motion, herein private respondent Delfin Jao
was allowed to intervene in the case. Making common WHEREUPON, judgment is hereby rendered as follows:
cause with respondents Valencia and Pearroyo,
respondent Jao alleged that the subject lot which had 1) Allowing defendant to redeem from third-party defendants and
been sold to respondent Pearroyo through respondent ordering the latter to allow the former to redeem the property in
question, by paying the sum of P14,000.00 plus legal interest of 12%
Valencia was in turn sold to him on 20 August 1973 for
thereon from January 21, 1980;
the sum of P71,500.00, upon his paying earnest money
in the amount of P5,000.00. He, therefore, prayed that 2) Ordering defendant to execute a Deed of Absolute Sale in favor of
judgment be rendered in favor of respondents, the latter plaintiff Felix Pearroyo covering the property in question and to
in turn be ordered to execute in his favor the appropriate deliver peaceful possession and enjoyment of the said property to the
deed of conveyance covering the property in question said plaintiff, free from any liens and encumbrances;
and to turn over to him the rentals which aforesaid
respondents sought to collect from petitioner Myron V. Should this not be possible, for any reason not attributable to
defendant, said defendant is ordered to pay to plaintiff Felix Pearroyo
Papa. the sum of P45,000.00 plus legal interest of 12% from June 15, 1973;

Respondent Jao, likewise, averred that as a result of 3) Ordering plaintiff Felix Pearroyo to execute and deliver to
petitioner's refusal to deliver the title to the property to intervenor a deed of absolute sale over the same property, upon the
latter's payment to the former of the balance of the purchase price of
respondents Valencia and Pearroyo, who in turn failed
P71,500.00;
to deliver the said title to him, he suffered mental
anguish and serious anxiety for which he sought Should this not be possible, plaintiff Felix Pearroyo is ordered to pay
payment of moral damages; and, additionally, the intervenor the sum of P5,000.00 plus legal interest of 12% from August
payment of attorney's fees and costs. 23, 1973; and

For his part, petitioner, as administrator of the Testate 4) Ordering defendant to pay plaintiffs the amount of P5,000.00 for and
as attorney's fees and litigation expenses.
Estate of Angela M. Butte, filed a third-party complaint
against herein private respondents, spouses Arsenio B.
SO ORDERED. 1
Reyes and Amanda Santos (respondent Reyes spouses,
for short). He averred, among other's that the late Angela
Petitioner appealed the aforesaid decision of the trial
M. Butte was the owner of the subject property; that due
court to the Court of Appeals, alleging among others that
to non-payment of real estate tax said property was sold
20

the sale was never "consummated" as he did not encash Petitioner filed a motion for reconsideration of the above
the check (in the amount of P40,000.00) given by decision, which motion was denied by respondent Court
respondents Valencia and Pearroyo in payment of the of Appeals.
full purchase price of the subject lot. He maintained that
what said respondent had actually paid was only the Hence, this petition wherein petitioner raises the
amount of P5,000.00 (in cash) as earnest money. following issues:

Respondent Reyes spouses, likewise, appealed the I. THE CONCLUSION OR FINDING OF THE COURT OF APPEALS
above decision. However, their appeal was dismissed THAT THE SALE IN QUESTION WAS CONSUMMATED IS
GROUNDED ON SPECULATION OR CONJECTURE, AND IS
because of failure to file their appellant's brief. CONTRARY TO THE APPLICABLE LEGAL PRINCIPLE.

On 27 January 1992, the Court of Appeals rendered a II. THE COURT OF APPEALS, IN MODIFYING THE DECISION OF
decision, affirming with modification the trial court's THE TRIAL COURT, ERRED BECAUSE IT, IN EFFECT, CANCELLED
decision, thus: OR NULLIFIED AN ASSIGNMENT OF THE SUBJECT PROPERTY IN
FAVOR OF THE ESTATE OF RAMON PAPA, JR. WHICH IS NOT A
PARTY IN THIS CASE.
WHEREFORE, the second paragraph of the dispositive portion of the
appealed decision is MODIFIED, by ordering the defendant-appellant
to deliver to plaintiff-appellees the owner's duplicate of TCT No. 28993 III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
of Angela M. Butte and the peaceful possession and enjoyment of the ESTATE OF ANGELA M. BUTTE AND THE ESTATE OF RAMON
lot in question or, if the owner's duplicate certificate cannot be PAPA, JR. ARE INDISPENSABLE PARTIES IN THIS
produced, to authorize the Register of Deeds to cancel it and issue a CASE. 6
certificate of title in the name of Felix Pearroyo. In all other respects,
the decision appealed from is AFFIRMED. Costs against defendant- Petitioner argues that respondent Court of Appeals erred
appellant Myron C. Papa.
in concluding that alleged sale of the subject property
had been consummated. He contends that such a
SO ORDERED. 2
conclusion is based on the erroneous presumption that
the check (in the amount of P40,000.00) had been
In affirming the trial court's decision, respondent court cashed, citing Art. 1249 of the Civil Code, which
held that contrary to petitioner's claim that he did not provides, in part, that payment by checks shall produce
encash the aforesaid check, and therefore, the sale was the effect of payment only when they have been cashed
not consummated, there was no evidence at all that or when through the fault of the creditor they have been
petitioner did not, in fact, encash said check. On the impaired. 7 Petitioner insists that he never cashed said
other hand, respondent Pearroyo testified in court that check; and, such being the case, its delivery never
petitioner Papa had received the amount of P45,000.00 produced the effect of payment. Petitioner, while
and issued receipts therefor. According to respondent admitting that he had issued receipts for the payments,
court, the presumption is that the check was encashed, asserts that said receipts, particularly the receipt of PCIB
especially since the payment by check was not denied Check No. 761025 in the amount of P40,000.00, do not
by defendant-appellant (herein petitioner) who, in his prove payment. He avers that there must be a showing
Answer, merely alleged that he "can no longer recall the that said check had been encashed. If, according to
transaction which is supposed to have happened 10 petitioner, the check had been encashed, respondent
years ago." 3 Pearroyo should have presented PCIB Check No.
761025 duly stamped received by the payee, or at least
On petitioner's claim that he cannot be held personally its microfilm copy.
liable as he had acted merely as attorney-in-fact of the
owner, Angela M. Butte, respondent court held that such Petitioner finally avers that, in fact, the consideration for
contention is without merit. This action was not brought the sale was still in the hands of respondents Valencia
against him in his personal capacity, but in his capacity and Pearroyo, as evidenced by a letter addressed to
as the administrator of the Testate Estate of Angela M. him in which said respondents wrote, in part:
Butte. 4
. . . Please be informed that I had been
On petitioner's contention that the estate of Angela M. authorized by Dr. Ramon Papa, Jr., heir
Butte should have been joined in the action as the real of Mrs. Angela M. Butte to pay you the
party in interest, respondent court held that pursuant to aforementioned amount of P75,000.00
Rule 3, Section 3 of the Rules of Court, the estate of for the release and cancellation of
Angela M. Butte does not have to be joined in the action. subject property's mortgage. The money
Likewise, the estate of Ramon Papa, Jr., is not an is with me and if it is alright with you, I
indispensable party under Rule 3, Section 7 of the same would like to tender the payment as
Rules. For the fact is that Ramon Papa, Jr., or his estate, soon as possible. . . . 8
was not a party to the Deed of Absolute Sale, and it is
basic law that contracts bind only those who are parties
We find no merit in petitioner's arguments.
thereto. 5

It is an undisputed fact that respondents Valencia and


Respondent court observed that the conditions under
Pearroyo had given petitioner Myron C. Papa the
which the mortgage rights of the bank were assigned are
amounts of Five Thousand Pesos (P5,000.00) in cash on
not clear. In any case, any obligation which the estate of
24 May 1973, and Forty Thousand Pesos (P40,000.00)
Angela M. Butte might have to the estate of Ramon
in check on 15 June 1973, in payment of the purchase
Papa, Jr. is strictly between them. Respondents Valencia
price of the subject lot. Petitioner himself admits having
and Pearroyo are not bound by any such obligation.
received said amounts, 9 and having issued receipts
21

therefor. 10 Petitioner's assertion that he never encashed Valencia and Pearroyo have against petitioner is
the aforesaid check is not substantiated and is at odds different from the cause of action which the estate of
with his statement in his answer that "he can no longer Ramon Papa, Jr. may have to enforce whatever rights or
recall the transaction which is supposed to have liens it has on the property by reason of its being an
happened 10 years ago." After more than ten (10) years alleged assignee of the bank's rights of mortgage.
from the payment in party by cash and in part by check,
the presumption is that the check had been encashed. Finally, the estate of Angela M. Butte is not an
As already stated, he even waived the presentation of indispensable party. Under Section 3 of Rule 3 of the
oral evidence. Rules of Court, an executor or administrator may sue or
be sued without joining the party for whose benefit the
Granting that petitioner had never encashed the check, action is presented or defended, thus:
his failure to do so for more than ten (10) years
undoubtedly resulted in the impairment of the check Sec. 3. Representative parties. A trustee of an
through his unreasonable and unexplained delay. express trust, a guardian, executor or administrator, or a
party authorized by statute, may sue or be sued without
While it is true that the delivery of a check produces the joining the party for whose benefit the action is
effect of payment only when it is cashed, pursuant to Art. presented or defended; but the court may, at any stage
1249 of the Civil Code, the rule is otherwise if the debtor of the proceedings, order such beneficiary to be made a
is prejudiced by the creditor's unreasonable delay in party. An agent acting in his own name and for the
presentment. The acceptance of a check implies an benefit of an undisclosed principal may sue or be sued
undertaking of due diligence in presenting it for payment, without joining the principal except when the contract
and if he from whom it is received sustains loss by want involves things belonging to the principal. 16
of such diligence, it will be held to operate as actual
payment of the debt or obligation for which it was given. Neither is the estate of Ramon Papa, Jr. an
11
It has, likewise, been held that if no presentment is indispensable party without whom, no final determination
made at all, the drawer cannot be held liable irrespective of the action can be had. Whatever prior and subsisting
of loss or injury 12 unless presentment is otherwise mortgage rights the estate of Ramon Papa, Jr. has over
excused. This is in harmony with Article 1249 of the Civil the property may still be enforced regardless of the
Code under which payment by way of check or other change in ownership thereof.
negotiable instrument is conditioned on its being cashed,
except when through the fault of the creditor, the WHEREFORE, the petition for review is hereby DENIED
instrument is impaired. The payee of a check would be a and the Decision of the Court of Appeals, dated 27
creditor under this provision and if its no-payment is January 1992 is AFFIRMED.
caused by his negligence, payment will be deemed
effected and the obligation for which the check was SO ORDERED.
given as conditional payment will be discharged. 13
Republic of the Philippines
Considering that respondents Valencia and Pearroyo Supreme Court
had fulfilled their part of the contract of sale by delivering Manila
the payment of the purchase price, said respondents, FIRST DIVISION
therefore, had the right to compel petitioner to deliver to
them the owner's duplicate of TCT No. 28993 of Angela
M. Butte and the peaceful possession and enjoyment of UNION BANK OF THE PHILIPPINES, G.R. Nos
the lot in question. Petitioner,
- versus -
With regard to the alleged assignment of mortgage SPOUSES RODOLFO T. TIU AND VICTORIA
N. TIU, Promulga
rights, respondent Court of Appeals has found that the
Respondents.
conditions under which said mortgage rights of the bank Septemb
were assigned are not clear. Indeed, a perusal of the
original records of the case would show that there is
nothing there that could shed light on the transactions DECISION
leading to the said assignment of rights; nor is there any
evidence on record of the conditions under which said
mortgage rights were assigned. What is certain is that LEONARDO-DE CASTRO, J.:
despite the said assignment of mortgage rights, the title
to the subject property has remained in the name of the
late Angela M. Butte. 14 This much is admitted by This is a Petition for Review on Certiorari
petitioner himself in his answer to respondent's seeking to reverse the Joint Decision1[1] of the Court of
Appeals dated February 21, 2006 in CA-G.R. CV No.
complaint as well as in the third-party complaint that
00190 and CA-G.R. SP No. 00253, as well as the
petitioner filed against respondent-spouses Arsenio B.
Resolution2[2] dated June 1, 2006 denying the Motion for
Reyes and Amanda Santos. 15 Assuming arquendo that Reconsideration.
the mortgage rights of the Associated Citizens Bank had
been assigned to the estate of Ramon Papa, Jr., and
granting that the assigned mortgage rights validly exists 1
and constitute a lien on the property, the estate may file
the appropriate action to enforce such lien. The cause of 2
action for specific performance which respondents
22

The factual and procedural antecedents of this HUNDRED SIXTY[-]FOUR THOUSAND


case are as follows: EIGHT HUNDRED PESOS (PHP
155,364,800.00) exclusive of interests,
On November 21, 1995, petitioner Union Bank of service and penalty charges (the
the Philippines (Union Bank) and respondent spouses Indebtedness) and further confirms the
Rodolfo T. Tiu and Victoria N. Tiu (the spouses Tiu) correctness, legality, collectability and
entered into a Credit Line Agreement (CLA) whereby enforceability of the Indebtedness. The
Union Bank agreed to make available to the spouses Tiu BORROWER unconditionally waives
credit facilities in such amounts as may be approved. 3[3] any action, demand or claim that they
From September 22, 1997 to March 26, 1998, the may otherwise have to dispute the
spouses Tiu took out various loans pursuant to this CLA amount of the Indebtedness as of the
in the total amount of three million six hundred thirty-two date specified in this Section, or the
thousand dollars (US$3,632,000.00), as evidenced by collectability and enforceability thereof. It
promissory notes: is the understanding of the parties that
the BORROWERs acknowledgment,
PN No. Amount in US$ Date Granted affirmation, and waiver herein are
87/98/111 72,000.00 02/16/98 material considerations for the BANKs
87/98/108 84,000.00 02/13/98 agreeing to restructure the Indebtedness
87/98/152 320,000.00 03/02/98 which would have already become due
87/98/075 150,000.00 01/30/98
and payable as of the above date under
87/98/211 32,000.00 03/26/98
87/98/071 110,000.00 01/29/98 the terms of the Agreement and the
87/98/107 135,000.00 02/13//98 Notes.9[9]
87/98/100 75,000.00 02/12/98
87/98/197 195,000.00 03/19/98
87/97/761 60,000.00 09/26/97 The restructured amount (P155,364,800.00) is
87/97/768 30,000.00 09/29/97
87/97/767 180,000.00 09/29/97the sum of the following figures: (1) P150,364,800.00,
87/97/970 110,000.00 12/29/97which is the value of the US$3,632,000.00 loan as
87/97/747 50,000.00 09/22/97redenominated under the above-mentioned exchange
87/96/944 605,000.00 12/19/97rate of US$1=P41.40; and (2) P5,000,000.00, an
87/98/191 470,000.00 03/16/98additional loan given to the spouses Tiu to update their
87/98/198 505,000.00 03/19/98
87/98/090 449,000.00 02/09/98
interest payments.10[10]
US$3,632,000.004[4]
Under the same Restructuring Agreement, the
parties declared that the loan obligation to be
On June 23, 1998, Union Bank advised the restructured (after deducting the dacion price of
spouses Tiu through a letter 5[5] that, in view of the properties ceded by the Tiu spouses and adding: [1] the
existing currency risks, the loans shall be redenominated taxes, registration fees and other expenses advanced by
to their equivalent Philippine peso amount on July 15, Union Bank in registering the Deeds of Dation in
1998. On July 3, 1998, the spouses Tiu wrote to Union Payment; and [2] other fees and charges incurred by the
Bank authorizing the latter to redenominate the loans at Indebtedness) is one hundred four million six hundred
the rate of US$1=P41.406[6] with interest of 19% for one sixty-eight thousand seven hundred forty-one pesos
year.7[7] (P104,668,741.00) (total restructured amount). 11[11] The
Deeds of Dation in Payment referred to are the following:
On December 21, 1999, Union Bank and the
spouses Tiu entered into a Restructuring Agreement. 8[8] 1. Dation of the Labangon properties Deed
The Restructuring Agreement contains a clause wherein executed by Juanita Tiu, the mother of
the spouses Tiu confirmed their debt and waived any respondent Rodolfo Tiu, involving ten
action on account thereof. To quote said clause: parcels of land with improvements located in
Labangon, Cebu City and with a total land
1. Confirmation of Debt The area of 3,344 square meters, for the amount
BORROWER hereby confirms and of P25,130,000.00. The Deed states that
accepts that as of December 8, 1999, its these properties shall be leased to the Tiu
outstanding principal indebtedness to spouses at a monthly rate of P98,000.00 for
the BANK under the Agreement and the a period of two years.12[12]
Notes amount to ONE HUNDRED
FIFTY[-]FIVE MILLION THREE 2. Dation of the Mandaue property Deed
executed by the spouses Tiu involving one
3 parcel of land with improvements located in
A.S. Fortuna St., Mandaue City, covered by
TCT No. T-31604 and with a land area of
4 2,960 square meters, for the amount of
P36,080,000.00. The Deed states that said

5 9

6 10

7 11

8 12
23

property shall be leased to the Tiu spouses because this amount was immediately applied by Union
at a monthly rate of P150,000.00 for a Bank to interest payments.18[18]
period of two years.13[13]
The spouses Tiu allege that the foreclosure sale
As likewise provided in the Restructuring of the mortgaged properties was invalid, as the loans
Agreement, the spouses Tiu executed a Real Estate have already been fully paid. They also allege that they
Mortgage in favor of Union Bank over their residential are not the owners of the improvements constructed on
property inclusive of lot and improvements located at P. the lot because the real owners thereof are their co-
Burgos St., Mandaue City, covered by TCT No. T-11951 petitioners, Juanita T. Tiu, Rosalinda T. King, Rufino T.
with an area of 3,096 square meters.14[14] Tiu, Rosalie T. Young and Rosenda T. Tiu.19[19]

The spouses Tiu undertook to pay the total The spouses Tiu further claim that prior to the
restructured amount (P104,668,741.00) via three loan signing of the Restructuring Agreement, they entered
facilities (payment schemes). into a Memorandum of Agreement with Union Bank
whereby the former deposited with the latter several
The spouses Tiu claim to have made the certificates of shares of stock of various companies and
following payments: (1) P15,000,000.00 on August 3, four certificates of title of various parcels of land located
1999; and (2) another P13,197,546.79 as of May 8, in Cebu. The spouses Tiu claim that these properties
2001. Adding the amounts paid under the Deeds of have not been subjected to any lien in favor of Union
Dation in Payment, the spouses Tiu postulate that their Bank, yet the latter continues to hold on to these
payments added up to P89,407,546.79.15[15] properties and has not returned the same to the former. 20
[20]
Asserting that the spouses Tiu failed to comply
with the payment schemes set up in the Restructuring On the other hand, Union Bank claims that the
Agreement, Union Bank initiated extrajudicial foreclosure Restructuring Agreement was voluntarily and validly
proceedings on the residential property of the spouses entered into by both parties. Presenting as evidence the
Tiu, covered by TCT No. T-11951. The property was to Warranties embodied in the Real Estate Mortgage,
be sold at public auction on July 18, 2002. Union Bank contends that the foreclosure of the
mortgage on the residential property of the spouses Tiu
The spouses Tiu, together with Juanita T. Tiu, was valid and that the improvements thereon were
Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and absolutely owned by them. Union Bank denies receiving
Rosenda T. Tiu, filed with the Regional Trial Court (RTC) certificates of shares of stock of various companies or
of Mandaue City a Complaint seeking to have the the four certificates of title of various parcels of land from
Extrajudicial Foreclosure declared null and void. The the spouses Tiu. However, Union Bank also alleges that
case was docketed as Civil Case No. MAN-4363. 16[16] even if said certificates were in its possession it is
Named as defendants were Union Bank and Sheriff IV authorized under the Restructuring Agreement to retain
Veronico C. Ouano (Sheriff Oano) of Branch 55, RTC, any and all properties of the debtor as security for the
Mandaue City. Complainants therein prayed for the loan.21[21]
following: (1) that the spouses Tiu be declared to have
fully paid their obligation to Union Bank; (2) that The RTC issued a Temporary Restraining
defendants be permanently enjoined from proceeding Order22[22] and, eventually, a Writ of Preliminary
with the auction sale; (3) that Union Bank be ordered to Injunction23[23] preventing the sale of the residential
return to the spouses Tiu their properties as listed in the property of the spouses Tiu. 24[24]
Complaint; (4) that Union Bank be ordered to pay the
plaintiffs the sum of P10,000,000.00 as moral damages, On December 16, 2004, the RTC rendered its
P2,000,000.00 as exemplary damages, P3,000,000.00 Decision25[25] in Civil Case No. MAN-4363 in favor of
as attorneys fees and P500,000.00 as expenses of Union Bank. The dispositive portion of the Decision read:
litigation; and (5) a writ of preliminary injunction or
temporary restraining order be issued enjoining the WHEREFORE, premises
public auction sale to be held on July 18, 2002.17[17] considered, judgment is hereby
rendered dismissing the Complaint and
The spouses Tiu claim that from the beginning
the loans were in pesos, not in dollars. Their office clerk, 18
Lilia Gutierrez, testified that the spouses Tiu merely
received the peso equivalent of their US$3,632,000.00
19
loan at the rate of US$1=P26.00. The spouses Tiu
further claim that they were merely forced to sign the
Restructuring Agreement and take up an additional loan 20
of P5,000,000.00, the proceeds of which they never saw

13 21

14 22

15 23

16 24

17 25
24

lifting and setting aside the Writ of Both the spouses Tiu and Union Bank appealed
Preliminary Injunction. No the case to the Court of Appeals. 34[34] The two appeals
pronouncement as to damages, were given a single docket number, CA-G.R. CEB-CV
attorneys fees and costs of suit.26[26] No. 00190. Acting on a motion filed by the spouses Tiu,
the Court of Appeals consolidated CA-G.R. SP No.
00253 with CA-G.R. CEB-CV No. 00190.35[35]
In upholding the validity of the Restructuring
Agreement, the RTC held that the spouses Tiu failed to On April 19, 2005, the Court of Appeals issued a
present any evidence to prove either fraud or intimidation Resolution finding that there was no need for the
or any other act vitiating their consent to the same. The issuance of a Writ of Preliminary Injunction as the
exact obligation of the spouses Tiu to Union Bank is judgment of the lower court has been stayed by the
therefore P104,668,741.00, as agreed upon by the perfection of the appeal therefrom.36[36]
parties in the Restructuring Agreement. As regards the
contention of the spouses Tiu that they have fully paid On May 9, 2005, Sheriff Oano proceeded to
their indebtedness, the RTC noted that they could not conduct the extrajudicial sale. Union Bank submitted the
present any detailed accounting as to the total amount lone bid of P18,576,000.00.37[37] On June 14, 2005,
they have paid after the execution of the Restructuring Union Bank filed a motion with the Court of Appeals
Agreement.27[27] praying that Sheriff Oano be ordered to issue a definite
and regular Certificate of Sale. 38[38] On July 21, 2005,
On January 4, 2005, Union Bank filed a Motion the Court of Appeals issued a Resolution denying the
for Partial Reconsideration,28[28] protesting the finding in Motion and suspending the auction sale at whatever
the body of the December 16, 2004 Decision that the stage, pending resolution of the appeal and conditioned
residential house on Lot No. 639 is not owned by the upon the filing of a bond in the amount of
spouses Tiu and therefore should be excluded from the P18,000,000.00 by the Tiu spouses.39[39] The Tiu
real properties covered by the real estate mortgage. On spouses failed to file said bond.40[40]
January 6, 2005, the spouses Tiu filed their own Motion
for Partial Reconsideration and/or New Trial. 29[29] They On February 21, 2006, the Court of Appeals
alleged that the trial court failed to rule on their fourth rendered the assailed Joint Decision in CA-G.R. CV No.
cause of action wherein they mentioned that they turned 00190 and CA-G.R. SP No. 00253. The Court of Appeals
over the following titles to Union Bank: TCT Nos. 30271, dismissed the Petition for Prohibition, CA-G.R. SP No.
116287 and 116288 and OCT No. 0-3538. They also 00253, on the ground that the proper venue for the same
prayed for a partial new trial and for a declaration that is with the RTC.41[41]
they have fully paid their obligation to Union Bank. 30[30]
On the other hand, the Court of Appeals ruled in
On January 11, 2005, the spouses Tiu received favor of the spouses Tiu in CA-G.R. CV No. 00190. The
from Sheriff Oano a Second Notice of Extra-judicial Court of Appeals held that the loan transactions were in
Foreclosure Sale of Lot No. 639 to be held on February pesos, since there was supposedly no stipulation the
3, 2005. To prevent the same, the Tiu spouses filed with loans will be paid in dollars and since no dollars ever
the Court of Appeals a Petition for Prohibition and exchanged hands. Considering that the loans were in
Injunction with Application for TRO/Writ of Preliminary pesos from the beginning, the Court of Appeals reasoned
Injunction.31[31] The petition was docketed as CA-G.R. that there is no need to convert the same. By making it
SP No. 00253. The Court of Appeals issued a Temporary appear that the loans were originally in dollars, Union
Restraining Order on January 27, 2005.32[32] Bank overstepped its rights as creditor, and made
unwarranted interpretations of the original loan
On January 19, 2005, the RTC issued an Order agreement. According to the Court of Appeals, the
denying Union Banks Motion for Partial Reconsideration Restructuring Agreement, which purportedly attempts to
and the Tiu spouses Motion for Partial Reconsideration create a novation of the original loan, was not clearly
and/or New Trial.33[33] authorized by the debtors and was not supported by any
cause or consideration. Since the Restructuring
Agreement is void, the original loan of P94,432,000.00
(representing the amount received by the spouses Tiu of
26 34

27 35

28 36

29 37

30 38

31 39

32 40

33 41
25

US$3,632,000.00 using the US$1=P26.00 exchange exploited and manipulated the situation,47[47] held Union
rate) should subsist. The Court of Appeals likewise Bank liable to the spouses Tiu for P100,000.00 in moral
invalidated (1) the P5,000,000.00 charge for interest in damages, P100,000.00 in exemplary damages, and
the Restructuring Agreement, for having been unilaterally P50,000.00 in attorneys fees.48[48]
imposed by Union Bank; and (2) the lease of the
properties conveyed in dacion en pago, for being against The Court of Appeals disposed of the case as
public policy. 42[42] follows:
In sum, the Court of Appeals found Union Bank
liable to the spouses Tiu in the amount of P927,546.79. WHEREFORE, in view of the
For convenient reference, we quote relevant portion of foregoing premises, judgment is hereby
the Court of Appeals Decision here: rendered by us permanently enjoining
Union Bank from foreclosing the
To summarize the obligation of mortgage of the residential property of
the Tiu spouses, they owe Union Bank the Tiu spouses which is covered by
P94,432,000.00. The Tiu spouses had Transfer Certificate of Title No. 11951
already paid Union Bank the amount of and from pursuing other foreclosure of
P89,407,546.79. On the other hand, mortgages over any other properties of
Union Bank must return to the Tiu the Tiu spouses for the above-litigated
spouses the illegally collected rentals in debt that has already been fully paid. If a
the amount of P5,952,000.00. Given foreclosure sale has already been made
these findings, the obligation of the Tiu over such properties, this Court orders
spouses has already been fully paid. In the cancellation of such foreclosure sale
fact, it is the Union Bank that must and the Certificate of Sale thereof if any
return to the Tiu spouses the amount of has been issued. This Court orders
NINE HUNDRED TWENTY[-]SEVEN Union Bank to return to the Tiu spouses
THOUSAND FIVE HUNDRED the amount of NINE HUNDRED
FORTY[-]SIX PESOS AND TWENTY[-]SEVEN THOUSAND FIVE
SEVENTY[-]NINE CENTAVOS HUNDRED FORTY[-]SIX PESOS AND
(P927,546.79).43[43] SEVENTY[-]NINE CENTAVOS
(P927,546.79) representing illegally
collected rentals. This Court also orders
With regard to the ownership of the Union Bank to return to the Tiu spouses
improvements on the subject mortgaged property, the all the certificates of shares of stocks
Court of Appeals ruled that it belonged to respondent and titles to real properties of the Tiu
Rodolfo Tius father, Jose Tiu, since 1981. According to spouses that were deposited to it or, in
the Court of Appeals, Union Bank should not have relied lieu thereof, to pay the cost for the
on warranties made by debtors that they are the owners replacement and issuance of new
of the property. The appellate court went on to certificates and new titles over the said
permanently enjoin Union Bank from foreclosing the properties. This Court finally orders
mortgage not only of the property covered by TCT No. T- Union Bank to pay the Tiu spouses ONE
11951, but also any other mortgage over any other HUNDRED THOUSAND PESOS
property of the spouses Tiu.44[44] (P100,000.00) in moral damages, ONE
HUNDRED THOUSAND PESOS
The Court of Appeals likewise found Union Bank (P100,000.00) in exemplary damages,
liable to return the certificates of stocks and titles to real FIFTY THOUSAND PESOS
properties of the spouses Tiu in its possession. The (P50,000.00) in attorneys fees and cost,
appellate court held that Union Bank made judicial both in the lower court and in this
admissions of such possession in its Reply to Plaintiffs Court.49[49]
Request for Admission.45[45] In the event that Union
Bank can no longer return these certificates and titles, it
was mandated to shoulder the cost for their On June 1, 2006, the Court of Appeals rendered
replacement.46[46] the assailed Resolution denying Union Banks Motion for
Reconsideration.
Finally, the Court of Appeals took judicial notice
that before or during the financial crisis, banks actively Hence, this Petition for Review on Certiorari,
convinced debtors to make dollar loans in the guise of wherein Union Bank submits the following issues for the
benevolence, saddling borrowers with loans that consideration of this Court:
ballooned twice or thrice their original loans. The Court of
Appeals, noting the cavalier way with which banks 1. WHETHER OR NOT THE COURT OF
APPEALS COMMITTED GRAVE AND
42 REVERSIBLE ERROR WHEN IT
CONCLUDED THAT THERE WERE NO
DOLLAR LOANS OBTAINED BY [THE]
43 TIU SPOUSES FROM UNION BANK

44 47

45 48

46 49
26

DESPITE [THE] CLEAR ADMISSION REVERSIBLE ERROR IN ORDERING


OF INDEBTEDNESS BY THE UNION BANK TO RETURN THE
BORROWER-MORTGAGOR TIU CERTIFICATES OF SHARES OF
SPOUSES. STOCK AND TITLES TO REAL
PROPERTIES OF TIU SPOUSES
2. WHETHER OR NOT THE COURT OF ALLEGEDLY IN THE POSSESSION OF
APPEALS COMMITTED GRAVE AND UNION BANK.
REVERSIBLE ERROR WHEN IT
NULLIFIED THE RESTRUCTURING
AGREEMENT BETWEEN TIU 9. WHETHER OR NOT THE COURT OF
SPOUSES AND UNION BANK FOR APPEALS VIOLATED THE
LACK OF CAUSE OR DOCTRINES AND PRINCIPLES ON
CONSIDERATION DESPITE THE APPELLATE JURISDICTION.
ADMISSION OF THE BORROWER-
MORTGAGOR TIU SPOUSES OF THE
10. WHETHER OR NOT THE COURT OF
DUE AND VOLUNTARY EXECUTION
APPEALS COMMITTED GRAVE AND
OF SAID RESTRUCTURING
REVERSIBLE ERROR IN AWARDING
AGREEMENT.
DAMAGES AGAINST UNION BANK.50
[50]
3. WHETHER OR NOT THE COURT OF
APPEALS COMMITTED GRAVE AND
REVERSIBLE ERROR WHEN IT Validity of the Restructuring Agreement
PERMANENTLY ENJOINED UNION
BANK FROM FORECLOSING THE As previously discussed, the Court of Appeals
MORTGAGE ON THE RESIDENTIAL declared that the Restructuring Agreement is void on
PROPERTY OF THE TIU SPOUSES account of its being a failed novation of the original loan
DESPITE THE ADMISSION OF NON- agreements. The Court of Appeals explained that since
PAYMENT OF THEIR OUTSTANDING there was no stipulation that the loans will be paid in
LOAN TO THE BANK BY THE dollars, and since no dollars ever exchanged hands, the
BORROWER-MORTGAGOR TIU original loan transactions were in pesos.51[51]
SPOUSES; Proceeding from this premise, the Court of Appeals held
that the Restructuring Agreement, which was meant to
convert the loans into pesos, was unwarranted. Thus, the
4. WHETHER OR NOT THE COURT OF Court of Appeals reasoned that:
APPEALS COMMITTED GRAVE AND
REVERSIBLE ERROR WHEN IT FIXED Be that as it may, however,
THE AMOUNT OF THE OBLIGATION since the loans of the Tiu spouses from
OF RESPONDENT SPOUSES Union Bank were peso loans from the
CONTRARY TO THE PROVISIONS OF very beginning, there is no need for
THE PROMISSORY NOTES, conversion thereof. A Restructuring
RESTRUCTURING AGREEMENT AND Agreement should merely confirm the
[THE] VOLUNTARY ADMISSIONS BY loans, not add thereto. By making it
BORROWER-MORTGAGOR TIU appear in the Restructuring Agreement
SPOUSES; that the loans were originally dollar
loans, Union Bank overstepped its rights
as a creditor and made unwarranted
5. WHETHER OR NOT THE COURT OF interpretations of the original loan
APPEALS COMMITTED GRAVE AND agreement. This Court is not bound by
REVERSIBLE ERROR WHEN IT such interpretations made by Union
RULED ON THE ALLEGED RENTALS Bank. When one party makes an
PAID BY RESPONDENT SPOUSES interpretation of a contract, he makes it
WITHOUT ANY FACTUAL BASIS; at his own risk, subject to a subsequent
challenge by the other party and a
modification by the courts. In this case,
6. WHETHER OR NOT THE COURT OF
that party making the interpretation is
APPEALS COMMITTED GRAVE AND
not just any party, but a well entrenched
REVERSIBLE ERROR WHEN IT HELD
and highly respected bank. The matter
WITHOUT ANY FACTUAL BASIS THAT
that was being interpreted was also a
THE LOAN OBLIGATION OF TIU
financial matter that is within the
SPOUSES HAS BEEN FULLY PAID;
profound expertise of the bank. A normal
person who does not possess the same
7. WHETHER OR NOT THE COURT OF financial proficiency or acumen as that
APPEALS COMMITTED GRAVE AND of a bank will most likely defer to the
REVERSIBLE ERROR WHEN IT HELD latters esteemed opinion,
WITHOUT ANY FACTUAL BASIS THAT representations and interpretations. It
THE HOUSE INCLUDED IN THE REAL has been often stated in our
ESTATE MORTGAGE DID NOT jurisprudence that banks have a
BELONG TO THE TIU SPOUSES. 50

8. WHETHER OR NOT THE COURT OF 51


APPEALS COMMITTED GRAVE AND
27

fiduciary duty to their depositors. Union Bank does not dispute that the spouses
According to the case of Bank of the Tiu received the loaned amount of US$3,632,000.00 in
Philippine Islands vs. IAC (G.R. No. Philippine pesos, not dollars, at the prevailing exchange
69162, February 21, 1992), as a rate of US$1=P26.53[53] However, Union Bank claims
business affected with public interest that this does not change the true nature of the loan as a
and because of the nature of its foreign currency loan,54[54] and proceeded to illustrate in
functions, the bank is under obligation to its Memorandum that the spouses Tiu obtained favorable
treat the accounts of its depositors with interest rates by opting to borrow in dollars (but receiving
meticulous care, always having in mind the equivalent peso amount) as opposed to borrowing in
the fiduciary nature of their relationship. pesos.55[55]
Such fiduciary relationship should also
extend to the banks borrowers who, We agree with Union Bank on this point.
more often than not, are also depositors Although indeed, the spouses Tiu received peso
of the bank. Banks are in the business equivalents of the borrowed amounts, the loan
of lending while most borrowers hardly documents presented as evidence, i.e., the promissory
know the basics of such business. When notes,56[56] expressed the amount of the loans in US
transacting with a bank, most borrowers dollars and not in any other currency. This clearly
concede to the expertise of the bank indicates that the spouses Tiu were bound to pay Union
and consider their procedures, Bank in dollars, the amount stipulated in said loan
pronouncements and representations as documents. Thus, before the Restructuring Agreement,
unassailable, whether such be true or the spouses Tiu were bound to pay Union Bank the
not. Therefore, when there is a doubtful amount of US$3,632,000.00 plus the interest stipulated
banking transaction, this Court will tip in the promissory notes, without converting the same to
the scales in favor of the borrower. pesos. The spouses Tiu, who are in the construction
business and appear to be dealing primarily in Philippine
Given the above ruling, the currency, should therefore purchase the necessary
Restructuring Agreement, therefore, amount of dollars to pay Union Bank, who could have
between the Tiu spouses and Union justly refused payment in any currency other than that
Bank does not operate to supersede all which was stipulated in the promissory notes.
previous loan documents, as claimed by
Union Bank. But the said Restructuring We disagree with the finding of the Court of
Agreement, as it was crafted by Union Appeals that the testimony of Lila Gutierrez, which
Bank, does not merely confirm the merely attests to the fact that the spouses Tiu received
original loan of the Tiu spouses but the peso equivalent of their dollar loan, proves the
attempts to create a novation of the said intention of the parties that such loans should be paid in
original loan that is not clearly pesos. If such had been the intention of the parties, the
authorized by the debtors and that is not promissory notes could have easily indicated the same.
supported by any cause or
consideration. According to Article 1292 Such stipulation of payment in dollars is not
of the New Civil Code, in order that an prohibited by any prevailing law or jurisprudence at the
obligation may by extinguished by time the loans were taken. In this regard, Article 1249 of
another which substitutes the same, it is the Civil Code provides:
imperative that it be so declared in
unequivocal terms, or that the old and Art. 1249. The payment of debts
the new obligations be on every point in money shall be made in the currency
incompatible with each other. Such is stipulated, and if it is not possible to
not the case in this instance. No valid deliver such currency, then in the
novation of the original obligation took currency which is legal tender in the
place. Even granting arguendo that Philippines.
there was a novation, the sudden
change in the original amount of the
loan to the new amount declared in the Although the Civil Code took effect on August 30, 1950,
Restructuring Agreement is not jurisprudence had upheld57[57] the continued effectivity of
supported by any cause or Republic Act No. 529, which took effect earlier on June
consideration. Under Article 1352 of the 16, 1950. Pursuant to Section 158[58] of Republic Act No.
Civil Code, contracts without cause, or 529, any agreement to pay an obligation in a currency
with unlawful cause, produce no effect
whatever. A contract whose cause did 53
not exist at the time of the transaction is
void. Accordingly, Article 1297 of the
New Civil Code mandates that, if the 54
new obligation is void, the original one
shall subsist, unless the parties intended
that the former relation should be 55
extinguished at any event. Since the
Restructuring Agreement is void and
56
since there was no intention to
extinguish the original loan, the original
loan shall subsist.52[52] 57

52 58
28

other than the Philippine currency is void; the most that Having established that Union Bank and the
could be demanded is to pay said obligation in Philippine spouses Tiu validly entered into dollar loans, the
currency to be measured in the prevailing rate of conclusion of the Court of Appeals that there were no
exchange at the time the obligation was incurred. 59[59] dollar loans to novate into peso loans must necessarily
On June 19, 1964, Republic Act No. 4100 took effect, fail.
modifying Republic Act No. 529 by providing for several
exceptions to the nullity of agreements to pay in foreign Similarly, the Court of Appeals pronouncement
currency.60[60] that the novation was not supported by any cause or
consideration is likewise incorrect. This conclusion
On April 13, 1993, Central Bank Circular No. suggests that when the parties signed the Restructuring
138961[61] was issued, lifting foreign exchange Agreement, Union Bank got something out of nothing or
restrictions and liberalizing trade in foreign currency. In that the spouses Tiu received no benefit from the
cases of foreign borrowings and foreign currency loans, restructuring of their existing loan and was merely taken
however, prior Bangko Sentral approval was required. On advantage of by the bank. It is important to note at this
July 5, 1996, Republic Act No. 8183 took effect, 62[62] point that in the determination of the nullity of a contract
expressly repealing Republic Act No. 529 in Section based on the lack of consideration, the debtor has the
263[63] thereof. The same statute also explicitly provided burden to prove the same. Article 1354 of the Civil Code
that parties may agree that the obligation or transaction provides that [a]though the cause is not stated in the
shall be settled in a currency other than Philippine contract, it is presumed that it exists and is lawful, unless
currency at the time of payment.64[64] the debtor proves the contrary.

Although the Credit Line Agreement between the In the case at bar, the Restructuring Agreement
spouses Tiu and Union Bank was entered into on was signed at the height of the financial crisis when the
November 21, 1995,65[65] when the agreement to pay in Philippine peso was rapidly depreciating. Since the
foreign currency was still considered void under Republic spouses Tiu were bound to pay their debt in dollars, the
Act No. 529, the actual loans, 66[66] as shown in the cost of purchasing the required currency was likewise
promissory notes, were taken out from September 22, swiftly increasing. If the parties did not enter into the
1997 to March 26, 1998, during which time Republic Act Restructuring Agreement in December 1999 and the
No. 8183 was already in effect. In United Coconut peso continued to deteriorate, the ability of the spouses
Planters Bank v. Beluso,67[67] we held that: Tiu to pay and the ability of Union Bank to collect would
both have immensely suffered. As shown by the
[O]pening a credit line does not create a evidence presented by Union Bank, the peso indeed
credit transaction of loan or mutuum, continued to deteriorate, climbing to US$1=P50.01 on
since the former is merely a preparatory December 2000.69[69] Hence, in order to ensure the
contract to the contract of loan or stability of the loan agreement, Union Bank and the
mutuum. Under such credit line, the spouses Tiu agreed in the Restructuring Agreement to
bank is merely obliged, for the peg the principal loan at P150,364,800.00 and the unpaid
considerations specified therefor, to lend interest at P5,000,000.00.
to the other party amounts not
exceeding the limit provided. The credit Before this Court, the spouses Tiu belatedly
transaction thus occurred not when the argue that their consent to the Restructuring Agreement
credit line was opened, but rather when was vitiated by fraud and mistake, alleging that (1) the
the credit line was availed of. x x x.68[68] Restructuring Agreement did not take into consideration
their substantial payment in the amount of
P40,447,185.60 before its execution; and (2) the dollar
loans had already been redenominated in 1997 at the
59 rate of US$1=P26.34.70[70]

We have painstakingly perused over the records


60 of this case, but failed to find any documentary evidence
of the alleged payment of P40,447,185.60 before the
execution of the Restructuring Agreement. In paragraph
61 16 of their Amended Complaint, the spouses Tiu alleged
payment of P40,447,185.60 for interests before the
conversion of the dollar loan. 71[71] This was specifically
62
denied by Union Bank in paragraph 5 of its Answer with
Counterclaim.72[72] Respondent Rodolfo Tiu testified that
63 they made 50 million plus in cash payment plus other
monthly interest payments,73[73] and identified a

64 69

65 70

66 71

67 72

68 73
29

computation of payments dated July 17, 2002 signed by difficult to believe that the spouses Tiu, veteran
himself.74[74] Such computation, however, was never businessmen who operate a multi-million peso company,
formally offered in evidence and was in any event, wholly would sign a very important document without fully
self-serving. understanding its contents and consequences.

As regards the alleged redenomination of the This Court therefore rules that the Restructuring
same dollar loans in 1997 at the rate of US$1=P26.34, Agreement is valid and, as such, a valid and binding
the spouses Tiu merely relied on the following direct novation of loans of the spouses Tiu entered into from
testimony of Herbert Hojas, one of the witnesses of September 22, 1997 to March 26, 1998 which had a total
Union Bank: amount of US$3,632,000.00.

Q:Could you please describe what kind Validity of the Foreclosure of Mortgage
of loan was the loan of the
spouses Rodolfo Tiu, the The spouses Tiu challenge the validity of the
plaintiffs in this case? foreclosure of the mortgage on two grounds, claiming
that: (1) the debt had already been fully paid; and (2)
A: It was originally an FCDU, they are not the owners of the improvements on the
meaning a dollar loan. mortgaged property.

Q: What happened to this FCDU (1) Allegation of full payment of the mortgage
loan or dollar loan? debt

A: The dollar loan was re- In the preceding discussion, we have ruled that
denominated in view of the very the Restructuring Agreement is a valid and binding
unstable exchange of the dollar novation of loans of the spouses Tiu entered into from
and the peso at that time, September 22, 1997 to March 26, 1998 in the total
amount of US$3,632,000.00. Thus, in order that the
Q: Could you still remember what spouses Tiu can be held to have fully paid their loan
year this account was re- obligation, they should present evidence showing their
denominated from dollar to payment of the total restructured amount under the
peso? Restructuring Agreement which was P104,668,741.00.
As we have discussed above, however, while respondent
A: I think it was on the year 1997. Rodolfo Tiu appeared to have identified during his
testimony a computation dated July 17, 2002 of the
Q: Could [you] still remember what alleged payments made to Union Bank,78[78] the same
was then the prevailing was not formally offered in evidence. Applying Section
exchange rate between the 34, Rule 13279[79] of the Rules of Court, such
dollar and the peso at that year computation cannot be considered by this Court. We
1997? have held that a formal offer is necessary because
judges are mandated to rest their findings of facts and
A: Yes. I have here the list of the their judgment only and strictly upon the evidence offered
dollar exchange rate from by the parties at the trial. It has several functions: (1) to
January 1987 (sic). It was enable the trial judge to know the purpose or purposes
P26.34 per dollar.75[75] for which the proponent is presenting the evidence; (2) to
allow opposing parties to examine the evidence and
object to its admissibility; and (3) to facilitate review by
Neither party presented any documentary the appellate court, which will not be required to review
evidence of the alleged redenomination in 1997. documents not previously scrutinized by the trial court. 80
Respondent Rodolfo Tiu did not even mention it in his [80] Moreover, even if such computation were admitted in
testimony. Furthermore, Hojas was obviously uncertain evidence, the same is self-serving and cannot be given
in his statement that said redenomination was made in probative weight. In the case at bar, the records do not
1997. contain even a single receipt evidencing payment to
Union Bank.
As pointed out by the trial court, the
Restructuring Agreement, being notarized, is a public The Court of Appeals, however, held that several
document enjoying a prima facie presumption of payments made by the spouses Tiu had been admitted
authenticity and due execution. Clear and convincing by Union Bank. Indeed, Section 11, Rule 8 of the Rules
evidence must be presented to overcome such legal of Court provides that an allegation not specifically
presumption.76[76] The spouses Tiu, who attested before denied is deemed admitted. In such a case, no further
the notary public that the Restructuring Agreement is evidence would be required to prove the antecedent
their own free and voluntary act and deed, 77[77] failed to facts. We should therefore examine which of the
present sufficient evidence to prove otherwise. It is payments specified by the spouses Tiu in their Amended
Complaint81[81] were not specifically denied by Union
74 Bank.

75 78

76 79

77 80
30

expenses advanced by the bank


The allegations of payment are made in in registering the Deeds of
paragraphs 16 to 21 of the Amended Complaint: Dacion, and also adding to the
Indebtedness the interest, and
16. Before conversion of the other fees and charges incurred
dollar loan into a peso loan[,] the by the Indebtedness, amounts
spouses Tiu had already paid the to ONE HUNDRED FOUR
defendant bank the amount of MILLION SIX HUNDRED
P40,447,185.60 for interests; SIXTY-EIGHT THOUSAND
SEVEN HUNDRED FORTY-
17. On August 3, 1999 and ONE PESOS
August 12, 1999, plaintiffs made (PHP104,668,741.00) (the
payments in the amount of TOTAL RESTRUCTURED
P15,000,000.00; AMOUNT).84[84]

18. In order to lessen the As regards the allegations of cash payments in


obligation of plaintiffs, the mother of paragraphs 17 and 21 of the Amended Complaint, the
plaintiff Rodolfo T. Tiu, plaintiff Juanita T. date of the alleged payment is critical as to whether they
Tiu, executed a deed of dacion in were included in the Restructuring Agreement. The
payment in favor of defendant involving payment of P15,000,000.00 alleged in paragraph 17 of
her 10 parcels of land located in the Amended Complaint was supposedly made on
Labangon, Cebu City for the amount of August 3 and 12, 1999. This payment was before the
P25,130,000.00. Copy of the deed was date of execution of the Restructuring Agreement on
attached to the original complaint as December 21, 1999, and is therefore already factored
Annex C; into the restructured obligation of the spouses. 85[85] On
the other hand, the payment of P13,197,546.79 alleged
19. For the same purpose, in paragraph 21 of the Amended Complaint was dated
plaintiffs spouses Tiu also executed a May, 8, 2001. Said payment cannot be deemed included
deed of dacion in payment of their in the computation of the spouses Tius debt in the
property located at A.S. Fortuna St., Restructuring Agreement, which was assented to more
Mandaue City for the amount of than a year earlier. This amount (P13,197,546.79) is
P36,080,000.00. Copy of the deed was even absent86[86] in the computation of Union Bank of
attached to the original complaint as the outstanding debt, in contrast with the P15,000,000.00
Annex D; payment which is included87[87] therein. Union Bank did
not explain this discrepancy and merely relied on the
20. The total amount of the two spouses Tius failure to formally offer supporting
dacions in payment made by the evidence. Since this payment of P13,197,546.79 on May
plaintiffs was P61,210,000.00; 8, 2001 was admitted by Union Bank in their Answer with
Counterclaim, there was no need on the part of the
21. Plaintiffs spouses Tiu also spouses Tiu to present evidence on the same.
made other payment of the amount of Nonetheless, if we subtract this figure from the total
P13,197,546.79 as of May 8, 2001;82[82] restructured amount (P104,668,741.00) in the
Restructuring Agreement, the result is that the spouses
Tiu still owe Union Bank P91,471,194.21.
In paragraphs 4 and 5 of their Answer with
Counterclaim,83[83] Union Bank specifically denied the (2) Allegation of third party ownership of the
allegation in paragraph 9 of the Complaint, but admitted improvements on the mortgaged lot
the allegations in paragraphs 17, 18, 19, 20 and 21
thereof. Paragraphs 18, 19 and 20 allege the two deeds The Court of Appeals, taking into consideration
of dacion. However, these instruments were already its earlier ruling that the loan was already fully paid,
incorporated in the computation of the outstanding debt permanently enjoined Union Bank from foreclosing the
(i.e., subtracted from the confirmed debt of mortgage on the property covered by Transfer Certificate
P155,364,800.00), as can be gleaned from the following of Title No. 11951 (Lot No. 639) and from pursuing other
provisions in the Restructuring Agreement: foreclosure of mortgages over any other properties of the
spouses Tiu. The Court of Appeals ruled:
a.) The loan obligation to the
BANK to be restructured herein The prayer, therefore, of the Tiu
after deducting from the spouses to enjoin the foreclosure of the
Indebtedness of the real estate mortgage over their
BORROWER the dacion price residential property has merit. The loan
of the properties subject of the has already been fully paid. It should
Deeds of Dacion and adding to also be noted that the house
the Indebtedness all the taxes,
registration fees and other 84

81 85

82 86

83 87
31

constructed on the residential property improvements on Lot No. 639 were owned by third
of the Tiu spouses is not registered in persons. In fact, the evidence presented by the spouses
the name of the Tiu spouses, but in the Tiu merely attempt to prove that the improvements on Lot
name of Jose Tiu (Records, pp. 127- No. 639 were declared for taxes in the name of
132), the father of appellant and respondent Rodolfo Tius father, Jose Tiu, who allegedly
petitioner Rodolfo Tiu, since 1981. It had died on December 18, 1983. There was no effort to show
been alleged by the Tiu spouses that how their co-plaintiffs in the original complaint, namely
Jose Tiu died on December 18, 1983, Juanita T. Tiu, Rosalinda T. King, Rufino T. Tiu, Rosalie T.
and, that consequently upon his death, Young and Rosenda T. Tiu, became co-owners of the
Juanita T. Tiu, Rosalinda T. King, Rufino house. The spouses Tiu did not present evidence as to
T. Tiu, Rosalie T. Young and Rosenda T. (1) who the heirs of Jose Tiu are; (2) if Juanita T. Tiu,
Tiu became owners of the house Rosalinda T. King, Rufino T. Tiu, Rosalie T. Young and
(Records, p. 116). This allegation has Rosenda T. Tiu are indeed included as heirs; and (3) why
not been substantially denied by Union petitioner Rodolfo Tiu is not included as an heir despite
Bank. All that the Union Bank presented being the son of Jose Tiu. No birth certificate of the
to refute this allegation are a Transfer alleged heirs, will of the deceased, or any other piece of
Certificate of Title and a couple of Tax evidence showing judicial or extrajudicial settlement of
Declarations which do not indicate that a the estate of Jose Tiu was presented.
residential house is titled in the name of
the Tiu spouses. In fact, in one of the In light of the foregoing, this Court therefore sets
Tax Declarations, the market value of aside the ruling of the Court of Appeals permanently
the improvements is worth only enjoining Union Bank from foreclosing the mortgage on
P3,630.00. Certainly, Union Bank should Lot No. 639, including the improvements thereon.
have been aware that this Tax
Declaration did not cover the residential Validity of Alleged Rental Payments on the Properties
house. Union Bank should also not rely Conveyed to the Bank via Dacion en Pago
on warranties made by debtors that they
are the owners of the property. They The Court of Appeals found the lease contracts
should investigate such representations. over the properties conveyed to Union Bank via dacion
The courts have made consistent rulings en pago to be void for being against public policy. The
that a bank, being in the business of appellate court held that since the General Banking Law
lending, is obligated to verify the true of 200092[92] mandates banks to immediately dispose of
ownership of the properties mortgaged real estate properties that are not necessary for its own
to them. Consequently, this Court use in the conduct of its business, banks should not enter
permanently enjoins Union Bank from into two-year contracts of lease over properties paid to
foreclosing the mortgage of the them through dacion.93[93] The Court of Appeals thus
residential property of the Tiu spouses ordered Union Bank to return the rentals it collected. To
which is covered by Transfer Certificate determine the amount of rentals paid by the spouses Tiu
of Title No. 11951 and from pursuing to Union Bank, the Court of Appeals simply multiplied the
other foreclosure of mortgages over any monthly rental stipulated in the Restructuring Agreement
other properties of the Tiu spouses. If a by the stipulated period of the lease agreement:
foreclosure sale has already been made
over such properties, this Court orders For the Labangon property, the
the cancellation of such foreclosure sale Tiu spouses paid rentals in the amount
and the Certificate of Sale thereof if any of P98,000.00 per month for two years,
has been issued, and the return of the or a total amount of P2,352,000.00. For
title to the Tiu spouses.88[88] the A.S. Fortuna property, the Tiu
spouses paid rentals in the amount of
P150,000.00 per month for two years, or
We disagree. Contrary to the ruling of the Court a total amount of P3,600,000.00. The
of Appeals, the burden to prove the spouses Tius total amount in rentals paid by the Tiu
allegation that they do not own the improvements on Lot spouses to Union Bank is FIVE
No. 639, despite having such improvements included in MILLION NINE HUNDRED FIFTY- TWO
the mortgage is on the spouses Tiu themselves. The THOUSAND PESOS (P5,952,000.00).
fundamental rule is that he who alleges must prove. 89[89] This Court finds that the return of this
The allegations of the spouses Tiu on this matter, which amount to the Tiu spouses is called for
are found in paragraphs 35 to 3990[90] of their Amended since it will better serve public policy.
Complaint, were specifically denied in paragraph 9 of These properties that were given by the
Union Banks Answer with Counterclaim.91[91] Tiu spouses to Union Bank as payment
should not be used by the latter to
Upon careful examination of the evidence, we extract more money from the former.
find that the spouses Tiu failed to prove that the This situation is analogous to having a
debtor pay interest for a debt already
88 paid. Instead of leasing the properties,
Union Bank should have instructed the
Tiu spouses to vacate the said
89

90 92

91 93
32

properties so that it could dispose of Provided, however, That the bank may,
them.94[94] after said period, continue to hold the
property for its own use, subject to the
limitations of the preceding Section.
The Court of Appeals committed a serious error
in this regard. As pointed out by petitioner Union Bank,
the spouses Tiu did not present any proof of the alleged Section 52.2 contemplates a dacion en pago.
rental payments. Not a single receipt was formally Thus, Section 52 undeniably gives banks five years to
offered in evidence. The mere stipulation in a contract of dispose of properties conveyed to them in satisfaction of
the monthly rent to be paid by the lessee is certainly not debts previously contracted in the course of its dealings,
evidence that the same has been paid. Since the unless another period is prescribed by the Monetary
spouses Tiu failed to prove their payment to Union Bank Board. Furthermore, there appears to be no legal
of the amount of P5,952,000.00, we are constrained to impediment for a bank to lease the real properties it has
reverse the ruling of the Court of Appeals ordering its received in satisfaction of debts, within the five-year
return. period that such bank is allowed to hold the acquired
realty.
Even assuming arguendo that the spouses Tiu
had duly proven that it had paid rent to Union Bank, we We do not dispute the interpretation of the Court
nevertheless disagree with the finding of the Court of of Appeals that the purpose of the law is to prevent the
Appeals that it is against public policy for banks to enter concentration of land holdings in a few hands, and that
into two-year contracts of lease of properties ceded to banks should not be allowed to hold on to the properties
them through dacion en pago. The provisions of law cited contemplated in Section 52 beyond the five-year period
by the Court of Appeals, namely Sections 51 and 52 of unless such bank has exerted its best efforts to dispose
the General Banking Law of 2000, merely provide: of the property in good faith but failed. However, inquiries
as to whether the banks exerted best efforts to dispose of
SECTION 51.Ceiling on the property can only be done if said banks fail to
Investments in Certain Assets. Any bank dispose of the same within the period provided. Such
may acquire real estate as shall be inquiry is furthermore irrelevant to the issues in the case
necessary for its own use in the conduct at bar.
of its business: Provided, however, That
the total investment in such real estate Order to Return Certificates Allegedly in Union
and improvements thereof, including Banks Possession
bank equipment, shall not exceed fifty
percent (50%) of combined capital In the Amended Complaint, the spouses Tiu
accounts: Provided, further, That the alleged95[95] that they delivered several certificates and
equity investment of a bank in another titles to Union Bank pursuant to a Memorandum of
corporation engaged primarily in real Agreement. These certificates and titles were not
estate shall be considered as part of the subjected to any lien in favor of Union Bank, but the
bank's total investment in real estate, latter allegedly continued to hold on to said properties.
unless otherwise provided by the
Monetary Board. The RTC failed to rule on this issue. The Court of
Appeals, tackling this issue for the first time, ruled in
SECTION 52. Acquisition of favor of the Tiu spouses and ordered the return of these
Real Estate by Way of Satisfaction of certificates and titles. The appellate court added that if
Claims. Notwithstanding the limitations Union Bank can no longer return these certificates or
of the preceding Section, a bank may titles, it should shoulder the cost for their replacement. 96
acquire, hold or convey real property [96]
under the following circumstances:
Union Bank, asserting that the Memorandum of
52.1. Such as shall be Agreement did not, in fact, push through, denies having
mortgaged to it in good faith by way of received the subject certificates and titles. Union Bank
security for debts; added that even assuming arguendo that it is in
possession of said documents, the Restructuring
52.2. Such as shall be Agreement itself allows such possession.97[97]
conveyed to it in satisfaction of debts
previously contracted in the course of its The evidence on hand lends credibility to the
dealings; or allegation of Union Bank that the Memorandum of
Agreement did not push through. The copy of the
52.3. Such as it shall Memorandum of Agreement attached by the spouses Tiu
purchase at sales under judgments, themselves to their original complaint did not bear the
decrees, mortgages, or trust deeds held signature of any representative from Union Bank and
by it and such as it shall purchase to was not notarized.98[98]
secure debts due it.
95
Any real property acquired or
held under the circumstances
96
enumerated in the above paragraph
shall be disposed of by the bank within a
period of five (5) years or as may be 97
prescribed by the Monetary Board:

94 98
33

We, however, agree with the finding of the Court In the first place, notwithstanding the foregoing
of Appeals that despite the failure of the Memorandum of provision, there is no clear intention on the part of the
Agreement to push through, the certificates and titles spouses Tiu to deliver the certificates over certain shares
mentioned therein do appear to be in the possession of of stock and real properties as security for their debt.
Union Bank. As held by the Court of Appeals: From the terms of the Memorandum of Agreement, these
certificates were surrendered to Union Bank in order that
Lastly, this Court will order, as it the said properties described therein be given their
hereby orders, Union Bank to return to corresponding loan values required for the restructuring
the Tiu spouses all the certificates of of the spouses Tius outstanding obligations. However, in
shares of stocks and titles to real the event the parties fail to agree on the valuation of the
properties of the Tiu spouses in its subject properties, Union Bank agrees to release the
possession. Union Bank cannot deny same.101[101] As Union Bank itself vehemently alleges,
possession of these items since it had the Memorandum of Agreement was not consummated.
made judicial admissions of such Moreover, despite the fact that the Bank was aware, or in
possession in their document entitled possession, of these certificates,102[102] at the time of
Reply to Plaintiffs request for Admission execution of the Restructuring Agreement, only the
(records, pp. 216-217). While in that mortgage over the real property covered by TCT No. T-
document, Union Bank only admitted to 11951 was expressly mentioned as a security in the
the possession of four real estate titles, Restructuring Agreement. In fact, in its Reply to Request
this Court is convinced that all the for Admission,103[103] Union Bank admitted that (1) the
certificates and titles mentioned in the titles to the real properties were submitted to it for
unconsummated Memorandum of appraisal but were subsequently rejected, and (2) no real
Agreement (Records, pp. 211-213) were estate mortgages were executed over the said
given by the Tiu spouses to Union Bank properties. There being no agreement that these
for appraisal. This finding is further properties shall secure respondents obligation, Union
bolstered by the admission of the Union Bank has no right to retain said certificates.
Bank that it kept the titles for
safekeeping after it rejected the Assuming arguendo that paragraph 11(b) of the
Memorandum of Agreement. Since Restructuring Agreement indeed allows the retention of
Union Bank rejected these certificates the certificates (submitted to the Bank ostensibly for
and titles of property, it should return the safekeeping and appraisal) as security for spouses Tius
said items to the Tiu spouses. If Union debt, Union Banks position still cannot be upheld. Insofar
Bank can no longer return these as said provision permits Union Bank to apply properties
certificates and titles or if it has of the spouses Tiu in its possession to the full or partial
misplaced them, it shall shoulder the payment of the latters obligations, the same appears to
cost for the replacement and issuance of impliedly allow Union Bank to appropriate these
new certificates and new titles over the properties for such purpose. However, said provision
said properties.99[99] cannot be validly applied to the subject certificates and
titles without violating the prohibition against pactum
As regards Union Banks argument that it has the commissorium contained in Article 2088 of the Civil
right to retain said documents pursuant to the Code, to the effect that [t]he creditor cannot appropriate
Restructuring Agreement, it is referring to paragraph the things given by way of pledge or mortgage, or
11(b), which provides that: dispose of them[;] [a]ny stipulation to the contrary is null
and void. Applicable by analogy to the present case is
11. Effects of Default When the our ruling in Nakpil v. Intermediate Appellate Court, 104
BORROWER is in default, such [104] wherein property held in trust was ceded to the
default shall have the following trustee upon failure of the beneficiary to answer for the
effects, alternative, concurrent and amounts owed to the former, to wit:
cumulative with each other:
For, there was to be automatic
xxxx appropriation of the property by Valdes
in the event of failure of petitioner to pay
(b) The BANK shall be the value of the advances. Thus,
entitled to all the remedies provided contrary to respondent's manifestations,
for and further shall have the right to all the elements of a pactum
effect or apply against the partial or commissorium were present: there was
full payment of any and all a creditor-debtor relationship between
obligations of the BORROWER the parties; the property was used as
under this Restructuring Agreement
any and all moneys or other 100
properties of the BORROWER
which, for any reason, are or may
hereafter come into the possession 101
of the Bank or the Banks agent. All
such moneys or properties shall be
102
deemed in the BANKs possession
as soon as put in transit to the
BANK by mail or carrier.100[100] 103

99 104
34

security for the loan; and, there was the formers interest. Article 1339 of the
automatic appropriation by New Civil Code provides that the failure
respondent of Pulong Maulap in case of to disclose facts, when there is a duty to
default of petitioner.105[105] (Emphases reveal them, as when the parties are
supplied.) bound by confidential relations,
constitutes fraud. Undoubtedly, the
banks and their clients are bound by
This Court therefore affirms the order of the confidential relations. The almost perfect
Court of Appeals for Union Bank to return to the spouses timing of the banks in convincing their
Tiu all the certificates of shares of stock and titles to real clients to shift to dollar loans just when
properties that were submitted to it or, in lieu thereof, to the Asian financial crisis struck indicates
pay the cost for the replacement and issuance of new that the banks not only failed to disclose
certificates and new titles over the said properties. facts to their clients of the looming crisis,
but also suggests of the insidious design
Validity of the Award of Damages to take advantage of these undisclosed
facts.106[106]
The Court of Appeals awarded damages in favor
of the spouses Tiu based on its taking judicial notice of
the alleged exploitation by many banks of the Asian We have already held that the foreclosure of the
financial crisis, as well as the foreclosure of the mortgage mortgage was warranted under the circumstances. As
of the home of the spouses Tiu despite the alleged full regards the alleged exploitation by many banks of the
payment by the latter. As regards the alleged Asian financial crisis, this Court rules that the
manipulation of the financial crisis, the Court of Appeals generalization made by the appellate court is unfounded
held: and cannot be the subject of judicial notice. It is
axiomatic that good faith is always presumed unless
As a final note, this Court convincing evidence to the contrary is adduced. It is
observes the irregularity in the incumbent upon the party alleging bad faith to sufficiently
circumstances [surrounding] dollar loans prove such allegation. Absent enough proof thereof, the
granted by banks right before or during presumption of good faith prevails. 107[107] The alleged
the Asian financial crisis. It is of common insidious design of many banks to betray their clients
knowledge that many banks, around that during the Asian financial crisis is certainly not of public
time, actively pursued and convinced knowledge. The deletion of the award of moral and
debtors to make dollar loans or to exemplary damages in favor of the spouses Tiu is
convert their peso loans to dollar loans therefore in order.
allegedly because of the lower interest
rate of dollar loans. This is a highly WHEREFORE, the Petition is PARTIALLY
suspect behavior on the part of the GRANTED. The Joint Decision of the Court of Appeals in
banks because it is irrational for the CA-G.R. CV No. 00190 and CA-G.R. SP No. 00253
banks to voluntarily and actively proffer dated February 21, 2006 is hereby AFFIRMED insofar as
a conversion that would give them it ordered petitioner Union Bank of the Philippines to
substantially less income. In the guise of return to the respondent spouses Rodolfo T. Tiu and
benevolence, many banks were able to Victoria N. Tiu all the certificates of shares of stock and
convince borrowers to make dollar loans titles to real properties that were submitted to it or, in lieu
or to convert their peso loans to dollar thereof, to pay the cost for the replacement and issuance
loans. Soon thereafter, the Asian of new certificates and new titles over the said properties.
financial crisis hit, and many borrowers The foregoing Joint Decision is hereby SET ASIDE: (1)
were saddled with loans that ballooned insofar as it permanently enjoined Union Bank of the
to twice or thrice the amount of their Philippines from foreclosing the mortgage of the
original loans. This court takes judicial residential property of respondent spouses Rodolfo T. Tiu
notice of these events or matters which and Victoria N. Tiu which is covered by Transfer
are of public knowledge. It is Certificate of Title No. 11951; (2) insofar as it ordered
inconceivable that the banks were Union Bank of the Philippines to return to the respondent
unaware of the looming Asian financial spouses Rodolfo T. Tiu and Victoria N. Tiu the amount of
crisis. Being in the forefront of the P927,546.79 representing illegally collected rentals; and
financial world and having access to (3) insofar as it ordered Union Bank of the Philippines to
financial data that were not available to pay the respondent spouses Rodolfo T. Tiu and Victoria
the average borrower, the banks were in N. Tiu P100,000.00 in moral damages, P100,000.00 in
such a position that they had a higher exemplary damages, P50,000.00 in attorneys fees and
vantage point with respect to the cost, both in the lower court and in this Court.
financial landscape over their average
clients. The cavalier way with which No further pronouncement as to costs.
banks exploited and manipulated the
situation is almost too palpable that they SO ORDERED.
openly and unabashedly struck heavy
blows on the Philippine economy,
industries and businesses. The banks
have a fiduciary duty to their clients and
to the Filipino people to be transparent
in their dealings and to make sure that 106
the latters interest are not prejudiced by

105 107
35

corrected the POEA on the proper rate of exchange to


be applied in converting the award of US$11,550.00 to
its equivalent in Philippine currency. It thus held:

However, while we are convinced that because Pangan


was illegally dismissed, he should be paid the salaries
corresponding to the unexpired portion of his contract,
we believe that because of the erratic devaluation of the
Philippine Peso vis-a-vis, the US Dollars, simple fairness
dictates that the payment of the awards in the Philippine
Currency should not be "at the rate of exchange at the
time of payment," as mandated by the POEA, but rather
Republic of the Philippines at the rate of exchange prevailing at the time the
SUPREME COURT complainant's cause of action accrued or at the time he
Manila was illegally dismissed on 21 July 1988. 2

THIRD DIVISION Consequently, said resolution disposed as follows:

WHEREFORE, subject to the modification abovestated, the decision


appealed from should be, as it is hereby, AFFIRMED.

G.R. No. 98450 July 21, 1993


SO ORDERED. 3

THE PHILIPPINE MANPOWER SERVICES, INC.,


A motion for reconsideration of NLRC's Resolution of
ADAWLIAH UNIVERSAL ELECTRONICS and AFISCO
March 4, 1991 was denied in its Resolution of April 24,
INSURANCE CORPORATION, petitioners,
1991.
vs.
NATIONAL LABOR RELATIONS COMMISSION and
ARTHUR P. PANGAN, respondents. As a final recourse, petitioners filed the instant petition
for annulment of the NLRC's Resolutions of March 4,
1991 and April 24, 1991.
Agcaoili Law Offices for petitioners.

The alleged dismissal without cause of private


Melencio D. Fabros, Jr. for private respondent.
respondent Arthur F. Pangan by his employer Adawliah
Union Electronics and Afisco Insurance Corporation
(Adawliah, for short) based in Alkhobar, Saudi Arabia,
spawned the present controversy. Pangan filed with the
ROMERO, J.: POEA, a case for illegal dismissal, underpayment of
overtime pay, separation pay, actual damages
On August 10, 1990, the Philippine Overseas representing his salaries for the unexpired portion of his
Employment Administration (POEA) rendered a decision contract of employment, and exemplary damages of
in POEA Cases No. (L) 88-07-595 entitled Arthur Pangan US$10,000.00 plus attorney's fees. His complaint
v. Philippine Manpower Services, Inc. and Adawliah alleged that he entered into a two-year contract of
Universal Electronics and Afisco Insurance Corporation, employment with Adawliah, as a data entry clerk
disposing as follows: technician for US$550.00 a month, commencing on April
30, 1988. He complained that he rendered overtime work
WHEREFORE, premises considered, judgment is hereby rendered of fourteen (14) hours last May 1988 and another twenty-
ordering respondent Philippine Manpower Services Corporation, jointly
four (24) hours in June 1988 without having received any
and severally with its principal Adawliah Universal Electronics, to pay
complainant Arthur F. Pangan the following amounts: compensation therefor; worse, he has ordered to work
as programmer in addition to his work as data entry clerk
1. ELEVEN THOUSAND FIVE HUNDRED FIFTY U.S. DOLLARS technician without any offer to correspondingly increase
(US$11,550.), representing his salaries for the unexpired portion of his his salary; that Pangan's demand for salary adjustment
contract of employment; and irked Mr. Ahmed Yosul, Administrative Manager of
Adawliah, who thus ordered Pangan's termination on
2. FIVE PERCENT (5%) of the total award as and by way of attorney's grounds of incompetence. Pangan was consequently
fees.
compelled to accept payment of only US389.00 dollars,
covering his services for July 1-21. All other claims were
All other claims of complainant as well as respondent's counterclaims
are hereby dismissed for lack of merit. waived by him after he was threatened to be jailed.

Payment of the above awards shall be made in Philippine Currency at Petitioner Philippine Manpower Services, Inc. (Philman)
the prevailing rate of exchange at the time of payment. denied Pangan's allegations in his complaint. Philman
justified Pangan's termination as a valid exercise by his
SO ORDERED. 1 employer Adawliah, of its management prerogative to fire
employees who proved to be incompetent while still
Petitioners herein appealed said POEA decision before under probation. It thus prayed for the dismissal of the
public respondent National Labor Relations Commission instant case.
(NLRC). The NLRC, in its Resolution of March 4, 1991,
modified the decision of the POEA but only insofar as it
36

The POEA, however, found Pangan's complaint Philman and Adawliah insist that during the probationary
meritorious. Though it recognized the management period, the employer is acting within his rights in
prerogative to select its employees, it nevertheless ruled dismissing his employee who failed to meet the
that the exercise thereof is not without any qualification. qualification standard for continued employment.
The POEA explained that probationary employees can Moreover, they aver that Pangan's inability to satisfy the
only be dismissed for just cause duly proved. In the case standards set by Adawliah amounts to incompetence
at bar, it found that there was no justified dismissal of which is a just cause for termination of his services
complainant Pangan for failure of Adawliah to pursuant to the first paragraph of the contract of
substantiate its claim of his unsatisfactory performance. employment executed between Adawliah and Pangan, to
General averments on Pangan's incompetence do not wit:
constitute just cause to warrant his termination.
If during the first three (3) months (probation period) of
Philman and Adawliah were thus ordered to pay in employment, the EMPLOYER find the EMPLOYEE to be
solidum, the equivalent in Philippine currency of incompetent or incapable of performing the type of work
US$11,550.00 representing Pangan's salary for the for which he was hired, then the EMPLOYER may
unexpired portion of his contract and attorney's fees discharge the EMPLOYEE for cause with no obligation
amounting to five percent (5%) of said award. The POEA on the part of the EMPLOYER except for payment of
further ruled that in paying the above award in Philippine accrued pay up to the time of termination. The payment
currency, the conversion rate to be used shall be that of economy class air transportation back to the point of
prevailing at the time of payment. hire shall be for the account of EMPLOYEE. 5

Philman and Adawliah sought a reversal of said POEA On the basis of the foregoing, they argued that the
ruling by appealing before the National Labor Relations determination of whether Pangan is capable of
Commission (NLRC). As aforementioned, the NLRC performing the duties of Data Entry Clerk Technician
affirmed, with modification, the POEA ruling appealed rests solely with Adawliah, his employer, who is in the
from, in its Resolution of March 4, 1991. best position to observe Pangan's performance during
the probationary period. There is thus no necessity,
Philman and Adawliah moved for reconsideration of the contrary to the views of the POEA and NLRC, to cite
Resolution of March 4, 1991 but were denied by the specific incidents of Pangan's incompetence in order to
NLRC for lack of merit. prove the legality of the dismissal.

Consequently, the instant petition was filed by Philman Philman and Adawliah further maintained that as a result
and Adawliah claiming that: of Pangan's failure to qualify as a regular employee, he
did not acquire any rights whatsoever to work out the full
I. With grave abuse of discretion, the Honorable term of his employment contract. Accordingly, they
Commission (Second Division) together with POEA concluded that Pangan is not entitled to an award
Administrator Jose N. Sarmiento brushed aside equivalent to the unexpired portion of his two-year
petitioners-appellants submission that complainant- employment contract.
appellee was lawfully dismissed in accordance with
his contract of employment and in consonance with In his Comment to the petition, the Solicitor General
previous POEA and NLRC rulings applicable to the considers petitioners' arguments as untenable. He
case at bar. contends that, notwithstanding Pangan's probationary
status, he nonetheless enjoys the constitutional
II. With grave abuse of discretion, the Honorable protection on security of tenure unless just cause exists
Commission (Second Division) disregarded to justify his termination. He further stressed that the
appellant's contention based on Article 281 of the prerogative of management to dismiss Pangan must be
Labor Code of the Philippines, that workers on exercised without abuse of discretion. The absence of
probation or trial acquire only transitional rights to sufficient evidence to substantiate Pangan's dismissal
the fulfillment of their employment contracts and and the lack of specific acts or instances to show
therefore the complainant-appellee cannot lawfully Pangan's lackluster performance negates the claim of
be entitled to payment of salary for the period of 21 Adawliah that the dismissal was a rightful exercise of
months after failing to qualify as a regular employee such prerogative. Due to the gross violation of Pangan's
during his three months' trial period. security of tenure, the Solicitor General opined that he is
entitled to an award equivalent to his salary for the
III. The Honorable Commission (Second Division) gravely unexpired portion of his two-year employment contract.
erred in holding that appellee's dismissal is
sustained by the Supreme Court ruling in Manila The petition should be dismissed. Jurisprudence is rich
Hotel vs. NLRC, 141 SCRA 169. in cases guaranteeing the security of tenure, limited
though it may be, of probationary employees. 6 Except
IV. With grave abuse of discretion, the Honorable for just cause as provided by law or under the
Commission (Second Division) affirmed the findings employment contract, a probationary employee cannot
of the POEA Administrator to the effect that the be terminated. 7 Petitioners do not view Pangan's
dismissal of the complainant-appellee was termination as a violation of these legal precepts. Rather,
capricious. 4 they consider his incompetence as a just cause,
sufficient to constitute the basis of his dismissal under
the contract.
37

At first blush, petitioners' position may seem sound, it probationary period. Accordingly, had not Pangan been
appearing that their contract, which is the law between compelled to return to the Philippines, he could have
them, contains a stipulation that the employer has the demanded enforcement of the employment contract. In
discretion to dismiss its employees for incompetence. the case of Skillword Management and Marketing Corp.,
However, where the dismissed employee, Pangan in this et al. v. NLRC, et al., 12 we similarly unheld a POEA
instance, challenges his dismissal as illegal, predicating ruling awarding private respondents therein $6,900.00 or
his claim on the absence of a just cause, the correct its equivalent in Philippine currency at the time of actual
issue is not so much Adawliah's discretion to terminate payment covering complainant's salary for the unexpired
as the existence of Pangan's alleged incompetence as portion of twenty-three months due to unjust dismissal as
ground for his termination. Hence, the POEA and NLRC a probationary employee.
did not commit grave abuse of discretion in requiring
petitioners to present proof of the alleged incompetence In the case of Republic Resources and Development
of Pangan. Thus, it has been held that: Corporation v. Court of Appeals, 13 reiterating our
decision in Kalalo v. Luz, 14 with regard to obligations
It is a basic principle in the dismissal of employees that the burden of incurred after enactment of RA No. 529 15 on June 16,
proof rests upon the employer to show that the dismissal of the
1950, we also held that the rate of exchange to be
employee is for a just cause, and failure to do so would necessarily
mean that the dismissal is not justified [Polymedic General Hospital v. applied should be that prevailing at the time of payment.
NLRC, G.R. No. 64190, January 31, 1985, 134 SCRA 420; Asphalt and
Cement Pavers, Inc. v. Leogardo, et al., G.R. No. 74563, June 20, As a consequence of our affirmance of the POEA award,
1988.] Should the employer fail in discharging this duty, the dismissal
of the employee cannot be sustained. This is consonant with the we find incorrect the NLRC Resolution of March 4, 1991
constitutional guarantee of security of tenure, as implemented in what to the effect that the proper rate of exchange to be
is now Sec. 279 of the Labor Code, as amended. 8 applied in converting the award of US$11,550.00 to its
equivalent in Philippine currency is that prevailing at the
This same principle applies to probationary employees time complainant's cause of action accrued and not at
allegedly terminated without cause during their limited the time of actual payment as ruled by the POEA.
tenure. Thus in Euro-Linea Philippines Inc. v. NLRC, et
al., 9 this Court dismissed the petition on the ground that: WHEREFORE, finding no grave abuse of discretion on
the part of public respondents, the petition is
Petitioner not only failed to present sufficient evidence to substantiate DISMISSED. The decision of the POEA dated August
the cause of private respondent's dismissal, but likewise failed to cite
10, 1991 is hereby AFFIRMED in toto and the Resolution
particular acts or instances to show the latter's poor performance.
of the NLRC dated March 4, 1991 is MODIFIED, insofar
as the proper rate of exchange to be applied in
Similarly, no convincing proof establishing Pangan's
converting the award of US$11,550.00 in Philippine
alleged incompetence was presented. The POEA and
currency is that prevailing at the time of actual payment.
NLRC, therefore, correctly declared the dismissal to be
illegal. Pangan's dismissal without cause during the
probationary period constitutes a violation of his SO ORDERED.
Constitutional right to security of tenure. The
Constitution, which is built into all contracts entered into
in the Philippines and governed by Philippines law when
it provides in Art. XIII,
Sec 3 10 that "they shall be entitled to security of
tenure . . ." did not distinguish between probationary and
regular employees. Consequently, Pangan deserves the
disputed award of the POEA, entitling him to an amount
representing his salary for the unexpired portion of his
employment contract. It was erroneous for petitioners to
question the award as improper, theorizing that he is not
entitled to sum equivalent to his salary for the unexpired
portion of the contract, he being merely a probationary
employee who has not acquired a vested right to
demand fulfillment of his employment contract.

Apparently, petitioners have misread the statutory grant


of security of tenure to probationary employees. Under
Article 281 of the Labor Code, 11 a probationary
employee may be terminated on two grounds: (a) for just
cause or (b) when he fails to qualify as a regular
employee in accordance with reasonable standards
made known by the employer to the employee at the
time of his engagement. Since as established in the case
at bar, petitioners were unable to prove either ground as
a basis for terminating Pangan's employment, no reason
exists to sever the employment relationship between
Adawliah and Pangan. Otherwise stated, absent the
grounds for termination of a probationary employee, he
is entitled to continued employment even beyond the
38

less a discount of eleven (11) percent per annum


computed on a monthly diminishing balance, shall be
paid to LESSOR upon compliance of the three (3)
conditions provided in clause (2) above.

LESSEE also agrees to pay lessor, the sum of Six


Thousand Pesos (P6,000.00) as demolition expenses,
upon effectivity of this lease.

The rental herein provided for is in any event the


maximum rental which LESSOR may collect during the
term of this lease or any renewal or extension thereof.
LESSEE further agrees for thirty (30) days after written
notice of such default has actually been delivered to the
General Manager of Caltex (Philippines), Inc. LESSOR
shall then have the right to terminate this lease on thirty
(30) days written notice to LESSEE. xxx xxx xxx iii[3]

Thus, based on the foregoing provisions of the lease


contract, the monthly rental was fixed at P3,500.00 for
the first ten years, and at P4,200.00 for the succeeding
ten years of the lease.

On June 23, 1983, or five years before the expiration of


the lease contract, petitioner asked respondent to adjust
or increase the amount of rentals citing that the country
was experiencing extraordinary inflation. In a letter dated
August 3, 1983, respondent refused petitioner's request
and declared that the terms of the lease contract are
clear as to the rental amounts therein provided being
[G.R. No. 137798. October 4, 2000] "the maximum rental which the lessor may collect during
the term of the lease."iv[4]
LUCIA R. SINGSON, petitioner, vs. CALTEX
(PHILIPPINES), INC. respondent. On September 21, 1983, petitioner instituted a complaint
before the RTC praying for, among other things, the
DECISION payment by respondent of adjusted rentals based on the
value of the Philippine peso at the time the contract of
lease was executed. The complaint invoked Article 1250
GONZAGA-REYES, J.: of the Civil Code, stating that since the execution of the
contract of lease in 1968 an extraordinary inflation had
Petitioner seeks a review on certiorari of the decision of supervened resulting from the deterioration of worldwide
the former Special Second Division of the Court of economic conditions, a circumstance that was not
Appeals dated November 27, 1998,i[1] affirming the foreseen and could not have been reasonably foreseen
decision of the Regional Trial Court of Manila, Branch by the parties at the time they entered into contract.
25ii[2] which dismissed petitioner's action for reformation
of contract and adjustment of rentals. To substantiate its allegation of extraordinary inflation,
petitioner presented as witness Mr. Narciso Uy, Assistant
The facts of the case are undisputed --- Director of the Supervising and Examining Sector of the
Central Bank, who attested that the inflation rate
Petitioner and respondent entered into a contract of increased abruptly during the period 1982 to 1985,
lease on July 16, 1968 over a parcel of land in Cubao, caused mainly by the devaluation of the peso.v[5]
Quezon City. The land, which had an area of 1,400 Petitioner also submitted into evidence a certification of
square meters and was covered by Transfer Certificates the official inflation rates from 1966 to 1986 prepared by
of Title No. 43329 and 81636 issued by the Register of the National Economic Development Authority ("NEDA")
Deeds of Quezon City, was to be used by respondent as based on consumer price index, which reflected that at
a gasoline service station. the time the parties entered into the subject contract, the
inflation rate was only 2.06%; then, it soared to 34.51%
The contract of lease provides that the lease shall run for in 1974, and in 1984, reached a high of 50.34%. vi[6]
a period of twenty (20) years and shall abide by the
following rental rates: In a decision rendered on July 15, 1991, the RTC
dismissed the complaint for lack of merit. This judgment
xxxxxx xxx xxx was affirmed by the Court of Appeals. Both courts found
that petitioner was unable to prove the existence of
extraordinary inflation from 1968 to 1983 (or from the
Rental. --- The LESSEE agrees to pay the following
year of the execution of the contract up to the year of the
rental for said premises:
filing of the complaint before the RTC) as to justify an
adjustment or increase in the rentals based upon the
P2.50/sq.m. per month from the 1st to 10th years and provisions of Article 1250 of the Civil Code.
P3.00/sq.m. per month from the 11th to 20th years,
payable monthly in advance within the 1st 15 days of
The Court of Appeals declared that although, admittedly,
each month; provided that the rentals for the 1st 5 years
there was an economic inflation during the period in
39

question, it was not such as to call for the application of 1983). Petitioner argues that the placing of the country
Article 1250 which is made to apply only to "violent and under martial rule in 1972, the OPEC oil price increases
sudden changes in the price level or uncommon or in 1973, and the Aquino assassination which triggered
unusual decrease of the value of the currency. (It) does the EDSA revolution, were fortuitous events that
not contemplate of a normal or ordinary decline in the drastically affected the Philippine economy and were
purchasing power of the peso."vii[7] beyond the reasonable contemplation of the parties.

The Court of Appeals also found similarly with the trial To further bolster her arguments, petitioner invokes by
court that the terms of rental in the contract of lease analogy the principle of rebus sic stantibus in public
dated July 16, 1968 are clear and unequivocal as to the international law, under which a vital change of
specific amount of the rental rates and the fact that the circumstances justifies a state's unilateral withdrawal
rentals therein provided shall be the "maximum rental" from a treaty. In the herein case, petitioner posits that in
which petitioner as lessor may collect. Absent any pegging the monthly rental rates of P2.50 and P3.00 per
showing that such contractual provisions are contrary to square meter, respectively, the parties were guided by
law, morals, good customs, public order or public policy, the economic conditions prevalent in 1968, when the
the Court of Appeals held that there was no basis for not Philippines faced robust economic prospects. Petitioner
acknowledging their binding effect upon the parties. It contends that between her and respondent, a
also upheld the application by the trial court of the ruling corporation engaged in high stakes business and
in Filipino Pipe and Foundry Corporation vs. National employing economic and business experts, it is the latter
Waterworks and Sewerage Authority, 161 SCRA 32, who had the unmistakable advantage to analyze the
where the Court held that although there has been a feasibility of entering into a 20-year lease contract at
decline in the purchasing power of the Philippine peso such meager rates.
during the period 1961 to 1971, such downward fall of
the currency could not be considered "extraordinary" and The only issue crucial to the present appeal is whether
was simply a universal trend that has not spared the there existed an extraordinary inflation during the period
Philippines. 1968 to 1983 that would call for the application of Article
1250 of the Civil Code and justify an adjustment or
Thus, the dispositive portion of the decision of the Court increase of the rentals between the parties.
of Appeals reads:
Article 1250 of the Civil Code states:
WHEREFORE, in view of the foregoing, the appeal is
hereby DISMISSED and the decision appealed from is In case an extraordinary inflation or deflation of the
hereby AFFIRMED. currency stipulated should supervene, the value of the
currency at the time of the establishment of the
SO ORDERED.viii[8] obligation shall be the basis of payment, unless there is
an agreement to the contrary.
Petitioner's motion for reconsideration of the above
decision was denied by the Court of Appeals in a Article 1250 was inserted in the Civil Code of 1950 to
resolution dated March 10, 1999. abate the uncertainty and confusion that affected
contracts entered into or payments made during World
Aggrieved, petitioner filed this petition for review on War II, and to help provide a just solution to future
certiorari where she assails as erroneous the decision of cases.x[10] The Court has, in more than one occasion,
the Court of Appeals, specifically, (1) in ruling that Article been asked to interpret the provisions of Article 1250,
1250 of the Civil Code is inapplicable to the instant case, and to expound on the scope and limits of "extraordinary
(2) in not recognizing the applicability of the principle of inflation".
rebus sic stantibus, and (3) in applying the ruling in
Filipino Pipe and Foundry Corporation vs. NAWASA. We have held extraordinary inflation to exist when there
is a decrease or increase in the purchasing power of the
Petitioner contends that the monthly rental of P3.00 per Philippine currency which is unusual or beyond the
square meter is patently inequitable. Based on the common fluctuation in the value of said currency, and
inflation rates supplied by NEDA, there was an unusual such increase or decrease could not have been
increase in inflation that could not have been foreseen reasonably foreseen or was manifestly beyond the
by the parties; otherwise, they would not have entered contemplation of the parties at the time of the
into a relatively long-term contract of lease. She argued establishment of the obligation.xi[11]
that the rentals in this case should not be regarded by
their quantitative or nominal value, but as "debts of An example of extraordinary inflation, as cited by the
value", that is, the rental rates should be adjusted to Court in Filipino Pipe and Foundry Corporation vs.
reflect the value of the peso at the time the lease was NAWASA, supra, is that which happened to the
contracted.ix[9] deutschmark in 1920. Thus:

Petitioner also insists that the factual milieu of the "More recently, in the 1920s, Germany experienced a
present case is distinct from that in Filipino Pipe and case of hyperinflation. In early 1921, the value of the
Foundry Corporation vs. NAWASA. She pointed out that German mark was 4.2 to the U.S. dollar. By May of the
the inflation experienced by the country during the period same year, it had stumbled to 62 to the U.S. dollar. And
1961 to 1971 (the pertinent time period in the Filipino as prices went up rapidly, so that by October 1923, it had
Pipe case) had a lowest of 1.35% in 1969 and a highest reached 4.2 trillion to the U.S. dollar!" (Bernardo M.
of 15.03% in 1971, whereas in the instant case, involving Villegas & Victor R. Abola, Economics, An Introduction
the period 1968 to 1983, there had been highly abnormal [Third Edition]).
inflation rates like 34.51% in 1974 (triggered by the
OPEC oil price increases in 1973) and 50.34% in 1984
(caused by the assassination of Benigno Aquino, Jr. in
40

As reported, "prices were going up every week, then "Erosion" is indeed an accurate description of the trend
every day, then every hour. Women were paid several of decline in the value of the peso in the past three to
times a day so that they could rush out and exchange four decades. Unfortunate as this trend may be, it is
their money for something of value before what little certainly distinct from the phenomenon contemplated by
purchasing power was left dissolved in their hands. Article 1250.
Some workers tried to beat the constantly rising prices
by throwing their money out of the windows to their Moreover, this Court has held that the effects of
waiting wives, who would rush to unload the nearly extraordinary inflation are not to be applied without an
worthless paper. A postage stamp cost millions of marks official declaration thereof by competent authorities.xvii
and a loaf of bread, billions." (Sidney Rutberg, "The [17]
Money Balloon", New York: Simon and Schuster, 1975,
p. 19, cited in "Economics, An Introduction" by Villegas & Lastly, the provisions on rentals in the lease contract
Abola, 3rd Ed.) dated July 16, 1968 between petitioner and respondent
are clear and categorical, and we have no reason to
The supervening of extraordinary inflation is never suppose that such lease contract does not reflect or
assumed.xii[12] The party alleging it must lay down the express their true intention and agreement. The contract
factual basis for the application of Article 1250. is the law between the parties and if there is indeed
reason to adjust the rent, the parties could have by
Thus, in the Filipino Pipe case, the Court acknowledged themselves negotiated the amendment of the contract. xviii
that the voluminous records and statistics submitted by [18]
plaintiff-appellant proved that there has been a decline in
the purchasing power of the Philippine peso, but this WHEREFORE, the petition seeking the reversal of the
downward fall cannot be considered "extraordinary" but decision of the Court of Appeals in CA-G.R. CV No.
was simply a universal trend that has not spared our 54115 is DENIED.
country.xiii[13] Similarly, in Huibonhoa vs. Court of
Appeals,xiv[14] the Court dismissed plaintiff-appellant's SO ORDERED.
unsubstantiated allegation that the Aquino assassination
in 1983 caused building and construction costs to double
during the period July 1983 to February 1984. In Serra
vs. Court of Appeals,xv[15] the Court again did not
consider the decline in the peso's purchasing power from
1983 to 1985 to be so great as to result in an
extraordinary inflation.

Like the Serra and Huibonhoa cases, the instant case


also raises as basis for the application of Article 1250 the
Philippine economic crisis in the early 1980s --- when,
based on petitioner's evidence, the inflation rate rose to
50.34% in 1984. We hold that there is no legal or factual
basis to support petitioner's allegation of the existence of
extraordinary inflation during this period, or, for that
matter, the entire time frame of 1968 to 1983, to merit
the adjustment of the rentals in the lease contract dated
July 16, 1968. Although by petitioner's evidence there
was a decided decline in the purchasing power of the
Philippine peso throughout this period, we are hard put
to treat this as an "extraordinary inflation" within the
meaning and intent of Article 1250. Rather, we adopt
with approval the following observations of the Court of
Appeals on petitioner's evidence, especially the NEDA
certification of inflation rates based on consumer price
index:

xxx (a) from the period 1966 to 1986, the official inflation
rate never exceeded 100% in any single year; (b) the
highest official inflation rate recorded was in 1984 which
reached only 50.34%; (c) over a twenty one (21) year
period, the Philippines experienced a single-digit inflation
in ten (10) years (i.e., 1966, 1967, 1968, 1969, 1975,
1976, 1977, 1978, 1983 and 1986); (d) in other years
(i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981,
1982, 1984 and 1989) when the Philippines experienced
double-digit inflation rates, the average of those rates
was only 20.88%; (e) while there was a decline in the
purchasing power of the Philippine currency from the
period 1966 to 1986, such cannot be considered as
extraordinary; rather, it is a normal erosion of the value
of the Philippine peso which is a characteristic of most
currencies.xvi[16]
41

"1. P16,484,994.42, the principal obligation


under the two promissory note Nos. 003 and
00037 plus interest and penalties;

"2. P100,000.00 for loss of goodwill and good


reputation;

"3. An amount equivalent to 10% of the


collectible amount, plus P50,000, as acceptance
fee and P500 per appearance, as and for
attorneys fees: and

"4. P100,000 as litigation expenses.

"Costs shall be taxed against defendant-appellees.

"SO ORDERED."3

The Facts

The facts, as found by the Court of Appeals, are as


follows:

"On 7 August 1990 plaintiff Advance Capital Corporation,


a licensed lending investor, extended a loan to defendant
Philippine Lawin Bus Company (hereafter referred to as
LAWIN), in the amount of P8,000,000.00 payable within
a period of one (1) year, as evidenced by a Credit
Agreement (Exhibits "B" to "B-4-B"). The defendant,
through Marciano Tan, its Executive Vice President,
executed Promissory Note No. 003, for the amount of
P8,000,000.00 (Exhs. "C" to "C-1").
Republic of the Philippines
SUPREME COURT "To guarantee payment of the loan, defendant Lawin
Manila executed in favor of plaintiff the following documents: (1)
A Deed of Chattel Mortgage wherein 9 units of buses
FIRST DIVISION were constituted as collaterals (Exhibits "F" to "F-7"): (2)
A joint and several UNDERTAKING of defendant Master
G.R. No. 130972 January 23, 2002 Tours and Travel Corporation dated 07 August 1990,
signed by Isidro Tan and Marciano Tan (Exhs. "H" to "H-
PHILIPPINE LAWIN BUS, CO., MASTER TOURS & 1): and (3) A joint and several UNDERTAKING dated 21
TRAVEL CORP., MARCIANO TAN, ISIDRO TAN, August 1990, executed and signed by Esteban, Isidro,
ESTEBAN TAN and HENRY TAN, petitioners, Marciano and Henry, all surnamed Tan (Exhs. "I" to "I-
vs. 6").
COURT OF APPEALS and ADVANCE CAPITAL
CORPORATION, respondents. "Out of the P8,000,000.00 loan, P1,800,000.00 was
paid. Thus, on 02 November 1990, defendant Bus
DECISION Company was able to avail an additional loan of
P2,000,000.00 for one (1) month under Promissory Note
PARDO, J.: 00028 (Exhs. "J"-"J-1").

The Case "Defendant LAWIN failed to pay the aforementioned


promissory note and the same was renewed on 03
The case is a petition for review via certiorari of the December 1990 to become due on or before 01
decision of the Court of Appeals,1 reversing that of the February 1991, under Promissory Note 00037 (Exh. "K").
trial court2 and sentencing petitioners as follows:
"On 15 May 1991 for failure to pay the two promissory
"WHEREFORE, the appealed decision should be, as it is notes, defendant LAWIN was granted a loan re-
hereby REVERSED and SET ASIDE. In lieu thereof, a structuring for two (2) months to mature on 31 July 1991.
new one is hereby rendered ordering the defendants-
appellees to pay, jointly and solidarily, in favor of plaintiff- "Despite the restructuring, defendant LAWIN failed to
appellant Advance Capital Corporation, the following pay. Thus, plaintiff foreclosed the mortgaged buses and
amounts: as the sole bidder thereof, the amount of P2,000,000.00
was accepted by the deputy sheriff conducting the sale
and credited to the account of defendant LAWIN.
42

"Thereafter, on 27 May 1992, identical demand letters "6. Dismissing defendants counterclaim for lack
were sent to the defendants to pay their obligation (Exhs. of sufficient merit.
"X" to "CC"). Despite repeated demands, the defendants
failed to pay their indebtedness which totaled of "No pronouncement as to costs.
P16,484,992.42 as of 31 July 1992 (Exhs. "DD"-"DD-1").
"SO ORDERED."5
"Thus, the suit for sum of money, wherein the plaintiff
prays that defendants solidarily pay plaintiff as of July In time, respondent Advance Capital Corporation
31, 1992 the sum of (a) P16,484,994.12 as principal appealed from the decision to the Court of Appeals.6
obligation under the two promissory notes Nos. 003 and
00037, plus interests and penalties: (b) P300,000.00 for On 30 September 1997, the Court of Appeals
loss of good will and good business reputation: (c) promulgated a decision reversing that of the trial court,
attorneys fees amounting to P100,000.00 as acceptance the dispositive portion of which is set out in the opening
fee and a sum equivalent to 10% of the collectible paragraph of this decision.
amount, and P500.00 as appearance fee; (d)
P200,000.00 as litigation expenses; (e) exemplary
Hence, this appeal.7
damages in an amount to be awarded at the courts
discretion; and (f) the costs.
The Issue
"On 04 September 1993, a writ of preliminary injunction
was issued with respect to movable and immovable The issue raised is whether there was dacion en pago
properties of the defendants. between the parties upon the surrender or transfer of the
mortgaged buses to the respondent.8
"In answer to the complaint, defendants-appellees assert
by way of special and affirmative defense, that there was The Courts Ruling
already an arrangement as to the full settlement of the
loan obligation by way of: We deny the petition, with modification.

"17.A. Sale of the nine (9) units passenger buses the The issue raised is factual. In an appeal via certiorari, we
proceeds of which will be credited against the loan may not review the factual findings of the Court of
amount as full payment thereof; or in the alternative. Appeals.9 When supported by substantial evidence, the
findings of fact of the Court of Appeals are conclusive
"17.B. Plaintiff will shoulder and bear the cost of and binding on the parties and are not reviewable by this
rehabilitating the buses, with the amount thereof to be Court,10 unless the case falls under any of the
included in the total obligation of defendant Lawin and recognized exceptions to the rule.11
the bus operated, with the earnings thereof to be applied
to the loan obligation of defendant Lawin." (p. 4 Answer; Petitioner failed to prove that the case falls within the
p. 166, rec.) exceptions.12 The Supreme Court is not a trier of facts.13
It is not our function to review, examine and evaluate or
"Defendants further assert that the foreclosure sale was weigh the probative value of the evidence presented. 14 A
in violation of the aforequoted arrangement and prayed question of fact would arise in such event.15
for the nullification of the same and the dismissal of the
complaint."4 Nonetheless, we agree with the Court of Appeals that
there was no dacion en pago that took place between
On 28 June 1995, the trial court rendered a decision the parties.
dismissing the complaint, as follows:
In dacion en pago, property is alienated to the creditor in
"WHEREFORE, judgment is rendered as follows: satisfaction of a debt in money.16 It is "the delivery and
transmission of ownership of a thing by the debtor to the
creditor as an accepted equivalent of the performance of
"1. Dismissing the complaint for lack of merit;
the obligation."17 It "extinguishes the obligation to the
extent of the value of the thing delivered, either as
"2. Declaring the foreclosure and auction sale agreed upon by the parties or as may be proved, unless
null and void; the parties by agreement, express or implied, or by their
silence, consider the thing as equivalent to the
"3. Declaring the obligation or indebtedness of obligation, in which case the obligation is totally
defendants EXTINGUISHED; extinguished."18

"4. Declaring the writ of attachment issued in this Article 1245 of the Civil Code provides that the law on
case null and void and, therefore, is hereby sales shall govern an agreement of dacion en pago. A
declared dissolved; and contract of sale is perfected at the moment there is a
meeting of the minds of the parties thereto upon the
"5. Ordering the Sheriff of this Branch or thing which is the object of the contract and upon the
whoever is in possession, to return all the price.19 In Filinvest Credit Corporation v. Philippine
personal properties attached in this case to the Acetylene Co., Inc., we said:
owner/s thereof within one (1) week from the
finality of this decision;
43

"x x x. In dacion en pago, as a special mode of payment, (3) Costs of suit.


the debtor offers another thing to the creditor who
accepts it as equivalent of payment of an outstanding All other monetary awards are deleted.
obligation. The undertaking really partakes in one sense
of the nature of sale, that is, the creditor is really buying SO ORDERED.
the thing or property of the debtor, payment for which is
to be charged against the debtors debt.1wphi1 As
such, the essential elements of a contract of sale,
namely, consent, object certain, and cause or
consideration must be present. In its modern concept,
what actually takes place in dacion en pago is an
objective novation of the obligation where the thing
offered as an accepted equivalent of the performance of
an obligation is considered as the object of the contract
of sale, while the debt is considered as the purchase
price. In any case, common consent is an essential
prerequisite, be it sale or novation, to have the effect of
totally extinguishing the debt or obligation." 20

In this case, there was no meeting of the minds between


the parties on whether the loan of the petitioners would
be extinguished by dacion en pago. The petitioners
anchor their claim solely on the testimony of Marciano
Tan that he proposed to extinguish petitioners obligation
by the surrender of the nine buses to the respondent
acceded to as shown by receipts its representative
made.21 However, the receipts executed by respondents
representative as proof of an agreement of the parties
that delivery of the buses to private respondent would
result in extinguishing petitioners obligation do not in
any way reflect the intention of the parties that ownership
thereof by respondent would be complete and absolute.
The receipts show that the two buses were delivered to
respondent in order that it would take custody for the
purpose of selling the same. The receipts themselves in
fact show that petitioners deemed respondent as their
agent in the sale of the two vehicles whereby the
proceeds thereof would be applied in payment of
petitioners indebtedness to respondent. Such an
agreement negates transfer of absolute ownership over
the property to respondent, as in a sale. Thus, in
Philippine National Bank v. Pineda22 we held that where
machinery and equipment were repossessed to secure
the payment of a loan obligation and not for the purpose
of transferring ownership thereof to the creditor in
satisfaction of said loan, no dacion en pago was ever
accomplished.1wphi1

The Fallo

IN VIEW WHEREOF, the Court DENIES the petition and


AFFIRMS the decision of the Court of Appeals23 with
MODIFICATION as follows:

WHEREFORE, the appealed decision is hereby


REVERSED and SET ASIDE. In lieu thereof, judgment
is hereby rendered ordering defendants-appellees to
pay, jointly and severally, plaintiff-appellant Advance
Capital Corp. the following amounts:

(1) P16,484,994.42, the principal obligation


under the two promissory notes plus 12% per
annum from the finality of this decision until fully
paid;

(2) P50,000.00 as attorneys fees;


44

of the President (OP) in O.P. Case No. 04D182


(HLURB Case No. REMA0307240186).

Facts of the Case

Some time in July 1994, respondent Teresita Tan Dee


(Dee) bought from respondent Prime East Properties
Inc.5 (PEPI) on an installment basis a residential lot
located in Binangonan, Rizal, with an area of 204 square
meters6 and covered by Transfer Certificate of Title
(TCT) No. 619608. Subsequently, PEPI assigned its
rights over a 213,093sq m property on August 1996 to
respondent Armed Forces of the PhilippinesRetirement
and Separation Benefits System, Inc. (AFPRSBS),
which included the property purchased by Dee.

Thereafter, or on September 10, 1996, PEPI obtained a


P205,000,000.00 loan from petitioner Philippine National
Bank (petitioner), secured by a mortgage over several
properties, including Dees property. The mortgage was
cleared by the Housing and Land Use Regulatory Board
(HLURB) on September 18, 1996.7cralawred

After Dees full payment of the purchase price, a deed of


sale was executed by respondents PEPI and AFP
RSBS on July 1998 in Dees favor. Consequently, Dee
sought from the petitioner the delivery of the owners
duplicate title over the property, to no avail. Thus, she
filed with the HLURB a complaint for specific
performance to compel delivery of TCT No. 619608 by
the petitioner, PEPI and AFPRSBS, among others. In
its Decision8 dated May 21, 2003, the HLURB ruled in
favor of Dee and disposed as
follows:chanRoblesvirtualLawlibrary
WHEREFORE, premises considered, judgment is
hereby rendered as follows:chanroblesvirtuallawlibrary

1. Directing [the petitioner] to cancel/release the


mortgage on Lot 12, Block 21A, Village East
Executive Homes covered by Transfer
Certificate of Title No. 619608 (TCT No.
619608), and accordingly, surrender/release
the title thereof to [Dee];

2. Immediately upon receipt by [Dee] of the


owners duplicate of Transfer Certificate of Title
No. 619608 (TCT No. 619608),
respondents PEPI and AFPRSBS are hereby
ordered to deliver the title of the subject lot in the
name of [Dee] free from all liens and
encumbrances;

3. Directing respondents PEPI and AFPRSBS to


FIRST DIVISION pay [the petitioner] the redemption value of Lot
12, Block 21A, Village East Executive Homes
G.R. No. 182128, February 19, 2014 covered by Transfer Certificate of Title No.
619608 (TCT No. 619608) as agreed upon
by them in their Real Estate Mortgage within six
PHILIPPINE NATIONAL BANK, Petitioner, v.
(6) months from the time the owners duplicate
TERESITA TAN DEE, ANTIPOLO PROPERTIES, INC.,
of Transfer Certificate of Title No. 619608
(NOW PRIME EAST PROPERTIES, INC.) AND AFP
(TCT No. 619608) is actually surrendered and
RSBS, INC., Respondents.
released by [the petitioner] to [Dee];
DECISION
4. In the alternative, in case of legal and physical
impossibility on the part of [PEPI, AFPRSBS,
REYES, J.: and the petitioner] to comply and perform their
respective obligation/s, as abovementioned,
This is a Petition for Review1 under Rule 45 of the Rules respondents PEPI and AFPRSBS are hereby
of Court, assailing the Decision2 dated August 13, 2007 ordered to jointly and severally pay to [Dee] the
and Resolution3 dated March 13, 2008 rendered by the amount of FIVE HUNDRED TWENTY
Court of Appeals (CA) in CAG.R. SP No. 86033, which THOUSAND PESOS ([P]520,000.00) plus
affirmed the Decision4 dated August 4, 2004 of the Office twelve percent (12%) interest to be computed
45

from the filing of complaint on April 24, 2002 until The petitioner also maintains that Presidential Decree
fully paid; and (P.D.) No. 95715 cannot nullify the subsisting agreement
between it and PEPI, and that the petitioners rights over
5. Ordering [PEPI, AFPRSBS, and the petitioner] the mortgaged properties are protected by Act 3135 16 . If
to pay jointly and severally [Dee] the following at all, the petitioner can be compelled to release or
sums: cancel the mortgage only after the provisions of P.D. No.
957 on redemption of the mortgage by the
a) The amount of TWENTY FIVE THOUSAND PESOS owner/developer (Section 25) are complied with. The
([P]25,000.00) as attorneys fees; petitioner also objects to the denomination by the CA of
the provisions in the Affidavit of Undertaking as
b) The cost of litigation[;] and stipulations pour autrui,17 arguing that the release of the
title was conditioned on Dees direct payment to it. 18
c) An administrative fine of TEN THOUSAND PESOS
([P]10,000.00) payable to this Office fifteen (15) days Respondent AFPRSBS, meanwhile, contends that it
upon receipt of this decision, for violation of Section cannot be compelled to pay or settle the obligation under
18 in relation to Section 38 of PD 957. the mortgage contract between PEPI and the petitioner
9
SO ORDERED. ChanRoblesVirtualawlibrary as it is merely an investor in the subdivision project and
The HLURB decision was affirmed by its Board of is not privy to the mortgage.19
Commissioners per Decision dated March 15, 2004, with
modification as to the rate of interest.10 Respondent PEPI, on the other hand, claims that the title
over the subject property is one of the properties due for
On appeal, the Board of Commissioners decision was release by the petitioner as it has already been the
affirmed by the OP in its Decision dated August 4, 2004, subject of a Memorandum of Agreement and dacion en
11
with modification as to the monetary award. cralawred pago entered into between them.20 The agreement was
reached after PEPI filed a petition for rehabilitation, and
Hence, the petitioner filed a petition for review with the contained the stipulation that the petitioner agreed to
CA, which, in turn, issued the assailed Decision dated release the mortgage lien on fully paid mortgaged
August 13, 2007, affirming the OP decision. The properties upon the issuance of the certificates of title
dispositive portion of the decision over the dacioned properties.21
reads:chanRoblesvirtualLawlibrary
WHEREFORE, in view of the foregoing, the petition is For her part, respondent Dee adopts the arguments of
DENIED. The Decision dated August 4, 2004 rendered the CA in support of her prayer for the denial of the
by the Office of the President in O. P. Case No. 04D petition for review.22
182 (HLURB Case No. REMA0307240186) is hereby
AFFIRMED.chanroblesvirtualawlibrary Ruling of the Court

SO ORDERED. 12ChanRoblesVirtualawlibrary The petition must be DENIED.


Its motion for reconsideration having been denied by the
CA in the Resolution dated March 13, 2008, the The petitioner is correct in arguing that it is not obliged to
petitioner filed the present petition for review on the perform any of the undertaking of respondent PEPI and
following grounds:chanRoblesvirtualLawlibrary AFPRSBS in its transactions with Dee because it is not
a privy thereto. The basic principle of relativity of
contracts is that contracts can only bind the parties who
I. THE HONORABLE COURT OF APPEALS
entered into it,23 and cannot favor or prejudice a third
ERRED IN ORDERING OUTRIGHT RELEASE
person, even if he is aware of such contract and has
OF TCT NO. 619608 DESPITE PNBS DULY
acted with knowledge thereof.24 Where there is no
REGISTERED AND HLURB[] APPROVED
privity of contract, there is likewise no obligation or
MORTGAGE ON TCT NO. 619608.
liability to speak about.25cralawred
II. THE HONORABLE COURT OF APPEALS The petitioner, however, is not being tasked to undertake
ERRED IN ORDERING CANCELLATION OF the obligations of PEPI and AFPRSBS. In this case,
MORTGAGE/RELEASE OF TITLE IN FAVOR there are two phases involved in the transactions
OF RESPONDENT DEE DESPITE THE LACK between respondents PEPI and Dee the first phase is
OF PAYMENT OR SETTLEMENT BY THE the contract to sell, which eventually became the second
MORTGAGOR (API/PEPI and AFPRSBS) OF phase, the absolute sale, after Dees full payment of the
ITS EXISTING LOAN OBLIGATION TO PNB, purchase price. In a contract of sale, the parties
OR THE PRIOR EXERCISE OF RIGHT OF obligations are plain and simple. The law obliges the
REDEMPTION BY THE MORTGAGOR AS vendor to transfer the ownership of and to deliver the
MANDATED BY SECTION 25 OF PD 957 OR thing that is the object of sale.26 On the other hand, the
DIRECT PAYMENT MADE BY RESPONDENT principal obligation of a vendee is to pay the full
DEE TO PNB PURSUANT TO THE DEED OF purchase price at the agreed time.27 Based on the final
UNDERTAKING WHICH WOULD WARRANT contract of sale between them, the obligation of PEPI, as
RELEASE OF THE SAME.13 owners and vendors of Lot 12, Block 21A, Village East
Executive Homes, is to transfer the ownership of and to
The petitioner claims that it has a valid mortgage over deliver Lot 12, Block 21A to Dee, who, in turn, shall pay,
Dees property, which was part of the property and has in fact paid, the full purchase price of the
mortgaged by PEPI to it to secure its loan obligation, and property. There is nothing in the decision of the HLURB,
that Dee and PEPI are bound by such mortgage. The as affirmed by the OP and the CA, which shows that the
petitioner also argues that it is not privy to the petitioner is being ordered to assume the obligation of
transactions between the subdivision project buyers and any of the respondents. There is also nothing in the
PEPI, and has no obligation to perform any of their HLURB decision, which validates the petitioners claim
respective undertakings under their contract.14 that the mortgage has been nullified. The order of
46

cancellation/release of the mortgage is simply a xxx


consequence of Dees full payment of the purchase
price, as mandated by Section 25 of P.D. No. 957, to x x x Under these circumstances, the BANK knew or
wit:chanRoblesvirtualLawlibrary should have known of the possibility and risk that the
Sec. 25. Issuance of Title. The owner or developer shall assigned properties were already covered by existing
deliver the title of the lot or unit to the buyer upon full contracts to sell in favor of subdivision lot buyers. As
payment of the lot or unit. No fee, except those required observed by the Court in another case involving a bank
for the registration of the deed of sale in the Registry of regarding a subdivision lot that was already subject of a
Deeds, shall be collected for the issuance of such title. In contract to sell with a third
the event a mortgage over the lot or unit is outstanding party:chanRoblesvirtualLawlibrary
at the time of the issuance of the title to the buyer, the [The Bank] should have considered that it was dealing
owner or developer shall redeem the mortgage or the with a property subject of a real estate development
corresponding portion thereof within six months from project. A reasonable person, particularly a financial
such issuance in order that the title over any fully paid lot institution x x x, should have been aware that, to finance
or unit may be secured and delivered to the buyer in the project, funds other than those obtained from the
accordance herewith. loan could have been used to serve the purpose, albeit
It must be stressed that the mortgage contract between partially. Hence, there was a need to verify whether any
PEPI and the petitioner is merely an accessory contract part of the property was already intended to be the
to the principal threeyear loan takeout from the subject of any other contract involving buyers or potential
petitioner by PEPI for its expansion project. It need not buyers. In granting the loan, [the Bank] should not have
be belaboured that [a] mortgage is an accessory been content merely with a clean title, considering the
undertaking to secure the fulfillment of a principal presence of circumstances indicating the need for a
obligation,28 and it does not affect the ownership of the thorough investigation of the existence of buyers x x x.
property as it is nothing more than a lien thereon serving Wanting in care and prudence, the [Bank] cannot be
as security for a debt.29 deemed to be an innocent mortgagee. x x x 36 (Citation
omitted)chanroblesvirtualawlibrary
Note that at the time PEPI mortgaged the property to the More so in this case where the contract to sell has
petitioner, the prevailing contract between respondents already ripened into a contract of absolute sale.
PEPI and Dee was still the Contract to Sell, as Dee was
yet to fully pay the purchase price of the property. On Moreover, PEPI brought to the attention of the Court the
this point, PEPI was acting fully well within its right when subsequent execution of a Memorandum of Agreement
it mortgaged the property to the petitioner, for in a dated November 22, 2006 by PEPI and the petitioner.
contract to sell, ownership is retained by the seller and is Said agreement was executed pursuant to an Order
not to pass until full payment of the purchase price. 30 In dated February 23, 2004 by the Regional Trial Court
other words, at the time of the mortgage, PEPI was still (RTC) of Makati City, Branch 142, in SP No. 021219, a
the owner of the property. Thus, in China Banking petition for Rehabilitation under the Interim Rules of
Corporation v. Spouses Lozada,31 the Court affirmed the Procedure on Corporate Rehabilitation filed by PEPI.
right of the owner/developer to mortgage the property The RTC order approved PEPIs modified Rehabilitation
subject of development, to wit: [P.D.] No. 957 cannot Plan, which included the settlement of the latters unpaid
totally prevent the owner or developer from mortgaging obligations to its creditors by way of dacion of real
the subdivision lot or condominium unit when the title properties. In said order, the RTC also incorporated
thereto still resides in the owner or developer awaiting certain measures that were not included in PEPIs plan,
the full payment of the purchase price by the installment one of which is that [t]itles to the lots which have been
buyer.32 Moreover, the mortgage bore the clearance of fully paid shall be released to the purchasers within 90
the HLURB, in compliance with Section 18 of P.D. No. days after the dacion to the secured creditors has been
957, which provides that [n]o mortgage on any unit or lot completed.37 Consequently, the agreement stipulated
shall be made by the owner or developer without prior that as partial settlement of PEPIs obligation with the
written approval of the [HLURB]. petitioner, the former absolutely and irrevocably conveys
by way of dacion en pago the properties listed
Nevertheless, despite the apparent validity of the therein,38 which included the lot purchased by Dee. The
mortgage between the petitioner and PEPI, the former is petitioner also committed to
still bound to respect the transactions between [R]elease its mortgage lien on fully paid Mortgaged
respondents PEPI and Dee. The petitioner was well Properties upon issuance of the certificates of title over
aware that the properties mortgaged by PEPI were also the Dacioned Properties in the name of the [petitioner].
the subject of existing contracts to sell with other buyers. The request for release of a Mortgaged Property shall be
While it may be that the petitioner is protected by Act No. accompanied with: (i) proof of full payment by the buyer,
3135, as amended, it cannot claim any superior right as together with a certificate of full payment issued by the
against the installment buyers. This is because the Borrower x x x. The [petitioner] hereby undertakes to
contract between the respondents is protected by P.D. cause the transfer of the certificates of title over the
No. 957, a social justice measure enacted primarily to Dacioned Properties and the release of the Mortgaged
protect innocent lot buyers.33 Thus, in Luzon Properties with reasonable
Development Bank v. Enriquez,34 the Court reiterated the dispatch.39ChanRoblesVirtualawlibrary
rule that a bank dealing with a property that is already Dacion en pago or dation in payment is the delivery and
subject of a contract to sell and is protected by the transmission of ownership of a thing by the debtor to the
provisions of P.D. No. 957, is bound by the contract to creditor as an accepted equivalent of the performance of
sell.35 the obligation.40 It is a mode of extinguishing an existing
However, the transferee BANK is bound by the Contract obligation41 and partakes the nature of sale as the
to Sell and has to respect Enriquezs rights thereunder. creditor is really buying the thing or property of the
This is because the Contract to Sell, involving a debtor, the payment for which is to be charged against
subdivision lot, is covered and protected by PD 957. the debtors debt.42 Dation in payment extinguishes the
x x x. obligation to the extent of the value of the thing
delivered, either as agreed upon by the parties or as
47

may be proved, unless the parties by agreement obvious that the lawas an instrument of social justice
express or implied, or by their silence consider the must favor the weak.46 (Emphasis
thing as equivalent to the obligation, in which case the omitted)chanroblesvirtualawlibrary
obligation is totally extinguished.43 Finally, the Court will not dwell on the arguments of
AFPRSBS given the finding of the OP that [b]y its non
There is nothing on record showing that the payment of the appeal fee, AFPRSBS is deemed to
Memorandum of Agreement has been nullified or is the have abandoned its appeal and accepts the decision of
subject of pending litigation; hence, it carries with it the the HLURB.47 As such, the HLURB decision had long
presumption of validity.44 Consequently, the execution of been final and executory as regards AFPRSBS and can
the dation in payment effectively extinguished no longer be altered or modified.48
respondent PEPIs loan obligation to the petitioner
insofar as it covers the value of the property purchased WHEREFORE, the petition for review is DENIED for lack
by Dee. This negates the petitioners claim that PEPI of merit. Consequently, the Decision dated August 13,
must first redeem the property before it can cancel or 2007 and Resolution dated March 13, 2008 of the Court
release the mortgage. As it now stands, the petitioner of Appeals in CAG.R. SP No. 86033 are AFFIRMED.
already stepped into the shoes of PEPI and there is no
more reason for the petitioner to refuse the cancellation Petitioner Philippine National Bank and respondents
or release of the mortgage, for, as stated by the Court in Prime East Properties Inc. and Armed Forces of the
Luzon Development Bank, in accepting the assigned PhilippinesRetirement and Separation Benefits System,
properties as payment of the obligation, [the bank] has Inc. are hereby ENJOINED to strictly comply with the
assumed the risk that some of the assigned properties Housing and Land Use Regulatory Board Decision dated
are covered by contracts to sell which must be honored May 21, 2003, as modified by its Board of
under PD 957.45 Whatever claims the petitioner has Commissioners Decision dated March 15, 2004 and
against PEPI and AFPRSBS, monetary or otherwise, Office of the President Decision dated August 4, 2004.
should not prejudice the rights and interests of Dee over
the property, which she has already fully paid for. SO ORDERED.
As between these small lot buyers and the gigantic
financial institutions which the developers deal with, it is
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