You are on page 1of 211

[JANUARY 2016 CASES] 1

January 11, 2016

FIRST DIVISION

G.R. No. 160408

SPOUSES ROBERTO and ADELAIDA PEN, Petitioners,


vs.
SPOUSES SANTOS and LINDA JULIAN, Respondents.

DECISION

BERSAMIN, J.:

The petitioners who were the buyers of the mortgaged property of the
respondents seek the reversal of the decision promulgated on October 20,
2003,1 whereby the Court of Appeals (CA) affirmed with modification the
adverse judgment rendered on August 30, 1999 by the Regional Trial Court
(RTC), Branch 77, in Quezon City. 2 In their respective rulings, the CA and the
RTC both declared the deed of sale respecting the respondents' property as
void and inexistent, albeit premised upon different reasons.

Antecedents

The CA summarized the antecedent facts and procedural matters in its


assailed decision as follows:

On April 9, 1986, the appellees (the Julians) obtained a P60,000.00 loan from
appellant Adelaida Pen. On May 23, 1986 and on the (sic) May 27, 1986, they
were again extended loans in the amounts of P50,000.00 and P10,000.00,
respectively by appellant Adelaida. The initial interests were deducted by
appellant Adelaida, (1) P3,600.00 from the P60,000.00 loan; (2) P2,400.00
from the P50,000.00 loan; and (3) P600.00 from the P10,000.00 loan. Two (2)
promissory notes were executed by the appellees in favor of appellant
Adelaida to evidence the foregoing loans, one dated April 9, 1986 and
payable on June 15, 1986 for the P60,000.00 loan and another dated May 22,
1986 payable on July 22, 1986 for the P50,000.00 loan. Both Joans were
charged interest at 6% per month. As security, on May 23, 1986, the
appellees executed a Real Estate Mortgage over their property covered by
TCT No. 327733 registered under the name of appellee Santos Julian, Jr. The
owner's duplicate of TCT No. 327733 was delivered to the appellants.

Appellant's version of the subsequent events run as follows: When the loans
became due and demandable, appellees failed to pay despite several
demands. As such, appellant Adelaida decided to institute foreclosure
proceedings. However, she was prevailed upon by appellee Linda not to
foreclose the property because of the cost of litigation and since it would

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 2

cause her embarrassment as the proceedings will be announced in public


places at the City Hall, where she has many friends. Instead, appellee Linda
offered their mortgaged property as payment in kind. After the ocular
inspection, the parties agreed to have the property valued at P70,000.00.
Thereafter, on October 22, 1986 appellee executed a two (2) page Deed of
Sale duly signed by her on the left margin and over her printed name. After
the execution of the Deed of Sale, appellant Pen paid the capital gains tax
and the required real property tax. Title to the property was transferred to the
appellants by the issuance of TCT No. 364880 on July 17, 1987. A
reconstituted title was also issued to the appellants on July 09, 1994 when
the Quezon City Register of Deeds was burned (sic).

On July 1989, appellants allege that appellee Linda offered to repurchase the
property to which the former agreed at the repurchase price of P436,l 15.00
payable in cash on July 31, 1989. The appellees failed to repurchase on the
agreed date. On February 1990, appellees again offered to repurchase the
property for the same amount, but they still failed to repurchase. On June 28,
1990, another offer was made to repurchase the property for the same
amount. Appellee Linda offered to pay P100,000.00 in cash as sign of good
faith. The offer was rejected by appellant Adelaida. The latter held the money
only for safekeeping upon the pleading of appellee Linda. Upon the
agreement of the parties, the amount of P100,000.00 was deducted from the
balance of the appellees' indebtedness, so that as of October 15, 1997, their
unpaid balance amounted to P319,065.00. Appellants allege that instead of
paying lthe] said balance, the appellees instituted on September 8, 1994 the
civil complaint and filed an adverse claim and lis pendens which were
annotated at the back of the title to the property.

On the other hand, the appellees aver the following: At the time the
mortgage was executed, they were likewise required by the appellant
Adelaida to sign a one (1) page document purportedly an "Absolute Deed of
Sale". Said document did not contain any consideration, and was "undated,
unfilled and unnotarized". They allege that their total payments amounted to
P115,400.00 and that their last payment was on June 28, 1990 in the amount
of P100,000.00.

In December 1992, appellee Linda Julian offered to pay appellant Adelaida


the amount of P150,000.00. The latter refused to accept the offer and
demanded that she be paid the amount of P250,000.00. Unable to meet the
demand, appellee Linda desisted from the offer and requested that she be
shown the land title which she conveyed to the appellee Adelaida, but the
latter refused. Upon verification with the Registry of Deeds of Quezon City,
she was informed that the title to the mortgaged property had already been
registered in the name of appellee Adelaida under TCT No. 364880, and that
the transfer was entered on July 17, 1987. A reconstituted title, TCT No. RT-
45272 (364880), also appeared on file in the Registry of Deeds replacing TCT
No. 364880.

By reason of the foregoing discoveries, appellee filed an Affidavit of Adverse


Claim on January 1993.1avvphi1 Counsel for the appellees, on August 12,

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 3

1994, formally demanded the reconveyance of the title and/or the property to
them, but the appellants refused. In the process of obtaining other
documents; the appellees also discovered that the appellants have obtained
several Declarations of Real Property, and a Deed of Sale consisting of two (2)
pages which was notarized by one Atty. Cesar Ching. Said document indicates
a consideration of P70,000.00 for the lot, and was made to appear as having
been executed on October 22, 1986. On September 8, 1994, appellees filed a
suit for the Cancellation of Sale, Cancellation of Title issued to the appellants;
Recovery of Possession; Damages with Prayer for Preliminary Injunction. The
complaint alleged that appellant Adelaida, through obvious bad faith,
maliciously typed, unilaterally filled up, and caused to be notarized the Deed
of Sale earlier signed by appellee Julian, and used this spurious deed of sale
as the vehicle for her fraudulent transfer unto herself the parcel of land
covered by TCT No. 327733.3

Judgment of the RTC

In its judgment rendered on August 30, 1999, 4 the RTC ruled in favor of the
respondents. According greater credence to the version of the respondents
on the true nature of their transaction, the trial court concluded that they had
not agreed on the consideration for the sale at the time they signed the deed
of sale; that in the absence of the consideration, the sale lacked one of the
essential requisites of a valid contract; that the defense of prescription was
rejected because the action to impugn the void contract was imprescriptible;
and that the promissory notes and the real estate mortgage in favor of the
petitioners were nonetheless valid, rendering the respondents liable to still
pay their outstanding obligation with interest.

The RTC disposed thusly:

WHEREFORE, judgment is hereby rendered:

1. Declaring the Deed of Sale, dated October 22, 1986, void or


inexistent;

2. Cancelling TCT No. RT-45272 (364480) and declaring it to be of no


further legal force and effect;

3. Ordering the defendants to reconvey the subject property to the


plaintiffs and to deliver to them the possession thereof; and

4. Ordering the plaintiffs to pay to the defendants the unpaid balance


of their indebtedness plus accrued interest totaling P,319,065.00 as of
October 15, 1997, plus interests at the legal rate counted from the
date of filing of the complaint and until the full payment thereof,
without prejudice to the right of the defendants to foreclose the
mortgage in the event that plaintiffs will fail to pay their obligation.

No pronouncement as to cost.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 4

SO ORDERED.5

Decision of the CA

On appeal by the petitioners, the CA affirmed the RTC with modification under
its assailed decision of October 20, 2003,6 decreeing:

WHEREFORE, premises considered, the Decision of the Regional Trial Court of


Quezon City is AFFIRMED WITH modification. Judgement is hereby rendered:

1. Declaring the Deed of Sale, dated October 22, 1986, void or


inexistent;

2. Cancelling TCT No. RT-45272 (364880) and declaring it to be of no


further legal force and effect;

3. Ordering the appellants-defendants to reconvey the subject property


to the plaintiffs-appellees and to deliver to them the possession
thereof; and

4. Ordering the plaintiffs-appellces to pay to the defendants the unpaid


balance of their indebtedness, P43,492.15 as of June 28, 1990, plus
interests at the legal rate of 12% per annum from said date and until
the full payment thereof, without prejudice to the right of the
defendants to foreclose the mortgage in the event that plaintiffs-
appellees will fail to pay their obligation.

SO ORDERED.7

The CA pronounced the deed of sale as void but not because of the supposed
lack of consideration as the R TC had indicated, but because of the deed of
sale having been executed at the same time as the real estate mortgage,
which rendered the sale as a prohibited pactum commissorium in light of the
fact that the deed of sale was blank as to the consideration and the date,
which details would be filled out upon the default by the respondents; that
the promissory notes contained no stipulation on the payment of interest on
the obligation, for which reason no monetary interest could be imposed for
the use of money; and that compensatory interest should instead be imposed
as a form of damages arising from Linda's failure to pay the outstanding
obligation.

Issues

In this appeal, the petitioners posit the following issues, namely: (1) whether
or not the CA erred in ruling against the validity of the deed of sale; and (2)
whether or not the CA erred in ruling that no monetary interest was due for
Linda's use of Adelaida's money.

Ruling of the Court

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 5

The appeal is partly meritorious.

That the petitioners are raising factual issues about the true nature of their
transaction with the respondent is already of itself, sufficient reason to
forthwith deny due course to the petition for review on certiorari. They cannot
ignore that any appeal to the Court is limited to questions of law because the
Court is not a trier of facts. As such, the factual findings of the CA should be
respected and accorded great weight, and even finality when supported by
the substantial evidence on record. 8 Moreover, in view of the unanimity
between the RTC and the CA on the deed of sale being void, varying only in
their justifications, the Court affirms the CA, and adopts its conclusions on the
invalidity of the deed of sale.

Nonetheless, We will take the occasion to explain why we concur with the
CA's justification in discrediting the deed of sale between the parties
as pactum commissorium.

Article 2088 of the Civil Code prohibits the creditor from appropriating the
things given by way of pledge or mortgage, or from disposing of them; any
stipulation to the contrary is null and void. The elements for pactum
commissorium to exist are as follows, to wit: (a) that there should be a pledge
or mortgage wherein property is pledged or mortgaged by way of security for
the payment of the principal obligation; and (b) that there should be a
stipulation for an automatic appropriation by the creditor of the thing pledged
or mortgaged in the event of non-payment of the principal obligation within
the stipulated period.9 The first element was present considering that the
property of the respondents was mortgaged by Linda in favor of Adelaida as
security for the farmer's indebtedness. As to the second, the authorization for
Adelaida to appropriate the property subject of the mortgage upon Linda's
default was implied from Linda's having signed the blank deed of sale
simultaneously with her signing of the real estate mortgage. The haste with
which the transfer of property was made upon the default by Linda on her
obligation, and the eventual transfer of the property in a manner not in the
form of a valid dacion en pago ultimately confirmed the nature of the
transaction as a pactum commissorium.

It is notable that in reaching its conclusion that Linda's deed of sale had been
executed simultaneously with the real estate mortgage, the CA first
compared the unfilled deed of sale presented by Linda with the notarized
deed of sale adduced by Adelaida. The CA justly deduced that the completion
and execution of the deed of sale had been conditioned on the non-payment
of the debt by Linda, and reasonably pronounced that such circumstances
rendered the transaction pactum commissorium. The Court should not disturb
or undo the CA's conclusion in the absence of the clear showing of abuse,
arbitrariness or capriciousness on the part of the CA. 10

The petitioners have theorized that their transaction with the respondents
was a valid dacion en pago by highlighting that it was Linda who had offered
to sell her property upon her default. Their theory cannot stand
scrutiny. Dacion en pago is in the nature of a sale because property is

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 6

alienated in favor of the creditor in satisfaction of a debt in money. 11 For a


valid dacion en pago to transpire, however, the attendance of the following
elements must be established, namely: (a) the existence of a money
obligation; (b) the alienation to the creditor of a property by the debtor with
the consent of the former; and (c) the satisfaction of the money obligation of
the debtor.12 To have a valid dacion en pago, therefore, the alienation of the
property must fully extinguish the debt. Yet, the debt of the
respondents subsisted despite the transfer of the property in favor of
Adelaida.

The petitioners insist that the parties agreed that the deed of sale would not
yet contain the date and the consideration because they had still to agree on
the price.13 Their insistence is not supported by the established
circumstances. It appears that two days after the loan fell due on October 15,
1986,14 Linda offered to sell the mortgaged property; 15 hence, the parties
made the ocular inspection of the premises on October 18, 1986. By that
time, Adelaida had already become aware that the appraiser had valued the
property at P70,000.00. If that was so, there was no plausible reason for still
leaving the consideration on the deed of sale blank if the deed was drafted by
Adelaida on October 20, 1986, especially considering that they could have
conveniently communicated with each other in the meanwhile on this
significant aspect of their transaction. It was also improbable for Adelaida to
still hand the unfilled deed of sale to Linda as her copy if, after all, the deed
of sale would be eventually notarized on October 22, 1986.

According to Article 1318 of the Civil Code, the requisites for any contract to
be valid are, namely: (a) the consent of the contracting parties; (b) the
object; and (c) the consideration. There is a perfection of a contract when
there is a meeting of the minds of the parties on each of these
requisites.16 The following passage has fittingly discussed the process of
perfection in Moreno, Jr. v. Private Management Office: 17

To reach that moment of perfection, the parties must agree on the same
thing in the same sense, so that their minds meet as to all the terms. They
must have a distinct intention common to both and without doubt or
difference; until all understand alike, there can be no assent, and therefore no
contract. The minds of parties must meet at every point; nothing can be left
open for further arrangement. So long as there is any uncertainty or
indefiniteness, or future negotiations or considerations to be had between the
parties, there is not a completed contract, and in fact, there is no contract at
all.18

In a sale, the contract is perfected at the moment when the seller obligates
herself to deliver and to transfer ownership of a thing or right to the buyer for
a price certain, as to which the latter agrees. 19 The absence of the
consideration from Linda's copy of the deed of sale was credible proof of the
lack of an essential requisite for the sale. In other words, the meeting of the
minds of the parties so vital in the perfection of the contract of sale did not
transpire. And, even assuming that Linda's leaving the consideration blank
implied the authority of Adelaida to fill in that essential detail in the deed of

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 7

sale upon Linda's default on the loan, the conclusion of the CA that the deed
of sale was a pactum commisorium still holds, for, as earlier mentioned, all
the elements of pactum commisorium were present.

Anent interest, the CA deleted the imposition of monetary interest but


decreed compensatory interest of 12% per annum.

Interest that is the compensation fixed by the parties for the use or
forbearance of money is referred to as monetary interest.1wphi1 On the
other hand, interest that may be imposed by law or by the courts as penalty
or indemnity for damages is called compensatory interest. In other words, the
right to recover interest arises only either by vi11ue of a contract or as
damages for delay or failure to pay the principal loan on which the interest is
demanded.20

The CA correctly deleted the monetary interest from the judgment. Pursuant
to Article 1956 of the Civil Code, no interest shall be due unless it has been
expressly stipulated in writing. In order for monetary interest to be imposed,
therefore, two requirements must be present, specifically: (a) that there has
been an express stipulation for the payment of interest; and (b) that the
agreement for the payment of interest has been reduced in
writing.21Considering that the promissory notes contained no stipulation on
the payment of monetary interest, monetary interest cannot be validly
imposed.

The CA properly imposed compensatory interest to offset the delay in the


respondents' performance of their obligation. Nonetheless, the imposition of
the legal rate of interest should be modified to conform to the prevailing
jurisprudence. The rate of 12% per annum imposed by the CA was the rate
set in accordance with Eastern Shipping Lines, Inc., v. Court of Appeals. 22 In
the meanwhile, Bangko Sentral ng Pilipinas Monetary Board Resolution No.
796 dated May 16, 2013, amending Section 2 of Circular No. 905, Series of
1982, and Circular No. 799, Series of 2013, has lowered to 6% per annum the
legal rate of interest for a loan or forbearance of money, goods or credit
starting July 1, 2013. This revision is expressly recognized in Nacar v. Gallery
Frames.23 It should be noted, however, that imposition of the legal rate of
interest at 6% per annum is prospective in application.

Accordingly, the legal rate of interest on the outstanding obligation of


P43,492.15 as of June 28, 1990, as the CA found, should be as
follows: (a) from the time of demand on October 13, 1994 until June 30, 2013,
the legal rate of interest was 12% per annum conformably with Eastern
Shipping lines; and (b) following Nacar, from July 1, 2013 until full payment,
the legal interest is 6% per annum.

WHEREFORE, the Court AFFIRMS the decision promulgated on October 20,


2003 subject to the MODIFICATION that the amount of P43,492.l5 due from
the respondents shall earn legal interest of 12% per annum reckoned from
October 13, 1994 until June 30, 2013, and 6% per annum from July 1, 2013
until full payment.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 8

Without pronouncement on costs of suit. SO ORDERED.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 9

2.

SECOND DIVISION

January 11, 2016

G.R. No. 194964-65

UNIVERSITY OF MINDANAO, INC., Petitioner,


vs.
BANGKO SENTRAL NG PILIPINAS, ET AL., Respondents.

DECISION

LEONEN, J.:

Acts of an officer that are not authorized by the board of directors/trustees do


not bind the corporation unless the corporation ratifies the acts or holds the
officer out as a person with authority to transact on its behalf.

This is a Petition for Review on Certiorari 1 of the Court of Appeals' December


17, 2009 Decision2 and December 20, 2010 Resolution.3 The Court of Appeals
reversed the Cagayan De Oro City trial courts and the Iligan City trial courts
Decisions to nullify mortgage contracts involving University of Mindanaos
properties.4

University of Mindanao is an educational institution. For the year 1982, its


Board of Trustees was chaired by Guillermo B. Torres. His wife, Dolores P.
Torres, sat as University of Mindanaos Assistant Treasurer. 5

Before 1982, Guillermo B. Torres and Dolores P. Torres incorporated and


operated two (2) thrift banks: (1) First Iligan Savings & Loan Association, Inc.
(FISLAI); and (2) Davao Savings and Loan Association, Inc. (DSLAI). Guillermo
B. Torres chaired both thrift banks. He acted as FISLAIs President, while his
wife, Dolores P. Torres, acted as DSLAIs President and FISLAIs Treasurer. 6

Upon Guillermo B. Torres request, Bangko Sentral ng Pilipinas issued a P1.9


million standby emergency credit to FISLAI. The release of standby
emergency credit was evidenced by three (3) promissory notes dated
February 8, 1982, April 7, 1982, and May 4, 1982 in the amounts of
P500,000.00, P600,000.00, and P800,000.00, respectively. All these
promissory notes were signed by Guillermo B. Torres, and were co-signed by
either his wife, Dolores P. Torres, or FISLAIs Special Assistant to the President,
Edmundo G. Ramos, Jr.7

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 10

On May 25, 1982, University of Mindanaos Vice President for Finance,


Saturnino Petalcorin, executed a deed of real estate mortgage over University
of Mindanaos property in Cagayan de Oro City (covered by Transfer
Certificate of Title No. T-14345) in favor of Bangko Sentral ng Pilipinas. 8 "The
mortgage served as security for FISLAIs P1.9 Million loan[.]" 9 It was allegedly
executed on University of Mindanaos behalf.10

As proof of his authority to execute a real estate mortgage for University of


Mindanao, Saturnino Petalcorin showed a Secretarys Certificate signed on
April 13, 1982 by University of Mindanaos Corporate Secretary, Aurora de
Leon.11 The Secretarys Certificate stated:

That at the regular meeting of the Board of Trustees of the aforesaid


corporation [University of Mindanao] duly convened on March 30, 1982, at
which a quorum was present, the following resolution was unanimously
adopted:

"Resolved that the University of Mindanao, Inc. be and is hereby authorized,


to mortgage real estate properties with the Central Bank of the Philippines to
serve as security for the credit facility of First Iligan Savings and Loan
Association, hereby authorizing the President and/or Vice-president for
Finance, Saturnino R. Petalcorin of the University of Mindanao, Inc. to sign,
execute and deliver the covering mortgage document or any other
documents which may be proper[l]y required." 12

The Secretarys Certificate was supported by an excerpt from the minutes of


the January 19, 1982 alleged meeting of University of Mindanaos Board of
Trustees. The excerpt was certified by Aurora de Leon on March 13, 1982 to
be a true copy of University of Mindanaos records on file. 13 The excerpt
reads:

3 Other Matters:

(a) Cagayan de Oro and Iligan properties: Resolution No. 82-1-8

Authorizing the Chairman to appoint Saturnino R. Petalcorin, Vice-President


for Finance, to represent the University of Mindanao to transact, transfer,
convey, lease, mortgage, or otherwise hypothecate any or all of the following
properties situated at Cagayan de Oro and Iligan City and authorizing further
Mr. Petalcorin to sign any or all documents relative thereto:

1. A parcel of land situated at Cagayan de Oro City, covered and technically


described in TRANSFER CERTIFICATE OF TITLE No. T-14345 of the Registry of
Deeds of Cagayan de Oro City;

2. A parcel of land situated at Iligan City, covered and technically described in


TRANSFER CERTIFICATE OF TITLE NO. T-15696 (a.t.) of the Registry of Deeds
of Iligan City; and

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 11

3. A parcel of land situated at Iligan City, covered and technically described in


TRANSFER CERTIFICATE OF TITLE NO. T-15697 (a.f.) of the Registry of Deeds
of Iligan City.14

The mortgage deed executed by Saturnino Petalcorin in favor of Bangko


Sentral ng Pilipinas was annotated on the certificate of title of the Cagayan
de Oro City property (Transfer Certificate of Title No. 14345) on June 25, 1982.
Aurora de Leons certification was also annotated on the Cagayan de Oro City
propertys certificate of title (Transfer Certificate of Title No. 14345). 15

On October 21, 1982, Bangko Sentral ng Pilipinas granted FISLAI an additional


loan of P620,700.00. Guillermo B. Torres and Edmundo Ramos executed a
promissory note on October 21, 1982 to cover that amount. 16

On November 5, 1982, Saturnino Petalcorin executed another deed of real


estate mortgage, allegedly on behalf of University of Mindanao, over its two
properties in Iligan City.1wphi1 This mortgage served as additional security
for FISLAIs loans. The two Iligan City properties were covered by Transfer
Certificates of Title Nos. T-15696 and T-15697.17

On January 17, 1983, Bangko Sentral ng Pilipinas mortgage lien over the
Iligan City properties and Aurora de Leons certification were annotated on
Transfer Certificates of Title Nos. T-15696 and T-15697. 18 On January 18, 1983,
Bangko Sentral ng Pilipinas mortgage lien over the Iligan City properties was
also annotated on the tax declarations covering the Iligan City properties. 19

Bangko Sentral ng Pilipinas also granted emergency advances to DSLAI on


May 27, 1983 and on August 20, 1984 in the amounts of P1,633,900.00 and
P6,489,000.00, respectively.20

On January 11, 1985, FISLAI, DSLAI, and Land Bank of the Philippines entered
into a Memorandum of Agreement intended to rehabilitate the thrift banks,
which had been suffering from their depositors heavy withdrawals. Among
the terms of the agreement was the merger of FISLAI and DSLAI, with DSLAI
as the surviving corporation. DSLAI later became known as Mindanao Savings
and Loan Association, Inc. (MSLAI). 21

Guillermo B. Torres died on March 2, 1989.22

MSLAI failed to recover from its losses and was liquidated on May 24, 1991. 23

On June 18, 1999, Bangko Sentral ng Pilipinas sent a letter to University of


Mindanao, informing it that the bank would foreclose its properties if MSLAIs
total outstanding obligation of P12,534,907.73 remained unpaid. 24

In its reply to Bangko Sentral ng Pilipinas June 18, 1999 letter, University of
Mindanao, through its Vice President for Accounting, Gloria E. Detoya, denied
that University of Mindanaos properties were mortgaged. It also denied
having received any loan proceeds from Bangko Sentral ng Pilipinas. 25

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 12

On July 16, 1999, University of Mindanao filed two Complaints for nullification
and cancellation of mortgage. One Complaint was filed before the Regional
Trial Court of Cagayan de Oro City, and the other Complaint was filed before
the Regional Trial Court of Iligan City.26

University of Mindanao alleged in its Complaints that it did not obtain any
loan from Bangko Sentral ng Pilipinas. It also did not receive any loan
proceeds from the bank.27

University of Mindanao also alleged that Aurora de Leons certification was


anomalous. It never authorized Saturnino Petalcorin to execute real estate
mortgage contracts involving its properties to secure FISLAIs debts. It never
ratified the execution of the mortgage contracts. Moreover, as an educational
institution, it cannot mortgage its properties to secure another persons
debts.28

On November 23, 2001, the Regional Trial Court of Cagayan de Oro City
rendered a Decision in favor of University of Mindanao, 29 thus:

WHEREFORE, premises considered, judgment is hereby rendered in favor of


plaintiff and against defendants:

1. DECLARING the real estate mortgage Saturnino R. Petalcorin executed in


favor of BANGKO SENTRAL NG PILIPINAS involving Lot 421-A located in
Cagayan de Oro City with an area of 482 square meters covered by TCT No. T-
14345 as annuled [sic];

2. ORDERING the Register of Deeds of Cagayan de Oro City to cancel Entry


No. 9951 and Entry No. 9952 annotated at the back of said TCT No. T-14345,
Registry of Deeds of Cagayan de Oro City;

Prayer for attorneys fee [sic] is hereby denied there being no proof that in
demanding payment of the emergency loan, defendant BANGKO SENTRAL NG
PILIPINAS was motivated by evident bad faith,

SO ORDERED.30 (Citation omitted)

The Regional Trial Court of Cagayan de Oro City found that there was no
board resolution giving Saturnino Petalcorin authority to execute mortgage
contracts on behalf of University of Mindanao. The Cagayan de Oro City trial
court gave weight to Aurora de Leons testimony that University of
Mindanaos Board of Trustees did not issue a board resolution that would
support the Secretarys Certificate she issued. She testified that she signed
the Secretarys Certificate only upon Guillermo B. Torres orders. 31

Saturnino Petalcorin testified that he had no authority to execute a mortgage


contract on University of Mindanaos behalf. He merely executed the contract
because of Guillermo B. Torres request.32

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 13

Bangko Sentral ng Pilipinas witness Daciano Pagui, Jr. also admitted that
there was no board resolution giving Saturnino Petalcorin authority to execute
mortgage contracts on behalf of University of Mindanao. 33

The Regional Trial Court of Cagayan de Oro City ruled that Saturnino
Petalcorin was not authorized to execute mortgage contracts for University of
Mindanao. Hence, the mortgage of University of Mindanaos Cagayan de Oro
City property was unenforceable. Saturnino Petalcorins unauthorized acts
should be annulled.34

Similarly, the Regional Trial Court of Iligan City rendered a Decision on


December 7, 2001 in favor of University of Mindanao. 35 The dispositive
portion of the Decision reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of


the plaintiff and against the defendants, as follows:

1. Nullifying and canceling [sic] the subject Deed of Real Estate Mortgage
dated November 5, 1982 for being unenforceable or void contract;

2. Ordering the Office of the Register of Deeds of Iligan City to cancel the
entries on TCT No. T-15696 and TCT No. T-15697 with respect to the aforesaid
Deed of Real Estate Mortgage dated November 5, 1982 and all other entries
related thereto;

3. Ordering the defendant Bangko Sentral ng Pilipinas to return the owners


duplicate copies of TCT No. T-15696 and TCT No. 15697 to the plaintiff;

4. Nullifying the subject [f]oreclosure [p]roceedings and the [a]uction [s]ale


conducted by defendant Atty. Gerardo Paguio, Jr. on October 8, 1999 including
all the acts subsequent thereto and ordering the Register of Deeds of Iligan
City not to register any Certificate of Sale pursuant to the said auction sale
nor make any transfer of the corresponding titles, and if already registered
and transferred, to cancel all the said entries in TCT No. T-15696 and TCT No.
T-15697 and/or cancel the corresponding new TCTs in the name of defendant
Bangko Sentral ng Pilipinas;

5. Making the Preliminary Injunction per Order of this Court dated October 13,
2000 permanent.

No pronouncement as to costs.36 (Citation omitted)

The Iligan City trial court found that the Secretarys Certificate issued by
Aurora de Leon was fictitious 37 and irregular for being unnumbered. 38 It also
did not specify the identity, description, or location of the mortgaged
properties.39

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 14

The Iligan City trial court gave credence to Aurora de Leons testimony that
the University of Mindanaos Board of Trustees did not take up the documents
in its meetings. Saturnino Petalcorin corroborated her testimony. 40

The Iligan City trial court ruled that the lack of a board resolution authorizing
Saturnino Petalcorin to execute documents of mortgage on behalf of
University of Mindanao made the real estate mortgage contract
unenforceable under Article 1403 41 of the Civil Code.42 The mortgage contract
and the subsequent acts of foreclosure and auction sale were void because
the mortgage contract was executed without University of Mindanaos
authority.43

The Iligan City trial court also ruled that the annotations on the titles of
University of Mindanaos properties do not operate as notice to the University
because annotations only bind third parties and not owners. 44 Further, Bangko
Sentral ng Pilipinas right to foreclose the University of Mindanaos properties
had already prescribed.45

Bangko Sentral ng Pilipinas separately appealed the Decisions of both the


Cagayan de Oro City and the Iligan City trial courts. 46

After consolidating both cases, the Court of Appeals issued a Decision on


December 17, 2009 in favor of Bangko Sentral ng Pilipinas, thus:

FOR THE REASONS STATED, the Decision dated 23 November 2001 of the
Regional Trial Court of Cagayan de Oro City, Branch 24 in Civil Case No. 99-
414 and the Decision dated 7 December 2001 of the Regional Trial Court of
Iligan City, Branch 1 in Civil Case No. 4790 are REVERSED and SET
ASIDE. The Complaints in both cases before the trial courts
are DISMISSED. The Writ of Preliminary Injunction issued by the Regional
Trial Court of Iligan City, Branch 1 in Civil Case No. 4790 is LIFTED and SET
ASIDE.

SO ORDERED.47

The Court of Appeals ruled that "[a]lthough BSP failed to prove that the UM
Board of Trustees actually passed a Board Resolution authorizing Petalcorin to
mortgage the subject real properties," 48 Aurora de Leons Secretarys
Certificate "clothed Petalcorin with apparent and ostensible authority to
execute the mortgage deed on its behalf[.]" 49Bangko Sentral ng Pilipinas
merely relied in good faith on the Secretarys Certificate. 50 University of
Mindanao is estopped from denying Saturnino Petalcorins authority. 51

Moreover, the Secretarys Certificate was notarized. This meant that it


enjoyed the presumption of regularity as to the truth of its statements and
authenticity of the signatures. 52 Thus, "BSP cannot be faulted for relying on
the [Secretarys Certificate.]" 53

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 15

The Court of Appeals also ruled that since University of Mindanaos officers,
Guillermo B. Torres and his wife, Dolores P. Torres, signed the promissory
notes, University of Mindanao was presumed to have knowledge of the
transaction.54 Knowledge of an officer in relation to matters within the scope
of his or her authority is notice to the corporation. 55

The annotations on University of Mindanaos certificates of title also operate


as constructive notice to it that its properties were mortgaged. 56 Its failure to
disown the mortgages for more than a decade was implied ratification. 57

The Court of Appeals also ruled that Bangko Sentral ng Pilipinas action for
foreclosure had not yet prescribed because the due date extensions that
Bangko Sentral ng Pilipinas granted to FISLAI extended the due date of
payment to five (5) years from February 8, 1985.58 The banks demand letter
to Dolores P. Torres on June 18, 1999 also interrupted the prescriptive
period.59

University of Mindanao and Bangko Sentral ng Pilipinas filed a Motion for


Reconsideration60 and Motion for Partial Reconsideration respectively of the
Court of Appeals Decision. On December 20, 2010, the Court of Appeals
issued a Resolution, thus:

Acting on the foregoing incidents, the Court RESOLVES to:

1. GRANT the appellants twin motions for extension of time to file


comment/opposition and NOTE the Comment on the appellees Motion for
Reconsideration it subsequently filed on June 23, 2010;

2. GRANT the appellees three (3) motions for extension of time to file
comment/opposition and NOTE the Comment on the appellants Motion for
Partial Reconsideration it filed on July 26, 2010;

3. NOTE the appellants "Motion for Leave to File Attached Reply Dated
August 11, 2010" filed on August 13, 2010 and DENY the attached "Reply to
Comment Dated July 26, 2010";

4. DENY the appellees Motion for Reconsideration as it does not offer any
arguments sufficiently meritorious to warrant modification or reversal of the
Courts 17 December 2009 Decision. The Court finds that there is no
compelling reason to reconsider its ruling; and

5. GRANT the appellants Motion for Partial Reconsideration, as the Court


finds it meritorious, considering that it ruled in its Decision that "BSP can still
foreclose on the UMs real property in Cagayan de Oro City covered by TCT
No. T-14345." It then follows that the injunctive writ issued by the RTC of
Cagayan de Oro City, Branch 24 must be lifted. The Courts 17 December
2009 Decision is accordingly MODIFIED and AMENDED to read as follows:

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 16

"FOR THE REASONS STATED, the Decision dated 23 November 2001 of the
Regional Trial Court of Cagayan de Oro City, Branch 24 in Civil Case No. 99-
414 and the Decision dated 7 December 2001 of the Regional Trial Court of
Iligan City, Branch 1 in Civil Case No. 4790 are REVERSED and SET
ASIDE. The Complaints in both cases before the trial courts
are DISMISSED. The Writs of Preliminary Injunction issued by the Regional
Trial Court of Iligan City, Branch 1 in Civil Case No. 4790 and in the Regional
Trial Court of Cagayan de Oro City, Branch 24 in Civil Case No. 99-414
are LIFTED and SET ASIDE."

SO ORDERED.61 (Citation omitted)

Hence, University of Mindanao filed this Petition for Review.

The issues for resolution are:

First, whether respondent Bangko Sentral ng Pilipinas action to foreclose the


mortgaged properties had already prescribed; and

Second, whether petitioner University of Mindanao is bound by the real estate


mortgage contracts executed by Saturnino Petalcorin.

We grant the Petition.

Petitioner argues that respondents action to foreclose its mortgaged


properties had already prescribed.

Petitioner is mistaken.

Prescription is the mode of acquiring or losing rights through the lapse of


time.62 Its purpose is "to protect the diligent and vigilant, not those who sleep
on their rights."63

The prescriptive period for actions on mortgages is ten (10) years from the
day they may be brought.64 Actions on mortgages may be brought not upon
the execution of the mortgage contract but upon default in payment of the
obligation secured by the mortgage.65

A debtor is considered in default when he or she fails to pay the obligation on


due date and, subject to exceptions, after demands for payment were made
by the creditor. Article 1169 of the Civil Code provides:

ART. 1169. Those obliged to deliver or to do something incur in delay from the
time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 17

However, the demand by the creditor shall not be necessary in order that
delay may exist:

(1) When the obligation or the law expressly so declare; or

(2) When from the nature and the circumstances of the obligation it appears
that the designation of the time when the thing is to be delivered or the
service is to be rendered was a controlling motive for the establishment of
the contract; or

(3) When demand would be useless, as when the obligor has rendered it
beyond his power to perform.

Article 1193 of the Civil Code provides that an obligation is demandable only
upon due date. It provides:

ART. 1193. Obligations for whose fulfillment a day certain has been fixed,
shall be demandable only when that day comes.

Obligations with a resolutory period take effect at once, but terminate upon
arrival of the day certain.

A day certain is understood to be that which must necessarily come, although


it may not be known when.

If the uncertainty consists in whether the day will come or not, the obligation
is conditional, and it shall be regulated by the rules of the preceding Section.

In other words, as a general rule, a person defaults and prescriptive period for
action runs when (1) the obligation becomes due and demandable; and (2)
demand for payment has been made.

The prescriptive period neither runs from the date of the execution of a
contract nor does the prescriptive period necessarily run on the date when
the loan becomes due and demandable. 66 Prescriptive period runs from the
date of demand,67 subject to certain exceptions.

In other words, ten (10) years may lapse from the date of the execution of
contract, without barring a cause of action on the mortgage when there is a
gap between the period of execution of the contract and the due date or
between the due date and the demand date in cases when demand is
necessary.68

The mortgage contracts in this case were executed by Saturnino Petalcorin in


1982. The maturity dates of FISLAIs loans were repeatedly extended until the
loans became due and demandable only in 1990. 69 Respondent informed
petitioner of its decision to foreclose its properties and demanded payment in
1999.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 18

The running of the prescriptive period of respondents action on the


mortgages did not start when it executed the mortgage contracts with
Saturnino Petalcorin in 1982.

The prescriptive period for filing an action may run either (1) from 1990 when
the loan became due, if the obligation was covered by the exceptions under
Article 1169 of the Civil Code; (2) or from 1999 when respondent demanded
payment, if the obligation was not covered by the exceptions under Article
1169 of the Civil Code.

In either case, respondents Complaint with cause of action based on the


mortgage contract was filed well within the prescriptive period.

Given the termination of all traces of FISLAIs existence,70 demand may have
been rendered unnecessary under Article 1169(3) 71 of the Civil Code.
Granting that this is the case, respondent would have had ten (10) years from
due date in 1990 or until 2000 to institute an action on the mortgage
contract.

However, under Article 115572 of the Civil Code, prescription of actions may
be interrupted by (1) the filing of a court action; (2) a written extrajudicial
demand; and (3) the written acknowledgment of the debt by the debtor.

Therefore, the running of the prescriptive period was interrupted when


respondent sent its demand letter to petitioner on June 18, 1999. This
eventually led to petitioners filing of its annulment of mortgage complaints
before the Regional Trial Courts of Iligan City and Cagayan De Oro City on July
16, 1999.

Assuming that demand was necessary, respondents action was within the
ten (10)-year prescriptive period. Respondent demanded payment of the
loans in 1999 and filed an action in the same year.

II

Petitioner argues that the execution of the mortgage contract was ultra vires.
As an educational institution, it may not secure the loans of third
persons.73 Securing loans of third persons is not among the purposes for
which petitioner was established.74

Petitioner is correct.

Corporations are artificial entities granted legal personalities upon their


creation by their incorporators in accordance with law. Unlike natural persons,
they have no inherent powers. Third persons dealing with corporations cannot
assume that corporations have powers. It is up to those persons dealing with
corporations to determine their competence as expressly defined by the law
and their articles of incorporation. 75

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 19

A corporation may exercise its powers only within those definitions. Corporate
acts that are outside those express definitions under the law or articles of
incorporation or those "committed outside the object for which a corporation
is created"76 are ultra vires.

The only exception to this rule is when acts are necessary and incidental to
carry out a corporations purposes, and to the exercise of powers conferred
by the Corporation Code and under a corporations articles of
incorporation.77This exception is specifically included in the general powers of
a corporation under Section 36 of the Corporation Code:

SEC. 36. Corporate powers and capacity.Every corporation incorporated


under this Code has the power and capacity:

1. To sue and be sued in its corporate name;

2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;

3. To adopt and use a corporate seal;

4. To amend its articles of incorporation in accordance with the provisions of


this Code;

5. To adopt by-laws, not contrary to law, morals, or public policy, and to


amend or repeal the same in accordance with this Code;

6. In case of stock corporations, to issue or sell stocks to subscribers and to


sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;

7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,


mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject
to the limitations prescribed by law and the Constitution;

8. To enter into merger or consolidation with other corporations as provided in


this Code;

9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation, domestic or foreign, shall give
donations in aid of any political party or candidate or for purposes of partisan
political activity;

10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 20

11. To exercise such other powers as may be essential or necessary to carry


out its purpose or purposes as stated in its articles of incorporation.
(Emphasis supplied)

Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc. 78 stated the test to


determine if a corporate act is in accordance with its purposes:

It is a question, therefore, in each case, of the logical relation of the act to


the corporate purpose expressed in the charter. If that act is one which is
lawful in itself, and not otherwise prohibited, is done for the purpose of
serving corporate ends, and is reasonably tributary to the promotion of those
ends, in a substantial, and not in a remote and fanciful, sense, it may fairly be
considered within charter powers. The test to be applied is whether the act in
question is in direct and immediate furtherance of the corporations business,
fairly incident to the express powers and reasonably necessary to their
exercise. If so, the corporation has the power to do it; otherwise,
not.79 (Emphasis supplied)

As an educational institution, petitioner serves:

a. To establish, conduct and operate a college or colleges, and/or university;

b. To acquire properties, real and/or personal, in connection with the


establishment and operation of such college or colleges;

c. To do and perform the various and sundry acts and things permitted by the
laws of the Philippines unto corporations like classes and kinds;

d. To engage in agricultural, industrial, and/or commercial pursuits in line with


educational program of the corporation and to acquire all properties, real and
personal[,] necessary for the purposes[;]

e. To establish, operate, and/or acquire broadcasting and television stations


also in line with the educational program of the corporation and for such
other purposes as the Board of Trustees may determine from time to time;

f. To undertake housing projects of faculty members and employees, and to


acquire real estates for this purpose;

g. To establish, conduct and operate and/or invest in educational foundations;


[As amended on December 15, 1965][;]

h. To establish, conduct and operate housing and dental schools, medical


facilities and other related undertakings;

i. To invest in other corporations. [As amended on December 9, 1998].


[Amended Articles of Incorporation of the University of Mindanao, Inc. the
Petitioner].80

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 21

Petitioner does not have the power to mortgage its properties in order to
secure loans of other persons. As an educational institution, it is limited to
developing human capital through formal instruction. It is not a corporation
engaged in the business of securing loans of others.

Hiring professors, instructors, and personnel; acquiring equipment and real


estate; establishing housing facilities for personnel and students; hiring a
concessionaire; and other activities that can be directly connected to the
operations and conduct of the education business may constitute the
necessary and incidental acts of an educational institution.

Securing FISLAIs loans by mortgaging petitioners properties does not appear


to have even the remotest connection to the operations of petitioner as an
educational institution. Securing loans is not an adjunct of the educational
institutions conduct of business. 81 It does not appear that securing third-
party loans was necessary to maintain petitioners business of providing
instruction to individuals.

This court upheld the validity of corporate acts when those acts were shown
to be clearly within the corporations powers or were connected to the
corporations purposes.

In Pirovano, et al. v. De la Rama Steamship Co.,82 this court declared valid the
donation given to the children of a deceased person who contributed to the
growth of the corporation. 83 This court found that this donation was within the
broad scope of powers and purposes of the corporation to "aid in any other
manner any person . . . in which any interest is held by this corporation or in
the affairs or prosperity of which this corporation has a lawful interest." 84

In Twin Towers Condominium Corporation v. Court of Appeals, et al.,85 this


court declared valid a rule by Twin Towers Condominium denying delinquent
members the right to use condominium facilities. 86 This court ruled that the
condominiums power to promulgate rules on the use of facilities and to
enforce provisions of the Master Deed was clear in the Condominium Act,
Master Deed, and By-laws of the condominium. 87 Moreover, the promulgation
of such rule was "reasonably necessary" to attain the purposes of the
condominium project.88

This court has, in effect, created a presumption that corporate acts are valid
if, on their face, the acts were within the corporations powers or purposes.
This presumption was explained as early as in 1915 in Coleman v. Hotel De
France89 where this court ruled that contracts entered into by corporations in
the exercise of their incidental powers are not ultra vires. 90

Coleman involved a hotels cancellation of an employment contract it


executed with a gymnast. One of the hotels contentions was the supposed
ultra vires nature of the contract. It was executed outside its express and
implied powers under the articles of incorporation. 91

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 22

In ruling in favor of the contracts validity, this court considered the incidental
powers of the hotel to include the execution of employment contracts with
entertainers for the purpose of providing its guests entertainment and
increasing patronage.92

This court ruled that a contract executed by a corporation shall be presumed


valid if on its face its execution was not beyond the powers of the corporation
to do.93 Thus:

When a contract is not on its face necessarily beyond the scope of the power
of the corporation by which it was made, it will, in the absence of proof to the
contrary, be presumed to be valid. Corporations are presumed to contract
within their powers. The doctrine of ultra vires, when invoked for or against a
corporation, should not be allowed to prevail where it would defeat the ends
of justice or work a legal wrong. 94

However, this should not be interpreted to mean that such presumption


applies to all cases, even when the act in question is on its face beyond the
corporations power to do or when the evidence contradicts the presumption.

Presumptions are "inference[s] as to the existence of a fact not actually


known, arising from its usual connection with another which is known, or a
conjecture based on past experience as to what course human affairs
ordinarily take."95 Presumptions embody values and revealed behavioral
expectations under a given set of circumstances.

Presumptions may be conclusive96 or disputable.97

Conclusive presumptions are presumptions that may not be overturned by


evidence, however strong the evidence is. 98 They are made conclusive not
because there is an established uniformity in behavior whenever identified
circumstances arise. They are conclusive because they are declared as such
under the law or the rules. Rule 131, Section 2 of the Rules of Court identifies
two (2) conclusive presumptions:

SEC. 2. Conclusive presumptions. The following are instances of conclusive


presumptions:

(a) Whenever a party has, by his own declaration, act, or omission,


intentionally and deliberately led another to believe a particular thing true,
and to act upon such belief, he cannot, in any litigation arising out of such
declaration, act or omission, be permitted to falsify it;

(b) The tenant is not permitted to deny the title of his landlord at the time of
the commencement of the relation of landlord and tenant between them.

On the other hand, disputable presumptions are presumptions that may be


overcome by contrary evidence.99 They are disputable in recognition of the
variability of human behavior. Presumptions are not always true. They may be

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 23

wrong under certain circumstances, and courts are expected to apply them,
keeping in mind the nuances of every experience that may render the
expectations wrong.

Thus, the application of disputable presumptions on a given circumstance


must be based on the existence of certain facts on which they are meant to
operate. "[P]resumptions are not allegations, nor do they supply their
absence[.]"100Presumptions are conclusions. They do not apply when there
are no facts or allegations to support them.

If the facts exist to set in motion the operation of a disputable presumption,


courts may accept the presumption. However, contrary evidence may be
presented to rebut the presumption.

Courts cannot disregard contrary evidence offered to rebut disputable


presumptions. Disputable presumptions apply only in the absence of contrary
evidence or explanations. This court explained in Philippine Agila Satellite Inc.
v. Usec. Trinidad-Lichauco:101

We do not doubt the existence of the presumptions of "good faith" or "regular


performance of official duty," yet these presumptions are disputable and may
be contradicted and overcome by other evidence. Many civil actions are
oriented towards overcoming any number of these presumptions, and a
cause of action can certainly be geared towards such effect. The very
purpose of trial is to allow a party to present evidence to overcome the
disputable presumptions involved. Otherwise, if trial is deemed irrelevant or
unnecessary, owing to the perceived indisputability of the presumptions, the
judicial exercise would be relegated to a mere ascertainment of what
presumptions apply in a given case, nothing more. Consequently, the entire
Rules of Court is rendered as excess verbiage, save perhaps for the provisions
laying down the legal presumptions.

If this reasoning of the Court of Appeals were ever adopted as a


jurisprudential rule, no public officer could ever be sued for acts executed
beyond their official functions or authority, or for tortious conduct or
behavior, since such acts would "enjoy the presumption of good faith and in
the regular performance of official duty." Indeed, few civil actions of any
nature would ever reach the trial stage, if a case can be adjudicated by a
mere determination from the complaint or answer as to which legal
presumptions are applicable. For example, the presumption that a person is
innocent of a wrong is a disputable presumption on the same level as that of
the regular performance of official duty. A civil complaint for damages
necessarily alleges that the defendant committed a wrongful act or omission
that would serve as basis for the award of damages. With the rationale of the
Court of Appeals, such complaint can be dismissed upon a motion to dismiss
solely on the ground that the presumption is that a person is innocent of a
wrong.102 (Emphasis supplied, citations omitted)

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 24

In this case, the presumption that the execution of mortgage contracts was
within petitioners corporate powers does not apply. Securing third-party
loans is not connected to petitioners purposes as an educational institution.

III

Respondent argues that petitioners act of mortgaging its properties to


guarantee FISLAIs loans was consistent with petitioners business interests,
since petitioner was presumably a FISLAI shareholder whose officers and
shareholders interlock with FISLAI. Respondent points out that petitioner and
its key officers held substantial shares in MSLAI when DSLAI and FISLAI
merged. Therefore, it was safe to assume that when the mortgages were
executed in 1982, petitioner held substantial shares in FISLAI. 103

Parties dealing with corporations cannot simply assume that their transaction
is within the corporate powers. The acts of a corporation are still limited by its
powers and purposes as provided in the law and its articles of incorporation.

Acquiring shares in another corporation is not a means to create new powers


for the acquiring corporation. Being a shareholder of another corporation
does not automatically change the nature and purpose of a corporations
business. Appropriate amendments must be made either to the law or the
articles of incorporation before a corporation can validly exercise powers
outside those provided in law or the articles of incorporation. In other words,
without an amendment, what is ultra vires before a corporation acquires
shares in other corporations is still ultra vires after such acquisition.

Thus, regardless of the number of shares that petitioner had with FISLAI,
DSLAI, or MSLAI, securing loans of third persons is still beyond petitioners
power to do. It is still inconsistent with its purposes under the law 104 and its
articles of incorporation.105

In attempting to show petitioners interest in securing FISLAIs loans by


adverting to their interlocking directors and shareholders, respondent
disregards petitioners separate personality from its officers, shareholders,
and other juridical persons.

The separate personality of corporations means that they are "vest[ed] [with]
rights, powers, and attributes [of their own] as if they were natural
persons[.]"106 Their assets and liabilities are their own and not their officers,
shareholders, or another corporations. In the same vein, the assets and
liabilities of their officers and shareholders are not the corporations.
Obligations incurred by corporations are not obligations of their officers and
shareholders. Obligations of officers and shareholders are not obligations of
corporations.107 In other words, corporate interests are separate from the
personal interests of the natural persons that comprise corporations.

Corporations are given separate personalities to allow natural persons to


balance the risks of business as they accumulate capital. They are, however,

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 25

given limited competence as a means to protect the public from fraudulent


acts that may be committed using the separate juridical personality given to
corporations.

Petitioners key officers, as shareholders of FISLAI, may have an interest in


ensuring the viability of FISLAI by obtaining a loan from respondent and
securing it by whatever means. However, having interlocking officers and
stockholders with FISLAI does not mean that petitioner, as an educational
institution, is or must necessarily be interested in the affairs of FISLAI.

Since petitioner is an entity distinct and separate not only from its own
officers and shareholders but also from FISLAI, its interests as an educational
institution may not be consistent with FISLAIs.

Petitioner and FISLAI have different constituencies. Petitioners constituents


comprise persons who have committed to developing skills and acquiring
knowledge in their chosen fields by availing the formal instruction provided
by petitioner. On the other hand, FISLAI is a thrift bank, which constituencies
comprise investors.

While petitioner and FISLAI exist ultimately to benefit their stockholders, their
constituencies affect the means by which they can maintain their existence.
Their interests are congruent with sustaining their constituents needs
because their existence depends on that. Petitioner can exist only if it
continues to provide for the kind and quality of instruction that is needed by
its constituents. Its operations and existence are placed at risk when
resources are used on activities that are not geared toward the attainment of
its purpose. Petitioner has no business in securing FISLAI, DSLAI, or MSLAIs
loans. This activity is not compatible with its business of providing quality
instruction to its constituents.

Indeed, there are instances when we disregard the separate corporate


personalities of the corporation and its stockholders, directors, or officers.
This is called piercing of the corporate veil.

Corporate veil is pierced when the separate personality of the corporation is


being used to perpetrate fraud, illegalities, and injustices. 108 In Lanuza, Jr. v.
BF Corporation:109

Piercing the corporate veil is warranted when "[the separate personality of a


corporation] is used as a means to perpetrate fraud or an illegal act, or as a
vehicle for the evasion of an existing obligation, the circumvention of
statutes, or to confuse legitimate issues." It is also warranted in alter ego
cases "where a corporation is merely a farce since it is a mere alter ego or
business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation." 110

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 26

These instances have not been shown in this case. There is no evidence
pointing to the possibility that petitioner used its separate personality to
defraud third persons or commit illegal acts. Neither is there evidence to
show that petitioner was merely a farce of a corporation. What has been
shown instead was that petitioner, too, had been victimized by fraudulent
and unauthorized acts of its own officers and directors.

In this case, instead of guarding against fraud, we perpetuate fraud if we


accept respondents contentions.

IV

Petitioner argues that it did not authorize Saturnino Petalcorin to mortgage its
properties on its behalf. There was no board resolution to that effect. Thus,
the mortgages executed by Saturnino Petalcorin were unenforceable. 111

The mortgage contracts executed in favor of respondent do not bind


petitioner. They were executed without authority from petitioner.

Petitioner must exercise its powers and conduct its business through its Board
of Trustees. Section 23 of the Corporation Code provides:

SEC. 23. The board of directors or trustees.Unless otherwise provided in


this Code, the corporate powers of all corporations formed under this Code
shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1) year
and until their successors are elected and qualified.

Being a juridical person, petitioner cannot conduct its business, make


decisions, or act in any manner without action from its Board of Trustees. The
Board of Trustees must act as a body in order to exercise corporate powers.
Individual trustees are not clothed with corporate powers just by being a
trustee. Hence, the individual trustee cannot bind the corporation by himself
or herself.

The corporation may, however, delegate through a board resolution its


corporate powers or functions to a representative, subject to limitations
under the law and the corporations articles of incorporation. 112

The relationship between a corporation and its representatives is governed by


the general principles of agency. 113Article 1317 of the Civil Code provides that
there must be authority from the principal before anyone can act in his or her
name:

ART. 1317. No one may contract in the name of another without being
authorized by the latter, or unless he has by law a right to represent him.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 27

Hence, without delegation by the board of directors or trustees, acts of a


personincluding those of the corporations directors, trustees, shareholders,
or officersexecuted on behalf of the corporation are generally not binding
on the corporation.114

Contracts entered into in anothers name without authority or valid legal


representation are generally unenforceable. The Civil Code provides:

ART. 1317. . . .

A contract entered into in the name of another by one who has no authority
or legal representation, or who has acted beyond his powers, shall be
unenforceable, unless it is ratified, expressly or impliedly, by the person on
whose behalf it has been executed, before it is revoked by the other
contracting party.

....

ART. 1403. The following contracts are unenforceable, unless they are
ratified:

(1) Those entered into in the name of another person by one who has been
given no authority or legal representation, or who has acted beyond his
powers[.]

The unenforceable status of contracts entered into by an unauthorized person


on behalf of another is based on the basic principle that contracts must be
consented to by both parties.115 There is no contract without meeting of the
minds as to the subject matter and cause of the obligations created under
the contract.116

Consent of a person cannot be presumed from representations of another,


especially if obligations will be incurred as a result. Thus, authority is required
to make actions made on his or her behalf binding on a person. Contracts
entered into by persons without authority from the corporation shall generally
be considered ultra vires and unenforceable 117 against the corporation.

Two trial courts118 found that the Secretarys Certificate and the board
resolution were either non-existent or fictitious. The trial courts based their
findings on the testimony of the Corporate Secretary, Aurora de Leon herself.
She signed the Secretarys Certificate and the excerpt of the minutes of the
alleged board meeting purporting to authorize Saturnino Petalcorin to
mortgage petitioners properties. There was no board meeting to that effect.
Guillermo B. Torres ordered the issuance of the Secretarys Certificate. Aurora
de Leons testimony was corroborated by Saturnino Petalcorin.

Even the Court of Appeals, which reversed the trial courts decisions,
recognized that "BSP failed to prove that the UM Board of Trustees actually

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 28

passed a Board Resolution authorizing Petalcorin to mortgage the subject real


properties[.]"119

Well-entrenched is the rule that this court, not being a trier of facts, is bound
by the findings of fact of the trial courts and the Court of Appeals when such
findings are supported by evidence on record. 120 Hence, not having the proper
board resolution to authorize Saturnino Petalcorin to execute the mortgage
contracts for petitioner, the contracts he executed are unenforceable against
petitioner. They cannot bind petitioner.

However, personal liabilities may be incurred by directors who assented to


such unauthorized act121 and by the person who contracted in excess of the
limits of his or her authority without the corporations knowledge. 122

Unauthorized acts that are merely beyond the powers of the corporation
under its articles of incorporation are not void ab initio.

In Pirovano, et al., this court explained that corporate acts may be ultra vires
but not void.123 Corporate acts may be capable of ratification: 124

[A] distinction should be made between corporate acts or contracts which are
illegal and those which are merely ultra vires. The former contemplates the
doing of an act which is contrary to law, morals, or public order, or
contravene some rules of public policy or public duty, and are, like similar
transactions between individuals, void. They cannot serve as basis of a court
action, nor acquire validity by performance, ratification, or estoppel. Mere
ultra vires acts, on the other hand, or those which are not illegal and void ab
initio, but are not merely within the scope of the articles of incorporation, are
merely voidable and may become binding and enforceable when ratified by
the stockholders.125

Thus, even though a person did not give another person authority to act on
his or her behalf, the action may be enforced against him or her if it is shown
that he or she ratified it or allowed the other person to act as if he or she had
full authority to do so. The Civil Code provides:

ART. 1910. The principal must comply with all the obligations which the agent
may have contracted within the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal
is not bound except when he ratifies it expressly or tacitly.

ART. 1911. Even when the agent has exceeded his authority, the principal is
solidarily liable with the agent if the former allowed the latter to act as
though he had full powers. (Emphasis supplied)

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 29

Ratification is a voluntary and deliberate confirmation or adoption of a


previous unauthorized act.126 It converts the unauthorized act of an agent into
an act of the principal.127 It cures the lack of consent at the time of the
execution of the contract entered into by the representative, making the
contract valid and enforceable. 128 It is, in essence, consent belatedly given
through express or implied acts that are deemed a confirmation or waiver of
the right to impugn the unauthorized act. 129 Ratification has the effect of
placing the principal in a position as if he or she signed the original contract.
In Board of Liquidators v. Heirs of M. Kalaw, et al.:130

Authorities, great in number, are one in the idea that "ratification by a


corporation of an unauthorized act or contract by its officers or others relates
back to the time of the act or contract ratified, and is equivalent to original
authority;" and that "[t]he corporation and the other party to the transaction
are in precisely the same position as if the act or contract had been
authorized at the time." The language of one case is expressive: "The
adoption or ratification of a contract by a corporation is nothing more nor less
than the making of an original contract. The theory of corporate ratification is
predicated on the right of a corporation to contract, and any ratification or
adoption is equivalent to a grant of prior authority." 131 (Citations omitted)

Implied ratification may take the form of silence, acquiescence, acts


consistent with approval of the act, or acceptance or retention of
benefits.132 However, silence, acquiescence, retention of benefits, and acts
that may be interpreted as approval of the act do not by themselves
constitute implied ratification. For an act to constitute an implied ratification,
there must be no acceptable explanation for the act other than that there is
an intention to adopt the act as his or her own. 133 "[It] cannot be inferred from
acts that a principal has a right to do independently of the unauthorized act
of the agent."134

No act by petitioner can be interpreted as anything close to ratification. It


was not shown that it issued a resolution ratifying the execution of the
mortgage contracts. It was not shown that it received proceeds of the loans
secured by the mortgage contracts. There was also no showing that it
received any consideration for the execution of the mortgage contracts. It
even appears that petitioner was unaware of the mortgage contracts until
respondent notified it of its desire to foreclose the mortgaged properties.

Ratification must be knowingly and voluntarily done. 135 Petitioners lack of


knowledge about the mortgage executed in its name precludes an
interpretation that there was any ratification on its part.

Respondent further argues that petitioner is presumed to have knowledge of


its transactions with respondent because its officers, the Spouses Guillermo
and Dolores Torres, participated in obtaining the loan. 136

Indeed, a corporation, being a person created by mere fiction of law, can act
only through natural persons such as its directors, officers, agents, and

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 30

representatives. Hence, the general rule is that knowledge of an officer is


considered knowledge of the corporation.

However, even though the Spouses Guillermo and Dolores Torres were
officers of both the thrift banks and petitioner, their knowledge of the
mortgage contracts cannot be considered as knowledge of the corporation.

The rule that knowledge of an officer is considered knowledge of the


corporation applies only when the officer is acting within the authority given
to him or her by the corporation. In Francisco v. Government Service
Insurance System:137

Knowledge of facts acquired or possessed by an officer or agent of a


corporation in the course of his employment, and in relation to matters within
the scope of his authority, is notice to the corporation, whether he
communicates such knowledge or not.138

The public should be able to rely on and be protected from the


representations of a corporate representative acting within the scope of his or
her authority. This is why an authorized officers knowledge is considered
knowledge of corporation. However, just as the public should be able to rely
on and be protected from corporate representations, corporations should also
be able to expect that they will not be bound by unauthorized actions made
on their account.

Thus, knowledge should be actually communicated to the corporation


through its authorized representatives. A corporation cannot be expected to
act or not act on a knowledge that had not been communicated to it through
an authorized representative. There can be no implied ratification without
actual communication. Knowledge of the existence of contract must be
brought to the corporations representative who has authority to ratify it.
Further, "the circumstances must be shown from which such knowledge may
be presumed."139

The Spouses Guillermo and Dolores Torres knowledge cannot be interpreted


as knowledge of petitioner. Their knowledge was not obtained as petitioners
representatives. It was not shown that they were acting for and within the
authority given by petitioner when they acquired knowledge of the loan
transactions and the mortgages. The knowledge was obtained in the interest
of and as representatives of the thrift banks.

VI

Respondent argues that Saturnino Petalcorin was clothed with the authority
to transact on behalf of petitioner, based on the board resolution dated March
30, 1982 and Aurora de Leons notarized Secretarys Certificate. 140 According
to respondent, petitioner is bound by the mortgage contracts executed by
Saturnino Petalcorin.141

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 31

This court has recognized presumed or apparent authority or capacity to bind


corporate representatives in instances when the corporation, through its
silence or other acts of recognition, allowed others to believe that persons,
through their usual exercise of corporate powers, were conferred with
authority to deal on the corporations behalf.142

The doctrine of apparent authority does not go into the question of the
corporations competence or power to do a particular act. It involves the
question of whether the officer has the power or is clothed with the
appearance of having the power to act for the corporation. A finding that
there is apparent authority is not the same as a finding that the corporate act
in question is within the corporations limited powers.

The rule on apparent authority is based on the principle of estoppel. The Civil
Code provides:

ART. 1431. Through estoppel an admission or representation is rendered


conclusive upon the person making it, and cannot be denied or disproved as
against the person relying thereon.

....

ART. 1869. Agency may be express, or implied from the acts of the principal,
from his silence or lack of action, or his failure to repudiate the agency,
knowing that another person is acting on his behalf without authority.

Agency may be oral, unless the law requires a specific form.

A corporation is estopped by its silence and acts of recognition because we


recognize that there is information asymmetry between third persons who
have little to no information as to what happens during corporate meetings,
and the corporate officers, directors, and representatives who are insiders to
corporate affairs.143

In Peoples Aircargo and Warehousing Co. Inc. v. Court of Appeals,144 this


court held that the contract entered into by the corporations officer without a
board resolution was binding upon the corporation because it previously
allowed the officer to contract on its behalf despite the lack of board
resolution.145

In Francisco, this court ruled that Franciscos proposal for redemption of


property was accepted by and binding upon the Government Service
Insurance System. This court did not appreciate the Government Service
Insurance Systems defense that since it was the Board Secretary and not the
General Manager who sent Francisco the acceptance telegram, it could not be
made binding upon the Government Service Insurance System. It did not
authorize the Board Secretary to sign for the General Manager. This court
appreciated the Government Service Insurance Systems failure to disown the

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 32

telegram sent by the Board Secretary and its silence while it accepted all
payments made by Francisco for the redemption of property. 146

There can be no apparent authority and the corporation cannot be estopped


from denying the binding affect of an act when there is no evidence pointing
to similar acts and other circumstances that can be interpreted as the
corporation holding out a representative as having authority to contract on its
behalf. In Advance Paper Corporation v. Arma Traders Corporation,147 this
court had the occasion to say:

The doctrine of apparent authority does not apply if the principal did not
commit any acts or conduct which a third party knew and relied upon in good
faith as a result of the exercise of reasonable prudence. Moreover, the
agents acts or conduct must have produced a change of position to the third
partys detriment.148 (Citation omitted)

Saturnino Petalcorins authority to transact on behalf of petitioner cannot be


presumed based on a Secretarys Certificate and excerpt from the minutes of
the alleged board meeting that were found to have been simulated. These
documents cannot be considered as the corporate acts that held out
Saturnino Petalcorin as petitioners authorized representative for mortgage
transactions. They were not supported by an actual board meeting. 149

VII

Respondent argues that it may rely on the Secretarys Certificate issued by


Aurora de Leon because it was notarized.

The Secretarys Certificate was void whether or not it was notarized.

Notarization creates a presumption of regularity and authenticity on the


document. This presumption may be rebutted by "strong, complete and
conclusive proof"150 to the contrary. While notarial acknowledgment "attaches
full faith and credit to the document concerned[,]" 151 it does not give the
document its validity or binding effect. When there is evidence showing that
the document is invalid, the presumption of regularity or authenticity is not
applicable.

In Basilio v. Court of Appeals,152 this court was convinced that the purported
signatory on a deed of sale was not as represented, despite testimony from
the notary public that the signatory appeared before him and signed the
instrument.153 Apart from finding that there was forgery,154 this court noted:

The notary public, Atty. Ruben Silvestre, testified that he was the one who
notarized the document and that Dionisio Z. Basilio appeared personally
before him and signed the instrument himself. However, he admitted that he
did not know Dionisio Z. Basilio personally to ascertain if the person who
signed the document was actually Dionisio Z. Basilio himself, or another

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 33

person who stood in his place. He could not even recall whether the
document had been executed in his office or not.

Thus, considering the testimonies of various witnesses and a comparison of


the signature in question with admittedly genuine signatures, the Court is
convinced that Dionisio Z. Basilio did not execute the questioned deed of
sale. Although the questioned deed of sale was a public document having in
its favor the presumption of regularity, such presumption was adequately
refuted by competent witnesses showing its forgery and the Courts own
visual analysis of the document.155 (Emphasis supplied, citations omitted)

In Suntay v. Court of Appeals,156 this court held that a notarized deed of sale
was void because it was a mere sham. 157 It was not intended to have any
effect between the parties.158 This court said:

[I]t is not the intention nor the function of the notary public to validate and
make binding an instrument never, in the first place, intended to have any
binding legal effect upon the parties thereto. 159

Since the notarized Secretarys Certificate was found to have been issued
without a supporting board resolution, it produced no effect. It is not binding
upon petitioner. It should not have been relied on by respondent especially
given its status as a bank.

VIII

The banking institution is "impressed with public interest" 160 such that the
publics faith is "of paramount importance." 161 Thus, banks are required to
exercise the highest degree of diligence in their transactions. 162 In China
Banking Corporation v. Lagon,163 this court found that the bank was not a
mortgagee in good faith for its failure to question the due execution of a
Special Power of Attorney that was presented to it in relation to a mortgage
contract.164 This court said:

Though petitioner is not expected to conduct an exhaustive investigation on


the history of the mortgagors title, it cannot be excused from the duty of
exercising the due diligence required of a banking institution. Banks are
expected to exercise more care and prudence than private individuals in their
dealings, even those that involve registered lands, for their business is
affected with public interest.165 (Citations omitted)

For its failure to exercise the degree of diligence required of banks,


respondent cannot claim good faith in the execution of the mortgage
contracts with Saturnino Petalcorin. Respondents witness, Daciano Paguio,
Jr., testified that there was no board resolution authorizing Saturnino
Petalcorin to act on behalf of petitioner. 166 Respondent did not inquire further
as to Saturnino Petalcorins authority.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 34

Banks cannot rely on assumptions. This will be contrary to the high standard
of diligence required of them.

VI

According to respondent, the annotations of respondents mortgage interests


on the certificates of titles of petitioners properties operated as constructive
notice to petitioner of the existence of such interests. 167 Hence, petitioners
are now estopped from claiming that they did not know about the mortgage.

Annotations of adverse claims on certificates of title to properties operate as


constructive notice only to third partiesnot to the court or the registered
owner.1wphi1 In Sajonas v. Court of Appeals:168

[A]nnotation of an adverse claim is a measure designed to protect the


interest of a person over a piece of real property where the registration of
such interest or right is not otherwise provided for by the Land Registration
Act or Act 496 (now [Presidential Decree No.] 1529 or the Property
Registration Decree), and serves a warning to third parties dealing with said
property that someone is claiming an interest on the same or a better right
than that of the registered owner thereof.169 (Emphasis supplied)

Annotations are merely claims of interest or claims of the legal nature and
incidents of relationship between the person whose name appears on the
document and the person who caused the annotation. It does not say
anything about the validity of the claim or convert a defective claim or
document into a valid one. 170 These claims may be proved or disproved
during trial.

Thus, annotations are not conclusive upon courts or upon owners who may
not have reason to doubt the security of their claim as their properties' title
holders.

WHEREFORE, the Petition is GRANTED. The Court of Appeals' Decision


dated December 17, 2009 is REVERSED and SET ASIDE. The Regional Trial
Courts' Decisions of November 23, 2001 and December 7, 2001
are REINSTATED.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 35

3.

SECOND DIVISION

January 11, 2016

G.R. No. 169507

AIR CANADA, Petitioner,


vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

LEONEN, J.:

An offline international air carrier selling passage tickets in the Philippines,


through a general sales agent, is a resident foreign corporation doing
business in the Philippines. As such, it is taxable under Section 28(A)(l), and
not Section 28(A)(3) of the 1997 National Internal Revenue Code, subject to
any applicable tax treaty to which the Philippines is a signatory. Pursuant to
Article 8 of the Republic of the Philippines-Canada Tax Treaty, Air Canada may
only be imposed a maximum tax of 1 % of its gross revenues earned from
the sale of its tickets in the Philippines.

This is a Petition for Review1 appealing the August 26, 2005 Decision2 of the
Court of Tax Appeals En Banc, which in turn affirmed the December 22, 2004
Decision3 and April 8, 2005 Resolution4 of the Court of Tax Appeals First
Division denying Air Canadas claim for refund.

Air Canada is a "foreign corporation organized and existing under the laws of
Canada[.]"5 On April 24, 2000, it was granted an authority to operate as an
offline carrier by the Civil Aeronautics Board, subject to certain conditions,
which authority would expire on April 24, 2005. 6 "As an off-line carrier, [Air
Canada] does not have flights originating from or coming to the Philippines
[and does not] operate any airplane [in] the Philippines[.]" 7

On July 1, 1999, Air Canada engaged the services of Aerotel Ltd., Corp.
(Aerotel) as its general sales agent in the Philippines. 8 Aerotel "sells [Air
Canadas] passage documents in the Philippines." 9

For the period ranging from the third quarter of 2000 to the second quarter of
2002, Air Canada, through Aerotel, filed quarterly and annual income tax
returns and paid the income tax on Gross Philippine Billings in the total
amount of 5,185,676.77,10 detailed as follows:

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 36

Applicable Date Filed/Paid Amount of Tax


Quarter[/]Year

3rd Qtr 2000 November 29, P 395,165.00


2000

Annual ITR 2000 April 16, 381,893.59


2001

1st Qtr 2001 May 30, 2001 522,465.39

2nd Qtr 2001 August 29, 2001 1,033,423.34

3rd Qtr 2001 November 29, 765,021.28


2001

Annual ITR 2001 April 15, 2002 328,193.93

1st Qtr 2002 May 30, 2002 594,850.13

2nd Qtr 2002 August 29, 2002 1,164,664.11


11
TOTAL P
5,185,676.77

On November 28, 2002, Air Canada filed a written claim for refund of alleged
erroneously paid income taxes amounting to 5,185,676.77 before the
Bureau of Internal Revenue,12 Revenue District Office No. 47-East Makati. 13It
found basis from the revised definition 14 of Gross Philippine Billings under
Section 28(A)(3)(a) of the 1997 National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

....

(3) International Carrier. - An international carrier doing business in the


Philippines shall pay a tax of two and onehalf percent (2 1/2%) on its Gross
Philippine Billings as defined hereunder:

(a) International Air Carrier. - Gross Philippine Billings refers to the amount
of gross revenue derived from carriage of persons, excess baggage,
cargo and mail originating from the Philippines in a continuous and

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 37

uninterrupted flight, irrespective of the place of sale or issue and


the place of payment of the ticket or passage document: Provided,
That tickets revalidated, exchanged and/or indorsed to another international
airline form part of the Gross Philippine Billings if the passenger boards a
plane in a port or point in the Philippines: Provided, further, That for a flight
which originates from the Philippines, but transshipment of passenger takes
place at any port outside the Philippines on another airline, only the aliquot
portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine
Billings. (Emphasis supplied)

To prevent the running of the prescriptive period, Air Canada filed a Petition
for Review before the Court of Tax Appeals on November 29, 2002. 15 The case
was docketed as C.T.A. Case No. 6572.16

On December 22, 2004, the Court of Tax Appeals First Division rendered its
Decision denying the Petition for Review and, hence, the claim for refund. 17 It
found that Air Canada was engaged in business in the Philippines through a
local agent that sells airline tickets on its behalf. As such, it should be taxed
as a resident foreign corporation at the regular rate of 32%. 18 Further,
according to the Court of Tax Appeals First Division, Air Canada was deemed
to have established a "permanent establishment" 19 in the Philippines under
Article V(2)(i) of the Republic of the Philippines-Canada Tax Treaty 20 by the
appointment of the local sales agent, "in which [the] petitioner uses its
premises as an outlet where sales of [airline] tickets are made[.]" 21

Air Canada seasonably filed a Motion for Reconsideration, but the Motion was
denied in the Court of Tax Appeals First Divisions Resolution dated April 8,
2005 for lack of merit.22 The First Division held that while Air Canada was not
liable for tax on its Gross Philippine Billings under Section 28(A)(3), it was
nevertheless liable to pay the 32% corporate income tax on income derived
from the sale of airline tickets within the Philippines pursuant to Section 28(A)
(1).23

On May 9, 2005, Air Canada appealed to the Court of Tax Appeals En


Banc.24 The appeal was docketed as CTA EB No. 86. 25

In the Decision dated August 26, 2005, the Court of Tax Appeals En Banc
affirmed the findings of the First Division. 26 The En Banc ruled that Air Canada
is subject to tax as a resident foreign corporation doing business in the
Philippines since it sold airline tickets in the Philippines. 27 The Court of Tax
Appeals En Banc disposed thus:

WHEREFORE, premises considered, the instant petition is hereby DENIED


DUE COURSE, and accordingly, DISMISSED for lack of merit.28

Hence, this Petition for Review29 was filed.

The issues for our consideration are:

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 38

First, whether petitioner Air Canada, as an offline international carrier selling


passage documents through a general sales agent in the Philippines, is a
resident foreign corporation within the meaning of Section 28(A)(1) of the
1997 National Internal Revenue Code;

Second, whether petitioner Air Canada is subject to the 2% tax on Gross


Philippine Billings pursuant to Section 28(A)(3). If not, whether an offline
international carrier selling passage documents through a general sales agent
can be subject to the regular corporate income tax of 32% 30 on taxable
income pursuant to Section 28(A)(1);

Third, whether the Republic of the Philippines-Canada Tax Treaty applies,


specifically:

a. Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

b. Whether the appointment of a local general sales agent in the Philippines


falls under the definition of "permanent establishment" under Article V(2)(i) of
the Republic of the Philippines-Canada Tax Treaty; and

Lastly, whether petitioner Air Canada is entitled to the refund of


5,185,676.77 pertaining allegedly to erroneously paid tax on Gross
Philippine Billings from the third quarter of 2000 to the second quarter of
2002.

Petitioner claims that the general provision imposing the regular corporate
income tax on resident foreign corporations provided under Section 28(A)(1)
of the 1997 National Internal Revenue Code does not apply to "international
carriers,"31 which are especially classified and taxed under Section 28(A)
(3).32 It adds that the fact that it is no longer subject to Gross Philippine
Billings tax as ruled in the assailed Court of Tax Appeals Decision "does not
render it ipso facto subject to 32% income tax on taxable income as a
resident foreign corporation." 33 Petitioner argues that to impose the 32%
regular corporate income tax on its income would violate the Philippine
governments covenant under Article VIII of the Republic of the Philippines-
Canada Tax Treaty not to impose a tax higher than 1% of the carriers gross
revenue derived from sources within the Philippines. 34 It would also allegedly
result in "inequitable tax treatment of on-line and off-line international air
carriers[.]"35

Also, petitioner states that the income it derived from the sale of airline
tickets in the Philippines was income from services and not income from sales
of personal property.36 Petitioner cites the deliberations of the Bicameral
Conference Committee on House Bill No. 9077 (which eventually became the
1997 National Internal Revenue Code), particularly Senator Juan Ponce
Enriles statement,37 to reveal the "legislative intent to treat the revenue
derived from air carriage as income from services, and that the carriage of
passenger or cargo as the activity that generates the income." 38 Accordingly,
applying the principle on the situs of taxation in taxation of services,

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 39

petitioner claims that its income derived "from services rendered outside the
Philippines [was] not subject to Philippine income taxation." 39

Petitioner further contends that by the appointment of Aerotel as its general


sales agent, petitioner cannot be considered to have a "permanent
establishment"40 in the Philippines pursuant to Article V(6) of the Republic of
the Philippines-Canada Tax Treaty. 41 It points out that Aerotel is an
"independent general sales agent that acts as such for . . . other international
airline companies in the ordinary course of its business." 42 Aerotel sells
passage tickets on behalf of petitioner and receives a commission for its
services.43 Petitioner states that even the Bureau of Internal Revenue
through VAT Ruling No. 003-04 dated February 14, 2004has conceded that
an offline international air carrier, having no flight operations to and from the
Philippines, is not deemed engaged in business in the Philippines by merely
appointing a general sales agent.44 Finally, petitioner maintains that its "claim
for refund of erroneously paid Gross Philippine Billings cannot be denied on
the ground that [it] is subject to income tax under Section 28 (A) (1)" 45 since
it has not been assessed at all by the Bureau of Internal Revenue for any
income tax liability.46

On the other hand, respondent maintains that petitioner is subject to the 32%
corporate income tax as a resident foreign corporation doing business in the
Philippines. Petitioners total payment of 5,185,676.77 allegedly shows that
petitioner was earning a sizable income from the sale of its plane tickets
within the Philippines during the relevant period. 47 Respondent further points
out that this court in Commissioner of Internal Revenue v. American Airlines,
Inc.,48 which in turn cited the cases involving the British Overseas Airways
Corporation and Air India, had already settled that "foreign airline companies
which sold tickets in the Philippines through their local agents . . . [are]
considered resident foreign corporations engaged in trade or business in the
country."49 It also cites Revenue Regulations No. 6-78 dated April 25, 1978,
which defined the phrase "doing business in the Philippines" as including
"regular sale of tickets in the Philippines by offline international airlines either
by themselves or through their agents." 50

Respondent further contends that petitioner is not entitled to its claim for
refund because the amount of 5,185,676.77 it paid as tax from the third
quarter of 2000 to the second quarter of 2001 was still short of the 32%
income tax due for the period.51 Petitioner cannot allegedly claim good faith
in its failure to pay the right amount of tax since the National Internal
Revenue Code became operative on January 1, 1998 and by 2000, petitioner
should have already been aware of the implications of Section 28(A)(3) and
the decided cases of this courts ruling on the taxability of offline
international carriers selling passage tickets in the Philippines. 52

At the outset, we affirm the Court of Tax Appeals ruling that petitioner, as an
offline international carrier with no landing rights in the Philippines, is not

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 40

liable to tax on Gross Philippine Billings under Section 28(A)(3) of the 1997
National Internal Revenue Code:

SEC. 28. Rates of Income Tax on Foreign Corporations.

(A) Tax on Resident Foreign Corporations. -

....

(3) International Carrier. - An international carrier doing business in the


Philippines shall pay a tax of two and one-half percent (2 1/2%) on its Gross
Philippine Billings as defined hereunder:

(a) International Air Carrier. - 'Gross Philippine Billings' refers to the amount
of gross revenue derived from carriage of persons, excess baggage, cargo
and mail originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of
the ticket or passage document: Provided, That tickets revalidated,
exchanged and/or indorsed to another international airline form part of the
Gross Philippine Billings if the passenger boards a plane in a port or point in
the Philippines: Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port outside
the Philippines on another airline, only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the Philippines to the point of
transshipment shall form part of Gross Philippine Billings. (Emphasis supplied)

Under the foregoing provision, the tax attaches only when the carriage of
persons, excess baggage, cargo, and mail originated from the Philippines in a
continuous and uninterrupted flight, regardless of where the passage
documents were sold.

Not having flights to and from the Philippines, petitioner is clearly not liable
for the Gross Philippine Billings tax.

II

Petitioner, an offline carrier, is a resident foreign corporation for income tax


purposes. Petitioner falls within the definition of resident foreign corporation
under Section 28(A)(1) of the 1997 National Internal Revenue Code, thus, it
may be subject to 32%53 tax on its taxable income:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation


organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall
be subject to an income tax equivalent to thirty-five percent (35%)

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 41

of the taxable income derived in the preceding taxable year from all
sources within the Philippines: Provided, That effective January 1, 1998,
the rate of income tax shall be thirty-four percent (34%); effective January 1,
1999, the rate shall be thirty-three percent (33%); and effective January 1,
2000 and thereafter, the rate shall be thirty-two percent (32% 54). (Emphasis
supplied)

The definition of "resident foreign corporation" has not substantially changed


throughout the amendments of the National Internal Revenue Code. All
versions refer to "a foreign corporation engaged in trade or business within
the Philippines."

Commonwealth Act No. 466, known as the National Internal Revenue Code
and approved on June 15, 1939, defined "resident foreign corporation" as
applying to "a foreign corporation engaged in trade or business within the
Philippines or having an office or place of business therein." 55

Section 24(b)(2) of the National Internal Revenue Code, as amended by


Republic Act No. 6110, approved on August 4, 1969, reads:

Sec. 24. Rates of tax on corporations. . . .

(b) Tax on foreign corporations. . . .

(2) Resident corporations. A corporation organized, authorized, or existing


under the laws of any foreign country, except a foreign life insurance
company, engaged in trade or business within the Philippines, shall be
taxable as provided in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within the
Philippines.56 (Emphasis supplied)

Presidential Decree No. 1158-A took effect on June 3, 1977 amending certain
sections of the 1939 National Internal Revenue Code. Section 24(b)(2) on
foreign resident corporations was amended, but it still provides that "[a]
corporation organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines, shall be taxable
as provided in subsection (a) of this section upon the total net income
received in the preceding taxable year from all sources within the
Philippines[.]"57

As early as 1987, this court in Commissioner of Internal Revenue v. British


Overseas Airways Corporation58declared British Overseas Airways
Corporation, an international air carrier with no landing rights in the
Philippines, as a resident foreign corporation engaged in business in the
Philippines through its local sales agent that sold and issued tickets for the
airline company.59 This court discussed that:

There is no specific criterion as to what constitutes "doing" or "engaging in"


or "transacting" business. Each case must be judged in the light of its

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 42

peculiar environmental circumstances. The term implies a continuity of


commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of
the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business
organization. "In order that a foreign corporation may be regarded as doing
business within a State, there must be continuity of conduct and intention to
establish a continuous business, such as the appointment of a local agent,
and not one of a temporary character.["]

BOAC, during the periods covered by the subject-assessments, maintained a


general sales agent in the Philippines. That general sales agent, from 1959 to
1971, "was engaged in (1) selling and issuing tickets; (2) breaking down the
whole trip into series of trips each trip in the series corresponding to a
different airline company; (3) receiving the fare from the whole trip; and (4)
consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline
settlement as prescribed by Article VI of the Resolution No. 850 of the IATA
Agreement." Those activities were in exercise of the functions which are
normally incident to, and are in progressive pursuit of, the purpose and object
of its organization as an international air carrier. In fact, the regular sale of
tickets, its main activity, is the very lifeblood of the airline business, the
generation of sales being the paramount objective. There should be no doubt
then that BOAC was "engaged in" business in the Philippines through a local
agent during the period covered by the assessments. Accordingly, it is a
resident foreign corporation subject to tax upon its total net income received
in the preceding taxable year from all sources within the
Philippines.60 (Emphasis supplied, citations omitted)

Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides
guidance with its definition of "doing business" with regard to foreign
corporations. Section 3(d) of the law enumerates the activities that constitute
doing business:

d. the phrase "doing business" shall include soliciting orders, service


contracts, opening offices, whether called "liaison" offices or branches;
appointing representatives or distributors domiciled in the Philippines or who
in any calendar year stay in the country for a period or periods totalling one
hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business, firm, entity or corporation in
the Philippines; and any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that
extent the performance of acts or works, or the exercise of some of
the functions normally incident to, and in progressive prosecution
of, commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase "doing business" shall not
be deemed to include mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the exercise of
rights as such investor; nor having a nominee director or officer to represent
its interests in such corporation; nor appointing a representative or distributor

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 43

domiciled in the Philippines which transacts business in its own name and for
its own account[.]61 (Emphasis supplied)

While Section 3(d) above states that "appointing a representative or


distributor domiciled in the Philippines which transacts business in its own
name and for its own account" is not considered as "doing business," the
Implementing Rules and Regulations of Republic Act No. 7042 clarifies that
"doing business" includes "appointing representatives or
distributors, operating under full control of the foreign corporation,
domiciled in the Philippines or who in any calendar year stay in the country
for a period or periods totaling one hundred eighty (180) days or more[.]" 62

An offline carrier is "any foreign air carrier not certificated by the [Civil
Aeronautics] Board, but who maintains office or who has designated or
appointed agents or employees in the Philippines, who sells or offers for sale
any air transportation in behalf of said foreign air carrier and/or others, or
negotiate for, or holds itself out by solicitation, advertisement, or otherwise
sells, provides, furnishes, contracts, or arranges for such transportation." 63

"Anyone desiring to engage in the activities of an off-line carrier [must] apply


to the [Civil Aeronautics] Board for such authority." 64 Each offline carrier must
file with the Civil Aeronautics Board a monthly report containing information
on the tickets sold, such as the origin and destination of the passengers,
carriers involved, and commissions received.65

Petitioner is undoubtedly "doing business" or "engaged in trade or business"


in the Philippines.

Aerotel performs acts or works or exercises functions that are incidental and
beneficial to the purpose of petitioners business. The activities of Aerotel
bring direct receipts or profits to petitioner. 66 There is nothing on record to
show that Aerotel solicited orders alone and for its own account and without
interference from, let alone direction of, petitioner. On the contrary, Aerotel
cannot "enter into any contract on behalf of [petitioner Air Canada] without
the express written consent of [the latter,]" 67 and it must perform its
functions according to the standards required by petitioner. 68 Through Aerotel,
petitioner is able to engage in an economic activity in the Philippines.

Further, petitioner was issued by the Civil Aeronautics Board an authority to


operate as an offline carrier in the Philippines for a period of five years, or
from April 24, 2000 until April 24, 2005.69

Petitioner is, therefore, a resident foreign corporation that is taxable on its


income derived from sources within the Philippines. Petitioners income from
sale of airline tickets, through Aerotel, is income realized from the pursuit of
its business activities in the Philippines.

III

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 44

However, the application of the regular 32% tax rate under Section 28(A)(1)
of the 1997 National Internal Revenue Code must consider the existence of
an effective tax treaty between the Philippines and the home country of the
foreign air carrier.

In the earlier case of South African Airways v. Commissioner of Internal


Revenue,70 this court held that Section 28(A)(3)(a) does not categorically
exempt all international air carriers from the coverage of Section 28(A)(1).
Thus, if Section 28(A)(3)(a) is applicable to a taxpayer, then the general rule
under Section 28(A)(1) does not apply. If, however, Section 28(A)(3)(a) does
not apply, an international air carrier would be liable for the tax under Section
28(A)(1).71

This court in South African Airways declared that the correct interpretation of
these provisions is that: "international air carrier[s] maintain[ing] flights to
and from the Philippines . . . shall be taxed at the rate of 2% of its Gross
Philippine Billings[;] while international air carriers that do not have flights to
and from the Philippines but nonetheless earn income from other activities in
the country [like sale of airline tickets] will be taxed at the rate of 32% of
such [taxable] income."72

In this case, there is a tax treaty that must be taken into consideration to
determine the proper tax rate.

A tax treaty is an agreement entered into between sovereign states "for


purposes of eliminating double taxation on income and capital, preventing
fiscal evasion, promoting mutual trade and investment, and according fair
and equitable tax treatment to foreign residents or
nationals."73 Commissioner of Internal Revenue v. S.C. Johnson and Son,
Inc.74 explained the purpose of a tax treaty:

The purpose of these international agreements is to reconcile the national


fiscal legislations of the contracting parties in order to help the taxpayer
avoid simultaneous taxation in two different jurisdictions. More precisely, the
tax conventions are drafted with a view towards the elimination
of international juridical double taxation, which is defined as the imposition of
comparable taxes in two or more states on the same taxpayer in respect of
the same subject matter and for identical periods.

The apparent rationale for doing away with double taxation is to encourage
the free flow of goods and services and the movement of capital, technology
and persons between countries, conditions deemed vital in creating robust
and dynamic economies. Foreign investments will only thrive in a fairly
predictable and reasonable international investment climate and the
protection against double taxation is crucial in creating such a
climate.75 (Emphasis in the original, citations omitted)

Observance of any treaty obligation binding upon the government of the


Philippines is anchored on the constitutional provision that the Philippines

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 45

"adopts the generally accepted principles of international law as part of the


law of the land[.]"76 Pacta sunt servanda is a fundamental international law
principle that requires agreeing parties to comply with their treaty obligations
in good faith.77

Hence, the application of the provisions of the National Internal Revenue


Code must be subject to the provisions of tax treaties entered into by the
Philippines with foreign countries.

In Deutsche Bank AG Manila Branch v. Commissioner of Internal


Revenue,78 this court stressed the binding effects of tax treaties. It dealt with
the issue of "whether the failure to strictly comply with [Revenue
Memorandum Order] RMO No. 1-200079 will deprive persons or corporations
of the benefit of a tax treaty." 80 Upholding the tax treaty over the
administrative issuance, this court reasoned thus:

Our Constitution provides for adherence to the general principles of


international law as part of the law of the land. The time-honored
international principle of pacta sunt servanda demands the performance in
good faith of treaty obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and obligations
under the treaty must be performed by them in good faith. More
importantly, treaties have the force and effect of law in this
jurisdiction.

Tax treaties are entered into "to reconcile the national fiscal legislations of the
contracting parties and, in turn, help the taxpayer avoid simultaneous
taxations in two different jurisdictions." CIR v. S.C. Johnson and Son,
Inc. further clarifies that "tax conventions are drafted with a view towards the
elimination of international juridical double taxation, which is defined as the
imposition of comparable taxes in two or more states on the same taxpayer
in respect of the same subject matter and for identical periods. The apparent
rationale for doing away with double taxation is to encourage the free flow of
goods and services and the movement of capital, technology and persons
between countries, conditions deemed vital in creating robust and dynamic
economies. Foreign investments will only thrive in a fairly predictable and
reasonable international investment climate and the protection against
double taxation is crucial in creating such a climate." Simply put, tax treaties
are entered into to minimize, if not eliminate the harshness of international
juridical double taxation, which is why they are also known as double tax
treaty or double tax agreements.

"A state that has contracted valid international obligations is bound to make
in its legislations those modifications that may be necessary to ensure the
fulfillment of the obligations undertaken." Thus, laws and issuances must
ensure that the reliefs granted under tax treaties are accorded to the parties
entitled thereto. The BIR must not impose additional requirements that would
negate the availment of the reliefs provided for under international
agreements. More so, when the RPGermany Tax Treaty does not provide for
any pre-requisite for the availment of the benefits under said agreement.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 46

....

Bearing in mind the rationale of tax treaties, the period of application for the
availment of tax treaty relief as required by RMO No. 1-2000 should not
operate to divest entitlement to the relief as it would constitute a violation of
the duty required by good faith in complying with a tax treaty. The denial of
the availment of tax relief for the failure of a taxpayer to apply within the
prescribed period under the administrative issuance would impair the value
of the tax treaty. At most, the application for a tax treaty relief from the BIR
should merely operate to confirm the entitlement of the taxpayer to the relief.

The obligation to comply with a tax treaty must take precedence over the
objective of RMO No. 1-2000. Logically, noncompliance with tax treaties has
negative implications on international relations, and unduly discourages
foreign investors. While the consequences sought to be prevented by RMO
No. 1-2000 involve an administrative procedure, these may be remedied
through other system management processes, e.g., the imposition of a fine or
penalty. But we cannot totally deprive those who are entitled to the benefit of
a treaty for failure to strictly comply with an administrative issuance requiring
prior application for tax treaty relief.81 (Emphasis supplied, citations omitted)

On March 11, 1976, the representatives 82 for the government of the Republic
of the Philippines and for the government of Canada signed the Convention
between the Philippines and Canada for the Avoidance of Double Taxation
and the Prevention of Fiscal Evasion with Respect to Taxes on Income
(Republic of the Philippines-Canada Tax Treaty). This treaty entered into force
on December 21, 1977.

Article V83 of the Republic of the Philippines-Canada Tax Treaty defines


"permanent establishment" as a "fixed place of business in which the
business of the enterprise is wholly or partly carried on." 84

Even though there is no fixed place of business, an enterprise of a


Contracting State is deemed to have a permanent establishment in the other
Contracting State if under certain conditions there is a person acting for it.

Specifically, Article V(4) of the Republic of the Philippines-Canada Tax Treaty


states that "[a] person acting in a Contracting State on behalf of an
enterprise of the other Contracting State (other than an agent of independent
status to whom paragraph 6 applies) shall be deemed to be a permanent
establishment in the first-mentioned State if . . . he has and habitually
exercises in that State an authority to conclude contracts on behalf of the
enterprise, unless his activities are limited to the purchase of goods or
merchandise for that enterprise[.]" The provision seems to refer to one who
would be considered an agent under Article 1868 85 of the Civil Code of the
Philippines.

On the other hand, Article V(6) provides that "[a]n enterprise of a Contracting
State shall not be deemed to have a permanent establishment in the other

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 47

Contracting State merely because it carries on business in that other State


through a broker, general commission agent or any other agent of an
independent status, where such persons are acting in the ordinary course
of their business."

Considering Article XV86 of the same Treaty, which covers dependent personal
services, the term "dependent" would imply a relationship between the
principal and the agent that is akin to an employer-employee relationship.

Thus, an agent may be considered to be dependent on the principal where


the latter exercises comprehensive control and detailed instructions over the
means and results of the activities of the agent. 87

Section 3 of Republic Act No. 776, as amended, also known as The Civil
Aeronautics Act of the Philippines, defines a general sales agent as "a person,
not a bonafide employee of an air carrier, who pursuant to an authority from
an airline, by itself or through an agent, sells or offers for sale any air
transportation, or negotiates for, or holds himself out by solicitation,
advertisement or otherwise as one who sells, provides, furnishes, contracts or
arranges for, such air transportation." 88 General sales agents and their
property, property rights, equipment, facilities, and franchise are subject to
the regulation and control of the Civil Aeronautics Board. 89 A permit or
authorization issued by the Civil Aeronautics Board is required before a
general sales agent may engage in such an activity. 90

Through the appointment of Aerotel as its local sales agent, petitioner is


deemed to have created a "permanent establishment" in the Philippines as
defined under the Republic of the Philippines-Canada Tax Treaty.

Petitioner appointed Aerotel as its passenger general sales agent to perform


the sale of transportation on petitioner and handle reservations,
appointment, and supervision of International Air Transport
Associationapproved and petitioner-approved sales agents, including the
following services:

ARTICLE 7
GSA SERVICES

The GSA [Aerotel Ltd., Corp.] shall perform on behalf of AC [Air Canada] the
following services:

a) Be the fiduciary of AC and in such capacity act solely and entirely for the
benefit of AC in every matter relating to this Agreement;

....

c) Promotion of passenger transportation on AC;

....

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 48

e) Without the need for endorsement by AC, arrange for the reissuance, in
the Territory of the GSA [Philippines], of traffic documents issued by AC
outside the said territory of the GSA [Philippines], as required by the
passenger(s);

....

h) Distribution among passenger sales agents and display of timetables, fare


sheets, tariffs and publicity material provided by AC in accordance with the
reasonable requirements of AC;

....

j) Distribution of official press releases provided by AC to media and reference


of any press or public relations inquiries to AC;

....

o) Submission for ACs approval, of an annual written sales plan on or before


a date to be determined by AC and in a form acceptable to AC;

....

q) Submission of proposals for ACs approval of passenger sales agent


incentive plans at a reasonable time in advance of proposed implementation.

r) Provision of assistance on request, in its relations with Governmental and


other authorities, offices and agencies in the Territory [Philippines].

....

u) Follow AC guidelines for the handling of baggage claims and customer


complaints and, unless otherwise stated in the guidelines, refer all such
claims and complaints to AC.91

Under the terms of the Passenger General Sales Agency Agreement, Aerotel
will "provide at its own expense and acceptable to [petitioner Air Canada],
adequate and suitable premises, qualified staff, equipment, documentation,
facilities and supervision and in consideration of the remuneration and
expenses payable[,] [will] defray all costs and expenses of and incidental to
the Agency."92 "[I]t is the sole employer of its employees and . . . is
responsible for [their] actions . . . or those of any subcontractor." 93 In
remuneration for its services, Aerotel would be paid by petitioner a
commission on sales of transportation plus override commission on flown
revenues.94 Aerotel would also be reimbursed "for all authorized expenses
supported by original supplier invoices." 95

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 49

Aerotel is required to keep "separate books and records of account, including


supporting documents, regarding all transactions at, through or in any way
connected with [petitioner Air Canada] business." 96

"If representing more than one carrier, [Aerotel must] represent all carriers in
an unbiased way."97 Aerotel cannot "accept additional appointments as
General Sales Agent of any other carrier without the prior written consent of
[petitioner Air Canada]."98

The Passenger General Sales Agency Agreement "may be terminated by


either party without cause upon [no] less than 60 days prior notice in
writing[.]"99 In case of breach of any provisions of the Agreement, petitioner
may require Aerotel "to cure the breach in 30 days failing which [petitioner
Air Canada] may terminate [the] Agreement[.]" 100

The following terms are indicative of Aerotels dependent status:

First, Aerotel must give petitioner written notice "within 7 days of the date [it]
acquires or takes control of another entity or merges with or is acquired or
controlled by another person or entity[.]" 101 Except with the written consent
of petitioner, Aerotel must not acquire a substantial interest in the ownership,
management, or profits of a passenger sales agent affiliated with the
International Air Transport Association or a non-affiliated passenger sales
agent nor shall an affiliated passenger sales agent acquire a substantial
interest in Aerotel as to influence its commercial policy and/or management
decisions.102 Aerotel must also provide petitioner "with a report on any
interests held by [it], its owners, directors, officers, employees and their
immediate families in companies and other entities in the aviation industry or
. . . industries related to it[.]" 103 Petitioner may require that any interest be
divested within a set period of time.104

Second, in carrying out the services, Aerotel cannot enter into any contract
on behalf of petitioner without the express written consent of the latter; 105 it
must act according to the standards required by petitioner; 106 "follow the
terms and provisions of the [petitioner Air Canada] GSA Manual [and all]
written instructions of [petitioner Air Canada;]" 107 and "[i]n the absence of an
applicable provision in the Manual or instructions, [Aerotel must] carry out its
functions in accordance with [its own] standard practices and
procedures[.]"108

Third, Aerotel must only "issue traffic documents approved by [petitioner Air
Canada] for all transportation over [its] services[.]" 109 All use of petitioners
name, logo, and marks must be with the written consent of petitioner and
according to petitioners corporate standards and guidelines set out in the
Manual.110

Fourth, all claims, liabilities, fines, and expenses arising from or in connection
with the transportation sold by Aerotel are for the account of petitioner,
except in the case of negligence of Aerotel. 111

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 50

Aerotel is a dependent agent of petitioner pursuant to the terms of the


Passenger General Sales Agency Agreement executed between the parties. It
has the authority or power to conclude contracts or bind petitioner to
contracts entered into in the Philippines. A third-party liability on contracts of
Aerotel is to petitioner as the principal, and not to Aerotel, and liability to
such third party is enforceable against petitioner. While Aerotel maintains a
certain independence and its activities may not be devoted wholly to
petitioner, nonetheless, when representing petitioner pursuant to the
Agreement, it must carry out its functions solely for the benefit of petitioner
and according to the latters Manual and written instructions. Aerotel is
required to submit its annual sales plan for petitioners approval.

In essence, Aerotel extends to the Philippines the transportation business of


petitioner. It is a conduit or outlet through which petitioners airline tickets are
sold.112

Under Article VII (Business Profits) of the Republic of the Philippines-Canada


Tax Treaty, the "business profits" of an enterprise of a Contracting State is
"taxable only in that State[,] unless the enterprise carries on business in the
other Contracting State through a permanent establishment[.]" 113 Thus,
income attributable to Aerotel or from business activities effected by
petitioner through Aerotel may be taxed in the Philippines. However, pursuant
to the last paragraph 114 of Article VII in relation to Article VIII 115 (Shipping and
Air Transport) of the same Treaty, the tax imposed on income derived from
the operation of ships or aircraft in international traffic should not exceed 1
% of gross revenues derived from Philippine sources.

IV

While petitioner is taxable as a resident foreign corporation under Section


28(A)(1) of the 1997 National Internal Revenue Code on its taxable
income116 from sale of airline tickets in the Philippines, it could only be taxed
at a maximum of 1% of gross revenues, pursuant to Article VIII of the
Republic of the Philippines-Canada Tax Treaty that applies to petitioner as a
"foreign corporation organized and existing under the laws of Canada[.]" 117

Tax treaties form part of the law of the land, 118 and jurisprudence has applied
the statutory construction principle that specific laws prevail over general
ones.119

The Republic of the Philippines-Canada Tax Treaty was ratified on December


21, 1977 and became valid and effective on that date. On the other hand, the
applicable provisions120 relating to the taxability of resident foreign
corporations and the rate of such tax found in the National Internal Revenue
Code became effective on January 1, 1998. 121 Ordinarily, the later provision
governs over the earlier one.122 In this case, however, the provisions of the
Republic of the Philippines-Canada Tax Treaty are more specific than the
provisions found in the National Internal Revenue Code.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 51

These rules of interpretation apply even though one of the sources is a treaty
and not simply a statute.

Article VII, Section 21 of the Constitution provides:

SECTION 21. No treaty or international agreement shall be valid and effective


unless concurred in by at least two-thirds of all the Members of the Senate.

This provision states the second of two ways through which international
obligations become binding. Article II, Section 2 of the Constitution deals with
international obligations that are incorporated, while Article VII, Section 21
deals with international obligations that become binding through ratification.

"Valid and effective" means that treaty provisions that define rights and
duties as well as definite prestations have effects equivalent to a statute.
Thus, these specific treaty provisions may amend statutory provisions.
Statutory provisions may also amend these types of treaty obligations.

We only deal here with bilateral treaty state obligations that are not
international obligations erga omnes. We are also not required to rule in this
case on the effect of international customary norms especially those with jus
cogens character.

The second paragraph of Article VIII states that "profits from sources within a
Contracting State derived by an enterprise of the other Contracting State
from the operation of ships or aircraft in international traffic may be taxed in
the first-mentioned State but the tax so charged shall not exceed the lesser
of a) one and one-half per cent of the gross revenues derived from sources in
that State; and b) the lowest rate of Philippine tax imposed on such profits
derived by an enterprise of a third State."

The Agreement between the government of the Republic of the Philippines


and the government of Canada on Air Transport, entered into on January 14,
1997, reiterates the effectivity of Article VIII of the Republic of the Philippines-
Canada Tax Treaty:

ARTICLE XVI
(Taxation)

The Contracting Parties shall act in accordance with the provisions of Article
VIII of the Convention between the Philippines and Canada for the Avoidance
of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes
on Income, signed at Manila on March 31, 1976 and entered into force on
December 21, 1977, and any amendments thereto, in respect of the
operation of aircraft in international traffic. 123

Petitioners income from sale of ticket for international carriage of passenger


is income derived from international operation of aircraft. The sale of tickets

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 52

is closely related to the international operation of aircraft that it is considered


incidental thereto.

"[B]y reason of our bilateral negotiations with [Canada], we have agreed to


have our right to tax limited to a certain extent[.]" 124 Thus, we are bound to
extend to a Canadian air carrier doing business in the Philippines through a
local sales agent the benefit of a lower tax equivalent to 1% on business
profits derived from sale of international air transportation.

Finally, we reject petitioners contention that the Court of Tax Appeals erred in
denying its claim for refund of erroneously paid Gross Philippine Billings tax
on the ground that it is subject to income tax under Section 28(A)(1) of the
National Internal Revenue Code because (a) it has not been assessed at all by
the Bureau of Internal Revenue for any income tax liability; 125 and (b) internal
revenue taxes cannot be the subject of set-off or
compensation,126citing Republic v. Mambulao Lumber Co., et al.127 and Francia
v. Intermediate Appellate Court.128

In SMI-ED Philippines Technology, Inc. v. Commissioner of Internal


Revenue,129 we have ruled that "[i]n an action for the refund of taxes
allegedly erroneously paid, the Court of Tax Appeals may determine whether
there are taxes that should have been paid in lieu of the taxes paid." 130 The
determination of the proper category of tax that should have been paid is
incidental and necessary to resolve the issue of whether a refund should be
granted.131 Thus:

Petitioner argued that the Court of Tax Appeals had no jurisdiction to subject
it to 6% capital gains tax or other taxes at the first instance. The Court of Tax
Appeals has no power to make an assessment.

As earlier established, the Court of Tax Appeals has no assessment powers. In


stating that petitioners transactions are subject to capital gains tax,
however, the Court of Tax Appeals was not making an assessment. It was
merely determining the proper category of tax that petitioner should have
paid, in view of its claim that it erroneously imposed upon itself and paid the
5% final tax imposed upon PEZA-registered enterprises.

The determination of the proper category of tax that petitioner should have
paid is an incidental matter necessary for the resolution of the principal issue,
which is whether petitioner was entitled to a refund.

The issue of petitioners claim for tax refund is intertwined with the issue of
the proper taxes that are due from petitioner. A claim for tax refund carries
the assumption that the tax returns filed were correct. If the tax return filed
was not proper, the correctness of the amount paid and, therefore, the claim
for refund become questionable. In that case, the court must determine if a

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 53

taxpayer claiming refund of erroneously paid taxes is more properly liable for
taxes other than that paid.

In South African Airways v. Commissioner of Internal Revenue, South African


Airways claimed for refund of its erroneously paid 2% taxes on its gross
Philippine billings. This court did not immediately grant South Africans claim
for refund. This is because although this court found that South African
Airways was not subject to the 2% tax on its gross Philippine billings, this
court also found that it was subject to 32% tax on its taxable income.

In this case, petitioners claim that it erroneously paid the 5% final tax is an
admission that the quarterly tax return it filed in 2000 was improper. Hence,
to determine if petitioner was entitled to the refund being claimed, the Court
of Tax Appeals has the duty to determine if petitioner was indeed not liable
for the 5% final tax and, instead, liable for taxes other than the 5% final tax.
As in South African Airways, petitioners request for refund can neither be
granted nor denied outright without such determination.

If the taxpayer is found liable for taxes other than the erroneously paid 5%
final tax, the amount of the taxpayers liability should be computed and
deducted from the refundable amount.

Any liability in excess of the refundable amount, however, may not be


collected in a case involving solely the issue of the taxpayers entitlement to
refund. The question of tax deficiency is distinct and unrelated to the
question of petitioners entitlement to refund. Tax deficiencies should be
subject to assessment procedures and the rules of prescription. The court
cannot be expected to perform the BIRs duties whenever it fails to do so
either through neglect or oversight. Neither can court processes be used as a
tool to circumvent laws protecting the rights of taxpayers. 132

Hence, the Court of Tax Appeals properly denied petitioners claim for refund
of allegedly erroneously paid tax on its Gross Philippine Billings, on the
ground that it was liable instead for the regular 32% tax on its taxable
income received from sources within the Philippines. Its determination of
petitioners liability for the 32% regular income tax was made merely for the
purpose of ascertaining petitioners entitlement to a tax refund and not for
imposing any deficiency tax.

In this regard, the matter of set-off raised by petitioner is not an issue.


Besides, the cases cited are based on different circumstances. In both cited
cases,133 the taxpayer claimed that his (its) tax liability was off-set by his (its)
claim against the government.

Specifically, in Republic v. Mambulao Lumber Co., et al., Mambulao Lumber


contended that the amounts it paid to the government as reforestation
charges from 1947 to 1956, not having been used in the reforestation of the
area covered by its license, may be set off or applied to the payment of forest

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 54

charges still due and owing from it. 134Rejecting Mambulaos claim of legal
compensation, this court ruled:

[A]ppellant and appellee are not mutually creditors and debtors of each other.
Consequently, the law on compensation is inapplicable. On this point, the trial
court correctly observed:

Under Article 1278, NCC, compensation should take place when two persons
in their own right are creditors and debtors of each other. With respect to the
forest charges which the defendant Mambulao Lumber Company has paid to
the government, they are in the coffers of the government as taxes
collected, and the government does not owe anything to defendant
Mambulao Lumber Company. So, it is crystal clear that the Republic of the
Philippines and the Mambulao Lumber Company are not creditors and
debtors of each other, because compensation refers to mutual debts. * * *.

And the weight of authority is to the effect that internal revenue taxes, such
as the forest charges in question, can not be the subject of set-off or
compensation.

A claim for taxes is not such a debt, demand, contract or judgment as is


allowed to be set-off under the statutes of set-off, which are construed
uniformly, in the light of public policy, to exclude the remedy in an action or
any indebtedness of the state or municipality to one who is liable to the state
or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. * * *. (80
C.J.S. 7374.)

The general rule, based on grounds of public policy is well-settled that no set-
off is admissible against demands for taxes levied for general or local
governmental purposes. The reason on which the general rule is based, is
that taxes are not in the nature of contracts between the party and party but
grow out of a duty to, and are the positive acts of the government, to the
making and enforcing of which, the personal consent of individual taxpayers
is not required. * * * If the taxpayer can properly refuse to pay his tax when
called upon by the Collector, because he has a claim against the
governmental body which is not included in the tax levy, it is plain that some
legitimate and necessary expenditure must be curtailed. If the taxpayers
claim is disputed, the collection of the tax must await and abide the result of
a lawsuit, and meanwhile the financial affairs of the government will be
thrown into great confusion. (47 Am. Jur. 766767.) 135 (Emphasis supplied)

In Francia, this court did not allow legal compensation since not all requisites
of legal compensation provided under Article 1279 were present. 136 In that
case, a portion of Francias property in Pasay was expropriated by the
national government,137 which did not immediately pay Francia. In the
meantime, he failed to pay the real property tax due on his remaining
property to the local government of Pasay, which later on would auction the
property on account of such delinquency. 138 He then moved to set aside the
auction sale and argued, among others, that his real property tax

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 55

delinquency was extinguished by legal compensation on account of his


unpaid claim against the national government. 139 This court ruled against
Francia:

There is no legal basis for the contention. By legal compensation, obligations


of persons, who in their own right are reciprocally debtors and creditors of
each other, are extinguished (Art. 1278, Civil Code). The circumstances of the
case do not satisfy the requirements provided by Article 1279, to wit:

(1) that each one of the obligors be bound principally and that he be at the
same time a principal creditor of the other;

xxx xxx xxx

(3) that the two debts be due.

xxx xxx xxx

This principal contention of the petitioner has no merit. We have consistently


ruled that there can be no off-setting of taxes against the claims that the
taxpayer may have against the government. A person cannot refuse to pay a
tax on the ground that the government owes him an amount equal to or
greater than the tax being collected. The collection of a tax cannot await the
results of a lawsuit against the government.

....

There are other factors which compel us to rule against the petitioner. The
tax was due to the city government while the expropriation was effected by
the national government. Moreover, the amount of 4,116.00 paid by the
national government for the 125 square meter portion of his lot was
deposited with the Philippine National Bank long before the sale at public
auction of his remaining property. Notice of the deposit dated September 28,
1977 was received by the petitioner on September 30, 1977. The petitioner
admitted in his testimony that he knew about the 4,116.00 deposited with
the bank but he did not withdraw it. It would have been an easy matter to
withdraw 2,400.00 from the deposit so that he could pay the tax obligation
thus aborting the sale at public auction. 140

The ruling in Francia was applied to the subsequent cases of Caltex


Philippines, Inc. v. Commission on Audit 141 and Philex Mining Corporation v.
Commissioner of Internal Revenue.142 In Caltex, this court reiterated:

[A] taxpayer may not offset taxes due from the claims that he may have
against the government. Taxes cannot be the subject of compensation
because the government and taxpayer are not mutually creditors and debtors
of each other and a claim for taxes is not such a debt, demand, contract or
judgment as is allowed to be set-off.143 (Citations omitted)

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 56

Philex Mining ruled that "[t]here is a material distinction between a tax and
debt. Debts are due to the Government in its corporate capacity, while taxes
are due to the Government in its sovereign capacity." 144 Rejecting Philex
Minings assertion that the imposition of surcharge and interest was
unjustified because it had no obligation to pay the excise tax liabilities within
the prescribed period since, after all, it still had pending claims for VAT input
credit/refund with the Bureau of Internal Revenue, this court explained:

To be sure, we cannot allow Philex to refuse the payment of its tax liabilities
on the ground that it has a pending tax claim for refund or credit against the
government which has not yet been granted. It must be noted that a
distinguishing feature of a tax is that it is compulsory rather than a matter of
bargain. Hence, a tax does not depend upon the consent of the taxpayer. If
any tax payer can defer the payment of taxes by raising the defense that it
still has a pending claim for refund or credit, this would adversely affect the
government revenue system. A taxpayer cannot refuse to pay his taxes when
they fall due simply because he has a claim against the government or that
the collection of the tax is contingent on the result of the lawsuit it filed
against the government. Moreover, Philexs theory that would automatically
apply its VAT input credit/refund against its tax liabilities can easily give rise
to confusion and abuse, depriving the government of authority over the
manner by which taxpayers credit and offset their tax liabilities. 145 (Citations
omitted)

In sum, the rulings in those cases were to the effect that the taxpayer cannot
simply refuse to pay tax on the ground that the tax liabilities were off-set
against any alleged claim the taxpayer may have against the government.
Such would merely be in keeping with the basic policy on prompt collection of
taxes as the lifeblood of the government.1wphi1

Here, what is involved is a denial of a taxpayers refund claim on account of


the Court of Tax Appeals finding of its liability for another tax in lieu of the
Gross Philippine Billings tax that was allegedly erroneously paid.

Squarely applicable is South African Airways where this court rejected similar
arguments on the denial of claim for tax refund:

Commissioner of Internal Revenue v. Court of Tax Appeals, however, granted


the offsetting of a tax refund with a tax deficiency in this wise:

Further, it is also worth noting that the Court of Tax Appeals erred in denying
petitioners supplemental motion for reconsideration alleging bringing to said
courts attention the existence of the deficiency income and business tax
assessment against Citytrust. The fact of such deficiency assessment is
intimately related to and inextricably intertwined with the right of respondent
bank to claim for a tax refund for the same year. To award such refund
despite the existence of that deficiency assessment is an absurdity and a
polarity in conceptual effects. Herein private respondent cannot be entitled to
refund and at the same time be liable for a tax deficiency assessment for the
same year.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 57

The grant of a refund is founded on the assumption that the tax return is
valid, that is, the facts stated therein are true and correct. The deficiency
assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return
which, by itself and without unquestionable evidence, cannot be the basis for
the grant of the refund.

Section 82, Chapter IX of the National Internal Revenue Code of 1977, which
was the applicable law when the claim of Citytrust was filed, provides that
"(w)hen an assessment is made in case of any list, statement, or return,
which in the opinion of the Commissioner of Internal Revenue was false or
fraudulent or contained any understatement or undervaluation, no tax
collected under such assessment shall be recovered by any suits unless it is
proved that the said list, statement, or return was not false nor fraudulent
and did not contain any understatement or undervaluation; but this provision
shall not apply to statements or returns made or to be made in good faith
regarding annual depreciation of oil or gas wells and mines."

Moreover, to grant the refund without determination of the proper


assessment and the tax due would inevitably result in multiplicity of
proceedings or suits. If the deficiency assessment should subsequently be
upheld, the Government will be forced to institute anew a proceeding for the
recovery of erroneously refunded taxes which recourse must be filed within
the prescriptive period of ten years after discovery of the falsity, fraud or
omission in the false or fraudulent return involved. This would necessarily
require and entail additional efforts and expenses on the part of the
Government, impose a burden on and a drain of government funds, and
impede or delay the collection of much-needed revenue for governmental
operations.

Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it


is both logically necessary and legally appropriate that the issue of the
deficiency tax assessment against Citytrust be resolved jointly with its claim
for tax refund, to determine once and for all in a single proceeding the true
and correct amount of tax due or refundable.

In fact, as the Court of Tax Appeals itself has heretofore conceded, it would be
only just and fair that the taxpayer and the Government alike be given equal
opportunities to avail of remedies under the law to defeat each others claim
and to determine all matters of dispute between them in one single case. It is
important to note that in determining whether or not petitioner is entitled to
the refund of the amount paid, it would [be] necessary to determine how
much the Government is entitled to collect as taxes. This would necessarily
include the determination of the correct liability of the taxpayer and,
certainly, a determination of this case would constitute res judicata on both
parties as to all the matters subject thereof or necessarily involved therein.

Sec. 82, Chapter IX of the 1977 Tax Code is now Sec. 72, Chapter XI of the
1997 NIRC. The above pronouncements are, therefore, still applicable today.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 58

Here, petitioner's similar tax refund claim assumes that the tax return that it
filed was correct. Given, however, the finding of the CTA that petitioner,
although not liable under Sec. 28(A)(3)(a) of the 1997 NIRC, is liable under
Sec. 28(A)(l), the correctness of the return filed by petitioner is now put in
doubt. As such, we cannot grant the prayer for a refund. 146 (Emphasis
supplied, citation omitted)

In the subsequent case of United Airlines, Inc. v. Commissioner of Internal


Revenue, 147 this court upheld the denial of the claim for refund based on the
Court of Tax Appeals' finding that the taxpayer had, through erroneous
deductions on its gross income, underpaid its Gross Philippine Billing tax on
cargo revenues for 1999, and the amount of underpayment was even greater
than the refund sought for erroneously paid Gross Philippine Billings tax on
passenger revenues for the same taxable period. 148

In this case, the P5,185,676.77 Gross Philippine Billings tax paid by petitioner
was computed at the rate of 1 % of its gross revenues amounting to
P345,711,806.08149 from the third quarter of 2000 to the second quarter of
2002. It is quite apparent that the tax imposable under Section 28(A)(l) of the
1997 National Internal Revenue Code [32% of t.axable income, that is, gross
income less deductions] will exceed the maximum ceiling of 1 % of gross
revenues as decreed in Article VIII of the Republic of the Philippines-Canada
Tax Treaty. Hence, no refund is forthcoming.

WHEREFORE, the Petition is DENIED. The Decision dated August 26, 2005
and Resolution dated April 8, 2005 of the Court of Tax Appeals En Banc
are AFFIRMED.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 59

4.

SECOND DIVISION

January 11, 2016

G.R. No. 206584

MAE FLOR GALIDO, Petitioner,


vs.
NELSON P. MAGRARE, EVANGELINE M. PALCAT, RODOLFO
BAYOMBONG, and REGISTER OF DEEDS OF ANTIQUE, San Jose,
Antique, Respondents.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review 1 assailing the Decision2 dated 29
February 2012 and Resolution3 dated 28 February 2013 of the Court of
Appeals in CA-G.R. CEB CV No. 02306, affirming the Order 4 dated 2 October
2007 of the Regional Trial Court (RTC), Branch 12, San Jose, Antique in RTC
Cad. Case No. 2004-819, Cad. Record No. 936.

The Antecedent Facts

On 19 August 2004, Mae Flor Galido (petitioner) filed before the RTC of San
Jose, Antique a petition 5 to cancel all entries appearing on Transfer Certificate
of Title (TCT) Nos. T-22374, T-22375 and T-22376, all in the name of Isagani
Andigan (Andigan), and to annul TCT No. T-24815 and all other TCTs issued
pursuant to the Order dated 18 October 2011 of RTC Branch 11, San Jose,
Antique (Branch 11) in RTC Civil Case No. 2001-2-3230. The petition was
raffled to RTC Branch 12, San Jose, Antique (trial court) and docketed as RTC
Cad. Case No. 2004-819 Cad. Record No. 936.

The controversy revolves around three parcels of land, designated as Lot


1052-A-1, Lot 1052-A-2 and Lot 1052-A-3, all of the San Jose, Antique
Cadastre. These parcels of land were, prior to subdivision in 1999, part of Lot
1052-A which was covered by TCT No. T-21405 in the name of Andigan.

On 28 December 1998, Andigan sold undivided portions of Lot 1052-A to


Nelson P. Magrare (Magrare), Evangeline M. Palcat (Palcat) and Rodolfo
Bayombong (Bayombong). To Magrare was sold an undivided portion with an
area of 700 square meters, more or less; to Palcat, 1,000 square meters,
more or less; and to Bayombong, 500 square meters, more or less.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 60

Andigan caused the subdivision of Lot 1052-A into five lots, namely: Lot 1052-
A-1, Lot 1052-A-2, Lot 1052-A-3, Lot 1052-A-4 and Lot 1052-A-5. On 18
October 1999, TCT No. T-21405 was cancelled and new certificates were
issued for the subdivided portions. Pertinent to the case are TCT No. T-22374
which was issued for Lot 1052-A-1, TCT No. T-22375 for Lot 1052-A-2 and TCT
No. T-22376 for Lot 1052-A-3, all in the name of Andigan. Andigan did not turn
over the new TCTs to Magrare, Palcat and Bayombong, and the latter were
unaware of the subdivision.

On 8 May 2000, Andigan mortgaged the same three lots to petitioner and the
latter came into possession of the owners duplicate copies of TCT Nos. T-
22374, T-22375 and T-22376.

On 6 February 2001, at 11:00 a.m., Magrare, Palcat and Bayombong


registered their respective adverse claims on TCT Nos. T-22374, T-22375 and
T-22376. On the same day, at 3:00 p.m., petitioner also registered her
mortgage on the same TCTs, such that the certificates in the custody of the
Register of Deeds were annotated thus:

TCT No. T-22374

Entry No. 246290 Adverse Claim executed by Nelson Magrare, covering


the parcel of land described herein subject to the conditions embodied in the
instrument on file in this office.

Date of Instrument: February 6, 2001.

Date of Inscription: February 6, 2001.

A:M 11:00

Entry No. 246303 Real Estate Mortgage executed by Isagani Andigan in


favor of Mae Flor Galido, covering the parcel of land described herein for the
sum of SIXTY THOUSAND PESOS (P60,000.00), subject to the conditions
embodied in the instrument acknowledged before Notary Public Mariano R.
Pefianco of San Jose, Antique as Doc. No. 302 Page No. 61; Book No. 61,
Series of 2000.

Date of Instrument: May 8, 2000.

Date of Inscription: February 6, 2001.

P:M 3:006

TCT No. T-22375

Entry No. 246300 Adverse Claim executed by Evangeline M. Palcat,


covering the parcel of land described herein subject to the conditions
embodied in the instrument on file in this office.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 61

Date of Instrument: February 6, 2001.

Date of Inscription: February 6, 2001.

A:M 11:00

Entry No. 246305 Real Estate Mortgage executed by Isagani Andigan in


favor of Mae Flor Galido, covering the parcel of land described herein for the
sum of TEN THOUSAND PESOS (P10,000.00), subject to the conditions
embodied in the instrument acknowledged before Notary Public Mariano R.
Pefianco of San Jose, Antique as Doc. No. 226; Page No. 46; Book No. IV,
Series of 2000.

Date of Instrument: May 8, 2000.

Date of Inscription: February 6, 2001.

P:M 3:007

TCT No. T-22376

Entry No. 246299 Adverse Claim executed by Rodolfo Bayombong,


covering the parcel of land described herein subject to the conditions
embodied in the instrument on file in this office.

Date of Instrument: February 6, 2001.

Date of Inscription: February 6, 2001.

A:M 11:00

Entry No. 246304 Real Estate Mortgage executed by Isagani Andigan in


favor of Mae Flor Galido, covering the parcel of land described herein for the
sum of SIXTY THOUSAND PESOS (P60,000.00), subject to the conditions
embodied in the instrument acknowledged before Notary Public Mariano R.
Pefianco of San Jose, Antique as Doc. No. 219; Page No. 44; Book No. IV,
Series of 2000.

Date of Instrument: May 5, 2000.

Date of Inscription: February 6, 2001.

P:M 3:008

On 22 February 2001, Magrare, Palcat and Bayombong filed before the RTC of
San Jose, Antique a Petition to Compel the Surrender to the Register of Deeds
of Antique the Owners Duplicate Copies of TCT No. T-22374 Issued for Lot
1052-A-1; TCT No. T-22375 Issued for Lot 1052-A-2; and TCT No. T-22376
Issued for Lot 1052-A-3, all of the San Jose Cadastre against the Spouses

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 62

Isagani and Merle Andigan.9 The case, raffled to Branch 11 and docketed as
Civil Case No. 2001-2-3230, was tried and decided on its merits.

Civil Case No. 2001-2-3230 (RTC Branch 11)

According to Magrare, Palcat and Bayombong, even prior to the subdivision,


they had made oral demands on Andigan to secure TCT No. T-21405 in order
that they may take the appropriate steps to register the affected lots in their
names.10 That Andigan had proceeded with the subdivision and registration of
the subdivided lots was unknown to them. They registered their adverse
claims upon discovery of the subdivision. Neither were they aware that
Andigan had mortgaged the lots he sold to them. They only discovered the
mortgage when they requested certified true copies of TCT Nos. T-22374, T-
22375 and T-22376, in preparation for filing a petition to compel delivery.

On the other hand, Andigan insisted that he made demands on Magrare,


Palcat and Bayombong to pay for the costs of subdividing Lot 1052-A and
registering the subdivided lots. Their failure to pay the costs was his
motivation in withholding the TCTs from them. In other words, Andigan did not
dispute that the undivided portions of Lot 1052-A he sold them were indeed
Lot 1052-A-1 covered by TCT No. T-22374, Lot 1052-A-2 covered by TCT No. T-
22375 and Lot 1052-A-3 covered by TCT No. T-22376. 11

On 18 October 2001, RTC Branch 11 issued an Order granting the petition, to


wit:

WHEREFORE, premises considered, the PETITION dated February 16, 2001 is


hereby granted and, in consequence, the respondent spouses ISAGANI
ANDIGAN and MERL[E] ANDIGAN are hereby directed to surrender or deliver
to the Register of Deeds for Antique the owners duplicate copies of Transfer
Certificates of Title Nos. T-22374, T-22375 and T-22376.

If for any reason the outstanding owners duplicate copies of the subject
certificates of title cannot be so surrendered or delivered, the Register of
Deeds for Antique is hereby ordered to annul the same, issue new certificates
of title in lieu thereof which shall contain a memorandum of the annulment of
the outstanding owners duplicate copies.

SO ORDERED.12

Spouses Andigan through counsel filed a Notice of Appeal. The appeal was
docketed as CA G.R. CV 73363. However, they failed to timely file their
appellants brief, and the appeal was dismissed in a Resolution dated 15
October 2002.13 The 15 October 2002 Resolution became final and executory
on 22 December 2002 and was recorded in the Book of Entries of
Judgments.14

Upon Motion for Execution, RTC Branch 11 issued the Writ of Execution
directing the Provincial Sheriff of Antique to cause the satisfaction of the

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 63

Order dated 18 October 2001. 15 For failure to gain satisfaction of the order
from the Spouses Andigan, the Register of Deeds was notified and
commanded to annul the duplicate copies of TCT Nos. T-22374, T-22375 and
T-22376 and new ones were issued in lieu thereof. 16

The records bare that petitioner filed a Third Party Claimants Affidavit dated
3 March 200417 before the RTC Branch 11 after learning of the Notification
and Writ of Execution.

The following were also inscribed on TCT Nos. T-22374, T-22375, and T-22376:

(1) Notice of Lis Pendens of CA G.R. CV-No. 73363, on 16 July 2002;

(2) Order issued by RTC Branch 11 directing the Register of Deeds for Antique
to annul the subject certificates and issue new ones in lieu thereof, on 21
April 2004;

(3) Resolution by the Court of Appeals dismissing the appeal from the RTC
Branch 11 decision in Civil Case No. 2001-2-3230, on 21 April 2004;

(4) Writ of Execution issued by RTC Branch 11, on 21 April 2004; and

(5) Notification issued by the Sheriff to cancel the owners duplicate copies,
on 21 April 2004.18

Civil Case No. 3345 (RTC Branch 10)

Meanwhile, petitioner also filed with the RTC a case for foreclosure of
mortgage against the heirs of Isagani Andigan, entitled Mae Flor Galido v.
Heirs of Isagani Andigan.19 The case was raffled to Branch 10 and docketed as
Civil Case No. 3345.

It appears that petitioner prevailed in Civil Case No. 3345. As a result, the
Sheriff issued a Certificate of Sale20 in favor of petitioner of the properties
covered by TCT Nos. T-22374, T-22375 and T-22376.

RTC Cad. Case No. 2004-819, Cad. Record No. 936 (RTC Branch 12)

Hence, petitioner filed a petition seeking to cancel all entries appearing on


TCT No. T-22374 for Lot 1052-A-1, TCT No. T-22375 for Lot 1052-A-2, and TCT
No. T-22376 for Lot 1052-A-3, and to annul TCT No. T-24815 21 and all other
titles issued pursuant to RTC Civil Case No. 2001-2-3230.

Petitioner alleged that she had been a holder in good faith of the following
owners duplicate certificates of title, all of the San Jose Cadastre, in the
name of one Andigan:

TCT No. T-22374 for Lot 1052-A-1;

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 64

TCT No. T-22375 for Lot 1052-A-2; and

TCT No. T-22376 for Lot 1052-A-3.

And that she had prevailed in Civil Case No. 3345 (RTC Branch 10) and was
issued a Certificate of Sale by the Sheriff. She also averred that the titles
contained adverse claims filed by Magrare, Palcat and Bayombong, and
annotations in connection with Civil Case No. 2001-2-3230.

Finding that the case was contentious in nature, the trial court ordered
petitioner to amend her petition to implead the following: (1) Magrare, in
whose name TCT No. T-24815 was registered and who had earlier registered
an adverse claim on TCT No. T-22374; (2) Palcat, who had registered an
adverse claim on TCT No. T-22375; and (3) Bayombong, who had registered
an adverse claim on TCT No. T-22376.22

After petitioner amended her petition, the trial court issued summons to
Magrare, Palcat and Bayombong.23 The summons were duly served on
Magrare and Palcat. However, the sheriff reported that Bayombong was not
served because he was already dead. 24 Petitioner moved to substitute the
heirs of Bayombong, but the trial court ruled that the substitution was
without legal basis because Bayombong was not properly impleaded. He died
on 13 December 2001 and could not have been made a party to the petition
filed on 19 August 2004. Hence, the trial court dismissed the case against
Bayombong in an Order dated 22 April 2005.25

Petitioner moved to amend her petition for the second time to include the
heirs of Bayombong and the Rural Bank of Sibalom (Antique), Inc., whose
mortgage was registered on TCT No. T-24815. The trial court ruled that the
names and addresses of all the heirs of Bayombong were not identified, and
that there was no showing that the widow of Bayombong represented all the
heirs.26 The trial court also found no legal or factual basis to implead the
bank. Hence, the trial court denied petitioners motion to further amend the
petition.27

Meanwhile, respondents Magrare and Palcat filed their answer on 4 March


2005,28 setting forth the following affirmative defenses: (1) petitioner has no
cause of action against them; and (2) the present case is barred by the prior
ruling in Civil Case No. 2001-2-3230.

Upon motion, the trial court held a summary hearing on the affirmative
defenses. Despite due notice, neither petitioner nor her counsel appeared.
The trial court allowed respondents counsel to proceed with the presentation
of evidence.29

After receiving respondents evidence in support of their affirmative defenses,


the trial court set another hearing to give petitioner a chance to refute the
same.30 However, despite due notice and even a postponement requested by
petitioner,31 she and her counsel failed to appear. 32 The judge took

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 65

petitioners absences during the settings for the preliminary hearing as a


waiver to present documentary evidence or arguments to refute respondents
evidence.

The Ruling of the Trial Court

On 2 October 2007, the trial court ruled in favor of respondents, dismissing


the case, thus:

On the basis of the foregoing findings and observations, this court finds
meritorious the affirmative defenses put up by the respondents/adverse
claimants, that, the petitioner Mae Flor Galido has no cause of action against
them and, that, this case is already barred by prior judgment rendered in Civil
Case No. 2001-2-3230. In Nicasio I. Alacantara, et al. vs. Vicente C. Ponce, et
al., G.R. No. 131547, Dec. 15, 2005, it was ruled that, "Litigation must end
and terminate sometime and somewhere, and it is essential to an effective
and efficient administration of justice that once a judgment has become final,
the winning party be not, through a mere subterfuge, deprived of the fruits of
the verdict. Court[s] must therefore guard against any scheme calculated to
bring about the result. Constituted as they are to put an end to the
controversies, courts should frown upon any attempt to prolong them."

PREMISES CONSIDERED, the petition in this case is hereby DENIED and, this
case dismissed for the reasons aforestated. 33

The trial court found petitioners prayer for cancellation of entries concerning
the adverse claims of respondents moot and academic because the same
were already cancelled.34 Further, the decision in Civil Case No. 2001-2-3230
had already become final and in fact was executed. 35 The trial court also ruled
that since Andigan had already sold Lots 1052-A-1 and 1052-A-2 to
respondents when he mortgaged the same to her, it was as if nothing was
mortgaged at all.36

Petitioner filed an appeal before the Court of Appeals with the following
assignment of errors:

1. THE LOWER COURT ERRED IN FAILING TO GIVE NOTICES TO ALL PARTIES IN


INTEREST;

2. THE LOWER COURT ERRED IN REQUIRING THE APPELLANT TO AMEND HER


PETITION TO IMPLEAD THE ADVERSE CLAIMANTS-APPELLEES;

3. THE LOWER COURT ERRED IN REFUSING TO ADMIT AMENDED PETITION


THAT COMPLIED WITH HIS LIKINGS;

4. THE LOWER COURT ERRED IN REFUSING TO CONDUCT PRE-TRIAL


CONFERENCE IN THE INSTANT CASE;

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 66

5. THE TRIAL COURT ERRED IN ALLOWING THE HEARING OF ADVERSE


CLAIMANTS-APPELLEES AFFIRMATIVE DEFENSES;

6. THE TRIAL COURT ERRED IN REFUSING TO CONSIDER THE EVIDENCE OF


THE APPELLANT IN ITS DECISION; [AND]

7. THE LOWER COURT ERRED IN DISMISSING THE PETITION FILED IN THE


INSTANT CASE.37

The Ruling of the Court of Appeals

The Court of Appeals denied petitioners appeal in a Decision 38 dated 29


February 2012, the dispositive portion of which reads:

WHEREFORE, premises considered, and finding no reversible error in the


order appealed from, the appeal is DENIED and the Order dated October 2,
2007 of the Regional Trial Court, Branch 12 in San Jose, Antique denying and
dismissing the petition, is AFFIRMED. 39

For lack of merit, the Court of Appeals denied petitioners motion for
reconsideration in a Resolution40 dated 28 February 2013.

Hence, the instant petition.

The Issues

Petitioner raises the following issues:

1. WHETHER OR NOT NOTICES TO ALL PARTIES IN INTEREST ARE REQUIRED IN


THIS CASE;

2. WHETHER OR NOT THE LOWER COURT COULD ORDER PETITIONER TO


AMEND HER PETITION TO IMPLEAD THE ADVERSE CLAIMANTS-APPELLEES;

3. WHETHER OR NOT THE LOWER COURT COULD REFUSE ADMISSION OF


AMENDED PETITION THAT INCLUDED HEIRS OF THE DECEASED RODOLFO
BAYOMBONG;

4. WHETHER OR NOT THE LOWER COURT COULD REFUSE HOLDING PRE-TRIAL


CONFERENCE IN THE INSTANT CASE;

5. WHETHER OR NOT THE TRIAL COURT WAS CORRECT IN ALLOWING THE


HEARING OF ADVERSE CLAIMANTS-APPELLEES AFFIRMATIVE DEFENSES;

6. WHETHER OR NOT THE TRIAL COURT WAS CORRECT IN REFUSING TO


CONSIDER THE EVIDENCE OF THE PETITIONER IN ITS DECISION; [AND]

7. WHETHER OR NOT THE LOWER COURT WAS CORRECT IN DISMISSING THE


PETITION FILED IN THE INSTANT CASE.41

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 67

The Courts Ruling

We grant the petition in part.

At the crux is the question of who has a better right to the properties
concerned: petitioner on the one hand, and Magrare, Palcat and Bayombong
on the other?

No Valid Mortgage in Favor of Petitioner

Petitioner derives her title from Andigan, as mortgagor. However, at the time
Andigan mortgaged the lots to petitioner he had already sold the same to
Magrare, Palcat and Bayombong. Indeed, petitioners case is negated by Civil
Case No. 2001-2-3230. There, Andigan admitted that Lot Nos. 1052-A-1,
1052-A-2 and 1052-A-3 were the parcels of land he sold to Magrare, Palcat
and Bayombong, respectively, on 28 December 1998. 42 Hence, when Andigan
mortgaged the lots to petitioner on 8 May 2000, he no longer had any right to
do so. We quote with approval the discussion of the trial court:

Finally, when the spouses Andigan mortgaged to the herein petitioner Galido
Lot Nos. 1052-A-1 and 1052-A-2, the said lots were already sold to the
respondents Palcat and Magrare. It is therefore as if nothing was mortgaged
to her because Isagani Andigan was no longer the owner of the mortgaged
real property. Under Art. 2085 of the Civil Code, two of the prescribed
requisites for a valid mortgage are, that, the mortgagor be the absolute
owner of the thing mortgaged and, that, he has the free disposal thereof.
These requisites are absent when Isagani Andigan and his wife mortgaged
the lots alluded to above to the herein petitioner. 43

A spring cannot rise higher than its source. Since Andigan no longer had any
interest in the subject properties at the time he mortgaged them to her,
petitioner had nothing to foreclose.

Prior Registered Adverse Claims Prevail

The parcels of land involved in this case are registered under the Torrens
system. One who deals with property registered under the Torrens system
need not go beyond the certificate of title, but only has to rely on the
certificate of title.44 Every subsequent purchaser of registered land taking a
certificate of title for value and in good faith shall hold the same free from all
encumbrances except those noted on said certificate and any of the
encumbrances provided by law. 45

The Property Registration Decree 46 provides:

Section 51. Conveyance and other dealings by registered owner. An owner of


registered land may convey, mortgage, lease, charge or otherwise deal with
the same in accordance with existing laws. He may use such forms of deeds,
mortgages, leases or other voluntary instruments as are sufficient in law. But

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 68

no deed, mortgage, lease, or other voluntary instrument, except a will


purporting to convey or affect registered land shall take effect as a
conveyance or bind the land, but shall operate only as a contract between
the parties and as evidence of authority to the Register of Deeds to make
registration.

The act of registration shall be the operative act to convey or affect the land
insofar as third persons are concerned, and in all cases under this Decree, the
registration shall be made in the office of the Register of Deeds for the
province or city where the land lies.1wphi1

Section 52. Constructive notice upon registration. Every conveyance,


mortgage, lease, lien, attachment, order, judgment, instrument or entry
affecting registered land shall, if registered, filed or entered in the office of
the Register of Deeds for the province or city where the land to which it
relates lies, be constructive notice to all persons from the time of such
registering, filing or entering.

The adverse claims were registered on the respective titles on 6 February


2001, at 11:00 in the morning. They were already in existence when
petitioner filed her case for foreclosure of mortgage. In fact, when petitioner
registered the mortgages on 6 February 2011 at 3:00 in the afternoon, she
was charged with the knowledge that the properties subject of the mortgage
were encumbered by interests the same as or better than that of the
registered owner.

Petitioner does not hide the fact that she was aware of the adverse claim and
the proceedings in Civil Case No. 2001-2-3230. In her petition before the
Court, she stated that "on March 03, 2004, petitioner had filed a third party
claim with the Regional Trial Court, Branch 11 in said Civil Case No. 2001-2-
3230."47

Instead, petitioner insists that it was illegal for Magrare, Palcat and
Bayombong to file a case compelling the surrender of the owners duplicates
of TCT Nos. T-22374, T-22375 and T-22376. On the contrary, the law itself
provides the recourse they took registering an adverse claim and filing a
petition in court to compel surrender of the owners duplicate certificate of
title:

Sec. 70. Adverse claim. Whoever claims any part or interest in registered land
adverse to the registered owner, arising subsequent to the date of the
original registration, may if no other provision is made in this Decree for
registering the same, make a statement in writing setting forth fully his
alleged right or interest, and how or under whom acquired, a reference to the
number of the certificate of title of the registered owner, the name of the
registered owner, and a description of the land which the right or interest is
claimed.

xxxx

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 69

Sec. 107. Surrender of withheld duplicate certificates. Where it is necessary


to issue a new certificate of title pursuant to any involuntary instrument
which divests the title of the registered owner against his consent or where a
voluntary instrument cannot be registered by reason of the refusal or failure
of the holder to surrender the owners duplicate certificate of title, the party
in interest may file a petition in court to compel surrender of the same to the
Register of Deeds. The court, after hearing, may order the registered owner
or any person withholding the duplicate certificate to surrender the same,
and direct the entry of a new certificate or memorandum upon such
surrender. If the person withholding the duplicate certificate is not amenable
to the process of the court, or if for any reason the outstanding owners
duplicate certificate cannot be delivered, the court may order the annulment
of the same as well as the issuance of a new certificate of title in lieu thereof.
Such new certificate and all duplicates thereof shall contain a memorandum
of the annulment of the outstanding duplicate.

Further, RTC Branch 11, after trial on the merits of Civil Case No. 2001-2-
3230, found for Magrare, Palcat and Bayombong. That decision has attained
finality and was entered in the Book of Judgments. The trial court was correct
in not touching upon the final and executory decision in that case.

Petitioner is not a Buyer in Good Faith

But even assuming that the mortgage was valid, petitioner can hardly be
considered a buyer in good faith. A purchaser in good faith and for value is
one who buys the property of another without notice that some other person
has a right to or interest in such property and pays a full and fair price for the
same at the time of such purchase, or before he has notice of the claims or
interest of some other person in the property. 48

As discussed above, petitioner had notice as early as 2001 of the adverse


claims of Magrare, Palcat and Bayombong. The decision in Civil Case No.
2001-2-3230 became final and executory before the Certificate of Sale was
issued by the Provincial Sheriff on 14 July 2004 in Civil Case No. 3345.

Without speculating as to petitioners motivations in foreclosing on the


mortgage, the law on the matter is clear. Preference is given to the prior
registered adverse claim because registration is the operative act that binds
or affects the land insofar as third persons are concerned. 49 Thus, upon
registration of respondents adverse claims, notice was given the whole
world, including petitioner.

Hence, the trial courts dismissal of the case against Magrare and Palcat is in
order. There is no need for us to discuss petitioners other assignments of
error. Besides, the same issues were sufficiently addressed by the Court of
Appeals.

Heirs of Bayombong are Indispensable Parties

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 70

However, we find reversible error on the part of the trial court in not
impleading the heirs of Bayombong. Indispensable parties are parties in
interest without whom no final determination can be had of an
action.50Petitioners action was for the cancellation of titles, including TCT No.
T-22376. In its Order dated 17 January 2005, 51 the trial court itself recognized
that the controversy was contentious in nature, and required the participation
of Bayombong, among others. Bayombong, like respondents Magrare and
Palcat stood to be benefited or prejudiced by the outcome of the case. Since
he was already dead at the time the case was filed by petitioner, the heirs of
Bayombong stand in his stead not only as parties in interest, but
indispensable parties. Without the heirs of Bayombong to represent the
interest of Bayombong, there can be no complete determination of all the
issues presented by petitioner, particularly, in regard to TCT No. T-22376.

Failure to implead an indispensable party is not a ground for the dismissal of


an action, as the remedy in such case is to implead the party claimed to be
indispensable, considering that parties may be added by order of the court,
on motion of the party or on its own initiative at any stage of the action. 52

By denying petitioners motion to implead the heirs of Bayombong due to


technicalities, the trial court in effect deprived petitioner a full adjudication of
the action, and the heirs of Bayombong any beneficial effects of the decision.
Indeed, the dismissal of the petition as to Magrare and Palcat greatly benefits
them as the controversy regarding TCT Nos. T-22374 and T-22375 is finally
laid to rest. Not so with the heirs of Bayombong. We note that the trial courts
decision discusses TCT Nos. T-22374 and T-22375. The records do not contain
any direct refutation of the claim of petitioner as to TCT No. T-22376, as could
be expected since there were no parties impleaded to defend such interest.
Hence, we cannot, without depriving petitioner due process, extend the trial
courts decision to TCT No. T-22376.

Given the Courts authority to order the inclusion of an indispensable party at


any stage of the proceedings,53 the heirs of Bayombong are hereby ordered
impleaded as parties-defendants. Since the action has been disposed of as
regards Magrare and Palcat, the action is to proceed solely against the heirs
of Bayombong, once they are properly impleaded. 54

We note that the counsel representing Magrare and Palcat is the same
counsel that represented Magrare, Palcat and Bayombong in Civil Case No.
2001-2-3230. There is no information on record, apart from petitioners
allegation, whether or not counsel informed the court of the death of
Bayombong, in accordance with Section 16, Rule 3 of the Rules of Court.
Nevertheless, for expediency, Atty. Alexis C. Salvani is directed to provide the
trial court and petitioner the full names and addresses of the heirs of
Bayombong to enable the trial court to properly implead them.

WHEREFORE, we GRANT the petition IN PART. The Decision dated 29


February 2012 and Resolution dated 28 February 2013 of the Court of
Appeals in CA-G.R. CEB CV No. 02306, affirming the Order dated 2 October
2007 of the Regional Trial Court, Branch 12, San Jose, Antique in RTC Cad.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 71

Case No. 2004-819, Cad. Record No. 936, is: (1) AFFIRMED insofar as the
dismissal of the case with respect to Nelson P. Magrare and Evangeline M.
Palcat; and (2) REVERSED insofar as the dismissal of the case pertaining to
TCT No. T-22376. The heirs of Rodolfo Bayombong are ORDERED
IMPLEADED as parties-defendants and the trial court is directed to proceed
with the case pertaining to TCT No. T-22376. Atty. Alexis C. Salvani is further
directed to provide the full names and addresses of the heirs of Bayombong.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 72

5.

THIRD DIVISION

January 11, 2016

G.R. No. 191033

THE ORCHARD GOLF & COUNTRY CLUB, INC., EXEQUIEL D. ROBLES,


CARLO R.H. MAGNO, CONRADO L. BENITEZ II, VICENTE R. SANTOS,
HENRY CUA LOPING, MARIZA SANTOS-TAN, TOMAS B. CLEMENTE III,
and FRANCIS C. MONTALLANA, Petitioners,
vs.
ERNESTO V. YU and MANUEL C. YUHICO, Respondents.

DECISION

PERALTA, J.:

This petition for review on certiorari under Rule 45 of the Rules of


Court (Rules) seeks to reverse the Resolutions dated September 16,
20091 and January 21, 20102 of the Court of Appeals (CA) in CA-G.R. SP No.
106918, which reconsidered and set aside its Resolution dated January 15,
20093 granting petitioners a 15-day period within which to file a petition for
review under Rule 43 of the Rules.

The present case is a continuation of Yu v. The Orchard Gold & Country Club,
Inc.4 decided by this Court on March 1, 2007. For brevity, the relevant facts
narrated therein are quoted as follows:

On May 28, 2000, a Sunday, [respondents] Ernesto Yu and Manuel Yuhico


went to the Orchard Golf & Country Club to play a round of golf with another
member of the club. At the last minute, however, that other member
informed them that he could not play with them. Due to the "no twosome"
policy of the Orchard contained in the membership handbook prohibiting
groups of less than three players from teeing off on weekends and public
holidays before 1:00 p.m., [respondents] requested management to look for
another player to join them.

Because [Orchard] were unable to find their third player, [respondent] Yu


tried to convince Francis Montallana, Orchards assistant golf director, to
allow them to play twosome, even if they had to tee off from hole no. 10 of
the Palmer golf course. Montallana refused, stating that the flights which
started from the first nine holes might be disrupted. [Respondent] Yu then
shouted invectives at Montallana, at which point he told [respondent] Yuhico

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 73

that they should just tee off anyway, regardless of what management's
reaction would be. [Respondents] then teed off, without permission from
Montallana. They were thus able to play, although they did so without
securing a tee time control slip before teeing off, again in disregard of a rule
in the handbook. As a result of [respondents] actions, Montallana filed a
report on the same day with the board of directors (the board).

In separate letters dated May 31, 2000, the board, through [petitioner]
Clemente, requested [respondents] to submit their written comments on
Montallanas incident report dated May 28, 2000. The reportwas submitted
for the consideration of the board.

Subsequently, on June 29, 2000, the board resolved to suspend [respondents]


from July 16 to October 15, 2000, and served notice thereof on them.

On July 11, 2000, [respondents] filed separate petitions for injunction with
application for temporary restraining order (TRO) and/or preliminary
injunction with the Securities Investigation and Clearing Department (SICD) of
the Securities and Exchange Commission (SEC), at that time the tribunal
vested by law with jurisdiction to hear and decide intra-corporate
controversies. The cases, in which [respondents] assailed the validity of their
suspension, were docketed as SEC Case Nos. 07-00-6680 and 07-00-6681.
They were eventually consolidated.

After a joint summary hearing on the aforesaid petitions, the SEC-SICD, on


July 14, 2000, issued a TRO effective for 20 days from issuance, restraining
and enjoining [petitioners], their agents or representatives from
implementing or executing the suspension of [respondents].

On August 1, 2000, the SEC en banc issued its "Guidelines on Intra-Corporate


Cases Pending Before the SICD and the Commission En Banc of the Securities
and Exchange Commission" (guidelines). Sections 1 and 2 of these guidelines
provided:

Section 1. Intra-corporate and suspension of payments or rehabilitation cases


may still be filed with the Securities and Exchange Commission on or before
August 8, 2000. However, the parties-litigants or their counsels or
representatives shall be advised that the jurisdiction of the Commission over
these cases shall be eventually transferred to the Regional Trial Courts upon
effectivity of The Securities Regulation Code by August 9, 2000.

Section 2. Prayers for temporary restraining order or injunction or suspension


of payment order contained in cases filed under the preceding section may
be acted upon favorably provided that the effectivity of the corresponding
order shall only be up to August 8, 2000. Prayers for other provisional
remedies shall no longer be acted upon by the Commission. In all these
cases, the parties-litigants or their counsels or representatives shall be
advised that the said cases will eventually be transferred to the regular
courts by August 9, 2000. (Emphasis ours)

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 74

After hearing [respondents] applications for preliminary injunction, the SEC-


SICD issued an order dated August 2, 2000 directing the issuance of a writ of
preliminary injunction enjoining the individual [petitioners], their agents and
representatives from suspending [respondents], upon the latter's posting of
separate bonds of P40,000. This [respondents] did on August 4, 2000.

On August 7, 2000, the SEC-SICD issued a writ of preliminary injunction


against [petitioners] directing them to strictly observe the order dated August
2, 2000.1wphi1

On October 31, 2000, the board held a special meeting in which it resolved to
implement the June 29, 2000 order for the suspension of [respondents] in
view of the fact that the writs of injunction issued by the SICD in their
respective cases had already [elapsed] on August 8, 2000 under the SEC
guidelines.

In separate letters dated December 4, 2000 addressed to each [respondent],


[petitioner] Clemente informed them that the board was implementing their
suspensions.

On December 12, 2000, [respondents] filed a petition for indirect contempt


against [petitioners] in the Regional Trial Court (RTC) of Dasmarias, Cavite,
docketed as Civil Case No. 2228-00.

In an order dated December 13, 2000, the Dasmarias, Cavite RTC, Branch
90, through Judge Dolores [L.] Espaol, directed the parties to maintain the
"last, actual, peaceable and uncontested state of things," effectively restoring
the writ of preliminary injunction, and also ordered [petitioners] to file their
answer to the petition. [Petitioners] did not file a motion for reconsideration
but filed a petition for certiorari and prohibition with the CA, docketed as CA-
G.R. SP No. 62309, contesting the propriety of the December 13, 2000 order
of Judge Espaol. They also prayed for the issuance of a TRO and writ of
preliminary injunction.

The CA reversed the Dasmarias, Cavite RTC in the x x x decision dated


August 27, 2001.

In view of the CA's decision in CA-G.R. SP No. 62309, [petitioners] finally


implemented [respondents] suspension.

In the meantime, [respondents] filed a motion ad cautelam dated August 30,


2001 in the RTC of Imus, Cavite, Branch 21, praying for the issuance of a TRO
and/or writ of injunction to enjoin [petitioners] from implementing the
suspension orders. They alleged that neither the CA nor this Court could
afford them speedy and adequate relief, hence[,] the case in the RTC of Imus,
Cavite. The case was docketed as SEC Case Nos. 001-01 and 002-01.

On September 7, 2001, the Imus, Cavite RTC issued a TRO. [Petitioners] filed
a motion for reconsideration on September [11,] 2001.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 75

It was after the issuance of this TRO that [respondents] filed, on September
12, 2001, a motion for reconsideration of the CAs decision in CA-G.R. SP No.
62309. In a resolution dated October 10, 2001, the CA denied [respondents]
motion, prompting them to elevate the matter to this Court via petition for
review on certiorari, docketed as G.R. No. 150335.

In an order dated September 21, 2001, the Imus, Cavite RTC denied
[petitioners] motion for reconsideration and directed the issuance of a writ of
preliminary injunction. This prompted [petitioners] to file another petition
for certiorari in the Court of Appeals [docketed as CA-G.R. SP No. 67664]
which x x x issued [on March 26, 2002] a TRO against the Imus, Cavite RTC,
enjoining it from implementing the writ of preliminary injunction.

At this point, [respondents] filed their second petition in this Court, this time a
special civil action for certiorari, docketed as G.R. No. 152687, which included
a prayer for the issuance of a TRO and/or the issuance of a writ of preliminary
injunction to restrain the enforcement of the CA-issued TRO.

On May 6, 2002, the Court issued a resolution consolidating G.R. No. 152687
and G.R. No. 150335.

In G.R. No. 150335, the issue for consideration [was] whether Sections 1 and
2 of the SEC guidelines dated August 1, 2000 shortened the life span of the
writs of preliminary injunction issued on August 7, 2000 by the SEC-SICD in
SEC Case Nos. 07-00-6680 and 07-00-6681, thereby making them effective
only until August 8, 2000.

At issue in G.R. No. 152687, on the other hand, [was] whether or not the CA
committed grave abuse of discretion amounting to lack of jurisdiction by
issuing a TRO against the Imus, Cavite RTC and enjoining the implementation
of its writ of preliminary injunction against [petitioners]. 5

On March 1, 2007, the Court denied the petitions in G.R. Nos. 150335 and
152687. In G.R. No. 150335, it was held that the parties were allowed to file
their cases before August 8, 2000 but any provisional remedies the SEC
granted them were to be effective only until that date. Given that the SEC
Order and Writ of Injunction were issued on August 2 and 7, 2000,
respectively, both were covered by the guidelines and the stated cut-off date.
As to G.R. No. 152687, We ruled that the petition became moot and academic
because the TRO issued by the CA on March 26, 2002 already expired, its
lifetime under Rule 58 of the Rules being only 60 days, and petitioners
themselves admitted that the CA allowed its TRO to elapse.

Meanwhile, per Order dated September 24, 2002 of the Imus RTC, SEC Case
Nos. 001-01 and 002-01 were set for pre-trial conference. 6 Trial on the merits
thereafter ensued.

On December 4, 2008, the Imus RTC ruled in favor of respondents. The


dispositive portion of the Decision7 ordered:

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 76

WHEREFORE, premises considered, the decision of the Clubs Board of


Directors suspending [respondents] Ernesto V. Yu and Manuel C. Yuhico is
hereby declared void and of no effect, and its (sic) enforcement permanently
enjoined. The writ of preliminary injunction is hereby declared permanent.

[Petitioners] are hereby directed to jointly and severally pay each of the
[respondents] the following amounts:

(a) P2,000,000.00 as moral damages;

(b) P2,000,000.00 as exemplary damages;

(c) P500,000.00 as attorneys fees[;] and

(d) P100,000.00 as costs of litigation.

SO ORDERED.8

Upon receiving a copy of the Imus RTC Decision on December 22, 2008,
petitioners filed a Notice of Appeal accompanied by the payment of docket
fees on January 5, 2009.9 Respondents then filed an Opposition to Notice of
Appeal with Motion for Issuance of Writ of Execution, 10 arguing that the
December 4, 2008 Decision already became final and executory since no
petition for review under Rule 43 of the Rules was filed before the CA
pursuant to Administrative Matter No. 04-9-07-SC.

Realizing the mistake, petitioners filed on January 13, 2009 an Urgent Motion
for Extension of Time to File a Petition. 11 Before the Imus RTC, they also filed a
Motion to Withdraw the Notice of Appeal.12

On January 15, 2009, the CA resolved to give petitioners a 15-day period


within which to file the petition, but "[s]ubject to the timeliness of the filing of
petitioners Urgent Motion for Extension of Time to File Petition for Review
Under Rule 43 of the Rules of Court dated January 13, 2009." 13 Afterwards, on
January 21, 2009, petitioners filed a Petition for Review. 14

In the meantime, respondents filed an Opposition to Petitioners Urgent


Motion.15 Subsequently, they also filed a motion for reconsideration of the
CAs Resolution dated January 15, 2009.16

Before the Imus RTC, respondents motion for execution was granted on
February 17, 2009. The trial court opined that the proper appellate mode of
review was not filed within the period prescribed by the Rules and that the CA
issued no restraining order. 17 On March 2, 2009, the Writ of Execution was
issued.18 Eventually, on March 30, 2009, the Sheriff received the total amount
of P9,200,000.00, as evidenced by two managers check payable to
respondents in the amount of P4,600,000.00 each, which were turned over to
respondents counsel.19

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 77

On September 16, 2009, the CA granted respondents motion for


reconsideration, setting aside its January 15, 2009 Resolution. It relied
on Atty. Abrenica v. Law Firm of Abrenica, Tungol & Tibayan (Atty.
Abrenica)20 and Land Bank of the Philippines v. Ascot Holdings and Equities,
Inc., (LBP),21 which respondents cited in their Opposition to the Urgent Motion
and Motion for Reconsideration. Petitioners moved to reconsider, 22 but it was
denied on January 21, 2010; hence, this petition.

The Court initially denied the petition, but reinstated the same on October 6,
2010.23

We grant the petition.

The cases of LBP and Atty. Abrenica are inapplicable. In LBP, the Court
affirmed the CAs denial of the banks motion for extension of time to file a
petition for review. Examination of said case revealed that the bank filed a
motion for reconsideration of the trial courts adverse judgment dated March
15, 2006, in violation of Section 8(3), Rule 1 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies under Republic Act No. 8799. It was
held that the filing of such prohibited pleading did not toll the reglementary
period to appeal the judgment via a petition for review under Rule 43 of the
Rules. Thus, the CA already lacked jurisdiction to entertain the petition which
the bank intended to file, much less to grant the motion for extension of time
that was belatedly filed on July 25, 2006.

Also, in Atty. Abrenica, We found no compelling reasons to relax the stringent


application of the rules on the grounds as follows:

First, when petitioner received the trial courts consolidated decision on


December 16, 2004, A.M. No. 04-9-07-SC was already in effect for more than
two months.

Second, petitioner had known about the new rules on the second week of
January, 2005 when he received a copy of respondents Opposition (To
Defendants Notice of Appeal) dated January 6, 2005. In their opposition,
respondents specifically pointed to the applicability of A.M. No. 04-9-07-SC to
the instant case.

Third, petitioner originally insisted in his Reply with Manifestation (To the
Opposition to Defendants Notice of Appeal) that the correct mode of appeal
was a "notice of appeal."

Petitioner reiterated in his Opposition to respondents motion for execution


dated January 14, 2005 that a notice of appeal was the correct remedy.

Finally, petitioner filed his Motion to Admit Attached Petition for Review only
on June 10, 2005, or almost eight months from the effectivity of A.M. No.
04-9-07-SC on October 15, 2004, after he received the trial courts Order of
May 11, 2005.24

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 78

Unlike LBP and Atty. Abrenica, petitioners in this case committed an


excusable delay of merely seven (7) days. When they received a copy of the
Imus RTC Decision on December 22, 2008, they filed before the CA an
Urgent Motion for Extension of Time to File a Petition on January 13, 2009.
Meantime, they exhibited their desire to appeal the case by filing a Notice of
Appeal before the Imus RTC. Upon realizing their procedural faux pax,
petitioners exerted honest and earnest effort to file the proper pleading
despite the expiration of the reglementary period. In their urgent motion,
they candidly admitted that a petition for review under Rule 43 and not a
notice of appeal under Rule 41 ought to have been filed. The material dates
were also indicated. Hence, the CA was fully aware that the 15-day
reglementary period already elapsed when it granted the time to file the
petition.

In general, procedural rules setting the period for perfecting an appeal or


filing a petition for review are inviolable considering that appeal is not a
constitutional right but merely a statutory privilege and that perfection of an
appeal in the manner and within the period permitted by law is not only
mandatory but jurisdictional.25 However, procedural rules may be waived or
dispensed with in order to serve and achieve substantial justice. 26 Relaxation
of the rules may be had when the appeal, on its face, appears to be
absolutely meritorious or when there are persuasive or compelling reasons to
relieve a litigant of an injustice not commensurate with the degree of
thoughtlessness in not complying with the prescribed procedure. 27

Notably, under A.M. No. 04-9-07-SC (Re: Mode of Appeal in Cases Formerly
Cognizable by the Securities and Exchange Commission), 28 while the petition
for review under Rule 43 of the Rules should be filed within fifteen (15) days
from notice of the decision or final order of the RTC, the CA may actually
grant an additional period of fifteen (15) days within which to file the petition
and a further extension of time not exceeding fifteen (15) days for the most
compelling reasons. This implies that the reglementary period is neither an
impregnable nor an unyielding rule.

Here, there is also no material prejudice to respondents had the CA allowed


the filing of a petition for review. When the Imus RTC declared as permanent
the writ of preliminary injunction, the injunction became immediately
executory. Respondents suspension as Club members was effectively lifted;
in effect, it restored their rights and privileges unless curtailed by a
temporary restraining order or preliminary injunction.

More importantly, the substantive merits of the case deserve Our utmost
consideration.

In the present case, Yu acknowledged that there was an offense


committed.29 Similarly, Yuhico admitted that he was aware or had prior
knowledge of the Clubs "no twosome" policy as contained in the Clubs
Membership Handbook and that they teed off without the required tee time
slip.30 Also, while Yu recognized telling Montallana "kamote ka," Yuhico heard
him also say that he (Montallana) is "gago."31

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 79

Respondents assert that the "no twosome" policy was relaxed by the
management when a member or player would not be prejudiced or, in the
words of Yu, allowed when "maluwag."32 Yet a thorough reading of the
transcript of stenographic records (TSN) disclosed that such claim is based
not on concrete examples. No specific instance as to when and under what
circumstance the supposed relaxation took place was cited. Yuhico roughly
recollected two incidents but, assuming them to be true, these happened
only after May 28, 2000.33 Further, the tee pass or control slip and the Clubs
Palmer Course Card,34 which was identified by respondents witness, Pepito
Dimabuyo, to prove that he and another member were allowed to play
twosome on June 13, 2004, a Sunday, indicated that they were allowed to tee
off only at 1:45 p.m.35 Lastly, granting, for the sake of argument, that the "no
twosome" policy had been relaxed in the past, Montallana cannot be faulted
in exercising his prerogative to disallow respondents from playing since they
made no prior reservation and that there were standing flights waiting for tee
time. Per Cipriano Santos Report, May 28, 2000 was a relatively busy day as
it had 200 registered players to accommodate as of 8:00 a.m.

It was averred that respondents teed off without the required tee time slip
based on the thinking that it was no longer necessary since Santos, the
Clubs Manager, allowed them by waving his hands when Yuhicos caddie
tried to pick up the slip in the registration office. Such excuse is flimsy
because it ignored the reality that Santos, a mere subordinate of Montallana
who already earned the ire of Yu, was practically more helpless to contain the
stubborn insistence of respondents.

Definitely, the contentions that respondents were not stopped by the


management when they teed off and that they did not cause harm to other
members playing golf at the time for absence of any complaints are
completely immaterial to the fact that transgressions to existing Club rules
and regulations were committed. It is highly probable that they were
tolerated so as to restore the peace and avoid further confrontation and
inconvenience to the parties involved as well as to the Club members in
general.

With regard to the purported damages they incurred, respondents testified


during the trial to support their respective allegations.1wphi1 Yuhico stated
that he distanced himself from his usual group (the "Alabang Boys") and that
he became the butt of jokes of fellow golfers. 36 On the other hand, Yu
represented that some of his friends in the business like Freddy Lim, a certain
Atty. Benjie, and Jun Ramos started to evade or refuse to have dealings with
him after his suspension.37 Apart from these self-serving declarations,
respondents presented neither testimonial nor documentary evidence to
bolster their claims. Worse, Yu even admitted that Freddy Lim and Atty. Benjie
did not tell him that his suspension was the reason why they did not want to
transact with him.38

Records reveal that respondents were given due notice and opportunity to be
heard before the Board of Directors imposed the penalty of suspension as
Club members. Respondent Yu was served with the May 31, 2000

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 80

letter39signed by then Acting General Manager Tomas B. Clemente III


informing that he violated the "no twosome" policy, teed off without the
required tee time slip, and uttered derogatory remarks to Montallana in front
of another member and the caddies. In response, Yus counsel asked for a
copy of Montallanas report and a formal hearing to confront the complainant
and all the witnesses.40 Subsequently, on June 13, 2000, Yu, through counsel,
submitted his explanation that included an admission of the "no twosome"
policy.41 Finally, on September 15, 2000, Yu was advised of the Board
resolution to give him another opportunity to present his side in a meeting
supposed to be held on September 20, 2000. 42 It appears, however, that Yu
refused to attend.43

Likewise, respondent Yuhico was given by Clemente a letter dated May 31,
2000 informing him of violating the "no twosome" policy and teeing off
without the required tee time slip.44 After receiving the same, Yuhico called up
Clemente to hear his side.45 Like Yu, however, Yuhico later refused to attend a
meeting with the Board. 46

Respondents were suspended in accordance with the procedure set forth in


the Clubs By-laws. There is no merit on their insistence that their suspension
is invalid on the ground that the affirmative vote of eight (8) members is
required to support a decision suspending or expelling a Club member. Both
the provisions of Articles of Incorporation 47 and By-Laws48 of the Club
expressly limit the number of directors to seven (7); hence, the provision on
suspension and expulsion of a member which requires the affirmative vote of
eight (8) members is obviously a result of an oversight. Former Senator
Helena Z. Benitez, the Honorary Chairperson named in the Membership
Handbook, could not be included as a regular Board member since there was
no evidence adduced by respondents that she was elected as such pursuant
to the Corporation Code and the By-laws of the Club or that she had the right
and authority to attend and vote in Board meetings. In addition, at the time
the Board resolved to suspend respondents, the affirmative votes of only six
(6) Board members already sufficed. The testimony of Jesus A. Liganor, who
served as Assistant Corporate Secretary, that Rodrigo Francisco had not
attended a single Board meeting since 1997 remains uncontroverted. 49 The
Court agrees with petitioners that the Club should not be powerless to
discipline its members and be helpless against acts inimical to its interest just
because one director had been suspended and refused to take part in the
management affairs.

Lastly, contrary to respondents position, the recommendation of the House


Committee50 to suspend a Club member is not a pre-requisite. Section 1,
Article XIV,51 not Section 2 (b), Article XI,52 of the By-Laws governs as it
outlines the procedure for the suspension of a member. Even assuming that
the recommendation of the House Committee is mandatory, respondents
failed to prove, as a matter of fact, that petitioners acted in bad faith in
relying on the subject provision, which employs the permissive word "may" in
reference to the power of the House Committee to recommend anytime the
suspension of a Club member.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 81

Way different from the trial courts findings, there is, therefore, no factual and
legal basis to grant moral and exemplary damages, attorneys fees and costs
of suit in favor of respondents. The damages suffered, if there are any,
partake of the nature of a damnum absque injuria. As elaborated in Spouses
Custodio v. CA:53

x x x [T]he mere fact that the plaintiff suffered losses does not give rise to a
right to recover damages. To warrant the recovery of damages, there must be
both a right of action for a legal wrong inflicted by the defendant, and
damage resulting to the plaintiff therefrom. Wrong without damage, or
damage without wrong, does not constitute a cause of action, since damages
are merely part of the remedy allowed for the injury caused by a breach or
wrong.

There is a material distinction between damages and injury. Injury is the


illegal invasion of a legal right; damage is the loss, hurt, or harm which
results from the injury; and damages are the recompense or compensation
awarded for the damage suffered. Thus, there can be damage without injury
in those instances in which the loss or harm was not the result of a violation
of a legal duty. These situations are often called damnum absque injuria.

In order that a plaintiff may maintain an action for the injuries of which he
complains, he must establish that such injuries resulted from a breach of duty
which the defendant owed to the plaintiff a concurrence of injury to the
plaintiff and legal responsibility by the person causing it. The underlying basis
for the award of tort damages is the premise that an individual was injured in
contemplation of law. Thus, there must first be the breach of some duty and
the imposition of liability for that breach before damages may be awarded; it
is not sufficient to state that there should be tort liability merely because the
plaintiff suffered some pain and suffering.

Many accidents occur and many injuries are inflicted by acts or omissions
which cause damage or loss to another but which violate no legal duty to
such other person, and consequently create no cause of action in his favor. In
such cases, the consequences must be borne by the injured person alone.
The law affords no remedy for damages resulting from an act which does not
amount to a legal injury or wrong.

In other words, in order that the law will give redress for an act causing
damage, that act must be not only hurtful, but wrongful. There must
be damnum et injuria. If, as may happen in many cases, a person sustains
actual damage, that is, harm or loss to his person or property, without
sustaining any legal injury, that is, an act or omission which the law does not
deem an injury, the damage is regarded as damnum absque injuria.

xxxx

The proper exercise of a lawful right cannot constitute a legal wrong for which
an action will lie, although the act may result in damage to another, for no

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 82

legal right has been invaded. One may use any lawful means to accomplish a
lawful purpose and though the means adopted may cause damage to
another, no cause of action arises in the latters favor. Any injury or damage
occasioned thereby is damnum absque injuria. The courts can give no redress
for hardship to an individual resulting from action reasonably calculated to
achieve a lawful end by lawful means.54

"One who makes use of his own legal right does no injury. Qui jure suo utitur
nullum damnum facit. If damage results from a person's exercising his legal
rights, it is damnum absque injuria."55 In this case, respondents failed to
prove by preponderance of evidence that there is fault or negligence on the
part of petitioners in order to oblige them to pay for the alleged damage
sustained as a result of their suspension as Club members. Certainly,
membership in the Club is a privilege.56 Regular members are entitled to use
all the facilities and privileges of the Club, subject to its rules and
regulations.57 As correctly pointed out by petitioners, the mental anguish
respondents experienced, assuming to be true, was brought upon them by
themselves for deliberately and consciously violating the rules and
regulations of the Club. Considering that respondents were validly
suspended, there is no reason for the Club to compensate them. Indeed, the
penalty of suspension provided for in Section 1, Article XIV of the By-Laws is a
means to protect and preserve the interest and purposes of the Club. This
being so, the suspension of respondents does not fall under any of the
provisions of the Civil Code pertaining to the grant of moral and exemplary
damages, attorneys fees, and litigation costs.

WHEREFORE, premises considered, the petition is GRANTED. The


Resolutions dated September 16, 2009 and January 21, 2010 of the Court of
Appeals in CA-G.R. SP No. 106918, which reconsidered and set aside its
Resolution dated January 15, 2009, granting petitioners a fifteen-day period
within which to file a petition for review under Rule 43 of the Rules,
is ANNULLED AND SET ASIDE. SEC Case Nos. 001-0l and 002-0l filed and
raffled before the Regional Trial Court, Branch 21 of Imus, Cavite are
hereby DISMISSED for lack of merit. Respondents are ORDERED TO
RETURN to petitioners the total amount of P9,200,000.00 or P4,600,000.00
each, within THIRTY (30) DAYS from the time this decision becomes final
and executory. Thereafter, said amount shall earn legal interest of six percent
(6%) per annum until fully paid.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 83

6.

SECOND DIVISION

January 11, 2016

G.R. No. 167615

SPOUSES ALEXANDER AND JULIE LAM, Doing Business Under the


Name and Style "COLORKWIK LABORATORIES" AND "COLORKWIK
PHOTO SUPPLY", Petitioners,
vs.
KODAK PHILIPPINES, LTD., Respondent.

DECISION

LEONEN, J.:

This is a Petition for Review on Certiorari filed on April 20, 2005 assailing the
March 30, 2005 Decision1 and September 9, 2005 Amended Decision 2 of the
Court of Appeals, which modified the February 26, 1999 Decision 3 of the
Regional Trial Court by reducing the amount of damages awarded to
petitioners Spouses Alexander and Julie Lam (Lam Spouses). 4 The Lam
Spouses argue that respondent Kodak Philippines, Ltd.s breach of their
contract of sale entitles them to damages more than the amount awarded by
the Court of Appeals.5

On January 8, 1992, the Lam Spouses and Kodak Philippines, Ltd. entered into
an agreement (Letter Agreement) for the sale of three (3) units of the Kodak
Minilab System 22XL6 (Minilab Equipment) in the amount of 1,796,000.00
per unit,7 with the following terms:

This confirms our verbal agreement for Kodak Phils., Ltd. To provide Colorkwik
Laboratories, Inc. with three (3) units Kodak Minilab System 22XL . . . for your
proposed outlets in Rizal Avenue (Manila), Tagum (Davao del Norte), and your
existing Multicolor photo counter in Cotabato City under the following terms
and conditions:

1. Said Minilab Equipment packages will avail a total of 19% multiple order
discount based on prevailing equipment price provided said equipment
packages will be purchased not later than June 30, 1992.

2. 19% Multiple Order Discount shall be applied in the form of merchandise


and delivered in advance immediately after signing of the contract.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 84

* Also includes start-up packages worth P61,000.00.

3. NO DOWNPAYMENT.

4. Minilab Equipment Package shall be payable in 48 monthly installments at


THIRTY FIVE THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for
the first 12 months; the balance shall be re-amortized for the remaining 36
months and the prevailing interest shall be applied.

5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at


ONE MILLION SEVEN HUNDRED NINETY SIX THOUSAND PESOS.

6. Price is subject to change without prior notice.

*Secured with PDCs; 1st monthly amortization due 45 days after


installation[.]8

On January 15, 1992, Kodak Philippines, Ltd. delivered one (1) unit of the
Minilab Equipment in Tagum, Davao Province. 9 The delivered unit was
installed by Noritsu representatives on March 9, 1992. 10 The Lam Spouses
issued postdated checks amounting to 35,000.00 each for 12 months as
payment for the first delivered unit, with the first check due on March 31,
1992.11

The Lam Spouses requested that Kodak Philippines, Ltd. not negotiate the
check dated March 31, 1992 allegedly due to insufficiency of funds. 12 The
same request was made for the check due on April 30, 1992. However, both
checks were negotiated by Kodak Philippines, Ltd. and were honored by the
depository bank.13 The 10 other checks were subsequently dishonored after
the Lam Spouses ordered the depository bank to stop payment. 14

Kodak Philippines, Ltd. canceled the sale and demanded that the Lam
Spouses return the unit it delivered together with its accessories. 15 The Lam
Spouses ignored the demand but also rescinded the contract through the
letter dated November 18, 1992 on account of Kodak Philippines, Ltd.s
failure to deliver the two (2) remaining Minilab Equipment units. 16

On November 25, 1992, Kodak Philippines, Ltd. filed a Complaint for replevin
and/or recovery of sum of money. The case was raffled to Branch 61 of the
Regional Trial Court, Makati City. 17 The Summons and a copy of Kodak
Philippines, Ltd.s Complaint was personally served on the Lam Spouses. 18

The Lam Spouses failed to appear during the pre-trial conference and submit
their pre-trial brief despite being given extensions. 19 Thus, on July 30, 1993,
they were declared in default.20 Kodak Philippines, Ltd. presented evidence
ex-parte.21 The trial court issued the Decision in favor of Kodak Philippines,
Ltd. ordering the seizure of the Minilab Equipment, which included the lone
delivered unit, its standard accessories, and a separate generator
set.22 Based on this Decision, Kodak Philippines, Ltd. was able to obtain a writ

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 85

of seizure on December 16, 1992 for the Minilab Equipment installed at the
Lam Spouses outlet in Tagum, Davao Province. 23 The writ was enforced on
December 21, 1992, and Kodak Philippines, Ltd. gained possession of the
Minilab Equipment unit, accessories, and the generator set. 24

The Lam Spouses then filed before the Court of Appeals a Petition to Set
Aside the Orders issued by the trial court dated July 30, 1993 and August 13,
1993. These Orders were subsequently set aside by the Court of Appeals
Ninth Division, and the case was remanded to the trial court for pre-trial. 25

On September 12, 1995, an Urgent Motion for Inhibition was filed against
Judge Fernando V. Gorospe, Jr., 26 who had issued the writ of seizure. 27 The
ground for the motion for inhibition was not provided. Nevertheless, Judge
Fernando V. Gorospe Jr. inhibited himself, and the case was reassigned to
Branch 65 of the Regional Trial Court, Makati City on October 3, 1995. 28

In the Decision dated February 26, 1999, the Regional Trial Court found that
Kodak Philippines, Ltd. defaulted in the performance of its obligation under its
Letter Agreement with the Lam Spouses. 29 It held that Kodak Philippines,
Ltd.s failure to deliver two (2) out of the three (3) units of the Minilab
Equipment caused the Lam Spouses to stop paying for the rest of the
installments.30 The trial court noted that while the Letter Agreement did not
specify a period within which the delivery of all units was to be made, the
Civil Code provides "reasonable time" as the standard period for compliance:

The second paragraph of Article 1521 of the Civil Code provides:

Where by a contract of sale the seller is bound to send the goods to the
buyer, but no time for sending them is fixed, the seller is bound to send them
within a reasonable time.

What constitutes reasonable time is dependent on the circumstances availing


both on the part of the seller and the buyer. In this case, delivery of the first
unit was made five (5) days after the date of the agreement. Delivery of the
other two (2) units, however, was never made despite the lapse of at least
three (3) months.31

Kodak Philippines, Ltd. failed to give a sufficient explanation for its failure to
deliver all three (3) purchased units within a reasonable time. 32

The trial court found:

Kodak would have the court believe that it did not deliver the other two (2)
units due to the failure of defendants to make good the installments
subsequent to the second. The court is not convinced. First of all, there
should have been simultaneous delivery on account of the circumstances
surrounding the transaction. . . . Even after the first delivery . . . no delivery
was made despite repeated demands from the defendants and despite the
fact no installments were due. Then in March and in April (three and four

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 86

months respectively from the date of the agreement and the first delivery)
when the installments due were both honored, still no delivery was made.

Second, although it might be said that Kodak was testing the waters with just
one delivery - determining first defendants capacity to pay - it was not at
liberty to do so. It is implicit in the letter agreement that delivery within a
reasonable time was of the essence and failure to so deliver within a
reasonable time and despite demand would render the vendor in default.

....

Third, at least two (2) checks were honored. If indeed Kodak refused delivery
on account of defendants inability to pay, non-delivery during the two (2)
months that payments were honored is unjustified. 33

Nevertheless, the trial court also ruled that when the Lam Spouses accepted
delivery of the first unit, they became liable for the fair value of the goods
received:

On the other hand, defendants accepted delivery of one (1) unit. Under
Article 1522 of the Civil Code, in the event the buyer accepts incomplete
delivery and uses the goods so delivered, not then knowing that there would
not be any further delivery by the seller, the buyer shall be liable only for the
fair value to him of the goods received. In other words, the buyer is still liable
for the value of the property received. Defendants were under obligation to
pay the amount of the unit. Failure of delivery of the other units did not
thereby give unto them the right to suspend payment on the unit delivered.
Indeed, in incomplete deliveries, the buyer has the remedy of refusing
payment unless delivery is first made. In this case though, payment for the
two undelivered units have not even commenced; the installments made
were for only one (1) unit.

Hence, Kodak is right to retrieve the unit delivered. 34

The Lam Spouses were under obligation to pay for the amount of one unit,
and the failure to deliver the remaining units did not give them the right to
suspend payment for the unit already delivered. 35 However, the trial court
held that since Kodak Philippines, Ltd. had elected to cancel the sale and
retrieve the delivered unit, it could no longer seek payment for any
deterioration that the unit may have suffered while under the custody of the
Lam Spouses.36

As to the generator set, the trial court ruled that Kodak Philippines, Ltd.
attempted to mislead the court by claiming that it had delivered the
generator set with its accessories to the Lam Spouses, when the evidence
showed that the Lam Spouses had purchased it from Davao Ken Trading, not
from Kodak Philippines, Ltd.37 Thus, the generator set that Kodak Philippines,
Ltd. wrongfully took from the Lam Spouses should be replaced. 38

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 87

The dispositive portion of the Regional Trial Court Decision reads:

PREMISES CONSIDERED, the case is hereby dismissed. Plaintiff is ordered to


pay the following:

1) PHP 130,000.00 representing the amount of the generator set, plus legal
interest at 12% per annum from December 1992 until fully paid; and

2) PHP 1,300,000.00 as actual expenses in the renovation of the Tagum,


Davao and Rizal Ave., Manila outlets.

SO ORDERED.39

On March 31, 1999, the Lam Spouses filed their Notice of Partial Appeal,
raising as an issue the Regional Trial Courts failure to order Kodak
Philippines, Ltd. to pay: (1) 2,040,000 in actual damages; (2) 50,000,000 in
moral damages; (3) 20,000,000 in exemplary damages; (4) 353,000 in
attorneys fees; and (5) 300,000 as litigation expenses. 40 The Lam Spouses
did not appeal the Regional Trial Courts award for the generator set and the
renovation expenses.41

Kodak Philippines, Ltd. also filed an appeal. However, the Court of


Appeals42 dismissed it on December 16, 2002 for Kodak Philippines, Ltd.s
failure to file its appellants brief, without prejudice to the continuation of the
Lam Spouses appeal.43 The Court of Appeals December 16, 2002 Resolution
denying Kodak Philippines, Ltd.s appeal became final and executory on
January 4, 2003.44

In the Decision45 dated March 30, 2005, the Court of Appeals Special
Fourteenth Division modified the February 26, 1999 Decision of the Regional
Trial Court:

WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26


February 1999 of the Regional Trial Court, Branch 65 in Civil Case No. 92-3442
is hereby MODIFIED. Plaintiff-appellant is ordered to pay the following:

1. P130,000.00 representing the amount of the generator set, plus legal


interest at 12% per annum from December 1992 until fully paid; and

2. P440,000.00 as actual damages;

3. P25,000.00 as moral damages; and

4. P50,000.00 as exemplary damages.

SO ORDERED.46 (Emphasis supplied)

The Court of Appeals agreed with the trial courts Decision, but extensively
discussed the basis for the modification of the dispositive portion.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 88

The Court of Appeals ruled that the Letter Agreement executed by the parties
showed that their obligations were susceptible of partial performance. Under
Article 1225 of the New Civil Code, their obligations are divisible:

In determining the divisibility of an obligation, the following factors may be


considered, to wit: (1) the will or intention of the parties, which may be
expressed or presumed; (2) the objective or purpose of the stipulated
prestation; (3) the nature of the thing; and (4) provisions of law affecting the
prestation.

Applying the foregoing factors to this case, We found that the intention of the
parties is to be bound separately for each Minilab Equipment to be delivered
as shown by the separate purchase price for each of the item, by the
acceptance of Sps. Lam of separate deliveries for the first Minilab Equipment
and for those of the remaining two and the separate payment arrangements
for each of the equipment. Under this premise, Sps. Lam shall be liable for
the entire amount of the purchase price of the Minilab

Equipment delivered considering that Kodak had already completely fulfilled


its obligation to deliver the same. . . .

Third, it is also evident that the contract is one that is severable in character
as demonstrated by the separate purchase price for each of the minilab
equipment. "If the part to be performed by one party consists in several
distinct and separate items and the price is apportioned to each of them, the
contract will generally be held to be severable. In such case, each distinct
stipulation relating to a separate subject matter will be treated as a separate
contract." Considering this, Kodak's breach of its obligation to deliver the
other two (2) equipment cannot bar its recovery for the full payment of the
equipment already delivered. As far as Kodak is concerned, it had already
fully complied with its separable obligation to deliver the first unit of Minilab
Equipment.47 (Emphasis supplied)

The Court of Appeals held that the issuance of a writ of replevin is proper
insofar as the delivered Minilab Equipment unit and its standard accessories
are concerned, since Kodak Philippines, Ltd. had the right to possess it: 48

The purchase price of said equipment is P1,796,000.00 which, under the


agreement is payable with forty eight (48) monthly amortization. It is
undisputed that Sps. Lam made payments which amounted to Two Hundred
Seventy Thousand Pesos (P270,000.00) through the following checks:
Metrobank Check Nos. 00892620 and 00892621 dated 31 March 1992 and 30
April 1992 respectively in the amount of Thirty Five Thousand Pesos
(P35,000.00) each, and BPI Family Check dated 31 July 1992 amounting to
Two Hundred Thousand Pesos (P200,000.00). This being the case, Sps. Lam
are still liable to Kodak in the amount of One Million Five Hundred Twenty Six
Thousand Pesos (P1,526,000.00), which is payable in several monthly
amortization, pursuant to the Letter Agreement. However, Sps. Lam admitted
that sometime in May 1992, they had already ordered their drawee bank to
stop the payment on all the other checks they had issued to Kodak as

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 89

payment for the Minilab Equipment delivered to them. Clearly then, Kodak
ha[d] the right to repossess the said equipment, through this replevin suit.
Sps. Lam cannot excuse themselves from paying in full the purchase price of
the equipment delivered to them on account of Kodaks breach of the
contract to deliver the other two (2) Minilab Equipment, as contemplated in
the Letter Agreement.49(Emphasis supplied)

Echoing the ruling of the trial court, the Court of Appeals held that the liability
of the Lam Spouses to pay the remaining balance for the first delivered unit is
based on the second sentence of Article 1592 of the New Civil Code. 50 The
Lam Spouses receipt and use of the Minilab Equipment before they knew
that Kodak Philippines, Ltd. would not deliver the two (2) remaining units has
made them liable for the unpaid portion of the purchase price. 51

The Court of Appeals noted that Kodak Philippines, Ltd. sought the rescission
of its contract with the Lam Spouses in the letter dated October 14,
1992.52 The rescission was based on Article 1191 of the New Civil Code, which
provides: "The power to rescind obligations is implied in reciprocal ones, in
case one of the obligors should not comply with what is incumbent upon
him."53 In its letter, Kodak Philippines, Ltd. demanded that the Lam Spouses
surrender the lone delivered unit of Minilab Equipment along with its standard
accessories.54

The Court of Appeals likewise noted that the Lam Spouses rescinded the
contract through its letter dated November 18, 1992 on account of Kodak
Philippines, Inc.s breach of the parties agreement to deliver the two (2)
remaining units.55

As a result of this rescission under Article 1191, the Court of Appeals ruled
that "both parties must be restored to their original situation, as far as
practicable, as if the contract was never entered into." 56 The Court of Appeals
ratiocinated that Article 1191 had the effect of extinguishing the obligatory
relation as if one was never created: 57

To rescind is to declare a contract void in its inception and to put an end to it


as though it never were. It is not merely to terminate it and to release parties
from further obligations to each other but abrogate it from the beginning and
restore parties to relative positions which they would have occupied had no
contract been made.58

The Lam Spouses were ordered to relinquish possession of the Minilab


Equipment unit and its standard accessories, while Kodak Philippines, Ltd.
was ordered to return the amount of 270,000.00, tendered by the Lam
Spouses as partial payment.59

As to the actual damages sought by the parties, the Court of Appeals found
that the Lam Spouses were able to substantiate the following:

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 90

Incentive fee paid to Mr. Ruales in the amount of P100,000.00; the rider to
the contract of lease which made the Sps. Lam liable, by way of advance
payment, in the amount of P40,000.00, the same being intended for the
repair of the flooring of the leased premises; and lastly, the payment of
P300,000.00, as compromise agreement for the pre-termination of the
contract of lease with Ruales.60

The total amount is 440,000.00. The Court of Appeals found that all other
claims made by the Lam Spouses were not supported by evidence, either
through official receipts or check payments.61

As regards the generator set improperly seized from Kodak Philippines, Ltd.
on the basis of the writ of replevin, the Court of Appeals found that there was
no basis for the Lam Spouses claim for reasonable rental of 5,000.00. It
held that the trial courts award of 12% interest, in addition to the cost of the
generator set in the amount of 130,000.00, is sufficient compensation for
whatever damage the Lam Spouses suffered on account of its improper
seizure.62

The Court of Appeals also ruled on the Lam Spouses entitlement to moral
and exemplary damages, as well as attorneys fees and litigation expenses:

In seeking recovery of the Minilab Equipment, Kodak cannot be considered to


have manifested bad faith and malevolence because as earlier ruled upon, it
was well within its right to do the same. However, with respect to the seizure
of the generator set, where Kodak misrepresented to the court a quo its
alleged right over the said item, Kodaks bad faith and abuse of judicial
processes become self-evident. Considering the off-setting circumstances
attendant, the amount of P25,000.00 by way of moral damages is considered
sufficient.

In addition, so as to serve as an example to the public that an application for


replevin should not be accompanied by any false claims and
misrepresentation, the amount of P50,000.00 by way of exemplary damages
should be pegged against Kodak.

With respect to the attorneys fees and litigation expenses, We find that there
is no basis to award Sps. Lam the amount sought for. 63

Kodak Philippines, Ltd. moved for reconsideration of the Court of Appeals


Decision, but it was denied for lack of merit. 64 However, the Court of Appeals
noted that the Lam Spouses Opposition correctly pointed out that the
additional award of 270,000.00 made by the trial court was not mentioned
in the decretal portion of the March 30, 2005 Decision:

Going over the Decision, specifically page 12 thereof, the Court noted that, in
addition to the amount of Two Hundred Seventy Thousand (P270,000.00)
which plaintiff-appellant should return to the defendantsappellants, the Court
also ruled that defendants-appellants should, in turn, relinquish possession of

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 91

the Minilab Equipment and the standard accessories to plaintiff-appellant.


Inadvertently, these material items were not mentioned in the decretal
portion of the Decision. Hence, the proper correction should herein be
made.65

The Lam Spouses filed this Petition for Review on April 14, 2005. On the other
hand, Kodak Philippines, Ltd. filed its Motion for Reconsideration 66 before the
Court of Appeals on April 22, 2005.

While the Petition for Review on Certiorari filed by the Lam Spouses was
pending before this court, the Court of Appeals Special Fourteenth Division,
acting on Kodak Philippines, Ltd.s Motion for Reconsideration, issued the
Amended Decision67 dated September 9, 2005. The dispositive portion of the
Decision reads:

WHEREFORE, premises considered, this Court resolved that:

A. Plaintiff-appellants Motion for Reconsideration is hereby DENIED for lack


of merit.

B. The decretal portion of the 30 March 2005 Decision should now read as
follows:

"WHEREFORE, PREMISES CONSIDERED, the Assailed Decision dated 26


February 1999 of the Regional Trial Court, Branch 65 in Civil Cases No. 92-
3442 is hereby MODIFIED. Plaintiff-appellant is ordered to pay the following:

a. P270,000.00 representing the partial payment made on the Minilab


equipment.

b. P130,000.00 representing the amount of the generator set, plus legal


interest at 12% per annum from December 1992 until fully paid;

c. P440,000.00 as actual damages;

d. P25,000.00 as moral damages; and

e. P50,000.00 as exemplary damages.

Upon the other hand, defendants-appellants are hereby ordered to return to


plaintiff-appellant the Minilab equipment and the standard accessories
delivered by plaintiff-appellant.

SO ORDERED."

SO ORDERED.68 (Emphasis in the original)

Upon receiving the Amended Decision of the Court of Appeals, Kodak


Philippines, Ltd. filed a Motion for Extension of Time to File an Appeal by

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 92

Certiorari under Rule 45 of the 1997 Rules of Civil Procedure before this
court.69

This was docketed as G.R. No. 169639. In the Motion for Consolidation dated
November 2, 2005, the Lam Spouses moved that G.R. No. 167615 and G.R.
No. 169639 be consolidated since both involved the same parties, issues,
transactions, and essential facts and circumstances. 70

In the Resolution dated November 16, 2005, this court noted the Lam
Spouses September 23 and September 30, 2005 Manifestations praying that
the Court of Appeals September 9, 2005 Amended Decision be considered in
the resolution of the Petition for Review on Certiorari. 71 It also granted the
Lam Spouses Motion for Consolidation.72

In the Resolution73 dated September 20, 2006, this court deconsolidated G.R
No. 167615 from G.R. No. 169639 and declared G.R. No. 169639 closed and
terminated since Kodak Philippines, Ltd. failed to file its Petition for Review.

II

We resolve the following issues:

First, whether the contract between petitioners Spouses Alexander and Julie
Lam and respondent Kodak Philippines, Ltd. pertained to obligations that are
severable, divisible, and susceptible of partial performance under Article
1225 of the New Civil Code; and

Second, upon rescission of the contract, what the parties are entitled to
under Article 1190 and Article 1522 of the New Civil Code.

Petitioners argue that the Letter Agreement it executed with respondent for
three (3) Minilab Equipment units was not severable, divisible, and
susceptible of partial performance. Respondents recovery of the delivered
unit was unjustified.74

Petitioners assert that the obligations of the parties were not susceptible of
partial performance since the Letter Agreement was for a package deal
consisting of three (3) units. 75 For the delivery of these units, petitioners were
obliged to pay 48 monthly payments, the total of which constituted one
debt.76 Having relied on respondents assurance that the three units would be
delivered at the same time, petitioners simultaneously rented and renovated
three stores in anticipation of simultaneous operations. 77 Petitioners argue
that the divisibility of the object does not necessarily determine the
divisibility of the obligation since the latter is tested against its susceptibility
to a partial performance.78 They argue that even if the object is susceptible of
separate deliveries, the transaction is indivisible if the parties intended the
realization of all parts of the agreed obligation. 79

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 93

Petitioners support the claim that it was the parties intention to have an
indivisible agreement by asserting that the payments they made to
respondent were intended to be applied to the whole package of three
units.80 The postdated checks were also intended as initial payment for the
whole package.81 The separate purchase price for each item was merely
intended to particularize the unit prices, not to negate the indivisible nature
of their transaction.82 As to the issue of delivery, petitioners claim that their
acceptance of separate deliveries of the units was solely due to the
constraints faced by respondent, who had sole control over delivery
matters.83

With the obligation being indivisible, petitioners argue that respondents


failure to comply with its obligation to deliver the two (2) remaining Minilab
Equipment units amounted to a breach. Petitioners claim that the breach
entitled them to the remedy of rescission and damages under Article 1191 of
the New Civil Code.84

Petitioners also argue that they are entitled to moral damages more than the
50,000.00 awarded by the Court of Appeals since respondents wrongful act
of accusing them of non-payment of their obligations caused them sleepless
nights, mental anguish, and wounded feelings. 85 They further claim that, to
serve as an example for the public good, they are entitled to exemplary
damages as respondent, in making false allegations, acted in evident bad
faith and in a wanton, oppressive, capricious, and malevolent manner. 86

Petitioners also assert that they are entitled to attorneys fees and litigation
expenses under Article 2208 of the New Civil Code since respondents act of
bringing a suit against them was baseless and malicious. This prompted them
to engage the services of a lawyer. 87

Respondent argues that the parties Letter Agreement contained divisible


obligations susceptible of partial performance as defined by Article 1225 of
the New Civil Code.88 In respondents view, it was the intention of the parties
to be bound separately for each individually priced Minilab Equipment unit to
be delivered to different outlets:89

The three (3) Minilab Equipment are intended by petitioners LAM for
install[a]tion at their Tagum, Davao del Norte, Sta. Cruz, Manila and Cotabato
City outlets. Each of these units [is] independent from one another, as many
of them may perform its own job without the other. Clearly the objective or
purpose of the prestation, the obligation is divisible.

The nature of each unit of the three (3) Minilab Equipment is such that one
can perform its own functions, without awaiting for the other units to perform
and complete its job. So much so, the nature of the object of the Letter
Agreement is susceptible of partial performance, thus the obligation is
divisible.90

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 94

With the contract being severable in character, respondent argues that it


performed its obligation when it delivered one unit of the Minilab
Equipment.91 Since each unit could perform on its own, there was no need to
await the delivery of the other units to complete its job. 92 Respondent then is
of the view that when petitioners ordered the depository bank to stop
payment of the issued checks covering the first delivered unit, they violated
their obligations under the Letter Agreement since respondent was already
entitled to full payment.93

Respondent also argues that petitioners benefited from the use of the Minilab
Equipment for 10 monthsfrom March to December 1992 despite having
paid only two (2) monthly installments. 94 Respondent avers that the two
monthly installments amounting to 70,000.00 should be the subject of an
offset against the amount the Court of Appeals awarded to petitioners. 95

Respondent further avers that petitioners have no basis for claiming damages
since the seizure and recovery of the Minilab Equipment was not in bad faith
and respondent was well within its right. 96

III

The Letter Agreement contained an indivisible obligation.

Both parties rely on the Letter Agreement 97 as basis of their respective


obligations. Written by respondents Jeffrey T. Go and Antonio V. Mines and
addressed to petitioner Alexander Lam, the Letter Agreement contemplated a
"package deal" involving three (3) units of the Kodak Minilab System 22XL,
with the following terms and conditions:

This confirms our verbal agreement for Kodak Phils., Ltd. to provide Colorkwik
Laboratories, Inc. with three (3) units Kodak Minilab System 22XL . . . for your
proposed outlets in Rizal Avenue (Manila), Tagum (Davao del Norte), and your
existing Multicolor photo counter in Cotabato City under the following terms
and conditions:

1. Said Minilab Equipment packages will avail a total of 19% multiple order
discount based on prevailing equipment price provided said equipment
packages will be purchased not later than June 30, 1992.

2. 19% Multiple Order Discount shall be applied in the form of merchandise


and delivered in advance immediately after signing of the contract.

* Also includes start-up packages worth P61,000.00.

3. NO DOWNPAYMENT.

4. Minilab Equipment Package shall be payable in 48 monthly installments at


THIRTY FIVE THOUSAND PESOS (P35,000.00) inclusive of 24% interest rate for

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 95

the first 12 months; the balance shall be re-amortized for the remaining 36
months and the prevailing interest shall be applied.

5. Prevailing price of Kodak Minilab System 22XL as of January 8, 1992 is at


ONE MILLION SEVEN HUNDRED NINETY SIX THOUSAND PESOS.

6. Price is subject to change without prior notice.

*Secured with PDCs; 1st monthly amortization due 45 days after


installation[.]98

Based on the foregoing, the intention of the parties is for there to be a single
transaction covering all three (3) units of the Minilab Equipment.
Respondents obligation was to deliver all products purchased under a
"package," and, in turn, petitioners obligation was to pay for the total
purchase price, payable in installments.

The intention of the parties to bind themselves to an indivisible obligation can


be further discerned through their direct acts in relation to the package deal.
There was only one agreement covering all three (3) units of the Minilab
Equipment and their accessories. The Letter Agreement specified only one
purpose for the buyer, which was to obtain these units for three different
outlets. If the intention of the parties were to have a divisible contract, then
separate agreements could have been made for each Minilab Equipment unit
instead of covering all three in one package deal. Furthermore, the 19%
multiple order discount as contained in the Letter Agreement was applied to
all three acquired units.99 The "no downpayment" term contained in the Letter
Agreement was also applicable to all the Minilab Equipment units. Lastly, the
fourth clause of the Letter Agreement clearly referred to the object of the
contract as "Minilab Equipment Package."

In ruling that the contract between the parties intended to cover divisible
obligations, the Court of Appeals highlighted: (a) the separate purchase price
of each item; (b) petitioners acceptance of separate deliveries of the units;
and (c) the separate payment arrangements for each unit. 100 However,
through the specified terms and conditions, the tenor of the Letter Agreement
indicated an intention for a single transaction. This intent must prevail even
though the articles involved are physically separable and capable of being
paid for and delivered individually, consistent with the New Civil Code:

Article 1225. For the purposes of the preceding articles, obligations to give
definite things and those which are not susceptible of partial performance
shall be deemed to be indivisible.

When the obligation has for its object the execution of a certain number of
days of work, the accomplishment of work by metrical units, or analogous
things which by their nature are susceptible of partial performance, it shall be
divisible.

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 96

However, even though the object or service may be physically divisible, an


obligation is indivisible if so provided by law or intended by the
parties. (Emphasis supplied)

In Nazareno v. Court of Appeals, 101 the indivisibility of an obligation is tested


against whether it can be the subject of partial performance:

An obligation is indivisible when it cannot be validly performed in parts,


whatever may be the nature of the thing which is the object thereof. The
indivisibility refers to the prestation and not to the object thereof. In the
present case, the Deed of Sale of January 29, 1970 supposedly conveyed the
six lots to Natividad. The obligation is clearly indivisible because the
performance of the contract cannot be done in parts, otherwise the value of
what is transferred is diminished. Petitioners are therefore mistaken in basing
the indivisibility of a contract on the number of obligors. 102 (Emphasis
supplied, citation omitted)

There is no indication in the Letter Agreement that the units petitioners


ordered were covered by three (3) separate transactions. The factors
considered by the Court of Appeals are mere incidents of the execution of the
obligation, which is to deliver three units of the Minilab Equipment on the part
of respondent and payment for all three on the part of petitioners. The
intention to create an indivisible contract is apparent from the benefits that
the Letter Agreement afforded to both parties. Petitioners were given the
19% discount on account of a multiple order, with the discount being equally
applicable to all units that they sought to acquire. The provision on "no
downpayment" was also applicable to all units. Respondent, in turn, was
entitled to payment of all three Minilab Equipment units, payable by
installments.

IV

With both parties opting for rescission of the contract under Article 1191, the
Court of Appeals correctly ordered for restitution.

The contract between the parties is one of sale, where one party obligates
himself or herself to transfer the ownership and deliver a determinate thing,
while the other pays a certain price in money or its equivalent. 103 A contract
of sale is perfected upon the meeting of minds as to the object and the price,
and the parties may reciprocally demand the performance of their respective
obligations from that point on.104

The Court of Appeals correctly noted that respondent had rescinded the
parties Letter Agreement through the letter dated October 14, 1992. 105 It
likewise noted petitioners rescission through the letter dated November 18,
1992.106This rescission from both parties is founded on Article 1191 of the
New Civil Code:

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 97

The power to rescind obligations is implied in reciprocal ones, in case one of


the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfilment and the rescission of
the obligation, with the payment of damages in either case. He may also seek
rescission, even after he has chosen fulfilment, if the latter should become
impossible.

The court shall decree the rescission claimed, unless there be just cause
authorizing the fixing of a period.

Rescission under Article 1191 has the effect of mutual


restitution.107 In Velarde v. Court of Appeals:108

Rescission abrogates the contract from its inception and requires a mutual
restitution of benefits received.

....

Rescission creates the obligation to return the object of the contract. It can
be carried out only when the one who demands rescission can return
whatever he may be obliged to restore. To rescind is to declare a contract
void at its inception and to put an end to it as though it never was. It is not
merely to terminate it and release the parties from further obligations to
each other, but to abrogate it from the beginning and restore the parties to
their relative positions as if no contract has been made.109 (Emphasis
supplied, citations omitted)

The Court of Appeals correctly ruled that both parties must be restored to
their original situation as far as practicable, as if the contract was never
entered into. Petitioners must relinquish possession of the delivered Minilab
Equipment unit and accessories, while respondent must return the amount
tendered by petitioners as partial payment for the unit received. Further,
respondent cannot claim that the two (2) monthly installments should be
offset against the amount awarded by the Court of Appeals to petitioners
because the effect of rescission under Article 1191 is to bring the parties
back to their original positions before the contract was entered into. Also
in Velarde:

As discussed earlier, the breach committed by petitioners was the


nonperformance of a reciprocal obligation, not a violation of the terms and
conditions of the mortgage contract. Therefore, the automatic rescission and
forfeiture of payment clauses stipulated in the contract does not apply.
Instead, Civil Code provisions shall govern and regulate the resolution of this
controversy.

Considering that the rescission of the contract is based on Article 1191 of the
Civil Code, mutual restitution is required to bring back the parties to their
original situation prior to the inception of the contract. Accordingly, the initial

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 98

payment of 800,000 and the corresponding mortgage payments in the


amounts of 27,225, 23,000 and 23,925 (totaling 874,150.00) advanced
by petitioners should be returned by private respondents, lest the latter
unjustly enrich themselves at the expense of the former. 110 (Emphasis
supplied)

When rescission is sought under Article 1191 of the Civil Code, it need not be
judicially invoked because the power to resolve is implied in reciprocal
obligations.111 The right to resolve allows an injured party to minimize the
damages he or she may suffer on account of the other partys failure to
perform what is incumbent upon him or her. 112 When a party fails to comply
with his or her obligation, the other partys right to resolve the contract is
triggered.113 The resolution immediately produces legal effects if the non-
performing party does not question the resolution. 114 Court intervention only
becomes necessary when the party who allegedly failed to comply with his or
her obligation disputes the resolution of the contract. 115 Since both parties in
this case have exercised their right to resolve under Article 1191, there is no
need for a judicial decree before the resolution produces effects.

The issue of damages is a factual one. A petition for review on certiorari


under Rule 45 shall only pertain to questions of law. 116 It is not the duty of this
court to re-evaluate the evidence adduced before the lower
courts.117Furthermore, unless the petition clearly shows that there is grave
abuse of discretion, the findings of fact of the trial court as affirmed by the
Court of Appeals are conclusive upon this court. 118 In Lorzano v. Tabayag,
Jr.:119

For a question to be one of law, the same must not involve an examination of
the probative value of the evidence presented by the litigants or any of them.
The resolution of the issue must rest solely on what the law provides on the
given set of circumstances. Once it is clear that the issue invites a review of
the evidence presented, the question posed is one of fact.

....

For the same reason, we would ordinarily disregard the petitioners allegation
as to the propriety of the award of moral damages and attorneys fees in
favor of the respondent as it is a question of fact. Thus, questions on whether
or not there was a preponderance of evidence to justify the award of
damages or whether or not there was a causal connection between the given
set of facts and the damage suffered by the private complainant or whether
or not the act from which civil liability might arise exists are questions of fact.

Essentially, the petitioner is questioning the award of moral damages and


attorneys fees in favor of the respondent as the same is supposedly not fully
supported by evidence. However, in the final analysis, the question of
whether the said award is fully supported by evidence is a factual question as

CIVIL LAW REVIEW 2


[JANUARY 2016 CASES] 99

it would necessitate whether the evidence adduced in support of the same


has any probative value. For a question to be one of law, it must involve no
examination of the probative value of the evidence presented by the litigants
or any of them.120 (Emphasis supplied, citations omitted)

The damages awarded by the Court of Appeals were supported by


documentary evidence.121 Petitioners failed to show any reason why the
factual determination of the Court of Appeals must be reviewed, especially in
light of their failure to produce receipts or check payments to support their
other claim for actual damages.122

Furthermore, the actual damages amounting to 2,040,000.00 being sought


by petitioners123 must be tempered on account of their own failure to pay the
rest of the installments for the delivered unit. This failure on their part is a
breach of their obligation, for which the liability of respondent, for its failure
to deliver the remaining units, shall be equitably tempered on account of
Article 1192 of the New Civil Code. 124 In Central Bank of the Philippines v.
Court of Appeals:125

Since both parties were in default in the performance of their respective


reciprocal obligations, that is, Island Savings Bank failed to comply with its
obligation to furnish the entire loan and Sulpicio M. Tolentino failed to comply
with his obligation to pay his 17,000.00 debt within 3 years as
stipulated, they are both liable for damages.

Article 1192 of the Civil Code provides that in case both parties have
committed a breach of their reciprocal obligations, the liability of the first
infractor shall be equitably tempered by the courts. WE rule that the liability
of Island Savings Bank for damages in not furnishing the entire loan is offset
by the liability of Sulpicio M. Tolentino for damages, in the form of penalties
and surcharges, for not paying his overdue 17,000.00 debt. The liability of
Sulpicio M. Tolentino for interest on his 17,000.00 debt shall not be included
in offsetting the liabilities of both parties. Since Sulpicio M. Tolentino derived
some benefit for his use of the 17,000.00, it is just that he should account
for the interest thereon.126 (Emphasis supplied)

The award for moral and exemplary damages also appears to be sufficient.
Moral damages are granted to alleviate the moral suffering suffered by a
party due to an act of another, but it is not intended to enrich the victim at
the defendants expense.127 It is not meant to punish the culpable party and,
therefore, must always be reasonable vis-a-vis the injury
caused.128 Exemplary damages, on the other hand, are awarded when the
injurious act is attended by bad faith. 129 In this case, respondent was found to
have misrepresented its right over the generator set that was seized. As
such, it is properly liable for exemplary damages as an example to the
public.130

However, the dispositive portion of the Court of Appeals Amended Decision


dated September 9, 2005 must be modified to include the recovery of
attorneys fees and costs of suit in favor of petitioners. In Sunbanun v. Go:131

CIVIL LAW REVIEW 2


10
[JANUARY 2016 CASES] 0

Furthermore, we affirm the award of exemplary damages and attorneys fees.


Exemplary damages may be awarded when a wrongful act is accompanied by
bad faith or when the defendant acted in a wanton, fraudulent, reckless,
oppressive, or malevolent manner which would justify an award of exemplary
damages under Article 2232 of the Civil Code. Since the award of exemplary
damages is proper in this case, attorneys fees and cost of the suit may also
be recovered as provided under Article 2208 of the Civil Code.132 (Emphasis
supplied, citation omitted)

Based on the amount awarded for moral and exemplary damages, it is


reasonable to award petitioners 20,000.00 as attorneys fees.

WHEREFORE, the Petition is DENIED. The Amended Decision dated


September 9, 2005 is AFFIRMED with MODIFICATION. Respondent Kodak
Philippines, Ltd. is ordered to pay petitioners Alexander and Julie Lam:

(a) P270,000.00, representing the partial payment made on the Minilab


Equipment;

(b) P130,000.00, representing the amount of the generator set, plus legal
interest at 12% .per annum from December 1992 until fully paid;

(c) P440,000.00 as actual damages;

(d) P25,000.00 as moral damages;

(e) P50,000.00 as exemplary damages; and

(f) P20,000.00 as attorney's fees.

Petitioners are ordered to return the Kodak Minilab System 22XL unit and its
standard accessories to respondent.

CIVIL LAW REVIEW 2


10
[JANUARY 2016 CASES] 1

7.

THIRD DIVISION

G.R. No. 178110 June 15, 2011

AYALA LAND, INC. and CAPITOL CITIFARMS, INC., Petitioners,


vs.
SIMEONA CASTILLO, LORENZO PERLAS, JESSIELYN CASTILLO, LUIS
MAESA, ROLANDO BATIQUIN, and BUKLURAN MAGSASAKA NG TIBIG,
as represented by their attorney-in-fact, SIMEONA
CASTILLO, Respondents.

DECISION

SERENO, J.:

This is a Petition for Review on Certiorari under Rule 45 of the 1997 Rules of
Civil Procedure questioning the Decision1 dated 31 January 2007 of the Court
of Appeals (CA) in CA-G.R. SP No. 86321, which reversed the Decision 2 of the
Office of the President (OP) dated 28 January 2004. The OP Decision upheld
Conversion Order No. 4-97-1029-051 issued by then Secretary of the
Department of Agrarian Reform (DAR) Ernesto Garilao, as well as the Orders
issued by Secretary Hernani Braganza and Secretary Roberto Pagdanganan
both affirming the conversion.

The CA found merit in the OPs rationale for maintaining the Conversion
Order, yet invalidated the same on the basis that a Notice of Coverage and a
Notice of Acquisition had already been issued over the lands hence, they
could no longer be subject to conversion. Thus, landowner Capitol Citifarms,
Inc. (CCFI) and its successor-in-interest Ayala Land, Inc. (ALI) filed the present
petition imputing error on the appellate court for the following reasons: 1) the
CA resolved an issue that the alleged Notice of Acquisition prevents the land
from being converted raised for the first time on appeal, 2) the CAs finding
has no factual basis, 3) the DAR itself found that the subject property has
long been converted to non-agricultural uses, and 4) a Certificate of Finality
of the Braganza Order has already been issued.

We grant certiorari on the following procedural and substantial grounds:

I. For the first time on appeal, respondents raised a new issue that had never
been passed upon by the DAR or by the Office of the President; hence, the CA
is barred from entertaining the claim.

CIVIL LAW REVIEW 2


10
[JANUARY 2016 CASES] 2

II. The rule that a prior Notice of Acquisition bars the issuance of a Conversion
Order is only a guiding principle; upon applicants compliance with the
application requirements, the DAR is rightly authorized to determine the
propriety of conversion.

III. Respondents are barred from appealing the Conversion Order long after it
has attained finality.

IV. The conversion and/ or reclassification of the said lands has become an
operative fact.

V. The OP has long resolved that the lands that are the subject of this case
are exempted from the Comprehensive Agrarian Reform Law (CARL) partly to
maintain the stability of the countrys banking system.

The uncontroverted factual antecedents, as culled from the records, are as


follows:

CCFI owned two parcels of land with a total area of 221.3048 hectares
located at Barangay Tibig in Silang, Cavite hereon referred to as the subject
land. The subject land was mortgaged in favor of one of CCFIs creditors,
MBC. Pursuant to Resolution No. 505 of the Monetary Board of the Bangko
Sentral ng Pilipinas (BSP), MBC was placed under receivership on 22 May
1987, in accordance with Section 29 of the Central Bank Act (Republic Act
265). Pursuant to this law, the assets of MBC were placed in the hands of its
receiver under custodia legis. 3 On 29 September 1989, the DAR issued a
Notice of Coverage placing the property under compulsory acquisition under
the Comprehensive Agrarian Reform Law of 1988.4

In the meantime, CCFI was unable to comply with its mortgage obligations to
MBC. The latter foreclosed on the lien, and the land was awarded to it in an
auction sale held on 4 January 1991. The sale was duly annotated on the
titles as Entry No. 5324-44. Subsequently, the Supreme Court in G.R. No.
85960 ordered MBCs partial liquidation and allowed the receiver-designate of
the BSP to sell the banks assets, including the subject landholding, "at their
fair market value, under the best terms and condition and for the highest
price under current real estate appraisals..." 5In a Deed of Partial
Redemption,6 CCFI was authorized to partially redeem the two parcels of land
and sell them to a third party, pending full payment of the redemption price.
Under the Deed, the downpayment, which was 30% of the purchase price,
would be payable to the bank only upon approval of the exemption of the two
parcels of land from the coverage of CARL or upon their conversion to non-
agricultural use.

On the same date as the execution of the Deed of Partial Redemption, 29


December 1995, the property was sold to petitioner ALI in a Deed of Sale
over the properties covered by TCT Nos. 128672 and 144245. The sale was
not absolute but conditional, i.e. subject to terms and conditions other than

CIVIL LAW REVIEW 2


10
[JANUARY 2016 CASES] 3

the payment of the price and the delivery of the titles. The Deed stated that
MBC was to continue to have custody of the corresponding titles for as long
as any obligation remained due it.

Prompted by the numerous proceedings for compulsory acquisition initiated


by the DAR against MBC, Governor Reyes requested then DAR Secretary
Ernesto Garilao to issue an order exempting the landholdings of MBC from
CARL and to declare a moratorium on the compulsory acquisition of MBCs
landholdings. On 14 February 1995, Secretary Garilao denied the request. On
1 August 1995, MBC and Governor Reyes filed with the OP a Petition for
Review of Secretary Garilaos Decision. The OP issued a Stay Order of the
appealed Decision. Thereafter, MBC filed with the OP a motion for the
issuance of an order granting the former a period of five years within which to
seek the conversion of its landholdings to non-agricultural use.

Instead of ruling on the motion alone, however, the OP, through Executive
Secretary Ruben D. Torres, decided to rule on the merits of the petition, as
"what is involved in this case is the susceptibility of a bank to undergo
rehabilitation which will be jeopardized by the distribution of its
assets"7 Secretary Torres remanded the case to the DAR and ordered the
agency to determine which parcels of land were exempt from the coverage of
the CARL. He stated that the ends of justice would be better served if BSP
were given the fullest opportunity to monetize the banks assets that were
outside the coverage of CARL or could be converted into non-agricultural
uses. He then ordered the DAR to respect the BSPs temporary custody of the
landholdings, as well as to cease and desist from subjecting MBCs properties
to the CARL or from otherwise distributing to farmer-beneficiaries those
parcels of land already covered. 8

Secretary Torres denied the Motion for Reconsideration filed by the DAR. He
reiterated the need to balance the goal of the agrarian reform program vis--
vis the interest of the bank (under receivership by the BSP), and the banks
creditors (85% of whose credit, or a total of P8,771,893,000, was payable to
BSP).9

Secretary Garilao issued a Resolution dated 3 October 1997, granting MBCs


"Request for Clearance to Sell," with the sale to be undertaken by CCFI. He
applied Section 73-A of Republic Act No. (R.A.) 6657, as amended by R.A.
7881, that allows the sale of agricultural land where such sale or transfer is
necessitated by a banks foreclosure of a mortgage. DAR Memorandum
Circular No. 05, Series of 1996 further clarified the above provision, stating
that foreclosed assets are subject to existing laws on their compulsory
transfer under Section 16 of the General Banking Act. CCFI thereafter filed an
application for conversion and/or exemption pursuant to its prerogative as a
landowner under Part IV of DAR A.O. 12-94 and the procedure outlined
therein.

On 31 October 1997, Secretary Garilao issued Conversion Order No. 4-97-


1029-051, approving the conversion and/or exemption of the 221-hectare

CIVIL LAW REVIEW 2


10
[JANUARY 2016 CASES] 4

property in Silang, based on the findings of the DARs Center for Land Use
Policy, Planning and Implementation (CLUPPI) and of the Municipal Agrarian
Reform Officer (MARO). These agencies found that the property was exempt
from agrarian reform coverage, as it was beyond eighteen (18) degrees in
slope. They recommended conversion, subject to the submission of several
documentary requirements. On 1 December 1997, CCFI complied by
submitting the following groups of documents:

1. A Certification and a copy of Resolution No. 295-S-96 by the Sangguniang


Panlalawigan of Cavite, adopted in its 4th Special Session, approving the
conversion/ reclassification of the said parcels of land from agricultural to
residential, commercial, and industrial uses;

2. A copy of Resolution No. ML-08-S-96 adopted by the Sangguniang Bayan of


Silang, recommending conversion based on the favorable findings by the
Committee on Housing and Land Use;10

3. Statement of Justification of economic/social benefits of the proposed


subdivision project; development plan, work and financial plan and proof of
financial and organizational capability;

4. Proof of settlement of claims: a table of the list of tenant-petitioners, the


area tilled and the amount of compensation received by each tenant, the
Kasunduan,11 and a compilation of the agreements signed by the one
hundred and eighteen (118) tenants waiving all claims over the property. 12

The Morales Order Revoking the Grant of Conversion

On 19 May 2000, almost three years after the Conversion Order had been in
force and effect, the farmers tilling the subject land (hereinafter known as
farmers) filed a Petition for Revocation of Conversion Order No. 4-97-1029-
051. They alleged (1) that the sale in 1995 by CCFI to ALI was invalid; and (2)
that CCFI and ALI were guilty of misrepresentation in claiming that the
property had been reclassified through a mere Resolution, when the law
required an ordinance of the Sanggunian. 13 The issue of the alleged Notice of
Acquisition was never raised. Neither was there any mention of the issuance
of a Notice of Coverage.

CCFI and ALI, on the other hand, argued that the claim of the farmers had
prescribed, as mandated by Section 34 of Administrative Order No. (A.O.) 1,
Series of 1999, which laid down a one-year prescriptive period for the filing of
a petition to cancel or withdraw conversion. They stated further that the
farmers had already received their disturbance compensation as evidenced in
a Kasunduan, in compliance with the Conversion Order.

On 18 December 2000, DAR Secretary Horacio Morales, Jr. issued an Order


declaring that the action to revoke the conversion had not yet prescribed.
According to him, Section 34 of A.O. 1-99 imposing the one-year prescription

CIVIL LAW REVIEW 2


10
[JANUARY 2016 CASES] 5

period did not apply, because administrative rules should be applied


prospectively. Thus, the rule to be followed was that prevailing at the time of
the issuance of the Conversion Order DAR A.O. 12-94 not A.O. 1-99, which
was the rule prevailing when the Petition for Revocation was filed.

As for the two issues raised by the farmer-beneficiaries, these were resolved
by Secretary Morales in favor of CCFI and ALI. First, he found that CCFI did not
violate the order of conversion when it sold the land to ALI, because the
prohibition to sell is not a condition for the conversion. In fact, the sale
preceded the issuance of the Conversion Order. Second, he ruled that there
was no misrepresentation by CCFI and ALI regarding the lands
reclassification. However, he found a new issue for withdrawing the grant of
conversion, that was not previously raised by petitioner-farmers. Apparently
unaware of the earlier history of the land as property in custodia legis, he
ruled that the delayed registration of the sale was evidence of respondents
intention to evade coverage of the landholding under agrarian reform.
Because the sale was concealed from the Register of Deeds, and the land was
still agricultural at that time, Secretary Morales opined that ALI and CCFI
violated the CARL. It must be remembered however, that contrary to Morales
findings, it was the Supreme Court itself that ordered the sale of the lands
through its Resolution in G.R. No 85960. Thus there could be no finding by
any government body that the sale was illegal.

Secretary Morales never passed upon or even mentioned any matter related
to the Notice of Acquisition. The gist of both the Petition for Revocation and
the Morales Decision revolved exclusively around the illicit intent behind the
sale of the land to ALI:

The gravamen of respondents acts lies not upon the sale by respondent
Capitol of the land to ALI, and upon ALI having bought the land from Capitol.
It lies somewhere deeper: that the sale was done as early as 1995 prior to the
lands conversion, and was concealed in the application until it was registered
in 1999.

At the time of the registration of the deed on 29 September 1999, the subject
land had ceased to be an agricultural land since it has already been
converted to other uses by virtue of an approved conversion application. As
such, the requirement of reporting by the Register of Deeds of any
transaction involving agricultural lands beyond five (5) hectares, was not
made as it is no longer necessary. 14

It is important to note, however, that Secretary Morales declared that CCFI


and ALI had completed the payment of disturbance compensation to the
farmers, as shown by the Kasunduan, which was a waiver of all the farmers
rights over the landholding, and by the Katunayan ng Pagbabayad, which
expressly acknowledged the amounts paid as the full and final settlement of
their claims against CCFI and ALI.

CIVIL LAW REVIEW 2


10
[JANUARY 2016 CASES] 6

The Braganza Order Reversing the Revocation

On 26 September 2002, acting on the Motion for Reconsideration filed by ALI,


DAR Secretary Hernani Braganza reversed 15 the Revocation of Conversion
Order 4-97-1029-051. He resolved three issues to arrive at his Decision,
namely: 1) whether the Petition for Revocation had prescribed; 2) whether ALI
was the owner of the subject landholding at the time of the application; and
3) whether there was complete payment of the disturbance compensation.
Again, Secretary Braganza was not afforded an opportunity to discuss any
evidence related to the existence or effect of any Notice of Acquisition, as the
joinder of issues was limited to those already summarized above.

Secretary Braganza found that the Deed of Partial Redemption was


conditional, and that there was no transfer of ownership to CCFI or its
successor-in-interest, ALI. Hence, there could be no violation of the CARL
arising from an unauthorized transfer of the land to ALI. In fact, the obligation
of ALI to pay the purchase price did not arise until the DARs issuance of an
order of exemption or conversion. In Secretary Braganzas words:

Was ownership included in the bundle of rights that was transferred from CCFI
to ALI? This Office answers in the negative.

For CCFI to convey ownership to ALI, MBC must have first transferred this
right to CCFI under the DEED OF PARTIAL REDEMPTION for the reason that
CCFI can only convey its present rights and obligations to ALI.

The fact that MBC is holding on to the Transfer Certificates of Title pending
full payment of the purchase price is indicative of the reservation of
ownership in MBC.

Thus, it is only upon the full payment of consideration shall the title to the
subject landholding be issued to CCFI or its successor-in-interest, ALI. 16

On 14 January 2003, Secretary Braganza granted ALIs Motion for Extension


to develop the land for another five (5) years.

The Pagdanganan Order Declaring FINALITY

In response to Secretary Braganzas grant of the Motion for Reconsideration


filed by ALI, the farmers, through their counsel, Atty. Henry So, filed their own
Motion for Reconsideration of the Braganza Order. The farmers questioned
the jurisdiction of the DAR to determine the ownership of the lands and to
determine whether or not the sale was conditional, as these issues are within
the ambit of the civil courts. Atty. So found fault with Secretary Braganzas

CIVIL LAW REVIEW 2


10
[JANUARY 2016 CASES] 7

attention to "the intricate history of the property," 17 when substantial


evidence was all that was required in agrarian cases. He also claimed that the
farmers previous counsel, Atty. Dolor, was misleading the farmers into
accepting payment in exchange for their tenancy rights. 18

Secretary Roberto Pagdanganan issued an Order on 13 August 2003, denying


the farmers Motion for Reconsideration and affirming the finality of the
Braganza Order. He stated therein that the revocation of the conversion,
which came almost three years after the conversion, had not passed through
the CLUPPI-1 Deliberation Committee. In addition, he found that Atty. So had
no locus standi to represent the farmers. Secretary Pagdanganan upheld the
Kasunduan the farmers signed as waiver of their claims and deemed the
Braganza Order "final and executory":

WHEREFORE, premises considered, Order is hereby issued DENYING both the


Motion for Reconsideration dated 4 November 2002 and the Urgent Motion
for Issuance of Cease and Desist Order dated 7 May 2003, filed by Atty. Henry
So.

FURTHERMORE, the Bureau of Agrarian Legal Assistance is hereby DIRECTED


to issue a Certificate of Finality of the 26 September 2002 order.
ACCORDINGLY, this case is deemed close as far as this office is concern
(sic).19

Petitioners Appeal before the Office of the President

The farmers then went to the OP and raised only two issues:

The Secretary of Agrarian Reform erred in declaring herein counsel to have no


more locus standi to represent the farmer-petitioners.

The Secretary of Agrarian Reform erred in affirming the Order of 26


September 2002 issued by then Secretary Hernani Braganza. 20

The Appeal Memorandum pointed out that DARs grant of conversion was
issued under "suspicious circumstances." They attached to the Appeal
Memorandum an uncertified photocopy of a Notice of Coverage as "Annex
B."21 The photocopy of the Notice of Coverage was mentioned in passing
when the farmers cited paragraph VI-E of Administrative Order No. 12, Series
of 1994. Additionally, farmer-beneficiaries alleged that a Notice of Acquisition
was also in existence. No such document, however, could be found in the
memorandum or in any prior or subsequent pleadings filed by farmer-
beneficiaries. They never stated that the issue of the Notice of Acquisition
prevents the conversion of the land.

On 23 January 2004, the Office of the President dismissed the appeal 22 and
affirmed the Pagdanganan Order. The OP found the subject property to have
been legally converted into non-agricultural land, citing the findings of the

CIVIL LAW REVIEW 2


10
[JANUARY 2016 CASES] 8

local agencies of Silang that the property was beyond eighteen (18) degrees
in slope, remained undeveloped, was not irrigated, and was without any other
source of irrigation in the area. The OP stated: "Upon our examination of the
voluminous motions, memoranda, evidence submitted by appellants, but not
a single document sufficiently controverts the factual finding of the DAR that
the subject property had long been converted to non-agricultural
uses."23 Farmer-beneficiaries then elevated the case to the CA. The CA
reversed the findings of the OP and the DAR, prompting ALI and CCFI to file
the instant Petition.

I. Respondents raised a new issue for the first time on appeal.

The CA found the Conversion Order valid on all points, with the sole exception
of the effect of the alleged issuance of a Notice of Acquisition. In its eight-
page Decision, the CA merely asserted in two lines: "no less than the cited
DAR Administrative Order No. 12 enjoins the conversion of lands directly
under a notice of acquisition."24

After perusing the records of the DAR and the OP, however, we find no
admissible proof presented to support this claim. What was attached to the
Petition for Review25 to the CA was not a Notice of Acquisition, but a mere
photocopy of the Notice of Coverage. A Notice of Acquisition was never
offered in evidence before the DAR and never became part of the records
even at the trial court level. Thus, its existence is not a fully established fact
for the purpose of serving as the sole basis the entire history of the policy
decisions made by the DAR and the OP were to be overturned. The CA
committed reversible error when it gave credence to a mere assertion by the
tenant-farmers, rather than to the policy evaluation made by the OP.

Assuming arguendo however, that the farmers had submitted the proper
document to the appellate court, the latter could not have reversed the OP
Decision on nothing more than this submission, as the issue of the Notice of
Acquisition had never been raised before the administrative agency
concerned. In fact, the records show that this issue was not raised in the
original Petition for Revocation in the second Motion for Reconsideration filed
by the farmers before the DAR, and that no Notice of Acquisition was
attached to their Appeal Memorandum to the OP. As a consequence, the OP,
Secretary Pagdanganan, Secretary Braganza, and Secretary Morales did not
have any opportunity to dwell on this issue in their Orders and Decision.
Instead, what respondents persistently allege is the concealment of the sale
by CCFI and ALI. The three DAR Secretaries, including Secretary Garilao who
issued the Conversion Order, correctly found this allegation bereft of merit.

We cannot uphold respondents proposition for us to disregard basic rules,


particularly the rule that new issues cannot be raised for the first time on
appeal. Aside from their failure to raise the non-issuance of a notice of
acquisition before the OP and DAR, they also failed to question the lack of
approved town plan at the DAR level, prompting the OP to correctly rule on
the latter, thus:

CIVIL LAW REVIEW 2


10
[JANUARY 2016 CASES] 9

Appellants lapses in not raising the issues before the DAR which has the
expertise to resolve the same and in a position to conduct due hearings and
reception of evidence from contending parties pertaining to the issue, puts
the appellants in estoppel to question the same for the first time on appeal.
Jurisprudence dictates the following:

The petitioner for the first time, to allow him to assume a different posture
when he comes before the court and challenge the position he had accepted
at the administrative level, would be to sanction a procedure whereby the
court which is supposed to review administrative determinations would
not review, but determine and decide for the first time, a question not raised
at the administrative forum. This cannot be permitted, for the same reason
that underlies the requirement of prior exhaustion of administrative remedies
to give administrative authorities the prior authority to decide controversies
within its competence, and in much the same way that, on the judicial level,
issues not raised in the lower court cannot be raised for the first time on
appeal. (Aguinaldo Industries Corporation vs. Commissioner of Internal
Revenue & Court of Tax Appeals, 112 SCRA 136) 26

It is well established that issues raised for the first time on appeal and not
raised in the proceedings in the lower court are barred by estoppel. Points of
law, theories, issues, and arguments not brought to the attention of the trial
court ought not to be considered by a reviewing court, as these cannot be
raised for the first time on appeal. To consider the alleged facts and
arguments belatedly raised would amount to trampling on the basic
principles of fair play, justice, and due process. 27 More important, if these
matters had been raised earlier, they could have been seriously examined by
the administrative agency concerned.28

Courts will not interfere in matters which are addressed to the sound
discretion of the government agency entrusted with the regulation of
activities coming under its special and technical training and knowledgeand
the latter are given wide latitude in the evaluation of evidence and in the
exercise of their adjudicative functions. 29 This Court has always given primary
importance to the DAR Secretarys ruling and will not disturb such ruling
without substantial reason:

Considering that these issues involve an evaluation of the DARs findings of


facts, this Court is constrained to accord respect to such findings. It is settled
that factual findings of administrative agencies are generally accorded
respect and even finality by this Court, if such findings are supported by
substantial evidence. The factual findings of the Secretary of DAR who, by
reason of his official position, has acquired expertise in specific matters
within his jurisdiction, deserve full respect and, without justifiable reason,
ought not to be altered, modified or reversed. 30

The CA erred in passing upon and ruling on an issue not raised by the farmers
themselves. This Court must not countenance the violation of petitioners
right to due process by the CA upholding its conclusion founded on a legal

CIVIL LAW REVIEW 2


11
[JANUARY 2016 CASES] 0

theory only newly discovered by the CA itself. This is especially insupportable


considering the long history of government affirmation of the conversion of
the subject land.

II. Provision in DAR A.O. 12-94 is only a guiding principle.

Assuming for a moment that the notice of acquisition exists, it is not an


absolute, perpetual ban on conversion. The provision invoked in AO 12-94,
paragraph E, disallows applications for conversion of lands for which the DAR
has issued a notice of acquisition. But paragraph E falls under heading VI,
"Policies and Guiding Principles." By no stretch of the imagination can a mere
"principle" be interpreted as an absolute proscription on conversion.
Secretary Garilao thus acted within his authority in issuing the Conversion
Order, precisely because the law grants him the sole power to make this
policy judgment, despite the "guiding principle" regarding the notice of
acquisition. The CA committed grave error by favoring a principle over the
DARs own factual determination of the propriety of conversion. The CA
agreed with the OP that land use conversion may be allowed when it is by
reason of changes in the predominant use brought about by urban
development, but the appellate court invalidated the OP Decision anyway for
the following reason:

The argument is valid if the agricultural land is still not subjected to


compulsory acquisition under CARP. But as we saw, there has already been a
notice of coverage and notice of acquisition issued for the property...Verily, no
less than the cited DAR Administrative Order No. 12 enjoins conversions of
lands already under a notice of acquisition. The objectives and ends of
economic progress must always be sought after within the framework of the
law, not against it, or in spite of it.31

However, under the same heading VI, on Guiding Principles, is paragraph B


(3), which reads:

If at the time of the application, the land still falls within the agricultural zone,
conversion shall be allowed only on the following instances:

a) When the land has ceased to be economically feasible and sound for
agricultural purposes, as certified by the Regional Director of the Department
of Agriculture (DA) or

b) When the locality has become highly urbanized and the land will have a
greater economic value for residential, commercial and industrial purposes,
as certified by the local government unit.

The thrust of this provision, which DAR Secretary Garilao rightly took into
account in issuing the Conversion Order, is that even if the land has not yet
been reclassified, if its use has changed towards the modernization of the
community, conversion is still allowed.

CIVIL LAW REVIEW 2


11
[JANUARY 2016 CASES] 1

As DAR Secretary, Garilao had full authority to balance the guiding principle
in paragraph E against that in paragraph B (3) and to find for conversion.
Note that the same guiding principle which includes the general proscription
against conversion was scrapped from the new rules on conversion, DAR A.O.
1, Series of 2002, or the "Comprehensive Rules on Land Use Conversion." It
must be emphasized that the policy allowing conversion, on the other hand,
was retained. This is a complex case in which there can be no simplistic or
mechanical solution. The Comprehensive Agrarian Reform Law is not
intractable, nor does it condemn a piece of land to a single use forever. With
the same conviction that the state promotes rural development, 32 it also
"recognizes the indispensable role of the private sector, encourages private
enterprise, and provides incentives to needed investments." 33

Respondents herein muddle the issue in contending that a Sangguniang


Bayan Resolution was not a sufficient compliance with the requirement of the
Local Government Code that an ordinance must be enacted for a valid
reclassification. Yet there was already a Conversion Order. To correct a
situation in which lands redeemed from the MBC would remain idle,
petitioners took the route of applying for conversion. Conversion and
reclassification are separate procedures. 34 CCFI and ALI submitted the two
Resolutions to the DAR (one issued by the Sangguniang Bayan of Silang, the
other by the Sangguniang Panlalawigan of Cavite) only as supporting
documents in their application.

Again, paragraph B (3), Part VI of DAR AO 12-94, cited above, allows


conversion when the land will have greater economic value for residential,
commercial or industrial purposes "as certified by the Local Government
Unit." It is clear that the thrust of the community and the local government is
the conversion of the lands. To this end, the two Resolutions, one issued by
the Sangguniang Bayan of Silang, the other by the Sangguniang Panlalawigan
of Cavite, while not strictly for purposes of reclassification, are sufficient
compliance with the requirement of the Conversion Order.

Paragraph E and paragraph B (3) were thus set merely as guidelines in issues
of conversion. CARL is to be solely implemented by the DAR, taking into
account current land use as governed by the needs and political will of the
local government and its people. The palpable intent of the Administrative
Order is to make the DAR the principal agency in deciding questions on
conversion. A.O. 12-94 clearly states:

A. The Department of Agrarian Reform is mandated to "approve or disapprove


applications for conversion, restructuring, or readjustment of agricultural
lands into non-agricultural uses," pursuant to Section 4 (j) of Executive Order
No. 129-A, Series of 1987."

B. Section 5 (1) of E.O. No. 129-A, Series of 1987, vests in the DAR, exclusive
authority to approve or disapprove applications for conversion of agricultural
lands for residential, commercial, industrial, and other land uses. 35

CIVIL LAW REVIEW 2


11
[JANUARY 2016 CASES] 2

III. The Conversion Order has long attained finality and may no longer be
questioned.

Respondents came forward as claimants under CARL almost three years after
the Conversion Order was issued. In arguing that the claim of respondents
had already prescribed, petitioner ALI applied DAR A.O. 1, Series of 1999,
which lays down a one-year prescriptive period for petitions for cancellation
or withdrawal. Section 34 thereof states:

Filing of Petition A petition for cancellation or withdrawal of the conversion


order may be filed at the instance of DAR or any aggrieved party before the
approving authority within ninety (90) days from discovery of facts which
would warrant such cancellation but not more than one (1) year from
issuance of the order: Provided, that where the ground refers to any of those
enumerated in Sec. 35 (b), (e), and (f), the petition may be filed within ninety
(90) days from discovery of such facts but not beyond the period for
development stipulated in the order of conversion; Provided further, That
where the ground is lack of jurisdiction, the petition shall be filed with the
Secretary and the period prescribed herein shall not apply.

The Conversion Order was issued by Secretary Garilao on 31 October 1997.


Respondents questioned the Order only on 19 May 2000, almost two years
and seven months later. Since the action was filed during the effectivity of
A.O. 01-99, its provision on prescription should apply.

Respondents, on the other hand, state that the applicable rule is A.O. 12
(promulgated in 1994), which was the rule subsisting at the time the
Conversion Order was issued. A.O. 12-94 imposes a prescriptive period of five
(5) years; thus, according to the farmers, the petition was filed well within the
period.

Petitioner ALIs argument is well-taken. A.O. 01-99 entitled "REVISED RULES


AND REGULATIONS ON THE CONVERSION OF AGRICULTURAL LANDS TO NON-
AGRICULTURAL USES," provides for its own effectivity as follows:

SEC. 56. Effectivity This Order shall take effect ten (10) days after its
publication in two (2) national newspapers of general circulation.

A.O. 01-99 was promulgated on 30 March 1999 and published in Malaya and
Manila Standard on the following day, 31 March 1999. Thus, A.O. 01-99 was
the rule governing the filing of a "petition for cancellation or withdrawal of the
conversion order" at the time the farmers filed their petition.

Respondent farmers argue that, according to A.O. No. 01-99, the one-year
prescriptive period should be reckoned from the issuance of the Conversion
Order. They point out that it was impossible for them to receive notice of this
rule when Secretary Garilao issued the Conversion Order, since the rule was
published only one year and seven months after the issuance of the Order.

CIVIL LAW REVIEW 2


11
[JANUARY 2016 CASES] 3

Thus, it should be A.O. 12-94, or the five-year prescription period, that should
be applied to them, and not the one-year period in A.O. 01-99.

Respondents assume that the rule to be applied is that prevailing at the time
of the issuance of the Conversion Order. This is incorrect. The rule applicable
in determining the timeliness of a petition for cancellation or withdrawal of a
conversion order is the rule prevailing at the time of the filing of that petition,
and not at the time of the issuance of the Conversion Order. It is axiomatic
that laws have prospective effect, as the Administrative Code
provides.36While A.O. 01-99 was not yet promulgated at the time of the
issuance of the Conversion Order, it was already published and in effect when
the Petition for Revocation was filed on 19 May 2000.

Regarding the question on when the one-year prescription period should be


reckoned, it must be still be resolved in conformity with the prospective
character of laws and rules. In this case, the one-year period should be
reckoned from the date of effectivity of A.O. 1-99, which is 31 March 1999.
Therefore, no petition for cancellation or withdrawal of conversion of lands
already converted as of 30 March 1999 may be filed after 1 March 2000.

The Conversion Order is final and executory. The Court ruled in Villorente v.
Aplaya Laiya Corporation:

Indubitably, the Conversion Order of the DAR was a final order, because it
resolved the issue of whether the subject property may be converted to non-
agricultural use. The finality of such Conversion Order is not dependent upon
the subsequent determination, either by agreement of the parties or by the
DAR, of the compensation due to the tenants/occupants of the property
caused by its conversion to non-agricultural use. Once final and executory,
the Conversion Order can no longer be questioned. 37

A conversion order is a final judgment and cannot be repeatedly assailed by


respondents in perpetuity, after they have received compensation and
exhausted other means. In Villorente, the Court had occasion to rebuke the
would-be beneficiaries who, after accepting the compensation stipulated in
the conversion Order thereby impliedly acknowledging the validity of the
order turned around and suddenly assailed it. The Court held:

We are convinced that the petition for review filed by the petitioners with the
CA was merely an afterthought

It must be stressed that the petitioners agreed to negotiate with the


respondent for the disturbance compensation which they claimed was due
them, conformably with the said Conversion Order. Hence, they cannot now
assail the said order without running afoul to (sic) the doctrine of estoppel.
The petitioners cannot approbate and disapprobate at the same time. 38

CIVIL LAW REVIEW 2


11
[JANUARY 2016 CASES] 4

It must be borne in mind that there can be no vested right to judicial relief, as
ruled by the Court in United Paracale Mining v. Dela Rosa:

There can be no vested right in a judicial relief for this is a mere statutory
privilege and not a property rightthe right to judicial relief is not a right
which may constitute vested right because to be vested, a right must have
become a title, legal or equitable, to the present or future enjoyment of
property, or to the present or future enforcement of a demand or legal
exemption from a demand made by another. 39

IV. The conversion and/or reclassification of the said lands has become an
operative fact.

Respondent farmers do not deny that at the time of filing of the Petition for
Revocation, the lands in question were no longer agricultural. Secretary
Morales affirmed this fact in his Decision, even as he revoked Secretary
Garilaos Order of conversion:

When respondent Capitol applied for conversion of the subject land on 7 May
1996, the land is already reclassified from agricultural to other uses.
Respondent Capitol applied for conversion as the registered owner of the
land, although in truth it was no longer the owner of the same by virtue of its
sale to ALI. This fact of transfer of ownership is not known since the absolute
sale of the land was not yet public, the deed of sale not having been
registered before the Register of Deeds at that time.

At the time of the registration of the deed on 29 September 1999, the subject
land had ceased to be an agricultural land since it has already been
converted to other uses by virtue of an approved conversion application. As
such, the requirement of reporting by the Register of Deeds of any
transaction involving agricultural lands beyond five (5) hectares, was not
made as it is no longer necessary.

Clearly, the findings of the CLUPPI, the Sangguniang Bayan of Silang, and
Secretary Morales himself confirm as an operative fact the reclassification
and/or conversion of the lands. Both the DAR and the Sangguniang Bayan
anchored their findings on the Certifications from the CLUPPI (obtained by the
CLUPPIs executive committee as required by the DAR procedure), the
National Irrigation Administration, the Philippine Coconut Authority, and the
Department of Environment and Natural Resources. 40 The CLUPPI and the
MARO (Municipal Agrarian Reform Office) conducted their own ocular
inspection. The Sangguniang Bayan of Silang conducted plebiscites before
issuing the Resolution for reclassification. 41

In sum, the findings of the different government agencies are as follows:

CIVIL LAW REVIEW 2


11
[JANUARY 2016 CASES] 5

1. The property is about ten (10) kilometers from the provincial road.

2. The land sits on a mountainside overlooking Santa Rosa Technopark.

3. The property is beyond eighteen (18) degrees in slope and undeveloped.

4. Based on a DAR Soil Investigation Report, the property is only marginally


suitable for agriculture use due to its undulating topography. 42

5. The land is outside the irrigable area of the Cavite Friar Lands Irrigation
Systems.

6. DENR Administrative Order No. 08 granted the application for an


Environmental Clearance while presenting these additional findings:

The area is unirrigated, and the main source of water supply is


rainfall.
The occupants have been paid disturbance compensation.
The area in question had been granted a Certificate of Eligibility for
Conversion by the DAR on 16 January 1996.

The reclassification/conversion of the land has long been a foregone fact.


While respondents insist that the process by which the land was reclassified
was invalid, their claim is immaterial, because, as stated, the two procedures
are distinct. Independently of the Sangguniang Bayans own initiative, the
DAR issued a Certificate of Eligibility. These issuances only bolster the fact
that, at the time it was converted, the land was no longer agricultural, and
that it would generate more revenue if reclassified as a residential area.
Resolution No. ML-08-S-96, adopted by the Sangguniang Bayan of Silang,
recommended conversion based on the favorable findings of the Committee
on Housing and Land Use. The Resolution states: 43

...Whereas based on the favorable findings by the Committee on Housing and


Land Use after careful study and after conducting several public hearings has
favorably recommended the approval of the request of Capitol Citifarms, Inc.;

Whereas, the land use reclassification of the said parcels of land will benefit
the people of Silang by way of increased municipal revenue, generate
employment, increased commercial activities and general (sic) uplift the
socio-economic condition of the people particularly those in the vicinity of
said parcels of land.

It is no longer necessary to delve into the allegations of the lack of a valid


ordinance or the lack of a land use plan. Aside from the OP finding that this
issue was raised belatedly, the submission of "new or revised town plans
approved by the HLURB" is a requirement only in the process of
reclassification embodied in the Local Government Code. This is not a
requirement in the process of conversion, wherein the DAR is given the sole

CIVIL LAW REVIEW 2


11
[JANUARY 2016 CASES] 6

prerogative to make technical determinations on changes in land use and to


decide whether a particular parcel of agricultural land, due to modernization
and the needs of the community, has indeed been converted to non-
agricultural use.

V. It has long been resolved by the Office of the President that the lands in
this case are exempted from CARL coverage, partly in order to maintain the
stability of the countrys banking system.

In the first OP Decision dated 11 October 1996, Executive Secretary Ruben D.


Torres expressly declared that the preservation of the assets of the BSP
warranted higher consideration, so certain lands of the MBC were exempt
from coverage of the CARL. In remanding the case to the DAR for it to identify
which lands should be exempted, Secretary Torres held:

Upon review of the entire records of the case, this Office is persuaded that a
stringent appreciation of the issues raised by the parties may not do justice
to their respective causes, and the public in general. What is involved is the
susceptibility of a bank to undergo rehabilitation which will be jeopardized by
the distribution of its assetsa careful balance between the interest of the
petitioner bank, its creditors (which includes the Bangko Sentral ng Pilipinas)
and the general public on the one hand, and adherence to the
implementation of the agrarian reform program on the other, must be
established.

the ends of justice will be better subserved if the Statutory Receiver is


given the fullest opportunity to monetize the assets of the bank which are
supposed to be outside of the coverage of the CARL or may be converted into
non-agricultural uses.44

Secretary Torres denied the Motion for Reconsideration filed by the DAR. The
denial was based precisely on the need to balance the agrarian reform law
with another policy consideration, the stability of the banking system. He
explained as follows:

The guiding principle on land use conversion is to preserve prime agricultural


lands. On the other hand, when coinciding with the objectives of the
Comprehensive Agrarian Reform Law to promote social justice,
industrialization and the optimum use of lands as a national resource for
public welfare, shall be pursued in a speedy and judicious manner.

Finally, we wish to reiterate the need to balance the interest between the
petitioner bank (under receivership by the BSP), its creditors (85% of which or
a total of P8, 771, 893, 000 is payable to BSP) and the general public on one

CIVIL LAW REVIEW 2


11
[JANUARY 2016 CASES] 7

hand, and the faithful implementation of agrarian reform program on the


other hand, with the view to harmonizing them and ensuring that the
objectives of the CAR are met and satisfied. 45

The Conversion Order was a product of policy determinations made by the


DAR, the Office of the President, and even the Supreme Court. Secretary
Torres had ordered the DAR to "respect the temporary custody of those
properties by the Statutory Receiver (BSP Deputy Governor Alberto Reyes) by
deferring their coverage under the CARL" This order stemmed in turn from
the BSP Resolution of 22 May 1987 placing MBCs assets under custodia legis.
Bolstered by the need to save MBC, which was one of BSPs crucial debtors,
the Supreme Court allowed the BSP receiver to sell MBCs assets to a third
party "under the best terms and conditions," to give it ample opportunity to
rehabilitate MBC. The disposition of MBCs properties was a judgment call
made by the BSP, which, as the sole agency mandated to assist banks and
financial institutions in distress, exercises asset management on a macro
level. The Supreme Court Resolution called the arrangement the "best
solution for Manila Banking and CCFI."

In light of the foregoing, it would be absurd to impute bad faith to ALI solely
because it chose to purchase the redeemed land. Similarly, ALI cannot be
held accountable for all the years that the land remained idle pending
conversion. To deny relief to ALI would be tantamount to placing the private
sector in the unjust situation of investing, upon invitation from the
government, in a banks distressed assets among which are lands the
government itself has ordered converted then subsequently confiscating
the same from it.1avvphi1

Petitioners did not renege on their duty to pay disturbance compensation to


the tenant-farmers. They expended substantial amounts in addition to the
purchase price of the foreclosed lands for litigation and administrative
processing costs, the farmers compensation, and improvements on the land.
The development projects were grounded on a reliance on national
government actions that support the thrust of Cavite towards urbanization.

It was the OPs first Decision, together with the Supreme Court Resolution,
that ultimately paved the way for ALI to acquire title to the subject lands as a
third party buyer. When the dispute over the subject land reached the OP for
the second time when the validity of the conversion order was in dispute
the OP of course found no merit in the allegation of concealment. There is
therefore absolutely no basis for the imputation of bad faith upon ALI simply
on account of the alleged delay in the registration of the sale from CCFI to it.

It must be emphasized that the OPs ground for supporting conversion finds
its moorings in DAR Memorandum Circular 11-79 governing the conversion of
private agricultural lands into other uses. The Circular states that conversion
may be allowed when it is by reason of the changes in the predominant land
use, brought about by urban development. The OP Decision pointed to the
fact that the close proximity of Cavite to Manila opened Cavite to the effects

CIVIL LAW REVIEW 2


11
[JANUARY 2016 CASES] 8

of modernization and urbanization. While the CA characterized this ground as


"novel," it still agreed that land use conversion may be allowed, if caused by
changes in predominant land use due to urban development.

The DAR found merit in the thrust of the local government to "disperse urban
growth towards neighboring regions of Metro Manila"; to encourage the
movement of residential development in the area; and to support the housing
needs not just of the neighboring Santa Rosa Technopark, but also of other
commercial centers. It is helpful to remember that it is the local government,
in this case, that of Silang, Cavite, that occupies the primary policy role of
allowing the development of real estate to generate real property taxes and
other local revenues.

The CA Decision effectively enfeebles the Orders of no less than three


Secretaries of the DAR and the policy pronouncements of the OP. The actions
of respondents accepting disturbance compensation for the land, seeking
petitioners compliance with the terms of the Conversion Order, then
reversing themselves by assailing the Order itself long after the proper period
had prescribed contradict this Courts rule that conversion orders, once final
and executory, may no longer be questioned.

The only justification for the CA ruling that the lands had already been
subjected to a Notice of Acquisition, hence no conversion thereof can take
place cannot stand in the light of two points: 1) the record before this Court
(including the CA and the DAR records) is bereft of any copy, certified or
otherwise, of the alleged Notice of Acquisition; and 2) even if the land is
subject to a Notice of Acquisition, this issue was never raised before the DAR
or the OP, nor was it argued before the CA. It existed as a single-line
statement in petitioners Appeal Memorandum. 46 Since the DAR and the OP
had ruled for petitioners CCFI and ALI, and the CA itself admitted that
petitioners stand would have been valid if not for the alleged Notice, the CA
should have been more circumspect in verifying whether the evidence on
record supported respondents self-serving claim.

Before the CAs unilateral action, this unsupported allegation was never
raised as a live legal issue. Hence, CCFI and ALI were deprived of any
opportunity to controvert the fact of the Notice of Acquisition and its legal
effect, because they were never alerted that the existence of such Notice
would in any way endanger their legal position. They had the right to expect
that only issues properly raised before the administrative tribunals needed to
be addressed. Even assuming that the Notice of Acquisition did exist,
considering that CCFI and ALI had no chance to controvert the CA finding of
its legal bar to conversion, this Court is unable to ascertain the details of the
Notice of Acquisition at this belated stage, or rule on its legal effect on the
Conversion Order duly issued by the DAR, without undermining the technical
expertise of the DAR itself. To do so would run counter to another basic rule
that courts will not resolve a controversy involving a question that is within
the jurisdiction of the administrative tribunal prior to its resolution of that
question.47

CIVIL LAW REVIEW 2


11
[JANUARY 2016 CASES] 9

CARL cannot be used to stultify modernization. It is not the role of the


Supreme Court to apply the missing notice of acquisition in perpetuity. This is
not a case wherein a feudal landowner is unjustly enriched by the plantings of
a long-suffering tenant. ALI is in the precarious position of having been that
third-party buyer who offered the terms and conditions most helpful to CCFI,
MBC, and effectively, the BSP, considering the 85% portion of the total debt
of MBC that BSP owns. What this Court can do positively is to contribute to
policy stability by binding the government to its clear policy decisions borne
over a long period of time.

WHEREFORE, premises considered, the Court of Appeals committed


reversible error in nullifying the policy pronouncement of the Office of the
President and the Department of Agrarian Reform. The instant petition for
certiorari is hereby GRANTED, and the Order of the Office of the President
dated 26 January 2004 is AFFIRMED.

SO ORDERED.

CIVIL LAW REVIEW 2


12
[JANUARY 2016 CASES] 0

8.

EN BANC

January 12, 2016

A.C. No. 10910


[Formerly CBD Case No. 12-3594)

ANTERO M. SISON, JR., Complainant,


vs.
ATTY. MANUEL N. CAMACHO, Respondent.

DECISION

PERCURIAM:

In his verified affidavit-complaint,1 dated September 17, 2012, filed before


the Integrated Bar of the Philippines Commission on Bar Discipline (JBP-
CBD), complainant Atty. Antero M. Sison, Jr. (Atty. Sison), president of
Marsman-Drysdale Agribusiness Holdings Inc. (MDAHI), charged respondent
Atty. Manuel Camacho (Atty. Camacho) with violation of the Code of
Professional Responsibility (CPR). He accused Atty. Camacho of violating Rule
1.01, for dishonestly entering into a compromise agreement without
authorization, and Rule 16.01, for failure to render an accounting of funds
which were supposed to be paid as additional docket fees.

Complaint's Position

Atty. Sison alleged that Atty. Camacho was the counsel of MDAHI in an
insurance claim action against Paramount Life & General Insurance
Corp. (Paramount Insurance), docketed as Civil Case No. 05-655, before the
Regional Trial Court, Makati City, Branch 139 (RTC). The initial insurance claim
of MDAHI against Paramount Insurance was P14,863,777.00.

On March 4, 2011, Atty. Camacho met with Atty. Enrique Dimaano (Atty.
Dimaano), corporate secretary of MDAHI, and proposed to increase their
claim to P64,412,534. l 8 by taking into account the interests imposed. Atty.
Camacho, however, clarified that the increase in the claim would require
additional docket fees in the amount of Pl,288,260.00, as shown in his hand-
written computation.2 MDAHI agreed and granted the said amount to Atty.
Dimaano which was evidenced by a Payment Request/Order Form. 3 On May
27, 2011, Atty. Dimaano gave the money for docket fees to Atty. Camacho
who promised to issue a receipt for the said amount, but never did. 4

CIVIL LAW REVIEW 2


12
[JANUARY 2016 CASES] 1

Atty. Sison later discovered that on May 26, 2011, the RTC had already
rendered a decision5 in favor of MDAHI granting its insurance claim plus
interests in the amount of approximately P65,000,000.00.

On August 11, 2011, Atty. Camacho sent a letter 6 to MDAHI recommending a


settlement with Paramount Insurance in Civil Case No. 05-655 in the amount
of Pl5,000,000.00 allegedly to prevent a protracted appeal with the appellate
court. MDAHI refused the offer of compromise and did not indicate its
conforme on the letter of Atty. Camacho. Surprisingly, even without the
written conformity of MDAHI, Atty. Camacho filed the Satisfaction of
Judgment,7 dated August 15, 2011, before the R TC stating that the parties
had entered into a compromise agreement.

On August 18, 2011, Atty. Sison met with Atty. Camacho to clarify the events
that transpired.8 He asked Atty. Camacho whether he paid the amount of
Pl,288,260.00 as additional dockets fees, and the latter replied that he simply
gave it to the clerk of court as the payment period had lapsed.

Disappointed with the actions of Atty. Camacho, Atty. Sison sent a


letter,9 dated August 24, 2011, stating that he was alarmed that the former
would accept a disadvantageous compromise; that it was against company
policy to bribe any government official with respect to the Pl,288,260.00
given to the clerk of court; and that MDAHI would only pay P200,000.00 to
Atty. Camacho as attorney's fees.

Respondent's Position

In his verified answer,10 dated October 30, 2012, Atty. Camacho denied all the
allegations against him. He stressed that he had the authority to enter into
the compromise agreement. Moreover, the alleged docket fees given to him
by MDAHI formed part of his attorney's fees.

He further stated in his position paper11 that the judgment debt was paid and
accepted by MDAHI without any objection, as duly evidenced by an
acknowledgment receipt.12 Thus, there was no irregularity in the compromise
agreement.

With respect to the amount handed to him, Atty. Camacho averred that he
filed a Motion to Compel Plaintiff to Pay Attorney's Fee on September 13,
2011 before the RTC. The Court granted the said motion in its April 12, 2012
Order13 stating that the amount of Pl,288,260.00 was considered as part of
his attorney's fees.

On July 6, 2012, the R TC issued an Order 14 resolving the motion for


reconsideration filed by both parties in favor of Atty. Camacho. In the said
order, the RTC opined that only P300,000.00 was previously paid to Atty.
Camacho15 as attorney's fees. Based on the foregoing, Atty. Camacho
asserted that the amount of Pl,288,260.00 which he received, truly formed

CIVIL LAW REVIEW 2


12
[JANUARY 2016 CASES] 2

part of his unpaid attorney's fees. He stressed that the said RTC order had
attained finality and constituted res judicata on the present administrative
case. He added that MDAHI disregarded the RTC order as it filed an estafa
case against him concerning the amount ofl:ll,288,260.00.

Report and Recommendation

After the mandatory conference on January 24, 2013 and upon a thorough
evaluation of the evidence presented by the parties in their respective
position papers, the IBP-CBD submitted its Report and
Recommendation,16 dated April 1, 2013 finding Atty. Camacho to have
violated the provisions of Rule 1.01 and Rule 16.01 of the CPR and
recommending the imposition of the penalty of one (1) year suspension from
the practice of law against him. In its Resolution No. XX-2013-474, 17 dated
April 16, 2013, the Board of Governors of the Integrated Bar of the
Philippines (Board) adopted the said report and recommendation of
Investigating Commissioner Eldrid C. Antiquiera.

Aggrieved, Atty. Camacho filed a motion for reconsideration 18 before the


Board reiterating that the compromise agreement was valid because MDAHI
did not reject the same and that the amount of Pl,288,260.00 formed part of
his attorney's fees.

In his Comment/Opposition,19 Atty. Sison countered that Atty. Camacho never


denied that he filed the satisfaction of judgment without the written authority
of MDAHI and that there was ca pending estafa case against him before the
Regional Trial Court, Makati City, Branch 146, docketed as Criminal Case No.
13-1688, regarding the Pl,288,260.00 handed to him.

In its Resolution No. XXI-2014-532,20 dated August 10, 2014, the Board
adopted the report and recommendation 21of National Director Dominic C.M.
Solis. The Board partially granted the motion for reconsideration and
dismissed, without prejudice, the charge regarding the failure to account for
the money, because it was premature to act on such issue due to the pending
criminal case against the Atty. Camacho. Accordingly, the penalty of one (1)
year suspension imposed was lowered to six (6) months suspension from the
practice of law.

Hence, the case was elevated to the Court.

The Court's Ruling

The Court finds that Atty. Camacho violated Rules 1.01 and 16.01 of the CPR.

Entering into a compromise


agreement without written
authority of the client

CIVIL LAW REVIEW 2


12
[JANUARY 2016 CASES] 3

Those in the legal profession must always conduct themselves with honesty
and integrity in all their dealings. Members of the Bar took their oath to
conduct themselves according to the best of their knowledge and discretion
with all good fidelity as well to the courts as to their clients and to delay no
man for money or malice. These mandates apply especially to dealings of
lawyers with their clients considering the highly fiduciary nature of their
relationship.22

In the practice of law, lawyers constantly formulate compromise agreements


for the benefit of their clients. Article 1878 of the Civil Code provides that " [ s
]pecial powers of attorney are necessary in the following cases: xxx (3) To
compromise, to submit questions to arbitration, to renounce the right to
appeal from a judgment, to waive objections to the venue of an action or to
abandon a prescription already acquired xxx."

In line with the fiduciary duty of the Members of the Bar, Section 23, Rule 138
of the Rules of Court specifies a stringent requirement with respect to
compromise agreements, to wit:

Sec. 23. Authority of attorneys to bind clients. - Attorneys have authority to


bind their clients in any case by any agreement in relation thereto made in
writing, and in taking appeals, and in all matters of ordinary judicial
procedure. But they cannot, without special authority, compromise
their client's litigation, or receive anything in discharge of a client's
claim but the full amount in cash.

[Emphasis and Underscoring Supplied]

In the case at bench, the R TC decision, dated May 26, 2011, awarded MDAHI
approximately P65,000,000.00. When Paramount Insurance offered a
compromise settlement in the amount of Pl5,000,000.00, it was clear as
daylight that MDAHI never consented to the said offer. As can be gleaned
from Atty. Camacho's letter, MDAHI did not sign the conforme regarding the
compromise agreement.23

Glaringly, despite the lack of a written special authority, Atty. Camacho


agreed to a lower judgment award on behalf of his client and filed a
satisfaction of judgment before the R TC. The said pleading also failed to bear
the conformity of his client.24 Although MDAHI subsequently received the
payment of P15M from Paramount Insurance, it does not erase Atty.
Camacho's transgression in reaching the compromise agreement without the
prior consent of his client.

For entering into a compromise agreement without the written authority of


his client, Atty. Camacho violated Rule 1.01 of the CPR, which states that " [a]
lawyer shall not engage in unlawful, dishonest, immoral or deceitful conduct."
Members of the Bar must always conduct themselves in a way that promotes
public confidence in the integrity of the legal profession. 25

CIVIL LAW REVIEW 2


12
[JANUARY 2016 CASES] 4

Failing to account for


the money of the client

Atty. Camacho was also charged with violation of Rule 16.01 of the CPR,
which provides for a lawyer's duty to "account for all money or property
collected or received for or from the client."

Here, Atty. Sison alleged that MDAHI gave Atty. Camacho the amount of P
1,288,260.00 as payment of additional docket fees but the latter failed to
apply the same for its intended purpose. In contrast, Atty. Camacho invoked
the July 6, 2012 Order of the RTC which declared the MDAHI allegation as
unsubstantiated, and claimed that the said amount formed part of his
attorney's fees. The Board, on the other hand, opined that it was still
premature to decide such issue because there was a pending estafa case,
docketed as Criminal Case No. 13-1688, filed by MDAHI against Atty.
Camacho involving the same amount of P 1,288,260.00.

The Court is of the view that it is not premature to rule on the charge against
Atty. Camacho for his failure to account for the money of his client. The
pending case against him is criminal in nature. The issue therein is whether
he is guilty beyond reasonable doubt of misappropriating the amount of
Pl,288,260.00 entrusted to him by his client. The present case, however, is
administrative in character, requiring only substantial evidence. It only entails
a determination of whether Atty. Camacho violated his solemn oath by failing
to account for the money of his client. Evidently, the adjudication of such
issue in this administrative case shall not, in any way, affect the separate
criminal proceeding.

In disciplinary proceedings against lawyers, the only issue is whether the


officer of the court is still fit to be allowed to continue as a member of the
Bar.1wphi1 The only concern of the Court is the determination of the
respondent's administrative liability. The findings in this case will have no
material bearing on other judicial action which the parties may choose to file
against each other. While a lawyer's wrongful actuations may give rise at the
same time to criminal, civil, and administrative liabilities, each must be
determined in the appropriate case; and every case must be resolved in
accordance with the facts and the law applicable and the quantum of proof
required in each.26

Delving into the substance of the allegation, the Court rules that Atty.
Camacho indeed violated Rule 16.01 of the CPR. When Atty. Camacho
personally requested MDAHI for additional docket fees, the latter obediently
granted the amount of Pl ,288,260.00 to the former. Certainly, it was
understood that such amount was necessary for the payment of supposed
additional docket fees in Civil Case No. 05-655. Yet, when Atty. Sison
confronted Atty. Camacho regarding the said amount, the latter replied that
he simply gave it to the clerk of court as the payment period had lapsed.
Whether the said amount was pocketed by him or improperly given to the
clerk of court as a form of bribery, it was unmistakably clear that Atty.

CIVIL LAW REVIEW 2


12
[JANUARY 2016 CASES] 5

Camacho did not apply the amount given to him by his client for its intended
legal purpose.

Atty. Camacho did not even deny making that request to MDAHI for additional
docket fees and receiving such amount from his client. Rather, he set up a
defense that the said amount formed part of his attorney's fees. Such
defense, however, is grossly contradictory to the established purpose of
the Pl,288,260.00. In its Payment Request/Order Form, 27 it is plainly indicated
therein that MDAHI released the said amount only to be applied as payment
for additional docket fees, and not for any other purposes. Consequently, the
lame excuse of Atty. Camacho is bereft of merit because it constitutes a mere
afterthought and a manifest disrespect to the legal profession. Atty. Camacho
is treading on a perilous path where the payment of his attorney's fees is
more important than his fiduciary and faithful duty of accounting the money
of his client. Well-settled is the rule that lawyers are not entitled to
unilaterally appropriate their clients' money for themselves by the mere fact
that the clients owe them attorney's fees. 28

Moreover, Atty. Camacho failed to issue a receipt to MDAHI from the moment
he received the said amount. In Tarog v. Ricafort,29 the Court held that ethical
and practical considerations made it both natural and imperative for a lawyer
to issue receipts, even if not demanded, and to keep copies of the receipts for
his own records. Pursuant to Rule 16.01 of the CPR, a lawyer must be aware
that he is accountable for the money entrusted to him by the clients, and that
his only means of ensuring accountability is by issuing and keeping receipts.

Worse, on May 26, 2011, the RTC already rendered its decision in Civil Case
No. 05-655, adjudging MDAHI entitled to an insurance claim in the amount of
approximately P.65,000,000.00. From that date on, there was no more need
for additional docket fees. Apparently, still unaware of the judgment, MDAHI
subsequently released the money for additional docket fees to Atty. Dimaano,
who handed it to Atty. Camacho on May 27, 2011. Despite a decision having
been rendered, Atty. Camacho did not reject the said amount or return it to
his client upon receipt. Instead, he unilaterally withheld the said amount by
capriciously invoking the payment of his attorney's fees.

The fiduciary nature of the relationship between the counsel and his client
imposes on the lawyer the duty to account for the money or property
collected or received for or from his client. Money entrusted to a lawyer for a
specific purpose but not used for the purpose should be immediately
returned. A lawyer's failure, to return upon demand, the funds held by him on
behalf of his client gives rise to the presumption that he has appropriated the
same for his own use in violation of the trust reposed in him by his client.
Such act is a gross violation of general morality as well as of professional
ethics. It impairs public confidence in the legal profession and deserves
punishment.30

Administrative penalty

CIVIL LAW REVIEW 2


12
[JANUARY 2016 CASES] 6

A member of the Bar may be penalized, even disbarred or suspended from


his office as an attorney, for violation of the lawyer's oath and/or for breach of
the ethics of the legal profession as embodied in the CPR. The practice of law
is a profession, a form of public trust, the performance of which is entrusted
to those who are qualified and who possess good moral character. The
appropriate penalty for an errant lawyer depends on the exercise of sound
judicial discretion based on the surrounding facts. 31

In Luna v. Galarrita,32 the Court suspended the respondent lawyer for two
(2) years because he accepted a compromise agreement without valid
authority and he failed to tum over the payment to his client. In the case
of Melendrez v. Decena,33 the lawyer therein was disbarred because he
entered into a compromise agreement without the special authority of his
client and he drafted deceptive and dishonest contracts. Similarly, in Navarro
v. Meneses III,34 another lawyer, who misappropriated the money entrusted to
him by his client which he failed and/or refused to account for despite
repeated demands, was disbarred because his lack of personal honesty and
good moral character rendered him unworthy of public confidence.

In this case, Atty. Camacho entered into a compromise agreement without the
conformity of his client which is evidently against the provisions of the CPR
and the law. Moreover, he deliberately failed to account for the money he
received from his client, which was supposed to be paid as additional docket
fees. He even had the gall to impute that the money was illicitly given to an
officer of the court. The palpable indiscretions of Atty. Camacho shall not be
countenanced by the Court for these constitute as a blatant and deliberate
desecration of the fiduciary duty that a lawyer owes to his client.

The Court finds that Atty. Camacho's acts are so reprehensible, and his
violations of the CPR are so flagrant, exhibiting his moral unfitness and
inability to discharge his duties as a member of the Bar. His actions erode
rather than enhance the public perception of the legal profession. Therefore,
in view of the totality of his violations, as well as the damage and prejudice
they caused to his client, Atty. Camacho deserves the ultimate penalty of
disbarment.

Further, he must be ordered to return the amount of Pl,288,260.00 to MDAHI,


which he received in his professional capacity for payment of the purported
additional docket fees. Disciplinary proceedings revolve around the
determination of the respondent-lawyer's administrative liability, which must
include those intrinsically linked to his professional engagement. 35

WHEREFORE, Atty. Manuel N. Camacho is found guilty of violating Rule 1.01


and Rule 16.01 of the Code of Professional Responsibility. For reasons above-
stated, he is DISBARRED from the practice of law and his name stricken off
the Roll of Attorneys, effective immediately.

Furthermore, Atty. Manuel N. Camacho is ORDERED to return to Marsman-


Drysdale Agribusiness Holdings Inc. the money intended to pay for additional

CIVIL LAW REVIEW 2


12
[JANUARY 2016 CASES] 7

docket fees which he received from the latter in the amount of P


1,288,260.00 within ninety (90) days from the finality of this decision.

Let a copy of this decision be furnished the Office of the Bar Confidant to be
entered into the records of respondent Atty. Manuel N. Camacho. Copies shall
likewise be furnished the Integrated Bar of the Philippines and the Office of
the Court Administrator for circulation to all courts concerned.

CIVIL LAW REVIEW 2


12
[JANUARY 2016 CASES] 8

9.

FIRST DIVISION

January 13, 2016

G.R. No. 168078

FABIO CAHAYAG and CONRADO RIVERA, Petitioners,


vs.
COMMERCIAL CREDIT CORPORATION, represented by its President,
LEONARDO B. ALEJANDRO; TERESITA T. QUA, assisted by her husband
ALFONSO MA. QUA; and the REGISTER OF DEEDS OF LAS PINAS,
METRO MANILA, DISTRICT IV, Respondents.

x-----------------------x

G.R. No. 168357

DULOS REALTY & DEVELOPMENT CORPORATION, represented by its


President, JUANITO C. DULOS; and MILAGROS E. ESCALONA, and
ILUMINADA D. BALDOZA, Petitioners,
vs.
COMMERCIAL CREDIT CORPORATION, represented by its President,
LEONARDO B. ALEJANDRO; TERESITA T. QUA, assisted by her husband
ALFONSO MA. QUA; and the REGISTER OF DEEDS OF LAS PINAS,
METRO MANILA, DISTRICT IV, Respondents.

DECISION

SERENO, J.:

Before us are consolidated Rule 45 Petitions 1 seeking to nullify the Court of


Appeals (CA) Decision dated 2 November 2004 2 and Resolution dated 10 May
20053 in CA-G.R. CV No. 47421. The CA Decision reversed and set aside the
Decision dated 6 July 1992 issued by the Regional Trial Court (RTC), Branch 65
of Makati.4

FACTUAL ANTECEDENTS

Petitioner Dulos Realty was the registered owner of certain residential lots
covered by Transfer Certificate of Title (TCT) Nos. S-39767, S-39775, S-28335,
S-39778 and S-29776, located at Airmen's Village Subdivision, Pulang Lupa II,
Las Pinas, Metro Manila.

CIVIL LAW REVIEW 2


12
[JANUARY 2016 CASES] 9

On 20 December 1980, Dulos Realty obtained a loan from respondent CCC in


the amount of P300,000. To secure the loan, the realty executed a Real Estate
Mortgage over the subject properties in favor of respondent. The mortgage
was duly annotated on the certificates of title on 3 February 1981. 5

On 29 March 1981, Dulos Realty entered into a Contract to Sell with petitioner
Cahayag over the lot covered by TCT No. S-39775. 6

On 12 August 1981, Dulos Realty entered into another Contract to Sell, this
time with petitioner Rivera over the lot covered by TCT No. S-28335. 7

Dulos Realty defaulted in the payment of the mortgage loan, prompting


respondent CCC to initiate extrajudicial foreclosure proceedings. On 17
November 1981, the auction sale was held, with respondent CCC emerging as
the highest bidder.8

On 23 November 1981, a Certificate of Sale covering the properties, together


with all the buildings and improvements existing thereon, was issued in favor
of CCC.9 The Certificate of Sale was annotated on the corresponding titles to
the properties on 8 March 1982.10

Thereafter, or on 13 January 1983, Dulos Realty entered into a Contract to


Sell with petitioner Escalona over the house and lot covered by TCT No. S-
29776.11

On 10 November 1983, an Affidavit of Consolidation in favor of respondent


CCC dated 26 August 1983 was annotated on the corresponding titles to the
properties.12 By virtue of the affidavit, TCT Nos. S-39775, S-28335, S-39778
and S-29776 - all in the name of Dulos Realty - were cancelled and TCT Nos.
74531, 74532, 74533 and 74534 were issued in the name of respondent CCC
on the same day.13

On 10 December 1983, Dulos Realty entered into a Deed of Absolute Sale


with petitioner Baldoza over the property covered by TCT No. S-39778,
together with the improvements existing thereon. 14

On 21 December 1983, respondent CCC, through a Deed of Absolute Sale,


sold to respondent Qua the same subject properties, now covered by TCT
Nos. 74531, 74532, 74533 and 74534, which were in the name of respondent
CCC. The sale was duly annotated on the corresponding titles to the
properties on 5 January 1984.15

Accordingly, TCT Nos. 74531, 74532, 74533 and 74534 were cancelled; and
TCT Nos. 77012, 77013, 77014 and 770015 were issued to respondent Qua
on 5 January 1984.16

CIVIL LAW REVIEW 2


13
[JANUARY 2016 CASES] 0

Subsequently, respondent Qua filed ejectment suits individually against


petitioners Du1os Realty,17 Cahayag,18Esca1ona,19 and Rivera20 before the
Metropolitan Trial Court (MTC) of Las Pias, Metro Manila.

The MTC rendered Decisions in favor of respondent Qua. It ordered Dulos


Realty, Escalona, Cahayag, and Rivera to vacate the properties.

On 8 March 1988, the MTC issued a Writ of Execution to enforce its Decision
dated 20 October 1986 in Civil Case No. 2257 against Dulos Realty "and all
persons claiming right under defendant." 21 The subject of the writ of
execution was Lot 11 Block II, 22 which was the lot sold by Dulos Realty to
petitioner Baldoza.

COMPLAINT FOR ANNULMENT


OF SHERIFF'S SALE AND OTHER DOCUMENTS

On 5 December 1988, petitioners filed a Complaint against respondents for


the "Annulment of Sherifffs] Sale and Other Documents with Preliminary
Injunction and/or Temporary Restraining Order" before the RTC of Makati City,
where it was docketed as Civil Case No. 88-2599. 23

The Complaint24 alleged that petitioners Cahayag, Rivera, Escalona and


Baldoza were owners of the properties in question by virtue of Contracts of
Sale individually executed in their favor, and that the Real Estate Mortgage
between Dulos Realty and defendant-appellant CCC did not include the
houses, but merely referred to the lands themselves. 25 Thus, the inclusion of
the housing units in the Deed of Sale executed by respondent CCC in favor of
respondent Qua was allegedly illegal.26

Respondents failed to file an answer within the reglementary period.


Subsequently, they were declared in default. They appealed the order of
default but their appeal was dismissed on 8 February 1990. 27

On 6 July 1992, the RTC rendered a Decision, 28 which ruled that the houses
were not included in the Real Estate Mortgage; and that the foreclosure of the
mortgage over the subject lots, as well as the housing units, was not
valid.29 The trial court held that this conclusion was established by the
plaintiffs' evidence, which went unrefuted when defendants were declared in
default.30

THE CA DECISION

Respondents proceeded to the CA, where they secured a favorable ruling. In


its Decision rendered on 2 November 2004, 31 the appellate court held that the
extrajudicial foreclosure was valid, since the Real Estate Mortgage clearly
included the buildings and improvements on the lands, subject of the
mortgage.

CIVIL LAW REVIEW 2


13
[JANUARY 2016 CASES] 1

After establishing the inclusion of the housing units in the Real Estate
Mortgage, the CA determined the rights of the buyers in the Contracts to
Sell/Contract of Sale vis-a-vis those of the mortgagee and its successor-in-
interest.

In the cases of petitioners Cahayag, Rivera and Escalona, the CA pointed to


lack of evidence establishing full payment of the price. As supporting reason,
it stated that even if there were full payment of the purchase price, the
mortgagee and the latter's successor-in-interest had a better right over the
properties. The CA anchored this conclusion on the fact that the Real Estate
Mortgage was annotated at the back of the titles to the subject properties
before the execution of the Contracts to Sell. It said that the annotation
constituted sufficient notice to third parties that the property was subject to
an encumbrance. With the notice, Cahayag, Rivera and Escalona should have
redeemed the properties within the one-year redemption period, but they
failed to do so. Consequently, the right of respondent CCC over the properties
became absolute, and the transfer to respondent Qua was valid.

As regards Baldoza, though the case involved a Contract of Sale, and not a
mere Contract to Sell, the CA declared the transaction null and void on the
purported ground that Dulos was no longer the owner at the time of the sale.

The CA accordingly reversed and set aside the RTC Decision, dismissed the
case for lack of merit, and ordered petitioners to surrender possession of the
properties to respondent Qua.

THE RULE 45 PETITIONS

On 30 May 2005, petitioners Cahayag and Rivera filed their Rule 45 Petition
with this Court.32 For their part, petitioners Dulos Realty, Baldoza and
Escalona filed their Rule 45 Petition on 19 July 2005. 33

In the Petition under G.R. No. 168357, it is argued, among others, that the
Deed of Absolute Sale in favor of petitioner Baldoza was the culmination of a
Contract to Sell between her and Dulos Realty. She claims that the Contract
to Sell, marked as Exhibit "L" during the trial, was executed on 10 January
1979, which preceded the execution of the Deed of Real Estate Mortgage and
the registration of the mortgage on 3 February 1981. 34 After full payment of
the price under the Contract to Sell, Dulos Realty executed the Deed of
Absolute Sale. In other words, Baldoza is arguing that she has a better title to
the property than respondent Qua since the unregistered contract to sell in
her favor was executed before the registration of the mortgage. But the CA
ignored Exhibit "L" and merely stated that there was only a Deed of Absolute
Sale in favor of Baldoza.

THE ARGUMENTS

CIVIL LAW REVIEW 2


13
[JANUARY 2016 CASES] 2

The arguments of petitioners, as stated in their respective Memoranda, are


summarized as follows:

Coverage of the Mortgage

Initially, petitioners attempt to stave off the effects of the extra judicial
foreclosure by attacking the coverage of the Real Estate Mortgage with
respect to its subject-matter.35 They draw attention to the fact that the List of
Properties attached to the Deed of Real Estate Mortgage refers merely to the
lands themselves and does not include the housing units found
thereon.36 Petitioners also contend that doubts should be resolved against the
drafter inasmuch as the agreement is a contract of adhesion, having been
prepared by the mortgagee.37

As backup argument for the theory that the houses are outside the coverage
of the mortgage agreement, petitioners argue that the improvements were
not owned by Dulos Realty, the mortgagor, but by its buyers under the
Contracts to Sell and Contracts of Sale; hence, those improvements are
excluded from the coverage of the real estate mortgage.

Validity of the Mortgage

Petitioners next challenge the validity of the foreclosure sale on the ground
that the mortgage executed by the mortgagor (petitioner Dulos Realty) and
the mortgagee (respondent CCC) was null and void. 38 Petitioners claim that
Dulos Realty was no longer the owner of the properties it had mortgaged at
the time of the execution of the mortgage contract, as they were sold under
existing Contracts to Sell and Deed of Absolute Sale. 39

Petitioners Cahayag, Rivera and Escalona lean on the unregistered Contracts


to Sell they had individually executed with Dulos Realty as vendor. For his
part, petitioner Baldoza points to the Deed of Absolute Sale executed by
Dulos Realty in his favor.

Better Right over the Properties

Petitioners claim that respondent CCC cannot claim to be a mortgagee in


good faith, since it is a financial institution. 40 As such, respondent CCC knew
that it was dealing with a subdivision developer, which was in the business of
selling subdivision lots.41 Dela Merced v. GSIS42 which states that the general
rule that a mortgagee need not look beyond the title cannot benefit banks
and other financial institutions, as a higher due diligence requirement is
imposed on them.

They also raise the contention that lack of full payment of the purchase price
under the Contracts to Sell on the part of Cahayag, Rivera and Escalona was
due to respondent Qua's "harassment and unlawful actuations. 43

CIVIL LAW REVIEW 2


13
[JANUARY 2016 CASES] 3

Petitioners further state that respondent Qua is a mere transferee of


respondent CCC and that, like a stream, she cannot rise higher than her
source. They also argue that Qua is not an innocent purchaser for value, since
she is a former investor of respondent CCC and one of its principal
stockholders.44

No Prior Written HLURB Approval of


the Mortgage

Finally, petitioners allege that the mortgage contract in this case was not
approved by the BLURB, which violates Section 18 of P.D. 957 45 and results in
the nullity of the mortgage.46

Exhibit "L" as Evidence of a Prior


Contract to Sell

The matter of CA ignoring Exhibit "L" as evidence of a prior unregistered


Contract to Sell was not included in the Memoranda of petitioners.

THE ISSUES

Based on the foregoing facts and arguments raised by petitioners, the


threshold issues to be resolved are the following:

1. Whether the real mortgage covers the lands only, as enumerated in the
Deed of Real Estate Mortgage or the housing units as well;

2. Whether Dulos Realty was the owner of the properties it had mortgaged at
the time of its execution in view of the various Contracts to Sell and Deed of
Absolute Sale respectively executed in favor of petitioners Cahayag, Rivera,
Escalona and Cahayag;

3. Who, as between petitioners-buyers and respondent Qua, has a better


right over the properties?

4. Whether the Deed of Absolute Sale in favor of Baldoza was not preceded
by a Contract to Sell and full payment of the purchase price; and

5. Whether the mortgage is void on the ground that it lacked the prior written
approval of the HLURB.

OUR RULING

We deny the Petition for reasons as follows.

1. Attack on the Subject-matter of


the Real Estate Mortgage

CIVIL LAW REVIEW 2


13
[JANUARY 2016 CASES] 4

It is true that the List of Properties attached to the Deed of Real Estate
Mortgage refers merely to the lands themselves and does not include the
housing units found thereon. A plain reading of the Real Estate Mortgage,
however, reveals that it covers the housing units as well. We quote the
pertinent provision of the agreement:

[T]he MORTGAGOR has transferred and conveyed and, by these presents, do


hereby transfer and convey by way of FIRST MORTGAGE unto the
MORTGAGEE, its successors and assigns the real properties described in the
list appearing at the back of this document and/or in a supplemental
document attached hereto as Annex "A" and made and integral part
hereof, together with all the buildings and/or other improvements
now existing or which may hereafter be place[d] or constructed
thereon, all of which the MORTGAGOR hereby warrants that he is the
absolute owner and exclusive possessor thereof, free from all liens and
encumbrances of whatever kind and nature. xxx. 47 (Emphasis Ours)

Thus, the housing units would fall under the catch-all phrase "together with
all the buildings and/or other improvements now existing or which
may hereafter be placed or constructed thereon."

The contra proferentem rule finds no application to this case. The doctrine
provides that in the interpretation of documents, ambiguities are to be
construed against the drafter.48 By its very nature, the precept assumes the
existence of an ambiguity in the contract, which is why contra proferentem is
also called the ambiguity doctrine.49 In this case, the Deed of Real Estate
Mortgage clearly establishes that the improvements found on the real
properties listed therein are included as subject-matter of the contract. It
covers not only the real properties, but the buildings and improvements
thereon as well.

2. Challenge to the Foreclosure


Sale with Regard to the
Ownership of the Mortgaged
Properties

To begin with, the Contracts to Sell and Deed of Absolute Sale could not have
posed an impediment at all to the mortgage, given that these contracts had
yet to materialize when the mortgage was constituted. They were all
executed after the constitution of the Real Estate Mortgage on 20
December 1980.

As regards Cahayag, the Contract to Sell in his favor was executed on 29


March 1981, more than three months after the execution of the mortgage
contract.50 This is taken from the Contract to Sell itself, which forms part of
the records of this case.51

CIVIL LAW REVIEW 2


13
[JANUARY 2016 CASES] 5

At this juncture, we note that the CA, for reasons unknown, specified 29
September 1980,52 and not 29 March 1981, as the date of the execution of
the Contract to Sell in its Decision. Respondent Qua has raised this point in
her Memorandum filed with us. This Court cannot be bound by the factual
finding of the CA with regard to the date of the Contract to Sell in favor of
Cahayag. The general rule that the Court is bound by the factual findings of
the CA must yield in this case, as it falls under one of the exceptions: when
the findings of the CA are contradicted by the evidence on record. 53 In this
case, there is nothing in the records to support the CA's conclusion that the
Contract to Sell was executed on 29 September 1980. The evidence on
record, however, reveals that the correct date is 29 March 1981.

In the case of petitioner Rivera, the corresponding Contract to Sell in his favor
was executed only on 12 August 1981, or almost eight months after the
perfection of the mortgage contract on 20 December 1980.

Lastly, Dulos Realty executed the Deed of Absolute Sale in favor of petitioner
Baldoza on 10 December 1983, which was almost three years from the time
the mortgage contract was executed on 20 December 1980.

There was neither a contract to sell nor a deed of absolute sale to speak of
when the mortgage was executed.

Petitioners equate a contract to sell to a contract of sale, in which the vendor


loses ownership over the property upon its delivery. 54 But a contract to sell,
standing alone, does not transfer ownership. 55 At the point of perfection, the
seller under a contract to sell does not even have the obligation to transfer
ownership to the buyer.56 The obligation arises only when the buyer fulfills the
condition: full payment of the purchase price. 57 In other words, the seller
retains ownership at the time of the execution of the contract to sell. 58

There is no evidence to show that any of petitioners Cahayag, Rivera and


Escalona were able to effect full payment of the purchase price, which could
have at least given rise to the obligation to transfer ownership. Petitioners
Cahayag and Rivera even admit that they defaulted on their obligations
under their respective Contracts to Sell, although they attribute the default to
respondent Qua's "harassment and unlawful actuations." 59 The statement,
though, was a mere allegation that was left unsubstantiated and, as such,
could not qualify as proof of anything.60

3. Who Has a Better Right over the Properties

Registration of the mortgage hound the buyers under the Contracts


to Sell

Registration of the mortgage establishes a real right or lien in favor of the


mortgagee, as provided by Articles 1312 61and 212662 of the Civil
Code.63 Corollary to the rule, the lien has been treated as "inseparable from

CIVIL LAW REVIEW 2


13
[JANUARY 2016 CASES] 6

the property inasmuch as it is a right in rem." 64 In other words, it binds third


persons to the mortgage.

The purpose of registration is to notify persons other than the parties to the
contract that a transaction concerning the property was entered
into.65 Ultimately, registration, because it provides constructive notice to the
whole world, makes the certificate of title reliable, such that third persons
dealing with registered land need only look at the certificate to determine the
status of the property.66

In this case, the Real Estate Mortgage over the property was registered on 3
February 1981. On the other hand, the Contracts to Sell were all executed
after the registration of the mortgage. The Contract to Sell in favor of
petitioner Cahayag was executed on 29 March 1981, or almost two
months after the registration of the mortgage. The corresponding Contract to
Sell in favor of Rivera was executed only on 12 August 1981, roughly six
months after the registration of the mortgage contract. Lastly, the Contract to
Sell in favor of Escalona was executed on 13 January 1983, or nearly two
years after the registration of the mortgage on 3 February 1981.

Consequently, petitioners Cahayag, Rivera and Escalona, were bound to the


mortgage executed between mortgagor Dulos Realty and mortgagee CCC, by
virtue of its registration. Definitely, the buyers each had constructive
knowledge of the existence of the mortgage contract when they individually
executed the Contracts to Sell.

Dela Merced v. GSIS not applicable

Petitioner invokes the above case. Dela Merced involved a clash between an
unrecorded contract to sell and a registered mortgage contract. The contract
to sell between the mortgagors (Spouses Zulueta) and the buyer (Francisco
Dela Merced) was executed before the former's constitution of the mortgage
in favor of GSIS. Because the Zuluetas defaulted on their loans, the mortgage
was foreclosed; the properties were sold at public auction to GSIS as the
highest bidder; and the titles were consolidated after the spouses' failure to
redeem the properties within the one-year redemption period. GSIS later sold
the contested lot to Elizabeth D. Manlongat and Ma. Therese D. Manlongat.
However, Dela Merced was able to fully pay the purchase price to Spouses
Zulueta, who executed a Deed of Absolute Sale in his favor prior to the
foreclosure sale.

This Court stated therein the general rule that the purchaser is not required
to go beyond the Torrens title if there is nothing therein to indicate any cloud
or vice in the ownership of the property or any encumbrance thereon. The
case nonetheless provided an exception to the general rule. The exception
arises when the purchaser or mortgagee has knowledge of a defect in the
vendor's title or lack thereof, or is aware of sufficient facts to induce a
reasonably prudent person to inquire into the status of the property under

CIVIL LAW REVIEW 2


13
[JANUARY 2016 CASES] 7

litigation. The Court applied the exception, taking into consideration the fact
that GSIS, the mortgagee, was a financing institution.

But Dela Merced is not relevant here. Dela Merced involved a Contract to Sell
that was executed prior to the mortgage, while the Contracts to Sell in this
case were all executed after the constitution and registration of the
mortgage.

In Dela Merced, since GSIS had knowledge of the contract to sell, this
knowledge was equivalent to the registration of the Contract to Sell.
Effectively, this constitutes registration canceled out the subsequent
registration of the mortgage. In other words, the buyer under the Contract to
Sell became the- first to register. Following the priority in time rule in civil law,
the lot buyer was accorded preference or priority in right in Dela Merced.

In this case, the registration of the mortgage, which predated the Contracts
to Sell, already bound the buyers to the mortgage. Consequently, the
determination of good faith does not come into play.

Dela Merced materially differs from this case on another point. The Contract
to Sell in favor of Dela Merced was followed by full payment of the price
and execution of the Deed of Absolute Sale. In this case, the Contract to
Sell in favor of each of petitioners Cahayag, Rivera and Escalona, is not
coupled with full payment and execution of a deed of absolute sale.

This case also needs to be distinguished from Luzon Development Bank v.


Enriquez.67 In that case, the unregistered Contract to Sell was
executed after the execution of the mortgage. Instead of resorting to
foreclosure, the owner/developer and the bank entered into a dacion en
pago. The Court declared that the bank was bound by the Contract to Sell
despite the non-registration of the contract. It reasoned that the bank
impliedly assumed the risk that some of the units might have been covered
by contracts to sell. On the other hand, the Court pronounced the mortgage
to be void, as it was without the approval of the Housing and Land Use
Regulatory Board (HLURB). The Court consequently ordered the unit buyer in
that case to pay the balance to the bank, after which the buyer was obliged
to deliver a clean title to the property.

There are points of distinction between the case at bar and Luzon
Development Bank. First, there is a definite finding in Luzon Development
Bank that the mortgage was without prior HLURB approval, rendering the
mortgage void. In the present case, as will be discussed later, there is no
proof from the records on whether the HLURB did or did not approve the
mortgage. Second, Luzon Development Bank did not even reach the
foreclosure stage of the mortgage. This case, however, not only reached the
foreclosure stage; it even went past the redemption period, consolidation of
the title in the owner, and sale of the property by the highest bidder to a third
person.

CIVIL LAW REVIEW 2


13
[JANUARY 2016 CASES] 8

The first distinction deserves elaboration. The absence of prior written


approval of the mortgage by the HLURB rendered it void. This effectively
wiped out any discussion on whether registration bound the installment
buyer. In fact, Luzon Development Bank did not even bother to state whether
the mortgage was registered or not. More important, the tables were turned
when Luzon Development Bank held that the bank was bound to the Contract
to Sell in view of the latter's constructive notice of the Contract to Sell. Stated
differently, the actually unregistered Contract to Sell became fictionally
registered, making it binding on the bank.

In this case, on account of its registration, and the fact that the contracts
were entered into after it, the mortgage is valid even as to petitioners.

No Redemption within One Year from the Foreclosure Sale

When it comes to extrajudicial foreclosures, the law 68 grants mortgagors or


their successors-in-interest an opportunity to redeem the property within one
year from the date of the sale. The one-year period has been jurisprudentially
held to be counted from the registration of the foreclosure sale with the
Register of Deeds.69 An exception to this rule has been carved out by
Congress for juridical mortgagors. Section 47 of the General Banking Law of
2000 shortens the redemption period to within three months after the
foreclosure sale or until the registration of the certificate of sale, whichever
comes first.70 The General Banking Law of 2000 came into law on 13 June
2000.

If the redemption period expires and the mortgagors or their successors-in-


interest fail to redeem the foreclosed property, the title thereto is
consolidated in the purchaser.71 The consolidation confirms the purchaser as
the owner of the property; concurrently, the mortgagor-for failure to exercise
the right of redemption within the period-loses all interest in the property. 72

We now apply the rules to this case.

As the foreclosure sale took place prior to the advent of the General Banking
Law of 2000, the applicable redemption period is one year. In this case,
because the Certificate of Sale in favor of respondent CCC was registered on
8 March 1982, the redemption period was until 8 March 1983. It lapsed
without any right of redemption having been exercised by Dulos Realty.
Consequently, the right of respondent CCC, as purchaser of the subject lots,
became absolute. As a matter of right, it was entitled to the consolidation of
the titles in its name and to the possession of those lots. Further, the right of
respondent CCC over the lots was transferred to respondent Qua by virtue of
the Deed of Sale executed between them.

Given the foregoing considerations, respondent Qua, who now has title to the
properties subject of the various Contracts to Sell, is the lawful owner thereof.

CIVIL LAW REVIEW 2


13
[JANUARY 2016 CASES] 9

Foreclosure Sale vs. Contract of Sale

When Dulos Realty executed a Deed of Absolute Sale covering the real
property registered under TCT No. S-39778 in favor of petitioner Baldoza on
10 December 1983, it was no longer the owner of the property. Titles to the
subject properties, including the one sold to Baldoza, had already been
consolidated in favor of respondent CCC as early as 10 November 1983. In
fact, on the same date, the titles to the subject lots in the name of Dulos
Realty had already been cancelled and new ones issued to respondent CCC.

The fact that Dulos Realty was no longer the owner of the real property at the
time of the sale led the CA to declare that the Contract of Sale was null and
void. On this premise, the appellate court concluded that respondent Qua had
a better title to the property over petitioner Baldoza.

We find no error in the conclusion of the CA that respondent Qua has a better
right to the property. The problem lies with its reasoning. We therefore take a
different route to reach the same conclusion.

Proper place of nemo dat quod non habet in the Law on Sales

Undeniably, there is an established rule under the law on sales that one
cannot give what one does not have (Nemo dat quad non ha bet).73 The CA,
however, confuses the application of this rule with respect to time. It makes
the nemo dat quad non habet rule a requirement for the perfection of a
contract of sale, such that a violation thereof goes into the validity of the
sale. But the Latin precept has been jurisprudentially held to apply to a
contract of sale at its consummation stage, and not at the perfection stage. 74

Cavite Development Bank v. Spouses Syrus Lim 75 puts nemo dat quad non
habet in its proper place.1wphi1 Initially, the Court rules out ownership as a
requirement for the perfection of a contract of sale. For all that is required is a
meeting of the minds upon the object of the contract and the price. The case
then proceeds to give examples of the rule. It cites Article 1434 of the Civil
Code, which provides that in case the seller does not own the subject matter
of the contract at the time of the sale, but later acquires title to the thing
sold, ownership shall pass to the buyer. The Court also refers to the rule as
the rationale behind Article 1462, which deals with sale of "future goods."

Cavite Development Bank thereafter turns to Article 1459, which requires


ownership by the seller of the thing sold at the time of delivery or
consummation stage of the sale. The Court explains that if the rule were
otherwise, the seller would not be able to comply with the latter's obligation
to transfer ownership to the buyer under a perfected contract of sale. The
Court ends the discourse with the conclusion that "[i]t is at the
consummation stage where the principle of nemo dat quad non
habet applies.76

CIVIL LAW REVIEW 2


14
[JANUARY 2016 CASES] 0

Case law also provides that the fact th,at the seller is not the owner of the
subject matter of the sale at the time of perfection does not make the sale
void.77

Hence, the lesson: for title to pass to the buyer, the seller must be the owner
of the thing sold at the consummation stage or at the time of delivery of the
item sold. The seller need not be the owner at the perfection stage of the
contract, whether it is of a contract to sell or a contract of sale. Ownership is
not a requirement for a valid contract of sale; it is a requirement for a valid
transfer of ownership'.

Consequently, it was not correct for the CA to consider the contract of sale
void. The CA erroneously considered lack of ownership on the part of the
seller as having an effect on the validity of the sale. The sale was very much
valid when the Deed of Absolute Sale between the parties was executed on
10 December 1983, even though title to the property had earlier been
consolidated in favor of respondent CCC as early as 10 November 1983. The
fact that Dulos Realty was no longer the owner of the property in question at
the time of the sale did not affect the validity of the contract.

On the contrary, lack of title goes into the performance of a contract of sale.
It is therefore crucial to determine in this case if the seller was the owner at
the time of delivery of the object of the sale. For this purpose, it should be
noted that execution of a public instrument evidencing a sale translates to
delivery.78 It transfers ownership of the item sold to the buyer. 79

In this case, the delivery coincided with the perfection of the contract -The
Deed of Absolute Sale covering the real property in favor of petitioner
Baldoza was executed on 10 December 1983. As already mentioned, Dulos
Realty was no longer the owner of the property on that date. Accordingly, it
could not have validly transferred ownership of the real property it had sold
to petitioner.

Thus, the correct conclusion that should be made is that while there was a
valid sale, there was no valid transfer of title to Baldoza, since Dulos Realty
was no longer the owner at the time of the execution of the Deed of Absolute
Sale.

No Bad Faith on Qua

The contention that Qua is a stockholder and former member of the Board of
Directors of respondent CCC and therefore she is not exactly a stranger to the
affairs of CCC is not even relevant.

An innocent purchaser for value is one who "buys the property of another
without notice that some other person has a right to or interest in it, and who
pays a full and fair price at the time of the purchase or before receiving any
notice of another person's claim."80 The concept thus presupposes that there

CIVIL LAW REVIEW 2


14
[JANUARY 2016 CASES] 1

must be an adverse claim or defect in the title to the property to be


purchased by the innocent purchaser for value.

Respondent Qua traces her title to respondent CCC, whose acquisition over
the property proceeded from a foreclosure sale that was valid. As there is no
defect in the title of respondent CCC to speak of in this case, there is no need
to go into a discussion of whether Qua is an innocent purchaser for value.

4. Dispute as to the Factual Finding of the CA that the Deed of


Absolute Sale in Favor of Baldoza was not Preceded by a Contract to
Sell and Full Payment of the Purchase Price

We absolutely discard the argument. We can think of at least four reasons


why. First, Exhibit "L" was not formally offered in evidence. Second, it was not
even incorporated into the records. Third, the argument is
irrelevant. Fourth, it was even abandoned in the Memoranda filed by
petitioners with us. Last, we are not a trier of facts and thus we yield to the
finding of the CA.

Exhibit "L" not formally offered

A perusal of the records shows that the Contract to Sell that Baldoza referred
to had in fact been marked as Exhibit "L" during her direct examination in
court.81 Even so, Exhibit "L" was never formally offered as evidence. For this
reason, we reject her contention. Courts do not consider evidence that has
not been formally offered.82 This explains why the CA never mentioned the
alleged Contract to Sell in favor of Baldoza.

The rationale behind the rule rests on the need for judges to confine their
factual findings and ultimately their judgment solely and strictly to the
evidence offered by the parties to a suit. 83 The rule has a threefold purpose. It
allows the trial judge to know the purpose of the evidence presented; affords
opposing parties the opportunity to examine the evidence and object to its
admissibility when necessary; and facilitates review, given that an appellate
court does not have to review documents that have not been subjected to
scrutiny by the trial court.84

Exhibit "L" not incorporated into the records

The rule, of course, admits an exception. Evidence not formally offered may
be admitted and considered by the trial court so long as the following
requirements obtain: (1) the evidence is duly identified by testimony duly
recorded; and (2) the evidence is incorporated into the records of the case.

The exception does not apply to the case of Baldoza. While she duly identified
the Contract to Sell during her direct examination, which was duly recorded,
Exhibit "L" was not incorporated into the records.

CIVIL LAW REVIEW 2


14
[JANUARY 2016 CASES] 2

Exhibit "L" not relevant

Be that as it may, the contention that a Contract to Sell in favor of Baldoza


preceded the sale in her favor is irrelevant. It must be stressed that the sale
to Baldoza made by Dulos Realty took place after the lapse of the
redemption period and after consolidation of title in the name of
respondent CCC on 10 November 1983, one month prior to the sale to
Baldoza on 10 December 1983. Dulos Realty still would have lost all interest
over the property mortgaged.

The fact that Dulos Realty ceased to be the owner of the property and
therefore it could no longer effect delivery of the property at the time the
Deed of Absolute Sale in favor of Baldoza was executed is the very reason
why the case of Baldoza cannot be compared with Dela Merced. In the case,
the buyer in the Contract to Sell was able to effect full payment of the
purchase price and to execute a Deed of Absolute Sale in his favor before
the foreclosure sale. In this case, the full payment of the purchase price
and the execution of a Deed of Absolute Sale in favor of Baldoza was
done after the foreclosure sale.

Issue over Exhibit "L" not included in the Memorandum

Equally important is the fact that petitioners failed to include the issue over
Exhibit "L" in any of the Memoranda they filed with us. The omission is
fatal. Issues raised in previous pleadings but not included in the
memorandum are deemed waived or abandoned (A.M. No. 99-2-04-SC).
As they are "a summation of the parties' previous pleadings, the memoranda
alone may be considered by the Court in deciding or resolving the
petition."85 Thus, even as the issue was raised in the Petition, the Court may
not consider it in resolving the case on the ground of failure of petitioners to
include the issue in the Memorandum. They have either waived or abandoned
it.

5. Issue of HLURB's Non-Approval of the Mortgage

Petitioners allege before the Court that the mortgage contract in this case
was not approved by the HLURB. They claim that this violates Section 18 of
P.D. 95786 and results in the nullity of the mortgage. Respondents have
disputed the claim and counter-argue that the allegation of the petitioners is
not supported by evidence. Respondents likewise aver that the argument was
raised for the first time on appeal.87

It is rather too late in the day for petitioners to raise this argument. Parties
are not permitted to change their theory of a case at the appellate
stage.88 Thus, theories and issues not raised at the trial level will not be
considered by a reviewing court on the ground that they cannot be raised for
the first time on appeal.89 Overriding considerations of fair play, justice and

CIVIL LAW REVIEW 2


14
[JANUARY 2016 CASES] 3

due process dictate this recognized rule. 90 This Court cannot even receive
evidence on this matter.

Petitioners' original theory of the case is the nullity of the mortgage on the
grounds previously discussed. If petitioners are allowed to introduce their new
theory, respondents would have no more opportunity to rebut the new claim
with contrary evidence, as the trial stage has already been terminated. In the
interest of fair play and justice, the introduction of the new argument must be
barred.91

Exceptions Not Applicable

The Court is aware that the foregoing is merely a general rule. Exceptions are
written in case law: first, an issue of jurisdiction may be raised at any time,
even on appeal, for as long as the exercise thereof will not result in a
mockery of the demands of fair play; 92 second, in the interest of justice and at
the sound discretion of the appellate court, a party may be allowed to change
its legal theory on appeal, but only when the factual bases thereof would not
require further presentation of evidence by the adverse party for the purpose
of addressing the issue raised in the new theory; 93 and last, which is actually
a bogus exception, is when the question falls within the issues raised at the
trial court.94

The exceptions do not apply to the instant case. The new argument offered in
this case concerns a factual matter - prior approval by the HLURB. This
prerequisite is not in any way related to jurisdiction, and so the first exception
is not applicable. There is nothing in the record to allow us to make any
conclusion with respect to this new allegation.

Neither will the case fall under the second exception. Evidence would be
required of the respondents to disprove the new allegation that the mortgage
did not have the requisite prior HLURB approval. Besides, to the mind of this
court, to allow petitioners to change their theory at this stage of the
proceedings will be exceedingly inappropriate.

Petitioners raised the issue only after obtaining an unfavorable judgment


from the CA. Undoubtedly, if we allow a change of theory late in the game, so
to speak, we will unjustifiably close our eyes to the fundamental right of
petitioners to procedural due process. They will lose the opportunity to meet
the challenge, because trial has already ended. Ultimately, we will be
throwing the Constitutional rulebook out the window.

WHEREFORE, premises considered, the Petitions are DENIED, and the Court
of Appeals Decision dated 2 November 2004 and Resolution dated 10 May
2005 in CA-G.R. CV No. 47421 are hereby AFFIRMED.

CIVIL LAW REVIEW 2


14
[JANUARY 2016 CASES] 4

10.

THIRD DIVISION

January 13, 2016

G.R. No. 172919

TIMOTEO BACALSO and DIOSDADA BACALSO, Petitioners,


vs.
GREGORIA B. ACA-AC, EUTIQUIA B. AGUILA, JULIAN BACUS and
EVELYN SYCHANGCO, Respondents.

DECISION

REYES, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the
Rules of Court seeking to annul and set aside the Decision 2 dated December
14, 2005 and the Resolution3 dated May 30, 2006 of the Court of Appeals (CA)
in CA-G.R. CV No. 67516. The CA affirmed the Decision dated April 19, 2000
of the Regional Trial Court (RTC) of Cebu City, Branch 11, in Civil Case No.
CEB-17994. The RTC ruled that the Deed of Absolute Sale elated October 15,
1987 between herein respondents Gregoria B. Aca-Ac, Eutiguia B. Aguila and
Julian Bacus (Julian) (Bacus siblings) and herein petitioner Timoteo Bacalso
(Timoteo) was void for want of consideration.

The Facts

The Bacus siblings were tbe registered owners of a parcel of land described
as Lot No. 1809-G-2 located in San Roque, Talisay, Cebu with an area of 1,200
square meters and covered by Transfer Certificate of Title (TCT) No. 59260.
The Bacus siblings inherited the said property from their mother Matea
Bacalso (Matea).4

On October 15, 1987, the Bacus siblings executed a Deed of Absolute Sale
conveying a portion of Lot No. 1809-G-2 with an area of 271 sq m, described
as Lot No. 1809-G-2-C, in favor of their cousin, Timoteo for and in
consideration of the amount of P8,000.00.5

On March 4, 1988, however, Timoteo, together with his sisters Lucena and
Victoria and some of his cousins filed a complaint for declaration of nullity of
documents, certificates of title, reconveyance of real property and damages
against the Bacus siblings and four other persons before the RTC of Cebu
City, Branch 12, and was docketed as Civil Case No. CEB-6693. They claimed
that they are co-owners of the three-fourths portion of Lot No. 1809-G (which

CIVIL LAW REVIEW 2


14
[JANUARY 2016 CASES] 5

Lot No. 1809-G-2-C was originally part of) as Matea had paid for the said
property for and in behalf of her brother Alejandro (father of petitioner
Timoteo) and sisters Perpetua and Liberata, all surnamed Bacalso. 6

On November 29, 1989, the RTC found that Matea was the sole owner of Lot
No. 1809-G and affirmed the validity of the conveyances of portions of Lot No.
1809-G made by her children. The same was aflirmed by the CA in a Decision
dated March 23, 1992 and became final and executory on April 15, 1992. 7

Undaunted, Timoteo and Diosdada Bacalso (petitioners) filed on October 26,


1995, a complaint for declaration of nullity of contract and certificates of title,
reconveyance and damages against the Bacus siblings, this time claiming
ownership over Lot No. 1809-G-2-C by virtue of the Deed of Absolute Sale
dated October 15, 1987. They claimed, however, that the Bacus siblings
reneged on their promise to cause the issuance of a new TCT in the name of
the petitioners.8

Moreover, the petitioners alleged that the Bacus siblings have caused the
subdivision of Lot No. 1809-G-2 into four lots and one of which is Lot No.
1809-G-2-C which is now covered by TCT No. 70783. After subdividing the
property, the Bacus siblings, on February 11, 1992, without knowledge of the
petitioners, sold Lot No. 1809-G-2-C again to respondent Evelyn Sychangco
(Sychangco) and that TCT No. 74687 covering the same property was issued
in her name.9

In their answer, the Bacus siblings denied the allegations of the petitioners
and claimed that the alleged sale of Lot No. 1809-G-2-C in favor of the
petitioners did not push through because the petitioners failed to pay the
purchase price thereof.10

For her part, Sychangco averred that she is a buyer in good faith and for
value as she relied on what appeared in the certificate of title of the property
which appeared to be a clean title as no lien or encumbrance was annotated
therein.11

On April 19, 2000, the RTC issued a Decision declaring the Deed of Absolute
Sale dated October 15, 1987 void for want of consideration after finding that
the petitioners failed to pay the price of the subject property. Moreover, the
RTC held that even granting that the sale between the Bacus siblings and the
petitioners was valid, the petitioners still cannot ask for the rescission of the
sale of the disputed portion to Sychangco as the latter was a buyer in good
faith, thus has a better right to the property. 12

Aggrieved by the foregoing disquisition of the RTC, the petitioners interposed


an appeal with the CA. On December 14, 2005, however, the CA affirmed the
ruling of the RTC. The petitioners sought a reconsideration 13 of the CA
decision but it was denied in a Resolution dated May 30, 2006.

CIVIL LAW REVIEW 2


14
[JANUARY 2016 CASES] 6

The Issues

The petitioners assign the following errors of the CA:

I.

THE [CA] SERIOUSLY ERRED WHEN IT RELIED TOO MUCH ON THE RESPECTIVE
ORAL TESTIMONIES OF RESPONDENTS JULIAN BACUS AND EVELYN
SYCHANGCO UTTERLY DISREGARDING THE ORAL TESTIMONIES OF
PETITIONER TIMOTEO BACALSO AND THE LATTER'S WITNESS ROBERTO YBAS
AND THE DOCUMENTARY EVIDENCE OF THE PETITIONERS, THE DULY
EXECUTED AND NOTARIZED DEED OF ABSOLUTE SALE COVERING THE
SUBJECT LOT NO. 1809-G-2-C.

II

THE [CA] SERIOUSLY ERRED WHEN IT RULED THAT THE DEED OF ABSOLUTE
SALE DATED 15 OCTOBER 1987 IS NULL AND VOID AB INITIO FOR FAILURE OR
WANT OF CONSIDERATION.

III

THE [CA] SERIOUSLY ERRED WHEN IT DID NOT CONSIDER TI-IE FACT THAT
THE DEED OF ABSOLUTE SALE DATED 15 OCTOBER 1987 WAS NOTARIZED,
HENCE, A PUBLIC DOCUMENT WHICH ENJOYS THE PRESUMPTION OF
REGULARITY.

IV

THE [CA] SERIOUSLY ERRED WHEN IT DID NOT RULE THAT ON 15 OCTOBER
1987, THE [BACUS SIBLINGS] WERE NO LONGER OWNERS AND POSSESSORS
OF Tl-IE SUBJECT LOT AS THE SAME WAS ALREADY TRANSFERRED TO TI-IE
PETITIONERS BY REASON OF THE MERE EXECUTION OF A DEED OF SALE IN A
PUBLIC DOCUMENT, AS IN THIS CASE.14

Essentially, the issues presented to the Court for resolution could be reduced
into whether the CA erred in holding that the Deed of Absolute Sale dated
October 15, 1987 is void for want of consideration.

Ruling of the Court

The petition is bereft of merit.

The central issue to be resolved in the present controversy is the validity of


the Deed of Absolute Sale between the petitioners and the Bacus siblings.
"Such issue involves a question of fact and settled jurisprudence dictates
that, subject to a few exceptions, only questions of law may be brought
before the Court via a petition for review on certiorari."15

CIVIL LAW REVIEW 2


14
[JANUARY 2016 CASES] 7

The Court has repeatedly held that it is not necessitated to examine, evaluate
or weigh the evidence considered in the lower courts all over again. "This is
especially true where the trial court's factual findings are adopted and
affirmed by the CA as in the present case. Factual findings of the trial court,
afiirmed by the CA, are final and conclusive and may not be reviewed on
appeal."16

Although the Court recognized several exceptions to the limitation of an


appeal by certiorari to only questions of law, including: (1) when the findings
are grounded entirely on speculation, surmises, or conjectures; (2) when the
interference made is manifestly mistaken, absurd, or impossible; (3) when
there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; (5) when the findings of fact are conflicting; (6)
when in making its findings, the CA went beyond the issues of the case, or its
findings are contrary to the admissions of both the appellant and the
appellee; (7) when the findings are contrary to those of the trial court; (8)
when the findings are conclusions without citation of specific evidence on
which they are based; (9) when the facts set forth in the petition as well as in
the petitioner's main and reply briefs are not disputed by the respondent; and
(10) when the findings of fact are premised on the supposed absence of
evidence and contradicted by the evidence on record, 17 the present appeal
does not come under any of the exceptions.

In any event, the Court has carefully reviewed the records of the instant case
and found no reason to disturb the findings of the RTC as affirmed by the CA.

Under the Civil Code, a contract is a meeting of minds, with respect to the
other, to give something or to render some service. Article 1318 provides:

Art. 1318. There is no contract unless the following requisites concur:

(l) Consent of the contracting parties;

(2) Object certain which is the subject matter of the contract;

(3) Cause of the obligation which is established.

In the case at bar, the petitioners argue that the Deed of Absolute Sale has all
the requisites of a valid contract. The petitioners contend that there is no lack
of consideration that would prevent the existence of a valid contract. They
assert that the testimonies of Timoteo and witness Roberto Ybas sufficiently
established that the purchase price of P5,000.00 for Lot No. 1809-G-2-C was
paid to Julian at Sto. Nifio Church in Cebu City before the execution of the
Deed of Absolute Sale. They also claim that even assuming that they failed to
pay the purchase price, such failure does not render the sale void for being
fictitious or simulated, rather, there is only non-payment of the consideration
within the period agreed upon for payment. 18

CIVIL LAW REVIEW 2


14
[JANUARY 2016 CASES] 8

The Court does not agree.

Contrary to the petitioners' claim, this is not merely a case of failure to pay
the purchase price which can only amount to a breach of obligation with
rescission as the proper remedy. As correctly observed by the RTC, the
disputed sale produces no effect and is considered void ab initio for failure to
or want of consideration since the petitioner failed to pay the consideration
stipulated in the Deed of Absolute Sale. The trial court's discussion on the
said issue, as affirmed by the CA, is hereby quoted:

To begin with, the Court hereby states that, from the totality of the evidence
adduced in this case which it scrutinized and evaluated, it has come up with a
finding that there was failure or want of consideration of the Deed of Sale of
Lot 1809-G-2-C executed in favor of the [petitioners] on October 15, 1987.
The Court is morally and sufficiently convinced that [Timoteo] had not paid to
the [Bacus siblings] the price for the said land. This fact has been
competently and preponderantly established by the testimony in court of
[Julian]. [Julian] made the following narration in his testimony:

Sometime in October 1987, he and his two sisters agreed to sell to the
[petitioners] Lot No. 1809-G-2-C because they needed money for the
issuance of the titles to the four lots into which Lot 1809-G-2 was subdivided.
[Timoteo] lured him and his sisters into selling the said land by his promise
and representation that money was coming from his sister, Lucena Bacalso,
from Jolo, Sulu. Timoteo Bacalso asked for two weeks within which to produce
the said money. However, no such money came. To the shock and surprise of
him and his sisters, a complaint was filed in Court against them in Civil Case
No. CEB-6693 by [Timoteo], together with nine others, when Lucena Bacalso
arrived from Jolo, Sulu, wherein they claimed as theirs Lot 1809-G. Instead of
being paid, he and his sisters were sued in Court. From then on, [Timoteo]
never cared anymore to pay for Lot 1809-G-2-C. He and his sisters just went
through the titling of Lots 1809-G-A, 1809-G-2-B, Lot 1809-G-2-C and 1809-G-
2-D on their own.

On his part, [Timoteo] himself acted in such a manner as to confirm that he


did not anymore give significance or importance to the Deed of Sale of Lot
1809-G-2-C which, in turn, creates an impression or conclusion that he did
not pay Jor the consideration or price thereof. Upon being cross-examined in
Court on his testimony, he made the following significant admissions and
statements:

1. That he did not let [Julian] sign a receipt for the sum of P8,000.00
purportedly given by him to the latter as payment for the land in question;

2. That the alleged payment of the said sum of P8,000.00 was made not in
the presence of the notary public who notarized the document but in a place
near Sto. Nino Church in Cebu City;

CIVIL LAW REVIEW 2


14
[JANUARY 2016 CASES] 9

3. That it was only [Julian] who appeared before the notary public, but he had
no special power of attorney from his two sisters;

4. That the Deed of Sale of Lot 1809-G-2-C was already in his possession
before Civil Case No. CEB-6693 was filed in court;

5. That he did not however show the said Deed of Sale to his lawyer who filed
for the plaintiffs the complaint in Civil Case No. CEB 6693, as in fact he
suppressed the said document from others;

6. That he did not bother to cause the segregation of Lot 1809-G-2-C from the
rest of the lots even after he had already bought it already;

7. That it was only after he lost in Civil Case No. CEB-6693 that he decided to
file the present case;

8. That he did not apply for building permits for the three houses that he
purportedly caused to be built on the land in question;

9. That he did not also declare for taxation purposes the said alleged houses;

10. That he did not declare either for taxation purposes the land in question
in his name or he had not paid taxes therefore; and

11. That he did not bother to register with the Registry of Deeds for the
Province of Cebu the Deed of Sale of the lot.1a\^/phi1

To the mind of the Court, [Timoteo] desisted from paying to [the Bacus
siblings] the price for Lot 1809-G-2-C when he, together with nine others,
filed in Court the complaint in Civil Case No. CEB-6693. He found it
convenient to just acquire the said land as supposed co-owners of Lot 1809-G
of which the land in question is merely a part of xx x:

xxxx

Thus, it is evident from all the foregoing circumstances that there was a
failure to or want of consideration of the supposed sale of the land in
question to the [petitioners] on October 15, 1987. So, the said sale could not
be given effect. Article 1352 of the New Civil Code of the Philippines is explicit
in providing that 'contracts without cause produce no effect whatsoever'. If
there is no cause, the contract is void. x x x There being no price paid, there
is no cause or consideration; hence, the contract is void as a sale. x x x
Consequently, in the case at bench, the plaintiffs have not become absolute
owners of Lot 1809-G-2-C of Psd-07-022093 by virtue of the Deed of Sale
thereof which was executed on October 15, 1987 by the [Bacus siblings] in
their favor.19 (Citations omitted)

CIVIL LAW REVIEW 2


15
[JANUARY 2016 CASES] 0

It is clear from the factual findings of the RTC that the Deed of Absolute Sale
entirely lacked consideration and, consequently, void and without effect. No
portion of the P8,000.00 consideration indicated in the Deed of Absolute Sale
was ever paid by the petitioners.1wphi1

The Court also finds no compelling reason to depart from the court a
quo's finding that the Deed of Absolute Sale executed on October 15, 1987 is
null and void ab initio for lack of consideration, thus:

It must be stressed that the present case is not merely a case of failure to
pay the purchase price, as [the petitioners] claim, which can only amount to
a breach of obligation with rescission as the proper remedy. What we have
here is a purported contract that lacks a cause - one of the three essential
requisites of a valid contract. Failure to pay the consideration is different from
lack of consideration. The former results in a right to demand the fulfillment
or cancellation of the obligation under an existing valid contract while the
latter prevents the existence of a valid contract. Consequently, we rule that
the October 15, 1987 Deed of Sale is null and void ab initio for lack of
consideration.20 (Citation omitted)

Well-settled is the rule that where there is no consideration, the sale is null
and void ab initio. In Sps. Lequin v. Sps. Vizconde,21 the Court ruled that:

There can be no doubt that the contract of sale or Kasulatan lacked the
essential element of consideration.1wphi1 It is a well-entrenched rule that
where the deed of sale states that the purchase price has been paid but in
fact has never been paid, the clcecl of sale is null and void ab initio for lack of
consideration.22 (Citation omitted)

WHEREFORE, petition is DENIED and the Decision dated December 14,


2005 of the Court of Appeals in CA-G.R. CV No. 67516 is AFFIRMED.

CIVIL LAW REVIEW 2


15
[JANUARY 2016 CASES] 1

11.

FIRST DIVISION

January 13, 2016

G.R. No. 174113

PAZ CHENG y CHU, Petitioner,


vs.
PEOPLE OF THE PHILIPPINES, Respondent.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated March
28, 2006 and the Resolution 3 dated June 26, 2006 of the Court of Appeals
(CA) in CA-G.R. CR No. 24871, which affirmed the conviction of petitioner Paz
Cheng y Chu (Cheng) for three (3) counts of the crime of Estafa defined and
penalized under Article 315 (1) (b) of the Revised Penal Code (RPC).

The Facts

The instant case arose from the filing of three (3) separate
Informations4 charging Cheng of the crime of Estafa defined and penalized
under Article 315 (1) (b) of the RPC before the Regional Trial Court of Quezon
City, Branch 226 (RTC), docketed as Criminal Case Nos. Q-98-75440, Q-98-
75441 and Q-98-75442. According to the prosecution, private complaint
"Rowena Rodriguez (Rodriguez) and Cheng entered into an agreement
whereby Rodriguez shall deliver pieces of jewelry to Cheng for the latter to
sell on commission basis. After one month, Cheng is obliged to either: (a)
remit the proceeds of the sold jewelry; or (b) return the unsold jewelry to the
former. On different dates (i.e., July 12, 1997, July 16, 1997, and August 12,
1997), Rodriguez delivered various sets of jewelry to Cheng in the respective
amounts of P18,000.00, P36,000.00, and P257,950.00. Upon delivery of the
last batch of jewelry, Cheng issued a check worth P120,000.00 as full security
for the first two (2) deliveries and as partial security for the last. When Cheng
failed to remit the proceeds or to return the unsold jewelry on due date,
Rodriguez presented the check to the bank for encashment, but was
dishonored due to insufficient funds. Upon assurance of Cheng, Rodriguez re-
deposited the check, but again, the same was dishonored because the
drawee account had been closed. Rodriguez then decided to confront Cheng,
who then uttered "Akala mo, babayaran pa kita?" Thus, Rodriguez was
constrained to file the instant charges.5

CIVIL LAW REVIEW 2


15
[JANUARY 2016 CASES] 2

In defense, Cheng denied receiving any jewelry from Rodriguez or signing any
document purporting to be contracts of sale of jewelry, asserting that
Rodriguez is a usurious moneylender. She then admitted having an unpaid
loan with Rodriguez and that she issued a check to serve as security for the
same, but was nevertheless surprised of her arrest due to the latter's filing
of Estafa charges against her.6

The RTC Ruling

In a Decision7 dated December 7, 2000, the RTC found Cheng guilty beyond
reasonable doubt of three (3) counts of Estafa and, accordingly, sentenced
her as follows: (a) for the first count, Cheng is sentenced to an indeterminate
penalty ranging from four (4) years, two (2) months, and one (1) day to six
(6) years, eight (8) months, and twenty-one (21) days to eight (8) years
of prision correccional in its maximum period to prision mayor in its minimum
period (maximum); (b) for the second count, Cheng is sentenced to an
indeterminate penalty ranging from six (6) months and one (1) day to one (1)
year, eight (8) months, and twenty (20) days of prision correccional in its
minimum and medium periods to six (6) years, eight (8) months, and twenty-
one (21) days to eight (8) years of prision correccional in its maximum period
to prision mayor in its minimum period (maximum); and (c) for the third
count, Cheng is sentenced to an indeterminate penalty ranging from six (6)
months and one (1) day to one (1) year, eight (8) months, and twenty (20)
days of prision correccional in its minimum and medium periods to four (4)
years, two (2) months, and one (1) day to five (5) years, five (5) months, and
ten (10) days of prision correccional in its maximum period to prision
mayor in its minimum period (minimum).8

The RTC found that the prosecution has sufficiently proven through
documentary and testimonial evidence that: (a) Rodriguez indeed gave
Cheng several pieces of jewelry for the latter- to either sell and remit the
proceeds or to return said jewelry if unsold to the former; and (b) Cheng
neither returned the jewelry nor remitted their proceeds to Rodriguez within
the specified period despite the latter's demands. In contrast, Cheng failed to
substantiate her claims through the documentary evidence she presented
while her testimony was deemed to be incredible and not worthy of belief. 9

Aggrieved, Cheng appealed10 to the CA.

The CA Ruling

In a Decision11 dated March 28, 2006, the CA affirmed Cheng's conviction for
three (3) counts of Estafa, with modification as to the penalties, as
follows: (a) for the first count of Estafa where the amount misappropriated is
P257,950.00, Cheng is sentenced to suffer the penalty of imprisonment for an
indeterminate period of four (4) years and two (2) months of prision
correccional, as minimum, to twenty (20) years of reclusion temporal, as
maximum; (b) for the second count of Estafa where the amount
misappropriated is P36,000.00, Cheng is sentenced to suffer the penalty of

CIVIL LAW REVIEW 2


15
[JANUARY 2016 CASES] 3

imprisonment for an indeterminate period of four (4) years and two (2)
months of prision correccional, as minimum, to nine (9) years of prision
mayor, as maximum; and (c) for the third count of Estafa where the amount
misappropriated is Pl8,000.00, Cheng is sentenced to suffer the penalty of
imprisonment for an indeterminate period of four (4) years and two (2)
months of prision correccional, as minimum, to six (6) years, eight (8)
months, and twenty (20) days of prision mayor, as maximum.12

The CA agreed with the RTC's findings that the prosecution had sufficiently
established Cheng's guilt beyond reasonable doubt, pointing out that
Rodriguez's testimony was "'more candid, credible and straightforward and
that 'her demeanor in the witness stand is worthy of belief" as opposed to
that of Cheng which is highly self-serving and uncorroborated. 13 Further, the
CA found that a modification of Cheng's penalties is in order to conform with
prevailing law and jurisprudence on the matter. 14

Undaunted, Cheng moved for reconsideration 15 but was denied in a


Resolution16 dated June 26, 2006; hence, this petition.

The Issue Before the Court

The core issue for the Court's resolution is whether or not the CA correctly
affirmed Cheng's conviction for three counts of Estafa defined and penalized
under Article 315 (1) (b) of the RPC.

The Court's Ruling

The petition is without merit.

Article 315 (1) (b) of the RPC states:

Art. 315. Swindling (estafa). - Any person who shall defraud another by any of
the means mentioned hereinbelow shall be punished by:

1st. The penalty of prision correccional in its maximum period to prision


mayor in its minimum period, if the amount of the fraud is over 12,000 pesos
but does not exceed 22,000 pesos; and if such amount exceeds the latter
sum, the penalty provided in this paragraph shall be imposed in its maximum
period, adding one year for each additional 10,000 pesos; but the total
penalty which may be imposed shall not exceed twenty years. In such cases,
and in connection with the accessory penalties which may be imposed and
for the purpose of the other provisions of this Code, the penalty shall be
termed prision mayor or reclusion temporal, as the case may be[.]

xxxx

1. With unfaithfulness or abuse of confidence, namely:

CIVIL LAW REVIEW 2


15
[JANUARY 2016 CASES] 4

xxxx

(b) By misappropriating or converting, to the prejudice of another, money,


goods or any other personal property received by the offender in trust, or on
commission, or for administration, or under any other obligation involving the
duty to make delivery of, or to return the same, even though such obligation
be totally or partially guaranteed by a bond; or by denying having received
such money, goods, or other property;

xxxx

The elements of Estafa under this provision are as follows: (1) the offender's
receipt of money, goods, or other personal property in trust, or on
commission, or for administration, or under any other obligation involving the
duty to deliver, or to return, the same; (2) misappropriation or conversion by
the offender of the money or property received, or denial of receipt of the
money or property; (3) the misappropriation, conversion or denial is to the
prejudice of another; and (4) demand by the offended party that the offender
return the money or property received. 17 In the case of Pamintuan v.
People,18 the Court had the opportunity to elucidate further on the essence of
the aforesaid crime, as well as the proof needed to sustain a conviction for
the same, to wit:

The essence of this kind of [E]stafa is the appropriation or


conversion of money or property received to the prejudice of the
entity to whom a return should be made. The words "convert" and
"misappropriate" connote the act of using or disposing of another's property
as if it were one's own, or of devoting it to a purpose or use different from
that agreed upon. To misappropriate for one's own use includes not only
conversion to one's personal advantage, but also every attempt to dispose of
the property of another without right. In proving the element of
conversion or misappropriation, a legal presumption of
misappropriation arises when the accused fails to deliver the
proceeds of the sale or to return the items to be sold and fails to
give an account of their whereabouts. 19 (Emphases and underscoring
supplied)

In this case, a judicious review of the case records reveals that the elements
of Estafa, as defined and penalized by the afore-cited provision, are present,
considering that: (a) Rodriguez delivered the jewelry to Cheng for the purpose
of selling them on commission basis; (b) Cheng was required to either remit
the proceeds of the sale or to return the jewelry after one month from
delivery; (c) Cheng failed to do what was required of her despite the lapse of
the aforesaid period; (d) Rodriguez attempted to encash the check given by
Cheng as security, but such check was dishonored twice for being drawn
against insufficient funds and against a closed account; (e) Rodriguez
demanded that Cheng comply with her undertaking, but the latter
disregarded such demand; (j) Cheng's acts clearly prejudiced Rodriguez who
lost the jewelry and/or its value.

CIVIL LAW REVIEW 2


15
[JANUARY 2016 CASES] 5

In a desperate attempt to absolve herself from liability, Cheng insists that


Rodriguez admitted in her own testimony that the transaction between them
is not an agency on commission basis, but a plain sale of jewelry with
Rodriguez as the seller and Cheng as the buyer.1wphi1 As such, Cheng's
non-payment of the purchase price of the jewelry would only give rise to civil
liability and not criminal liability. 20 The pertinent portion of Rodriguez's
testimony is as follows:

Q. After the delivery of these several items totaling P257,950.00, what


happened next?

A. She issued a check worth P120,000.00.

Q. What check is that?

A. PDCP Bank, sir.

Q. What is this check for, Ms. Witness?

A. As payment for the first and second transactions, sir, for


Pl8,000.00 and P36,000.00 and the excess amount is applied for the
third transaction.

xxxx

Q. So, all in all, you have sixty (60) days period with respect to this item, and
the first delivery expired I am referring to July 12, 1997 worth P18,000.00
which will mature on September 11, so, from September 11, what happened?

A. These were considered paid because she issued me a check for


the period of August 13, so I was expecting that. 21 (Emphases and
underscoring supplied)

Essentially, Cheng posits that since Rodriguez "admitted" in her testimony


that the check issued by the former in the amount of Pl20,000.00 constituted
full payment for the first and second batch of jewelry and partial payment for
the last batch, the transactions entered into by the parties should be deemed
in the nature of a sale.

Cheng is sadly mistaken.

The foregoing "admission" on the part of Rodriguez did not change the fact
that her transactions with Cheng should be properly deemed as an agency on
a commission basis whereby Rodriguez, as the owner of the jewelry, is the
principal, while Cheng is the agent who is tasked to sell the same on
commission. In the eyes of the Court, Rodriguez merely accepted the check
as full security for the first and second batches of jewelry and as partial
security for the last batch. It was only when Cheng defaulted in her

CIVIL LAW REVIEW 2


15
[JANUARY 2016 CASES] 6

undertaking pursuant to their agreement that Rodriguez was constrained to


treat the check as the former's remittance of the proceeds of the sale of
jewelry - albeit deficient - by presenting it for encashment on October 20,
1997, or more than two (2) months after the delivery of the last batch of
jewelry.22 However, the check was dishonored for being drawn against
insufficient funds.23 This notwithstanding and with the assurance from Cheng
that the check will be cleared, Rodriguez presented such check for the second
time on November 4, 1997; but it .was again dishonored - this time for being
drawn against a closed account. 24 As such, the fact that Rodriguez loosely
used the words "payment" and "paid" should not be taken against her and
should not in any way change the nature of her transactions with Rodriguez
from an agency on a commission basis to a full-fledged sale. Moreover, even
Cheng does not consider such check as payment for the jewelry, but rather,
as security for the loan she allegedly obtained from Rodriguez.

Indisputably, there is no reason to deviate from the findings of the RTC and
the CA as they have fully considered the evidence presented by the
prosecution and the defense, and they have adequately explained the legal
and evidentiary reasons in concluding that Cheng is indeed guilty beyond
reasonable doubt of three (3) counts of Estafa by misappropriation defined
and penalized under Article 315 (1) (b) of the RPC. It is settled that factual
findings of the RTC, when affirmed by the CA, are entitled to great weight and
respect by this Court and are deemed final and conclusive when supported by
the evidence on record,25 as in this case.

WHEREFORE, the petition is DENIED. The Decision dated March 28, 2006
and the Resolution dated June 26, 2006 of the Court of Appeals in CA-G.R. CR
No. 24871 are hereby AFFIRMED.

Accordingly, petitioner Paz Cheng y Chu is found GUILTY beyond reasonable


doubt of Estafa defined and penalized under Article 315 (1) (b) of the Revised
Penal Code, and is SENTENCED as follows: (a) for the first count
of Estafa where the amount misappropriated is P257,950.00, Cheng is
sentenced to suffer the penalty of imprisonment for an indeterminate period
of four (4) years and two (2) months of prision correccional, as minimum, to
twenty (20) years of reclusion temporal, as maximum; (b) for the second
count of Estafa where the amount misappropriated is P36,000.00, Cheng is
sentenced to suffer the penalty of imprisonment for an indeterminate period
of four (4) years and two (2) months of prision correccional, as minimum, to
nine (9) years of prision mayor, as maximum; and (c) for the third count
of Estafa where the amount misappropriated is Pl 8,000.00, Cheng is
sentenced to suffer the penalty of imprisonment for an indeterminate period
of four (4) years and two (2) months of prision correccional, as minimum, to
six (6) years, eight (8) months, and twenty (20) days of prision mayor, as
maximum.

SO ORDERED.

CIVIL LAW REVIEW 2


15
[JANUARY 2016 CASES] 7

12.

THIRD DIVISION

January 13, 2016

G.R. No. 198745

BANCO DE ORO UNIBANK, INC. (Formerly Banco De Oro-EPCI,


Inc.), Petitioner,
vs.
SUNNYSIDE HEIGHTS HOMEOWNERS ASSOCIATION, INC., Respondent.

DECISION

REYES, J.:

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the
Rules of Court seeking to annul the Decision 2 dated March 11, 2011 of the
Court of Appeals (CA) in CA-G.R. SP No. 101740, which affirmed, with
modification, the Decision3 dated November 22, 2007 of the Office of the
President (OP) in O.P. Case No. 97-E-8033, entitled Mover Enterprises, Inc.
and Philippine Commercial & International Bank (PCIB) v. The Housing and
Land Use Regulatory Board (HLURB) and Sunnyside Heights J-Jomeowners
Association, Inc.

The Facts

Mover Enterprises, Inc. (Mover) is the owner and developer of the Sunnyside
Heights Subdivision located in Batasan Hills, Quezon City. In March 1988,
Mover mortgaged Lot 5, Block 10 of Phase I of the said subdivision containing
5,764 square meters to the Philippine Commercial International Bank (PCIB)
to secure a loan of Pl ,700,000.00. Mover failed to pay its loan and PCIB
foreclosed on the mortgage. After title was consolidated in PCIB, the Registry
of Deeds of Quezon City issued Transfer Certificate of Title (TCT) No. 86389 to
the said bank on May 17, 1993.4

Sometime in mid-1994, PCIB advertised the aforesaid lot for sale in the
newspapers. This prompted the Sunnyside Heights Homeowners Association
(SI-IHA) to file before the Housing and Land Use Regulatory Board (I-ILURB) a
letter-complaint,5 docketed as HLURB Case No. REM-091594-6077, to declare
the mortgage between Mover and PCIB void on the ground that the subject
property, originally covered by TCT No. 366219, has been allocated as SHJ-
IA's open space pursuant to law. SHI-IA thus sought reconveyance of the
property.6

CIVIL LAW REVIEW 2


15
[JANUARY 2016 CASES] 8

In its Answer,7 PCIB maintained that the mortgaged lot is different from the
lot referred to in SHI-IA's complaint, and moreover, the title to the said
mortgaged lot bears no annotation that it has been reserved as open space.
Claiming to be an innocent mortgagee in good faith and for value, PCIB
insisted that under Batas Pambansa Bilang 129 8 and Presidential Decree
(P.D.) No. 1344,9 the complaint should have been filed with the regular courts.

On August 28, 1995, the BLURB Arbiter dismissed SHHA's complaint for lack
of cause of action.10 He found that, per the records of the BLURB, the property
claimed by SHI-IA to be an open space is covered by TCT No. 223475, which
is not the same as the property originally covered by TCT No. 366219 in the
name of Mover, and now titled to PClB, viz:

There is no explanation or allegation, much less proof, that TCT [N]o. 366219
registered in the name of respondent Mover and subsequently registered as
TCT [N]o. 8638[9] in the name of respondent PCIB, and TCT [N]o. 223475 as
identified in the letter of the Technical Services Section of this Office, refer to
one and the same property.

From the foregoing, it has therefore not been established that the property of
respondent Mover covered by TCT [N]o. 366219 which had been mortgaged
and been foreclosed by respondent PCIB, is the very same property identified
as Lot 5, Block 10 and covered by TCT No. 223475, that was allocated as
open space for Sum1yside Heights Subdivision. The complaint therefore must
necessarily fail as it failed to state a cause of action x x x. 11

Petition for Review to the HLURB Board of Commissioners

On petition for review to the HLURB Board of Commissioners, 12 SHHA


presented a certification from the HLURB Expanded National Capital Region
Field Office showing that on May 18, 1987 the HLURB had approved an
alteration in the subdivision plan whereby the former Block 10, the
subdivision's open space, had been renamed as Block 7, now covered by TCT
No. 366219:

Upon review of our records on file, lot 5, block 10 was [an] open space
covered by TCT No. 223475; however, in view of the HL[U]RB's grant of
Alteration of Plan elated 18 May 1987, on which subject property was
involved, the boundaries of above[-]mentioned open space are [sic] modified
resulting to be identified as Block 7 of consolidation subdivision plan Pcs-
000990 covered by TCT No. 366219. xx x.13

In its Decision14 dated September 6, 1996, the HLURB Board of


Commissioners held that Lot 5, Block 10 (TCT No. 223475), the designated
open space in the original subdivision plan, became Block 7 (TCT No. 366219)
in the altered plan; that the said new Block 7 was mortgaged to PCIB; that by
reason of foreclosure, PCIB became the owner of Block 7 (now covered by TCT
No. 86389 in PCIB's name); that TCT Nos. 223475, 366219 and 86389 all refer

CIVIL LAW REVIEW 2


15
[JANUARY 2016 CASES] 9

to one and the same property. Concluding that the subject matter of the
mortgage and foreclosure in question was the designated open space of
Sunnyside Heights Subdivision,15 it ruled that the said open space, originally
covered by TCT No. 366219, and now registered in the name of PCIB, can
neither be mortgaged nor foreclosed, being inalienable, non-buildable and
beyond the commerce of man. The HLURB Board of Commissioners thus
ordered, as follows:

WHEREFORE, the decision of the Office below dated August 28, 1995 is
hereby SET ASIDE and a new decision entered as follows:

1. Declaring subject mortgage and for[e]closure as null and void;

2. Declaring Block 7 of Phase I, Sunnyside Heights, Batasan Hills, Quezon City


as the designated open space of the aforesaid project;

3. Ordering the Register of Deeds of Quezon City to cancel TCT No. 8638[9] in
the name of respondent PCIB and to issue a new title in the name of
respondent Mover;

4. Ordering respondent Mover to comply with Section 31 of P.D. 957 as


amended by Section 2 of P.D. 1216; and

5. Ordering respondent Mover to pay back the amount of Pl,700,000.00 to


respondent PCIB.

Let a copy of this decision be furnished the Register of Deeds of Quezon City
for his/her guidance and appropriate action.

SO ORDERED.16

Appeal to the Office of the President

After its motion for reconsideration was denied, PCIB appealed to the OP.
Mover did not appeal.17 In the Decision18dated November 22, 2007, the OP
found no merit in the appeal, ruling that the HLURB has jurisdiction over
matters related to or connected with the complaint for annulment of
mortgage, as in this case.

Meanwhile, in 2000 PCIB merged with Equitable Banking Corporation to


become the Equitable PCIBank. In May 2001, it merged with Banco de Oro
Universal Bank and became the Banco de Oro-EPCI, Inc.; now it is known as
Banco de Oro Unibank, Inc. (BDO).

Petition for Review to the CA

In the petition for review filed with the CA, 19 Banco de Oro-EPCI, Inc. alleged
that:

CIVIL LAW REVIEW 2


16
[JANUARY 2016 CASES] 0

THE [OP] SERIOUSLY ERRED IN DISMISSING THE APPEAL ON THE POLLOWING


GROUNDS:

I. THE [HLURB] HAS NO JURISDICTION OVER ACTIONS FOR ANNULMENT OF


TITLE;

II. PCIB IS A MORTGAGEE IN GOOD FAITH, THEREFORE, ITS TITLE OVER THE
SAID PROPERTY CANNOT BE ANNULLED;

III. NEW EVIDENCE CANNOT BE ADMITTED ON APPEAL, OTHERWISE IT


VIOLATES THE RULE ON DUE PROCESS OF LAW; and

IV. OBLIGATION OF [MOVER] THAT IS SECURED BY THE REAL ESTATE


MORTGAGE IS MORE THAN THE PRINCIPAL AMOUNT OF Phpl,700,000.00. 20

Banco de Oro-EPCI, Inc. alleged in the main that the HLURB has no
jurisdiction over SHHA's letter-complaint to annul the mortgage between
Mover and PCIB. In the event that the nullification of the mortgage is
affirmed, it conceded that it was but fair that the mortgagor be also adjudged
to pay interest on the principal loan plus costs incurred. 21

On March 11, 2011, the CA rendered the assailed judgment ruling that "[t]he
jurisdiction of the HLURB to regulate the real estate trade is broad enough to
include jurisdiction over complaints for annulment of mortgage." 22 The CA
further noted Banco de Oro-EPCI, Inc. 's argument that Mover's obligation was
more than the principal amount of Pl,700,000.00. While the CA could not give
credence to Banco de Oro-EPCI, Inc.'s allegations of expenses it incurred, it
acknowledged that Mover was indebted to Banco de Oro-EPCI, Inc. in the
amount of Pl,700,000.00 as pointed out in the decision of the HLURB Board of
Commissioners. Inasmuch as the amount represents a loan, Mover must also
be held liable for the payment of interest at the rate stipulated in the
mortgage contract. In the absence thereof, the legal rate of 12% per
annum in accordance with Eastern Shipping Lines, Inc. v. CA23 shall be
imposed.24

Accordingly, the fallo reads as follows:

WHEREFORE, the Petition is DENIED. The Decision, dated November 22,


2007, of the Oflice of the President in O.P. Case No. 97-E-8033 is
hereby AFFIRMED, with the modification that Mover Enterprises, Inc. is held
liable to pay the corresponding interest o[n] its mortgage indebtedness to
Petitioner Banco de Oro-EPCI Inc., in addition to its payment of the principal
amount of Php1, 700,000.00 to Banco de Oro-EPCI Inc.

SO ORDERED.25

Banco de Oro-EPCI, Inc. moved for reconsideration, 26 but the same was
denied on September 23, 2011.27

CIVIL LAW REVIEW 2


16
[JANUARY 2016 CASES] 1

Petition for Review to the Supreme Court

Now in this petition, BDO raises the following grounds, to wit:

I.

THE [CA] HAS SO FAR DEPARTED FROM THE USUAL COURSE OF JUDICIAL
PROCEEDINGS IN ITS QUESTIONED DECISION AND RESOLUTION WHEN IT
AFFIRMED THE DECISIONS OF THE [OP] AND HLURB BOARD DESPITE THE
UNDISPUTED FACT THAT THE LATTER WAS BASED ON NEW EVIDENCE RAISED
FOR THE FIRST TIME BY [SHHA] ON APPEAL IN VIOLATION OF THE RIGHT OF
[BOO] TO DUE PROCESS OF LAW.

II.

THE [CA] COMMITTED SERIOUS AND REVERSIBLE ERROR AND DECIDED A


MATTER OF SUBSTANCE IN A WAY NOT IN ACCORD WITH THE LAW AND WITH
APPLICABLE DECISIONS OF THE HONORABLE COURT WHEN IT DID NOT HOLD
THAT [BDO] IS A MORTGAGEE IN GOOD FAITH AS IT HAD THE RIGHT TO RELY
ON THE TITLE PRESENTED TO IT; THUS, ITS TITLE OVER THE SUBJECT
PROPERTY CANNOT BE ANNULLED.

III.

THE [CA] HAS SO FAR DEPARTED FROM THE USUAL COURSE OF JUDICIAL
PROCEEDINGS WHEN ITS QUESTIONED DECISION AND RESOLUTION DENIED
[BDO'S] PETITION FOR REVIEW DESPITE THE FACT THAT THE HLURB DOES
NOT HAVE JURISDICTION OVER THE INSTANT CASE.28

The Court finds no merit in the petition.

Importantly, BDO has interposed a continuing objection concerning the


HLURB's jurisdiction over what it claims to be the exclusive province of the
regular courts. Corollarily, BDO insists that no evidence was presented before
the HLURB Arbiter to establish that the property covered by TCT No. 223475,
claimed by SHHA as a subdivision open space, is in any way related to TCT
No. 366219 registered in the name of Mover and now covered by TCT No.
86389 in the name of BDO (then PCIB).

Section 3 of P.D. No. 95729 granted to the National Housing Authority (NBA)
exclusive jurisdiction to regulate the real estate trade and business in order
to curb swindling and fraudulent manipulations by unscrupulous subdivision
and condominium sellers and operators, such as failure to deliver titles to the
buyers or titles free from liens and encumbrances, or to pay real estate taxes,
and fraudulent sales of the same subdivision lots to different innocent
purchasers for value. P.D. No. 1344 in turn expanded the jurisdiction of the
NBA to include the following:

CIVIL LAW REVIEW 2


16
[JANUARY 2016 CASES] 2

SECTION 1. In the exercise of its functions to regulate the real estate trade
and business and in addition to its powers provided for in Presidential Decree
No. 957, the National Housing Authority sl1all have exclusive jurisdiction to
hear and decide cases of the following nature:

a) Unsound real estate business practices;

b) Claims involving refund and any other claims filed by subdivision lot or
condominium unit buyer against the project owner, developer, dealer, broker
or salesman; and

c) Cases involving specific performance of contractual and statutory


obligations filed by buyers of subdivision lot or condominium unit against the
owner, developer, dealer, broker or salesman.

Under Executive Order (E.O.) No. 648, which reorganized the Human
Settlements Regulatory Commission in 1981, the regulatory and quasi-judicial
functions of the NHA were transferred to the Human Settlements Regulatory
Commission, later renamed as HLURB under E.O. No. 90. 30 In the cases
reaching this Court, the consistent ruling has been that the HLURB has
jurisdiction over complaints arising from contracts between the subdivision
developer and the lot buyer, or those aimed at compelling the
developer to comply with its contractual and statutory obligations.31

SHHA's letter-complaint puts in issue the validity of the mortgage over Block
10, now renamed as Block 7, of Sunnyside Heights Subdivision, and the
detriment and prejudice to the residents and the violation by Mover of its
obligation to maintain its open space under P.D. No. 1216 32 are all too plain,
as the following "whereas" clauses of P.D. No. 1216 underscore:

WHEREAS, there is a compelling need to create and maintain a healthy


environment in human settlements by providing open spaces, roads, alleys
and sidewalks as may be deemed suitable to enhance the quality of life of the
residents therein;

WHEREAS, such open spaces, roads, alleys and sidewalks in residential


subdivision are for public use and are, therefore, beyond the commerce of
men[.]

Section 1 of P.D. No. 1216 defines "open space" as an area in the subdivision
reserved exclusively for parks, playgrounds, recreational uses, schools, roads,
places of worship, hospitals, health centers, barangay centers and other
similar facilities and amenities. Section 2 thereof further provides that these
reserved areas are non-alienable and non-buildable. The SHHA was correct to
seek the annulment of the mortgage between Mover and PCIB before the
HLURB, in view of its exclusive jurisdiction over "any claims filed by
subdivision lot or condominium unit buyer against the project owner,
developer, dealer, broker or salesman; and cases involving specific

CIVIL LAW REVIEW 2


16
[JANUARY 2016 CASES] 3

performance of contractual and statutory obligations filed by buyers of


subdivision lot or condominium unit against the owner or developer. "

As for the claim that SHHA violated BDO's right to due process when on
appeal it "belatedly" presented a certification to the HLURB Board of
Commissioners that in May 1987 an approved alteration of the subdivision
plan renamed Block 10 of Sunnyside Heights Subdivision as Block 7 but
retained it as open space, let it suffice that in view of BDO's continuing
objection to HLURB 's jurisdiction, it cannot now complain that additional
documentary proof has been adduced confirming its jurisdiction. As the
agency tasked to oversee the specific compliance by developers with their
contractual and statutory obligations, such as maintaining the open space as
non-alienable and non-buildable, there is no doubt that the HLURB is
empowered to annul the subject mortgage. For if a party may continually
interpose the HLURB's lack of jurisdiction, even raising the same for the first
time on appeal, since jurisdictional issues cannot be waived, then BDO is
estopped to complain that on appeal SHHA is finally able to present proof of
HLURB's jurisdiction over the present action. 33

The Court has long recognized and upheld the rationale behind P.D. No. 957,
which is to protect innocent lot buyers from scheming developers, 34 buyers
who are by law entitled to the enjoyment of an open space within the
subdivision.1wphi1 Thus, this Court has broadly construed HLURB's
jurisdiction to include complaints to annul mortgages of condominium or
subdivision units.35 In The Manila Banking Corp. v. Spouses Rabina, et
al.,36 the Court said:

The jurisdiction of the HLURB to regulate the real estate trade is broad
enough to include jurisdiction over complaints for annulment of mortgage. To
disassociate the issue of nullity of mortgage and lodge it separately with the
liquidation court would only cause inconvenience to the parties and would not
serve the ends of speedy and inexpensive administration of justice as
mandated by the laws vesting quasi-judicial powers in the agency. 37(Citations
omitted)

Coming now to Mover's liability, the Court agrees with the observation of the
HLURB Board of Commissioners that it would be unjust enrichment on the
part of Mover not to acknowledge its indebtedness to BDO in the amount of
Pl,700,000.00 in view of the nullity of the mortgage. 38 It should have known
that its mortgage security was invalid considering the alteration in its
subdivision plan in May 1987. In equity, it must therefore compensate PCIB
for the loss thereat: reckoned from the filing of SHHA's letter-complaint on
September 14, 1994. Eastern Shipping Lines, Inc.39 provides, "with regard
particularly to an award of interest in the concept of actual and compensatory
damages,"40 that the rate of interest, and the accrual thereof shall be
imposed as follows:

1. When the obligation is breached, and it consists in the payment of a sum


of money, i.e., a loan or forbearance of money, the interest due should be

CIVIL LAW REVIEW 2


16
[JANUARY 2016 CASES] 4

that which may have been stipulated in writing. Furthermore, the interest due
shall itself earn legal interest from the time it is judicially demanded. In the
absence of stipulation, the rate of interest shall be 12% per annum to be
computed from default, i.e., from judicial or extrajudicial demand under and
subject to the provisions of Article 1169 of the Civil Code. 41(Citations omitted)

Sunga-Chan, et al. v. CA, et al.42 further clarified the above rules:

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of


interest, if proper, and the applicable rate, as follows: The 12% per annum
rate under CB Circular No. 416 shall apply only to loans or forbearance of
money, goods, or credits, as well as to judgments involving such loan or
forbearance of money, goods, or credit, while the. 6% per annum under Art.
2209 of the Civil Code applies "when the transaction involves the payment of
indemnities in the concept of damage arising from the breach or a delay in
the performance of obligations in general," with the application of both rates
reckoned "from the time the complaint was filed until the [adjudged] amount
is fully paid." In either instance, the reckoning period for the commencement
of the running of the legal interest shall be subject to the condition "that the
courts are vested with discretion, depending on the equities of each case,
on the award of interest." 43 (Citations omitted and emphasis ours)

Lastly, in view of absence of bad faith by PCIB in the questioned mortgage


loan, the Court agrees that in addition to the loan amount of Pl,700,000.00,
Mover should pay thereon to BDO legal interest at 12% per annum from the
time it is due pursuant to Eastern Shipping Lines, except that with the
effectivity of Monetary Board Circular No. 799, the rate of interest for the loan
shall be reduced to six percent (6o/o) per annum from and after July 1,
2013.44

WHEREFORE, the petition is DENIED. The Decision dated March 11, 2011 of
the Court of Appeals in CA-G.R. SP No. 101740 is AFFIRMED with
CLARIFICATION, in that Mover Enterprises, Inc. shall pay Banco de Oro-EPCI,
Inc., now Banco de Oro Unibank, Inc., the amount of'Pl,700,000.00 plus legal
interest at twelve percent (12%) per annum from September 14, 1994, the
date of the letter-complaint of Sunnyside Heights Homeowners Association,
Inc., the said rate to be reduced to six percent (6o/o) per annum starting July
1, 2013 until finality hereof. Thereafter, interest as thus computed shall, along
with the principal, earn interest at six percent (6%) per annum until fully paid.

CIVIL LAW REVIEW 2


16
[JANUARY 2016 CASES] 5

13.

THIRD DIVISION

January 13, 2016

G.R. No. 176986

NISSAN CAR LEASE PHILS., INC., Petitioner,


vs.
LICA MANAGEMENT, INC. and PROTON PILIPINAS, INC., Respondents.

DECISION

JARDELEZA, J.:

This is a Petition for Review on Certiorari1 filed by Nissan Car Lease


Philippines, Inc. (NCLPI) to assail the Decision 2and Resolution3 dated
September 27, 2006 and March 8, 2007, respectively, of the Court of Appeals
(CA) in CA-G.R. CV No. 75985. The CA affirmed with modification the
Decision4 of the Regional Trial Court dated June 7, 2002 and ruled that there
was a valid extrajudicial rescission of the lease contract between NCLPI and
Lica Management, Inc. (LMI). It also ordered NCLPI to pay its unpaid rentals
and awarded damages in favor of LMI and third-party respondent Proton
Pilipinas, Inc. (Proton).

The Facts

LMI is the absolute owner of a property located at 2326 Pasong Tamo


Extension, Makati City with a total area of approximately 2,860 square
meters.5 On June 24, 1994, it entered into a contract with NCLPI for the latter
to lease the property for a term of ten (10) years (or from July 1, 1994 to June
30, 2004) with a monthly rental of 308,000.00 and an annual escalation rate
of ten percent (10%).6 Sometime in September 1994, NCLPI, with LMIs
consent, allowed its subsidiary Nissan Smartfix Corporation (NSC) to use the
leased premises.7

Subsequently, NCLPI became delinquent in paying the monthly rent, such


that its total rental arrearages8 amounted to 1,741,520.85.9 In May 1996,
Nissan and Lica verbally agreed to convert the arrearages into a debt to be
covered by a promissory note and twelve (12) postdated checks, each
amounting to 162,541.95 as monthly payments starting June 1996 until May
1997.10

While NCLPI was able to deliver the postdated checks per its verbal
agreement with LMI, it failed to sign the promissory note and pay the checks

CIVIL LAW REVIEW 2


16
[JANUARY 2016 CASES] 6

for June to October 1996. Thus, in a letter dated October 16, 1996, which was
sent on October 18, 1996 by registered mail, LMI informed NCLPI that it was
terminating their Contract of Lease due to arrears in the payment of rentals.
It also demanded that NCLPI (1) pay the amount of 2,651,570.39 for unpaid
rentals11 and (2) vacate the premises within five (5) days from receipt of the
notice.12

In the meantime, Proton sent NCLPI an undated request to use the premises
as a temporary display center for "Audi" brand cars for a period of ten (10)
days. In the same letter, Proton undertook "not to disturb [NCLPI and LMIs]
lease agreement and ensure that [NCLPI] will not breach the same [by]
lending the premises x x x without any consideration." 13 NCLPI acceded to
this request.14

On October 11, 1996, NCLPI entered into a Memorandum of Agreement with


Proton whereby the former agreed to allow Proton "to immediately commence
renovation work even prior to the execution of the Contract of Sublease x x
x."15 In consideration, Proton agreed to transmit to NCLPI a check
representing three (3) months of rental payments, to be deposited only upon
the due execution of their Contract of Sublease. 16

In a letter dated October 24, 1996, NCLPI, through counsel, replied to LMIs
letter of October 16, 1996 acknowledging the arrearages incurred by it under
their Contract of Lease. Claiming, however, that it has no intention of
abandoning the lease and citing efforts to negotiate a possible sublease of
the property, NCLPI requested LMI to defer taking court action on the
matter.17

LMI, on November 8, 1996, entered into a Contract of Lease with Proton over
the subject premises.18

On November 12, 1996, LMI filed a Complaint 19 for sum of money with
damages seeking to recover from NCLPI the amount of 2,696,639.97,
equivalent to the balance of its unpaid rentals, with interest and penalties, as
well as exemplary damages, attorneys fees, and costs of litigation. 20

On November 20, 1996, NCLPI demanded Proton to vacate the leased


premises.21 However, Proton replied that it was occupying the property based
on a lease contract with LMI.22 In a letter of even date addressed to LMI,
NCLPI asserted that its failure to pay rent does not automatically result in the
termination of the Contract of Lease nor does it give LMI the right to
terminate the same.23 NCLPI also informed LMI that since it was unlawfully
ousted from the leased premises and was not deriving any benefit therefrom,
it decided to stop payment of the checks issued to pay the rent. 24

In its Answer25 and Third-Party Complaint26 against Proton, NCLPI alleged that
LMI and Proton "schemed" and "colluded" to unlawfully force NCLPI (and its
subsidiary NSC) from the premises. Since it has not abandoned its leasehold

CIVIL LAW REVIEW 2


16
[JANUARY 2016 CASES] 7

right, NCLPI asserts that the lease contract between LMI and Proton is void for
lack of a valid cause or consideration.27 It likewise prayed for the award of: (1)
3,000,000.00, an amount it anticipates to lose on account of LMI and
Protons deprivation of its right to use and occupy the premises; (2)
1,000,000.00 as exemplary damages; and (3) 500,000.00 as attorneys
fees, plus 2,000.00 for every court appearance. 28

The trial court admitted29 the third-party complaint over LMIs opposition.30

Subsequently, or on April 17, 1998, Proton filed its Answer with Compulsory
Counterclaim against NCLPI.31According to Proton, the undated letter-request
supposedly sent by Proton to NCLPI was actually prepared by the latter so as
to keep from LMI its intention to sublease the premises to Proton until NCLPI
is able to secure LMIs consent. 32 Denying NCLPIs allegation that its use of
the lease premises was made without any consideration, Proton claims that it
"actually paid [NCLPI] rental of 200,000.00 for the use of subject property
for 10 days x x x."33

Proton further asserted that NCLPI had vacated the premises as early as
during the negotiations for the sublease and, in fact, authorized the former to
enter the property and commence renovations. 34 When NCLPI ultimately
failed to obtain LMIs consent to the proposed sublease and its lease contract
was terminated, Proton, having already incurred substantial expenses
renovating the premises, was constrained to enter into a Contract of Lease
with LMI. Thus, Proton prayed for the dismissal of the Third-Party Complaint,
and asked, by way of counterclaim, that NCLPI be ordered to pay exemplary
damages, attorneys fees, and costs of litigation. 35

Ruling of the Trial Court

On June 7, 2002, the trial court promulgated its Decision, 36 the decretal
portion of which reads:

WHEREFORE, in view of the foregoing, judgment is rendered in plaintiff LICA


MANAGEMENT INCORPORATEDs favor. As a consequence of this, defendant
NISSAN CAR LEASE PHILIPPINES, INC. is directed to pay plaintiff the following:

1.) []2,696,639.97 representing defendants unpaid rentals inclusive of


interest and penalties up to 12 November 1996, plus interest to be charged
against said amount at the rate of twelve percent (12%) beginning said date
until the amount is fully paid.

2.) Exemplary damages and attorneys fees amounting to Two Hundred


Thousand Pesos ([]200,000.00) and litigation expenses amounting to Fifty
Thousand Pesos ([]50,000.00).

The third party complaint filed by defendant is DENIED for lack of merit and in
addition to the foregoing and as prayed for, defendant NISSAN is ordered to

CIVIL LAW REVIEW 2


16
[JANUARY 2016 CASES] 8

pay third party defendant PROTON PILIPINAS INC. the sum of Two Hundred
Thousand Pesos ([]200,000.00) representing exemplary damages and
attorneys fees due.

SO ORDERED.37

The trial court found that NCLPI purposely violated the terms of its contract
with LMI when it failed to pay the required rentals and contracted to sublease
the premises without the latters consent. 38 Under Article 1191 of the Civil
Code, LMI was therefore entitled to rescind the contract between the parties
and seek payment of the unpaid rentals and damages. 39 In addition, the trial
court ruled that LMIs act of notifying NCLPI of the termination of their lease
contract due to non-payment of rentals is expressly sanctioned under
paragraphs 1640 and 1841 of their contract.42

Contrary to NCLPIs claim that it was "fooled" into allowing Proton to occupy
the premises for a limited period after which the latter unilaterally usurped
the premises for itself, the trial court found that it was NCLPI "which
misrepresented itself to [Proton] as being a lessee of good standing, so that it
could induce the latter to occupy and renovate the premises when at that
time the negotiations were underway the lease between [LMI] and [NCLPI]
had already been terminated."43

Aggrieved, NCLPI filed a Petition for Review with the CA. In its Appellants
Brief,44 it argued that the trial court erred in: (1) holding that there was a valid
extrajudicial rescission of its lease contract with LMI; and (2) dismissing
NCLPIs claim for damages against LMI and Proton while at the same time
holding NCLPI liable to them for exemplary damages and attorneys fees. 45

Ruling of the Court of Appeals

The CA denied NCLPIs appeal and affirmed the trial courts decision with
modification. The decretal portion of the CAs Decision 46 reads:

WHEREFORE, the appealed Decision dated June 7, 2002 of the trial court is
affirmed, subject to modification that:

(1) The award of exemplary damages of 100,000.00 each in favor of


plaintiff-appellee and third-party defendant-appellee is reduced to 50,000.00
each;

(2) The award of attorneys fees of 100,000.00 each in favor of plaintiff-


appellee and third-party defendantappellee is reduced to 50,000.00 each;

(3) The amount of unpaid rentals is reduced from 2,696,639.97 to


2,365,569.61, exclusive of interest; and,

CIVIL LAW REVIEW 2


16
[JANUARY 2016 CASES] 9

(4) Plaintiff-appellee is ordered to return the balance of the security deposit


amounting to 883,253.72 to defendant-appellant.

The Decision dated June 7, 2002 is affirmed in all other respects.

SO ORDERED.47

NCLPI sought for a reconsideration 48 of this decision. LMI, on the other hand,
filed a motion to clarify whether the amount of 2,365,569.61 representing
unpaid rentals was inclusive of interest. 49 The CA resolved both motions, thus:

WHEREFORE, the motion for reconsideration filed by defendant-appellant


Nissan Car Lease is denied for lack of merit.

With respect to the motion for clarification filed by plaintiff-appellee Lica


Management, Inc., paragraph (3) of the dispositive portion of the Decision is
hereby clarified to read as follows:

(3) The amount of unpaid rentals is reduced from 2,696,639.97 to


2,365,569.61, inclusive of interest and penalties up to November 12, 1996,
plus interest to be charged against said amount at the rate of twelve per cent
(12%) beginning said date until the amount is fully paid.

SO ORDERED.50

Hence, this petition.

The Petition

NCLPI, in its Petition, raises the following questions:

1. May a contract be rescinded extrajudicially despite the absence of a


special contractual stipulation therefor?

2. Do the prevailing facts warrant the dismissal of [LMI]s claims and the
award of NCLPIs claims?

3. How much interest should be paid in the delay of the release of a security
deposit in a lease contract? 51

The Courts Ruling

We deny the Petition for lack of merit.

Before going into the substantive merits of the case, however, we shall first
resolve the technical issue raised by LMI in its Comment 52 dated August 22,
2007.

CIVIL LAW REVIEW 2


17
[JANUARY 2016 CASES] 0

According to LMI, NCLPIs petition must be denied outright on the ground that
Luis Manuel T. Banson (Banson), who caused the preparation of the petition
and signed the Verification and Certification against Forum Shopping, was not
duly authorized to do so. His apparent authority was based, not by virtue of
any NCLPI Board Resolution, but on a Special Power of Attorney (SPA) signed
only by NCLPIs Corporate Secretary Robel C. Lomibao. 53

As a rule, a corporation has a separate and distinct personality from its


directors and officers and can only exercise its corporate powers through its
board of directors. Following this rule, a verification and certification signed
by an individual corporate officer is defective if done without authority from
the corporations board of directors. 54

The requirement of verification being a condition affecting only the form of


the pleading,55 this Court has, in a number of cases, held that:

[T]he following officials or employees of the company can sign the


verification and certification without need of a board resolution: (1)
the Chairperson of the Board of Directors, (2) the President of a
corporation, (3) the General Manager or Acting General Manager, (4)
Personnel Officer, and (5) an Employment Specialist in a labor case.

x x x [T]he determination of the sufficiency of the authority was done on a


case to case basis. The rationale applied in the foregoing cases is to
justify the authority of corporate officers or representatives of the
corporation to sign x x x, being "in a position to verify the
truthfulness and correctness of the allegations in the

petition."56 (Emphasis and underscoring supplied)

In this case, Banson was President of NCLPI at the time of the filing of the
petition.57 Thus, and applying the foregoing ruling, he can sign the verification
and certification against forum shopping in the petition without the need of a
board resolution.58

Having settled the technical issue, we shall now proceed to discuss the
substantial issues.

Validity of Extrajudicial Rescission of Lease Contract

It is clear from the records that NCLPI committed substantial breaches of its
Contract of Lease with LMI.

Under Paragraph 2, NCLPI bound itself to pay a monthly rental of 308,000.00


not later than the first day of every month to which the rent corresponds.
NCLPI, however, defaulted on its contractual obligation to timely and properly
pay its rent, the arrearages of which, as of October 16, 1996, amounted to
2,651,570.39.59 This fact was acknowledged and admitted by NCLPI. 60

CIVIL LAW REVIEW 2


17
[JANUARY 2016 CASES] 1

Aside from non-payment of rentals, it appears that NCLPI also breached its
obligations under Paragraphs 461 and 562 of the Contract of Lease which
prohibit it from subleasing the premises or introducing improvements or
alterations thereon without LMIs prior written consent. The trial court found:

As revealed from the evidence presented by PROTON however, even before


[NCLPI] represented that it would try to negotiate a possible sub-lease of the
premises, it had, without any semblance of authority from
[LMI,] already effectively subleased the subject premises to PROTON
and allowed the latter not only to enter the premises but to renovate
the same.

[NCLPI]s assertion that they only allowed PROTON to utilize the premises for
ten days as a display center for Audi cars on the occasion of the historic visit
of Chancellor Helmut Kohl of Germany to the Philippines is belied by the
evidence offered by PROTON that by virtue of a Memorandum of
Agreement [NCLPI] had already permitted PROTON "to immediately
commence renovation work even prior to the execution of the
Contract of Sublease" and had accepted a check from PROTON
representing the rental deposit under the yet to be executed Contract of
Sublease. x x x

xxxx

Besides, the court is not inclined to show [NCLPI] any sympathy x x x


because it came to court with unclean hands when it accused [LMI]
and PROTON of being guilty parties when they supposedly connived
with each other to oust [NCLPI] from the leased premises when in
truth and in fact, [NCLPI]s lease was already terminated when it
pursued negotiations to sub-lease the premises to PROTON then
giving the latter the assurance they would be able to obtain [LMI]s consent
to the sublease when this was very remote, in light of [NCLPI]s failure to
update its rental payments.63 (Emphasis and underscoring supplied)

This factual finding was affirmed by the CA:

There is no merit in [NCLPI]s claim for damages allegedly arising from [LMI]s
failure to maintain it in peaceful possession of the leased premises. It was
[NCLPI] who breached the lease contract by defaulting in the payment
of lease rentals, entering into a sublease contract with [Proton] and
allowing [Proton] to introduce renovations on the leased premises
without the consent of [LMI].64 x x x (Emphasis supplied)

Factual findings of the CA are binding and conclusive on the parties and upon
this Court and will not be reviewed or disturbed on appeal. While the rule
admits of certain exceptions, 65 NCLPI failed to prove that any of the
exceptions applies in this case.

CIVIL LAW REVIEW 2


17
[JANUARY 2016 CASES] 2

The crux of the controversy rather revolves around the validity of LMIs act of
extrajudicially rescinding its Contract of Lease with NCLPI.

NCLPI maintains that while a lessor has a right to eject a delinquent lessee
from its property, such right must be exercised in accordance with law:

6.15. In this case, [LMI] did not comply with the requirement laid down in
Section 2 of Rule 70 of the Rules of Court, in unceremoniously ejecting
[NCLPI] from the property. The said Rule explicitly provides that the lessor
shall serve a written notice of the demand to pay or comply with the
conditions of the lease and to vacate or post such notice on the premises if
no person is found thereon, giving the lessee 15 days to comply with the
demand. [LMI]s demand letter dated 16 October 1996 provides only a
period of five days for [NCLPI] to comply with such demand and, thus,
defective.66 (Emphasis and underscoring supplied)

NCLPIs reliance on Section 2, Rule 7067 in this case is misplaced.

Rule 70 of the Rules of Court sets forth the procedure in relation to the filing
of suits for forcible entry and unlawful detainer. The action filed by LMI
against NCLPI, however, is one for the recovery of a sum of money. Clearly,
Section 2 of Rule 70 is not applicable.

In fact, it does not appear that it was even necessary for LMI to eject NCLPI
from the leased premises. NCLPI had already vacated the same as early as
October 11, 1996 when it surrendered possession of the premises to Proton,
by virtue of their Memorandum of Agreement, so that the latter can
commence renovations.68

NCLPI also maintains that LMI cannot unilaterally and extrajudicially rescind
their Contract of Lease in the absence of an express provision in their
Contract to that effect.69 According to NCLPI:

6.1. The power to rescind is judicial in nature x x x

6.2. Nevertheless, the Supreme Court has allowed extrajudicial rescission if


such remedy is specifically provided for in the contract. A provision granting
the nondefaulting party merely a right to rescind would be superfluous
because by law, it is inherent in such contract [see by analogy Villanueva,
PHILIPPINE LAW ON SALES, P. 238 (1998)].

xxxx

6.4. [Paragraph 16],70 however, cannot be construed as an authority for either


party to unilaterally and extrajudicially rescind the Lease Contract in case of
breach by the other party. All that [Paragraph] 16 affords the aggrieved party
is merely the right to rescind the lease contract, which is the very same right

CIVIL LAW REVIEW 2


17
[JANUARY 2016 CASES] 3

already granted under Article 1191 of the Civil Code. 71 (Emphasis and
underscoring in the original)

It is true that NCLPI and LMIs Contract of Lease does not contain a provision
expressly authorizing extrajudicial rescission. LMI can nevertheless rescind
the contract, without prior court approval, pursuant to Art. 1191 of the Civil
Code.

Art. 1191 provides that the power to rescind is implied in reciprocal


obligations, in cases where one of the obligors should fail to comply with what
is incumbent upon him. Otherwise stated, an aggrieved party is not
prevented from extrajudicially rescinding a contract to protect its interests,
even in the absence of any provision expressly providing for such right. 72 The
rationale for this rule was explained in the case of University of the
Philippines v. De los Angeles73 wherein this Court held:

[T]he law definitely does not require that the contracting party who believes
itself injured must first file suit and wait for a judgment before taking
extrajudicial steps to protect its interest. Otherwise, the party injured by
the other's breach will have to passively sit and watch its damages
accumulate during the pendency of the suit until the final judgment
of rescission is rendered when the law itself requires that he should
exercise due diligence to minimize its own damages (Civil Code, Article
2203). (Emphasis and underscoring supplied)

We are aware of this Courts previous rulings in Tan v. Court of


Appeals,74 Iringan v. Court of Appeals,75 and EDS Manufacturing, Inc. v.
Healthcheck International, Inc.,76 for example, wherein we held that
extrajudicial rescission of a contract is not possible without an express
stipulation to that effect.77

The seeming "conflict" between this and our previous rulings, however, is
more apparent than real.

Whether a contract provides for it or not, the remedy of rescission is always


available as a remedy against a defaulting party. When done without prior
judicial imprimatur, however, it may still be subject to a possible court review.
In Golden Valley Exploration, Inc. v. Pinkian Mining Company, 78 we explained:

This notwithstanding, jurisprudence still indicates that an extrajudicial


rescission based on grounds not specified in the contract would not
preclude a party to treat the same as rescinded. The rescinding party,
however, by such course of action, subjects himself to the risk of being held
liable for damages when the extrajudicial rescission is questioned by the
opposing party in court. This was made clear in the case of U.P. v. De los
Angeles, wherein the Court held as follows:

CIVIL LAW REVIEW 2


17
[JANUARY 2016 CASES] 4

Of course, it must be understood that the act of a party in treating a


contract as cancelled or resolved on account of infractions by the
other contracting party must be made known to the other and is
always provisional, being ever subject to scrutiny and review by the
proper court. If the other party denies that rescission is justified, it
is free to resort to judicial action in its own behalf, and bring the
matter to court.Then, should the court, after due hearing, decide that
the resolution of the contract was not warranted, the responsible
party will be sentenced to damages; in the contrary case, the resolution
will be affirmed, and the consequent indemnity awarded to the party
prejudiced.

In other words, the party who deems the contract violated may
consider it resolved or rescinded, and act accordingly, without
previous court action, but it proceeds at its own risk. For it is only
the final judgment of the corresponding court that will conclusively
and finally settle whether the action taken was or was not correct in
law. x x x (Emphasis and underscoring in the original)

The only practical effect of a contractual stipulation allowing extrajudicial


rescission is "merely to transfer to the defaulter the initiative of instituting
suit, instead of the rescinder."79

In fact, the rule is the same even if the parties contract expressly allows
extrajudicial rescission. The other party denying the rescission may still seek
judicial intervention to determine whether or not the rescission was proper. 80

Having established that LMI can extrajudicially rescind its contract with NCLPI
even absent an express contractual stipulation to that effect, the question
now to be resolved is whether this extrajudicial rescission was proper under
the circumstances.

As earlier discussed, NCLPIs non-payment of rentals and unauthorized


sublease of the leased premises were both clearly proven by the
records.1avvphi1 We thus confirm LMIs rescission of its contract with NCLPI
on account of the latters breach of its obligations.

Rental Arrearages and Interest

Having upheld LMIs extrajudicial rescission of its Contract of Lease, we hold


that NCLPI is required to pay all rental arrearages owing to LMI, computed by
the CA as follows:

In its appellants brief, [NCLPI] admitted that it had rental arrears of


1,300,335.60 as of May 1996.1wphi1 Additionally, the statement of
account submitted by [LMI] showed that from June 1996 to October 1996 the
rental arrears of [NCLPI] amounted to 1,065,234.01. Hence, the total of

CIVIL LAW REVIEW 2


17
[JANUARY 2016 CASES] 5

said rental arrears not disputed by the parties is 2,365,569.61 x x


x.81 (Emphasis and underscoring supplied)

The Contract of Lease shows that the parties did not stipulate an applicable
interest rate in case of default in the payment of rentals. Thus, and following
this Courts ruling in Nacar v. Gallery Frames,82 the foregoing amount of rental
arrearages shall earn interest at the rate of six percent (6%) per annum
computed from October 18, 1996, the date of LMIs extrajudicial
demand,83 until the date of finality of this judgment. The total amount shall
thereafter earn interest at the rate of six percent (6%) per annum from such
finality of judgment until its satisfaction.

Security Deposit

NCLPI also argues that, assuming LMI could validly rescind their Contract of
Lease, the security deposit must be returned, with interest at the rate of
twelve percent (12%) per annum, the obligation to return being in the nature
of a forbearance of money.84

NCLPI is partly correct.

Paragraph 385 of the Contract of Lease provides that, in case of termination of


the lease, the balance of the security deposit must be returned to NCLPI
within seven (7) days. Since "there is no question that [LMI] is retaining the
security deposit" in the amount of 883,253.72 (after deduction of the
expenses for water and telephone services), 86LMI must return the same to
NCLPI, with interest.

Considering, however, that the Contract of Lease does not stipulate an


applicable interest rate, again following our ruling in Nacar, the rate shall
be six percent (6%) from the time of judicial or extrajudicial demand. The
records of this case show that the first time NCLPI raised the issue on the
security deposit was in its Brief dated March 25, 2003 filed with the
CA.87 Thus, the interest should be computed starting only on said date until
the finality of this Decision, after which the total amount shall earn interest at
the rate of six percent (6%) from the finality of this Decision until satisfaction
by LMI.88

Improvements

In its Petition, NCLPI also prayed for the return of "all the equipment installed
and the other improvements on the property, or their value, pursuant to the
mandate of mutual restitution."89

NCLPI errs.

Under Paragraph 5 of the Contract of Lease, NCLPI is entitled only to the


return of those improvements introduced by it which can be removed without

CIVIL LAW REVIEW 2


17
[JANUARY 2016 CASES] 6

causing damage to the leased premises. 90 Considering, however, that the


issue of ownership of the improvements within the premises appears to be
subject of another case initiated by NCLPIs subsidiary, NSC, 91 this Court will
not rule on the same.

Denial of NCLPIs claim and award of damages in favor of LMI and Proton
proper

Both the trial court and CA found that NCLPI breached the Contract of Lease.
In sustaining the denial of NCLPIs claim for damages, the CA held:

There is no merit in [NCLPI]s claim for damages allegedly arising from [LMI]s
failure to maintain it in peaceful possession of the leased premises. It was
[NCLPI] who breached the lease contract x x x Moreover, the lease contract
between [LMI] and [Proton] was entered into only on November 8, 1996 x x x
after the lease contract between [LMI] and [NCLPI] had been terminated. As
aptly noted by the trial court:

xxxx

In other words, while in its responsive pleading [NCLPI] claims [that] it was
fooled into allowing [Proton] to occupy the subject premises for a limited
period, after which the latter, in alleged collusion with [LMI] unilaterally
usurped the premises for itself, the evidence shows that it was [NCLPI]
which misrepresented itself to PROTON as being a lessee of good
standing, so that it could induce the latter to occupy and renovate
the premises when at that time the negotiations were underway, the
lease between [LMI] and [NCLPI] had already been
terminated.92(Emphasis and underscoring supplied)

Contrary to NCLPl's claims of an unlawful "scheme" devised by LMJ and


Proton to force it out of the leased premises, we find that it was NCLPI who
was in bad faith and itself provided the bases for the cancellation of its
Contract of Lease with LMI and its eventual ejectment from the leased
premises. Accordingly, we affirm (1) the award of exemplary damages and
attorney's fees in favor of LMI and Proton and (2) the denial of NCLPI's claim
for damages.93

WHEREFORE, in view of the foregoing, the petition is DENIED. The Decision


dated September 27, 2006 and the Resolution dated March 8, 2007 rendered
by the CA in CA-G.R. CV No. 75985 are, however, MODIFIED as follows:

(1) NCLP I is ordered to pay LMI and Proton exemplary damages of


P50,000.00 and attorney's fees of P50,000.00, each;

(2) NCLPI is ordered to pay the amount of P2,365,569.61 unpaid rentals, with
interest at the rate of six percent ( 6%) per annum computed from October
18, 1996 until the date of finality of this judgment. The total amount shall

CIVIL LAW REVIEW 2


17
[JANUARY 2016 CASES] 7

thereafter earn interest at the rate of six percent (6%) per annum from the
finality of judgment until its satisfaction;

(3) LMI is ordered to return to NCLPI the balance of the security deposit
amounting to P883,253.72, with interest at the rate of six percent ( 6o/o)
starting March 25, 2003 until the finality of this Decision, after which the total
amount shall earn interest at the rate of six percent (6%) from the finality of
this Decision until satisfaction by LMI.94

CIVIL LAW REVIEW 2


17
[JANUARY 2016 CASES] 8

14.

THIRD DIVISION

January 13, 2016

G.R. No. 198752

ARTURO C. ALBA, JR., duly represented by his attorneys-in-fact,


ARNULFO B. ALBA and ALEXANDER C. ALBA, Petitioner,
vs.
RAYMUND D. MALAPAJO, RAMIL D. MALAPAJO and the Register of
Deeds for the City of Roxas, Respondents.

DECISION

PERALTA, J.:

Assailed in this petition for review on certiorari are the Resolution1 dated
February 28, 2011 and the Resolution 2dated August 31, 2011 issued by the
Court of Appeals (CA) Cebu City, in CA-G.R. SP No. 05594.

The antecedents are as follows:

On October 19, 2009, petitioner Arturo C. Alba, Jr., duly represented by his
attorneys-in-fact, Arnulfo B. Alba and Alexander C. Alba, filed with the
Regional Trial Court (RTC) of Roxas City, Branch 15, a Complaint 3 against
respondents Raymund D. Malapajo, Ramil D. Malapajo and the Register of
Deeds of Roxas City for recovery of ownership and/or declaration of nullity or
cancellation of title and damages alleging, among others, that he was the
previous registered owner of a parcel of land consisting of 98,146 square
meters situated in Bolo, Roxas City, covered by TCT No. T-22345; that his title
was subsequently canceled by virtue of a deed of sale he allegedly executed
in favor of respondents Malapajo for a consideration of Five Hundred
Thousand Pesos (P500,000.00); that new TCT No. T-56840 was issued in the
name of respondents Malapajo; that the deed of sale was a forged document
which respondents Malapajo were the co-authors of.

Respondents Malapajo filed their Answer with Counterclaim 4 contending that


they were innocent purchasers for value and that the deed was a unilateral
document which was presented to them already prepared and notarized; that
before the sale, petitioner had, on separate occasions, obtained loans from
them and their mother which were secured by separate real estate
mortgages covering the subject property; that the two real estate mortgages

CIVIL LAW REVIEW 2


17
[JANUARY 2016 CASES] 9

had never been discharged. Respondents counterclaimed for damages and


for reimbursement of petitioner's loan from them plus the agreed monthly
interest in the event that the deed of sale is declared null and void on the
ground of forgery.

Petitioner filed a Reply to Answer and Answer to (Permissive)


Counterclaim5 stating, among others, that the court had not acquired
jurisdiction over the nature of respondents' permissive counterclaim; and,
that assuming without admitting that the two real estate mortgages are valid,
the rate of five percent (5%) per month uniformly stated therein is
unconscionable and must be reduced. Respondents filed their
Rejoinder6 thereto.

Petitioner filed a Motion to Set the Case for Preliminary Hearing as if a Motion
to Dismiss had been Filed7 alleging that respondents counterclaims are in the
nature of a permissive counterclaim, thus, there must be payment of docket
fees and filing of a certification against forum shopping; and, that the
supposed loan extended by respondents mother to petitioner, must also be
dismissed as respondents are not the real parties-in-interest. Respondents
filed their Opposition8 thereto.

On June 4, 2010, the RTC issued an Order 9 denying petitioner's motion finding
that respondents counterclaims are compulsory. Petitioners motion for
reconsideration was denied in an Order10 dated September 30, 2010.

Petitioner filed a petition for certiorari with the CA which sought the
annulment of the RTC Orders dated June 4, 2010 and September 30, 2010.

In a Resolution dated February 28, 2011, the CA dismissed the petition


for certiorari saying that there was no proper proof of service of the petition
to the respondents, and that only the last page of the attached copy of the
RTC Order was signed and certified as a true copy of the original while the
rest of the pages were mere machine copies.

Petitioner filed a motion for reconsideration which the CA denied in a


Resolution dated August 31, 2011 based on the following findings:

Nevertheless, while petitioner filed with the Petition his Affidavit of Service
and incorporated the registry receipts, petitioner still failed to comply with
the requirement on proper proof of service. Post office receipt is not the
required proof of service by registered mail. Section 10, Rule 13 of the 1997
Rules of Civil Procedure specifically stated that service by registered mail is
complete upon actual receipt by the addressee, or after five (5) days from the
date he received the first notice of the postmaster, whichever is earlier.
Verily, registry receipts cannot be considered sufficient proof of service; they
are merely evidence of the mail matter with the post office of the sender, not
the delivery of said mail matter by the post office to the addressee. Moreover,
Section 13, Rule 13 of the 1997 Rules of Civil Procedure specifically stated

CIVIL LAW REVIEW 2


18
[JANUARY 2016 CASES] 0

that the proof of personal service in the form of an affidavit of the party
serving shall contain a full statement of the date, place and manner of
service, which was not true in the instant petition. 11

Petitioner filed the instant petition for review raising the following assignment
of errors:

I. CONTRARY TO THE ERRONEOUS RULING OF THE COURT A QUO, THE


COUNTERCLAIMS INTERPOSED BY RESPONDENTS MALAPAJO IN THEIR
ANSWER WITH COUNTERCLAIM ARE, BASED ON APPLICABLE LAW AND
JURISPRUDENCE, PERMISSIVE IN NATURE, NOT COMPULSORY, AND
THEREFORE, SUCH ANSWER WITH RESPECT TO SUCH COUNTERCLAIMS IS IN
REALITY AN INITIATORY PLEADING WHICH SHOULD HAVE BEEN ACCOMPANIED
BY A CERTIFICATION AGAINST FORUM SHOPPING AND CORRESPONDING
DOCKET FEES, THEREFORE, SHOULD HAVE BEEN PAID, FAILING IN WHICH THE
COUNTERCLAIMS SHOULD HAVE BEEN ORDERED DISMISSED. MOREOVER, AS
REGARDS THE LOAN ALLEGEDLY EXTENDED BY THEIR MOTHER TO
PETITIONER, WHICH UP TO NOW IS SUPPOSEDLY STILL UNPAID,
RESPONDENTS MALAPAJO ARE NOT THE REAL PARTIES-IN-INTEREST AND IS,
THEREFORE, DISMISSIBLE ON THIS ADDITIONAL GROUND; and

II. THE HONORABLE COURT OF APPEALS COMMITTED A VERY SERIOUS ERROR


WHEN IT DISMISSED THE PETITION FOR CERTIORARI BASED ON PURE
TECHNICALITY, THEREBY GIVING MORE PREMIUM AND MORE WEIGHT ON
TECHNICALITIES RATHER THAN SUBSTANCE AND DISREGARDING THE MERITS
OF THE PETITION.12

We find that the CA erred in denying petitioner's petition for certiorari after
the latter had clearly shown compliance with the proof of service of the
petition as required under Section 13 of Rule 13 of the 1997 Rules of Civil
Procedure, which provides:

Sec.13. Proof of service.

Proof of personal service shall consist of a written admission of the party


served, or the official return of the server, or the affidavit of the party
serving, containing a full statement of the date, place and manner of service.
If the service is by ordinary mail, proof thereof shall consist of an affidavit of
the person mailing of facts showing compliance with section 7 of this Rule. If
service is made by registered mail, proof shall be made by such affidavit and
the registry receipt issued by the mailing office. The registry return card shall
be filed immediately upon its receipt by the sender, or in lieu thereof the
unclaimed letter together with the certified or sworn copy of the notice given
by the postmaster to the addressee.

Clearly, service made through registered mail is proved by the registry


receipt issued by the mailing office and an affidavit of the person mailing of
facts showing compliance with the rule. In this case, Nerissa Apuyo, the

CIVIL LAW REVIEW 2


18
[JANUARY 2016 CASES] 1

secretary of petitioners counsel, had executed an affidavit 13 of personal


service and service by registered mail which she attached to the petition
marked as original filed with the CA. She stated under oath that she
personally served a copy of the petition to the RTC of Roxas City on
December 6, 2010, as evidenced by a stamp mark of the RTC on the
corresponding page of the petition; that she also served copies of the petition
by registered mail to respondents' counsels on December 6, 2010 as
evidenced by registry receipts numbers "PST 188" and "PST 189", both issued
by the Roxas City Post Office. The registry receipts issued by the

post office were attached to the petition filed with the CA. Petitioner had
indeed complied with the rule on proof of service.

Since the case was dismissed outright on technicality, the arguments raised
in the petition for certiorari were not at all considered. However, we will now
resolve the issue on the merits so as not to delay further the disposition of
the case instead of remanding it to the CA.

The issue for resolution is whether respondents counterclaim, i.e.,


reimbursement of the loan obtained from them in case the deed of absolute
sale is declared null and void on the ground of forgery, is permissive in nature
which requires the payment of docket fees and a certification against forum
shopping for the trial court to acquire jurisdiction over the same.

A counterclaim is any claim which a defending party may have against an


opposing party.14 A compulsory counterclaim is one which, being cognizable
by the regular courts of justice, arises out of or is connected with the
transaction or occurrence constituting the subject matter of the opposing
party's claim and does not require for its adjudication the presence of third
parties of whom the court cannot acquire jurisdiction. Such a counterclaim
must be within the jurisdiction of the court both as to the amount and the
nature thereof, except that in an original action before the Regional Trial
Court, necessarily connected with the subject matter of the opposing party's
claim or even where there is such a connection, the Court has no jurisdiction
to entertain the claim or it requires for adjudication the presence of third
persons over whom the court acquire jurisdiction. 15 A compulsory
counterclaim is barred if not set up in the same action.

A counterclaim is permissive if it does not arise out of or is not necessarily


connected with the subject matter of the opposing party's claim. 16 It is
essentially an independent claim that may be filed separately in another
case.

To determine whether a counterclaim is compulsory or permissive, we have


devised the following tests: (a) Are the issues of fact and law raised by the
claim and by the counterclaim largely the same? (b) Would res judicata bar a
subsequent suit on defendants claims, absent the compulsory counterclaim
rule? (c) Will substantially the same evidence support or refute plaintiffs
claim as well as the defendants counterclaim? and (d) Is there any logical

CIVIL LAW REVIEW 2


18
[JANUARY 2016 CASES] 2

relation between the claim and the counterclaim? 17 A positive answer to all
four questions would indicate that the counterclaim is compulsory. 18

Based on the above-mentioned tests, we shall determine the nature of


respondents counterclaim. Respondents anchored their assailed
counterclaim on the following allegations in their affirmative defenses in their
Answer with Counterclaim, thus:

xxxx

10. The plaintiff's cause of action is based on his allegation that his signature
on the Deed of Absolute Sale was forged.

The Deed of Absolute Sale is a unilateral instrument, i.e., it was signed only
by the vendor, who is the plaintiff in this case and his instrumental witnesses,
who are his parents in this case. It was presented to defendants already
completely prepared, accomplished and notarized. Defendants had no hand
in its preparation, accomplishment and notarization.

While the plaintiff claims that his signature on the instrument is forged, he
never questioned the genuineness of the signatures of his instrumental
witnesses, his parents Arturo P. Alba, Sr. and Norma C. Alba, who signed the
said instrument below the words "SIGNED IN THE PRESENCE OF" and above
the words "Father" and "Mother," respectively.

Furthermore, plaintiff acknowledged in par. 7 of his Complaint that the stated


consideration in the Deed of Absolute Sale is P500,000.00 and he never
categorically denied having received the same.

11. Before the plaintiff sold the property to the defendants, he secured a loan
from them in the sum of Six Hundred Thousand Pesos (P600,000.00) payable
on or before November 10, 2008. The loan is evidenced by a Promissory Note
and secured by a Real Estate Mortgage dated September 11, 2008, both
executed by him, covering the parcel of land subject of this case, Lot 2332-D,
Psd 06-000738. Like the Deed of Absolute Sale, the Real Estate Mortgage is a
unilateral instrument, was signed solely by the plaintiff, and furthermore, his
parents affixed their signatures thereon under the heading "WITH MY
PARENTAL CONSENT", and above the words, "Father" and "Mother,"
respectively.

Prior to this, or as early as July 25, 2008, the plaintiff also obtained a loan
payable on or before September 6, 2008 from defendants' mother, Alma D.
David, and already mortgaged to her Lot 2332-D, Psd 06-000738. The loan is
evidenced by a Promissory Note and a Real Estate Mortgage, both of which
were executed by plaintiff. Again, the Real Estate Mortgage is an unilateral
instrument, was signed solely by the plaintiff and furthermore, his parents
also affixed their signatures thereon under the heading, "WITH MY PARENTAL
CONSENT " and above the words, "Father" and "Mother," respectively.

CIVIL LAW REVIEW 2


18
[JANUARY 2016 CASES] 3

In both instances, the plaintiff was always represented by his parents, who
always manifested their authority to transact in behalf of their son the
plaintiff.1wphi1

As in the case with the Deed of Absolute Sale, the defendants or their mother
did not have any hand in the preparation, accomplishment or notarization of
the two Promissory Notes with accompanying Real Estate Mortgages, x x x.

Neither of the two Real Estate Mortgages have been discharged or


extinguished.

12. Considering the foregoing, the plaintiff's allegation that his signature on
the Deed of Absolute Sale was forged, and that the defendants are the "co-
authors" of the said forgery, are absolutely false and baseless.

13. If the Deed of Absolute Sale is declared null and void on the ground of
forgery, then the plaintiff should reimburse the defendants the loan he
obtained from them, which he did not deny having obtained, plus the agreed
monthly interest.19

Petitioner seeks to recover the subject property by assailing the validity of


the deed of sale on the subject property which he allegedly executed in favor
of respondents Malapajo on the ground of forgery. Respondents
counterclaimed that, in case the deed of sale is declared null and void, they
be paid the loan petitioner obtained from them plus the agreed monthly
interest which was covered by a real estate mortgage on the subject property
executed by petitioner in favor of respondents. There is a logical relationship
between the claim and the counterclaim, as the counterclaim is connected
with the transaction or occurrence constituting the subject matter of the
opposing party's claim. Notably, the same evidence to sustain respondents'
counterclaim would disprove petitioner's case. In the event that respondents
could convincingly establish that petitioner actually executed the promissory
note and the real estate mortgage over the subject property in their favor
then petitioner's complaint might fail. Petitioner's claim is so related logically
to respondents' counterclaim, such that conducting separate trials for the
claim and the counterclaim would result in the substantial duplication of the
time and effort of the court and the parties. 20

Since respondents' counterclaim is compulsory, it must be set up in the same


action; otherwise, it would be barred forever. 21 If it is filed concurrently with
the main action but in a different proceeding, it would be abated on the
ground of litis pendentia; if filed subsequently, it would meet the same fate
on the ground of res judicata.22 There is, therefore, no need for respondents
to pay docket fees and to file a certification against forum shopping for the
court to acquire jurisdiction over the said counterclaim.

We agree with the RTCs disquisition in finding that respondents counterclaim


is compulsory, to wit:

CIVIL LAW REVIEW 2


18
[JANUARY 2016 CASES] 4

The arguments of the plaintiffs that this transaction is a permissive


counterclaim do not convince.

By the manner in which the answer pertaining to this transaction was


phrased, the real estate mortgage was the origin of the Deed of Absolute Sale
after the loan of P600,000.00 using the same property as security for the
payment thereof was not settled. In short, it is one of defendants' defenses
and controverting evidence against plaintiffs' allegations of falsification of the
Deed of Absolute Sale, the property subject of the Deed of Sale being one
and the same property subject of the mortgage. 23

xxxx

Can the Court adjudicate upon the issues [of whether or not the plaintiff could
recover ownership and or whether or not the title to the property in question
may be canceled or declared null and void, and damages] without the
presence of the mother of defendants in whose favor the Real Estate
Mortgage of the property subject of this action was executed?

Definitely, this Court can. That there was an allegation pertaining to the
mortgage of the property in question to defendants mother is only some sort
of a backgrounder on why a deed of sale was executed by plaintiff in
defendants favor, the truth or falsity of which will have to be evidentiary on
the part of the parties hereto. In short, the Court does not need the presence
of defendants mother before it can adjudicate on whether or not the deed of
absolute sale was genuine or falsified and whether or not the title to the
property may be cancelled.24

WHEREFORE, premises considered, the instant petition is PARTIALLY


GRANTED. The Resolutions dated February 28, 2011 and August 31, 2011
issued by the Court of Appeals in CA-G.R. SP No. 05594 dismissing the
petition for certiorari and denying reconsideration thereof, respectively, for
failure to show proper proof of service of the petition to respondents, are SET
ASIDE. Acting on the petition for certiorari, we resolve to DENY the same
and AFFIRM the Order dated June 4, 2010 of the Regional Trial Court of
Roxas City, Branch 15, denying petitioner's motion to set the case for hearing
as if a motion to dismiss had been filed, and the Order dated September 30,
2010 denying reconsideration thereof.

SO ORDERED.

CIVIL LAW REVIEW 2


18
[JANUARY 2016 CASES] 5

15.

SECOND DIVISION

January 13, 2016

G.R. No. 201417

ORIX METRO LEASING AND FINANCE CORPORATION, Petitioner,


vs.
CARDLINE INC., MARY C. CALUBAD, SONY N. CALUBAD, and NG BENG
SHENG, Respondents.

DECISION

BRION, J.:

We resolve the petition for review on certiorari challenging the January 6,


2012 decision1 and April 16, 2012 resolution2 of the Court of
Appeals (CA) in CA-GR SP No. 118226. The CA annulled the Regional Trial
Court's (RTC) order to execute the judgment against the respondents. The CA
ruled that Cardline Inc. (Cardline) had fully satisfied its outstanding obligation
by returning the leased properties to Orix Metro Leasing and Finance
Corporation (Orix).

THE ANTECEDENTS

Cardline leased four machines (machines) from Orix as evidenced by three


similarly-worded lease agreements. Cardlines principal stockholders and
officers - Mary C. Calubad, Sony N. Calubad, and Ng Beng Sheng (individual
respondents) signed the suretyship agreements in their personal capacities
to guarantee Cardlines obligations under each lease agreement.

Cardline defaulted in paying the rent: the unpaid obligations amounted to


P9,369,657.00 as of July 12, 2007. Orix formally demanded payment from
Cardline but the latter refused to pay.

Orix filed a complaint for replevin, sum of money, and damages with an
application for a writ of seizure against Cardline and the individual
respondents (collectively, the respondents) before the RTC. The case was
docketed as Civil Case No. 07-855.

The RTC issued a writ of seizure allowing Orix to recover the machines from
Cardline.

CIVIL LAW REVIEW 2


18
[JANUARY 2016 CASES] 6

Thereafter, the RTC declared the respondents in default for failing to file an
answer, and allowed Orix to present evidence ex parte. The respondents filed
a motion to set aside the order of default, but the RTC denied their motion.
On May 6, 2008, the RTC rendered judgment in Orixs favor and ordered the
respondents to pay Orix, as follows:

1. The sum of P9,369,657.00 or whatever may be the balance of


defendants outstanding obligation still owing the plaintiff after the
recovery or sale of the [machines] as and by way of actual damages
(Section 9, Rule 60), in either case, with interest and penalty charges as
stipulated, from 12 July 2007 until fully paid;

2. As stipulated in the Continuing Surety, thirty (30%) percent of the total


amount due as Attorneys fees;

3. As stipulated in the Continuing Surety, twenty-five (25%) percent of the


total amount due as liquidated damages; and

4. Expenses incurred in securing the leased properties through manual


delivery. (emphasis supplied)

On appeal, the respondents argued that the RTC erred in declaring them in
default. The CA,3 and subsequently this Court,4 denied the respondents
appeal. Our denial in G.R. No. 189877 became final and executory.

Ng Beng Sheng filed a petition for annulment of judgment. 5 He argued that


the RTC had no jurisdiction over his person since the summons was not
properly served on him. The CA denied the petition on the grounds of forum
shopping and res judicata. The CA explained that this issue had been
addressed by the RTC in the order denying the motion to set aside the order
of default, and by the CA and the Supreme Court on appeal.

In the main case, Orix filed a motion for the issuance of a writ of execution
which the RTC granted in its December 1, 2010 order. Thereafter, the RTC
clerk of court issued a writ of execution commanding the sheriff to enforce
the May 8, 2009 judgment. The respondents filed a motion for a status quo
ante order but the RTC denied the motion.

Thereafter, the respondents filed a petition for prohibition6 under Rule 65


of the Rules of Court before the CA. 7They assailed the issuance of the
December 1, 2010 order, arguing that their rental obligations were offset by
the market value of the returned machines and by the guaranty deposit.

THE CA RULING

The CA granted the petition, annulled the RTCs order dated December 1,
2010, and prohibited the sheriff from executing the judgment dated May 6,
2008.

CIVIL LAW REVIEW 2


18
[JANUARY 2016 CASES] 7

The CA based its decision on Sections 19.2(d) 8 in relation with Section


19.39 of the lease agreements. The CA ruled that the respondents debt
amounting to P9,369,657.00 had been satisfied when Orix recovered the
machines valued at P14,481,500.00 and received the security deposit
amounting to P1,635,638.89. Considering that the judgment had been
satisfied in full, the RTCs issuance of a writ of execution was no longer
necessary.

The CA denied Orixs motion for reconsideration; hence, this petition.

THE PARTIES ARGUMENTS

In its petition, Orix argues that: (1) the market value of the returned
machines and the guaranty deposit do not offset the outstanding obligations;
(2) the individual respondents are solidarily liable to Orix and are not entitled
to the benefit of excussion; and (3) the respondents and their counsel
engaged in willful and deliberate forum shopping.

After the petition was filed, Atty. Efren C. Lizardo withdrew his appearance
and Atty. David A. Domingo entered his appearance as the respondents
counsel.

In their comment, the respondents argue that: (1) the RTCs judgment should
be interpreted as follows: if Orix recovers the properties, their market values
should be deducted from the respondents outstanding obligations; (2) the
individual respondents merely acted as guarantors, not as sureties; and (3)
the respondents committed no forum shopping because no cases were
pending before the courts when they filed the petition for prohibition.

OUR RULING

We find the petition partly meritorious.

We note at the outset that the RTCs May 6, 2008 judgment has attained
finality and can no longer be altered. Once a judgment becomes final and
executory, all that remains is the execution of the decision. Thus, the RTC
issued the December 1, 2010 order of execution. An order of execution is not
appealable;10 otherwise, a case would never end.11

As a rule, parties are not allowed to object to the execution of a final


judgment.12 One exception is when the terms of the judgment are not clear
enough and there remains room for its interpretation. 13 If the exception
applies, the respondents may seek the stay of execution or the quashal of the
writ of execution.14 Although an order of execution is not appealable, an
aggrieved party may challenge the order of execution via an appropriate
special civil action under Rule 65 of the Rules of Court. 15 The special civil
action of prohibition is an available remedy against a tribunal exercising
judicial, quasi-judicial or ministerial powers if it acted without or in excess of

CIVIL LAW REVIEW 2


18
[JANUARY 2016 CASES] 8

its jurisdiction and there is no other plain, speedy, and adequate remedy in
the ordinary course of law.16

In the present case, the respondents effectively argued that the terms of the
RTCs May 6, 2008 judgment are not clear enough such that the parties
agreement must be examined to arrive at the proper interpretation. The
respondents, however, did not give the RTC an opportunity to clarify its
judgment. The respondents filed a special civil action for prohibition before
the CA without first filing a motion to stay or quash the writ of execution
before the RTC. Hence, the petition for prohibition obviously lacked the
requirement that no "other plain, speedy, and adequate remedy" is available.
Thus, the petition should have been dismissed.

However, the CA gave due course to the petition. In granting the petition, the
CA ruled that the judgment had been satisfied; thus, there was no more
judgment to execute. To stress, the CA erred in granting the petition despite
the availability of a "plain, speedy, and adequate remedy."

Orix comes before us for a review of the CAs decision. The issues for
resolution are: (1) whether the CA correctly prohibited the RTC from enforcing
the writ of execution; (2) whether the individual respondents can invoke the
benefit of excussion; and (3) whether the respondents committed forum
shopping.

I. Propriety of the CAs decision

The core issue presented in this case is whether the CA correctly


prohibited the RTC from enforcing the writ of execution. To resolve
this issue, we must determine whether the CA correctly interpreted this
portion of the RTCs May 6, 2008 judgment:

The sum of P9,369,657.00 or whatever may be the balance of


defendants outstanding obligation still owing the plaintiff after the
recovery or sale of the [machines] as and by way of actual damages xxx.
(emphasis supplied)

The CA cited Sections 19.2(d) and 19.3 of the lease agreements in


interpreting the above-quoted judgment. The CA ruled that the balance of
Cardlines debt was P9,369,657.00, less the machines market value and the
guaranty deposit. After applying this formula, the CA concluded that Cardline
no longer owed Orix any indebtedness so that no judgment needed to be
executed.

We disagree with the CAs conclusion.

A review of these agreements shows that the CA erroneously relied on


Sections 19.2(d) and 19.3 of the lease agreements. The CA also erred in

CIVIL LAW REVIEW 2


18
[JANUARY 2016 CASES] 9

deducting the guaranty deposit from the outstanding debt, contrary to the
provisions of the lease agreements.

We review the lease agreements on two points: first, on whether the market
values of the returned machines were intended to reduce Cardlines debt;
and second, on whether the parties intended to deduct the guaranty deposit
from the unpaid obligation.

On the first point, the machines market values were not intended to
reduce, much less offset, Cardlines debt.

The lease agreements default provisions are instructive. Section 19 17 of the


agreements provides that if Cardline fails to pay rent, Orix may cancel the
agreements and may avail of the following remedies under Section 19.2:

a) LESSOR may require LESSEE to surrender possession of the property x x


x;

xxx

d) Subject to the provisions of Section 19.3, after repossessing the property,


the LESSOR may re-lease or sell the PROPERTY to any third person, in
such manner and upon such terms as the LESSOR may solely deem proper;

e) Recovery of all accrued and unpaid rental, including rentals up to


the time the PROPERTY is actually returned to the LESSOR xxx;"
(emphasis supplied)

Should Orix choose to re-lease or sell the machines after repossessing them
pursuant to Section 19.2(d), Section 19.3 shall apply, to wit:

19.3 The proceeds derived from the sale or re-leasing of the PROPERTY, shall
x xx be applied first to the expenses incurred by the LESSOR in connection
with the repossession, sale, or re-leasing of the PROPERTY, a reasonable
compensation for undertaking such sale or re-lease, all legal costs and fees,
OTHER AMOUNTS, and the balance, if any, to the RENTAL due from the
LESSEE. x x x. (emphasis supplied)

Applying these provisions, when Cardline defaulted in paying rent, Orix was
authorized to: (a) re-possess the machines; and (b) recover all unpaid rent.
Considering that Orix neither re-leased nor sold the machines, Sections
19.2(d) and 19.3 are not applicable. Thus, the CA erred in applying these
provisions to the present case.

Even assuming that these provisions apply, Section 19.3 states that the net
"proceeds" derived from the sale, not the machines market values, shall be
applied to the unpaid rent. Therefore, these contractual provisions do

CIVIL LAW REVIEW 2


19
[JANUARY 2016 CASES] 0

not support the CAs stance that the machines market values must
be reduced from Cardlines unpaid rent.

As Orix correctly argued, the CAs decision leads to an absurd situation where
Cardline pays for its liabilities to Orix using Orixs own properties. The Court
cannot affirm this unreasonable and inequitable interpretation.

On the second point, Sections 6.1 and 19.2(b) of the lease agreements
discuss the use of the guaranty deposit, to wit:

6.1 The LESSEE shall pay to the LESSOR simultaneously with the execution of
this Agreement, an amount by way of deposit (the "GUARANTY DEPOSIT") as
specified in the Lease Schedule, which deposit shall be held as security for
the faithful and timely performance by the LESSEE of its obligations
hereunder, as well as its compliance with all the provisions of this Agreement,
or of any extension or renewals thereof. Should the PROPERTY be
returned to the LESSOR for any reason whatsoever including
LESSEEs default under Section 19 hereof before the expiration of
this Agreement, then the GUARANTY DEPOSIT shall be forfeited
automatically in favor of the LESSOR as additional penalty over and
above those stipulated in Section 3.5 [on interest and penalty], without
prejudice to the right of the LESSOR to recover any unpaid RENTAL as
well as the OTHER AMOUNTS for which the LESSEE may be liable under this
agreement. (emphasis supplied)

19.2(b) The LESSOR may retain all amounts including any advance rental
paid to it hereunder as compensation for rent, use and depreciation of the
PROPERTY. Furthermore, the LESSOR may apply the GUARANTY DEPOSIT
towards the payment of liquidated damages.18

These provisions are relevant to determine the parties intent with respect to
the guaranty deposit. These provisions show that the parties did not intend to
deduct the guaranty deposit from Cardlines unpaid rent. On the contrary, the
guaranty deposit was intended to be automatically forfeited to serve as
penalty for Cardlines default. In any case, Orix retained the right to recover
the unpaid rent but it had the option to consider the guaranty deposit as
liquidated damages. Notably, Orix did not exercise this option. Thus, the CA
erred when it deducted the guaranty deposit from Cardlines unpaid rent.

After examining the RTCs judgment under the lease agreements lenses, we
rule that the return or recovery of the machines does not reduce Cardlines
outstanding obligation unless the returned machines are sold. No sale
transpired pursuant to the lease agreements. Moreover, the guaranty deposit
was not meant to reduce Cardlines unpaid obligation. Thus, Cardlines actual
damages remain at P9,369,657.00.

CIVIL LAW REVIEW 2


19
[JANUARY 2016 CASES] 1

In sum, we rule that the CA erroneously interpreted the RTCs May 6, 2008
judgment. Consequently, the CA erred in preventing the RTC from enforcing
the writ of execution.

II. The Benefit of Excussion

The second issue before us is whether the individual respondents are


entitled to the benefit of excussion. We note that this issue had already
been raised before the CA in G.R. 189877. The CA, as affirmed by the Court,
ruled that the issue cannot be raised for the first time on appeal.

For clarity, we briefly discuss this issue and rule in favor of Orix.

The terms of a contract govern the parties rights and obligations. When a
party undertakes to be "jointly and severally" liable, it means that the
obligation is solidary. 19 Furthermore, even assuming that a party is liable only
as a guarantor, he can be held immediately liable without the benefit of
excussion if the guarantor agreed that his liability is direct and
immediate.20 In effect, the guarantor waived the benefit of excussion
pursuant to Article 2059(1) of the Civil Code.

In the present case, the records show that the individual respondents bound
themselves solidarily with Cardline. Section 31.1 21 of the lease agreements
states that the persons who sign separate instruments to secure Cardlines
obligations to Orix shall be jointly and severally liable with Cardline.

Even assuming arguendo that the individual respondents signed the


continuing surety agreements merely as guarantors, they still cannot invoke
the benefit of excussion. The surety agreements provide that the individual
respondents liability is "solidary, direct, and immediate and not
contingent upon"22 Orixs remedies against Cardline. The continuing
suretyship agreements also provide that the individual respondents
"individually and collectively waive(s) in advance the benefit of excussion
xxx under Articles 2058 and 2065 of the Civil Code." 23

Without any doubt, the individual respondents can no longer avail of the
benefit of excussion.

III. Forum-Shopping

We now turn to whether the respondents committed forum shopping when


they filed the petition for prohibition before the CA.

Orix asserts that the respondents committed forum shopping by instituting


several actions essentially seeking to nullify the RTCs decision.

First, the respondents appealed before the CA to reverse the RTCs judgment
which held them liable for the unpaid rent. The CA, and subsequently this

CIVIL LAW REVIEW 2


19
[JANUARY 2016 CASES] 2

Court via a petition for review on certiorari,24 affirmed the RTCs


judgment. The decision became final and executory.

Second, Ng Beng Sheng filed a petition for annulment of


judgment,25 dated September 4, 2010, which the CA dismissed on the
grounds of forum shopping and res judicata.1wphi1

Third, the respondents filed the petition for prohibition,26 dated February
21, 2011, to prevent the execution of the RTCs judgment.

We disagree with Orixs assertions.

Section 5 Rule 7 of the Rules prohibits forum shopping. The rule against
forum shopping seeks to address the great evil of two competent tribunals
rendering two separate and contradictory decisions. 27 Forum shopping exists
when a party initiates two or more actions, other than appeal
or certiorari, grounded on the same cause to obtain a more favorable
decision from any tribunal.28

The elements of forum shopping are: (i) identity of parties, or at least such
parties representing the same interest; (ii) identity of rights asserted and
relief prayed for, the latter founded on the same facts; (iii) any judgment
rendered in one action will amount to res judicata in the other action.29

In Reyes v. Alsons,30 the petitioner filed a petition for annulment of judgment


raising the issue of the RTCs lack of jurisdiction to enforce the lower courts
judgment. This Court held that this jurisdictional issue has been resolved in
the previous cases filed by the petitioner. Thus, the petition for annulment of
judgment was barred by res judicata and the policy against forum shopping.31

In the present case, the CA correctly denied Ng Beng Shengs petition for
annulment of judgment. As in Reyes, the CA correctly reasoned out that the
issue on jurisdiction had been resolved with finality in the review
on certiorari. Thus, the issue could no longer be re-litigated.

After the denial of the petition for annulment of judgment, Ng Beng Shen
joined the other respondents in filing a petition for prohibition. We are now
called upon to ascertain whether the recourse to the petition for prohibition
amounted to forum shopping.

We rule in the negative.

The two cases filed collectively by the respondents are similar only in that
they involve the same parties. The cases, however, involve different causes
of actions. The petition for review on certiorari was filed to review the merits
of the RTC's judgment. On the other hand, the petition for prohibition respects
the finality of the RTC's judgment on the merits but interprets the dispositive

CIVIL LAW REVIEW 2


19
[JANUARY 2016 CASES] 3

portion in a way that would render the execution unnecessary. Thus, the
elements of forum shopping are not present in the two cases.

Moreover, the resort to a remedy under Rule 65 is expressly allowed by the


Rules of Court. Section 1, Rule 41 of the Rules of Court provides that an
aggrieved party may file the appropriate civil action under Rule 65 to
challenge an order of execution. Accordingly, the respondents filed their
petition for prohibition under Rule 65 of the Rules of Court.

With respect to Ng Beng Sheng's petition for annulment of judgment, the CA


has already ruled that the filing of the petition constituted forum shopping,
specifically due to the jurisdictional issue raised. The petition for prohibition,
however, involves a different cause of action. Thus, there is no forum
shopping.

To recap, first, the CA erred in preventing the execution of the RTC's


judgment. Nothing in the lease agreements' provisions supports the CA's
ruling that the market value of the returned machines and the guaranty
deposit shall be deducted from Cardline' s unpaid rent. Second, the individual
respondents are solidarily liable for Cardline's obligations and are not entitled
to the benefit of excussion. Finally, the respondents did not commit forum
shopping by filing the petition for prohibition.

With these matters clarified, Orix should no longer be denied the fruits of its
victory. The RTC is hereby ordered to execute its long-final judgment.

WHEREFORE, we hereby GRANT the petition. The January 6, 2012 decision


and April 16, 2012 resolution of the Court of Appeals in CA-GR SP No. 118226
are hereby REVERSED and SET ASIDE. Costs against the respondents.

SO ORDERED.

CIVIL LAW REVIEW 2


19
[JANUARY 2016 CASES] 4

16.

SECOND DIVISION

January 13, 2016

G.R. No. 206147

MICHAEL C. GUY, Petitioner,


vs.
ATTY. GLENN C. GACOTT, Respondent.

DECISION

MENDOZA, J.:

Before this Court is a petition for review on certiorari under Rule 45 of the
Rules of Court filed by petitioner Michael C. Guy (Guy), assailing the June 25,
2012 Decision1 and the March 5, 2013 Resolution 2 of the Court of
Appeals (CA) in CA-G.R. CV No. 94816, which affirmed the June 28, 2009 3 and
February 19, 20104 Orders of the Regional Trial Court, Branch 52, Puerto
Princesa City, Palawan (RTC), in Civil Case No. 3108, a case for damages. The
assailed RTC orders denied Guy's Motion to Lift Attachment Upon
Personalty5 on the ground that he was not a judgment debtor.

The Facts

It appears from the records that on March 3, 1997, Atty. Glenn


Gacott (Gacott) from Palawan purchased two (2) brand new transreceivers
from Quantech Systems Corporation (QSC) in Manila through its employee
Rey Medestomas (Medestomas), amounting to a total of P18,000.00. On May
10, 1997, due to major defects, Gacott personally returned the transreceivers
to QSC and requested that they be replaced. Medestomas received the
returned transreceivers and promised to send him the replacement units
within two (2) weeks from May 10, 1997.

Time passed and Gacott did not receive the replacement units as promised.
QSC informed him that there were no available units and that it could not
refund the purchased price. Despite several demands, both oral and written,
Gacott was never given a replacement or a refund. The demands caused
Gacott to incur expenses in the total amount of P40,936.44. Thus, Gacott
filed a complaint for damages. Summons was served upon QSC and
Medestomas, afterwhich they filed their Answer, verified by Medestomas

CIVIL LAW REVIEW 2


19
[JANUARY 2016 CASES] 5

himself and a certain Elton Ong (Ong). QSC and Medestomas did not present
any evidence during the trial.6

In a Decision,7 dated March 16, 2007, the RTC found that the two (2)
transreceivers were defective and that QSC and Medestomas failed to replace
the same or return Gacott's money. The dispositive portion of the decision
reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff, ordering


the defendants to jointly and severally pay plaintiff the following:

1. Purchase price plus 6% per annum from March 3, 1997 up P


to and until fully paid ------------ 18,000.00
2. Actual Damages ----------------------------------- 40,000.00
3. Moral Damages ----------------------------------- 75,000.00
100,000.0
4. Corrective Damages -------------------------------
0
5. Attorneys Fees ------------------------------------ 60,000.00
6. Costs.

SO ORDERED.

The decision became final as QSC and Medestomas did not interpose an
appeal. Gacott then secured a Writ of Execution, 8 dated September 26, 2007.

During the execution stage, Gacott learned that QSC was not a corporation,
but was in fact a general partnership registered with the Securities and
Exchange Commission (SEC). In the articles of partnership,9 Guy was
appointed as General Manager of QSC.

To execute the judgment, Branch Sheriff Ronnie L. Felizarte (Sheriff


Felizarte) went to the main office of the Department of Transportation and
Communications, Land Transportation Office (DOTC-LTO), Quezon City, and
verified whether Medestomas, QSC and Guy had personal properties
registered therein.10 Upon learning that Guy had vehicles registered in his
name, Gacott instructed the sheriff to proceed with the attachment of one of
the motor vehicles of Guy based on the certification issued by the DOTC-
LTO.11

On March 3, 2009, Sheriff Felizarte attached Guys vehicle by virtue of the


Notice of Attachment/Levy upon Personalty12 served upon the record
custodian of the DOTC-LTO of Mandaluyong City. A similar notice was served
to Guy through his housemaid at his residence.

Thereafter, Guy filed his Motion to Lift Attachment Upon Personalty, arguing
that he was not a judgment debtor and, therefore, his vehicle could not be
attached.13 Gacott filed an opposition to the motion.

CIVIL LAW REVIEW 2


19
[JANUARY 2016 CASES] 6

The RTC Order

On June 28, 2009, the RTC issued an order denying Guys motion. It explained
that considering QSC was not a corporation, but a registered partnership, Guy
should be treated as a general partner pursuant to Section 21 of the
Corporation Code, and he may be held jointly and severally liable with QSC
and Medestomas. The trial court wrote:

All persons who assume to act as a corporation knowing it to be without


authority to do so shall be liable as general partners for all debts, liabilities
and damages incurred or arising as a result thereof x x x. Where, by any
wrongful act or omission of any partner acting in the ordinary course of the
business of the partnership x x x, loss or injury is caused to any person, not
being a partner in the partnership, or any penalty is incurred, the partnership
is liable therefore to the same extent as the partner so acting or omitting to
act. All partners are liable solidarily with the partnership for everything
chargeable to the partnership under Article 1822 and 1823. 14

Accordingly, it disposed:

WHEREFORE, with the ample discussion of the matter, this Court finds and so
holds that the property of movant Michael Guy may be validly attached in
satisfaction of the liabilities adjudged by this Court against Quantech Co., the
latter being an ostensible Corporation and the movant being considered by
this Court as a general partner therein in accordance with the order of this
court impressed in its decision to this case imposing joint and several liability
to the defendants. The Motion to Lift Attachment Upon Personalty submitted
by the movant is therefore DENIED for lack of merit.

SO ORDERED.15

Not satisfied, Guy moved for reconsideration of the denial of his motion. He
argued that he was neither impleaded as a defendant nor validly served with
summons and, thus, the trial court did not acquire jurisdiction over his
person; that under Article 1824 of the Civil Code, the partners were only
solidarily liable for the partnership liability under exceptional circumstances;
and that in order for a partner to be liable for the debts of the partnership, it
must be shown that all partnership assets had first been exhausted. 16

On February 19, 2010, the RTC issued an order 17denying his motion.

The denial prompted Guy to seek relief before the CA.

The CA Ruling

On June 25, 2012, the CA rendered the assailed decision dismissing Guys
appeal for the same reasons given by the trial court. In addition thereto, the
appellate court stated:

CIVIL LAW REVIEW 2


19
[JANUARY 2016 CASES] 7

We hold that Michael Guy, being listed as a general partner of QSC during
that time, cannot feign ignorance of the existence of the court summons. The
verified Answer filed by one of the partners, Elton Ong, binds him as a
partner because the Rules of Court does not require that summons be served
on all the partners. It is sufficient that service be made on the "president,
managing partner, general manager, corporate secretary, treasurer or in-
house counsel." To Our mind, it is immaterial whether the summons to QSC
was served on the theory that it was a corporation. What is important is that
the summons was served on QSCs authorized officer xxx. 18

The CA stressed that Guy, being a partner in QSC, was bound by the
summons served upon QSC based on Article 1821 of the Civil Code. The CA
further opined that the law did not require a partner to be actually involved in
a suit in order for him to be made liable. He remained solidarily liable
whether he participated or not, whether he ratified it or not, or whether he
had knowledge of the act or omission.19

Aggrieved, Guy filed a motion for reconsideration but it was denied by the CA
in its assailed resolution, dated March 5, 2013.

Hence, the present petition raising the following

ISSUE

THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE


ERROR IN HOLDING THAT PETITIONER GUY IS SOLIDARILY LIABLE
WITH THE PARTNERSHIP FOR DAMAGES ARISING FROM THE BREACH
OF THE CONTRACT OF SALE WITH RESPONDENT GACOTT.20

Guy argues that he is not solidarily liable with the partnership because the
solidary liability of the partners under Articles 1822, 1823 and 1824 of the
Civil Code only applies when it stemmed from the act of a partner. In this
case, the alleged lapses were not attributable to any of the partners. Guy
further invokes Article 1816 of the Civil Code which states that the liability of
the partners to the partnership is merely joint and subsidiary in nature.

In his Comment,21 Gacott countered, among others, that because Guy was a
general and managing partner of QSC, he could not feign ignorance of the
transactions undertaken by QSC. Gacott insisted that notice to one partner
must be considered as notice to the whole partnership, which included the
pendency of the civil suit against it.

In his Reply,22 Guy contended that jurisdiction over the person of the
partnership was not acquired because the summons was never served upon
it or through any of its authorized office. He also reiterated that a partners
liability was joint and subsidiary, and not solidary.

The Courts Ruling

CIVIL LAW REVIEW 2


19
[JANUARY 2016 CASES] 8

The petition is meritorious.

The service of summons was flawed; voluntary appearance cured the defect

Jurisdiction over the person, or jurisdiction in personam the power of the


court to render a personal judgment or to subject the parties in a particular
action to the judgment and other rulings rendered in the action is an
element of due process that is essential in all actions, civil as well as criminal,
except in actions in rem or quasi in rem.23Jurisdiction over the person of the
plaintiff is acquired by the mere filing of the complaint in court. As the
initiating party, the plaintiff in a civil action voluntarily submits himself to the
jurisdiction of the court. As to the defendant, the court acquires jurisdiction
over his person either by the proper service of the summons, or by his
voluntary appearance in the action. 24

Under Section 11, Rule 14 of the 1997 Revised Rules of Civil Procedure, when
the defendant is a corporation, partnership or association organized under
the laws of the Philippines with a juridical personality, the service of
summons may be made on the president, managing partner, general
manager, corporate secretary, treasurer, or in-house counsel. Jurisprudence is
replete with pronouncements that such provision provides an exclusive
enumeration of the persons authorized to receive summons for juridical
entities.25

The records of this case reveal that QSC was never shown to have been
served with the summons through any of the enumerated authorized persons
to receive such, namely: president, managing partner, general manager,
corporate secretary, treasurer or in-house counsel. Service of summons upon
persons other than those officers enumerated in Section 11 is invalid.
Even substantial compliance is not sufficient service of summons. 26 The CA
was obviously mistaken when it opined that it was immaterial whether the
summons to QSC was served on the theory that it was a corporation. 27

Nevertheless, while proper service of summons is necessary to vest the court


jurisdiction over the defendant, the same is merely procedural in nature and
the lack of or defect in the service of summons may be cured by the
defendants subsequent voluntary submission to the courts jurisdiction
through his filing a responsive pleading such as an answer. In this case, it is
not disputed that QSC filed its Answer despite the defective summons. Thus,
jurisdiction over its person was acquired through voluntary appearance.

A partner must be separately and distinctly impleaded before he can be


bound by a judgment

The next question posed is whether the trial courts jurisdiction over QSC
extended to the person of Guy insofar as holding him solidarily liable with the
partnership. After a thorough study of the relevant laws and jurisprudence,
the Court answers in the negative.

CIVIL LAW REVIEW 2


19
[JANUARY 2016 CASES] 9

Although a partnership is based on delectus personae or mutual agency,


whereby any partner can generally represent the partnership in its business
affairs, it is non sequitur that a suit against the partnership is necessarily a
suit impleading each and every partner. It must be remembered that a
partnership is a juridical entity that has a distinct and separate personality
from the persons composing it.28

In relation to the rules of civil procedure, it is elementary that a judgment of a


court is conclusive and binding only upon the parties and their successors-in-
interest after the commencement of the action in court. 29 A decision rendered
on a complaint in a civil action or proceeding does not bind or prejudice a
person not impleaded therein, for no person shall be adversely affected by
the outcome of a civil action or proceeding in which he is not a party. 30The
principle that a person cannot be prejudiced by a ruling rendered in an action
or proceeding in which he has not been made a party conforms to the
constitutional guarantee of due process of law. 31

In Muoz v. Yabut, Jr., 32 the Court declared that a person not impleaded and
given the opportunity to take part in the proceedings was not bound by the
decision declaring as null and void the title from which his title to the
property had been derived. The effect of a judgment could not be extended
to non-parties by simply issuing an alias writ of execution against them, for
no man should be prejudiced by any proceeding to which he was a stranger.

In Aguila v. Court of Appeals,33 the complainant had a cause of action against


the partnership. Nevertheless, it was the partners themselves that were
impleaded in the complaint. The Court dismissed the complaint and held that
it was the partnership, not its partners, officers or agents, which should be
impleaded for a cause of action against the partnership itself. The Court
added that the partners could not be held liable for the obligations of the
partnership unless it was shown that the legal fiction of a different juridical
personality was being used for fraudulent, unfair, or illegal purposes. 34

Here, Guy was never made a party to the case. He did not have any
participation in the entire proceeding until his vehicle was levied upon and he
suddenly became QSCs co-defendant debtor during the judgment
execution stage. It is a basic principle of law that money judgments are
enforceable only against the property incontrovertibly belonging to the
judgment debtor. 35 Indeed, the power of the court in executing judgments
extends only to properties unquestionably belonging to the judgment debtor
alone. An execution can be issued only against a party and not against one
who did not have his day in court. The duty of the sheriff is to levy the
property of the judgment debtor not that of a third person. For, as the saying
goes, one man's goods shall not be sold for another man's debts. 36

In the spirit of fair play, it is a better rule that a partner must first be
impleaded before he could be prejudiced by the judgment against the
partnership. As will be discussed later, a partner may raise several defenses
during the trial to avoid or mitigate his obligation to the partnership liability.

CIVIL LAW REVIEW 2


20
[JANUARY 2016 CASES] 0

Necessarily, before he could present evidence during the trial, he must first
be impleaded and informed of the case against him. It would be the height of
injustice to rob an innocent partner of his hard-earned personal belongings
without giving him an opportunity to be heard. Without any showing that Guy
himself acted maliciously on behalf of the company, causing damage or
injury to the complainant, then he and his personal properties cannot be
made directly and solely accountable for the liability of QSC, the judgment
debtor, because he was not a party to the case.

Further, Article 1821 of the Civil Code does not state that there is no
need to implead a partner in order to be bound by the partnership liability.
It provides that:

Notice to any partner of any matter relating to partnership


affairs, and the knowledge of the partner acting in the particular
matter, acquired while a partner or then present to his mind, and the
knowledge of any other partner who reasonably could and should have
communicated it to the acting partner, operate as notice to or knowledge
of the partnership, except in the case of fraud on the partnership,
committed by or with the consent of that partner.

[Emphases and Underscoring Supplied]

A careful reading of the provision shows that notice to any partner, under
certain circumstances, operates as notice to or knowledge to the partnership
only. Evidently, it does not provide for the reverse situation, or that notice to
the partnership is notice to the partners. Unless there is an unequivocal law
which states that a partner is automatically charged in a complaint against
the partnership, the constitutional right to due process takes precedence and
a partner must first be impleaded before he can be considered as a judgment
debtor. To rule otherwise would be a dangerous precedent, harping in favor of
the deprivation of property without ample notice and hearing, which the
Court certainly cannot countenance.

Partners liability is subsidiary and generally joint; immediate levy upon the
property of a partner cannot be made

Granting that Guy was properly impleaded in the complaint, the execution of
judgment would be improper. Article 1816 of the Civil Code governs the
liability of the partners to third persons, which states that:

Article 1816. All partners, including industrial ones, shall be liable pro
rata with all their property and after all the partnership assets have
been exhausted, for the contracts which may be entered into in the name
and for the account of the partnership, under its signature and by a person
authorized to act for the partnership. However, any partner may enter into a
separate obligation to perform a partnership contract.

CIVIL LAW REVIEW 2


20
[JANUARY 2016 CASES] 1

[Emphasis Supplied]

This provision clearly states that, first, the partners obligation with respect to
the partnership liabilities is subsidiary in nature. It provides that the partners
shall only be liable with their property after all the partnership assets have
been exhausted. To say that ones liability is subsidiary means that it merely
becomes secondary and only arises if the one primarily liable fails to
sufficiently satisfy the obligation. Resort to the properties of a partner may be
made only after efforts in exhausting partnership assets have failed or that
such partnership assets are insufficient to cover the entire obligation. The
subsidiary nature of the partners liability with the partnership is one of the
valid defenses against a premature execution of judgment directed to a
partner.

In this case, had he been properly impleaded, Guys liability would only arise
after the properties of QSC would have been exhausted. The records,
however, miserably failed to show that the partnerships properties were
exhausted. The report37 of the sheriff showed that the latter went to the main
office of the DOTC-LTO in Quezon City and verified whether Medestomas, QSC
and Guy had personal properties registered therein. Gacott then instructed
the sheriff to proceed with the attachment of one of the motor vehicles of
Guy.38 The sheriff then served the Notice of Attachment/Levy upon Personalty
to the record custodian of the DOTC-LTO of Mandaluyong City. A similar notice
was served to Guy through his housemaid at his residence.

Clearly, no genuine efforts were made to locate the properties of QSC that
could have been attached to satisfy the judgment contrary to the clear
mandate of Article 1816. Being subsidiarily liable, Guy could only be held
personally liable if properly impleaded and after all partnership assets had
been exhausted.

Second, Article 1816 provides that the partners obligation to third persons
with respect to the partnership liability is pro rata or joint.1wphi1 Liability
is joint when a debtor is liable only for the payment of only a proportionate
part of the debt. In contrast, a solidary liability makes a debtor liable for the
payment of the entire debt. In the same vein, Article 1207 does not presume
solidary liability unless: 1) the obligation expressly so states; or 2) the law
or nature requires solidarity. With regard to partnerships, ordinarily, the
liability of the partners is not solidary. 39 The joint liability of the partners is a
defense that can be raised by a partner impleaded in a complaint against the
partnership.

In other words, only in exceptional circumstances shall the partners liability


be solidary in nature. Articles 1822, 1823 and 1824 of the Civil Code provide
for these exceptional conditions, to wit:

Article 1822. Where, by any wrongful act or omission of any partner acting in
the ordinary course of the business of the partnership or with the authority of
his co-partners, loss or injury is caused to any person, not being a partner in

CIVIL LAW REVIEW 2


20
[JANUARY 2016 CASES] 2

the partnership, or any penalty is incurred, the partnership is liable therefor


to the same extent as the partner so acting or omitting to act.

Article 1823. The partnership is bound to make good the loss:

(1) Where one partner acting within the scope of his apparent authority
receives money or property of a third person and misapplies it; and

(2) Where the partnership in the course of its business receives money or
property of a third person and the money or property so received is
misapplied by any partner while it is in the custody of the partnership.

Article 1824. All partners are liable solidarily with the partnership for
everything chargeable to the partnership under Articles 1822 and 1823.

[Emphases Supplied]

In essence, these provisions articulate that it is the act of a partner which


caused loss or injury to a third person that makes all other partners solidarily
liable with the partnership because of the words "any wrongful act or
omission of any partner acting in the ordinary course of the business," "one
partner acting within the scope of his apparent authority" and "misapplied
by any partner while it is in the custody of the partnership." The obligation
is solidary because the law protects the third person, who in good faith relied
upon the authority of a partner, whether such authority is real or apparent. 40

In the case at bench, it was not shown that Guy or the other partners did a
wrongful act or misapplied the money or property he or the partnership
received from Gacott. A third person who transacted with said partnership
can hold the partners solidarily liable for the whole obligation if the case of
the third person falls under Articles 1822 or 1823.41 Gacotts claim
stemmed from the alleged defective transreceivers he bought from QSC,
through the latter's employee, Medestomas. It was for a breach of warranty in
a contractual obligation entered into in the name and for the account of QSC,
not due to the acts of any of the partners. For said reason, it is the general
rule under Article 1816 that governs the joint liability of such breach, and not
the exceptions under Articles 1822 to 1824. Thus, it was improper to hold
Guy solidarily liable for the obligation of the partnership.

Finally, Section 21 of the Corporation Code, 42 as invoked by the RTC, cannot


be applied to sustain Guy's liability. The said provision states that a general
partner shall be liable for all debts, liabilities and damages incurred by an
ostensible corporation. It must be read, however, in conjunction with Article
1816 of the Civil Code, which governs the liabilities of partners against third
persons. Accordingly, whether QSC was an alleged ostensible corporation or a
duly registered partnership, the liability of Guy, if any, would remain to be
joint and subsidiary because, as previously stated, all partners shall be
liable pro rata with all their property and after all the partnership assets have

CIVIL LAW REVIEW 2


20
[JANUARY 2016 CASES] 3

been exhausted for the contracts which may be entered into in the name and
for the account of the partnership.

WHEREFORE, the petition is GRANTED. The June 25, 2012 Decision and the
March 5, 2013 Resolution of the Court of Appeals in CA-G.R. CV No. 94816 are
hereby REVERSED and SET ASIDE. Accordingly, the Regional Trial Court,
Branch 52, Puerto Princesa City, is ORDERED TO RELEASE Michael C. Guy's
Suzuki Grand Vitara subject of the Notice of Levy/ Attachment upon
Personalty.

CIVIL LAW REVIEW 2


20
[JANUARY 2016 CASES] 4

17.

SECOND DIVISION

January 20, 2016

G.R. No. 205785

HELEN B. LUKBAN, Petitioner,


vs.
OPTIMUM DEVELOPMENT BANK, Respondent.

DECISION

CARPIO, J.:

The Case

Before the Court is a petition for review on certiorari assailing the 28 August
2012 Decision1 and the 7 February 2013 Resolution 2 of the Court of Appeals in
CA-G.R. CV No. 95150.

The Antecedent Facts

On 18 August 2005, the City Treasurer's Office of Marikina (City Treasurer)


conducted an auction sale of tax delinquent real properties, which included
the real property of Melba T. Atienza (Atienza) under Transfer Certificate of
Title (TCT) No. 234408 particularly described as follows:

A parcel of land (Lot 8 of the conso-subd., plan (LRA) Pcs-30783, approved as


non subd., project, being a portion of the conso- of Lots 7 & 9, Blk. 87, Pcs-
4259, LRC Rec. No. 7672), in the Bo. of Concepcion, (Bayanbayanan), Mun. of
Marikina, MM., Is. of Luzon. Bounded on the NE., points 4-1 by Lot 5, Blk. 87,
Pcs-4259; on the SE., points 1-2 by Lot 9; on the SW., points 2-3 by Lot 6;
both of the conso-subd., plan; on the NW., points 4-5 by ST. Lot 66, Pcs-4259
(Katipunan St.). Beginning at a point marked "1" on plan, being S. 45 deg. 39'
E., 1704.37 m. from BLBM 1, Bayanbayanan, Marikina, MM., thence S. 20 deg.
06' W., 8.00 m. to point 2; thence N. 69 deg. 54' W., 12.75 m. to point 3;
thence [N]. 20 deg. 06' E., 8.00 m. to point 4; thence S. 69 deg. 54' E., 12.75
m. to (OVER) MELBA T. ATIENZA, of legal age, Filipino, married to Franco
Mariano Atienza, the point of beginning; containing an area of ONE HUNDRED
TWO (102) SQUARE METERS, more or less. All points referred to are indicated
on the plan and are marked on the ground by as follows: point 4, by Old
PLS/Ps cyl.conc. [m]ons., 15x60 bearings true; date of the original survey,

CIVIL LAW REVIEW 2


20
[JANUARY 2016 CASES] 5

De[c]. 1910-June 1911 and that of the conso-subd., survey, executed by D.F.
Caparas, GE on June 22, 1991.3

Petitioner Helen B. Lukban (Lukban) was the highest and winning bidder of
the property during the public auction. She paid the amount of
P47,265.604 inclusive of penalties and publication fees. On 25 August 2005,
the City Treasurer issued Lukban a Certificate of Sale of Delinquent Real
Property to Purchaser, acknowledging receipt of her payment. Lukban then
paid the realty taxes, capital gains tax, documentary stamp tax, and all other
internal revenue taxes due on the property.

On 10 June 2008, Lukban filed a petition for the cancellation of TCT No.
234408 and the issuance by the Register of Deeds of Marikina City (Marikina
Register of Deeds) of a new TCT in her favor. The case was raffled to the
Regional Trial Court of Marikina City, Branch 272 (trial court) and docketed as
LRC Case No. R-08-1010-MK. In an Order 5dated 22 July 2008, the trial court
found that there was an entry on TCT No. 234408 annotating a prior Notice of
Levy in favor of Capitol Bank, denominated as Entry No. 285574/T-No.
234408Mortgage. It was annotated more than 12 years ahead of the Notice
of Levy for tax delinquency. The trial court noted that there was a possibility
that the owners duplicate certificate of title was not with Atienza but with
Capitol Bank. The trial court further noted that while Lukban provided it with
Atienzas address, she did not furnish the trial court with Capitol Banks
address. The trial court ordered Lukban to provide it with Capitol Banks
correct address so that it could be notified of the case as a party in interest.
Lukban sought the help of the Marikina Register of Deeds but it could not
provide her with Capitol Banks address.

On 23 October 2008, Atty. Aleta I. Lopez (Atty. Lopez) appeared as counsel of


Rizal Commercial Banking Corporation (RCBC) and manifested that RCBC had
acquired a portion of the shares of Capitol Bank. Atty. Lopez further
manifested that RCBC did not have the TCT of the property in its possession.
Atty. Lopez informed the trial court that Capitol Bank already changed its
name to Optimum Development Bank (Optimum Bank). During the hearing,
Atty. Felix S. Caballes, Lukbans counsel, moved for the marking of exhibits to
establish jurisdictional requirements. The exhibits included the following:

(1) Order of the trial court dated 22 July 2008;

(2) Order dated 9 September 2008 setting the initial hearing on 23 October
2008;

(3) Registry return slips showing that Lukban, Lukbans counsel, the Marikina
Register of Deeds, and RCBC separately received copies of the 9 September
2008 Order and the petition; and

(4) Certificate of posting.

CIVIL LAW REVIEW 2


20
[JANUARY 2016 CASES] 6

The trial court then issued an Order setting the continuance of the
proceedings on 27 November 2008 and the initial presentation of evidence on
3 December 2008.

After the termination of the lone witness testimony but before Lukbans offer
of evidence, Optimum Bank filed an Urgent Manifestation and Motion to
Admit as well as its Opposition to Lukbans petition on the ground that its
rights would be affected should the petition be granted. Optimum Bank
alleged that while it was the registered mortgagee of the property, it was not
aware that it was sold by the City Treasurer in a public auction and that
Lukban was the highest bidder. Optimum Bank further alleged that the bid
was too low compared to the actual market value of the property and the
mortgage debt amounting to P340,000. Optimum Bank manifested that it had
the original duplicate title of the property in its possession. Optimum Bank
also reserved its right to present documentary evidence of its rights as
mortgagee.

On 4 February 2009, Optimum Bank filed a motion for extension of time to


submit its supplemental opposition and to attach proof of its interest in the
property. On 4 March 2009, Lukban filed her Formal Offer of Evidence. On 25
March 2009, Optimum Bank filed a certified true copy of the Loan and
Mortgage Agreement in its favor. During the hearing of 25 June 2009, Atty.
Restituto Mendoza (Atty. Mendoza), Optimum Banks counsel, failed to appear
for the presentation of Optimum Banks evidence. The hearing was reset to
17 July 2009. However, on 15 July 2009, Atty. Mendoza filed an Urgent Motion
to Reset date of hearing from 17 July 2009 to 28 August 2009. The trial court
denied the motion in its 17 July 2009 Order, deemed Optimum Bank to have
waived its right to present evidence, and submitted the case for decision.
Optimum Bank filed a motion for reconsideration but the trial court denied
the motion in its Order of 30 October 2009.

Optimum Bank filed a petition for certiorari and prohibition before the Court
of Appeals assailing the 17 July 2009 and 30 October 2009 Orders of the trial
court. The case was docketed as CA-G.R. SP No. 111764. In a Decision 6dated
30 November 2010, the Court of Appeals dismissed the petition and upheld
the trial courts ruling that Optimum Bank had waived its right to present
evidence.

Meanwhile, the trial court granted Lukbans petition.

The Decision of the Trial Court

In its Decision7 dated 16 February 2010, the trial court granted Lukbans
petition. The trial court ruled that Lukban was able to satisfactorily prove that
she acquired the property from a public auction sale, that the one-year
redemption period lapsed without Atienza redeeming the property, and that a
Final Deed of Sale was issued in her favor. The trial court noted that the City
of Marikina complied with the requirements of notice and publication in
accordance with Republic Act No. 71608 (R.A. No. 7160). The trial court

CIVIL LAW REVIEW 2


20
[JANUARY 2016 CASES] 7

further noted that Lukban paid the capital gains tax and that the Bureau of
Internal Revenue issued a Tax Clearance and a Certificate Authorizing
Registration in her favor.

The dispositive portion of the Decision reads:

WHEREFORE, finding merit in the herein petition, the same is hereby


GRANTED. Pursuant to Section 107 of PD 1529 also known as the Property
Registration Decree, Melba T. Atienza married to Franco Mariano Atienza, the
registered owner of the property covered by TCT No. 234408 of the Registry
of Deeds of Marikina City, or any person withholding the same is hereby
ordered to surrender the said title to the Register of Deeds of Marikina City
within THIRTY (30) DAYS upon receipt hereof. In case of non-compliance, the
Register of Deeds of Marikina City is hereby ordered to cancel TCT No.
234408 and to issue, in lieu thereof, a new title in the name of herein
petitioner, HELEN B. LUKBAN of No. 6 Remuda St., Rancho I, Marikina City,
upon payment of the prescribed taxes and fees therefor. The mortgage
annotated on the subject title shall be incorporated in or carried over to the
new transfer certificate of title and its duplicates and shall also contain a
memorandum of the annulment of the outstanding duplicate.

SO ORDERED.9

Optimum Bank appealed from the trial courts Decision.

The Decision of the Court of Appeals

In its assailed 28 August 2012 Decision, the Court of Appeals granted the
appeal and set aside the trial courts 16 February 2010 Decision.

The Court of Appeals ruled that actual notice to the registered owner of the
real property is a condition sine qua non for the validity of the auction sale.
The Court of Appeals ruled that the records of the case did not show that
Atienza actually received a notice of the auction sale. According to the Court
of Appeals, such failure invalidated the auction sale and as a consequence,
Lukban did not acquire any right therefrom. However, Optimum Bank, not
being the registered owner of the property, was not entitled to the notice of
sale. The Court of Appeals then ruled that it was no longer necessary to rule
on Optimum Banks arguments that the issuance of a new TCT to Lukban
would impair its rights as a mortgagee and that Lukban had the burden to
prove that the mortgage debt had been paid.

The dispositive portion of the Decision reads:

WHEREFORE, the Appeal is hereby GRANTED. The Decision dated 16 February


2010 of the Regional Trial Court of Marikina City, Branch 272 granting the
Petition for Cancellation of Transfer Certificate of Title (TCT) No. 234408 and
Issuance of a New One and ordering the issuance of a new TCT in favor of

CIVIL LAW REVIEW 2


20
[JANUARY 2016 CASES] 8

appellee Helen B. Lukban, in LRC Case No. 08-1010-MK, is SET ASIDE. The
public auction sale conducted on 18 August 2005 is declared VOID for lack of
notice to Melba T. Atienza, the registered owner of the subject property.

SO ORDERED.10

Lukban filed a motion for reconsideration. In its 7 February 2013 Resolution,


the Court of Appeals denied the motion for lack of merit.

Hence, the petition before this Court.

Lukban argued that:

A. The Honorable Court of Appeals committed serious error of law in setting


aside the 16 February 2010 Decision of the Honorable Regional Trial Court
and declaring void the public auction sale conducted on 18 August 2005 by
the City Treasurer of Marikina City because the Decision dated 16 February
2010 (the "Decision" for short) was issued in accordance with applicable law,
jurisprudence and the rules of evidence, and the public auction sale on 18
August 2005 (the "auction sale" for short) was performed in accordance with
what Sections 254, 258 and 260 of Republic Act No. 7610, as amended, or
the Local Government Code of 1991 (RA No. 7610 for short) provides insofar
as the procedure in public auction sale of delinquent real property is
concerned.

B. The Honorable Court of Appeals committed reversible error of law in the


interpretation and application of the law when it ruled to invalidate the public
auction sale notwithstanding the fact that the appeal of respondent was
premised only on the following so-called arguments:

a. That petitioner did not adduce evidence that the so-called loan of Melba T.
Atienza had been paid;

b. That petitioner has the burden of proving that Melba T. Atienza had paid
her so-called loan; and

c. That respondent was entitled to personal notice of the public auction sale. 11

The Issues

We can sum up the issues of this case as follows:

(1) Whether the Court of Appeals committed a reversible error in setting


aside the trial courts Decision based on an issue that was not raised by the
parties; and

CIVIL LAW REVIEW 2


20
[JANUARY 2016 CASES] 9

(2) Whether the Court of Appeals committed a reversible error in setting


aside the trial courts Decision on the ground that the registered owner did
not receive a copy of the notice of auction sale.

The Ruling of this Court

In its petition before the Court of Appeals, Optimum Bank argued that Lukban
did not proffer any proof that the mortgage debt had been paid. It alleged
that since the annotation of the mortgage on the property had not been
cancelled, the presumption was that the mortgage amount of P340,000 in its
favor was still unpaid. Optimum Bank likewise argued that it should have
been notified of the delinquency sale because as a person having legal
interest in the property, it should have been given the right to redeem the
property under Section 261 of R.A. No. 7160. It further argued that the
cancellation of TCT No. 234408 would effectively extinguish its interest in the
property.

In resolving the issue before it, the Court of Appeals premised its Decision on
an issue that was not raised in the petition. Instead of ruling solely on the
issues raised by Optimum Bank, the Court of Appeals ruled on the basis of
the lack of notice of the auction sale on Atienza under Section 260 of R.A. No.
7160. According to the Court of Appeals, the records failed to disclose that
Atienza actually received a notice of the auction sale from the City Treasurer.

We must point out here that Atienza is not a party to the case before the
Court of Appeals and in the present case before this Court. On 9 September
2008, the trial court issued an Order which states:

This is a verified Petition For The Cancellation of Transfer Certificate of Title


No. 234408 and Issuance of New One filed by petitioner Helen B. Lukban on
June 10, 2008.1wphi1

WHEREFORE, notice is hereby given that the said petition will be heard by
this Court on October 23, 2008 at 8:30 in the morning.

Let this Order together with the petition be posted for three (3) consecutive
weeks prior to the date of hearing in three (3) conspicuous public places in
this city where the said land is situated and on the land itself at the expense
of the petitioner.

Likewise, let a copy of this Order together with copy of the petition be served
upon: 1) the Office of the Registry of Deeds of Marikina City; 2) the registered
owner Melba T. Atienza at her address stated in T.C.T. 234408, i.e., Rm. A-1,
992 Halili Complex, Quezon City; and 3) the registered mortgagee Capitol
Bank, now RCBC Savings Bank at its main office Tektite Bldg., West Tower,
Exchange Road, Ortigas Center, Pasig City and at its Marikina Branch, J.P.
Rizal St., San Roque, Marikina City. 12

CIVIL LAW REVIEW 2


21
[JANUARY 2016 CASES] 0

The records showed that the copies of the Order and the Petition sent to
Atienza remained unserved despite several attempts to serve them on her. At
the back of the envelope containing the 9 September 2008 Order were
written notations of the attempts made on 18 September, 22 September and
23 September 2008 while the notations at the back of the envelope of the 23
October 2008 Order showed that attempts to serve were made on 3
November, 4 November, and 7 November 2008. The copies were returned to
sender with the notation "unclaimed." 13 Thus, Atienza did not participate in
the proceedings before the trial court. The only oppositor before the trial
court was Optimum Bank.

Only the registered owner of the property is deemed the taxpayer who is
entitled to a notice of delinquency and other proceedings relative to the tax
sale.14 In this case, Atienza received the Warrant of Levy 15 and the Notice of
Sale.16 Whether Atienza received the Notice of Public Auction is a factual
issue that was not raised by Optimum Bank because it is an issue that only
Atienza, being the registered owner, can raise.

We do not find merit in the claim of Optimum Bank that the issuance of a new
TCT in favor of Lukban will impair its rights as a mortgagee. The trial court
made a clear ruling on this. It stated:

As for the opposition interposed in the instant petition by the oppositor,


Optimum Development Bank, the Court deemed that in the issuance of a new
title under petitioners name, the oppositors rights as a mortgagee should be
annotated in the new title. This is in line with the pronouncement in Ligon v.
CA that, "It (the mortgage) is inseparable from the property mortgaged as it
is a right in rem a lien on the property whoever its owner may be. It subsists
notwithstanding a change in ownership; in short, the personality of the owner
is disregarded. Thus, all subsequent purchasers must respect the mortgage
whether the transfer to them be with or without the consent of the
mortgage[e], for such mortgage until discharged follows the property." 17

In the dispositive portion of its Decision, the trial court mandated that "[t]he
mortgage annotated on the subject title shall be incorporated in or carried
over to the new transfer certificate of title and its duplicates and shall also
contain a memorandum of the annulment of the outstanding duplicate." 18 In
short, the rights of Optimum Bank as a mortgagee are amply protected, both
by the Decision and by Section 180 of R.A. No. 7160, 19 despite the
cancellation of the old TCT and the issuance of a new TCT in favor of Lukban.
Even in the petition before this Court, Lukban stressed that she never alleged
and prayed for the cancellation of the encumbrances on TCT No. 234408.

We do not subscribe to Optimum Banks view that it is entitled to the Notice


of Sale so that it may exercise its right to redeem the property. Section 260 of
R.A. No. 7160 states:

Section 260. Advertisement and Sale. - x x x.

CIVIL LAW REVIEW 2


21
[JANUARY 2016 CASES] 1

Within thirty (30) days after the sale, the local treasurer or his deputy shall
make a report of the sale to the sanggunian concerned, and which shall form
part of his records. The local treasurer shall likewise prepare and deliver to
the purchaser a certificate of sale which shall contain the name of the
purchaser, a description of the property sold, the amount of the delinquent
tax, the interest due thereon, the expenses of sale and a brief description of
the proceedings: Provided, however, That proceeds of the sale in excess of
the delinquent tax, the interest due thereon, and the expenses of sale shall
be remitted to the owner of the real property or person having legal interest
therein.

xxxx

Clearly, only the registered owner is entitled to the Notice of Sale.

WHEREFORE, we GRANT the petition. We SET ASIDE the 28 August 2012


Decision and the 7 February 2013 Resolution of the Court of Appeals in CA-
G.R. CV No. 95150 and REINSTATE the trial court's 16 February 2010
Decision in LRC Case No. R-08-1010-MK.

CIVIL LAW REVIEW 2