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THIRD DIVISION applying such proceeds to the satisfaction of the principal obligation

and returning any balance remaining thereafter to the assignor.

[G.R. No. 53955. January 13, 1989.]
THE MANILA BANKING CORPORATION, Plaintiff-Appellee, PROHIBITED. — The parties gaved the deed of assignment the form
v. ANASTACIO TEODORO JR. and GRACE ANNA of an absolute conveyance of title over the receivables assigned,
TEODORO, Defendants-Appellants. essentially for the convenience of the assignee. Without such
formally unlimited conveyance of title, the assignee would have to
Formoso & Quimbo Law Office for Plaintiff-Appellee. treat the deed of assignment as no more than a deed of pledge or of
chattel mortgage. In other words, in such hypothetical case, should
Serafin P. Rivera, for Defendants-Appellants. the assignee seek to realize upon the security given to him through
the deed of assignment (which would then have to comply with the
documentation and registration requirements of a pledge or chattel
SYLLABUS mortgage), the assignee would have to foreclose upon the securities
or credits assigned and place them on public sale and there acquire
the same. It should be recalled that under the principle which forbids
1. CIVIL LAW; CIVIL CODE; OBLIGATIONS AND a pactum commisorium Article 2088, Civil Code), a mortgagee or
CONTRACTS; CHARACTER OF TRANSACTION, pledgee is prohibited from simply taking and appropriating the
DETERMINED NOT BY THE LANGUAGE BUT BY THE personal property turned over to him as security for the payment of a
INTENTION. — The character of the transactions between the principal obligation. A deed of assignment by way of security avoids
parties is not, however, determined by the language used in the the necessity of a public sale imposed by the rule on pactum
document but by their intention. commisorium, by in effect placing the sale of the collateral up front.

SAME; REQUISITE. — Moreover, in order that an obligation may MUST BE FOUND IN THE DOCUMENT. — The foregoing is
be extinguished by another which substitutes the same, it is applicable where, as in the present instance, the deed of assignment
imperative that it be so declared in unequivocal terms, or that the old of receivables combines elements of both a complete or absolute
and the new obligations be on every point incompatible with each alienation of the credits being assigned and a security arrangement to
other (Article 1292, New Civil Code). assure payment of a principal obligation. Where the second element
is absent, that is, where there is nothing to indicate that the parties
3. ID.; ID.; PLEDGE; PRESUMPTION IN FAVOR OF PLEDGE. — intended the deed of assignment to function as a security device, it
In case of doubt as to whether a transaction is a pledge or a dation in would of course follow that the simple absolute conveyance
payment, the presumption is in favor of pledge, the latter being the embodied in the deed of assignment would be operative; the
lesser transmission of rights and interests (Lopez v. Court of Appeals, assignment would constitute essentially a mode of payment or dacion
supra). en pago. Put a little differently, in order that a deed of assignment of
receivables which is in form an absolute conveyance of title to the
4. ID.; ID.; ID.; ESSENCE. — It is of course of the essence of a credits being assigned, may be qualified and treated as a security
contract of pledge or mortgage that when the principal obligation arrangement, language to such effect must be found in the document
becomes due, the things in which the pledge or mortgage consists itself and that language, precisely, is embodied in the deed of
may be alienated for the payment to the creditor (Article 2087, New assignment in the instant case. Finally, it might be noted that that
Civil Code). deed simply follows a form in standard use in commercial banking.

FELICIANO, J., CONCURRING:chanrob1es virtual 1aw library

merely wish to add a few lines in respect of the point made by
Bidin, J., that "the character of the transactions between the parties is
not, however, determined by the language used in the document but This is an appeal from the decision ** of the Court of First Instance
by their intention." This statement is basically not exceptionable, so of Manila, Branch XVII in Civil Case No. 78178 for collection of
far as it goes. It might, however, be borne in mind that the intent of sum of money based on promissory notes executed by the
the parties to the transaction is to be determined, in the first instance, defendants-appellants in favor of plaintiff-appellee bank. The
by the very language which they used. dispositive portion of the appealed decision (Record on Appeal, p.
33) reads as
AT BAR IS FOR A LIMITED PURPOSE. — The point that appears "WHEREFORE judgment is hereby rendered (a) sentencing
to me to be worth making is that although in its form, the deed of defendants, Anastacio Teodoro, Jr. and Grace Anna Teodoro jointly
assignment of receivables partakes of the nature of a complete and severally, to pay plaintiff the sum of P15,037.11 plus 12%
alienation of the receivables assigned, such form should be taken in interest per annum from September 30, 1969 until fully paid, in
conjunction with, and indeed must be qualified and controlled by, payment of Promissory Notes No. 11487, plus the sum of P1,000.00
other language showing an intent of the parties that title to the as attorney’s fees; and (b) sentencing defendant Anastacio Teodoro,
receivables shall pass to the assignee for the limited purpose of Jr. to pay plaintiff the sum of P8,934.74, plus interest at 12% per
securing another, principal; obligation owed by the assignor to the annum from September 30, 1969 until fully paid, in payment of
assignee. Title moves from assignor to assignee but that title is Promissory Notes Nos. 11515 and 11699, plus the sum of P500.00 a
defeasible being designed to collateralize the principal obligation. attorney’s fees.
Operationally, what this means is that the assignee is burdened with
an obligation of taking the proceeds of the receivables assigned and With Costs against defendants."cralaw virtua1aw library
complied with their contractual obligations; and that the President of
The facts of the case as found by the trial court are as plaintiff Bank took steps to collect from the Commission, but no collection was effected.

"On April 25, 1966, Defendants, together with Anastacio Teodoro, For failure of defendants to pay the sums due on the Promissory
Sr., jointly and severally, executed in favor of plaintiff a Promissory Note, this action was instituted on November 13, 1969, originally
Note (No. 11487) for the sum of P10,420.00 payable in 120 days, or against the Father, Son, and the latter’s wife. Because the Father died,
on August 25, 1966, at 12% interest per annum. Defendants failed to however, during the pendency of the suit, the case as against him was
pay the aid amount inspite of repeated demands and the obligation as dismissed under the provisions of Section 21, Rule 3 of the Rules of
of September 30, 1969 stood at P15,137.11 including accrued interest Court. The action, then is against defendant Son and his wife for the
and service charge. collection of the sum of P15,037.11 on Promissory Note No. 14487;
and against defendant Son for the recovery of P8,394.74 on
On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Promissory Notes Nos. 11515 and 11699, plus interest on both
Sr. (Father) and Anastacio Teodoro, Jr. (Son) executed in favor of amounts at 12% per annum from September 30, 1969 until fully paid,
plaintiff two Promissory Notes (Nos. 11515 and 11699) for and 10% of the amounts due as attorney’s fees.
P8,000.00 and P1,000.00 respectively, payable in 120 days at 12%
interest per annum. Father and Son made a partial payment on the Neither of the parties presented any testimonial evidence and
May 3, 1966 Promissory Note but none on the June 20, 1966 submitted the case for decision based on their Stipulations of Fact and
Promissory Note, leaving still an unpaid balance of P8,934.74 as of on their documentary evidence.
September 30, 1969 including accrued interest and service
charge.cralawnad The issues, as defined by the parties are: (1) whether or not plaintiff’s
claim is already considered paid by the Deed of Assignment of
The three Promissory Notes stipulated that any interest due if not paid Receivables by the Son; and (2) whether or not it is plaintiff who
at the end of every month shall be added to the total amount then due, should directly sue the Philippine Fisheries Commission for
the whole amount to bear interest at the rate of 12% per annum until collection." (Record on Appeal, p. 29-32).
fully paid; and in case of collection through an attorney-at-law, the
makers shall, jointly and severally, pay 10% of the amount over-due On April 17, 1972, the trial court rendered its judgment adverse to
as attorney’s fees, which in no case shall be less than P200.00. defendants. On June 8, 1972, defendants filed a motion for
reconsideration (Record on Appeal, p. 33) which was denied by the
It appears that on January 24, 1964, the Son executed in favor of trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On
plaintiff a Deed of Assignment of Receivables from the Emergency June 23, 1972, defendants filed with the lower court their notice of
Employment Administration in the sum of P44,635.00. The Deed of appeal together with the appeal bond (Record on Appeal, p. 38). The
Assignment provided that it was for and in consideration of certain record of appeal was forwarded to the Court of Appeals on August
credits, loans, overdrafts and other credit accommodations extended 22, 1972 (Record on Appeal, p. 42).chanrobles law library : red
to defendants as security for the payment of said sum and the interest
thereon, and that defendants do hereby remise, release and quitclaim In their appeal (Brief for the Appellants, Rollo, p. 12), appellants
all its rights, title, and interest in and to the accounts receivables.’ raised a single assignment of error, that is —
Further:chanrob1es virtual 1aw library
‘(1) The title and right of possession to said accounts receivable is to JUDICIAL REMAKING OF THE CONTRACT BETWEEN THE
remain in the assignee, and it shall have the right to collect the same PARTIES, IN VIOLATION OF LAW; HENCE, TANTAMOUNT
from the debtor, and whatsoever the Assignor does in connection TO LACK OR EXCESS OF JURISDICTION.’
with the collection of said accounts, it agrees to do as agent and
representative of the Assignee and in trust for said Assignee . . .; As the appeal involves a pure question of law, the Court of Appeals,
in its resolution promulgated on March 6, 1980, certified the case to
(6) The Assignor guarantees the existence and legality of said this Court (Rollo, p. 24). The record on Appeal was forwarded to this
accounts receivable, and the due and punctual payment thereof unto Court on March 31, 1980 (Rollo, p. 1).
the assignee, . . . on demand, . . . and further, that Assignor warrants
the solvency and credit worthiness of each and every account. In the resolution of May 30, 1980, the First Division of this Court
ordered that the case be docketed and declared submitted for decision
(7) The Assignor does hereby guarantee the payment when due on all (Rollo, p. 33).
sums payable under the contracts giving rise to the accounts
receivable . . . including reasonable attorney’s fees in enforcing any On March 7, 1988, considering the length of time that the case has
rights against the debtors of the assigned accounts receivable and will been pending with the Court and to determine whether supervening
pay upon demand, the entire unpaid balance of said contract in the events may have rendered the case moot and academic, the Court
event of non payment by the said debtors of any monthly sum at its resolved (1) to require the parties to MOVE IN THE PREMISES
due date or of any other default by said debtors . . . within thirty days from notice, and in case they fail to make the
proper manifestation within the required period, (2) to consider the
(9) . . . This Assignment shall also stand as a continuing guarantee for case terminated and closed with the entry of judgment accordingly
any and all whatsoever there is or in the future there will be justly made thereon (Rollo, p. 40).
owing from the Assignor to the Assignee . . .
On April 27, 1988, appellee moved for a resolution of the
In their stipulations of Fact, it is admitted by the parties that plaintiff appeal/review interposed by defendants-appellants (Rollo, p. 41).
extended loans to defendants on the basis and by reason of certain
contracts entered into by the defunct Emergency Employment The major issues raised in this case are as follows: (1) whether or not
Administration (EEA) with defendants for the fabrication of fishing the assignment of receivables has the effect of payment of all the
boats, and that the Philippine Fisheries Commission succeeded the loans contracted by appellants from appellee bank; and (2) whether or
EEA after its abolition; that non-payment of the notes was due to the not appellee bank must first exhaust all legal remedies against the
failure of the Commission to pay defendants after the latter had Philippine Fisheries Commission before it can proceed against
appellants for collections of loan under the promissory notes which determined by the language used in the document but by their
are plaintiff’s bases in the action for collection in Civil Case No. intention. Thus, the Court, quoting from the American Jurisprudence
78178. (68 2d, Secured Transaction, Section 50)

"Assignment of credit is an agreement by virtue of which the owner "The characters of the transaction between the parties is to be
of a credit, known as the assignor, by a legal cause, such as sale, determined by their intention, regardless of what language was used
dation in payment, exchange or donation, and without the need of the or what the form of the transfer was. If it was intended to secure the
consent of the debtor, transfers his credit and its accessory rights to payment of money, it must be construed all a pledge. However, even
another, known as the assignee, who acquires the power to enforce it though a transfer, if regarded by itself, appears to have been absolute,
to the same extent as the assignor could have enforced it against the its object and character might still be qualified and explained by a
debtor . . . It may be in the form of a sale, but at times it may contemporaneous writing declaring it to have been a deposit of the
constitute a dation in payment, such as when a debtor, in order to property as collateral security. It has been said that a transfer of
obtain a release from his debt, assigns to his creditor a credit he has property by the debtor to a creditor, even if sufficient on its face to
against a third person, or it may constitute a donation as when it is by make an absolute conveyance, should be treated as a pledge if the
gratuitous title; or it may even be merely by way of guaranty, as debt continues in existence and is not discharged by the transfer, and
when the creditor gives as a collateral, to secure his own debt in favor that accordingly, the use of the terms ordinarily importing
of the assignee, without transmitting ownership. The character that it conveyance, of absolute ownership will not be given that effect in
may assume determines its requisites and effects, its regulation, and such a transaction if they are also commonly used in pledges and
the capacity of the parties to execute it; and in every case, the mortgages and therefore do not unqualifiedly indicate a transfer of
obligations between assignor and assignee will depend upon the absolute ownership, in the absence of clear and ambiguous language
judicial relation which is the basis of the assignment: (Tolentino, or other circumstances excluding an intent to pledge." (Lopez v.
Commentaries and Jurisprudence on the Civil Code of the Court of Appeals, 114 SCRA 671 [1962]).
Philippines, Vol. 5, pp. 165-166).
Definitely, the assignment of the receivables did not result from a
There is no question as to the validity of the assignment of sale transaction. It cannot be said to have been constituted by virtue
receivables executed by appellants in favor of appellee bank. The of a dation in payment for appellants’ loans with the bank evidenced
issue is with regard to its legal effects. by promissory note Nos. 11487, 11515 and 11699 which are the
subject of the suit for collection in Civil Case No. 78178. At the time
I the deed of assignment was executed, said loans were non-existent
yet. The deed of assignment was executed on January 24, 1964 (Exh.
"G"), while promissory note No. 11487 is dated April 25, 1966 (Exh.
It is evident that the assignment of receivables executed by appellants "A"), promissory note 11515, dated May 3, 1966 (Exh. "B"),
on January 24, 1964 did not transfer the ownership of the receivables promissory note 11699, on June 20, 1966 (Exh. "C"). At most, it was
to appellee bank and release appellants from their loans with the bank a dation in payment for P10,000.00, the amount of credit from
incurred under promissory notes Nos. 11487, 11515 and appellee bank indicated in the deed of assignment. At the time the
11699.chanrobles law library : red assignment was executed, there was no obligation to be extinguished
except the amount of P10,000.00. Moreover, in order that an
The Deed of Assignment provided that it was for and in consideration obligation may be extinguished by another which substitutes the
of certain credits, loans, overdrafts, and their credit accommodations same, it is imperative that it be so declared in unequivocal terms, or
in the sum of P10,000.00 extended to appellants by appellee bank, that the old and the new obligations be on every point incompatible
and as security for the payment of said sum and the interest thereon; with each other (Article 1292, New Civil Code).chanrobles
that appellants as assignors, remise, release, and quitclaim to assignee virtualawlibrary
bank all their rights, title and interest in and to the accounts
receivable assigned (1st paragraph). It was further stipulated that the Obviously, the deed of assignment was intended as collateral security
assignment will also stand as a continuing guaranty for future loans for the bank loans of appellants, as a continuing guaranty for
of appellants to appellee bank and correspondingly the assignment whatever sums would be owing by defendants to plaintiff, as stated in
shall also extend to all the accounts receivable; appellants shall also stipulation No. 9 of the deed.
obtain in the future, until the consideration on the loans secured by
appellants from appellee bank shall have been fully paid by them In case of doubt as to whether a transaction is a pledge or a dation in
(No. 9). payment, the presumption is in favor of pledge, the latter being the
lesser transmission of rights and interests (Lopez v. Court of Appeals,
The position of appellants, however, is that the deed of assignment is supra).
a quitclaim in consideration of their indebtedness to appellee bank,
not mere guaranty, in view of the following provisions of the deed of In one case, the assignments of rights, title and interest of the defendant in the contracts of lease of two buildings as well as her
rights, title and interest in the land on which the buildings were
". . . the Assignor do hereby remise, release and quit-claim unto said constructed to secure an overdraft from a bank amounting to
assignee all its rights, title and interest in the accounts receivable P110,000.00 which was increased to P150,000.00, then to
described hereunder." (Emphasis supplied by appellants, first par., P165,000.00 was considered by the Court to be documents of
Deed of Assignment)."cralaw virtua1aw library mortgage contracts inasmuch as they were executed to guarantee the
principal obligations of the defendant consisting of the overdrafts or
". . . that the title and right of possession to said account receivable is the indebtedness resulting therefrom. The Court ruled that an
to remain in said assignee and it shall have the right to collect directly assignment to guarantee an obligation is in effect a mortgage and not
from the debtor, and whatsoever the Assignor does in connection an absolute conveyance of title which confers ownership on the
with the collection of said accounts, it agrees to do so agent and assignee (Peoples Bank & Trust Co. v. Odom, 64 Phil. 126 [1937]).
representative of the Assignee and it trust for said Assignee . . ."
(Ibid. par. 2 of Deed of Assignment)." (Record on Appeal, p. 27) II

The character of the transactions between the parties is not, however,

As to whether or not appellee bank must have to exhaust all legal ordering defendant Sheriff Sula to sell at public auction several lots
remedies against the Philippine Fisheries Commission before it can formerly owned by defendant corporation including subject lot of
proceed against appellants for collection of loans under their plaintiffs; that the alleged mortgage of subject lot is null and void as
promissory notes, must also be answered in the negative. it is not authorized by plaintiffs pursuant to Art. 2085 of the Civil
Code which requires that the mortgagor must be the absolute owner
The obligation of appellants under the promissory notes not having of the mortgaged property; that as a consequence of the nullity of said
been released by the assignment of receivables, appellants remain as mortgage, the execution foreclosing [the] mortgage is likewise null
the principal debtors of appellee bank rather than mere guarantors. and void; that plaintiffs advised defendants to exclude subject lot
The deed of assignment merely guarantees said obligations. That the from the auction sale but the latter refused. Plaintiffs likewise prayed
guarantor cannot be compelled to pay the creditor unless the latter has for damages in the sum of P50,000.00.
exhausted all the property of the debtor, and has resorted to all the
legal remedies against the debtor, under Article 2058 of the New Defendant William Ong Genato filed a motion to dismiss the
Civil Code does not therefore apply to them. It is of course of the complaint which was opposed by the plaintiffs and denied by the
essence of a contract of pledge or mortgage that when the principal Court in its Order dated February 16, 1993.
obligation becomes due, the things in which the pledge or mortgage
consists may be alienated for the payment to the creditor (Article
2087, New Civil Code). In the instant case, appellants are both the Defendant Genato, then filed his answer averring that on May 19,
principal debtors and the pledgors or mortgagors. Resort to one is, 1989 co-defendant Oakland Development Resources Corporation
therefore, resort to the other. mortgaged to Genato two (2) parcels of land covered by TCT Nos.
356315 and 366380 as security and guaranty for the payment of a
Appellee bank did try to collect on the pledged receivables. As the loan in the sum of P2,000,000.00; that it appears in the complaint that
Emergency Employment Agency (EEA) which issued the receivables the subject parcel of land is an unsubdivided portion of the aforesaid
had been abolished, the collection had to be coursed through the TCT No. 366380 which covers an area of 4,334 square meters more
Office of the President which disapproved the same (Record on or less; that said real estate mortgage has been duly annotated at the
Appeal, p. 16). The receivable became virtually worthless leaving back of TCT No. 366380 on May 22, 1989; that for non-payment of
appellants’ loans from appellee bank unsecured. It is but proper that the loan of P2,000,000.00 defendant Genato filed an action for
after their repeated demands made on appellants for the settlement of foreclosure of real estate mortgage against co-defendant corporation;
their obligations, appellee bank should proceed against appellants. It that after [trial], a decision was rendered by the Regional Trial Court
would be an exercise in futility to proceed against a defunct office for of Quezon City, Branch 98 against defendant corporation which
the collection of the receivables pledged. decision was affirmed by the Honorable Court of Appeals; that the
decision of the Court of Appeals has long become final and thus, the
WHEREFORE, the appeal is Dismissed for lack of merit and the Regional Trial Court, Brach 98 of Quezon City issued an Order dated
appealed decision of the trial court is affirmed in toto. December 7, 1992 ordering defendant Sheriff Ernesto Sula to cause
the sale at public auction of the properties covered by TCT No.
SO ORDERED. 366380 for failure of defendant corporation to deposit in Court the
money judgment within ninety (90) days from receipt of the decision
of the Court of Appeals; that plaintiffs have no cause of action
--[power to encumber]-- against defendant Genato; that the alleged plaintiffs Contract to Sell
[G.R. No. 146997. April 26, 2005] does not appear to have been registered with the Register of Deeds of
Quezon City to affect defendant Genato and the latter is thus not
SPOUSES GODOFREDO & DOMINICA FLANCIA, petitioners, bound by the plaintiffs Contract to Sell; that the registered mortgage
vs. COURT OF APPEALS & WILLIAM ONG is superior to plaintiffs alleged Contract to Sell and it is sufficient for
GENATO, respondents. defendant Genato as mortgagee to know that the subject TCT No.
366380 was clean at the time of the execution of the mortgage
DECISION contract with defendant corporation and defendant Genato is not
bound to go beyond the title to look for flaws in the mortgagors title;
CORONA, J.: that plaintiffs alleged Contract to Sell is neither a mutual promise to
buy and sell nor a Contract of Sale. Ownership is retained by the
seller, regardless of delivery and is not to pass until full payment of
Before us is a petition for review under Rule 45 of the Rules of
the price; that defendant Genato has not received any advice from
Court, seeking to set aside the October 6, 2000 decision[1] of the Court
plaintiffs to exclude the subject lot from the auction sale, and by way
of Appeals in CA-G.R. CV No. 56035.
of counterclaim, defendant Genato prays for P150,000.00 moral
The facts as outlined by the trial court[2] follow. damages and P20,000.00 for attorneys fees.

This is an action to declare null and void the mortgage executed by On the other hand, defendant Oakland Development Resources
defendant Oakland Development Resources Corp. xxx in favor of Corporation likewise filed its answer and alleged that the complaint
defendant William Ong Genato over the house and lot plaintiffs states no cause of action; xxx Defendant corporation also prays for
spouses Godofredo and Dominica Flancia purchased from defendant attorneys fees of P20,000.00 in its counterclaim.[3]
After trial, the assisting judge[4] of the trial court rendered a
In the complaint, plaintiffs allege that they purchased from defendant decision dated August 16, 1996, the decretal portion of which
corporation a parcel of land known as Lot 12, Blk. 3, Phase III-A provided:
containing an area of 128.75 square meters situated in Prater Village
Subd. II located at Brgy. Old Balara, Quezon City; that by virtue of Wherefore, premises considered, judgment is hereby rendered.
the contract of sale, defendant corporation authorized plaintiffs to
transport all their personal belongings to their house at the aforesaid
1) Ordering defendant Oakland Devt. Resources
lot; that on December 24, 1992, plaintiffs received a copy of the
Corporation to pay plaintiffs:
execution foreclosing [the] mortgage issued by the RTC, Branch 98
a) the amount of P10,000.00 representing payment for (2) whether or not the registered mortgage was superior to the
the option to purchase lot; contract to sell; and
b) the amount of P140,000.00 representing the first
downpayment of the contract price; (3) whether or not the mortgagee was in good faith.
c) the amount of P20,520.80 representing five monthly Under the Art. 2085 of the Civil Code, the essential requisites of
amortizations for February, March, April, May a contract of mortgage are: (a) that it be constituted to secure the
and June 1990; fulfillment of a principal obligation; (b) that the mortgagor be the
d) the amount of P3,000.00 representing amortization absolute owner of the thing mortgaged; and (c) that the persons
for November 1990; all plus legal interest from constituting the mortgage have the free disposal of their property, and
the constitution of the mortgage up to the time the in the absence thereof, that they be legally authorized for the purpose.
instant case was filed.
All these requirements are present in this case.
2) Ordering said defendant corporation to pay further to
plaintiffs the sum of P30,000.00 for moral
damages, P10,000.00 for exemplary damages
and P20,000.00 for and as reasonable attorneys fees FIRST ISSUE: WAS THE REGISTERED MORTGAGE
plus cost; VALID?
3) Dismissing defendant corporations counterclaim;
4) Dismissing defendant Genatos counterclaim.[5] As to the first essential requisite of a mortgage, it is undisputed
that the mortgage was executed on May 15, 1989 as security for a loan
On motion for reconsideration, the regular presiding judge set obtained by Oakland from Genato.
aside the judgment of the assisting judge and rendered a new one on
November 27, 1996, the decretal portion of which read: As to the second and third requisites, we need to discuss the
difference between a contract of sale and a contract to sell.
WHEREFORE, premises considered, the Motion for Reconsideration In a contract of sale, title to the property passes to the vendee
is hereby GRANTED. The decision dated August 16, 1996 is hereby upon the delivery of the thing sold; in a contract to sell, ownership is,
set aside and a new one entered in favor of the plaintiffs, declaring by agreement, reserved by the vendor and is not to pass to the vendee
the subject mortgage and the foreclosure proceedings held thereunder until full payment of the purchase price.
as null and void insofar as they affect the superior right of the
plaintiffs over the subject lot, and ordering as follows: Otherwise stated, in a contract of sale, the vendor loses
ownership over the property and cannot recover it unless and until the
contract is resolved or rescinded; in a contract to sell, title is retained
1. Defendant Oakland Development Resources to
by the vendor until full payment of the price.[8]
pay to plaintiffs the amount of P20,000.00 for
litigation-related expenses; In the contract between petitioners and Oakland, aside from the
fact that it was denominated as a contract to sell, the intention of
2. Ordering defendant Sheriff Ernesto L. Sula to
Oakland not to transfer ownership to petitioners until full payment of
desist from conducting further proceedings in
the purchase price was very clear. Acts of ownership over the property
the extra-judicial foreclosure insofar as they
were expressly withheld by Oakland from petitioner. All that was
affect the plaintiffs, or, in the event that title
granted to them by the occupancy permit was the right to possess it.
has been consolidated in the name of defendant
William O. Genato, ordering said defendant to Specifically, the contract between Oakland and petitioners
reconvey to plaintiffs the title corresponding to stated:
Lot 12, Blk. 3, Phase III-A of Prater Village
[Subd. II], located in Old Balara, Quezon City,
containing an area of 128.75 square meters; xxx xxx xxx
7. That the BUYER/S may be allowed to enter into and
3. Dismissing the counterclaims of defendants take possession of the property upon issuance of
Oakland and Genato and with costs against Occupancy Permit by the OWNER/DEVELOPER
them.[6] exclusively, although title has not yet passed to the
On appeal, the Court of Appeals issued the assailed order: BUYER/S, in which case his possession shall be
that of a possessor by mere tolerance Lessee, subject
to certain restrictions contained in this deed.
Wherefore, foregoing premises considered, the appeal having merit in
fact and in law is hereby GRANTED and the decision of the Trial
xxx xxx xxx
Court dated 27 November 1996 hereby SET
ASIDE and REVERSED, and its judgment dated August 16,
1996 REINSTATED and AFFIRMED IN TOTO. No Costs. 13. That the BUYER/S cannot sell, mortgage, cede,
transfer, assign or in any manner alienate or
SO ORDERED.[7] dispose of, in whole or in part, the rights acquired
by and the obligations imposed on the BUYER/S by
virtue of this contract, without the express written
Hence, this petition. consent of the OWNER/DEVELOPER.
For resolution before us now are the following issues:
xxx xxx xxx
(1) whether or not the registered mortgage constituted over the
property was valid;
24. That this Contract to Sell shall not in any way THIRD ISSUE: WAS THE MORTGAGE IN GOOD FAITH?
[authorize] the BUYER/S to occupy the assigned
house and lot to them.[9]
The third issue involves a factual matter which should not be
xxx xxx xxx raised in this petition. Only questions of law may be raised in a Rule
45 petition. This Court is not a trier of facts. The resolution of factual
issues is the function of the lower courts. We therefore adopt the
Clearly, when the property was mortgaged to Genato in May factual findings of the Court of Appeals and uphold the good faith of
1989, what was in effect between Oakland and petitioners was a the mortgagee Genato.
contract to sell, not a contract of sale. Oakland retained absolute
ownership over the property.
Ownership is the independent and general power of a person
over a thing for purposes recognized by law and within the limits
established thereby.[10] According to Art. 428 of the Civil Code, this
means that:
Just as an innocent purchaser for value may rightfully rely on
what appears in the certificate of title, a mortgagee has the right to rely
The owner has the right to enjoy and dispose of a thing, without other on what appears in the title presented to him. In the absence of anything
limitations than those established by law. to arouse suspicion, he is under no obligation to look beyond the
certificate and investigate the title of the mortgagor appearing on the
xxx xxx xxx face of the said certificate. [14]
We agree with the findings and conclusions of the trial court
Aside from the jus utendi and the jus abutendi [11] inherent in the regarding the liabilities of Oakland in its August 16, 1996 decision, as
right to enjoy the thing, the right to dispose, or the jus disponendi, is affirmed by the Court of Appeals:
the power of the owner to alienate, encumber, transform and even
destroy the thing owned.[12]
Anent [plaintiffs] prayer for damages, the Court finds that defendant
Because Oakland retained all the foregoing rights as owner of corporation is liable to return to plaintiffs all the
the property, it was entitled absolutely to mortgage it to Genato. Hence, installments/payments made by plaintiffs consisting of the amount
the mortgage was valid. of P10,000.00 representing payment for the option to purchase lot;
the amount of P140,000.00 which was the first downpayment; the
sum of P20,520.80 representing five monthly amortizations for
February, March, April, May and June 1990 and the amount
SECOND ISSUE: WAS THE REGISTERED MORTGAGE of P3,000.00 representing amortization for November 1990 plus legal
SUPERIOR TO THE CONTRACT TO SELL? interest from the time of the mortgage up to the time this instant case
was filed. Further, considering that defendant corporation wantonly
and fraudulently mortgaged the subject property without regard to
In their memorandum, petitioners cite our ruling in State [plaintiffs] rights over the same, said defendant should pay plaintiffs
moral damages in the reasonable amount of P30,000.00. xxx
Investment House, Inc. v. Court of Appeals [13] to the effect that Furthermore, since defendant [corporations] acts have compelled the
an unregistered sale is preferred over a registered mortgage over the plaintiffs to litigate and incur expenses to protect their interest, it
same property. The citation is misplaced. should likewise be adjudged to pay plaintiffs attorneys fees
This Court in that case explained the rationale behind the rule: of P20,000.00 under Article 2208 paragraph two (2) of the Civil

The unrecorded sale between respondents-spouses and SOLID is

preferred for the reason that if the original owner xxx had parted with WHEREFORE, the petition for review is hereby DENIED. The
his ownership of the thing sold then he no longer had ownership and decision of the Court of Appeals reinstating the August 16, 1996
free disposal of that thing as to be able to mortgage it again. decision of the trial court is hereby AFFIRMED.
State Investment House is completely inapplicable to the case at
bar. A contract of sale and a contract to sell are worlds apart. State
Investment House clearly pertained to a contract of sale, not to a
contract to sell which was what Oakland and petitioners had. In State
Investment House, ownership had passed completely to the buyers and --[free disposal]--
therefore, the former owner no longer had any legal right to mortgage
the property, notwithstanding the fact that the new owner-buyers had G.R. No. 201264
not registered the sale. In the case before us, Oakland retained absolute
ownership over the property under the contract to sell and therefore
had every right to mortgage it. FLORANTE VITUG, Petitioner,
In sum, we rule that Genatos registered mortgage was superior EVANGELINE A. ABUDA, Respondent.
to petitioners contract to sell, subject to any liabilities Oakland may
have incurred in favor of petitioners by irresponsibly mortgaging the DECISION
property to Genato despite its commitments to petitioners under their
contract to sell.
Parties who have validly executed a contract and have availed interest at 5% per month from May 31, 2002 to actual date
themselves of its benefits may not, to escape their contractual of payment plus P20,000.00 as and for attorney's fees;
obligations, invoke irregularities in its execution to seek its
invalidation. 2. Upon default of the defendant to fully pay the aforesaid
sums, the subject mortgaged property shall be sold at public
This is a Petition for Review on Certiorari under Rule 45 assailing the auction to pay off the mortgage debt and its accumulated
Court of Appeals' October 26, 2011 Decision and its March 8, 2012 interest plus attorney's fees, expenses and costs; and
Resolution. The Court of Appeals affirmed the Regional Trial Court's
December 19, 2008 Decision upholding the validity of the mortgage 3. After the confirmation of the sale, ordering the defendant
contract executed by petitioner Florante Vitug (Vitug) and respondent and all persons claiming rights under her [sic] to
Evangeline A. Abuda (Abuda). immediately vacate the subject premises.

On March 17, 1997, Abuda loaned P250,000.00 to Vitug and his SO ORDERED.12
wife, Narcisa Vitug.1 As security for the loan, Vitug mortgaged to
Abuda his property in Tondo Foreshore along R-10, Block A-50-3,
Del Pan to Kagitingan Streets, Tondo, Manila.2 The property was Vitug appealed the December 19, 2008 Regional Trial Court
then subject of a conditional Contract to Sell between the National Decision before the Court of Appeals.13 He contended that the real
Housing Authority and Vitug. Pertinent portions of the mortgage estate mortgage contract he and Abuda entered into was void on the
deed reads: grounds of fraud and lack of consent under Articles 1318, 1319, and
1332 of the Civil Code.14 He alleged that he was only tricked into
signing the mortgage contract, whose terms he did not really
That, Mortgagor, is the owner, holder of a Conditional Contract to understand. Hence, his consent to the mortgage contract was
Sell of the National Housing Authority (NHA) over a piece of vitiated.15
property located at the Tondo Foreshore along R-10, Block "A-50-3,
Delpan to Kagitingan Streets in the district of Tondo, Manila;
On October 26, 2011, the Court of Appeals promulgated a
Decision,16 the dispositive portion of which reads:
That, with the full consent of wife Narcisa Vitug, hereby mortgage to
Evangeline A. Abuda, with full consent of husband Paulino Abuda,
said property for TWO HUNDRED FIFTY THOUSAND PESOS WHEREFORE, the instant appeal is PARTIALLY
ONLY (P250,000.00), in hand paid by Mortgagee and in hand GRANTED. The Decision of the RTC dated December 19, 2008 in
received to full satisfaction by Mortgagor, for SIX MONTHS (6) Civil Case No. 03-1084 70 in favor of the appellee and against the
within which to pay back the full amount plus TEN PERCENT (10%) appellant is AFFIRMED with the MODIFICATION that an interest
agreed interest per month counted from the date stated hereon; rate of 1 % per month or 12% per annum shall be applied to the
principal loan of P600,000.00, computed from the date of judicial
demand, i.e., November 21, 2003; and 12% interest per annum on the
That, upon consummation and completion of the sale by the NHA of amount due from the date of the finality of the Decision until fully
said property, the title-award thereof, shall be received by the paid.
Mortgagee by virtue of a Special Power of Attorney, executed by
Mortgagor in her favor, authorizing Mortgagee to expedite, follow-
up, cause the release and to received [sic] and take possession of the SO ORDERED.17
title award of the said property from the NHA, until the mortgage
amount is fully paid for and settled[.] 3 The Court of Appeals found that Vitug failed to pay his obligation
within the stipulated six-month period under the March 17, 1997
On November 17, 1997, the parties executed a mortgage contract.18 As a result of this failure, the parties entered into
"restructured" 4 mortgage contract on the property to secure the a restructured mortgage contract on November 17, 1997.19 The new
amount of P600,000.00 representing the original P250,000.00 loan, mortgage contract was signed before a notary public by Vitug, his
additional loans,5 and subsequent credit accommodations6 given by wife Narcisa, and witnesses Rolando Vitug, Ferdinand Vitug, and
Abuda to Vitug with an interest of five (5) percent per month.7 By Emily Vitug.20
then, the property was covered by Transfer Certificate of Title No.
234246 under Vitug's name.8 The Court of Appeals also found that all the elements of a valid
mortgage contract were present in the parties' mortgage
Spouses Vitug failed to pay their loans despite Abuda's demands.9 contract.21 The mortgage contract was also clear in its terms-that
failure to pay the P600,000.00 loan amount, with a 5% interest rate
per month from November 17, 1997 to November 17, 1998, shall
On November 21, 2003, Abuda filed a Complaint for Foreclosure of result in the foreclosure of Vitug's mortgaged property. 22 No evidence
Property before the Regional Trial Court ofManila.10 on record showed that Vitug was defrauded when he entered into the
agreement with Abuda.23
On December 19, 2008, the Regional Trial Court promulgated a
Decision in favor of Abuda.11 The dispositive portion of the Decision However, the Court of Appeals found that the interest rates imposed
reads: on Vitug's loan were "iniquitous, unconscionable[,] and
exorbitant."24 It instead ruled that a legal interest of 1 % per month or
WHEREFORE, judgment is rendered in favor of the plaintiffs [sic] 12% per annum should apply from the judicial demand on November
and against the defendant: 21, 2003.25

1. Ordering the defendant to pay unto the court and/or to On November 23, 2011, Vitug moved for the reconsideration of the
the judgment debtor within the reglementary period of Court of Appeals' October 26, 2011 Decision.26He pointed out that
Ninety (90) days the principal sum of P600,000.00 with not all the requisites of a valid mortgage contract were present since
he did not have free disposal of his property when he mortgaged it to
Abuda. His transfer certificate of title had an annotation by the "In the event of foreclosure, the NHA shall be
National Housing Authority, which restricted his right to dispose or notified of the date, time and place of the auction
encumber the property.27 The restriction clause provided that the sale so that it can participate in the foreclosure
National Housing Authority's consent must first be obtained before sale of the property."
he may dispose or encumber his property.28
(2) The mortgage contract must be submitted to NHA for
Abuda, according to Vitug, failed to get the National Housing verification and final approval [. ]43
Authority's consent before the property was mortgaged to him.
Thus, according to petitioner, there was neither written consent nor
Vitug also argued in his Motion for Reconsideration that the property approval by the National Housing Authority of the mortgage
was exempt from execution because it was constituted as a family contracts.44
home before its mortgage.
Petitioner further contends that the alleged lack of NHA consent on
In the Resolution promulgated on March 8, 2012,29 the Court of the mortgage (and, being a family home, his property's exemption
Appeals denied Vitug's Motion for Reconsideration. from execution) was raised in his Answer to respondent's complaint
for foreclosure filed before the Regional Trial Court, thus:
Vitug filed this Petition for Review on Certiorari under Rule 45 to
assail the Court of Appeals' October 26, 2011 Decision and its March 20. Similarly, defendant has constituted their family home over said
8, 2012 Resolution. mortgage property and should that property be sold, defendant and
his family will be left with no place to reside with [sic] within Metro
Vitug raises the following issues: Manila, hence, for humanitarian reason[s], the defendant prayed that
he be given ample time within which to settle his obligation with the
First, whether petitioner Florante Vitug may raise in this Petition
issues regarding the National Housing Authority's alleged lack of
consent to the mortgage, as well as the exemption of his property 21. Lastly, the Memorandum of Encumbrances contained at the back
from execution; of defendant's title prohibits her from selling, encumbering,
mortgaging, leasing, sub-leasing or in any manner altering or
disposing the lot or right thereon, in whole or in part within the
Second, whether the restriction clause in. petitioner's title rendered period of ten (10) years from the time of issuance of said title without
invalid the real estate mortgage he and respondent Evangeline Abuda first obtaining the consent of the NHA. As reflected in the title, the
executed; and same was issued on 25 June 1997 hence, the mortgage executed even
prior to the issuance of said title should be declared void.45
Lastly, whether petitioner's property is a family home that is free
from execution, forced sale, or attachment under the Family Code.30 I

We deny the Petition. Due process46 dictates that arguments not raised in the trial court may
not be considered by the reviewing court.47
Petitioner argues that not all the requisites of a valid mortgage are
present.31 A mortgagor must have free disposal of the mortgaged Petitioner may raise in his Petition the issues of lack of the National
property.32 The existence of a restriction clause33 in his title means Housing Authority's consent to the mortgage and his property's
that he does not have free disposal of his property.34 The restriction alleged exemption from execution.
clause does not allow him to mortgage the property without the
National Housing Authority's approval.35 Since the National Housing
Authority never gave its consent to the mortgage,36 the mortgage The records show that petitioner mentioned these issues as early as in
contract between him and respondent is invalid.37 his Answer to respondent's Complaint48 and Pre-trial Brief.49 The trial
court acknowledged these issues, but found that his defenses based on
these grounds could not be given credence:
On the other hand, respondent argues that the only issue in this case
should be the validity of the real estate mortgage executed by
petitioner in her favor.38 Petitioner raised other issues, such as the The defendant further stated that he is willing to pay the obligation
alleged lack of written consent by the National Housing Authority provided that the interest be equitably reduced because the interest is
(and the property's exemption from execution), only in his Motion for unconscionable. Further, the said property constituted their family
Reconsideration before the Court of Appeals.39 home. The defendant claimed that Memorandum of Encumbrance
prohibits her from selling, encumbering, mortgaging, leasing,
subleasing or in any manner altering or disposing the lot or right
Respondent also argues that the National Housing Authority issued a thereon in whole or in part within ten (10) years from the time of
Permit to Mortgage the property. This was formally offered in issuance of the said title without obtaining the consent of the NHA.
evidence before the Regional Trial Court as Exhibit "E."40 The
National Housing Authority even accepted respondent's personal
checks to settle petitioner's mortgage obligations to the National ... The court opines that the defendant has failed to raise a legitimate
Housing Authority. 41 The National Housing Authority would have and lawful ground in order to bar the herein plaintiff from asserting
already foreclosed petitioner's property if not for the loan that its lawful right under the law.
respondent extended to petitioner.42
The contention of the defendant that the subject mortgaged property
(1) The Mortgage Contract must provide that: is their family home is irrelevant as the debt secured by mortgages on
the premises before or after the constitution of the family home does
not exempt the same from execution (Rule 106 of the Rules of
Whether these arguments seasonably raised are valid is, however, a National Housing Authority. These restrictions were annotated on his
different matter. title, thus:

II Entry No. 4519/V-013/T-234246 - RESTRICTI0N - that the Vendee

shall not sell, encumber, mortgage, lease, sub-let or in any manner,
All the elements of a valid mortgage contract were present. For a alter or dispose the lot or right therein at any time, in whole or in part
mortgage contract to be valid, the absolute owner of a property must without obtaining the written consent of the Vendor. Other
have free disposal of the property.51 That property must be used to restrictions set forth in Doc. No. 287; Page No. 59; Book No. 250;
secure the fulfillment of an obligation.52 Article 2085 of the Civil SERIES of 1997 of Notary Public for Quezon City, Liberty S. Perez.
Code provides:
Date of instrument - June 24, 1997
Art. 2085. The following requisites are essential to contracts of Date of inscription - June 25, 1997 - 11 :39 a.m.57
pledge and mortgage:
The National Housing Authority's restrictions were provisions in a
(1) That they be constituted to secure the fulfillment of a contract it executed with petitioner. This contract bound petitioner to
principal obligation; certain conditions before transferring or encumbering the property.
Specifically, when the National Housing Authority sold the property
to petitioner, petitioner became obligated not to sell, encumber,
(2) That the pledgor or mortgagor be the absolute owner of mortgage, lease, sublease, alter, or dispose the property without the
the thing pledged or mortgaged; National Housing Authority's consent.

(3) That the persons constituting the pledge or mortgage These restrictions do not divest petitioner of his ownership rights.
have the free disposal of their property, and in the absence They are mere burdens or limitations on petitioner's jus
thereof, that they be legally authorized for the purpose. disponendi. Thus, petitioner may dispose or encumber his property.
However, the disposition or encumbrance of his property is subject to
.... the limitations and to the rights that may accrue to the National
Housing Authority. When annotated to the title, these restrictions
Petitioner, who held under his name a transfer certificate of title to serve as notice to the whole world that the National Housing
the property, mortgaged the property to respondent to secure the Authority has claims over the property, which it may enforce against
payment of his loan of P600,000.00. others.

Petitioner claims that he only borrowed P250,000.00 and that he was Contracts entered into in violation of restrictions on a property
only made to sign another mortgage contract whose terms he did not owner's rights do not always have the effect of making them void ab
agree to. initio.58 This has been clarified as early as 1956 in Municipality of
Camiling v. Lopez.59

These claims were already found by the trial court and the Court of
Appeals to be unsupported by evidence. Petitioner's consent to the The Municipality of Camiling sought to collect from Diego Z. Lopez
mortgage contract dated November 17, 1997 was not vitiated. He payments for the lease of "certain fisheries." As. a defense, Diego Z.
voluntarily signed it in the presence of a notary public, his wife, and Lopez invoked the alleged nullity of the lease contract he entered into
other witnesses.53 with the Municipality of Camiling.

Further, the amount of P600,000.00 under the November 17, 1997 Citing Municipality of Hagonoy v. Evangelista,60 the trial court ruled
mortgage contract represented the initial loan of P250,000.00 and the that the lease contract between the Municipality of Camiling and
subsequent loan amounts, which were found to have been actually Diego Z. Lopez was void since it "was not approved by the provincial
released to petitioner. The November 17, 1997 mortgage contract governor in violation of section 2196 of the Revised Administrative
reflected the changes in the parties' obligations after they executed Code. "61 This court reversed the trial court's Decision and noted the
the March 17, 1997 mortgage contract. incorrect interpretation in Municipality of Hagonoy of the term
"nulos" under Article 4 of the then Civil Code: "Son nulos las actos
ejecutados contra lo dispuesto en la ley, salvo las casos en que la
This court is not a trier of facts. As a general rule, findings of fact of naisma ley ordene su validez."62
the lower court and of the Court of Appeals are not reviewable and
are binding upon this court54 unless the circumstances of the case are
shown to be covered by the exceptions.55 Petitioner failed to show In Municipality of Camiling, this court explained that void acts
any ground for this court to review the trial court's and the Court of declared in Article 4 of the Old Civil Code63 refer to those made in
Appeals' finding that petitioner mortgaged his property in violation of the law. Not all those acts are void from the beginning.
consideration of a loan amounting to P600,000.00. Void acts may be "those that are ipso facto void and those which are
merely voidable."64

Petitioner's undisputed title to and ownership of the property is

sufficient to give him free disposal of it. As owner of the property, he The lease contract executed by the Municipality of Camiling and
has the right to enjoy all attributes of ownership Diego Z. Lopez was not treated as ipso facto void. Section 2196 of
including jus disponendi or the right to encumber, alienate, or dispose the Administrative Code required the provincial governor's approval
his property "without other limitations than those established by before the municipal council entered into contracts. However, the
law."56 same provision did not prohibit the municipal council from entering
into contracts involving the properties of the municipality.65 The
municipal council's exercise of power to enter into these contracts
Petitioner's claim that he lacks free disposal of the property stems might have been limited, but its power was recognized. This court
from the existence of the restrictions imposed on his title by the found that aside from the lack of approval, the contract had no badge
of illegality that would make it ipso facto void. The execution of the the duly executed subsequent contract remains valid; or (2) assail the
contract was not tainted with violation of public order, morality, or subsequent contract based on the breach of restrictions imposed in its
public policy. The contract could have been ratified. Hence, this court favor.
said that it was "merely voidable at the option of the party who in law
is granted the right to invoke its invalidity."66 In Sarmiento, this court recognized that the right to waive follows
from the right to invoke any violation of conditions under the
The same doctrine was repeated in Sarmiento v. Salud,67 which contract. Only the person who has the right to invoke this violation
involved a property in Kamuning, Quezon City. The property was has the cause of action for annulment of contract. The validity or
sold by Philippine Homesite and Housing Corp. to Spouses Francisco invalidity of the contract on the ground of the violation is dependent
and Marcelina Sarmiento. The transfer certificate of title that covered on whether that person will invoke this right. Hence, there was
the property contained an annotation stating that the property was effectively a waiver on the part of People's Homesite and Housing
sold on the condition that it could not be resold within 25 years from Corporation when it did riot assail the validity of the mortgage in that
contract date. Sale could be made within the period only to People's case:
Homesite and Housing Corporation.68 Spouses Sarmiento later
mortgaged the property to Jorge Salud. Because Spouses Sarmiento It follows that on the assumption that the mortgage to appellee Salud
failed to redeem the property, the sheriff auctioned and sold the and the foreclosure sale violated the condition in the Sarmiento
property to Jorge Salud, who was issued a certificate of sale. contract, only the PHHC was entitled to invoke the condition
aforementioned, and not the Sarmientos. The validity or invalidity of
Spouses Sarmiento sought to prevent the foreclosure of the property the sheriffs foreclosure sale to appellant Salud thus depended
by filing an action for annulment of the foreclosure proceedings, sale, exclusively on the PHHC; the latter could attack the sale as violative
and certificate of sale on the ground that the prohibition against sale of its right of exclusive reacquisition; but it (PHHC) also could waive
of the property within 25 years was violated. the condition and treat the sale as good, in which event, the sale can
not be assailed [for] breach of the condition aforestated. Since it does
This court did not declare the contract void for violating the condition not appear anywhere in the record that the PHHC treated the
that the property could not be resold within 25 years. Instead, it mortgage and foreclosure sale as an infringement of the condition, the
recognized People's Homesite and Housing Corporation's right to validity of the mortgage, with all its consequences, including its
cause the annulment of the contract. Since the condition was made in foreclosure and sale thereat, can not be an issue between the parties to
favor of People's Homesite and Housing Corporation, it was the the present case. In the last analysis, the appellant, as purchaser at the
Corporation, not Spouses Sarmiento, who had a cause of action for foreclosure sale, should be regarded as the owner of the lot, subject
annulment.69 In effect, this court considered the contract between only to the right of PHHC to have his acquisition of the land set aside
Spouses Sarmiento and Jorge Salud as merely voidable at the option if it so desires.81
of People's Homesite and Housing Corporation.
There is no showing that the National Housing Authority assailed the
Thus, contracts that contain provisions in favor of one party may be validity of the mortgage contract on the ground of violation of
void ab initio or voidable.70 Contracts that lack consideration,71 those restrictions on petitioner's title. The validity of the mortgage contract
that are against public order or public policy,72 and .those that are based on the restrictions is not an issue between the parties. Petitioner
attended by illegality73 or immorality74 are void ab initio. has no cause of action against respondent based on those restrictions.
The mortgage contract remains binding upon petitioner and
Contracts that only subject a property owner's property rights to
conditions or limitations but otherwise contain all the elements of a
valid contract are merely voidable by the person in whose favor the In any case, there was at least substantial compliance with the
conditions or limitations are made.75 consent requirement given the National Housing Authority's issuance
of a Permit to Mortgage. The Permit reads:
The mortgage contract entered into by petitioner and respondent
contains all the elements of a valid contract of mortgage. The trial 25 November 1997
court and the Court of Appeals found no irregularity in its execution.
There was no showing that it was attended by fraud, illegality, MR. FLORANTE VITUG
immorality, force or intimidation, and lack of consideration. 901 Del Pan Street
Tondo, Manila
At most, therefore, the restrictions made the contract entered into by
the parties voidable76 by the person in whose favor they were made-in PERMIT TO MORTGAGE
this case, by the National Housing Authority.77 Petitioner has no
actionable right or cause of action based on those restrictions.78 Dear Mr. Vitug,

Having the right to assail the validity of the mortgage contract based Please be informed that your request dated 20 November 1997 for
on violation of the restrictions, the National Housing Authority may permission to mortgage Commercial Lot 5, Block 1, Super Block 3,
seek the annulment of the mortgage contract.79 Without any action Area I, Tondo Foreshore Estate Management Project covered by TCT
from the National Housing Authority, rights and obligations, No. 234246 is hereby GRANTED subject to the following terms and
including the right to foreclose the property in case of non-payment conditions:
of the secured loan, are still enforceable between the parties that
executed the mortgage contract.
1. The Mortgage Contract must provide that:
The voidable nature of contracts entered into in violation of
restrictions or conditions necessarily implies that the person in whose "In the event of foreclosure, the NHA shall be notified of the date,
favor the restrictions were made has two (2) options. It may either: time and place of the auction sale so that it can participate in the
(1) waive80 its rights accruing from such restrictions, in which case, foreclosure sale of the property."
2. The mortgage contract must be submitted to NHA for verification (1) When the fault is on the part of both contracting parties,
and final approval; and neither may recover what he has given by virtue of the
contract, or demand the performance of the other's
3. This permit shall be good only for a period of ninety (90) days undertaking;
from date of receipt hereof.
(2) When only one of the contracting parties is at fault, he
Very truly yours, cannot recover what he has given by reason of the contract,
or ask for the fulfillment of what has been promised him.
The other, who is not at fault, may demand the return of
(Signed) what he has given without any obligation to comply his
Mariano M. Pineda promise.
General Manager82
Under this principle, courts shall not aid parties in their illegal
Petitioner insists that the Permit cannot be treated as consent by the acts.86 The court shall leave them as they are.87 It is an equitable
National Housing Authority because of respondent's failure to principle that bars parties from enforcing their illegal acts, assailing
comply with its conditions. the validity of their acts, or using its invalidity as a defense.88

However, a reading of the mortgage contract executed by the parties In the 1906 case of Batarra v. Marcos,89 this court declared that a
on November 17, 1997 shows otherwise. The November 17, 1997 person cannot enforce a promise to marry based on the consideration
mortgage contract had references to the above conditions imposed by of "carnal connection." This court ruled that whether or not such
the National Housing Authority, thus: consideration was a crime, neither of the parties can recover because
the acts "were common to both parties."90
It is the essence of this Contract, that if and should the Mortgagor
fails to comply and pay the principal obligations hereon within the In Bough v. Cantiveros,91 this court refused to enforce in favor of the
period of the Contract, the Mortgage shall be foreclosed according to guilty parties a contract of sale that was not only simulated but also
law and in which case the NHA shall be duly notified of the matter. executed to defeat any attempt by a husband to recover properties
from his wife.
That this mortgage contract shall be submitted to the NHA for
verifixation [sic] and final approval in accordance with NHA permit Another case, Liguez v. Court of Appeals,92 involves a party's claim
to mortgage the property. 83 (Emphasis supplied) over a property based on a deed of donation executed in her favor
when she was 16 years old. The heirs of the donor assailed the
Assuming there was non-compliance with the conditions set forth in donation on the ground of having an illicit causa.
the Permit, petitioner cannot blame respondent. The restrictions were
part of the contract between the National Housing Authority and The donor in that case was found to have had sexual relations with
petitioner. It was petitioner, not respondent, who had the obligation to the claimant. The donation was done to secure the claimant's
notify and obtain the National Housing Authority's consent within the continuous cohabitation with the donor, as well as to gratify the
prescribed period before sale or encumbrance of the property. donor's sexual impulses. At the time of the donation, the donor was
married to another woman. The donated property was part of their
Petitioner cannot invoke his own mistake to assail the validity of a conjugal property.
contract he voluntarily entered into.84
This court held that the donation was founded on an
III illicit causa. While this court found the principle of in pari
delicto inapplicable in that case given the claimant's minority at the
Even if the mortgage contract were illegal or wrongful, neither of the time of donation, it had the occasion to say that the parties were
parties may assail the contract's validity as against the other because barred "from pleading the illegality of the bargain either as a cause of
they were equally at fault.85 This is the principle of in pari action or as a defense."93 The claimant was declared entitled to the
delicto (or in delicto) as embodied in Articles 1411 and 1412 of the donated property, without prejudice to the share and legitimes of the
Civil Code: donor's forced heirs.

Art. 1411. When the nullity proceeds from the illegality of the cause In the later case of Villegas v. Rural Bank of Tanjay, Inc.,94 this court
or object of the contract, and the act constitutes a criminal offense, ruled that the petitioners in that case were not entitled to relief
both parties being in pari delicto, they shall have no action against because they did not come to court with clean hands.
each other, and both shall be prosecuted. Moreover, the provisions of
the Penal Code relative to the disposal of effects or instruments of a This court found that they "readily participated in a ploy to
crime shall be applicable to the things or the price of the contract. circumvent the Rural Banks Act and offered no objection when their
original loan of P350,000.00 was divided into small separate loans
This rule shall be applicable when only one of the parties is guilty; not exceeding P50,000.00 each."95They and respondent bank were in
but the innocent one may claim what he has given, and shall not be pari delicto. They could not be given affirmative relief against each
bound to comply with his promise. other.96Hence, Spouses Villegas may not seek the annulment of the
loan and mortgage contracts they voluntarily executed with
respondent bank on the ground that these contracts were simulated to
Art. 1412. If the act in which the unlawful or forbidden cause consists make it appear that the loans were sugar crop loans, allowing
does not constitute a criminal offense, the following rules shall be respondent bank to approve it pursuant to Republic Act No. 720,
observed: otherwise known as the Rural Banks Act.
The principle of in pari delicto admits exceptions. It does not apply Parties are free to stipulate interest rates in their loan contracts in
when the result of its application is clearly against statutory law, view of the suspension of the implementation of the Usury Law
morals, good customs, and public policy.97 ceiling on interest effective January 1, 1983.104

In Philippine Banking Corporation, representing the Estate of Justina The freedom to stipulate interest rates is granted under the
Santos v. Lui She,98 this court refused to apply the principle of in pari assumption that we have a perfectly competitive market for loans
delicto. Applying the principle meant that this court had to declare as where a borrower has many options from whom to borrow. It
valid between the parties a 50-year lease contract with option to buy, assumes that parties are on equal footing during bargaining and that
which was executed by a Filipino and a Chinese citizen. This court neither of the parties has a relatively greater bargaining power to
ruled that the policy to conserve land in favor of Filipinos would be command a higher or lower interest rate. It assumes that the parties
defeated if the principle of in pari delicto was applied instead of are equally in control of the interest rate and equally have options to
setting aside the contracts executed by the parties.99 accept or deny the other party's proposals. In other words, the
freedom is granted based on the premise that parties arrive at interest
Petitioner in this case did not come to this court with clean hands. He rates that they are willing but are not compelled to take either by
was aware of the restrictions in his title when he executed the loan force of another person or by force of circumstances.105
and mortgage contracts with respondent. He voluntarily executed the
contracts with respondent despite this knowledge. He also availed However, the premise is not always true. There are imperfections in
himself of the benefits of the loan and mortgage contract. He cannot the loan market. One party may have more bargaining power than the
now assail the validity of the mortgage contract to escape the other. A borrower may be in need of funds more than a lender is in
obligations incurred because of it.100 need of lending them. In that case, the lender has more commanding
power to set the price of borrowing than the borrower has the
Petitioner also failed to show that upholding the validity of the freedom to negotiate for a lower interest rate.
mortgage contract would be contrary to law, morals, good customs,
and public policy. Hence, there are instances when the state must step in to correct
market imperfections resulting from unequal bargaining positions of
Petitioner's contract with the National Housing Authority is not a law the parties.
prohibiting the transfer or encumbrance of his property. It does not
render subsequent transactions involving the property a violation of Article 1306 of the Civil Code limits the freedom to contract to
morals, good customs, and public policy. Violation of its terms does promote public morals, safety, and welfare:106
not render subsequent transactions involving the property void ab
initio.101 It merely provides the National Housing Authority with a Art. 1306. The contracting parties may establish such stipulations,
cause of action to annul subsequent transactions involving the clauses, terms and conditions as they may deem convenient, provided
property. they are not contrary to law, morals, good customs, public order, or
public policy.
In stipulating interest rates, parties must ensure that the rates are
Petitioner argues that the property should be exempt from forced sale, neither iniquitous nor unconscionable. Iniquitous or unconscionable
attachment, and execution, based on Article 155 of the Family interest rates are illegal and, therefore, void for being against public
Code.102 Petitioner and his family have been neighbors with morals.107 The lifting of the ceiling on interest rates may not be read
respondent since 1992, before the execution of the mortgage as "grant[ing] lenders carte blanche [authority] to raise interest rates
contract.103 to levels which will either enslave their borrowers or lead to a
hemorrhaging of their assets."108
Even though petitioner's property has been constituted as a family
home, it is not exempt from execution. Article 155 of the Family Voluntariness of stipulations on interest rates is not sufficient to make
Code explicitly provides that debts secured by mortgages are the interest rates valid.109 In Castro v. Tan:110
exempted from the rule against execution, forced sale, or attachment
of family home: The imposition of an unconscionable rate of interest on a money debt,
even if knowingly and voluntarily assumed, is immoral and unjust. It
Art. 155. The family home shall be exempt from execution, forced is tantamount to a repugnant spoliation and an iniquitous deprivation
sale or attachment except: of property, repulsive to the common sense of man. It has no support
in law, in principles of justice, or in the human conscience nor is
.... there any reason whatsoever which may justify such imposition as
righteous and as one that may be sustained within the sphere of
public or private morals.111
(3) For debts secured by mortgages on the premises before or after
such constitution[.]
Thus, even if the parties voluntarily agree to an interest rate, courts
are given the discretionary power to equitably reduce it if it is later
Since petitioner's property was voluntarily used by him as security for found to be iniquitous or unconscionable.112 Courts approximate what
a loan he obtained from respondent, it may be subject to execution the prevailing market rate would have been under the circumstances
and attachment. had the parties had equal bargaining power.

V An interest rate is not inherently conscionable or unconscionable.

Interest rates become unconscionable in light of the context in which
The Court of Appeals correctly found that the interest rates of 5% or they were imposed or applied. In Medel v. Court of Appeals,113 this
10% per month imposed on petitioner's loan were unconscionable. Court ruled that the stipulated interest of 5.5% or 66% per annum was
unconscionable and contrary to morals. It was declared void. This available balance of ?276,203.03 in the latter's account and yet she
court reduced the interest rate to 1 % per month or 12% per annum. 114 ordered for the stop payments of the seven checks which can actually
be covered by the available funds in said account. She then caught
This court also ruled that the interest rates of 3%, 5%, and 10% per Marilou by surprise when she surreptitiously filed a case for
month were unconscionable, thus justifying the need to reduce the declaration of nullity of the document and for damages.117 (Emphases
interest rates to 12% per annum.115 supplied, citations omitted)

On the other hand, despite rulings that interest rates of 3% and 5% Under the circumstances of this case, we find no reason to uphold the
per month are unconscionable, this court in Toledo v. Hyden116 found stipulated interest rates of 5% to 10% per month on petitioner's loan.
that the interest rate of 6% to 7% per month was not unconscionable. Petitioner obtained the loan out of extreme necessity. As pointed out
This court noted circumstances that differentiated that case by respondent, the property would have been earlier foreclosed by the
from Medel and found that the borrower in Toledo was not in dire National Housing Authority if not for the loan. Moreover, it would be
need of money when she obtained a loan; this implied that the interest unjust to impose a heavier burden upon petitioner, who would already
rates were agreed upon by the parties on equal footing. This court be losing his and his family's home. Respondent would not be
also found that it was the borrower in Toledo who was guilty of unjustly deprived if the interest rate is reduced. After all, respondent
inequitable acts: still has the right to foreclose the property. Thus, we affirm the Court
of Appeals Decision to reduce the interest rate to I% per month or
12% per annum.
Noteworthy is the fact that in Medel, the defendant-spouses were
never able to pay their indebtedness from the very beginning and
when their obligations ballooned into a staggering sum, the creditors However, we modify the rates in accordance with the guidelines set
filed a collection case against them. In this case, there was no forth in Nacar v. Gallery Frames:118
urgency of the need for money on the part of Jocelyn, the debtor,
which compelled her to enter into said loan transactions. She used II. With regard particularly to an award of interest in the concept of
the money from the loans to make advance payments for prospective actual and compensatory damages, the rate of interest, as well as the
clients of educational plans offered by her employer. In this way, her accrual thereof, is imposed, as follows:
sales production would increase, thereby entitling her to 50% rebate
on her sales. This is the reason why she did not mind the 6% 1. When the obligation is breached, and it consists in the
to 7% monthly interest. Notably too, a business transaction of this payment of a sum of money, i.e., a loan or forbearance of
nature between Jocelyn and Marilou continued for more than five money, the interest due should be that which may have
years. Jocelyn religiously paid the agreed amount of interest until she been stipulated in writing. Furthermore, the interest due
ordered for stop payment on some of the checks issued to shall itself earn legal interest from the time it is judicially
Marilou. The checks were in fact sufficiently funded when she demanded. In the absence of stipulation, the rate of interest
ordered the stop payment and then filed a case questioning the shall be 6% per annum to be computed from
imposition of a 6% to 7% interest rate for being allegedly iniquitous default, i.e., from judicial or extrajudicial demand under
or unconscionable and, hence, contrary to morals. and subject to the provisions of Article 1169 of the Civil
It was clearly shown that before Jocelyn availed of said loans, she
knew fully well that the same carried with it an interest rate of 6% 2. When an obligation, not constituting a loan or
to 7% per month, yet she did not complain. In fact, when she availed forbearance of money, is breached, an interest on the
of said loans, an advance interest of 6% to 7% was already deducted amount of damages awarded may be imposed at the
from the loan amount, yet she never uttered a word of protest. discretion of the court at the rate of 6% per annum. No
interest, however, shall be adjudged on unliquidated claims
After years of benefiting from the proceeds of the loans bearing an or damages, except when or until the demand can be
interest rate of 6% to 7% per month and paying for the same, Jocelyn established with reasonable certainty. Accordingly, where
cannot now go to court to have the said interest rate annulled on the the demand is established with reasonable certainty, the
ground that it is excessive, iniquitous, unconscionable, exorbitant, interest shall begin to run from the time the claim is made
and absolutely revolting to the conscience of man. "This is so because judicially or extrajudicially (Art. 1169, Civil Code), but
among the maxims of equity are (1) he who seeks equity must do when such certainty cannot be so reasonably established at
equity, and (2) he who comes into equity must come with clean the time the demand is made, the interest shall begin to run
hands. The latter is a frequently stated maxim which is also expressed only from the date the judgment of the court is made (at
in the principle that he who has done inequity shall not have equity. It which time the quantification of damages may be deemed
signifies that a litigant may be denied relief by a court of equity on to have been reasonably ascertained). The actual base for
the ground that his conduct has been inequitable, unfair and the computation of legal interest shall, in any case, be on
dishonest, or fraudulent, or deceitful as to the controversy in issue." the amount finally adjudged.

We are convinced that Jocelyn did not come to court for equitable 3. When the judgment of the court awarding a sum of
relief with equity or with clean hands. It is patently clear from the money becomes final and executory, the rate of legal
above summary of the facts that the conduct of Jocelyn can by no interest, whether the case falls under paragraph 1 or
means be characterized as nobly fair, just, and reasonable. This paragraph 2, above, shall be 6% per annum from such
Court likewise notes certain acts of Jocelyn before filing the case finality until its satisfaction, this interim period being
with the RTC. In September 1998, she requested Marilou not to deemed to be by then an equivalent to a forbearance of
deposit her checks as she can cover the checks only the following credit.
month.1âwphi1 On the next month, Jocelyn again requested for
another extension of one month. It turned out that she was only And, in addition to the above, judgments that have become final and
sweet-talking Marilou into believing that she had no money at that executory prior to July 1, 2013, shall not be disturbed and shall
time. But as testified by Serapio Romarate, an employee of the Bank continue to be implemented applying the rate of interest fixed
of Commerce where Jocelyn is one of their clients, there was an therein.119
Thus, the interest rate for petitioner's loan should be further reduced obligations arising from the loan.11 Thereafter, on October 22, 2004,
to 6% per annum from July 1, 2013 until full satisfaction. Atty. Ygoña notarized the Deed of Absolute Sale which Grauel used
to cause the transfer of the tax declaration over the subject property to
WHEREFORE, the Petition is DENIED. The Court of Appeals her name.12
Decision dated October 26, 2011 and its Resolution dated March 8,
2012 are AFFIRMED. The interest rate for the loan of P600,000.00 Upon learning that Grauel filed a civil case for Quieting of Title, the
is further reduced to 6% per annum from July 1, 2013 until fully paid. Spouses Navarro filed an adverse claim in order to restore their right
over the subject property.13 The Spouses Navarro also filed a criminal
SO ORDERED. complaint against Grauel and Atty. Ygoña for Estafa through
Falsification of Public Document, and the instant administrative case
against Atty. Ygoña.14 The Spouses Navarro asserted that, driven by
their dire need for the proceeds of the loan and lacking familiarity
with the particulars of the transaction, they hastily signed the Deed of
--[pactum commissorium]-- Absolute Sale, of which the date and other relevant portions were
allegedly left blank.15
A.C. No. 8450
According to the Spouses Navarro, and as admitted by Grauel, the
SPOUSES FELIX AND FE NAVARRO, Complainants Promissory Note, the Real Estate Mortgage, and the Deed of
vs. Absolute Sale were all executed on November 22, 2002.16 The Real
ATTY.MARGARITOG. YGOÑA, Respondent Estate Mortgage was notarized by Atty. Ygoña on the same date.
However, the Deed of Sale was notarized only on October 22, 2004. 17

In their complaint,18 the Spouses Navarro alleged that the Deed of
Absolute Sale was fictitious and that their signatures therein were
CAGUIOA, J.: forged. In impugning the validity of the Deed of Absolute Sale, the
Spouses Navarro pointed out several irregularities, particularly, the
A notarized document is entitled to full faith and credit upon its face. Community Tax Certificates (CTC) used in the Deed of Absolute
A notary public must exercise utmost care in performing his duties to Sale and the Acknowledgment portion.19 In addition, the Spouses
preserve the public's confidence in the integrity of notarized Navarro presented a Certification20 issued by the Office of the Clerk
documents.1 of Court (Notarial Section), Regional Trial Court of Cebu, 7th
Judicial Region, confirming that Atty. Ygoña had submitted his
notarial report for the year 2004, but the subject Deed of Absolute
The relevant facts, as borne by the records, are as follows:
Sale notarized on October 22, 2004 was not among the documents
Complainants spouses Felix and Fe Navarro (Spouses Navarro) were
the owners of a parcel of land (subject property) located at Barrio
For his part, Atty. Ygoña averred that at the time the Deed of
Panadtaran, San Fernando, Cebu, Philippines, covered by Tax
Absolute Sale was presented to him for notarization, it was complete
Declaration No. 0137-7148.2
in all material particulars, and that the Spouses Navarro freely and
voluntary executed and signed the same.21 Atty. Ygoña also
Sometime in November 2002, the Spouses Navarro obtained a loan emphasized that the Spouses Navarro did not deny the genuineness of
from Mercy Grauel (Grauel) in the amount of ₱300,000.00.3 As a their signatures in the Deed of Absolute Sale.22
collateral for the loan, the Spouses Navarro executed and signed a
Promissory Note and a Real Estate Mortgage over the subject
In a Resolution23 dated September 19, 2005, the City Prosecutor
property on November 22, 2002.4 In addition, Grauel proposed to the
dismissed the criminal complaint for Estafa against Atty. Ygoña as
Spouses Navarro the execution of a Deed of Absolute Sale conveying
there was no proof that he conspired with Grauel in committing the
the subject property to Grauel, in the event that the Spouses Navarro
crime against the Spouses Navarro. However, in the same Resolution,
would fail to pay the loan.5 Grauel admitted that she made the
the City Prosecutor recommended the filing of an Information for
proposal to avoid the tedious process of foreclosing a property, and
Estafa under Article 315, No. 3(a) of the Revised Penal Code (RPC)
that the Deed of Absolute Sale would serve merely as an additional
against Grauel after finding probable cause that she employed deceit
security for the loan.6 According to Grauel, the Spouses Navarro
and fraud when she induced the Spouses Navarro to sign the Deed of
agreed to her proposal and voluntarily signed the Deed of Absolute
Absolute Sale purposely as an assurance before granting the loan, but
used it to transfer the title over the property to her name, to the
prejudice of the Spouses Navarro.24
Grauel repeatedly demanded payment from the Spouses Navarro, but
her demands went unheeded.8 Grauel recounted that due to her hectic
At the scheduled mandatory conference on August 13, 2010, the
schedule, she forgot to register the Real Estate Mortgage with the
Spouses Navarro and Atty. Ygoña were present, and assisted by their
Office of the Register of Deeds. It was only on March 2004 when
respective counsels, jointly moved for the resetting of the case to give
Grauel filed her request and paid the corresponding fees for the
them enough time to go over the records.25
registration of the Real Estate Mortgage. Despite this, the Real Estate
Mortgage was not registered because the Office of the Register of
Deeds allegedly just sat on Grauel's request.9 During the last mandatory conference on November 19, 2010, the
Spouses Navarro, represented by Atty. Rainier C. Lacap, and Atty.
Ygoña agreed that stipulations, admissions, and issues shall be
Upon instructions made by Grauel, Atty. Ygoña sent the Spouses
limited to the pleadings already filed.26 The mandatory conference
Navarro a letter, received on September 24, 2004, demanding
was terminated and the parties submitted their respective position
payment of the loan.10 According to Grauel, since the Spouses
papers. Thereafter, the case was deemed submitted for decision.
Navarro could no longer pay, Grauel proposed that the Spouses
Navarro convey to her the subject property to extinguish all their
After due proceedings, Commissioner Mario V. Andres public.37 Corollary to this, notaries public must observe utmost care
(Commissioner Andres) rendered a Report and Recommendation 27 on and diligence in carrying out their duties and functions.
June 10, 2013, concluding that Atty. Ygoña failed to diligently
perform his notarial functions after notarizing the Deed of Absolute In Salita v. Salve,38 a case with a similar factual milieu, the Court
Sale, when he should have already been aware of a possible badge revoked therein respondent Atty. Salve's notarial commission and
of pactum commissorium in the transaction - that the lender, Grauel, disqualified him from being commissioned as a notary for a period of
intended an automatic appropriation of the subject property in case of (2) years, for his gross neglect in the performance of his duty as a
nonpayment of the loan by the Spouses Navarro.28 The dispositive notary when he notarized the pre-formed Deed of Absolute Sale
portion reads: without therein complainant Salita's presence before him. The Court
found that it was unfathomable for Salita to appear before Atty. Salve
WHEREFORE, the Undersigned respectfully recommends that if the to have the Deed of Absolute Sale notarized, as it would be
notarial commission of the Respondent still exists, that it be hereby detrimental to his own interests.39
revoked and that he be disqualified from being commissioned as a
notary public for two (2) years. It is also recommended that herein Here, Atty. Ygoña should have been more circumspect in notarizing
Respondent be suspended from the practice of law for three (3) to six the Deed of Absolute Sale. Assuming that there is truth in Atty.
(6) months.29 Ygoña's assertion that the Spouses Navarro freely and voluntarily
signed and executed the Deed of Absolute Sale, the Court agrees with
In its Resolution30 dated August 9, 2014, the IBP Board of Governors Commissioner Andres that the discrepancies in the CTCs used in the
resolved to adopt and approve the said Report and Recommendation, Deed of Absolute are too glaring to ignore.40 Thus, serious doubt
thus: exists as to whether the Spouses Navarro did indeed appear before
Atty. Ygoña to have the Deed of Absolute Sale notarized, as required
RESOLVED to ADOPT and APPROVE, as it is hereby ADOPTED by the Rules on Notarial Practice.41
and APPROVED, the Report and Recommendation of the
Investigating Commissioner in the above-entitled case, herein made Moreover, the Court notes the Certification from the Office of the
part of this Resolution as Annex "A", and finding the Clerk of Court confirming that the notarial report submitted by Atty.
recommendation fully supported by evidence on record and the Ygoña did not contain the subject Deed of Absolute Sale.42 This
applicable laws, and for failure to exercise the utmost diligence in the failure on the part of Atty. Ygoña to record the transaction in his
performance of his functions as a notary public, Atty. Margarito G. books and include the same in his notarial register, as required by the
Ygoña's Notarial Commission is hereby Immediately Revoked. Atty. Rules on Notarial Practice,43 warrants a corresponding sanction.
Margarito G. Ygoña is further DISQUALIFIED from being
commissioned as notary public for two (2) years and SUSPENDED As for the penalty to be imposed, the Court takes into account the
from the practice of law for three (3) months.31 dismissal of the criminal case for falsification filed against Atty.
Ygoña. Despite the ruling of the IBP Board of Governors on Atty.
On February 25, 2016, the IBP Board of Governors denied Atty. Ygoña's Second Motion for Reconsideration, the Court deems it
Ygoña's Motion for Reconsideration finding no reason to reverse its necessary to point out that the Spouses Navarro previously filed a
previous decision.32 On August 26, 2016, the IBP Board of disbarment case44 against the former counsel of Grauel, Atty.
Governors denied Atty. Ygoña's Second Motion for Reconsideration Gregorio B. Escasinas, concerning the same civil action involving the
for the following reasons: (1) neither the Rules of Court nor the IBP subject property. This shows the Spouses Navarro's propensity to file
Commission on Bar Discipline Rules allow the filing of the same; (2) suits against the lawyers of their opponent, which the Court should
for being dilatory; and (3) the issues therein had already been passed not overlook. Thus, considering the foregoing, the Court agrees with,
upon.33 and hereby adopts, the recommended penalty of the IBP that
respondent Atty. Ygoña's notarial commission be revoked and that he
After a judicious examination of the records and submission of the be disqualified from being commissioned as a notary public for two
parties, this Court affirms the resolution of the IBP Board of (2) years. However, the Court does not agree that the acts of Atty.
Governors finding respondent Atty. Ygoña administratively liable, Ygoña warrant the recommended penalty of suspension from the
but modifies the penalty imposed.1âwphi1 practice of law for three (3) months.

The Court does not entirely agree with the basis of Commissioner WHEREFORE, Atty. Margarito G. Ygoña is found GUILTY of
Andres in finding Atty. Ygoña liable for his failure to diligently gross negligence in the performance of his duties as notary
perform his notarial functions. Commissioner Andres concluded that public.1âwphi1 His notarial commission, if still existing, is
Atty. Ygoña should have been aware that the Deed of Absolute Sale hereby REVOKED and he is DISQUALIFIED from being
he had notarized was in the nature of a pactum commissorium. The commissioned as a notary public for a period of two (2) years. He
Court finds that this issue should be resolved in a separate civil is STERNLY WARNED that a repetition of the same or similar act
action. Likewise, the issue of whether or not the Deed of Absolute will be dealt with more severely.
Sale was indeed forged, is civil, and perhaps criminal, in nature, and
should be passed upon in a proper case.34 Nevertheless, the Court Let copies of this Resolution be furnished the Office of the Bar
agrees that Atty. Ygoña was remiss in the exercise of his notarial Confidant, to be appended to respondent's personal record as
functions. attorney. Further, let copies of this Resolution be furnished the
Integrated Bar of the Philippines and the Office of the Court
Notarization is not merely an empty or meaningless exercise. It is Administrator, which is directed to circulate them to all courts in the
invested with public interest, such that only those qualified and country for their information and guidance.
authorized may act as notaries public.35 Notarization converts a
private document into a public document, making it admissible in SO ORDERED.
evidence without further proof of its authenticity. 36 A notarized
document is, therefore, entitled to full faith and credit upon its face,
and the courts, administrative agencies, and the public at large must --[pawnshop ticket]--
be able to rely upon the acknowledgment executed by a notary
WHEREFORE, in view of all the foregoing, the
H. TAMBUNTING PAWNSHOP, INC., G.R. No. 171138 instant Petition for Review is
Petitioner, hereby PARTIALLY GRANTED. Accordingly,
Present: petitioner is
hereby ORDERED to PAY deficiency VAT
QUISUMBING, J., Chairperson,
assessment.However, finding that petitioner is not
CARPIO MORALES,subject to the documentary stamp tax under
- versus - TINGA, Section 195 of the Tax Code, Assessment Notice
VELASCO, JR., and No. 32-97 dated April 11, 2001 for deficiency
BRION, JJ. documentary stamp tax is
Respondent. April 7, 2009
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
- - - -x
The CIRs motion for reconsideration was denied by the
DECISION CTA. Thus, the CIR elevated the case to the Court of Appeals. The

QUISUMBING, J.: appellate court ruled in favor of the CIR and decreed:
WHEREFORE, premises considered, Petition for
Partial Review by the Commissioner of Internal
Revenue is hereby GRANTED and the assailed
This petition for review assails the Decision[1] dated June 30, 2005 of March 18, 2003 Decision of the Court of Tax
Appeals, , in so far as it cancelled the deficiency
the Court of Appeals in CA-G.R.-SP No. 79116 and its documentary stamp tax assessment of Php
50,910.00 against respondent TAMBUNTING, is
Resolution[2] dated January 10, 2006, denying the motion for hereby MODIFIED in that respondent
TAMBUNTING is hereby ordered to pay petitioner
reconsideration. The appellate court had modified the
Commissioner of Internal Revenue, the amount of
Decision[3] dated March 18, 2003 of the Court of Tax Appeals (CTA) Php50,910.00 as 1997 deficiency documentary
stamp tax assessment, plus 25% surcharge, 20%
in C.T.A. Case No. 6366. deficiency interest, and 20% delinquency interest
thereon from May 11, 2001 until fully paid pursuant
to Section 248 and 249 (B) of the Tax Code.
The case stemmed from a Pre-Assessment Notice[4] issued by the
Commissioner of Internal Revenue (CIR) against H. Tambunting

Pawnshop, Inc. (Tambunting) for, among others, deficiency

documentary stamp tax (DST) of P50,910. Thereafter, the CIR issued Tambunting now before us raises the following issue:

an assessment notice[5] with the corresponding demand letters[6] for the WHETHER OR NOT THE HONORABLE
payment of the DST and the corresponding compromise penalty for FINDING PETITIONER LIABLE FOR DST ON
taxable year 1997.

Tambunting filed its written protest to the assessment notice alleging Stated simply, is Tambunting liable for documentary stamp
that it was not subject to documentary stamp tax under Section 195[7] of taxes based on the pawn tickets that it issued?
the National Internal Revenue Code (NIRC) because documentary

stamp taxes were applicable only to pledge contracts, and the Petitioner contends that it is the document evidencing a
pawnshop business did not involve contracts of pledge. pledge of personal property which is subject to the DST. A pawn ticket

is defined under Section 3 of Presidential Decree No. 114[11] as the

When Tambuntings written protest was not acted upon by the CIR, the pawnbrokers receipt for a pawn [and] is neither a security nor a printed
former filed a petition with the CTA appealing the assessments issued evidence of indebtedness. Petitioner argues that since the document
by the CIR. The CTA gave due course to Tambuntings petition for taxable under Section 195 must show the existence of a debt, a pawn
review and rendered a Decision, the dispositive portion of which reads: ticket which is merely a receipt for a pawn is not subject to DST.
Petitioner further contends that the DST is imposed on the obligation, upon fulfillment of which the thing pledged, with all its accessions

documents issued, not the transactions so had or accomplished. It and accessories, shall be returned to the debtor or to the third person.[13] The

insists that the document to be taxed under the transaction pawn ticket is required to contain the same essential information that would

contemplated should be the pledge agreement, if any is issued, not the be found in a pledge agreement. Only the nomenclature of the requirements

pawn ticket. in the pawn ticket is changed to refer to the specific kind of pledge

transactions undertaken by pawnshops. The property or thing pledged is

On the other hand, the CIR, through the Office of the referred to as the pawn, the creditor (pledgee) is referred to as the

Solicitor General, argues that Section 195 of the NIRC expressly pawnee[14] and the debtor (pledgor) is referred to as the pawner.

provides that a documentary stamp tax shall be collected on every

pledge of personal property as a security for the fulfillment of the Petitioners explanations fail to dissuade us from recognizing

contract of loan. Since the transactions in a pawnshop business partake the pawn ticket as the document that evidences the pledge. True, the

of the nature of pledge transactions, then pawn transactions evidenced pawn ticket is neither a security nor a printed evidence of

by pawn tickets, are subject to documentary stamp taxes. indebtedness. But, precisely being a receipt for a pawn, it documents

the pledge. A pledge is a real contract, hence, it is necessary in order

The CIR further argues that the pawn ticket is the pledge to constitute the contract of pledge, that the thing pledged be placed in

contract itself and thus, it is subject to documentary stamp tax. the possession of the creditor, or of a third person by common

agreement.[15] Consequently, the issuance of the pawn ticket by the

After considering the submission of the parties, we find that the instant
pawnshop means that the thing pledged has already been placed in its
petition lacks merit.
possession and that the pledge has been constituted.

First, on the subject of pawn tickets, the Bangko Sentral ng

Second, on the subject of documentary stamp tax, the NIRC provides:
Pilipinas Manual of Regulations for Non-Bank Financial

Institutions[12] provides: SEC. 173. Stamp Taxes Upon

Documents, Loan Agreements, Instruments and
SEC. 4322P Pawn Ticket. Pawnshops Papers. Upon documents, instruments, loan
shall at the time of the loan, deliver to each pawner a agreements and papers, and upon acceptances,
pawn ticket which shall contain the following: assignments, sales and transfers of the
obligation, right or property incident thereto,
a. Name and residence of the there shall be levied, collected and paid for, and in
pawner; respect of the transaction so had or
b. Date the loan is granted; accomplished, the corresponding documentary
c. Amount of the principal stamp taxes prescribed in the following
loan; Sections (Emphasis supplied.)
d. Interest rate in percent;
e. Period of maturity; SEC. 195. Stamp Tax on Mortgages,
f. Description of the pawn; Pledges and Deeds of Trust. On every mortgage
g. Expiry date of redemption or pledge of lands, estate, or property, real or
period; personal, heritable or movable, whatsoever, where
h. Signature of the pawnshops the same shall be made as a security for the
authorized representative; payment of any definite and certain sum of money
i. Signature or thumbmark of lent at the time or previously due and owing or
the pawner or his authorized forborne to be paid, being payable, and on any
representative; and conveyance of land, estate, or property
j. Such other terms and whatsoever, in trust or to be sold, or otherwise
conditions as may be agreed converted into money which shall be and intended
upon between the pawnshop only as security, either by express stipulation or
and the pawner. otherwise, there shall be collected a
documentary stamp tax at the following rates:

Notably, a pledge is an accessory, real and unilateral contract by (a) When the amount secured does not
exceed Five thousand pesos (P5,000), Twenty
virtue of which the debtor or a third person delivers to the creditor or to a third pesos (P20.00).
person movable property as security for the performance of the principal
(b) On each Five thousand pesos
(P5,000), or fractional part thereof in excess of interest imposed on the deficiency documentary stamp tax assessment
Five thousand pesos (P5,000), an additional tax of
Ten pesos (P10.00). (Emphasis supplied.)


The law imposes DST on documents issued in respect of the

specified transactions, such as pledge, and not only on papers

evidencing indebtedness. Therefore, a pawn ticket, being issued in

respect of a pledge transaction, is subject to documentary stamp tax.

Third, the issue in this case is not novel. The question of whether

pawnshop transactions evidenced by pawn tickets are subject to

documentary stamp taxes has been answered in the affirmative

in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal

Revenue.[16] There the Court held:


Section 195 of the National Internal

Revenue Code (NIRC) imposes a DST
on every pledge regardless of whether the same is
a conventional pledge governed by the Civil Code
or one that is governed by the provisions of P.D.
No. 114. All pledges are subject to DST, unless
there is a law exempting them in clear and
categorical language.


No law on legal hermeneutics could

change the fact that the entries contained in a
pawnshop ticket spell out a contract of pledge and
that the exercise of the privilege to conclude such
a contract is taxable under Section 195 of the

Even so, we note that the present case was filed with the Supreme

Court before September 11, 2006, when the Court resolved for the first

time the matter of surcharges and interest for failure to pay

documentary stamp taxes on pledge transactions in Michel J. Lhuillier

Pawnshop, Inc. v. Commissioner of Internal Revenue. Hence, as in the

said case, we can still ascribe good faith to petitioner. Consequently,

the imposition of surcharges and interest in the present case must also

be deleted.[18]

WHEREFORE, the petition is PARTLY GRANTED. The Decision

dated June 30, 2005 of the Court of Appeals in CA-G.R.-SP No. 79116

is AFFIRMED with the MODIFICATION that surcharges and