Republic of the Philippines DECISION

Supreme Court

Manila AUSTRIA-MARTINEZ, J.:

Before us is a Petition for Review on Certiorari filed by Roberto C. Sicam, Jr.

(petitioner Sicam) and Agencia de R.C. Sicam, Inc. (petitioner corporation) seeking
to annul the Decision[1] of the Court of Appeals dated March 31, 2003, and its
THIRD DIVISION Resolution[2] dated August 8, 2003, in CA G.R. CV No. 56633.

It appears that on different dates from September to October 1987, Lulu V. Jorge
(respondent Lulu) pawned several pieces of jewelry with Agencia de R.
ROBERTO C. SICAM and AGENCIA G.R. NO. 159617 C. Sicam located at No. 17 Aguirre Ave., BF Homes Paraaque, Metro Manila, to
secure a loan in the total amount of P59,500.00.
de R.C. SICAM, INC.,

Petitioners,

Present:
On October 19, 1987, two armed men entered the pawnshop and took away
whatever cash and jewelry were found inside the pawnshop vault. The incident was
YNARES-SANTIAGO, J., entered in the police blotter of the Southern Police District, Paraaque Police Station
as follows:
Chairperson,

- versus - AUSTRIA-MARTINEZ,
Investigation shows that at above TDPO, while victims were inside the office, two
CHICO-NAZARIO, and (2) male unidentified persons entered into the said office with guns
NACHURA, JJ. drawn. Suspects(sic) (1) went straight inside and poked his gun toward
Romeo Sicam and thereby tied him with an electric wire while suspects (sic) (2)
poked his gun toward Divina Mata and Isabelita Rodriguez and ordered them to lay
(sic) face flat on the floor. Suspects asked forcibly the case and assorted pawned
LULU V. JORGE and CESAR
jewelries items mentioned above.
JORGE, Promulgated:

Respondents. August 8, 2007

Suspects after taking the money and jewelries fled on board a Marson Toyota
x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - x unidentified plate number.[3]

Petitioner Sicam sent respondent Lulu a letter dated October 19, 1987 informing
her of the loss of her jewelry due to the robbery incident in the pawnshop. On
November 2, 1987, respondent Lulu then wrote a letter[4] to
petitioner Sicam expressing disbelief stating that when the robbery happened, all
The RTC further ruled that petitioner corporation could not be held liable for the
jewelry pawned were deposited with Far East Bank near the pawnshop since it had
loss of the pawned jewelry since it had not been rebutted by respondents that the
been the practice that before they could withdraw, advance notice must be given to
loss of the pledged pieces of jewelry in the possession of the corporation was
the pawnshop so it could withdraw the jewelry from the bank. Respondent Lulu
occasioned by armed robbery; that robbery is a fortuitous event which exempts the
then requested petitioner Sicam to prepare the pawned jewelry for withdrawal
victim from liability for the loss, citing the case of Austria v. Court of Appeals;[7] and
on November 6, 1987 but petitioner Sicam failed to return the jewelry.
that the parties transaction was that of a pledgor and pledgee and under Art. 1174
of the Civil Code, the pawnshop as a pledgee is not responsible for those events
which could not be foreseen.

On September 28, 1988, respondent Lulu joined by her husband, Cesar Jorge, filed a
complaint against petitioner Sicam with the Regional Trial Court of Makati seeking Respondents appealed the RTC Decision to the CA. In a Decision dated March 31,
indemnification for the loss of pawned jewelry and payment of actual, moral and 2003, the CA reversed the RTC, the dispositive portion of which reads as follows:
exemplary damages as well as attorney's fees. The case was docketed as Civil Case
No. 88-2035.
WHEREFORE, premises considered, the instant Appeal is GRANTED, and the
Decision dated January 12, 1993,of the Regional Trial Court of Makati, Branch 62, is
Petitioner Sicam filed his Answer contending that he is not the real party-in-interest hereby REVERSED and SET ASIDE, ordering the appellees to pay appellants the
as the pawnshop was incorporated on April 20, 1987 and known actual value of the lost jewelry amounting to P272,000.00, and attorney' fees
as Agencia de R.C. Sicam, Inc; that petitioner corporation had exercised due care of P27,200.00.[8]
and diligence in the safekeeping of the articles pledged with it and could not be
made liable for an event that is fortuitous.

In finding petitioner Sicam liable together with petitioner corporation, the CA

Respondents subsequently filed an Amended Complaint to include petitioner
corporation.
Thereafter, petitioner Sicam filed a Motion to Dismiss as far as he is concerned
considering that he is not the real party-in-interest. Respondents opposed the
same. The RTC denied the motion in an Order dated November 8, 1989.[5]
After trial on the merits, the RTC rendered its Decision [6] dated January 12, 1993,
dismissing respondents complaint as well as petitioners counterclaim. The RTC held
that petitioner Sicam could not be made personally liable for a claim arising out of a
corporate transaction; that in the Amended Complaint of respondents, they
asserted that plaintiff pawned assorted jewelries in defendants' pawnshop; and
that as a consequence of the separate juridical personality of a corporation, the
corporate debt or credit is not the debt or credit of a stockholder.
applied the doctrine of piercing the veil of corporate entity reasoning that
respondents were misled into thinking that they were dealing with the pawnshop
owned by petitioner Sicam as all the pawnshop tickets issued to them bear the
words Agencia de R.C. Sicam; and that there was no indication on the pawnshop
tickets that it was the petitioner corporation that owned the pawnshop which
explained why respondents had to amend their complaintimpleading petitioner
corporation.
The CA further held that the corresponding diligence required of a pawnshop is that
it should take steps to secure and protect the pledged items and should take steps
to insure itself against the loss of articles which are entrusted to its custody as it
derives earnings from the pawnshop trade which petitioners failed to do;
that Austria is not applicable to this case since the robbery incident happened in
1961 when the criminality had not as yet reached the levels attained in the present
day; that they are at least guilty of contributory negligence and should be held
liable for the loss of jewelries; and that robberies and hold-ups are foreseeable risks
in that those engaged in the pawnshop business are expected to foresee.
The CA concluded that both petitioners should be jointly and severally held liable to
respondents for the loss of the pawned jewelry.
Petitioners motion for reconsideration was denied in a Resolution dated August 8,
2003.
Hence, the instant petition for review with the following assignment of errors:
THE COURT OF APPEALS ERRED AND WHEN IT DID, IT OPENED ITSELF TO REVERSAL,
WHEN IT ADOPTED UNCRITICALLY (IN FACT IT REPRODUCED AS ITS OWN WITHOUT
IN THE MEANTIME ACKNOWLEDGING IT) WHAT THE RESPONDENTS ARGUED IN
THEIR BRIEF, WHICH ARGUMENT WAS PALPABLY UNSUSTAINABLE.
THE COURT OF APPEALS ERRED, AND WHEN IT DID, IT OPENED ITSELF TO REVERSAL
BY THIS HONORABLE COURT, WHEN IT AGAIN ADOPTED UNCRITICALLY (BUT
WITHOUT ACKNOWLEDGING IT) THE SUBMISSIONS OF THE RESPONDENTS IN THEIR
BRIEF WITHOUT ADDING ANYTHING MORE THERETO DESPITE THE FACT THAT THE
SAID ARGUMENT OF THE RESPONDENTS COULD NOT HAVE BEEN SUSTAINED IN
VIEW OF UNREBUTTED EVIDENCE ON RECORD.[9]
Anent the first assigned error, petitioners point out that the CAs finding that
petitioner Sicam is personally liable for the loss of the pawned jewelries is a virtual
and uncritical reproduction of the arguments set out on pp. 5-6 of the Appellants
brief.[10]
Petitioners argue that the reproduced arguments of respondents in their Appellants
Brief suffer from infirmities, as follows:
(1) Respondents conclusively asserted in paragraph 2 of their Amended Complaint
that Agencia de R.C. Sicam, Inc. is the present owner of Agencia de
R.C. Sicam Pawnshop, and therefore, the CA cannot rule against said conclusive
assertion of respondents;
(2) The issue resolved against petitioner Sicam was not among those raised and
litigated in the trial court; and
(3) By reason of the above infirmities, it was error for the CA to have pierced the
corporate veil since a corporation has a personality distinct and separate from its
individual stockholders or members.
Anent the second error, petitioners point out that the CA finding on their
negligence is likewise an unedited reproduction of respondents brief which had the
following defects:
(1) There were unrebutted evidence on record that petitioners had observed the
diligence required of them, i.e, they wanted to open a vault with a nearby bank for
purposes of safekeeping the pawned articles but was discouraged by the Central
Bank (CB) since CB rules provide that they can only store the pawned articles in a
vault inside the pawnshop premises and no other place;
(2) Petitioners were adjudged negligent as they did not take insurance against the
loss of the pledged jelweries, but it is judicial notice that due to high incidence of
crimes, insurance companies refused to cover pawnshops and banks because of
high probability of losses due to robberies;
(3) In Hernandez v. Chairman, Commission on Audit (179 SCRA 39, 45-46), the victim
of robbery was exonerated from liability for the sum of money belonging to others
and lost by him to robbers.

Respondents filed their Comment and petitioners filed their Reply thereto. The
parties subsequently submitted their respective Memoranda.
We find no merit in the petition.
To begin with, although it is true that indeed the CA findings were exact
reproductions of the arguments raised in respondents (appellants) brief filed with
the CA, we find the same to be not fatally infirmed. Upon examination of the
Decision, we find that it expressed clearly and distinctly the facts and the law on
which it is based as required by Section 8, Article VIII of the Constitution. The
discretion to decide a case one way or another is broad enough to justify the
adoption of the arguments put forth by one of the parties, as long as these are
legally tenable and supported by law and the facts on records. [11]
Our jurisdiction under Rule 45 of the Rules of Court is limited to the review of errors
of law committed by the appellate court. Generally, the findings of fact of the
appellate court are deemed conclusive and we are not duty-bound to analyze and
calibrate all over again the evidence adduced by the parties in the court a
quo.[12] This rule, however, is not without exceptions, such as where the factual
findings of the Court of Appeals and the trial court are conflicting or
contradictory[13] as is obtaining in the instant case.
However, after a careful examination of the records, we find no justification to
absolve petitioner Sicam from liability.
The CA correctly pierced the veil of the corporate fiction and adjudged
petitioner Sicam liable together with petitioner corporation. The rule is that the veil
of corporate fiction may be pierced when made as a shield to perpetrate fraud
and/or confuse legitimate issues. [14] The theory of corporate entity was not meant
to promote unfair objectives or otherwise to shield them.[15]
Notably, the evidence on record shows that at the time respondent Lulu pawned
her jewelry, the pawnshop was owned by petitioner Sicam himself. As correctly
observed by the CA, in all the pawnshop receipts issued to respondent Lulu in
September 1987, all bear the words Agencia de R. C. Sicam, notwithstanding that
the pawnshop was allegedly incorporated in April 1987. The receipts issued after
such alleged incorporation were still in the name of Agencia de R. C. Sicam, thus
inevitably misleading, or at the very least, creating the wrong impression to
respondents and the public as well, that the pawnshop was owned solely by
petitioner Sicam and not by a corporation.
Even petitioners counsel, Atty. Marcial T. Balgos, in his letter[16] dated October 15,
1987 addressed to the Central Bank, expressly referred to petitioner Sicam as the
proprietor of the pawnshop notwithstanding the alleged incorporation in April
1987.
We also find no merit in petitioners' argument that since respondents had alleged
in their Amended Complaint that petitioner corporation is the present owner of the
pawnshop, the CA is bound to decide the case on that basis.
Section 4 Rule 129 of the Rules of Court provides that an admission, verbal or
written, made by a party in the course of the proceedings in the same case, does
not require proof. The admission may be contradicted only by showing that it was
made through palpable mistake or that no such admission was made.
Thus, the general rule that a judicial admission is conclusive upon the party making
it and does not require proof, admits of two exceptions, to wit: (1) when it is shown
that such admission was made through palpable mistake, and (2) when it is shown
that no such admission was in fact made. The latter exception allows one to
contradict an admission by denying that he made such an admission. [17]
The Committee on the Revision of the Rules of Court explained the second
exception in this wise:
x x x if a party invokes an admission by an adverse party, but cites the admission out
of context, then the one making the admission may show that he made no such
admission, or that his admission was taken out of context.

x x x that the party can also show that he made no such admission, i.e., not in the
sense in which the admission is made to appear.
That is the reason for the modifier such because if the rule simply states that the
admission may be contradicted by showing that no admission was made, the rule
would not really be providing for a contradiction of the admission but just a
denial.[18] (Emphasis supplied).
While it is true that respondents alleged in their Amended Complaint that petitioner
corporation is the present owner of the pawnshop, they did so only because
petitioner Sicamalleged in his Answer to the original complaint filed against him
that he was not the real party-in-interest as the pawnshop was incorporated in April
1987. Moreover, a reading of the Amended Complaint in its entirety shows that
respondents referred to both petitioner Sicam and petitioner corporation where
they (respondents) pawned their assorted pieces of jewelry and ascribed to both
the failure to observe due diligence commensurate with the business which
resulted in the loss of their pawned jewelry.
Markedly, respondents, in their Opposition to petitioners Motion to Dismiss
Amended Complaint, insofar as petitioner Sicam is concerned, averred as follows:
Roberto C. Sicam was named the defendant in the original complaint because the
pawnshop tickets involved in this case did not show that the R.C. Sicam Pawnshop
was a corporation. In paragraph 1 of his Answer, he admitted the allegations in
paragraph 1 and 2 of the Complaint. He merely added that defendant is not now
the real party in interest in this case.
It was defendant Sicam's omission to correct the pawnshop tickets used in the
subject transactions in this case which was the cause of the instant action. He
cannot now ask for the dismissal of the complaint against him simply on the mere
allegation that his pawnshop business is now incorporated. It is a matter of defense,
the merit of which can only be reached after consideration of the evidence to be
presented in due course.[19]
Unmistakably, the alleged admission made in respondents'
Amended Complaint was taken out of context by petitioner Sicam to suit his own
purpose. Ineluctably, the fact that petitioner Sicam continued to issue pawnshop
receipts under his name and not under the corporation's name militates for the
piercing of the corporate veil.
We likewise find no merit in petitioners' contention that the CA erred in piercing
the veil of corporate fiction of petitioner corporation, as it was not
an issue raised and litigated before the RTC.
Petitioner Sicam had alleged in his Answer filed with the trial court that he was not
the real party-in-interest because since April 20, 1987, the pawnshop business
initiated by him was incorporated and known as Agencia de R.C. Sicam. In the pre-
trial brief filed by petitioner Sicam, he submitted that as far as he was concerned,
the basic issue was whether he is the real party in interest against whom the
complaint should be directed.[20] In fact, he subsequently moved for the dismissal of
the complaint as to him but was not favorably acted upon by the trial court.
Moreover, the issue was squarely passed upon, although erroneously, by the trial
court in its Decision in this manner:
x x x The defendant Roberto Sicam, Jr likewise denies liability as far as he is
concerned for the reason that he cannot be made personally liable for a claim
arising from a corporate transaction.
This Court sustains the contention of the defendant Roberto C. Sicam, Jr. The
amended complaint itself asserts that plaintiff pawned assorted jewelries in
defendant's pawnshop. It has been held that as a consequence of the separate
juridical personality of a corporation, the corporate debt or credit is not the debt or
credit of the stockholder, nor is the stockholder's debt or credit that of a
corporation.[21]
Clearly, in view of the alleged incorporation of the pawnshop, the issue of whether
petitioner Sicam is personally liable is inextricably connected with the
determination of the question whether the doctrine of piercing the corporate veil
should or should not apply to the case.
The next question is whether petitioners are liable for the loss of the pawned
articles in their possession.
Petitioners insist that they are not liable since robbery is a fortuitous event and they
are not negligent at all.
We are not persuaded.
Article 1174 of the Civil Code provides:
Art. 1174. Except in cases expressly specified by the law, or when it is otherwise
declared by stipulation, or when the nature of the obligation requires the
assumption of risk, no person shall be responsible for those events which could not
be foreseen or which, though foreseen, were inevitable.
Fortuitous events by definition are extraordinary events not foreseeable or
avoidable. It is therefore, not enough that the event should not have been foreseen
or anticipated, as is commonly believed but it must be one impossible to foresee or
to avoid. The mere difficulty to foresee the happening is not impossibility to foresee
the same. [22]
To constitute a fortuitous event, the following elements must concur: (a) the cause
of the unforeseen and unexpected occurrence or of the failure of the debtor to
comply with obligations must be independent of human will; (b) it must be
impossible to foresee the event that constitutes the caso fortuito or, if it can be
foreseen, it must be impossible to avoid; (c) the occurrence must be such as to
render it impossible for the debtor to fulfill obligations in a normal manner; and, (d)
the obligor must be free from any participation in the aggravation of the injury or
loss. [23]
The burden of proving that the loss was due to a fortuitous event rests on him who
invokes it.[24] And, in order for a fortuitous event to exempt one from liability, it is
necessary that one has committed no negligence or misconduct that may have
occasioned the loss. [25]
It has been held that an act of God cannot be invoked to protect a person who has
failed to take steps to forestall the possible adverse consequences of such a loss.
One's negligence may have concurred with an act of God in producing damage and
injury to another; nonetheless, showing that the immediate or proximate cause of
the damage or injury was a fortuitous event would not exempt one from liability.
When the effect is found to be partly the result of a person's participation --
whether by active intervention, neglect or failure to act -- the whole occurrence is
humanized and removed from the rules applicable to acts of God. [26]
Petitioner Sicam had testified that there was a security guard in their pawnshop at
the time of the robbery. He likewise testified that when he started the pawnshop
business in 1983, he thought of opening a vault with the nearby bank for the
purpose of safekeeping the valuables but was discouraged by the Central Bank since
pawned articles should only be stored in a vault inside the pawnshop. The very
measures which petitioners had allegedly adopted show that to them the possibility
of robbery was not only foreseeable, but actually foreseen and
anticipated. Petitioner Sicams testimony, in effect, contradicts petitioners defense
of fortuitous event.
Moreover, petitioners failed to show that they were free from any negligence by
which the loss of the pawned jewelry may have been occasioned.
Robbery per se, just like carnapping, is not a fortuitous event. It does not foreclose
the possibility of negligence on the part of herein petitioners. In Co v. Court of
Appeals,[27]the Court held:
It is not a defense for a repair shop of motor vehicles to escape liability simply
because the damage or loss of a thing lawfully placed in its possession was due
to carnapping. Carnapping per se cannot be considered as a fortuitous event. The
fact that a thing was unlawfully and forcefully taken from another's rightful
possession, as in cases of carnapping, does not automatically give rise to a
fortuitous event. To be considered as such, carnapping entails more than the
mere forceful taking of another's property. It must be proved and established that
the event was an act of God or was done solely by third parties and that neither
the claimant nor the person alleged to be negligent has any participation. In
accordance with the Rules of Evidence, the burden of proving that the loss was
due to a fortuitous event rests on him who invokes it which in this case is the
private respondent.However, other than the police report of the
alleged carnapping incident, no other evidence was presented by private
respondent to the effect that the incident was not due to its fault. A police report of
an alleged crime, to which only private respondent is privy, does not suffice to
establish the carnapping. Neither does it prove that there was no fault on the part
of private respondent notwithstanding the parties' agreement at the pre-trial that
the car was carnapped. Carnapping does not foreclose the possibility of fault or
negligence on the part of private respondent.[28]
Just like in Co, petitioners merely presented the police report of the Paraaque Police
Station on the robbery committed based on the report of petitioners' employees
which is not sufficient to establish robbery. Such report also does not prove that
petitioners were not at fault.
On the contrary, by the very evidence of petitioners, the CA did not err in finding
that petitioners are guilty of concurrent or contributory negligence as provided in
Article 1170 of the Civil Code, to wit:
Art. 1170. Those who in the performance of their obligations are guilty of fraud,
negligence, or delay, and those who in any manner contravene the tenor thereof,
are liable for damages.[29]
Article 2123 of the Civil Code provides that with regard to pawnshops and other
establishments which are engaged in making loans secured by pledges, the special
laws and regulations concerning them shall be observed, and subsidiarily, the
provisions on pledge, mortgage and antichresis.
The provision on pledge, particularly Article 2099 of the Civil Code, provides that
the creditor shall take care of the thing pledged with the diligence of a good father
of a family. This means that petitioners must take care of the pawns the way a
prudent person would as to his own property.
In this connection, Article 1173 of the Civil Code further provides:
Art. 1173. The fault or negligence of the obligor consists in the omission of that
diligence which is required by the nature of the obligation and corresponds with the
circumstances of the persons, of time and of the place. When negligence shows bad
faith, the provisions of Articles 1171 and 2201, paragraph 2 shall apply.
If the law or contract does not state the diligence which is to be observed in the
performance, that which is expected of a good father of a family shall be required.
We expounded in Cruz v. Gangan[30] that negligence is the omission to do
something which a reasonable man, guided by those considerations which
ordinarily regulate the conduct of human affairs, would do; or the doing of
something which a prudent and reasonable man would not do.[31] It is want of care
required by the circumstances.
A review of the records clearly shows that petitioners failed to exercise reasonable
care and caution that an ordinarily prudent person would have used in the same
situation. Petitioners were guilty of negligence in the operation of their pawnshop
business. Petitioner Sicam testified, thus:
Court:
Q. Do you have security guards in your pawnshop?
A. Yes, your honor.

Q. Then how come that the robbers were able to enter the premises when
according to you there was a security guard?
A. Sir, if these robbers can rob a bank, how much more a pawnshop.
Q. I am asking you how were the robbers able to enter despite the fact that there
was a security guard?
A. At the time of the incident which happened about 1:00 and 2:00 o'clock in the
afternoon and it happened on a Saturday and everything was quiet in the area BF
Homes Paraaque they pretended to pawn an article in the pawnshop, so one of my
employees allowed him to come in and it was only when it was announced that it
was a hold up.
Q. Did you come to know how the vault was opened?
A. When the pawnshop is official (sic) open your honor the pawnshop is partly
open. The combination is off.
Q. No one open (sic) the vault for the robbers?
A. No one your honor it was open at the time of the robbery.
Q. It is clear now that at the time of the robbery the vault was open the reason why
the robbers were able to get all the items pawned to you inside the vault.
A. Yes sir.[32]
revealing that there were no security measures adopted by petitioners in the
operation of the pawnshop. Evidently, no sufficient precaution and vigilance were
adopted by petitioners to protect the pawnshop from unlawful intrusion. There was
no clear showing that there was any security guard at all. Or if there was one, that
he had sufficient training in securing a pawnshop. Further, there is no showing that
the alleged security guard exercised all that was necessary to prevent any untoward
incident or to ensure that no suspicious individuals were allowed to enter the
premises. In fact, it is even doubtful that there was a security guard, since it is quite
impossible that he would not have noticed that the robbers were armed with
caliber .45 pistols each, which were allegedly poked at the
employees.[33] Significantly, the alleged security guard was not presented at all to
corroborate petitioner Sicam's claim; not one of petitioners' employees who were
present during the robbery incident testified in court.
Furthermore, petitioner Sicam's admission that the vault was open at the time of
robbery is clearly a proof of petitioners' failure to observe the care, precaution and
vigilance that the circumstances justly demanded. Petitioner Sicam testified that
once the pawnshop was open, the combination was already off. Considering
petitioner Sicam's testimony that the robbery took place on a Saturday afternoon
and the area in BF Homes Paraaque at that time was quiet, there was more reason
for petitioners to have exercised reasonable foresight and diligence in protecting
the pawned jewelries. Instead of taking the precaution to protect them, they let
open the vault, providing no difficulty for the robbers to cart away the pawned
articles.
We, however, do not agree with the CA when it found petitioners negligent for not
taking steps to insure themselves against loss of the pawned jewelries.
Under Section 17 of Central Bank Circular No. 374, Rules and Regulations for
Pawnshops, which took effect on July 13, 1973, and which was issued pursuant to
Presidential Decree No. 114, Pawnshop Regulation Act, it is provided that pawns
pledged must be insured, to wit:
Sec. 17. Insurance of Office Building and Pawns- The place of business of a
pawnshop and the pawns pledged to it must be insured against fire and against
burglary as well as for the latter(sic), by an insurance company accredited by the
Insurance Commissioner.

However, this Section was subsequently amended by CB Circular No. 764 which
took effect on October 1, 1980, to wit:
Sec. 17 Insurance of Office Building and Pawns The office building/premises and
pawns of a pawnshop must be insured against fire. (emphasis supplied).
where the requirement that insurance against burglary was deleted. Obviously, the
Central Bank considered it not feasible to require insurance of pawned articles
against burglary.
The robbery in the pawnshop happened in 1987, and considering the above-quoted
amendment, there is no statutory duty imposed on petitioners to insure the
pawned jewelry in which case it was error for the CA to consider it as a factor in
concluding that petitioners were negligent.
Nevertheless, the preponderance of evidence shows that petitioners failed to
exercise the diligence required of them under the Civil Code.
The diligence with which the law requires the individual at all times to govern his
conduct varies with the nature of the situation in which he is placed and the
importance of the act which he is to perform.[34] Thus, the cases of Austria v. Court
of Appeals,[35] Hernandez v. Chairman, Commission on Audit[36] and Cruz
v. Gangan[37] cited by petitioners in their pleadings, where the victims of robbery
were exonerated from liability, find no application to the present case.
In Austria, Maria Abad received from Guillermo Austria a pendant with diamonds to
be sold on commission basis, but which Abad failed to subsequently return because
of a robbery committed upon her in 1961. The incident became the subject of a
criminal case filed against several persons. Austria filed an action against Abad and
her husband (Abads) for recovery of the pendant or its value, but the Abads set up
the defense that the robbery extinguished their obligation. The RTC ruled in favor
of Austria, as the Abadsfailed to prove robbery; or, if committed, that
Maria Abad was guilty of negligence. The CA, however, reversed the RTC decision
holding that the fact of robbery was duly established and declared the Abads not
responsible for the loss of the jewelry on account of a fortuitous event. We
held that for the Abads to be relieved from the civil liability of returning the
pendant under Art. 1174 of the Civil Code, it would only be sufficient that the
unforeseen event, the robbery, took place without any concurrent fault on the
debtors part, and this can be done by preponderance of evidence; that to be free
from liability for reason of fortuitous event, the debtor must, in addition to
the casus itself, be free of any concurrent or contributory fault or negligence.[38]
We found in Austria that under the circumstances prevailing at the time the
Decision was promulgated in 1971, the City of Manila and its suburbs had a high
incidence of crimes against persons and property that rendered travel after nightfall
a matter to be sedulously avoided without suitable precaution and protection; that
the conduct of Maria Abad in returning alone to her house in the evening carrying
jewelry of considerable value would have been negligence per se and would not
exempt her from responsibility in the case of robbery. However we did not
hold Abad liable for negligence since, the robbery happened ten years previously;
i.e., 1961, when criminality had not reached the level of incidence obtaining in
1971.
In contrast, the robbery in this case took place in 1987 when robbery was already
prevalent and petitioners in fact had already foreseen it as they wanted to deposit
the pawn with a nearby bank for safekeeping. Moreover, unlike in Austria, where
no negligence was committed, we found petitioners negligent in securing their
pawnshop as earlier discussed.
In Hernandez, Teodoro Hernandez was the OIC and special disbursing officer of the
Ternate Beach Project of the Philippine Tourism in Cavite. In the morning of July 1,
1983, a Friday, he went to Manila to encash two checks covering the wages of the
employees and the operating expenses of the project. However for some reason,
the processing of the check was delayed and was completed at about 3
p.m. Nevertheless, he decided to encash the check because the project employees
would be waiting for their pay the following day; otherwise, the workers would
have to wait until July 5, the earliest time, when the main office would open. At that
time, he had two choices: (1) return to Ternate, Cavite that same afternoon and
arrive early evening; or (2) take the money with him to his house
in Marilao, Bulacan, spend the night there, and leave for Ternate the following day.
He chose the second option, thinking it was the safer one. Thus, a little past 3
p.m., he took a passenger jeep bound for Bulacan. While the jeep was
on Epifanio de los Santos Avenue, the jeep was held up and the money kept by
Hernandez was taken, and the robbers jumped out of the jeep and ran. Hernandez
chased the robbers and caught up with one robber who was subsequently charged
with robbery and pleaded guilty. The other robber who held the stolen money
escaped. The Commission on Audit found Hernandez negligent because he had not
brought the cash proceeds of the checks to his office in Ternate, Cavite for
safekeeping, which is the normal procedure in the handling of funds. We held that
Hernandez was not negligent in deciding to encash the check and bringing it home
to Marilao, Bulacan instead of Ternate, Cavite due to the lateness of the hour for
the following reasons: (1) he was moved by unselfish motive for his co-employees
to collect their wages and salaries the following day, a Saturday, a non-working,
because to encashthe check on July 5, the next working day after July 1, would have
caused discomfort to laborers who were dependent on their wages for sustenance;
and (2) that choosing Marilao as a safer destination, being nearer, and in view of
the comparative hazards in the trips to the two places, said decision seemed logical
at that time. We further held that the fact that two robbers attacked him in broad
daylight in the jeep while it was on a busy highway and in the presence of other
passengers could not be said to be a result of his imprudence and negligence.
LRT to be able to arrive in Caloocan in time for her 3 pm meeting; that any prudent
and rational person under similar circumstance can reasonably be expected to do
the same; that possession of a cellphone should not hinder one from boarding the
LRT coach as Cruz did considering that whether she rode a jeep or bus, the risk of
theft would have also been present; that because of her relatively low position and
pay, she was not expected to have her own vehicle or to ride a taxicab; she did not
have a government assigned vehicle; that placing the cellphone in a bag away from
covetous eyes and holding on to that bag as she did is ordinarily sufficient care of
a cellphone while traveling on board the LRT; that the records did not show any
specific act of negligence on her part and negligence can never be presumed.
Unlike in the Cruz case, the robbery in this case happened in petitioners' pawnshop
and they were negligent in not exercising the precautions justly demanded of a
pawnshop.

Unlike in Hernandez where the robbery happened in a public utility, the robbery in WHEREFORE, except for the insurance aspect, the Decision of the Court of Appeals
this case took place in the pawnshop which is under the control of petitioners. dated March 31, 2003 and its Resolution dated August 8, 2003, are AFFIRMED.
Petitioners had the means to screen the persons who were allowed entrance to the
premises and to protect itself from unlawful intrusion. Petitioners had failed to
exercise precautionary measures in ensuring that the robbers were prevented from
Costs against petitioners.
entering the pawnshop and for keeping the vault open for the day, which paved the
way for the robbers to easily cart away the pawned articles.

SO ORDERED.

In Cruz, Dr. Filonila O. Cruz, Camanava District Director of Technological Education

and Skills Development Authority (TESDA), boarded the Light Rail Transit (LRT)
fromSen. Puyat Avenue to Monumento when her handbag was slashed and the
contents were stolen by an unidentified person. Among those stolen were her
wallet and the government-issued cellular phone. She then reported the incident to
the police authorities; however, the thief was not located, and the cellphone was
not recovered. She also reported the loss to the Regional Director of TESDA, and
she requested that she be freed from accountability for the cellphone. The Resident
Auditor denied her request on the ground that she lacked the diligence required in
the custody of government property and was ordered to pay the purchase value in
the total amount of P4,238.00. The COA found no sufficient justification to grant the
request for relief from accountability. We reversed the ruling and found that riding
the LRT cannot per se be denounced as a negligent act more so because Cruzs mode
of transit was influenced by time and money considerations; that she boarded the
 FIRST DIVISION
[G.R. No. 126891. August 5, 1998]
LIM TAY, petitioner vs., COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and
THE ESTATE OF ALFONSO LIM, respondents.
DECISION
PANGANIBAN, J.:
The duty of a corporate secretary to record transfers of stocks is ministerial.
However, he cannot be compelled to do so when the transferees title to said shares
has no prima facievalidity or is uncertain. More specifically, a pledgee, prior to
foreclosure and sale, does not acquire ownership rights over the pledged shares
and thus cannot compel the corporate secretary to record his alleged ownership of
such shares on the basis merely of the contract of pledge. Similarly, the SEC does
not acquire jurisdiction over a dispute when a partys claim to being a shareholder
is, on the face of the complaint, invalid or inadequate or is otherwise negated by
the very allegations of such complaint. Mandamus will not issue to establish a right,
but only to enforce one that is already established.
Statement of the Case
These are the principles used by this Court in resolving this Petition for Review on
Certiorari before us assailing the October 24, 1996 Decision [1] of the Court of
Appeals[2] in CA-GR SP No. 40832, the dispositive portion of which reads:
IN THE LIGHT OF ALL THE FOREGOING, the Petition at bench is DENIED DUE COURSE
and is hereby DISMISSED. With costs against the [p]etitioner.[3]
By the foregoing disposition, the Court of Appeals effectively affirmed the March 7,
1996 Decision[4] of the Securities and Exchange Commission (SEC) en banc:
WHEREFORE, in view of all the foregoing, judgment is hereby rendered dismissing
the appeal on the ground that mandamus will only issue upon a clear showing of
ownership over the assailed shares of stock, [t]he determination of which, on the
basis of the foregoing facts, is within the jurisdiction of the regular courts and not
with the SEC.[5]
The SEC en banc upheld the August 16, 1993 Decision[6] of SEC Hearing Officer
Rolando C. Malabonga, which dismissed the action for mandamus filed by
petitioner.
The Facts
As found by the Court of Appeals, the facts of the case are as follows:
x x x On January 8, 1980, Respondent-Appellee Sy Guiok secured a loan from the
[p]etitioner in the amount of P40,000 payable within six (6) months. To secure the
payment of the aforesaid loan and interest thereon, Respondent Guiok executed a
Contract of Pledge in favor of the [p]etitioner whereby he pledged his three
hundred (300) shares of stock in the Go Fay & Company Inc., Respondent
Corporation, for brevitys sake. Respondent Guiok obliged himself to pay interest on
said loan at the rate of 10% per annum from the date of said contract of pledge. On
the same date, Alfonso Sy Lim secured a loan from the [p]etitioner in the amount of
P40,000 payable in six (6) months. To secure the payment of his loan, Sy Lim
executed a Contract of Pledge covering his three hundred (300) shares of stock in
Respondent Corporation. Under said contract, Sy Lim obliged himself to pay interest
on his loan at the rate of 10% per annum from the date of the execution of said
contract.
Under said Contracts of Pledge, Respondent[s] Guiok and Sy Lim covenanted, inter
alia, that:
3. In the event of the failure of the PLEDGOR to pay the amount within a period of
six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose
the pledge upon the said shares of stock hereby created by selling the same at
public or private sale with or without notice to the PLEDGOR, at which sale the
PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby authorized
and empowered at his option to transfer the said shares of stock on the books of
the corporation to his own name and to hold the certificate issued in lieu thereof
under the terms of this pledge, and to sell the said shares to issue to him and to
apply the proceeds of the sale to the payment of the said sum and interest, in the
manner hereinabove provided;
4. In the event of the foreclosure of this pledge and the sale of the pledged
certificate, any surplus remaining in the hands of the PLEDGEE after the payment of
the said sum and interest, and the expenses, if any, connected with the foreclosure
sale, shall be paid by the PLEDGEE to the PLEDGOR;
5. Upon payment of the said amount and interest in full, the PLEDGEE will, on
demand of the PLEDGOR, redeliver to him the said shares of stock by surrendering
the certificate delivered to him by the PLEDGOR or by retransferring each share to
the PLEDGOR, in the event that the PLEDGEE, under the option hereby granted,
shall have caused such shares to be transferred to him upon the books of the
issuing company. (idem, supra)
Respondent Guiok and Sy Lim endorsed their respective shares of stock in blank and
delivered the same to the [p]etitioner.[7]
However, Respondent Guiok and Sy Lim failed to pay their respective loans and the
accrued interests thereon to the [p]etitioner. In October, 1990, the [p]etitioner filed
a Petition for Mandamus against Respondent Corporation, with the SEC entitled Lim
Tay versus Go Fay & Company, Inc., SEC Case No. 03894, praying that:
PRAYER
WHEREFORE, premises considered, it is respectfully prayed that an order be issued
directing the corporate secretary of [R]espondent Go Fay & Co., Inc. to register the
stock transfers and issue new certificates in favor of Lim Tay. It is likewise prayed
that [R]espondent Go Fay & Co., Inc[.] be ordered to pay all dividends due and
unclaimed on the said certificates to [P]laintiff Lim Tay.
Plaintiff further prays for such other relief just and equitable in the premises. (page
34, Rollo)
The [p]etitioner alleged, inter alia, in his Petition that the controversy between him
as stockholder and the Respondent Corporation was intra-corporate in view of the
obstinate refusal of the corporate secretary of Respondent Corporation to record
the transfer of the shares of stock of Respondent Guiok and Sy Lim in favor of and
under the name of the [p]etitioner and to issue new certificates of stock to the
[p]etitioner.
The Respondent Corporation filed its Answer to the Complaint and alleged, as
Affirmative Defense, that:
AFFIRMATIVE DEFENSE
7. Respondent repleads and incorporates herein by reference the foregoing
allegations.
8. The Complaint states no cause of action against [r]espondent.
9. Complainant is not a stockholder of [r]espondent. Hence, the Honorable
Commission has no jurisdiction to enter the present controversy since their [sic] is
no intracorporate relationship between complainant and respondent.
10. Granting arguendo that a pledge was constituted over the shareholdings of Sy
Guiok in favor of the complainant and that the former defaulted in the payment of
his obligations to the latter, the same did not automatically vest [i]n complainant
ownership of the pledged shares. (page 37, Rollo)
In the interim, Sy Lim died. Respondents Guiok and the Intestate Estate of Alfonso
Sy Lim, represented by Conchita Lim, filed their Answer-In-Intervention with the SEC
alleging, inter alia, that:
xxx
3. Deny specifically the allegation under paragraph 5 of the Complaint that, failure
to pay the loan within the contract period automatically foreclosed the pledged
shares of stocks and that the share of stocks are automatically purchased by the
plaintiff, for being false and distorted, the truth being that pursuant to the [sic]
paragraph 3 of the contract of pledges, Annexes A and B, it is clear that upon failure
to pay the amount within the stipulated period, the pledgee is authorized to
foreclose the pledge and thereafter, to sell the same to satisfy the loan. [H]owever,
to this point in time, plaintiff has not performed any operative act of foreclosing the
shares of stocks of [i]ntervenors in accordance with the Chattel Mortgage law,
[n]either was there any sale of stocks -- by way of public or private auction -- made
after foreclosure in favor of the plaintiff to speak about, and therefore, the
respondent company could not be force[d] to [sic] by way of mandamus, to transfer
the subject shares of stocks from the name of your [i]ntervenors to that of the
plaintiff in the absence of clear and legal basis for such;
4. DENY specifically the allegations under paragraphs 6, 7 and 8 of the complaint as
to the existence of the alleged intracorporate dispute between plaintiff and
company for being without proper and legal basis. In the first place, plaintiff is not a
stockholder of the respondent corporation; there was no foreclosure of shares
executed in accordance with the Chattel Mortgage Law whatsoever; there were no
sales consumated that would transfer to the plaintiff the subject shares of stocks
and therefore, any demand to transfer the shares of stocks to the name of the
plaintiff has no legal basis. In the second place, [i]ntervenors had been in the past
negotiating possible compromise and at the same time, had tendered payment of
the loan secured by the subject pledges but plaintiff refused unjustifiably to oblige
and accept payment o[r] even agree on the computation of the principal amount of
the loan and interest on top of a substantial amount offered just to settle and
compromise the indebtedness of [i]ntervenors;
II. SPECIAL AFFIRMATIVE DEFENSES
Intervenors replead by way of reference all the foregoing allegations to form part of
the special affirmative defenses;
5. This Honorable Commission has no jurisdiction over the person of the respondent
and nature of the action, plaintiff having no personality at all to compel respondent
by way of mandamus to perform certain corporate function[s];
6. The complaint states no cause of action;
7. That respondent is not [a] real party in interest;
8. The appropriation of the subject shares of stocks by plaintiff, without compliance
with the formality of law, amounted to [p]actum commis[s]orium therefore, null
and void;
9. Granting for the sake of argument only that there was a valid foreclosure and sale
of the subject st[o]cks in favor of the plaintiff -- which [i]ntervenors deny -- still
paragraph 5 of the contract allows redemption, for which intervenors are willing to
redeem the share of stocks pledged;
10. Even the Chattel Mortgage law allowed redemption of the [c]hattel foreclosed;
11. As a matter of fact, on several occasions, [i]ntervenors had made
representations with the plaintiff for the compromise and settlement of all the
obligations secured by the subject pledges -- even offering to pay compensation
over and above the value of the obligations, interest[s] and dividends accruing to
the share of stocks but, plaintiff unjustly refused to accept the offer of payment;
(pages 39-42, Rollo)
The [r]espondents-[i]ntervenors prayed the SEC that judgment be rendered in their
favor, as follows:
IV. PRAYER
It is respectfully prayed to this Honorable Commission after due hearing, to dismiss
the case for lack of merit, ordering plaintiff to accept payment for the loans secured
by the subject shares of stocks and to pay plaintiff:
1. The sum of P50,000.00, as moral damages;
2. the sum of P50,000.00, as attorneys fees; and,
3. costs of suit.
Other reliefs just and equitable [are] likewise prayed for. (pages 42-43, Rollo)
After due proceedings, the [h]earing [o]fficer promulgated a Decision dismissing
[p]etitioners Complaint on the ground that although the SEC had jurisdiction over
the action, pursuant to the Decision of the Supreme Court in the case of Rural Bank
of Salinas, et al. versus Court of Appeals, et al., 210 SCRA 510, he failed to prove
the legal basis for the secretary of the Respondent Corporation to be compelled to
register stock transfers in favor of the [p]etitioner and to issue new certificates of
stock under his name (pages 67-77, Rollo). The [p]etitioner appealed the Decision
of the [h]earing [o]fficer to the SEC, but, on March 7, 1996, the SEC promulgated a
Decision, dismissing [p]etitioners appeal on the grounds that: (a) the issue between
the [p]etitioner and the [r]espondents being one involving the ownership of the
shares of stock pledged by Respondent Guiok and Sy Lim, the SEC had no
jurisdiction over the action filed by the [p]etitioner; (b) the latter had no cause of
action for mandamus against the Respondent Corporation, the right of ownership
of the [p]etitioner over the 300 shares of stock pledged by Respondent Guiok and
Sy Lim not having been as yet, established, preparatory to the institution of said
Petition for Mandamus with the SEC.
Ruling of the Court of Appeals
On the issue of jurisdiction, the Court of Appeals ruled:
In ascertaining whether or not the SEC had exclusive jurisdiction over [p]etitioners
action, the [a]ppellate [c]ourt must delve into and ascertain: (a) whether or not
there is a need to enlist the expertise and technical know-how of the SEC in
resolving the issue of the ownership of the shares of stock; (b) the status of the
relationships of the parties; [and] (c) the nature of the question that is the subject
of the controversy. Where the controversy is purely a civil matter resoluble by civil
law principles and there is no need for the application of the expertise and technical
know-how of the SEC, then the regular courts have jurisdiction over the
action.[8] [citations omitted]
On the issue of whether mandamus can be availed of by the petitioner, the Court of
Appeals agreed with the SEC, viz.:
x x x [T]he [p]etitioner failed to establish a clear and legal right to the writ of
mandamus prayed for by him. x x x Mandamus will not issue to enforce a right
which is in substantial dispute or to which a substantial doubt exists x x x. The
principal function of the writ of mandamus is to command and expedite, and not to
inquire and adjudicate and, therefore it is not the purpose of the writ to establish a
legal right, but to enforce one which has already been established. [9] [citations
omitted]
The Court of Appeals debunked petitioners claim that he had acquired ownership
over the shares by virtue of novation, holding that respondents indorsement and
delivery of the shares were pursuant to Articles 2093 and 2095 of the Civil Code and
that petitioners receipt of dividends was in compliance with Article 2102 of the
same Code. Petitioners claim that he had acquired ownership of the shares by
virtue of prescription was likewise dismissed by Respondent Court in this wise:
The prescriptive period for the action of Respondent[s] Guiok and Sy Lim to recover
the shares of stock from the [p]etitioner accrued only from the time they paid their
loans and the interests thereon and [made] a demand for their return.[10]
Hence, the petitioner brought before us this Petition for Review on Certiorari in
accordance with Rule 45 of the Rules of Court.[11]
Assignment of Errors
Petitioner submits, for the consideration of this Court, these issues:[12]
(a) Whether the Securities and Exchange Commission had jurisdiction over the
complaint filed by the petitioner; and
(b) Whether the petitioner is entitled to the relief of mandamus as against the
respondent Go Fay & Co., Inc.
In addition, petitioner contends that it has acquired ownership of the shares
through extraordinary prescription, pursuant to Article 1132 of the Civil Code, and
through respondents subsequent acts, which amounted to a novation of the
contracts of pledge. Petitioner also claims that there was dacion en pago, in which
the shares of stock were deemed sold to petitioner, the consideration for which
was the extinguishment of the loans and the interests thereon. Petitioner likewise
claims that laches bars respondents from recovering the subject shares.
The Courts Ruling
The petition has no merit.
First Issue: Jurisdiction of the SEC
Claiming that the present controversy is intra-corporate and falls within the
exclusive jurisdiction of the SEC, petitioner relies heavily on Abejo v. De
la Cruz,[13] which upheld the jurisdiction of the SEC over a suit filed by an
unregistered stockholder seeking to enforce his rights. He also seeks support
from Rural Bank of Salinas, Inc. v. Court of Appeals,[14] which ruled that the right of a
transferee or an assignee to have stocks transferred to his name was an inherent
right flowing from his ownership of the said stocks.
The registration of shares in a stockholders name, the issuance of stock certificates,
and the right to receive dividends which pertain to the said shares are all rights that
flow from ownership. The determination of whether or not a shareholder is entitled
to exercise the above-mentioned rights falls within the jurisdiction of the
SEC. However, if ownership of the shares is not clearly established and is still
unresolved at the time the action for mandamus is filed, then jurisdiction lies with
the regular courts.
Section 5 of Presidential Decree No. 902-A sets forth the jurisdiction of the SEC as
follows:
SEC. 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and decrees,
it shall have original and exclusive jurisdiction to hear and decide cases involving:
(a) Devices or schemes employed by or any acts of the board of directors, business
associates, its officers or partners, amounting to fraud and misrepresentation which
may be detrimental to the interest of the public and/or of stockholders, partners,
members of associations or organizations registered with the Commission;
(b) Controversies arising out of intra-corporate or partnership relations, between
and among stockholders, members, or associates; between any or all of them and
the corporation, partnership or association of which they are stockholders,
members or associates, respectively; and between such corporation, partnership or
association and the State insofar as it concerns their individual franchise or right to
exist as such entity;
(c) Controversies in the election or appointment of directors, trustees, officers or
managers of such corporations, partnerships or associations.
(d) Petitions of corporations, partnerships or associations to be declared in the state
of suspension of payments in cases where the corporation, partnership or
association possesses property to cover all its debts but foresees the impossibility of
meeting them when they respectively fall due or in cases where the corporation,
partnership or association has no sufficient assets to cover its liabilities, but is under
the Management Committee created pursuant to this decree.[15]
Thus, a controversy among stockholders, partners or associates themselves[16] is
intra-corporate in nature and falls within the jurisdiction of the SEC.
As a general rule, the jurisdiction of a court or tribunal over the subject matter is
determined by the allegations in the complaint.[17] In the present case, however,
petitioners claim that he was the owner of the shares of stock in question has
no prima facie basis.
In his Complaint, petitioner alleged that, pursuant to the contracts of pledge, he
became the owner of the shares when the term for the loans expired. The
Complaint contained the following pertinent averments:
xxx
3. On [J]anuary 8, 1990, under a Contract of Pledge, Lim Tay received three hundred
(300) shares of stock of Go Fay & Co., Inc., from Sy Guiok as security for the
payment of a loan of [f]orty [t]housand [p]esos (P40,000.00) Philippine currency,
the sum of which was payable within six (6) months [with
interest] at ten percentum (10%) per annum from the date of the execution of the
contract; a copy of this Contract of Pledge is attached as Annex A and made part
hereof;
4. On the same date January 8, 1980, under a similar Contract of Pledge, Lim Tay
received three hundred (300) shares of stock of Go Fay & Co., Inc. from Alfonso Sy
Lim as security for the payment of a loan of [f]orty [t]housand [p]esos (P40,000.00)
Philippine currency, the sum of which was payable within six (6) months [with
interest] at ten percentum (10%) per annum from the date of the execution of the
contract; a copy of this Contract of Pledge is attached as Annex B and made part
hereof;
5. By the express terms of the agreements, upon failure of the borrowers to pay the
stated amounts within the contract period, the pledge is foreclosed and the shares
of stock are purchased by [p]laintiff, who is expressly authorized and empowered to
transfer the duly endorsed shares of stock on the books of the corporation to his
own name; x x x[18] (underscoring supplied)
However , the contracts of pledge, which were made integral parts of the
Complaint, contain this common proviso:
3. In the event of the failure of the PLEDGOR to pay the amount within a period of
six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose
the pledge upon the said shares of stock hereby created by selling the same at
public or private sale with or without notice to the PLEDGOR, at which sale the
PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby authorized
and empowered at his option, to transfer the said shares of stock on the books of
the corporation to his own name and to hold the certificate issued in lieu thereof
under the terms of this pledge, and to sell the said shares to issue to him and to
apply the proceeds of the sale to the payment of the said sum and interest, in the
manner hereinabove provided;
This contractual stipulation, which was part of the Complaint, shows that plaintiff
was merely authorized to foreclose the pledge upon maturity of the loans, not to
own them. Such foreclosure is not automatic, for it must be done in a public or
private sale. Nowhere did the Complaint mention that petitioner had in fact
foreclosed the pledge and purchased the shares after such foreclosure. His status as
a mere pledgee does not, under civil law, entitle him to ownership of the subject
shares. It is also noteworthy that petitioners Complaint did not aver that said shares
were acquired through extraordinary prescription, novation or laches. Moreover,
petitioners claim, subsequent to the filing of the Complaint, that he acquired
ownership of the said shares through these three modes is not indubitable and still
has to be resolved. In fact, as will be shown, such allegation has no
merit. Manifestly, the Complaint by itself did not contain any prima facie showing
that petitioner was the owner of the shares of stocks. Quite the contrary, it
demonstrated that he was merely a pledgee, not an owner. Accordingly, it failed to
lay down a sufficient basis for the SEC to exercise jurisdiction over the
controversy. In fact, the very allegations of the Complaint and its annexes negated
the jurisdiction of the SEC.
Petitioners reliance on the doctrines set forth in Abejo v. De la Cruz and Rural Bank
of Salinas, Inc. v. Court of Appeals is misplaced. In Abejo, the Abejo spouses sold to
Telectronic Systems, Inc. shares of stock in Pocket Bell Philippines, Inc. Subsequent
to such contract of sale, the corporate secretary, Norberto Braga, refused to record
the transfer of the shares in the corporate books and instead asked for the
annulment of the sale, claiming that he and his wife had a preemptive right over
some of the shares, and that his wifes shares were sold without consideration or
consent.
At the time the Bragas questioned the validity of the sale, the contract had already
been perfected, thereby demonstrating that Telectronic Systems, Inc. was already
the prima facieowner of the shares and, consequently, a stockholder of Pocket Bell
Philippines, Inc. Even if the sale were to be annulled later on, Telectronic Systems,
Inc. had, in the meantime, title over the shares from the time the sale was
perfected until the time such sale was annulled. The effects of an annulment
operate prospectively and do not, as a rule retroact to the time the sale was made.
Therefore, at the time the Bragas questioned the validity of the transfers made by
the Abejos, Telectronic Systems, Inc. was already a prima facie shareholder of the
corporation, thus making the dispute between the Bragas and the Abejos intra-
corporate in nature. Hence, the Court held that the issue is not on ownership of
shares but rather the non-performance by the corporate secretary of the ministerial
duty of recording transfers of shares of stock of the corporation of which he is
secretary.[19]
Unlike Abejo, however, petitioners ownership over the shares in this case was not
yet perfected when the Complaint was filed. The contract of pledge certainly does
not make him the owner of the shares pledged. Further, whether prescription
effectively transferred ownership of the shares, whether there was a novation of
the contracts of pledge, and whether laches had set in were difficult legal issues,
 Is Not the Owner of Pledged Shares
which were unpleaded and unresolved when herein petitioner asked the corporate
secretary of Go Fay to effect the transfer, in his favor, of the shares pledged to him.
Petitioner initially argued that ownership of the shares pledged had passed to him,
In Rural Bank of Salinas, Melenia Guerrero executed deeds of assignment for the upon Respondents Sy Guiok and Sy Lims failure to pay their respective loans. But on
shares in favor of the respondents in that case. When the corporate secretary appeal, petitioner claimed that ownership over the shares had passed to him, not
refused to register the transfer, an action for mandamus was via the contracts of pledge, but by virtue of prescription and by respondents
instituted. Subsequently, a motion for intervention was filed, seeking the subsequent acts which amounted to a novation of the contracts of pledge. We do
annulment of the deeds of assignment on the grounds that the same were fictitious not agree.
and antedated, and that they were in fact donations because the considerations
At the outset, it must be underscored that petitioner did not acquire ownership of
therefor were below the book value of the shares.
the shares by virtue of the contracts of pledge. Article 2112 of the Civil Code states:
Like the Abejo spouses, the respondents in Rural Bank of Salinas were
The creditor to whom the credit has not been satisfied in due time, may proceed
already prima facie shareholders when the deeds of assignment were questioned. If
before a Notary Public to the sale of the thing pledged. This sale shall be made at a
the said deeds were to be annulled later on, respondents would still be considered
public auction, and with notification to the debtor and the owner of the thing
shareholders of the corporation from the time of the assignment until the
pledged in a proper case, stating the amount for which the public sale is to be held.
annulment of such contracts.
If at the first auction the thing is not sold, a second one with the same formalities
Second Issue: Mandamus Will Not
shall be held; and if at the second auction there is no sale either, the creditor may
Issue to Establish a Right
appropriate the thing pledged. In this case he shall be obliged to give an
acquaintance for his entire claim.
Petitioner prays for the issuance of a writ of mandamus, directing the corporate
Furthermore, the contracts of pledge contained a common proviso, which we quote
secretary of respondent corporation to have the shares transferred to his name in
again for the sake of clarity:
the corporate books, to issue new certificates of stock and to deliver the
corresponding dividends to him.[20] 3. In the event of the failure of the PLEDGOR to pay the amount within a period of
six (6) months from the date hereof, the PLEDGEE is hereby authorized to foreclose
In order that a writ of mandamus may issue, it is essential that the person
the pledge upon the said shares of stock hereby created by selling the same at
petitioning for the same has a clear legal right to the thing demanded and that it is
public or private sale with or without notice to the PLEDGOR, at which sale the
the imperative duty of the respondent to perform
PLEDGEE may be the purchaser at his option; and the PLEDGEE is hereby authorized
the act required. It neither confers powers nor imposes duties and is never issued in
and empowered at his option to transfer the said shares of stock on the books of
doubtful cases. It is simply a command to exercise a power already possessed and
the corporation to his own name, and to hold the certificate issued in lieu thereof
to perform a duty already imposed.[21]
under the terms of this pledge, and to sell the said shares to issue to him and to
In the present case, petitioner has failed to establish a clear legal right. Petitioners apply the proceeds of the sale to the payment of the said sum and interest, in the
contention that he is the owner of the said shares is completely without manner hereinabove provided;[22]
merit. Quite the contrary and as already shown, he does not have any ownership
There is no showing that petitioner made any attempt to foreclose or sell the shares
rights at all. At the time petitioner instituted his suit at the SEC, his ownership claim
through public or private auction, as stipulated in the contracts of pledge and as
had no prima facie leg to stand on. At best, his contention was disputable and
required by Article 2112 of the Civil Code. Therefore, ownership of the shares could
uncertain. Mandamus will not issue to establish a legal right, but only to enforce
not have passed to him. The pledgor remains the owner during the pendency of the
one that is already clearly established.
pledge and prior to foreclosure and sale, as explicitly provided by Article 2103 of the
Without Foreclosure and same Code:

Purchase at Auction, Pledgee

Unless the thing pledged is expropriated, the debtor continues to be the owner
thereof.
Nevertheless, the creditor may bring the actions which pertain to the owner of the
thing pledged in order to recover it from, or defend it against a third person.
No Ownership
by Prescription
Petitioner did not acquire the shares by prescription either. The period of
prescription of any cause of action is reckoned only from the date the cause of
action accrued.
Since a cause of action requires as an essential element not only a legal right of the
plaintiff and a correlative obligation of the defendant, but also an act or omission of
the defendant in violation of said legal right, the cause of action does not accrue
until the party obligated refuses, expressly or impliedly, to comply with its
duty.[23] Accordingly, a cause of action on a written contract accrues when a breach
or violation thereof occurs.
Under the contracts of pledge, private respondents would have a right to ask for the
redelivery of their certificates of stock upon payment of their debts to petitioner,
consonant with Article 2105 of the Civil Code, which reads:
The debtor cannot ask for the return of the thing pledged against the will of the
creditor, unless and until he has paid the debt and its interest, with expenses in a
proper case.[24]
Thus, the right to recover the shares based on the written contract of pledge
between petitioner and respondents would arise only upon payment of their
respective loans. Therefore, the prescriptive period within which to demand the
return of the thing pledged should begin to run only after the payment of the loan
and a demand for the thing has been made, because it is only then that
respondents acquire a cause of action for the return of the thing pledged.
Prescription should not begin to run on the action to demand the return of the
thing pledged while the loan still exists. This is because the right to ask for the
return of the thing pledged will not arise so long as the loan subsists. In the present
case, the prescriptive period did not begin to run when the loan became due. On
the other hand, it is petitioners right to demand payment that may be in danger of
prescription.
Petitioner contends that he can be deemed to have acquired ownership over the
certificates of stock through extraordinary prescription, as provided for in Article
1132 of the Civil Code which states:
Art. 1132. The ownership of movables prescribes through uninterrupted possession
for four years in good faith.
The ownership of personal property also prescribes through uninterrupted
possession for eight years, without need of any other condition. x x x.
Petitioners argument is untenable. What is required by Article 1132 is possession in
the concept of an owner. In the present case, petitioners possession of the stock
certificates came about because they were delivered to him pursuant to the
contracts of pledge. His possession as a pledgee cannot ripen into ownership by
prescription. As aptly pointed out by Justice Jose C. Vitug:
Acquisitive prescription is a mode of acquiring ownership by a possessor through
the requisite lapse of time. In order to ripen into ownership, possession must be in
the concept of an owner, public, peaceful and uninterrupted. Thus, possession with
a juridical title, such as by a usufructory, a trustee, a lessee, agent or a pledgee, not
being in the concept of an owner, cannot ripen into ownership by acquisitive
prescription unless the juridical relation is first expressly repudiated and such
repudiation has been communicated to the other party.[25]
Petitioner expressly repudiated the pledge, only when he filed his Complaint and
claimed that he was not a mere pledgee, but that he was already the owner of the
shares. Based on the foregoing, petitioner has not acquired the certificates of stock
through extraordinary prescription.
No Novation
in Favor of Petitioner
Neither did petitioner acquire the shares by virtue of a novation of the contract of
pledge. Novation is defined as the extinguishment of an obligation by a subsequent
one which terminates it, either by changing its object or principal conditions, by
substituting a new debtor in place of the old one, or by subrogating a third person
to the rights of the creditor.[26]Novation of a contract must not be presumed. In the
absence of an express agreement, novation takes place only when the old and the
new obligations are incompatible on every point.[27]
In the present case, novation cannot be presumed by (a) respondents indorsement
and delivery of the certificates of stock covering the 600 shares, (b) petitioners
 Laches Not
receipt of dividends from 1980 to 1983, and (c) the fact that respondents have not
instituted any action to recover the shares since 1980. a Bar to Petitioner

Respondents indorsement and delivery of the certificates of stock were pursuant to

Petitioner submits that the inaction of the individual respondents with respect to
paragraph 2 of the contract of pledge which reads:
the recovery of the shares of stock serves to bar them from asserting rights over
2. The said certificates had been delivered by the PLEDGOR endorsed in blank to be said shares on the basis of laches.[31]
held by the PLEDGEE under the pledge as security for the payment of the
Laches has been defined as the failure or neglect, for an unreasonable length of
aforementioned sum and interest thereon accruing.[28]
time, to do that which by exercising due diligence could or should have been done
This stipulation did not effect the transfer of ownership to petitioner. It was merely earlier; it is negligence or omission to assert a right within a reasonable time,
in compliance with Article 2093 of the Civil Code,[29] which requires that the thing warranting a presumption that the party entitled to assert it either has abandoned
pledged be placed in the possession of the creditor or a third person of common it or declined to assert it.[32]
agreement; and Article 2095,[30] which states that if the thing pledged are shares of
In this case, it is in fact petitioner who may be guilty of laches. Petitioner had all the
stock, then the instrument proving the right pledged must be delivered to the
time to demand payment of the debt. More important, under the contracts of
creditor.
pledge, petitioner could have foreclosed the pledges as soon as the loans became
Moreover, the fact that respondents allowed the petitioner to receive dividends due. But for still unknown or unexplained reasons, he failed to do so, preferring
pertaining to the shares was not meant to relinquish ownership thereof. As stated instead to pursue his baseless claim to ownership.
by respondent corporation, the same was done pursuant to an agreement between
WHEREFORE, the petition is hereby DENIED and the assailed Decision
the petitioner and Respondents Sy Guiok and Sy Lim, following Article 2102 of the
is AFFIRMED. Costs against petitioner.
Civil Code which provides:
SO ORDERED.
If the pledge earns or produces fruits, income, dividends, or interests, the creditor
shall compensate what he receives with those which are owing him; but if none are
owing him, or insofar as the amount may exceed that which is due, he shall apply it
to the principal. Unless there is a stipulation to the contrary, the pledge shall extend
to the interest and the earnings of the right pledged.

Novation cannot be inferred from the mere fact that petitioner has not, since 1980,
instituted any action to recover the shares. Such action is, in fact, premature, as the
loan is still outstanding. Besides, as already pointed out, novation is never
presumed or inferred.
No Dacion en Pago

in Favor of Petitioner

Neither can there be dacion en pago, in which the certificates of stock are deemed
sold to petitioner, the consideration for which is the extinguishment of the loans
and the accrued interests thereon. Dacion en pago is a form of novation in which a
change takes place in the object involved in the original contract. Absent an explicit
agreement, petitioner cannot simply presume dacion en pago.
 THIRD DIVISION
[G.R. No. 140964. January 16, 2002]
INSULAR LIFE ASSURANCE COMPANY, LTD., INSULAR SAVINGS BANK and JACINTO
D. JIMENEZ, petitioners, vs. ROBERT YOUNG, GABRIEL LA'O II, ARTHUR
TAN, LOPE JUBAN, JR., MARIA LOURDES ONGPIN, ANTONIO ONGPIN, ELSIE
DIZON, YOLANDA BAYER, CECILIA VIRAY, MANUEL VIRAY and JOSE VITO
BORROMEO, respondents.
[G.R. No. 142267. January 16, 2002]
INSULAR LIFE ASSURANCE COMPANY, LTD., INSULAR SAVINGS BANK and JACINTO
D. JIMENEZ, petitioners, vs. ROBERT YOUNG, GABRIEL LA'O II, ARTHUR
TAN, LOPE JUBAN, JR., MARIA LOURDES ONGPIN, ANTONIO ONGPIN, ELSIE
DIZON, YOLANDA BAYER, CECILIA VIRAY, MANUEL VIRAY and JOSE VITO
BORROMEO, COURT OF APPEALS and DEPUTY SHERIFF RUBEN
NEQUINTO, respondents.
DECISION
SANDOVAL-GUTIERREZ, J.:
Before this Court are two (2) consolidated petitions, the first, docketed as G.R.
No. 140964, is a petition for review on certiorari[1] of the Decision of the Court of
Appeals dated September 22, 1999 in CA-G.R. CV No. 54264 reversing the Decision
of the Regional Trial Court, Branch 142, Makati City in Civil Case No. 92-049. The
other, G. R. No. 142267, is a petition for certiorari,[2] assailing the Resolution
dated March 10, 2000 of the Court of Appeals (in the same civil case) which granted
private respondents' motion for execution pending appeal.
The undisputed facts are:
In December, 1987, respondent Robert Young, together with his associates and
co-respondents, namely: Gabriel La'O II, Arthur Tan, Lope Juban, Jr., Maria Lourdes
Ongpin, Antonio Ongpin, Elsie Dizon, Yolanda Bayer, Cecilia Viray, Manuel Viray and
Jose Vito Borromeo, acquired by purchase Home Bankers Savings and Trust Co., now
petitioner Insular Savings Bank ("the Bank," for brevity), from the Licaros family
for P65,000,000.00. Young and his group obtained 55% equity in the Bank, while
Jorge Go and his group owned the remaining 45%.
Subsequently, the Bank granted respondents and others individual loans in the
total amount of P153,000,000.00, secured by promissory notes.[3]
On December, 1990, Benito Araneta, a stockholder of the Bank, signified his
intention to purchase 99.82% of its outstanding capital stock for P340,000,000.00,
subject to the condition that the ownership of all the shares will be consolidated in
Young's name. On February 5, 1991, Araneta paid Young P14,000,000.00 as part of
the downpayment.[4]
In order to carry out the intended sale to Araneta, Young bought from Jorge Go
and his group their 45% equity in the Bank for P153,000,000.00. In order to pay this
amount, Young obtained a short-term loan of P170,000,000.00 from International
Corporate Bank ("Interbank") to finance the purchase.
However, Araneta backed out from the intended sale and demanded the return
of his downpayment.
Meanwhile, Young's loan from Interbank became due, causing his serious
financial problem. Consequently, he engaged the services of Asian Oceanic
Investment House, Inc. ("Asian Oceanic"), a domestic company owned and controlled
by another petitioner, Insular Life Assurance Co., Ltd. ("Insular Life"), to look for
possible sources of capital.
On August 27, 1991, through the intervention of Asian Oceanic, Young and
Insular Life entered into a Credit Agreement.[5] Under its provisions, Insular Life
extended a loan to Young in the amount of P200,000,000.00. To secure the loan,
Young, acting in his behalf and as attorney-in-fact of the other stockholders, executed
on the same day a Deed of Pledge[6] over 1,324,864 shares which represented 99.82%
of the outstanding capital stock of the Bank. The next day, he also executed a
promissory note[7] in favor of Insular Life in the same amount with an interest rate of
26% per annum to mature 120 days from execution. The Credit Agreement further
provides that Insular Life shall have the prior right to purchase the Schedule I Shares
(owned by Young) and the Schedule II Shares (owned by the other stockholders of
the Bank), as well as the 250,000 shares which will be issued after the additional
capital of P25,000,000.00 (payable from the proceeds of the loan) shall have been
infused.
On October 1, 1991, Insular Life and Insular Life Pension Fund formally informed
Young of their intention to acquire 30% and 12%, respectively, of the Bank's
outstanding shares, subject to due diligence audit and proper documentation. [8] On
October 9, 1991, Insular Life and Young, authorized to represent the other
stockholders, entered into a Memorandum of Agreement (MOA),[9] wherein Insular
Life and its Pension Fund agreed to purchase 830,860 common shares and 311,572
common shares, respectively, for a total consideration of P198,000,000.00. Under its
terms, the MOA is subject to Young's representations and warranties[10] that, as of
September 30, 1991, the Bank has (a) a total outstanding paid-in capital
of P157,714,900.00, (b) a total net worth of P114,801,539.00, and (c) total loans with
doubtful recovery of P60,000,000.00. The MOA is also subject to these "condition
precedents":[11] (1) Young shall infuse additional capital of P50,000,000.00 into the
Bank, and (2) Insular Life and its Pension Fund shall undertake a due diligence audit
on the Bank to determine whether the provision for P60,000,000.00 doubtful
account made by Young is sufficient.
On October 11, 1991, Insular Life, through a team of auditors led by Mr. Wilfrido
Patawaran, conducted a due diligence audit on the Bank pursuant to the MOA. The
audit revealed several check-kiting operations which amounted
to P340,000,000.00. As a result, the Bank's Board of Directors was convened to
discuss this matter.
On October 17, 1991, a special meeting of the Bank's directors was held. Chief
Executive Officer Antonino L. Alindogan, Jr. reported to the Board the initial findings
of the audit team about the irregularities in the Banks "kiting operations." When
asked to explain these anomalies, Young, who was then the Bank's President,
assumed responsibility since it happened during his incumbency. Thereupon, he
offered, among others, to the Bank the 45% of his holdings as security. He admitted
that he has compromised the interest of the Bank and thus tendered his
resignation. The Board deferred its acceptance.[12]
On October 21, 1991, Young signed a letter[13] prepared by Atty. Jacinto
Jimenez, counsel of Insular Life, addressed to Mr. Vicente R. Ayllon, Chairman of the
Bank's Board of Directors, stating that due to business reverses, he shall not be able
to pay his obligations under the Credit Agreement between him and Insular
Life. Consequently, Young "unconditionally and irrevocably waive(s) the benefit of
the period" of the loan (up to December 26, 1991) and Insular "may consider (his)
obligations thereunder as defaulted." He likewise interposes no objection to Insular
Life's exercise of its rights under the said agreement.
Forthwith, Insular Life instructed its counsel to foreclose the pledge constituted
upon the shares. The latter then sent Young a notice informing him of the sale of the
shares in a public auction scheduled on October 28, 1991, and in the event that the
shares are not sold, a second auction sale shall be held the next day, October 29.
On October 28, 1991, only Insular Life submitted a bid, hence, the shares were
not sold on that day. The next day, a second auction was held. Again, Insular Life was
the sole bidder.Since the shares were not sold at the two public auctions, Insular Life
appropriated to itself, not only the original 1,324,864 shares, but also the 250,000
shares subsequently issued by the Bank and delivered to Insular Life by way of
pledge. Thus, Insular Life gave Young an acquittance of his entire claim.[14]
Thereafter, title to the said shares was consolidated in the name of Insular
Life. On November 12, 1991, the Bangko Sentral ng Pilipinas' Supervision and
Examination Sector approved Insular Life's request to maintain its present ownership
of 99.82% of the Bank.[15]
From October 31, 1991 to December 27, 1991, Insular Life invested a total
of P325,000,000.00 in the Bank. Meanwhile, on November 27, 1991, its Board of
Directors, during its meeting, accepted the resignation of Young as President.[16]
On January 7, 1992, Young and his associates filed with the Regional Trial
Court (RTC), Branch 142, Makati City, a complaint[17] against the Bank, Insular Life and
its counsel, Atty. Jacinto Jimenez, petitioners, for annulment of notarial sale, specific
performance and damages, docketed as Civil Case No. 92-049. The complaint
alleges, inter alia, that the notarial sale conducted by petitioner Atty. Jacinto Jimenez
is void as it does not comply with the requirement of notice of the second auction
sale; that Young was forced by the officers of Insular Life to sign letters to enable
them to have control of the Bank; that under the MOA, Insular Life should apply the
purchase price of P198,000,000.00 (corresponding to the 55% of the outstanding
capital stock of the Bank) to Young's loan of P200,000,000.00 and pay the
latter P162,000,000.00, representing the remaining 45% of its outstanding capital
stock, which must be set-off against the loans of the other respondents.
Petitioners filed their answer[18] with counterclaim against Young, Gabriel La'O
II, Arthur Tan, Lope Juban, Jr., Antonio Ongpin, Elsie Dizon, Yolanda Bayer and Manuel
Viray, respondents herein. Except for Young, none of the respondents answered the
counterclaim, hence, the RTC declared them in default.
On May 10, 1995, the RTC rendered a Decision,[19] dismissing the complaint,
ordering the respondents to pay the Bank their respective loans with interest at the
rate of 30% per annum and monthly penalty interest of 3% from the date they are
due until fully paid and dismissing petitioners' counterclaim against Young, thus:
"Judgment is therefore rendered as follows:
1. Dismissing the complaint; and
2. Ordering the plaintiffs jointly and severally to reimburse to the defendants the
sum of P300,000.00 as attorney's fees and cost of litigation;
ON THE COUNTERCLAIMS:
Judgment is hereby rendered in favor of counterplaintiff HOME as follows:
1. Ordering GABRIEL LA'O II to pay HOME the following amounts:
a. the sum of P4 Million with interest at the rate of 30% per annum and monthly
penalty interest at 3% from June 17, 1991 until fully paid;
b. the sum of P6 Million with interest at the rate of 30% per annum and monthly
penalty interest at 3% from September 10, 1991 until fully paid;
c. the sum of P500,000.00 with interest at the rate of 30% per annum and monthly
penalty interest at 3% from September 12, 1991 until fully paid;
2. Ordering ARTHUR TAN to pay to HOME the sum of P4.2 Million with interest at
the rate of 30% per annum and monthly penalty interest at 3% from July 4, 1991
until fully paid;
3. Ordering LOPE JUBAN, JR., to pay to HOME the sum of P3 Million with interest at
the rate of 29% per annum from May 27, 1991 to August 25, 1991, and 30% per
annum from August 26, 1991 and monthly penalty interest at 3% from May 27,
1991 until fully paid;
4. Ordering ANTONIO ONGPIN to pay to HOME the following amounts:
a. the sum of P445,000.00 with interest at the rate of 32% per annum from May 25,
1991 to August 29, 1991, and 29% per annum from August 30, 1991, and monthly
penalty interest at 3% from May 25, 1991 until fully paid;
b. the sum of P1 Million with interest at the rate of 32% a month from May 4, 1991
to August 29, 1991, and 29% per annum from August 30, 1991, and monthly penalty
interest at 3% from May 4, 1991 until fully paid;
c. the sum of P550,000.00 with interest at the rate of 32% per annum from May 21,
1991 to August 29, 1991, and 29% per annum from August 30, 1991 and monthly
penalty interest at 3% from May 21, 1991 until fully paid;
d. the sum of P5 Million with interest at the rate of 32% per annum from May 16,
1991 to August 29, 1991, and 29% per annum from August 30, 1991 and monthly
penalty interest at 3% from May 16, 1991 until fully paid;
e. the sum of P705,000.00 with interest at the rate of 32% per annum from May 4,
1991 to August 29, 1991, and 29% per annum from May 4, 1991 and monthly
penalty interest at 3% from May 4, 1991 until fully paid;
5. Ordering ELSIE DIZON to pay to HOME the following amounts:
a. the sum of P2 Million with interest at the rate of 30% per annum and monthly
penalty interest at 3% from June 17, 1991 until fully paid; and
b. the sum of P7.4 Million with interest at the rate of 30% per annum and monthly
penalty interest at 3% from September 10, 1991 until fully paid;
6. Ordering YOLANDA BAYER to pay to HOME the following amounts:
a. the sum of P1 Million with interest at the rate of 30% per annum and monthly
penalty interest at 3% from June 17, 1991 until fully paid; and
b. the sum of P6.9 Million with interest at the rate of 30% per annum and monthly
penalty interest at 3% from September 10, 1991 until fully paid;
7. Ordering MANUEL VIRAY to pay to HOME the sum of P8.7 Million with interest at
the rate of 29% per annum from May 29, 1991 to August 26, 1991, and 30% per
annum from August 27, 1991, and monthly penalty interest at 3% from May 29,
1991 until fully paid;
8. Ordering the above counterdefendants jointly and severally to pay to the
counterplaintiff the some of P500,000.00 as attorney's fees and cost of litigation.
The counterclaim against YOUNG is dismissed for lack of merit."[20]
Aggrieved by the RTC Decision, respondents appealed to the Court of Appeals.
On September 22, 1999, the Court of Appeals rendered judgment [21] reversing
the RTC Decision, the dispositive portion of which reads:
PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and SET
ASIDE, and a new one entered thereby:
1. Declaring the Credit Agreement dated August 27, 1991 and the Memorandum of
Agreement dated October 9, 1991 valid and binding between the parties;
2. Declaring the delinquent accounts of borrowers Lope Juben, Elsie Dizon, Arthur
Tan, Gabriel La O, Yolanda Bayer, Antonio Ongpin and Jose Vito Borromeo as fully
paid;
3. Ordering the defendant Insular Life to pay the appellant Robert T. Young the
amount of One Hundred Sixty Two Million Pesos (P162,000,000.00) representing
the money value of 45% of the shareholdings of Home Bankers Savings and Trust
Co., Inc.;
4. Ordering the appellee Insular Life Assurance Co., Ltd. to pay appellant Robert T.
Young moral damages in the amount of Five Million Pesos (P5,000,000.00); and
5. Ordering the appellees to pay attorneys fees of One Million Five Hundred
Thousand Pesos (P1,500,000.00) and the costs of the suit.
SO ORDERED.[22]
On October 14, 1999, petitioners filed a motion for reconsideration, while
respondents filed a motion for execution pending appeal.
On December 1, 1999, the Court of Appeals issued a Resolution [23] denying
petitioners' motion for reconsideration for lack of merit, prompting them to file the
instant petition for review on certiorari (G. R. No. 140964).
On March 10, 2000, the Court of Appeals issued a Resolution [24] granting
respondents' motion for execution pending appeal. Forthwith, petitioners filed the
instant petition for certiorari(G. R. No. 142267).
[25]
On March 27, 2000, we issued a Resolution ordering the consolidation of the
two petitions and directing the parties "to maintain the STATUS QUO before the
assailed (CA) Resolution of March 10, 2000 was issued, until further orders from this
Court.
In G.R. No. 140964, petitioners ascribe to the Court of Appeals the following
errors:
1. In declaring the MOA dated October 9, 1991 valid and enforceable between
the parties despite respondent Young's failure to comply with the terms and
conditions thereof;
2. In holding that the foreclosure of the pledge held on October 29, 1992 is void;
and
3. In awarding moral damages and attorneys fees in favor of respondent Robert
Young.
In G.R. No. 142267, petitioners allege that the Court of Appeals acted with grave
abuse of discretion in granting respondent Young's motion for execution pending
appeal.[26]
Petitioners contend that the MOA executed on October 9, 1991 is not
enforceable considering that Robert Young committed fraud, misrepresented the
warranties and failed to comply with his obligations. Hence, the Court of Appeals
erred when it held that the MOA is valid and ordered petitioners to pay for the shares
covered by the same.
In their comment, respondents simply contend that since the MOA was
prepared by counsel of petitioner Insular Life and duly signed by them, they cannot
now impugn the same and avoid compliance with their obligations specified therein.
The Court of Appeals, in reversing the Decision of the RTC, ruled that the MOA
is binding between the parties as it was not validly rescinded. In exercising its option
to rescind the MOA, Insular Life failed to notify Young pursuant to Article 1599 of the
Civil Code.[27] Hence, the MOA is enforceable against the parties thereto. The
Appellate Court then concluded that Young's loan with Insular Life is deemed fully
paid based on the representation and warranty in the MOA that "the entire proceeds
of the sale shall be used to pay off the outstanding debt of Robert T. Young to Insular
Life."
In other words, the Court of Appeals construed the MOA as a contract of
sale since it applied Article 1599 of the Civil Code which pertains to cases where there
is a breach of warranty.
We disagree.
The Memorandum of Agreement pertinently provides:
"1. Insular Life and the Pension Fund hereby agree to purchase from the Vendor
and the Vendor agrees to convey, transfer, assign EIGHT HUNDRED THIRTY
THOUSAND EIGHT HUNDRED SIXTY (830,860) Common Shares and THREE
HUNDRED ELEVEN THOUSAND FIVE HUNDRED SEVENTY TWO (311,572) Common
Shares of Home Bankers Savings and Trust Co., respectively, Insular Life and the
Pension Fund, or to such person designated by Insular Life or the Pension Fund, for
a total consideration of ONE HUNDRED NINETY-EIGHT MILLION PESOS
(P198,000,000.00), subject to the following terms and conditions and
representations and warranties made by the Vendor:
A. REPRESENTATION AND WARRANTIES:
1. As of September 30, 1991, the total outstanding paid in capital of the
bank is ONE HUNDRED FIFTY SEVEN MILLION SEVEN HUNDRED
FOURTEEN THOUSAND NINE HUNDRED PESOS (P157,714,900.00),
2. As of September 30, 1991, the total net worth of the bank is ONE
HUNDRED FOURTEEN MILLION EIGHT HUNDRED ONE THOUSAND FIVE
HUNDRED THIRTY NINE PESOS (P114,801,593.00),
 3. As of September 30, 1991, the total loans with doubtful recovery
amounted to SIXTY MILLION PESOS (P60,000,000.00), which includes
the loans with doubtful recovery contained in the May 1991 findings
of the Central Bank and an additional provision for certain loan
accounts identified and listed by Robert T. Young,
4. The entire proceeds of the sale shall be used to pay off the outstanding
debt of Robert T. Young to Insular Life.
B. CONDITION PRECEDENTS:
Upon the signing of this Agreement and prior to the execution of a Deed of Sale by
the parties, the following events shall occur:
1. The Vendor shall infuse an additional capital of FIFTY MILLION PESOS
(P50,000,000.00) into the Bank,
2. The Vendee shall undertake a due diligence audit on the bank for a
period not exceeding 60 days from the date of the signing of this
Agreement, and the audit shall be undertaken to determine that the
provision for SIXTY MILLION PESOS (P60,000,000.00) for doubtful
account is sufficient,
3. After signing of this Agreement and during the 60 days due diligence
audit of the Vendee, as mentioned in No. 2, the Vendor shall endorse
and deliver the stock certificates representing TWENTY FIVE (25%)
percent of the total outstanding capital stock of the bank to the
Vendee, the stock certificates shall be returned to the Vendor at the
end of the 60 days due diligence audit and after the Vendee is satisfied
that the provision of SIXTY MILLION PESOS (P60,000,000.00) for
doubtful accounts is sufficient.[28] (Emphasis ours)
Contrary to the findings of the Court of Appeals, the foregoing provisions of the
MOA negate the existence of a perfected contract of sale. The MOA is merely
a contract to sell since the parties therein specifically undertook to enter into a
contract of sale if the stipulated conditions are met and the representation and
warranties given by Young prove to be true.The obligation of petitioner Insular Life
to purchase, as well as the concomitant obligation of Young to convey to it the
shares, are subject to the fulfillment of the conditions contained in the MOA. Once
the conditions, representation and warranties are satisfied, then it is incumbent upon
the parties to perform their respective obligations under the contract. Conversely, in
the event that these conditions are not met or complied with, no obligation on the
part of either party arises. This is in accord with Article 1181 of the Civil Code which
provides that "(i)n conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening
of the event which constitutes the condition." And when the obligation assumed by
a party to a contract is expressly subjected to a condition, the obligation cannot be
enforced against him unless the condition is complied with.[29]
Here, the MOA provides that Young shall infuse additional capital
of P50,000,000.00 into the Bank. It likewise specifies the warranty given by Young
that the doubtful accounts of petitioner Bank amounted to P60,000,000.00
only. However, records show that Young failed to infuse the required additional
capital. Moreover, the due diligence audit shows that Young was involved in
fraudulent schemes like check-kiting[30] which amounted to a
staggering P344,000,000.00. This belies his representation that the doubtful
accounts of petitioner Bank amounted only to P60,000,000.00. As a result of these
anomalous transactions, the reserves of the Bank were depleted and it had to
undergo a ten-year rehabilitation plan under the supervision of the Central Bank.
Significantly, respondents do not dispute petitioners assertion that Young
committed fraud, misrepresented the warranties and failed to comply with his
obligations under the MOA.Accordingly, no right in favor of Young's arose and no
obligation on the part of Insular Life was created.[31] In Mortel vs. Kassco, Inc.,[32] this
Court held:
In contracts subject to a suspensive condition, the birth or effectivity of such
contracts only takes place if and when the event constituting the condition happens
or is fulfilled, and if the suspensive condition does not take place or is not
fulfilled, the parties would stand as if the conditional obligation had never existed.
Since no sale transpired between the parties, the Court of Appeals erred in
concluding that Insular Life purchased 55% of the total shares of the Bank under the
MOA. Consequently, its findings that the debt of Young has been fully paid and that
Insular Life is liable to pay for the remaining 45% equity have no basis. It must be
emphasized that the MOA did not convey title of the shares to Insular Life. If ever
there was delivery of the said shares to Insular Life, it was because they were pledged
by Young to Insular Life under the Credit Agreement.
It would be unfair on the part of Young to demand compliance by Insular Life of
its obligations when he himself was remiss in his own. Neither can he feign ignorance
of the stipulation in the MOA since it is presumed that he read the same and was
satisfied with its provisions before he affixed his signature therein. The fact that no
deed of sale was subsequently executed by the parties confirms the conclusion that
no sale transpired between them.
Notably, the Deed of Pledge which secured the Credit Agreement between the
parties, covered not only 1,324,864 shares which then constituted 99.82% of the total
outstanding shares of petitioner Bank, but also the 250,000 shares subsequently
issued. Consequently, when Young waived in his letter the period granted him under
the said agreement and manifested his inability to pay his obligation (which waiver
has been declared by the RTC and the CA to be valid), the loan extended by petitioner
Insular Life became due and demandable.[33] Definitely, petitioners merely exercised
the right granted to them under the law, which is to foreclose the pledge constituted
on the shares, in satisfaction of respondent Young's loan.
The Court of Appeals also erred in declaring that the auction sale is void since
petitioners failed to send a separate notice for the second auction.
Article 2112 of the Civil Code provides:
The creditor to whom the credit has not been satisfied in due time, may proceed
before a Notary Public for the sale of the thing pledged. The sale shall be made at a
public auction, and with notification to the debtor and the owner of the thing
pledged in a proper case, stating the amount for which the public sale is to be
held. If at the first auction the thing is not sold, a second one with the same
formalities shall be held; and if at the second auction there is no sale either, the
creditor may appropriate the thing pledged. In this case he shall be obliged to give
an acquittance for his entire claim.
Clearly, there is no prohibition contained in the law against the sending of one
notice for the first and second public auction as was done here by petitioner Insular
Life. The purpose of the law in requiring notice is to sufficiently apprise the debtor
and the pledgor that the thing pledged to secure payment of the loan will be sold in
a public auction and the proceeds thereof shall be applied to satisfy the debt. When
petitioner Insular Life sent a notice to Young informing him of the public auction
scheduled on October 28, 1991, and a second auction on the next day, October 29,
in the event that the shares are not sold on the first auction, the purpose of the law
was achieved. We thus reject respondents' argument that the term "second one"
refers to a separate notice which requires the same formalities as the first notice.
Petitioners contend that the Court of Appeals likewise erred when it declared
in the fallo of its decision that the unpaid accounts of the other respondents have
been fully paid. There is no showing how the Appellate Court reached such
conclusion. In doing so, the Court of Appeals violated the constitutional mandate that
"(n)o decision shall be rendered by any court without expressing clearly and distinctly
the facts and the law on which it is based."[34] Indeed, due process demands that the
parties to a litigation be informed of how it was decided with an explanation of the
factual and legal reasons that led to the conclusions of the court. [35] It must be
observed that those respondents did not contest petitioners' counterclaim against
them.
On the issue of damages, we find the Court of Appeals' award of moral damages
of P5,000,000.00 and attorney's fees of P1,500,000.00 to respondents without any
basis. Under Article 2220 of the Civil Code, moral damages may be awarded in breach
of contracts where the defendant acted fraudulently or in bad faith. Contrary to the
finding of the Court of Appeals, we find no such breach committed by petitioners,
much less any badge of fraud or bad faith on their part. It must be stressed that moral
damages are emphatically not intended to enrich a plaintiff at the expense of the
defendant.[36] Attorney's fees are not automatically awarded to every winning
litigant.[37] It must be shown that any of the instances enumerated under Art. 2208 of
the Civil Code exists to justify the award thereof.[38] Not one of such instances exists
here. Surprisingly, the Court of Appeals awarded the excessive amounts
of P5,000,000.00 as moral damages and P1,500,000.00 as attorneys fees to
respondents.
We now come to the issue of whether or not the Court of Appeals committed
grave abuse of discretion when it ordered the execution of its own judgment, thus:
It can not be denied that the plaintiffs-appellants, who are stockholders of Home,
have long been deprived of their rights as such stockholders. It has been almost a
decade since their cause of action accrued.And to this day, no immediate relief is
still in sight. On the contrary, with Insular Life practically controlling the fate of
Home, redress may become all but nugatory. This is the very line of reasoning this
Court has adopted in rendering its main decision. There has been an unjust
enrichment on the part of the defendants-appellees, all to the injury and
humiliation of the plaintiffs-appellants are denied what is properly theirs, the injury
will be a continued one.
"This, we believe, is good reason enough to grant the plaintiffs'-appellants'
motion. Good reasons consist of compelling circumstances justifying the immediate
execution lest judgment becomes illusory, or the prevailing party may after the
lapse of time become unable to enjoy it, considering the tactics of the adverse party
who may apparently have no case except to delay.
"The allegation by the defendants-appellees that the plaintiff-appellant Young is a
fugitive from justice deserves scant consideration from this Court. It is a personal
attack on an adverse party that is completely uncalled for and has no bearing
whatsoever in the present case. And even if the same is true, it is not difficult to see
that the present predicament Young now finds himself in stemmed from the unfair,
nay, unlawful treatment he has received from the defendants-appellees. That
Young now has very little assets should not come as a surprise to the defendants-
appellees; through their own machinations they deprived him of the same. To now
hold the plight of Young against himself would be to and insult to injury, especially if
one is to consider that the latter's situation was brought about by the same party
who now opposes the claim for immediate relief.
"With the grant of the instant motion, plaintiff-appellant Young may once again
reclaim his rightful place in society, before he sinks deeper into the mire in which
he, according to the defendants-appellees, may now be in. Contrary to the
defendants'-appellees' contentions, it is, in fact, another reason to extend our
favorable consideration to the motion. It is the least we can do.

xxx

"In fine, it is this Court's considered opinion that the combination of all the
foregoing facts, and the plaintiffs'-appellants' readiness and willingness to post the
requisite bond, constitute sufficient grounds to grant immediate relief. [39]

We reject the Court of Appeal's ratiocination. The ruling of this Court in Heirs of
the Late Justice Jose B. L. Reyes vs. Court of Appeals[40] is instructive on this point:

One final word. It was bad enough that the Court of Appeals erred in ruling that the
lease contract must be judicially rescinded before respondent MMB, Inc. may be
evicted from the premises. It was worse that the Court of Appeals immediately
enforced its decision pending appeal restoring respondent in possession of the
leased premises and worst, appointed a special sheriff to carry out the writ of
execution. In the first place, we emphatically rule that the Court of Appeals has no
authority to issue immediate execution pending appeal of its own
decision. Discretionary execution under Rule 29, Section 2 (a), 1997 Rules of Civil
Procedure, as amended, is allowed pending appeal of a judgment or final order of
the trial court, upon good reasons to be stated in a special order after due
hearing. A judgment of the Court of Appeals cannot be executed pending appeal.
Once final and executory, the judgment must be remanded to the lower court,
where a motion for its execution may be filed only after its entry. In other words,
before its finality, the judgment cannot be executed. There can be no
discretionary execution of a decision of the Court of Appeals. x x x.

We therefore rule that the Court of Appeals committed grave abuse of

discretion when it granted respondents motion for execution pending appeal.
WHEREFORE, the petitions are GRANTED. In G.R. No. 140964, the assailed
Decision dated September 22, 1999 and the Resolution dated December 1, 1999
issued by the Court of Appeals in CA G.R. CV No. 54264 are REVERSED and SET ASIDE.
In G.R. No. 142267, the Resolution dated March 10, 2000 issued by the Court of
Appeals granting respondents' motion for execution is declared VOID.
The Decision dated March 10, 1995 of the Regional Trial Court, Branch
42, Makati City, in Civil Case No. 92-049, is REINSTATED. Costs against respondents.
SO ORDERED.
 SECOND DIVISION
service charge, and that the note is secured by a real estate mortgage as
PRUDENTIAL BANK, G.R. No. 150197 aforementioned.[3] Significantly, the real estate mortgage contained the following
Petitioner,
clause:
Present:

PUNO, J., That for and in consideration of certain loans, overdraft and other
Chairman, credit accommodations obtained from the Mortgagee by the
- versus - AUSTRIA-MARTINEZ, Mortgagor and/or ________________ hereinafter referred to,
CALLEJO, SR., irrespective of number, as DEBTOR, and to secure the payment of
TINGA, and the same and those that may hereafter be obtained, the principal
CHICO-NAZARIO, JJ. or all of which is hereby fixed at Two Hundred Fifty Thousand
DON A. ALVIAR and GEORGIA (P250,000.00) Pesos, Philippine Currency, as well as those that the
B. ALVIAR, Mortgagee may extend to the Mortgagor and/or DEBTOR, including
Respondents. Promulgated: interest and expenses or any other obligation owing to the
July 28, 2005 Mortgagee, whether direct or indirect, principal or secondary as
appears in the accounts, books and records of the Mortgagee, the
x-------------------------------------------------------------------x Mortgagor does hereby transfer and convey by way of mortgage
unto the Mortgagee, its successors or assigns, the parcels of land
which are described in the list inserted on the back of this
DECISION document, and/or appended hereto, together with all the buildings
and improvements now existing or which may hereafter be erected
TINGA, J.: or constructed thereon, of which the Mortgagor declares that he/it
is the absolute owner free from all liens and incumbrances. . . .[4]

Before us is a petition for review on certiorari under Rule 45 of the Rules of Court.
Petitioner Prudential Bank seeks the reversal of the Decision[1]of the Court of Appeals
dated 27 September 2001 in CA-G.R. CV No. 59543 affirming the Decision of the
Regional Trial Court (RTC) of Pasig City, Branch 160, in favor of respondents.
Respondents, spouses Don A. Alviar and Georgia B. Alviar, are the registered owners
of a parcel of land in San Juan, Metro Manila, covered by Transfer Certificate of Title
(TCT) No. 438157 of the Register of Deeds of Rizal. On 10 July 1975, they executed a
deed of real estate mortgage in favor of petitioner Prudential Bank to secure the
payment of a loan worth P250,000.00.[2] This mortgage was annotated at the back of
TCT No. 438157. On 4 August 1975, respondents executed the corresponding
promissory note, PN BD#75/C-252, covering the said loan, which provides that the
loan matured on 4 August 1976 at an interest rate of 12% per annum with a 2%
On 22 October 1976, Don Alviar executed another promissory note, PN BD#76/C-345
for P2,640,000.00, secured by D/A SFDX #129, signifying that the loan was secured
by a hold-out on the mortgagors foreign currency savings account with the bank
under Account No. 129, and that the mortgagors passbook is to be surrendered to
the bank until the amount secured by the hold-out is settled.[5]
On 27 December 1976, respondent spouses executed for Donalco Trading, Inc., of
which the husband and wife were President and Chairman of the Board and Vice
President,[6] respectively, PN BD#76/C-430 covering P545,000.000. As provided in the
note, the loan is secured by Clean-Phase out TOD CA 3923, which means that the
temporary overdraft incurred by Donalco Trading, Inc. with petitioner is to be
converted into an ordinary loan in compliance with a Central Bank circular directing
the discontinuance of overdrafts.[7]
 made on 6 March 1979 was not a payment made by respondents, but by G.B. Alviar
On 16 March 1977, petitioner wrote Donalco Trading, Inc., informing the latter of its Realty and Development Inc., which has a separate loan with the bank secured by a
approval of a straight loan of P545,000.00, the proceeds of which shall be used to separate mortgage.[12]
liquidate the outstanding loan of P545,000.00 TOD. The letter likewise mentioned
On 15 March 1994, the trial court dismissed the complaint and ordered the Sheriff to
that the securities for the loan were the deed of assignment on two promissory notes
proceed with the extra-judicial foreclosure.[13]Respondents sought reconsideration of
executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U.
the decision.[14] On 24 August 1994, the trial court issued an Order setting aside its
Valencia and Co. and the chattel mortgage on various heavy and transportation
earlier decision and awarded attorneys fees to respondents.[15] It found that only
equipment.[8]
the P250,000.00 loan is secured by the mortgage on the land covered by TCT No.
438157. On the other hand, the P382,680.83 loan is secured by the foreign currency
On 06 March 1979, respondents paid petitioner P2,000,000.00, to be applied to the
deposit account of Don A. Alviar, while the P545,000.00 obligation was an unsecured
obligations of G.B. Alviar Realty and Development, Inc. and for the release of the real
loan, being a mere conversion of the temporary overdraft of Donalco Trading, Inc. in
estate mortgage for the P450,000.00 loan covering the two (2) lots located at Vam
compliance with a Central Bank circular. According to the trial court, the blanket
Buren and Madison Streets, North Greenhills, San Juan, Metro Manila. The payment
mortgage clause relied upon by petitioner applies only to future loans obtained by
was acknowledged by petitioner who accordingly released the mortgage over the
the mortgagors, and not by parties other than the said mortgagors, such as Donalco
two properties.[9]
Trading, Inc., for which respondents merely signed as officers thereof.

On appeal to the Court of Appeals, petitioner made the following assignment of

On 15 January 1980, petitioner moved for the extrajudicial foreclosure of the errors:
mortgage on the property covered by TCT No. 438157. Per petitioners computation,
I. The trial court erred in holding that the real
respondents had the total obligation of P1,608,256.68, covering the three (3) estate mortgage covers only the promissory note
BD#75/C-252 for the sum of P250,000.00.
promissory notes, to wit: PN BD#75/C-252 for P250,000.00, PN BD#76/C-345
for P382,680.83, and PN BD#76/C-340 for P545,000.00, plus assessed past due II. The trial court erred in holding that the
promissory note BD#76/C-345 for P2,640,000.00
interests and penalty charges. The public auction sale of the mortgaged property was
(P382,680.83 outstanding principal balance) is not
set on 15 January 1980.[10] covered by the real estate mortgage by expressed
agreement.
Respondents filed a complaint for damages with a prayer for the issuance of a writ of
III. The trial court erred in holding that Promissory
preliminary injunction with the RTC of Pasig,[11] claiming that they have paid their Note BD#76/C-430 for P545,000.00 is not covered by the
principal loan secured by the mortgaged property, and thus the mortgage should not real estate mortgage.

be foreclosed. For its part, petitioner averred that the payment of P2,000,000.00 IV. The trial court erred in holding that the real
estate mortgage is a contract of adhesion.
 V. The trial court erred in holding defendant-
Anent the Court of Appeals conclusion that the parties did not intend to
appellant liable to pay plaintiffs-appellees attorneys fees
for P20,000.00.[16] include PN BD#76/C-345 in the real estate mortgage because the same was
specifically secured by a foreign currency deposit account, petitioner states that
The Court of Appeals affirmed the Order of the trial court but deleted the
there is no law or rule which prohibits an obligation from being covered by more than
award of attorneys fees.[17] It ruled that while a continuing loan or credit
one security.[27] Besides, respondents even continued to withdraw from the same
accommodation based on only one security or mortgage is a common practice in
foreign currency account even while the promissory note was still outstanding,
financial and commercial institutions, such agreement must be clear and
strengthening the belief that it was the real estate mortgage that principally secured
unequivocal. In the instant case, the parties executed different promissory notes
all of respondents promissory notes.[28] As for PN BD#76/C-345, which the Court of
agreeing to a particular security for each loan. Thus, the appellate court ruled that
Appeals found to be exclusively secured by the Clean-Phase out TOD 3923, petitioner
[18]
the extrajudicial foreclosure sale of the property for the three loans is improper.
posits that such security is not exclusive, as the dragnet clause of the real estate
mortgage covers all the obligations of the respondents.[29]
The Court of Appeals, however, found that respondents have not yet paid
the P250,000.00 covered by PN BD#75/C-252 since the payment of P2,000,000.00
Moreover, petitioner insists that respondents attempt to evade foreclosure by the
adverted to by respondents was issued for the obligations of G.B. Alviar Realty and
expediency of stating that the promissory notes were executed by them not in their
[19]
Development, Inc.
personal capacity but as corporate officers. It claims that PN BD#76/C-430 was in fact
for home construction and personal consumption of respondents. Thus, it states that
Aggrieved, petitioner filed the instant petition, reiterating the assignment of
there is a need to pierce the veil of corporate fiction.[30]
errors raised in the Court of Appeals as grounds herein.
Finally, petitioner alleges that the mortgage contract was executed by respondents
Petitioner maintains that the blanket mortgage clause or the dragnet clause
with knowledge and understanding of the dragnet clause, being highly educated
in the real estate mortgage expressly covers not only the P250,000.00 under PN
individuals, seasoned businesspersons, and political personalities.[31] There was no
BD#75/C-252, but also the two other promissory notes included in the application for
oppressive use of superior bargaining power in the execution of the promissory notes
extrajudicial foreclosure of real estate mortgage.[20] Thus, it claims that it acted within
and the real estate mortgage.[32]
the terms of the mortgage contract when it filed its petition for extrajudicial
foreclosure of real estate mortgage. Petitioner relies on the cases of Lim Julian v.
For their part, respondents claim that the dragnet clause cannot be applied to the
[21] [22]
Lutero, Tad-Y v. Philippine National Bank, Quimson v. Philippine National
subsequent loans extended to Don Alviar and Donalco Trading, Inc. since these loans
[23]
Bank, C & C Commercial v. Philippine National Bank, [24] Mojica v. Court of
are covered by separate promissory notes that expressly provide for a different form
[25] [26]
Appeals, and China Banking Corporation v. Court of Appeals, all of which upheld
of security.[33] They reiterate the holding of the trial court that the blanket mortgage
the validity of mortgage contracts securing future advancements.
clause would apply only to loans obtained jointly by respondents, and not to loans
obtained by other parties.[34] Respondents also place a premium on the finding of the
lower courts that the real estate mortgage clause is a contract of adhesion and must
be strictly construed against petitioner bank.[35]
The instant case thus poses the following issues pertaining to: (i) the validity of the
blanket mortgage clause or the dragnet clause; (ii) the coverage of the blanket
mortgage clause; and consequently, (iii) the propriety of seeking foreclosure of the
mortgaged property for the non-payment of the three loans.
promissory note. If respondents were indeed the real parties to the loan, petitioner,
a big, well-established institution of long standing that it is, should have insisted that
the note be made in the name of respondents themselves, and not to Donalco
Trading Inc., and that they sign the note in their personal capacity and not as officers
of the corporation.
Now on the main issues.

A blanket mortgage clause, also known as a dragnet clause in American

At this point, it is important to note that one of the loans sought to be included in the
jurisprudence, is one which is specifically phrased to subsume all debts of past or
blanket mortgage clause was obtained by respondents for Donalco Trading, Inc.
future origins. Such clauses are carefully scrutinized and strictly
Indeed, PN BD#76/C-430 was executed by respondents on behalf of Donalco Trading, [38]
construed. Mortgages of this character enable the parties to provide continuous
Inc. and not in their personal capacity. Petitioner asks the Court to pierce the veil of
dealings, the nature or extent of which may not be known or anticipated at the time,
corporate fiction and hold respondents liable even for obligations they incurred for
and they avoid the expense and inconvenience of executing a new security on each
the corporation. The mortgage contract states that the mortgage covers as well as
new transaction.[39] A dragnet clause operates as a convenience and accommodation
those that the Mortgagee may extend to the Mortgagor and/or DEBTOR, including
to the borrowers as it makes available additional funds without their having to
interest and expenses or any other obligation owing to the Mortgagee, whether
execute additional security documents, thereby saving time, travel, loan closing
direct or indirect, principal or secondary. Well-settled is the rule that a corporation
costs, costs of extra legal services, recording fees, et cetera.[40] Indeed, it has been
has a personality separate and distinct from that of its officers and stockholders.
settled in a long line of decisions that mortgages given to secure future
Officers of a corporation are not personally liable for their acts as such officers unless
advancements are valid and legal contracts,[41] and the amounts named as
it is shown that they have exceeded their authority.[36] However, the legal fiction that
consideration in said contracts do not limit the amount for which the mortgage may
a corporation has a personality separate and distinct from stockholders and members
stand as security if from the four corners of the instrument the intent to secure future
may be disregarded if it is used as a means to perpetuate fraud or an illegal act or as
and other indebtedness can be gathered.[42]
a vehicle for the evasion of an existing obligation, the circumvention of statutes, or
to confuse legitimate issues.[37] PN BD#76/C-430, being an obligation of Donalco
The blanket mortgage clause in the instant case states:
Trading, Inc., and not of the respondents, is not within the contemplation of the That for and in consideration of certain loans, overdraft
and other credit accommodations obtained from the Mortgagee by
blanket mortgage clause. Moreover, petitioner is unable to show that respondents
the Mortgagor and/or ________________ hereinafter referred to,
are hiding behind the corporate structure to evade payment of their obligations. Save irrespective of number, as DEBTOR, and to secure the payment of
the same and those that may hereafter be obtained, the principal
for the notation in the promissory note that the loan was for house construction and
or all of which is hereby fixed at Two Hundred Fifty Thousand
personal consumption, there is no proof showing that the loan was indeed for (P250,000.00) Pesos, Philippine Currency, as well as those that the
respondents personal consumption. Besides, petitioner agreed to the terms of the Mortgagee may extend to the Mortgagor and/or DEBTOR,
 including interest and expenses or any other obligation owing to
the Mortgagee, whether direct or indirect, principal or
secondary as appears in the accounts, books and records of the
Mortgagee, the Mortgagor does hereby transfer and convey by way
of mortgage unto the Mortgagee, its successors or assigns, the
parcels of land which are described in the list inserted on the back
of this document, and/or appended hereto, together with all the
buildings and improvements now existing or which may hereafter
be erected or constructed thereon, of which the Mortgagor
declares that he/it is the absolute owner free from all liens and
incumbrances. . . .[43] (Emphasis supplied.)
Thus, contrary to the finding of the Court of Appeals, petitioner and respondents
intended the real estate mortgage to secure not only the P250,000.00 loan from the
petitioner, but also future credit facilities and advancements that may be obtained
by the respondents. The terms of the above provision being clear and unambiguous,
there is neither need nor excuse to construe it otherwise.
The cases cited by petitioner, while affirming the validity of dragnet clauses
or blanket mortgage clauses, are of a different factual milieu from the instant case.
There, the subsequent loans were not covered by any security other than that for the
mortgage deeds which uniformly contained the dragnet clause.
In the case at bar, the subsequent loans obtained by respondents were
secured by other securities, thus: PN BD#76/C-345, executed by Don Alviar was
secured by a hold-out on his foreign currency savings account, while PN BD#76/C-
430, executed by respondents for Donalco Trading, Inc., was secured by Clean-Phase
out TOD CA 3923 and eventually by a deed of assignment on two promissory notes
executed by Bancom Realty Corporation with Deed of Guarantee in favor of A.U.
Valencia and Co., and by a chattel mortgage on various heavy and transportation
equipment. The matter of PN BD#76/C-430 has already been discussed. Thus, the
critical issue is whether the blanket mortgage clause applies even to subsequent
advancements for which other securities were intended, or particularly, to PN
BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged on
this question. One school advocates that a dragnet clause so worded as to be broad
enough to cover all other debts in addition to the one specifically secured will be
construed to cover a different debt, although such other debt is secured by another
mortgage.[44] The contrary thinking maintains that a mortgage with such a clause will
not secure a note that expresses on its face that it is otherwise secured as to its
entirety, at least to anything other than a deficiency after exhausting the security
specified therein,[45] such deficiency being an indebtedness within the meaning of the
mortgage, in the absence of a special contract excluding it from the arrangement. [46]
The latter school represents the better position. The parties having conformed to the
blanket mortgage clause or dragnet clause, it is reasonable to conclude that they also
agreed to an implied understanding that subsequent loans need not be secured by
other securities, as the subsequent loans will be secured by the first mortgage. In
other words, the sufficiency of the first security is a corollary component of the
dragnet clause. But of course, there is no prohibition, as in the mortgage contract in
issue, against contractually requiring other securities for the subsequent loans. Thus,
when the mortgagor takes another loan for which another security was given it could
not be inferred that such loan was made in reliance solely on the original security
with the dragnet clause, but rather, on the new security given. This is the reliance on
the security test.
Hence, based on the reliance on the security test, the California court in the cited
case made an inquiry whether the second loan was made in reliance on the original
security containing a dragnet clause. Accordingly, finding a different security was
taken for the second loan no intent that the parties relied on the security of the first
loan could be inferred, so it was held. The rationale involved, the court said, was that
the dragnet clause in the first security instrument constituted a continuing offer by
the borrower to secure further loans under the security of the first security
instrument, and that when the lender accepted a different security he did not accept
[47]
the offer.
In another case, it was held that a mortgage with a dragnet clause is an offer
by the mortgagor to the bank to provide the security of the mortgage for advances
of and when they were made. Thus, it was concluded that the offer was not accepted
by the bank when a subsequent advance was made because (1) the second note was
secured by a chattel mortgage on certain vehicles, and the clause therein stated that
the note was secured by such chattel mortgage; (2) there was no reference in the
second note or chattel mortgage indicating a connection between the real estate
mortgage and the advance; (3) the mortgagor signed the real estate mortgage by her
name alone, whereas the second note and chattel mortgage were signed by the
mortgagor doing business under an assumed name; and (4) there was no allegation
by the bank, and apparently no proof, that it relied on the security of the real estate
mortgage in making the advance.[48]
Indeed, in some instances, it has been held that in the absence of clear, supportive
evidence of a contrary intention, a mortgage containing a dragnet clause will not be
extended to cover future advances unless the document evidencing the subsequent
advance refers to the mortgage as providing security therefor. [49]
It was therefore improper for petitioner in this case to seek foreclosure of
the mortgaged property because of non-payment of all the three promissory notes.
While the existence and validity of the dragnet clause cannot be denied, there is a
need to respect the existence of the other security given for PN BD#76/C-345. The
foreclosure of the mortgaged property should only be for the P250,000.00 loan
covered by PN BD#75/C-252, and for any amount not covered by the security for the
second promissory note. As held in one case, where deeds absolute in form were
executed to secure any and all kinds of indebtedness that might subsequently
become due, a balance due on a note, after exhausting the special security given for
the payment of such note, was in the absence of a special agreement to the contrary,
within the protection of the mortgage, notwithstanding the giving of the special
security.[50] This is recognition that while the dragnet clause subsists, the security
specifically executed for subsequent loans must first be exhausted before the
mortgaged property can be resorted to.
One other crucial point. The mortgage contract, as well as the promissory notes
subject of this case, is a contract of adhesion, to which respondents only participation
was the affixing of their signatures or adhesion thereto. [51] A contract of adhesion is
one in which a party imposes a ready-made form of contract which the other party
may accept or reject, but which the latter cannot modify. [52]
The real estate mortgage in issue appears in a standard form, drafted and
prepared solely by petitioner, and which, according to jurisprudence must be strictly
construed against the party responsible for its preparation.[53] If the parties intended
that the blanket mortgage clause shall cover subsequent advancement secured by
separate securities, then the same should have been indicated in the mortgage
contract. Consequently, any ambiguity is to be taken contra proferentum, that is,
construed against the party who caused the ambiguity which could have avoided it
by the exercise of a little more care.[54] To be more emphatic, any ambiguity in a
contract whose terms are susceptible of different interpretations must be read
against the party who drafted it,[55] which is the petitioner in this case.
Even the promissory notes in issue were made on standard forms prepared
by petitioner, and as such are likewise contracts of adhesion. Being of such nature,
the same should be interpreted strictly against petitioner and with even more reason
since having been accomplished by respondents in the presence of petitioners
personnel and approved by its manager, they could not have been unaware of the
import and extent of such contracts.
Petitioner, however, is not without recourse. Both the Court of Appeals and the trial
court found that respondents have not yet paid the P250,000.00, and gave no
credence to their claim that they paid the said amount when they paid
petitioner P2,000,000.00. Thus, the mortgaged property could still be properly
subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and as
mentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/C-
345, has been exhausted, subject of course to defenses which are available to
respondents.

WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals in CA-G.R.
CV No. 59543 is AFFIRMED.
Costs against petitioner.

SO ORDERED.

DANTE O. TINGA Associate Justice

WE CONCUR
 EN BANC
[G.R. No. L-17500. May 16, 1967.]
PEOPLE’S BANK AND TRUST CO. and ATLANTIC, GULF AND PACIFIC CO. OF
MANILA, plaintiffs and appellants, v. DAHICAN LUMBER COMPANY, DAHICAN
AMERICAN LUMBER CORPORATION, and CONNELL BROS. CO. (PHIL.), defendants
and appellants.
Angel S. Gamboa, for Defendants-Appellants.
Laurel Law Offices, for Plaintiffs-Appellants.
SYLLABUS
1. REAL ESTATE MORTGAGE; STIPULATION INCLUDING IN THE LIEN AFTER
ACQUIRED PROPERTIES; VALIDITY THEREOF. — A stipulation including in the
mortgage lien after acquired properties is common and logical in all cases where
the properties given as collateral are perishable or subject to inevitable wear and
tear or were intended to be sold, or to be used — thus becoming subject to the
inevitable wear and tear — but with the understanding that they shall be replaced
with others to be thereafter acquired by the mortgagor. Such stipulation is neither
unlawful nor immoral, its obvious purpose being to maintain, to the extent allowed
by circumstances, the original value of the properties given as securities.
2. ID.; ID.; ID.; MACHINERIES INTENDED FOR AN INDUSTRY; NATURE THEREOF. —
Under Articles 334 and 1877 of the old Civil Code substantially reproduced in
Articles 415 and 2127 respectively of the new Civil Code, the properties in question
being machinery, receptacles, instruments or replacements intended by the owner
of the tenement for an industry or works which may be carried on in a building or
on a piece of land, and shall tend directly to meet the needs of the said industry or
works, are classified as immovable properties, therefore not covered by the Chattel
Mortgage Law.
3. ID.; ID.; ID.; ID; ID.; SUPPLIERS NOT FINANCIERS CONSIDERED UNPAID SELLERS. —
Unpaid sellers who were the suppliers or vendors of the after acquired properties
and not the financiers, like the defendants herein can claim a right superior to the
lien constituted on said properties by virtue of the deeds of mortgage under
foreclosure.
4. ID.; ID.; ID.; ID.; ID.; FORECLOSURE PRIOR TO MATURITY OF PROMISSORY NOTE;
WHEN PROPER. — Although an extension of time was given to the debtor,
considering that when this complaint was filed the debtor was insolvent, it follows
that the debtor thereby lost the benefit of the period unless he gives a guaranty or
security for the debt (Art. 1198, New Civil Code). Whereas in this case the guaranty
given was plainly inadequate, then the foreclosure was proper because the
collection of the notes were not premature.
DECISION
DIZON, J.:
On September 8, 1948, Atlantic Gulf & Pacific Company of Manila, a West Virginia
corporation licensed to do business in the Philippines, — hereinafter referred to as
ATLANTIC — sold and assigned all its right in the Dahican lumber concession to
Dahican Lumber Company — hereinafter referred to as DALCO — for the total sum
of P500,000.00 of which only the amount of $50,000.00 was paid. Thereafter, to
develop the concession, DALCO obtained various loans from the People’s Bank &
Trust Company — hereinafter referred to as the Bank — amounting, as of July 13,
1950, to P200,000.00. In addition, DALCO obtained, through the Bank, a loan of
$250,000.00 from the Export-Import Bank of Washington D.C., evidenced by five
promissory notes of $50,000.00 each, maturing on different dates, executed by
both DALCO and the Dahican American Lumber Corporation, a foreign corporation
and a stockholder of DALCO, — hereinafter referred to as DAMCO, all payable to
the BANK or its order.
As security for the payment of the abovementioned loans, on July 13, 1950 DALCO
executed in favor of the BANK — the latter acting for itself and as trustee for the
Export, Import Bank of Washington D. C. — a deed of mortgage covering live parcels
of land situated in the province of Camarines Norte, together with all the buildings
and other improvements existing thereon and all the personal properties of the
mortgagor located in its place of business in the municipalities of Mambulao and
Capalonga, Camarines Norte (Exhibit D). On the same date, DALCO executed a
second mortgage on the same properties in favor of ATLANTIC to secure payment
of the unpaid balance of the sale price of the lumber concession amounting to the
sum of $450,000.00 (Exhibit G). Both deeds contained the following provision
extending the mortgage lien to properties to be subsequently acquired — referred
to hereafter as "after acquired properties" — by the
mortgagor:jgc:chanrobles.com.ph
"All property of every nature and description taken in exchange or replacement,
and all buildings, machinery, fixtures, tools, equipment and other property which
the Mortgagor may hereafter acquire, construct, install, attach, or use in, to, upon,
or in connection with the premises, shall immediately be and become subject to the
lien of this mortgage in the same manner and to the same extent as if now included
therein, and the Mortgagor shall from time to time during the existence of this
mortgage furnish the Mortgagee with an accurate inventory of such substituted and
subsequently acquired property."cralaw virtua1aw library
Both mortgages were registered in the Office of the Register of Deeds of Camarines
Norte. In addition thereto DALCO and DAMCO pledged to the BANK 7,296 shares of
stock of DALCO and 9,286 shares of DAMCO to secure the same obligations.
Upon DALCO’s and DAMCO’s failure to pay the fifth promissory note upon its
maturity, the BANK paid the same to the Export-Import Bank of Washington D.C.
and the latter assigned to the former its credit and the first mortgage securing it.
Subsequently, the BANK gave DALCO and DAMCO up to April 1, 1953 to pay the
overdue promissory note.
After July 13, 1950 — the date of execution of the mortgages mentioned above —
DALCO purchased various machineries, equipment, spare parts and supplies in
addition to, or in replacement of some of those already owned and used by it on
the date aforesaid. Pursuant to the provision of the mortgage deeds quoted
heretofore regarding "after acquired properties", the BANK requested DALCO to
submit complete lists of said properties but the latter failed to do so. In connection
with these purchases, there appeared in the books of DALCO as due to Connell
Bros. Company (Philippines) — a domestic corporation who was acting as the
general purchasing agent of DALCO — hereinafter called CONNEL — the sum of
P452,860.55 and to DAMCO, the sum of P2,151,678.34.
On December 16, 1952, the Board of Directors of DALCO in a special meeting called
for the purpose, passed a resolution agreeing to rescind the alleged sales of
equipment, spare parts and supplies by CONNELL and DAMCO to it. Thereafter, the
corresponding agreements of rescission of sale were executed between DALCO and
DAMCO, on the one hand, and between DALCO and CONNELL, on the other.
On January 23, 1953, the BANK, in its own behalf and that of ATLANTIC, demanded
that said agreements be cancelled but CONNELL and DAMCO refused to do so. As a
result, on February 12, 1953, ATLANTIC and the BANK, commenced foreclosure
proceedings in the Court of First Instance of Camarines Norte against DALCO and
DAMCO. On the same date they filed an ex-parte application for the appointment of
a Receiver and/or for the issuance of a writ of preliminary injunction to restrain
DALCO from removing its properties. The court granted both remedies and
appointed George U. Evans as Receiver. Upon defendants’ motion, however, the
court, in its order of February 21, 1953, discharged the Receiver.
On March 2, 1953, defendants filed their answer denying the material allegations of
the complaint and alleging several affirmative defenses and a counterclaim.
On March 4 of the same year, CONNELL filed a motion for intervention alleging that
it was the owner and possessor of some of the equipments, spare parts and
supplies which DALCO had acquired subsequent to the execution of the mortgages
sought to be foreclosed and which plaintiffs claimed were covered by their lien. In
its order of March 18, 1953 the Court granted the motion, as well as plaintiffs’
motion to set aside the order discharging the Receiver. Consequently, Evans was
reinstated.
On April 1, 1953, CONNELL filed its answer denying the material averments of the
complaint, and asserting affirmative defenses and a counterclaim.
Upon motion of the parties, the Court, on September 30, 1953, issued an order
transferring the venue of the action to the Court of First Instance of Manila where it
was docketed as Civil Case No. 20987.
On August 30, 1958, upon motion of all the parties, the Court ordered the sale of all
the machineries, equipment and supplies of DALCO, and the same were
subsequently sold for a total consideration of P175,000.00 which was deposited in
court pending final determination of the action. By a similar agreement one half
(P87,500.00) of this amount was considered as representing the proceeds obtained
from the sale of the "undebated properties" (those not claimed by DAMCO and
CONNELL), and the other half as representing those obtained from the sale of the
"after acquired properties."
After due trial, the Court, on July 15, 1960, rendered Judgment as
follows:jgc:chanrobles.com.ph
"IN VIEW WHEREOF, the Court:chanrob1es virtual 1aw library
1. Condemns Dahican Lumber Co. to pay unto People’s Bank the sum of
P200,000.00 with 7% interest per annum from July 13, 1950, plus another sum of
P100,000.00 with 5% interest per annum from July 13, 1950; plus 10% on both
principal sums as attorney’s fees;
2. Condemns Dahican Lumber Co. to pay into Atlantic Gulf the sum of P900,000.00
with 4% interest per annum from July 13, 1950, plus 10% of the principal as
attorney’s fees;
3. Condemns Dahican Lumber Co. to pay unto Connel Bros. the sum of P425,860.55,
and to pay unto Dahican American Lumber Co. the sum of P2,151,678.34 both with
legal interest from the date of the filing of the respective answers of those parties,
plus 10% of the principals as attorney’s fees;

4. Orders that of the sum realized from the sale of the properties of P175,000.00,
after deducting the recognized expenses, one half thereof be adjudicated unto
plaintiffs, the Court no longer specifying the share of each because of their
announced intention under the stipulation of facts to ‘pool their resources’; as to
the other one-half, the same should be adjudicated unto both plaintiffs, and
defendant Dahican American and Connell Bros. in the proportion already set forth
on page 9, lines 21, 22 and 23 of the body of this decision; but with the
understanding that whatever plaintiffs and Dahican American and Connell Bros.
should receive from the P175,000.00 deposited in the Court shall be applied to the
judgments particularly rendered in favor of each;
5. No other pronouncement as to costs; but the costs of the receivership as to the
debated properties shall be borne by People’s Bank, Atlantic Gulf, Connell Bros. and
Dahican American Lumber Co., pro rata."cralaw virtua1aw library
On the following day, the Court issued the following supplementary
decision:jgc:chanrobles.com.ph
"IN VIEW WHEREOF, the dispositive part of the decision is hereby amended in order
to add the following paragraph 6:chanrob1es virtual 1aw library
6. If the sums mentioned in paragraphs 1 and 2 are not paid within ninety (90) days,
the Court orders the sale at public auction if the lands object of the mortgages to
satisfy the said mortgages and costs of foreclosure."cralaw virtua1aw library
From the above-quoted decision, all the parties appealed.
Main contentions of plaintiffs as appellants are the following: that the "after
acquired properties" were subject to the deeds of mortgage mentioned heretofore;
that said properties were acquired from suppliers other than DAMCO and CONNELL;
that even granting that DAMCO and CONNELL were the real suppliers, the rescission
of the sales to DALCO could not prejudice the mortgage lien in favor of plaintiffs;
that considering the foregoing, the proceeds obtained from the sale of the "after
acquired properties" as well as those obtained from the sale of the "undebated
properties" in the total sum of P175,000.00 should have been awarded exclusively
to plaintiffs by reason of the mortgage lien they had thereon; that damages should
have been awarded to plaintiffs against defendants, all of them being guilty of an
attempt to defraud the former when they sought to rescind the sales already
mentioned for the purpose of defeating their mortgage lien, and finally, that
defendants should have been made to bear all the expenses of the Receivership,
costs and attorney’s fees.
On the other hand, defendants-appellants contend that the trial court erred: firstly,
in not holding that plaintiffs had no cause of action against them because the
promissory note sued upon was not yet due when the action to foreclose the
mortgages was commenced; secondly, in not holding that the mortgages aforesaid
were null and void as regards the "after acquired properties" of DALCO because
they were not registered in accordance with the Chattel Mortgage Law, the court
erring, as a consequence, in holding that said properties were subject to the
mortgage lien in favor of plaintiffs; thirdly, in not holding that the provision of the
fourth paragraph of each of said mortgages did not automatically make subject to
such mortgages the "after acquired properties", the only meaning thereof being
that the mortgagor was willing to constitute a lien over such properties; fourthly, in
not ruling that said stipulation was void as against DAMCO and CONNELL and in not
awarding the proceeds obtained from the sale of the "after acquired properties" to
the latter exclusively; fifthly, in appointing a Receiver and in holding that the
damages suffered by DAMCO and CONNELL by reason of the depreciation or loss in
value of the "after acquired properties" placed under receivership was damnum
absque injuria and, consequently, in not awarding to said parties the corresponding
damages claimed in their counterclaim; lastly, in sentencing DALCO and DAMCO to
pay the costs of the Receivership, instead of sentencing plaintiffs to pay attorney’s
fees.
Plaintiffs’ brief as appellants submit six assignments of error, while that of
defendants also as appellants submit a total of seventeen. However, the
multifarious issues thus before Us may be resolved, directly or indirectly, by
deciding the following issues:chanrob1es virtual 1aw library
Firstly, are the so-called "after acquired properties" covered by and subject to the
deeds of mortgage subject of foreclosure?; secondly, assuming that they are subject
thereto, are the mortgages valid and binding on the properties aforesaid in spite of
the fact that they were not registered in accordance with the provisions of the
Chattel Mortgage Law?; thirdly, assuming again that the mortgages are valid and
binding upon the "after acquired properties", what is the effect thereon, if any, of
the rescission of sales entered into, on the one hand, between DALCO and DAMCO
and between DALCO and CONNELL, on the other?; and lastly, was the action to
foreclose the mortgages premature?
A. Under the fourth paragraph of both deeds of mortgage, it is crystal clear that all
property of every nature and description taken in exchange or replacement, as well
as all buildings, machineries, fixtures, tools, equipments, and other property that
the mortgagor may acquire, construct, install, attach, or use in, to, upon, or in
connection with the premises — that is, its lumber concession — "shall immediately
be and become subject to the lien" of both mortgages in the same manner and to
the same extent as if already included therein at the time of their execution. As the
language thus used leaves no room for doubt as to the intention of the parties, We
see no useful purpose in discussing the matter extensively. Suffice it to say that the
stipulation referred to is common, and We might say logical, in all cases where the
properties given as collateral are perishable or subject to inevitable wear and tear
or were intended to be sold, or to be used — thus becoming subject to the
inevitable wear and tear — but with the understanding — express or implied —
that they shall be replaced with others to be thereafter acquired by the mortgagor.
Such stipulation is neither unlawful nor immoral, its obvious purpose being to
maintain, to the extent allowed by circumstances, the original value of the
properties given as security. Indeed, if such properties were of the nature already
referred to, it would be poor judgment on the part of the creditor who does not see
to it that a similar provision is included in the contract.
B. But defendants contend that, granting without admitting, that the deeds of
mortgage in question cover the "after acquired properties" of DALCO, the same are
void and ineffectual because they were not registered in accordance with the
Chattel Mortgage Law. In support of this and of the proposition that, even if said
mortgages were valid, they should not prejudice them, the defendants argue (1)
that the deeds do not describe the mortgaged chattels specifically, nor were they
registered in accordance with the Chattel Mortgage Law; (2) that the stipulation
contained in the fourth paragraph thereof constitutes "mere executory agreements
to give a lien" over the "after acquired properties" upon their acquisition; and (3)
that any mortgage stipulation concerning "after acquired properties" should not
prejudice creditors and other third persons such as DAMCO and CONNELL.
The stipulation under consideration strongly belies defendants’ contention. As
adverted to hereinafter, it states that all property of every nature, buildings,
machinery, etc. taken in exchange or replacement by the mortgagor "shall
immediately be and become subject to the lien of this mortgage in the same
manner and to the same extent as if now included therein." No clearer language
could have been chosen.
Conceding, on the other hand, that it is the law in this jurisdiction that, to affect
third persons, a chattel mortgage must be registered and must describe the
mortgaged chattels or personal properties sufficiently to enable the parties and any
other person to identify them, We say that such law does not apply to this case.
As the mortgages in question were executed on July 13, 1950 with the old Civil Code
still in force, there can be no doubt that the provisions of said code must govern
their interpretation and the question of their validity. It happens, however, that
Articles 334 and 1877 of the old Civil Code are substantially reproduced in Article
415 and 2127, respectively, of the new Civil Code. It is, therefore, immaterial in this
case whether we take the former or the latter as guide in deciding the point under
consideration.
Article 415 does not define real property but enumerates what are considered as
such, among them being machinery, receptacles, instruments or replacements
intended by the owner of the tenement for an industry or works which may be
carried on in a building or on a piece of land, and shall tend directly to meet the
needs of the said industry or works.
On the strength of the above-quoted legal provisions, the lower court held that
inasmuch as "the chattels were placed in the real properties mortgaged to plaintiffs,
they came within the operation of Art. 415, paragraph 5 and Art. 2127 of the new
Civil Code."cralaw virtua1aw library
We find the above ruling in agreement with our decisions on the
subject:chanrob1es virtual 1aw library
(1) In Berkenkotter v. Cu Unjieng, 61 Phil. 663, We held that Article 334, paragraph
5 of the Civil Code (old) gives the character of real property to machinery, liquid
containers, instruments or replacements intended by the owner of any building or
land for use in connection with any industry or trade being carried on therein and
which are expressly adapted to meet the requirements of such trade or industry.
(2) In Cu Unjieng Hijos v. Mabalacat Sugar Co., 58 Phil. 439, We held that a
mortgage constituted on a sugar central includes not only the land on which it is
built but also the buildings, machinery and accessories installed at the time the
mortgage was constituted as well as the buildings, machinery and accessories
belonging to the mortgagor, installed after the constitution thereof.
It is not disputed in the case at bar that the "after acquired properties" were
purchased by DALCO in connection with, and for use in the development of its
lumber concession and that they were purchased in addition to, or in replacement
of those already existing in the premises on July 13, 1950. In law, therefore, they
must be deemed to have been immobilized, with the result that the real estate
mortgages involved herein — which were registered as such — did not have to be
registered a second time as chattel mortgages in order to bind the "after acquired
properties" and affect third parties.
But defendants, invoking the case of Davao Sawmill Company v. Castillo, 61 Phil.
709, claim that the "after acquired properties" did not become immobilized
because DALCO did not own the whole area of its lumber concession all over which
said properties were scattered.
The facts in the Davao Sawmill case, however, are not on all fours with the ones
obtaining in the present. In the former, the Davao Sawmill Company, Inc. had
repeatedly treated the machinery therein involved as personal property by
executing chattel mortgages thereon in favor of third parties, while in the present
case the parties had treated the "after acquired properties" as real properties by
expressly and unequivocally agreeing that they shall automatically become subject
to the lien of the real estate mortgages executed by them. In the Davao Sawmill
decision it was, in fact, stated that "the characterization of the property as chattels
by the appellant is indicative of intention and impresses upon the property the
character determined by the parties" (61 Phil. 712, Emphasis supplied). In the
present case, the characterization of the "after acquired properties" as real
property was made not only by one but by both interested parties. There is,
therefore, more reason to hold that such consensus impresses upon the properties
the character determined by the parties who must now be held in estoppel to
question it.
Moreover, quoted in the Davao Sawmill case was that of Valdez v. Central
Altagracia Inc. (225 U.S. 58) where it was held that while under the general law of
Puerto Rico machinery placed on property by a tenant does not become
immobilized, yet, when the tenant places it there pursuant to contract that it shall
belong to the owner, it then becomes immobilized as to that tenant and even as
against his assignees and creditors who had sufficient notice of such stipulation. In
the case at bar it is not disputed that DALCO purchased the "after acquired
properties" to be placed on, and be used in the development of its lumber
concession, and agreed further that the same shall become immediately subject to
the lien constituted by the questioned mortgages. There is also abundant evidence
in the record that DAMCO and CONNELL had full notice of such stipulation and had
never thought of disputing its validity until the present case was filed.
Consequently, all of them must be deemed barred from denying that the properties
in question had become immobilized.
What We have said heretofore sufficiently disposes of all the arguments adduced by
defendants in support of their contention that the mortgages under foreclosure are
void, and, that, even if valid, are ineffectual as against DAMCO and CONNELL.
Now to the question of whether or not DAMCO and CONNELL have rights over the
"after acquired properties" superior to the mortgage lien constituted thereon in
favor of plaintiffs. It is defendants’ contention that in relation to said properties
they are "unpaid sellers" ; that as such they had not only a superior lien on the
"after acquired properties" but also the right to rescind the sales thereof to DALCO.
This contention — it is obvious — would have validity only if it were true that
DAMCO and CONNELL were the suppliers or vendors of the "after acquired
properties." According to the record, plaintiffs did not know their exact identity and
description prior to the filing of the case at bar because DALCO, in violation of its
obligation under the mortgages, had failed and refused therefore to submit a
complete list thereof. In the course of the proceedings, however, when defendants
moved to dissolve the order of receivership and the writ of preliminary injunction
issued by the lower court, they attached to their motion the lists marked as Exhibits
1, 2 and 3 describing the properties aforesaid. Later on, the parties agreed to
consider said lists as identifying and describing the "after acquired properties", and
engaged the services of auditors to examine the books of DALCO so as to bring out
the details thereof. The report of the auditors and its annexes (Exhibits V, V-1 — V-
4) show that neither DAMCO nor CONNELL had supplied any of the goods of which
they respectively claimed to be the unpaid seller; that all items were supplied by
different parties, neither of whom appeared to be DAMCO or CONNELL; that, in
fact, CONNELL collected a 5 per cent service charge on the net value of all items it
claims to have sold to DALCO and which, in truth, it had purchased for DALCO as the
latter’s general agent; that CONNELL had to issue its own invoices in addition to
those of the real suppliers in order to collect and justify such service charge.
Taking into account the above circumstances together with the fact that DAMCO
was a stockholder and CONNELL was not only a stockholder but the general agent
of DALCO, their claim to be the suppliers of the "after acquired properties" would
seem to be preposterous. The most that can be claimed on the basis of the
evidence is that DAMCO and CONNELL probably financed some of the purchases.
But if DALCO still owes them any amount in this connection, it is clear that, as
financiers, they can not claim any right over the "after acquired properties" superior
to the lien constituted thereon by virtue of the deeds of mortgage under
foreclosure. Indeed, the execution of the rescission of sales mentioned heretofore
appears to be but a desperate attempt to better or improve DAMCO and CONNELL’s
position by enabling them to assume the role of "unpaid suppliers" and thus claim a
vendor’s lien over the "after acquired properties." The attempt, of course, is utterly
ineffectual, not only because they are not the "unpaid sellers" they claim to be but
also because there is abundant evidence in the record showing that both DAMCO
and CONNELL had known and admitted from the beginning that the "after acquired
properties" of DALCO were meant to be included in the first and second mortgages
under foreclosure.
The claim that Belden, of ATLANTIC, had given his consent to the rescission,
expressly or otherwise, is of no consequence and does not make the rescission valid
and legally effective. It must be stated clearly, however, in justice to Belden, that, as
a member of the Board of Directors of DALCO, he opposed the resolution of
December 16, 1952 passed by said Board and the subsequent rescission of the
sales.
Finally, defendants claim that the action to foreclose the mortgages filed on
February 12, 1953 was premature because the promissory note sued upon did not
fall due until April 1 of the same year, concluding from this that, when the action
was commenced, the plaintiffs had no cause of action. Upon this question the lower
court says the following in the appealed judgment:red:chanrobles.com.ph
"The other is the defense of prematurity of the causes of action in that plaintiffs as
a matter of grace, conceded an extension of time to pay up to 1 April, 1953 while
the action was filed on 12 February 1953, but as to this, the Court taking it that
there is absolutely no debate that Dahican Lumber Co., was insolvent as of the date
of the filing of the complaint, it should follow that the debtor thereby lost the
benefit to the period.
‘. . . unless he gives a guaranty or security for the debt . . .’ (Art. 1198, New Civil
Code);
and as the guaranty was plainly inadequate since the claim of plaintiffs reached in
the aggregate, P1,200,000 excluding interest while the aggregate price of the ‘after-
acquired’ chattels claimed by Connell under the rescission contracts was
P1,614,675.94, Exh. 1, Exh. V, report of auditors, and as a matter of fact, almost all
the properties were sold afterwards for only P175,000.00, page 47, Vol. IV, and the
Court understanding that when the law permits the debtor to enjoy the benefits of
the period notwithstanding that he is insolvent by his giving a guaranty for the debt,
that must mean a new and efficient guaranty, must concede that the causes of
action for collection of the notes were not premature."cralaw virtua1aw library
Very little need be added to the above. Defendants, however, contend that the
lower court had no basis for finding that, when the action was commenced, DALCO
was insolvent for purposes related to Article 1198, paragraph 1 of the Civil Code.
We find, however, that the finding of the trial court is sufficiently supported by the
evidence particularly the resolution marked as Exhibit K which shows that on
December 16, 1952 — in the words of the Chairman of the Board — DALCO was
"without funds, neither does it expect to have any funds in the foreseeable future"
(p. 64, record on appeal).
The remaining issues, namely, whether or not the proceeds obtained from the sale
of the "after acquired properties" should have been awarded exclusively to the
plaintiffs or to DAMCO and CONNELL, and if in law they should be distributed
among said parties, whether or not the distribution should be pro-rata or
otherwise; whether or not plaintiffs are entitled to damages; and lastly, whether or
not the expenses incidental to the Receivership should be borne by all the parties
on a pro-rata basis or exclusively by one or some of them are of a secondary nature
as they are already impliedly resolved by what has been said heretofore.
As regard the proceeds obtained from the sale of the "after acquired properties"
and the "undebated properties", it is clear, in view of our opinion sustaining the
validity of the mortgages in relation thereto, that said proceeds should be awarded
exclusively to the plaintiffs in payment of the money obligations secured by the
mortgages under foreclosure.
On the question of plaintiffs’ right to recover damages from the defendants, the law
(Articles 1313 and 1314 of the New Civil Code) provides that creditors are protected
in cases of contracts intended to defraud them, and that any third person who
induces another to violate his contract shall be liable for damages to the other
contracting party. Similar liability is demandable under Arts. 20 and 21 — which
may be given retroactive effect (Arts. 2252-53) — or under Arts. 1902 and 2176 of
the Old Civil Code.
The facts of this case, as stated heretofore, clearly show that DALCO and DAMCO,
after failing to pay the fifth promissory note upon its maturity, conspired jointly
with CONNELL to violate the provisions of the fourth paragraph of the mortgages
under foreclosure by attempting to defeat plaintiffs’ mortgage lien on the "after
acquired properties." As a result, the plaintiffs had to go to court to protect their
rights thus jeopardized. Defendants’ liability for damages is therefore clear.
However, the measure of the damages suffered by the plaintiffs is not what the
latter claim, namely, the difference between the alleged total obligation secured by
the mortgages amounting to around P1,200,000.00, plus the stipulated interest and
attorney’s fees, on the one hand, and the proceeds obtained from the sale of the
"after acquired properties", and of those that were not claimed neither by DAMCO
nor CONNELL, on the other. Considering that the sale of the real properties subject
to the mortgages under foreclosure has not been effected, and considering further
the lack of evidence showing that the true value of all the properties already sold
was not realized because their sale was under stress, We feel that We do not have
before Us the true elements or factors that should determine the amount of
damages that plaintiffs are entitled to recover from defendants. It is, however, our
considered opinion that, upon the facts established, all the expenses of the
Receivership, which was deemed necessary to safeguard the rights of the plaintiffs,
should be borne by all the defendants, jointly and severally, in the same manner
that all of them should pay to the plaintiffs, jointly and severally, the attorney’s fees
awarded in the appealed judgment.
In consonance with the portion of this decision concerning the damages that the
plaintiffs are entitled to recover from the defendants, the record of this case shall
be remanded below for the corresponding proceedings.
Modified as above indicated, the appealed judgment is affirmed in all other
respects. With costs.
Concepcion, C.J., Reyes, J.B.L., Regala, Makalintal, Bengzon, J.P., Zaldivar, Sanchez
and Castro, JJ., concur.
 SECOND DIVISION
G.R. NO. 169211 : March 6, 2013
1
STAR TWO (SPV-AMC), INC., Petitioner, v. PAPER CITY CORPORATION OF THE
PHILIPPINES,Respondent.
DECISION
PEREZ, J.:
For review before this Court is a Petition for Review on Certiorari filed by Rizal
Commercial Banking Corporation now substituted by Star Two (SPV-AMC), Inc. by
virtue of Republic Act No. 91822 otherwise known as the "Special Purpose Vehicle
Act of 2002," assailing the 8 March 2005 Decision and 8 August 2005 Resolution of
the Special Fourth Division of the Court of Appeals (CA) in CA-G.R. SP No. 82022
upholding the 15 August 2003 and 1 December 2003 Orders of the Valenzuela
Regional Trial Court (RTC) ruling that the subject machineries and equipments of
Paper City Corporation (Paper City) are movable properties by agreement of the
parties and cannot be considered as included in the extrajudicial foreclosure sale of
the mortgaged land and building of Paper City.3chanroblesvirtualawlibrary
The facts as we gathered from the records are:chanroblesvirtualawlibrary
Abad over the merchandise and stocks-in-trade covered by the continuing chattel
mortgages.9chanroblesvirtualawlibrary
On 26 August 1992, RCBC, Metrobank and Union Bank (creditor banks with RCBC
instituted as the trustee bank) entered into a Mortgage Trust Indenture (MTI) with
Paper City. In the said MTI, Paper City acquired an additional loan of One Hundred
Seventy Million Pesos (P170,000,000.00) from the creditor banks in addition to the
previous loan from RCBC amounting to P110,000,000.00 thereby increasing the
entire loan to a total of P280,000,000.00. The old loan of P110,000,000.00 was
partly secured by various parcels of land covered by TCT Nos. T-157743, V-13515, V-
1184, V-1485, V-13518 and V-13516 situated in Valenzuela City pursuant to five (5)
Deeds of Real Estate Mortgage dated 8 January 1990, 27 February 1990, 19 July
1990, 20 February 1992 and 12 March 1992.10 The new loan obligation
of P170,000,000.00 would be secured by the same five (5) Deeds of Real Estate
Mortgage and additional real and personal properties described in an annex to MTI,
Annex "B."11 Annex "B" of the said MTI covered the machineries and equipments of
Paper City.12chanroblesvirtualawlibrary
The MTI was later amended on 20 November 1992 to increase the contributions of
the RCBC and Union Bank to P80,000,000.00 and P70,000,000.00, respectively. As a
consequence, they executed a Deed of Amendment to MTI 13 but still included as
part of the mortgaged properties by way of a first mortgage the various machineries
and equipments located in and bolted to and/or forming part of buildings generally
described as:chanroblesvirtualawlibrary

Rizal Commercial Banking Corporation (RCBC), Metropolitan Bank and Trust Co.
Annex "A"
(Metrobank) and Union Bank of the Philippines (Union Bank) are banking
corporations duly organized and existing under the laws of the Philippines.
A. Office Building
Building 1, 2, 3, 4, and 5
On the other hand, respondent Paper City is a domestic corporation engaged in the
Boiler House
manufacture of paper products particularly cartons, newsprint and clay-coated
Workers' Quarter/Restroom
paper.4chanroblesvirtualawlibrary
Canteen
Guardhouse, Parking Shed, Elevated Guard
From 1990-1991, Paper City applied for and was granted the following loans and Post and other amenities
credit accommodations in peso and dollar denominations by RCBC: P10,000,000.00 B. Pollution Tank Nos. 1 and 2.
on 8 January 1990,5 P14,000,000.00 on 19 July 1990,6 P10,000,000.00 on 28 June Reserve Water Tank and Swimming Pool
1991,7 and P16,615,000.00 on 28 November 1991.8 The loans were secured by four Waste Water Treatment Tank
(4) Deeds of Continuing Chattel Mortgages on its machineries and equipments Elevated Concrete Water Tank
found inside its paper plants. And other Improvements listed in Annex "A"
C. Power Plants Nos. 1 and 2
On 25 August 1992, a unilateral Cancellation of Deed of Continuing Chattel Fabrication Building
Mortgage on Inventory of Merchandise/Stocks-in-Trade was executed by RCBC Various Fuel, Water Tanks and Pumps
through its Branch Operation Head Joey P. Singh and Asst. Vice President Anita O. Transformers
Annex "B"
D. Material Handling Equipment
Paper Plant No. 3
A Second Supplemental Indenture to the 26 August 1992 MTI was executed on 7
June 1994 to increase the amount of the loan from P280,000,000.00
to P408,900,000.00 secured against the existing properties composed of land,
building, machineries and equipments and inventories described in Annexes "A"
and "B."14chanroblesvirtualawlibrary
Finally, a Third Supplemental Indenture to the 26 August 1992 MTI was executed on
24 January 1995 to increase the existing loan obligation of P408,900,000.00
to P555,000,000.00 with an additional security composed of a newly constructed
two-storey building and other improvements, machineries and equipments located
in the existing plant site.15chanroblesvirtualawlibrary
Paper City was able to comply with its loan obligations until July 1997. But economic
crisis ensued which made it difficult for Paper City to meet the terms of its
obligations leading to payment defaults.16Consequently, RCBC filed a Petition for
Extrajudicial Foreclosure Under Act No. 3135 Against the Real Estate Mortgage
executed by Paper City on 21 October 1998.17 This petition was for the extra-judicial
foreclosure of eight (8) parcels of land including all improvements thereon
enumerated as TCT Nos. V-9763, V-13515, V-13516, V-13518, V-1484, V-1485, V-
6662 and V-6663 included in the MTI dated 26 August 1992, Supplemental
MTI dated 20 November 1992, Second Supplemental Indenture on the MTI dated 7
June 1994 and Third Supplemental Indenture on the MTI dated 24 January
1995.18 Paper City then had an outstanding obligation with the creditor banks
adding up to Nine Hundred One Million Eight Hundred One Thousand Four Hundred
Eighty-Four and 10/100 Pesos (P901,801,484.10), inclusive of interest and penalty
charges.19chanroblesvirtualawlibrary
A Certificate of Sale was executed on 8 February 1999 certifying that the eight (8)
parcels of land with improvements thereon were sold on 27 November 1998 in the
amount of Seven Hundred Two Million Three Hundred Fifty-One Thousand Seven
Hundred Ninety-Six Pesos and 28/100 (P702,351,796.28) in favor of the creditor
banks RCBC, Union Bank and Metrobank as the highest
bidders.20chanroblesvirtualawlibrary
This foreclosure sale prompted Paper City to file a Complaint21 docketed as Civil
Case No. 164-V-99 on 15 June 1999 against the creditor banks alleging that the
extra-judicial sale of the properties and plants was null and void due to lack of prior
notice and attendance of gross and evident bad faith on the part of the creditor
banks. In the alternative, it prayed that in case the sale is declared valid, to render
the whole obligation of Paper City as fully paid and extinguished. Also prayed for
was the return of P5,000,000.00 as excessive penalty and the payment of damages
and attorney's fees.
In the meantime, Paper City and Union Bank entered into a Compromise Agreement
which was later approved by the trial court on 19 November 2001. It was agreed
that the share of Union Bank in the proceeds of the foreclosure shall be up to
34.23% of the price and the remaining possible liabilities of Paper City shall be
condoned by the bank. Paper City likewise waived all its claim and counter charges
against Union Bank and agreed to turn-over its proportionate share over the
property within 120 days from the date of agreement.22chanroblesvirtualawlibrary
On the other hand, the negotiations between the other creditor banks and Paper
City remained pending. During the interim, Paper City filed with the trial court a
Manifestation with Motion to Remove and/or Dispose Machinery on 18 December
2002 reasoning that the machineries located inside the foreclosed land and building
were deteriorating. It posited that since the machineries were not included in the
foreclosure of the real estate mortgage, it is appropriate that it be removed from
the building and sold to a third party.23chanroblesvirtualawlibrary
Acting on the said motion, the trial court, on 28 February 2003 issued an Order
denying the prayer and ruled that the machineries and equipments were included
in the annexes and form part of the MTI dated 26 August 1992 as well as its
subsequent amendments. Further, the machineries and equipments are covered by
the Certificate of Sale issued as a consequence of foreclosure, the certificate stating
that the properties described therein with improvements thereon were sold to
creditor banks to the defendants at public auction.24chanroblesvirtualawlibrary
Paper City filed its Motion for Reconsideration25 on 4 April 2003 which was
favorably granted by the trial court in its Order dated 15 August 2003. The court
justified the reversal of its order on the finding that the disputed machineries and
equipments are chattels by agreement of the parties through their inclusion in the
four (4) Deeds of Chattel Mortgage dated 28 January 1990, 19 July 1990, 28 June
1991 and 28 November 1991. It further ruled that the deed of cancellation executed
by RCBC on 25 August 1992 was not valid because it was done unilaterally and
without the consent of Paper City and the cancellation only refers to the
merchandise/stocks-in-trade and not to machineries and
equipments.26chanroblesvirtualawlibrary
RCBC in turn filed its Motion for Reconsideration to persuade the court to reverse
its 15 August 2003 Order. However, the same was denied by the trial court through
its 1 December 2003 Order reiterating the finding and conclusion of the previous
Order.27chanroblesvirtualawlibrary
Aggrieved, RCBC filed with the CA a Petition for Certiorari under Rule 65 to annul
the Orders dated 15 August 2003 and 1 December 2003 of the trial court, 28 for the
reasons that:chanroblesvirtualawlibrary
I. Paper City gave its conformity to consider the subject machineries and equipment
as real properties when the president and Executive Vice President of Paper City
signed the Mortgage Trust Indenture as well as its subsequent amendments and all
pages of the annexes thereto which itemized all properties that were
mortgaged.29chanroblesvirtualawlibrary
II. Under Section 8 of Act No. 1508, otherwise known as "The Chattel Mortgage
Law" the consent of the mortgagor (Paper City) is not required in order to cancel a
chattel mortgage. Thus the "Cancellation of Deed of Continuing Chattel Mortgage
on Inventory of Merchandise/Stocks-in-Trade" dated August 25, 1992 is valid and
binding on the Paper City even assuming that it was executed unilaterally by
petitioner RCBC.30chanroblesvirtualawlibrary
III. The four (4) Deeds of Chattel Mortgage that were attached as Annexes "A" to
"D" to the December 18, 2003 "Manifestation with Motion to Remove and/or
Dispose of Machinery" were executed from January 8, 1990 until November 28,
1991. On the other hand, the "Cancellation of Deed of Continuing Chattel
Mortgage" was executed on August 25, 1992 while the MTI and the subsequent
supplemental amendments thereto were executed from August 26, 1992 until
January 24, 1995. It is of the contention of RCBC that Paper City's unreasonable
delay of ten
(10) years in assailing that the disputed machineries and equipments were personal
amounted to estoppel and ratification of the characterization that the same were
real properties.31chanroblesvirtualawlibrary
IV. The removal of the subject machineries or equipment is not among the reliefs
prayed for by the Paper City in its June 11, 1999 Complaint. The Paper City sought
the removal of the subject machineries and equipment only when it filed its
December 18, 2002 Manifestation with Motion to Remove and/or Dispose of
Machinery.32chanroblesvirtualawlibrary
V. Paper City did not specify in its various motions filed with the respondent judge
the subject machineries and equipment that are allegedly excluded from the
extrajudicial foreclosure sale.33chanroblesvirtualawlibrary
VI. The machineries and equipments mentioned in the four (4) Deeds of Chattel
Mortgage that were attached on the Manifestation with Motion to Remove and/or
Dispose of Machinery are the same machineries and equipments included in the
MTI and supplemental amendments, hence, are treated by agreement of the
parties as real properties.34chanroblesvirtualawlibrary
In its Comment,35 Paper City refuted the claim of RCBC that it gave its consent to
consider the machineries and equipments as real properties. It alleged that the
disputed properties remained within the purview of the existing chattel mortgages
which in fact were acknowledged by RCBC in the MTI particularly in Section 11.07
which reads:chanroblesvirtualawlibrary
Section 11.07. This INDENTURE in respect of the MORTGAGE OBLIGATIONS in the
additional amount not exceeding TWO HUNDRED TWENTY MILLION SIX HUNDRED
FIFTEEN THOUSAND PESOS (P220,615,000.00) shall be registered with the Register
of Deeds of Valenzuela, Metro Manila, apportioned based on the corresponding
loanable value of the MORTGAGED PROPERTIES, viz:chanroblesvirtualawlibrary
a. Real Estate Mortgage P206,815,000.00
b. Chattel Mortgage P13,800,000.0036chanroblesvirtualawlibrary
Paper City argued further that the subject machineries and equipments were not
included in the foreclosure of the mortgage on real properties particularly the eight
(8) parcels of land. Further, the Certificate of Sale of the Foreclosed Property
referred only to "lands and improvements" without any specification and made no
mention of the inclusion of the subject properties. 37chanroblesvirtualawlibrary
In its Reply,38 RCBC admitted that there was indeed a provision in the MTI
mentioning a chattel mortgage in the amount of P13,800,000.00. However, it
justified that its inclusion in the MTI was merely for the purpose of ascertaining the
amount of the loan to be extended to Paper City.39 It reiterated its position that the
machineries and equipments were no longer treated as chattels but already as real
properties following the MTI.40chanroblesvirtualawlibrary
On 8 March 2005, the CA affirmed41 the challenged orders of the trial court. The
dispositive portion reads:chanroblesvirtualawlibrary
WHEREFORE, finding no grave abuse of discretion committed by public respondent,
the instant petition is hereby DISMISSED for lack of merit. The assailed Orders dated
15 August and 2 December 2003, issued by Hon. Judge Floro P. Alejo are hereby
AFFIRMED. No costs at this instance.42chanroblesvirtualawlibrary
The CA relied on the "plain language of the MTIs:chanroblesvirtualawlibrary
Undoubtedly, nowhere from any of the MTIs executed by the parties can we find
the alleged "express" agreement adverted to by petitioner. There is no provision in
any of the parties' MTI, which expressly states to the effect that the parties shall
treat the equipments and machineries as real property. On the contrary, the plain
and unambiguous language of the aforecited MTIs, which described the same as
personal properties, contradicts petitioner's claims.43chanroblesvirtualawlibrary
It was also ruled that the subject machineries and equipments were not included in
the extrajudicial foreclosure sale. The claim of inclusion was contradicted by the
very caption of the petition itself, "Petition for Extra-Judicial Foreclosure of Real
Estate Mortgage Under Act No. 3135 As Amended." It opined further that this
inclusion was further stressed in the Certificate of Sale which enumerated only the
mortgaged real properties bought by RCBC without the subject
properties.44chanroblesvirtualawlibrary
RCBC sought reconsideration but its motion was denied in the CA's Resolution
dated 8 August 2005.
By contracts, all uncontested in this case, machineries and equipments are included
in the mortgage in favor of RCBC, in the foreclosure of the mortgage and in the
consequent sale on foreclosure also in favor of petitioner.
The mortgage contracts are the original MTI of 26 August 1992 and its amendments
and supplements on 20 November 1992, 7 June 1994, and 24 January 1995. The
clear agreements between RCBC and Paper City follow:chanroblesvirtualawlibrary
The original MTI dated 26 August 1992 states that:chanroblesvirtualawlibrary
MORTGAGE TRUST INDENTURE
This MORTGAGE TRUST INDENTURE, executed on this day of August 26, 1992, by
and between:chanroblesvirtualawlibrary
PAPER CITY CORPORATION OF THE PHILIPPINES, x x x hereinafter referred to as the
"MORTGAGOR");cralawlibrary
-and-

RCBC before this Court reiterated all the issues presented before the appellate
RIZAL COMMERCIAL BANKING CORPORATION, x x x (hereinafter referred to as the
court:chanroblesvirtualawlibrary
"TRUSTEE").

1. Whether the unreasonable delay of ten (10) years in assailing that the disputed
xxx
machineries and equipments were personal properties amounted to estoppel on
the part of Paper City;cralawlibrary
WHEREAS, against the same mortgaged properties and additional real and personal
properties more particularly described in ANNEX "B" hereof, the MORTGAGOR
2. Whether the Cancellation of Deed of Continuing Mortgage dated 25 August 1992
desires to increase their borrowings to TWO HUNDRED EIGHTY MILLION PESOS
is valid despite the fact that it was executed without the consent of the mortgagor
(P280,000,000.00) or an increase of ONE HUNDRED SEVENTY MILLION PESOS
Paper City;cralawlibrary
(P170,000,000.00) xxx from various banks/financial institutions;

3. Whether the subsequent contracts of the parties such as Mortgage Trust

xxx
Indenture dated 26 August 1992 as well as the subsequent supplementary
amendments dated 20 November 1992, 7 June 1992, and 24 January 1995 included
GRANTING CLAUSE
in its coverage of mortgaged properties the subject machineries and equipment;
and
NOW, THEREFORE, this INDENTURE witnesseth:chanroblesvirtualawlibrary
4. Whether the subject machineries and equipments were included in the
extrajudicial foreclosure dated 21 October 1998 which in turn were sold to the THAT the MORTGAGOR in consideration of the premises and of the acceptance by
creditor banks as evidenced by the Certificate of Sale dated 8 February 1999. the TRUSTEE of the trust hereby created, and in order to secure the payment of the
MORTGAGE OBLIGATIONS which shall be incurred by the MORTGAGOR pursuant to
the terms hereof xxx hereby states that with the execution of this INDENTURE it will
We grant the petition.
assign, transfer and convey as it has hereby ASSIGNED, TRANSFERRED and
CONVEYED by way of a registered first mortgage unto RCBC x x x the various parcels
of land covered by several Transfer Certificates of Title issued by the Registry of
Deeds, including the buildings and existing improvements thereon, as well as of the
machinery and equipment more particularly described and listed that is to say, the
real and personal properties listed in Annexes "A" and "B" hereof of which the
MORTGAGOR is the lawful and registered owner. 45(Emphasis and underlining ours)
The Deed of Amendment to MTI dated 20 November 1992 expressly
provides:chanroblesvirtualawlibrary
NOW, THEREFORE, premises considered, the parties considered have amended and
by these presents do further amend the Mortgage Trust Indenture dated August 26,
1992 including the Real Estate Mortgage as follows:chanroblesvirtualawlibrary
xxx
2. The Mortgage Trust Indenture and the Real Estate Mortgage are hereby
amended to include as part of the Mortgage Properties, by way of a first mortgage
and for pari-passu and pro-rata benefit of the existing and new creditors, various
machineries and equipment owned by the Paper City, located in and bolted to and
forming part of the following, generally describes as x x x more particularly
described and listed in Annexes "A" and "B" which are attached and made integral
parts of this Amendment. The machineries and equipment listed in Annexes "A" and
"B" form part of the improvements listed above and located on the parcels of land
subject of the Mortgage Trust Indenture and the Real Estate Mortgage.46 (Emphasis
and underlining ours)
A Second Supplemental Indenture to the 26 August 1992 MTI executed on 7 June
1994 to increase the amount of loan from P280,000,000.00 to P408,900,000.00 also
contains a similar provision in this regard:chanroblesvirtualawlibrary
WHEREAS, the Paper City desires to increase its borrowings to be secured by the
INDENTURE from PESOS: TWO HUNDRED EIGHTY MILLION (P280,000,000.00) to
PESOS: FOUR HUNDRED EIGHT MILLION NINE HUNDRED THOUSAND
(P408,900,000.00) or an increase of PESOS: ONE HUNDRED TWENTY EIGHT MILLION
NINE HUNDRED THOUSAND (P128,900,000.00) x x x which represents additional
loan/s granted to the Paper City to be secured against the existing properties
composed of land, building, machineries and equipment and inventories more
particularly described in Annexes "A" and "B" of the INDENTURE x x
x.47chanroblesvirtualawlibrary
(Emphasis and underlining ours)
Finally, a Third Supplemental Indenture to the 26 August 1992 MTI executed on 24
January 1995 contains a similar provision:chanroblesvirtualawlibrary
WHEREAS, in order to secure NEW/ADDITIONAL LOAN OBLIGATION under the
Indenture, there shall be added to the collateral pool subject of the Indenture
properties of the Paper City composed of newly constructed two (2)-storey building,
other land improvements and machinery and equipment all of which are located at
the existing Plant Site in Valenzuela, Metro Manila and more particularly described
in Annex "A" hereof x x x.48 (Emphasis and underlining ours)
Repeatedly, the parties stipulated that the properties mortgaged by Paper City to
RCBC are various parcels of land including the buildings and existing improvements
thereon as well as the machineries and equipments, which as stated in the granting
clause of the original mortgage, are "more particularly described and listed that is
to say, the real and personal properties listed in Annexes A and B x x x of which the
Paper City is the lawful and registered owner." Significantly, Annexes "A" and "B"
are itemized listings of the buildings, machineries and equipments typed single
spaced in twenty-seven pages of the document made part of the records.
As held in Gateway Electronics Corp. v. Land Bank of the Philippines, 49 the rule in
this jurisdiction is that the contracting parties may establish any agreement, term,
and condition they may deem advisable, provided they are not contrary to law,
morals or public policy. The right to enter into lawful contracts constitutes one of
the liberties guaranteed by the Constitution.
It has been explained by the Supreme Court in Norton Resources and Development
Corporation v. All Asia Bank Corporation50 in reiteration of the ruling in Benguet
Corporation v. Cabildo51 that:chanroblesvirtualawlibrary
x x x A court's purpose in examining a contract is to interpret the intent of the
contracting parties, as objectively manifested by them. The process of interpreting a
contract requires the court to make a preliminary inquiry as to whether the contract
before it is ambiguous. A contract provision is ambiguous if it is susceptible of two
reasonable alternative interpretations. Where the written terms of the contract are
not ambiguous and can only be read one way, the court will interpret the contract
as a matter of law. x x x
Then till now the pronouncement has been that if the language used is as clear as
day and readily understandable by any ordinary reader, there is no need for
construction.52chanroblesvirtualawlibrary
The case at bar is covered by the rule.
The plain language and literal interpretation of the MTIs must be applied. The
petitioner, other creditor banks and Paper City intended from the very first
execution of the indentures that the machineries and equipments enumerated in
Annexes "A" and "B" are included. Obviously, with the continued increase in the
amount of the loan, totaling hundreds of millions of pesos, Paper City had to offer
all valuable properties acceptable to the creditor banks.
The plain and obvious inclusion in the mortgage of the machineries and equipments
of Paper City escaped the attention of the CA which, instead, turned to another
"plain language of the MTI" that "described the same as personal properties." It was
error for the CA to deduce from the "description" exclusion from the mortgage.
1. The MTIs did not describe the equipments and machineries as personal property.
Had the CA looked into Annexes "A" and "B" which were referred to by the phrase
"real and personal properties," it could have easily noted that the captions
describing the listed properties were "Buildings," "Machineries and Equipments,"
"Yard and Outside," and "Additional Machinery and Equipment." No mention in any
manner was made in the annexes about "personal property." Notably, while
"personal" appeared in the granting clause of the original MTI, the subsequent
Deed of Amendment specifically stated that:chanroblesvirtualawlibrary
x x x The machineries and equipment listed in Annexes "A" and "B" form part of the
improvements listed above and located on the parcels of land subject of the
Mortgage Trust Indenture and the Real Estate Mortgage.
The word "personal" was deleted in the corresponding granting clauses in the Deed
of Amendment and in the First, Second and Third Supplemental Indentures.
2. Law and jurisprudence provide and guide that even if not expressly so stated, the
mortgage extends to the improvements.
Article 2127 of the Civil Code provides:chanroblesvirtualawlibrary
Art. 2127. The mortgage extends to the natural accessions, to the improvements,
growing fruits, and the rents or income not yet received when the obligation
becomes due, and to the amount of the indemnity granted or owing to the
proprietor from the insurers of the property mortgaged, or in virtue of
expropriation for public use, with the declarations, amplifications and limitations
established by law, whether the estate remains in the possession of the mortgagor,
or it passes into the hands of a third person. (Underlining ours)
In the early case of Bischoff v. Pomar and Cia. General de Tabacos, 53 the Court ruled
that even if the machinery in question was not included in the mortgage expressly,
Article 111 of the old Mortgage Law provides that chattels permanently located in a
building, either useful or ornamental, or for the service of some industry even
though they were placed there after the creation of the mortgage shall be
considered as mortgaged with the estate, provided they belong to the owner of said
estate. The provision of the old Civil Code was cited.
Thus:chanroblesvirtualawlibrary
Article 1877 provides that a mortgage includes the natural accessions,
improvements, growing fruits, and rents not collected when the obligation is due,
and the amount of the indemnities granted or due the owner by the underwriters
of the property mortgaged or by virtue of the exercise of eminent domain by reason
of public utility, with the declarations, amplifications, and limitations established by
law, in case the estate continues in the possession of the person who mortgaged it,
as well as when it passes into the hands of a third
person.54chanroblesvirtualawlibrary
The case of Cu Unjieng e Hijos v. Mabalacat Sugar Co.55 relied on this provision. The
issue was whether the machineries and accessories were included in the mortgage
and the subsequent sale during public auction. This was answered in the affirmative
by the Court when it ruled that the machineries were integral parts of said sugar
central hence included following the principle of law that the accessory follows the
principal.
Further, in the case of Manahan v. Hon. Cruz,56 this Court denied the prayer of
Manahan to nullify the order of the trial court including the building in question in
the writ of possession following the public auction of the parcels of land mortgaged
to the bank. It upheld the inclusion by relying on the principles laid upon in Bischoff
v. Pomar and Cia. General de Tabacos57 and Cu Unjieng e Hijos v. Mabalacat Sugar
Co.58chanroblesvirtualawlibrary
In Spouses Paderes v. Court of Appeals,59 we reiterated once more the Cu Unjieng e
Hijos ruling and approved the inclusion of machineries and accessories installed at
the time the mortgage, as well as all the buildings, machinery and accessories
belonging to the mortgagor, installed after the constitution thereof.
3. Contrary to the finding of the CA, the Extra-Judicial Foreclosure of Mortgage
includes the machineries and equipments of respondent. While captioned as a
"Petition for Extra-Judicial Foreclosure of Real Estate Mortgage Under Act No. 3135
As Amended," the averments state that the petition is based on "x x x the Mortgage
Trust Indenture, the Deed of Amendment to the Mortgage Trust Indenture, the
Second Supplemental Indenture to the Mortgage Trust Indenture, and the Third
Supplemental Indenture to the Mortgage Trust Indenture (hereinafter collectively
referred to as the Indenture) duly notarized and entered as x x x." 60 Noting that
herein respondent has an outstanding obligation in the total amount of Nine SO ORDERED.
Hundred One Million Eight Hundred One Thousand Four Hundred Eighty Four and
10/100 Pesos (P901,801,484.10), the petition for foreclosure prayed that a
foreclosure proceedings "x x x on the aforesaid real properties, including all
improvements thereon covered by the real estate mortgage be undertaken and the
appropriate auction sale be conducted x x x."61chanroblesvirtualawlibrary

Considering that the Indenture which is the instrument of the mortgage that was
foreclosed exactly states through the Deed of Amendment that the machineries and
equipments listed in Annexes "A" and "B" form part of the improvements listed and
located on the parcels of land subject of the mortgage, such machineries and
equipments are surely part of the foreclosure of the "real estate properties,
including all improvements thereon" as prayed for in the petition.

Indeed, the lower courts ought to have noticed the fact that the chattel mortgages
adverted to were dated 8 January 1990, 19 July 1990, 28 June 1991 and 28
November 1991. The real estate mortgages which specifically included the
machineries and equipments were subsequent to the chattel mortgages dated 26
August 1992, 20 November 1992, 7 June 1994 and 24 January 1995. Without doubt,
the real estate mortgages superseded the earlier chattel mortgages.

The real estate mortgage over the machineries and equipments is even in full
accord with the classification of such properties by the Civil Code of the Philippines
as immovable property. Thus:chanroblesvirtualawlibrary

Article 415. The following are immovable property:chanroblesvirtualawlibrary

(1) Land, buildings, roads and constructions of all kinds adhered to the
soil;cralawlibrary

xxxx

(5) Machinery, receptacles, instruments or implements intended by the owner of

the tenement for an industry or works which may be carried on in a building or on a
piece of land, and which tend directly to meet the needs of the said industry or
works;cralawlibrary

WHEREFORE, the petition is GRANTED. Accordingly, the Decision and Resolution of

the Court of Appeals dated 8 March 2005 and 8 August 2005 upholding the 15
August 2003 and 1 December 2003 Orders of the Valenzuela Regional Trial Court
are hereby REVERSED and SET ASIDE and the original Order of the trial court dated
28 February 2003 denying the motion of respondent to remove or dispose of
machinery is hereby REINSTATED.
 Republic of the Philippines Lourdes V. Galas (Galas) was the original owner of a piece of property
Supreme Court (subject property) located at Malindang St., Quezon City, covered by Transfer
Manila
Certificate of Title (TCT) No. RT-67970(253279).[5]

FIRST DIVISION On July 6, 1993, Galas, with her daughter, Ophelia G. Pingol (Pingol), as co-
maker, mortgaged the subject property to Yolanda Valdez Villar (Villar) as security for

PABLO P. GARCIA, G.R. No. 158891 a loan in the amount of Two Million Two Hundred Thousand Pesos (P2,200,000.00).[6]
Petitioner,
Present:
On October 10, 1994, Galas, again with Pingol as her co-maker, mortgaged
*
LEONARDO-DE CASTRO, the same subject property to Pablo P. Garcia (Garcia) to secure her loan of One
Acting Chairperson,
BERSAMIN, Million Eight Hundred Thousand Pesos (P1,800,000.00).[7]
- versus - DEL CASTILLO,
VILLARAMA, JR., and
PERLAS-BERNABE,** JJ. Both mortgages were annotated at the back of TCT No. RT-67970 (253279),
Promulgated: to wit:

REAL ESTATE MORTGAGE

YOLANDA VALDEZ VILLAR, June 27, 2012
Respondent.
Entry No. 6537/T-RT-67970(253279) MORTGAGE In favor of
Yolanda Valdez Villar m/to Jaime Villar to guarantee a principal
obligation in the sum of P2,200,000- mortgagees consent
necessary in case of subsequent encumbrance or alienation of the
x----------------------------------------------------x property; Other conditions set forth in Doc. No. 97, Book No. VI,
Page No. 20 of the Not. Pub. of Diana P. Magpantay
DECISION Date of Instrument: 7-6-93
Date of Inscription: 7-7-93

LEONARDO-DE CASTRO, J.:

SECOND REAL ESTATE MORTGAGE

This is a petition for review on certiorari[1] of the February 27, 2003
Decision[2] and July 2, 2003 Resolution[3] of the Court of Appeals in CA-G.R. SP No.
72714, which reversed the May 27, 2002 Decision[4] of the Regional Trial Court (RTC),
Branch 92 of Quezon City in Civil Case No. Q-99-39139.
Entry No. 821/T-RT-67970(253279) MORTGAGE In favor of Pablo
Garcia m/to Isabela Garcia to guarantee a principal obligation in the
sum of P1,800,000.00 mortgagees consent necessary in case of
subsequent encumbrance or alienation of the property; Other
conditions set forth in Doc. No. 08, Book No. VII, Page No. 03 of the
Not. Pub. of Azucena Espejo Lozada
 Date of Instrument: 10/10/94
Date of Inscription: 10/11/94
LRC Consulta No. 169[8]
On November 21, 1996, Galas sold the subject property to Villar for One
Million Five Hundred Thousand Pesos (P1,500,000.00), and declared in the Deed of
Sale[9] that such property was free and clear of all liens and encumbrances of any kind
whatsoever.[10]
On December 3, 1996, the Deed of Sale was registered and, consequently,
TCT No. RT-67970(253279) was cancelled and TCT No. N-168361[11] was issued in the
name of Villar. Both Villars and Garcias mortgages were carried over and annotated
at the back of Villars new TCT.[12]
On October 27, 1999, Garcia filed a Petition for Mandamus with
Damages[13] against Villar before the RTC, Branch 92 of Quezon City. Garcia
subsequently amended his petition to a Complaint for Foreclosure of Real Estate
Mortgage with Damages.[14] Garcia alleged that when Villar purchased the subject
property, she acted in bad faith and with malice as she knowingly and willfully
disregarded the provisions on laws on judicial and extrajudicial foreclosure of
mortgaged property. Garcia further claimed that when Villar purchased the subject
property, Galas was relieved of her contractual obligation and the characters of
creditor and debtor were merged in the person of Villar. Therefore, Garcia argued,
he, as the second mortgagee, was subrogated to Villars original status as first
mortgagee, which is the creditor with the right to foreclose. Garcia further asserted
that he had demanded payment from Villar,[15] whose refusal compelled him to incur
expenses in filing an action in court.[16]
Villar, in her Answer,[17] claimed that the complaint stated no cause of action
and that the second mortgage was done in bad faith as it was without her consent
and knowledge. Villar alleged that she only discovered the second mortgage when
she had the Deed of Sale registered. Villar blamed Garcia for the controversy as he
accepted the second mortgage without prior consent from her. She averred that
there could be no subrogation as the assignment of credit was done with neither her
knowledge nor prior consent. Villar added that Garcia should seek recourse against
Galas and Pingol, with whom he had privity insofar as the second mortgage of
property is concerned.
On May 23, 2000, the RTC issued a Pre-Trial Order[18] wherein the parties
agreed on the following facts and issue:
STIPULATIONS OF FACTS/ADMISSIONS
The following are admitted:
1. the defendant admits the second mortgage annotated at the
back of TCT No. RT-67970 of Lourdes V. Galas with the
qualification that the existence of said mortgage was
discovered only in 1996 after the sale;
2. the defendant admits the existence of the annotation of the
second mortgage at the back of the title despite the transfer of
the title in the name of the defendant;
3. the plaintiff admits that defendant Yolanda Valdez Villar is the
first mortgagee;
4. the plaintiff admits that the first mortgage was annotated at
the back of the title of the mortgagor Lourdes V. Galas; and
5. the plaintiff admits that by virtue of the deed of sale the title
of the property was transferred from the previous owner in
favor of defendant Yolanda Valdez Villar.
xxxx
ISSUE
 Whether or not the plaintiff, at this point in time, could judicially provisions of Rules 39 and 68 of the 1997 Revised Rules of Civil
foreclose the property in question. Procedure and other regulations governing sale of real estate
under execution in order to satisfy the judgment in this case. The
defendant is further ordered to pay costs.[26]
On June 8, 2000, upon Garcias manifestation, in open court, of his intention
to file a Motion for Summary Judgment,[19] the RTC issued an Order[20] directing the
The RTC declared that the direct sale of the subject property to Villar, the
parties to simultaneously file their respective memoranda within 20 days.
first mortgagee, could not operate to deprive Garcia of his right as a second
mortgagee. The RTC said that upon Galass failure to pay her obligation, Villar should
On June 26, 2000, Garcia filed a Motion for Summary Judgment with
have foreclosed the subject property pursuant to Act No. 3135 as amended, to
Affidavit of Merit[21] on the grounds that there was no genuine issue as to any of the
provide junior mortgagees like Garcia, the opportunity to satisfy their claims from the
material facts of the case and that he was entitled to a judgment as a matter of law.
residue, if any, of the foreclosure sale proceeds. This, the RTC added, would have
resulted in the extinguishment of the mortgages.[27]
[22]
On June 28, 2000, Garcia filed his Memorandum in support of his Motion
for Summary Judgment and in compliance with the RTCs June 8, 2000 Order. Garcia
The RTC held that the second mortgage constituted in Garcias favor had not
alleged that his equity of redemption had not yet been claimed since Villar did not
been discharged, and that Villar, as the new registered owner of the subject property
foreclose the mortgaged property to satisfy her claim.
with a subsisting mortgage, was liable for it.[28]

On August 13, 2000, Villar filed an Urgent Ex-Parte Motion for Extension of
Villar appealed[29] this Decision to the Court of Appeals based on the
[23] [24]
Time to File Her Memorandum. This, however, was denied by the RTC in view
arguments that Garcia had no valid cause of action against her; that he was in bad
[25]
of Garcias Opposition.
faith when he entered into a contract of mortgage with Galas, in light of the
restriction imposed by the first mortgage; and that Garcia, as the one who gave the
On May 27, 2002, the RTC rendered its Decision, the dispositive portion of
occasion for the commission of fraud, should suffer. Villar further asseverated that
which reads:
the second mortgage is a void and inexistent contract considering that its cause or
object is contrary to law, moral, good customs, and public order or public policy,
WHEREFORE, the foregoing premises considered, judgment is
hereby rendered in favor of the plaintiff Pablo P. Garcia and against insofar as she was concerned.[30]
the defendant Yolanda V. Villar, who is ordered to pay to the
former within a period of not less than ninety (90) days nor more
than one hundred twenty (120) days from entry of judgment, the Garcia, in his Memorandum,[31] reiterated his position that his equity of
sum of P1,800,000.00 plus legal interest from October 27, 1999 and
redemption remained unforeclosed since Villar did not institute foreclosure
upon failure of the defendant to pay the said amount within the
prescribed period, the property subject matter of the 2nd Real proceedings. Garcia added that the mortgage, until discharged, follows the property
Estate Mortgage dated October 10, 1994 shall, upon motion of the
plaintiff, be sold at public auction in the manner and under the
to whomever it may be transferred no matter how many times over it changes hands This motion was denied for lack of merit by the Court of Appeals in its July
as long as the annotation is carried over.[32] 2, 2003 Resolution.

The Court of Appeals reversed the RTC in a Decision dated February 27, Garcia is now before this Court, with the same arguments he posited before
2003, to wit: the lower courts. In his Memorandum,[37] he added that the Deed of Real Estate
WHEREFORE, the decision appealed from
Mortgage contained a stipulation, which is violative of the prohibition on pactum
is REVERSED and another one entered DISMISSING the complaint
for judicial foreclosure of real estate mortgage with damages.[33] commissorium.

Issues
The Court of Appeals declared that Galas was free to mortgage the subject
property even without Villars consent as the restriction that the mortgagees consent
The crux of the controversy before us boils down to the propriety of Garcias
was necessary in case of a subsequent encumbrance was absent in the Deed of Real
demand upon Villar to either pay Galass debt of P1,800,000.00, or to judicially
Estate Mortgage. In the same vein, the Court of Appeals said that the sale of the
foreclose the subject property to satisfy the aforesaid debt. This Court will, however,
subject property to Villar was valid as it found nothing in the records that would show
address the following issues in seriatim:
that Galas violated the Deed of Real Estate Mortgage prior to the sale.[34]

1. Whether or not the second mortgage to Garcia was valid;

In dismissing the complaint for judicial foreclosure of real estate mortgage
2. Whether or not the sale of the subject property to Villar was valid;
with damages, the Court of Appeals held that Garcia had no cause of action against
3. Whether or not the sale of the subject property to Villar was in violation
Villar in the absence of evidence showing that the second mortgage executed in his
of the prohibition on pactum commissorium;
favor by Lourdes V. Galas [had] been violated and that he [had] made a demand on
4. Whether or not Garcias action for foreclosure of mortgage on the
the latter for the payment of the obligation secured by said mortgage prior to the
subject property can prosper.
institution of his complaint against Villar.[35]

Discussion
On March 20, 2003, Garcia filed a Motion for Reconsideration [36] on the
ground that the Court of Appeals failed to resolve the main issue of the case, which
Validity of second mortgage to Garcia
was whether or not Garcia, as the second mortgagee, could still foreclose the and sale of subject property to Villar
mortgage after the subject property had been sold by Galas, the mortgage debtor, to
At the onset, this Court would like to address the validity of the second
Villar, the mortgage creditor.
mortgage to Garcia and the sale of the subject property to Villar. We agree with the

Court of Appeals that both are valid under the terms and conditions of the Deed of
Real Estate Mortgage executed by Galas and Villar.
While it is true that the annotation of the first mortgage to Villar on Galass
TCT contained a restriction on further encumbrances without the mortgagees prior
consent, this restriction was nowhere to be found in the Deed of Real Estate
Mortgage. As this Deed became the basis for the annotation on Galass title, its terms
and conditions take precedence over the standard, stamped annotation placed on
her title. If it were the intention of the parties to impose such restriction, they would
have and should have stipulated such in the Deed of Real Estate Mortgage itself.
Neither did this Deed proscribe the sale or alienation of the subject property
during the life of the mortgages. Garcias insistence that Villar should have judicially
or extrajudicially foreclosed the mortgage to satisfy Galass debt is misplaced. The
Deed of Real Estate Mortgage merely provided for the options Villar may undertake
in case Galas or Pingol fail to pay their loan. Nowhere was it stated in the Deed that
Galas could not opt to sell the subject property to Villar, or to any other person. Such
stipulation would have been void anyway, as it is not allowed under Article 2130 of
the Civil Code, to wit:
Art. 2130. A stipulation forbidding the owner from
alienating the immovable mortgaged shall be void.
Prohibition on pactum commissorium
Garcia claims that the stipulation appointing Villar, the mortgagee, as the
mortgagors attorney-in-fact, to sell the property in case of default in the payment of
the loan, is in violation of the prohibition on pactum commissorium, as stated under
Article 2088 of the Civil Code, viz:
Art. 2088. The creditor cannot appropriate the things
given by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.
The power of attorney provision in the Deed of Real Estate Mortgage reads:
5. Power of Attorney of MORTGAGEE. Effective upon the breach
of any condition of this Mortgage, and in addition to the remedies
herein stipulated, the MORTGAGEE is likewise appointed attorney-
in-fact of the MORTGAGOR with full power and authority to take
actual possession of the mortgaged properties, to sell, lease any of
the mortgaged properties, to collect rents, to execute deeds of
sale, lease, or agreement that may be deemed convenient, to make
repairs or improvements on the mortgaged properties and to pay
the same, and perform any other act which the MORTGAGEE may
deem convenient for the proper administration of the mortgaged
properties. The payment of any expenses advanced by the
MORTGAGEE in connection with the purpose indicated herein is
also secured by this Mortgage. Any amount received from the sale,
disposal or administration abovementioned maybe applied by
assessments and other incidental expenses and obligations and to
the payment of original indebtedness including interest and
penalties thereon. The power herein granted shall not be revoked
during the life of this Mortgage and all acts which may be executed
by the MORTGAGEE by virtue of said power are hereby ratified.[38]
The following are the elements of pactum commissorium:
(1) There should be a property mortgaged by way of security for the
payment of the principal obligation; and
(2) There should be a stipulation for automatic appropriation by the creditor
of the thing mortgaged in case of non-payment of the principal obligation within the
stipulated period.[39]
 Villars purchase of the subject property did not violate the prohibition
Simply put, a mortgage is a real right, which follows the property, even after
on pactum commissorium. The power of attorney provision above did not provide
subsequent transfers by the mortgagor. A registered mortgage lien is considered
that the ownership over the subject property would automatically pass to Villar upon
inseparable from the property inasmuch as it is a right in rem.[41]
Galass failure to pay the loan on time. What it granted was the mere appointment of
Villar as attorney-in-fact, with authority to sell or otherwise dispose of the subject
The sale or transfer of the mortgaged property cannot affect or release the
property, and to apply the proceeds to the payment of the loan. [40] This provision is
mortgage; thus the purchaser or transferee is necessarily bound to acknowledge and
customary in mortgage contracts, and is in conformity with Article 2087 of the Civil
respect the encumbrance.[42] In fact, under Article 2129 of the Civil Code, the
Code, which reads:
mortgage on the property may still be foreclosed despite the transfer, viz:
Art. 2087. It is also of the essence of these contracts that
when the principal obligation becomes due, the things in which the Art. 2129. The creditor may claim from a third person in
pledge or mortgage consists may be alienated for the payment to possession of the mortgaged property, the payment of the part of
the creditor. the credit secured by the property which said third person
possesses, in terms and with the formalities which the law
establishes.
Galass decision to eventually sell the subject property to Villar for an
additional P1,500,000.00 was well within the scope of her rights as the owner of the
While we agree with Garcia that since the second mortgage, of which he is
subject property.The subject property was transferred to Villar by virtue of another
the mortgagee, has not yet been discharged, we find that said mortgage subsists and
and separate contract, which is the Deed of Sale. Garcia never alleged that the
is still enforceable. However, Villar, in buying the subject property with notice that it
transfer of the subject property to Villar was automatic upon Galass failure to
was mortgaged, only undertook to pay such mortgage or allow the subject property
discharge her debt, or that the sale was simulated to cover up such automatic
to be sold upon failure of the mortgage creditor to obtain payment from the principal
transfer.
debtor once the debt matures. Villar did not obligate herself to replace the debtor in
the principal obligation, and could not do so in law without the creditors
Propriety of Garcias action
for foreclosure of mortgage consent.[43] Article 1293 of the Civil Code provides:

The real nature of a mortgage is described in Article 2126 of the Civil Code, Art. 1293. Novation which consists in substituting a new
debtor in the place of the original one, may be made even without
to wit:
the knowledge or against the will of the latter, but not without the
consent of the creditor. Payment by the new debtor gives him the
Art. 2126. The mortgage directly and immediately rights mentioned in articles 1236 and 1237.
subjects the property upon which it is imposed, whoever the
possessor may be, to the fulfillment of the obligation for whose
security it was constituted.
 We find the stand of petitioners-appellants to be
Therefore, the obligation to pay the mortgage indebtedness remains with
unmeritorious and untenable. The maxim caveat emptor applies
the original debtors Galas and Pingol.[44] The case of E.C. McCullough & Co. v. Veloso only to execution sales, and this was not one such. The mere fact
that the purchaser of an immovable has notice that the acquired
and Serna[45] is square on this point:
realty is encumbered with a mortgage does not render him liable
for the payment of the debt guaranteed by the mortgage, in the
The effects of a transfer of a mortgaged property to a third person
absence of stipulation or condition that he is to assume payment
are well determined by the Civil Code. According to article
of the mortgage debt. The reason is plain: the mortgage is merely
1879[46] of this Code, the creditor may demand of the third person
an encumbrance on the property, entitling the mortgagee to have
in possession of the property mortgaged payment of such part of
the property foreclosed, i.e., sold, in case the principal obligor does
the debt, as is secured by the property in his possession, in the
not pay the mortgage debt, and apply the proceeds of the sale to
manner and form established by the law. The Mortgage Law in
the satisfaction of his credit. Mortgage is merely an accessory
force at the promulgation of the Civil Code and referred to in the
undertaking for the convenience and security of the mortgage
latter, provided, among other things, that the debtor should not
creditor, and exists independently of the obligation to pay the debt
pay the debt upon its maturity after judicial or notarial demand, for
secured by it. The mortgagee, if he is so minded, can waive the
payment has been made by the creditor upon him. (Art. 135 of the
mortgage security and proceed to collect the principal debt by
Mortgage Law of the Philippines of 1889.) According to this, the
personal action against the original mortgagor.[49]
obligation of the new possessor to pay the debt originated only
from the right of the creditor to demand payment of him, it being
necessary that a demand for payment should have previously been
made upon the debtor and the latter should have failed to pay. And In view of the foregoing, Garcia has no cause of action against Villar in the
even if these requirements were complied with, still the third
absence of evidence to show that the second mortgage executed in favor of Garcia
possessor might abandon the property mortgaged, and in that case
it is considered to be in the possession of the debtor. (Art. 136 of has been violated by his debtors, Galas and Pingol, i.e., specifically that Garcia has
the same law.) This clearly shows that the spirit of the Civil Code is
made a demand on said debtors for the payment of the obligation secured by the
to let the obligation of the debtor to pay the debt stand although
the property mortgaged to secure the payment of said debt may second mortgage and they have failed to pay.
have been transferred to a third person. While the Mortgage Law
of 1893 eliminated these provisions, it contained nothing indicating
any change in the spirit of the law in this respect. Article 129 of this WHEREFORE, this Court hereby AFFIRMS the February 27, 2003 Decision
law, which provides the substitution of the debtor by the third and March 8, 2003 Resolution of the Court of Appeals in CA-G.R. SP No. 72714.
person in possession of the property, for the purposes of the giving
of notice, does not show this change and has reference to a case
where the action is directed only against the property burdened SO ORDERED.
with the mortgage. (Art. 168 of the Regulation.)[47]

This pronouncement was reiterated in Rodriguez v. Reyes[48] wherein this

Court, even before quoting the same above portion in E.C. McCullough & Co. v.
Veloso and Serna, held:
 SECOND DIVISION
[G.R. No. 138292. April 10, 2002]
KOREA EXCHANGE BANK, petitioner, vs. FILKOR BUSINESS INTEGRATED, INC., KIM
EUNG JOE, and LEE HAN SANG, respondents.
DECISION
QUISUMBING, J.:
This petition assails the order[1] dated April 16, 1999 of the Regional Trial Court
of Cavite City, Branch 88, in Civil Case No. N-6689. Said order denied petitioners
partial motion for reconsideration of the trial courts order[2] dated March 12, 1999
whereby respondents were ordered to pay petitioner various sums of U.S. dollars as
payment of the formers various loans with interest but omitted to state that the
property mortgaged as security for said loans be foreclosed and sold at public auction
in case respondents fail to pay their obligations to petitioner ninety days from entry
of judgment.
The facts are summarized from the findings of the trial court.
On January 9, 1997, respondent Filkor Business Integrated, Inc. (Filkor),
borrowed US$140,000 from petitioner Korea Exchange Bank, payable on July 9,
1997. Of this amount, only US$40,000 was paid by Filkor.[3]
In addition, Filkor executed nine trust receipts in favor of petitioner, from June
26, 1997 to September 11, 1997. However, Filkor failed to turn over to petitioner the
proceeds from the sale of the goods, or the goods themselves as required by the trust
receipts in case Filkor could not sell them.[4]
In the period from June 9, 1997 to October 1, 1997, Filkor also negotiated to
petitioner the proceeds of seventeen letters of credit issued by the Republic Bank of
New York and the Banque Leumi France, S.A. to pay for goods which Filkor sold to
Segerman International, Inc. and Davyco, S.A. When petitioner tried to collect the
proceeds of the letters of credit by presenting the bills of exchange drawn to collect
the proceeds, they were dishonored because of discrepancies.[5]
Prior to all the foregoing, in order to secure payment of all its obligations, Filkor
executed a Real Estate Mortgage on February 9, 1996. It mortgaged to petitioner the
improvements belonging to it constructed on the lot it was leasing at the Cavite
Export Processing Zone Authority.[6] Respondents Kim Eung Joe and Lee Han Sang
also executed Continuing Suretyships binding themselves jointly and severally with
respondent Filkor to pay for the latters obligations to petitioner. [7]
As respondents failed to make good on their obligations, petitioner filed Civil
Case No. N-6689 in the Regional Trial Court of Cavite City, docketed as Korea
Exchange Bank vs. Filkor Business Integrated, Inc. In its complaint, petitioner prayed
that (a) it be paid by respondents under its twenty-seven causes of action; (b) the
property mortgaged be foreclosed and sold at public auction in case respondents
failed to pay petitioner within ninety days from entry of judgment; and (c) other
reliefs just and equitable be granted.[8]
Petitioner moved for summary judgment pursuant to Section 1, Rule 35 of the
1997 Rules of Civil Procedure. On March 12, 1999, the trial court rendered its order
granting petitioners motion, reasoning as follows:
xxx
It appears that the only reason defendants deny all the material allegations in the
complaint is because the documents attached thereto are mere photocopies and
not the originals thereof. Section 7, Rule 8 of the Rules of Court allows copies of
documents to be attached to the pleading as an exhibit. Defendants are, therefore,
deemed to have admitted the genuineness and due execution of all actionable
documents attached to the complaint inasmuch as they were not specifically
denied, pursuant to Section 8 of the Rule 8 of the Rules of Court.
In the case at bar, there is clearly no substantial triable issue, hence, the motion for
summary judgment filed by plaintiff is proper.
A summary of judgment is one granted by the court upon motion by a party for an
expeditious settlement of the case, there appearing from the pleadings,
depositions, admissions and affidavits that there are no important questions or
issues of fact involved (except as to the amount of damages) and that, therefore,
the moving party is entitled to a judgment as a matter of law (Sections 1, 2, 3, Rule
35, 1997 Rules of Civil Procedure).
The court having taken into account the pleadings of the parties as well as the
affidavits attached to the motion for summary judgment and having found that
there is indeed no genuine issue as to any material fact and that plaintiff is entitled
to a summary of judgment as a matter of law, hereby renders judgment for the
plaintiff and against the defendants, ordering said defendants jointly and severally
to pay plaintiff, as follows[9]
The trial court then rendered judgment in favor of petitioner, granting its
prayers under all its twenty-seven causes of action. It, however, failed to order that
the property mortgaged by respondent Filkor be foreclosed and sold at public auction
in the event that Filkor fails to pay its obligations to petitioner.
Petitioner filed a motion for partial reconsideration of the trial courts order,
praying that the aforesaid relief of foreclosure and sale at public auction be granted.
In an order dated April 16, 1999, the trial court denied petitioners motion, ruling as
follows:
Plaintiff, in opting to file a civil action for the collection of defendants obligations,
has abandoned its mortgage lien on the property subject of the real estate
mortgage.
The issue has already been resolved in Danao vs. Court of Appeals, 154 SCRA 446,
citing Manila Trading and Supply Co. vs. Co Kim, et al., 71 Phil. 448, where the
Supreme Court ruled that:
The rule is now settled that a mortgage creditor may elect to waive his security and
bring, instead, an ordinary action to recover the indebtedness with the right to
execute a judgment thereon on all the properties of the debtor including the
subject matter of the mortgage, subject to the qualification that if he fails in the
remedy by him elected, he cannot pursue further the remedy he has waived.
WHEREFORE, the Partial Motion for Reconsideration filed by the plaintiff of the
Courts Order dated March 12, 1999 is hereby denied for lack of merit.
SO ORDERED.[10]
Hence, the present petition, where petitioner ascribes the following error to the
trial court.
THE REGIONAL TRIAL COURT OF CAVITE CITY ERRED IN RULING THAT PETITIONER
HAD ABANDONED THE REAL ESTATE MORTGAGE IN ITS FAVOR, BECAUSE IT FILED A
SIMPLE COLLECTION CASE.[11]
The resultant issue is whether or not petitioners complaint before the trial court
was an action for foreclosure of a real estate mortgage, or an action for collection of
a sum of money. In addition, we must also determine if the present appeal was
correctly lodged before us rather than with the Court of Appeals.
In petitioners complaint before the trial court, Paragraph 183 thereof alleges:
183. To secure payment of the obligations of defendant Corporation under the First
to the Twenty-Seventh Cause of Action, on February 9, 1996, defendant
Corporation executed a Real Estate Mortgage by virtue of which it mortgaged to
plaintiff the improvements standing on Block 13, Lot 1, Cavite Export Processing
Zone, Rosario, Cavite, belonging to defendant Corporation covered by Tax
Declaration No. 5906-1 and consisting of a one-story building called warehouse and
spooling area, the guardhouse, the cutting/sewing area building and the packing
area building. (A copy of the Real Estate Mortgage is attached hereto as Annex SS
and made an integral part hereof.)[12]
This allegation satisfies in part the requirements of Section 1, Rule 68 of the
1997 Rules of Civil Procedure on foreclosure of real estate mortgage, which provides:
SECTION 1. Complaint in action for foreclosure. In an action for the foreclosure of a
mortgage or other encumbrance upon real estate, the complaint shall set forth the
date and due execution of the mortgage; its assignments, if any; the names and
residences of the mortgagor and the mortgagee; a description of the mortgaged
property; a statement of the date of the note or other documentary evidence of the
obligation secured by the mortgage, the amount claimed to be unpaid thereon; and
the names and residences of all persons having or claiming an interest in the
property subordinate in right to that of the holder of the mortgage, all of whom
shall be made defendants in the action.
In Paragraph 183 above, the date and due execution of the real estate mortgage
are alleged. The properties mortgaged are stated and described therein as well. In
addition, the names and residences of respondent Filkor, as mortgagor, and of
petitioner, as mortgagee, are alleged in paragraphs 1 and 2 of the complaint. [13] The
dates of the obligations secured by the mortgage and the amounts unpaid thereon
are alleged in petitioners first to twenty-seventh causes of action.[14] Moreover, the
very prayer of the complaint before the trial court reads as follows:
WHEREFORE, it is respectfully prayed that judgment be rendered:
xxx
2. Ordering that the property mortgaged be foreclosed and sold at public auction in
case defendants fail to pay plaintiff within ninety (90) days from entry of judgment.
x x x[15]
Petitioners allegations in its complaint, and its prayer that the mortgaged
property be foreclosed and sold at public auction, indicate that petitioners action was
one for foreclosure of real estate mortgage. We have consistently ruled that what
determines the nature of an action, as well as which court or body has jurisdiction
over it, are the allegations of the complaint and the character of the relief
sought.[16] In addition, we find no indication whatsoever that petitioner had waived
its rights under the real estate mortgage executed in its favor. Thus, the trial court
erred in concluding that petitioner had abandoned its mortgage lien on Filkors
property, and that what it had filed was an action for collection of a sum of money.
Petitioners action being one for foreclosure of real estate mortgage, it was
incumbent upon the trial court to order that the mortgaged property be foreclosed
and sold at public auction in the event that respondent Filkor fails to pay its
outstanding obligations. This is pursuant to Section 2 of Rule 68 of the 1997 Rules of
Civil Procedure, which provides:
WHEREFORE, the petition is GRANTED. The Order dated March 12, 1999, of the
Regional Trial Court of Cavite City, Branch 88, in Civil Case No. N-6689 is hereby
MODIFIED, to state that the mortgaged property of respondent Filkor be ordered
foreclosed and sold at public auction in the event said respondent fails to pay its
obligations to petitioner within ninety (90) days from entry of judgment.
No pronouncement as to costs.
SO ORDERED.

SEC. 2. Judgment on foreclosure for payment or sale.- If upon the trial in such action
the court shall find the facts set forth in the complaint to be true, it shall ascertain
the amount due to the plaintiff upon the mortgage debt or obligation, including
interest and other charges as approved by the court, and costs, and shall render
judgment for the sum so found due and order that the same be paid to the court or
to the judgment obligee within a period of not less than ninety (90) days nor more
than one hundred twenty (120) days from entry of judgment, and that in default of
such payment the property shall be sold at public auction to satisfy the
judgment. (Italics supplied.)

Accordingly, the dispositive portion of the decision of the trial court dated
March 12, 1999, must be modified to comply with the provisions of Section 2 of Rule
68 of the 1997 Rules of Civil Procedure. This modification is subject to any appeal
filed by respondents of said decision.
On the propriety of the present appeal, we note that what petitioner impugns
is the determination by the trial court of the nature of action filed by petitioner, based
on the allegations in the complaint. Such a determination as to the correctness of the
conclusions drawn from the pleadings undoubtedly involves a question of law. [17] As
the present appeal involves a question of law, petitioner appropriately filed it with
this Court, pursuant to Section 1 of Rule 45 of the 1997 Rules of Civil Procedure, which
provides:

SECTION 1. Filing of petition with Supreme Court. A party desiring to appeal by

certiorari from a judgment or final order or resolution of the Court of Appeals, the
Sandiganbayan, the Regional Trial Court or other courts whenever authorized by
law, may file with the Supreme Court a verified petition for review on certiorari. The
petition shall raise only questions of law which must be distinctly set forth. (Italics
supplied).

There is no dispute with respect to the fact that when an appeal raises only pure
questions of law, this Court has jurisdiction to entertain the same.[18]
 EN BANC
[A.M. No. P-O1-1449. February 24, 2003]
CLEMENTINO IMPERIAL, petitioner, vs. MARIANO F. SANTIAGO, JR., Sheriff IV, RTC,
Branch 139, Makati City, respondent.
DECISION
PER CURIAM:
In a sworn letter-complaint dated November 26, 1998,[1] Clementino Imperial,
President and Chairman of the Board of Laoang Shipping Corporation, charged
respondent Mariano F. Santiago, Jr., Sheriff IV of the Regional Trial Court of Makati
City (Branch 139) with Grave Abuse of Authority and Grave Misconduct for the illegal
foreclosure of a pledge on the vessel M/V Angela Ceferina.
In his Comment dated April 29, 1999, respondent denies the alleged illegal
foreclosure. He stressed that the foreclosure and auction sale was done in a legal and
appropriate manner and that he issued a Certificate of Sale dated July 9, 1998
attesting that by virtue of a contract of pledge executed on November 7, 1995 by
Richard Tang Tepace, for and in behalf of Laoang Shipping Corporation, respondent
sold the vessel M/V Angela Ceferina in a public auction held on July 9, 1998 to Zoilo
Uy, the highest bidder for Three Million Five Hundred Thousand Pesos
(P3,500,000.00), conducted in front of the main entrance of the Gusali ng
Katarungan, Zobel St., Makati City.[2]
In his Reply, dated June 14, 1999, complainant contends that the alleged valid
foreclosure is belied by a Certification dated November 15, 1998 of Atty. Engracio M.
Escasinas, Jr., Clerk of Court VII and Ex-Officio Sheriff, stating that: per records of the
court, the alleged foreclosure of pledge does not appear to have been filed or
properly docketed in the record; the prescribed filing and commission on sale fees
does not appear to have been paid; the public sale of the vessel could not physically
be done in front of the Gusali ng Katarungan in Makati since the vessel could not be
brought to said location; the pledge cannot be legally foreclosed in Makati City since
it was executed in the City of Manila; the pledge does not conform to the legal
requirements; the alleged publication of the notice of the Sheriffs sale did not pass
through the raffle required before publication by any newspaper could be had; there
is no record in the Office of the Clerk of Court and Ex-Officio Sheriff of the raffle first
being done because no petition had been filed with the said office; the posting of
Sheriffs sale does not appear to have been certified to and does not comply with the
requirements of Certification of the posting of Affidavit; Richard Tepace is no longer
the President of Laoang Shipping Corporation since he was ousted as hold-over
president on April 6, 1998; Laoang Shipping Corporation which appears in the
Registration of Ownership to be the owner of the vessel, with address at Laoang, N.
Samar, was never notified; there was no notice made to MARINA where the vessel is
registered; respondent could not feign that he advised Zoilo Uy to pay the necessary
fees required by the Office of the Clerk of Court after the auction sale; respondent
issued a Certificate of Sale to Zoilo Uy dated July 9, 1998 without ensuring that the
said fees were actually and properly paid; and respondent conspired with Richard
Tepace and Zoilo Uy to deprive him (complainant) of his vessel by way of a false
Certificate of Sale.[3]
On January 22, 2001, the administrative case was re-docketed as a regular
administrative matter and referred to then Executive Judge Florentino A. Thason, Jr.,
RTC (Branch 139) Makati City for investigation, report and recommendation. [4] In a
Resolution, dated March 19, 2001, the Court referred the case to the then First Vice
Executive Judge Leticia P. Morales, RTC (Branch 140) Makati City in lieu of Judge
Tuason, Jr. because of the administrative case filed by him against respondent,
docketed as A.M. OCA IPI No. 00-791-P.[5]
After conducting the necessary investigation, Judge Morales submitted her
Report dated May 26, 2002. She found respondent guilty of Grave Abuse of Authority
and Grave Misconduct. She pointed out that respondent evidently treated an extra-
judicial foreclosure based on mortgage and a foreclosure based on a pledge as
similar, if not the same; that such error cannot be treated as insignificant since the
law treats the two securities as different, and it was inexcusable negligence, if not
gross ignorance of the law on the part of the respondent to ignore such statutory
differences. Judge Morales added that even the foreclosure proceeding adopted by
the respondent was invalid inasmuch as the Certification of the Clerk of Court VII
affirmed the non-existence of the foreclosure, the filing and recording, as well as
payment of the necessary fees; and, that respondent in fact admitted his negligence
as regards the payment of the necessary filing and docket fees. However, Judge
Morales did not recommend a specific penalty to be meted out to the respondent. [6]
In its Memorandum dated August 30, 2002, the Office of the Court
Administrator (OCA) adopted the findings of the Investigating Judge and
recommended to the Court the dismissal of respondent from the service.
The Court agrees with the OCA.
Respondent claims that he conducted a valid foreclosure on the vessel M/V
Angela Ceferina as supported by an Affidavit of Publication,[7] Certificate of
Posting[8] and Certificate of Sale.[9] However, a close scrutiny of the extant evidence
reveals otherwise.
 The procedure for foreclosure of a pledge is set forth under Article 2112 of the
Civil Code, to wit:
Art. 2112. The creditor to whom the credit has not been satisfied in due time, may
proceed before a Notary Public to the sale of the thing pledged. This sale shall be
made at a public auction, and with notification to the debtor and the owner of the
thing pledged in a proper case, stating the amount for which the public sale is to be
held. If at the first auction the thing is not sold, a second one with the same
formalities shall be held; and if at the second auction there is no sale either, the
creditor may appropriate the thing pledged. In this case he shall be obliged to give
an acquittance for his entire claim. (Underscoring supplied)
Although it is only on February 12, 2001 that the Court in A.M. No. 01-1-01-0
clarified that the procedure in the foreclosure of pledge before a notary public does
not require the submission of a petition for extra-judicial foreclosure before the
Executive Judge of the appropriate Regional Trial Court, through the Clerk of
Court/Ex-Officio Sheriff, it is expressly provided for in Article 2112, as above-quoted,
that only a notary public can conduct a public auction after proper notice is sent to
the debtor and owner of the thing pledged.
The fault of respondent could have been regarded as simple ignorance of the
proper procedure or an error of judgment on his part but respondent sheriff betrayed
himself and confirmed the charges against him when he testified during the
investigation conducted by the Investigating Judge:
Q - As a Sheriff, you know that in pledges, only the Notary Public can
conduct foreclosure, not the Sheriff?
A - What I know, I can.
Q - In this case, you conducted this alleged foreclosure and auction sale
concerning the vessel mortgaged under R.A. - (interrupted)
A - Pledge Contract.
Q - How long have you been a Sheriff?
A - Nine (9) to ten (10) years.
Q- So, you can distinguish between Pledge and Chattel mortgage?
A - Yes.
Q.- You know that in Pledges, only lawyers can conduct the foreclosure?
A - As far as I know, I can also conduct foreclosure.
Q.- In this case, you issued a Certificate of Sale on the same day, July 9,
1998, allegedly on the same day when the auction sale was made?
A - Auction sale was in the morning.
Q - So, you issued the certificate of Sale even knowing that there was no
docket fees paid?
A - Thats why I issued the certificate of Sale and told them to pay the
required fees.
Q - So, what you did, you first issued the Certificate of Sale and you told
them to pay the legal fees?
A - Yes.
Q - When you issued the Certificate of Sale, the Certificate of Sale was not
signed by Engracio Escasinas, Jr.?
A - Yes.
Q - And he has not even seen that Certificate of Sale?
A - Yes.
Q.- Nor the Certificate of Sale was even forwarded to the Office of the
Clerk of Court?
A - Yes, sir. I told when they should pay - (interrupted)
Q - No, no, no. My question is, this Certificate of Sale was not even
forwarded to the Office of the Clerk of Court?
A - Yes.
ATTY. SIRUELO:
That will be all.
COURT:
Q - As a matter of procedure, do you not forward the sale to the Clerk of
Court?
A - I told them, maam, to go to the Office of the Clerk of Court to pay
considering that the Certificate of Sale will be registered.
Q - As a Sheriff, is it not your duty to bring the Certificate of Sale there to
be noted by Atty. Engracio Escasinas, Jr.?
A - Its my fault, maam. I forgot to do it because of other tasks.[10]
 In claiming that he followed the procedure required in the foreclosure of a
chattel mortgage, and in admitting before the Investigating Judge that he is well-
aware that the proper requirement of law is that a petition for foreclosure of
mortgage, real estate or chattel, must be filed first with the Clerk of Court before
foreclosure or auction may commence,[11] he sealed his fate. This is because the
records lay bare the following facts:
1. Respondent totally ignored the specific reference in paragraph 4 of the Pledge
Agreement[12] that Article 2112 of the Civil Code is the applicable law.
2. No petition for foreclosure of chattel mortgage was ever filed before the Clerk of
Court.[13] Despite the lack of petition, respondent proceeded with the auction sale.
3. The prescribed filing and commission on sale fees were not paid [14] yet
respondent signed the certificate of sale merely because he trusted that Tepace will
pay the fees. The explanation of respondent that: its only on my good faith and
thats only my procedure because others usually pay[15], is absolutely weak and
completely absurd.
4. The certificate of sale was not even forwarded to the Office of the Clerk of Court,
and bears only the signature of respondent.[16]
5. When the Investigating Judge inquired why he did not recall the certification
since no fees were paid, respondent replied that he simply forgot the
transaction.[17] Forgetfulness or failure to remember is never a rational or
acceptable explanation.[18]
6. Respondent failed to controvert the amounts received by him totalling One
Hundred Sixty-Five Thousand Pesos (P165,000.00), as shown by the unofficial
receipt issued and signed by him, to wit:
PETITION FOR PUBLIC AUCTION
PARTIAL RECEIPT
1. PUBLICATION P 20,000.00
2. POSTING P 5,000.00
3. NOTARIAL FEES P 35,000.00
4. JUDICIAL FUNDS P 70,000.00
5. SHERIFFS FEES P 35,000.00
RECEIVED the described amount from Mr. & Mrs. Uy for the implementation of the
Extra-Judicial Foreclosure of M/V Ceferina.[19]
Respondent and his counsel, Atty. Salvador D. Abong, did not appear in the
subsequent investigation despite being fully notified and given the opportunity to
explain on the amounts received. When the Investigating Judge required Process
Server Aldwin Atilon to call respondent, the latter refused to come. Respondent
instead told Atilon that the case should be submitted for resolution because he does
not intend to present additional evidence other than the ones previously submitted
and those admitted by him during the investigation.[20]
Per Certification of the Clerk of Court, respondent did not remit said amounts
nor did he secure the approval of the court.
Evidently, respondent grievously failed to comply with the requirements of Rule
141 of the Rules of Court, as follows:
SEC. 3. Persons authorized to collect legal fees. - Except as otherwise provided in
this rule, the officers and persons hereinafter mentioned, together with their
assistants and deputies, may demand, receive, and take the several fees hereinafter
mentioned and allowed for any business by them respectively done by virtue of
their several offices, and no more. All fees so collected shall be forthwith remitted
to the Supreme Court. The fees collected shall accrue to the general fund. However,
all increases in the legal fees prescribed in amendments to this rule shall pertain to
the Judiciary Development Fund as established by law. The persons herein
authorized to collect legal fees shall be accountable officers and shall be required to
post bond in such amount as prescribed by law.
SEC. 9. Sheriff, and other persons serving processes.-
xxx xxx xxx
(h) For advertising a sale, besides cost of publication, fifty (P50.00) pesos;
xxx xxx xxx
(I) For money collected by him by order, execution, attachment, or any other
process, judicial or extrajudicial, the following sums, to wit:
1. On the first four thousand (P4,000.00) pesos, four (4%) per centum.
2. On all sums in excess of four thousand (P4,000.00) pesos two (2%) per centum.
In addition to the fees hereinabove fixed, the party requesting the process of any
court. preliminary, incidental, or final, shall pay the sheriffs expenses in serving or
executing the process, or safeguarding the property levied upon, attached or seized,
including kilometrage for each kilometer of travel, guards fees, warehousing and
similar charges, in an amount estimated by the sheriff, subject to the approval of
the court. Upon approval of said estimated expenses, the interested party shall
deposit such amount with the clerk of court and ex-officio sheriff, who shall
disburse the same to the deputy sheriff assigned to effect the process, subject to
liquidation within the same period for rendering a return on the process. Any
unspent amount shall be refunded to the party making the deposit. A full report
shall be submitted by the deputy sheriff assigned with his return, and the sheriffs
expenses shall be taxed as costs against the judgment debtor.[21] (Underscoring
supplied)
It is clear that under the rule, sheriffs are authorized to collect certain specified fees
in specified amounts. The sheriff has to estimate the expenses to be incurred and
upon the approval of the estimated expenses by the court, the interested party has
to deposit the amount with the Clerk of Court and the Ex-Officio Sheriff. These
expenses shall then be disbursed to the executing Sheriff subject to his liquidation
within the same period for rendering a return on the process or writ. Any unspent
amount shall be refunded to the party who made the deposit.
Respondent did not prepare an estimate of expenses to be incurred in the
auction, for which he should have sought the approval of the Court. He did not render
an accounting. He did not remit and report the amounts he received.[22] He blatantly
disregarded general auditing and accounting rules when he did not issue an official
receipt for the total amount he received. His willful failure to offer any explanation
on what happened to the money he received leads to the inescapable conclusion that
he misappropriated the same for his own personal use.[23]
The Court has once held that when a judges inefficiency springs from a failure
to consider so basic and elemental a rule, a law or a principle in the discharge of his
duties, he is either too incompetent and undeserving of the position and title he holds
or he is too vicious that the oversight or omission was deliberately done in bad faith
and with grave abuse of judicial authority.[24] There is no reason not to apply the same
principle to respondent.
By his conduct, respondent gravely abused his authority to conduct auction
sales. Respondent cannot feign ignorance of the proper procedure to follow in case
of pledge considering that he has been a sheriff for more than 10 years.[25] He wielded
authority where he had none and admitted disregarding the procedure in the
foreclosure of a chattel mortgage. Respondent knew his action to be wrong yet
persisted in doing the same. Such grave abuse of authority amounts to grave
misconduct.
Misconduct is a transgression of some established and definite rule of action,
more particularly, unlawful behavior or gross negligence by the public officer. To
warrant dismissal from the service, the misconduct must be grave, serious,
important, weighty, momentous and not trifling. The misconduct must imply
wrongful intention and not a mere error of judgment. The misconduct must also have
a direct relation to and be connected with the performance of his official duties
amounting either to maladministration or willful, intentional neglect or failure to
discharge the duties of the office.[26] There must also be reliable evidence showing
that the judicial acts complained of were corrupt or inspired by an intention to violate
the law.[27] All of these requisites are met in this case.
Respondent grossly violated the yardstick of public service imposed in Section
1, Article XI of our Constitution that a public office is a public trust; that public officers
and employees must serve with the highest degree of responsibility, integrity, loyalty
and efficiency; and that they must at all times remain accountable to the people. No
other office in the government service exacts a greater demand for moral
righteousness and uprightness from an employee than in the judiciary. [28]
The Court will not tolerate any Court employees conduct, act or omission that
violates the norm of public accountability and diminishes or tends to diminish the
faith of the people in the judiciary.[29] By the very nature of their functions, sheriffs
must conduct themselves with propriety and decorum, and above all else, be above
suspicion.[30] The Court has repeatedly stressed that high standards are expected of
sheriffs, thus:
At the grassroots of our judicial machinery, sheriffs and deputy sheriffs are
indispensably in close contact with the litigants, hence, their conduct should be
geared towards maintaining the prestige and integrity of the court, for the image of
a court of justice is necessarily mirrored in the conduct, official or otherwise, of the
men and women who work thereat, from the judge to the least and lowest of its
personnel; hence, it becomes the imperative sacred duty of each and everyone in
the court to maintain its good name and standing as a temple of justice. [31]
Respondents conduct fell far too short of the standard required of court
employees. He allowed himself to be a pawn for fraud and deceit, sowing injustice in
exchange for One Hundred Sixty-Five Thousand Pesos (P165,000.00).
Grave misconduct is a malevolent act which threatens the very existence of the
system of administration of justice. Because of his misconduct, respondent does not
deserve to stay a minute longer in the judicial service as he seriously lacks the
integrity, uprightness and honesty demanded of an employee in the judiciary. [32]
 Clearly grave in character, said act is tainted by the element of corruption
punishable under Section 46 (b), (4) of Book V of the Executive Order No. 292,
otherwise known as the Administrative Code of 1987. Under Section 23, Rule XIV of
the Omnibus Civil Service Rules and Regulations, Grave Misconduct is punishable with
dismissal even in the first offense. This penalty is reiterated in Civil Service
Memorandum Circular No, 30, Series of 1989,[33] the prevailing rule at the time of the
commission of the complained acts in 1998.
Section 9, Rule XIV of. the Omnibus Rules and the aforecited circulars likewise
provide that the penalty of dismissal from the service shall carry with it cancellation
of civil service eligibility, forfeiture of leave credits and retirement benefits, and
disqualification from any employment in the government service, unless otherwise
provided in the decision, per Section 58 of Civil Service Memorandum Circular No.
19, Series of 1999.
WHEREFORE, Mariano F. Santiago, Jr., Sheriff IV of the Regional Trial Court of
Makati City (Branch 139) is found GUILTY of GRAVE MISCONDUCT. He is DISMISSED
from service with prejudice to re-employment in any government agency and
government-owned or controlled corporation and with forfeiture of all retirement
benefits, except accrued leave credits.
This decision shall take effect immediately.
SO ORDERED.
 THIRD DIVISION
[G.R. No. 128567. September 1, 2000]
HUERTA ALBA RESORT, INC., petitioner, vs. COURT OF APPEALS and SYNDICATED
MANAGEMENT GROUP, INC., respondents.
DECISION
PURISIMA, J.:
Litigation must at some time be terminated, even at the risk of occasional
errors. Public policy dictates that once a judgment becomes final, executory and
unappealable, the prevailing party should not be denied the fruits of his victory by
some subterfuge devised by the losing party. Unjustified delay in the enforcement of
a judgment sets at naught the role of courts in disposing justiciable controversies with
finality.
TheCase
At bar is a petition assailing the Decision, dated November 14, 1996, and
Resolution, dated March 11, 1997, of the Court of Appeals in CA-G.R. No. 38747,
which set aside the Order, dated July 21, 1995, and Order, dated September 4, 1997,
of the Regional Trial Court of Makati City, in Civil Case No. 89-5424. The aforesaid
orders of the trial court held that petitioner had the right to redeem subject pieces
of property within the one-year period prescribed by Section 78 of Republic Act No.
337 otherwise known as the General Banking Act.
Section 78 of R.A. No. 337 provides that in case of a foreclosure of a mortgage
in favor of a bank, banking or credit institution, whether judicially or extrajudicially,
the mortgagor shall have the right, within one year after the sale of the real estate as
a result of the foreclosure of the respective mortgage, to redeem the property.
TheFacts
The facts that matter are undisputed:
In a complaint for judicial foreclosure of mortgage with preliminary injunction
filed on October 19, 1989, docketed as Civil Case No. 89-5424 before the Regional
Trial Court of Makati City, the herein private respondent sought the foreclosure of
four (4) parcels of land mortgaged by petitioner to Intercon Fund Resource, Inc.
(Intercon).
Private respondent instituted Civil Case No. 89-5424 as mortgagee-assignee of
a loan amounting to P8.5 million obtained by petitioner from Intercon, in whose favor
petitioner mortgaged the aforesaid parcels of land as security for the said loan.
In its answer below, petitioner questioned the assignment by Intercon of its
mortgage right thereover to the private respondent, on the ground that the same
was ultra vires. Petitioner also questioned during the trial the correctness of the
charges and interest on the mortgage debt in question.
On April 30, 1992, the trial court, through the then Judge now Court of Appeals
Justice Buenaventura J. Guerrero, came out with its decision granting herein private
respondent SMGIs complaint for judicial foreclosure of mortgage, disposing as
follows:
WHEREFORE, judgment is hereby rendered ordering defendant to pay plaintiff the
following:
(1) P8,500,000.00 representing the principal of the amount due;
(2) P850,000.00 as penalty charges with interest at 6% per annum, until fully paid;
(3) 22% per annum interest on the above principal from September 6, 1998, until
fully paid;
(4) 5% of the sum total of the above amounts, as reasonable attorneys fees; and,
(5) Costs.
All the above must be paid within a period of not less than 150 days from receipt
hereof by the defendant. In default of such payment, the four parcels of land
subject matter of the suit including its improvements shall be sold to realize the
mortgage debt and costs, in the manner and under the regulations that govern
sales of real estate under execution.[1]
Petitioner appealed the decision of the trial court to the Court of Appeals, the
appeal docketed as CA-G.R. CV No. 39243 before the Sixth Division of the appellate
court, which dismissed the case on June 29, 1993 on the ground of late payment of
docket fees.
 Dissatisfied with the dismissal of CA-G.R. No. 39243, petitioner came to this
Court via a petition for certiorari, docketed as G.R. No. 112044, which this court
resolved to dismiss on December 13, 1993, on the finding that the Court of Appeals
erred not in dismissing the appeal of petitioner.
Petitioners motion for reconsideration of the dismissal of its petition in G.R. No.
112044 was denied with finality in this Courts Resolution promulgated on February
16, 1994. On March 10, 1994, leave to present a second motion for reconsideration
in G.R. No. 112044 or to submit the case for hearing by the Court en banc was filed,
but to no avail. The Court resolved to deny the same on May 11, 1994.
On March 14, 1994, the Resolution dated December 13, 1993, in G.R. No.
112044 became final and executory and was entered in the Book of Entries of
Judgment.
On July 4, 1994, private respondent filed with the trial court of origin a motion
for execution of the Decision promulgated on April 30, 1992 in Civil Case No. 89-
5424. The said motion was granted on July 13, 1994.
Accordingly, on July 15, 1994 a writ of execution issued and, on July 20, 1994, a
Notice of Levy and Execution was issued by the Sheriff concerned, who issued on
August 1, 1994 a Notice of Sheriffs Sale for the auction of subject properties on
September 6, 1994.
On August 23, 1994, petitioner filed with the same trial court an Urgent Motion
to Quash and Set Aside Writ of Execution ascribing to it grave abuse of discretion in
issuing the questioned Writ of Execution. To support its motion, petitioner invited
attention and argued that the records of the case were still with the Court of Appeals
and therefore, issuance of the writ of execution was premature since the 150-day
period for petitioner to pay the judgment obligation had not yet lapsed and petitioner
had not yet defaulted in the payment thereof since no demand for its payment was
made by the private respondent. In petitioners own words, the dispute between the
parties was principally on the issue as to when the 150-day period within which
Huerta Alba may exercise its equity of redemption should be counted.
In its Order of September 2, 1994, the lower court denied petitioners urgent
motion to quash the writ of execution in Civil Case No. 89-5424, opining that subject
judgment had become final and executory and consequently, execution thereof was
a matter of right and the issuance of the corresponding writ of execution became its
ministerial duty.
Challenging the said order granting execution, petitioner filed once more with
the Court of Appeals another petition for certiorari and prohibition with preliminary
injunction, docketed as C.A.-G.R. SP No. 35086, predicated on the same grounds
invoked for its Motion to Quash Writ of Execution.
On September 6, 1994, the scheduled auction sale of subject pieces of
properties proceeded and the private respondent was declared the highest
bidder. Thus, private respondent was awarded subject bidded pieces of
property. The covering Certificate of Sale issued in its favor was registered with the
Registry of Deeds on October 21, 1994.
On September 7, 1994, petitioner presented an Ex-Parte Motion for Clarification
asking the trial court to clarify whether or not the twelve (12) month period of
redemption for ordinary execution applied in the case.
On September 26, 1994, the trial court ruled that the period of redemption of
subject property should be governed by the rule on the sale of judicially foreclosed
property under Rule 68 of the Rules of Court.
Thereafter, petitioner then filed an Exception to the Order dated September 26,
1994 and Motion to Set Aside Said Order, contending that the said Order materially
altered the Decision dated April 30, 1992 which declared that the satisfaction of the
judgment shall be in the manner and under the regulation that govern sale of real
estate under execution.
Meanwhile, in its Decision of September 30, 1994, the Court of Appeals resolved
the issues raised by the petitioner in C.A.-G.R. SP No. 35086, holding that the one
hundred-fifty day period within which petitioner may redeem subject properties
should be computed from the date petitioner was notified of the Entry of Judgment
in G.R. No. 112044; and that the 150-day period within which petitioner may exercise
its equity of redemption expired on September 11, 1994. Thus:
Petitioner must have received the resolution of the Supreme Court dated February
16, 1994 denying with finality its motion for reconsideration in G.R. No.
112044 before March 14, 1994, otherwise the Supreme Court would not have made
an entry of judgment on March 14, 1994. While, computing the 150-day
period, petitioner may have until September 11, 1994, within which to pay the
amounts covered by the judgment, such period has already expired by this
time, and therefore, this Court has no more reason to pass upon the parties
opposing contentions, the same having become moot and
academic.[2](Underscoring supplied).
Petitioner moved for reconsideration of the Decision of the Court of Appeals in
C.A.-G.R. SP No. 35086. In its Motion for Reconsideration dated October 18, 1994,
petitioner theorized that the period of one hundred fifty (150) days should not be
reckoned with from Entry of Judgment but from receipt on or before July 29, 1994 by
the trial court of the records of Civil Case No. 89-5424 from the Court of Appeals. So
also, petitioner maintained that it may not be considered in default, even after the
expiration of 150 days from July 29, 1994, because prior demand to pay was never
made on it by the private respondent. According to petitioner, it was therefore,
premature for the trial court to issue a writ of execution to enforce the judgment.
The trial court deferred action on the Motion for Confirmation of the Certificate
of Sale in view of the pendency of petitioners Motion for Reconsideration in CA-G.R.
SP No. 35086.
On December 23, 1994, the Court of Appeals denied petitioners motion for
reconsideration in CA-G.R. SP No. 35086. Absent any further action with respect to
the denial of the subject motion for reconsideration, private respondent presented a
Second Motion for Confirmation of Certificate of Sale before the trial court.
As regards the Decision rendered on September 30, 1994 by the Court of
Appeals in CA G.R. SP No. 35086 it became final and executory on January 25, 1995.
On February 10, 1995, the lower court confirmed the sale of subject properties
to the private respondent. The pertinent Order declared that all pending incidents
relating to the Order dated September 26, 1994 had become moot and
academic. Conformably, the Transfer Certificates of Title to subject pieces of
property were then issued to the private respondent.
On February 27, 1995, petitioner filed with the Court of Appeals a Motion for
Clarification seeking clarification of the date of commencement of the one (1) year
period for the redemption of the properties in question.
In its Resolution dated March 20, 1995, the Court of Appeals merely noted such
Motion for Clarification since its Decision promulgated on September 30, 1994 had
already become final and executory; ratiocinating thus:
We view the motion for clarification filed by petitioner, purportedly signed by its
proprietor, but which we believe was prepared by a lawyer who wishes to hide
under the cloak of anonymity, as a veiled attempt to buy time and to delay further
the disposition of this case.
Our decision of September 30, 1994 never dealt on the right and period of
redemption of petitioner, but was merely circumscribed to the question of whether
respondent judge could issue a writ of execution in its Civil Case No. 89-5424 xxx.
We further ruled that the one-hundred fifty day period within which petitioner may
exercise its equity of redemption should be counted, not from the receipt of
respondent court of the records of Civil Case No. 89-5424 but from the date
petitioner was notified of the entry of judgment made by the appellate court.
But we never made any pronouncement on the one- year right of redemption of
petitioner because, in the first place, the foreclosure in this case is judicial, and as
such, the mortgagor has only the equity, not the right of redemption xxx. While it
may be true that under Section 78 of R.A. 337 as amended, otherwise known as the
General Banking Act, a mortgagor of a bank, banking or credit institution, whether
the foreclosure was done judicially or extrajudicially, has a period of one year from
the auction sale within which to redeem the foreclosed property, the question of
whether the Syndicated Management Group, Inc., is a bank or credit institution was
never brought before us squarely, and it is indeed odd and strange that petitioner
would now sarcastically ask a rhetorical question in its motion for
clarification.[3](Underscoring supplied).
Indeed, if petitioner did really act in good faith, it would have ventilated before
the Court of Appeals in CA-G.R. No. 35086 its pretended right under Section 78 of
R.A. No. 337 but it never did so.
At the earliest opportunity, when it filed its answer to the complaint for judicial
foreclosure, petitioner should have averred in its pleading that it was entitled to the
beneficial provisions of Section 78 of R.A. No. 337; but again, petitioner did not make
any such allegation in its answer.
From the said Resolution, petitioner took no further step such that on March
31, 1995, the private respondent filed a Motion for Issuance of Writ of Possession
with the trial court.
During the hearing called on April 21, 1995, the counsel of record of petitioner
entered appearance and asked for time to interpose opposition to the Motion for
Issuance of /Writ of Possession.
On May 2, 1995, in opposition to private respondents Motion for Issuance of
/writ of Possession, petitioner filed a Motion to Compel Private Respondent to Accept
Redemption. It was the first time petitioner ever asserted the right to redeem subject
properties under Section 78 of R.A. No. 337, the General Banking Act; theorizing that
the original mortgagee, being a credit institution, its assignment of the mortgage
credit to petitioner did not remove petitioner from the coverage of Section 78 of R.A.
No. 337. Therefore, it should have the right to redeem subject properties within one
year from registration of the auction sale, theorized the petitioner which concluded
that in view of its right of redemption, the issuance of the titles over subject parcels
of land to the private respondent was irregular and premature.
In its Order of July 21, 1995, the trial court, presided over by Judge Napoleon
Inoturan, denied private respondents motion for a writ of possession, opining that
Section 78 of the General Banking Act was applicable and therefore, the petitioner
had until October 21, 1995 to redeem the said parcels of land, said Order ruled as
follows:
It is undisputed that Intercon is a credit institution from which defendant obtained
a loan secured with a real estate mortgage over four (4) parcels of land. Assuming
that the mortgage debt had not been assigned to plaintiff, there is then no question
that defendant would have a right of redemption in case of foreclosure, judicially or
extrajudicially, pursuant to the above quoted Section 78 of RA 337, as amended.
However, the pivotal issue here is whether or not the defendant lost its right of
redemption by virtue of the assignment of its mortgage debt by Intercon to
plaintiff, which is not a bank or credit institution. The issue is resolved in the
negative. The right of redemption in this case is vested by law and is therefore an
absolute privilege which defendant may not lose even though plaintiff-assignee is
not a bank or credit institution (Tolentino versus Court of Appeals, 106 SCRA
513). Indeed, a contrary ruling will lead to a possible circumvention of Section 78
because all that may be needed to deprive a defaulting mortgagor of his right of
redemption is to assign his mortgage debt from a bank or credit institution to one
which is not. Protection of defaulting mortgagors, which is the avowed policy
behind the provision, would not be achieved if the ruling were
otherwise. Consequently, defendant still possesses its right of redemption which it
may exercise up to October 21, 1995 only, which is one year from the date of
registration of the certificate of sale of subject properties (GSIS versus Iloilo, 175
SCRA 19, citing Limpin versus IAC, 166 SCRA 87).
Since the period to exercise defendants right of redemption has not yet expired, the
cancellation of defendants transfer certificates of title and the issuance of new ones
in lieu thereof in favor of plaintiff are therefore illegal for being premature, thereby
necessitating reconveyance (see Sec. 63 (a) PD 1529, as amended).
WHEREFORE, the Court hereby rules as follows:
(1) The Motion for Issuance of Writ of Possession is hereby denied;
(2) Plaintiff is directed to accept the redemption on or before October 21, 1995 in
an amount computed according to the terms stated in the Writ of Execution dated
July 15, 1994 plus all other related costs and expenses mentioned under Section 78,
RA 337, as amended; and
(3) The Register of Deeds of Valenzuela, Bulacan is directed (a) to reconvey to the
defendant the following titles of the four (4) parcels of land, namely TCT Nos. V-
38878, V-38879, V-38880, and V-38881, now in the name of plaintiff, and (b) to
register the certificate of sale dated October 7, 1994 and the Order confirming the
sale dated February 10, 1995 by a brief memorandum thereof upon the transfer
certificates of title to be issued in the name of defendant, pursuant to Sec. 63 (a) PD
1529, as amended.
The Omnibus Motion dated June 5, 1995, together with the Opposition thereto, is
now deemed resolved.
SO ORDERED.[4]
Private respondent interposed a Motion for Reconsideration seeking the
reversal of the Order but to no avail. In its Order dated September 4, 1995, the trial
court denied the same.
To attack and challenge the aforesaid order of July 21, 1995 and subsequent
Order of September 4, 1995 of the trial court, the private respondent filed with this
court a Petition for Certiorari, Prohibition and Mandamus, docketed as G.R. No.
121893, but absent any special and cogent reason shown for entertaining the same,
the Court referred the petition to the Court of Appeals, for proper determination.
Docketed as G.R. No. 387457 on November 14, 1996, the Court of Appeals gave
due course to the petition and set aside the trial courts Order dated July 21, 1995 and
Order dated September 4, 1995.
In its Resolution of March 11, 1997, the Court of Appeals denied petitioners
Motion for Reconsideration of the Decision promulgated on November 14, 1996 in
CA-G.R. No. 38747.
Undaunted, petitioner has come to this Court via the present petition, placing
reliance on the assignment of errors, that:
I
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT THE
COURT OF APPEALS (TWELFTH DIVISION) IN CA G.R. SP NO. 35086 HAD
RESOLVED WITH FINALITY THAT PETITIONER HUERTA ALBA HAD NO RIGHT OF
REDEMPTION BUT ONLY THE EQUITY OF REDEMPTION.
II
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN IGNORING THAT
PETITIONER HUERTA ALBA POSSESSES THE ONE-YEAR RIGHT OF REDEMPTION
UNDER SECTION 78, R.A. NO. 337 (THE GENERAL BANKING ACT).
III
THE RESPONDENT COURT OF APPEALS ERRED GRAVELY IN HOLDING THAT
PRIVATE RESPONDENT SYNDICATED MANAGEMENT GROUP, INC. IS ENTITLED
TO THE ISSUANCE OF A WRIT OF POSSESSION OVER THE SUBJECT PROPERTY.[5]
 In its comment on the petition, private respondent countered that:
A. THE HONORABLE COURT OF APPEALS CORRECTLY HELD THAT IT RESOLVED
WITH FINALITY IN C.A.-G.R. SP NO. 35086 THAT PETITIONER ONLY HAD THE
RIGHT OF REDEMPTION IN RESPECT OF THE SUBJECT PROPERTIES.
B. THE PETITION IS AN INSIDIOUS AND UNDERHANDED ATTEMPT TO EVADE
THE FINALITY OF VARIOUS DECISIONS, RESOLUTIONS AND ORDERS WHICH
HELD THAT PETITIONER ONLY POSSESSES THE EQUITY OF REDEMPTION IN
RESPECT OF THE SUBJECT PROPERTIES.
C. PETITIONER IS BARRED BY ESTOPPEL FROM BELATEDLY RAISING THE ISSUE
OF ITS ALLEGED RIGHT OF REDEMPTION.
D. IN HOLDING THAT THE PETITIONER HAD THE RIGHT OF REDEMPTION OVER
THE SUBJECT PROPERTIES, THE TRIAL COURT MADE A MOCKERY OF THE LAW
OF THE CASE.[6]
And by way of Reply, petitioner argued, that:
I.
THE COURT OF APPEALS IN CA G.R. SP NO. 35086 COULD NOT HAVE POSSIBLY
RESOLVED THEREIN - WHETHER WITH FINALITY OR OTHERWISE - THE ISSUE OF
PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION UNDER SECTION 78, R.A.
NO. 337.
II.
THERE IS NO ESTOPPEL HERE. PETITIONER HUERTA ALBA INVOKED ITS RIGHT
OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IN TIMELY FASHION, i.e.,
AFTER CONFIRMATION BY THE COURT OF THE FORECLOSURE SALE, AND
WITHIN ONE (1) YEAR FROM THE DATE OF REGISTRATION OF THE CERTIFICATE
OF SALE.
III.
THE PRINCIPLE OF THE LAW OF THE CASE HAS ABSOLUTELY NO BEARING HERE:
(1)
THE RIGHT OF REDEMPTION UNDER SECTION 78, R.A. NO. 337 IS IN FACT
PREDICATED UPON THE FINALITY AND CORRECTNESS OF THE DECISION IN
CIVIL CASE NO. 89-5424.
(2)
THUS, THE RTCS ORDER RECOGNIZING PETITIONER HUERTA ALBAS RIGHT OF
REDEMPTION UNDER SECTION 78, R.A. NO. 37 DOES NOT IN ANY WAY HAVE
THE EFFECT OF AMENDING, MODIFYING, OR SETTING ASIDE THE DECISION IN
CIVIL CASE NO. 89-5424.
The above arguments and counter-arguments advanced relate to the pivotal
issue of whether or not the petitioner has the one-year right of redemption of subject
properties under Section 78 of Republic Act No. 337 otherwise known as the General
Banking Act.
The petition is not visited by merit.
Petitioners assertion of right of redemption under Section 78 of Republic Act
No. 337 is premised on the submission that the Court of Appeals did not resolve such
issue in CA-G.R. SP No. 35086; contending thus:
(1)
BY NO STRETCH OF LOGIC CAN THE 20 MARCH 1995 RESOLUTION IN CA G.R.
SP NO. 35086 BE INTERPRETED TO MEAN THE COURT OF APPEALS HAD
RESOLVED WITH FINALITY THE ISSUE OF WHETHER PETITIONER HUERTA ALBA
HAD THE RIGHT OF REDEMPTION WHEN ALL THAT THE RESOLUTION DID WAS
TO MERELY NOTE THE MOTION FOR CLARIFICATION.
(2)
THE 20 MARCH 1995 RESOLUTION IN CA G.R. SP NO. 35086 IS NOT A FINAL
JUDGMENT, ORDER OR DECREE. IT IS NOT EVEN A JUDGMENT OR ORDER TO
BEGIN WITH. IT ORDERS NOTHING; IT ADJUDICATES NOTHING.
(3)
PETITIONER HUERTA ALBAS RIGHT OF REDEMPTION UNDER SECTION 78, R.A.
NO. 37 WAS NOT AN ISSUE AND WAS NOT IN ISSUE, AND COULD NOT HAVE
POSSIBLY BEEN AN ISSUE NOR IN ISSUE, IN CA G.R. SP NO. 35086.
(4)
 THE 30 SEPTEMBER 1994 DECISION IN CA G.R. SP NO. 35086 HAVING ALREADY
BECOME FINAL EVEN BEFORE THE FILING OF THE MOTION FOR
CLARIFICATION, THE COURT OF APPEALS NO LONGER HAD ANY JURISDICTION
TO ACT OF THE MOTION OR ANY OTHER MATTER IN CA G.R. SP NO. 35086,
EXCEPT TO MERELY NOTE THE MOTION.
II.
IN STARK CONTRAST, THE ISSUE OF PETITIONER HUERTA ALBAS RIGHT OF
REDEMPTION UNDER SECTION 78, R.A. NO. 337 WAS DIRECTLY RAISED AND
JOINED BY THE PARTIES, AND THE SAME DULY RESOLVED BY THE TRIAL
COURT.
III.
THE RIGHT OF REDEMPTION UNDER SECTION 78 OF R.A. NO. 337 IS
MANDATORY AND AUTOMATICALLY EXISTS BY LAW. THE COURTS ARE DUTY-
BOUND TO RECOGNIZE SUCH RIGHT.
IV.
EQUITABLE CONSIDERATIONS WEIGH HEAVILY IN FAVOR OF PETITIONER
HUERTA ALBA, NOT THE LEAST OF WHICH IS THE WELL-SETTLED POLICY OF
THE LAW TO AID RATHER THAN DEFEAT THE RIGHT OF REDEMPTION.
V.
THEREFORE THE 21 JULY 1995 AND 04 SEPTEMBER 1995 ORDERS OF THE TRIAL
COURT ARE VALID AND PROPER IN ACCORDANCE WITH THE MANDATE OF THE
LAW.
From the various decisions, resolutions and orders a quo it can be gleaned that
what petitioner has been adjudged to have was only the equity of redemption over
subject properties.On the distinction between the equity of redemption and right of
redemption, the case of Gregorio Y. Limpin vs. Intermediate Appellate Court,[7] comes
to the fore. Held the Court in the said case:
The equity of redemption is, to be sure, different from and should not be confused
with the right of redemption.
The right of redemption in relation to a mortgage - understood in the sense of a
prerogative to re-acquire mortgaged property after registration of the foreclosure
sale - exists only in the case of the extrajudicial foreclosure of the mortgage. No
such right is recognized in a judicial foreclosure except only where the mortgagee is
the Philippine National Bank or a bank or banking institution.
Where a mortgage is foreclosed extrajudicially, Act 3135 grants to the mortgagor
the right of redemption within one (1) year from the registration of the sheriffs
certificate of foreclosure sale.
Where the foreclosure is judicially effected, however, no equivalent right of
redemption exists. The law declares that a judicial foreclosure sale, when confirmed
by an order of the court, x x shall operate to divest the rights of all the parties to the
action and to vest their rights in the purchaser, subject to such rights of redemption
as may be allowed by law. Such rights exceptionally allowed by law (i.e., even after
confirmation by an order of the court) are those granted by the charter of the
Philippine National Bank (Acts No. 2747 and 2938), and the General Banking Act
(R.A. 337). These laws confer on the mortgagor, his successors in interest or any
judgment creditor of the mortgagor, the right to redeem the property sold on
foreclosure - after confirmation by the court of the foreclosure sale - which right
may be exercised within a period of one (1) year, counted from the date of
registration of the certificate of sale in the Registry of Property.
But, to repeat, no such right of redemption exists in case of judicial foreclosure of a
mortgage if the mortgagee is not the PNB or a bank or banking institution. In such a
case, the foreclosure sale, when confirmed by an order of the court. x x shall
operate to divest the rights of all the parties to the action and to vest their rights in
the purchaser. There then exists only what is known as the equity of
redemption.This is simply the right of the defendant mortgagor to extinguish the
mortgage and retain ownership of the property by paying the secured debt within
the 90-day period after the judgment becomes final, in accordance with Rule 68, or
even after the foreclosure sale but prior to its confirmation.
Section 2, Rule 68 provides that -
x x If upon the trial x x the court shall find the facts set forth in the complaint to be
true, it shall ascertain the amount due to the plaintiff upon the mortgage debt or
obligation, including interest and costs, and shall render judgment for the sum so
found due and order the same to be paid into court within a period of not less
than ninety (90) days from the date of the service of such order, and that in default
of such payment the property be sold to realize the mortgage debt and costs.
This is the mortgagors equity (not right) of redemption which, as above stated, may
be exercised by him even beyond the 90-day period from the date of service of the
order, and even after the foreclosure sale itself, provided it be before the order of
confirmation of the sale. After such order of confirmation, no redemption can be
effected any longer.[8] (Underscoring supplied)
Petitioner failed to seasonably invoke its purported right under Section 78 of
R.A. No. 337.
Petitioner avers in its petition that the Intercom, predecessor in interest of the
private respondent, is a credit institution, such that Section 78 of Republic Act No.
337 should apply in this case. Stated differently, it is the submission of petitioner that
it should be allowed to redeem subject properties within one year from the date of
sale as a result of the foreclosure of the mortgage constituted thereon.
The pivot of inquiry here therefore, is whether the petitioner seasonably
invoked its asserted right under Section 78 of R.A. No. 337 to redeem subject
properties.
Petitioner theorizes that it invoked its "right" in "timely fashion", that is, after
confirmation by the court of the foreclosure sale, and within one (1) year from the
date of registration of the certificate of sale. Indeed, the facts show that it was only
on May 2, 1995 when, in opposition to the Motion for Issuance of Writ of Possession,
did petitioner file a Motion to Compel Private Respondent to Accept Redemption,
invoking for the very first time its alleged right to redeem subject properties under to
Section 78 of R.A. No. 337.
In light of the aforestated facts, it was too late in the day for petitioner to invoke
a right to redeem under Section 78 of R.A. No. 337. Petitioner failed to assert a right
to redeem in several crucial stages of the Proceedings.
For instance, on September 7, 1994, when it filed with the trial court an Ex-part
Motion for Clarification, petitioner failed to allege and prove that private
respondent's predecessor in interest was a credit institution and therefore, Section
78 of R.A. No. 337 was applicable. Petitioner merely asked the trial court to clarify
whether the sale of subject properties was execution sale or judicial foreclosure sale.
So also, when it presented before the trial court an Exception to the Order and
Motion to Set Aside Said Order dated October 13, 1994, petitioner again was silent
on its alleged right under Section 78 of R.A. No. 337, even as it failed to show that
private respondent's predecessor in interest is a credit institution. Petitioner just
argued that the aforementioned Order materially altered the trial court's Decision of
April 30, 1992.
Then, too, nothing was heard from petitioner on its alleged right under Section
78 of R.A. No. 337 and of the predecessor in interest of private respondent as a credit
institution, when the trial court came out with an order on February 10, 1995,
confirming the sale of subject properties in favor of private respondent and declaring
that all pending incidents with respect to the Order dated September 26, 1994 had
become moot and academic.
Similarly, when petitioner filed on February 27, 1995 a Motion for Clarification
with the Court of Appeals, seeking "clarification" of the date of commencement of
the one (1) year redemption period for the subject properties, petitioner never
intimated any alleged right under Section 78 of R.A. No. 337 nor did it invite attention
to its present stance that private respondent's predecessor-in-interest was a credit
institution. Consequently, in its Resolution dated March 20, 1995, the Court of
Appeals ruled on the said motion thus:
But we never made any pronouncement on the one-year right of redemption of
petitioner because, in the first place, the foreclosure in this case is judicial, and as
such, the mortgagor has only the equity, not the right of redemption xxx. While it
may be true that under Section 78 of R.A. 337 as amended, otherwise known as the
General Banking Act, a mortgagor of a bank, banking or credit institution, whether
the foreclosure was done judicially or extrajudicially, has a period of one year from
the auction sale within which to redeem the foreclosed property, the question of
whether the Syndicated Management Group, Inc., is bank or credit institution was
never brought before us squarely, and it is indeed odd and strange that petitioner
would now sarcastically ask a rhetorical question in its motion for
clarification.[9](Underscoring supplied).
If petitioner were really acting in good faith, it would have ventilated before the
Court of Appeals in CA-G.R. No. 35086 its alleged right under Section 78 of R.A. No.
337; but petitioner never did do so.
Indeed, at the earliest opportunity, when it submitted its answer to the
complaint for judicial foreclosure, petitioner should have alleged that it was entitled
to the beneficial provisions of Section 78 of R.A. No. 337 but again, it did not make
any allegation in its answer regarding any right thereunder. It bears stressing that the
applicability of Section 78 of R.A. No. 337 hinges on the factual question of whether
or not private respondents predecessor in interest was a credit institution. As was
held in Limpin, a judicial foreclosure sale, when confirmed by an order of the court,
xx shall operate to divest the rights of all the parties to the action and to vest their
rights in the purchaser, subject to such rights of redemption as may be allowed by
law,[10]which confer on the mortgagor, his successors in interest or any judgment
creditor of the mortgagor, the right to redeem the property sold on foreclosure after
confirmation by the court of the judicial foreclosure sale. Thus, the claim that
petitioner is entitled to the beneficial provisions of Section 78 of R.A. No. 337 - since
private respondents predecessor-in-interest is a credit institution - is in the nature of
a compulsory counterclaim which should have been averred in petitioners answer to
the compliant for judicial foreclosure.
xxx A counterclaim is, most broadly, a cause of action existing in favor of the
defendant against the plaintiff. More narrowly, it is a claim which, if established,
will defeat or in some way qualify a judgment or relief to which plaintiff is otherwise
entitled. It is sometimes defined as any cause of action arising in contract available
against any action also arising in contract and existing at the time of the
commencement of such an action. It is frequently defined by the codes as a cause
of action arising out of the contract or transaction set forth in the complaint as the
foundation of the plaintiffs claim, or connected with the subject of the
action.[11] (underscoring supplied)
The counterclaim is in itself a distinct and independent cause of action, so that
when properly stated as such, the defendant becomes, in respect to the matters
stated by him, an actor, and there are two simultaneous actions pending between
the same parties, wherein each is at the same time both a plaintiff and a
defendant. Counterclaim is an offensive as well as a defensive plea and is not
necessarily confined to the justice of the plaintiffs claim. It represents the right of
the defendant to have the claims of the parties counterbalanced in whole or in
part, and judgment to be entered in excess, if any. A counterclaim stands on the
same footing, and is to be tested by the same rules, as if it were an independent
action.[12] (underscoring supplied)
The very purpose of a counterclaim would have been served had petitioner
alleged in its answer its purported right under Section 78 of R.A. No. 337:
xxx The rules of counterclaim are designed to enable the disposition of
a whole controversy of interested parties conflicting claims, at one time and in one
action, provided all parties be brought before the court and the matter decided
without prejudicing the rights of any party.[13]
The failure of petitioner to seasonably assert its alleged right under Section 78
of R.A. No. 337 precludes it from so doing at this late stage of the case. Estoppel may
be successfully invoked if the party fails to raise the question in the early stages of
the proceedings.[14] Thus, a party to a case who failed to invoked his claim in the main
case, while having the opportunity to do so, will be precluded, subsequently, from
invoking his claim, even if it were true, after the decision has become final, otherwise
the judgment may be reduced to a mockery and the administration of justice may be
placed in disrepute.[15]
All things viewed in proper perspective, it is decisively clear that the trial court
erred in still allowing petitioner to introduce evidence that private respondents
predecessor-in-interest was a credit institution, and to thereafter rule that the
petitioner was entitled to avail of the provisions of Section 78 of R.A. No. 337. In
effect, the trial court permitted the petitioner to accomplish what the latter failed to
do before the Court of Appeals, that is, to invoke its alleged right under Section 78 of
R.A. No. 337 although the Court of Appeals in CA-G.R. no. 35086 already found that
the question of whether the Syndicated Management Council Group, Inc. is a bank or
credit institution was never brought before (the Court of Appeals) squarely. The said
pronouncement by the Court of Appeals unerringly signified that petitioner did not
make a timely assertion of any right under Section 78 of R.A. No. 337 in all the stages
of the proceedings below.
Verily, the petitioner has only itself to blame for not alleging at the outset that
the predecessor-in-interest of the private respondent is a credit institution. Thus,
when the trial court, and the Court of Appeals repeatedly passed upon the issue of
whether or not petitioner had the right of redemption or equity of redemption over
subject properties in the decisions, resolutions and orders, particularly in Civil Case
no. 89-5424, CA-G.R. CV No. 39243, CA-G.R. SP No. 35086, and CA-G.R. SP No. 38747,
it was unmistakable that the petitioner was adjudged to just have the equity of
redemption without any qualification whatsoever, that is, without any right of
redemption allowed by law.
The law of case holds that petitioner has the equity of redemption without any
qualification.
There is, therefore, merit in private respondents contention that to allow
petitioner to belatedly invoke its right under Section 78 of R.A. No. 337 will disturb
the law of the case. However, private respondents statement of what constitutes the
law of the case is not entirely accurate. The law of the case is not simply that the
defendant possesses an equity of redemption. As the Court has stated, the law of the
case holds that petitioner has the equity of the redemption without any qualification
whatsoever, that is, without the right of redemption afforded by Section 78 of R.A.
No. 337. Whether or not the law of the case is erroneous is immaterial, it still remains
the law of the case. A contrary rule will contradict both the letter and spirit of the
rulings of the Court of Appeals in CA-G.R. SP No. 35086, CA-G.R. CV No. 39243, and
CA-G.R. 38747, which clearly saw through the repeated attempts of petitioner to
forestall so simple a matter as making the security given for a just debt to answer for
its payment.
Hence, in conformity with the ruling in Limpin, the sale of the subject properties,
as confirmed by the Order dated February 10, 1995 of the trial court in Civil Case No.
89-5424 operated to divest the rights of all the parties to the action and to vest their
rights in private respondent. There then existed only what is known as the equity of
redemption, which is simply the right of the petitioner to extinguish the mortgage
and retain ownership of the property by paying the secured debt within the 90-day
period after the judgment became final. There being an explicit finding on the part of
the Court of Appeals in its Decision of September 30, 1994 in CA-G.R. No. 35086 - that
the herein petitioner failed to exercise its equity of redemption within the prescribed
period, redemption can no longer be effected. The confirmation of the sale and the
issuance of the transfer certificates of title covering the subject properties to private
respondent was then, in order. The trial court therefore, has the ministerial duty to
place private respondent in the possession of subject properties.
WHEREFORE, the petition is DENIED, and the assailed decision of the Court of
Appeals, declaring null and void the Order dated 21 July 1995 and Order dated 4
September 1997 of the Regional Trial Court of Makati City in Civil Case No. 89-
5424, AFFIRMED. No pronouncement as to costs.
SO ORDERED.