THIRD DIVISION

[G.R. No. 123509. March 14, 2000]

LUCIO ROBLES, EMETERIA ROBLES, ALUDIA ROBLES and EMILIO

ROBLES, petitioners, vs. COURT OF APPEALS, Spouses VIRGILIO SANTOS and BABY
RUTH CRUZ, RURAL BANK OF CARDONA, Inc., HILARIO ROBLES, ALBERTO PALAD
JR. in his capacity as Director of Lands, and JOSE MAULEON in his capacity as District Land
Officer of the Bureau Of Lands, respondents.

DECISION

PANGANIBAN, J.:

To be entitled to the remedy of quieting of title, petitioners must show that they have title to the
real property at issue, and that some deed or proceeding beclouds its validity or efficacy. Buyers
of unregistered real property, especially banks, must exert due diligence in ascertaining the titles
of mortgagors and sellers, lest some innocent parties be prejudiced. Failure to observe such
diligence may amount to bad faith and may result in the nullity of the mortgage, as well as of the
subsequent foreclosure and/or auction sale. Unless the co-ownership is clearly repudiated, a co-
owner cannot, by prescription, acquire title to the shares of the other co-owners. Mesm

The Case

Before us is a Petition for Review under Rule 45, assailing the June 15, 1995 Decision and the
January 15, 1996 Resolution of the Court of Appeals[1] (CA) in CA-GR CV No. 34213.[2] In its
Decision, the CA ruled:[3]

"WHEREFORE, the trial court’s June 17, 1991 decision is REVERSED and SET
ASIDE, and in lieu thereof a new one is hereby entered ordering the dismissal of
the plaintiffs-appellees['] second amended complaint."

Earlier, the trial court had disposed as follows: Sppedä jo

"WHEREFORE, premises considered, judgment is hereby rendered as follows:

1. Declaring free patent Title No. IV-1-010021 issued by the Bureau of

Lands as null and void;

2. Ordering the defendant spouses Vergel Santos and Ruth Santos to

deliver the property subject of this case to the plaintiff; and

3. Declaring the heirs of Silvino Robles as the absolute owner of the land
in controversy."

The January 15, 1996 CA Resolution denied petitioners' Motion for Reconsideration.
 The Facts

The present Petition is rooted in a case for quieting of title before the Regional Trial Court of
Morong, Rizal, filed on March 14, 1988,[4] by Petitioners Lucio Robles, Emeteria Robles, Aludia
Robles and Emilio Robles. The facts were narrated by the trial court in this wise:

"There seems to be no dispute that Leon Robles primitively owned the land
situated in Kay Taga, Lagundi, Morong, Rizal with an area of 9,985 square
meters. He occupied the same openly and adversely. He also declared the same in
his name for taxation purposes as early as 1916 covered by Tax Declaration No.
17865 (Exh. "I") and paid the corresponding taxes thereon (Exh. "B"). When
Leon Robles died, his son Silvino Robles inherited the land, who took possession
of the land, declared it in his name for taxation purposes and paid the taxes
thereon. Rtc-spped

"Upon the death of Silvino Robles in 1942, his widow Maria de la Cruz and his
children inherited the property. They took adverse possession of said property and
paid taxes thereon. The task of cultivat[ing] the land was assigned to plaintiff
Lucio Robles who planted trees and other crops. He also built a nipa hut on the
land. The plaintiffs entrusted the payment of the land taxes to their co-heir and
half-brother, Hilario Robles.

"In 1962, for unknown reasons, the tax declaration of the parcel of land in the
name of Silvino Robles was canceled and transferred to one Exequiel Ballena
(Exh. "19"), father of Andrea Robles who is the wife of defendant Hilario Robles.
Thereafter, Exequiel Ballena secured a loan from the Antipolo Rural Bank, using
the tax declaration as security. Somehow, the tax declaration was transferred [to]
the name of Antipolo Rural Bank (Exh. "17") and later on, was transferred [to] the
name of defendant Hilario Robles and his wife (Exh. "16"). Calrky

"In 1996, Andrea Robles secured a loan from the Cardona Rural Bank, Inc., using
the tax declaration as security. Andrea Robles testified without contradiction that
somebody else, not her husband Hilario Robles, signed the loan papers because
Hilario Robles was working in Marinduque at that time as a carpenter.

"For failure to pay the mortgage debt, foreclosure proceedings were had and
defendant Rural Bank emerged as the highest bidder during the auction sale in
October 1968.

"The spouses Hilario Robles failed to redeem the property and so the tax
declaration was transferred in the name of defendant Rural Bank. On September
25, 1987, defendant Rural Bank sold the same to the Spouses Vergel Santos and
Ruth Santos. Joä spped

"In September 1987, plaintiff discovered the mortgage and attempted to redeem
the property, but was unsuccessful. On May 10,1988, defendant spouses Santos
 took possession of the property in question and was able to secure Free Patent No.
IV-1-010021 in their names."[5]

On the other hand, the Court of Appeals summarized the facts of the case as follows:

"The instant action for quieting of title concerns the parcel of land bounded and
more particularly described as follows: Sd-aad-sc

"A parcel of land located at Kay Taga, Lagundi, Morong, Rizal. Bounded
[i]n the north by the property of Venancio Ablay y Simeon Ablay; [i]n the
east by the property of Veronica Tulak y Dionisio Ablay; [i]n the south by
the property of Simeon Ablay y Dionisio Ablay; and [i]n the west by the
property of Dionisio Ablay y Simeon Ablay, with an area of 9,985 square
meters, more or less, assessed in the year 1935 at P60.00 under Tax
Declaration No. 23219.

"As the heirs of Silvino Robles who, likewise inherited the above-described
parcel from Leon Robles, the siblings Lucio, Emeteria, Aludia and Emilio, all
surnamed Robles, commenced the instant suit with the filing of their March 14,
1988 complaint against Spouses Virgilio and Ruth Santos, as well as the Rural
Bank of Cardona, Inc. Contending that they had been in possession of the land
since 1942, the plaintiff alleged, among other matters, that it was only in
September of 1987 that they came to know of the foreclosure of the real estate
mortgage constituted thereon by the half-brother, Hilario Robles, in favor of
defendant Rural Bank; and that they likewise learned upon further inquiry, that
the latter had already sold the self-same parcel in favor of the Santos spouses (pp.
1-3, orig. rec.). Twice amended to implead Hilario Robles (pp. 76-80, orig. rec)
and, upon subsequent discovery of the issuance of Free Patent No. IV-I-010021 in
favor of the defendant spouses, the Director of Lands and the District Land
Officer of the Bureau of Lands as parties-defendants (pp. 117-121, orig. rec). The
plaintiffs’ complaint sought the following reliefs on the theory that the
encumbrance of their half-brother, constituted on the land, as well as all
proceedings taken subsequent thereto, were null and void, to wit:

"Wherefore, it is respectfully prayed that (a) a preliminary mandatory

injunction be issued forthwith restoring plaintiffs to their possession of
said parcel of land; (b) an order be issued annulling said Free Patent No.
IV-I-010021 in the name of defendants spouses Vergel Santos and Ruth C.
Santos, the deed of sale aforementioned and any tax declaration which
have been issued in the name of defendants; and (c) ordering defendants
jointly and severally, to pay plaintiffs the sum of P10,000.00 as attorney’s
fees.

"Plaintiffs pray for other relief as [may be] just and equitable under the
premises." (pp. 120-121, orig. rec.)
 xxxxxxxxx

"With the termination of the pre-trial stage upon the parties-litigants’ agreement
(p. 203, orig. rec.) the trial court proceeded to try the case on the merits. It
thereafter rendered the challenged June 17, 1991 decision upon the following
findings and conclusions:

"The real estate mortgage allegedly executed by Hilario Robles is not

valid because his signature in the mortgage deed was forged. This fact,
which remains unrebutted, was admitted by Andrea Robles.

"Inasmuch as the real estate mortgage executed allegedly by Hilario

Robles in favor of the defendant Cardona Rural Bank, Inc. was not valid,
it stands to reason that the foreclosure proceedings therein were likewise
not valid. Therefore, the defendant bank did not acquire any right arising
out of the foreclosure proceedings. Consequently, defendant bank could
not have transferred any right to the spouses Santos.

"The fact that the land was covered by a free patent will not help the
defendant Santos any.

"There can be no question that the subject [property was held] in the
concept of owner by Leon Robles since 1916. Likewise, his successor-in-
interest, Silvino Robles, his wife Maria de la Cruz and the plaintiffs
occupied the property openly, continuously and exclusively until they
were ousted from their possession in 1988 by the spouses Vergel and Ruth
Santos.

"Under the circumstances, therefore, and considering that "open, exclusive

and undisputed possession of alienable public lands for the period
prescribed by law (30 years), creates the legal fiction whereby the land,
upon completion of the requisite period, ipso jure and without the need of
judicial or other action, ceases to be public land and becomes private
property. Possession of public land x x x which is [of] the character and
duration prescribed by the statute is the equivalent of an express grant
from the State, considering the dictum of the statute itself[:]; "The
possessor x x x shall be conclusively presumed to have performed all the
conditions essential to a government grant and shall be entitled to a
certificate of title x x x." No proof is admissible to overcome a conclusive
presumption[,] and confirmation proceedings would be a little more than a
formality, at the most limited to ascertaining whether the possession
claimed is of the required character and length of time. Registration
thereunder would not confer title, but simply recognize a title already
vested. (Cruz v. IAC, G.R. No. 75042, November 29, 1988) The land in
question has become private land.
 "Consequently, the issuance of [a] free patent title to the Spouses Vergel
Santos and Ruth C. Santos is not valid because at the time the property
subject of this case was already private land, the Bureau of Lands having
no jurisdiction to dispose of the same." (pp. 257-259, orig. rec.)"

"Dissatisfied with the foregoing decision, the Santos spouses and the defendant
Rural Bank jointly filed their July 6, 1991 Notice of Appeal (p.260, orig. rec.) x x
x."[6]

Ruling of the Court of Appeals

In reversing the trial court, the Court of Appeals held that petitioners no longer had any title to
the subject property at the time they instituted the Complaint for quieting of title. The CA
ratiocinated as follows: MisÓ spped

"As correctly urged by the appellants, the plaintiff-appellees no longer had any
title to the property at the time of the institution of the instant complaint. (pp. 25-
27, rec.) The latter’s claim of continuous possession notwithstanding (pp. 3-5,
TSN, July 5, 1990; p. 12, TSN, July 12, 1990), the aforesaid loss of title is amply
evidenced by the subsequent declaration of the subject realty for taxation
purposes not only in the name of Exequiel Ballena (Exhibits "1" and "2", pp. 23-
24, orig. rec.) but also in the name of the Rural Bank of Antipolo (Exhibit 17, vol.
II, orig. rec.). On the theory that tax declarations can be evincive of the transfer of
a parcel of land or a portion thereof (Gacos v. Court of Appeals, 212 SCRA 214),
the court a quo clearly erred in simply brushing aside the apparent transfers
[which] the land in litigation had undergone. Whether legal or equitable, it cannot,
under the circumstances, be gainsaid that the plaintiff-appellees no longer had any
title to speak of when Exequiel Ballena executed the November 7, 1966 Deed of
Absolute Sale transferring the land in favor of the spouses Hilario and Andrea
Robles (Exhibit "3", p. 25, orig. rec.)

"Even on the theory that the plaintiffs-appellees and their half-brother, Hilario
Robles, are co-owners of the land left behind by their common father, Silvino
Robles, such title would still be effectively discounted by what could well serve
as the latter’s acts of repudiation of the co-ownership, i.e., his possession (p. 22,
TSN, November 15, 1990) and declaration thereof for taxation purposes in his
own name (Exhibit "4", p. 26, orig. rec.). In view of the plaintiffs-appellees’
inaction for more than twenty (20) years from the time the subject realty was
transferred in favor of Hilario Robles, the appellants correctly maintain that
prescription had already set in. While it may be readily conceded that an action to
quiet title to property in the possession of the plaintiff is imprescriptible (Almanza
vs. Arguelles, 156 SCRA 718; Coronel vs. Intermediate Appellate Court, 155
SCRA 270; Caragay-Layno vs. Court of Appeals, 133 SCRA 718; Charon
Enterprises vs. Court of Appeals, 124 SCRA 784; Faja vs. Court of Appeals, 75
SCRA 441; Burton vs. Gabar, 55 SCRA 4999), it equally bears emphasis that a
co-owner or, for that matter, the said co-owner[']s successors-in-interest who
occupy the community property other than as co-owner[s] can claim prescription
as against the other co-owners (De Guzman vs. Austria, 148 SCRA 75; Ramos vs.
Ramos, 45 Phil. 362; Africa vs. Africa, 42 Phil. 902; Bargayo vs. Camumot, 40
Phil. 857; De Castro vs. Echarri, 20 Phil. 23). If only in this latter sense, the
appellants correctly argue that the plaintiffs-appellees have lost their cause of
action by prescription.

"Over and above the foregoing considerations, the court a quo gravely erred in
invalidating the real estate mortgage constituted on the land solely on the basis of
Andrea Robles’ testimony that her husband’s signature thereon was forged (p.
257, orig. rec.),

xxx xxx xxx

"In according to the foregoing testimony x x x credibility which, while admittedly

unrebutted, was altogether uncorroborated, the trial court lost sight of the fact that
the assailed deed of real estate mortgage (Exhibit "5", Vol. II, orig. rec.) is a
public document, the acknowledgment of which is a prima facie evidence of its
due execution (Chua vs. Court of Appeals, 206 SCRA 339). As such, it retains the
presumption of validity in the absence of a full, clear and convincing evidence to
overcome such presumption (Agdeppa vs. Ibe, 220 SCRA 584). Maniks

"The foregoing principles take even more greater [sic] when it is, moreover, borne
in mind that Hilario Robles made the following admissions in his March 8, 1989
answer, viz:

"3. The complaint filed against herein answering defendant has no legal
basis considering that as the lawful owner of the subject real property,
defendant Hilario Robles has the right to mortgage the said real property
and could dispose the same in whatever manner he wishe[s] to do." (p. 96,
orig. rec.)

"Appropriately underscored by the appellants, the foregoing admission is binding

against Hilario [Robles]. Judicial admissions, verbal or written, made by the
parties in the pleadings or in the course of the trial or other proceedings in the
same case are conclusive, no evidence being required to prove the same. They
cannot be contradicted unless shown to have been made through [a] palpable
mistake or [unless] no such admission was actually made (Philippine American
General Insurance, Inc. vs. Sweet Lines, Inc., 212 SCRA 194).

"It does not help the plaintiffs-appellees’ cause any that, aside from complying
with the requirements for the foreclosure of the subject real estate mortgage
(Exhibits "6", "7", "8" and "10", Volume II[)], the appellant Rural Bank had not
only relented to the mortgagor’s request to postpone the (Exhibit "g", Vol. II,
orig. rec.) but had likewise granted the latter’s request for an extension of the
redemption period therefor (Exhibits "11" and "12", pp. 35-36, orig. rec.).
 Without going into minute detail in discussing the Santos spouses’ rights as
purchasers for value and in good faith (Exhibit "21", Vol. II, orig. rec.), the
mortgagor and the plaintiffs’-appellees cannot now be heard to challenge the
validity of the sale of the land after admittedly failing to redeem the same within
the extension the appellant Rural Bank granted (pp. 10-11, TSN, November 15,
1990).

"Being dependent on the supposed invalidity of the constitution and foreclosure of

the subject real estate mortgage, the plaintiffs-appellees’ attack upon x x x Free
Patent No. IV-I must necessarily fail. The trial court, therefore, misread, and
ignored the evidence o[n] record, to come up with erroneous conclusion." Manikx

Contending that such ruling was contrary to law and jurisprudence, Petitioners Lucio, Emeteria,
Aludia and Emilio -- all surnamed Robles -- filed this Petition for Review.[7]

The Assigned Error

Petitioners ascribe the following error to the respondent court:

"Respondent Court of Appeals grievously erred in ruling that with the transfers of
the tax declaration over the parcel of land in question from Silvino Robles to
Exequiel Ballena, then to the Rural Bank of Antipolo, then to Respondent Hilario
Robles, then to Respondent Rural Bank of Cardona Inc., and then finally to
Respondent Spouses Santos, petitioners, who by themselves and their
predecessors in interest have been in open, actual and adverse possession of said
parcel of land since 1916 up to their forced removal therefrom in 1988, have lost
their title to said property by prescription to their half-brother, Respondent Hilario
Robles, and then finally, to Respondent Spouses Santos."[8]

For a better understanding of the case, the above issue will be broken down into three
points: first, the nature of the remedy of quieting of title; second, the validity of the real estate
mortgage; and third, the efficacy of the free patent granted to the Santos spouses. Sppedâ

First Issue: Quieting of Title

Article 476 of the Civil Code provides:

"Whenever there is cloud on title to real property or any interest therein, by reason
of any instrument, record, claim, encumbrance or proceeding which is apparently
valid or effective but is in truth and in fact invalid, ineffective, voidable or
unenforceable, and may be prejudicial to said title, an action may be brought to
remove such cloud or to quiet title.

"An action may also be brought to prevent a cloud from being cast upon title to
real property or any interest therein."
Based on the above definition, an action to quiet title is a common-law remedy for the removal
of any cloud or doubt or uncertainty on the title to real property.[9] It is essential for the plaintiff
or complainant to have a legal or an equitable title to or interest in the real property which is the
subject matter of the action.[10] Also, the deed, claim, encumbrance or proceeding that is being
alleged as a cloud on plaintiff’s title must be shown to be in fact invalid or inoperative despite
its prima facie appearance of validity or legal efficacy.[11]

That there is an instrument or a document which, on its face, is valid and efficacious is clear in
the present case. Petitioners allege that their title as owners and possessors of the disputed
property is clouded by the tax declaration and, subsequently, the free patent thereto granted to
Spouses Vergel and Ruth Santos. The more important question to be resolved, however, is
whether the petitioners have the appropriate title that will entitle them to avail themselves of the
remedy of quieting of title. Nexold

Petitioners anchor their claim to the disputed property on their continued and open occupation
and possession as owners thereof. They allege that they inherited it from their father, Silvino,
who in turn had inherited it from his father, Leon. They maintain that after their father’s death,
they agreed among themselves that Petitioner Lucio Robles would be tending and cultivating it
for everyone, and that their half-brother Hilario would be paying the land taxes.

Petitioners insist that they were not aware that from 1962 until 1987, the subject property had
been declared in the names of Exequiel Ballena, the Rural Bank of Antipolo, Hilario Robles, the
Rural Bank of Cardona, Inc., and finally, Spouses Vergel and Ruth Santos. Maintaining that as
co-owners of the subject property, they did not agree to the real estate mortgage constituted on it,
petitioners insist that their shares therein should not have been prejudiced by Hilario’s
actions. Miso

On the other hand, Private Respondents Vergel and Ruth Santos trace their claim to the subject
property to Exequiel Ballena, who had purportedly sold it to Hilario and Andrea Robles.
According to private respondents, the Robles spouses then mortgaged it to the Rural Bank of
Cardona, Inc. -- not as co-owners but as absolute owners -- in order to secure an agricultural loan
worth P2,000. Upon their failure to pay their indebtedness, the mortgage was foreclosed and the
property sold to the bank as the highest bidder. Thereafter, private respondents purchased the
property from the bank. Sppedjo

Undisputed is the fact that the land had previously been occupied by Leon and later by Silvino
Robles, petitioners’ predecessors-in-interest, as evidenced by the different tax declarations issued
in their names. Also undisputed is the fact that the petitioners continued occupying and
possessing the land from the death of Silvino in 1942 until they were allegedly ousted therefrom
in 1988. In 1962, the subject property was declared in the name of Exequiel for taxation
purposes. On September 30, 1965, it was again declared in the same name; on October 28, 1965,
in the name of the Rural Bank of Antipolo; on November 7, 1966, in the name of Hilario and
Andrea; and thereafter, in the name of the Rural Bank of Cardona and, finally, in the name of the
Santos spouses.
Ostensibly, the Court of Appeals failed to consider irregularities in the transactions involving the
disputed property. First, while it was declared in the name of Exequiel in 1962, there was no
instrument or deed of conveyance evidencing its transfer from the heirs of Silvino to him. This
fact is important, considering that the petitioners are alleging continued possession of the
property. Second, Exequiel was the father-in-law of Hilario, to whom petitioners had entrusted
the payment of the land taxes. Third, considering that the subject property had been mortgaged
by Exequiel to the Rural Bank of Antipolo, and that it was foreclosed and in fact declared in the
bank’s name in 1965, why was he able to sell it to Spouses Hilario and Andrea in 1966? Lastly,
inasmuch as it was an unregistered parcel of land, the Rural Bank of Cardona, Inc., did not
observe due diligence in determining Hilario’s title thereto. Jospped

The failure to show the indubitable title of Exequiel to the property in question is vital to the
resolution of the present Petition. It was from him that Hilario had allegedly derived his title
thereto as owner, an allegation which thereby enabled him to mortgage it to the Rural Bank of
Cardona. The occupation and the possession thereof by the petitioners and their predecessors-in-
interest until 1962 was not disputed, and Exequiel’s acquisition of the said property by
prescription was not alleged. Thus, the deed of conveyance purportedly evidencing the transfer
of ownership and possession from the heirs of Silvino to Exequiel should have been presented as
the best proof of that transfer. No such document was presented, however. Scmis

Therefore, there is merit to the contention of the petitioners that Hilario mortgaged the disputed
property to the Rural Bank of Cardona in his capacity as a mere co-owner thereof. Clearly, the
said transaction did not divest them of title to the property at the time of the institution of the
Complaint for quieting of title.

Contrary to the disquisition of the Court of Appeals, Hilario effected no clear and evident
repudiation of the co-ownership. It is a fundamental principle that a co-owner cannot acquire by
prescription the share of the other co-owners, absent any clear repudiation of the co-ownership.
In order that the title may prescribe in favor of a co-owner, the following requisites must concur:
(1) the co-owner has performed unequivocal acts of repudiation amounting to an ouster of the
other co-owners; (2) such positive acts of repudiation have been made known to the other co-
owners; and (3) the evidence thereof is clear and convincing.[12]

In the present case, Hilario did not have possession of the subject property; neither did he
exclude the petitioners from the use and the enjoyment thereof, as they had indisputably shared
in its fruits.[13] Likewise, his act of entering into a mortgage contract with the bank cannot be
construed to be a repudiation of the co-ownership. As absolute owner of his undivided interest in
the land, he had the right to alienate his share, as he in fact did.[14] Neither should his payment of
land taxes in his name, as agreed upon by the co-owners, be construed as a repudiation of the co-
ownership. The assertion that the declaration of ownership was tantamount to repudiation was
belied by the continued occupation and possession of the disputed property by the petitioners
as owners. MisÓ sc

Second Issue: Validity of the Real Estate Mortgage

In a real estate mortgage contract, it is essential that the mortgagor be the absolute owner of the
property to be mortgaged; otherwise, the mortgage is void.[15] In the present case, it is apparent
that Hilario Robles was not the absolute owner of the entire subject property; and that the Rural
Bank of Cardona, Inc., in not fully ascertaining his title thereto, failed to observe due diligence
and, as such, was a mortgagee in bad faith.

First, the bank was utterly remiss in its duty to establish who the true owners and possessors of
the subject property were. It acted with precipitate haste in approving the Robles spouses’ loan
application, as well as the real estate mortgage covering the disputed parcel of land.[16] Had it
been more circumspect and assiduous, it would have discovered that the said property was in fact
being occupied by the petitioners, who were tending and cultivating it.

Second, the bank should not have relied solely on the Deed of Sale purportedly showing that the
ownership of the disputed property had been transferred from Exequiel Ballena to the Robles
spouses, or that it had subsequently been declared in the name of Hilario. Because it was dealing
with unregistered land, and the circumstances surrounding the transaction between Hilario and
his father-in-law Exequiel were suspicious, the bank should have exerted more effort to fully
determine the title of the Robleses. Rural Bank of Compostela v. Court of Appeals[17] invalidated
a real estate mortgage after a finding that the bank had not been in good faith. The Court
explained: "The rule that persons dealing with registered lands can rely solely on the certificate
of title does not apply to banks." In Tomas v. Tomas, the Court held: Sc-slx

"x x x. Banks, indeed, should exercise more care and prudence in dealing even
with registered lands, than private individuals, for their business is one affected
with public interest, keeping in trust money belonging to their depositors, which
they should guard against loss by not committing any act of negligence which
amounts to lack of good faith by which they would be denied the protective
mantle of land registration statute, Act 496, extended only to purchasers for value
and in good faith, as well as to mortgagees of the same character and description.
x x x."[18]

Lastly, the Court likewise finds it unusual that, notwithstanding the bank’s insistence that it had
become the owner of the subject property and had paid the land taxes thereon, the petitioners
continued occupying it and harvesting the fruits therefrom.[19]

Considering that Hilario can be deemed to have mortgaged the disputed property not as absolute
owner but only as a co-owner, he can be adjudged to have disposed to the Rural Bank of
Cardona, Inc., only his undivided share therein. The said bank, being the immediate predecessor
of the Santos spouses, was a mortgagee in bad faith. Thus, justice and equity mandate the
entitlement of the Santos spouses, who merely stepped into the shoes of the bank, only to what
legally pertains to the latter -- Hilario’s share in the disputed property. Missc

Third Issue: Efficacy of Free Patent Grant

Petitioners repeatedly insist that the disputed property belongs to them by private ownership and,
as such, it could not have been awarded to the Santos spouses by free patent. They allege that
they possessed it in the concept of owners -- openly, peacefully, publicly and continuously as
early as 1916 until they were forcibly ousted therefrom in 1988. They likewise contend that they
cultivated it and harvested its fruits. Lucio Robles testified:

"xxx xxx xxx

Q By the way, why do you know this parcel of land?

A Because before my father died, he showed me all the documents.

Q Before the death of your father, who was the owner of this parcel of land?

A My father, sir. Spped

Q How did your father acquire this parcel of land?

A My father knew that it [was] by inheritance, sir.

Q From whom?

A From his father, Leon Robles, sir.

Q And do you know also [from] whom Leon Robles acquired this land?

A It was inherited from his father, sir.

Q What is the nature of this parcel of land?

A It’s an agricultural land, sir,

Q Now, at the time of the death of your father, this land was planted with what
crops?

A Mango trees, santol trees, and I was the one who planted those trees, sir.

Q When did you plant those trees?

A Before the death of my father, sir. M-issdaa

Q Now, after the death of your father, who cultivated this parcel of land?

A I took charge of the land after the death of my father, sir.

Q Up to when?

A Up to the present, sir, after this case was already filed."[20]

The preceding claim is an assertion that the subject property is private land. The petitioners do
not concede, and the records do not show, that it was ever an alienable land of the public domain.
They allege private ownership thereof, as evidenced by their testimonies and the tax declarations
issued in the names of their predecessors-in-interest. It must be noted that while their claim was
not corroborated by other witnesses, it was not controverted by the other parties, either. Kycalr

Carlos Dolores insisted that the Rural Bank of Cardona, Inc., of which he was the manager, had
acquired and possessed the subject property. He did not, however, give any reason why the
petitioners had continued occupying it, even as he admitted on the stand that he had visited
it twice.[21]

In the light of their open, continuous, exclusive and notorious possession and occupation of the
land, petitioners are "deemed to have acquired, by operation of law, a right to a grant, a
government grant, without the necessity of a certificate of title being issued."[22] The land was
"segregated from the public domain." Accordingly, the director of lands had no authority to issue
a free patent thereto in favor of another person. Verily, jurisprudence holds that a free patent
covering private land is null and void.[23]

Worth quoting is the disquisition of the Court in Agne v. Director of Lands,[24] in which it held
that a riparian owner presently in possession had a better right over an abandoned river bed than
had a registered owner by virtue of a free patent.

"Under the provisions of Act 2874 pursuant to which the title of private
respondents’ predecessor-in-interest was issued, the President of the Philippines,
or his alter ego, the Director of Lands, has no authority to grant a free patent for
land that has ceased to be a public land and has passed to private ownership and
a title so issued is null and void. The nullity arises, not from fraud or deceit, but
from the fact that the land is not under the jurisdiction of the Bureau of Lands.
The jurisdiction of the Director of Lands is limited only to public lands and does
not cover lands publicly owned. The purpose of the Legislature in adopting the
former Public Land Act, Act No. 2874, was and is to limit its application to lands
of the public domain, and lands held in private ownership are not included therein
and are not affected in any manner whatsoever thereby. Land held in freehold or
fee title, or of private ownership, constitutes no part of the public domain, and
cannot possibly come within the purview of said act 2874, inasmuch as the
‘subject’ of such freehold or private land is not embraced in any manner in the
title of the Act and the same is excluded from the provisions of the text
thereof. Kyle

"We reiterate that private ownership of land is not affected by the issuance of the
free patent over the same land because the Public Land Act applies only to lands
of the public domain. Only public land may be disposed of by the Director of
Lands. Since as early as 1920, the land in dispute was already under the private
ownership of herein petitioners and no longer a part of the lands of the public
domain, the same could not have been the subject matter of a free patent. The
patentee and his successors-in-interest acquired no right or title to said land.
 Necessarily, Free Patent No. 23263 issued to Herminigildo Agpoon is null and
void and the subsequent titles issued pursuant thereto cannot become final and
indefeasible. Hence we ruled in Director of Lands v. Sicsican, et al. that if at the
time the free patents were issued in 1953 the land covered therein were already
private property of another and, therefore, not part of the disposable land of the
public domain, then applicants patentees acquired no right or title to the land.

"Now, a certificate of title fraudulently secured is null and void ab initio if the
fraud consisted in misrepresenting that the land is part of the public domain,
although it is not. As earlier stated, the nullity arises, not from the fraud or deceit,
but from the fact that the land is not under the jurisdiction of the Bureau of Lands.
Being null and void, the free patent granted and the subsequent titles produce no
legal effect whatsoever. Quod nullum est, nullum producit effectum.

"A free patent which purports to convey land to which the government did not
have any title at the time of its issuance does not vest any title in the patentee as
against the true owner. The Court has previously held that the Land Registration
Act and the Cadastral Act do not give anybody who resorts to the provisions
thereof a better title than what he really and lawfully has. Exsm

xxx xxx xxx

"We have, therefore, to arrive at the unavoidable conclusion that the title of
herein petitioners over the land in dispute is superior to the title of the registered
owner which is a total nullity. The long and continued possession of petitioners
under a valid claim of title cannot be defeated by the claim of a registered owner
whose title is defective from the beginning."

The Santos spouses argue that petitioners do not have the requisite personality to question the
free patent granted them, inasmuch as "it is a well-settled rule that actions to nullify free patents
should be filed by the Office of the Solicitor General at the behest of the Director of Lands."[25]

Private respondents’ reliance on this doctrine is misplaced. Indeed, the Court held in Peltan
Development, Inc. v. Court of Appeals[26] that only the solicitor general could file an action for
the cancellation of a free patent. Ruling that the private respondents, who were applicants for a
free patent, were not the proper parties in an action to cancel the transfer certificates covering the
parcel of land that was the subject of their application, the Court ratiocinated thus: Sl-xm-is

"The Court also holds that private respondents are not the proper parties to initiate
the present suit. The complaint, praying as it did for the cancellation of the
transfer certificates of title of petitioners on the ground that they were derived
from a "spurious" OCT No. 4216, assailed in effect the validity of said title.
While private respondents did not pray for the reversion of the land to the
government, we agree with the petitioners that the prayer in the complaint will
have the same result of reverting the land to the government under the Regalian
 Doctrine. Gabila v. Barinaga[27] ruled that only the government is entitled to this
relief. x x x."

Because the cancellation of the free patent as prayed for by the private respondents
in Peltan would revert the property in question to the public domain, the ultimate beneficiary
would be the government, which can be represented by the solicitor general only. Therefore, the
real party-in-interest is the government, not the private respondents.

This ruling does not, however, apply to the present case. While the private respondents
in Peltan recognized that the disputed property was part of the public domain when they applied
for free patent,[28] herein petitioners asserted and proved private ownership over the disputed
parcel of land by virtue of their open, continued and exclusive possession thereof since
1916. Msesm

Neither does the present case call for the reversion of the disputed property to the State. By
asking for the nullification of the free patent granted to the Santos spouses, the petitioners
are claiming the property which, they contend, rightfully belongs to them.

Indeed, the same issue was resolved by this Court in Heirs of Marciano Nagano v. Court of
Appeals.[29] In that case, the trial court dismissed a Complaint seeking the declaration of nullity
of an Original Certificate of Title issued pursuant to a free patent, reasoning that the action
should have been instituted by the solicitor general. In reversing the trial court, the Supreme
Court held: Sl-xsc

"It is settled that a Free Patent issued over private land is null and void, and
produces no legal effect whatsoever. Quod nullum est, nullum producit effectum.
Moreover, private respondents’ claim of open, peaceful, continuous and adverse
possession of the 2,250 square meter portion since 1920, and its illegal inclusion
in the Free Patent of petitioners and in their original certificate of title, gave
private respondents a cause of action for quieting of title which is
imprescriptible." ScmisÓ

In any event, the Office of the Solicitor General was afforded an opportunity to express its
position in these proceedings. But it manifested that it would not file a memorandum, because
"this case involves purely private interests."[30]

The foregoing considered, we sustain the contention of petitioners that the free patent granted to
the Santos spouses is void. It is apparent that they are claiming ownership of the disputed
property on the basis of their possession thereof in the concept of owners -- openly, peacefully,
publicly, continuously and adversely since 1916. Because they and their predecessors-in-interest
have occupied, possessed and cultivated it as owners for more than thirty years,[31] only one
conclusion can be drawn -- it has become private land and is therefore beyond the authority of
the director of lands. Misspped

Epilogue
We recognize that both the petitioners and the Santos spouses fell victim to the dubious
transaction between Spouses Hilario and Andrea Robles and the Rural Bank of Cardona, Inc.
However, justice and equity mandate that we declare Petitioners Lucio, Emerita, Aludia and
Emilio Robles to have the requisite title essential to their suit for quieting of title. Considering
the circumstances peculiar to this complicated problem, the Court finds this conclusion the
logical and just solution. Scä

The claim that petitioners were guilty of laches in not asserting their rights as owners of the
property should be viewed in the light of the fact that they thought their brother was paying the
requisite taxes for them, and more important, the fact that they continued cultivating it and
harvesting and gaining from its fruits.

From another viewpoint, it can even be said that it was the Rural Bank of Cardona, Inc., which
was guilty of laches because, granting that it had acquired the subject property legally, it failed to
enforce its rights as owner. It was oblivious to the petitioners’ continued occupation, cultivation
and possession thereof. Considering that they had possessed the property ingood faith for more
than ten years, it can even be argued that they thus regained it by acquisitive prescription. In any
case, laches is a remedy in equity, and considering the circumstances in this case, the petitioners
cannot be held guilty of it. Jurismis

In sum, the real estate mortgage contract covering the disputed property – a contract executed
between Spouses Hilario and Andrea on the one hand and the Rural Bank of Cardona, Inc., on
the other -- is hereby declared null and void insofar as it prejudiced the shares of Petitioners
Lucio, Emerita, Aludia and Emilio Robles; it is valid as to Hilario Robles’ share
therein. Consequently, the sale of the subject property to the Santos spouses is valid insofar as it
pertained to his share only. Likewise declared null and void is Free Patent No. IV-1-010021
issued by the Bureau of Lands covering the subject property. Jjjuris

WHEREFORE, the Petition is hereby GRANTED. The assailed Decision is REVERSED and SET

ASIDE. Except as modified by the last paragraph of this Decision, the trial court’s Decision
is REINSTATED. No costs.

SO ORDERED.

Melo, (Chairman), Vitug, Purisima, and Gonzaga-Reyes, JJ., concur.

ROBLES V. CA
328 SCRA 97
FACTS:
An action for quieting of title was filed by petitioner against Santos. The subject land was
inherited from their father. Their brother was able to mortgage the land and upon failure to pay,
the REM was foreclosed. They later knew about the REM and foreclosure and subsequent sale to
Santos.
HELD:
A co-owner cannot acquire by prescription the share of other co-owners absent any clear
indication of repudiation of co-ownership. An action to quiet title is a common law remedy for
the removal of any cloud or doubt or uncertainty on the title to real property. 
G.R. No. L-40018 December 15, 1975

NORTHERN MOTORS, INC., petitioner, 

vs.
HON. JORGE R. COQUIA, etc., et al., respondents, FILINVEST CREDIT
CORPORATION, intervenor.

RESOLUTION

AQUINO, J.:

Respondent Honesto Ong and City Sheriff of Manila filed a motion for the reconsideration of
this Court's resolution of August 29, 1975. In that resolution, it was held that the lien of Northern
Motors, Inc., as chattel mortgagee, over certain taxicabs is superior to the levy made on the said
cabs by Honesto Ong, the assignee of the unsecured judgment creditor of the chattel mortgagor,
Manila Yellow Taxicab Co., Inc.

On the other hand, Northern Motors, Inc. in its motion for the partial reconsideration of the
same August 29 resolution, prayed for the reversal of the lower court's orders cancelling the
bond filed by Filwriters Guaranty Assurance Corporation. Northern Motors, Inc. further prayed
that the sheriff should be required to deliver to it the proceeds of the execution sale of the
mortgaged taxicabs without deducting the expenses of execution.

1. Respondents' motion for reconsideration. — Honesto Ong in his motion invokes his supposed
"legal and equity status" vis-a-vis the mortgaged taxicabs. He contends that his only recourse
was to levy upon the taxicabs which were in the possession of the judgment debtor, Manila
Yellow Taxicab Co. Inc., whereas, Northern Motors, Inc., as unpaid seller and mortgagee, "has
still an independent legal remedy" against the mortgagor for the recovery of the unpaid balance
of the price.

That contention is not a justification for setting aside the holding that Ong had no right to levy
upon the mortgaged taxicabs and that he could have levied only upon the mortgagor's equity of
redemption. The essence of the chattel mortgage is that the mortgaged chattels should answer for
the mortgage credit and not for the judgment credit of the mortgagor's unsecured creditor. The
mortgagee is not obligated to file an "independent action" for the enforcement of his credit. To
require him to do so would be a nullification of his lien and would defeat the purpose of the
chattel mortgage which is to give him preference over the mortgaged chattels for the satisfaction
of his credit. (See art. 2087, Civil Code).

It is relevant to note that intervenor Filinvest Credit Corporation, the assignee of a portion of the
chattel mortgage credit, realized that to vindicate its claim by independent action would be
illusory. For that pragmatic reason, it was constrained to enter into a compromise with Honesto
Ong by agreeing to pay him P145,000. That amount was characterized by Northern Motors, Inc.
as the "ransom" for the taxicabs levied upon by the sheriff at the behest of Honesto Ong.

Honesto Ong's theory that Manila Yellow Taxicab's breach of the chattel mortgage should not
affect him because he is not privy of such contract is untenable. The registration of the chattel
mortgage is an effective and binding notice to him of its existence (Ong Liong Tiak vs. Luneta
Motor Company, 66 Phil 459). The mortgage creates a real right (derecho real, jus in re or jus
ad rem, XI Enciclopedia Juridica Española 294) or a lien which, being recorded, follows the
chattel wherever it goes.

Honesto Ong's contention that Northern Motors, Inc., was negligent because it did not sue the
sheriff within the 120-day period provided for in section 17, Rule 39 of the Rules of Court is not
correct. Such action was filed on April 14, 1975 in the Court of First Instance of Rizal, Pasig
Branch XIII, in Civil Case No. 21065 entitled "Northern Motors, Inc. vs. Filwriters Guaranty
Assurance Corporation, et al.". However, instead of Honesto Ong, his assignor, Tropical
Commercial Corporation, was impleaded as a defendant therein. That might explain his
unawareness of the pendency of such action.

The other arguments of Honesto Ong in his motion may be boiled down to the proposition that
the levy made by mortgagor's judgment creditor against the chattel mortgagor should prevail
over the chattel mortgage credit. That proposition is devoid of any legal sanction and is glaringly
contrary to the nature of a chattel mortgage. To uphold that contention is to destroy the essence
of chattel mortgage as a paramount encumbrance on the mortgaged chattel.

Respondent Ong admits "that the mortgagee's right to the mortgaged property is superior to that
of the judgment creditor". But he contends that the rights of the purchasers of the cars at the
execution sale should be respected. He reasons out they were not parties to the mortgage and that
they acquired the cars prior to the mortgagee's assertion of its rights thereto.

That contention is not well-taken. The third-party claim filed by Northern Motors, Inc. should
have alerted the purchasers to the risk which they were taking when they took part in the auction
sale. Moreover, at an execution sale the buyers acquire only the right of the judgment debtor
which in this case was a mere right or equity of redemption. The sale did not extinguish the pre-
existing mortgage lien (See sec. 25, Rule 39, Rules of Court; Potenciano vs. Dineros and
Provincial Sheriff of Rizal, 97 Phil, 196; Lara vs. Bayona, 97 Phil. 951; Hacbang vs. Leyte
Autobus Co., Inc., L-7907, May 30, 1963, 8 SCRA 103).

Some arguments adduced by Honesto Ong in his motion were intended to protect the interests of
the mortgagor, Manila Yellow Taxicab Co., Inc., which he erroneously characterized as a
"respondent" (it is not a respondent in this case). Ong argues that the proceeds of the execution
sale, which was held on December 18, 1974, should be delivered to Northern Motors, Inc. "only
to such extent as has exceeded the amount paid by respondent Manila Yellow Taxicab to"
Northern Motors, Inc. That argument is not clear. Ong probably means that the installments
already paid by Manila Yellow Taxicab Co., Inc. to Northern Motors, Inc. should be deducted
from the proceeds of the execution sale. If that is the point which Ong is trying to put across, and
it is something which does not directly affect him, then, that matter should be raised by Manila
Yellow Taxicab Co., Inc. in the replevin case, Civil Case No. 20536 of the Court of First
Instance of Rizal, Pasig Branch VI, entitled "Northern Motors, Inc. versus Manila Yellow
Taxicab Co., Inc. et al."

Ong's contention, that the writ of execution, which was enforced against the seven taxicabs
(whose sale at public auction was stopped) should have precedence over the mortgage lien,
cannot be sustained. Those cabs cannot be sold at an execution sale because, as explained in the
resolution under reconsideration, the levy thereon was wrongful.

The motion for reconsideration of Ong and the sheriff should be denied.

2. Petitioners motion for partial reconsideration. — The lower court in its order of January 3,
1975 cancelled the indemnity bonds for P480,000 filed on December 18, 1975 by Filwriters
Guaranty Assurance Corporation for Tropical Commercial Co., Inc. The bonds were cancelled
without notice to Northern Motors, Inc. as third-party claimant.

We already held that the cancellation of the bonds constituted a grave abuse of discretion but we
previously denied petitioner's prayer for the reinstatement of the bonds because Northern Motors
Inc. had given the impression that it had not filed any action for damages against the sheriff
within the one hundred twenty-day period contemplated in Section 17, Rule 39 of the Rules of
Court.

As already noted above, the truth is that such an action for damages was filed on April 14, 1975
against the surety, the sheriff and the judgment creditor in Civil Case No. 21065 of the Court of
First Instance of Rizal, Pasig Branch XIII. The action involves the indemnity bond for P240,000
(No. 0032 posted on December 18, 1974).

It may also be noted that in a prior case, Civil Case No. 20536 of the Court of First Instance of
Rizal at Pasig, entitled "Northern Motors, Inc. vs. Manila Yellow Taxicab Co., Inc., et al.", a
replevin case (where an amended complaint dated January 15, 1975 was filed), the surety,
Filwriters Guaranty Assurance Corporation, was impleaded as a defendant by reason of its bond
for P240,000. Northern Motors, Inc. in that case prayed that the surety be ordered to pay to it
damages in the event that the eight taxicabs could not be surrendered to the mortgagee.

Northern Motors, Inc., in its instant motion for partial reconsideration, reiterates its petition for
the reinstatement of the bond filed by Filwriters Guaranty Assurance Corporation. If the said
bond is not reinstated or if the lower court's orders cancelling it are allowed to stand, the
aforementioned Civil Cases Nos. 20536 and 21065 would be baseless or futile actions against the
surety. That injustice should be corrected. Hence, our resolution of August 29, 1975, insofar as it
did not disturb the lower court's orders cancelling the indemnity bonds, should be reconsidered.

Northern Motors. Inc. further prays for the reconsideration of that portion of our resolution
allowing the sheriff to deduct expenses from the proceeds of the execution sale for the eight
taxicabs which sale was held on December 18, 1974. It argues that Honesto Ong or Manila
Yellow Taxicab Co., Inc. should shoulder such expenses of execution.
We already held that the execution was not justified and that Northern Motors, Inc., as
mortgagee, was entitled to the possession of the eight taxicabs. Those cabs should not have been
levied upon and sold at public auction to satisfy the judgment credit which was inferior to the
chattel mortgage. Since the cabs could no longer be recovered because apparently they had been
transferred to persons whose addresses are unknown (see par. 12, page 4, Annex B of motion),
the proceeds of the execution sale may be regarded as a partial substitute for the unrecovarable
cabs (See arts. 1189[2] and 1269, Civil Code; Urrutia & Co. vs. Baco River Plantation Co., 26
Phil. 632). Northern Motors, Inc. is entitled to the entire proceeds without deduction of the
expenses of execution.

WHEREFORE, private respondents' motion for reconsideration is denied and petitioner's motion
for partial reconsideration is granted. The resolution of August 29, 1975 is modified in the sense
that the lower court's orders of January 3 and 6, 1975, cancelling the indemnity bond for
P240,000 (as reaffirmed in its order of January 17, 1975), are set aside. The said indemnity bond
for P240,000 is regarded as in full force and Respondent Sheriff of Manila is further directed to
deliver to Northern Motors, Inc. the entire proceeds of the execution sale held on December 18,
1974 for the eight taxicabs which were mortgaged to that firm.

SO ORDERED.

Makalintal, C.J., Teehankee, Makasiar, Antonio, Esguerra, Muñoz Palma, Concepcion Jr., and
Martin, JJ., concur.

Castro, Fernando, and Barredo JJ., took no part.

SECOND DIVISION

G.R. No. 155206 : October 28, 2003]

GOVERNMENT SERVICE INSURANCE SYSTEM,, Petitioner, v. EDUARDO M.

SANTIAGO, substituted by his widow ROSARIO ENRIQUEZ VDA. DE
SANTIAGO, respondent.

DECISION

CALLEJO, SR., J.:

Before the Court is the petition for review on certiorari filed by the Government Service
Insurance System (GSIS), seeking to reverse and set aside the Decision[1 dated February 22,
2002 of the Court of Appeals (CA) in CA-G.R. CV No. 62309 and its Resolution
dated September 5, 2002 denying its motion for reconsideration.

The antecedent facts of the case, as culled from the assailed CA decision and that of the trial
court, are as follows:
Deceased spouses Jose C. Zulueta and Soledad Ramos obtained various loans from defendant
GSIS for (the) period September, 1956 to October, 1957 in the total amount of P3,117,000.00
secured by real estate mortgages over parcels of land covered by TCT Nos. 26105, 37177 and
50365. The Zuluetas failed to pay their loans to defendant GSIS and the latter foreclosed the real
estate mortgages dated September 25, 1956, March 6, 1957, April 4, 1957 and October 15, 1957.

On August 14, 1974, the mortgaged properties were sold at public auction by defendant GSIS
submitting a bid price ofP5,229,927.84. Not all lots covered by the mortgaged titles, however,
were sold. Ninety-one (91) lots were expressly excluded from the auction since the lots were
sufficient to pay for all the mortgage debts. A Certificate of Sale (Annex F, Records, Vol. I, pp.
23-28) was issued by then Provincial Sheriff Nicanor D. Salaysay.

The Certificate of Sale dated August 14, 1974 had been annotated and inscribed in TCT Nos.
26105, 37177 and 50356, with the following notations: (T)he following lots which form part of
this title (TCT No. 26105) are not covered by the mortgage contract due to sale to third parties
and donation to the government: 50-H-5-C-9-J-65-H-8, 50-H-5-C-9J-M-7; 50-H-5-C-9-J-65-H-
5; 1 lots Nos. 1 to 13, Block No. 1 -6,138 sq.m. 2. Lots Nos. 1 to 11, Block No. 2 4,660 sq.m. 3.
Lot No. 15, Block No. 3 487 sq.m. 4. Lot No. 17, Block No. 4 263 sq.m. 5. Lot No. 1, Block No.
7 402 sq.m. 6. Road Lots Nos. 1, 2, 3, & 4 2,747 sq.m.

In another NOTE: The following lots in the Antonio Subdivision were already released by the
GSIS and therefore are not included in this sale, namely: LOT NO. 1, 6, 7, 8, 9, 10, and 13 (Old
Plan) Block I; 1, 3, 4, 5, 7, 8 and 10 (Old Plan) Block II; 3, 10, 12 and 13 (New Plan) Block I
(Old Plan) Block III; 7, 14 and 20 (New Plan) Block III (Old Plan) Block V; 13 and 20 (New
Plan) Block IV (Old Plan) Block VI; 1, 2, 3 and 10 (New Plan) Block V (Old Plan) Block VII; 1,
5, 8, 15, 26 and 27 (New Plan) Block VI (Old Plan) Block VIII; 7, 12 and 20 (New Plan) Block
VII (Old Plan) Block II; 1, 4 and 6 (New Plan) Block VIII (Old Plan) Block X; 5 (New Plan)
Block X (Old Plan) Block ZXII; 6 (New Plan) Block XI (Old Plan) Block XII; 1, Block 9; 12
Block 1; 11 Block 2; 19 Block 1; 10 Block 6; 23 Block 3.

And the lots on ADDITIONAL EXCLUSION FROM PUBLIC SALE are LOTS NO. 6 Block 4;
2 Block 2; 5 Block 5; 1, 2 and 3 Block 11, 1, 2, 3 and 4 Block 10; 5 Block 11 (New); 1 Block 3;
5 Block 1; 15 Block 7; 11 Block 9; 13 Block 5; 12 Block 5; 3 Block 10; 6.

On November 25, 1975, an Affidavit of Consolidation of Ownership (Annex G, Records, Vol. I,

pp. 29-31) was executed by defendant GSIS over Zuluetas lots, including the lots, which as
earlier stated, were already excluded from the foreclosure.

On March 6, 1980, defendant GSIS sold the foreclosed properties to Yorkstown Development
Corporation which sale was disapproved by the Office of the President of the Philippines. The
sold properties were returned to defendant GSIS.

The Register of Deeds of Rizal cancelled the land titles issued to Yorkstown Development
Corporation. On July 2, 1980, TCT No. 23552 was issued cancelling TCT No. 21926; TCT No.
23553 cancelled TCT No. 21925; and TCT No. 23554 cancelling TCT No. 21924, all in the
name of defendant GSIS.
After defendant GSIS had re-acquired the properties sold to Yorkstown Development
Corporation, it began disposing the foreclosed lots including the excluded ones.

On April 7, 1990, representative Eduardo Santiago and then plaintiff Antonio Vic Zulueta
executed an agreement whereby Zulueta transferred all his rights and interests over the excluded
lots. Plaintiff Eduardo Santiagos lawyer, Atty. Wenceslao B. Trinidad, wrote a demand letter
dated May 11, 1989 (Annex H, Records, Vol. I, pp. 32-33) to defendant GSIS asking for the
return of the eighty-one (81) excluded lots.[2

On May 7, 1990, Antonio Vic Zulueta, represented by Eduardo M. Santiago, filed with the
Regional Trial Court (RTC) of Pasig City, Branch 71, a complaint for reconveyance of real
estate against the GSIS. Spouses Alfeo and Nenita Escasa, Manuel III and Sylvia G. Urbano, and
Marciana P. Gonzales and the heirs of Mamerto Gonzales moved to be included as intervenors
and filed their respective answers in intervention. Subsequently, the petitioner, as defendant
therein, filed its answer alleging inter alia that the action was barred by the statute of limitations
and/or laches and that the complaint stated no cause of action. Subsequently, Zulueta was
substituted by Santiago as the plaintiff in the complaint a quo. Upon the death
of Santiago on March 6, 1996, he was substituted by his widow, Rosario Enriquez Vda. de
Santiago, as the plaintiff.

After due trial, the RTC rendered judgment against the petitioner ordering it to reconvey to the
respondent, Rosario Enriquez Vda. de Santiago, in substitution of her deceased husband
Eduardo, the seventy-eight lots excluded from the foreclosure sale. The dispositive portion of the
RTC decision reads:

WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the defendant:

1. Ordering defendant to reconvey to plaintiff the seventy-eight (78) lots released and excluded
from the foreclosure sale including the additional exclusion from the public sale, namely:
a. Lot Nos. 1, 6, 7, 8, 0, 10, 13, Block I (Old Plan).
b. Lot Nos. 1, 3, 4, 5, 7, 8 and 10, Block II (Old Plan).
c. Lot Nos. 3, 10, 12, and 13, Block I (New Plan), Block III (Old Plan),
d. Lot Nos. 7, 14 and 20, Block III (New Plan), Block V (Old Plan).
e. Lot Nos. 13 and 20, Block IV (New Plan), Block VI (Old Plan).
f. Lot Nos. 1, 2, 3 and 10, Block V (New Plan), Block VII (Old Plan).
g. Lot Nos. 1, 5, 8, 15, 26 and 27, Block VI (New Plan), Block VIII (Old
Plan).
h. Lot Nos. 7 and 12, Block VII (New Plan), Block II (Old Plan).
i. Lot Nos. 1, 4 and 6, Block VIII (New Plan), Block X (Old Plan).
j. Lot 5, Block X (New Plan), Block XII (Old Plan).
k. Lot 6, Block XI (New Plan), Block XII (Old Plan).
l. Lots 2, 5, 12 and 15, Block I.
m. Lots 6, 9 and 11, Block 2.
n. Lots 1, 5, 6, 7, 16 and 23, Block 3.
o. Lot 6, Block 4.
p. Lots 5, 12, 13 and 24, Block 5.
 q. Lots 10 and 16, Block 6.
r. Lots 6 and 15, Block 7.
s. Lots 13, 24, 28 and 29, Block 8.
t. Lots 1, 11, 17 and 22, Block 9.
u. Lots 1, 2, 3 and 4, Block 10.
v. Lots 1, 2, 3 and 5 (New), Block 11.

2. Ordering defendant to pay plaintiff, if the seventy-eight (78) excluded lots could not be
reconveyed, the fair market value of each of said lots.

3. Ordering the Registry of Deeds of Pasig City to cancel the land titles covering the excluded
lots in the name of defendant or any of its successors-in-interest including all derivative titles
therefrom and to issue new land titles in plaintiffs name.

4. Ordering the Registry of Deeds of Pasig City to cancel the Notices of Lis Pendens inscribed in
TCT No. PT-80342 under Entry No. PT-12267/T-23554; TCT No. 81812 under Entry No. PT-
12267/T-23554; and TCT No. PT-84913 under Entry No. PT-12267/T-23554.

5. Costs of suit.[3

The petitioner elevated the case to the CA which rendered the assailed decision affirming that of
the RTC. The dispositive portion of the assailed decision reads:

WHEREFORE, premises considered, the herein appeal is DISMISSED for lack of merit. The
Decision of December 17, 1997 of Branch 71 of the Regional Trial Court of Pasig City is hereby
AFFIRMED.[4

The petitioner moved for a reconsideration of the aforesaid decision but the same was denied in
the assailed CA Resolution ofSeptember 5, 2002.

The petitioner now comes to this Court alleging that:

THE COURT OF APPEALS COMMITTED A REVERSIBLE ERROR IN RULING THAT A)

PETITIONER WAS GUILTY OF BAD FAITH WHEN IN TRUTH AND IN FACT, THERE
WAS NO SUFFICIENT GROUND TO SUPPORT SUCH CONCLUSION; AND B) THERE
WAS NO PRESCRIPTION IN THIS CASE.[5

In its petition, the petitioner maintains that it did not act in bad faith when it erroneously included
in its certificate of sale, and subsequently consolidated the titles in its name over the seventy-
eight lots (subject lots) that were excluded from the foreclosure sale. There was no proof of bad
faith nor could fraud or malice be attributed to the petitioner when it erroneously caused the
issuance of certificates of title over the subject lots despite the fact that these were expressly
excluded from the foreclosure sale.

The petitioner asserts that the action for reconveyance instituted by the respondent had already
prescribed after the lapse of ten years from November 25, 1975 when the petitioner consolidated
its ownership over the subject lots. According to the petitioner, an action for reconveyance based
on implied or constructive trust prescribes in ten years from the time of its creation or upon the
alleged fraudulent registration of the property. In this case, when the action was instituted
on May 7, 1990, more than fourteen years had already lapsed. Thus, the petitioner contends that
the same was already barred by prescription as well as laches.

The petitioner likewise takes exception to the holding of the trial court and the CA that it (the
petitioner) failed to apprise or return to the Zuluetas, the respondents predecessors-in-interest, the
seventy-eight lots excluded from the foreclosure sale because the petitioner had no such
obligation under the pertinent loan and mortgage agreement.

The petitioners arguments fail to persuade.

At the outset, it bears emphasis that the jurisdiction of this Court in a petition for review on
certiorari under Rule 45 of the Rules of Court, as amended, is limited to reviewing only errors of
law. This Court is not a trier of facts. Case law has it that the findings of the trial court especially
when affirmed by the CA are binding and conclusive upon this Court. Although there are
exceptions to the said rule, we find no reason to deviate therefrom.[6 By assailing the findings of
facts of the trial court as affirmed by the CA, that it acted in bad faith, the petitioner thereby
raised questions of facts in its petition.

Nonetheless, even if we indulged the petition and delved into the factual issues, we find the
petition barren of merit.

That the petitioner acted in bad faith in consolidating ownership and causing the issuance of
titles in its name over the subject lots, notwithstanding that these were expressly excluded from
the foreclosure sale was the uniform ruling of the trial court and appellate court. As declared by
the CA:

The acts of defendant-appellant GSIS in concealing from the Zuluetas [the respondents
predecessors-in-interest] the existence of these lots, in failing to notify or apprise the spouses
Zulueta about the excluded lots from the time it consolidated its titles on their foreclosed
properties in 1975, in failing to inform them when it entered into a contract of sale of the
foreclosed properties to Yorkstown Development Corporation in 1980 as well as when the said
sale was revoked by then President Ferdinand E. Marcos during the same year demonstrated a
clear effort on its part to defraud the spouses Zulueta and appropriate for itself the subject
properties. Even if titles over the lots had been issued in the name of the defendant-appellant,
still it could not legally claim ownership and absolute dominion over them because
indefeasibility of title under the Torrens system does not attach to titles secured by fraud or
misrepresentation. The fraud committed by defendant-appellant in the form of concealment of
the existence of said lots and failure to return the same to the real owners after their exclusion
from the foreclosure sale made defendant-appellant holders in bad faith. It is well-settled that a
holder in bad faith of a certificate of title is not entitled to the protection of the law for the law
cannot be used as a shield for fraud.[7
The Court agrees with the findings and conclusion of the trial court and the CA. The petitioner is
not an ordinary mortgagee. It is a government financial institution and, like banks, is expected to
exercise greater care and prudence in its dealings, including those involving registered lands.
[8 The Courts ruling in Rural Bank of Compostela v. CA[9 is apropos:

Banks, indeed, should exercise more care and prudence in dealing even with registered lands,
than private individuals, for their business is one affected with public interest, keeping in trust
money belonging to their depositors, which they should guard against loss by not committing
any act of negligence which amounts to lack of good faith by which they would be denied the
protective mantle of land registration statute, Act [No.] 496, extended only to purchasers for
value and in good faith, as well as to mortgagees of the same character and description.[10

Due diligence required of banks extend even to persons, or institutions like the petitioner,
regularly engaged in the business of lending money secured by real estate mortgages.[11

In this case, the petitioner executed an affidavit in consolidating its ownership and causing the
issuance of titles in its name over the subject lots despite the fact that these were expressly
excluded from the foreclosure sale. By so doing, the petitioner acted in gross and evident bad
faith. It cannot feign ignorance of the fact that the subject lots were excluded from the sale at
public auction. At the least, its act constituted gross negligence amounting to bad faith. Further,
as found by the CA, the petitioners acts of concealing the existence of these lots, its failure to
return them to the Zuluetas and even its attempt to sell them to a third party is proof of the
petitioners intent to defraud the Zuluetas and appropriate for itself the subject lots.

On the issue of prescription, generally, an action for reconveyance of real property based on
fraud prescribes in four years from the discovery of fraud; such discovery is deemed to have
taken place upon the issuance of the certificate of title over the property. Registration of real
property is a constructive notice to all persons and, thus, the four-year period shall be counted
therefrom.[12 On the other hand, Article 1456 of the Civil Code provides:

Art. 1456. If property is acquired through mistake or fraud, the person obtaining it is, by force of
law, considered a trustee of an implied trust for the benefit of the person from whom the property
comes.

An action for reconveyance based on implied or constructive trust prescribes in ten years from
the alleged fraudulent registration or date of issuance of the certificate of title over the property.
[13

The petitioners defense of prescription is untenable. As held by the CA, the general rule that the
discovery of fraud is deemed to have taken place upon the registration of real property because it
is considered a constructive notice to all persons does not apply in this case. The CA correctly
cited the cases of Adille v. Court of Appeals[14 and Samonte v. Court of Appeals,[15 where this
Court reckoned the prescriptive period for the filing of the action for reconveyance based on
implied trust from the actualdiscovery of fraud.
In ruling that the action had not yet prescribed despite the fact that more than ten years had
lapsed between the date of registration and the institution of the action for reconveyance, the
Court in Adille ratiocinated:

It is true that registration under the Torrens system is constructive notice of title, but it has
likewise been our holding that theTorrens title does not furnish a shield for fraud. It is therefore
no argument to say that the act of registration is equivalent to notice of repudiation, assuming
there was one, notwithstanding the long-standing rule that registration operates as a universal
notice of title.

For the same reason, we cannot dismiss private respondents claims commenced in 1974 over the
estate registered in 1955. While actions to enforce a constructive trust prescribes in ten years,
reckoned from the date of the registration of the property, we, as we said, are not prepared to
count the period from such a date in this case. We note the petitioners sub rosa efforts to get hold
of the property exclusively for himself beginning with his fraudulent misrepresentation in his
unilateral affidavit of extrajudicial settlement that he is the only heir and child of his mother
Feliza with the consequence that he was able to secure title in his name [alone]. Accordingly, we
hold that the right of the private respondents commenced from the time they actually discovered
the petitioners act of defraudation. According to the respondent Court of Appeals, they came to
know [of it] apparently only during the progress of the litigation. Hence, prescription is not a bar.
[16

The above ruling was reiterated in the more recent case of Samonte. In this case, as established
by the CA, the respondent actually discovered the fraudulent act of the petitioner only in 1989:

... [T]he prescriptive period of the action is to be reckoned from the time plaintiff-appellee (then
Eduardo M. Santiago) hadactually discovered the fraudulent act of defendant-appellant which
was, as borne out by the records, only in 1989. Plaintiff-appellee Eduardo M. Santiago
categorically testified (TSN of July 11, 1995, pp. 14-15) that he came to know that there were 91
excluded lots in Antonio Village which were foreclosed by the GSIS and included in its
consolidation of ownership in 1975 when, in 1989, he and Antonio Vic Zulueta discussed it and
he was given by Zulueta a special power of attorney to represent him to recover the subject
properties from GSIS. The complaint for reconveyance was filed barely a year from the
discovery of the fraud.[17

Following the Courts pronouncements in Adille and Samonte, the institution of the action for
reconveyance in the court a quo in 1990 was thus well within the prescriptive period. Having
acted in bad faith in securing titles over the subject lots, the petitioner is a holder in bad faith of
certificates of title over the subject lots. The petitioner is not entitled to the protection of the law
for the law cannot be used as a shield for frauds.[18

Contrary to its claim, the petitioner unarguably had the legal duty to return the subject lots to the
Zuluetas. The petitioners attempts to justify its omission by insisting that it had no such duty
under the mortgage contract is obviously clutching at straw. Article 22 of the Civil Code
explicitly provides that every person who, through an act of performance by another, or any
other means, acquires or comes into possession of something at the expense of the latter without
just or legal ground, shall return the same to him.

WHEREFORE, the petition is DENIED for lack of merit. The assailed Decision dated February
22, 2002 and Resolution dated September 5, 2002 of the Court of Appeals in CA-G.R. CV No.
62309 are AFFIRMED IN TOTO. Costs against the petitioner.

SO ORDERED.
 
SECOND DIVISION
 
 
SPOUSES WILFREDO N. ONG and G.R. No. 172592
EDNA SHEILA PAGUIO-ONG,  
Petitioners, Present:
   
  QUISUMBING, J., Chairperson,
- versus - CARPIO MORALES,
  TINGA,
  BRION, and
  AUSTRIA-MARTINEZ,* JJ.
ROBAN LENDING CORPORATION,  
Respondent.  
Promulgated:
July 9, 2008
 
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x
 
 
DECISION
 
 
CARPIO MORALES, J.:
On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Wilfredo N. Ong
and Edna Sheila Paguio-Ong obtained several loans from Roban Lending Corporation
(respondent) in the total amount of P4,000,000.00. These loans were secured by a real estate
mortgage on petitioners parcels of land located in Binauganan, Tarlac City and covered by TCT
No. 297840.[1]
 
On February 12, 2001, petitioners and respondent executed an Amendment to Amended Real
Estate Mortgage[2] consolidating their loans inclusive of charges thereon which
totaled P5,916,117.50. On even date, the parties executed a Dacion in Payment
Agreement[3] wherein petitioners assigned the properties covered by TCT No. 297840 to
respondent in settlement of their total obligation, and a Memorandum of Agreement[4] reading:
 
 That the FIRST PARTY [Roban Lending Corporation] and the SECOND
PARTY [the petitioners] agreed to consolidate and restructure all
aforementioned loans, which have been all past due and delinquent since April
19, 2000, and outstanding obligations totaling P5,916,117.50. The SECOND
PARTY hereby sign [sic] another promissory note in the amount of
P5,916,117.50 (a copy of which is hereto attached and forms xxx an integral
part of this document), with a promise to pay the FIRST PARTY in full within
one year from the date of the consolidation and restructuring, otherwise the
SECOND PARTY agree to have their DACION IN PAYMENT agreement,
which they have executed and signed today in favor of the FIRST PARTY be
enforced[.][5]
 
 
 
In April 2002 (the day is illegible), petitioners filed a Complaint, [6] docketed as Civil Case No.
9322, before the Regional Trial Court (RTC) of Tarlac City, for declaration of mortgage contract
as abandoned, annulment of deeds, illegal exaction, unjust enrichment, accounting, and damages,
alleging that the Memorandum of Agreement and the Dacion in Payment executed are void for
being pactum commissorium.[7]
 
Petitioners alleged that the loans extended to them from July 14, 1999 to March 20, 2000 were
founded on several uniform promissory notes, which provided for 3.5% monthly interest rates,
5% penalty per month on the total amount due and demandable, and a further sum of 25%
attorneys fees thereon,[8] and in addition, respondent exacted certain sums denominated as
EVAT/AR.[9] Petitioners decried these additional charges as illegal, iniquitous, unconscionable,
and revolting to the conscience as they hardly allow any borrower any chance of survival in case
of default.[10]
 
Petitioners further alleged that they had previously made payments on their loan accounts, but
because of the illegal exactions thereon, the total balance appears not to have moved at all,
hence, accounting was in order.[11]
 
Petitioners thus prayed for judgment:
 
a)                Declaring the Real Estate Mortgage Contract and its
amendments x x x as null and void and without legal force and effect for
having been renounced, abandoned, and given up;
 
b)               Declaring the Memorandum of Agreement xxx and Dacion
in Payment x x x as null and void for being pactum commissorium;
 
c)                Declaring the interests, penalties, Evat [sic] and attorneys
fees assessed and loaded into the loan accounts of the plaintiffs with defendant
as unjust, iniquitous, unconscionable and illegal and therefore, stricken out or
set aside;
 
 d)               Ordering an accounting on plaintiffs loan accounts to
determine the true and correct balances on their obligation against legal
charges only; and
 
e)                Ordering defendant to [pay] to the plaintiffs: --
 
e.1 Moral damages in an amount not less than P100,000.00 and
exemplary damages of P50,000.00;
 
e.2 Attorneys fees in the amount of P50,000.00 plus P1,000.00
appearance fee per hearing; and
 
e.3 The cost of suit.[12]
 
 
 
 
 
as well as other just and equitable reliefs.
cralawIn its Answer with Counterclaim, [13] respondent maintained the legality of its transactions
with petitioners, alleging that:
 
xxxx
 
If the voluntary execution of the Memorandum of Agreement and Dacion in
Payment Agreement novated the Real Estate Mortgage then the allegation of
Pactum Commissorium has no more legal leg to stand on;
 
 
The Dacion in Payment Agreement is lawful and valid as it is recognized x x x
under Art. 1245 of the Civil Code as a special form of payment whereby the
debtor-Plaintiffs alienates their property to the creditor-Defendant in
satisfaction of their monetary obligation;
 
The accumulated interest and other charges which were computed for more
than two (2) years would stand reasonable and valid taking into consideration
[that] the principal loan isP4,000,000 and if indeed it became beyond the
Plaintiffs capacity to pay then the fault is attributed to them and not the
Defendant[.][14]
 
After pre-trial, the initial hearing of the case, originally set on December 11, 2002, was reset
several times due to, among other things, the parties efforts to settle the case amicably.[15]
 
During the scheduled initial hearing of May 7, 2003, the RTC issued the following order:
 
 Considering that the plaintiff Wilfredo Ong is not around on the ground that he
is in Manila and he is attending to a very sick relative, without objection on the
part of the defendants counsel, the initial hearing of this case is reset to June
18, 2003 at 10:00 oclock in the morning.
 
Just in case [plaintiffs counsel] Atty. Concepcion cannot present his witness in
the person of Mr. Wilfredo Ong in the next scheduled hearing, the counsel
manifested that he will submit the case for summary judgment.
[16]
 (Underscoring supplied)
 
It appears that the June 18, 2003 setting was eventually rescheduled to February 11, 2004 at
which both counsels were present[17] and the RTC issued the following order:
 
The counsel[s] agreed to reset this case on April 14, 2004, at 10:00 oclock in
the morning.However, the counsels are directed to be ready with their
memorand[a] together with all the exhibits or evidence needed to support their
respective positions which should be the basis for the judgment on the
pleadings if the parties fail to settle the case in the next scheduled setting.
 
x x x x[18] (Underscoring supplied)
 
 
At the scheduled April 14, 2004 hearing, both counsels appeared but only the counsel of
respondent filed a memorandum.[19]
 
By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the basis of the
pleadings that there was no pactum commissorium, dismissed the complaint.[20]
 
On appeal,[21] the Court of Appeals[22] noted that
 
x x x [W]hile the trial court in its decision stated that it was rendering
judgment on the pleadings, x x x what it actually rendered was a summary
judgment. A judgment on the pleadings is proper when the answer fails to
tender an issue, or otherwise admits the material allegations of the adverse
partys pleading. However, a judgment on the pleadings would not have been
proper in this case as the answer tendered an issue, i.e. the validity of the MOA
and DPA. On the other hand, a summary judgment may be rendered by the
court if the pleadings, supporting affidavits, and other documents show that,
except as to the amount of damages, there is no genuine issue as to any
material fact.[23]
 
 
Nevertheless, finding the error in nomenclature to be mere semantics with no bearing on the
merits of the case,[24] the Court of Appeals upheld the RTC decision that there was no pactum
commissorium.[25]
 
Their Motion for Reconsideration [26] having been denied,[27] petitioners filed the instant Petition
for Review on Certiorari,[28] faulting the Court of Appeals for having committed a clear and
reversible error
 
I.    . . . WHEN IT FAILED AND REFUSED TO APPLY PROCEDURAL
REQUISITES WHICH WOULD WARRANT THE SETTING ASIDE
OF THE SUMMARY JUDGMENT IN VIOLATION OF
APPELLANTS RIGHT TO DUE PROCESS;
 
II.                 . . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN THIS
CASE IS NECESSARY BECAUSE THE FACTS ARE VERY MUCH
IN DISPUTE;
 
III.               . . . WHEN IT FAILED AND REFUSED TO HOLD THAT THE
MEMORANDUM OF AGREEMENT (MOA) AND THE DACION
EN PAGO AGREEMENT (DPA) WERE DESIGNED TO
CIRCUMVENT THE LAW AGAINST PACTUM COMMISSORIUM;
and
 
IV.            . . . WHEN IT FAILED TO CONSIDER THAT THE
MEMORANDUM OF AGREEMENT (MOA) AND THE DACION
EN PAGO (DPA) ARE NULL AND VOID FOR BEING
CONTRARY TO LAW AND PUBLIC POLICY.[29]
 
 
The petition is meritorious.
 
Both parties admit the execution and contents of the Memorandum of Agreement and Dacion in
Payment.They differ, however, on whether both contracts constitute pactum
commissorium or dacion en pago.
 
This Court finds that the Memorandum of Agreement and Dacion in Payment constitute pactum
commissorium, which is prohibited under Article 2088 of the Civil Code which provides:
 
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 elements of pactum commissorium, which enables the mortgagee to acquire ownership of
the mortgaged property without the need of any foreclosure proceedings, [30] are: (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.[31]
 
In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no
provisions for foreclosure proceedings nor redemption. Under the Memorandum of Agreement,
the failure by the petitioners to pay their debt within the one-year period gives respondent the
right to enforce the Dacion in Payment transferring to it ownership of the properties covered by
TCT No. 297840. Respondent, in effect, automatically acquires ownership of the properties upon
petitioners failure to pay their debt within the stipulated period.
 
Respondent argues that the law recognizes dacion en pago as a special form of payment whereby
the debtor alienates property to the creditor in satisfaction of a monetary obligation. [32] This does
not persuade. In a true dacion en pago, the assignment of the property extinguishes the monetary
debt.[33] In the case at bar, the alienation of the properties was by way of security, and not by way
of satisfying the debt.[34] The Dacion in Payment did not extinguish petitioners obligation to
respondent. On the contrary, under the Memorandum of Agreement executed on the same day as
the Dacion in Payment, petitioners had to execute a promissory note for P5,916,117.50 which
they were to pay within one year.[35]
 
Respondent cites Solid Homes, Inc. v. Court of Appeals[36]  where this Court upheld a
Memorandum of Agreement/Dacion en Pago.[37] That case did not involve the issue of pactum
commissorium.[38]
 
That the questioned contracts were freely and voluntarily executed by petitioners and respondent
is of no moment, pactum commissorium being void for being prohibited by law.[39]
 
Respecting the charges on the loans, courts may reduce interest rates, penalty charges, and
attorneys fees if they are iniquitous or unconscionable.[40]
 
This Court, based on existing jurisprudence,[41] finds the monthly interest rate of 3.5%, or 42%
per annum unconscionable and thus reduces it to 12% per annum. This Court finds too the
penalty fee at the monthly rate of 5% (60% per annum) of the total amount due and demandable
principal plus interest, with interest not paid when due added to and becoming part of the
principal and likewise bearing interest at the same rate, compounded monthly [42] unconscionable
and reduces it to a yearly rate of 12% of the amount due, to be computed from the time of
demand.[43] This Court finds the attorneys fees of 25% of the principal, interests and interests
thereon, and the penalty fees unconscionable, and thus reduces the attorneys fees to 25% of the
principal amount only.[44]
 
The prayer for accounting in petitioners complaint requires presentation of evidence, they
claiming to have made partial payments on their loans, vis a vis respondents denial thereof.[45] A
remand of the case is thus in order.
 
Prescinding from the above disquisition, the trial court and the Court of Appeals erred in holding
that a summary judgment is proper. A summary judgment is permitted only if there is no genuine
issue as to any material fact and a moving party is entitled to a judgment as a matter of law. [46] A
summary judgment is proper if, while the pleadings on their face appear to raise issues, the
affidavits, depositions, and admissions presented by the moving party show that such issues are
not genuine.[47] A genuine issue, as opposed to a fictitious or contrived one, is an issue of fact that
requires the presentation of evidence.[48] As mentioned above, petitioners prayer for accounting
requires the presentation of evidence on the issue of partial payment.
 
But neither is a judgment on the pleadings proper. A judgment on the pleadings may be rendered
only when an answer fails to tender an issue or otherwise admits the material allegations of the
adverse partys pleadings.[49] In the case at bar, respondents Answer with Counterclaim disputed
petitioners claims that the Memorandum of Agreement and Dation in Payment are illegal and
that the extra charges on the loans are unconscionable. [50] Respondent disputed too petitioners
allegation of bad faith.[51]
 
WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET ASIDE. The
Memorandum of Agreement and the Dacion  in Payment executed by petitioner- spouses
Wilfredo N. Ong and Edna Sheila Paguio-Ong and respondent Roban Lending Corporation
on February 12, 2001 are declared NULL AND VOID for being pactum commissorium.
 
 
In line with the foregoing findings, the following terms of the loan contracts between the parties
areMODIFIED as follows:
 
1.                 The monthly interest rate of 3.5%, or 42% per annum, is reduced to 12% per
annum;
 
2.                 The monthly penalty fee of 5% of the total amount due and demandable is
reduced to 12%per annum, to be computed from the time of demand; and
 
3.                 The attorneys fees are reduced to 25% of the principal amount only.
 
Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of receiving
evidence on petitioners prayer for accounting.
 
SO ORDERED.