A. Francisco Realty & Dev Coro vs CA, G.R.

125055

This is a petition for review on certiorari of the decision rendered on February 29, 1996 by the
Court of Appeals 1 reversing, in toto, the decision of the Regional Trial Court of Pasig City in Civil
Case No. 62290, as well as the appellate court's resolution of May 7, 1996 denying
reconsideration.

Petitioner A. Francisco Realty and Development Corporation granted a loan of P7.5 Million to
private respondents, the spouses Romulo and Erlinda Javillonar, in consideration of which the
latter executed the following documents: (a) a promissory note, dated November 27, 1991,
stating an interest charge of 4% per month for six months; (b) a deed of mortgage over realty
covered by TCT No. 58748, together with the improvements thereon; and (c) an undated deed of
sale of the mortgaged property in favor of the mortgagee, petitioner A. Francisco Realty. 2

The interest on the said loan was to be paid in four installments: half of the total amount agreed
upon (P900,000.00) to be paid in advance through a deduction from the proceeds of the loan,
while the balance to be paid monthly by means of checks post-dated March 27, April 27, and May
27, 1992. The promissory note expressly provided that upon "failure of the MORTGAGOR (private
respondents) to pay the interest without prior arrangement with the MORTGAGEE (petitioner),
full possession of the property will be transferred and the deed of sale will be registered. 3 For
this purpose, the owner's duplicate of TCT No. 58748 was delivered to petitioner A. Francisco
Realty.

Petitioner claims that private respondents failed to pay the interest and, as a consequence, it
registered the sale of the land in its favor on February 21, 1992. As a result, TCT No. 58748 was
cancelled and in lieu thereof TCT No. PT-85569 was issued in the name of petitioner A. Francisco
Realty. 4

Private respondents subsequently obtained an additional loan of P2.5 Million from petitioner on
March 13, 1992 for which they signed a promissory note which reads:

PROMISSORY NOTE

For value received I promise to pay A. FRANCISCO REALTY AND DEVELOPMENT CORPORATION,
the additional sum of Two Million Five Hundred Thousand Pesos (P2,500,000.00) on or before
April 27, 1992, with interest at the rate of four percent (4%) a month until fully paid and if after
the said date this note and/or the other promissory note of P7.5 Million remains unpaid and/or
unsettled, without any need for prior demand or notification, I promise to vacate voluntarily and
willfully and/or allow A.FRANCISCO REALTY AND DEVELOPMENT CORPORATION to appropriate
and occupy for their exclusive use the real property located at 56 Dragonfly, Valle Verde VI,
Pasig, Metro Manila. 5

Petitioner demanded possession of the mortgaged realty and the payment of 4% monthly
interest from May 1992, plus surcharges. As respondent spouses refused to vacate, petitioner
filed the present action for possession before the Regional Trial Court in Pasig City. 6

In their answer, respondents admitted liability on the loan but alleged that it was not their intent
to sell the realty as the undated deed of sale was executed by them merely as an additional
security for the payment of their loan. Furthermore, they claimed that they were not notified of
the registration of the sale in favor of petitioner A. Francisco Realty and that there was no
interest then unpaid as they had in fact been paying interest even subsequent to the registration
of the sale. As an alternative defense, respondents contended that the complaint was actually for
ejectment and, therefore, the Regional Trial Court had no jurisdiction to try the case. As
counterclaim, respondents sought the cancellation of TCT No. PT-85569 as secured by petitioner
and the issuance of a new title evidencing their ownership of the property. 7

On December 19, 1992, the Regional Trial Court rendered a decision, the dispositive portion of
which reads as follows:

WHEREFORE, prescinding from the foregoing considerations, judgment is hereby rendered

declaring as legal and valid, the right of ownership of A. Francisco Realty Find Development
Corporation, over the property subject of this case and now registered in its name as owner
thereof, under TCT No. 85569 of the Register of Deeds of Rizal, situated at No. 56 Dragonfly
Street, Valle Verde VI, Pasig, Metro Manila.

Consequently, defendants are hereby ordered to cease and desist from further committing acts
of dispossession or from withholding possession from plaintiff of the said property as herein
described and specified.

Claim for damages in all its forms, however, including attorney's fees, are hereby denied, no
competent proofs having been adduced on record, in support thereof. 8

Respondent spouses appealed to the Court of Appeals which reversed the decision of the trial
court and dismissed the complaint against them. The appellate court ruled that the Regional Trial
Court had no jurisdiction over the case because it was actually an action for unlawful detainer
which is exclusively cognizable by municipal trial courts. Furthermore, it ruled that, even
presuming jurisdiction of the trial court, the deed of sale was void for being in fact a pactum
commissorium which is prohibited by Art. 2088 of the Civil Code.

Petitioner A. Francisco Realty filed a motion for reconsideration, but the Court of Appeals denied
the motion in its resolution, dated May 7, 1996. Hence, this petition for review on certiorari
raising the following issues:

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE REGIONAL TRIAL
COURT HAD NO JURISDICTION OVER THE COMPLAINT FILED BY THE PETITIONER.

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT THE CONTRACTUAL
DOCUMENTS SUBJECT OF THE INSTANT CASE ARE CONSTITUTIVE OF PACTUM
COMMISSORIUM AS DEFINED UNDER ARTICLE 2088 OF THE CIVIL CODE OF THE PHILIPPINES.

On the first issue, the appellate court stated:

Ostensibly, the cause of action in the complaint indicates a case for unlawful detainer, as contra-
distinguished from accion publiciana. As contemplated by Rule 70 of the Rules of Court, an action
for unlawful detainer which falls under the exclusive jurisdiction of the Metropolitan or Municipal
Trial Courts, is defined as withholding from by a person from another for not more than one
year, the possession of the land or building to which the latter is entitled after the expiration or
termination of the supposed rights to hold possession by virtue of a contract, express or implied.
(Tenorio vs. Gamboa, 81 Phil. 54; Dikit vs. Dicaciano, 89 Phil. 44). If no action is initiated for
forcible entry or unlawful detainer within the expiration of the 1 year period, the case may still be
filed under the plenary action to recover possession by accion publiciana before the Court of First
Instance (now the Regional Trial Court) (Medina vs. Valdellon, 63 SCRA 278). In plain language,
the case at bar is a legitimate ejectment case filed within the 1 year period from the jurisdictional
demand to vacate. Thus, the Regional Trial Court has no jurisdiction over the case. Accordingly,
under Section 33 of B.P. Blg. 129 Municipal Trial Courts are vested with the exclusive original
jurisdiction over forcible entry and unlawful detainer case. (Sen Po Ek Marketing Corp. vs. CA,
212 SCRA 154 [1990]) 9

We think the appellate court is in error. What really distinguishes an action for unlawful detainer
from a possessory action (accion publiciana) and from a reivindicatory action (accion
reivindicatoria) is that the first is limited to the question of possession de facto.

An unlawful detainer suit (accion interdictal) together with forcible entry are the two forms of an
ejectment suit that may be filed to recover possession of real property. Aside from the summary
action of ejectment, accion publiciana or the plenary action to recover the right of possession and
accion reivindicatoria or the action to recover ownership which includes recovery of possession,
make up the three kinds of actions to judicially recover possession.

Illegal detainer consists in withholding by a person from another of the possession of a land or
building to which the latter is entitled after the expiration or termination of the former's right to
hold possession by virtue of a contract, express or implied. An ejectment suit is brought before
the proper inferior court to recover physical possession only or possession de facto and not
possession de jure, where dispossession has lasted for not more than one year. Forcible entry
and unlawful detainer are quieting processes and the one-year time bar to the suit is in
pursuance of the summary nature of the action. The use of summary procedure in ejectment
cases is intended to provide an expeditious means of protecting actual possession or right to
possession of the property. They are not processes to determine the actual title to an estate. If
at all, inferior courts are empowered to rule on the question of ownership raised by the
defendant in such suits, only to resolve the issue of possession. Its determination on the
ownership issue is, however, not conclusive. 10

The allegations in both the original and the amended complaints of petitioner before the trial
court clearly raise issues involving more than the question of possession, to wit: (a) the validity
of the Transfer of ownership to petitioner; (b) the alleged new liability of private respondents for
P400,000.00 a month from the time petitioner made its demand on them to vacate; and (c) the
alleged continuing liability of private respondents under both loans to pay interest and surcharges
on such. As petitioner A. Francisco Realty alleged in its amended complaint:

5. To secure the payment of the sum of 7.5 Million together with the monthly interest, the
defendant spouses agreed to execute a Deed of Mortgage over the property with the express
condition that if and when they fail to pay monthly interest or any infringement thereof they
agreed to convert the mortgage into a Deed of Absolute Sale in favor of the plaintiff by executing
Deed of Sale thereto, copy of which is hereto attached and incorporated herein as Annex "A";

6. That in order to authorize the Register of Deeds into registering the Absolute Sale and transfer
to the plaintiff, defendant delivered unto the plaintiff the said Deed of Sale together with the
original owner's copy of Transfer Certificate of Title No. 58748 of the Registry of Rizal, copy of
which is hereto attached and made an integral part herein as Annex "B";

7. That defendant spouses later secured from the plaintiff an additional loan of P2.5 Million with
the same condition as aforementioned with 4% monthly interest;

8. That defendants spouses failed to pay the stipulated monthly interest and as per agreement of
the parties, plaintiff recorded and registered the Absolute Deed of Sale in its favor on and was
issued Transfer Certificate of Title No. PT-85569, copy of which is hereto attached and
incorporated herein as Annex "C";
9. That upon registration and transfer of the Transfer Certificate of Title in the name of the
plaintiff, copy of which is hereto attached and incorporated herein as Annex "C", plaintiff
demanded the surrender of the possession of the above-described parcel of land together with
the improvements thereon, but defendants failed and refused to surrender the same to the
plaintiff without justifiable reasons thereto; Neither did the defendants pay the interest of 4% a
month from May, 1992 plus surcharges up to the present;

10. That it was the understanding of the parties that if and when the defendants shall fail to pay
the interest due and that the Deed of Sale be registered in favor of plaintiff, the defendants shall
pay a monthly rental of P400,000.00 a month until they vacate the premises, and that if they still
fail to pay as they are still failing to pay the amount of P400,000.00 a month as rentals and/or
interest, the plaintiff shall take physical possession of the said property; 11

It is therefore clear from the foregoing that petitioner A. Francisco Realty raised issues which
involved more than a simple claim for the immediate possession of the subject property. Such
issues range across the full scope of rights of the respective parties under their contractual
arrangements. As held in an analogous case:

The disagreement of the parties in Civil Case No. 96 of the Justice of the Peace of Hagonoy,
Bulacan extended far beyond the issues generally involved in unlawful detainer suits. The
litigants therein did not raise merely the question of who among them was entitled to the
possession of the fishpond of Federico Suntay. For all judicial purposes, they likewise prayed of
the court to rule on their respective rights under the various contractual documents - their
respective deeds of lease, the deed of assignment and the promissory note - upon which they
predicate their claims to the possession of the said fishpond. In other words, they gave the court
no alternative but to rule on the validity or nullity of the above documents. Clearly, the case was
converted into the determination of the nature of the proceedings from a mere detainer suit to
one that is "incapable of pecuniary estimation" and thus beyond the legitimate authority of the
Justice of the Peace Court to rule on. 12

Nor can it be said that the compulsory counterclaim filed by respondent spouses challenging the
title of petitioner A. Francisco Realty was merely a collateral attack which would bar a ruling here
on the validity of the said title.

A counterclaim is considered a complaint, only this time, it is the original defendant who becomes
the plaintiff (Valisno v. Plan, 143 SCRA 502 (1986). It stands on the same footing and is to be
tested by the same rules as if it were an independent action. Hence, the same rules on
jurisdiction in an independent action apply to a counterclaim (Vivar v. Vivar, 8 SCRA 847 (1963);
Calo v. Ajar International, Inc. v. 22 SCRA 996 (1968); Javier v. Intermediate Appellate Court,
171 SCRA 605 (1989); Quiason, Philippine Courts and Their Jurisdictions, 1993 ed., p. 203). 13

On the second issue, the Court of Appeals held that, even "on the assumption that the trial court
has jurisdiction over the instant case," petitioner's action could not succeed because the deed of
sale on which it was based was void, being in the nature of a pactum commissorium prohibited
by Art. 2088 of the Civil Code which provides:

Art. 2088. The creditor cannot appropriate the things given by way to pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.

With respect to this question, the ruling of the appellate court should be affirmed. Petitioner
denies, however, that the promissory notes contain a pactum commissorium. It contends that -
What is envisioned by Article 2088 of the Civil Code of the Philippines is a provision in the deed of
mortgage providing for the automatic conveyance of the mortgaged property in case of the
failure of the debtor to pay the loan (Tan v. West Coast Life Assurance Co., 54 Phil. 361). A
pactum commissorium is a forfeiture clause in a deed of mortgage (Hechanova v. Adil, 144 SCRA
450; Montevergen v. Court of Appeals, 112 SCRA 641; Report of the Code Commission, 156).

Thus, before Article 2088 can find application herein, the subject deed of mortgage must be
scrutinized to determine if it contains such a provision giving the creditor the right "to appropriate
the things given by way of mortgage without following the procedure prescribed by law for the
foreclosure of the mortgage" (Ranjo v. Salmon, 15 Phil. 436). IN SHORT, THE PROSCRIBED
STIPULATION SHOULD BE FOUND IN THE MORTGAGE DEED ITSELF. 14

The contention is patently without merit. To sustain the theory of petitioner would be to allow a
subversion of the prohibition in Art. 2088.

In Nakpil v. Intermediate Appellate Court, 15 which involved the violation of a constructive trust,
no deed of mortgage was expressly executed between the parties in that case: Nevertheless, this
Court ruled that an agreement whereby property held in trust was ceded to the trustee upon
failure of the beneficiary to pay his debt to the former as secured by the said property was void
for being a pactum commissorium. Itwas there held:

The arrangement entered into between the parties, whereby Pulong Maulap was to be
"considered sold to him (respondent) . . ." in case petitioner fails to reimburse Valdes, must then
be construed as tantamount to a pactum commissorium which is expressly prohibited by Art.
2088 of the Civil Code. For, there was to be automatic appropriation of the property by Valdez in
the event of failure of petitioner to pay the value of the advances. Thus, contrary to respondent's
manifestations, all the elements of a pactum commissorium were present: there was a creditor-
debtor relationship between the parties; the property was used as security for the loan; and,
there was automatic appropriation by respondent of Pulong Maulap in case of default of
petitioner. 16

Similarly, the Court has struck down such stipulations as contained in deeds of sale purporting to
be pacto de retro sales but found actually to be equitable mortgages.

It has been consistently held that the presence of even one of the circumstances enumerated in
Art. 1602 of the New Civil Code is sufficient to declare a contract of sale with right to repurchase
an equitable mortgage. This is so because pacto de retro sales with the stringent and onerous
effects that accompany them are not favored. In case of doubt, a contract purporting to be a sale
with the right to repurchase shall be construed as an equitable mortgage.

Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that
complete and absolute title shall be vested on the vendee should the vendors fail to redeem the
property on the specified date. Such stipulation that the ownership of the property would
automatically pass to the vendee in case no redemption was effected within the stipulated period
is void for being a pactum commissorium which enables the mortgagee to acquire ownership of
the mortgaged property without need of foreclosure. Its insertion in the contract is an avowal of
the intention to mortgage rather that to sell the property. 17

Indeed, in Reyes v. Sierra 18 this Court categorically ruled that a mortgagee's mere act of
registering the mortgaged property in his own name upon the mortgagor's failure to redeem the
property amounted to the exercise of the privilege of a mortgagee in a pactum commissorium.
 Obviously, from the nature of the transaction, applicant's a predecessor-in-interest is a mere
mortgagee, and ownership of the thing mortgaged is retained by Basilia Beltran, the mortgagor.
The mortgagee, however, may recover the loan, although the mortgage document evidencing
the loan was nonregistrable being a purely private instrument. Failure of mortgagor to redeem
the property does not automatically vest ownership of the property to the mortgagee, which
would grant the latter the right to appropriate the thing mortgaged or dispose of it. This violates
the provision of Article 2088 of the New Civil Code, which reads:

The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose by
them. Any stipulation to the contrary is null and void.

The act of applicant in registering the property in his own name upon mortgagor's failure to
redeem the property would to a pactum commissorium which is against good morals and public
policy. 19

Thus, in the case at bar, the stipulations in the promissory notes providing that, upon failure of
respondent spouses to pay interest, ownership of the property would be automatically
transferred to petitioner A. Francisco Realty and the deed of sale in its favor would be registered,
are in substance a pactum commissorium. They embody the two elements of pactum
commissorium as laid down in Uy Tong v. Court of Appeals, 20 to wit:

The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil
Code:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgagee, or
dispose of the same. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1)
that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way
of security for the payment of the principal obligation; and (2) that there should be a stipulation
for an automatic appropriation by the creditor of the thing pledged or mortgaged in the event of
non-payment of the principal obligation within the stipulated period. 21

The subject transaction being void, the registration of the deed of sale, by virtue of which
petitioner A. Francisco Realty was able to obtain TCT No. PT-85569 covering the subject lot, must
also be declared void, as prayed for by respondents in their counterclaim.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED, insofar as it dismissed

petitioner's complaint against respondent spouses on the ground that the stipulations in the
promissory notes are void for being a pactum commissorium, but REVERSED insofar as it ruled
that the trial court had no jurisdiction over this case. The Register of Deeds of Pasig City is
hereby ORDERED to CANCEL TCT No. PT-85569 issued to petitioner and ISSUE a new one in the
name of respondent spouses.

SO ORDERED.

2. Hechanova vs. Adil, G.R. 49940

Petitioners seek the annulment of various orders issued by the respondent Presiding Judge of
Branch II, Court of First Instance of Iloilo, in Civil Case No. 12312 entitled "Pio Servando versus
Jose Y. Servando et al." A temporary restraining order was issued by this Court on May 9, 1979,
staying until further orders the execution of the decision rendered by the respondent Judge in
said case.

The case under review is for the annulment of a deed of sale dated March 11, 1978, executed by
defendant Jose Y. Servando in favor of his co-defendants, the petitioners herein, covering three
parcels of land situated in Iloilo City. Claiming that the said parcels of land were mortgaged to
him in 1970 by the vendor, who is his cousin, to secure a loan of P20,000.00, the plaintiff Pio
Servando impugned the validity of the sale as being fraudulent, and prayed that it be declared
null and void and the transfer certificates of title issued to the vendees be cancelled, or
alternatively, if the sale is not annulled, to order the defendant Jose Servando to pay the amount
of P20,000.00, plus interests, and to order defendants to pay damages. Attached to the
complaint was a copy of the private document evidencing the alleged mortgage (Annex A), which
is quoted hereunder:

August 20, 1970

This is to certify that I, Jose Yusay Servando, the sole owner of three parcel of land under Tax
Declaration No. 28905, 44123 and 31591 at Lot No. 1, 1863-Portion of 1863 & 1860 situated at
Sto. Nino St., Arevalo, Compania St. & Compania St., Interior Molo, respectively, have this date
mortgaged the said property to my cousin Pio Servando, in the amount of TWENTY THOUSAND
PESOS (P20,000.00), redeemable for a period not exceeding ten (10) years, the mortgage
amount bearing an interest of 10% per annum.

I further certify that in case I fail to redeem the said properties within the period stated above,
my cousin Pio Servando, shall become the sole owner thereof.

(SGD.) JOSE YUSAY SERVANDO

WITNESSES:

(Sgd) Ernesto G. Jeruta

(Sgd) Francisco B. Villanueva

The defendants moved to dismiss the complaint on the grounds that it did not state a cause of
action, the alleged mortgage being invalid and unenforceable since it was a mere private
document and was not recorded in the Registry of Deeds; and that the plaintiff was not the real
party in interest and, as a mere mortgagee, had no standing to question the validity of the sale.
The motion was denied by the respondent Judge, in its order dated June 20, 1978, "on the
ground that this action is actually one for collection."

On June 23, 1978, defendant Jose Y. Servando died. The defendants filed a Manifestation and
Motion, informing the trial court accordingly, and moving for the dismissal of the complaint
pursuant to Section 21 of Rule 3 of the Rules of Court, pointing out that the action was for.
recovery of money based on an actionable document to which only the deceased defendant was
a party. The motion to dismiss was denied on July 25, 1978, "it appearing from the face of the
complaint that the instant action is not purely a money claim, it being only incidental, the main
action being one for annulment and damages."

On August 1, 1978, plaintiff filed a motion to declare defendants in default, and on the very next
day, August 2, the respondent Judge granted the motion and set the hearing for presentation of
plaintiff's evidence ex-parte on August 24, 1978.
 On August 2, 1978, or the same day that the default order was issued, defendants Hechanova
and Masa filed their Answers, denying the allegations of the complaint and repeating, by way of
special and affirmative defenses, the grounds stated in their motions to dismiss.

On August 25, 1978, a judgment by default was rendered against the defendants, annulling the
deed of sale in question and ordering the Register of Deeds of Iloilo to cancel the titles issued to
Priscilla Masa and Gemma Hechanova, and to revive the title issued in the name of Jose Y.
Servando and to deliver the same to the plaintiff.

The defendants took timely steps to appeal the decision to the Court of Appeals by filing a notice
of appeal, an appeal bond, and a record on appeal. However, the trial court disapproved the
record on appeal due to the failure of defendants to comply with its order to eliminate therefrom
the answer filed on August 2, 1978 and accordingly, dismissed the appeal, and on February 2,
1978, issued an order granting the writ of execution prayed for by plaintiff.

We find the petition meritorious, and the same is hereby given due course.

It is clear from the records of this case that the plaintiff has no cause of action. Plaintiff has no
standing to question the validity of the deed of sale executed by the deceased defendant Jose
Servando in favor of his co-defendants Hechanova and Masa. No valid mortgage has been
constituted plaintiff's favor, the alleged deed of mortgage being a mere private document and
not registered; moreover, it contains a stipulation (pacto comisorio) which is null and void under
Article 2088 of the Civil Code. Even assuming that the property was validly mortgaged to the
plaintiff, his recourse was to foreclose the mortgage, not to seek annulment of the sale.

WHEREFORE, the decision of the respondent court dated August 25, 1973 and its Order of
February 2, 1979 are set aside, and the complaint filed by plaintiff dated February 4, 1978 is
hereby dismissed.

SO ORDERED.

Reyes vs. Sierra, L 28658

Appeal from the decision dated December 29, 1966 of the Court of First Instance of Rizal Branch 1,
Pasig, which declared applicant Vicente Reyes the true and rightful owner of the land covered by Plan
Psu-189753 and ordered the registration of his title thereto. 

On January 3, 1961, Vicente Reyes filed an application for registration of his title to a parcel of land
situated in Antipolo, Rizal and covered by Plan Psu-189753 of the Bureau of Lands. In his application, he
declared that he acquired the land by inheritance from his father who died sometime in 1944. Applicant is
one of the heirs of the deceased Vicente Reyes Sr. but the other heirs executed a deed of quit claim in
favor of the applicant. 

The notice of initial hearing was published in the Official Gazette, and a copy thereof was posted in a
conspicuous place in the land in question and in the municipal building of Antipolo, Rizal. An opposition
was filed by the Director of Lands, Francisco Sierra and Emilio Sierra. An Order of General Default was
issued on June 28, 1962. A motion to set aside an interlocutory default order was filed by Alejandra,
Felimon, Aurelio, Apolonio, Constancio, Cirilo, all surnamed Sierra and Antonia Santos, thru counsel, and
the trial court issued an Order on February 4, 1966 amending the general order of default so as to
include the aforementioned movants as oppositors. 
The case was set for hearing, and after trial the court rendered a decision, the dispositive portion of
which reads as follows: 

IN VIEW OF THE ABOVE CONSIDERATIONS this Court declares Vicente Reyes the true
and rightful owner of the land covered by Plan, Psu-189753 and orders the registration of
his title thereto, provided that the title to be issued shall be subject to a public easement
of right of-way over a 2.00 meter-wide strip of the land along Lucay Street for the latter's
widening and improvement. 

As soon as this decision is final let, the corresponding degree be issued in favor of
VICENTE REYES, widower, Pilipino, of legal age and resident of 1851 P. Guevarra Street,
Santa Cruz, Manila. (P. 25, Record on Appeal). 

Oppositors appealed from the aforesaid decision, with the following assignment of errors: 

I 

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT ARTICLES 1134 AND
1137 OF THE NEW CIVIL CODE ARE APPLICABLE TO THIS INSTANT CASE ALTHOUGH
THERE WAS NO FORECLOSURE OR SALE OF THE PROPERTY TO THE HIGHEST BIDDER. 

II 

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT APPLICANT-APPELLEE

AND HIS PREDECESSOR-IN-INTEREST HAD BEEN IN CONSTRUCTIVE POSSESSION OF
THE LAND FROM APRIL 19, 1926 UP TO THE PRESENT AS SHOWING BY THE FACT
THAT THEY HAD PAID THE REALTY TAXES. 

III

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT BECAUSE OPPOSITORS-
APPELLANTS AND THEIR PREDECESSORS-IN-INTEREST HAD NOT TAKEN ANY ACTIVE
INTEREST TO PAY REALTY TAXES SINCE 1926 AND IT WAS APPLICANT- APPELLEE AND
HIS PREDECESSOR-IN-INTEREST THAT PAID THE REALTY 'TAXES FROM THE SAME
PERIOD, THIS CONSTITUTES STRONG CORROBORATING EVIDENCE OF APPLICANT'S
ADVERSE POSSESSION. 

IV

THE LOWER COURT ERRED IN BELIEVING AND HOLDING THAT DOCUMENT EXH. "D"
EXECUTED BY BASILIA BELTRAN IN 1926 WAS ALREADY A CONVEYANCE OF THE LAND
I N QUESTION TO VICENTE REYES AND THE FAILURE OF BASILIA BELTRAN AND HER
CHILDREN TO REDEEM THE SAME, COULD BE CONSIDERED AS IF THE LAND HAD
ALREADY BEEN SOLD TO HIM. (p. 2 1, Rollo.) 

The land applied for was originally owned by Basilia Beltran's parents, and upon their death in 1894,
Basilia inherited the property. On April 19, 1926, Basilia Beltran, a widow, borrowed from applicant's
father, Vicente Reyes, Sr. the amount of P100.00 and secured the loan with the piece of land in question,
AS evidenced by exhibit "D" quoted hereunder: 

SA KAALAMAN NANG LAHAT NA BUMASA AT 

 NAKAKITA NITONG KASULATAN: 

Kaming mag-kakapatid may sapat na gulang na nakalagda Sa kasulatan ito, bilang

katibayan nang pag papahintulot sa aming Ina na si Bacilia Beltran na ipananagutan kay
G. Vicente Reyes sa inutang ha halagang isang daan piso (P100.00) na walang
anopamang pakinabang; ang isang lagay na lupa sa kallehon Sukay, Antipolo, Rizal,
naliligiran nang mga lupang may titulo Torrents, expendientes Nos. 770, 1831, lote 1,
645 at 1839 lote 2, may kabu-uan humigit kumulang sa apat na raan metro; ito'y aring
naiwan ng ama naming namatay na si Melecio Sierra. 

Ang katotohanan kahit isangla o ipag-bile man ng tuluyan ang nasabing pag-aaral' o lupa
wala kaming kinalaman, sapagkat ipinauubaya nang lubusan sa arming Ina ang
kapamahalaan. 

Sa katunayan nagsilagda kaming mga anak, at apo kay Esteban, sa harap nang saksing
magpapatotoo.

Ngayon ika 19 nang Abril nang 1926. Antipolo, Rizal. K.P. 

Lagda ni
Bacilia Beltran 
Gregorio Sierra 

Saksi: 

Since the execution of this document, Vicente Reyes, Sr. began paying the realty taxes up to the time of
his death in 1944, after which, his children continued paying the taxes. Basilia Beltran died in 1938 before
Reyes could recover from the loan. 

Applicant, in seeking the registration of the land, relied on his belief that the property belongs to his
father who bought the same from Basilia Beltran, as borne out by his testimony during the trial on direct
examination. 

Q. Mr. Reyes, do you claim to be the owner of this property included or

described in your application?

A Yes, sir. 

Q How did you acquire this property'? 

A. Since 1926 we were the ones paying the land taxes. 

Q. From whom did you acquire this property?

A. Basilia Beltran.

Q. Do you mean to say that you yourself bought this property. 

A. My father was the one who bought the property. 

 Q. What is the name of your father? 

A. Vicente C. Reyes.

Q. Where is he now? 

A. He is already dead. 

Q. Can you inform this Honorable Court, if you know, how your father
acquired this property?

A. Since 1926 my father bought that land. 

Q. Was that transaction evidenced by a document?

A. Yes, there is a document. 

Q. From whom did your father allegedly purchase the property? 

A. Basilia Beltran. 

From the above-quoted testimony of applicant, it is evident that he considered the document marked
Exhibit "D as contract of Sale and not as a mortgage . Oppositors contended that the words "isinangla,"
"na ipananagutan sa inutang na halagang isang daang piso," "Kahit isangla o ipagbili," etc., manifest that
the document should be treated as a mortgage, antichresis, or pactum commission and not as an
absolute sale or pacto de retro sale. (p. 28, Brief, Oppositors-Appellants). 

The Court is of the opinion that Exhibit "D" is a mortgage contract. The intention of the parties at the
time of the execution of the contract must prevail, that is, the borrowing and lending of money with
security. The use of the word Debt (utang) in an agreement helps to point out that the transaction was
intended to be a loan with mortgage, because the term "utang" implies the existence of a creditor-debtor
relationship. The ' Court has invariably upheld the validity of an agreement or understanding whereby the
lender of money has taken a deed to the land as security for repayment of the loan. Thus: 

The fact that the real transaction between the parties was a borrowing and lending, will,
whenever, or however, it may appear, show that a deed, absolute on its face was
intended as a security for money; and whenever it can be ascertained to be a security for
money, it is only a mortgage, however artfully it may be disguised. (Villa vs. Santiago, 38
Phil. 163). 

The whole case really turns on the question of whether the written instrument in
controversy was a mortgage or a conditional sale. ... The real intention of the parties at
the time the written instrument was made must concern in the interpretation given to it
by the courts. ... The correct test, where it can be applied, is the continued existence of
a debt or liability between the parties. If such exists, the conveyance may be held to be
merely a security for the debt or an indemnity against the liability. (Cuyugan vs. Santos,
34 Phil. 112). 

The Cuyugan Case quoted some provisions in Jones' Commentaries on Evidence, vol. 3, paragraphs 446-
447 which are likewise applicable to the facts of the case at bar: 
 446. To show that instruments apparently absolute are only securities . ... It is an
established doctrine that a court of equity will treat a deed, absolute in form, as a
mortgage, when it is executed as security for loan of money, The court looks beyond the
terms of the instrument to the real transaction; and when that is shown to be one of
security and not of sale, it will give effect to the actual contract of the parties.

447. Same-Real intention of the parties to be ascertained  ... As we have shown in the

preceding section, the intention of the parties must govern and it matters not what
peculiar form the transaction may have taken. The inquiry always is, Was a security for
the loan of money or other property intended? ... A debt owing to the mortgagee, or a
liability incurred for the grantor, either pre-existing or created at the time the deed is
made, is essential to give the deed the character of a mortgage. The relation of debtor
and creditor must appear. The existence of the debt is one on the tests. ... In construing
the deed to be a mortgage, its character as such must have existed from its very
inception, - created at the time the conveyance was made. 

The same principle was laid down in a later case, that of Macapinlac vs. Gutierrez Rapide, 43 Phil. 781,
quoting 3 Pomeroy's Equity Jurisdiction, Section .1195, wherein it was stated: 

... The doctrine has been firmly established from an early day that when the character of
a mortgage has attached at the commencement of the transaction, so that the
instrument, whatever be its form, is regarded in equity as a mortgage, that character of
mortgage must and will always continue. If the instrument is in its essence a mortgage,
the parties cannot by any stipulations, however express and positive, render it anything
but a mortgage or deprive it of the essential attributes belonging to a mortgage in
equity. 

Concerning the legal effects of such contract, Pomeroy observes: 

... Whenever a deed absolute on its face is thus treated as a mortgage, the parties are
clothed with all the rights, are subject to all liabilities, and are entitled to all the remedies
of ordinary mortgagors and mortgagees. The grantee may maintain an action for the
foreclosure of the grantor equity of redemption; the grantor may maintain an action to
redeem and to compel a reconvayance upon his payment of the debt secured. If the
grantee goes into possession, and as such is liable to account for the rents and profits. 

Obviously, from the nature of the transaction, applicant's predecessor-in-interest is a mere mortgagee,
and ownership of the thing mortgaged is retained by Basilia Beltran, the mortgagor. The mortgagee,
however, may recover the loan, although the mortgage document evidencing the loan was non-
registrable being a purely private instrument. Failure of mortgagor to redeem the property does not
automatically vest ownership of the property to the mortgagee, which would grant the latter the right to
appropriate the thing mortgaged or dispose of it. This violates the provision of Article 2088 of the New
Civil Code, which reads: 

The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose by them. Any stipulation to the contrary is null and void. 

The act of applicant in registering the property in his own name upon mortgagor's failure to redeem the
property would amount to a pactum commissorium which is against good morals and public policy. 

In declaring applicant as the "true and rightful owner of the land in question," the trial court held that
applicant and his predecessor-in- interest acquired ownership over the property by means of prescription
having been in constructive possession of the land applied for since 1926, applying Arts, 1134 and 1137
of the New Civil Code: 

Art. 1134. - Ownership and other real rights over immovable property are acquired by
ordinary prescription through possession of ten years. 

Art. 1137. - Ownership and other real rights over immovables also prescribe through
uninterrupted adverse possession thereof for thirty years, without need of title or good
faith. 

Applicant in his testimony on cross-examination, admitted that he and his father did not take possession
of the property but only made use of the same for the purpose of spending vacation there, which practice
they discontinued for the last 23 years. Possession of the property must. be in the concept of an owner.
This is a fundamental principle of the law of prescription in this jurisdiction. In the case at bar, the
possession of applicant was not adverse, nor continuous. 

An applicant for registration of title must prove his title and should not rely on the absence or weakness
of the evidence of the oppositors. For purposes of prescription, there is just title when adverse claimant
came into possession of the property through one of the modes recognized by law for the acquisition of
ownership (Art. 1129, New Civil Code). Just title must be proved and is never presumed (Art. 1131, New
Civil Code). Mortgage does not constitute just title on the part of the mortgagee. since ownership is
retained by the mortgagor. When possession is asserted to convert itself into ownership, a new right is
sought to be created, and the law becomes more exacting and requires positive proof of title. Applicant
failed to present sufficient evidence to prove that he is entitled to register the property. The trial court's
finding that since applicant and his father had been continuously paying the realty taxes, that fact
"constitutes strong corroborating evidence of applicant's adverse possession," does not carry much
weight. Mere failure of the owner to pay the taxes does not warrant a conclusion that there was
abandonment of a right to the property. The payment of taxes on property does not alone constitute
sufficient evidence of title. (Elumbaring vs. Elumbaring, 12 Phil. 389) 

The belief of applicant that he owns the property in question which he inherited from his father cannot
overthrow the fact that the transaction is a mortgage. The doctrine "once a mortgage always a
mortgage" has been firmly established whatever be its form. (Macapinlac vs. Gutierrez Rapide, supra)
The parties cannot by any stipulation, however express and positive, render it anything but a mortgage.
No right passes to applicant except that of a mortgage since one cannot acquire a right from another
who was not in possession thereof A derivative right cannot rise higher than its source. 

Applicant having failed to show by sufficient evidence a registrable title to the land in question, the
application for registration should be dismissed. 

WHEREFORE, the decision appealed from is hereby set aside, and let another one be entered ordering
the registration of the title of the land in question in the name of the oppositors- appellants. The said
oppositors-appellants are hereby directed to pay the applicant- appellee within ninety (90) days from the
finality of this decision, the debt in the amount of P100.00 plus interest at the rate of six per cent (6%)
per annum from April 19, 1926 until paid. No pronouncement as to costs. 

SO ORDERED.

1) PNB vs. Banatao, G.R. 149221

This petition for review on certiorari1 brings into focus: (1) the effect of a compromise agreement entered
into by some, but not all, of the parties to a litigation, and its effect on the non-participating litigants; and
(2) the prohibition against the encumbrance, within the same periods prescribed by law, of lands granted
under homestead patent. 

The facts as culled from the records are outlined below.

On November 16, 1962, Banatao, et al. (plaintiffs-respondents) initiated an action docketed as Civil Case
No. 1600 against Marciano Carag (one of the defendants-respondents) before the Regional Trial Court
(RTC), Branch IV, Tuguegarao, Cagayan. 2 The action was for the recovery of real property (disputed
property) situated at Malabac, Iguig, Cagayan. The disputed property was a new land formation on the
banks of the Cagayan River — an accretion to Lot 3192 of the Iguig Cadastre — that the plaintiffs-
respondents claimed as the owners of the adjoining Lot 3192. The defendants-respondents, on the other
hand, were the occupants of the disputed property. 

The records show that while the case was pending, the defendants-respondents (particularly the spouses
Pedro Soriano and Paz Tagacay, the spouses Eugenio Soriano and Maria Cauilan, the spouses Benjamin
Tagacay and Fausta Agustin, and Milagros B. Carag – wife of Marciano Carag) were able to secure
homestead patents evidenced by Original Certificates of Title (OCTs) issued in their names, denominated
as OCT Nos. 24800, 24801, 25217, and 25802, respectively. 3 The OCTs were issued in 1965 and
1966, and all bear the proviso that, in accordance with the Public Land Act, the patented homestead
shall neither be alienated nor encumbered for five (5) years from the date of the issuance of the patent. 4

Armed with their OCTs, the defendants-respondents separately applied for loans with the Philippine
National Bank (PNB or the bank) secured by real estate mortgages on their respective titled portions of
the disputed property. The bank approved the mortgages, relying solely on the OCTs which, at the time,
did not contain any notice of lis pendens or annotation of liens and encumbrances. The PNB mortgages
were annotated on the defendants-respondents' respective OCTs also in the years 1965 and
1966.5

On February 22, 1968, the trial court decided the case in favor of the plaintiffs-respondents and against
defendant-respondent Carag, and ordered the return of the disputed property to the plaintiffs-
respondents.6 Carag appealed the trial court decision to the Court of Appeals (CA).

While the appeal was pending, the appellate court discovered that the disputed property had
been subject of homestead patents issued in the names of defendants-respondents Carag, et
al. Hence, in its Resolution dated April 16, 1969, the Special Fourth Division of the CA set aside the
February 22, 1968 decision of the RTC and ordered the remand of the records to the trial court for
further proceedings.7 The appellate court likewise ordered the necessary amendment of the complaint to
implead the defendants-respondents who were deemed indispensable parties to the case. 1avvphi1

The plaintiffs-respondents filed on October 14, 1970 the required amended complaint, impleading as
party defendants Eugenio Soriano, Maria Cauilan, Pedro Soriano, Paz Tagacay, Benjamin Tagacay, Fausta
Agustin, and Milagros B. Carag, as well as the bank. 8 The plaintiffs-respondents also added two (2)
additional causes of action, or a total of three (3) causes of action, namely: (1) recovery of real property;
(2) cancellation of the OCTs; and (3) annulment of real estate mortgage. The bank was made a party to
the case in view of the suit for annulment of mortgage.

The records disclose that on March 29, 1973, while the case was pending before the trial court, the bank
extrajudicially foreclosed the property covered by OCT No. 24800 issued to the spouses Pedro Soriano
and Paz Tagacay. The bank was declared the highest bidder in the ensuing public auction. The spouses
Soriano failed to redeem the foreclosed property, resulting in the consolidation of title in the bank’s
name; hence, the issuance on October 3, 1985 of TCT No. T-65664 in the name of the bank. 9

On February 28, 1991, the plaintiffs-respondents and the defendants-respondents entered into a
compromise agreement whereby ownership of virtually the northern half of the disputed property was
ceded to the plaintiffs-respondents, while the remaining southern half was given to the defendants-
respondents.10 In the same compromise agreement, the defendants-respondents acknowledged their
indebtedness to petitioner PNB and bound themselves to pay their respective obligations to the bank,
including the interests accruing thereon. Petitioner PNB, however, was not a party to the compromise
agreement which reads:

COMPROMISE AGREEMENT11

Plaintiffs and defendants, by counsels, enter into and submit the following compromise agreement:

xxx

(b) That the defendant, PEDRO SORIANO, acknowledges the plaintiffs as the lawful owners of
the NORTHERN PORTION of the land covered by Original Certificate of Title No. P-24800, with an
area of 85,348 square meters more or less and is more particularly described in the technical
description hereto attached as Annex "A" and forming part hereof;

(c) That the defendant, BENJAMIN TAGACAY, acknowledges the plaintiffs to be the owners of the
NORTHERN PORTION of the land covered by Original Certificate of Title No. P-25217, with an
area of 98,790 square meters more or less and is more particularly described in the technical
description hereto attached as Annex "B" and forming part hereof;

(d) That the defendant, MILAGROS B. CARAG, acknowledges the plaintiffs to be the owners of
the NORTHERN PORTION of the land covered by Original Certificate of Title No. P-24802, with an
area of 58,378 square meters more or less and is more particularly described in the technical
description attached hereto as Annex "C" and forming part hereof;

(e) That the defendant Pedro Soriano acknowledges indebtedness to the Philippine National Bank
and binds himself to pay his loan together with the interest and other charges;

(f) That the defendant Benjamin Tagacay acknowledges indebtedness to the Philippine National
Bank and binds himself to pay his loan together with the interest and other charges;

(g) That the defendant Milagros B. Carag acknowledges indebtedness to the Philippine National
Bank and binds himself to pay his loan together with the interest and other charges;

(h) That the private defendants acknowledge the plaintiffs to be the owners and possessors of
the motherland otherwise known as Lot 3192 and the area ceded to the plaintiffs by the private
defendants;

(i) That the parties hereto submit the foregoing compromise agreement as basis for the decision
in the above-entitled case by the Honorable Court.

Tuguegarao, Cagayan, December 26, 1990.

On March 15, 1991, the trial court rendered its decision, approving and adopting in toto the compromise
agreement, and ordering the participating parties to strictly comply with its terms. 12 The bank moved for
reconsideration of the trial court’s decision and for the setting aside of the compromise agreement. The
trial court denied the motion in its Resolution of February 7, 1992, thus, compelled the bank to elevate
the case to the CA.13

The appellate court dismissed the appeal in its decision of March 30, 2001, ruling that the bank is not an
indispensable party to the compromise agreement that only settles the actions for: (1) recovery of
property; and (2) cancellation of OCTs.14 On the third cause of action for annulment of mortgage, the
court held the bank is only a necessary party and "the issue could be dealt with in a separate and
distinct action." The appellate court in the same decision proceeded to strike down the mortgages as void
because the mortgagors (defendants-respondents), not being the absolute owners of the disputed
parcels of land as agreed upon in the compromise agreement, did not have the right to constitute a
mortgage on these properties.

The PNB sought reconsideration of the dismissal of its appeal, but the appellate court denied its motion in
a Resolution dated July 27, 2001;15 hence, this petition for review on certiorari.

The PNB raises the following legal issue:

WHETHER THE COMPROMISE AGREEMENT ENTERED INTO BY AND BETWEEN THE HEREIN PLAINTIFFS-
RESPONDENTS AND DEFENDANTS-RESPONDENTS AND APPROVED BY THE TRIAL COURT LEGALLY
BINDS PETITIONER PNB WHICH IS NOT A PARTY THERETO AND CONSTITUTES SUFFICIENT LEGAL
BASIS TO NULLIFY PNB'S MORTGAGE LIEN ON THE REALTY IN QUESTION.

In attacking the compromise agreement between the plaintiffs-respondents and the defendants-
respondents, the PNB argues that it is an indispensable, not merely a necessary, party to all three causes
of action, namely, for (1) recovery of real property; (2) cancellation of the OCTs; and (3) annulment of
mortgages. Arguing that the causes of action are closely intertwined and intimately related, and that the
compromise was entered into precisely to put an end to the case, the PNB submits that its consent to the
compromise agreement is necessary to secure a final and complete determination of the claims and
defenses of all the parties to the case. 

The PNB further argues that when the appellate court approved in toto the trial court's judgment on the
compromise agreement, it failed to consider that the bank was a mortgagee in good faith. The bank
claims good faith on the position that the OCTs presented to it were all clean on their faces at the time
the mortgages were applied for; that there were no notices of lis pendens or any annotation of liens or
encumbrances on all of them; and that it had no knowledge, actual or constructive, of facts or
circumstances to warrant further inquiry into the titles of the defendants-respondents.

THE COURT’S RULING

We resolve to dismiss the petition for the reasons discussed below.

The compromise agreement disposed of the first two causes of action filed by plaintiffs-respondents
Banatao, et al. against defendants-respondents Carag, et al., namely, the actions for (1) recovery of real
property; and (2) cancellation of the OCTs, thereby settling the question of ownership between them.
The trial court approved the compromise agreement in toto. The appellate court, in turn, upheld the trial
court,  but it proceeded to discuss on the third cause of action (for annulment of mortgage), concluding
that the mortgages were void because the mortgagors were not the absolute owners of the
mortgaged properties.1avvphi1 In the words of the appellate court:
The main cause of action here is the "Recovery of Realty and Reconveyance," the "Annulment of
Mortgage" is only an ancillary cause of action. In the decision approving the compromise agreement it
disposes and finally determined the "Recovery of Realty and Reconveyance."

The moment ownership of the disputed real property was clearly proven to be that of the
[plaintiffs-respondents], the question of the validity of the mortgage made by the
[defendants-respondents] with [petitioner PNB] could easily be determined.

xxx

The [defendants-respondents], not being the absolute owners and not having been authorized to
mortgage the subject real property, could not validly mortgage the said real property with
[petitioner PNB]. However, we are not unmindful of the [defendants-respondents'] liability to [the
bank]. But such issue could be dealt with in a separate and distinct action. [Emphasis supplied.]

With the above ruling, the bank who was not a party to the agreement was therefore affected; it was a
mortgagee of a part of the disputed property, and had in fact foreclosed the portion covered by OCT No.
24800. 

It is basic in law that a compromise agreement, as a contract, is binding only upon the parties to the
compromise, and not upon non-parties. This is the doctrine of relativity of contracts. Consistent with this
principle, a judgment based entirely on a compromise agreement is binding only on the parties to the
compromise the court approved, and not upon the parties who did not take part in the compromise
agreement and in the proceedings leading to its submission and approval by the court. Otherwise stated,
a court judgment made solely on the basis of a compromise agreement binds only the parties to the
compromise, and cannot bind a party litigant who did not take part in the compromise agreement. In the
case of Castañeda v. Heirs of Maramba,16 we held that:

Judgment based on a compromise affects only participating litigants—A partial decision, stemming from
an amicable settlement among two of several parties to an action, binds only the parties so participating
in the settlement. This decision never becomes final with respect to the parties who did not
take part in the settlement confirmed by the partial decision aforesaid. [Emphasis supplied.]

Following Castañeda, the judgment on compromise rendered by the trial court in this case, and later
affirmed by the appellate court, is final with respect only to the plaintiffs-respondents and defendants-
respondents, but not with respect to the PNB. Hence, the trial court's judgment on compromise which
settles the issue of ownership over the properties in question is but a partial decision that does not
completely decide the case and cannot bind the PNB. 

In its assailed decision, the CA, while recognizing the liability of the defendants-respondents
to the PNB, declared that the mortgagors, not being the absolute owners of the mortgaged
properties as agreed upon in the compromise agreement, do not have the right to constitute
the mortgage. This conclusion is legally incorrect as the CA capitalized on the ownership
issue settled between the plaintiffs-respondents and the defendants-respondents in
invalidating the PNB mortgages, without hearing the side of the PNB as mortgagee, and
later, co-owner of the disputed property. As discussed above, the compromise agreement
cannot bind the bank, a non-party to the agreement; necessarily, the ownership issue which
was settled by the compromise agreement cannot be made applicable to the bank without
hearing it.

Our own review of the records of the case shows that the appellate court was not without basis to
properly dispose of all the causes of action, including the annulment of mortgage issue, had it fully
scrutinized the records of the case. A glaring fact that escaped the scrutiny of both the trial and appellate
courts, and which would have led them to the quick and correct disposition of the annulment issue (and
of the entire case, given the compromise agreement), is the proviso against alienation or encumbrance of
lands granted by homestead patent – a fact plainly evident upon a facial examination of the OCTs
involved. 

We conclude from our own examination of these OCTs that the mortgages cannot but
be void ab initio. On the faces of all the OCTs—secured through homestead patents—are
inscribed the following words that echo the mandatory provisions of law: 

TO HAVE AND TO HOLD the said tract of land with the appurtenances thereunto x x x subject to the
provisions of Sections 118, 121, 122 and 124 of Commonwealth Act No. 141, as amended, which provide
that except in favor of the Government or any of its branches, units or institutions,  THE LAND HEREBY
ACQUIRED SHALL BE INALIENABLE AND SHALL NOT BE SUBJECT TO [E]NCUMBRANCE FOR A
PERIOD OF FIVE (5) YEARS NEXT FOLLOWING THE DATE OF THIS PATENT, and shall not be
liable for the satisfaction of any debt contracted prior to the expiration of that period; x x x. 17 [Emphasis
supplied.]

This inscription reproduces Section 118 18 of the Public Land Act,19 as amended, which contains a
proscription against the alienation or encumbrance of homestead patents within five years from issue.
The rationale for the prohibition, reiterated in a line of cases, first laid down in Pascua v. Talens20 states
that "x x x homestead laws were designed to distribute disposable agricultural lots of the State to land-
destitute citizens for their home and cultivation. Pursuant to such benevolent intention the State prohibits
the sale or encumbrance of the homestead (Section 116, now Section 118) within five years after the
grant of the patent. x x x. It aims to preserve and keep in the family of the homesteader that portion of
public land which the State had gratuitously given to him."

In the present case, the annotation of the mortgage liens occurred only months after the date of
the issuance of the homestead patents. The pertinent facts as seen on the faces of the OCTs are
illustrated below:

Date of Date of Annotation / Period from

OCT
Mortgagors Homestead Inscription of Date of
No.
Patent Mortgage Patent21

Pedro Soriano/ Paz

P-24800 28 Apr 1965 17 Sep 1965 5 Months
Tagacay

Eugenio Soriano/
P-24801 28 Apr 1965 27 Oct 1965 6 Months
Maria Cauilan

Milagros B. Carag/
P-24802 28 Apr 1965 13 Oct 1965 6 Months
Marciano Carag

Benjamin Tagacay/
P-25217 15 Feb 1966 25 Mar 1966 1 Month
Fausta Agustin

This situation is similar to that of Republic v. Heirs of Alejaga, Sr.22 where the respondent obtained a loan
of ₱100,000.00 in 1981 from the PNB, secured by a real estate mortgage on the patented land. The 1981
encumbrance was contracted two years from date of issuance of the patent in 1979, for which reason the
Court cited a violation of Section 118 of the Public Land Act which proscribes the alienation or
encumbrance of the patented land within five years from the date of the patent, and which proscription
clearly appears as a proviso in the OCT issued in the name of the respondent in the case. Consequently,
the PNB mortgage was declared void. 

The present case deserves exactly the same treatment, and the PNB cannot claim that it is a mortgagee
in good faith. The proscription against alienation or encumbrance is unmistakable even on a cursory
reading of the the OCTs. Thus, one who contracts with a homestead patentee is charged with knowledge
of the law's proscriptive provision that must necessarily be read into the terms of any agreement
involving the homestead. Under the circumstances, the PNB simply failed to observe the diligence
required in the handling of its transactions and thus made the fatal error of approving the loans secured
by mortgages of properties that cannot, in the first place, be mortgaged.

Both the defendants-respondents and the bank are to be faulted for the invalidity of the mortgages. We
cannot, however, apply the doctrine of pari delicto in accordance with the ruling that the doctrine does
not apply when the contract is prohibited by law. 23 A saving factor for the bank under the situation is that
a mortgage is merely an accessory agreement and does not affect the principal contract of loan. The
mortgages, while void, can still be considered as instruments evidencing the indebtedness of defendants-
respondents to the PNB in a proper case for the collection of the defendants-respondents’ loans. 

Our conclusion on the nullity of mortgage issue renders it unnecessary to decide the question of whether
the compromise agreement between the plaintiffs-respondents and the defendants-respondents should
be set aside for its effect on the bank. With the mortgages invalidated, the PNB no longer has any
interest that the compromise agreement can affect. In the absence of any other reason to impugn the
lower court decisions approving the compromise agreement, we affirm the approval of the compromise
agreement and the disposition of the case on the basis of compromise. Given our ruling on the invalidity
of the mortgages, a remand of this issue is no longer necessary. The parties’ liabilities to PNB on the
loans they obtained are not issues before us for disposition, and are for the parties to act upon as
matters outside the coverage of this case.1avvphi1

WHEREFORE, we hereby DECLARE the mortgages constituted on OCT Nos. 24800, 24801, 25217 and
25802 VOID and, for this reason, we DISMISS the petition. We AFFIRM the approval of the compromise
agreement by the Court of Appeals and the disposition of the case on the basis of compromise. The order
to remand the case to the Regional Trial Court, Branch IV, Tuguegarao, Cagayan, for further proceedings
is therefore REVERSED. 

Costs against petitioner PNB.

SO ORDERED.

Dayrit vs. Ca, L 29388

Petition for certiorari by way of appeal from the Court of Appeals’ minute resolution of June 14,
1968 dismissing the petition for certiorari in CA-G.R. No. 41359-R, as well as its resolutions of
July 9, 1968 and August 5, 1968 denying the first and second motions for reconsideration,
respectively, in the same case.

On July 21, 1965, the defendants Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles
entered into a contract with the Mobil Oil Philippines, Inc., entitled "LOAN & MORTGAGE
AGREEMENT," providing, among others, that:jgc:chanrobles.com.ph
"(a) For and in consideration of Sales Agreement dated July 21, 1965 among, the parties herein,
Mobil grants a loan of P150,000 to borrowers.

"(b) Defendants-Borrowers shall repay Mobil the whole amount of P150,000 plus 10% interest
per annum on the diminishing balance for 48 months.

"(c) To secure the prompt repayment of such loan by defendants-borrowers to Mobil and the
faithful performance by Borrowers of that Sales Agreement, Defendants-Borrowers hereby
transfer in favor of Mobil by way of first mortgage lands covered by TCT No. 45169 and TCT No.
45170, together with the improvements existing in said two (2) parcels of land.

"(d) In case of default of Defendants-Borrowers in payment of any of the installments and/or

their failure to purchase the quantity of products stated therein Mobil shall have the right to
foreclose this mortgage.

"(e) Mobil, in case of default and foreclosure, shall be entitled to attorney’s fees and cost of
collection equivalent to not less than 25% of total indebtedness remaining unpaid.

"(f) All expenses in connection with the preparation and registration of this mortgage as well as
cancellation of same shall be for the account of Defendants-Borrowers.

"(g) If Defendants-Borrowers shall perform the full obligation above stated according to the
terms thereof, then this obligation shall be null and void, otherwise, it shall remain in full force
and effect."cralaw virtua1aw library

The defendants violated the Loan & Mortgage Agreement, they having paid but one installment
in the amount of P3,816, of which P1,250 was applied to interest, and the remaining P2,566 to
the principal obligation. The defendants likewise failed to buy the quantities of products as
required in the Sales Agreement (exh. D). The plaintiff made due demand (exh. I), which the
defendant Dayrit answered, acknowledging his liability in his letter exh. I-1.

On November 17, 1967, after trial and after the parties had submitted their memoranda, 1 the
trial court rendered its decision, the dispositive portion of which reads:jgc:chanrobles.com.ph

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants
Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles, ordering them to pay to the plaintiff
one-third each of the sum of P147,434.00 with interest of 10% per annum from the time it fell
due according to agreement, and in default of such payment, the properties put up in collateral
shall be sold in foreclosure sale in accordance with law, the proceeds to be applied in payment of
the amount due to the plaintiff from the defendants as claimed in the complaint provided that, as
to Dayrit, his liability shall in no case exceed 1/3 of the total obligation.

"The defendants are likewise ordered to pay to the plaintiff, in the same proportion of 1/3 each,
25% of the obligation as attorney’s fees as provided in the contract; and P300.60 for the
registration of the contract.

x x x

"Each of the three said defendants shall also pay 1/3 of the costs."cralaw virtua1aw library

No appeal having been interposed by the defendants, the above decision became final and
executory.
An undated Mobil’s motion for execution of the decision and for the appointment of Eladio Ylagan
as special sheriff (annex D) was received by the herein petitioner Dayrit on February 8, 1968.
Whereupon, he filed his opposition and motion to stay execution, alleging that before the finality
of the aforesaid judgment, he and the plaintiff had agreed not to appeal and/or file any motion
for reconsideration, the petitioner offering to pay his one-third share with a reasonable discount,
if possible, in so far as the interests and the award for attorney’s fees were concerned, with the
corresponding release of the mortgage on all his properties, and praying, in view thereof, for a
30-day grace period within which to pay the plaintiff. The 30-day grace period was granted by
the court in its order of February 24, 1968.

On March 25, 1968 the petitioner filed another motion for 20 days’ extension within which to pay
his one-third share of the judgment obligation and to submit the corresponding compromise
agreement for the satisfaction of the judgment. The said motion was granted on April 1, 1968.

Thereafter, the respondent Mobil filed an "Urgent Reply to Opposition and Motion to Stay
Execution dated Feb. 21, 1968 and Motion dated March 25, 1968," alleging therein that the
respondent agreed to release the mortgage or collateral for the entire judgment obligation only if
"the whole principal mortgaged debt plus the whole accrued interest" were fully paid. Mobil
further prayed for a writ of execution to be issued aga inst the petitioner after the lapse of 20
days from March 25, 1968, if by then the parties shall not have submitted to compromise
agreement for the satisfaction of the judgment; Mobil also reiterated its prayer for the
appointment of respondent Eladio Ylagan as special sheriff.

On April 3, 1968 the petitioner filed a manifestation and motion, praying that he be allowed to
deposit with the Clerk of Court the amount corresponding to his one-third share of the obligation
under the decision of November 17, 1967, and that thereupon the collateral or mortgage over
petitioner’s properties or lands be ordered released or cancelled.

On April 10, 1968 the court a quo ordered all pending incidents set for hearing on April 19, 1968,
"so that the Court may have the opportunity to confer with the parties to thresh out the
settlement of this case." At this hearing Mobil did not appear; the court reset the hearing for May
23, 1968.

Under date of May 8, 1968, Mobil filed an addendum to its reply dated April 1, 1968 and
opposition to petitioner’s motion dated April 3, 1968, praying that the motion of petitioner Dayrit
that the entire mortgaged collateral be released upon his payment of mere 1/3 of the loan
obligation, be denied and instead a writ of execution against him in accordance with the
dispositive portion of the decision and sections 2 and 3 of Rule 68 of the Revised Rules of Court
be issued.

On May 18, 1968 the petitioner filed his rejoinder to respondent Mobil’s aforesaid addendum and
opposition.

On May 23, 1968, after hearing oral argument, the court denied the manifestation and motion of
Dayrit filed thru counsel and dated April 3, 1968; the court further ruled that "There is no further
need to issue an order for the issuance of a writ of execution and appointment of special sheriff .
. . considering that the Court, in its order of February 24, 1968, has already ordered the issuance
of a writ of execution for the satisfaction of the judgment."cralaw virtua1aw library

The petitioner then filed his petition for certiorari with the Court of Appeals, dated May 30, 1968,
alleging that "respondent Judge Arca acted without or in excess of his jurisdiction and/or with
grave abuse of discretion, in denying petitioner’s motion to allow him to pay or deposit his one-
third share of the judgment obligation" as well as the consequent release or cancellation of the
mortgage on his properties.

The Court of Appeals, however, in its minute resolution of June 14, 1968, dismissed the petition
for certiorari, in the following words:jgc:chanrobles.com.ph

"Upon consideration of the petition for certiorari filed in this case, the Court RESOLVED TO
DISMISS the petition, there being no abuse of discretion in ordering the execution of a final
judgment. Details of execution for satisfaction of Vincent Dayrit’s liability will be worked out in
connection with the sale of the collateral for mortgaged debt, and the judgment in Civil Case No.
64138 of the CFI-Manila will control the disposition and application of the collateral."cralaw
virtua1aw library

The petitioner filed a motion for reconsideration dated June 9, 1968 which the Court of Appeals
denied in its resolution of July 9, 1968, as follows:jgc:chanrobles.com.ph

"Both the petition and the motion for reconsideration are based on a misapprehension of the
terms of the judgment. The mortgage obligation is one and indivisible. it was executed to assure
payment of the total indebtedness of the three defendants in Civil Case No. 64138, and not
merely one-third (1/3) thereof corresponding to petitioner Vincent P. Dayrit’s liability."cralaw
virtua1aw library

The petitioner’s second motion for reconsideration of July 25, 1968 was summarily dismissed on
August 5, 1968, for lack of merit.

The petitioner, in his present petition, tenders the following issues for
resolution:jgc:chanrobles.com.ph

"1) Whether or not respondent Judge [CFI-Manila] acted without or in excess of his jurisdiction,
and/or with grave abuse of discretion in denying petitioner’s motion to allow him to exercise his
clearly legal right to pay or deposit his one-third share of the judgment obligation;

"2) The next issue was that brought about by the Court of Appeals’ resolution dismissing the
petition for certiorari, and which was raised in petitioner’s motion dated June 19, 1968 for
reconsideration of said resolution, contending that the ground for dismissal did not jibe with the
issue raised in the petition for certiorari

"3) And lastly the Court of Appeals’ resolution of July 9, 1968 denying said motion for
reconsideration injected the issue of alleged misapprehension on the part of petitioner of the
terms of the judgment of respondent judge."cralaw virtua1aw library

1. The question raised by the respondent Mobil that the present petition for certiorari was filed
way beyond the reglementary period of 15 days from appellant’s receipt of notice of judgment or
of the denial of his motion for reconsideration pursuant to section 1, Rule 45 of the Revised Rules
of Court, 2 needs to be resolved before consideration of this case on the merits. Admittedly, the
ex parte first motion for reconsideration filed by the herein petitioner was denied, and copy of
such denial was received by the petitioner on July 15, 1968. Still not satisfied, petitioner filed
another ex parte motion for reconsideration on July 26, 1968, notice of the denial of which,
under CA resolution dated August 5, 1968, was received by said petitioner on August 9, 1968.

Respondent Mobil contends that the second motion for reconsideration filed by the petitioner was
a mere scrap of paper and pro-forma since it was filed ex parte and without express leave of
court, contrary to the mandate of section 1, Rule 52 of the Rules of Court. 3
The rule appears to be inflexible in the sense that no more than one motion for reconsideration
shall be filed without express leave of court. The requirement that the second motion for
reconsideration must be presented, with leave of court, within fifteen days from notice of the
order or judgment, deducting the time during which the first motion was pending, is to afford the
court sufficient time to evaluate whether there is prima facie merit therein, so that, "if the court
finds merit prima facie in the motion for re-hearing or reconsideration, the adverse party shall be
given time to answer, after which the court, in its discretion, may set the case for oral
argument." 4 And only upon compliance with the above stated requirements may the second
motion for reconsideration stay the final order or judgment sought to be re-examined. 5

The Court of Appeals gave due course to the second motion for reconsideration of the herein
petitioner, but nevertheless, dismissed the same summarily for lack of merit.

However, even assuming, that the ex parte second motion for reconsideration was properly filed
so as to toll the reglementary period within which to appeal, it appears that the petition for
certiorari filed with this Court on August 20, 1968 was time-barred. From the date of denial of
the petitioner’s ex parte first motion for reconsideration received by him on July 15, 1968 —
assuming that the period was interrupted by the ex parte second motion for reconsideration from
July 26, 1968 to August 9, 1968 (15 days) — to the elevation of the said case to this Court on
August 20, 1968, 36 days had elapsed. Deducting the 15 days during which the ex parte second
motion for reconsideration was pending from the total period of 36 days leaves 21 days. This
means that the present petition was filed with this Court six days late, contrary to and in violation
of section 1, Rule 45, which specifically provides that a petition for certiorari under such Rule
should be filed within 15 days from notice of judgment or denial of motion for reconsideration.
Hence, the present petition may be dismissed on the aforestated ground.

But we opt, nevertheless, to consider the merits of this case, if only to demonstrate to the
petitioner his error.

2. The decision of the lower court, let it not be forgotten, has admittedly become final and
executory. The controverted judgment ordered the defendants (Dayrit, Sumbillo and Angeles) "to
pay to the plaintiff one-third each of the sum of P147,434.00 with interest of 10% per annum
from the time it fell due according to agreement, and in default of such payment, the properties
put up in collateral shall be sold in foreclosure sale in accordance with law, the proceeds to be
applied in payment of the amount due to the plaintiff from the defendants as claimed in the
complaint, provided that, as to Dayrit, his liability shall in no case exceed 1/3 of the total
obligation."cralaw virtua1aw library

In sum, the issue that must be resolved in the instant case is, whether or not the Court of First
Instance of Manila erred in ordering the sale at public auction of the mortgaged properties to
answer for the entire P147,434 principal obligation after the defendants (Dayrit, Sumbillo and
Angeles) had failed to pay their respective one-third shares of the obligation to the respondent
Mobil; otherwise stated, whether or not the respondents Court of First Instance and the Court of
Appeals erred in refusing to allow the alleged proposed deposit of a sum equivalent to 1/3 of the
loan agreed upon and in refusing to release forever the collaterals owned by Dayrit, although the
other 2/3 portion of the loan obligation had not been satisfied due to insolvency of the other two
co-defendants.

To begin with, the prayer of the complaint filed with the respondent Court of First Instance
recites as follows:jgc:chanrobles.com.ph

"WHEREFORE, it is respectfully prayed that judgment be rendered —

"a) Ordering the defendants to pay the sum of P147,434 with 10% interest per annum from the
time it fell due as agreed upon and that in default of such payment, the above described
properties be sold and the proceeds of sale be applied to the payment of the amount due to the
plaintiff from the defendant under this complaint."cralaw virtua1aw library

The complaint, in effect, is a collection suit with damages and foreclosure of mortgage against
the three defendants, Leonila Sumbillo, Reynaldo Angeles and Vincent Dayrit. Although the Loan
and Mortgage Agreement was signed by the three defendants as mortgagors, the properties
being foreclosed belong solely to, and are registered solely in the name of, the petitioner Vincent
Dayrit.

The pertinent dispositive portion of the decision rendered by the lower court
reads:jgc:chanrobles.com.ph

"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants
Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles, ordering them to pay to the plaintiff
one-third each of the sum of P147,434 with interest of 10% per annum from the time it fell due
according to agreement, and in default of such payment, the properties put up in collateral shall
be sold in foreclosure sale in accordance with law, the proceeds to be applied in payment of the
amount due to the plaintiff from the defendants as claimed in the complaint, provided that, as to
Dayrit, his liability shall in no case exceed 1/3 of the total obligation."cralaw virtua1aw library

The petitioner contends that the said judgment is a simple money judgment and not a
foreclosure judgment, and that because the respondent Mobil resorted to the remedy of
enforcing his right by a complaint against the defendant-petitioner for collection of a sum of
money, with the consequent simple money judgment, the satisfaction of his 1/3 share of the joint
obligation would release all the mortgaged properties put up as collateral to secure the payment
of the whole obligation. The reason advanced by the petitioner is that the decision rendered
being a simple money judgment and not a mortgage-foreclosure judgment, the distinction in its
execution is decisive, that is, whereas in mortgage foreclosure the judgment should conform to
the requirement, embodied in section 2, Rule 68 of the Rules of Court, that the order of payment
be made into the court "within a period not less than ninety (90) days . . . and in default of such
payment, the property mortgaged be sold to realize" the indebtedness, in a simple money
judgment, upon satisfaction of part in the instant case his 1/3 share) of the joint obligation, the
mortgaged properties should be released from such mortgage contract.

This contention of the petitioner is clearly devoid of merit.

The decision which the petitioner describes as a simple money judgment orders the defendants
Vincent Dayrit, Leonila T. Sumbillo and Reynaldo Angeles to pay the plaintiff the sum of
P147,434, and in default of such payment, the properties put up in collateral shall be sold in
foreclosure sale in accordance with law, the proceeds to be applied in payment of the amount
due to the plaintiff from the defendants as claimed in the complaint. While it is true that the
obligation is merely joint and each of the defendants is obliged to pay only his/her 1/3 share of
the joint obligation, the undisputed fact remains that the intent and purpose of the Loan and
Mortgage Agreement was to secure, inter alia, the entire loan of P150,000 that the respondent
Mobil extended to the defendants. The court below found that the defendants had violated the
Loan and Mortgage Agreement, they having paid but one installment. The undisputed fact also
remains that the petitioner alone benefited from the proceeds of the loan of P150,000, the said
amount having been paid directly to the Bank of the Philippines to bail out the same properties
from a mortgage that was about to be foreclosed. In effect, Mobil merely stepped into the shoes
of the Bank of the Philippines.
The petitioner insists that the dispositive portion of the judgment declaring the obligation merely
joint with the proviso that "as to Dayrit, his liability shall in no case exceed 1/3 of the total
obligation," should be construed in the light of the opinion of the lower court that "said collateral
must answer in full but only to the extent of Dayrit’s liability which as above determined" is 1/3 of
the obligation," thereby entitling him to pay or deposit in court his corresponding share of the
joint obligation in satisfaction thereof, with the automatic release of all the mortgaged properties.

A judgment must be distinguished from an opinion. The latter is the informal expression of the
views of the court and cannot prevail against its final order or decision. "While the two may be
combined in one instrument, the opinion forms no part of the judgment. There is a distinction
between the findings and conclusion of a court and its judgment. While they may constitute its
decision and amount to a rendition of a judgment they are not the judgment itself. They amount
to nothing more than an order for judgment which must be distinguished from the judgment
Only the dispositive portion may be executed." 6

Besides, well-entrenched in law is the rule that a mortgage directly and immediately subjects the
property upon which it is imposed, 7 the same being indivisible even though the debt may be
divided, 8 and such indivisibility likewise being unaffected by the fact that the debtors are not
solidarily liable. 9 As Tolentino, in his Commentaries and Jurisprudence on the Civil Code of the
Philippines, 10 puts it —

"When several things are pledged or mortgaged, each thing for a determinate portion of the
debt, the pledges or mortgages are considered separate from each other. But when the several
things are given to secure the same debt in its entirety, all of them are liable for the debt, and
the creditor does not have to divide his action by distributing the debt among the various things
pledged or mortgaged. Even when only a part of the debt remains unpaid, all the things are still
liable for such balance. Hence, a mortgage voluntarily constituted by the debtor on two or more
parcels of land is one and indivisible, and the mortgagee has the right to have either or both
parcels, jointly or singly, sold to satisfy his claim. In case the mortgaged properties are a house
and lot, it can not be claimed that the lot and the house should be sold separately and not
together."cralaw virtua1aw library

But then there is this other seeming posture of the petitioner: that the judgment which has
become final and executory either modified or superseded the Loan and Mortgage Agreement
between the parties, and since the obligation is merely joint, upon payment thereof, as in
attachment, the properties mortgaged are released from liability. The decision under
consideration, however, did nothing of the sort. The petitioner conveniently refuses to recognize
the true import of the dispositive portion of the judgment. The said portion unequivocally states
that "in default of such payment, the properties put up in collateral shall be sold in foreclosure
sale in accordance with law, the proceeds to be applied in payment of the amount due to the
plaintiff as claimed in the complaint." And the claim in the complaint was the full satisfaction of
the total indebtedness of P147,434; therefore, the release of all the mortgaged properties may
be authorized only upon the full payment of the above-stated amount secured by the said
mortgage.

With respect to the provisions of section 2 of Rule 68 of the Rules of Court giving the petitioner a
period of 90 days within which he might voluntarily pay the debt before the sale of the collateral
at public auction was ordered, we agree that the trial court failed to provide such period.
However, this failure can be regarded as having resulted in mere damnum absque injuria. From
November 17, 1967 when the decision was rendered to May 23, 1968 when the final order to sell
the mortgaged properties was issued, a period of more than six months had passed, which is
considerably much more than the 90-day period of grace allowed the petitioner to validly tender
the proper payment.

ACCORDINGLY, the petition is denied, at petitioner’s cost.

Manila Banking Corp vs. Teodoro, G.R. 54955

This is an appeal from the decision ** of the Court of First Instance of Manila, Branch XVII in
Civil Case No. 78178 for collection of sum of money based on promissory notes executed by the
defendants-appellants in favor of plaintiff-appellee bank. The dispositive portion of the appealed
decision (Record on Appeal, p. 33) reads as follows:jgc:chanrobles.com.ph

"WHEREFORE judgment is hereby rendered (a) sentencing defendants, Anastacio Teodoro, Jr.
and Grace Anna Teodoro jointly and severally, to pay plaintiff the sum of P15,037.11 plus 12%
interest per annum from September 30, 1969 until fully paid, in payment of Promissory Notes No.
11487, plus the sum of P1,000.00 as attorney’s fees; and (b) sentencing defendant Anastacio
Teodoro, Jr. to pay plaintiff the sum of P8,934.74, plus interest at 12% per annum from
September 30, 1969 until fully paid, in payment of Promissory Notes Nos. 11515 and 11699, plus
the sum of P500.00 a attorney’s fees.

With Costs against defendants."

The facts of the case as found by the trial court are as follows:

"On April 25, 1966, Defendants, together with Anastacio Teodoro, Sr., jointly and severally,
executed in favor of plaintiff a Promissory Note (No. 11487) for the sum of P10,420.00 payable in
120 days, or on August 25, 1966, at 12% interest per annum. Defendants failed to pay the aid
amount inspite of repeated demands and the obligation as of September 30, 1969 stood at
P15,137.11 including accrued interest and service charge.

On May 3, 1966 and June 20, 1966, defendants Anastacio Teodoro, Sr. (Father) and Anastacio
Teodoro, Jr. (Son) executed in favor of plaintiff two Promissory Notes (Nos. 11515 and 11699)
for P8,000.00 and P1,000.00 respectively, payable in 120 days at 12% interest per annum.
Father and Son made a partial payment on the May 3, 1966 Promissory Note but none on the
June 20, 1966 Promissory Note, leaving still an unpaid balance of P8,934.74 as of September 30,
1969 including accrued interest and service charge.cralawnad

The three Promissory Notes stipulated that any interest due if not paid at the end of every month
shall be added to the total amount then due, the whole amount to bear interest at the rate of
12% per annum until fully paid; and in case of collection through an attorney-at-law, the makers
shall, jointly and severally, pay 10% of the amount over-due as attorney’s fees, which in no case
shall be less than P200.00.

It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of Assignment
of Receivables from the Emergency Employment Administration in the sum of P44,635.00. The
Deed of Assignment provided that it was for and in consideration of certain credits, loans,
overdrafts and other credit accommodations extended to defendants as security for the payment
of said sum and the interest thereon, and that defendants do hereby remise, release and
quitclaim all its rights, title, and interest in and to the accounts receivables.’ Further:chanrob1es
virtual 1aw library
‘(1) The title and right of possession to said accounts receivable is to remain in the assignee, and
it shall have the right to collect the same from the debtor, and whatsoever the Assignor does in
connection with the collection of said accounts, it agrees to do as agent and representative of the
Assignee and in trust for said Assignee . . .;

(6) The Assignor guarantees the existence and legality of said accounts receivable, and the due
and punctual payment thereof unto the assignee, . . . on demand, . . . and further, that Assignor
warrants the solvency and credit worthiness of each and every account.

(7) The Assignor does hereby guarantee the payment when due on all sums payable under the
contracts giving rise to the accounts receivable . . . including reasonable attorney’s fees in
enforcing any rights against the debtors of the assigned accounts receivable and will pay upon
demand, the entire unpaid balance of said contract in the event of non payment by the said
debtors of any monthly sum at its due date or of any other default by said debtors . . .

(9) . . . This Assignment shall also stand as a continuing guarantee for any and all whatsoever
there is or in the future there will be justly owing from the Assignor to the Assignee . . .

In their stipulations of Fact, it is admitted by the parties that plaintiff extended loans to
defendants on the basis and by reason of certain contracts entered into by the defunct
Emergency Employment Administration (EEA) with defendants for the fabrication of fishing boats,
and that the Philippine Fisheries Commission succeeded the EEA after its abolition ; that non-
payment of the notes was due to the failure of the Commission to pay defendants after the latter
had complied with their contractual obligations; and that the President of plaintiff Bank took
steps to collect from the Commission, but no collection was effected.

For failure of defendants to pay the sums due on the Promissory Note, this action was instituted
on November 13, 1969, originally against the Father, Son, and the latter’s wife. Because the
Father died, however, during the pendency of the suit, the case as against him was dismissed
under the provisions of Section 21, Rule 3 of the Rules of Court. The action, then is against
defendant Son and his wife for the collection of the sum of P15,037.11 on Promissory Note No.
14487; and against defendant Son for the recovery of P8,394.74 on Promissory Notes Nos.
11515 and 11699, plus interest on both amounts at 12% per annum from September 30, 1969
until fully paid, and 10% of the amounts due as attorney’s fees.

Neither of the parties presented any testimonial evidence and submitted the case for decision
based on their Stipulations of Fact and on their documentary evidence.

The issues, as defined by the parties are: (1) whether or not plaintiff’s claim is already
considered paid by the Deed of Assignment of Receivables by the Son; and (2)
whether or not it is plaintiff who should directly sue the Philippine Fisheries
Commission for collection." (Record on Appeal, p. 29-32).

On April 17, 1972, the trial court rendered its judgment adverse to defendants. On June 8, 1972,
defendants filed a motion for reconsideration (Record on Appeal, p. 33) which was denied by the
trial court in its order of June 14, 1972 (Record on Appeal, p. 37). On June 23, 1972, defendants
filed with the lower court their notice of appeal together with the appeal bond (Record on Appeal,
p. 38). The record of appeal was forwarded to the Court of Appeals on August 22, 1972 (Record
on Appeal, p. 42).chanrobles law library : red

In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment of
error, that is —
"THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF THE CONTRACT
BETWEEN THE PARTIES, IN VIOLATION OF LAW; HENCE, TANTAMOUNT TO LACK OR EXCESS
OF JURISDICTION.’

As the appeal involves a pure question of law, the Court of Appeals, in its resolution promulgated
on March 6, 1980, certified the case to this Court (Rollo, p. 24). The record on Appeal was
forwarded to this Court on March 31, 1980 (Rollo, p. 1).

In the resolution of May 30, 1980, the First Division of this Court ordered that the case be
docketed and declared submitted for decision (Rollo, p. 33).

On March 7, 1988, considering the length of time that the case has been pending with the Court
and to determine whether supervening events may have rendered the case moot and academic,
the Court resolved (1) to require the parties to MOVE IN THE PREMISES within thirty days from
notice, and in case they fail to make the proper manifestation within the required period, (2) to
consider the case terminated and closed with the entry of judgment accordingly made thereon
(Rollo, p. 40).

On April 27, 1988, appellee moved for a resolution of the appeal/review interposed by
defendants-appellants (Rollo, p. 41).

The major issues raised in this case are as follows: (1) whether or not the assignment of
receivables has the effect of payment of all the loans contracted by appellants from appellee
bank; and (2) whether or not appellee bank must first exhaust all legal remedies against the
Philippine Fisheries Commission before it can proceed against appellants for collections of loan
under the promissory notes which are plaintiff’s bases in the action for collection in Civil Case No.
78178.

"Assignment of credit is an agreement by virtue of which the owner of a credit, known as the
assignor, by a legal cause, such as sale, dation in payment, exchange or donation, and without
the need of the consent of the debtor, transfers his credit and its accessory rights to another,
known as the assignee, who acquires the power to enforce it to the same extent as the assignor
could have enforced it against the debtor . . . It may be in the form of a sale, but at times it may
constitute a dation in payment, such as when a debtor, in order to obtain a release from his debt,
assigns to his creditor a credit he has against a third person, or it may constitute a donation as
when it is by gratuitous title; or it may even be merely by way of guaranty, as when the creditor
gives as a collateral, to secure his own debt in favor of the assignee, without transmitting
ownership. The character that it may assume determines its requisites and effects, its regulation,
and the capacity of the parties to execute it; and in every case, the obligations between assignor
and assignee will depend upon the judicial relation which is the basis of the assignment:
(Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Vol. 5, pp. 165-
166).

There is no question as to the validity of the assignment of receivables executed by appellants in

favor of appellee bank. The issue is with regard to its legal effects.

It is evident that the assignment of receivables executed by appellants on January 24, 1964 did
not transfer the ownership of the receivables to appellee bank and release appellants from their
loans with the bank incurred under promissory notes Nos. 11487, 11515 and 11699.chanrobles
law library : red
The Deed of Assignment provided that it was for and in consideration of certain credits, loans,
overdrafts, and their credit accommodations in the sum of P10,000.00 extended to appellants by
appellee bank, and as security for the payment of said sum and the interest thereon; that
appellants as assignors, remise, release, and quitclaim to assignee bank all their rights, title and
interest in and to the accounts receivable assigned (1st paragraph). It was further stipulated that
the assignment will also stand as a continuing guaranty for future loans of appellants to appellee
bank and correspondingly the assignment shall also extend to all the accounts receivable;
appellants shall also obtain in the future, until the consideration on the loans secured by
appellants from appellee bank shall have been fully paid by them (No. 9).

The position of appellants, however, is that the deed of assignment is a quitclaim in consideration
of their indebtedness to appellee bank, not mere guaranty, in view of the following provisions of
the deed of assignment:jgc:chanrobles.com.ph

". . . the Assignor do hereby remise, release and quit-claim unto said assignee all its rights, title
and interest in the accounts receivable described hereunder." (Emphasis supplied by appellants,
first par., Deed of Assignment)."cralaw virtua1aw library

". . . that the title and right of possession to said account receivable is to remain in said assignee
and it shall have the right to collect directly from the debtor, and whatsoever the Assignor does
in connection with the collection of said accounts, it agrees to do so agent and representative of
the Assignee and it trust for said Assignee . . ." (Ibid. par. 2 of Deed of Assignment)." (Record on
Appeal, p. 27)

The character of the transactions between the parties is not, however, determined by the
language used in the document but by their intention. Thus, the Court, quoting from the
American Jurisprudence (68 2d, Secured Transaction, Section 50) said:jgc:chanrobles.com.ph

"The characters of the transaction between the parties is to be determined by their intention,
regardless of what language was used or what the form of the transfer was. If it was intended to
secure the payment of money, it must be construed all a pledge. However, even though a
transfer, if regarded by itself, appears to have been absolute, its object and character might still
be qualified and explained by a contemporaneous writing declaring it to have been a deposit of
the property as collateral security. It has been said that a transfer of property by the debtor to a
creditor, even if sufficient on its face to make an absolute conveyance, should be treated as a
pledge if the debt continues in existence and is not discharged by the transfer, and that
accordingly, the use of the terms ordinarily importing conveyance, of absolute ownership will not
be given that effect in such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership, in the
absence of clear and ambiguous language or other circumstances excluding an intent to pledge."
(Lopez v. Court of Appeals, 114 SCRA 671 [1962]).

Definitely, the assignment of the receivables did not result from a sale transaction. It cannot be
said to have been constituted by virtue of a dation in payment for appellants’ loans with the bank
evidenced by promissory note Nos. 11487, 11515 and 11699 which are the subject of the suit for
collection in Civil Case No. 78178. At the time the deed of assignment was executed, said loans
were non-existent yet. The deed of assignment was executed on January 24, 1964 (Exh. "G"),
while promissory note No. 11487 is dated April 25, 1966 (Exh. "A"), promissory note 11515,
dated May 3, 1966 (Exh. "B"), promissory note 11699, on June 20, 1966 (Exh. "C"). At most, it
was a dation in payment for P10,000.00, the amount of credit from appellee bank indicated in
the deed of assignment. At the time the assignment was executed, there was no obligation to be
extinguished except the amount of P10,000.00. Moreover, in order that an obligation may be
extinguished by another which substitutes the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point incompatible with
each other (Article 1292, New Civil Code).chanrobles virtualawlibrary
chanrobles.com:chanrobles.com.ph

Obviously, the deed of assignment was intended as collateral security for the bank loans of
appellants, as a continuing guaranty for whatever sums would be owing by defendants to
plaintiff, as stated in stipulation No. 9 of the deed.

In case of doubt as to whether a transaction is a pledge or a dation in payment, the presumption

is in favor of pledge, the latter being the lesser transmission of rights and interests (Lopez v.
Court of Appeals, supra).

In one case, the assignments of rights, title and interest of the defendant in the contracts of
lease of two buildings as well as her rights, title and interest in the land on which the buildings
were constructed to secure an overdraft from a bank amounting to P110,000.00 which was
increased to P150,000.00, then to P165,000.00 was considered by the Court to be documents of
mortgage contracts inasmuch as they were executed to guarantee the principal obligations of the
defendant consisting of the overdrafts or the indebtedness resulting therefrom. The Court ruled
that an assignment to guarantee an obligation is in effect a mortgage and not an absolute
conveyance of title which confers ownership on the assignee (Peoples Bank & Trust Co. v. Odom,
64 Phil. 126 [1937]).

II

As to whether or not appellee bank must have to exhaust all legal remedies against the Philippine
Fisheries Commission before it can proceed against appellants for collection of loans under their
promissory notes, must also be answered in the negative.

The obligation of appellants under the promissory notes not having been released by the
assignment of receivables, appellants remain as the principal debtors of appellee bank rather
than mere guarantors. The deed of assignment merely guarantees said obligations. That the
guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the
property of the debtor, and has resorted to all the legal remedies against the debtor, under
Article 2058 of the New Civil Code does not therefore apply to them. It is of course of the
essence of a contract of pledge or mortgage that when the principal obligation becomes due, the
things in which the pledge or mortgage consists may be alienated for the payment to the creditor
(Article 2087, New Civil Code). In the instant case, appellants are both the principal debtors and
the pledgors or mortgagors. Resort to one is, therefore, resort to the other.

Appellee bank did try to collect on the pledged receivables. As the Emergency Employment
Agency (EEA) which issued the receivables had been abolished, the collection had to be coursed
through the Office of the President which disapproved the same (Record on Appeal, p. 16). The
receivable became virtually worthless leaving appellants’ loans from appellee bank unsecured. It
is but proper that after their repeated demands made on appellants for the settlement of their
obligations, appellee bank should proceed against appellants. It would be an exercise in futility to
proceed against a defunct office for the collection of the receivables pledged.

WHEREFORE, the appeal is Dismissed for lack of merit and the appealed decision of the trial
court is affirmed in toto.

SO ORDERED.