G.R. No.
103576 August 22, 1996 suretyship, the faithful performance of the obligation by the principal debt or is secured by
ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA PAC, petitioners,
vs.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF CALOOCAN
CITY, respondents.
 
VITUG, J.:p
Would it be valid and effective to have a clause in a chattel mortgage that purports to likewise extend its
coverage to obligations yet to be contracted or incurred? This question is the core issue in the instant
petition for review on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner "Acme Shoe, Rubber & Plastic
Corporation," executed on 27 June 1978, for and in behalf of the company, a chattel mortgage in favor of
private respondent Producers Bank of the Philippines. The mortgage stood by way of security for
petitioner's corporate loan of three million pesos (P3,000,000.00). A provision in the chattel mortgage
agreement was to this effect —
(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly perform the full
obligation or obligations above-stated according to the terms thereof, then this mortgage shall be null and
void. . . .
In case the MORTGAGOR executes subsequent promissory note or notes either as a renewal of the former
note, as an extension thereof, or as a new loan, or is given any other kind of accommodations such as
overdrafts, letters of credit, acceptances and bills of exchange, releases of import shipments on Trust
Receipts, etc., this mortgage shall also stand as security for the payment of the said promissory note or
notes and/or accommodations without the necessity of executing a new contract and this mortgage shall
have the same force and effect as if the said promissory note or notes and/or accommodations were
existing on the date thereof. This mortgage shall also stand as security for said obligations and any and all
other obligations of the MORTGAGOR to the MORTGAGEE of whatever kind and nature, whether such
obligations have been contracted before, during or after the constitution of this mortgage. 1
In due time, the loan of P3,000,000.00 was paid by petitioner corporation. Subsequently, in 1981, it
obtained from respondent bank additional financial accommodations totalling P2,700,000.00. 2 These
borrowings were on due date also fully paid.
On 10 and 11 January 1984, the bank yet again extended to petitioner corporation a loan of one million
pesos (P1,000,000.00) covered by four promissory notes for P250,000.00 each. Due to financial constraints,
the loan was not settled at maturity. 3 Respondent bank thereupon applied for an extra judicial foreclosure
of the chattel mortgage, herein before cited, with the Sheriff of Caloocan City, prompting petitioner
corporation to forthwith file an action for injunction, with damages and a prayer for a writ of preliminary
injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C-12081). Ultimately, the court
dismissed the complaint and ordered the foreclosure of the chattel mortgage. It held petitioner
corporation bound by the stipulations, aforequoted, of the chattel mortgage.
Petitioner corporation appealed to the Court of Appeals 4 which, on 14 August 1991, affirmed, "in all
respects," the decision of the court a quo. The motion for reconsideration was denied on 24 January 1992.
The instant petition interposed by petitioner corporation was initially dinied on 04 March 1992 by this
Court for having been insufficient in form and substance. Private respondent filed a motion to dismiss the
petition while petitioner corporation filed a compliance and an opposition to private respondent's motion
to dismiss. The Court denied petitioner's first motion for reconsideration but granted a second motion for
reconsideration, thereby reinstating the petition and requiring private respondent to comment thereon. 5
Except in criminal cases where the penalty of reclusion perpetua or death is imposed 6 which the Court so
reviews as a matter of course, an appeal from judgments of lower courts is not a matter of right but of
sound judicial discretion. The circulars of the Court prescribing technical and other procedural
requirements are meant to weed out unmeritorious petitions that can unnecessarily clog the docket and
needlessly consume the time of the Court. These technical and procedural rules, however, are intended to
help secure, not suppress, substantial justice. A deviation from the rigid enforcement of the rules may thus
be allowed to attain the prime objective for, after all, the dispensation of justice is the core reason for the
existence of courts. In this instance, once again, the Court is constrained to relax the rules in order to give
way to and uphold the paramount and overriding interest of justice.
Contracts of security are either personal or real. In contracts of personal security, such as a guaranty or a
the personal commitment of another (the guarantor or surety). In contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment is secured by an encumbrance of property — in
pledge, the placing of movable property in the possession of the creditor; in chattel mortgage, by the
execution of the corresponding deed substantially in the form prescribed by law; in real estate mortgage,
by the execution of a public instrument encumbering the real property covered thereby; and in antichresis,
by a written instrument granting to the creditor the right to receive the fruits of an immovable property
with the obligation to apply such fruits to the payment of interest, if owing, and thereafter to the principal
of his credit — upon the essential condition that if the obligation becomes due and the debtor defaults,
then the property encumbered can be alienated for the payment of the obligation, 7 but that should the
obligation be duly paid, then the contract is automatically extinguished proceeding from the accessory
character 8 of the agreement. As the law so puts it, once the obligation is complied with, then the contract
of security becomes, ipso facto, null and void. 9
While a pledge, real estate mortgage, or antichresis may exceptionally secure after-incurred obligations so
long as these future debts are accurately described, 10 a chattel mortgage, however, can only cover
obligations existing at the time the mortgage is constituted. Although a promise expressed in a chattel
mortgage to include debts that are yet to be contracted can be a binding commitment that can be
compelled upon, the security itself, however, does not come into existence or arise until after a chattel
mortgage agreement covering the newly contracted debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract conformably with the form prescribed by the Chattel Mortgage
Law. 11 Refusal on the part of the borrower to execute the agreement so as to cover the after-incurred
obligation can constitute an act of default on the part of the borrower of the financing agreement whereon
the promise is written but, of course, the remedy of foreclosure can only cover the debts extant at the time
of constitution and during the life of the chattel mortgage sought to be foreclosed.
A chattel mortgage, as hereinbefore so intimated, must comply substantially with the form prescribed by
the Chattel Mortgage Law itself. One of the requisites, under Section 5 thereof, is an affidavit of good faith.
While it is not doubted that if such an affidavit is not appended to the agreement, the chattel mortgage
would still be valid between the parties (not against third persons acting in good faith 12), the fact,
however, that the statute has provided that the parties to the contract must execute an oath that —
. . . (the) mortgage is made for the purpose of securing the obligation specified in the conditions thereof,
and for no other purpose, and that the same is a just and valid obligation, and one not entered into for the
purpose of fraud. 13
makes it obvious that the debt referred to in the law is a current, not an obligation that is yet merely
contemplated. In the chattel mortgage here involved, the only obligation specified in the chattel mortgage
contract was the P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of Section 3 of
the Chattel Mortgage Law, the payment of the obligation automatically rendered the chattel mortgage void
or terminated. In Belgian Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al., 14 the Court
said —
. . . A mortgage that contains a stipulation in regard to future advances in the credit will take effect only
from the date the same are made and not from the date of the mortgage. 15
The significance of the ruling to the instant problem would be that since the 1978 chattel mortgage had
ceased to exist coincidentally with the full payment of the P3,000,000.00 loan, 16 there no longer was any
chattel mortgage that could cover the new loans that were concluded thereafter.
We find no merit in petitioner corporation's other prayer that the case should be remanded to the trial
court for a specific finding on the amount of damages it has sustained "as a result of the unlawful action
taken by respondent bank against it." 17 This prayer is not reflected in its complaint which has merely
asked for the amount of P3,000,000.00 by way of moral damages. 18 In LBC Express, Inc. vs. Court of
Appeals, 19 we have said:
Moral damages are granted in recompense for physical suffering, mental anguish, fright, serious anxiety,
besmirched reputation, wounded feelings, moral shock, social humiliation, and similar injury. A
corporation, being an artificial person and having existence only in legal contemplation, has no feelings, no
emotions, no senses; therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and it flows from real ills, sorrows, and
griefs of life — all of which cannot be suffered by respondent bank as an artificial person. 20
While Chua Pac is included in the case, the complaint, however, clearly states that he has merely been so
named as a party in representation of petitioner corporation.
Petitioner corporation's counsel could be commended for his zeal in pursuing his client's cause. It instead
turned out to be, however, a source of disappointment for this Court to read in petitioner's reply to private
respondent's comment on the petition his so-called "One Final Word;" viz:
In simply quoting in toto the patently erroneous decision of the trial court, respondent Court of Appeals
should be required to justify its decision which completely disregarded the basic laws on obligations and
contracts, as well as the clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this
Honorable Court; that in the event that its explanation is wholly unacceptable, this Honorable Court should
impose appropriate sanctions on the erring justices. This is one positive step in ridding our courts of law of
incompetent and dishonest magistrates especially members of a superior court of appellate
jurisdiction. 21 (Emphasis supplied.)
The statement is not called for. The Court invites counsel's attention to the admonition in Guerrero
vs. Villamor; 22 thus:
(L)awyers . . . should bear in mind their basic duty "to observe and maintain the respect due to the courts
of justice and judicial officers and . . . (to) insist on similar conduct by others." This respectful attitude
towards the court is to be observed, "not for the sake of the temporary incumbent of the judicial office,
but for the maintenance of its supreme importance." And it is through a scrupulous preference for
respectful language that a lawyer best demonstrates his observance of the respect due to the courts and
judicial officers . . . 23
The virtues of humility and of respect and concern for others must still live on even in an age of
materialism.
WHEREFORE, the questioned decisions of the appellate court and the lower court are set aside without
prejudice to the appropriate legal recourse by private respondent as may still be warranted as an
unsecured creditor. No costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be circumspect in dealing with the
courts.
SO ORDERED.

321 Phil. 938

BELLOSILLO, J.:
Petitioners Olivia M. Navoa and Ernesto Navoa seek reversal of the decision of the Court of
Appeals[1] which "modified" the order of the trial court dismissing the complaint for lack of cause of
action.  The appellate court remanded the case to the court a quo for private respondents to file their
responsive pleading and for trial on the merits.
On 17 December 1977 private respondents filed with the Regional Trial Court of Manila an action against
petitioners for collection of various sums of money based on loans obtained by the latter.  On 3 January
1978 petitioners filed a motion to dismiss the complaint on the ground that the complaint stated no cause
of action and that plaintiffs had no capacity to sue.
After private respondents submitted their opposition to the motion to dismiss on 9 January 1978 the trial
court dismissed the case.  A motion to reconsider the dismissal was denied.
On 27 March 1978 private respondents appealed to the Court of Appeals which on 11 December 1980
modified the order of dismissal "by returning the records of this case for trial on the merits, upon filing of
an answer subject to the provisions of Articles 1182 and 1197 of the Civil Code for the first cause of action.  Second Cause of Action
The other causes of action should be tried on the merits subject to the defenses the defendants may allege
in their answer."
The instant petition alleges that respondent court erred:  (a) in not dismissing the appeal for lack of
appellate jurisdiction over the case which involves merely a question of law; (b) in not affirming the order
of dismissal for lack of cause of action; and, (c) in holding that private respondents have a cause of action
under the second to the sixth causes of action of the complaint.[2]
We cannot sustain the petition. Petitioners are now estopped from assailing the appellate jurisdiction of
the Court of Appeals after receiving an adverse judgment therefrom.[3] Having participated actively in the
proceedings before the appellate court, petitioners can no longer question its authority.
Petitioners submit that private respondents failed to specify in their complaint a fixed period within which
petitioners should pay their obligations; that instead of stating that petitioners failed to discharge their
obligations upon maturity private respondents sought to collect on the checks which were issued to them
merely as security for the loans; and, that private respondents failed to make a formal demand on
petitioners to satisfy their obligations before filing the action.
For a proper determination of whether the complaint filed by private respondents sufficiently stated a
cause of action, we shall examine the relevant allegations in the complaint, to wit:
Allegations Common To All Causes of Actions
xxx                                x x x                                x x x
3.    That sometime in x x x February, 1977, when the Reycard Duet was in Manila, plaintiff Teresita got
acquainted with defendant Olivia in the jewelry business, the former selling the jewelries of the latter; that
to the Reycard Duet alone, plaintiff Teresita sold jewelries worth no less than ONE HUNDRED TWENTY
THOUSAND (P120,000.00) PESOS in no less than twenty (20) transactions; that even when the Reycards
have already left, their association continued, and up to the month of August, 1977, plaintiff Teresita sold
for defendant Olivia jewelries worth no less than TWENTY THOUSAND (P20,000.00) PESOS, in ten (10)
transactions more or less;
xxx                                x x x                                x x x
5.    That sometime in the months of June and July of 1977, defendant Olivia, on two occasions, asked for a
loan from plaintiff Teresita, for the purpose of investing the same in the purchase of jewelries, which loan
were secured by personal checks of the former; that in connection with these loans, defendant promised
plaintiff a participation in an amount equivalent to one half (1/2) of the profit to be realized; that on these
loans, plaintiff was given a share in the amount of P1,200.00 in the first transaction, and in the second
transaction, the sum of P950.00;
First Cause of Action
6.    That on August 15, 1977, defendant Olivia got from plaintiff Teresita, one diamond ring, one and one
half (1-1/2) karats, heart shape, valued in the amount of Fifteen thousand (P15,000.00) Pesos; that as a
security for the said ring, Olivia issued a Philippine Commercial and Industrial Bank Check, San Sebastian
Branch, dated August 15, 1977, No. 13894, copy of which is hereto attached and made a part hereof as
Annex "A";
7.    That the condition of the issuance of the check was - if the ring is not returned within fifteen (15) days
from August 15, 1977, the ring is considered sold; that after fifteen days, plaintiff Teresita asked defendant
Olivia if she could deposit the check, and the answer of defendant Olivia was - hold it for sometime, until I
tell you to deposit the same; that the check was held until the month of November, 1977, and when
deposited, it was dishonored for lack of sufficient funds; that for the reason that the aforementioned check
was not honored when deposited, defendant Olivia should be held liable for interest at the rate of one
percent a month, from date of issue, until the same is fully paid;
8.    That on August 25, 1977, plaintiff Teresita extended a loan to the herein defendant Olivia in the
amount of TEN THOUSAND (P10,000.00) PESOS, secured by a Philippine Commercial and Industrial Bank
Check, PCIBANK Singalong Branch, No. 14307, dated Sept. 25, 1977, photo copy of which is hereto
attached and made a part hereof as Annex "B";
9.    That this loan was extended upon representation of defendant Olivia that she needed money to pay
for jewelries which she can resell for a big profit; that having established her goodwill, by reason of the
transaction mentioned in par. "5" hereof, the loan was extended by plaintiff;
10. That this check, Annex "B", when deposited was dishonored; that for the reason that the check was
dishonored when deposited, defendant Olivia should be held liable for interest at the rate of one percent
(1%) per month, from the date of issue until fully paid;
Third Cause of Action
11. That on August 27, 1977, plaintiff extended to defendant Olivia a loan in the amount of FIVE
THOUSAND PESOS (P5,000.00), secured by a Philippine Commercial & Industrial Bank check, PCIBANK
Singalong Branch, No. 14308, dated Sept. 27, 1977, photo copy of which is hereto attached and made a
part hereof as Annex "C";
12. That this loan was extended on the same representation made by defendant Olivia, stated in par. "9",
under the terms and conditions stated in par. "5" hereof;
13. That the check Annex "C", has not as yet been paid up to now, hence, defendant Olivia should be held
liable for interest at the rate of one percent (1%) monthly, from date of issue, until fully paid;
Fourth Cause of Action
14. That on August 30, 1977, plaintiff Teresita, extended a loan in favor of defendant Olivia, in the amount
of Five Thousand (P5,000.00) Pesos, secured by a Philippine Commercial and Industrial Bank Check,
PCIBANK Singalong Branch, No. 14311, dated Sept. 30, 1977, photo copy of which is hereto attached and
made a part hereof as Annex "D";
15. That this loan was extended on the same representation made by defendant Olivia, as stated in par. "9"
hereof, under the terms and conditions stated in par. "5" hereof;
16. That this check, Annex "D" has not as yet been paid up to now, hence, she should be held liable for
interest thereon at the rate of one percent (1%) per month, from date of issue, until fully paid;
Fifth Cause of Action

17. That on Sept. 15, 1977, plaintiff Teresita extended a loan in favor of defendant Olivia, in the amount of
TEN THOUSAND (P10,000.00) PESOS, secured by a Philippine Commercial & Industrial Bank check, PCIBANK
Singalong Branch, No. 14320, dated October 15, 1977, photo copy of which is hereto attached and made a
part hereof as Annex "E";
18. That this loan was given on the same representation made by defendant Olivia, stated on par. "9"
hereof, and under the terms and conditions stated in par. "5" hereof;
19. That this check Annex "E" when deposited was dishonored; that for the reason that the check was
dishonored when deposited, defendant Olivia should be held liable for interest at the rate of one percent
(1%) monthly, from date of issue, until fully paid;
Sixth Cause of Action
20. That on Sept. 27, 1977, plaintiff Teresita extended a loan to defendant Olivia, in the amount of TEN
THOUSAND (P10,000.00) PESOS, secured by a Philippine Commercial & Industrial Bank check, No. 14325,
dated October 27, 1977, photo copy of which is hereto attached and made a part hereof as Annex "F";
21. That this loan was given on the same representation made by defendant Olivia, stated in par. "9"
hereof, and under the terms and conditions stated in par. "5" hereof;
22. That this check, Annex F, when deposited was dishonored; that for the reason that the check was
dishonored when deposited, defendant Olivia should be held liable for interest thereon, at the rate of one
percent (1%) monthly, from date of issue, until fully paid;
Seventh Cause of Action
23. That plaintiff, by reason of the two transactions in par. "5" hereof, reposed trust and confidence on
defendant Olivia, however, by virtue of these trust and confidence, she availed of the same in securing the
loans aforementioned by misrepresentations, and as a direct consequence thereof, the loans have not as
yet been settled up to now, for which plaintiff Teresita suffered sleepless nights, mental torture and
wounded feelings, for the reason that the money used in said transactions do all belong to her; that this
situation is further aggravated by the malicious act of defendant Olivia, by having filed a complaint with the
Manila Police, to the effect that she (Teresita) stole the checks involved in this case; that as a consequence
thereof, she was investigated and she suffered besmirched reputation, social humiliation, wounded
feelings, moral shock and similar injuries, for which defendant Olivia should be held liable, as and by way of
moral damages in the amount of EIGHTY THOUSAND (P80,000.00) PESOS;
Eight Cause of Action
24. That as and by way of exemplary or corrective damages, to serve as an example or correction for the
public good, defendant Olivia should be held liable to pay to the herein plaintiff Teresita, the amount of
Ten Thousand Pesos, as exemplary damages;
Ninth Cause of Action
25. That plaintiff, in order to protect her rights and interests, engaged the services of the undersigned, and
she committed herself to pay the following:
The amount of P200.00 for every appearance in the trial of this case.
The amount of P2,000.00 as retainers fees.
An amount equivalent to ten percent of any recover from defendant.
On the basis of the allegations under the heading Allegations Common to all Causes of Action above stated
as well as those found under the First Cause of Action to the Ninth Cause of Action, should the complaint
be dismissed for want of cause of action?
A cause of action is the fact or combination of facts which affords a party a right to judicial interference in
his behalf.  The requisites for a cause of action are:  (a) a right in favor of the plaintiff by whatever means
and under whatever law it arises or is created, (b) an obligation on the part of the defendant to respect
and not to violate such right; and, (c) an act or omission on the part of the defendant constituting a
violation of the plaintiff's right or breach of the obligation of the defendant to the plaintiff.[4]  Briefly
stated, it is the reason why the litigation has come about; it is the act or omission of defendant resulting in
the violation of someone's right.[5]
In determining the existence of a cause of action, only the statements in the complaint may properly be
considered.  Lack of cause of action must appear on the face of the complaint and its existence may be
determined only by the allegations of the complaint, consideration of other facts being proscribed and any
attempt to prove extraneous circumstances not being allowed.
If a defendant moves to dismiss the complaint on the ground of lack of cause of action, such as what
petitioners did in the case at bar, he is regarded as having hypothetically admitted all the averments
thereof.  The test of sufficiency of the facts found in a complaint as constituting a cause of action is
whether or not admitting the facts alleged the court can render a valid judgment upon the same in
accordance with the prayer thereof.  The hypothetical admission extends to the relevant and material facts
well pleaded in the complaint and inferences fairly deducible therefrom.  Hence, if the allegations in a
complaint furnish sufficient basis by which the complaint can be maintained, the same should not be
dismissed regardless of the defense that may be assessed by the defendants.[6]
In their first cause of action private respondents Eduardo and Teresita Domdoma alleged that petitioner
Olivia Navoa obtained from the latter a ring valued at P15,000.00 and issued as security therefor a check
for the same amount dated 15 August 1977 with the condition that if the ring was not returned within
fifteen (15) days the ring would be considered sold; and, after the lapse of the period, private respondent
Teresita Domdoma asked to deposit the check but petitioner Olivia Navoa requested the former not to
deposit it in the meantime; that when Teresita Domdoma deposited the check after holding it for
sometime the same was dishonored for lack of funds.  Private respondent Teresita Domdoma sought to
collect the amount of P15,000.00 plus interest from 15 August 1977 until fully paid.
From these facts the ring was considered sold to petitioner Olivia Navoa 15 days from 15 August 1977 and
despite the sale the latter failed to pay the price therefor even as the former was given ample time to pay
the agreed amount covered by a check. Clearly, respondent Teresita Domdoma's right under the
agreement with petitioner Olivia Navoa was violated by the latter.
In the second to the sixth causes of action it was alleged that private respondents granted loans to
petitioners in different amounts on different dates.  All these loans were secured by separate checks
intended for each amount of loan obtained and dated one month after the contracts of loan were
executed.  That when these checks were deposited on their due dates they were all dishonored by the
bank.  As a consequence, private respondents prayed that petitioners be ordered to pay the amounts of
the loans granted to them plus one percent interest monthly from the dates the checks were dishonored
until fully paid.
Culled from the above, the right of private respondents to recover the amounts loaned to petitioners is
clear.  Moreover, the corresponding duty of petitioners to pay private respondents is undisputed.   The
question now is whether petitioners committed an act or omission constituting a violation of the right of
private respondents.
All the loans granted to petitioners are secured by corresponding checks dated a month after each loan
was obtained.  In this regard, the term security is defined as a means of ensuring the enforcement of an
obligation or of protecting some interest in property.  It may be personal, as when an individual becomes a
surety or a guarantor; or a property security, as when a mortgage, pledge, charge, lien, or other device is
used to have property held, out of which the person to be made secure can be compensated for loss.
[7] Security is something to answer for as a promissory note.[8] That is why a secured creditor is one who
holds a security from his debtor for payment of a debt.[9] From the allegations in the complaint there is no
other fair inference than that the loans were payable one month after they were contracted and the
checks issued by petitioners were drawn to answer for their debts to private respondents.

Petitioners failed to make good the checks on their due dates for the payment of their obligations. Hence,
private respondents filed the action with the trial court precisely to compel petitioners to pay their due
and demandable obligations.  Art. 1169 of the Civil Code is explicit - those obliged to deliver or to do
something incur in delay from the time the obligee judicially or extrajudicially demands from them the
fulfillment of their obligation.  The continuing refusal of petitioners to heed the demand of private
respondents stated in their complaint unmistakably shows the existence of a cause of action on the part of
the latter against the former.

Quite obviously, the trial court erred in dismissing the case on the ground of lack of cause of action.
Respondent Court of Appeals therefore is correct in remanding the case to the trial court for the filing of an
answer by petitioners and to try the case on the merits.

WHEREFORE, the petition is DENIED.  The judgment of the Court of Appeals dated 11 December 1980
remanding the case to the trial court for the filing of petitioners' answer and thereafter for trial on the
merits is AFFIRMED.  Costs against petitioners.

SO ORDERED.

G.R. No. L-19190             November 29, 1922

THE PEOPLE OF THE PHILIPPINE ISLANDS, plaintiff-appellee,
vs.
VENANCIO CONCEPCION, defendant-appellant.
Recaredo Ma. Calvo for appellant.
Attorney-General Villa-Real for appellee.
MALCOLM, J.:
By telegrams and a letter of confirmation to the manager of the Aparri branch of the Philippine National
Bank, Venancio Concepcion, President of the Philippine National Bank, between April 10, 1919, and May 7,
1919, authorized an extension of credit in favor of "Puno y Concepcion, S. en C." in the amount of
P300,000. This special authorization was essential in view of the memorandum order of President
Concepcion dated May 17, 1918, limiting the discretional power of the local manager at Aparri, Cagayan, to
grant loans and discount negotiable documents to P5,000, which, in certain cases, could be increased to
P10,000. Pursuant to this authorization, credit aggregating P300,000, was granted the firm of "Puno y
Concepcion, S. en C.," the only security required consisting of six demand notes. The notes, together with
the interest, were taken up and paid by July 17, 1919.
"Puno y Concepcion, S. en C." was a copartnership capitalized at P100,000. Anacleto Concepcion
contributed P5,000; Clara Vda. de Concepcion, P5,000; Miguel S. Concepcion, P20,000; Clemente Puno,
P20,000; and Rosario San Agustin, "casada con Gral. Venancio Concepcion," P50,000. Member Miguel S.
Concepcion was the administrator of the company.
On the facts recounted, Venancio Concepcion, as President of the Philippine National Bank and as member
of the board of directors of this bank, was charged in the Court of First Instance of Cagayan with a violation
of section 35 of Act No. 2747. He was found guilty by the Honorable Enrique V. Filamor, Judge of First
Instance, and was sentenced to imprisonment for one year and six months, to pay a fine of P3,000, with
subsidiary imprisonment in case of insolvency, and the costs.
Section 35 of Act No. 2747, effective on February 20, 1918, just mentioned, to which reference must
hereafter repeatedly be made, reads as follows: "The National Bank shall not, directly or indirectly, grant
loans to any of the members of the board of directors of the bank nor to agents of the branch banks."
Section 49 of the same Act provides: "Any person who shall violate any of the provisions of this Act shall be
punished by a fine not to exceed ten thousand pesos, or by imprisonment not to exceed five years, or by
both such fine and imprisonment." These two sections were in effect in 1919 when the alleged unlawful
acts took place, but were repealed by Act No. 2938, approved on January 30, 1921.
Counsel for the defense assign ten errors as having been committed by the trial court. These errors they
have argued adroitly and exhaustively in their printed brief, and again in oral argument. Attorney-General
Villa-Real, in an exceptionally accurate and comprehensive brief, answers the proposition of appellant one
by one.
The question presented are reduced to their simplest elements in the opinion which follows:
I. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, a "loan" within the meaning of section 35 of Act No.
2747?
Counsel argue that the documents of record do not prove that authority to make a loan was given, but
only show the concession of a credit. In this statement of fact, counsel is correct, for the exhibits in
question speak of a "credito" (credit) and not of a " prestamo" (loan).
The "credit" of an individual means his ability to borrow money by virtue of the confidence or trust
reposed by a lender that he will pay what he may promise. (Donnell vs. Jones [1848], 13 Ala., 490;
Bouvier's Law Dictionary.) A "loan" means the delivery by one party and the receipt by the other party of a
given sum of money, upon an agreement, express or implied, to repay the sum loaned, with or without
interest. (Payne vs. Gardiner [1864], 29 N. Y., 146, 167.) The concession of a "credit" necessarily involves
the granting of "loans" up to the limit of the amount fixed in the "credit,"
II. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C.," by
Venancio Concepcion, President of the Philippine National Bank, a "loan" or a "discount"?
Counsel argue that while section 35 of Act No. 2747 prohibits the granting of a "loan," it does not prohibit
what is commonly known as a "discount."
In a letter dated August 7, 1916, H. Parker Willis, then President of the National Bank, inquired of the
Insular Auditor whether section 37 of Act No. 2612 was intended to apply to discounts as well as to loans.
The ruling of the Acting Insular Auditor, dated August 11, 1916, was to the effect that said section referred
to loans alone, and placed no restriction upon discount transactions. It becomes material, therefore, to
discover the distinction between a "loan" and a "discount," and to ascertain if the instant transaction
comes under the first or the latter denomination.
Discounts are favored by bankers because of their liquid nature, growing, as they do, out of an actual, live,
transaction. But in its last analysis, to discount a paper is only a mode of loaning money, with, however,
these distinctions: (1) In a discount, interest is deducted in advance, while in a loan, interest is taken at the
expiration of a credit; (2) a discount is always on double-name paper; a loan is generally on single-name
paper.
Conceding, without deciding, that, as ruled by the Insular Auditor, the law covers loans and not discounts,
yet the conclusion is inevitable that the demand notes signed by the firm "Puno y Concepcion, S. en C."
were not discount paper but were mere evidences of indebtedness, because (1) interest was not deducted
from the face of the notes, but was paid when the notes fell due; and (2) they were single-name and not
double-name paper.
The facts of the instant case having relation to this phase of the argument are not essentially different from
the facts in the Binalbagan Estate case. Just as there it was declared that the operations constituted a loan
and not a discount, so should we here lay down the same ruling.
III. Was the granting of a credit of P300,000 to the copartnership, "Puno y Concepcion, S. en C." by
Venancio Concepcion, President of the Philippine National Bank, an "indirect loan" within the meaning of
section 35 of Act No. 2747?
Counsel argue that a loan to the partnership "Puno y Concepcion, S. en C." was not an "indirect loan." In
this connection, it should be recalled that the wife of the defendant held one-half of the capital of this
partnership.
In the interpretation and construction of statutes, the primary rule is to ascertain and give effect to the
intention of the Legislature. In this instance, the purpose of the Legislature is plainly to erect a wall of
safety against temptation for a director of the bank. The prohibition against indirect loans is a recognition
of the familiar maxim that no man may serve two masters — that where personal interest clashes with
fidelity to duty the latter almost always suffers. If, therefore, it is shown that the husband is financially
interested in the success or failure of his wife's business venture, a loan to partnership of which the wife of
a director is a member, falls within the prohibition.
Various provisions of the Civil serve to establish the familiar relationship called a conjugal partnership.
(Articles 1315, 1393, 1401, 1407, 1408, and 1412 can be specially noted.) A loan, therefore, to a
partnership of which the wife of a director of a bank is a member, is an indirect loan to such director.
That it was the intention of the Legislature to prohibit exactly such an occurrence is shown by the
acknowledged fact that in this instance the defendant was tempted to mingle his personal and family
affairs with his official duties, and to permit the loan P300,000 to a partnership of no established
reputation and without asking for collateral security.
In the case of Lester and Wife vs. Howard Bank ([1870], 33 Md., 558; 3 Am. Rep., 211), the Supreme Court
of Maryland said:
What then was the purpose of the law when it declared that no director or officer should borrow of the
bank, and "if any director," etc., "shall be convicted," etc., "of directly or indirectly violating this section he
shall be punished by fine and imprisonment?" We say to protect the stockholders, depositors and creditors
of the bank, against the temptation to which the directors and officers might be exposed, and the power
which as such they must necessarily possess in the control and management of the bank, and the
legislature unwilling to rely upon the implied understanding that in assuming this relation they would not
acquire any interest hostile or adverse to the most exact and faithful discharge of duty, declared in express
terms that they should not borrow, etc., of the bank.
In the case of People vs. Knapp ([1912], 206 N. Y., 373), relied upon in the Binalbagan Estate decision, it
was said:
We are of opinion the statute forbade the loan to his copartnership firm as well as to himself directly. The
loan was made indirectly to him through his firm.
IV. Could Venancio Concepcion, President of the Philippine National Bank, be convicted of a violation of
section 35 of Act No. 2747 in relation with section 49 of the same Act, when these portions of Act No. 2747
were repealed by Act No. 2938, prior to the finding of the information and the rendition of the judgment?
As noted along toward the beginning of this opinion, section 49 of Act No. 2747, in relation to section 35 of
the same Act, provides a punishment for any person who shall violate any of the provisions of the Act. It is
contended, however, by the appellant, that the repeal of these sections of Act No. 2747 by Act No. 2938
has served to take away the basis for criminal prosecution.
This same question has been previously submitted and has received an answer adverse to such contention
in the cases of United Stated vs. Cuna ([1908], 12 Phil., 241); People vs. Concepcion ([1922], 43 Phil., 653);
and Ong Chang Wing and Kwong Fok vs. United States ([1910], 218 U. S., 272; 40 Phil., 1046). In other
words, it has been the holding, and it must again be the holding, that where an Act of the Legislature which
penalizes an offense, such repeals a former Act which penalized the same offense, such repeal does not
have the effect of thereafter depriving the courts of jurisdiction to try, convict, and sentenced offenders
charged with violations of the old law.
V. Was the granting of a credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." by Venancio
Concepcion, President of the Philippine National Bank, in violation of section 35 of Act No. 2747, penalized
by this law?
Counsel argue that since the prohibition contained in section 35 of Act No. 2747 is on the bank, and since
section 49 of said Act provides a punishment not on the bank when it violates any provisions of the law,
but on a person violating any provisions of the same, and imposing imprisonment as a part of the penalty,
the prohibition contained in said section 35 is without penal sanction.lawph!l.net
The answer is that when the corporation itself is forbidden to do an act, the prohibition extends to the
board of directors, and to each director separately and individually. (People vs. Concepcion, supra.)
VI. Does the alleged good faith of Venancio Concepcion, President of the Philippine National Bank, in
extending the credit of P300,000 to the copartnership "Puno y Concepcion, S. en C." constitute a legal
defense?
Counsel argue that if defendant committed the acts of which he was convicted, it was because he was
misled by rulings coming from the Insular Auditor. It is furthermore stated that since the loans made to the
copartnership "Puno y Concepcion, S. en C." have been paid, no loss has been suffered by the Philippine
National Bank.
Neither argument, even if conceded to be true, is conclusive. Under the statute which the defendant has
violated, criminal intent is not necessarily material. The doing of the inhibited act, inhibited on account of
public policy and public interest, constitutes the crime. And, in this instance, as previously demonstrated,
the acts of the President of the Philippine National Bank do not fall within the purview of the rulings of the
Insular Auditor, even conceding that such rulings have controlling effect.
Morse, in his work, Banks and Banking, section 125, says:
It is fraud for directors to secure by means of their trust, and advantage not common to the other
stockholders. The law will not allow private profit from a trust, and will not listen to any proof of honest
intent.
JUDGMENT
On a review of the evidence of record, with reference to the decision of the trial court, and the errors
assigned by the appellant, and with reference to previous decisions of this court on the same subject, we
are irresistibly led to the conclusion that no reversible error was committed in the trial of this case, and
that the defendant has been proved guilty beyond a reasonable doubt of the crime charged in the
information. The penalty imposed by the trial judge falls within the limits of the punitive provisions of the
law.
Judgment is affirmed, with the costs of this instance against the appellant. So ordered

G.R. No. L-16106            December 30, 1961

REPUBLIC OF THE PHILIPPINES, plaintiff-appellant,
vs.
PHILIPPINE NATIONAL BANK, ET AL., defendants,
THE FIRST NATIONAL CITY BANK OF NEW YORK, defendant-appellee.
Office of the Solicitor General for plaintiff-appellant.
Picazo, Lichauco and Agcaoili for defendant-appellee.
BAUTISTA ANGELO, J.:
The Republic of the Philippines filed on September 25, 1957 before the Court of First Instance of Manila a
complaint for escheat of certain unclaimed bank deposits balances under the provisions of Act No. 3936
against several banks, among them the First National City Bank of New York. It is alleged that pursuant to
Section 2 of said Act defendant banks forwarded to the Treasurer of the Philippines a statement under
oath of their respective managing officials of all the credits and deposits held by them in favor of persons
known to be dead or who have not made further deposits or withdrawals during the period of 10 years or
more. Wherefore, it is prayed that said credits and deposits be escheated to the Republic of the Philippines
by ordering defendant banks to deposit them to its credit with the Treasurer of the Philippines.
In its answer the First National City Bank of New York claims that, while it admits that various savings
deposits, pre-war inactive accounts, and sundry accounts contained in its report submitted to the
Treasurer of the Philippines pursuant to Act No. 3936, totalling more than P100,000.00, which remained
dormant for 10 years or more, are subject to escheat however, it has inadvertently included in said report
certain items amounting to P18,589.89 which, properly speaking, are not credits or deposits within the
contemplation of Act No. 3936. Hence, it prayed that said items be not included in the claim of plaintiff.
After hearing the court a quo rendered judgment holding that cashier's is or manager's checks and demand
drafts as those which defendant wants excluded from the complaint come within the purview of Act No.
3936, but not the telegraphic transfer payment which orders are of different category. Consequently, the
complaint was dismissed with regard to the latter. But, after a motion to reconsider was filed by
defendant, the court a quo changed its view and held that even said demand drafts do not come within the
purview of said Act and so amended its decision accordingly. Plaintiff has appealed.lawphil.net
Section 1, Act No. 3936, provides:
Section 1. "Unclaimed balances" within the meaning of this Act shall include credits or deposits of money,
bullion, security or other evidence of indebtedness of any kind, and interest thereon with banks, as
hereinafter defined, in favor of any person unheard from for a period of ten years or more. Such unclaimed
balances, together with the increase and proceeds thereof, shall be deposited with the Insular Treasure to
the credit of the Government of the Philippine Islands to be as the Philippine Legislature may direct.
It would appear that the term "unclaimed balances" that are subject to escheat include credits or deposits
money, or other evidence of indebtedness of any kind with banks, in favor of any person unheard from for
a period of 10 years or more. And as correctly stated by the trial court, the term "credit" in its usual
meaning is a sum credited on the books of a company to a person who appears to be entitled to it. It
presupposes a creditor-debtor relationship, and may be said to imply ability, by reason of property or
estates, to make a promised payment ( In re Ford, 14 F. 2d 848, 849). It is the correlative to debt or
indebtedness, and that which is due to any person, a distinguished from that which he owes (Mountain
Motor Co. vs. Solof, 124 S.E., 824, 825; Eric vs. Walsh, 61 Atl. 2d 1, 4;  See also Libby vs. Hopkins, 104 U.S.
303, 309; Prudential Insurance Co. of America vs. Nelson, 101 F. 2d, 441, 443; Barnes vs. Treat, 7 Mass.
271, 274). The same is true with the term "deposits" in banks where the relationship created between the
depositor and the bank is that of creditor and debtor (Article 1980, Civil Code; Gullas vs. National Bank, 62
Phil. 915; Gopoco Grocery, et al. vs. Pacific Coast Biscuit Co., et al., 65 Phil. 443).
The questions that now arise are: Do demand draft and telegraphic orders come within the meaning of the
term "credits" or "deposits" employed in the law? Can their import be considered as a sum credited on the
books of the bank to a person who appears to be entitled to it? Do they create a creditor-debtor
relationship between drawee and the payee?
The answers to these questions require a digression the legal meaning of said banking terminologies.
To begin with, we may say that a demand draft is a bill of exchange payable on demand (Arnd vs.
Aylesworth, 145 Iowa 185; Ward vs. City Trust Company, 102 N.Y.S. 50; Bank of Republic vs. Republic State
Bank, 42 S.W. 2d, 27). Considered as a bill of exchange, a draft is said to be, like the former, an open letter
of request from, and an order by, one person on another to pay a sum of money therein mentioned to a
third person, on demand or at a future time therein specified (13 Words and Phrases, 371). As a matter of
fact, the term "draft" is often used, and is the common term, for all bills of exchange. And the words
"draft" and "bill of exchange" are used indiscriminately (Ennis vs. Coshoctan Nat. Bank, 108 S.E., 811;
Hinnemann vs. Rosenback, 39 N.Y. 98, 100, 101; Wilson vs. Bechenau, 48 Supp. 272, 275).
On the other hand, a bill of exchange within the meaning of our Negotiable Instruments Law (Act No. 2031)
does not operate as an assignment of funds in the hands of the drawee who is not liable on the instrument
until he accepts it. This is the clear import of Section 127. It says: "A bill of exchange of itself does not
operate as an assignment of the funds in the hands of the drawee available for the payment thereon and
the drawee is not liable on the bill unless and until he accepts the same." In other words, in order that a
drawee may be liable on the draft and then become obligated to the payee it is necessary that he first
accepts the same. In fact, our law requires that with regard to drafts or bills of exchange there is need that
they be presented either for acceptance or for payment within a reasonable time after their issuance or
after their last negotiation thereof as the case may be (Section 71, Act 2031). Failure to make such
presentment will discharge the drawer from liability or to the extent of the loss caused by the delay
(Section 186, Ibid.)
Since it is admitted that the demand drafts herein involved have not been presented either for acceptance
or for payment, the inevitable consequence is that the appellee bank never had any chance of accepting or
rejecting them. Verily, appellee bank never became a debtor of the payee concerned and as such the
aforesaid drafts cannot be considered as credits subject to escheat within the meaning of the law.
But a demand draft is very different from a cashier's or manager's cheek, contrary to appellant's pretense,
for it has been held that the latter is a primary obligation of the bank which issues it and constitutes its
written promise to pay upon demand. Thus, a cashier's check has been clearly characterized in  In Re Bank
of the United States, 277 N.Y.S. 96. 100, as follows:
A cashier's check issued by a bank, however, is not an ordinary draft. The latter is a bill of exchange payable
demand. It is an order upon a third party purporting to drawn upon a deposit of funds. Drinkall v. Movious State
Bank, 11 N.D. 10, 88 N.W. 724, 57 L.R.A. 341, 95 Am. St. Rep. 693; State v. Tyler County State Bank (Tex. Com.
App.) 277 S.W. 625, 42 A.L.R. 1347. A cashier's check is of a very different character. It is the primary obligation of
the bank which issues it (Nissenbaum v. State, 38 Ga. App. 253, S.E. 776) and constitutes its written promise to
pay upon demand (Steinmetz v. Schultz, 59 S.D. 603, 241 N.W. 734)....lawphil.net
The following definitions cited by appellant also confirm this view:
A cashier's check is a check of the bank's cashier on his or another bank. It is in effect a bill of exchange drawn by a
bank on itself and accepted in advance by the act of issuance (10 C.J.S. 409).
A cashier's check issued on request of a depositor is the substantial equivalent of a certified check and the deposit
represented by the check passes to the credit of the checkholder, who is thereafter a depositor to that amount
(Lummus Cotton Gin Co. v. Walker, 70 So. 754, 756, 195 Ala. 552).
A cashier's check, being merely a bill of exchange drawn by a bank on itself, and accepted in advance by the act of
issuance, is not subject to countermand by the payee after indorsement, and has the same legal effects as a
certificate deposit or a certified check (Walker v. Sellers, 77 So. 715, 201 Ala. 189).
A demand draft is not therefore of the same category as a cashier's check which should come within the purview
of the law.
The case, however, is different with regard to telegraphic payment order. It is said that as the transaction is for
the establishment of a telegraphic or cable transfer the agreement to remit creates a contractual obligation a has
been termed a purchase and sale transaction (9 C.J.S. 368). The purchaser of a telegraphic transfer upon making
payment completes the transaction insofar as he is concerned, though insofar as the remitting bank is concerned
the contract is executory until the credit is established (Ibid.) We agree with the following comment the Solicitor
General: "This is so because the drawer bank was already paid the value of the telegraphic transfer payment
order. In the particular cases under consideration it appears in the books of the defendant bank that the amounts
represented by the telegraphic payment orders appear in the names of the respective payees. If the latter choose
to demand payment of their telegraphic transfers at the time the same was (were) received by the defendant
bank, there could be no question that this bank would have to pay them. Now, the question is, if the payees
decide to have their money remain for sometime in the defendant bank, can the latter maintain that the
ownership of said telegraphic payment orders is now with the drawer bank? The latter was already paid the value
of the telegraphic payment orders otherwise it would not have transmitted the same to the defendant bank.
Hence, it is absurd to say that the drawer banks are still the owners of said telegraphic payment orders."
WHEREFORE, the decision of the trial court is hereby modified in the sense that the items specifically referred to
and listed under paragraph 3 of appellee bank's answer representing telegraphic transfer payment orders should
be escheated in favor of the Republic of the Philippines. No costs.
G.R. No. L-48349 December 29, 1986
FRANCISCO HERRERA, plaintiff-appellant,
vs.
PETROPHIL CORPORATION, defendant-appellee.
Paterno R. Canlas Law Offices for plaintiff-appellant.
CRUZ, J.:
This is an appeal by the plaintiff-appellant from a decision rendered by the then Court of First Instance of
Rizal on a pure question of law. 1
The judgment appealed from was rendered on the pleadings, the parties having agreed during the pretrial
conference on the factual antecedents.
The facts are as follows: On December 5, 1969, the plaintiff-appellant and ESSO Standard Eastern. Inc.,
(later substituted by Petrophil Corporation) entered into a "Lease Agreement" whereby the former leased
to the latter a portion of his property for a period of twenty (20) years from said date, subject  inter alia to
the following conditions:
3. Rental: The LESSEE shall pay the LESSOR a rental of Pl.40 sqm. per month on 400 sqm. and are to be
expropriated later on (sic) or P560 per month and Fl.40 per sqm. per month on 1,693 sqm. or P2,370.21
per month or a total of P2,930.20 per month 2,093 sqm. more or less, payable yearly in advance within the
1st twenty days of each year; provided, a financial aid in the sum of P15,000 to clear the leased premises of
existing improvements thereon is paid in this manner; P10,000 upon execution of this lease and P5,000
upon delivery of leased premises free and clear of improvements thereon within 30 days from the date of
execution of this agreement. The portion on the side of the leased premises with an area of 365 sqrm.
more or less, will be occupied by LESSEE without rental during the lifetime of this lease. PROVIDED
FINALLY, that the Lessor is paid 8 years advance rental based on P2,930.70 per month discounted at 12%
interest per annum or a total net amount of P130,288.47 before registration of lease. Leased premises
shall be delivered within 30 days after 1st partial payment of financial aid. 2
On December 31, 1969, pursuant to the said contract, the defendant-appellee paid to the plaintfff-
appellant advance rentals for the first eight years, subtracting therefrom the amount of P101,010.73, the
amount it computed as constituting the interest or discount for the first eight years, in the total sum
P180,288.47. On August 20, 1970, the defendant-appellee, explaining that there had been a mistake in
computation, paid to the appellant the additional sum of P2,182.70, thereby reducing the deducted
amount to only P98,828.03. 3
On October 14, 1974, the plaintiff-appellant sued the defendant-appellee for the sum of P98,828.03, with
interest, claiming this had been illegally deducted from him in violation of the Usury Law. 4 He also prayed
for moral damages and attorney's fees. In its answer, the defendant-appellee admitted the factual
allegations of the complaint but argued that the amount deducted was not usurious interest but a given to
it for paying the rentals in advance for eight years. 5 Judgment on the pleadings was rendered for the
defendant. 6
Plaintiff-appellant now prays for a reversal of that judgment, insisting that the lower court erred in the
computation of the interest collected out of the rentals paid for the first eight years; that such interest was
excessive and violative of the Usury Law; and that he had neither agreed to nor accepted the defendant-
appellant's computation of the total amount to be deducted for the eight years advance rentals. 7
The thrust of the plaintiff-appellant's position is set forth in paragraph 6 of his complaint, which read:
6. The interest collected by defendant out of the rentals for the first eight years was excessive and beyond
that allowable by law, because the total interest on the said amount is only P33,755.90 at P4,219.4880 per
yearly rental; and considering that the interest should be computed excluding the first year rental because
at the time the amount of P281, 199.20 was paid it was already due under the lease contract hence no
interest should be collected from the rental for the first year, the amount of P29,536.42 only as the total
interest should have been deducted by defendant from the sum of P281,299.20.
The defendant maintains that the correct amount of the discount is P98,828.03 and that the same is not
excessive and above that allowed by law.
As its title plainly indicates, the contract between the parties is one of lease and not of loan. It is clearly
denominated a "LEASE AGREEMENT." Nowhere in the contract is there any showing that the parties
intended a loan rather than a lease. The provision for the payment of rentals in advance cannot be
construed as a repayment of a loan because there was no grant or forbearance of money as to constitute
an indebtedness on the part of the lessor. On the contrary, the defendant-appellee was discharging its
obligation in advance by paying the eight years rentals, and it was for this advance payment that it was
getting a rebate or discount.
The provision for a discount is not unusual in lease contracts. As to its validity, it is settled that the parties
may establish such stipulations, clauses, terms and condition as they may want to include; and as long as
such agreements are not contrary to law, morals, good customs, public policy or public order, they shall
have the force of law between them. 8
There is no usury in this case because no money was given by the defendant-appellee to the plaintiff-
appellant, nor did it allow him to use its money already in his possession. 9 There was neither loan nor
forbearance but a mere discount which the plaintiff-appellant allowed the defendant-appellee to deduct
from the total payments because they were being made in advance for eight years. The discount was in
effect a reduction of the rentals which the lessor had the right to determine, and any reduction thereof, by
any amount, would not contravene the Usury Law.
The difference between a discount and a loan or forbearance is that the former does not have to be repaid.
The loan or forbearance is subject to repayment and is therefore governed by the laws on usury. 10
To constitute usury, "there must be loan or forbearance; the loan must be of money or something
circulating as money; it must be repayable absolutely and in all events; and something must be exacted for
the use of the money in excess of and in addition to interest allowed by law." 11
It has been held that the elements of usury are (1) a loan, express or implied; (2) an understanding
between the parties that the money lent shall or may be returned; that for such loan a greater rate or
interest that is allowed by law shall be paid, or agreed to be paid, as the case may be; and (4) a corrupt
intent to take more than the legal rate for the use of money loaned. Unless these four things concur in
every transaction, it is safe to affirm that no case of usury can be declared. 12
Concerning the computation of the deductible discount, the trial court declared:
As above-quoted, the 'Lease Agreement' expressly provides that the lessee (defendant) shag pay the lessor
(plaintiff) eight (8) years in advance rentals based on P2,930.20 per month discounted at 12% interest per
annum. Thus, the total rental for one-year period is P35,162.40 (P2,930.20 multiplied by 12 months) and
that the interest therefrom is P4,219.4880 (P35,162.40 multiplied by 12%). So, therefore, the total interest
for the first eight (8) years should be only P33,755.90 (P4,129.4880 multiplied by eight (8) years and not
P98,828.03 as the defendant claimed it to be.
The afore-quoted manner of computation made by plaintiff is patently erroneous. It is most seriously
misleading. He just computed the annual discount to be at P4,129.4880 and then simply multiplied it by
eight (8) years. He did not take into consideration the naked fact that the rentals due on the eight year
were paid in advance by seven (7) years, the rentals due on the seventh year were paid in advance by six
(6) years, those due on the sixth year by five (5) years, those due on the fifth year by four (4) years, those
due on the fourth year by three (3) years, those due on the third year by two (2) years, and those due on
the second year by one (1) year, so much so that the total number of years by which the annual rental of
P4,129.4880 was paid in advance is twenty-eight (28), resulting in a total amount of P118,145.44
(P4,129.48 multiplied by 28 years) as the discount. However, defendant was most fair to plaintiff. It did not
simply multiply the annual rental discount by 28 years. It computed the total discount with the principal
diminishing month to month as shown by Annex 'A' of its memorandum. This is why the total discount
amount to only P 8,828.03.
The allegation of plaintiff that defendant made the computation in a compounded manner is erroneous.
Also after making its own computations and after examining closely defendant's Annex 'A' of its
memorandum, the court finds that defendant did not charge 12% discount on the rentals due for the first
year so much so that the computation conforms with the provision of the Lease Agreement to the effect
that the rentals shall be 'payable yearly in advance within the 1st 20 days of each year. '
We do not agree. The above computation appears to be too much technical mumbo-jumbo and could not
have been the intention of the parties to the transaction. Had it been so, then it should have been clearly
stipulated in the contract. Contracts should be interpreted according to their literal meaning and should
not be interpreted beyond their obvious intendment. 13
The plaintfff-appellant simply understood that for every year of advance payment there would be a
deduction of 12% and this amount would be the same for each of the eight years. There is no showing that
the intricate computation applied by the trial court was explained to him by the defendant-appellee or that
he knowingly accepted it.
The lower court, following the defendant-appellee's formula, declared that the plaintiff-appellant had
actually agreed to a 12% reduction for advance rentals for all of twenty eight years. That is absurd. It is not
normal for a person to agree to a reduction corresponding to twenty eight years advance rentals when all
he is receiving in advance rentals is for only eight years.
The deduction shall be for only eight years because that was plainly what the parties intended at the time
they signed the lease agreement. "Simplistic" it may be, as the Solicitor General describes it, but that is
how the lessor understood the arrangement. In fact, the Court will reject his subsequent modification that
the interest should be limited to only seven years because the first year rental was not being paid in
advance. The agreement was for a uniform deduction for the advance rentals for each of the eight years,
and neither of the parties can deviate from it now.
On the annual rental of P35,168.40, the deducted 12% discount was P4,220.21; and for eight years, the
total rental was P281,347.20 from which was deducted the total discount of P33,761.68, leaving a
difference of P247,585.52. Subtracting from this amount, the sum of P182,471.17 already paid will leave a
balance of P65,114.35 still due the plaintiff-appellant.
The above computation is based on the more reasonable interpretation of the contract  as a whole rather
on the single stipulation invoked by the respondent for the flat reduction of P130,288.47.
WHEREFORE, the decision of the trial court is hereby modified, and the defendant-appellee Petrophil
Corporation is ordered to pay plaintiff-appellant the amount of Sixty Five Thousand One Hundred Fourteen
pesos and Thirty-Five Centavos (P65,114.35), with interest at the legal rate until fully paid, plus Ten
Thousand Pesos (P10,000.00) as attorney's fees. Costs against the defendant-appellee.
SO ORDERED.

G.R. No. L-24968 April 27, 1972

SAURA IMPORT and EXPORT CO., INC., plaintiff-appellee,
vs.
DEVELOPMENT BANK OF THE PHILIPPINES, defendant-appellant.
Mabanag, Eliger and Associates and Saura, Magno and Associates for plaintiff-appellee.
Jesus A. Avanceña and Hilario G. Orsolino for defendant-appellant.

MAKALINTAL, J.:p
In Civil Case No. 55908 of the Court of First Instance of Manila, judgment was rendered on June 28, 1965
sentencing defendant Development Bank of the Philippines (DBP) to pay actual and consequential
damages to plaintiff Saura Import and Export Co., Inc. in the amount of P383,343.68, plus interest at the
legal rate from the date the complaint was filed and attorney's fees in the amount of P5,000.00. The
present appeal is from that judgment.
In July 1953 the plaintiff (hereinafter referred to as Saura, Inc.) applied to the Rehabilitation Finance
Corporation (RFC), before its conversion into DBP, for an industrial loan of P500,000.00, to be used as
follows: P250,000.00 for the construction of a factory building (for the manufacture of jute sacks);
P240,900.00 to pay the balance of the purchase price of the jute mill machinery and equipment; and
P9,100.00 as additional working capital.
Parenthetically, it may be mentioned that the jute mill machinery had already been purchased by Saura on
the strength of a letter of credit extended by the Prudential Bank and Trust Co., and arrived in Davao City
in July 1953; and that to secure its release without first paying the draft, Saura, Inc. executed a trust receipt
in favor of the said bank.
On January 7, 1954 RFC passed Resolution No. 145 approving the loan application for P500,000.00, to be
secured by a first mortgage on the factory building to be constructed, the land site thereof, and the
machinery and equipment to be installed. Among the other terms spelled out in the resolution were the
following:
1. That the proceeds of the loan shall be utilized exclusively for the following purposes:
For construction of factory building P250,000.00
For payment of the balance of purchase
price of machinery and equipment 240,900.00
For working capital 9,100.00
T O T A L P500,000.00
4. That Mr. & Mrs. Ramon E. Saura, Inocencia Arellano, Aniceto Caolboy and Gregoria Estabillo and China
Engineers, Ltd. shall sign the promissory notes jointly with the borrower-corporation;
5. That release shall be made at the discretion of the Rehabilitation Finance Corporation, subject to
availability of funds, and as the construction of the factory buildings progresses, to be certified to by an
appraiser of this Corporation;"
Saura, Inc. was officially notified of the resolution on January 9, 1954. The day before, however, evidently
having otherwise been informed of its approval, Saura, Inc. wrote a letter to RFC, requesting a modification
of the terms laid down by it, namely: that in lieu of having China Engineers, Ltd. (which was willing to
assume liability only to the extent of its stock subscription with Saura, Inc.) sign as co-maker on the
corresponding promissory notes, Saura, Inc. would put up a bond for P123,500.00, an amount equivalent
to such subscription; and that Maria S. Roca would be substituted for Inocencia Arellano as one of the
other co-makers, having acquired the latter's shares in Saura, Inc.
In view of such request RFC approved Resolution No. 736 on February 4, 1954, designating of the members
of its Board of Governors, for certain reasons stated in the resolution, "to reexamine all the aspects of this
approved loan ... with special reference as to the advisability of financing this particular project based on
present conditions obtaining in the operations of jute mills, and to submit his findings thereon at the next
meeting of the Board."
On March 24, 1954 Saura, Inc. wrote RFC that China Engineers, Ltd. had again agreed to act as co-signer for
the loan, and asked that the necessary documents be prepared in accordance with the terms and
conditions specified in Resolution No. 145. In connection with the reexamination of the project to be
financed with the loan applied for, as stated in Resolution No. 736, the parties named their respective
committees of engineers and technical men to meet with each other and undertake the necessary studies,
although in appointing its own committee Saura, Inc. made the observation that the same "should not be
taken as an acquiescence on (its) part to novate, or accept new conditions to, the agreement already)
entered into," referring to its acceptance of the terms and conditions mentioned in Resolution No. 145.
On April 13, 1954 the loan documents were executed: the promissory note, with F.R. Halling, representing
China Engineers, Ltd., as one of the co-signers; and the corresponding deed of mortgage, which was duly
registered on the following April 17.
It appears, however, that despite the formal execution of the loan agreement the reexamination
contemplated in Resolution No. 736 proceeded. In a meeting of the RFC Board of Governors on June 10,
1954, at which Ramon Saura, President of Saura, Inc., was present, it was decided to reduce the loan from
P500,000.00 to P300,000.00. Resolution No. 3989 was approved as follows:
RESOLUTION No. 3989. Reducing the Loan Granted Saura Import & Export Co., Inc. under Resolution No.
145, C.S., from P500,000.00 to P300,000.00. Pursuant to Bd. Res. No. 736, c.s., authorizing the re-
examination of all the various aspects of the loan granted the Saura Import & Export Co. under Resolution
No. 145, c.s., for the purpose of financing the manufacture of jute sacks in Davao, with special reference as
to the advisability of financing this particular project based on present conditions obtaining in the
operation of jute mills, and after having heard Ramon E. Saura and after extensive discussion on the
subject the Board, upon recommendation of the Chairman, RESOLVED that the loan granted the Saura
Import & Export Co. be REDUCED from P500,000 to P300,000 and that releases up to P100,000 may be
authorized as may be necessary from time to time to place the factory in actual operation: PROVIDED that
all terms and conditions of Resolution No. 145, c.s., not inconsistent herewith, shall remain in full force and
effect."
On June 19, 1954 another hitch developed. F.R. Halling, who had signed the promissory note for China
Engineers Ltd. jointly and severally with the other RFC that his company no longer to of the loan and
therefore considered the same as cancelled as far as it was concerned. A follow-up letter dated July 2
requested RFC that the registration of the mortgage be withdrawn.
In the meantime Saura, Inc. had written RFC requesting that the loan of P500,000.00 be granted. The
request was denied by RFC, which added in its letter-reply that it was "constrained to consider as cancelled
the loan of P300,000.00 ... in view of a notification ... from the China Engineers Ltd., expressing their desire
to consider the loan insofar as they are concerned."
On July 24, 1954 Saura, Inc. took exception to the cancellation of the loan and informed RFC that China
Engineers, Ltd. "will at any time reinstate their signature as co-signer of the note if RFC releases to us the
P500,000.00 originally approved by you.".
On December 17, 1954 RFC passed Resolution No. 9083, restoring the loan to the original amount of
P500,000.00, "it appearing that China Engineers, Ltd. is now willing to sign the promissory notes jointly
with the borrower-corporation," but with the following proviso:
That in view of observations made of the shortage and high cost of imported raw materials, the
Department of Agriculture and Natural Resources shall certify to the following:
1. That the raw materials needed by the borrower-corporation to carry out its operation are available in
the immediate vicinity; and
2. That there is prospect of increased production thereof to provide adequately for the requirements of
the factory."
The action thus taken was communicated to Saura, Inc. in a letter of RFC dated December 22, 1954,
wherein it was explained that the certification by the Department of Agriculture and Natural Resources
was required "as the intention of the original approval (of the loan) is to develop the manufacture of sacks
on the basis of locally available raw materials." This point is important, and sheds light on the subsequent
actuations of the parties. Saura, Inc. does not deny that the factory he was building in Davao was for the
manufacture of bags from local raw materials. The cover page of its brochure (Exh. M) describes the
project as a "Joint venture by and between the Mindanao Industry Corporation and the Saura Import and
Export Co., Inc. to finance, manage and operate a Kenaf mill plant, to manufacture copra and corn bags,
runners, floor mattings, carpets, draperies; out of 100% local raw materials, principal kenaf." The
explanatory note on page 1 of the same brochure states that, the venture "is the first serious attempt in
this country to use 100% locally grown raw materials notably kenaf which is presently grown commercially
in theIsland of Mindanao where the proposed jutemill is located ..."
This fact, according to defendant DBP, is what moved RFC to approve the loan application in the first place,
and to require, in its Resolution No. 9083, a certification from the Department of Agriculture and Natural
Resources as to the availability of local raw materials to provide adequately for the requirements of the
factory. Saura, Inc. itself confirmed the defendant's stand impliedly in its letter of January 21, 1955: (1)
stating that according to a special study made by the Bureau of Forestry "kenaf will not be available in
sufficient quantity this year or probably even next year;" (2) requesting "assurances (from RFC) that my
company and associates will be able to bring in sufficient jute materials as may be necessary for the full
operation of the jute mill;" and (3) asking that releases of the loan be made as follows:
a) For the payment of the receipt for jute mill
machineries with the Prudential Bank &
Trust Company P250,000.00
(For immediate release)
b) For the purchase of materials and equip-
ment per attached list to enable the jute
mill to operate 182,413.91
c) For raw materials and labor 67,586.09
1) P25,000.00 to be released on the open-
ing of the letter of credit for raw jute
for $25,000.00.
2) P25,000.00 to be released upon arrival
of raw jute.
3) P17,586.09 to be released as soon as the
mill is ready to operate.
On January 25, 1955 RFC sent to Saura, Inc. the following reply:
Dear Sirs:
This is with reference to your letter of January 21, 1955, regarding the release of your loan under
consideration of P500,000. As stated in our letter of December 22, 1954, the releases of the loan, if
revived, are proposed to be made from time to time, subject to availability of funds towards the end that
the sack factory shall be placed in actual operating status. We shall be able to act on your request for
revised purpose and manner of releases upon re-appraisal of the securities offered for the loan.
With respect to our requirement that the Department of Agriculture and Natural Resources certify that the
raw materials needed are available in the immediate vicinity and that there is prospect of increased
production thereof to provide adequately the requirements of the factory, we wish to reiterate that the
basis of the original approval is to develop the manufacture of sacks on the basis of the locally available
raw materials. Your statement that you will have to rely on the importation of jute and your request that
we give you assurance that your company will be able to bring in sufficient jute materials as may be
necessary for the operation of your factory, would not be in line with our principle in approving the loan.
With the foregoing letter the negotiations came to a standstill. Saura, Inc. did not pursue the matter
further. Instead, it requested RFC to cancel the mortgage, and so, on June 17, 1955 RFC executed the
corresponding deed of cancellation and delivered it to Ramon F. Saura himself as president of Saura, Inc.
It appears that the cancellation was requested to make way for the registration of a mortgage contract,
executed on August 6, 1954, over the same property in favor of the Prudential Bank and Trust Co., under
which contract Saura, Inc. had up to December 31 of the same year within which to pay its obligation on
the trust receipt heretofore mentioned. It appears further that for failure to pay the said obligation the
Prudential Bank and Trust Co. sued Saura, Inc. on May 15, 1955.
On January 9, 1964, ahnost 9 years after the mortgage in favor of RFC was cancelled at the request of
Saura, Inc., the latter commenced the present suit for damages, alleging failure of RFC (as predecessor of
the defendant DBP) to comply with its obligation to release the proceeds of the loan applied for and
approved, thereby preventing the plaintiff from completing or paying contractual commitments it had
entered into, in connection with its jute mill project.
The trial court rendered judgment for the plaintiff, ruling that there was a perfected contract between the
parties and that the defendant was guilty of breach thereof. The defendant pleaded below, and reiterates
in this appeal: (1) that the plaintiff's cause of action had prescribed, or that its claim had been waived or
abandoned; (2) that there was no perfected contract; and (3) that assuming there was, the plaintiff itself
did not comply with the terms thereof.
We hold that there was indeed a perfected consensual contract, as recognized in Article 1934 of the Civil
Code, which provides:
ART. 1954. An accepted promise to deliver something, by way of commodatum or simple loan is binding
upon the parties, but the commodatum or simple loan itself shall not be perferted until the delivery of the
object of the contract.
There was undoubtedly offer and acceptance in this case: the application of Saura, Inc. for a loan of
P500,000.00 was approved by resolution of the defendant, and the corresponding mortgage was executed
and registered. But this fact alone falls short of resolving the basic claim that the defendant failed to fulfill
its obligation and the plaintiff is therefore entitled to recover damages.
It should be noted that RFC entertained the loan application of Saura, Inc. on the assumption that the
factory to be constructed would utilize locally grown raw materials, principally kenaf. There is no serious
dispute about this. It was in line with such assumption that when RFC, by Resolution No. 9083 approved on
December 17, 1954, restored the loan to the original amount of P500,000.00. it imposed two conditions, to
wit: "(1) that the raw materials needed by the borrower-corporation to carry out its operation are available
in the immediate vicinity; and (2) that there is prospect of increased production thereof to provide
adequately for the requirements of the factory." The imposition of those conditions was by no means a
deviation from the terms of the agreement, but rather a step in its implementation. There was nothing in
said conditions that contradicted the terms laid down in RFC Resolution No. 145, passed on January 7,
1954, namely — "that the proceeds of the loan shall be utilized exclusively for the following purposes: for
construction of factory building — P250,000.00; for payment of the balance of purchase price of machinery
and equipment — P240,900.00; for working capital — P9,100.00." Evidently Saura, Inc. realized that it
could not meet the conditions required by RFC, and so wrote its letter of January 21, 1955, stating that
local jute "will not be able in sufficient quantity this year or probably next year," and asking that out of the
loan agreed upon the sum of P67,586.09 be released "for raw materials and labor." This was a deviation
from the terms laid down in Resolution No. 145 and embodied in the mortgage contract, implying as it did
a diversion of part of the proceeds of the loan to purposes other than those agreed upon.
When RFC turned down the request in its letter of January 25, 1955 the negotiations which had been going
on for the implementation of the agreement reached an impasse. Saura, Inc. obviously was in no position
to comply with RFC's conditions. So instead of doing so and insisting that the loan be released as agreed
upon, Saura, Inc. asked that the mortgage be cancelled, which was done on June 15, 1955. The action thus
taken by both parties was in the nature cf mutual desistance — what Manresa terms "mutuo disenso" 1 —
which is a mode of extinguishing obligations. It is a concept that derives from the principle that since
mutual agreement can create a contract, mutual disagreement by the parties can cause its
extinguishment.2
The subsequent conduct of Saura, Inc. confirms this desistance. It did not protest against any alleged
breach of contract by RFC, or even point out that the latter's stand was legally unjustified. Its request for
cancellation of the mortgage carried no reservation of whatever rights it believed it might have against RFC
for the latter's non-compliance. In 1962 it even applied with DBP for another loan to finance a rice and
corn project, which application was disapproved. It was only in 1964, nine years after the loan agreement
had been cancelled at its own request, that Saura, Inc. brought this action for damages.All these
circumstances demonstrate beyond doubt that the said agreement had been extinguished by mutual
desistance — and that on the initiative of the plaintiff-appellee itself.
With this view we take of the case, we find it unnecessary to consider and resolve the other issues raised in
the respective briefs of the parties.
WHEREFORE, the judgment appealed from is reversed and the complaint dismissed, with costs against the
plaintiff-appellee.
G.R. No. 133632 : February 15, 2002
BPI INVESTMENT CORPORATION,, Petitioner, v. HON. COURT OF APPEALS and ALS MANAGEMENT &
DEVELOPMENT CORPORATION, Respondents.
DECISION
QUISUMBING, J.:
This petition for certiorari assails the decision dated February 28, 1997, of the Court of Appeals and its
resolution dated April 21, 1998, in CA-G.R. CV No. 38887. The appellate court affirmed the judgment of the
Regional Trial Court of Pasig City, Branch 151, in (a) Civil Case No. 11831, for foreclosure of mortgage by
petitioner BPI Investment Corporation (BPIIC for brevity) against private respondents ALS Management
and Development Corporation and Antonio K. Litonjua, 1 consolidated with (b) Civil Case No. 52093, for
damages with prayer for the issuance of a writ of preliminary injunction by the private respondents against
said petitioner.
The trial court had held that private respondents were not in default in the payment of their monthly
amortization, hence, the extrajudicial foreclosure conducted by BPIIC was premature and made in bad
faith. It awarded private respondents the amount of P300,000 for moral damages, P50,000 for exemplary
damages, and P50,000 for attorneys fees and expenses for litigation. It likewise dismissed the foreclosure
suit for being premature.
The facts are as follows:
Frank Roa obtained a loan at an interest rate of 16 1/4% per annum from Ayala Investment and
Development Corporation (AIDC), the predecessor of petitioner BPIIC, for the construction of a house on
his lot in New Alabang Village, Muntinlupa. Said house and lot were mortgaged to AIDC to secure the loan.
Sometime in 1980, Roa sold the house and lot to private respondents ALS and Antonio Litonjua
for P850,000. They paid P350,000 in cash and assumed the P500,000 balance of Roas indebtedness with
AIDC. The latter, however, was not willing to extend the old interest rate to private respondents and
proposed to grant them a new loan of P500,000 to be applied to Roas debt and secured by the same
property, at an interest rate of 20% per annum and service fee of 1% per annum on the outstanding
principal balance payable within ten years in equal monthly amortization of P9,996.58 and penalty interest
at the rate of 21% per annum per day from the date the amortization became due and payable.
Consequently, in March 1981, private respondents executed a mortgage deed containing the above
stipulations with the provision that payment of the monthly amortization shall commence on May 1, 1981.
On August 13, 1982, ALS and Litonjua updated Roas arrearages by paying BPIIC the sum of  P190,601.35.
This reduced Roas principal balance to P457,204.90 which, in turn, was liquidated when BPIIC applied
thereto the proceeds of private respondents loan of P500,000.
On September 13, 1982, BPIIC released to private respondents P7,146.87, purporting to be what was left of
their loan after full payment of Roas loan.
In June 1984, BPIIC instituted foreclosure proceedings against private respondents on the ground that they
failed to pay the mortgage indebtedness which from May 1, 1981 to June 30, 1984, amounted to Four
Hundred Seventy Five Thousand Five Hundred Eighty Five and 31/100 Pesos (P475,585.31). A notice of
sheriffs sale was published on August 13, 1984.
On February 28, 1985, ALS and Litonjua filed Civil Case No. 52093 against BPIIC. They alleged, among
others, that they were not in arrears in their payment, but in fact made an overpayment as of June 30,
1984. They maintained that they should not be made to pay amortization before the actual release of
the P500,000 loan in August and September 1982. Further, out of the P500,000 loan, only the total amount
of P464,351.77 was released to private respondents. Hence, applying the effects of legal compensation,
the balance of P35,648.23 should be applied to the initial monthly amortization for the loan.
On August 31, 1988, the trial court rendered its judgment in Civil Case Nos. 11831 and 52093, thus:
WHEREFORE, judgment is hereby rendered in favor of ALS Management and Development Corporation
and Antonio K. Litonjua and against BPI Investment Corporation, holding that the amount of loan granted
by BPI to ALS and Litonjua was only in the principal sum of P464,351.77, with interest at 20% plus service
charge of 1% per annum, payable on equal monthly and successive amortizations at P9,283.83 for ten (10)
years or one hundred twenty (120) months. The amortization schedule attached as Annex A to the Deed of
Mortgage is correspondingly reformed as aforestated.
The Court further finds that ALS and Litonjua suffered compensable damages when BPI caused their
publication in a newspaper of general circulation as defaulting debtors, and therefore orders BPI to pay ALS
and Litonjua the following sums:
a) P300,000.00 for and as moral damages;
b) P50,000.00 as and for exemplary damages;
c) P50,000.00 as and for attorneys fees and expenses of litigation.
The foreclosure suit (Civil Case No. 11831) is hereby DISMISSED for being premature.
Costs against BPI.
SO ORDERED.2cräläwvirtualibräry
Both parties appealed to the Court of Appeals. However, private respondents appeal was dismissed for
non-payment of docket fees.
On February 28, 1997, the Court of Appeals promulgated its decision, the dispositive portion reads:
WHEREFORE, finding no error in the appealed decision the same is hereby AFFIRMED in toto.
SO ORDERED.3cräläwvirtualibräry
In its decision, the Court of Appeals reasoned that a simple loan is perfected only upon the delivery of the
object of the contract. The contract of loan between BPIIC and ALS & Litonjua was perfected only
on September 13, 1982, the date when BPIIC released the purported balance of the P500,000 loan after
deducting therefrom the value of Roas indebtedness. Thus, payment of the monthly amortization should
commence only a month after the said date, as can be inferred from the stipulations in the contract. This,
despite the express agreement of the parties that payment shall commence on May 1, 1981. From October
1982 to June 1984, the total amortization due was only P194,960.43. Evidence showed that private
respondents had an overpayment, because as of June 1984, they already paid a total amount
of P201,791.96. Therefore, there was no basis for BPIIC to extrajudicially foreclose the mortgage and cause
the publication in newspapers concerning private respondents delinquency in the payment of their loan.
This fact constituted sufficient ground for moral damages in favor of private respondents.
The motion for reconsideration filed by petitioner BPIIC was likewise denied, hence this petition, where
BPIIC submits for resolution the following issues:
I. WHETHER OR NOT A CONTRACT OF LOAN IS A CONSENSUAL CONTRACT IN THE LIGHT OF THE RULE LAID
DOWN IN BONNEVIE VS. COURT OF APPEALS, 125 SCRA 122.
II. WHETHER OR NOT BPI SHOULD BE HELD LIABLE FOR MORAL AND EXEMPLARY DAMAGES AND
ATTORNEYS FEES IN THE FACE OF IRREGULAR PAYMENTS MADE BY ALS AND OPPOSED TO THE RULE LAID
DOWN IN SOCIAL SECURITY SYSTEM VS. COURT OF APPEALS, 120 SCRA 707.
On the first issue, petitioner contends that the Court of Appeals erred in ruling that because a simple loan
is perfected upon the delivery of the object of the contract, the loan contract in this case was perfected
only on September 13, 1982. Petitioner claims that a contract of loan is a consensual contract, and a loan
contract is perfected at the time the contract of mortgage is executed conformably with our ruling
in Bonnevie v. Court of Appeals, 125 SCRA 122. In the present case, the loan contract was perfected
on March 31, 1981, the date when the mortgage deed was executed, hence, the amortization and interests
on the loan should be computed from said date.
Petitioner also argues that while the documents showed that the loan was released only on August 1982,
the loan was actually released on March 31, 1981, when BPIIC issued a cancellation of mortgage of Frank
Roas loan. This finds support in the registration on March 31, 1981 of the Deed of Absolute Sale executed
by Roa in favor of ALS, transferring the title of the property to ALS, and ALS executing the Mortgage Deed
in favor of BPIIC. Moreover, petitioner claims, the delay in the release of the loan should be attributed to
private respondents. As BPIIC only agreed to extend a P500,000 loan, private respondents were required to
reduce Frank Roas loan below said amount. According to petitioner, private respondents were only able to
do so in August 1982.
In their comment, private respondents assert that based on Article 1934 of the Civil Code, 4 a simple loan is
perfected upon the delivery of the object of the contract, hence a real contract. In this case, even though
the loan contract was signed on March 31, 1981, it was perfected only on September 13, 1982, when the
full loan was released to private respondents. They submit that petitioner misread Bonnevie. To give
meaning to Article 1934, according to private respondents, Bonnevie must be construed to mean that the
contract to extend the loan was perfected on March 31, 1981 but the contract of loan itself was only
perfected upon the delivery of the full loan to private respondents on September 13, 1982.
Private respondents further maintain that even granting, arguendo, that the loan contract was perfected
on March 31, 1981, and their payment did not start a month thereafter, still no default took place.
According to private respondents, a perfected loan agreement imposes reciprocal obligations, where the
obligation or promise of each party is the consideration of the other party. In this case, the consideration
for BPIIC in entering into the loan contract is the promise of private respondents to pay the monthly
amortization. For the latter, it is the promise of BPIIC to deliver the money. In reciprocal obligations,
neither party incurs in delay if the other does not comply or is not ready to comply in a proper manner
with what is incumbent upon him. Therefore, private respondents conclude, they did not incur in delay
when they did not commence paying the monthly amortization on May 1, 1981, as it was only
on September 13, 1982 when petitioner fully complied with its obligation under the loan contract.
We agree with private respondents. A loan contract is not a consensual contract but a real contract. It is
perfected only upon the delivery of the object of the contract. 5 Petitioner misapplied Bonnevie. The But as admitted by private respondents themselves, they were irregular in their payment of monthly
contract in Bonnevie declared by this Court as a perfected consensual contract falls under the first clause amortization. Conformably with our ruling in SSS, we can not properly declare BPIIC in bad faith.
of Article 1934, Civil Code. It is an accepted promise to deliver something by way of simple loan. Consequently, we should rule out the award of moral and exemplary damages. 11cräläwvirtualibräry
In Saura Import and Export Co. Inc. vs. Development Bank of the Philippines,  44 SCRA 445, petitioner However, in our view, BPIIC was negligent in relying merely on the entries found in the deed of mortgage,
applied for a loan of P500,000 with respondent bank. The latter approved the application through a board without checking and correspondingly adjusting its records on the amount actually released to private
resolution. Thereafter, the corresponding mortgage was executed and registered. However, because of respondents and the date when it was released. Such negligence resulted in damage to private
acts attributable to petitioner, the loan was not released. Later, petitioner instituted an action for respondents, for which an award of nominal damages should be given in recognition of their rights which
damages. We recognized in this case, a perfected consensual contract which under normal circumstances were violated by BPIIC.12 For this purpose, the amount of P25,000 is sufficient.
could have made the bank liable for not releasing the loan. However, since the fault was attributable to Lastly, as in SSS where we awarded attorneys fees because private respondents were compelled to litigate,
petitioner therein, the court did not award it damages. we sustain the award of P50,000 in favor of private respondents as attorneys fees.
A perfected consensual contract, as shown above, can give rise to an action for damages. However, said WHEREFORE, the decision dated February 28, 1997, of the Court of Appeals and its resolution dated April
contract does not constitute the real contract of loan which requires the delivery of the object of the 21, 1998, are AFFIRMED WITH MODIFICATION as to the award of damages. The award of moral and
contract for its perfection and which gives rise to obligations only on the part of the exemplary damages in favor of private respondents is DELETED, but the award to them of attorneys fees in
borrower.6cräläwvirtualibräry the amount of P50,000 is UPHELD. Additionally, petitioner is ORDERED to pay private respondents P25,000
In the present case, the loan contract between BPI, on the one hand, and ALS and Litonjua, on the other, as nominal damages. Costs against petitioner.
was perfected only on September 13, 1982, the date of the second release of the loan. Following the SO ORDERED.
intentions of the parties on the commencement of the monthly amortization, as found by the Court of
Appeals, private respondents obligation to pay commenced only on October 13, 1982, a month after the
perfection of the contract.7cräläwvirtualibräry
We also agree with private respondents that a contract of loan involves a reciprocal obligation, wherein
the obligation or promise of each party is the consideration for that of the other. 8 As averred by private
respondents, the promise of BPIIC to extend and deliver the loan is upon the consideration that ALS and
Litonjua shall pay the monthly amortization commencing on May 1, 1981, one month after the supposed
release of the loan. It is a basic principle in reciprocal obligations that neither party incurs in delay, if the
other does not comply or is not ready to comply in a proper manner with what is incumbent upon
him.9 Only when a party has performed his part of the contract can he demand that the other party also
fulfills his own obligation and if the latter fails, default sets in. Consequently, petitioner could only demand
for the payment of the monthly amortization after September 13, 1982 for it was only then when it
complied with its obligation under the loan contract. Therefore, in computing the amount due as of the
date when BPIIC extrajudicially caused the foreclosure of the mortgage, the starting date is October 13,
1982 and not May 1, 1981.
Other points raised by petitioner in connection with the first issue, such as the date of actual release of the
loan and whether private respondents were the cause of the delay in the release of the loan, are factual.
Since petitioner has not shown that the instant case is one of the exceptions to the basic rule that only
questions of law can be raised in a petition for review under Rule 45 of the Rules of Court, 10 factual matters
need not tarry us now. On these points we are bound by the findings of the appellate and trial courts.
On the second issue, petitioner claims that it should not be held liable for moral and exemplary damages
for it did not act maliciously when it initiated the foreclosure proceedings. It merely exercised its right
under the mortgage contract because private respondents were irregular in their monthly amortization. It
invoked our ruling in Social Security System vs. Court of Appeals, 120 SCRA 707, where we said:
Nor can the SSS be held liable for moral and temperate damages. As concluded by the Court of Appeals the
negligence of the appellant is not so gross as to warrant moral and temperate damages, except that, said
Court reduced those damages by only P5,000.00 instead of eliminating them. Neither can we agree with
the findings of both the Trial Court and respondent Court that the SSS had acted maliciously or in bad faith.
The SSS was of the belief that it was acting in the legitimate exercise of its right under the mortgage
contract in the face of irregular payments made by private respondents and placed reliance on the G.R. No. L-49101 October 24, 1983
automatic acceleration clause in the contract. The filing alone of the foreclosure application should not be RAOUL S.V. BONNEVIE and HONESTO V. BONNEVIE, petitioners,
a ground for an award of moral damages in the same way that a clearly unfounded civil action is not vs.
among the grounds for moral damages. THE HONORABLE COURT OF APPEALS and THE PHILIPPINE BANK OF COMMERCE, respondents.
Private respondents counter that BPIIC was guilty of bad faith and should be liable for said damages Edgardo I. De Leon for petitioners.
because it insisted on the payment of amortization on the loan even before it was released. Further, it did Siguion Reyna, Montecillo & Associates for private respondent.
not make the corresponding deduction in the monthly amortization to conform to the actual amount of
loan released, and it immediately initiated foreclosure proceedings when private respondents failed to GUERRERO, J:
make timely payment. Petition for review on certiorari seeking the reversal of the decision of the defunct Court of Appeals, now
Intermediate Appellate Court, in CA-G.R. No. 61193-R, entitled "Honesto Bonnevie vs. Philippine Bank of
Commerce, et al.," promulgated August 11, 1978 1 as well as the Resolution denying the motion for
reconsideration.
The complaint filed on January 26, 1971 by petitioner Honesto Bonnevie with the Court of First Instance of
Rizal against respondent Philippine Bank of Commerce sought the annulment of the Deed of Mortgage
dated December 6, 1966 executed in favor of the Philippine Bank of Commerce by the spouses Jose M.
Lozano and Josefa P. Lozano as well as the extrajudicial foreclosure made on September 4, 1968. It alleged
among others that (a) the Deed of Mortgage lacks consideration and (b) the mortgage was executed by
one who was not the owner of the mortgaged property. It further alleged that the property in question
was foreclosed pursuant to Act No. 3135 as amended, without, however, complying with the condition
imposed for a valid foreclosure. Granting the validity of the mortgage and the extrajudicial foreclosure, it
finally alleged that respondent Bank should have accepted petitioner's offer to redeem the property under
the principle of equity said justice.
On the other hand, the answer of defendant Bank, now private respondent herein, specifically denied most
of the allegations in the complaint and raised the following affirmative defenses: (a) that the defendant has
not given its consent, much less the requisite written consent, to the sale of the mortgaged property to
plaintiff and the assumption by the latter of the loan secured thereby; (b) that the demand letters and
notice of foreclosure were sent to Jose Lozano at his address; (c) that it was notified for the first time about
the alleged sale after it had foreclosed the Lozano mortgage; (d) that the law on contracts requires
defendant's consent before Jose Lozano can be released from his bilateral agreement with the former and
doubly so, before plaintiff may be substituted for Jose Lozano and Alfonso Lim; (e) that the loan of
P75,000.00 which was secured by mortgage, after two renewals remain unpaid despite countless
reminders and demands; of that the property in question remained registered in the name of Jose M.
Lozano in the land records of Rizal and there was no entry, notation or indication of the alleged sale to
plaintiff; (g) that it is an established banking practice that payments against accounts need not be
personally made by the debtor himself; and (h) that it is not true that the mortgage, at the time of its
execution and registration, was without consideration as alleged because the execution and registration of
the securing mortgage, the signing and delivery of the promissory note and the disbursement of the
proceeds of the loan are mere implementation of the basic consensual contract of loan.
After petitioner Honesto V. Bonnevie had rested his case, petitioner Raoul SV Bonnevie filed a motion for
intervention. The intervention was premised on the Deed of Assignment executed by petitioner Honesto
Bonnevie in favor of petitioner Raoul SV Bonnevie covering the rights and interests of petitioner Honesto
Bonnevie over the subject property. The intervention was ultimately granted in order that all issues be
resolved in one proceeding to avoid multiplicity of suits.
On March 29, 1976, the lower court rendered its decision, the dispositive portion of which reads as
follows:
WHEREFORE, all the foregoing premises considered, judgment is hereby rendered dismissing the complaint
with costs against the plaintiff and the intervenor.
After the motion for reconsideration of the lower court's decision was denied, petitioners appealed to
respondent Court of Appeals assigning the following errors:
1. The lower court erred in not finding that the real estate mortgage executed by Jose Lozano was null and
void;
2. The lower court erred in not finding that the auction sale decide on August 19, 1968 was null and void;
3. The lower court erred in not allowing the plaintiff and the intervenor to redeem the property;
4. The lower court erred in not finding that the defendant acted in bad faith; and
5. The lower court erred in dismissing the complaint.
On August 11, 1978, the respondent court promulgated its decision affirming the decision of the lower
court, and on October 3. 1978 denied the motion for reconsideration. Hence, the present petition for
review.
The factual findings of respondent Court of Appeals being conclusive upon this Court, We hereby adopt the
facts found the trial court and found by the Court of Appeals to be consistent with the evidence adduced
during trial, to wit:
It is not disputed that spouses Jose M. Lozano and Josefa P. Lozano were the owners of the property which
they mortgaged on December 6, 1966, to secure the payment of the loan in the principal amount of
P75,000.00 they were about to obtain from defendant-appellee Philippine Bank of Commerce; that on
December 8, 1966, executed in favor of plaintiff-appellant the Deed of Sale with Mortgage ,, for and in
consideration of the sum of P100,000.00, P25,000.00 of which amount being payable to the Lozano
spouses upon the execution of the document, and the balance of P75,000.00 being payable to defendant-
appellee; that on December 6, 1966, when the mortgage was executed by the Lozano spouses in favor of
defendant-appellee, the loan of P75,000.00 was not yet received them, as it was on December 12, 1966
when they and their co-maker Alfonso Lim signed the promissory note for that amount; that from April 28,
1967 to July 12, 1968, plaintiff-appellant made payments to defendant-appellee on the mortgage in the
total amount of P18,944.22; that on May 4, 1968, plaintiff-appellant assigned all his rights under the Deed
of Sale with Assumption of Mortgage to his brother, intervenor Raoul Bonnevie; that on June 10, 1968,
defendant-appellee applied for the foreclosure of the mortgage, and notice of sale was published in the
Luzon Weekly Courier on June 30, July 7, and July 14, 1968; that auction sale was conducted on August 19,
1968, and the property was sold to defendant-appellee for P84,387.00; and that offers from plaintiff-
appellant to repurchase the property failed, and on October 9, 1969, he caused an adverse claim to be
annotated on the title of the property. (Decision of the Court of Appeals, p. 5).
Presented for resolution in this review are the following issues:
I
Whether the real estate mortgage executed by the spouses Lozano in favor of respondent bank was validly
and legally executed.
II
Whether the extrajudicial foreclosure of the said mortgage was validly and legally effected.
III
Whether petitioners had a right to redeem the foreclosed property.
IV
Granting that petitioners had such a right, whether respondent was justified in refusing their offers to
repurchase the property.
As clearly seen from the foregoing issues raised, petitioners' course of action is three-fold. They primarily
attack the validity of the mortgage executed by the Lozano spouses in favor of respondent Bank. Next, they
attack the validity of the extrajudicial foreclosure and finally, appeal to justice and equity. In attacking the
validity of the deed of mortgage, they contended that when it was executed on December 6, 1966, there
was yet no principal obligation to secure as the loan of P75,000.00 was not received by the Lozano spouses
"So much so that in the absence of a principal obligation, there is want of consideration in the accessory
contract, which consequently impairs its validity and fatally affects its very existence." (Petitioners' Brief,
par. 1, p. 7).
This contention is patently devoid of merit. From the recitals of the mortgage deed itself, it is clearly seen
that the mortgage deed was executed for and on condition of the loan granted to the Lozano spouses. The
fact that the latter did not collect from the respondent Bank the consideration of the mortgage on the date
it was executed is immaterial. A contract of loan being a consensual contract, the herein contract of loan
was perfected at the same time the contract of mortgage was executed. The promissory note executed on
December 12, 1966 is only an evidence of indebtedness and does not indicate lack of consideration of the
mortgage at the time of its execution.
Petitioners also argued that granting the validity of the mortgage, the subsequent renewals of the original
loan, using as security the same property which the Lozano spouses had already sold to petitioners,
rendered the mortgage null and void,
This argument failed to consider the provision 2 of the contract of mortgage which prohibits the sale,
disposition of, mortgage and encumbrance of the mortgaged properties, without the written consent of
the mortgagee, as well as the additional proviso that if in spite of said stipulation, the mortgaged property
is sold, the vendee shall assume the mortgage in the terms and conditions under which it is constituted.
These provisions are expressly made part and parcel of the Deed of Sale with Assumption of Mortgage.
Petitioners admit that they did not secure the consent of respondent Bank to the sale with assumption of
mortgage. Coupled with the fact that the sale/assignment was not registered so that the title remained in
the name of the Lozano spouses, insofar as respondent Bank was concerned, the Lozano spouses could
rightfully and validly mortgage the property. Respondent Bank had every right to rely on the certificate of
title. It was not bound to go behind the same to look for flaws in the mortgagor's title, the doctrine of
innocent purchaser for value being applicable to an innocent mortgagee for value. (Roxas vs. Dinglasan, 28
SCRA 430; Mallorca vs. De Ocampo, 32 SCRA 48). Another argument for the respondent Bank is that a
mortgage follows the property whoever the possessor may be and subjects the fulfillment of the obligation
for whose security it was constituted. Finally, it can also be said that petitioners voluntarily assumed the
mortgage when they entered into the Deed of Sale with Assumption of Mortgage. They are, therefore,
estopped from impugning its validity whether on the original loan or renewals thereof.
Petitioners next assail the validity and legality of the extrajudicial foreclosure on the following grounds:
a) petitioners were never notified of the foreclosure sale.
b) The notice of auction sale was not posted for the period required by law.
c) publication of the notice of auction sale in the Luzon Weekly Courier was not in accordance with law.
The lack of notice of the foreclosure sale on petitioners is a flimsy ground. Respondent Bank not being a
party to the Deed of Sale with Assumption of Mortgage, it can validly claim that it was not aware of the
same and hence, it may not be obliged to notify petitioners. Secondly, petitioner Honesto Bonnevie was
not entitled to any notice because as of May 14, 1968, he had transferred and assigned all his rights and
interests over the property in favor of intervenor Raoul Bonnevie and respondent Bank not likewise
informed of the same. For the same reason, Raoul Bonnevie is not entitled to notice. Most importantly, Act
No. 3135 does not require personal notice on the mortgagor. The requirement on notice is that:
Section 3. Notice shall be given by posting notices of the sale for not less than twenty days in at least three
public places of the municipality or city where the property is situated, and if such property is worth more
than four hundred pesos, such notice shall also be published once a week for at least three consecutive
weeks in a newspaper of general circulation in the municipality or city
In the case at bar, the notice of sale was published in the Luzon Courier on June 30, July 7 and July 14, 1968
and notices of the sale were posted for not less than twenty days in at least three (3) public places in the
Municipality where the property is located. Petitioners were thus placed on constructive notice.
The case of Santiago vs. Dionisio, 92 Phil. 495, cited by petitioners is inapplicable because said case
involved a judicial foreclosure and the sale to the vendee of the mortgaged property was duly registered
making the mortgaged privy to the sale.
As regards the claim that the period of publication of the notice of auction sale was not in accordance with
law, namely: once a week for at least three consecutive weeks, the Court of Appeals ruled that the
publication of notice on June 30, July 7 and July 14, 1968 satisfies the publication requirement under Act
No. 3135 notwithstanding the fact that June 30 to July 14 is only 14 days. We agree. Act No. 3135 merely
requires that such notice shall be published once a week for at least three consecutive weeks." Such
phrase, as interpreted by this Court in Basa vs. Mercado, 61 Phil. 632, does not mean that notice should be
published for three full weeks.
The argument that the publication of the notice in the "Luzon Weekly Courier" was not in accordance with
law as said newspaper is not of general circulation must likewise be disregarded. The affidavit of
publication, executed by the Publisher, business/advertising manager of the Luzon Weekly Courier, stares
that it is "a newspaper of general circulation in ... Rizal, and that the Notice of Sheriff's sale was published
in said paper on June 30, July 7 and July 14, 1968. This constitutes prima facie evidence of compliance with
the requisite publication. Sadang vs. GSIS, 18 SCRA 491).
To be a newspaper of general circulation, it is enough that "it is published for the dissemination of local
news and general information; that it has a bona fide subscription list of paying subscribers; that it is
published at regular intervals." (Basa vs. Mercado, 61 Phil. 632). The newspaper need not have the largest
circulation so long as it is of general circulation. Banta vs. Pacheco, 74 Phil. 67). The testimony of three
witnesses that they do read the Luzon Weekly Courier is no proof that said newspaper is not a newspaper
of general circulation in the province of Rizal.
Whether or not the notice of auction sale was posted for the period required by law is a question of fact. It
can no longer be entertained by this Court. (see Reyes, et al. vs. CA, et al., 107 SCRA 126). Nevertheless,
the records show that copies of said notice were posted in three conspicuous places in the municipality of
Pasig, Rizal namely: the Hall of Justice, the Pasig Municipal Market and Pasig Municipal Hall. In the same
manner, copies of said notice were also posted in the place where the property was located, namely: the
Municipal Building of San Juan, Rizal; the Municipal Market and on Benitez Street. The following statement
of Atty. Santiago Pastor, head of the legal department of respondent bank, namely:
Q How many days were the notices posted in these two places, if you know?
A We posted them only once in one day. (TSN, p. 45, July 25, 1973)
is not a sufficient countervailing evidence to prove that there was no compliance with the posting
requirement in the absence of proof or even of allegation that the notices were removed before the
expiration of the twenty- day period. A single act of posting (which may even extend beyond the period
required by law) satisfies the requirement of law. The burden of proving that the posting requirement was
not complied with is now shifted to the one who alleges non-compliance.
On the question of whether or not the petitioners had a right to redeem the property, We hold that the
Court of Appeals did not err in ruling that they had no right to redeem. No consent having been secured
from respondent Bank to the sale with assumption of mortgage by petitioners, the latter were not validly
substituted as debtors. In fact, their rights were never recorded and hence, respondent Bank is charged
with the obligation to recognize the right of redemption only of the Lozano spouses. But even granting that
as purchaser or assignee of the property, as the case may be, the petitioners had acquired a right to
redeem the property, petitioners failed to exercise said right within the period granted by law. Thru
certificate of sale in favor of appellee was registered on September 2, 1968 and the one year redemption
period expired on September 3, 1969. It was not until September 29, 1969 that petitioner Honesto
Bonnevie first wrote respondent and offered to redeem the property. Moreover, on September 29, 1969,
Honesto had at that time already transferred his rights to intervenor Raoul Bonnevie.
On the question of whether or not respondent Court of Appeals erred in holding that respondent Bank did
not act in bad faith, petitioners rely on Exhibit "B" which is the letter of lose Lozano to respondent Bank
dated December 8, 1966 advising the latter that Honesto Bonnevie was authorized to make payments for
the amount secured by the mortgage on the subject property, to receive acknowledgment of payments,
obtain the Release of the Mortgage after full payment of the obligation and to take delivery of the title of
said property. On the assumption that the letter was received by respondent Bank, a careful reading of the
same shows that the plaintiff was merely authorized to do acts mentioned therein and does not mention
that petitioner is the new owner of the property nor request that all correspondence and notice should be
sent to him.
The claim of appellants that the collection of interests on the loan up to July 12, 1968 extends the maturity of said
loan up to said date and accordingly on June 10, 1968 when defendant applied for the foreclosure of the
mortgage, the loan was not yet due and demandable, is totally incorrect and misleading. The undeniable fact is
that the loan matured on December 26, 1967. On June 10, 1968, when respondent Bank applied for foreclosure,
the loan was already six months overdue. Petitioners' payment of interest on July 12, 1968 does not thereby make
the earlier act of respondent Bank inequitous nor does it ipso facto result in the renewal of the loan. In order that
a renewal of a loan may be effected, not only the payment of the accrued interest is necessary but also the
payment of interest for the proposed period of renewal as well. Besides, whether or not a loan may be renewed
does not solely depend on the debtor but more so on the discretion of the bank. Respondent Bank may not be,
therefore, charged of bad faith.
WHEREFORE, the appeal being devoid of merit, the decision of the Court of Appeals is hereby AFFIRMED. Costs
against petitioners.
SO ORDERED.
Aquino, J., concur.
Makasiar (Chairman), Abad Santos and Escolin, JJ., concurs in the result.
Concepcion J J., took no part.
De Castro, J., is on leave.
Footnotes
1 Third Division, Reyes, L.B., J., ponente; Busran and Nocon, JJ., concurring.
2 4. The MORTGAGOR shall not sell, dispose of, mortgage, nor in any manner encumber the mortgaged properties
without the written consent of MORTGAGEE. If in spite of this stipulation, a mortgaged property is sold, the
Vendee shall assume the mortgaged in the terms and conditions under which it is constituted, it being understood
that the assumption of the Vendee (does) not release the Vendor of his obligation to the MORTGAGEE; on the
contrary, both the Vendor and the Vendee shall be jointly and severally liable for said mortgage obligation. ...
G.R. No. 76118 March 30, 1993
THE CENTRAL BANK OF THE PHILIPPINES and RAMON V. TIAOQUI, Petitioners, vs. COURT OF APPEALS and
TRIUMPH SAVINGS BANK, Respondents.
Sycip, Salazar, Hernandez & Gatmaitan for petitioners.chanrobles virtual law library
Quisumbing, Torres & Evangelista for Triumph Savings Bank.
BELLOSILLO, J.:
May a Monetary Board resolution placing a private bank under receivership be annulled on the ground of
lack of prior notice and hearing?chanrobles virtual law library
This petition seeks review of the decision of the Court of Appeals in CA G.R. S.P. No. 07867 entitled "The
Central Bank of the Philippines and Ramon V. Tiaoqui vs. Hon. Jose C. de Guzman and Triumph Savings
Bank," promulgated 26 September 1986, which affirmed the twin orders of the Regional Trial Court of
Quezon City issued 11 November 1985 1 denying herein petitioners' motion to dismiss Civil Case No. Q-
45139, and directing petitioner Ramon V. Tiaoqui to restore the private management of Triumph Savings
Bank (TSB) to its elected board of directors and officers, subject to Central Bank
comptrollership. 2chanrobles virtual law library
The antecedent facts: Based on examination reports submitted by the Supervision and Examination Sector
(SES), Department II, of the Central Bank (CB) "that the financial condition of TSB is one of insolvency and
its continuance in business would involve probable loss to its depositors and creditors," 3 the Monetary
Board (MB) issued on 31 May 1985 Resolution No. 596 ordering the closure of TSB, forbidding it from doing
business in the Philippines, placing it under receivership, and appointing Ramon V. Tiaoqui as receiver.
Tiaoqui assumed office on 3 June 1985. 4chanrobles virtual law library
On 11 June 1985, TSB filed a complaint with the Regional Trial Court of Quezon City, docketed as Civil Case
No. Q-45139, against Central Bank and Ramon V. Tiaoqui to annul MB Resolution No. 596, with prayer for
injunction, challenging in the process the constitutionality of Sec. 29 of R.A. 269, otherwise known as "The
Central Bank Act," as amended, insofar as it authorizes the Central Bank to take over a banking institution
even if it is not charged with violation of any law or regulation, much less found guilty thereof. 5chanrobles
virtual law library
On 1 July 1985, the trial court temporarily restrained petitioners from implementing MB Resolution No.
596 "until further orders", thus prompting them to move for the quashal of the restraining order (TRO) on
the ground that it did not comply with said Sec. 29, i.e., that TSB failed to show convincing proof of
arbitrariness and bad faith on the part of petitioners;' and, that TSB failed to post the requisite bond in
favor of Central Bank.chanroblesvirtualawlibrarychanrobles virtual law library
On 19 July 1985, acting on the motion to quash the restraining order, the trial court granted the relief
sought and denied the application of TSB for injunction. Thereafter, Triumph Savings Bank filed with Us a
petition for certiorari under Rule 65 of the Rules of Court 6 dated 25 July 1985 seeking to enjoin the
continued implementation of the questioned MB resolution.chanroblesvirtualawlibrarychanrobles virtual
law library
Meanwhile, on 9 August 1985; Central Bank and Ramon Tiaoqui filed a motion to dismiss the complaint
before the RTC for failure to state a cause of action, i.e., it did not allege ultimate facts showing
that the action was plainly arbitrary and made in bad faith, which are the only grounds for the annulment
of Monetary Board resolutions placing a bank under conservatorship, and that TSB was without legal
capacity to sue except through its receiver. 7chanrobles virtual law library
On 9 September 1985, TSB filed an urgent motion in the RTC to direct receiver Ramon V. Tiaoqui to restore
TSB to its private management. On 11 November 1985, the RTC in separate orders denied petitioners'
motion to dismiss and ordered receiver Tiaoqui to restore the management of TSB to its elected board of
directors and officers, subject to CB comptrollership.chanroblesvirtualawlibrarychanrobles virtual law
library
Since the orders of the trial court rendered moot the petition for certiorari then pending before this Court,
Central Bank and Tiaoqui moved on 2 December 1985 for the dismissal of G.R. No. 71465 which We
granted on 18 December 1985. 8chanrobles virtual law library
Instead of proceeding to trial, petitioners elevated the twin orders of the RTC to the Court of Appeals on a
petition for certiorari and prohibition under Rule 65. 9 On 26 September 1986, the appellate court, upheld
the orders of the trial court thus -
Petitioners' motion to dismiss was premised on two grounds, namely, that the complaint failed to state a
cause of action and that the Triumph Savings Bank was without capacity to sue except through its
appointed receiver.chanroblesvirtualawlibrarychanrobles virtual law library
Concerning the first ground, petitioners themselves admit that the Monetary Board resolution placing the
Triumph Savings Bank under the receivership of the officials of the Central Bank was done without prior
hearing, that is, without first hearing the side of the bank. They further admit that said resolution can be
the subject of judicial review and may be set aside should it be found that the same was issued with
arbitrariness and in bad faith.chanroblesvirtualawlibrarychanrobles virtual law library
The charge of lack of due process in the complaint may be taken as constitutive of allegations of
arbitrariness and bad faith. This is not of course to be taken as meaning that there must be previous
hearing before the Monetary Board may exercise its powers under Section 29 of its Charter. Rather,
judicial review of such action not being foreclosed, it would be best should private respondent be given the
chance to show and prove arbitrariness and bad faith in the issuance of the questioned resolution,
especially so in the light of the statement of private respondent that neither the bank itself nor its officials
were even informed of any charge of violating banking laws.chanroblesvirtualawlibrarychanrobles virtual
law library
In regard to lack of capacity to sue on the part of Triumph Savings Bank, we view such argument as being
specious, for if we get the drift of petitioners' argument, they mean to convey the impression that only the
CB appointed receiver himself may question the CB resolution appointing him as such. This may be asking
for the impossible, for it cannot be expected that the master, the CB, will allow the receiver it has
appointed to question that very appointment. Should the argument of petitioners be given circulation,
then judicial review of actions of the CB would be effectively checked and foreclosed to the very bank
officials who may feel, as in the case at bar, that the CB action ousting them from the bank deserves to be
set aside.
xxx xxx xxxchanrobles virtual law library
On the questioned restoration order, this Court must say that it finds nothing whimsical, despotic,
capricious, or arbitrary in its issuance, said action only being in line and congruent to the action of the
Supreme Court in the Banco Filipino Case (G.R. No. 70054) where management of the bank was restored to
its duly elected directors and officers, but subject to the Central Bank comptrollership.  10chanrobles virtual
law library
On 15 October 1986, Central Bank and its appointed receiver, Ramon V. Tiaoqui, filed this petition under
Rule 45 of the Rules of Court praying that the decision of the Court of Appeals in CA-G.R. SP No. 07867 be
set aside, and that the civil case pending before the RTC of Quezon City, Civil Case No.
Q-45139, be dismissed. Petitioners allege that the Court of Appeals erred -
(1) in affirming that an insolvent bank that had been summarily closed by the Monetary Board should be
restored to its private management supposedly because such summary closure was "arbitrary and in bad
faith" and a denial of "due process";chanrobles virtual law library
(2) in holding that the "charge of lack of due process" for "want of prior hearing" in a complaint to annul a
Monetary Board receivership resolution under Sec. 29 of R.A. 265 "may be taken as . . allegations of
arbitrariness and bad faith"; andchanrobles virtual law library
(3) in holding that the owners and former officers of an insolvent bank may still act or sue in the name and
corporate capacity of such bank, even after it had been ordered closed and placed under
receivership. 11chanrobles virtual law library
The respondents, on the other hand, allege inter alia that in the Banco Filipino case, 12 We held that CB
violated the rule on administrative due process laid down in Ang Tibay vs. CIR (69 Phil. 635) and Eastern
Telecom Corp. vs. Dans, Jr. (137 SCRA 628) which requires that prior notice and hearing be afforded to all
parties in administrative proceedings. Since MB Resolution No. 596 was adopted without TSB being
previously notified and heard, according to respondents, the same is void for want of due process;
consequently, the bank's management should be restored to its board of directors and
officers. 13chanrobles virtual law library
Petitioners claim that it is the essence of Sec. 29 of R.A. 265 that prior notice and hearing in cases involving
bank closures should not be required since in all probability a hearing would not only cause unnecessary
delay but also provide bank "insiders" and stockholders the opportunity to further dissipate the bank's
resources, create liabilities for the bank up to the insured amount of P40,000.00, and even destroy
evidence of fraud or irregularity in the bank's operations to the prejudice of its depositors and
creditors. 14Petitioners further argue that the legislative intent of Sec. 29 is to repose in the Monetary
Board exclusive power to determine the existence of statutory grounds for the closure and liquidation of
banks, having the required expertise and specialized competence to do
so.chanroblesvirtualawlibrarychanrobles virtual law library
The first issue raised before Us is whether absence of prior notice and hearing may be considered acts of
arbitrariness and bad faith sufficient to annul a Monetary Board resolution enjoining a bank from doing
business and placing it under receivership. Otherwise stated, is absence of prior notice and hearing
constitutive of acts of arbitrariness and bad faith?chanrobles virtual law library
Under Sec. 29 of R.A. 265, 15 the Central Bank, through the Monetary Board, is vested with exclusive
authority to assess, evaluate and determine the condition of any bank, and finding such condition to be
one of insolvency, or that its continuance in business would involve probable loss to its depositors or
creditors, forbid the bank or non-bank financial institution to do business in the Philippines; and shall
designate an official of the CB or other competent person as receiver to immediately take charge of its
assets and liabilities. The fourth paragraph, 16 which was then in effect at the time the action was
commenced, allows the filing of a case to set aside the actions of the Monetary Board which are tainted
with arbitrariness and bad faith.chanroblesvirtualawlibrarychanrobles virtual law library
Contrary to the notion of private respondent, Sec. 29 does not contemplate prior notice and hearing
before a bank may be directed to stop operations and placed under receivership. When par. 4 (now par. 5,
as amended by E.O. 289) provides for the filing of a case within ten (10) days after the receiver takes
charge of the assets of the bank, it is unmistakable that the assailed actions should precede the filing of the
case. Plainly, the legislature could not have intended to authorize "no prior notice and hearing" in the
closure of the bank and at the same time allow a suit to annul it on the basis of absence
thereof.chanroblesvirtualawlibrarychanrobles virtual law library
In the early case of Rural Bank of Lucena, Inc. v. Arca [1965], 17 We held that a previous hearing is
nowhere required in Sec. 29 nor does the constitutional requirement of due process demand that the
correctness of the Monetary Board's resolution to stop operation and proceed to liquidation be first
adjudged before making the resolution effective. It is enough that a subsequent judicial review be
provided.chanroblesvirtualawlibrarychanrobles virtual law library
Even in Banco Filipino, 18We reiterated that Sec. 29 of R.A. 265 does not require a previous hearing before
the Monetary Board can implement its resolution closing a bank, since its action is subject to judicial
scrutiny as provided by law.chanroblesvirtualawlibrarychanrobles virtual law library
It may be emphasized that Sec. 29 does not altogether divest a bank or a non-bank financial institution
placed under receivership of the opportunity to be heard and present evidence on arbitrariness and bad
faith because within ten (10) days from the date the receiver takes charge of the assets of the bank, resort
to judicial review may be had by filing an appropriate pleading with the court. Respondent TSB did in fact
avail of this remedy by filing a complaint with the RTC of Quezon City on the 8th day following the takeover
by the receiver of the bank's assets on 3 June 1985.chanroblesvirtualawlibrarychanrobles virtual law library
This "close now and hear later" scheme is grounded on practical and legal considerations to prevent
unwarranted dissipation of the bank's assets and as a valid exercise of police power to protect the
depositors, creditors, stockholders and the general public.chanroblesvirtualawlibrarychanrobles virtual law
library
In Rural Bank of Buhi, Inc. v. Court of Appeals, 19 We stated that -
. . . due process does not necessarily require a prior hearing; a hearing or an opportunity to be heard may
be subsequent to the closure. One can just imagine the dire consequences of a prior hearing: bank runs
would be the order of the day, resulting in panic and hysteria. In the process, fortunes may be wiped out
and disillusionment will run the gamut of the entire banking community.
We stressed in Central Bank of the Philippines v. Court of Appeals 20 that -
. . . the banking business is properly subject to reasonable regulation under the police power of the state
because of its nature and relation to the fiscal affairs of the people and the revenues of the state (9 CJS 32).
Banks are affected with public interest because they receive funds from the general public in the form of
deposits. Due to the nature of their transactions and functions, a fiduciary relationship is created between
the banking institutions and their depositors. Therefore, banks are under the obligation to treat with
meticulous care and utmost fidelity the accounts of those who have reposed their trust and confidence in
them (Simex International [Manila], Inc., v. Court of Appeals, 183 SCRA 360
[1990]).chanroblesvirtualawlibrarychanrobles virtual law library
It is then the Government's responsibility to see to it that the financial interests of those who deal with the
banks and banking institutions, as depositors or otherwise, are protected. In this country, that task is
delegated to the Central Bank which, pursuant to its Charter (R.A. 265, as amended), is authorized to
administer the monetary, banking and credit system of the Philippines. Under both the 1973 and 1987
Constitutions, the Central Bank is tasked with providing policy direction in the areas of money, banking and
credit; corollarily, it shall have supervision over the operations of banks (Sec. 14, Art. XV, 1973
Constitution, and Sec. 20, Art. XII, 1987 Constitution). Under its charter, the CB is further authorized to take
the necessary steps against any banking institution if its continued operation would cause prejudice to its
depositors, creditors and the general public as well. This power has been expressly recognized by this
Court. In Philippine Veterans Bank Employees Union-NUBE v. Philippine Veterans Banks (189 SCRA 14
[1990], this Court held that:
. . . [u]nless adequate and determined efforts are taken by the government against distressed and
mismanaged banks, public faith in the banking system is certain to deteriorate to the prejudice of the
national economy itself, not to mention the losses suffered by the bank depositors, creditors, and
stockholders, who all deserve the protection of the government. The government cannot simply cross its
arms while the assets of a bank are being depleted through mismanagement or irregularities. It is the duty
of the Central Bank in such an event to step in and salvage the remaining resources of the bank so that
they may not continue to be dissipated or plundered by those entrusted with their management.
Section 29 of R.A. 265 should be viewed in this light; otherwise, We would be subscribing to a situation
where the procedural rights invoked by private respondent would take precedence over the substantive
interests of depositors, creditors and stockholders over the assets of the
bank.chanroblesvirtualawlibrarychanrobles virtual law library
Admittedly, the mere filing of a case for receivership by the Central Bank can trigger a bank run and drain
its assets in days or even hours leading to insolvency even if the bank be actually solvent. The procedure
prescribed in Sec. 29 is truly designed to protect the interest of all concerned, i.e., the depositors, creditors
and stockholders, the bank itself, and the general public, and the summary closure pales in comparison to
the protection afforded public interest. At any rate, the bank is given full opportunity to
prove arbitrariness and bad faith in placing the bank under receivership, in which event, the resolution may
be properly nullified and the receivership lifted as the trial court may
determine.chanroblesvirtualawlibrarychanrobles virtual law library
The heavy reliance of respondents on the Banco Filipino case is misplaced in view of factual circumstances
therein which are not attendant in the present case. We ruled in Banco Filipino that the closure of the bank
was arbitrary and attendant with grave abuse of discretion, not because of the absence of prior notice and
hearing, but that the Monetary Board had no sufficient basis to arrive at a sound conclusion of insolvency
to justify the closure. In other words, the arbitrariness, bad faith and abuse of discretion were determined
only after the bank was placed under conservatorship and evidence thereon was received by the trial
court. As this Court found in that case, the Valenzuela, Aurellano and Tiaoqui Reports contained
unfounded assumptions and deductions which did not reflect the true financial condition of the bank. For
instance, the subtraction of an uncertain amount as valuation reserve from the assets of the bank would
merely result in its net worth or the unimpaired capital and surplus; it did not reflect the total financial
condition of Banco Filipino.chanroblesvirtualawlibrarychanrobles virtual law library
Furthermore, the same reports showed that the total assets of Banco Filipino far exceeded its total
liabilities. Consequently, on the basis thereof, the Monetary Board had no valid reason to liquidate the
bank; perhaps it could have merely ordered its reorganization or rehabilitation, if need be. Clearly, there
was in that case a manifest arbitrariness, abuse of discretion and bad faith in the closure of  Banco
Filipino by the Monetary Board. But, this is not the case before Us. For here, what is being raised as
arbitrary by private respondent is the denial of prior notice and hearing by the Monetary Board, a matter
long settled in this jurisdiction, and not the arbitrariness which the conclusions of the Supervision and
Examination Sector (SES), Department II, of the Central Bank were
reached.chanroblesvirtualawlibrarychanrobles virtual law library
Once again We refer to Rural Bank of Buhi, Inc. v. Court of Appeals, 21 and reiterate Our pronouncement
therein that -
. . . the law is explicit as to the conditions prerequisite to the action of the Monetary Board to forbid the
institution to do business in the Philippines and to appoint a receiver to immediately take charge of the
bank's assets and liabilities. They are: (a) an examination made by the examining department of the Central
Bank; (b) report by said department to the Monetary Board; and (c)  prima facie showing that its
continuance in business would involve probable loss to its depositors or creditors.
In sum, appeal to procedural due process cannot just outweigh the evil sought to be prevented; hence, We
rule that Sec. 29 of R.A. 265 is a sound legislation promulgated in accordance with the Constitution in the
exercise of police power of the state. Consequently, the absence of notice and hearing is not a valid ground
to annul a Monetary Board resolution placing a bank under receivership. The absence of prior notice and
hearing cannot be deemed acts of arbitrariness and bad faith. Thus, an MB resolution placing a bank under
receivership, or conservatorship for that matter, may only be annulled after a determination has been
made by the trial court that its issuance was tainted with arbitrariness and bad faith. Until such
determination is made, the status quo shall be maintained, i.e., the bank shall continue to be under
receivership.chanroblesvirtualawlibrarychanrobles virtual law library
As regards the second ground, to rule that only the receiver may bring suit in behalf of the bank is, to echo
the respondent appellate court, "asking for the impossible, for it cannot be expected that the master, the
CB, will allow the receiver it has appointed to question that very appointment." Consequently, only
stockholders of a bank could file an action for annulment of a Monetary Board resolution placing the bank
under receivership and prohibiting it from continuing operations. 22 In Central Bank v. Court of
Appeals, 23We explained the purpose of the law -
. . . in requiring that only the stockholders of record representing the majority of the capital stock may
bring the action to set aside a resolution to place a bank under conservatorship is to ensure that it be not
frustrated or defeated by the incumbent Board of Directors or officers who may immediately resort to
court action to prevent its implementation or enforcement. It is presumed that such a resolution is
directed principally against acts of said Directors and officers which place the bank in a state of continuing
inability to maintain a condition of liquidity adequate to protect the interest of depositors and creditors.
Indirectly, it is likewise intended to protect and safeguard the rights and interests of the stockholders.
Common sense and public policy dictate then that the authority to decide on whether to contest the
resolution should be lodged with the stockholders owning a majority of the shares for they are expected to
be more objective in determining whether the resolution is plainly arbitrary and issued in bad faith.
It is observed that the complaint in this case was filed on 11 June 1985 or two (2) years prior to 25 July
1987 when E.O. 289 was issued, to be effective sixty (60) days after its approval (Sec. 5). The implication is
that before E.Ochanrobles virtual law library
. 289, any party in interest could institute court proceedings to question a Monetary Board resolution
placing a bank under receivership. Consequently, since the instant complaint was filed by parties
representing themselves to be officers of respondent Bank (Officer-in-Charge and Vice President), the case
before the trial court should now take its natural course. However, after the effectivity of E.O. 289, the
procedure stated therein should be followed and observed.chanroblesvirtualawlibrarychanrobles virtual
law library
PREMISES considered, the Decision of the Court of Appeals in CA-G.R. SP No. 07867 is AFFIRMED, except
insofar as it upholds the Order of the trial court of 11 November 1985 directing petitioner RAMON V.
TIAOQUI to restore the management of TRIUMPH SAVINGS BANK to its elected Board of Directors and
Officers, which is hereby SET ASIDE.chanroblesvirtualawlibrarychanrobles virtual law library
Let this case be remanded to the Regional Trial Court of Quezon City for further proceedings to determine
whether the issuance of Resolution No. 596 of the Monetary Board was tainted with arbitrariness and bad
faith and to decide the case accordingly.chanroblesvirtualawlibrarychanrobles virtual law library
SO ORDERED.

G.R. No. 146364             June 3, 2004

COLITO T. PAJUYO, petitioner,
vs.
COURT OF APPEALS and EDDIE GUEVARRA, respondents.
DECISION
CARPIO, J.:
The Case
Before us is a petition for review1 of the 21 June 2000 Decision2 and 14 December 2000 Resolution of the
Court of Appeals in CA-G.R. SP No. 43129. The Court of Appeals set aside the 11 November 1996
decision3 of the Regional Trial Court of Quezon City, Branch 81,4 affirming the 15 December 1995
decision5 of the Metropolitan Trial Court of Quezon City, Branch 31.6
The Antecedents
In June 1979, petitioner Colito T. Pajuyo ("Pajuyo") paid ₱400 to a certain Pedro Perez for the rights over a
250-square meter lot in Barrio Payatas, Quezon City. Pajuyo then constructed a house made of light
materials on the lot. Pajuyo and his family lived in the house from 1979 to 7 December 1985.
On 8 December 1985, Pajuyo and private respondent Eddie Guevarra ("Guevarra") executed
a Kasunduan or agreement. Pajuyo, as owner of the house, allowed Guevarra to live in the house for free
provided Guevarra would maintain the cleanliness and orderliness of the house. Guevarra promised that
he would voluntarily vacate the premises on Pajuyo’s demand.
In September 1994, Pajuyo informed Guevarra of his need of the house and demanded that Guevarra
vacate the house. Guevarra refused.
Pajuyo filed an ejectment case against Guevarra with the Metropolitan Trial Court of Quezon City, Branch
31 ("MTC").
In his Answer, Guevarra claimed that Pajuyo had no valid title or right of possession over the lot where the
house stands because the lot is within the 150 hectares set aside by Proclamation No. 137 for socialized
housing. Guevarra pointed out that from December 1985 to September 1994, Pajuyo did not show up or
communicate with him. Guevarra insisted that neither he nor Pajuyo has valid title to the lot.
On 15 December 1995, the MTC rendered its decision in favor of Pajuyo. The dispositive portion of the
MTC decision reads:
WHEREFORE, premises considered, judgment is hereby rendered for the plaintiff and against defendant,
ordering the latter to:
A) vacate the house and lot occupied by the defendant or any other person or persons claiming any right
under him;
B) pay unto plaintiff the sum of THREE HUNDRED PESOS (₱300.00) monthly as reasonable compensation
for the use of the premises starting from the last demand;
C) pay plaintiff the sum of ₱3,000.00 as and by way of attorney’s fees; and
D) pay the cost of suit.
SO ORDERED.7
Aggrieved, Guevarra appealed to the Regional Trial Court of Quezon City, Branch 81 ("RTC").
On 11 November 1996, the RTC affirmed the MTC decision. The dispositive portion of the RTC decision
reads:
WHEREFORE, premises considered, the Court finds no reversible error in the decision appealed from, being
in accord with the law and evidence presented, and the same is hereby affirmed en toto.
SO ORDERED.8
Guevarra received the RTC decision on 29 November 1996. Guevarra had only until 14 December 1996 to
file his appeal with the Court of Appeals. Instead of filing his appeal with the Court of Appeals, Guevarra
filed with the Supreme Court a "Motion for Extension of Time to File Appeal by Certiorari Based on Rule
42" ("motion for extension"). Guevarra theorized that his appeal raised pure questions of law. The
Receiving Clerk of the Supreme Court received the motion for extension on 13 December 1996 or one day
before the right to appeal expired.
On 3 January 1997, Guevarra filed his petition for review with the Supreme Court.
On 8 January 1997, the First Division of the Supreme Court issued a Resolution9 referring the motion for
extension to the Court of Appeals which has concurrent jurisdiction over the case. The case presented no
special and important matter for the Supreme Court to take cognizance of at the first instance.
On 28 January 1997, the Thirteenth Division of the Court of Appeals issued a Resolution10 granting the
motion for extension conditioned on the timeliness of the filing of the motion.
On 27 February 1997, the Court of Appeals ordered Pajuyo to comment on Guevara’s petition for review.
On 11 April 1997, Pajuyo filed his Comment.
On 21 June 2000, the Court of Appeals issued its decision reversing the RTC decision. The dispositive
portion of the decision reads:
WHEREFORE, premises considered, the assailed Decision of the court a quo in Civil Case No. Q-96-26943
is REVERSED and SET ASIDE; and it is hereby declared that the ejectment case filed against defendant-
appellant is without factual and legal basis.
SO ORDERED.11
Pajuyo filed a motion for reconsideration of the decision. Pajuyo pointed out that the Court of Appeals
should have dismissed outright Guevarra’s petition for review because it was filed out of time. Moreover, it
was Guevarra’s counsel and not Guevarra who signed the certification against forum-shopping.
On 14 December 2000, the Court of Appeals issued a resolution denying Pajuyo’s motion for
reconsideration. The dispositive portion of the resolution reads:
WHEREFORE, for lack of merit, the motion for reconsideration is hereby DENIED. No costs.
SO ORDERED.12
The Ruling of the MTC
The MTC ruled that the subject of the agreement between Pajuyo and Guevarra is the house and not the
lot. Pajuyo is the owner of the house, and he allowed Guevarra to use the house only by tolerance. Thus,
Guevarra’s refusal to vacate the house on Pajuyo’s demand made Guevarra’s continued possession of the
house illegal.
The Ruling of the RTC
The RTC upheld the Kasunduan, which established the landlord and tenant relationship between Pajuyo
and Guevarra. The terms of the Kasunduan bound Guevarra to return possession of the house on demand.
The RTC rejected Guevarra’s claim of a better right under Proclamation No. 137, the Revised National
Government Center Housing Project Code of Policies and other pertinent laws. In an ejectment suit, the
RTC has no power to decide Guevarra’s rights under these laws. The RTC declared that in an ejectment
case, the only issue for resolution is material or physical possession, not ownership.
The Ruling of the Court of Appeals
The Court of Appeals declared that Pajuyo and Guevarra are squatters. Pajuyo and Guevarra illegally
occupied the contested lot which the government owned.
Perez, the person from whom Pajuyo acquired his rights, was also a squatter. Perez had no right or title
over the lot because it is public land. The assignment of rights between Perez and Pajuyo, and
the Kasunduan between Pajuyo and Guevarra, did not have any legal effect. Pajuyo and Guevarra are
in pari delicto or in equal fault. The court will leave them where they are.
The Court of Appeals reversed the MTC and RTC rulings, which held that the Kasunduan between Pajuyo
and Guevarra created a legal tie akin to that of a landlord and tenant relationship. The Court of Appeals
ruled that the Kasunduan is not a lease contract but a commodatum because the agreement is not for a
price certain.
Since Pajuyo admitted that he resurfaced only in 1994 to claim the property, the appellate court held that
Guevarra has a better right over the property under Proclamation No. 137. President Corazon C. Aquino
("President Aquino") issued Proclamation No. 137 on 7 September 1987. At that time, Guevarra was in
physical possession of the property. Under Article VI of the Code of Policies Beneficiary Selection and
Disposition of Homelots and Structures in the National Housing Project ("the Code"), the actual occupant
or caretaker of the lot shall have first priority as beneficiary of the project. The Court of Appeals concluded
that Guevarra is first in the hierarchy of priority.
In denying Pajuyo’s motion for reconsideration, the appellate court debunked Pajuyo’s claim that Guevarra
filed his motion for extension beyond the period to appeal.
The Court of Appeals pointed out that Guevarra’s motion for extension filed before the Supreme Court was
stamped "13 December 1996 at 4:09 PM" by the Supreme Court’s Receiving Clerk. The Court of Appeals
concluded that the motion for extension bore a date, contrary to Pajuyo’s claim that the motion for
extension was undated. Guevarra filed the motion for extension on time on 13 December 1996 since he
filed the motion one day before the expiration of the reglementary period on 14 December 1996. Thus, the
motion for extension properly complied with the condition imposed by the Court of Appeals in its 28
January 1997 Resolution. The Court of Appeals explained that the thirty-day extension to file the petition
for review was deemed granted because of such compliance.
The Court of Appeals rejected Pajuyo’s argument that the appellate court should have dismissed the
petition for review because it was Guevarra’s counsel and not Guevarra who signed the certification
against forum-shopping. The Court of Appeals pointed out that Pajuyo did not raise this issue in his
Comment. The Court of Appeals held that Pajuyo could not now seek the dismissal of the case after he had
extensively argued on the merits of the case. This technicality, the appellate court opined, was clearly an
afterthought.
The Issues
Pajuyo raises the following issues for resolution:
WHETHER THE COURT OF APPEALS ERRED OR ABUSED ITS AUTHORITY AND DISCRETION TANTAMOUNT TO
LACK OF JURISDICTION:
1) in GRANTING, instead of denying, Private Respondent’s Motion for an Extension of thirty days to file
petition for review at the time when there was no more period to extend as the decision of the Regional
Trial Court had already become final and executory.
2) in giving due course, instead of dismissing, private respondent’s Petition for Review even though the
certification against forum-shopping was signed only by counsel instead of by petitioner himself.
3) in ruling that the Kasunduan voluntarily entered into by the parties was in fact a commodatum, instead
of a Contract of Lease as found by the Metropolitan Trial Court and in holding that "the ejectment case
filed against defendant-appellant is without legal and factual basis".
4) in reversing and setting aside the Decision of the Regional Trial Court in Civil Case No. Q-96-26943 and in
holding that the parties are in pari delicto being both squatters, therefore, illegal occupants of the
contested parcel of land.
5) in deciding the unlawful detainer case based on the so-called Code of Policies of the National
Government Center Housing Project instead of deciding the same under the Kasunduan voluntarily
executed by the parties, the terms and conditions of which are the laws between themselves.13
The Ruling of the Court
The procedural issues Pajuyo is raising are baseless. However, we find merit in the substantive issues
Pajuyo is submitting for resolution.
Procedural Issues
Pajuyo insists that the Court of Appeals should have dismissed outright Guevarra’s petition for review
because the RTC decision had already become final and executory when the appellate court acted on
Guevarra’s motion for extension to file the petition. Pajuyo points out that Guevarra had only one day
before the expiry of his period to appeal the RTC decision. Instead of filing the petition for review with the
Court of Appeals, Guevarra filed with this Court an undated motion for extension of 30 days to file a
petition for review. This Court merely referred the motion to the Court of Appeals. Pajuyo believes that the
filing of the motion for extension with this Court did not toll the running of the period to perfect the
appeal. Hence, when the Court of Appeals received the motion, the period to appeal had already expired.
We are not persuaded.
Decisions of the regional trial courts in the exercise of their appellate jurisdiction are appealable to the
Court of Appeals by petition for review in cases involving questions of fact or mixed questions of fact and
law.14 Decisions of the regional trial courts involving pure questions of law are appealable directly to this
Court by petition for review.15 These modes of appeal are now embodied in Section 2, Rule 41 of the 1997
Rules of Civil Procedure.
Guevarra believed that his appeal of the RTC decision involved only questions of law. Guevarra thus filed
his motion for extension to file petition for review before this Court on 14 December 1996. On 3 January
1997, Guevarra then filed his petition for review with this Court. A perusal of Guevarra’s petition for review
gives the impression that the issues he raised were pure questions of law. There is a question of law when
the doubt or difference is on what the law is on a certain state of facts.16  There is a question of fact when
the doubt or difference is on the truth or falsity of the facts alleged.17
In his petition for review before this Court, Guevarra no longer disputed the facts. Guevarra’s petition for
review raised these questions: (1) Do ejectment cases pertain only to possession of a structure, and not the
lot on which the structure stands? (2) Does a suit by a squatter against a fellow squatter constitute a valid
case for ejectment? (3) Should a Presidential Proclamation governing the lot on which a squatter’s
structure stands be considered in an ejectment suit filed by the owner of the structure?
These questions call for the evaluation of the rights of the parties under the law on ejectment and the
Presidential Proclamation. At first glance, the questions Guevarra raised appeared purely legal. However,
some factual questions still have to be resolved because they have a bearing on the legal questions raised
in the petition for review. These factual matters refer to the metes and bounds of the disputed property
and the application of Guevarra as beneficiary of Proclamation No. 137.
The Court of Appeals has the power to grant an extension of time to file a petition for review.
In Lacsamana v. Second Special Cases Division of the Intermediate Appellate Court,18 we declared that the
Court of Appeals could grant extension of time in appeals by petition for review. In Liboro v. Court of
Appeals,19 we clarified that the prohibition against granting an extension of time applies only in a case
where ordinary appeal is perfected by a mere notice of appeal. The prohibition does not apply in a petition
for review where the pleading needs verification. A petition for review, unlike an ordinary appeal, requires
preparation and research to present a persuasive position.20 The drafting of the petition for review entails
more time and effort than filing a notice of appeal.21 Hence, the Court of Appeals may allow an extension
of time to file a petition for review.
In the more recent case of Commissioner of Internal Revenue v. Court of Appeals,22 we held
that Liboro’s clarification of Lacsamana is consistent with the Revised Internal Rules of the Court of Appeals
and Supreme Court Circular No. 1-91. They all allow an extension of time for filing petitions for review with
the Court of Appeals. The extension, however, should be limited to only fifteen days save in exceptionally
meritorious cases where the Court of Appeals may grant a longer period.
A judgment becomes "final and executory" by operation of law. Finality of judgment becomes a fact on the
lapse of the reglementary period to appeal if no appeal is perfected.23 The RTC decision could not have
gained finality because the Court of Appeals granted the 30-day extension to Guevarra.
The Court of Appeals did not commit grave abuse of discretion when it approved Guevarra’s motion for
extension. The Court of Appeals gave due course to the motion for extension because it complied with the
condition set by the appellate court in its resolution dated 28 January 1997. The resolution stated that the
Court of Appeals would only give due course to the motion for extension if filed on time. The motion for
extension met this condition.
The material dates to consider in determining the timeliness of the filing of the motion for extension are
(1) the date of receipt of the judgment or final order or resolution subject of the petition, and (2) the date
of filing of the motion for extension.24 It is the date of the filing of the motion or pleading, and not the
date of execution, that determines the timeliness of the filing of that motion or pleading. Thus, even if the
motion for extension bears no date, the date of filing stamped on it is the reckoning point for determining
the timeliness of its filing.
Guevarra had until 14 December 1996 to file an appeal from the RTC decision. Guevarra filed his motion
for extension before this Court on 13 December 1996, the date stamped by this Court’s Receiving Clerk on
the motion for extension. Clearly, Guevarra filed the motion for extension exactly one day before the lapse
of the reglementary period to appeal.
Assuming that the Court of Appeals should have dismissed Guevarra’s appeal on technical grounds, Pajuyo
did not ask the appellate court to deny the motion for extension and dismiss the petition for review at the
earliest opportunity. Instead, Pajuyo vigorously discussed the merits of the case. It was only when the
Court of Appeals ruled in Guevarra’s favor that Pajuyo raised the procedural issues against Guevarra’s
petition for review.
A party who, after voluntarily submitting a dispute for resolution, receives an adverse decision on the
merits, is estopped from attacking the jurisdiction of the court.25 Estoppel sets in not because the
judgment of the court is a valid and conclusive adjudication, but because the practice of attacking the
court’s jurisdiction after voluntarily submitting to it is against public policy.26
In his Comment before the Court of Appeals, Pajuyo also failed to discuss Guevarra’s failure to sign the
certification against forum shopping. Instead, Pajuyo harped on Guevarra’s counsel signing the verification,
claiming that the counsel’s verification is insufficient since it is based only on "mere information."
A party’s failure to sign the certification against forum shopping is different from the party’s failure to sign
personally the verification. The certificate of non-forum shopping must be signed by the party, and not by
counsel.27 The certification of counsel renders the petition defective.28
On the other hand, the requirement on verification of a pleading is a formal and not a jurisdictional
requisite.29 It is intended simply to secure an assurance that what are alleged in the pleading are true and
correct and not the product of the imagination or a matter of speculation, and that the pleading is filed in
good faith.30 The party need not sign the verification. A party’s representative, lawyer or any person who
personally knows the truth of the facts alleged in the pleading may sign the verification.31
We agree with the Court of Appeals that the issue on the certificate against forum shopping was merely an
afterthought. Pajuyo did not call the Court of Appeals’ attention to this defect at the early stage of the
proceedings. Pajuyo raised this procedural issue too late in the proceedings.
Absence of Title over the Disputed Property will not Divest the Courts of Jurisdiction to Resolve the Issue of
Possession
Settled is the rule that the defendant’s claim of ownership of the disputed property will not divest the
inferior court of its jurisdiction over the ejectment case.32 Even if the pleadings raise the issue of
ownership, the court may pass on such issue to determine only the question of possession, especially if the
ownership is inseparably linked with the possession.33 The adjudication on the issue of ownership is only
provisional and will not bar an action between the same parties involving title to the land.34 This doctrine
is a necessary consequence of the nature of the two summary actions of ejectment, forcible entry and
unlawful detainer, where the only issue for adjudication is the physical or material possession over the real
property.35
In this case, what Guevarra raised before the courts was that he and Pajuyo are not the owners of the
contested property and that they are mere squatters. Will the defense that the parties to the ejectment
case are not the owners of the disputed lot allow the courts to renounce their jurisdiction over the case?
The Court of Appeals believed so and held that it would just leave the parties where they are since they are
in pari delicto.
We do not agree with the Court of Appeals.
Ownership or the right to possess arising from ownership is not at issue in an action for recovery of
possession. The parties cannot present evidence to prove ownership or right to legal possession except to
prove the nature of the possession when necessary to resolve the issue of physical possession.36 The same
is true when the defendant asserts the absence of title over the property. The absence of title over the
contested lot is not a ground for the courts to withhold relief from the parties in an ejectment case.
The only question that the courts must resolve in ejectment proceedings is - who is entitled to the physical
possession of the premises, that is, to the possession de facto and not to the possession de jure.37 It does
not even matter if a party’s title to the property is questionable,38 or when both parties intruded into
public land and their applications to own the land have yet to be approved by the proper government
agency.39 Regardless of the actual condition of the title to the property, the party in peaceable quiet
possession shall not be thrown out by a strong hand, violence or terror.40 Neither is the unlawful
withholding of property allowed. Courts will always uphold respect for prior possession.
Thus, a party who can prove prior possession can recover such possession even against the owner
himself.41 Whatever may be the character of his possession, if he has in his favor prior possession in time,
he has the security that entitles him to remain on the property until a person with a better right lawfully
ejects him.42 To repeat, the only issue that the court has to settle in an ejectment suit is the right to
physical possession.
In Pitargue v. Sorilla,43 the government owned the land in dispute. The government did not authorize
either the plaintiff or the defendant in the case of forcible entry case to occupy the land. The plaintiff had
prior possession and had already introduced improvements on the public land. The plaintiff had a pending
application for the land with the Bureau of Lands when the defendant ousted him from possession. The
plaintiff filed the action of forcible entry against the defendant. The government was not a party in the
case of forcible entry.
The defendant questioned the jurisdiction of the courts to settle the issue of possession because while the
application of the plaintiff was still pending, title remained with the government, and the Bureau of Public
Lands had jurisdiction over the case. We disagreed with the defendant. We ruled that courts have
jurisdiction to entertain ejectment suits even before the resolution of the application. The plaintiff, by
priority of his application and of his entry, acquired prior physical possession over the public land applied
for as against other private claimants. That prior physical possession enjoys legal protection against other
private claimants because only a court can take away such physical possession in an ejectment case.
While the Court did not brand the plaintiff and the defendant in Pitargue44 as squatters, strictly speaking,
their entry into the disputed land was illegal. Both the plaintiff and defendant entered the public land
without the owner’s permission. Title to the land remained with the government because it had not
awarded to anyone ownership of the contested public land. Both the plaintiff and the defendant were in
effect squatting on government property. Yet, we upheld the courts’ jurisdiction to resolve the issue of
possession even if the plaintiff and the defendant in the ejectment case did not have any title over the
contested land.
Courts must not abdicate their jurisdiction to resolve the issue of physical possession because of the public
need to preserve the basic policy behind the summary actions of forcible entry and unlawful detainer. The
underlying philosophy behind ejectment suits is to prevent breach of the peace and criminal disorder and
to compel the party out of possession to respect and resort to the law alone to obtain what he claims is
his.45 The party deprived of possession must not take the law into his own hands.46 Ejectment
proceedings are summary in nature so the authorities can settle speedily actions to recover possession
because of the overriding need to quell social disturbances.47
We further explained in Pitargue the greater interest that is at stake in actions for recovery of possession.
We made the following pronouncements in Pitargue:
The question that is before this Court is: Are courts without jurisdiction to take cognizance of possessory
actions involving these public lands before final award is made by the Lands Department, and before title is
given any of the conflicting claimants? It is one of utmost importance, as there are public lands everywhere
and there are thousands of settlers, especially in newly opened regions. It also involves a matter of policy,
as it requires the determination of the respective authorities and functions of two coordinate branches of
the Government in connection with public land conflicts.
Our problem is made simple by the fact that under the Civil Code, either in the old, which was in force in
this country before the American occupation, or in the new, we have a possessory action, the aim and
purpose of which is the recovery of the physical possession of real property, irrespective of the question as
to who has the title thereto. Under the Spanish Civil Code we had the accion interdictal, a summary
proceeding which could be brought within one year from dispossession (Roman Catholic Bishop of Cebu vs.
Mangaron, 6 Phil. 286, 291); and as early as October 1, 1901, upon the enactment of the Code of Civil
Procedure (Act No. 190 of the Philippine Commission) we implanted the common law action of forcible
entry (section 80 of Act No. 190), the object of which has been stated by this Court to be  "to prevent
breaches of the peace and criminal disorder which would ensue from the withdrawal of the remedy, and
the reasonable hope such withdrawal would create that some advantage must accrue to those persons
who, believing themselves entitled to the possession of property, resort to force to gain possession rather
than to some appropriate action in the court to assert their claims." (Supia and Batioco vs. Quintero and
Ayala, 59 Phil. 312, 314.) So before the enactment of the first Public Land Act (Act No. 926) the action of
forcible entry was already available in the courts of the country. So the question to be resolved is, Did the
Legislature intend, when it vested the power and authority to alienate and dispose of the public lands in
the Lands Department, to exclude the courts from entertaining the possessory action of forcible entry
between rival claimants or occupants of any land before award thereof to any of the parties? Did Congress
intend that the lands applied for, or all public lands for that matter, be removed from the jurisdiction of the
judicial Branch of the Government, so that any troubles arising therefrom, or any breaches of the peace or
disorders caused by rival claimants, could be inquired into only by the Lands Department to the exclusion
of the courts? The answer to this question seems to us evident. The Lands Department does not have the
means to police public lands; neither does it have the means to prevent disorders arising therefrom, or
contain breaches of the peace among settlers; or to pass promptly upon conflicts of possession.  Then its
power is clearly limited to disposition and alienation, and while it may decide conflicts of possession in
order to make proper award, the settlement of conflicts of possession which is recognized in the court
herein has another ultimate purpose, i.e., the protection of actual possessors and occupants with a view to
the prevention of breaches of the peace. The power to dispose and alienate could not have been intended
to include the power to prevent or settle disorders or breaches of the peace among rival settlers or
claimants prior to the final award. As to this, therefore, the corresponding branches of the Government
must continue to exercise power and jurisdiction within the limits of their respective functions. The vesting
of the Lands Department with authority to administer, dispose, and alienate public lands, therefore, must
not be understood as depriving the other branches of the Government of the exercise of the respective
functions or powers thereon, such as the authority to stop disorders and quell breaches of the peace by
the police, the authority on the part of the courts to take jurisdiction over possessory actions arising
therefrom not involving, directly or indirectly, alienation and disposition.
Our attention has been called to a principle enunciated in American courts to the effect that courts have no
jurisdiction to determine the rights of claimants to public lands, and that until the disposition of the land
has passed from the control of the Federal Government, the courts will not interfere with the
administration of matters concerning the same. (50 C. J. 1093-1094.) We have no quarrel with this
principle. The determination of the respective rights of rival claimants to public lands is different from the
determination of who has the actual physical possession or occupation with a view to protecting the same
and preventing disorder and breaches of the peace. A judgment of the court ordering restitution of the
possession of a parcel of land to the actual occupant, who has been deprived thereof by another through
the use of force or in any other illegal manner, can never be "prejudicial interference" with the disposition
or alienation of public lands. On the other hand, if courts were deprived of jurisdiction of cases involving
conflicts of possession, that threat of judicial action against breaches of the peace committed on public
lands would be eliminated, and a state of lawlessness would probably be produced between applicants,
occupants or squatters, where force or might, not right or justice, would rule.
It must be borne in mind that the action that would be used to solve conflicts of possession between rivals
or conflicting applicants or claimants would be no other than that of forcible entry. This action, both in
England and the United States and in our jurisdiction, is a summary and expeditious remedy whereby one
in peaceful and quiet possession may recover the possession of which he has been deprived by a stronger
hand, by violence or terror; its ultimate object being to prevent breach of the peace and criminal disorder.
(Supia and Batioco vs. Quintero and Ayala, 59 Phil. 312, 314.) The basis of the remedy is mere possession
as a fact, of physical possession, not a legal possession. (Mediran vs. Villanueva, 37 Phil. 752.) The title or
right to possession is never in issue in an action of forcible entry; as a matter of fact, evidence thereof is
expressly banned, except to prove the nature of the possession. (Second 4, Rule 72, Rules of Court.) With
this nature of the action in mind, by no stretch of the imagination can conclusion be arrived at that the use
of the remedy in the courts of justice would constitute an interference with the alienation, disposition, and
control of public lands. To limit ourselves to the case at bar can it be pretended at all that its result would
in any way interfere with the manner of the alienation or disposition of the land contested? On the
contrary, it would facilitate adjudication, for the question of priority of possession having been decided in a
final manner by the courts, said question need no longer waste the time of the land officers making the
adjudication or award. (Emphasis ours)
The Principle of Pari Delicto is not Applicable to Ejectment Cases
The Court of Appeals erroneously applied the principle of pari delicto to this case.
Articles 1411 and 1412 of the Civil Code48 embody the principle of pari delicto. We explained the principle
of pari delicto in these words:
The rule of pari delicto is expressed in the maxims ‘ex dolo malo non eritur actio’ and ‘in pari delicto potior
est conditio defedentis.’ The law will not aid either party to an illegal agreement. It leaves the parties
where it finds them.49
The application of the pari delicto principle is not absolute, as there are exceptions to its application. One
of these exceptions is where the application of the pari delicto rule would violate well-established public
policy.50
In Drilon v. Gaurana,51 we reiterated the basic policy behind the summary actions of forcible entry and
unlawful detainer. We held that:
It must be stated that the purpose of an action of forcible entry and detainer is that, regardless of the
actual condition of the title to the property, the party in peaceable quiet possession shall not be turned out
by strong hand, violence or terror. In affording this remedy of restitution the object of the statute is to
prevent breaches of the peace and criminal disorder which would ensue from the withdrawal of the
remedy, and the reasonable hope such withdrawal would create that some advantage must accrue to
those persons who, believing themselves entitled to the possession of property, resort to force to gain
possession rather than to some appropriate action in the courts to assert their claims. This is the
philosophy at the foundation of all these actions of forcible entry and detainer which are designed to
compel the party out of possession to respect and resort to the law alone to obtain what he claims is his.52
Clearly, the application of the principle of pari delicto to a case of ejectment between squatters is fraught
with danger. To shut out relief to squatters on the ground of pari delicto would openly invite mayhem and
lawlessness. A squatter would oust another squatter from possession of the lot that the latter had illegally
occupied, emboldened by the knowledge that the courts would leave them where they are. Nothing would
then stand in the way of the ousted squatter from re-claiming his prior possession at all cost.
Petty warfare over possession of properties is precisely what ejectment cases or actions for recovery of
possession seek to prevent.53 Even the owner who has title over the disputed property cannot take the
law into his own hands to regain possession of his property. The owner must go to court.
Courts must resolve the issue of possession even if the parties to the ejectment suit are squatters. The
determination of priority and superiority of possession is a serious and urgent matter that cannot be left to
the squatters to decide. To do so would make squatters receive better treatment under the law. The law
restrains property owners from taking the law into their own hands. However, the principle of pari
delicto as applied by the Court of Appeals would give squatters free rein to dispossess fellow squatters or
violently retake possession of properties usurped from them. Courts should not leave squatters to their
own devices in cases involving recovery of possession.
Possession is the only Issue for Resolution in an Ejectment Case
The case for review before the Court of Appeals was a simple case of ejectment. The Court of Appeals
refused to rule on the issue of physical possession. Nevertheless, the appellate court held that the pivotal
issue in this case is who between Pajuyo and Guevarra has the "priority right as beneficiary of the
contested land under Proclamation No. 137."54 According to the Court of Appeals, Guevarra enjoys
preferential right under Proclamation No. 137 because Article VI of the Code declares that the actual
occupant or caretaker is the one qualified to apply for socialized housing.
The ruling of the Court of Appeals has no factual and legal basis.
First. Guevarra did not present evidence to show that the contested lot is part of a relocation site under
Proclamation No. 137. Proclamation No. 137 laid down the metes and bounds of the land that it declared
open for disposition to bona fide residents.
The records do not show that the contested lot is within the land specified by Proclamation No. 137.
Guevarra had the burden to prove that the disputed lot is within the coverage of Proclamation No. 137. He
failed to do so.
Second. The Court of Appeals should not have given credence to Guevarra’s unsubstantiated claim that he
is the beneficiary of Proclamation No. 137. Guevarra merely alleged that in the survey the project
administrator conducted, he and not Pajuyo appeared as the actual occupant of the lot.
There is no proof that Guevarra actually availed of the benefits of Proclamation No. 137. Pajuyo allowed
Guevarra to occupy the disputed property in 1985. President Aquino signed Proclamation No. 137 into law
on 11 March 1986. Pajuyo made his earliest demand for Guevarra to vacate the property in September
1994.
During the time that Guevarra temporarily held the property up to the time that Proclamation No. 137
allegedly segregated the disputed lot, Guevarra never applied as beneficiary of Proclamation No. 137. Even
when Guevarra already knew that Pajuyo was reclaiming possession of the property, Guevarra did not take
any step to comply with the requirements of Proclamation No. 137.
Third. Even assuming that the disputed lot is within the coverage of Proclamation No. 137 and Guevarra
has a pending application over the lot, courts should still assume jurisdiction and resolve the issue of
possession. However, the jurisdiction of the courts would be limited to the issue of physical possession
only.
In Pitargue,55 we ruled that courts have jurisdiction over possessory actions involving public land to
determine the issue of physical possession. The determination of the respective rights of rival claimants to
public land is, however, distinct from the determination of who has the actual physical possession or who
has a better right of physical possession.56 The administrative disposition and alienation of public lands
should be threshed out in the proper government agency.57
The Court of Appeals’ determination of Pajuyo and Guevarra’s rights under Proclamation No. 137 was
premature. Pajuyo and Guevarra were at most merely potential beneficiaries of the law. Courts should not
preempt the decision of the administrative agency mandated by law to determine the qualifications of
applicants for the acquisition of public lands. Instead, courts should expeditiously resolve the issue of
physical possession in ejectment cases to prevent disorder and breaches of peace.58
Pajuyo is Entitled to Physical Possession of the Disputed Property
Guevarra does not dispute Pajuyo’s prior possession of the lot and ownership of the house built on it.
Guevarra expressly admitted the existence and due execution of the Kasunduan. The Kasunduan reads:
Ako, si COL[I]TO PAJUYO, may-ari ng bahay at lote sa Bo. Payatas, Quezon City, ay nagbibigay pahintulot
kay G. Eddie Guevarra, na pansamantalang manirahan sa nasabing bahay at lote ng "walang bayad."
Kaugnay nito, kailangang panatilihin nila ang kalinisan at kaayusan ng bahay at lote.
Sa sandaling kailangan na namin ang bahay at lote, sila’y kusang aalis ng walang reklamo.
Based on the Kasunduan, Pajuyo permitted Guevarra to reside in the house and lot free of rent, but
Guevarra was under obligation to maintain the premises in good condition. Guevarra promised to vacate
the premises on Pajuyo’s demand but Guevarra broke his promise and refused to heed Pajuyo’s demand to
vacate.
These facts make out a case for unlawful detainer. Unlawful detainer involves the withholding by a person
from another of the possession of real property to which the latter is entitled after the expiration or
termination of the former’s right to hold possession under a contract, express or implied.59
Where the plaintiff allows the defendant to use his property by tolerance without any contract, the
defendant is necessarily bound by an implied promise that he will vacate on demand, failing which, an
action for unlawful detainer will lie.60 The defendant’s refusal to comply with the demand makes his
continued possession of the property unlawful.61 The status of the defendant in such a case is similar to
that of a lessee or tenant whose term of lease has expired but whose occupancy continues by tolerance of
the owner.62
This principle should apply with greater force in cases where a contract embodies the permission or
tolerance to use the property. The Kasunduan expressly articulated Pajuyo’s forbearance. Pajuyo did not
require Guevarra to pay any rent but only to maintain the house and lot in good condition. Guevarra
expressly vowed in the Kasunduan that he would vacate the property on demand. Guevarra’s refusal to
comply with Pajuyo’s demand to vacate made Guevarra’s continued possession of the property unlawful.
We do not subscribe to the Court of Appeals’ theory that the Kasunduan is one of commodatum.
In a contract of commodatum, one of the parties delivers to another something not consumable so that
the latter may use the same for a certain time and return it.63 An essential feature of commodatum is that
it is gratuitous. Another feature of commodatum is that the use of the thing belonging to another is for a
certain period.64 Thus, the bailor cannot demand the return of the thing loaned until after expiration of
the period stipulated, or after accomplishment of the use for which the commodatum is constituted.65 If
the bailor should have urgent need of the thing, he may demand its return for temporary use.66 If the use
of the thing is merely tolerated by the bailor, he can demand the return of the thing at will, in which case
the contractual relation is called a precarium.67 Under the Civil Code, precarium is a kind of
commodatum.68
The Kasunduan reveals that the accommodation accorded by Pajuyo to Guevarra was not essentially
gratuitous. While the Kasunduan did not require Guevarra to pay rent, it obligated him to maintain the
property in good condition. The imposition of this obligation makes the Kasunduan a contract different
from a commodatum. The effects of the Kasunduan are also different from that of a commodatum. Case
law on ejectment has treated relationship based on tolerance as one that is akin to a landlord-tenant
relationship where the withdrawal of permission would result in the termination of the lease.69 The
tenant’s withholding of the property would then be unlawful. This is settled jurisprudence.
Even assuming that the relationship between Pajuyo and Guevarra is one of commodatum, Guevarra as
bailee would still have the duty to turn over possession of the property to Pajuyo, the bailor. The obligation
to deliver or to return the thing received attaches to contracts for safekeeping, or contracts of commission,
administration and commodatum.70 These contracts certainly involve the obligation to deliver or return
the thing received.71
Guevarra turned his back on the Kasunduan on the sole ground that like him, Pajuyo is also a squatter.
Squatters, Guevarra pointed out, cannot enter into a contract involving the land they illegally occupy.
Guevarra insists that the contract is void.
Guevarra should know that there must be honor even between squatters. Guevarra freely entered into
the Kasunduan. Guevarra cannot now impugn the Kasunduan after he had benefited from it.
The Kasunduan binds Guevarra.
The Kasunduan is not void for purposes of determining who between Pajuyo and Guevarra has a right to
physical possession of the contested property. The Kasunduan is the undeniable evidence of Guevarra’s
recognition of Pajuyo’s better right of physical possession. Guevarra is clearly a possessor in bad faith. The
absence of a contract would not yield a different result, as there would still be an implied promise to
vacate.
Guevarra contends that there is "a pernicious evil that is sought to be avoided, and that is allowing an
absentee squatter who (sic) makes (sic) a profit out of his illegal act."72 Guevarra bases his argument on
the preferential right given to the actual occupant or caretaker under Proclamation No. 137 on socialized
housing.
We are not convinced.
Pajuyo did not profit from his arrangement with Guevarra because Guevarra stayed in the property
without paying any rent. There is also no proof that Pajuyo is a professional squatter who rents out
usurped properties to other squatters. Moreover, it is for the proper government agency to decide who
between Pajuyo and Guevarra qualifies for socialized housing. The only issue that we are addressing is
physical possession.
Prior possession is not always a condition sine qua non in ejectment.73 This is one of the distinctions
between forcible entry and unlawful detainer.74 In forcible entry, the plaintiff is deprived of physical
possession of his land or building by means of force, intimidation, threat, strategy or stealth. Thus, he must
allege and prove prior possession.75 But in unlawful detainer, the defendant unlawfully withholds
possession after the expiration or termination of his right to possess under any contract, express or
implied. In such a case, prior physical possession is not required.76
Pajuyo’s withdrawal of his permission to Guevarra terminated the Kasunduan. Guevarra’s transient right to
possess the property ended as well. Moreover, it was Pajuyo who was in actual possession of the property
because Guevarra had to seek Pajuyo’s permission to temporarily hold the property and Guevarra had to
follow the conditions set by Pajuyo in the Kasunduan. Control over the property still rested with Pajuyo
and this is evidence of actual possession.
Pajuyo’s absence did not affect his actual possession of the disputed property. Possession in the eyes of
the law does not mean that a man has to have his feet on every square meter of the ground before he is
deemed in possession.77 One may acquire possession not only by physical occupation, but also by the fact
that a thing is subject to the action of one’s will.78 Actual or physical occupation is not always necessary.79
Ruling on Possession Does not Bind Title to the Land in Dispute
We are aware of our pronouncement in cases where we declared that "squatters and intruders who
clandestinely enter into titled government property cannot, by such act, acquire any legal right to said
property."80 We made this declaration because the person who had title or who had the right to legal
possession over the disputed property was a party in the ejectment suit and that party instituted the case
against squatters or usurpers.
In this case, the owner of the land, which is the government, is not a party to the ejectment case. This case
is between squatters. Had the government participated in this case, the courts could have evicted the
contending squatters, Pajuyo and Guevarra.
Since the party that has title or a better right over the property is not impleaded in this case, we cannot
evict on our own the parties. Such a ruling would discourage squatters from seeking the aid of the courts in
settling the issue of physical possession. Stripping both the plaintiff and the defendant of possession just
because they are squatters would have the same dangerous implications as the application of the principle
of pari delicto. Squatters would then rather settle the issue of physical possession among themselves than
seek relief from the courts if the plaintiff and defendant in the ejectment case would both stand to lose
possession of the disputed property. This would subvert the policy underlying actions for recovery of
possession.
Since Pajuyo has in his favor priority in time in holding the property, he is entitled to remain on the
property until a person who has title or a better right lawfully ejects him. Guevarra is certainly not that
person. The ruling in this case, however, does not preclude Pajuyo and Guevarra from introducing
evidence and presenting arguments before the proper administrative agency to establish any right to
which they may be entitled under the law.81
In no way should our ruling in this case be interpreted to condone squatting. The ruling on the issue of
physical possession does not affect title to the property nor constitute a binding and conclusive
adjudication on the merits on the issue of ownership.82 The owner can still go to court to recover lawfully
the property from the person who holds the property without legal title. Our ruling here does not diminish
the power of government agencies, including local governments, to condemn, abate, remove or demolish
illegal or unauthorized structures in accordance with existing laws.
Attorney’s Fees and Rentals
The MTC and RTC failed to justify the award of ₱3,000 attorney’s fees to Pajuyo. Attorney’s fees as part of
damages are awarded only in the instances enumerated in Article 2208 of the Civil Code.83  Thus, the
award of attorney’s fees is the exception rather than the rule.84 Attorney’s fees are not awarded every
time a party prevails in a suit because of the policy that no premium should be placed on the right to
litigate.85 We therefore delete the attorney’s fees awarded to Pajuyo.
We sustain the ₱300 monthly rentals the MTC and RTC assessed against Guevarra. Guevarra did not
dispute this factual finding of the two courts. We find the amount reasonable compensation to Pajuyo. The
₱300 monthly rental is counted from the last demand to vacate, which was on 16 February 1995.
WHEREFORE, we GRANT the petition. The Decision dated 21 June 2000 and Resolution dated 14 December
2000 of the Court of Appeals in CA-G.R. SP No. 43129 are SET ASIDE. The Decision dated 11 November
1996 of the Regional Trial Court of Quezon City, Branch 81 in Civil Case No. Q-96-26943, affirming the
Decision dated 15 December 1995 of the Metropolitan Trial Court of Quezon City, Branch 31 in Civil Case
No. 12432, is REINSTATED with MODIFICATION. The award of attorney’s fees is deleted. No costs.
SO ORDERED.
G.R. No. L-8321             October 14, 1913
ALEJANDRA MINA, ET AL., plaintiffs-appellants,
vs.
RUPERTA PASCUAL, ET AL., defendants-appellees.
N. Segundo for appellants.
Iñigo Bitanga for appellees.

ARELLANO, C.J.:
Francisco Fontanilla and Andres Fontanilla were brothers. Francisco Fontanilla acquired during his lifetime,
on March 12, 1874, a lot in the center of the town of Laoag, the capital of the Province of Ilocos Norte, the
property having been awarded to him through its purchase at a public auction held by the alcalde mayor of
that province. The lot has a frontage of 120 meters and a depth of 15.
Andres Fontanilla, with the consent of his brother Francisco, erected a warehouse on a part of the said lot,
embracing 14 meters of its frontage by 11 meters of its depth.
Francisco Fontanilla, the former owner of the lot, being dead, the herein plaintiffs, Alejandro Mina, et al.,
were recognized without discussion as his heirs.
Andres Fontanilla, the former owner of the warehouse, also having died, the children of Ruperta Pascual
were recognized likes without discussion, though it is not said how, and consequently are entitled to the
said building, or rather, as Ruperta Pascual herself stated, to only six-sevenths of one-half of it, the other
half belonging, as it appears, to the plaintiffs themselves, and the remaining one-seventh of the first one-
half to the children of one of the plaintiffs, Elena de Villanueva. The fact is that the plaintiffs and the
defendants are virtually, to all appearance, the owners of the warehouse; while the plaintiffs are
undoubtedly, the owners of the part of the lot occupied by that building, as well as of the remainder
thereof.
This was the state of affairs, when, on May 6, 1909, Ruperta Pascual, as the guardian of her minor children,
the herein defendants, petitioned the Curt of First Instance of Ilocos Norte for authorization to sell "the six-
sevenths of the one-half of the warehouse, of 14 by 11 meters, together with its lot." The plaintiffs — that
is Alejandra Mina, et al. — opposed the petition of Ruperta Pascual for the reason that the latter had
included therein the lot occupied by the warehouse, which they claimed was their exclusive property. All
this action was taken in a special proceeding in re guardianship.
The plaintiffs did more than oppose Pascual's petition; they requested the court, through motion, to decide
the question of the ownership of the lot before it pass upon the petition for the sale of the warehouse. But
the court before determining the matter of the ownership of the lot occupied by the warehouse, ordered
the sale of this building, saying:
While the trial continues with respect to the ownership of the lot, the court orders the sale at public
auction of the said warehouse and of the lot on which it is built, with the present boundaries of the land
and condition of the building, at a price of not less than P2,890 Philippine currency . . . .
So, the warehouse, together with the lot on which it stands, was sold to Cu Joco, the other defendant in
this case, for the price mentioned.
The plaintiffs insisted upon a decision of the question of the ownership of the lot, and the court decided it
by holding that this land belonged to the owner of the warehouse which had been built thereon thirty
years before.
The plaintiffs appealed and this court reversed the judgment of the lower court and held that the
appellants were the owners of the lot in question. 1
When the judgment became final and executory, a writ of execution issued and the plaintiffs were given
possession of the lot; but soon thereafter the trial court annulled this possession for the reason that it
affected Cu Joco, who had not been a party to the suit in which that writ was served.
It was then that the plaintiffs commenced the present action for the purpose of having the sale of the said
lot declared null and void and of no force and effect.
An agreement was had ad to the facts, the ninth paragraph of which is as follows:
9. That the herein plaintiffs excepted to the judgment and appealed therefrom to the Supreme Court
which found for them by holding that they are the owners of the lot in question, although there existed
and still exists a commodatum by virtue of which the guardianship (meaning the defendants) had and has
the use, and the plaintiffs the ownership, of the property, with no finding concerning the decree of the
lower court that ordered the sale.
The obvious purport of the cause "although there existed and still exists a commodatum," etc., appears to
be that it is a part of the decision of the Supreme Court and that, while finding the plaintiffs to be the
owners of the lot, we recognized in principle the existence of a commodatum under which the defendants
held the lot. Nothing could be more inexact. Possibly, also, the meaning of that clause is that,
notwithstanding the finding made by the Supreme Court that the plaintiffs were the owners, these former
and the defendants agree that there existed, and still exists, a commodatum, etc. But such an agreement
would not affect the truth of the contents of the decision of this court, and the opinions held by the
litigants in regard to this point could have no bearing whatever on the present decision.
Nor did the decree of the lower court that ordered the sale have the least influence in our previous
decision to require our making any finding in regard thereto, for, with or without that decree, the Supreme
Court had to decide the ownership of the lot consistently with its titles and not in accordance with the
judicial acts or proceedings had prior to the setting up of the issue in respect to the ownership of the
property that was the subject of the judicial decree.
What is essentially pertinent to the case is the fact that the defendant agree that the plaintiffs have the
ownership, and they themselves only the use, of the said lot.
On this premise, the nullity of the sale of the lot is in all respects quite evident, whatsoever be the manner
in which the sale was effected, whether judicially or extrajudicially.
He who has only the use of a thing cannot validly sell the thing itself. The effect of the sale being a transfer
of the ownership of the thing, it is evident that he who has only the mere use of the thing cannot transfer
its ownership. The sale of a thing effected by one who is not its owner is null and void. The defendants
never were the owners of the lot sold. The sale of it by them is necessarily null and void. On cannot convey
to another what he has never had himself.
The returns of the auction contain the following statements:
I, Ruperta Pascual, the guardian of the minors, etc., by virtue of the authorization conferred upon me on
the 31st of July, 1909, by the Court of First Instance of Ilocos Norte, proceeded with the sale at public
auction of the six-sevenths part of the one-half of the warehouse constructed of rubble stone, etc.
Whereas I, Ruperta Pascual, the guardian of the minors, etc., sold at public auction all the land and all the
rights title, interest, and ownership in the said property to Cu Joco, who was the highest bidder, etc.
Therefore, . . . I cede and deliver forever to the said purchaser, Cu Joco, his heirs and assigns, all the
interest, ownership and inheritance rights and others that, as the guardian of the said minors, I have and
may have in the said property, etc.
The purchaser could not acquire anything more than the interest that might be held by a person to whom
realty in possession of the vendor might be sold, for at a judicial auction nothing else is disposed of. What
the minor children of Ruperta Pascual had in their possession was the ownership of the six-sevenths part of
one-half of the warehouse and the use of the lot occupied by his building. This, and nothing more, could
the Chinaman Cu Joco acquire at that sale: not the ownership of the lot; neither the other half, nor the
remaining one-seventh of the said first half, of the warehouse. Consequently, the sale made to him of this
one-seventh of one-half and the entire other half of the building was null and void, and likewise with still
more reason the sale of the lot the building occupies.
The purchaser could and should have known what it was that was offered for sale and what it was that he
purchased. There is nothing that can justify the acquisition by the purchaser of the warehouse of the
ownership of the lot that this building occupies, since the minors represented by Ruperta Pascual never
were the owners of the said lot, nor were they ever considered to be such.
The trial court, in the judgment rendered, held that there were no grounds for the requested annulment of
the sale, and that the plaintiffs were entitled to the P600 deposited with the clerk of the court as the value
of the lot in question. The defendants, Ruperta Pascual and the Chinaman Cu Joco, were absolved from the
complaint, without express finding as to costs.
The plaintiffs cannot be obliged to acquiesce in or allow the sale made and be compelled to accept the
price set on the lot by expert appraisers, not even though the plaintiffs be considered as coowner of the
warehouse. It would be much indeed that, on the ground of coownership, they should have to abide by
and tolerate the sale of the said building, which point this court does not decide as it is not a question
submitted to us for decision, but, as regards the sale of the lot, it is in all respects impossible to hold that
the plaintiffs must abide by it and tolerate, it, and this conclusion is based on the fact that they did not give
their consent (art. 1261, Civil Code), and only the contracting parties who have given it are obliged to
comply (art. 1091, idem).
The sole purpose of the action in the beginning was to obtain an annulment of the sale of the lot; but
subsequently the plaintiffs, through motion, asked for an amendment by their complaint in the sense that
the action should be deemed to be one for the recovery of possession of a lot and for the annulment of its
sale. The plaintiff's petition was opposed by the defendant's attorney, but was allowed by the court;
therefore the complaint seeks, after the judicial annulment of the sale of the lot, to have the defendants
sentenced immediately to deliver the same to the plaintiffs.
Such a finding appears to be in harmony with the decision rendered by the Supreme Court in previous suit,
wherein it was held that the ownership of the lot lay in the plaintiffs, and for this reason steps were taken
to give possession thereof to the defendants; but, as the purchaser Cu Joco was not a party to that suit, the
present action is strictly one for recover against Cu Joco to compel him, once the sale has been annulled, to
deliver the lot to its lawful owners, the plaintiffs.
As respects this action for recovery, this Supreme Court finds:
1. That it is a fact admitted by the litigating parties, both in this and in the previous suit, that Andres
Fontanilla, the defendants' predecessor in interest, erected the warehouse on the lot, some thirty years
ago, with the explicit consent of his brother Francisco Fontanilla, the plaintiff's predecessor in interest.
2. That it also appears to be an admitted fact that the plaintiffs and the defendants are the coowners of the
warehouse.
3. That it is a fact explicitly admitted in the agreement, that neither Andres Fontanilla nor his successors
paid any consideration or price whatever for the use of the lot occupied by the said building; whence it is,
perhaps, that both parties have denominated that use a commodatum.
Upon the premise of these facts, or even merely upon that of the first of them, the sentencing of the
defendants to deliver the lot to the plaintiffs does not follow as a necessary corollary of the judicial
declaration of ownership made in the previous suit, nor of that of the nullity of the sale of the lot, made in
the present case.
The defendants do not hold lawful possession of the lot in question.1awphil.net
But, although both litigating parties may have agreed in their idea of the commodatum, on account of its
not being, as indeed it is not, a question of fact but of law, yet that denomination given by them to the use
of the lot granted by Francisco Fontanilla to his brother, Andres Fontanilla, is not acceptable. Contracts are
not to be interpreted in conformity with the name that the parties thereto agree to give them, but must be
construed, duly considering their constitutive elements, as they are defined and denominated by law.
By the contract of loan, one of the parties delivers to the other, either anything not perishable, in order
that the latter may use it during the certain period and return it to the former, in which case it is
called commodatum . . . (art. 1740, Civil Code).
It is, therefore, an essential feature of the commodatum that the use of the thing belonging to another
shall for a certain period. Francisco Fontanilla did not fix any definite period or time during which Andres
Fontanilla could have the use of the lot whereon the latter was to erect a stone warehouse of considerable
value, and so it is that for the past thirty years of the lot has been used by both Andres and his successors
in interest. The present contention of the plaintiffs that Cu Joco, now in possession of the lot, should pay
rent for it at the rate of P5 a month, would destroy the theory of the commodatum sustained by them,
since, according to the second paragraph of the aforecited article 1740, "commodatum is essentially
gratuitous," and, if what the plaintiffs themselves aver on page 7 of their brief is to be believed, it never
entered Francisco's mind to limit the period during which his brother Andres was to have the use of the lot,
because he expected that the warehouse would eventually fall into the hands of his son, Fructuoso
Fontanilla, called the adopted son of Andres, which did not come to pass for the reason that Fructuoso
died before his uncle Andres. With that expectation in view, it appears more likely that Francisco intended
to allow his brother Andres a surface right; but this right supposes the payment of an annual rent, and
Andres had the gratuitous use of the lot.
Hence, as the facts aforestated only show that a building was erected on another's ground, the question
should be decided in accordance with the statutes that, thirty years ago, governed accessions to real
estate, and which were Laws 41 and 42, title 28, of the third Partida, nearly identical with the provisions of
articles 361 and 362 of the Civil Code. So, then, pursuant to article 361, the owner of the land on which a
building is erected in good faith has a right to appropriate such edifice to himself, after payment of the
indemnity prescribed in articles 453 and 454, or to oblige the builder to pay him the value of the land.
Such, and no other, is the right to which the plaintiff are entitled.
For the foregoing reasons, it is only necessary to annul the sale of the said lot which was made by Ruperta G.R. No. 115324             February 19, 2003
Pascual, in representation of her minor children, to Cu Joco, and to maintain the latter in the use of the lot PRODUCERS BANK OF THE PHILIPPINES (now FIRST INTERNATIONAL BANK), petitioner,
until the plaintiffs shall choose one or the other of the two rights granted them by article 361 of the Civil vs.
Code.1awphil.net HON. COURT OF APPEALS AND FRANKLIN VIVES, respondents.
The judgment appealed from is reversed and the sale of the lot in question is held to be null and void and DECISION
of no force or effect. No special finding is made as to the costs of both instances. CALLEJO, SR., J.:
Torres, Johnson, Carson, Moreland and Trent, JJ., concur. This is a petition for review on certiorari of the Decision1 of the Court of Appeals dated June 25, 1991 in
CA-G.R. CV No. 11791 and of its Resolution 2 dated May 5, 1994, denying the motion for reconsideration of
said decision filed by petitioner Producers Bank of the Philippines.
Sometime in 1979, private respondent Franklin Vives was asked by his neighbor and friend Angeles
Sanchez to help her friend and townmate, Col. Arturo Doronilla, in incorporating his business, the Sterela
Marketing and Services ("Sterela" for brevity). Specifically, Sanchez asked private respondent to deposit in
a bank a certain amount of money in the bank account of Sterela for purposes of its incorporation. She
assured private respondent that he could withdraw his money from said account within a month’s time.
Private respondent asked Sanchez to bring Doronilla to their house so that they could discuss Sanchez’s
request.3
On May 9, 1979, private respondent, Sanchez, Doronilla and a certain Estrella Dumagpi, Doronilla’s private
secretary, met and discussed the matter. Thereafter, relying on the assurances and representations of
Sanchez and Doronilla, private respondent issued a check in the amount of Two Hundred Thousand Pesos
(₱200,000.00) in favor of Sterela. Private respondent instructed his wife, Mrs. Inocencia Vives, to
accompany Doronilla and Sanchez in opening a savings account in the name of Sterela in the Buendia,
Makati branch of Producers Bank of the Philippines. However, only Sanchez, Mrs. Vives and Dumagpi went
to the bank to deposit the check. They had with them an authorization letter from Doronilla authorizing
Sanchez and her companions, "in coordination with Mr. Rufo Atienza," to open an account for Sterela
Marketing Services in the amount of ₱200,000.00. In opening the account, the authorized signatories were
Inocencia Vives and/or Angeles Sanchez. A passbook for Savings Account No. 10-1567 was thereafter
issued to Mrs. Vives.4
Subsequently, private respondent learned that Sterela was no longer holding office in the address
previously given to him. Alarmed, he and his wife went to the Bank to verify if their money was still intact.
The bank manager referred them to Mr. Rufo Atienza, the assistant manager, who informed them that part
of the money in Savings Account No. 10-1567 had been withdrawn by Doronilla, and that only ₱90,000.00
remained therein. He likewise told them that Mrs. Vives could not withdraw said remaining amount
because it had to answer for some postdated checks issued by Doronilla. According to Atienza, after Mrs.
Vives and Sanchez opened Savings Account No. 10-1567, Doronilla opened Current Account No. 10-0320
for Sterela and authorized the Bank to debit Savings Account No. 10-1567 for the amounts necessary to
cover overdrawings in Current Account No. 10-0320. In opening said current account, Sterela, through
Doronilla, obtained a loan of ₱175,000.00 from the Bank. To cover payment thereof, Doronilla issued three
postdated checks, all of which were dishonored. Atienza also said that Doronilla could assign or withdraw
the money in Savings Account No. 10-1567 because he was the sole proprietor of Sterela. 5
Private respondent tried to get in touch with Doronilla through Sanchez. On June 29, 1979, he received a
letter from Doronilla, assuring him that his money was intact and would be returned to him. On August 13,
1979, Doronilla issued a postdated check for Two Hundred Twelve Thousand Pesos (₱212,000.00) in favor
of private respondent. However, upon presentment thereof by private respondent to the drawee bank, the
check was dishonored. Doronilla requested private respondent to present the same check on September
15, 1979 but when the latter presented the check, it was again dishonored. 6
Private respondent referred the matter to a lawyer, who made a written demand upon Doronilla for the
return of his client’s money. Doronilla issued another check for ₱212,000.00 in private respondent’s favor
but the check was again dishonored for insufficiency of funds.7
Private respondent instituted an action for recovery of sum of money in the Regional Trial Court (RTC) in
Pasig, Metro Manila against Doronilla, Sanchez, Dumagpi and petitioner. The case was docketed as Civil
Case No. 44485. He also filed criminal actions against Doronilla, Sanchez and Dumagpi in the RTC.
However, Sanchez passed away on March 16, 1985 while the case was pending before the trial court. On
October 3, 1995, the RTC of Pasig, Branch 157, promulgated its Decision in Civil Case No. 44485, the
dispositive portion of which reads:
IN VIEW OF THE FOREGOING, judgment is hereby rendered sentencing defendants Arturo J. Doronila,
Estrella Dumagpi and Producers Bank of the Philippines to pay plaintiff Franklin Vives jointly and severally –
(a) the amount of ₱200,000.00, representing the money deposited, with interest at the legal rate from the
filing of the complaint until the same is fully paid;
(b) the sum of ₱50,000.00 for moral damages and a similar amount for exemplary damages;
(c) the amount of ₱40,000.00 for attorney’s fees; and
(d) the costs of the suit.
SO ORDERED.8
Petitioner appealed the trial court’s decision to the Court of Appeals. In its Decision dated June 25, 1991,
the appellate court affirmed in toto the decision of the RTC. 9 It likewise denied with finality petitioner’s
motion for reconsideration in its Resolution dated May 5, 1994.10
On June 30, 1994, petitioner filed the present petition, arguing that –
I.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT THE TRANSACTION BETWEEN THE
DEFENDANT DORONILLA AND RESPONDENT VIVES WAS ONE OF SIMPLE LOAN AND NOT
ACCOMMODATION;
II.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THAT PETITIONER’S BANK MANAGER, MR.
RUFO ATIENZA, CONNIVED WITH THE OTHER DEFENDANTS IN DEFRAUDING PETITIONER (Sic. Should be
PRIVATE RESPONDENT) AND AS A CONSEQUENCE, THE PETITIONER SHOULD BE HELD LIABLE UNDER THE
PRINCIPLE OF NATURAL JUSTICE;
III.
THE HONORABLE COURT OF APPEALS ERRED IN ADOPTING THE ENTIRE RECORDS OF THE REGIONAL TRIAL
COURT AND AFFIRMING THE JUDGMENT APPEALED FROM, AS THE FINDINGS OF THE REGIONAL TRIAL
COURT WERE BASED ON A MISAPPREHENSION OF FACTS;
IV.
THE HONORABLE COURT OF APPEALS ERRED IN DECLARING THAT THE CITED DECISION IN SALUDARES VS.
MARTINEZ, 29 SCRA 745, UPHOLDING THE LIABILITY OF AN EMPLOYER FOR ACTS COMMITTED BY AN
EMPLOYEE IS APPLICABLE;
V.
THE HONORABLE COURT OF APPEALS ERRED IN UPHOLDING THE DECISION OF THE LOWER COURT THAT
HEREIN PETITIONER BANK IS JOINTLY AND SEVERALLY LIABLE WITH THE OTHER DEFENDANTS FOR THE
AMOUNT OF P200,000.00 REPRESENTING THE SAVINGS ACCOUNT DEPOSIT, P50,000.00 FOR MORAL
DAMAGES, P50,000.00 FOR EXEMPLARY DAMAGES, P40,000.00 FOR ATTORNEY’S FEES AND THE COSTS OF
SUIT.11
Private respondent filed his Comment on September 23, 1994. Petitioner filed its Reply thereto on
September 25, 1995. The Court then required private respondent to submit a rejoinder to the reply.
However, said rejoinder was filed only on April 21, 1997, due to petitioner’s delay in furnishing private
respondent with copy of the reply12 and several substitutions of counsel on the part of private
respondent.13 On January 17, 2001, the Court resolved to give due course to the petition and required the
parties to submit their respective memoranda. 14 Petitioner filed its memorandum on April 16, 2001 while
private respondent submitted his memorandum on March 22, 2001.
Petitioner contends that the transaction between private respondent and Doronilla is a simple loan
(mutuum) since all the elements of a mutuum are present: first, what was delivered by private respondent
to Doronilla was money, a consumable thing; and second, the transaction was onerous as Doronilla was
obliged to pay interest, as evidenced by the check issued by Doronilla in the amount of ₱212,000.00, or
₱12,000 more than what private respondent deposited in Sterela’s bank account.15 Moreover, the fact that
private respondent sued his good friend Sanchez for his failure to recover his money from Doronilla shows
that the transaction was not merely gratuitous but "had a business angle" to it. Hence, petitioner argues
that it cannot be held liable for the return of private respondent’s ₱200,000.00 because it is not privy to
the transaction between the latter and Doronilla.16
It argues further that petitioner’s Assistant Manager, Mr. Rufo Atienza, could not be faulted for allowing
Doronilla to withdraw from the savings account of Sterela since the latter was the sole proprietor of said
company. Petitioner asserts that Doronilla’s May 8, 1979 letter addressed to the bank, authorizing Mrs.
Vives and Sanchez to open a savings account for Sterela, did not contain any authorization for these two to
withdraw from said account. Hence, the authority to withdraw therefrom remained exclusively with
Doronilla, who was the sole proprietor of Sterela, and who alone had legal title to the savings account. 17 
Petitioner points out that no evidence other than the testimonies of private respondent and Mrs. Vives
was presented during trial to prove that private respondent deposited his ₱200,000.00 in Sterela’s account
for purposes of its incorporation. 18 Hence, petitioner should not be held liable for allowing Doronilla to
withdraw from Sterela’s savings account.1a\^/phi1.net
Petitioner also asserts that the Court of Appeals erred in affirming the trial court’s decision since the
findings of fact therein were not accord with the evidence presented by petitioner during trial to prove
that the transaction between private respondent and Doronilla was a mutuum, and that it committed no
wrong in allowing Doronilla to withdraw from Sterela’s savings account.19
Finally, petitioner claims that since there is no wrongful act or omission on its part, it is not liable for the
actual damages suffered by private respondent, and neither may it be held liable for moral and exemplary
damages as well as attorney’s fees.20
Private respondent, on the other hand, argues that the transaction between him and Doronilla is not a
mutuum but an accommodation, 21 since he did not actually part with the ownership of his ₱200,000.00
and in fact asked his wife to deposit said amount in the account of Sterela so that a certification can be
issued to the effect that Sterela had sufficient funds for purposes of its incorporation but at the same time,
he retained some degree of control over his money through his wife who was made a signatory to the
savings account and in whose possession the savings account passbook was given.22
He likewise asserts that the trial court did not err in finding that petitioner, Atienza’s employer, is liable for
the return of his money. He insists that Atienza, petitioner’s assistant manager, connived with Doronilla in
defrauding private respondent since it was Atienza who facilitated the opening of Sterela’s current account
three days after Mrs. Vives and Sanchez opened a savings account with petitioner for said company, as well
as the approval of the authority to debit Sterela’s savings account to cover any overdrawings in its current
account.23
There is no merit in the petition.
At the outset, it must be emphasized that only questions of law may be raised in a petition for review filed
with this Court. The Court has repeatedly held that it is not its function to analyze and weigh all over again
the evidence presented by the parties during trial. 24 The Court’s jurisdiction is in principle limited to
reviewing errors of law that might have been committed by the Court of Appeals. 25 Moreover, factual
findings of courts, when adopted and confirmed by the Court of Appeals, are final and conclusive on this
Court unless these findings are not supported by the evidence on record. 26 There is no showing of any
misapprehension of facts on the part of the Court of Appeals in the case at bar that would require this
Court to review and overturn the factual findings of that court, especially since the conclusions of fact of
the Court of Appeals and the trial court are not only consistent but are also amply supported by the
evidence on record.
No error was committed by the Court of Appeals when it ruled that the transaction between private
respondent and Doronilla was a commodatum and not a mutuum. A circumspect examination of the
records reveals that the transaction between them was a commodatum. Article 1933 of the Civil Code
distinguishes between the two kinds of loans in this wise:
By the contract of loan, one of the parties delivers to another, either something not consumable so that
the latter may use the same for a certain time and return it, in which case the contract is called a
commodatum; or money or other consumable thing, upon the condition that the same amount of the
same kind and quality shall be paid, in which case the contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a stipulation to pay interest.
In commodatum, the bailor retains the ownership of the thing loaned, while in simple loan, ownership
passes to the borrower.
The foregoing provision seems to imply that if the subject of the contract is a consumable thing, such as
money, the contract would be a mutuum. However, there are some instances where a commodatum may
have for its object a consumable thing. Article 1936 of the Civil Code provides:
Consumable goods may be the subject of commodatum if the purpose of the contract is not the
consumption of the object, as when it is merely for exhibition.
Thus, if consumable goods are loaned only for purposes of exhibition, or when the intention of the parties
is to lend consumable goods and to have the very same goods returned at the end of the period agreed
upon, the loan is a commodatum and not a mutuum.
The rule is that the intention of the parties thereto shall be accorded primordial consideration in
determining the actual character of a contract. 27 In case of doubt, the contemporaneous and subsequent
acts of the parties shall be considered in such determination. 28
As correctly pointed out by both the Court of Appeals and the trial court, the evidence shows that private
respondent agreed to deposit his money in the savings account of Sterela specifically for the purpose of
making it appear "that said firm had sufficient capitalization for incorporation, with the promise that the
amount shall be returned within thirty (30) days." 29 Private respondent merely "accommodated" Doronilla
by lending his money without consideration, as a favor to his good friend Sanchez. It was however clear to
the parties to the transaction that the money would not be removed from Sterela’s savings account and
would be returned to private respondent after thirty (30) days.
Doronilla’s attempts to return to private respondent the amount of ₱200,000.00 which the latter deposited
in Sterela’s account together with an additional ₱12,000.00, allegedly representing interest on the
mutuum, did not convert the transaction from a commodatum into a mutuum because such was not the
intent of the parties and because the additional ₱12,000.00 corresponds to the fruits of the lending of the
₱200,000.00. Article 1935 of the Civil Code expressly states that "[t]he bailee in commodatum acquires the
use of the thing loaned but not its fruits." Hence, it was only proper for Doronilla to remit to private
respondent the interest accruing to the latter’s money deposited with petitioner.
Neither does the Court agree with petitioner’s contention that it is not solidarily liable for the return of
private respondent’s money because it was not privy to the transaction between Doronilla and private
respondent. The nature of said transaction, that is, whether it is a mutuum or a commodatum, has no
bearing on the question of petitioner’s liability for the return of private respondent’s money because the
factual circumstances of the case clearly show that petitioner, through its employee Mr. Atienza, was
partly responsible for the loss of private respondent’s money and is liable for its restitution.
Petitioner’s rules for savings deposits written on the passbook it issued Mrs. Vives on behalf of Sterela for
Savings Account No. 10-1567 expressly states that—
"2. Deposits and withdrawals must be made by the depositor personally or upon his written authority duly
authenticated, and neither a deposit nor a withdrawal will be permitted except upon the production of the
depositor savings bank book in which will be entered by the Bank the amount deposited or withdrawn." 30
Said rule notwithstanding, Doronilla was permitted by petitioner, through Atienza, the Assistant Branch
Manager for the Buendia Branch of petitioner, to withdraw therefrom even without presenting the
passbook (which Atienza very well knew was in the possession of Mrs. Vives), not just once, but several
times. Both the Court of Appeals and the trial court found that Atienza allowed said withdrawals because
he was party to Doronilla’s "scheme" of defrauding private respondent:
XXX
But the scheme could not have been executed successfully without the knowledge, help and cooperation
of Rufo Atienza, assistant manager and cashier of the Makati (Buendia) branch of the defendant bank.
Indeed, the evidence indicates that Atienza had not only facilitated the commission of the fraud but he
likewise helped in devising the means by which it can be done in such manner as to make it appear that the
transaction was in accordance with banking procedure.
To begin with, the deposit was made in defendant’s Buendia branch precisely because Atienza was a key
officer therein. The records show that plaintiff had suggested that the ₱200,000.00 be deposited in his
bank, the Manila Banking Corporation, but Doronilla and Dumagpi insisted that it must be in defendant’s
branch in Makati for "it will be easier for them to get a certification". In fact before he was introduced to
plaintiff, Doronilla had already prepared a letter addressed to the Buendia branch manager authorizing
Angeles B. Sanchez and company to open a savings account for Sterela in the amount of ₱200,000.00, as
"per coordination with Mr. Rufo Atienza, Assistant Manager of the Bank x x x" (Exh. 1). This is a clear
manifestation that the other defendants had been in consultation with Atienza from the inception of the
scheme. Significantly, there were testimonies and admission that Atienza is the brother-in-law of a certain
Romeo Mirasol, a friend and business associate of Doronilla.1awphi1.nét
Then there is the matter of the ownership of the fund. Because of the "coordination" between Doronilla
and Atienza, the latter knew before hand that the money deposited did not belong to Doronilla nor to
Sterela. Aside from such foreknowledge, he was explicitly told by Inocencia Vives that the money belonged
to her and her husband and the deposit was merely to accommodate Doronilla. Atienza even declared that
the money came from Mrs. Vives.
Although the savings account was in the name of Sterela, the bank records disclose that the only ones
empowered to withdraw the same were Inocencia Vives and Angeles B. Sanchez. In the signature card
pertaining to this account (Exh. J), the authorized signatories were Inocencia Vives &/or Angeles B.
Sanchez. Atienza stated that it is the usual banking procedure that withdrawals of savings deposits could
only be made by persons whose authorized signatures are in the signature cards on file with the bank. He,
however, said that this procedure was not followed here because Sterela was owned by Doronilla. He
explained that Doronilla had the full authority to withdraw by virtue of such ownership. The Court is not
inclined to agree with Atienza. In the first place, he was all the time aware that the money came from Vives
and did not belong to Sterela. He was also told by Mrs. Vives that they were only accommodating Doronilla
so that a certification can be issued to the effect that Sterela had a deposit of so much amount to be sued
in the incorporation of the firm. In the second place, the signature of Doronilla was not authorized in so far
as that account is concerned inasmuch as he had not signed the signature card provided by the bank
whenever a deposit is opened. In the third place, neither Mrs. Vives nor Sanchez had given Doronilla the
authority to withdraw.
Moreover, the transfer of fund was done without the passbook having been presented. It is an accepted
practice that whenever a withdrawal is made in a savings deposit, the bank requires the presentation of
the passbook. In this case, such recognized practice was dispensed with. The transfer from the savings
account to the current account was without the submission of the passbook which Atienza had given to
Mrs. Vives. Instead, it was made to appear in a certification signed by Estrella Dumagpi that a duplicate
passbook was issued to Sterela because the original passbook had been surrendered to the Makati branch
in view of a loan accommodation assigning the savings account (Exh. C). Atienza, who undoubtedly had a
hand in the execution of this certification, was aware that the contents of the same are not true. He knew
that the passbook was in the hands of Mrs. Vives for he was the one who gave it to her. Besides, as
assistant manager of the branch and the bank official servicing the savings and current accounts in
question, he also was aware that the original passbook was never surrendered. He was also cognizant that
Estrella Dumagpi was not among those authorized to withdraw so her certification had no effect
whatsoever.
The circumstance surrounding the opening of the current account also demonstrate that Atienza’s active
participation in the perpetration of the fraud and deception that caused the loss. The records indicate that
this account was opened three days later after the ₱200,000.00 was deposited. In spite of his disclaimer,
the Court believes that Atienza was mindful and posted regarding the opening of the current account
considering that Doronilla was all the while in "coordination" with him. That it was he who facilitated the
approval of the authority to debit the savings account to cover any overdrawings in the current account
(Exh. 2) is not hard to comprehend.
Clearly Atienza had committed wrongful acts that had resulted to the loss subject of this case. x x x. 31
Under Article 2180 of the Civil Code, employers shall be held primarily and solidarily liable for damages
caused by their employees acting within the scope of their assigned tasks. To hold the employer liable
under this provision, it must be shown that an employer-employee relationship exists, and that the
employee was acting within the scope of his assigned task when the act complained of was committed. 32 
Case law in the United States of America has it that a corporation that entrusts a general duty to its
employee is responsible to the injured party for damages flowing from the employee’s wrongful act done
in the course of his general authority, even though in doing such act, the employee may have failed in its
duty to the employer and disobeyed the latter’s instructions.33
There is no dispute that Atienza was an employee of petitioner. Furthermore, petitioner did not deny that
Atienza was acting within the scope of his authority as Assistant Branch Manager when he assisted
Doronilla in withdrawing funds from Sterela’s Savings Account No. 10-1567, in which account private
respondent’s money was deposited, and in transferring the money withdrawn to Sterela’s Current Account
with petitioner. Atienza’s acts of helping Doronilla, a customer of the petitioner, were obviously done in
furtherance of petitioner’s interests34 even though in the process, Atienza violated some of petitioner’s
rules such as those stipulated in its savings account passbook. 35 It was established that the transfer of
funds from Sterela’s savings account to its current account could not have been accomplished by Doronilla
without the invaluable assistance of Atienza, and that it was their connivance which was the cause of
private respondent’s loss.
The foregoing shows that the Court of Appeals correctly held that under Article 2180 of the Civil Code, G.R. No. L-5168 February 19, 1910
petitioner is liable for private respondent’s loss and is solidarily liable with Doronilla and Dumagpi for the THE UNITED STATES, Plaintiff-Appellee, vs. NICOMEDES MORALES and CRISPINA MORCO, defendants.
return of the ₱200,000.00 since it is clear that petitioner failed to prove that it exercised due diligence to NICOMEDES MORALES, Appellant.
prevent the unauthorized withdrawals from Sterela’s savings account, and that it was not negligent in the Fermin Mariano, for appellant.
selection and supervision of Atienza. Accordingly, no error was committed by the appellate court in the Office of the Solicitor-General Harvey, for appellee.
award of actual, moral and exemplary damages, attorney’s fees and costs of suit to private respondent. MORELAND, J.:
WHEREFORE, the petition is hereby DENIED. The assailed Decision and Resolution of the Court of Appeals The defendants were accused of the crime of estafa under article 535, subdivision 5, of the Penal Code.
are AFFIRMED. Nicomedes Morales was convicted in the court below and condemned to four months and one day
SO ORDERED. of arresto mayor, to indemnify the party injured in the sum of P666.05, to the accessories mentioned in
article 61 of the Penal Code, and to pay the costs of the action. Crispina Morco was acquitted, Nicomedes
Morales appealed.chanroblesvirtualawlibrary chanrobles virtual law library
It appears that the defendants received from Hatin Cafure to sell on commission certain jewels and jewelry
of the value of something more than P1,000. They sold all of said jewels and jewelry, and upon a
settlement of their accounts with said Hatin Cafure it was found that there was due to him from the
defendants the sum of P666.05. They defendants did not pay him that sum in cash, nor did they return to
him the jewels and jewelry which that sum represented.chanroblesvirtualawlibrary chanrobles virtual law
library
In receiving the said articles from Hatin Cafure the defendants gave to him a receipt in substantially the
following form:
Received of Mr. Atim Kapuri goods taken on commission which amount to P1,384.10 on account of him
who subscribes.chanroblesvirtualawlibrary chanrobles virtual law library
Legaspi, 14th of March, 1905.
(Signed) NICOMEDES MORALES.
This receipt constitutes the only written evidence of the terms of the agreement upon which the property
was taken by the defendants.chanroblesvirtualawlibrary chanrobles virtual law library
The defendants upon the trial and in their defense introduced in evidence promissory notes amounting to
the said sum of P666.05, given to the defendants by persons to whom had been sold the jewels and
jewelry amounting to that sum. These notes the defendants had several times tendered to the owner as
the proceeds of the jewelry sold. The defendants offered, if the owner would give them time, to collect
these notes and pay him the proceeds. It appears undisputed that the sales of the jewelry were made in
good faith by the defendants and that the promissory notes taken from the purchasers of said jewelry by
the defendants were bona fide in every respect. It does not appear whether the notes were good, bad, or
indifferent, collectible or uncollectible. Neither does it appear what they were actually worth. The only
evidence produced by the prosecution and, therefor, the only evidence upon which the defendants were
convicted, was, as before stated, that they had taken the property in question upon the terms and
conditions mentioned in the receipt above quoted and that they had failed to return either jewelry or the
value thereof, but, instead, had also said jewelry on credit and taken promissory notes from the purchasers
for the purchase price.chanroblesvirtualawlibrary chanrobles virtual law library
While the question in this precise from has never heretofore been presented to this court, we are of the
opinion that the principles laid down, either expressly or impliedly, in many similar cases, are applicable to
this. This court has uniformly required, either expressly or impliedly, that to convict there must be some
evidence of conversion of the property to the benefit of the accused or of some other person - that there
must be an intention to convert. A number of cases decided by this court have been cited by the fiscal to
sustain the conviction in this case. It may not be amiss to examine
them.chanroblesvirtualawlibrary chanrobles virtual law library
In the case of the United State vs. Pascual (10 Phil. Rep., 621), this court passed upon the question only of
whether or not to constitute estafa within the terms of article 535, subdivision 5, it was necessary that the
property be secured from the possession of the owner by deceit or fraud; and it was there held that
"deceit with intent to defraud, in obtaining the money or other personal property afterwards
misappropriated, is not always an essential requisites."chanrobles virtual law library
In the case of the United States vs. Leaño (6 Phil. Rep., 368), it appeared that a certain ring of the value of
P750 was delivered to the defendants on condition that they return the same within a week or pay the
value thereof if sold. It was further understood that if the defendants could not sell the ring for more than
a certain sum fixed by the contract it should not be sold. The week having elapsed and the defendants
having failed to comply with their agreement, the owner sought to obtain possession of it and found that it
had been pledged by the defendants with a pawnbroker for the sum of P180. The court held (p. 371) that
under the facts of the case: chanrobles virtual law library
The defendants appropriated, misapplied, and converted the said ring to their own use by pledging the
same with a pawnbroker, though they had secured the same under the pretext of selling it to person
desiring to buy it." chanrobles virtual law library
In the case of the United States vs. Alabanza (11 Phil. Rep., 475), it appeared that Mercedes Alabanza
received from one named Aquino a gold rosary, valued at P100, for sale on commission, with the obligation
to sell the rosary and to account for the value of the same; that, notwithstanding the fact that the time
within which the agreement was to be performed had elapsed and in spite of repeated demands made for
the return of the rosary or the payment of its value, the accused did nothing; that the accused claimed in
explanation of her refusal to comply with the agreement that she delivered the rosary to another person
for sale on commission and that the latter took it to Cagayan to be sold there and that it had not been
returned. It was clearly proved on the trial that the person to whom the accused claimed she had given the
rosary for sale on commission had died of cholera in Vigan four years prior to the date of the alleged
delivery. In that case the court said (p. 479):
It should be observed, on the other hand, that the Penal Code punished not only the appropriation but
also the conversion of property received under the obligation to return it, as in the present case.
The evidence here was very clear that the accused intended to convert the rosary  to her own use and that
she actually did do so. The court further said in that case (p. 478):
That in the behavior of the accused the elements which constitute the crime of estafa are present, i. e., the
deceit by which it was intended to defraud, . . . .
In the case of the United states vs. Zamora (2 Phil. Rep., 582), it appeared that on the 10th day of July,
1901, the defendant received from the complaining witness for sale on commission the jewelry mentioned
in the complaint, and, although repeatedly requested by the owner to return the same, failed to do so. In
discussing the question the court said (p. 583):
It is contended for the defense that no time was fixed within which the defendant was to make sale of or
return the property. It was proven that it is the custom, when jewelry is taken out for sale, that if taken in
the morning it is to be returned in the evening, or at least within two or three days. Independent of any
such custom, and in the absence of any time fixed for its return, it was the duty of the party so receiving it
to return it upon the demand of the owner.chanroblesvirtualawlibrary chanrobles virtual law library
The complaining witness testified that upon several occasions she demanded of the defendant the return
of the jewelry; that the defendant failed to comply, on each occasion asking for two or three days longer,
and up to the date of the trial, which was over one year from the date of the delivery of the property, he
had failed to make a return of the jewelry or to give any account
thereof.chanroblesvirtualawlibrary chanrobles virtual law library
We think the evidence in this entirely sufficient to show the conversion of the property by the defendant to
his own use.
In this case the defendant made no effort to explain what he had done with the property or to give any
account thereof or of the proceeds thereof. The evidence of conversion to his own use was
clear.chanroblesvirtualawlibrary chanrobles virtual law library
In the case of the United States vs. Ongtengco (4 Phil. Rep., 144) it appeared that the defendant received
from the complaint jewelry of the value of P1,510; that it was delivered on the condition that the
defendant sell it on commission and if not sold to return the same or, if sold, the value thereof on the 31st
day of July of the same year; that the defendant willfully and feloniously misapplied, embezzled, and
appropriated to himself the said jewelry and the value thereof without the consent and to the prejudice of
the complainant. In that case the court held (p. 146):
Instead of doing this he appropriated to himself the said jewelry by false pretenses and in bad faith, thus
deceiving the owner of the jewelry, to her prejudice.chanroblesvirtualawlibrary chanrobles virtual law
library
The guilt of the accused is evident, since up to the time the complaint was filed he had neither returned
the jewelry nor given any account of the same or of the price thereof . The fact that he pleaded not guilty;
that he gave the owner of the jewelry part of what he embezzled, 300 pesos; that he delivered some
jewelry (which was afterwards returned to him) as a guaranty for his obligation; and, finally, the fact that
he made a third person offer to reimburse the amount embezzled, do not exempt him from liability, since
neither the jewelry was returned nor the price thereof was paid to the owner of the same, and whatever
acts the defendant did, they all prove that he embezzled the jewelry or the value thereof .
Here again the conversion of the property to the use of the accused was clearly
proved.chanroblesvirtualawlibrary chanrobles virtual law library
In the case of the United States vs. Ramirez (9 Phil. Rep., 67) it appeared that the defendant received from
George W. Walker the sum of P65 for the purpose of investing the same in the business of buying and
selling fish in this city, with the obligation to account for and deliver the said sum of P65 or the proceeds
thereof, either in money or property of the said business, to the said Walker; that notwithstanding the
lapse of seven months and twenty- seven days, the accused did not account for the money received nor
produce the fish which he ought to have bought with the P65; that the defendant made no explanation
whatever of what became of the P65 or, if used, what be came of the fish bought therewith. The court held
that under the circumstances of the case there was sufficient evidence to hold that the defendant had
converted the said money to her own use and that she was therefor guilty
of estafa.chanroblesvirtualawlibrary chanrobles virtual law library
In the case of the United States vs. Anacleto (3 Phil. Rep., 172), it appeared that the defendant asked one
Modesto for some jewelry to sell, giving as a person for that request that she knew of some prospective
purchasers. The woman Modesto thereupon delivered them to the accused on the 10th of June. She never
recovered either the jewels or their value. She attempted to do so continuously for more than four
months. The defendant refused and failed to give any account whatever of the jewels or what had become
of them other than to say that she had sold them, neglecting to state to whom she had sold them, for what
price she had sold them, or whether or not she had received the pay for them. The court in that case said
(p.174):
The crime was committed by fraud and deceit, on the pretext that the defendants had some prospective
purchasers for the jewelry. Relying upon this statement the owner delivered the jewels.
Here the evidence of conversion to the use of the accused was entirely clear. It should be noted also that
the defendant denied having received the jewelry.chanroblesvirtualawlibrary chanrobles virtual law library
In the case of the United States vs. Singuimuto (3 Phil. Rep., 176) it appeared that the defendant received
300 sacks of rice for sale on commission and was to deliver their value to Lieut. William H. Bell, and that he
denied ever having received the said 300 sacks of rice. He was convicted because of his denial as well as for
having sold the same and converted the proceeds to his own use.chanroblesvirtualawlibrary chanrobles
virtual law library
In the case of the United States vs. Guzman (1 Phil. Rep., 138) it appeared that on October 16, 1900, the
defendant went to the house of another woman in the district of Santa Cruz and, on the pretext that she
had a purchaser who wished to see the jewels, took from the latter several pieces of gold jewelry, set with
diamonds, of the total value of P730. These the defendant promised to return or in case they were sold to
pay over their value on the afternoon of the same day. As she did not do so, the son of the owner of the
jewelry went next day in search of the defendant. He was unable to find her until after some days had
passed. Then the defendant pleaded with the owner of the jewels that she be given an extension of time
for their return. She failed, however, upon various pretexts to return the jewels. In explanation of what
became of the jewels the defendant asserted that she had delivered them to a broker, who stated that she
either lost them or that they were stolen from her. The court held upon this evidence that the defendant
was guilty of estafa. The evidence of misappropriation or conversion to the use of defendant or of some
other person was clear.chanroblesvirtualawlibrary chanrobles virtual law library
In the case of the United States vs. Ner (4 Phil. Rep., 131) it appeared that the defendant received from
another certain jewelry belonging to the latter, consisting of four rings, three pairs of earrings, and two
breastpins, all set with diamonds, of the total value of P869; that this jewelry had been given to the
defendant to be sold by him on commission; that instead of doing so the defendant, with the intention of
profiting thereby, misapplied and embezzled the value of said jewelry to the prejudice of the owner
thereof. The court found the defendant guilty, predicating that decision upon the foregoing facts and upon
the further fact that the defendant " did not given any account as to the whereabouts of the jewelry or the
value thereof ." chanrobles virtual law library
In the case of the United States vs. Jockers (7 Phil. Rep., 464) it appeared, as stated by the court, that "the
accused was employed by Weingarten Brothers to peddle on commission in the city of Manila cheap
jewelry, collars, cuffs, underwear, and other articles of like nature. On the 16th of February, 1906, he
informed his employers that he had a special opportunity to make a sale to two Turks who were to meet
him that evening at the Waldorf Hotel. Upon this representation he was intrusted with goods valued at
P267.18 Philippine currency, for which it was understood he would render an account the following day,
the terms of his commission obligating him to return the goods intrusted or the money received therefor,
less his commission."chanrobles virtual law library
The court said (p.465):
It does not appear whether this representation was or was not made in good faith, but the accused failed
to return on the following morning as agreed, and he left the city of Manila, taking the goods intrusted to
him to some of the outlying barrios and municipalities, where he remained until the 24th of February,
when he was arrested at the instance of his employers.chanroblesvirtualawlibrary  chanrobles virtual law
library
During his absence he sold various articles from his stock amounting to P37.77 Philippine currency, for
which he failed to make an accounting, the rest of the goods being found in his possession and being
returned to his employers.chanroblesvirtualawlibrary chanrobles virtual law library
The information charges the accused with estafa of all the goods intrusted to him, but we are of opinion
that, as to the goods unsold and which were returned to the owners, the charge of estafa can not be
maintained. The evidence of record strongly tends to establish the fact that in taking the goods intrusted to
him outside of the city of Manila he was merely seeking a better field for his peddling operations and
that it was not his intention to appropriate these goods to his own use or to make away with the proceeds
after selling them. The fact that he did not return at the time stipulated, and the fact that he went beyond
the limits of the city of Manila without the permission of his employers, taken by themselves and without
any other evidence as to his motive, might and probably would be sufficient to raise the presumption that
it was the accused's intention to make away with all the goods intrusted to him, but his conduct during his
absence appears to have been wholly inconsistent with such as intention, and we think in view of all the
circumstances that it affirmatively appears that he at no time entertained such a plan.
In this case the defendant was declared not guilty of the conversion of the goods unsold because of
the lack of intention to convert to his own use, but he was held to be guilty of converting the proceeds
resulting from the sale of the remaining merchandise, amounting to
P37.77.chanroblesvirtualawlibrary chanrobles virtual law library
It is apparent that the cases above set forth do not sustain the contention of the prosecution that the
defendants in the case at bar guilty of the crime of estafa. In all those cases there was present evidence of
the conversion of the goods by the defendant to his own use or to the use of some other
person.chanroblesvirtualawlibrary chanrobles virtual law library
Paragraph 5 of article 535 of the Penal Code is as follows:
ART. 535. The following shall incur the penalties of the preceding articles:
x x x x x x x x x
5. Those who, to the prejudice of another, shall appropriate or misapply any money, goods, or any kind of
personal property which they may have received as a deposit on commission for administration or in any
other character producing the obligation to deliver or return the same, or who shall deny having received
it.
Commenting upon that subdivision, Groizard, volume 5, page 16, says;
Other classes of estafa:chanrobles virtual law library
A new type now presents itself for study. In the four numbers which we have just commented upon the
acts therein punished have deceit, artifice, machination, or cunning employed by the agent to obtain the
defeat the confidence of the passive subject of the crime as a common factor and prevailing circumstance.
With regard to the persons accused in the present case such fraudulent activity as is employed by the
guilty in order to obtain possession of a thing, or to effect a fraud, does not exist, or exists in but few cases
and in limited proportions. Impudence, barefacedness, covetousness, and disloyalty employed in taking
advantage of an opportunity take here the place formerly occupied by deceit. It has been rightly stated by
the Supreme Court "that if the crime of estafa generally contains the element of deceit, the one specially
defined in paragraph 5 of article 548 of the Penal Code (equivalent to No. 5 of article 535 of that for the
Philippines) implies on the part of the person committing it a more or less  serious abuse of confidence, it
being the purpose of the criminal to obtain and benefit, to the prejudice or fraud of third persons, availing
himself of any of the means specified in the code." (Decision of November 26, 1884.)
Viada, discussing this same subdivision, says in his Commentaries on the Penal Code (vol. 3, 4th ed., p.
514): 1
In the matter of estafa, this is unquestionably the article which is most frequently applied in practice, it
being also the one that presents the most difficulties. It is therefore advisable to take carefully into
consideration the essential elements of the same. The fact of having received a thing constitutes the first
element, and in this the said crime differs from that of theft, the first element of which is the taking of the
thing. It is important to bear in mind such an essential circumstance so as not to mistake the one crime for
the other. In Question 11 of the commentary on article 533, we have already seen that, by reason of
having overlooked such an important distinction, the appeal in casacion interposed by the public
prosecutor in the case therein dealt with was rejected. The second requisite consists in that the thing
received be money, goods, or any other personal property, in a word, anything which, owing to its value,
may be an article of trade, among which we think are deeds and documents the appropriation or
misappropriation of which might cause a material prejudice - as, for example, a deed of sale, a promissory
note, a receipt for money, etc. The third element of this crime consists in that the above-stated things may
have been received by virtue of deposit, on commission, or for administration, or under any other title
producing the obligation to deliver or return them; that is, to deliver or return the same thing that was
received (not an equivalent thereto in kind or quality), as happens with the deposit, commission, and
administration specially dealth with in said article, and also, for example, in the contract
of commodatum by which the bailee is required to return the same thing that he received for a stated use.
Finally, the fourth and last requisite essential to the crime defined in this number consists in
the appropriation or misappropriation of the thing by whoever received it under such a title and which
obligences him to make restitution thereof, or denying the fact that he received it.
The proposition that an accused may not be convicted of estafa without proof of the misappropriation or
improper diversion of the property intrusted to his care to his own use or to the use of another, sanctioned
as we have seen by the supreme court of Spain and by the great commentators on the Penal Code, and by
the decisions of this court, is supported by the American authorities also. (Pullan vs. State, 78 Ala., 31, 56
Am. Rep., 21; Ex Parte Hedley, 31 Cal., 109; Lycan vs. People, 107 Ill., 423; State vs. Snell, 9 R. I., 112;
Webb vs. State, 8 Tex. App., 310; Griffin vs. State, 4 Tex. App., 390; State vs. Hill, 47 Neb., 456;
Chaplin vs. Lee, 18 Neb., 440; State vs. Adams, 108 Mo., 208; State vs. O'Kean, 35 La. Ann., 901;
Ker vs. People, 110 Ill., 627; U. S. vs. Sander, 6 McLean (U. S.) 598; Commonwealth vs. Smith, 129 Mass.,
104; State vs. Baumhager, 28 Minn., 226; Calkins vs. State, 18 Ohio State, 366; People vs. Gray, 66 Cal.,
271; People vs. Treadwell, 69 Cal., 226; Spalding vs. People, 172 Ill., 40; State vs. Smith, 47 La. Ann., 432;
Commonwealth vs. Tuckerman, 10 Gray (Mass.) 173; People vs. Hurst, 62 Mich., 276; People vs. Galland,
55 Mich., 628; People vs. Wadsworth, 63 Mich., 500; State vs. Fritchler, 54 Mo., 424; State vs. Noland, 111
Mo., 473; People vs. Wyman, 102 Cal., 552; U. S. vs. Fish, 24 Fed. Rep., 585; Ross vs. Innis, 35 Ill., 487;
People vs. Lapique, 120 Cal., 25.) chanrobles virtual law library
This court has held that the mere failure to return the goods is not sufficient proof of
conversion.chanroblesvirtualawlibrary chanrobles virtual law library
In the case of the United States vs. Dominguez (2 Phil. Rep., 580) the court says (p. 581):
We find it necessary to pass upon only one of the questions presented by the record. The appellant makes
the following statement in his brief in this court:
"There is no doubt that the defendant has the character of a receiver, consequently it is his duty to return
what he has received in trust. This being the case, the punishable act involved in a refusal to so return
implies a damage to the depositor or his assignee, inasmuch as the latter is illegally deprived of something
which belongs to him; and this refusal and damage is covered by the fifth clause of article 535 of the Penal
Code."
This is not the law. The paragraph cited from the Penal Code says that the depository shall be guilty of
estafa, not if he refuses to return the thing deposited but if he denies that he ever received it. In this case
the defendant has never denied that he received the rice as a deposit; on the contrary, when the demand
was made upon him by the private prosecutor on December 7, 1901, he said that he had delivered it to
Alejandro Cornejo a few days before the death of Borras, the bailor, by the written order of the letter. The
defendant never having denied that he received the deposit, he can not be convicted unless it is proved
that he has appropriated or diverted it. The mere refusal to return the article is not itself sufficient to prove
this. In addition to this refusal, there must be evidence in the case from which the court can see that the
depository has appropriated it to his own use or to that of another. There is no such evidence. On the
contrary, it is entirely probable that, after the departure of the defendant from Libmanan on September
20, 1898, two days after the uprising of the civil guard in Nueva Caceres, the rice was seized by the
revolutionists and appropriated to their own uses.
This court has held also that a sale of goods, taken to be sold on commission, for a less price than that
agreed upon is not conversion, misappropriation, or diversion of the
property.chanroblesvirtualawlibrary chanrobles virtual law library
In the case of the United States vs. Torres et al. (11 Phil. Rep., 606) it was held that when an agent who has
been intrusted with goods to be sold at a price fixed by the owner sells them at less than the price fixed
and appropriates to his own use the money realized, the crime of estafa which he thereby commits
consists in the misappropriation and not in the wrongful sale. in that case Ramona R. Evangelista delivered
certain jewels to Juliana Torres under the obligation on the part of Juliana Torres to sell them at a fixed
price for each jewels or in case she could not sell them at that price to return them on a certain date. She
sold a ring for P300 for which the selling price was fixed by her agreement at P600. She also sold a pair of
earrings for P100 for which the price fixed in the agreement was P200. The question before the court was,
Did the act of the commission agent in selling goods received for less than the price fixed by the contract of
commission constitute the crime of estafa? In discussing this question, the court said (p. 608):
If the act of selling the goods received on commission at a price lower than the one fixed constitutes the
crime of estafa, then the owner of the thing sold has not lost its legal possession, and it should be restored
to him either by the guilty person or by the third person who, in an illegal manner, obtained the possession
of the thing illegally sold; and in that case the articles of the Penal Code above cited are applicable, and the
thing misappropriated should be returned either by the guilty person or by the third person who
unlawfully restrains it in his possession as the object of an estafa committed by the one who sold it to
him.chanroblesvirtualawlibrary chanrobles virtual law library
But, if the act in question does not constitute estafa, since the act of transferring a thing sold to a third
party in such a manner, as it were between principal and agent is not punished by any statute, although
illegal on the part of the latter, yet after all it was not illegal as between the seller and the purchaser, and it
is sufficient that it was not illegal (it not proceeding from a crime) in order that the acquisition be legal and
the possession be just and lawful. The unlawful conduct of the seller in exceeding the powers of his
commission does not affect the purchaser in good faith, who was not proven to have been aware of the
illegality of such conduct.chanroblesvirtualawlibrary chanrobles virtual law library
In deciding this question we hold:chanrobles virtual law library
That the fact of an agent selling the thing received on commission for a lower price than the one fixed does
not constitute the crime of estafa, it not being penalized as such in the Penal Code; but the act of the
commission agent in misappropriating the price obtained by the sale, whatever it may be, constitutes
estafa, because it constitutes an appropriation for his private purposes of the money received on
commission, or realized by the commission which he undertook.
x x x x x x x x x
The crime did not consist in the sale of the thing, since the owner thereof delivered it to the seller for that
purpose; but it consisted in the seller's misappropriating the proceeds of the sale, . . . .
This latter case goes a long way toward being decisive of the case at bar upon the facts as well as the law.
In that case the contract expressly prohibited the sale of the jewelry for a price less than that fixed by the
agreement between the parties. If the accused might sell a ring for P300, the selling price of which was
fixed by the agreement at not less than P600, and not be guilty of misappropriation or misapplication, at
what price would he need to sell before he would be guilty? At P200? At P100? Whether or not he would
be guilty does not depend upon the amount for which he sells, but upon the quality of his act. His sale at
an unreasonable price may be unwise, unbusinesslike, and ruinous; but it is not criminal. It may be gross
neglect of duty, but it is not crime. His civil liability is apparent; but his criminal liability remains yet to be
established. Such a sale would be an extremely suspicious circumstance and but little additional evidence
would be required to establish the crime; but the point is that more evidence would be required. The
important thing is the purpose with which it was done - the intent. It is that which qualifies the act as
criminal or not criminal. The amount for which the jewelry was sold does not, of itself, determine the
quality of the act from the standpoint of the criminal law. The real question is, Was it done for his own
benefit or for the benefit of another? To be sure, such sale injured the other party to the contract. But that
is not sufficient. There must be the intent to benefit himself or another. This is the doctrine almost
universally recognized, as seen by the authorities above cited.chanroblesvirtualawlibrary chanrobles virtual
law library
In the case at bar there is wanting, under the authorities, almost every element of the crime charged.
There was no conversion, misappropriation, or diversion of the property for the benefit of the accused or
of any other person. No intent to convert, misappropriate, or misapply has been shown. He kept none of
the proceeds of the sales. Those, such as they were, he turned over to the owner. The fact that he did not
return the jewelry is not sufficient. (U. S. vs. Dominguez, supra; State vs. O'Kean, 35 La. Ann., 910;
People vs. Hurst, 62 Mich., 276.) The fact that he did not sell in accordance with the terms of the contract
(if that is that fact - the only writing between the parties, Exhibit, showing the contrary) is not sufficient.
(United States vs. Torres, supra.) To permit the accused to sell the property for a sum ridiculously and
ruinously (to the owner) below that fixed by the contract is fully as dangerous to the interests of the owner
as to permit him to sell on credit. If he is exempt from criminal responsibility in the one case there appears
no reason why he should not be in the other.chanroblesvirtualawlibrary chanrobles virtual law library
The proof failing utterly to show a conversion of the property to the use of defendant or of any other
person, the defendant should be acquitted.chanroblesvirtualawlibrary chanrobles virtual law library
The judgment of the court below is, therefore, reversed, the defendant acquitted, and his immediate
discharge from custody ordered.
G.R. No. 80294-95 September 21, 1988
CATHOLIC VICAR APOSTOLIC OF THE MOUNTAIN PROVINCE, petitioner,
vs.
COURT OF APPEALS, HEIRS OF EGMIDIO OCTAVIANO AND JUAN VALDEZ, respondents.
Valdez, Ereso, Polido & Associates for petitioner.
Claustro, Claustro, Claustro Law Office collaborating counsel for petitioner.
Jaime G. de Leon for the Heirs of Egmidio Octaviano.
Cotabato Law Office for the Heirs of Juan Valdez.

GANCAYCO, J.:
The principal issue in this case is whether or not a decision of the Court of Appeals promulgated a long
time ago can properly be considered res judicata by respondent Court of Appeals in the present two cases
between petitioner and two private respondents.
Petitioner questions as allegedly erroneous the Decision dated August 31, 1987 of the Ninth Division of
Respondent Court of Appeals 1 in CA-G.R. No. 05148 [Civil Case No. 3607 (419)] and CA-G.R. No. 05149
[Civil Case No. 3655 (429)], both for Recovery of Possession, which affirmed the Decision of the Honorable
Nicodemo T. Ferrer, Judge of the Regional Trial Court of Baguio and Benguet in Civil Case No. 3607 (419)
and Civil Case No. 3655 (429), with the dispositive portion as follows:
WHEREFORE, Judgment is hereby rendered ordering the defendant, Catholic Vicar Apostolic of the
Mountain Province to return and surrender Lot 2 of Plan Psu-194357 to the plaintiffs. Heirs of Juan Valdez,
and Lot 3 of the same Plan to the other set of plaintiffs, the Heirs of Egmidio Octaviano (Leonardo Valdez,
et al.). For lack or insufficiency of evidence, the plaintiffs' claim or damages is hereby denied. Said
defendant is ordered to pay costs. (p. 36, Rollo)
Respondent Court of Appeals, in affirming the trial court's decision, sustained the trial court's conclusions
that the Decision of the Court of Appeals, dated May 4,1977 in CA-G.R. No. 38830-R, in the two cases
affirmed by the Supreme Court, touched on the ownership of lots 2 and 3 in question; that the two lots
were possessed by the predecessors-in-interest of private respondents under claim of ownership in good
faith from 1906 to 1951; that petitioner had been in possession of the same lots as bailee in commodatum
up to 1951, when petitioner repudiated the trust and when it applied for registration in 1962; that
petitioner had just been in possession as owner for eleven years, hence there is no possibility of acquisitive
prescription which requires 10 years possession with just title and 30 years of possession without; that the
principle of res judicata on these findings by the Court of Appeals will bar a reopening of these questions of
facts; and that those facts may no longer be altered.
Petitioner's motion for reconsideation of the respondent appellate court's Decision in the two
aforementioned cases (CA G.R. No. CV-05418 and 05419) was denied.
The facts and background of these cases as narrated by the trail court are as follows —
... The documents and records presented reveal that the whole controversy started when the defendant
Catholic Vicar Apostolic of the Mountain Province (VICAR for brevity) filed with the Court of First Instance
of Baguio Benguet on September 5, 1962 an application for registration of title over Lots 1, 2, 3, and 4 in
Psu-194357, situated at Poblacion Central, La Trinidad, Benguet, docketed as LRC N-91, said Lots being the
sites of the Catholic Church building, convents, high school building, school gymnasium, school
dormitories, social hall, stonewalls, etc. On March 22, 1963 the Heirs of Juan Valdez and the Heirs of
Egmidio Octaviano filed their Answer/Opposition on Lots Nos. 2 and 3, respectively, asserting ownership
and title thereto. After trial on the merits, the land registration court promulgated its Decision, dated
November 17, 1965, confirming the registrable title of VICAR to Lots 1, 2, 3, and 4.
The Heirs of Juan Valdez (plaintiffs in the herein Civil Case No. 3655) and the Heirs of Egmidio Octaviano
(plaintiffs in the herein Civil Case No. 3607) appealed the decision of the land registration court to the then
Court of Appeals, docketed as CA-G.R. No. 38830-R. The Court of Appeals rendered its decision, dated May
9, 1977, reversing the decision of the land registration court and dismissing the VICAR's application as to
Lots 2 and 3, the lots claimed by the two sets of oppositors in the land registration case (and two sets of
plaintiffs in the two cases now at bar), the first lot being presently occupied by the convent and the second
by the women's dormitory and the sister's convent.
On May 9, 1977, the Heirs of Octaviano filed a motion for reconsideration praying the Court of Appeals to
order the registration of Lot 3 in the names of the Heirs of Egmidio Octaviano, and on May 17, 1977, the
Heirs of Juan Valdez and Pacita Valdez filed their motion for reconsideration praying that both Lots 2 and 3
be ordered registered in the names of the Heirs of Juan Valdez and Pacita Valdez. On August 12,1977, the
Court of Appeals denied the motion for reconsideration filed by the Heirs of Juan Valdez on the ground
that there was "no sufficient merit to justify reconsideration one way or the other ...," and likewise denied
that of the Heirs of Egmidio Octaviano.
Thereupon, the VICAR filed with the Supreme Court a petition for review on certiorari of the decision of
the Court of Appeals dismissing his (its) application for registration of Lots 2 and 3, docketed as G.R. No. L-
46832, entitled 'Catholic Vicar Apostolic of the Mountain Province vs. Court of Appeals and Heirs of
Egmidio Octaviano.'
From the denial by the Court of Appeals of their motion for reconsideration the Heirs of Juan Valdez and
Pacita Valdez, on September 8, 1977, filed with the Supreme Court a petition for review, docketed as G.R.
No. L-46872, entitled, Heirs of Juan Valdez and Pacita Valdez vs. Court of Appeals, Vicar, Heirs of Egmidio
Octaviano and Annable O. Valdez.
On January 13, 1978, the Supreme Court denied in a minute resolution both petitions (of VICAR on the one
hand and the Heirs of Juan Valdez and Pacita Valdez on the other) for lack of merit. Upon the finality of
both Supreme Court resolutions in G.R. No. L-46832 and G.R. No. L- 46872, the Heirs of Octaviano filed
with the then Court of First Instance of Baguio, Branch II, a Motion For Execution of Judgment praying that
the Heirs of Octaviano be placed in possession of Lot 3. The Court, presided over by Hon. Salvador J.
Valdez, on December 7, 1978, denied the motion on the ground that the Court of Appeals decision in CA-
G.R. No. 38870 did not grant the Heirs of Octaviano any affirmative relief.
On February 7, 1979, the Heirs of Octaviano filed with the Court of Appeals a petitioner for certiorari and
mandamus, docketed as CA-G.R. No. 08890-R, entitled Heirs of Egmidio Octaviano vs. Hon. Salvador J.
Valdez, Jr. and Vicar. In its decision dated May 16, 1979, the Court of Appeals dismissed the petition.
It was at that stage that the instant cases were filed. The Heirs of Egmidio Octaviano filed Civil Case No.
3607 (419) on July 24, 1979, for recovery of possession of Lot 3; and the Heirs of Juan Valdez filed Civil Case
No. 3655 (429) on September 24, 1979, likewise for recovery of possession of Lot 2 (Decision, pp. 199-201,
Orig. Rec.).
In Civil Case No. 3607 (419) trial was held. The plaintiffs Heirs of Egmidio Octaviano presented one (1)
witness, Fructuoso Valdez, who testified on the alleged ownership of the land in question (Lot 3) by their
predecessor-in-interest, Egmidio Octaviano (Exh. C ); his written demand (Exh. B—B-4 ) to defendant Vicar
for the return of the land to them; and the reasonable rentals for the use of the land at P10,000.00 per
month. On the other hand, defendant Vicar presented the Register of Deeds for the Province of Benguet,
Atty. Nicanor Sison, who testified that the land in question is not covered by any title in the name of
Egmidio Octaviano or any of the plaintiffs (Exh. 8). The defendant dispensed with the testimony of
Mons.William Brasseur when the plaintiffs admitted that the witness if called to the witness stand, would
testify that defendant Vicar has been in possession of Lot 3, for seventy-five (75) years continuously and
peacefully and has constructed permanent structures thereon.
In Civil Case No. 3655, the parties admitting that the material facts are not in dispute, submitted the case
on the sole issue of whether or not the decisions of the Court of Appeals and the Supreme Court touching
on the ownership of Lot 2, which in effect declared the plaintiffs the owners of the land constitute  res
judicata.
In these two cases , the plaintiffs arque that the defendant Vicar is barred from setting up the defense of
ownership and/or long and continuous possession of the two lots in question since this is barred by prior
judgment of the Court of Appeals in CA-G.R. No. 038830-R under the principle of res judicata. Plaintiffs
contend that the question of possession and ownership have already been determined by the Court of
Appeals (Exh. C, Decision, CA-G.R. No. 038830-R) and affirmed by the Supreme Court (Exh. 1, Minute
Resolution of the Supreme Court). On his part, defendant Vicar maintains that the principle of res
judicata would not prevent them from litigating the issues of long possession and ownership because the
dispositive portion of the prior judgment in CA-G.R. No. 038830-R merely dismissed their application for
registration and titling of lots 2 and 3. Defendant Vicar contends that only the dispositive portion of the
decision, and not its body, is the controlling pronouncement of the Court of Appeals. 2
The alleged errors committed by respondent Court of Appeals according to petitioner are as follows:
1. ERROR IN APPLYING LAW OF THE CASE AND RES JUDICATA;
2. ERROR IN FINDING THAT THE TRIAL COURT RULED THAT LOTS 2 AND 3 WERE ACQUIRED BY PURCHASE
BUT WITHOUT DOCUMENTARY EVIDENCE PRESENTED;
3. ERROR IN FINDING THAT PETITIONERS' CLAIM IT PURCHASED LOTS 2 AND 3 FROM VALDEZ AND
OCTAVIANO WAS AN IMPLIED ADMISSION THAT THE FORMER OWNERS WERE VALDEZ AND OCTAVIANO;
4. ERROR IN FINDING THAT IT WAS PREDECESSORS OF PRIVATE RESPONDENTS WHO WERE IN POSSESSION
OF LOTS 2 AND 3 AT LEAST FROM 1906, AND NOT PETITIONER;
5. ERROR IN FINDING THAT VALDEZ AND OCTAVIANO HAD FREE PATENT APPLICATIONS AND THE
PREDECESSORS OF PRIVATE RESPONDENTS ALREADY HAD FREE PATENT APPLICATIONS SINCE 1906;
6. ERROR IN FINDING THAT PETITIONER DECLARED LOTS 2 AND 3 ONLY IN 1951 AND JUST TITLE IS A PRIME
NECESSITY UNDER ARTICLE 1134 IN RELATION TO ART. 1129 OF THE CIVIL CODE FOR ORDINARY
ACQUISITIVE PRESCRIPTION OF 10 YEARS;
7. ERROR IN FINDING THAT THE DECISION OF THE COURT OF APPEALS IN CA G.R. NO. 038830 WAS
AFFIRMED BY THE SUPREME COURT;
8. ERROR IN FINDING THAT THE DECISION IN CA G.R. NO. 038830 TOUCHED ON OWNERSHIP OF LOTS 2
AND 3 AND THAT PRIVATE RESPONDENTS AND THEIR PREDECESSORS WERE IN POSSESSION OF LOTS 2 AND
3 UNDER A CLAIM OF OWNERSHIP IN GOOD FAITH FROM 1906 TO 1951;
9. ERROR IN FINDING THAT PETITIONER HAD BEEN IN POSSESSION OF LOTS 2 AND 3 MERELY AS BAILEE
BOR ROWER) IN COMMODATUM, A GRATUITOUS LOAN FOR USE;
10. ERROR IN FINDING THAT PETITIONER IS A POSSESSOR AND BUILDER IN GOOD FAITH WITHOUT RIGHTS
OF RETENTION AND REIMBURSEMENT AND IS BARRED BY THE FINALITY AND CONCLUSIVENESS OF THE
DECISION IN CA G.R. NO. 038830. 3
The petition is bereft of merit.
Petitioner questions the ruling of respondent Court of Appeals in CA-G.R. Nos. 05148 and 05149, when it
clearly held that it was in agreement with the findings of the trial court that the Decision of the Court of
Appeals dated May 4,1977 in CA-G.R. No. 38830-R, on the question of ownership of Lots 2 and 3, declared
that the said Court of Appeals Decision CA-G.R. No. 38830-R) did not positively declare private respondents
as owners of the land, neither was it declared that they were not owners of the land, but it held that the
predecessors of private respondents were possessors of Lots 2 and 3, with claim of ownership in good faith
from 1906 to 1951. Petitioner was in possession as borrower in commodatum up to 1951, when it
repudiated the trust by declaring the properties in its name for taxation purposes. When petitioner applied
for registration of Lots 2 and 3 in 1962, it had been in possession in concept of owner only for eleven years.
Ordinary acquisitive prescription requires possession for ten years, but always with just title. Extraordinary
acquisitive prescription requires 30 years. 4
On the above findings of facts supported by evidence and evaluated by the Court of Appeals in CA-G.R. No.
38830-R, affirmed by this Court, We see no error in respondent appellate court's ruling that said findings
are res judicata between the parties. They can no longer be altered by presentation of evidence because
those issues were resolved with finality a long time ago. To ignore the principle of res judicata would be to
open the door to endless litigations by continuous determination of issues without end.
An examination of the Court of Appeals Decision dated May 4, 1977, First Division 5 in CA-G.R. No. 38830-R,
shows that it reversed the trial court's Decision 6 finding petitioner to be entitled to register the lands in
question under its ownership, on its evaluation of evidence and conclusion of facts.
The Court of Appeals found that petitioner did not meet the requirement of 30 years possession for
acquisitive prescription over Lots 2 and 3. Neither did it satisfy the requirement of 10 years possession for
ordinary acquisitive prescription because of the absence of just title. The appellate court did not believe
the findings of the trial court that Lot 2 was acquired from Juan Valdez by purchase and Lot 3 was acquired
also by purchase from Egmidio Octaviano by petitioner Vicar because there was absolutely no
documentary evidence to support the same and the alleged purchases were never mentioned in the
application for registration.
By the very admission of petitioner Vicar, Lots 2 and 3 were owned by Valdez and Octaviano. Both Valdez
and Octaviano had Free Patent Application for those lots since 1906. The predecessors of private
respondents, not petitioner Vicar, were in possession of the questioned lots since 1906.
There is evidence that petitioner Vicar occupied Lots 1 and 4, which are not in question, but not Lots 2 and
3, because the buildings standing thereon were only constructed after liberation in 1945. Petitioner Vicar
only declared Lots 2 and 3 for taxation purposes in 1951. The improvements oil Lots 1, 2, 3, 4 were paid for
by the Bishop but said Bishop was appointed only in 1947, the church was constructed only in 1951 and
the new convent only 2 years before the trial in 1963.
When petitioner Vicar was notified of the oppositor's claims, the parish priest offered to buy the lot from
Fructuoso Valdez. Lots 2 and 3 were surveyed by request of petitioner Vicar only in 1962.
Private respondents were able to prove that their predecessors' house was borrowed by petitioner Vicar
after the church and the convent were destroyed. They never asked for the return of the house, but when
they allowed its free use, they became bailors in commodatum and the petitioner the bailee. The bailees'
failure to return the subject matter of commodatum to the bailor did not mean adverse possession on the
part of the borrower. The bailee held in trust the property subject matter of commodatum. The adverse
claim of petitioner came only in 1951 when it declared the lots for taxation purposes. The action of
petitioner Vicar by such adverse claim could not ripen into title by way of ordinary acquisitive prescription
because of the absence of just title.
The Court of Appeals found that the predecessors-in-interest and private respondents were possessors
under claim of ownership in good faith from 1906; that petitioner Vicar was only a bailee in commodatum;
and that the adverse claim and repudiation of trust came only in 1951.
We find no reason to disregard or reverse the ruling of the Court of Appeals in CA-G.R. No. 38830-R. Its
findings of fact have become incontestible. This Court declined to review said decision, thereby in effect,
affirming it. It has become final and executory a long time ago.
Respondent appellate court did not commit any reversible error, much less grave abuse of discretion,
when it held that the Decision of the Court of Appeals in CA-G.R. No. 38830-R is governing, under the
principle of res judicata, hence the rule, in the present cases CA-G.R. No. 05148 and CA-G.R. No. 05149.
The facts as supported by evidence established in that decision may no longer be altered.
WHEREFORE AND BY REASON OF THE FOREGOING, this petition is DENIED for lack of merit, the Decision
dated Aug. 31, 1987 in CA-G.R. Nos. 05148 and 05149, by respondent Court of Appeals is AFFIRMED, with
costs against petitioner.
SO ORDERED.