PROVISIONS COMMON TO PLEDGE AND MORTGAGE

Art. 2085-2092
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-48359. March 30, 1993.

MANOLO P. CERNA, petitioner, vs. THE HONORABLE COURT OF APPEALS and CONRAD C.
LEVISTE, respondents.

Zosa & Quijano Law Offices for petitioner.

Benjamin H. Aquino for private respondent.

SYLLABUS

1. CIVIL LAW; OBLIGATIONS & CONTRACTS; SOLIDARY LIABILITY, NOT PRESUMED. — Only
Delgado signed the promissory note and accordingly, he was the only one bound by the contract of loan.
Nowhere did it appear in the promissory note that petitioner was a co-debtor. The law is clear that "(c)ontracts
take effect only between the parties . . ." But by some stretch of the imagination, petitioner was held solidarily
liable for the debt allegedly because he was a co-mortgagor of the principal debtor, Delgado. This ignores the
basic precept that "(t)here is solidarily liability only when the obligation expressly so states, or when the law or
the nature of the obligation requires solidarity." The contract of loan, as evidenced by the promissory note, was
signed by Delgado only. Petitioner had no part in the said contract. Thus, nowhere could it be seen from the
agreement that petitioner was solidarily bound with Delgado for the payment of the loan.

2. ID.; ID.; SIGNATORY TO THE PRINCIPAL CONTRACT OF LOAN, PRIMARILY LIABLE; THIRD-
PARTY MORTGAGOR NOT SOLIDARILY BOUND WITH THE PRINCIPAL DEBTOR. — There is no
legal provision nor jurisprudence in our jurisdiction which makes a third person who secures the fulfillment of
another's obligation by mortgaging his own property to be solidarily bound with the principal obligor. A chattel
mortgage may be "an accessory contract" to a contract of loan, but that fact alone does not make a third-party
mortgagor solidarily bound with the principal debtor in fulfilling the principal obligation that is, to pay the loan.
The signatory to the principal contract — loan — remains to be primarily bound. It is only upon the default of
the latter that the creditor may have been recourse on the mortgagors by foreclosing the mortgaged properties in
lieu of an action for the recovery of the amount of the loan. And the liability of the third-party mortgagors
extends only to the property mortgaged. Should there be any deficiency, the creditors has recourse on the
principal debtor.

3. ID.; ID.; ID.; A SPECIAL POWER OF ATTORNEY AUTHORIZING THE MORTGAGE OF CERTAIN
PROPERTIES DID NOT MAKE THE ATTORNEY-IN-FACT A MORTGAGOR. — The mortgage contract
was also signed only by Delgado as mortgagor. The Special Power of Attorney did not make petitioner a
mortgagor. All it did was to authorized Delgado to mortgage certain properties belonging to petitioner. And this
is in compliance with the requirement in Article 2085 of the Civil Code which states that: "Art. 2085. The
following requisites are essential to the contracts of pledge and mortgage: (3) That the persons constituting the
pledge or mortgage have the free disposal of their property, and in the absence thereof, that they be legally
authorized for the purpose." In effect, petitioner lent his car to Delgado so that the latter may mortgage the same
to secure his debt. Thus, from the contract itself, it was clear that only Delgado was the mortgagor regardless of
the fact the he used properties belonging to a third person to secure his debt.

4. REMEDIAL LAW; CIVIL ACTIONS; FILING OF COLLECTION SUIT BARRED THE FORECLOSURE
OF MORTGAGE. — We agree with petitioner that the filing of collection suit barred the foreclosure of the
mortgage. Thus: "A mortgage who files a suit for collection abandons the remedy of foreclosure of the chattel
mortgage constituted over the personal property as security for the debt or value of the promissory note which
he seeks to recover in the said collection suit." The reason for this rule is that: ". . . when, however, the
mortgage elects to file a suit for collection, not foreclosure, thereby abandoning the chattel as basis for relief, he
clearly manifest his lack of desire and interest to go after the mortgaged property as security for the promissory
note . . ."
5. ID.; MORTGAGE DEBT DUE FROM ESTATE; OPTIONS GIVEN TO CREDITORS UNDER SEC. 7,
RULE 86, NEW RULES OF COURT. — Leviste, having chosen to file the collection suit, could not now run
after petitioner for the satisfaction of the debt. This is even more true in this case because of the death of the
principal debtor, Delgado. Leviste was pursuing a money claim against a deceased person. Section 7, Rule 86 of
the Rules of Court provides: "Sec. 7. Mortgage debt due from estate. — A creditor holding a claim against the
deceased secured by mortgaged or other collateral security, may abandon the security and prosecute his claim in
the manner provided in this rule, and share in the general distribution of the assets of the estate; or he may
foreclose his mortgage or realize upon his security, by action in court, making the executor or administrator a
party defendant, and if there is a judgment for a deficiency, after the sale of the mortgaged premises, or the
property pledged, in the foreclosure or the other proceeding to realize upon security, he may claim his
deficiency judgment in the manner provided in the preceding section; or he may upon his mortgage or other
security alone, and foreclosure the same at any time within the period of the statue of limitations, and in that
event he shall not be admitted as a creditor, and shall receive no share in the distribution of the other assets of
the estate; . . ."

DECISION

CAMPOS, JR., J p:

Before us is a Petition for Review on Certiorari of the decision ** of the Court of Appeals in CA G.R. No. SP-
07237, dated March 31, 1978.

The facts of this case are as follows:

On or about October 16, 1972, Celerino Delgado (Delgado) and Conrad Leviste (Leviste) entered into a loan
agreement which was evidenced by a promissory note worded as follows:

"FOR VALUE RECEIVED, I, CELERINO DELGADO, with postal address at 98 K-11 St., Kamias Rd.,
Quezon City, promise to pay to the order of CONRAD C. LEVISTE, NINETY (90) DAYS after date, at his
office at 215 Buendia Ave., Makati Rizal, then total sum of SEVENTEEN THOUSAND FIVE HUNDRED
(P17,500.00) PESOS, Philippine Currency without necessity of demand, with interest at the rate of TWELVE
(12%) PERCENT per annum;" 1

On the same date, Delgado executed a chattel mortgage 2 over a Willy's jeep owned by him. And acting as the
attorney-in-fact of herein petitioner, Manolo P. Cerna (petitioner), he also mortgage a "Taunus' car owned by
the latter.

The period lapsed without Delgado paying the loan. This prompted Leviste to a file a collection suit docketed as
Civil Case No. 17507 3 with the Court of First Instance of Rizal, Branch XXII against Delgado and petitioner as
solidary debtors. Herein petitioner filed his first Motion to Dismiss 4 on April 4, 1973. The grounds cited in the
Motion were lank of cause of action against petitioner and the death of Delgado. Anent the latter, petitioner
claimed that the claim should be filed in the proceedings for the settlement of Delgado's estate as the action did
not survive Delgado's death. Moreover, he also stated that since Leviste already opted to collect on the note, he
could no longer foreclose the mortgage. This Motion to Dismiss was denied on August 15, 1973 by Judge
Nicanor S. Sison. Thereafter, petitioner filed with the Court of Appeals a special civil action for certiorari,
mandamus, and prohibition with preliminary injunction docketed as CA G.R. No. 03088 on the ground that the
respondent judge committed grave abuse of discretion in refusing to dismiss the complaint. On June 28, 1976,
the Court of Appeals 5 denied the petition because herein petitioner failed to prove the death of Delgado and the
consequent settlement proceedings regarding the latter's estate. Neither did petitioner adequately prove his claim
that the special power of attorney in favor of Delgado was forged.

On February 18, 1977, petitioner filed his second Motion to Dismiss on the ground that the trial court, now
presided by Judge Nelly L. Romero Valdellon, acquired no jurisdiction over deceased defendant, that the claim
did not survive, and that there was no cause of action against him. On May 13, 1977, the said judge dismissed
the motion in an order hereunder quoted, to wit:

"Considering the second motion to dismiss filed by respondent Manolo Cerna on March 4, 1977, as well as
plaintiff's opposition thereto reiteration of the same grounds raised in the first motion to dismiss dated April 4,
1973, this Court hereby reiterates its resolution found in its order dated August 15, 1973." 6

Petitioner filed a motion to reconsider the said order but this was denied. Then, on October 17, 1977, he filed
another petition for certiorari and prohibition docketed as CA G.R. No. SP-07237 with the Court of Appeals.
This petition was dismissed by the said court in a decision which stated, thus:
"WHEREFORE, the herein petition insofar as it alleges lack of cause of action on the part of the herein
petitioner is concerned, is hereby dismissed and/or denied and the writ of preliminary injunction previously
issued by this Court is hereby lifted and/or set aside; insofar, however, as the case against the deceased Celerino
Delgado is concerned, the petition is granted, that is, the complaint in the lower court against Celerino Delgado
should be dismissed. No costs." 7

Thereafter, the instant petition for review was filed. Petitioner raised the following legal issue:

". . . NOW, INASMUCH AS THE COMPLAINT IS ONLY FOR COLLECTION OF A SUM OF MONEY
BASED ON THE PROMISSORY NOTE, SHOULD NOT THE COMPLAINANT BE DISMISSED FOR
LACK OF CAUSE OF ACTION AS AGAINST MANOLO P. CERNA WHO IS NOT A DEBTOR UNDER
THE PROMISSORY NOTE — CONSIDERING THAT ACCORDING TO SETTLED JURISPRUDENCE
THE FILING OF A COLLECTION SUIT IS DEEMED AN ABANDONMENT OF THE SECURITY OF THE
CHATTEL MORTGAGE?" 8

In holding petitioner liable, the Court of Appeals held that petitioner and Delgado were solidary debtors. Thus,
it held:

"But the herein petitioner pleads that the complaint states no cause of actions against the defendants Manolo P.
Cerna on the following grounds: 1) that the petitioner did not sign as joint obligator in the promissory note
signed by the deceased Celerino Delgado hence, even if the allegations of the complaint are hypothetically
admitted there is no cause of action against the herein petitioner because having proceeded against the
promissory note he is deemed to have abandoned the foreclosure of the chattel mortgage contract. This
contention deserves scant consideration. The chattel mortgage contract, prima facie shows that it created the
joint and solidary obligation of petitioner and Celerino Delgado against private respondent." 9 (Emphasis Ours)

We do not agree. Only Delgado signed the promissory note and accordingly, he was the only one bound by the
contract of loan. Nowhere did it appear in the promissory note that petitioner was a co-debtor. The law is clear
that "(c)ontracts take effect only between the parties . . ." 10

But by some stretch of the imagination, petitioner was held solidarily liable for the debt allegedly because he
was a co-mortgagor of the principal debtor, Delgado. This ignores the basic precept that "(t)here is solidarily
liability only when the obligation expressly so states, or when the law or the nature of the obligation requires
solidarity." 11

We have already stated that the contract of loan, as evidenced by the promissory note, was signed by Delgado
only. Petitioner had no part in the said contract. Thus, nowhere could it be seen from the agreement that
petitioner was solidarily bound with Delgado for the payment of the loan.

There is also no legal provision nor jurisprudence in our jurisdiction which makes a third person who secures
the fulfillment of another's obligation by mortgaging his own property to be solidarily bound with the principal
obligor. A chattel mortgage may be "an accessory contract" 12 to a contract of loan, but that fact alone does not
make a third-party mortgagor solidarily bound with the principal debtor in fulfilling the principal obligation that
is, to pay the loan. The signatory to the principal contract — loan — remains to be primarily bound. It is only
upon the default of the latter that the creditor may have been recourse on the mortgagors by foreclosing the
mortgaged properties in lieu of an action for the recovery of the amount of the loan. And the liability of the
third-party mortgagors extends only to the property mortgaged. Should there be any deficiency, the creditors
has recourse on the principal debtor.

In this case, however, the mortgage contract was also signed only by Delgado as mortgagor. It is true that the
contract stated the following:

"That this CHATTEL MORTGAGE, made and entered into this 16th day of October, 1972 at Makati, Rizal, by
and between:

CELERINO DELGADO, . . . as Attorney-in -Fact of Manolo P. Cerna . . . by virtue of a Special Power of

Attorney executed by said Manolo P. Cerna in my favor under the date of October 10, 1972 and acknowledged
before Orlando J. Coruna . . . herein referred to as the MORTGAGOR; - and -

CONRAD C. LEVISTE, . . . hereinafter referred to as the MORTGAGEE." 13

But this alone does not make petitioner a co-mortgagor especially so since only Delgado singed the chattel
mortgage as mortgagor. The Special Power of Attorney did not make petitioner a mortgagor. All it did was to
authorized Delgado to mortgage certain properties belonging to petitioner. And this is in compliance with the
requirement in Article 2085 of the Civil Code which states that:

"Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:

xxx xxx xxx

(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in the
absence thereof, that they be legally authorized for the purpose." (Emphasis Ours.)

In effect, petitioner lent his car to Delgado so that the latter may mortgage the same to secure his debt. Thus,
from the contract itself, it was clear that only Delgado was the mortgagor regardless of the fact the he used
properties belonging to a third person to secure his debt.

Granting, however, that petitioner was obligated under the mortgage contract to answer for Delgado's
indebtedness, under the circumstances, petitioner could not be held liable because the complaint was for
recovery of a sum of money, and not for the foreclosure of the security. We agree with petitioner that the filing
of collection suit barred the foreclosure of the mortgage. Thus:

"A mortgage who files a suit for collection abandons the remedy of foreclosure of the chattel mortgage
constituted over the personal property as security for the debt or value of the promissory note which he seeks to
recover in the said collection suit." 14

The reason for this rule is that:

". . . when, however, the mortgage elects to file a suit for collection, not foreclosure, thereby abandoning the
chattel as basis for relief, he clearly manifest his lack of desire and interest to go after the mortgaged property as
security for the promissory note . . ." 15

Hence, Leviste, having chosen to file the collection suit, could not now run after petitioner for the satisfaction of
the debt. This is even more true in this case because of the death of the principal debtor, Delgado. Leviste was
pursuing a money claim against a deceased person. Section 7, Rule 86 of the Rules of Court Provides:

"Sec. 7. Mortgage debt due from estate. — A creditor holding a claim against the deceased secured by
mortgaged or other collateral security, may abandon the security and prosecute his claim in the manner
provided in this rule, and share in the general distribution of the assets of the estate; or he may foreclose his
mortgage or realize upon his security, by action in court, making the executor or administrator a party
defendant, and if there is a judgment for a deficiency, after the sale of the mortgaged premises, or the property
pledged, in the foreclosure or the other proceeding to realize upon security, he may claim his deficiency
judgment in the manner provided in the preceding section; or he may upon his mortgage or other security alone,
and foreclosure the same at any time within the period of the statue of limitations, and in that event he shall not
be admitted as a creditor, and shall receive no share in the distribution of the other assets of the estate; . . ."

The above-quoted provision is substantially similar to Section 708 of the Code of Civil Procedure which states:

"Sec. 708. A creditor holding against the deceased, secured by mortgage or other collateral security, may
abandon the security and prosecute his claim before the committee, and share in the mortgage or realize upon
his security, by ordinary action in court, making the executor or administrator a party defendant; . . ."

The Supreme Court, in the case of Osorio vs. San Agustin, 16 has made the following interpretation of the said
provision,, to wit:

"It is clear by the provisions quoted section that a person holding a mortgage against the estate of a deceased
person may abandon such security and prosecute his claim before the committee, and share in the distribution of
the general assets of the estate. It provides also that he may, at his own election, foreclose the mortgage and
realize upon his security. But the law does not provide that he may have both remedies. If he elects one he must
abandon the other. If he fails in one he fails utterly."

But while there is a merit in the substantial allegations of this petition, We are constrained to deny the petition
on procedural grounds. The facts of this case reveal that the decision under review in the decision in the second
certiorari and prohibition case lodged petitioner against the judge trying the civil case. It appeared that after the
denial of the first motion to dismiss, petitioner filed CA-G.R. No. 03088 wherein petitioner alleged grave abuse
of discretion on the part of Judge Sison. The first petition was denied by the Court of Appeals. The decision
became final. The second motion to dismiss, based on the same grounds, was thereafter filed. It was likewise
denied and another petition for certiorari and prohibition was again instituted. The decision in the latter case is
now under review.

We agree with the contention of private respondent, that the action has been barred by the principle of res
judicata.

It appears in this case that the second motion was filed to circumvent the effects of the finality of the decision of
the Court of Appeals in Ca-G.R. No. 03088. Petitioner intended the second motion and the subsequent
proceedings as remedies for his lapsed appeal. We cannot such behavior. It delayed the proceedings in this case
and unduly burdened the courts. Petitioner should have allowed the trial of the case to go on where his defenses
could still be presented and heard.

WHEREFORE, in view of the forgoing,, the Petition is hereby DISMISSED. With costs.

SO ORDERED.
 SECOND DIVISION

G.R. No. 131679           February 1, 2000

CAVITE DEVELOPMENT BANK and FAR EAST BANK AND TRUST COMPANY, petitioners,
vs.
SPOUSES CYRUS LIM and LOLITA CHAN LIM and COURT OF APPEALS, respondents.

MENDOZA, J.:

This is a petition for review on certiorari of the decision1 of the Court of Appeals in C.A. GR CV No. 42315
and the order dated December 9, 1997 denying petitioners' motion for reconsideration.

The following facts are not in dispute.

Petitioners Cavite Development Bank (CDB) and Far East Bank and Trust Company (FEBTC) are banking
institutions duly organized and existing under Philippine laws. On or about June 15, 1983, a certain Rodolfo
Guansing obtained a loan in the amount of P90,000.00 from CDB, to secure which he mortgaged a parcel of
land situated at No. 63 Calavite Street, La Loma, Quezon City and covered by TCT No. 300809 registered in
his name. As Guansing defaulted in the payment of his loan, CDB foreclosed the mortgage. At the foreclosure
sale held on March 15, 1984, the mortgaged property was sold to CDB as the highest bidder. Guansing failed to
redeem, and on March 2, 1987, CDB consolidated title to the property in its name. TCT No. 300809 in the name
of Guansing was cancelled and, in lieu thereof, TCT No. 355588 was issued in the name of CDB.1âwphi1.nêt

On June 16, 1988, private respondent Lolita Chan Lim, assisted by a broker named Remedios Gatpandan,
offered to purchase the property from CDB. The written Offer to Purchase, signed by Lim and Gatpandan,
states in part:

We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma, Quezon City for
P300,000.00 under the following terms and conditions:

(1) 10% Option Money;

(2) Balance payable in cash;

(3) Provided that the property shall be cleared of illegal occupants or tenants.

Pursuant to the foregoing terms and conditions of the offer, Lim paid CDB P30,000.00 as Option Money, for
which she was issued Official Receipt No. 3160, dated June 17, 1988, by CDB. However, after some time
following up the sale, Lim discovered that the subject property was originally registered in the name of Perfecto
Guansing, father of mortgagor Rodolfo Guansing, under TCT No. 91148. Rodolfo succeeded in having the
property registered in his name under TCT No. 300809, the same title he mortgaged to CDB and from which
the latter's title (TCT No. 355588) was derived. It appears, however, that the father, Perfecto, instituted Civil
Case No. Q-39732 in the Regional Trial Court, Branch 83, Quezon City, for the cancellation of his son's title.
On March 23, 1984, the trial court rendered a decision2 restoring Perfecto's previous title (TCT No. 91148) and
cancelling TCT No. 300809 on the ground that the latter was fraudulently secured by Rodolfo. This decision
has since become final and executory.

Aggrieved by what she considered a serious misrepresentation by CDB and its mother-company, FEBTC, on
their ability to sell the subject property, Lim, joined by her husband, filed on August 29, 1989 an action for
specific performance and damages against petitioners in the Regional Trial Court, Branch 96, Quezon City,
where it was docketed as Civil Case No. Q-89-2863. On April 20, 1990, the complaint was amended by
impleading the Register of Deeds of Quezon City as an additional defendant.
On March 10, 1993, the trial court rendered a decision in favor of the Lim spouses. It ruled that: (1) there was a
perfected contract of sale between Lim and CDB, contrary to the latter's contention that the written offer to
purchase and the payment of P30,000.00 were merely pre-conditions to the sale and still subject to the approval
of FEBTC; (2) performance by CDB of its obligation under the perfected contract of sale had become
impossible on account of the 1984 decision in Civil Case No. Q-39732 cancelling the title in the name of
mortgagor Rodolfo Guansing; (3) CDB and FEBTC were not exempt from liability despite the impossibility of
performance, because they could not credibly disclaim knowledge of the cancellation of Rodolfo Guansing's
title without the admitting their failure to discharge their duties to the public as reputable banking institutions;
and (4) CDB and FEBTC are liable for damages for the prejudice caused against the Lims.3 Based on the
foregoing findings, the trial court ordered CDB and FEBTC to pay private respondents, jointly and severally,
the amount of P30,000.00 plus interest at the legal rate computed from June 17, 1988 until full payment. It also
ordered petitioners to pay private respondents, jointly and severally, the amounts of P250,000.00 as moral
damages, P50,000.00 as exemplary damages, P30,000.00 as attorney's fees, and the costs of the suit.4

Petitioners brought the matter to the Court of Appeals, which, on October 14, 1997, affirmed in toto the
decision of the Regional Trial Court. Petitioners moved for reconsideration, but their motion was denied by the
appellate court on December 9, 1997. Hence, this petition. Petitioners contend that —

1. The Honorable Court of Appeals erred when it held that petitioners CDB and FEBTC were aware of
the decision dated March 23, 1984 of the Regional Trial Court of Quezon City in Civil Case No. Q-
39732.

2. The Honorable Court of Appeals erred in ordering petitioners to pay interest on the deposit of
THIRTY THOUSAND PESOS (P30,000.00) by applying Article 2209 of the New Civil Code.

3. The Honorable Court of Appeals erred in ordering petitioners to pay moral damages, exemplary
damages, attorney's fees and costs of suit.

I.

At the outset, it is necessary to determine the legal relation, if any, of the parties.

Petitioners deny that a contract of sale was ever perfected between them and private respondent Lolita Chan
Lim. They contend that Lim's letter-offer clearly states that the sum of P30,000,00 was given as option money,
not as earnest money.5 They thus conclude that the contract between CDB and Lim was merely an option
contract, not a contract of sale.

The contention has no merit. Contracts are not defined by the parries thereto but by principles of law.6 In
determining the nature of a contract, the courts are not bound by the name or title given to it by the contracting
parties.7 In the case at bar, the sum of P30,000.00, although denominated in the offer to purchase as "option
money," is actually in the nature of earnest money or down payment when considered with the other terms of
the offer. In Carceler v. Court of Appeals,8 we explained the nature of an option contract, viz. —

An option contract is a preparatory contract in which one party grants to the other, for a fixed period and
under specified conditions, the power to decide, whether or not to enter into a principal contract, it binds
the party who has given the option not to enter into the principal contract with any other person during
the period; designated, and within that period, to enter into such contract with the one to whom the
option was granted, if the latter should decide to use the option. It is a separate agreement distinct from
the contract to which the parties may enter upon the consummation of the option.

An option contract is therefore a contract separate from and preparatory to a contract of sale which, if perfected,
does not result in the perfection or consummation of the sale. Only when the option is exercised may a sale be
perfected.

In this case, however, after the payment of the 10% option money, the Offer to Purchase provides for the
payment only of the balance of the purchase price, implying that the "option money" forms part of the purchase
price. This is precisely the result of paying earnest money under Art. 1482 of the Civil Code. It is clear then that
the parties in this case actually entered into a contract of sale, partially consummated as to the payment of the
price. Moreover, the following findings of the trial court based on the testimony of the witnesses establish that
CDB accepted Lim's offer to purchase:

It is further to be noted that CDB and FEBTC already considered plaintiffs' offer as good and no longer
subject to a final approval. In his testimony for the defendants on February 13, 1992, FEBTC's Leomar
Guzman stated that he was then in the Acquired Assets Department of FEBTC wherein plaintiffs' offer
 to purchase was endorsed thereto by Myoresco Abadilla, CDB's senior vice-president, with a
recommendation that the necessary petition for writ of possession be filed in the proper court; that the
recommendation was in accord with one of the conditions of the offer, i.e., the clearing of the property
of illegal occupants or tenants (tsn, p. 12); that, in compliance with the request, a petition for writ of
possession was thereafter filed on July 22, 1988 (Exhs. 1 and 1-A); that the offer met the requirements
of the banks; and that no rejection of the offer was thereafter relayed to the plaintiffs (p. 17); which was
not a normal procedure, and neither did the banks return the amount of P30,000.00 to the plaintiffs.9

Given CDB's acceptance of Lim's offer to purchase, it appears that a contract of sale was perfected and, indeed,
partially executed because of the partial payment of the purchase price. There is, however, a serious legal
obstacle to such sale, rendering it impossible for CDB to perform its obligation as seller to deliver and transfer
ownership of the property.

Nemo dat quod non habet, as an ancient Latin maxim says. One cannot give what one does not have. In
applying this precept to a contract of sale, a distinction must be kept in mind between the "perfection" and
"consummation" stages of the contract.

A contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of
the contract and upon the price.10 It is, therefore, not required that, at the perfection stage, the seller be the
owner of the thing sold or even that such subject matter of the sale exists at that point in time.11 Thus, under Art.
1434 of the Civil Code, when a person sells or alienates a thing which, at that time, was not his, but later
acquires title thereto, such title passes by operation of law to the buyer or grantee. This is the same principle
behind the sale of "future goods" under Art. 1462 of the Civil Code. However, under Art. 1459, at the time of
delivery or consummation stage of the sale, it is required that the seller be the owner of the thing sold.
Otherwise, he will not be able to comply with his obligation to transfer ownership to the buyer. It is at the
consummation stage where the principle of nemo dat quod non habet applies.

In Dignos v. Court of Appeals,12 the subject contract of sale was held void as the sellers of the subject land were
no longer the owners of the same because of a prior sale.13 Again, in Nool v. Court of Appeals,14 we ruled that a
contract of repurchase, in which the seller does not have any title to the property sold, is invalid:

We cannot sustain petitioners' view. Article 1370 of the Civil Code is applicable only to valid and
enforceable contracts. The Regional Trial Court and the Court of Appeals rules that the principal
contract of sale contained in Exhibit C and the auxiliary contract of repurchase in Exhibit D are both
void. This conclusion of the two lower courts appears to find support in Dignos v. Court of Appeals,
where the Court held:

Be that as it may, it is evident that when petitioners sold said land to the Cabigas spouses, they
were no longer owners of the same and the sale is null and void.

In the present case, it is clear that the sellers no longer had any title to the parcels of land at the time of
sale. Since Exhibit D, the alleged contract of repurchase, was dependent on the validity of Exhibit C, it
is itself void. A void contract cannot give rise to a valid one. Verily, Article 1422 of the Civil Code
provides that (a) contract which is the direct result of a previous illegal contract, is also void and
inexistent.

We should however add that Dignos did not cite its basis for ruling that a "sale is null and void" where
the sellers "were no longer the owners" of the property. Such a situation (where the sellers were no
longer owners) does not appear to be one of the void contracts enumerated in Article 1409 of the Civil
Code. Moreover, the Civil Code itself recognizes a sale where the goods are to be acquired . . . by the
seller after the perfection of the contract of sale, clearly implying that a sale is possible even if the seller
was not the owner at the time of sale, provided he acquires title to the property later on.

In the present case, however, it is likewise clear that the sellers can no longer deliver the object of the
sale to the buyers, as the buyers themselves have already acquired title and delivery thereof from the
rightful owner, the DBP. Thus, such contract may be deemed to be inoperative and may thus fall, by
analogy, under item No. 5 of Article 1409 of the Civil Code: Those which contemplate an impossible
service. Article 1459 of the Civil Code provides that "the vendor must have a right to transfer the
ownership thereof [subject of the sale] at the time it is delivered." Here, delivery of ownership is no
longer possible. It has become impossible.15

In this case, the sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing must, therefore,
be deemed a nullity for CDB did not have a valid title to the said property. To be sure, CDB never acquired a
valid title to the property because the foreclosure sale, by virtue of which, the property had been awarded to
CDB as highest bidder, is likewise void since the mortgagor was not the owner of the property foreclosed.

A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Art. 1458 of the Civil
Code, under which the mortgagor in default, the forced seller, becomes obliged to transfer the ownership of the
thing sold to the highest bidder who, in turn, is obliged to pay therefor the bid price in money or its equivalent.
Being a sale, the rule that the seller must be the owner of the thing sold also applies in a foreclosure sale. This is
the reason Art. 208516 of the Civil Code, in providing for the essential requisites of the contract of mortgage and
pledge, requires, among other things, that the mortgagor or pledgor be the absolute owner of the thing pledged
or mortgaged, in anticipation of a possible foreclosure sale should the mortgagor default in the payment of the
loan.

There is, however, a situation where, despite the fact that the mortgagor is not the owner of the mortgaged
property, his title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given
effect by reason of public policy. This is the doctrine of "the mortgagee in good faith" based on the rule that all
persons dealing with property covered by a Torrens Certificate of Title, as buyers or mortgagees, are not
required to go beyond what appears on the face of the title.17 The public interest in upholding the indefeasibility
of a certificate of title, as evidence of the lawful ownership of the land or of any encumbrance thereon, protects
a buyer or mortgagee who, in good faith, relied upon what appears on the face of the certificate of title.

This principle is cited by petitioners in claiming that, as a mortgagee bank, it is not required to make a detailed
investigation of the history of the title of the property given as security before accepting a mortgage.

We are not convinced, however, that under the circumstances of this case, CDB can be considered a mortgagee
in good faith. While petitioners are not expected to conduct an exhaustive investigation on the history of the
mortgagor's title, they cannot be excused from the duty of exercising the due diligence required of banking
institutions. In Tomas v. Tomas,18 we noted that it is standard practice for banks, before approving a loan, to
send representatives to the premises of the land offered as collateral and to investigate who are real owners
thereof, noting that banks are expected to exercise more care and prudence than private individuals in their
dealings, even those involving registered lands, for their business is affected with public interest. We held thus:

We, indeed, find more weight and vigor in a doctrine which recognizes a better right for the innocent
original registered owner who obtained his certificate of title through perfectly legal and regular
proceedings, than one who obtains his certificate from a totally void one, as to prevail over judicial
pronouncements to the effect that one dealing with a registered land, such as a purchaser, is under no
obligation to look beyond the certificate of title of the vendor, for in the latter case, good faith has yet to
be established by the vendee or transferee, being the most essential condition, coupled with valuable
consideration, to entitle him to respect for his newly acquired title even as against the holder of an
earlier and perfectly valid title. There might be circumstances apparent on the face of the certificate of
title which could excite suspicion as to prompt inquiry, such as when the transfer is not by virtue of a
voluntary act of the original registered owner, as in the instant case, where it was by means of a self-
executed deed of extra-judicial settlement, a fact which should be noted on the face of Eusebia Tomas
certificate of title. Failing to make such inquiry would hardly be consistent with any pretense of good
faith, which the appellant bank invokes to claim the right to be protected as a mortgagee, and for the
reversal of the judgment rendered against it by the lower court.19

In this case, there is no evidence that CDB observed its duty of diligence in ascertaining the validity of Rodolfo
Guansing's title. It appears that Rodolfo Guansing obtained his fraudulent title by executing an Extra-Judicial
Settlement of the Estate With Waiver where he made it appear that he and Perfecto Guansing were the only
surviving heirs entitled to the property, and that Perfecto had waived all his rights thereto. This self-executed
deed should have placed CDB on guard against any possible defect in or question as to the mortgagor's title.
Moreover, the alleged ocular inspection report20 by CDB's representative was never formally offered in
evidence. Indeed, petitioners admit that they are aware that the subject land was being occupied by persons
other than Rodolfo Guansing and that said persons, who are the heirs of Perfecto Guansing, contest the title of
Rodolfo.21

II.

The sale by CDB to Lim being void, the question now arises as to who, if any, among the parties was at fault for
the nullity of the contract. Both the trial court and the appellate court found petitioners guilty of fraud, because
on June 16, 1988, when Lim was asked by CDB to pay the 10% option money, CDB already knew that it was
no longer the owner of the said property, its title having been cancelled.22 Petitioners contend that: (1) such
finding of the appellate court is founded entirely on speculation and conjecture; (2) neither CDB nor FEBTC
was a party in the case where the mortgagor's title was cancelled; (3) CDB is not privy to any problem among
the Guansings; and (4) the final decision cancelling the mortgagor's title was not annotated in the latter's title.

As a rule, only questions of law may be raised in a petition for review, except in circumstances where questions
of fact may be properly raised.23 Here, while petitioners raise these factual issues, they have not sufficiently
shown that the instant case falls under any of the exceptions to the above rule. We are thus bound by the
findings of fact of the appellate court. In any case, we are convinced of petitioners' negligence in approving the
mortgage application of Rodolfo Guansing.

III.

We now come to the civil effects of the void contract of sale between the parties. Article 1412(2) of the Civil
Code provides:

If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the
following rules shall be observed:

xxx     xxx     xxx

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of
the contract, or ask for the fulfillment of what has been promised him. The other, who is not at fault,
may demand the return of what he has given without any obligation to comply with his promise.

Private respondents are thus entitled to recover the P30,000,00 option money paid by them. Moreover, since the
filing of the action for damages against petitioners amounted to a demand by respondents for the return of their
money, interest thereon at the legal rate should be computed from August 29, 1989, the date of filing of Civil
Case No. Q-89-2863, not June 17, 1988, when petitioners accepted the payment. This is in accord with our
ruling in Castillo v. Abalayan24 that in case of avoid sale, the seller has no right whatsoever to keep the money
paid by virtue thereof and should refund it, with interest at the legal rate, computed from the date of filing of the
complaint until fully paid. Indeed, Art. 1412(2) which provides that the non-guilty party "may demand the
return of what he has given" clearly implies that without such prior demand, the obligation to return what was
given does not become legally demandable.

Considering CDB's negligence, we sustain the award of moral damages on the basis of Arts. 21 and 2219 of the
Civil Code and our ruling in Tan v. Court of Appeals25 that moral damages may be recovered even if a bank's
negligence is not attended with malice and bad faith. We find, however, that the sum of P250,000.00 awarded
by the trial court is excessive. Moral damages are only intended to alleviate the moral suffering undergone by
private respondent, not to enrich them at the expenses of the petitioners.26 Accordingly, the award of moral
damages must be reduced to P50,000.00.

Likewise, the award of P50,000.00 as exemplary damages, although justified under Art. 2232 of the Civil Code,
is excessive and should be reduced to P30,000.00. The award of P30,000.00 attorney's fees based on Art. 2208,
pars. 1, 2, 5 and 11 of the Civil Code should similarly be reduced to P20,000.00.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the MODIFICATION as to the award
of damages as above stated.1âwphi1.nêt

SO ORDERED.
 THIRD DIVISION

G.R. No. 137471            January 16, 2002

GUILLERMO ADRIANO, petitioner,

vs.
ROMULO PANGILINAN, respondent.

PANGANIBAN, J.:

Loss brought about by the concurrent negligence of two persons shall be borne by the one who was in the
immediate, primary and overriding position to prevent it. In the present case, the mortgagee -- who is engaged
in the business of lending money secured by real estate mortgages -- could have easily avoided the loss by
simply exercising due diligence in ascertaining the identity of the impostor who claimed to be the registered
owner of the property mortgaged.

The Case

Before us is a Petition for Review under Rule 45 of the Rules of Court, assailing the November 11, 1998
Decision1 of the Court of Appeals (CA) in CA-GR CV No. 44558. The dispositive portion of the CA Decision
reads as follows:

"WHEREFORE, premises considered, the judgment appealed from is hereby REVERSED and SET
ASIDE, and another entered dismissing the complaint instituted in the court below. Without costs in this
instance."2

Also questioned is the February 5, 1999 CA Resolution3 denying petitioner's Motion for Reconsideration.

The CA reversed the Regional Trial Court (RTC) of San Mateo, Rizal (Branch 76) in Civil Case No. 845, which
disposed as follows:

"WHEREFORE, premises considered, judgment is hereby rendered declaring the real estate mortgage
constituted on the property described in and covered by TCT No. 337942 of the Registry of Deeds for
the Province of Rizal, in the name of Guillermo Adriano, to be null and void and of no force and effect,
and directing defendant Romulo Pangilinan to reconvey or deliver to herein plaintiff Guillermo Adriano
the aforesaid title after causing and effecting a discharge and cancellation of the real estate mortgage
annotated on the said title. No pronouncement as to costs.

"Defendant's counterclaim is dismissed for want of basis."4

The Facts

The undisputed facts of the case are summarized by the Court of Appeals as follows:

"[Petitioner] Guillermo Adriano is the registered owner of a parcel of land with an area of three hundred
four (304) square meters, more or less, situated at Col. S. Cruz, Geronimo, Montalban, Rizal and
covered by Transfer Certificate of Title No. 337942.

"Sometime on November 23, 1990[, petitioner] entrusted the original owner's copy of the aforesaid
Transfer Certificate of Title to Angelina Salvador, a distant relative, for the purpose of securing a
mortgage loan.

"Without the knowledge and consent of [petitioner], Angelina Salvador mortgaged the subject property
to the [Respondent] Romulo Pangilinan. After a time, [petitioner] verified the status of his title with the
Registry of Deeds of Marikina, Metro Manila, and was surprised to discover that upon the said TCT No.
 337942 was already annotated or inscribed a first Real Estate Mortgage purportedly executed by one
Guillermo Adriano over the aforesaid parcel of land, together with the improvements thereon, in favor
of the [Respondent] Romulo Pangilinan, in consideration of the sum of Sixty Thousand Pesos
(₱60,000.00). [Petitioner] denied that he ever executed the deed of mortgage, and denounced his
signature thereon as a forgery; he also denied having received the consideration of ₱60,000.00 stated
therein.

"[Petitioner] thereafter repeatedly demanded that [respondent] return or reconvey to him his title to the
said property and when these demands were ignored or disregarded, he instituted the present suit.

"[Petitioner] likewise filed a criminal case for estafa thru falsification of public document against
[Respondent] Romulo Pangilinan, as well as against Angelina Salvador, Romy de Castro and Marilen
Macanaya, in connection with the execution of the allegedly falsified deed of real estate mortgage: this
was docketed as Criminal Case No. 1533-91 of the Regional Trial Court of San Mateo, Rizal, Branch
76.

"[Respondent] in his defense testified that he [was] a businessman engaged in the buying and selling as
well as in the mortgage of real estate properties; that sometime in the first week of December, 1990
Angelina Salvador, together with Marilou Macanaya and a person who introduced himself as Guillermo
Adriano, came to his house inquiring on how they could secure a loan over a parcel of land; that he
asked them to submit the necessary documents, such as the owner's duplicate of the transfer certificate
of title to the property, the real estate tax declaration, its vicinity location plan, a photograph of the
property to be mortgaged, and the owner's residence certificate; that when he conducted an ocular
inspection of the property to be mortgaged, he was there met by a person who had earlier introduced
himself as Guillermo Adriano, and the latter gave him all the original copies of the required documents
to be submitted; that after he (defendant) had verified from the Registry of Deeds of Marikina that the
title to the property to be mortgaged was indeed genuine, he and that person Guillermo Adriano
executed the subject real estate mortgage, and then had it notarized and registered with the Registry of
Deeds. After that, the alleged owner, Guillermo Adriano, together with Marilou Macanaya and another
person signed the promissory note in the amount of Sixty Thousand Pesos (₱60,000.00) representing the
appraised value of the mortgage property. This done, he (defendant) gave them the aforesaid amount in
cash.

"[Respondent] claimed that [petitioner] voluntarily entrusted his title to the subject property to Angelina
Salvador for the purpose of securing a loan, thereby creating a principal-agent relationship between the
plaintiff and Angelina Salvador for the aforesaid purpose. Thus, according to [respondent], the execution
of the real estate mortgage was within the scope of the authority granted to Angelina Salvador; that in
any event TCT No. 337942 and the other relevant documents came into his possession in the regular
course of business; and that since the said transfer certificate of title has remained with [petitioner], the
latter has no cause of action for reconveyance against him."5

In his appeal before the CA,6 respondent contended that the RTC had erred (1) in holding that petitioner's
signature on the Real Estate Mortgage was a forgery and (2) in setting aside and nullifying the Mortgage.

Ruling of the Court of Appeals

The CA ruled that "when a mortgagee relies upon a Torrens title and lends money in all good faith on the basis
of the title standing in the name of the mortgagor, only to discover one defendant to be an alleged forger and the
other defendant to have by his negligence or acquiescence made it possible for fraud to transpire, as between
two innocent persons, the mortgagee and one of the mortgagors, the latter who made the fraud possible by his
act of confidence must bear the loss."7

It further explained that "even conceding for the sake of argument that the appellant's signature on the Deed of
First Real Estate Mortgage was a forgery, and even granting that the appellee did not participate in the
execution of the said deed of mortgage, and was not as well aware of the alleged fraud committed by other
persons relative to its execution, the undeniable and irrefutable fact remains that the appellee did entrust and did
deliver his Transfer Certificate of Title No. 337942 covering the subject property, to a distant relative, one
Angelina Salvador, for the avowed purpose of using the said property as a security or collateral for a real estate
mortgage debt of loan."8

Hence, this present recourse.9

The Issues
In his Memorandum,10 petitioner raises the following issues for our consideration:

"Whether or not consent is an issue in determining who must bear the loss if a mortgage contract is
sought to be declared a nullity[;]

and

II

"Whether or not the Motion for Reconsideration filed by the petitioner before the Court of Appeals
should have been dismissed[.]"11

This Court's Ruling

The Petition is meritorious.

First Issue:

Effect of Mortgage by Non-Owner

Petitioner contends that because he did not give his consent to the real estate mortgage (his signature having
been forged), then the mortgage is void and produces no force and effect.

Article 2085 of the Civil Code enumerates the essential requisites of a mortgage, as follows:

"Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:

"(1) That they be constituted to secure the fulfillment of a principal obligation;

"(2) That the pledgor or mortgagor be the absolute owner of the thing pledged or mortgaged;

"(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and in
the absence thereof, that they be legally authorized for that purpose.

"Third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property. (1857)" (Italics supplied)

In the case at bar, not only was it proven in the trial court that the signature of the mortgagor had been forged,
but also that somebody else -- an impostor -- had pretended to be the former when the mortgagee made an
ocular inspection of the subject property. On this point, the RTC held as follows:

"The falsity attendant to the subject real estate mortgage is evidenced not only by herein plaintiff's
vehement denial of having entered into that contract with defendant, but also by a comparison between
the signature of the debtor-mortgagor appearing in the said mortgage contract, and plaintiff's signatures
appearing in the records of this case. Even to the naked eye, the difference is glaring, and there can be
no denying the fact that both signatures were not written or affixed by one and the same person. The
falsity is further infe[r]able from defendant's admission that the plaintiff in this case who appeared in
court [was] not the same person who represented himself as the owner of the property (TSN, pp. 7, 11,
June 21, 1993 hearing) and who therefore was the one who signed the contract as the debtor-
mortgagor."12

The CA did not dispute the foregoing finding, but faulted petitioner for entrusting to Angelina Salvador the
TCT covering the property. Without his knowledge or consent, however, she caused or abetted an impostor's
execution of the real estate mortgage.

"Even conceding for the sake of argument that the appellee's signature on the Deed of First Real Estate
Mortgage (Exh. B; Original Record, pp. 56-58) was a forgery, and even granting that the appellee did
not participate in the execution of the said deed of mortgage, and was not as well aware of the alleged
fraud committed by other persons relative to its execution, the undeniable and irrefutable fact remains
that the appellee did entrust and did deliver his Transfer Certificate of Title No. 337942 (Exh. A;
Original Record, pp. 53-55) covering the subject property, to a distant relative, one Angelina Salvador,
 for the avowed purpose of using the said property as a security or collateral for a real estate mortgage
debt of loan. x x x"13

Be that as it may, it is clear that petitioner – who is undisputedly the property owner -- did not mortgage the
property himself. Neither did he authorize Salvador or anyone else to do so.

In Parqui v. Philippine National Bank,14 this Court affirmed the trial court's ruling that a mortgage was invalid
if the mortgagor was not the property owner:

"After carefully considering the issue, we reach the conclusion that His Honor's decision was correct.
One of the essential requisites of a valid mortgage, under the Civil Code is 'that the thing pledged or
mortgaged be owned by the person who pledges or mortgages it' (Art. 1857, par. 2); and there is no
question that Roman Oliver who pledged the property to the Philippine National Bank did not own it.
The mortgage was consequently void."15

Second Issue:

Concurrent Negligence of the Parties

The CA reversed the lower court, because petitioner had been negligent in entrusting and delivering his TCT
No. 337942 to his "distant relative" Angelina Salvador, who undertook to find a money lender. Citing Blondeau
v. Nano16 and Philippine National Bank v. CA,17 it then applied the "bona fide purchaser for value" principle.

Both cases cited involved individuals who, by their negligence, enabled other persons to cause the cancellation
of the original TCT of the disputed property and the issuance of a new one in their favor. Having obtained TCTs
in their names, they conveyed the subject property to third persons, who in Blondeau was a bona fide purchaser
while in Philippine National Bank was an innocent mortgagee for value. It should be stressed that in both these
cases, the seller and the mortgagor were the registered owners of the subject property; whereas in the present
case, the mortgagor was an impostor, not the registered owner.1âwphi1.nêt

It must be noted that a Torrens certificate "serves as evidence of an indefeasible title to the property in favor of
the person whose name appears therein."18 Moreover, the Torrens system "does not create or vest title. It only
confirms and records title already existing and vested. It does not protect a usurper from the true owner. It
cannot be a shield for the commission of fraud. It does not permit one to enrich himself at the expense of
another."19

Thus, we ask these questions: Was petitioner negligent in entrusting and delivering his TCT to a relative who
was supposed to help him find a money lender? And if so, was such negligence sufficient to deprive him of his
property?

To be able to answer these questions and apply the holding in Philippine National Bank, it is crucial to
determine whether herein respondent was an "innocent mortgagee for value." After a careful review of the
records and pleadings of the case, we hold that he is not, because he failed to observe due diligence in the grant
of the loan and in the execution of the real estate mortgage.20

Respondent testified that he was engaged in the real estate business, including the grant of loans secured by real
property mortgages. Thus, he is expected to ascertain the status and condition of the properties offered to him as
collaterals, as well as to verify the identities of the persons he transacts business with. Specifically, he cannot
simply rely on a hasty examination of the property offered to him as security and the documents backing them
up.21 He should also verify the identity of the person who claims to be the registered property owner.

Respondent stated in his testimony that he had been engaged in the real estate business for almost seven
years.22 Before the trial court, he testified on how he had approved the loan sought and the property mortgaged:

"Q       Mr. witness, you stated earlier that you are a businessman. Will you please inform the Hon. Court
what kind of business you are engaged in?

A       First, as a businessman, I buy and sell real estate properties, sir, and engaged in real estate
mortgage, sir.

Q       In relation to your buy and sell business, Mr. witness, how many clients have you had since you
started?
A       Since I started in 1985, I have [had] almost 30 to 50 clients, sir.

x x x           x x x           x x x

Q       Will you inform the Court, Mr. [W]itness, how are you found by your clients?

A       I advertise it in the newspapers, sir.

Q       And what is the frequency of this advertisement in the newspapers?

A       One whole week in every month, sir.

Q       Let us go specifically [to] the real estate mortgage, Mr. [W]itness, which has relation to this case.
Will you inform the Court how you go about this business, meaning, if you have any procedure that you
follow?

A       As soon as my client go[es] to our house, I usually give them the requirements, sir.

Q       And what are these requirements?

A       I usually require them to submit to me at least a machine copy of the title, the location plan with
vicinity, the real estate tax, the tax declaration, the picture of the property and the Res. Cert. of the
owner, sir.

Q       And when these documents are given to you, what else do you do, if any?

A       When they present to me the machine copy, I require them to visit the place for the ocular
inspection for the appraisal of the property, sir.

Q       What other steps, if any?

A       After that ocular inspection, sir, appraising the property, I usually tell them to come back
after one week for verification of the title in the Register of Deeds, sir.

Q       Will you inform the Court how you verif[ied] the title with the Register of Deeds?

A       I got a certified true copy from the Register of Deeds, sir.

Q       Certified true copy of what, Mr. witness?

A       The owner's duplicate title [to] the property, sir.

Q       Will you inform the Court why you asked for these documents?

A       To see to it that the title [was] genuine, sir.

x x x           x x x           x x x

Q       You mentioned Residence Certificate. Why did you ask for a Residence Certificate?

A       To fully identify the alleged owner, sir.

Q       So, when the machine copies of these documents x x x were given to you [as you said], what did
you do next, if any?

A       x x x [O]cular inspection, sir, that is my standard procedure. After they gave me all the
requirements, we usually go there for the ocular inspection for the appraisal of the property, sir.

Q       So, you went to the house itself?

A       Yes, sir.

Q       Did you go there alone or were you with somebody else?
 A       With the[ir] group x x x, sir, the one [which] came to our house. The two of them were Marilou
Macanaya and Angelina Salvador.

Q       And when you went to the house, what did you see?

A       I saw a man there x x x who posed as Guillermo Adriano and gave me all the original copies of
the requirements, sir.

Q       Did you get to enter the house?

A       As an architect, as soon as I [saw] the house, I already knew what [was] the appraisal, sir, and I
knew already the surroundings of the property.

Q       So, you did not need to go inside the house?

A       Inside the house, not anymore, sir, we talked only inside the property.

Q       And this person who gave you the original documents is the owner of the house?

A       I assumed it, sir, [that] he [was] the owner."23 (Emphasis supplied)

On cross[-]examination, he made a clarification:

"Q       Mr. Pangilinan, will you state again what business are you engaged [in]?

A       First, as an Architect, I do design and build and as a businessman, I do the buy and sell of real
properties and engag[e] in mortgage contract, sir.

Q       Actually, it is in the mortgage business that you practically have the big bulk of your business.
Isn't it?

A       Yes, sir."24

It is quite clear from the testimony of respondent that he dismally failed to verify whether the individual
executing the mortgage was really the owner of the property.

The ocular inspection respondent conducted was primarily intended to appraise the value of the property in
order to determine how much loan he would grant. He did not verify whether the mortgagor was really the
owner of the property sought to be mortgaged. Because of this, he must bear the consequences of his
negligence.

In Uy v. CA,25 the Court through Mr. Justice Jose A. R. Melo made the following significant observations:

"Thus, while it is true, as asserted by petitioners, that a person dealing with registered lands need not go
beyond the certificate of title, it is likewise a well-settled rule that a purchaser or mortgagee cannot close
his eyes to facts which should put a reasonable man on his guard, and then claim that he acted in good
faith under the belief that there was no defect in the title of the vendor or mortgagor. His mere refusal to
face up to the fact that such defect exists, or his willful closing of his eyes to the possibility of the
existence of a defect in the vendor's or mortgagor's title, will not make him an innocent purchaser for
value, if it afterwards develops that the title was in fact defective, and it appears that he had such notice
of the defect as would have led to its discovery had he acted with the measure of precaution which may
be required of a prudent man in a like situation."26

Indeed, there are circumstances that should put a party on guard and prompt an investigation of the property
being mortgaged. Citing Torres v. CA,27 the Court continued as follows:

"x x x [T]he value of the property, its principal value being its income potential in the form of monthly
rentals being located at the corner of Quezon Boulevard and Raon Street, Manila, and the registered title
not yielding any information as to the amount of rentals due from the building, much less on who is
collecting them, or who is recognized by the tenants as their landlord - it was held that any prospective
buyer or mortgagee of such a valuable building and land at the center of Manila, if prudent and in good
faith, is normally expected to inquire into all these and related facts and circumstances. For failing to
 conduct such an investigation, a party would be negligent in protecting his interests and cannot be held
as an innocent purchaser for value."28

We are not impressed by the claim of respondent that he exercised due diligence in ascertaining the identity of
the alleged mortgagor when he made an ocular inspection29 of the mortgaged property. Respondent's testimony
negated this assertion.

"Q       Now you told me also that you conducted an ocular inspection o[f] the premises. How many
times did you do it?

A       Once, sir.

Q       Who were with you when you went there?

A       The same group of them, sir.

Q       How long did you stay in the premises?

A       I think 5 to 10 minutes, sir.

Q       And did you see any people inside the premises where you visited?

A       Yes, sir.

Q       Did you ask these persons?

A       They told me that. . .

Q       Did you ask these persons whom you saw in the premises?

A       No, sir.

Q       And what x x x did you [just] do when you inspected the premises?

x x x           x x x           x x x

A       When I arrived in the property, that house, the alleged owner told me that the one staying at
his house were just renting from him, sir.

x x x           x x x           x x x

Q       Again, Mr. Pangilinan, my question to you is, what did you do when you arrived in the premises
in the course of your ocular inspection?

Atty. Garcia:

Already answered.

Court:

You may answer.

A       When I arrived at that place, I just looked around and as an Architect, I [saw] that I [could]
appraise it just [by] one look at it, sir.

Atty. Amado:

Q       And after that, where did you go? Where did you and this group go?

A       Just inside the property, sir. We talked [about] how much [would] be given to them and I told
them this [was] only the amount I [could] give them, sir."30 (Emphasis supplied)
Since he knew that the property was being leased, respondent should have made inquiries about the rights of the
actual possessors. He could have easily verified from the lessees whether the claimed owner was, indeed, their
lessor.

Petitioner's act of entrusting and delivering his TCT and Residence Certificate to Salvador was only for the
purpose of helping him find a money lender. Not having executed a power of attorney in her favor, he clearly
did not authorize her to be his agent in procuring the mortgage. He only asked her to look for possible money
lenders. Article 1878 of the Civil Code provides:

"Art. 1878. Special powers of attorney are necessary in the following cases:

x x x           x x x           x x x

(7) To loan or borrow money, unless the latter act be urgent and indispensable for the preservation of the
things which are under administration;

x x x           x x x           x x x

(12) To create or convey real rights over immovable property;

x x x           x x x           x x x."

As between petitioner and respondent, we hold that the failure of the latter to verify essential facts was the
immediate cause of his predicament. If he were an ordinary individual without any expertise or experience in
mortgages and real estate dealings, we would probably understand his failure to verify essential facts. However,
he has been in the mortgage business for seven years. Thus, assuming that both parties were negligent, the
Court opines that respondent should bear the loss. His superior knowledge of the matter should have made him
more cautious before releasing the loan and accepting the identity of the mortgagor.31

Given the particular circumstances of this case, we believe that the negligence of petitioner is not enough to
offset the fault of respondent himself in granting the loan. The former should not be made to suffer for
respondent's failure to verify the identity of the mortgagor and the actual status of the subject property before
agreeing to the real estate mortgage. While we commiserate with respondent -- who in the end appears to have
been the victim of scoundrels -- his own negligence was the primary, immediate and overriding reason that put
him in his present predicament.1âwphi1.nêt

To summarize, we hold that both law and equity favor petitioner. First, the relevant legal provision, Article
2085 of the Civil Code, requires that the "mortgagor be the absolute owner of the thing x x x mortgaged." Here,
the mortgagor was an impostor who executed the contract without the knowledge and consent of the owner.
Second, equity dictates that a loss brought about by the concurrent negligence of two persons shall be borne by
one who was in the immediate, primary and overriding position to prevent it. Herein respondent – who, we
repeat, is engaged in the business of lending money secured by real estate mortgages – could have easily
avoided the loss by simply exercising due diligence in ascertaining the identity of the impostor who claimed to
be the owner of the property being mortgaged. Finally, equity merely supplements, not supplants, the law. The
former cannot contravene or take the place of the latter.

In any event, respondent is not precluded from availing himself of proper remedies against Angelina Salvador
and her cohorts.

WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE. The November 25, 1993
Decision of the RTC of San Mateo, Rizal (Branch 76) is hereby REINSTATED. No costs.

SO ORDERED.
 PLEDGE

Art. 2093-2123
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 129918 July 9, 1998

PHILIPPINE NATIONAL BANK, petitioner,

vs.

HON. MARCELINO L. SAYO, JR., in his capacity as Presiding Judge of the Regional Trial Court
of Manila (Branch 45), NOAH'S ARK SUGAR REFINERY, ALBERTO T. LOOYUKO, JIMMY T. GO
and WILSON T. GO, respondents.

DAVIDE, JR., J.:

In this special civil action for certiorari, actually the third dispute between the same private parties to
have reached this Court, 1 petitioner asks us to annul the orders 2 of 15 April 1997 and 14 July
1997 issued in Civil Case No. 90-53023 by the Regional Trial Court, Manila, Branch 45. The first
order 3 granted private respondents' motion for execution to satisfy their warehouseman's
lien against petitioner, while the second order 4 denied, with finality, petitioner's motion for
reconsideration of the first order and urgent motion to lift garnishment, and private
respondents' motion for partial reconsideration.

The factual antecedents until the commencement of G.R. No. 119231 were summarized in our
decision therein, as follows:

In accordance with Act No. 2137, the Warehouse Receipts Law, Noah's Ark Sugar
Refinery issued on several dates, the following Warehouse Receipts (Quedans):
(a) March 1, 1989, Receipt No. 18062, covering sugar deposited by Rosa Sy; (b)
March 7, 1989, Receipt No. 18080, covering sugar deposited by RNS
Merchandising (Rosa Ng Sy); (c) March 21, 1989, Receipt No. 18081, covering
sugar deposited by St. Therese Merchandising; (d) March 31, 1989, Receipt No.
18086, covering sugar deposited by St. Therese Merchandising; and (e) April 1,
1989, Receipt No. 18087, covering sugar deposited by RNS Merchandising. The
receipts are substantially in the form, and contains the terms, prescribed for
negotiable warehouse receipts by Section 2 of the law.

Subsequently, Warehouse Receipts Nos. 18080 and 18081 were negotiated and
endorsed to Luis T. Ramos, and Receipts Nos. 18086, 18087 and 18062 were
negotiated and endorsed to Cresencia K. Zoleta. Ramos and Zoleta then used the
quedans as security for two loan agreements — one for P15.6 million and the
other for P23.5 million — obtained by them from the Philippine National Bank. The
aforementioned quedans were endorsed by them to the Philippine National Bank.

Luis T. Ramos and Cresencia K. Zoleta failed to pay their loans upon maturity on
January 9, 1990. Consequently, on March 16, 1990, the Philippine National Bank
wrote to Noah's Ark Sugar Refinery demanding delivery of the sugar stocks
covered by the quedans endorsed to it by Zoleta and Ramos. Noah's Ark Sugar
Refinery refused to comply with the demand alleging ownership thereof, for
which reason the Philippine National Bank filed with the Regional Trial Court of
Manila a verified complaint for "Specific Performance with Damages and
Application for Writ of Attachment" against Noah's Ark Sugar Refinery, Alberto T.
Looyuko, Jimmy T. Go and Wilson T. Go, the last three being identified as the
sole proprietor, managing partner, and Executive Vice President of Noah's Ark,
respectively.
Respondent Judge Benito C. Se, Jr., [to] whose sala the case was raffled, denied
the Application for Preliminary Attachment. Reconsideration therefor was
likewise denied.

Noah's Ark and its co-defendants filed an Answer with Counterclaim and Third-
Party Complaint in which they claimed that they [were] the owners of the subject
quedans and the sugar represented therein, averring as they did that:

9. * * * In an agreement dated April 1, 1989, defendants agreed to sell

to Rosa Ng Sy of RNS Merchandising and Teresita Ng of St. Therese
Merchandising the total volume of sugar indicated in the quedans
stored at Noah's Ark Sugar Refinery for a total consideration of
P63,000,000.00, * * * The corresponding payments in the form of
checks issued by the vendees in favor of defendants were
subsequently dishonored by the drawee banks by reason of
"payment stopped" and "drawn against insufficient funds," * * * Upon
proper notification to said vendees and plaintiff in due course,
defendants refused to deliver to vendees therein the quantity of
sugar covered by the subject quedans.

10. * * * Considering that the vendees and first endorsers of subject

quedans did not acquire ownership thereof, the subsequent
endorsers and plaintiff itself did not acquire a better right of
ownership than the original vendees/first endorsers.

The Answer incorporated a Third-Party Complaint by Alberto T. Looyuko, Jimmy

T. Go and Wilson T. Go, doing business under the trade name and style Noah's
Ark Sugar Refinery against Rosa Ng Sy and Teresita Ng, praying that the latter be
ordered to deliver or return to them the quedans (previously endorsed to PNB
and the subject of the suit) and pay damages and litigation expenses.

The Answer of Rosa Ng Sy and Teresita Ng, dated September 6, 1990, one of
avoidance, is essentially to the effect that the transaction between them, on the
one hand, and Jimmy T. Go, on the other, concerning the quedans and the sugar
stocks covered by them was merely a simulated one being part of the latter's
complex banking schemes and financial maneuvers, and thus, they are not
answerable in damages to him.

On January 31, 1991, the Philippine National Bank filed a Motion for Summary
Judgment in favor of the plaintiff as against the defendants for the reliefs prayed
for in the complaint.

On May 2, 1991, the Regional Trial Court issued an order denying the Motion for
Summary Judgment. Thereupon, the Philippine National Bank filed a Petition for
Certiorari with the Court of Appeals, docketed as CA-G.R. SP No. 25938 on
December 13, 1997.

Pertinent portions of the decision of the Court of Appeals read:

In issuing the questioned Orders, the respondent Court ruled that

"questions of law should be resolved after and not before, the
questions of fact are properly litigated." A scrutiny of defendant's
affirmative defenses does not show material questions of fact as to
the alleged nonpayment of purchase price by the vendees/first
endorsers, and which nonpayment is not disputed by PNB as it does
not materially affect PNB's title to the sugar stocks as holder of the
negotiable quedans.

What is determinative of the propriety of summary judgment is not

the existence of conflicting claims from prior parties but whether
from an examination of the pleadings, depositions, admissions and
documents on file, the defenses as to the main issue do not tender
material questions of fact (see Garcia vs. Court of Appeals, 167
SCRA 815) or the issues thus tendered are in fact sham, fictitious,
 contrived, set up in bad faith or so unsubstantial as not to constitute
genuine issues for trial. (See Vergara vs. Suelto, et al., 156 SCRA
753; Mercado, et al. vs. Court of Appeals, 162 SCRA 75). [sic] The
questioned Orders themselves do not specify what material facts are
in issue. (See Sec. 4, Rule 34, Rules of Court).

To require a trial notwithstanding pertinent allegations of the

pleadings and other facts appearing on the record, would constitute
a waste of time and an injustice to the PNB whose rights to relief to
which it is plainly entitled would be further delayed to its prejudice.

In issuing the questioned Orders, We find the respondent Court to

have acted in grave abuse of discretion which justify holding null
and void and setting aside the Orders dated May 2 and July 4, 1990
of respondent Court, and that a summary judgment be rendered
forthwith in favor of the PNB against Noah's Ark Sugar Refinery, et
al., as prayed for in petitioner's Motion for Summary Judgment.

On December 13, 1991, the Court of Appeals nullified and set aside the orders of
May 2 and July 4, 1990 of the Regional Trial Court and ordered the trial court to
render summary judgment in favor of the PNB. On June 18, 1992, the trial court
rendered judgment dismissing plaintiffs complaint against private respondents
for lack of cause of action and likewise dismissed private respondent's
counterclaim against PNB and of the Third-Party Complaint and the Third-Party
Defendant's Counterclaim. On September 4, 1992, the trial court denied PNB's
Motion for Reconsideration.

On June 9, 1992, the PNB filed an appeal from the RTC decision with the Supreme
Court, G.R. No. 107243, by way of a Petition for Review on Certiorari under Rule
45 of the Rules of Court. This Court rendered judgment on September 1, 1993, the
dispositive portion of which reads:

WHEREFORE, the trial judge's decision in Civil Case No. 90-53023, dated June 18,
7992, is reversed and set aside and a new one rendered conformably with the
final and executory decision of the Court of Appeals in CA-G.R. SP No. 25938,
ordering the private respondents Noah's Ark Sugar Refinery, Alberto T. Looyuko,
Jimmy T. Go and Wilson T. Go, jointly and severally:

(a) to deliver to the petitioner Philippine National Bank, "the sugar

stocks covered by the Warehouse Receipts/Quedans which are now
in the latter's possession as holder for value and in due course; or
alternatively, to pay (said) plaintiff actual damages in the amount of
P39.1 million," with legal interest thereon from the filing of the
complaint until full payment; and

(b) to pay plaintiff Philippine National Bank attorney's fees, litigation

expenses and judicial costs hereby fixed at the amount of One
Hundred Fifty Thousand Pesos (P150,000.00) as well as the costs.

SO ORDERED.

On September 29, 1993, private respondents moved for reconsideration of this

decision. A Supplemental/Second Motion for Reconsideration with leave of court
was filed by private respondents on November 8, 1993. We denied private
respondent's motion on January 10, 1994.

Private respondents filed a Motion Seeking Clarification of the Decision, dated

September 1, 1993. We denied this motion in this manner:

It bears stressing that the relief granted in this Court's decision of

September 1, 1993 is precisely that set out in the final and executory
decision of the Court of Appeals in CA-G.R. SP No. 25938, dated
December 13, 1991, which was affirmed in toto by this Court and
which became unalterable upon becoming final and executory.
 Private respondents thereupon filed before the trial court an Omnibus Motion
seeking among others the deferment of the proceedings until private respondents
[were] heard on their claim for warehouseman's lien. On the other hand, on
August 22, 1994, the Philippine National Bank filed a Motion for the Issuance of a
Writ of Execution and an Opposition to the Omnibus Motion filed by private
respondents.

The trial court granted private respondents' Omnibus Motion on December 20,
1994 and set reception of evidence on their claim for warehouseman's lien. The
resolution of the PNB's Motion for Execution was ordered deferred until the
determination of private respondents' claim.

On February 21, 1995, private respondents' claim for lien was heard and evidence
was received in support thereof. The trial court thereafter gave both parties five
(5) days to file respective memoranda.

On February 28, 1995, the Philippines National bank filed a Manifestation with
Urgent Motion to Nullify Court Proceedings. In adjudication thereof, the trial court
issued the following order on March 1, 1995:

WHEREFORE, this court hereby finds that there exists in favor of the
defendants a valid warehouseman's lien under Section 27 of
Republic Act 2137 and accordingly, execution of the judgment is
hereby ordered stayed and/or precluded until the full amount of
defendants' lien on the sugar stocks covered by the five (5) quedans
subject of this action shall have been satisfied conformably with the
provisions of Section 31 of Republic Act 2137. 5

Unsatisfied with the trial court's order of 1 March 1995, herein petitioner filed with us G.R. No.
119231, contending:

PNB'S RIGHT TO A WRIT OF EXECUTION IS SUPPORTED BY TWO FINAL AND

EXECUTORY DECISIONS: THE DECEMBER 13, 1991 COURT OF APPEALS [sic]
DECISION IN CA-G.R. SP NO. 25938; AND, THE NOVEMBER 9, 1992 SUPREME
COURT DECISION IN G.R. NO. 107243. RESPONDENT RTC'S MINISTERIAL AND
MANDATORY DUTY IS TO ISSUE THE WRIT OF EXECUTION TO IMPLEMENT THE
DECRETAL PORTION OF SAID SUPREME COURT DECISION.

II

RESPONDENT RTC IS WITHOUT JURISDICTION TO HEAR PRIVATE

RESPONDENTS' OMNIBUS MOTION. THE CLAIMS SET FORTH IN SAID MOTION:
(1) WERE ALREADY REJECTED BY THE SUPREME COURT IN ITS MARCH 9, 1994
RESOLUTION DENYING PRIVATE RESPONDENTS' "MOTION FOR
CLARIFICATION OF DECISION" IN G.R. NO. 107243; AND (2) ARE BARRED
FOREVER BY PRIVATE RESPONDENTS' FAILURE TO INTERPOSE THEM IN
THEIR ANSWER, AND FAILURE TO APPEAL FROM THE JUNE 18, 1992 DECISION
IN CIVIL CASE NO. 90-52023.

III

RESPONDENT RTC'S ONLY JURISDICTION IS TO ISSUE THE WRIT TO EXECUTE

THE SUPREME COURT DECISION. THUS, PNB IS ENTITLED TO: (1) A WRIT OF
CERTIORARI TO ANNUL THE RTC RESOLUTION DATED DECEMBER 20, 1994
AND THE ORDER DATED FEBRUARY 7, 1995 AND ALL PROCEEDINGS TAKEN
BY THE RTC THEREAFTER; (2) A WRIT OF PROHIBITION TO PREVENT
RESPONDENT RTC FROM FURTHER PROCEEDING WITH CIVIL CASE NO. 90-
53023 AND COMMITTING OTHER ACTS VIOLATIVE OF THE SUPREME COURT
DECISION IN G.R. NO. 107243; AND (3) A WRIT OF MANDAMUS TO COMPEL
RESPONDENT RTC TO ISSUE THE WRIT TO EXECUTE THE SUPREME COURT
JUDGMENT IN FAVOR OF PNB.
In our decision of 18 April 1996 in G.R. No. 119231, we held against herein petitioner as to
these issues and concluded:

In view of the foregoing, the rule may be simplified thus: While the PNB is entitled
to the stocks of sugar as the endorsee of the quedans, delivery to it shall be
effected only upon payment of the storage fees.

Imperative is the right of the warehouseman to demand payment of his lien at this
juncture, because, in accordance with Section 29 of the Warehouse Receipts Law,
the warehouseman loses his lien upon goods by surrendering possession
thereof. In other words, the lien may be lost where the warehouseman surrenders
the possession of the goods without requiring payment of his lien, because a
warehouseman's lien is possessory in nature.

We, therefore, uphold and sustain the validity of the assailed orders of public
respondent, dated December 20, 1994 and March 1, 1995.

In fine, we fail to see any taint of abuse of discretion on the part of the public
respondent in issuing the questioned orders which recognized the legitimate
right of Noah's Ark, after being declared as warehouseman, to recover storage
fees before it would release to the PNB sugar stocks covered by the five (5)
Warehouse Receipts. Our resolution, dated March 9, 1994, did not preclude
private respondents' unqualified right to establish its claim to recover storage
fees which is recognized under Republic Act No. 2137. Neither did the Court of
Appeals' decision, dated December 13, 1991, restrict such right.

Our Resolution's reference to the decision by the Court of Appeals, dated

December 13, 1991, in CA-G.R. SP No. 25938, was intended to guide the parties in
the subsequent disposition of the case to its final end. We certainly did not
foreclose private respondents' inherent right as warehouseman to collect storage
fees and preservation expenses as stipulated on the face of each of the
Warehouse Receipts and as provided for in the Warehouse Receipts Law (R.A.
2137). 6

Petitioner's motion to reconsider the decision in G.R. No. 119231 was denied.

After the decision in G.R. No. 119231 became final and executory, various incidents took place
before the trial court in Civil Case No. 90-53023. The petition in this case summarizes these as
follows:

3.24 Pursuant to the abovementioned Supreme Court Decision, private

respondents filed a Motion for Execution of Defendants' Lien as Warehouseman
dated 27 November 1996. A photocopy of said Motion for Execution is attached
hereto as Annex "I".

3.25 PNB opposed said Motion on the following grounds:

(a) The lien claimed by Noah's Ark in the unbelievable

amount of P734,341,595.06 is illusory; and

(b) There is no legal basis for execution of defendants'

lien as warehouseman unless and until PNB compels
the delivery of the sugar stocks.

3.26 In their Reply to Opposition dated 18 January 1997, private respondents

pointed out that a lien existed in their favor, as held by the Supreme Court. In its
Rejoinder dated 7 February 1997, PNB countered private respondents' argument,
pointing out that the dispositive portion of the court a quo's Order dated 1 March
1995 failed to state the amount for which execution may be granted and, thus, the
same could not be the subject of execution; and (b) private respondents should
instead file a separate action to prove the amount of its claim as warehouseman.
3.27 The court a quo, this time presided by herein public respondent, Hon.
Marcelino L. Sayo Jr., granted private respondents' Motion for Execution. In its
questioned Order dated 15 April 1997 (Annex "A"), the court a quo ruled in this
wise:

Accordingly, the computation of accrued storage fees and

preservation charges presented in evidence by the defendants, in the
amount of P734,341,595.06 as of January 31, 1995 for the 86,356.41,
50 kg. bags of sugar, being in order and with sufficient basis, the
same should be granted. This Court consequently rejects PNB's
claim of no sugar no lien, since it is undisputed that the amount of
the accrued storage fees is substantially in excess of the alternative
award of P39.1 Million in favor of PNB, including legal interest and
P150,000.00 in attorney's fees, which PNB is however entitled to be
credited . . . .

x x x           x x x          x x x

WHEREFORE, premises considered and finding merit in the

defendants' motion for execution of their claim for lien as
warehouseman, the same is hereby GRANTED. Accordingly, let a
writ of execution issue for the amount of P662,548,611.50, in
accordance with the above disposition.

SO ORDERED. (Emphasis supplied.)

3.28 On 23 April 1997, PNB was immediately served with a Writ of Execution for
the amount of P662,548,611.50 in spite of the fact that it had not yet been served
with the Order of the court a quo dated 15 April 1997. PNB thus filed an Urgent
Motion dated 23 April 1997 seeking the deferment of the enforcement of the Writ
of Execution. A photocopy of the Writ of Execution is attached hereto as Annex
"J".

3.29 Nevertheless, the Sheriff levied on execution several properties of PNB.

Firstly, a Notice of Levy dated 24 April 1997 on a parcel of land with an area of
Ninety-Nine Thousand Nine Hundred Ninety-Nine (99,999) square meters, covered
by Transfer Certificate of Title No. 23205 in the name of PNB, was served upon
the Register of Deeds of Pasay City. Secondly, a Notice of Garnishment dated 23
April 1997 on fund deposits of PNB was served upon the Bangko Sentral ng
Pilipinas. Photocopies of the Notice of Levy and the Notice of Garnishment are
attached hereto as Annexes "K" and "L" respectively.

3.30 On 28 April 1997, petitioner filed a Motion for Reconsideration with Urgent
Prayer for Quashal of Writ of Execution dated 15 April 1997. Petitioner's Motion
was based on the following grounds:

(1) Noah's Ark is not entitled to a warehouseman's lien

in the humongous amount of P734,341,595.06 because
the same has been waived for not having been raised
earlier as either counterclaim or defense against PNB;

(2) Assuming said lien has not been waived, the same,
not being registered, is already barred by prescription
and/or laches,

(3) Assuming further that said lien has not been waived
nor barred, still there was no complaint ever filed in
court to effectively commence this entirely new cause of
action;

(4) There is no evidence on record which would support

and sustain the claim of P734,341,595.06 which is
excessive, oppressive and unconscionable;
 (5) Said claim if executed would constitute unjust
enrichment to the serious prejudice of PNB and
indirectly the Philippine Government, who innocently
acquired the sugar quedans through assignment of
credit;

(6) In all respects, the decisions of both the Supreme

Court and of the former Presiding Judge of the trial
court do not contain a specific determination and/or
computation of warehouseman's lien, thus requiring
first and foremost a fair hearing of PNB's evidence, to
include the true and standard industry rates on sugar
storage fees, which if computed at such standard rate of
thirty centavos per kilogram per month, shall result in
the sum of about Three Hundred Thousand Pesos only.

3.31 In its Motion for Reconsideration, petitioner prayed for the following reliefs:

1. PNB be allowed in the meantime to exercise its basic right to

present evidence in order to prove the above allegations especially
the true and reasonable storage fees which may be deducted from
PNB's judgment award of P39.1 Million, which storage fees if
computed correctly in accordance with standard sugar industry
rates, would amount to only P300 Thousand Pesos, without however
waiving or abandoning its (PNB's) legal positions/contentions herein
abovementioned.

2. The Order dated April 15, 1997 granting the Motion for Execution
by defendant Noah's Ark be set aside.

3. The execution proceedings already commenced by said sheriffs

be nullified at whatever stage of accomplishment.

A photocopy of petitioner's Motion for Reconsideration with Urgent Prayer for

Quashal of Writ of Execution is attached hereto and made integral part hereof as
Annex "M".

3.32 Private respondents filed an Opposition with Motion for Partial

Reconsideration dated 8 May 1997. Still discontented with the excessive and
staggering amount awarded to them by the court a quo, private respondents'
Motion for Partial Reconsideration sought additional and continuing storage fees
over and above what the court a quo had already unjustly awarded. A photocopy
of private respondents' Opposition with Motion for Partial Reconsideration dated
8 May 1997 is attached hereto as Annex "N".

3.32.1 Private respondents prayed for the further amount of

P227,375,472.00 in storage fees from 1 February 1995 until 15 April
1997, the date of the questioned Order granting their Motion for
Execution.

3.32.2 In the same manner, private respondents prayed for a

continuing amount of P345,424.00 as daily storage fees after 15 April
1997 until the total amount of the storage fees is satisfied.

3.33 On 19 May 1997, PNB filed its Reply with Opposition (To Defendants'
Opposition with Partial Motion for Reconsideration), containing therein the
following motions: (i) Supplemental Motion for Reconsideration; (ii) Motion to
Strike out the Testimony of Noah's Ark's Accountant Last February 21, 1995; and
(iii) Motion for the Issuance of a Writ of Execution in favor of PNB. In support of
its pleading, petitioner raised the following:

(1) Private respondents failed to pay the appropriate

docket fees either for its principal claim or for its
additional claim, as said claims for warehouseman's lien
 were not at all mentioned in their answer to petitioner's
Complaint;

(2) The amount awarded by the court a quo was grossly

and manifestly unreasonable, excessive, and
oppressive;

(3) It is the dispositive portion of the decision which

shall be controlling in any execution proceeding. If no
specific award is stated in the dispositive portion, a writ
of execution supplying an amount not included in the
dispositive portion of the decision being executed is
null and void;

(4) Private respondents failed to prove the existence of

the sugar stocks in Noah's Ark's warehouses. Thus,
private respondents' claims are mere paper liens which
cannot be the subject of execution;

(5) The attendant circumstances, particularly Judge Se's

Order of 1 March 1995 onwards, were tainted with fraud
and absence of due process, as PNB was not given a
fair opportunity to present its evidence on the matter of
the warehouseman's lien. Thus, all orders prescinding
thereform, including the questioned Order dated 15 April
1997 must perforce be set aside and the execution
proceedings against PNB be permanently stayed.

3.34 On 6 May 1997, petitioner also filed an Urgent Motion to Lift Garnishment of
PNB Funds with Bangko Sentral ng Pilipinas.

3.35 On 14 July 1997, respondent Judge issued the second Order (Annex "B"),
the questioned part of the dispositive portion of which states:

WHEREFORE, premises considered, the plaintiff Philippine National

Bank's subject "Motion for Reconsideration With Urgent Prayer for
Quashal of Writ of Execution" dated April 28, 1997 and undated
"Urgent Motion to Lift Garnishment of PNB Funds With Bangko
Sentral ng Pilipinas" filed on May 6, 1997, together with all its related
Motions are all DENIED with finality for lack of merit.

x x x           x x x          x x x

The Order of this Court dated April 15, 1997, the final Writ of
Execution likewise dated April 15, 1997 and the corresponding
Garnishment all stand firm.

SO ORDERED.7

Aggrieved thereby, petitioners filed this petition, alleging as grounds therefor, the following:

A. THE COURT A QUO ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION

OR WITH GRAVE ABUSE OF DISCRETION WHEN IT ISSUED A WRIT OF
EXECUTION IN FAVOR OF DEFENDANTS FOR THE AMOUNT OF P734,341,595.06.

4.1 The court a quo had no authority to issue a writ of execution in favor of
private respondents as there was no final and executory judgment ripe for
execution.

4.2 Public respondent judge patently exceeded the scope of his authority in
making a determination of the amount of storage fees due private respondents in
a mere interlocutory order resolving private respondents' Motion for Execution.
 4.3 The manner in which the court a quo awarded storage fees in favor of private
respondents and ordered the execution of said award was arbitrary and
capricious, depriving petitioner of its inherent substantive and procedural rights.

B. EVEN ASSUMING ARGUENDO THAT THE COURT A QUO HAD AUTHORITY TO

GRANT PRIVATE RESPONDENTS' MOTION FOR EXECUTION, THE COURT A
QUO ACTED WITH GRAVE ABUSE OF DISCRETION IN AWARDING THE HIGHLY
UNREASONABLE, UNCONSCIONABLE, AND EXCESSIVE AMOUNT OF
P734,341,595.06 IN FAVOR OF PRIVATE RESPONDENTS.

4.4 There is no basis for the court a quo's award of P734,341,595.06 representing
private respondents' alleged warehouseman's lien.

4.5 PNB has sufficient evidence to show that the astronomical amount claimed by
private respondents is very much in excess of the industry rate for storage fees
and preservation expenses.

C. PUBLIC RESPONDENT JUDGE'S GRAVE ABUSE OF DISCRETION BECOMES

MORE PATENT AFTER A CLOSE PERUSAL OF THE QUESTIONED ORDER
DATED 14 JULY 1997.

4.6. The court a quo resolved a significant and consequential matter entirely
relying on documents submitted by private respondents totally disregarding
clearly contrary evidence submitted by PNB.

4.7 The court a quo misquoted and misinterpreted the Supreme Court Decision
dated 18 April 1997.

D. THE COURT A QUO ACTED WITH GRAVE ABUSE OF DISCRETION IN NOT

HOLDING THAT PRIVATE RESPONDENTS HAVE LONG WAIVED THEIR RIGHT TO
CLAIM ANY WAREHOUSEMAN'S LIEN.

4.8 Private respondents raised the matter of their entitlement to a

warehouseman's lien for storage fees and preservation expenses for the first time
only during the execution proceedings of the Decision in favor of PNB.

4.9 Private respondents' claim for warehouseman's lien is in the nature of a

compulsory counterclaim which should have been included in private
respondents' answer to the Complaint. Private respondents failed to include said
claim in their answer either as a counterclaim or as an alternative defense to
PNB's Complaint.

4.10 Private respondents' clam is likewise lost by virtue of a specific provision of

the Warehouse Receipts Law and barred by prescription and laches.

E. PUBLIC RESPONDENT JUDGE ACTED WITH GRAVE ABUSE OF DISCRETION

IN REFUSING TO LIFT THE ORDER OF GARNISHMENT OF THE FUNDS OF PNB
WITH THE BANGKO SENTRAL NG PILIPINAS.

4.11 Public respondent judge failed to consider PNB's arguments in support of its
Urgent motion to Lift Garnishment. 8

In arguing its cause, petitioner explained that this Court's decision in G.R. No. 119231 merely
affirmed the trial court's resolutions of 20 December 1994 and 1 March 1995. The earlier
resolution set private respondents' reception of evidence for hearing to prove their
warehouseman's lien and, pending determination thereof, deferred petitioner's motion for
execution of the summary judgment rendered in petitioner's favor in G.R. No. 107243. The
subsequent resolution recognized the existence of a valid warehouseman's lien without,
however, specifying the amount, and required its full satisfaction by petitioner prior to the
execution of the judgment in G.R. No. 107243.

Under said circumstances, petitioner reiterated that neither this Court's decision nor the trial
court's resolutions specified any amount for the warehouseman's lien, either in the bodies or
dispositive portions thereof. Petitioner therefore questioned the propriety of the computation
of the warehouseman's lien in the assailed order of 15 April 1997.

Petitioner further characterized as highly irregular the trial court's final determination of such
lien in a mere interlocutory order without explanation, as such should or could have been
done only by way of a judgment on the merits. Petitioner likewise reasoned that a writ of
execution was proper only to implement a final and executory decision, which was not present
in the instant case. Petitioner then cited the cases of Edward v. Arce, where we ruled that the
only portion of the decision which could be the subject of execution was that decreed in the
dispositive part, 9 and Ex-Bataan Veterans Security Agency, Inc. v. National Labor Relations
Commission, 10 where we held that a writ of execution should conform to the dispositive
portion to be executed, otherwise, execution becomes void if in excess of and beyond the
original judgment.

Petitioner likewise emphasized that the hearing of 21 February 1995 was marred by procedural
infirmities, narrating that the trial court proceeded with the hearing notwithstanding the urgent
motion for postponement of petitioner's counsel of record, who attended a previously
scheduled hearing in Pampanga. However, petitioner's lawyer-representative was sent to
confirm the allegations in said motion. To petitioner's dismay, instead of granting a
postponement, the trial court allowed the continuance of the hearing on the basis that there
was "nothing sensitive about [the presentation of private respondents' evidence]." 11 At the
same hearing, the trial court admitted all the documentary evidence offered by private
respondents and ordered the filing of the parties' respective memoranda. Hence, petitioner
was virtually deprived of its right to cross-examine the witness, comment on or object to the
offer of evidence and present countervailing evidence. In fact, to date, petitioner's urgent
motion to nullify the court proceedings remains unresolved.

To stress its point, petitioner underscores the conflicting views of Judge Benito C. Se, Jr.,
who heard and tried almost the entire proceedings, and his successor, Judge Marcelino L.
Sayo, Jr., who issued the assailed orders. In the resolution 12 of 1 March 1995, Judge Se
found private respondents' claim for warehouse lien in the amount of P734,341,595.06
unacceptable, thus:

In connection with [private respondents'] claim for payment of warehousing fees

and expenses, this Court cannot accept [private respondents'] pretense that they
are entitled to storage fees and preservation expenses in the amount of
P734,341,595.06 as shown in their Exhibits "1" to "11". There would, however,
appear to be legal basis for their claim for fees and expenses covered during the
period from the time of the issuance of the five (5) quedans until demand for their
delivery was made by [petitioner] prior to the institution of the present action.
[Petitioner] should not be made to shoulder the warehousing fees and expenses
after the demand was made. . . . 13

Since it was deprived of a fair opportunity to present its evidence on the warehouseman's lien
due Noah's Ark, petitioner submitted the following documents: (1) an affidavit of petitioner's
credit investigator 14 and his report 15 indicating that Noah's Ark only had 1,490, 50kg. bags,
and not 86,356.41, 50kg. bags, of sugar in its warehouse; (2) Noah's Ark's reports 16 for 1990-
94 showing that it did not have sufficient sugar stock to cover the quantity specified in the
subject quedans, (3) Circular Letter No. 18 (s. 1987-88) 17 of the Sugar Regulatory
Administration requiring sugar mill companies to submit reports at week's end to prevent the
issuance of warehouse receipts not covered by actual inventory; and (4) an affidavit of
petitioner's assistant vice president 18 alleging that Noah's Ark's daily storage fee of P4/bag
exceeded the prevailing industry rate.

Petitioner, moreover, laid stress on the fact that in the questioned order of 14 July 1997, the
trial court relied solely on the Annual Synopsis of Production & Performance Date/Annual
Compendium of Performance by Philippine Sugar Refineries from 1989 to 1994, in disregard of
Noah's Ark's certified reports that it did not have sufficient sugar stock to cover the quantity
specified in the subject quedans. Between the two, petitioner urged, the latter should have
been accorded greater evidentiary weight.

Petitioner then argued that the trial court's second assailed order of 14 July 1997
misinterpreted our decision in G.R. No. 119231 by ruling that the Refining Contract under
which the subject sugar stock was produced bound the parties. According to petitioner, the
Refining Contract never existed, it having been denied by Rosa Ng Sy; thus, the trial court
could not have properly based its computation of the warehouseman's lien on the Refining
Contract. Petitioner maintained that a separate trial was necessary to settle the issue of the
warehouseman's lien due Noah's Ark, if at all proper.

Petitioner further asserted that Noah's Ark could no longer recover its lien, having raised the
issue for the first time only during the execution proceedings of this Court's decision in G.R.
No. 107243. As said claim was a separate cause of action which should have been raised in
private respondents' answer with counterclaim to petitioner's complaint, private respondents'
failure to raise said claim should have been deemed a waiver thereof.

Petitioner likewise insisted that under Section 29 19 of the Warehouse Receipts Law, private
respondents were barred from claiming the warehouseman's lien due to their refusal to deliver
the goods upon petitioner's demand. Petitioner further raised that private respondents failed
to timely assert their claim within the five-year prescriptive period, citing Article 1149 20 of the
New Civil Code.

Finally, petitioner questioned the trial court's refusal to lift the garnishment order considering
that the levy on its real property, with an estimated market value of P6,000,000,000, was
sufficient to satisfy the judgment award; and contended that the garnishment was contrary to
Section 103 21 of the Bangko Sentral ng Pilipinas Law (Republic Act No. 7653).

On 8 August 1997, we required respondents to comment on the petition and issued a

temporary restraining order enjoining the trial court form implementing its orders of 15 April
and 14 July 1997.

In their comment, private respondents first sought the lifting of the temporary restraining
order, claiming that petitioner could no longer seek a stay of the execution of this Court's
decision in G.R. No. 119231 which had become final and executory; and the petition raised
factual issues which had long been resolved in the decision in G.R. No. 119231, thereby
rendering the instant petition moot and academic. They underscored that CA-G.R. No. SP No.
25938, G.R. No. 107243 and G.R. No. 119231 all sustained their claim for a warehouseman's
lien, while the storage fees stipulated in the Refining Contract had the approval of the Sugar
Regulatory Authority. Likewise, under the Warehouse Receipts Law, full payment of their lien
was a pre-requisite to their obligation to release and deliver the sugar stock to petitioner.

Anent the trial court's jurisdiction to determine the warehouseman's lien, private respondents
maintained that such had already been established. Accordingly, the resolution of 1 March
1995 declared that they were entitled to a warehouseman's lien, for which reason, the
execution of the judgment in favor of petitioner was stayed until the latter's full payment of the
lien. This resolution was then affirmed by this Court in our decision in G.R. No. 119231. Even
assuming the trial court erred, the error could only have been in the wisdom of its findings
and not of jurisdiction, in which case, the proper remedy of petitioner should have been an
appeal and certiorari did not lie.

Private respondents also raised the issue of res judicata as a bar to the instant petition, i.e.,
the March resolution was already final and unappealable, having been resolved in G.R. No.
119231, and the orders assailed here were issued merely to implement said resolution.

Private respondents then debunked the claim that petitioner was denied due process. In that
February hearing, petitioner was represented by counsel who failed to object to the
presentation and offer of their evidence consisting of the five quedans, Refining Contracts
with petitioner and other quedan holders, and the computation resulting in the amount of
P734,341,595.06, among other documents. Private respondents even attached a copy of the
transcript of stenographic notes 22 to their comment. In refuting petitioner's argument that no
writ of execution could issue in absence of a specific amount in the dispositive portion of this
Court's decision in G.R. No. 119231, private respondents argued that any ambiguity in the
decision could be resolved by referring to the entire record of the case, 23 even after the
decision had become final.

Private respondents next alleged that the award of P734,341,595.06 to satisfy their
warehouseman's lien was in accordance with the stipulations provided in the quedans and the
corresponding Refining Contracts, and that the validity of said documents had been
recognized by this Court in our decision in G.R. No. 119231. Private respondents then
questioned petitioner's failure to oppose or rebut the evidence they presented and bewailed
its belated attempts to present contrary evidence through its pleadings. Nonetheless, said
evidence was even considered by the trial court when petitioner sought a reconsideration of
the first assailed order of 15 April 1997, thus further precluding any claim of denial of due
process.

Private respondents next pointed to the fact that they consistently claimed that they had not
been paid for storing the sugar stock, which prompted them to file criminal charges of estafa
and violation of Batas Pambansa (BP) Blg. 22 against Rosa Ng Sy and Teresita Ng. In fact, Sy
was eventually convicted of two counts of violation of BP Blg. 22. Private respondents,
moreover, incurred, and continue to incur, expenses for the storage and preservation of the
sugar stock; and denied having waived their warehouseman's lien, an issue already raised
and rejected by this Court in G.R. No. 119231.

Private respondents further claimed that the garnishment order was proper, only that it was
rendered ineffective. In a letter 24 received by the sheriff from the Bangko Sentral ng Pilipinas,
it was stated that the garnishment could not be enforced since petitioner's deposits with the
Bangko Sentral ng Pilipinas consisted solely of legal reserves which were exempt from
garnishment. Petitioner therefore suffered no damage from said garnishment. Private
respondents likewise deemed immaterial petitioner's argument that the writ of execution
issued against its real property in Pasay City was sufficient, considering its prevailing market
value of P6,000,000,000 was in excess of the warehouseman's lien; and invoked Rule 39 of the
1997 Rules of Civil Procedure, which provided that the sheriff must levy on all the property of
the judgment debtor, excluding those exempt from execution, in the execution of a money
judgment.

Finally, private respondents accused petitioner of coming to court with unclean hands,
specifically citing its misrepresentation that the award of the warehouseman's lien would
result in the collapse of its business. This claim, private respondents asserted, was
contradicted by petitioner's 1996 Audited Financial Statement indicating that petitioner's
assets amounted to billions of pesos, and its 1996 Annual Report to its stockholders where
petitioner declared that the pending legal actions arising from their normal course of business
"will not materially affect the Group's financial position." 25

In reply, petitioner advocated that resort to the remedy of certiorari was proper since the
assailed orders were interlocutory, and not a final judgment or decision. Further, that it was
virtually deprived of its constitutional right to due process was a valid issue to raise in the
instant petition; and not even the doctrine of res judicata could bar this petition as the element
of a final and executory judgment was lacking. Petitioner likewise disputed the claim that the
resolution of 1 March 1995 was final and executory, otherwise private respondents would not
have filed an opposition and motion for partial reconsideration 26 two years later. Petitioner
also contended that the issues raised in this petition were not resolved in G.R. No. 119231, as
what was resolved there was private respondents' mere entitlement to a warehouseman's lien,
without specifying a corresponding amount. In the instant petition, the issues pertained to the
amount and enforceability of said lien based on the arbitrary manner the amount was
determined by the trial court.

Petitioner further argued that the refining contracts private respondents invoked could not
bind the former since it was not a party thereto. In fact, said contracts were not even attached
to the quedans when negotiated; and that their validity was repudiated by a supposed party
thereto, Rosa Ng Sy, who claimed that the contract was simulated, thus void pursuant to
Article 1345 of the New Civil Code. Should the refining contracts in turn be declared void,
petitioner advocated that any determination by the court of the existence and amount of the
warehouseman's lien due should be arrived at using the test of reasonableness. Petitioner
likewise noted that the other refining contracts 27 presented by private respondents to show
similar storage fees were executed between the years 1996 and 1997, several years after 1989.
Thus, petitioner concluded, private respondents could not claim that the more recent and
increased rates where those which prevailed in 1989.

Finally, petitioner asserted that in the event that this Court should uphold the trial court's
determination of the amount of the warehouseman's lien, petitioner should be allowed to
exercise its option as a judgment obligor to specify which of its properties may be levied
upon, citing Section 9(b), Rule 39 of the 1997 Rules of Civil Procedure. Petitioner claimed to
have been deprived of this option when the trial court issued the garnishment and levy orders.
The petition was set for oral argument on 24 November 1997 where the parties addressed the
following issues we formulated for them to discuss:

(1) Is this special civil action the appropriate remedy?

(2) Has the trial court the authority to issue a writ of execution on Noah's Ark's
claims for storage fees considering that this Court in G.R. No. 119231 merely
sustained the trial court's order of 20 December 1994 granting the Noah's Ark
Omnibus Motion and setting the reception of evidence on its claims for storage
fees, and of 1 March 1995 finding that there existed in favor of Noah's Ark a
warehouseman's lien under Section 27 of R.A. No. 2137 and directing that the
execution of the judgment in favor of PNB be stayed and/or precluded until the
full amount of Noah's Ark's lien is satisfied conformably with Section 31 of R.A.
No. 2137?

(3) Is [petitioner] liable for storage fees (a) from the issuance of the quedans in
1989 to Rosa Sy, St. Therese Merchandising and RNS Merchandising, up to their
assignment by endorsees Ramos and Zoleta to [petitioner] for their loan; or (b)
after [petitioner] has filed an action for specific performance and damages (Civil
Case No. 90-53023) against Noah's Ark for the latter's failure to comply with
[petitioner's] demand for the delivery of the sugar?

(4) Did respondent Judge commit grave abuse of discretion as charged? 28

In our resolution of 24 November 1997, we summarized the positions of the parties on these
issues, thus:

Expectedly, counsel for petitioner submitted that certiorari under Rule 65 of the
Rules of Court is the proper remedy and not an ordinary appeal, contending,
among others, that the order of execution was not final. On the other hand,
counsel for respondents maintained that petitioner PNB disregarded the
hierarchy of courts as it bypassed the Court of Appeals when it filed the instant
petition before this Court.

On the second issue, counsel for petitioner submitted that the trial court had no
authority to issue the writ of execution or if it had, it denied PNB due process
when it held PNB liable for the astronomical amount or P734,341,595.06 as
warehouseman's lien or storage fees. Counsel for respondent, on the other hand,
contended that the trial court's authority to issue the questioned writ of execution
is derived from the decision in G.R. No. 119231 which decision allegedly provided
for ample or sufficient parameters for the computation of the storage fees.

On the third issue, counsel for petitioner while presupposing that PNB may be
held to answer for storage fees, contended that the same should start from the
time the endorsees of the sugar quedans defaulted in their payments, i.e., 1990
because before that, respondent Noah's Ark's claim was that it was the owner of
the sugar covered by the quedans. On the other hand, respondents' counsel
pointed out that PNB's liability should start from the issuance of the quedans in
1989.

The arguments on the fourth issue, hinge on the parties' arguments for or against
the first three issues. Counsel for petitioner stressed that the trial court indeed
committed a grave abuse of discretion, while respondents' counsel insisted that
no grave abuse of discretion was committed by the trial court. 29

Private respondents likewise admitted that during the pendency of the case, they failed to
avail of their options as a warehouseman. Concretely, they could have enforced their lien
through the foreclosure of the goods or the filing of an ordinary civil action. Instead, they
sought to execute this Court's judgment in G.R. No. 119231. They eventually agreed that
petitioner's liability for the warehouseman's lien should be reckoned from the time it stepped
into the shoes of the original depositors. 30

In our resolution of 24 November 1997, we required the parties to simultaneously submit their
respective memoranda within 30 days or, in the alternative, a compromise agreement should a
settlement be achieved. Notwithstanding efforts exerted by the parties, no mutually
acceptable solution was reached.

In their respective memoranda, the parties reiterated or otherwise buttressed the arguments
raised in their previous pleadings and during the oral arguments on 24 November 1997,
especially on the formulated issues.

The petition is meritorious.

We shall take up the formulated issues in seriatim.

A. This Special Civil Action is an Appropriate Remedy.

A careful perusal of the first assailed order shows that the trial court not only granted the
motion for execution, but also appreciated the evidence in the determination of the
warehouseman's lien; formulated its computation of the lien; and adopted an offsetting of the
parties' claims. Ineluctably, the order as in the nature of a final order for it left nothing else to
be resolved thereafter. Hence, petitioner's remedy was to appeal therefrom. 31 Nevertheless,
petitioner was not precluded from availing of the extraordinary remedy of certiorari under Rule
65 of the Rules of Court. It is well-settled that the availability of an appeal does not foreclose
recourse to the extraordinary remedies of certiorari or prohibition where appeal is not
adequate, or equally beneficial, speedy and sufficient. 32

Petitioner assailed the challenged orders as having been issued without or in excess of
jurisdiction or with grave abuse of discretion and alleged that it had no other plain, speedy
and adequate remedy in the ordinary course of law. As hereafter shown, these claims were not
unfounded, thus the propriety of this special civil action is beyond question.

This Court had original jurisdiction, concurrent with that of Regional Trial Courts and the
Court of Appeals, over petitions for certiorari, prohibition, mandamus, quo warranto and
habeas curpus, 33 and we entertain direct resort to us in cases where special and important
reasons or exceptional and compelling circumstances justify the same. 34 These reasons and
circumstances are present here.

B. Under the Special Circumstances in This Case, Private

Respondents May Enforce Their Warehouseman 's Lien
in Civil Case No. 90-53023.

The remedies available to a warehouseman, such as private respondents, to enforce his

warehouseman's lien are:

(1) To refuse to deliver the goods until his lien is satisfied, pursuant
to Section 31 of the Warehouse Receipt Law;

(2) To sell the goods and apply the proceeds thereof to the value of
the lien pursuant to Sections 33 and 34 of the Warehouse Receipts
Law; and

(3) By other means allowed by law to a creditor against his debtor,

for the collection from the depositor of all charges and advances
which the depositor expressly or impliedly contracted with the
warehouseman to pay under Section 32 of the Warehouse Receipt
Law; or such other remedies allowed by law for the enforcement of a
lien against personal property under Section 35 of said law. The third
remedy is sought judicially by suing for the unpaid charges. 35

Initially, private respondents availed of the first remedy. However, when petitioner moved to
execute the judgment in G.R. No. 107243 before the trial court, private respondents, in turn,
moved to have the warehouse charges and fees due them determined and thereafter sought to
collect these from petitioners. While the most appropriate remedy for private respondents was
an action for collection, in G.R. No. 119231, we already recognized their right to have such
charges and fees determined in Civil Case No. 90-53023. The import of our holding in G.R. No.
119231 was that private respondents were likewise entitled to a judgment on their warehouse
charges and fees, and the eventual satisfaction thereof, thereby avoiding having to file
another action to recover these charges and fees, which would only have further delayed the
resolution of the respective claims of the parties, and as a corollary thereto, the indefinite
deferment of the execution of the judgment in G.R. No. 107243. Thus we note that petitioner, in
fact, already acquiesced to the scheduled dates previously set for the hearing on private
respondents' warehouseman's charges.

However, as will be shown below, it would be premature to execute the order fixing the
warehouseman's charges and fees.

C. Petitioner is Liable for Storage Fees.

We confirmed petitioner's liability for storage fees in G.R. No. 119231. However, petitioner's
status as to the quedans must first be clearly defined and delineated to be able to determine
the extent of its liability.

Petitioner insisted, both in its petition and during the oral arguments on 24 November 1997,
that it was a mere pledgee as the quedans were used to secure two loans it granted. 36 In our
decision in G.R. No. 107243, we upheld this contention of petitioner, thus;

Zoleta and Ramos then used the quedans as security for loans obtained by them
from the Philippine National Bank (PNB) as security for loans obtained by them in
the amounts of P23.5 million and P15.6 million, respectively. These quedans they
indoors to the bank. 37

As such, Martinez v. Philippine National Bank 38 becomes relevant:

In conclusion, we hold that where a warehouse receipt or quedan is transferred or

endorsed to a creditor only to secure the payment of a loan or debt, the
transferee or endorsee does not automatically become the owner of the goods
covered by the warehouse receipt or quedan but he merely retains the right to
keep and with the consent of the owner to sell them so as to satisfy the obligation
from the proceeds of the sale, this for the simple reason that the transaction
involved is not a sale but only a mortgage or pledge, and that if the property
covered by the quedans or warehouse receipts is lost without the fault or
negligence of the mortgagee or pledgee or the transferee or endorsee of the
warehouse receipt or quedan, then said goods are to be regarded as lost on
account of the real owner, mortgagor or pledgor.

The indorsement and delivery of the warehouse receipts (quedans) by Ramos and Zoleta to
petitioner was not to convey "title" to or ownership of the goods but to secure (by way of
pledge) the loans granted to Ramos and Zoleta by petitioner. The indorsement of the
warehouse receipts (quedans), to perfect the pledge, 39 merely constituted a symbolical or
constructive delivery of the possession of the thing thus encumbered. 40

The creditor, in a contract of real security, like pledge, cannot appropriate without foreclosure
the things given by way of pledge. 41 Any stipulation to the contrary, termed pactum
commissorio, is null and void. 42 The law requires foreclosure in order to allow a transfer of
title of the good given by way of security from its pledgor, 43 and before any such foreclosure,
the pledgor, not the pledgee, is the owner of the goods. In Philippine National Bank v.
Atendido, 44 we said:

The delivery of the palay being merely by way of security, it follows that by the
nature of the transaction its ownership remains with the pledgor subject only to
foreclosure in case of non-fulfillment of the obligation. By this we mean that if the
obligation is not paid upon maturity the most that the pledgee can do is to sell the
property and apply the proceeds to the payment of the obligation and to return
the balance, if any, to the pledgor (Art. 1872, Old Civil Code [Art. 2112, New Civil
Code]). This is the essence of this contract, for, according to law, a pledgee
cannot become the owner of, nor appropriate to himself, the thing given in pledge
(Article 1859, Old Civil Code [Art. 2088, New Civil Code]). . . The fact that the
warehouse receipt covering palay was delivered, endorsed in blank, to the bank
does not alter the situation, the purpose of such endorsement being merely to
transfer the juridical possession of the property to the pledgees and to forestall
 any possible disposition thereof on the part of the pledgor. This is true
notwithstanding the provisions of the Warehouse Receipt Law.

The warehouseman, nevertheless, is entitled to the warehouseman's lien that attaches to the
goods invokable against anyone who claims a right of possession thereon.

The next issue to resolve is the duration of time the right of petitioner over the goods may be
held subject to the warehouseman's lien.

Sec. 8, 29 and 31 of the Warehouse Receipts Law now come to fore. They provide, as follows:

Sec. 8. Obligation of warehousemen to deliver. — A warehouseman, in the

absence of some lawful excuse provided by this Act, is bound to deliver the
goods upon a demand made either by the holder of a receipt for the goods or by
the depositor, if such demand is accompanied with:

(a) An offer to satisfy warehouseman's lien;

(b) An offer to surrender the receipt, if negotiable, with

such indorsements as would be necessary for the
negotiation of the receipt; and

(c) A readiness and willingness to sign, when the goods

are delivered, an acknowledgment that they have been
delivered, if such signature is requested by the
warehouseman.

In case the warehouseman refuses or fails to deliver the goods in compliance

with a demand by the holder or depositor so accompanied, the burden shall be
upon the warehouseman to establish the existence of a lawful excuse for such
refusal.

Sec. 29. How the lien may be lost. — A warehouseman loses his lien upon goods;

(a) By surrendering possession thereof, or.

(b) By refusing to deliver the goods when a demand is

made with which he is bound to comply under the
provisions of this Act.

Sec. 31. Warehouseman need not deliver until lien is satisfied. — A

warehouseman having a lien valid against the person demanding the goods may
refuse to deliver the goods to him until the lien is satisfied.

Simply put, where a valid demand by the lawful holder of the quedans for the delivery of the
goods is refused by the warehouseman, despite the absence of a lawful excuse provided by
the statute itself, the warehouseman's lien is thereafter concomitantly lost. As to what the law
deems a valid demand, Section 8 enumerates what must accompany a demand; while as
regards the reasons which a warehouseman may invoke to legally refuse to effect delivery of
the goods covered by the quedans, these are:

(1) That the holder of the receipt does not satisfy the conditions prescribed in
Section 8 of the Act. (See Sec. 8, Act No. 2137)

(2) That the warehouseman has legal title in himself on the goods, such title or
right being derived directly or indirectly from a transfer made by the depositor at
the time of or subsequent to the deposit for storage, or from the warehouseman's
lien. (Sec. 16, Act No. 2137)

(3) That the warehouseman has legally set up the title or right of third persons as
lawful defense for non-delivery of the goods as follows:
 (a) Where the warehouseman has been requested, by or on behalf of
the person lawfully entitled to a right of property of or possession in
the goods, not to make such delivery (Sec. 10, Act No. 2137), in
which case, the warehouseman may, either as a defense to an action
brought against him for nondelivery of the goods, or as an original
suit, whichever is appropriate, require all known claimants to
interplead (Sec. 17, Act No. 2137);

(b) Where the warehouseman had information that the delivery about
to be made was to one not lawfully entitled to the possession of the
goods (Sec. 14 Act No. 2137), in which case, the warehouseman shall
be excused from liability for refusing to deliver the goods, either to
the depositor or person claiming under him or to the adverse
claimant, until the warehouseman has had a reasonable time to
ascertain the validity of the adverse claims or to bring legal
proceedings to compel all claimants to interplead (Sec. 18, Act No.
2137); and

(c) Where the goods have already been lawfully sold to third persons
to satisfy a warehouseman's lien, or have been lawfully sold or
disposed of because of their perishable or hazardous nature. (Sec.
36, Act No. 2137).

(4) That the warehouseman having a lien valid against the person demanding the
goods refuses to deliver the goods to him until the lien is satisfied. (Sec. 31 Act
No. 2137)

(5) That the failure was not due to any fault on the part of the warehouseman, as
by showing that, prior to demand for delivery and refusal, the goods were stolen
or destroyed by fire, flood, etc., without any negligence on his part, unless he has
contracted so as to be liable in such case, or that the goods have been taken by
the mistake of a third person without the knowledge or implied assent of the
warehouseman, or some other justifiable ground for non-delivery. (67 C.J. 532) 45

Regrettably, the factual settings do not sufficiently indicate whether the demand to obtain
possession of the goods complied with Section 8 of the law. The presumption, nevertheless,
would be that the law was complied with, rather than breached, by petitioner. Upon the other
hand, it would appear that the refusal of private respondents to deliver the goods was not
anchored on a valid excuse, i.e., non-satisfaction of the warehouseman's lien over the goods,
but on an adverse claim of ownership. Private respondents justified their refusal to deliver the
goods, as stated in their Answer with Counterclaim and Third-Party Complaint in Civil Case
No. 90-53023, by claiming that they "are still the legal owners of the subject quedans and the
quantity of sugar represented therein." Under the circumstances, this hardly qualified as a
valid, legal excuse. The loss of the warehouseman's lien, however, does not necessarily mean
the extinguishment of the obligation to pay the warehousing fees and charges which
continues to be a personal liability of the owners, i.e., the pledgors, not the pledgee, in this
case. But even as to the owners-pledgors, the warehouseman fees and charges have ceased
to accrue from the date of the rejection by Noah's Ark to heed the lawful demand by petitioner
for the release of the goods.

The finality of our denial in G.R. No. 119231 of petitioner's petition to nullify the trial court's
order of 01 March 1995 confirms the warehouseman's lien; however, such lien, nevertheless,
should be confined to the fees and charges as of the date in March 1990 when Noah's Ark
refused to heed PNB's demand for delivery of the sugar stocks and in no event beyond the
value of the credit in favor of the pledgee (since it is basic that, in foreclosures, the buyer
does not assume the obligations of the pledgor to his other creditors even while such buyer
acquires title over the goods less any existing preferred lien thereover). 46 The foreclosure of
the thing pledged, it might incidentally be mentioned, results in the full satisfaction of the loan
liabilities to the pledgee of the pledgors. 47

D. Respondent Judge Committed Grave Abuse of Discretion.

We hold that the trial court deprived petitioner of due process in rendering the challenged
order of 15 April 1996 without giving petitioner an opportunity to present its evidence. During
the final hearing of the case, private respondents commenced and concluded their
presentation of evidence as to the matter of the existence of and amount owing due to their
warehouseman's lien. Their exhibits were duly marked and offered and the trial court
thereafter ruled, to wit:

Court: Order.

With the admission of Exhibits "1" to "11", inclusive of submarkings,

as part of the testimony of Benigno Bautista, the defendant [private
respondents] is given five (5) days from today to file its
memorandum. Likewise, plaintiff [petitioner] is given five (5) days,
from receipt of defendants' [private respondents'] memorandum, to
file its comment thereto. Thereafter the same shall be deemed
submitted for decision.

SO ORDERED. 48

Nowhere in the transcript of stenographic notes, however, does it show that petitioner was
afforded an opportunity to comment on, much less, object to, private respondents' offer of
exhibits, or even present its evidence on the matter in dispute. In fact, petitioner immediately
moved to nullify the proceedings conducted during that hearing, but its motion was ignored
and never resolved by the trial court. Moreover, it cannot be said that petitioner's filing of
subsequent pleadings, where it attached its affidavits and documents to contest the
warehouseman's lien, was sufficient to fully satisfy the requirements of due process. The
subsequent pleadings were filed only to show that petitioner had evidence to refute the claims
of private respondents or that the latter were not entitled thereto, but could not have
adequately substituted for a full-blown opportunity to present its evidence, given the
exorbitant amounts involved. This, when coupled with the fact that the motion to postpone the
hearing filed by petitioner's counsel was not unreasonable, leads us to conclude that
petitioner's right to fully present its case was rendered nugatory. It is thus evident to us that
there was undue and unwarranted haste on the part of respondent court to rule in favor of
private respondents. We do not hesitate to say that any tilt of the scales of justice, no matter
how slight, evokes suspicion and erodes a litigant's faith and hope in seeking recourse before
courts of law.

Likewise do we refuse to give credence to private respondents' allegation that the parties
agreed that petitioner's presentation of evidence would be submitted on the basis of
affidavits, 49 without, however, specifying any order or written agreement to that effect.

It is interesting to note that among the evidence petitioner wanted to present were reports
obtained from Noah's Ark, disclosing that the latter failed to maintain a sufficient inventory to
satisfy the sugar stock covered by the subject quedans. This was a serious allegation, and on
that score alone, the trial court should have allowed a hearing on the matter, especially in light
of the magnitude of the claims sought. If it turns out to be true that the stock of sugar Noah's
Ark had in possession was below the quantities specified in the quedans, then petitioner
should not be made to pay for storage and preservation expenses for non-existent goods.

It was likewise grave abuse of discretion on the part of respondent court to order immediate
execution of the 15 April 1997 order. We ruled earlier that said order was in the nature of a
final order fixing the amount of the warehouseman's charges and fees, and petitioner's net
liability, after the set-off of the money judgment in its favor in G.R. No. 107243. Section 1 of
Rule 39 of the Rules of Court explicitly provides that execution shall issue as a matter of right,
on motion, upon a judgment or order that disposes of the action or proceeding upon the
expiration of the period to appeal therefrom if no appeal has been duly perfected. Execution
pending appeal is, however, allowed in Section 2 thereof, but only on motion with due notice
to the adverse party, more importantly, only "upon good reasons shown in a special order."
Here, there is no showing that a motion for execution pending appeal was filed and that a
special order was issued by respondent court. Verily, the immediate execution only served to
further strengthen our perception of undue and unwarranted haste on the part of respondent
court in resolving the issue of the warehouseman's lien in favor of private respondents.

In light of the above, we need not rule anymore on the fourth formulated issue.
WHEREFORE, the petition is GRANTED. The challenged orders of 15 April and 14 July 1997,
including the notices of levy and garnishment, of the Regional Trial Court of Manila, Branch
45, in Civil Case No. 90-53023 are REVERSED and SET ASIDE, and said court is DIRECTED to
conduct further proceedings in said case:

(1) to allow petitioner to present its evidence on the matter of the

warehouseman's lien;

(2) to compute the petitioner's warehouseman's lien in light of the

foregoing observations; and

(3) to determine whether, for the relevant period, Noah's Ark

maintained a sufficient inventory to cover the volume of sugar
specified in the quedans.

Costs against private respondents.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. L-53955 January 13, 1989

THE MANILA BANKING CORPORATION, plaintiff-appellee,

vs.
ANASTACIO TEODORO, JR. and GRACE ANNA TEODORO, defendants-appellants.

Formoso & Quimbo Law Office for plaintiff-appellee.

Serafin P. Rivera for defendants-appellants.

BIDIN, J.:

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

WHEREFORE judgment is hereby rendered (a) sentencing defendants, Anastacio

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

With Costs against defendants.

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

On April 25, 1966, defendants, together with Anastacio Teodoro, Sr., jointly and
severally, executed in favor of plaintiff a Promissory Note (No. 11487) for the sum of
P10,420.00 payable in 120 days, or on August 25, 1966, at 12% interest per annum.
Defendants failed to pay the said amount inspire of repeated demands and the
obligation as of September 30, 1969 stood at P 15,137.11 including accrued interest
and service charge.

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

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

It appears that on January 24, 1964, the Son executed in favor of plaintiff a Deed of
Assignment of Receivables from the Emergency Employment Administration in the sum
of P44,635.00. The Deed of Assignment provided that it was for and in consideration of
 certain credits, loans, overdrafts and other credit accommodations extended to
defendants as security for the payment of said sum and the interest thereon, and that
defendants do hereby remise, release and quitclaim all its rights, title, and interest in
and to the accounts receivables. Further.

(1) The title and right of possession to said accounts receivable is to

remain in the assignee, and it shall have the right to collect the same from
the debtor, and whatsoever the Assignor does in connection with the
collection of said accounts, it agrees to do as agent and representative of
the Assignee and in trust for said Assignee ;

xxx xxx xxx

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

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

xxx xxx xxx

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

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

For failure of defendants to pay the sums due on the Promissory Note, this action was
instituted on November 13, 1969, originally against the Father, Son, and the latter's
wife. Because the Father died, however, during the pendency of the suit, the case as
against him was dismiss under the provisions of Section 21, Rule 3 of the Rules of
Court. The action, then is against defendants Son and his wife for the collection of the
sum of P 15,037.11 on Promissory Note No. 14487; and against defendant Son for the
recovery of P 8,394.7.4 on Promissory Notes Nos. 11515 and 11699, plus interest on
both amounts at 12% per annum from September 30, 1969 until fully paid, and 10% of
the amounts due as attorney's fees.

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

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

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

In their appeal (Brief for the Appellants, Rollo, p. 12), appellants raised a single assignment of error,
that is —

THAT THE DECISION IN QUESTION AMOUNTS TO A JUDICIAL REMAKING OF THE

CONTRACT BETWEEN THE PARTIES, IN VIOLATION OF LAW; HENCE,
TANTAMOUNT TO LACK OR EXCESS OF JURISDICTION.

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

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

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

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

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

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

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

favor of appellee bank.

The issue is with regard to its legal effects.

It is evident that the assignment of receivables executed by appellants on January 24, 1964 did not
transfer the ownership of the receivables to appellee bank and release appellants from their loans
with the bank incurred under promissory notes Nos. 11487,11515 and 11699.

The Deed of Assignment provided that it was for and in consideration of certain credits, loans,
overdrafts, and their credit accommodations in the sum of P10,000.00 extended to appellants by
appellee bank, and as security for the payment of said sum and the interest thereon; that appellants
as assignors, remise, release, and quitclaim to assignee bank all their rights, title and interest in and
to the accounts receivable assigned (lst paragraph). It was further stipulated that the assignment will
also stand as a continuing guaranty for future loans of appellants to appellee bank and
correspondingly the assignment shall also extend to all the accounts receivable; appellants shall also
obtain in the future, until the consideration on the loans secured by appellants from appellee bank
shall have been fully paid by them (No. 9).

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

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

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

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

The characters of the transaction between the parties is to be determined by their

intention, regardless of what language was used or what the form of the transfer was. If
it was intended to secure the payment of money, it must be construed as a pledge.
However, even though a transfer, if regarded by itself, appellate to have been absolute,
its object and character might still be qualified and explained by a contemporaneous
writing declaring it to have been a deposit of the property as collateral security. It has
been Id that a transfer of property by the debtor to a creditor, even if sufficient on its
farm to make an absolute conveyance, should be treated as a pledge if the debt
continues in existence and is not discharged by the transfer, and that accordingly, the
use of the terms ordinarily exporting conveyance, of absolute ownership will not be
given that effect in such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of absolute ownership,
in the absence of clear and ambiguous language or other circumstances excluding an
intent to pledge. (Lopez v. Court of Appeals, 114 SCRA 671 [1982]).

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

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

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

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

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

II

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

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

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

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

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-19227             February 17, 1968

DIOSDADO YULIONGSIU, plaintiff-appellant,

vs.
PHILIPPINE NATIONAL BANK (Cebu Branch), defendant-appellee.

Vicente Jaime, Regino Hermosisima & E. Lumontad, Sr. for plaintiff-appellant.

Tomas Besa, R. B. de los Reyes and C. E. Medina for defendant-appellee.

BENGZON, J.P., J.:

          Plaintiff-appellant Diosdado Yuliongsiu 1 was the owner of two (2) vessels, namely: The M/S Surigao,
valued at P109,925.78 and the M/S Don Dino, valued at P63,000.00, and operated the FS-203, valued at
P210,672.24, which was purchased by him from the Philippine Shipping Commission, by installment or on
account. As of January or February, 1943, plaintiff had paid to the Philippine Shipping Commission only the
sum of P76,500 and the balance of the purchase price was payable at P50,000 a year, due on or before the end
of the current year. 2

          On June 30, 1947, plaintiff obtained a loan of P50,000 from the defendant Philippine National Bank,
Cebu Branch. To guarantee its payment, plaintiff pledged the M/S Surigao, M/S Don Dino and its equity in the
FS-203 to the defendant bank, as evidenced by the pledge contract, Exhibit "A" & "1-Bank", executed on the
same day and duly registered with the office of the Collector of Customs for the Port of Cebu. 3

          Subsequently, plaintiff effected partial payment of the loan in the sum of P20,000. The remaining balance
was renewed by the execution of two (2) promissory notes in the bank's favor. The first note, dated December
18, 1947, for P20,000, was due on April 16, 1948 while the second, dated February 26, 1948, for P10,000, was
due on June 25, 1948. These two notes were never paid at all by plaintiff on their respective due dates. 4

          On April 6, 1948, the bank filed criminal charges against plaintiff and two other accused for estafa thru
falsification of commercial documents, because plaintiff had, as last indorsee, deposited with defendant bank,
from March 11 to March 31, 1948, seven Bank of the Philippine Islands checks totalling P184,000. The drawer
thereof — one of the co-accused — had no funds in the drawee bank. However, in connivance with one
employee of defendant bank, plaintiff was able to withdraw the amount credited to him before the discovery of
the defraudation on April 2, 1948. Plaintiff and his co-accused were convicted by the trial court and sentenced
to indemnify the defendant bank in the sum of P184,000. On appeal, the conviction was affirmed by the Court of
Appeals on October 31, 1950. The corresponding writ of execution issued to implement the order for
indemnification was returned unsatisfied as plaintiff was totally insolvent. 5

          Meanwhile, together with the institution of the criminal action, defendant bank took physical possession
of three pledged vessels while they were at the Port of Cebu, and on April 29, 1948, after the first note fell due
and was not paid, the Cebu Branch Manager of defendant bank, acting as attorney-in-fact of plaintiff pursuant
to the terms of the pledge contract, executed a document of sale, Exhibit "4", transferring the two pledged
vessels and plaintiff's equity in FS-203, to defendant bank for P30,042.72. 6

          The FS-203 was subsequently surrendered by the defendant bank to the Philippine Shipping Commission
which rescinded the sale to plaintiff on September 8, 1948, for failure to pay the remaining installments on the
purchase price thereof. 7 The other two boats, the M/S Surigao and the M/S Don Dino were sold by defendant
bank to third parties on March 15, 1951.

          On July 19, 1948, plaintiff commenced action in the Court of First Instance of Cebu to recover the three
vessels or their value and damages from defendant bank. The latter filed its answer, with a counterclaim for
P202,000 plus P5,000 damages. After issues were joined, a pretrial was held resulting in a partial stipulation of
facts dated October 2, 1958, reciting most of the facts above-narrated. During the course of the trial, defendant
amended its answer reducing its claim from P202,000 to P8,846.01, 8 but increasing its alleged damages to
P35,000.
          The lower court rendered its decision on February 13, 1960 ruling: (a) that the bank's taking of physical
possession of the vessels on April 6, 1948 was justified by the pledge contract, Exhibit "A" & "1-Bank" and the
law; (b) that the private sale of the pledged vessels by defendant bank to itself without notice to the plaintiff-
pledgor as stipulated in the pledge contract was likewise valid; and (c) that the defendant bank should pay to
plaintiff the sums of P1,153.99 and P8,000, as his remaining account balance, or set-off these sums against the
indemnity which plaintiff was ordered to pay to it in the criminal cases.

          When his motion for reconsideration and new trial was denied, plaintiff brought the appeal to Us, the
amount involved being more than P200,000.00.

          In support of the first assignment of error, plaintiff-appellant would have this Court hold that Exhibit "A"
& "1-Bank" is a chattel mortgage contract so that the creditor defendant could not take possession of the
chattels object thereof until after there has been default. The submission is without merit. The parties stipulated
as a fact that Exhibit "A" & "1-Bank" is a pledge contract —

          3. That a credit line of P50,000.00 was extended to the plaintiff by the defendant Bank, and the
plaintiff obtained and received from the said Bank the sum of P50,000.00, and in order to guarantee the
payment of this loan, the pledge contract, Exhibit "A" & Exhibit "1-Bank", was executed and duly
registered with the Office of the Collector of Customs for the Port of Cebu on the date appearing therein;
(Emphasis supplied)1äwphï1.ñët

          Necessarily, this judicial admission binds the plaintiff. Without any showing that this was made thru
palpable mistake, no amount of rationalization can offset it. 9

          The defendant bank as pledgee was therefore entitled to the actual possession of the vessels. While it is
true that plaintiff continued operating the vessels after the pledge contract was entered into, his possession was
expressly made "subject to the order of the pledgee." 10 The provision of Art. 2110 of the present Civil Code 11
being new — cannot apply to the pledge contract here which was entered into on June 30, 1947. On the other
hand, there is an authority supporting the proposition that the pledgee can temporarily entrust the physical
possession of the chattels pledged to the pledgor without invalidating the pledge. In such a case, the pledgor is
regarded as holding the pledged property merely as trustee for the pledgee. 12

          Plaintiff-appellant would also urge Us to rule that constructive delivery is insufficient to make pledge
effective. He points to Betita v. Ganzon, 49 Phil. 87 which ruled that there has to be actual delivery of the
chattels pledged. But then there is also Banco Español-Filipino v. Peterson, 7 Phil. 409 ruling that symbolic
delivery would suffice. An examination of the peculiar nature of the things pledged in the two cases will readily
dispel the apparent contradiction between the two rulings. In Betita v. Ganzon, the objects pledged — carabaos
— were easily capable of actual, manual delivery unto the pledgee. In Banco Español-Filipino v. Peterson, the
objects pledged — goods contained in a warehouse — were hardly capable of actual, manual delivery in the
sense that it was impractical as a whole for the particular transaction and would have been an unreasonable
requirement. Thus, for purposes of showing the transfer of control to the pledgee, delivery to him of the keys to
the warehouse sufficed. In other words, the type of delivery will depend upon the nature and the peculiar
circumstances of each case. The parties here agreed that the vessels be delivered by the "pledgor to the pledgor
who shall hold said property subject to the order of the pledgee." Considering the circumstances of this case and
the nature of the objects pledged, i.e., vessels used in maritime business, such delivery is sufficient.

          Since the defendant bank was, pursuant to the terms of pledge contract, in full control of the vessels thru
the plaintiff, the former could take actual possession at any time during the life of the pledge to make more
effective its security. Its taking of the vessels therefore on April 6, 1948, was not unlawful. Nor was it
unjustified considering that plaintiff had just defrauded the defendant bank in the huge sum of P184,000.

          The stand We have taken is not without precedent. The Supreme Court of Spain, in a similar case
involving Art. 1863 of the old Civil Code, 13 has ruled: 14

          Que si bien la naturaleza del contrato de prenda consiste en pasar las cosas a poder del acreedor o
de un tercero y no quedar en la del deudor, como ha sucedido en el caso de autos, es lo cierto que todas
las partes interesadas, o sean acreedor, deudor y Sociedad, convinieron que continuaran los coches en
poder del deudor para no suspender el trafico, y el derecho de no uso de la prenda pertenence al deudor,
y el de dejar la cosa bajo su responsabilidad al acreedor, y ambos convinieron por creerlo util para las
partes contratantes, y estas no reclaman perjuicios no se infringio, entre otros este articulo.

          In the second assignment of error imputed to the lower court plaintiff-appellant attacks the validity of the
private sale of the pledged vessels in favor of the defendant bank itself. It is contended first, that the cases
holding that the statutory requirements as to public sales with prior notice in connection with foreclosure
proceedings are waivable, are no longer authoritative in view of the passage of Act 3135, as amended; second,
that the charter of defendant bank does not allow it to buy the property object of foreclosure in case of private
sales; and third, that the price obtained at the sale is unconscionable.

          There is no merit in the claims. The rulings in Philippine National Bank v. De Poli, 44 Phil. 763 and El
Hogar Filipino v. Paredes, 45 Phil. 178 are still authoritative despite the passage of Act 3135. This law refers
only, and is limited, to foreclosure of real estate mortgages. 15 So, whatever formalities there are in Act 3135 do
not apply to pledge. Regarding the bank's authority to be the purchaser in the foreclosure sale, Sec. 33 of Act
2612, as amended by Acts 2747 and 2938 only states that if the sale is public, the bank could purchase the
whole or part of the property sold " free from any right of redemption on the part of the mortgagor or pledgor."
This even argues against plaintiff's case since the import thereof is this if the sale were private and the bank
became the purchaser, the mortgagor or pledgor could redeem the property. Hence, plaintiff could have
recovered the vessels by exercising this right of redemption. He is the only one to blame for not doing so.

          Regarding the third contention, on the assumption that the purchase price was unconscionable, plaintiff's
remedy was to have set aside the sale. He did not avail of this. Moreover, as pointed out by the lower court,
plaintiff had at the time an obligation to return the P184,000 fraudulently taken by him from defendant bank.

          The last assignment of error has to do with the damages allegedly suffered by plaintiff-appellant by virtue
of the taking of the vessels. But in view of the results reached above, there is no more need to discuss the same.

          On the whole, We cannot say the lower court erred in disposing of the case as it did. Plaintiff-appellant
was not all-too-innocent as he would have Us believe. He did defraud the defendant bank first. If the latter
countered with the seizure and sale of the pledged vessels pursuant to the pledge contract, it was only to protect
its interests after plaintiff had defaulted in the payment of the first promissory note. Plaintiff-appellant did not
come to court with clean hands.

          WHEREFORE, the appealed judgment is, as it is hereby, affirmed. Costs against plaintiff-appellant. So
ordered.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-21069            October 26, 1967

MANILA SURETY and FIDELITY COMPANY, INC., plaintiff-appellee,

vs.
RODOLFO R. VELAYO, defendant-appellant.

Villaluz Law Office for plaintiff-appellee.

Rodolfo R. Velayo for and in his own behalf as defendant-appellant.

REYES, J.B.L., J.:

Direct appeal from a judgment of the Court of First Instance of Manila (Civil Case No. 49435) sentencing
appellant Rodolfo Velayo to pay appellee Manila Surety & Fidelity Co., Inc. the sum of P2,565.00 with interest
at 12-½% per annum from July 13, 1954; P120.93 as premiums with interest at the same rate from June 13,
1954: attorneys' fees in an amount equivalent to 15% of the total award, and the costs.

Hub of the controversy are the applicability and extinctive effect of Article 2115 of the Civil Code of the
Philippines (1950).

The uncontested facts are that in 1953, Manila Surety & Fidelity Co., upon request of Rodolfo Velayo, executed
a bond for P2,800.00 for the dissolution of a writ of attachment obtained by one Jovita Granados in a suit
against Rodolfo Velayo in the Court of First Instance of Manila. Velayo undertook to pay the surety company
an annual premium of P112.00; to indemnify the Company for any damage and loss of whatsoever kind and
nature that it shall or may suffer, as well as reimburse the same for all money it should pay or become liable to
pay under the bond including costs and attorneys' fees.

As "collateral security and by way of pledge" Velayo also delivered four pieces of jewelry to the Surety
Company "for the latter's further protection", with power to sell the same in case the surety paid or become
obligated to pay any amount of money in connection with said bond, applying the proceeds to the payment of
any amounts it paid or will be liable to pay, and turning the balance, if any, to the persons entitled thereto, after
deducting legal expenses and costs (Rec. App. pp. 12-15).

Judgment having been rendered in favor of Jovita Granados and against Rodolfo Velayo, and execution having
been returned unsatisfied, the surety company was forced to pay P2,800.00 that it later sought to recoup from
Velayo; and upon the latter's failure to do so, the surety caused the pledged jewelry to be sold, realizing
therefrom a net product of P235.00 only. Thereafter and upon Velayo's failure to pay the balance, the surety
company brought suit in the Municipal Court. Velayo countered with a claim that the sale of the pledged
jewelry extinguished any further liability on his part under Article 2115 of the 1950 Civil Code, which recites:

Art. 2115. The sale of the thing pledged shall extinguish the principal obligation, whether or not the
proceeds of the sale are equal to the amount of the principal obligation, interest and expenses in a proper
case. If the price of the sale is more than said amount, the debtor shall not be entitled to the excess,
unless it is otherwise agreed. If the price of the sale is less, neither shall the creditor be entitled to
recover the deficiency, notwithstanding any stipulation to the contrary.

The Municipal Court disallowed Velayo's claims and rendered judgment against him. Appealed to the Court of
First Instance, the defense was once more overruled, and the case decided in the terms set down at the start of
this opinion.

Thereupon, Velayo resorted to this Court on appeal.

The core of the appealed decision is the following portion thereof (Rec. Appeal pp. 71-72):

It is thus crystal clear that the main agreement between the parties is the Indemnity Agreement and if the
pieces of jewelry mentioned by the defendant were delivered to the plaintiff, it was merely as an added
protection to the latter. There was no understanding that, should the same be sold at public auction and
 the value thereof should be short of the undertaking, the defendant would have no further liability to the
plaintiff. On the contrary, the last portion of the said agreement specifies that in case the said collateral
should diminish in value, the plaintiff may demand additional securities. This stipulation is incompatible
with the idea of pledge as a principal agreement. In this case, the status of the pledge is nothing more nor
less than that of a mortgage given as a collateral for the principal obligation in which the creditor is
entitled to a deficiency judgment for the balance should the collateral not command the price equal to
the undertaking.

It appearing that the collateral given by the defendant in favor of the plaintiff to secure this obligation
has already been sold for only the amount of P235.00, the liability of the defendant should be limited to
the difference between the amounts of P2,800.00 and P235.00 or P2,565.00.

We agree with the appellant that the above quoted reasoning of the appealed decision is unsound. The accessory
character is of the essence of pledge and mortgage. As stated in Article 2085 of the 1950 Civil Code, an
essential requisite of these contracts is that they be constituted to secure the fulfillment of a principal obligation,
which in the present case is Velayo's undertaking to indemnify the surety company for any disbursements made
on account of its attachment counterbond. Hence, the fact that the pledge is not the principal agreement is of no
significance nor is it an obstacle to the application of Article 2115 of the Civil Code.

The reviewed decision further assumes that the extinctive effect of the sale of the pledged chattels must be
derived from stipulation. This is incorrect, because Article 2115, in its last portion, clearly establishes that the
extinction of the principal obligation supervenes by operation of imperative law that the parties cannot override:

If the price of the sale is less, neither shall the creditor be entitled to recover the deficiency
notwithstanding any stipulation to the contrary.

The provision is clear and unmistakable, and its effect can not be evaded. By electing to sell the articles
pledged, instead of suing on the principal obligation, the creditor has waived any other remedy, and must abide
by the results of the sale. No deficiency is recoverable.

It is well to note that the rule of Article 2115 is by no means unique. It is but an extension of the legal
prescription contained in Article 1484(3) of the same Code, concerning the effect of a foreclosure of a chattel
mortgage constituted to secure the price of the personal property sold in installments, and which originated in
Act 4110 promulgated by the Philippine Legislature in 1933.

WHEREFORE, the decision under appeal is modified and the defendant absolved from the complaint, except as
to his liability for the 1954 premium in the sum of P120.93, and interest at 12-1/2% per annum from June 13,
1954. In this respect the decision of the Court below is affirmed. No costs. So ordered.
CHATTEL MORTGAGE

Art. 2140-2141

Art. 1484-1485

Act. No. 1508

Art. 319, RPC

 ACT NO. 1508

ACT NO. 1508 - AN ACT PROVIDING FOR THE MORTGAGING OF PERSONAL PROPERTY AND FOR THE
REGISTRATION OF THE MORTGAGES SO EXECUTED

Section 1. The short title of this Act shall be "The Chattel Mortgage Law."

Sec. 2. All personal property shall be subject to mortgage, agreeably to the provisions of
this Act, and a mortgage executed in pursuance thereof shall be termed chattel mortgage.

Sec. 3. Chattel mortgage defined. — A chattel mortgage is a conditional sale of personal

property as security for the payment of a debt, or the performance of some other obligation
specified therein, the condition being that the sale shall be void upon the seller paying to
the purchaser a sum of money or doing some other act named. If the condition is performed
according to its terms the mortgage and sale immediately become void, and the mortgagee is
thereby divested of his title.

Sec. 4. Validity. — A chattel mortgage shall not be valid against any person except the
mortgagor, his executors or administrators, unless the possession of the property is delivered
to and retained by the mortgagee or unless the mortgage is recorded in the office of the
register of deeds of the province in which the mortgagor resides at the time of making the
same, or, if he resides without the Philippine Islands, in the province in which the property
is situated: Provided, however, That if the property is situated in a different province from
that in which the mortgagor resides, the mortgage shall be recorded in the office of the
register of deeds of both the province in which the mortgagor resides and that in which the
property is situated, and for the purposes of this Act the city of Manila shall be deemed to
be a province.

Sec. 5. Form. — A chattel mortgage shall be deemed to be sufficient when made substantially
in accordance with the following form, and shall be signed by the person or persons executing
the same, in the presence of two witnesses, who shall sign the mortgage as witnesses to the
execution thereof, and each mortgagor and mortgagee, or, in the absence of the mortgagee, his
agent or attorney, shall make and subscribe an affidavit in substance as hereinafter set
forth, which affidavit, signed by the parties to the mortgage as above stated, and the
certificate of the oath signed by the authority administering the same, shall be appended to
such mortgage and recorded therewith.
FORM OF CHATTEL MORTGAGE AND AFFIDAVIT.

"This mortgage made this ____ day of ______19____ by _______________, a resident of the
municipality of ______________, Province of ____________, Philippine Islands mortgagor, to
____________, a resident of the municipality of ___________, Province of ______________,
Philippine Islands, mortgagee, witnesseth:

"That the said mortgagor hereby conveys and mortgages to the said mortgagee all of the
following-described personal property situated in the municipality of ______________, Province
of ____________ and now in the possession of said mortgagor, to wit:

(Here insert specific description of the property mortgaged.)

"This mortgage is given as security for the payment to the said ______, mortgagee, of
promissory notes for the sum of ____________ pesos, with (or without, as the case may be)
interest thereon at the rate of ___________ per centum per annum, according to the terms of
__________, certain promissory notes, dated _________, and in the words and figures following
(here insert copy of the note or notes secured).
"(If the mortgage is given for the performance of some other obligation aside from the payment
of promissory notes, describe correctly but concisely the obligation to be performed.)
"The conditions of this obligation are such that 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 obligation shall be null and void.

"Executed at the municipality of _________, in the Province of ________, this _____ day of
19_____

____________________
(Signature of mortgagor.)

"In the presence of

"_________________
"_________________
(Two witnesses sign here.)
FORM OF OATH.
"We severally swear that the foregoing 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."

FORM OF CERTIFICATE OF OATH.

"At ___________, in the Province of _________, personally appeared ____________, the parties
who signed the foregoing affidavit and made oath to the truth thereof before me.

"_____________________________"
(Notary public, justice of the peace, 1 or other officer, as the case may be.)

Sec. 6. Corporations. — When
may be made and subscribed by
by a person authorized on the
When a partnership is a party
member thereof.
a corporation is a party to such mortgage the affidavit required
a director, trustee, cashier, treasurer, or manager thereof, or
part of such corporation to make or to receive such mortgage.
to the mortgage the affidavit may be made and subscribed by one

Sec. 7. Descriptions of property. — The description of the mortgaged property shall be such
as to enable the parties to the mortgage, or any other person, after reasonable inquiry and
investigation, to identify the same.

If the property mortgaged be large cattle," as defined by section one of Act Numbered Eleven
and forty-seven, 2 and the amendments thereof, the description of said property in the
mortgage shall contain the brands, class, sex, age, knots of radiated hair commonly known as
remolinos, or cowlicks, and other marks of ownership as described and set forth in the
certificate of ownership of said animal or animals, together with the number and place of
issue of such certificates of ownership.

If growing crops be mortgaged the mortgage may contain an agreement stipulating that the
mortgagor binds himself properly to tend, care for and protect the crop while growing, and
faithfully and without delay to harvest the same, and that in default of the performance of
such duties the mortgage may enter upon the premises, take all the necessary measures for the
protection of said crop, and retain possession thereof and sell the same, and from the
proceeds of such sale pay all expenses incurred in caring for, harvesting, and selling the
crop and the amount of the indebtedness or obligation secured by the mortgage, and the surplus
thereof, if any shall be paid to the mortgagor or those entitled to the same.

A chattel mortgage shall be deemed to cover only the property described therein and not like
or substituted property thereafter acquired by the mortgagor and placed in the same depository
as the property originally mortgaged, anything in the mortgage to the contrary
notwithstanding.

Sec. 8. Failure of mortgagee to discharge the mortgage. — If the mortgagee, assign,

administrator, executor, or either of them, after performance of the condition before or after
the breach thereof, or after tender of the performance of the condition, at or after the time
fixed for the performance, does not within ten days after being requested thereto by any
person entitled to redeem, discharge the mortgage in the manner provided by law, the person
entitled to redeem may recover of the person whose duty it is to discharge the same twenty
pesos for his neglect and all damages occasioned thereby in an action in any court having
jurisdiction of the subject-matter thereof.

Sec. 9-12. (inclusive) 3

Sec. 13. When the condition of a chattel mortgage is broken, a mortgagor or person holding a
subsequent mortgage, or a subsequent attaching creditor may redeem the same by paying or
delivering to the mortgagee the amount due on such mortgage and the reasonable costs and
expenses incurred by such breach of condition before the sale thereof. An attaching creditor
who so redeems shall be subrogated to the rights of the mortgagee and entitled to foreclose
the mortgage in the same manner that the mortgagee could foreclose it by the terms of this
Act.

Sec. 14. Sale of property at public auction; Officer's return; Fees; Disposition of proceeds.
— The mortgagee, his executor, administrator, or assign, may, after thirty days from the time
of condition broken, cause the mortgaged property, or any part thereof, to be sold at public
auction by a public officer at a public place in the municipality where the mortgagor resides,
or where the property is situated, provided at least ten days' notice of the time, place, and
purpose of such sale has been posted at two or more public places in such municipality, and
the mortgagee, his executor, administrator, or assign, shall notify the mortgagor or person
holding under him and the persons holding subsequent mortgages of the time and place of sale,
either by notice in writing directed to him or left at his abode, if within the municipality,
or sent by mail if he does not reside in such municipality, at least ten days previous to the
sale.

The officer making the sale shall, within thirty days thereafter, make in writing a return of
his doings and file the same in the office of the register of deeds where the mortgage is
recorded, and the register of deeds shall record the same. The fees of the officer for selling
the property shall be the same as in the case of sale on execution as provided in Act Numbered
One hundred and ninety, 4 and the amendments thereto, and the fees of the register of  deeds
for registering the officer's return shall be taxed as a part of the costs of sale, which the
officer shall pay to the register of deeds. The return shall particularly describe the
articles sold, and state the amount received for each article, and shall operate as a
discharge of the lien thereon created by the mortgage. The proceeds of such sale shall be
applied to the payment, first, of the costs and expenses of keeping and sale, and then to the
payment of the demand or obligation secured by such mortgage, and the residue shall be paid to
persons holding subsequent mortgages in their order, and the balance, after paying the
mortgages, shall be paid to the mortgagor or person holding under him on demand.

If the sale includes any "large cattle," a certificate of transfer as required by section
sixteen of Act Numbered Eleven hundred and forty-seven 5 shall be issued by the treasurer of
the municipality where the sale was held to the purchaser thereof.

Sec. 15. 6, 6a

Sec. 16. This Act shall take effect on August first, nineteen hundred and six.

Enacted, July 2, 1906.

 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-19468            October 30, 1964

SALVADOR PIANSAY and CLAUDIA V. VDA. DE UY KIM, plaintiffs-appellants,

vs.
CONRADO S. DAVID and MARCOS MANGUBAT, defendants-appellees.

Santiago F. Alidio for plaintiffs-appellants.

Marcos Mangubat in his own behalf and for co-defendant-appellee Conrado S. David.

CONCEPCION, J.:

This is an appeal from an order of the Court of First Instance of Manila in Civil Case No. 47664 thereof. The
pertinent facts are set forth in said order from which we quote:

It appears from the complaint that on December 11, 1948, defendant herein Conrado S. David received a
loan of P3,000 with interest at 12% per annum from Claudia B. Vda. de Uy Kim, one of the plaintiffs,
and to secure the payment of the same, Conrado S. David executed a chattel mortgage on a house
situated at 1259 Sande Street, Tondo, Manila; that the chattel mortgage was registered with the Register
of Deeds of Manila on December 19, 1948; that on February 10, 1953, the mortgaged house was sold at
public auction to satisfy the indebtedness to Claudia B. Vda. de Uy Kim, and the house was sold to
Claudia B. Vda. de Uy Kim in the said foreclosure proceedings; that on March 22, 1954, Claudia B.
Vda. de Uy Kim sold the said house to Marcos Mangubat, and on March 1, 1956. Marcos Mangubat
filed a complaint against Conrado S. David, Civil Case No. 29078, in the Court of First Instance of
Manila, for the collection of the loan of P2,000; that on March 24, 1956, the complaint was amended to
include the plaintiffs herein Salvador Piansay and Claudia B. Vda. de Uy Kim as party defendants and
praying that auction sale executed by the Sheriff on February 10, 1953, and the deed of absolute sale
executed by Claudia B. Vda. de Uy Kim in favor of Salvador Piansay be annulled; that decision was
rendered in Civil Case No. 29078 ordering Conrado S. David to pay the plaintiff the sum of P2,000,
damages and attorney's fees, and dismissing the complaint with respect to Claudia B. Vda. de Uy Kim,
Leonardo Uy Kim and Salvador Piansay; that upon appeal, the Court of Appeals affirmed the decision
but setting aside the award of damages in favor of Claudia B. Vda. de Uy Kim; that in the execution of
Civil Case No. 29078, which was affirmed by the Court of Appeals in CA-G.R. No. 21797-R, the house,
which had been bought by Uy Kim at the foreclosure proceedings and sold by her to Salvador Piansay,
was levied upon at the instance of the defendant Marcos Mangubat; that to prevent the sale at public
auction of the house here in question, the plaintiffs herein filed a petition for certiorari and mandamus
with preliminary injunction in the Court of Appeals, CA-G.R. No. 28974-R, entitled Claudia B. Vda. de
Uy Kim and Salvador Piansay versus Hon. Judge Jesus Y. Perez, et al.; that acting upon the said
petition, the Court of Appeals in its order of April 28, 1961, denied the petition to lift or discharge the
writ of execution.

Thereupon, or on July 31, 1961, Piansay and Mrs. Uy Kim, hereinafter referred to as the plaintiffs, instituted the
present action which was docketed as Civil Case No. 47664 of the Court of First Instance of Manila, against
David and Mangubat, hereinafter referred to as the defendants. In their complaint, plaintiffs, after averring the
foregoing facts, allege that, in the proceedings for the execution of the decision in Civil Case No. 29078. David
demanded from Piansay the payment of rentals for the use and occupation of the house aforementioned, which,
Piansay claims, is his property, and that the defendants are threatening to cause said house to be levied upon and
sold at public auction in violation of the alleged rights of the plaintiffs. Accordingly plaintiffs prayed that a writ
of preliminary injunction to restrain said levy and sale at public auction be issued and that, after appropriate
proceedings, judgment be rendered declaring that Piansay is the true and lawful owner of said house sentencing
the defendants to pay damages and making the preliminary injunction permanent.

Mangubat moved to dismiss said complaint, upon the theory that the same is barred by the principle of res
adjudicata and that plaintiffs have no personality to bring this action or to question the levy upon the house in
question, because they have no interest therein. After due hearing the lower court issued the order appealed
from, granting said motion and dismissing the complaint, with costs against the plaintiffs. A reconsideration of
said order having been denied, plaintiffs interposed the present appeal directly to this Court only questions of
law being raised in the appeal, namely: (1) applicability of the principle of res adjudicata; and (2) validity of the
chattel mortgage constituted in favor of Mrs. Uy Kim.

With reference to the first question, it should be noted that in case CA-G.R. No. 21797-R, the Court of Appeals
affirmed the decision in Case No. 29078 of the Court of First Instance of Manila stating:

In the case of Ladera, et al., vs. Hodges, et al. (CA-G.R. No. 8027-R, promulgated Sept. 23, 1952) this
Court, thru Justice J. B. L. Reyes, said, among others:

Since it is a rule in our law that buildings and constructions are regarded as mere accesories to
the land (following the Roman maxim omne quod solo inaedificatur solo credit) it is logical that
said accessories should partaked of the nature of the principal thing, which is the land forming,
as they do, but a single object (res) with it in contemplation of law.

... While it is true that said document was correspondingly registered in the Chattel Mortgage
Register of Rizal, this Act produced no effect whatsoever for where the interest conveyed is in
the nature of real property, the registration of the document in the registry of chattels is merely a
futile act. Thus the registration of the chattel mortgage of a building of strong materials produced
no effect as far as the building is concerned (Leung Yee vs. Strong Machinery Co., 37 Phil. 644).
Nor can we give any consideration to that contention of the surety that it has acquired ownership
over the property in question by reason of the sale conducted by the Provincial Sheriff of Rizal
for as this court has aptly pronounced:

A mortgage creditor who purchases real properties at an extra-judicial foreclosure sale

thereof by virtue of a chattel mortgage constituted in his favor, which mortgage has been
declared null and void with respect to said real properties acquires no right thereto by
virtue of said sale. (De la Riva vs. Ah Kee, 60 Phil. 899).

Thus, Mrs. Uy Kim had no right to foreclose the alleged chattel mortgage constituted in her favor,
because it was in reality a mere contract of an unsecured loan. It follows that the Sheriff was not
authorized to sell the house as a result of the foreclosure of such chattel mortgage. And as Mrs. Uy Kim
could not have acquired the house when the Sheriff sold it at public auction, she could not, in the same
token, it validly to Salvador Piansay. Conceding that the contract of sale between Mrs. Uy Kim and
Salvador Piansay was of no effect, we cannot nevertheless set it aside upon instance of Mangubat
because, as the court below opined, he is not a party thereto nor has he any interest in the subject matter
therein, as it was never sold or mortgaged to him (Emphasis supplied);

that, thereafter, the records of the case were remanded to the Court of First Instance of Manila, which caused the
corresponding writ of execution to be issued; that upon the request of Mangubat, the house in question was
levied upon; that Piansay filed with the trial court, presided over by Hon. Jesus Y. Perez, Judge, a motion to set
aside said levy; that this motion was denied by said court, in an order dated February 4, 1961, upon the
following ground:

Considering that the decision rendered by the Court of Appeals in this case when the same was elevated
to said Court recognizes that defendant Claudia B. de Uy Kim did not acquire the house of defendant
Conrado S. David and can therefore be executed by the plaintiff to satisfy the judgment rendered against
said defendant David in favor of the plaintiff. The mere fact that the dispositive part of the decision
states that the complaint is dismissed with respect to defendants Claudia B. de Uy Kim, Leonardo Uy
Kim and Salvador Piansay is of no moment because the chattel mortgage executed by David in favor of
Claudia B. de Uy Kim might not be annulled but it did not transmit any right from defendant David to
Claudia B. de Uy Kim. The house in question can therefore be levied upon because it had remained the
property of defendant David (Emphasis supplied);

that a reconsideration of this order of February 4, 1961 having been denied by Judge Perez, on February 25,
1961, plaintiffs instituted case CA-G.R. No. 28974-R of the Court of Appeals, for a writ of certiorari and
mandamus to annul said orders of Judge Perez and to compel him to release said house from the aforementioned
levy; and that on March 3, 1961, the Court of Appeals denied said petition for certiorari and mandamus
"insofar as it prays that the order of respondent Judge denying the lifting and discharge of the writ of execution
be set aside and revoked."

In other words, in Civil Case No. 29078 of the Court of First Instance of Manila, Piansay assailed the right of
Mangubat to levy execution upon the house in question alleging that the same belongs to him, he having bought
it from Mrs. Uy Kim, who had acquired it at the auction sale held in connection with the extrajudicial
foreclosure of the chattel mortgage constituted in her favor by David. This pretense was, however, overruled by
Judge Perez, who presided at said court, in its order of February 4, 1961, upon the theory that the chattel
mortgage and sale in favor of Mrs. Uy Kim had been annulled in the original decision in said case, as affirmed
by the Court of Appeals in CA-G.R. No. 21797-R. Regardless of whether this theory is accurate or not, the fact
is that said order became final and executory upon the denial of the petition for certiorari and mandamus, to
annul the same in CA-G.R. No. 28974-R of the Court of Appeals. Hence, plaintiffs are now barred from
asserting that the aforementioned chattel mortgage and sale are valid.

At any rate, regardless of the validity of a contract constituting a chattel mortgage on a house, as between the
parties to said contract (Standard Oil Co. of N. Y. vs. Jaramillo, 44 Phil. 632-633), the same cannot and does
not bind third persons, who are not parties to the aforementioned contract or their privies (Leung Yee vs. Strong
Machinery Co., 37 Phil. 644; Evangelista vs. Alto Surety, G.R. No. L-11139, April 23, 1958; Navarro vs.
Pineda, G.R. No. L-18456, November 30, 1963). As a consequence, the sale of the house in question in the
proceedings for the extrajudicial foreclosure of said chattel mortgage, is null and void insofar as defendant
Mangubat is concerned, and did not confer upon Mrs. Uy Kim, as buyer in said sale, any dominical right in and
to said house (De la Riva vs. Ah Yee, 60 Phil. 800), so that she could not have transmitted to her assignee,
plaintiff Piansay any such right as against defendant Mangubat. In short plaintiffs have no cause of action
against the defendants herein.

WHEREFORE, the others appealed from are hereby affirmed, with costs against plaintiffs Salvador Piansay and
Claudia B. Vda. de Uy Kim. It is so ordered.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-58469 May 16, 1983

MAKATI LEASING and FINANCE CORPORATION, petitioner,

vs.
WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF APPEALS, respondents.

Loreto C. Baduan for petitioner.

Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner.

Jose V. Mancella for respondent.

DE CASTRO, J.:

Petition for review on certiorari of the decision of the Court of Appeals (now Intermediate Appellate
Court) promulgated on August 27, 1981 in CA-G.R. No. SP-12731, setting aside certain Orders later
specified herein, of Judge Ricardo J. Francisco, as Presiding Judge of the Court of First instance of
Rizal Branch VI, issued in Civil Case No. 36040, as wen as the resolution dated September 22, 1981
of the said appellate court, denying petitioner's motion for reconsideration.

It appears that in order to obtain financial accommodations from herein petitioner Makati Leasing and
Finance Corporation, the private respondent Wearever Textile Mills, Inc., discounted and assigned
several receivables with the former under a Receivable Purchase Agreement. To secure the
collection of the receivables assigned, private respondent executed a Chattel Mortgage over certain
raw materials inventory as well as a machinery described as an Artos Aero Dryer Stentering Range.

Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of the
properties mortgage to it. However, the Deputy Sheriff assigned to implement the foreclosure failed to
gain entry into private respondent's premises and was not able to effect the seizure of the
aforedescribed machinery. Petitioner thereafter filed a complaint for judicial foreclosure with the Court
of First Instance of Rizal, Branch VI, docketed as Civil Case No. 36040, the case before the lower
court.

Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the enforcement
of which was however subsequently restrained upon private respondent's filing of a motion for
reconsideration. After several incidents, the lower court finally issued on February 11, 1981, an order
lifting the restraining order for the enforcement of the writ of seizure and an order to break open the
premises of private respondent to enforce said writ. The lower court reaffirmed its stand upon private
respondent's filing of a further motion for reconsideration.

On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of private
respondent and removed the main drive motor of the subject machinery.

The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by herein private
respondent, set aside the Orders of the lower court and ordered the return of the drive motor seized
by the sheriff pursuant to said Orders, after ruling that the machinery in suit cannot be the subject of
replevin, much less of a chattel mortgage, because it is a real property pursuant to Article 415 of the
new Civil Code, the same being attached to the ground by means of bolts and the only way to remove
it from respondent's plant would be to drill out or destroy the concrete floor, the reason why all that
the sheriff could do to enfore the writ was to take the main drive motor of said machinery. The
appellate court rejected petitioner's argument that private respondent is estopped from claiming that
the machine is real property by constituting a chattel mortgage thereon.
A motion for reconsideration of this decision of the Court of Appeals having been denied, petitioner
has brought the case to this Court for review by writ of certiorari. It is contended by private
respondent, however, that the instant petition was rendered moot and academic by petitioner's act of
returning the subject motor drive of respondent's machinery after the Court of Appeals' decision was
promulgated.

The contention of private respondent is without merit. When petitioner returned the subject motor
drive, it made itself unequivocably clear that said action was without prejudice to a motion for
reconsideration of the Court of Appeals decision, as shown by the receipt duly signed by
respondent's representative. 1 Considering that petitioner has reserved its right to question the
propriety of the Court of Appeals' decision, the contention of private respondent that this petition has
been mooted by such return may not be sustained.

The next and the more crucial question to be resolved in this Petition is whether the machinery in suit
is real or personal property from the point of view of the parties, with petitioner arguing that it is a
personality, while the respondent claiming the contrary, and was sustained by the appellate court,
which accordingly held that the chattel mortgage constituted thereon is null and void, as contended by
said respondent.

A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this Court,
speaking through Justice J.B.L. Reyes, ruled:

Although there is no specific statement referring to the subject house as personal

property, yet by ceding, selling or transferring a property by way of chattel mortgage
defendants-appellants could only have meant to convey the house as chattel, or at
least, intended to treat the same as such, so that they should not now be allowed to
make an inconsistent stand by claiming otherwise. Moreover, the subject house stood
on a rented lot to which defendants-appellants merely had a temporary right as lessee,
and although this can not in itself alone determine the status of the property, it does so
when combined with other factors to sustain the interpretation that the parties,
particularly the mortgagors, intended to treat the house as personality. Finally, unlike in
the Iya cases, Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. & Leung Yee vs. F.L. Strong
Machinery & Williamson, wherein third persons assailed the validity of the chattel
mortgage, it is the defendants-appellants themselves, as debtors-mortgagors, who are
attacking the validity of the chattel mortgage in this case. The doctrine of estoppel
therefore applies to the herein defendants-appellants, having treated the subject house
as personality.

Examining the records of the instant case, We find no logical justification to exclude the rule out, as
the appellate court did, the present case from the application of the abovequoted pronouncement. If a
house of strong materials, like what was involved in the above Tumalad case, may be considered as
personal property for purposes of executing a chattel mortgage thereon as long as the parties to the
contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no reason
why a machinery, which is movable in its nature and becomes immobilized only by destination or
purpose, may not be likewise treated as such. This is really because one who has so agreed is
estopped from denying the existence of the chattel mortgage.

In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of Appeals
lays stress on the fact that the house involved therein was built on a land that did not belong to the
owner of such house. But the law makes no distinction with respect to the ownership of the land on
which the house is built and We should not lay down distinctions not contemplated by law.

It must be pointed out that the characterization of the subject machinery as chattel by the private
respondent is indicative of intention and impresses upon the property the character determined by the
parties. As stated in Standard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that the
parties to a contract may by agreement treat as personal property that which by nature would be real
property, as long as no interest of third parties would be prejudiced thereby.

Private respondent contends that estoppel cannot apply against it because it had never represented
nor agreed that the machinery in suit be considered as personal property but was merely required
and dictated on by herein petitioner to sign a printed form of chattel mortgage which was in a blank
form at the time of signing. This contention lacks persuasiveness. As aptly pointed out by petitioner
and not denied by the respondent, the status of the subject machinery as movable or immovable was
never placed in issue before the lower court and the Court of Appeals except in a supplemental
memorandum in support of the petition filed in the appellate court. Moreover, even granting that the
charge is true, such fact alone does not render a contract void ab initio, but can only be a ground for
rendering said contract voidable, or annullable pursuant to Article 1390 of the new Civil Code, by a
proper action in court. There is nothing on record to show that the mortgage has been annulled.
Neither is it disclosed that steps were taken to nullify the same. On the other hand, as pointed out by
petitioner and again not refuted by respondent, the latter has indubitably benefited from said contract.
Equity dictates that one should not benefit at the expense of another. Private respondent could not
now therefore, be allowed to impugn the efficacy of the chattel mortgage after it has benefited
therefrom,

From what has been said above, the error of the appellate court in ruling that the questioned
machinery is real, not personal property, becomes very apparent. Moreover, the case of Machinery
and Engineering Supplies, Inc. v. CA, 96 Phil. 70, heavily relied upon by said court is not applicable to
the case at bar, the nature of the machinery and equipment involved therein as real properties never
having been disputed nor in issue, and they were not the subject of a Chattel Mortgage. Undoubtedly,
the Tumalad case bears more nearly perfect parity with the instant case to be the more controlling
jurisprudential authority.

WHEREFORE, the questioned decision and resolution of the Court of Appeals are hereby reversed
and set aside, and the Orders of the lower court are hereby reinstated, with costs against the private
respondent.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC
 

G.R. No. L-40018 December 15, 1975

NORTHERN MOTORS, INC., petitioner,

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

RESOLUTION

AQUINO, J.:

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

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

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

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

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

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

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

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

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

That contention is not well-taken. The third-party claim filed by Northern Motors, Inc. should have alerted the purchasers to the
risk which they were taking when they took part in the auction sale. Moreover, at an execution sale the buyers acquire only the
right of the judgment debtor which in this case was a mere right or equity of redemption. The sale did not extinguish the pre-
existing mortgage lien (See sec. 25, Rule 39, Rules of Court; Potenciano vs. Dineros and Provincial Sheriff of Rizal, 97 Phil,
196; Lara vs. Bayona, 97 Phil. 951; Hacbang vs. Leyte Autobus Co., Inc., L-7907, May 30, 1963, 8 SCRA 103).
Some arguments adduced by Honesto Ong in his motion were intended to protect the interests of the mortgagor, Manila Yellow
Taxicab Co., Inc., which he erroneously characterized as a "respondent" (it is not a respondent in this case). Ong argues that
the proceeds of the execution sale, which was held on December 18, 1974, should be delivered to Northern Motors, Inc. "only to
such extent as has exceeded the amount paid by respondent Manila Yellow Taxicab to" Northern Motors, Inc. That argument is
not clear. Ong probably means that the installments already paid by Manila Yellow Taxicab Co., Inc. to Northern Motors, Inc.
should be deducted from the proceeds of the execution sale. If that is the point which Ong is trying to put across, and it is
something which does not directly affect him, then, that matter should be raised by Manila Yellow Taxicab Co., Inc. in the
replevin case, Civil Case No. 20536 of the Court of First Instance of Rizal, Pasig Branch VI, entitled "Northern Motors, Inc.
versus Manila Yellow Taxicab Co., Inc. et al."

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

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

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

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

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

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

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

Northern Motors. Inc. further prays for the reconsideration of that portion of our resolution allowing the sheriff to deduct
expenses from the proceeds of the execution sale for the eight taxicabs which sale was held on December 18, 1974. It argues
that Honesto Ong or Manila Yellow Taxicab Co., Inc. should shoulder such expenses of execution.

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

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

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION
 

G.R. No. 103576 August 22, 1996

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
suretyship, the faithful performance of the obligation by the principal debt or is secured by 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.
 REAL ESTATE MORTGAGE
Art. 2124-2131

Procedural Law on Foreclosure

Rule 68, ROC

Extrajudicial Foreclosure
Act 3135 as amended by Act 4118
PD 694, the PNB Act
RA 85, the DBP Act
Sec. 63, PD 1529

Procedure in Extrajudicial Foreclosure

Administrative Matter No. 99-10-05-0 dtd 12/14/99

Special Rules on Redemption Period

Sec. 47 of RA 8791
Sec. 25 of PD 694
Sec. 16 of EO 81
Section 86-B of RA 3844 as amended by RA 7907
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 133366           August 5, 1999

UNIONBANK OF THE PHILIPPINES, petitioner,

vs.
THE COURT OF APPEALS and FERMINA S. DARIO and REYNALDO S. DARIO, respondents.

DAVIDE, JR., CJ.:

Unionbank of the Philippines (hereafter UNIONBANK) appeals, by way of certiorari, the Decision1 of the
Court of Appeals (CA) of 26 June 1997 and its Resolution of 7 April 19982. The CA nullified the Regional Trial
Court's (RTC) Order3 of 7 August 1995 denying private respondents' application for preliminary injunction as
UNIONBANK's consolidation of ownership divested private respondents of their property without due process
of law. It also ordered the register of deeds to cancel UNIONBANK's title and the trial court to hear private
respondents prayer for injunctive relief.1âwphi1.nêt

This case stemmed from a real estate mortgage executed on 17 December 1991 by spouses Leopoldo and
Jessica Dario (hereafter mortgagors) in favor of UNIONBANK to secure a P3 million loan, including interest
and other charges. The mortgage covered a Quezon City property with Transfer Certificate of Title (TCT) No.
41828 in Leopoldo Dario's name and was annotated on the title on 18 December 1991. For non-payment of the
principal obligation, UNIONBANK extrajudicially foreclosed the property mortgaged on 12 August 1993 and
sold the same at public auction, with itself posting the highest bid.

On 4 October 1994, one week before the one-year redemption period expired, private respondents filed a
complaint with the RTC of Quezon City against the mortgagors, UNIONBANK, the Register of Deeds and the
City Sheriff of Quezon City. Docketed as Civil Case No. Q-94-21830, the complaint was for annulment of sale
and real estate mortgage reconveyance and prayer for restraining notice of lis pendens was annotated on the
title.

On 10 October 1994, RTC, Branch 81, through Presiding Judge (later CA Justice) Celia Lipana-Reyes, issued a
temporary restraining order (TRO) enjoining the redemption of property within the statutory period and its
consolidation under UNIONBANK's name. At a hearing four days later, UNIONBANK's counsel orally moved
for dismissal of the complaint alleging that a certification of non-forum shopping-is prescribed by SC-Circular
4-944 was not attached thereto. Judge Lipana-Reyes settled the motion in favor of UNIONBANK and
dismissed5 the complaint on 17 October 1994.

Aggrieved, private respondents filed a motion for reconsideration6 of the dismissal on 20 October 1994 and
prayed that they be permitted to amend their verified complaint to comply with the requisites of Circular 4-94.
Upon the appointment of Judge Lipana-Reyes to the CA, pairing Judge Agustin S. Dizon took over the case and
on 15 November 1994 allowed private respondents to incorporate the mandatory formal requirements of SC
Administrative Circular 4-94 to their complaint.

In the meantime, without notifying private respondents, UNIONBANK consolidated its title over the foreclosed
property on 24 October 1994, TCT No. 41828 was cancelled and TCT No. 120929 in UNIONBANK's name
was issued in its stead.

Private respondents filed an amended complaint7 on 9 December 1994, alleging that they, not the mortgagors,
are the true owners of the property mortgaged and insisting on the invalidity of both the mortgage and its
subsequent extrajudicial foreclosure. They claimed that the original title, TCT No. 61571, was entrusted to a
certain Atty. Reynaldo Singson preparatory to its administrative reconstitution after a fire gutted the Quezon
City Hall building. Mortgagor Leopoldo, private respondent Fermina's son, obtained the property from Atty.
Singson, had the title reconstituted under his name without private respondents' knowledge, executed an ante-
dated deed of sale in his favor and mortgaged the property to UNIONBANK.

On 19 December 1994, Judge Ignacio M. Capulong to whom this case was assigned admitted the
aforementioned amended complaint and set the application for writ of preliminary injunction for hearing. After
UNIONBANK's motion for reconsideration of said Order was denied on 17 January 1995, it filed a petition for
certiorari with the CA questioning the admission of the amended complaint. The CA upheld Judge Capulong's
order admitting the amended complaint on 24 April 1995, UNIONBANK thereafter elevated its cause to this
Court.

Meanwhile, on 9 February 1995 UNIONBANK filed its answer ad cautelam asserting its status as an innocent
mortgagee for value whose right or lien upon the property mortgaged must be respected even if, the mortgagor
obtained his title through fraud. It also averred that the action had become "moot and academic by the
consolidation of the foreclosed property on 24 October 1994" in its name, resulting to the issuance of TCT No.
120929 by the Register of Deeds of Quezon City. In reaction to UNIONBANK's revelation, private respondents
moved to declare UNIONBANK's counsel in indirect contempt attacking his disobedience to the TRO.

On 19 May 1995, private respondents moved to declare the other defendants in default for their non-filing of
responsive pleadings within the mandatory period and to set the application for preliminary injunction and
indirect contempt for pre-trial and trial.

On 14 June 1995 the second division of this Court denied the petition for certiorari, which it considered as a
petition for review under Rule 45, "for failure to show that the CA had committed any reversible error" in
judgment.

In its 19 August 1995 Order, the RTC held the mortgagors and the City Sheriff of Quezon City in default and
sustained UNIONBANK's contention that the act sought to be enjoined had been enforced, negating the need of
hearing the application for preliminary injunction. Private respondents filed a lengthy motion for
reconsideration to this Order.

The annulment case was re-raffled to Branch 227 under Presiding Judge Vicente Q. Roxas upon the creation of
new salas. Judge Roxas, on 25 March 1996, denied the motion to reconsider the 19 August 1995 Order but
suggested that private respondents amend their application from prohibitory to mandatory injunction.

As private respondents were unable to amend their application, the RTC denied the motion for reconsideration
and their motion for indirect contempt, "in the interest of free speech and tolerance" on 9 July 1996. Asserting
grave abuse of discretion, private respondents brought the denial of their motion for reconsideration with the
Court of Appeals on 6 September 1996.

After considering the arguments presented by the parties, the CA ruled that despite its knowledge that the
ownership of the property was being questioned, UNIONBANK took advantage of private respondents'
procedural error by consolidating title to the property, which "smack[ed] of bad faith" and "evince[d] a
reprobate disposition of the part of its counsel to advance his client's cause by fair means or foul." As a result
thereof the transfer of title was vitiated by non-adherence to procedural due process.8

On 26 June 1997, CA nullified the consolidation of ownership, ordered the Register of Deeds to cancel the
certificate of title in UNIONBANK's name and to reinstate TCT No. 41828 with the notice of lis pendens
annotated at the back. The CA also set aside the portion of the assailed RTC Orders that declared private
respondents' prayer for writ of preliminary injunction as moot and academic. UNIONBANK's motion for
reconsideration of the above-mentioned decision was likewise rejected for lack of merit on 7 April 1998.

Hence, UNIONBANK came to this Court claiming to be a mortgagee in good faith and for value with a right to
consolidate ownership over the foreclosed property with the redemption period having expired and there having
been no redemptioners. UNIONBANK contends that the TRO which provisionally enjoined the tolling of the
redemption period was automatically dissolved upon dismissal of the complaint on 17 October 1994.
Conformably, consolidation of title in its name and the issuance of TCT No. 120929 rendered further
proceedings on the application for injunction academic. Moreover, the alleged fraudulent mortgage was
facilitated through private respondents' negligence so they must bear the loss. It also contends that since private
respondents had filed several pleadings, due process, being an opportunity to be heard either through pleadings
or oral arguments, was observed.

Private respondents maintain that UNIONBANK's consolidation of the title in its name was in bad faith, vitiated
a standing court order, is against the law, thus void ab initio. The application for preliminary injunction was not
rendered moot and academic by consolidation, which took place during the lifetime of the TRO, and did not
follow the proper legal procedure due to the surreptitious manner it was accomplished. By treating the
application for preliminary injunction as moot and academic and denying the motion for indirect contempt
without hearing, the RTC order ran afoul with the requirements of due process.
Two main issues can be gleaned from the posturing and claims of the parties, to wit, was the consolidation of
title in UNIONBANK's name proper, and was the dismissal of the application for preliminary prohibitory
injunction valid.

The issues must be answered in the affirmative.

UNIONBANK's consolidation of title over the property on 24 October 1994 was proper, though precipitate.
Contrary to private respondents' allegation UNIONBANK violated no standing court order. The only bar to
consolidation was the temporary restraining order issued by Justice Lipana-Reyes on 10 October 1994 which
effectively halted the tolling of the redemption period 7 days short of its expiration. When private respondents'
original complaint was dismissed on 17 October 1994 for failure to append a certification of non-forum
shopping, the TRO, as an ancillary order that cannot stand independent of the main proceeding, became functus
officio. Thus the tolling of the 12-month redemption period, interrupted by the filing of the complaint and the
TRO, recommenced and eventually expired 7 days thereafter or on 24 October 1994, the date of the disputed
consolidation.

The motion for reconsideration and to amend complaint filed by private respondent on 20 October 1994 was of
no moment, this Court recognizing that "a dismissal, discontinuance or non-suit of an action in which a
restraining order or temporary injunction has been granted operates as a dissolution of the restraining order or
temporary injunction,"9 regardless of whether the period for filing a motion for reconsideration of the order
dismissing the case or appeal therefrom has expired.10 The rationale therefor is that even in cases where an
appeal is taken from a judgment dismissing an action on the merits, the appeal does not suspend the judgment,
hence the general rule applies that a temporary injunction terminates automatically on the dismissal of the
action.11

We disagree with the appellate court's observation that consolidation deprived private respondents of their
property without due process. It is settled that the buyer in a foreclosure sale becomes the absolute owner of the
property purchased if it is not redeemed during the period of one year after the registration of the sale.12
Consolidation took place as a matter of right since there was no redemption of the foreclosed property and the
TRO expired upon dismissal of the complaint. UNIONBANK need not have informed private respondent that it
was consolidaint its title over the property, upon the expiration of the redemption period, without the judgment
debtor having made use of his right of redemption, the ownership of the property sold becomes consolidated in
the purchaser.13 Notice to the mortgagors and with more reason, to private respondents who are not even parties
to the mortgage contract nor to the extra judicial sale is not necessary.

In real estate mortgage, when the principal obligation is not paid when due, the mortgage has the right to
foreclose the mortgage and to have the property seized and sold with a view to applying the proceeds to the
payment of the principal obligation.14 Foreclosure may be effected either judicially or extrajudicially.

In a public bidding during extra-judicial foreclosure, the creditor —mortgagee, trustee, or other person
authorized to act for the creditor may participate and purchase the mortgaged property as any other bidder.
Thereafter the mortgagor has one year within which to redeem the property from and after registration of sale
with the Register of Deeds.15 In case of non-redemption, the purchaser at foreclosure sale shall file with the
Register of Deeds, either a final deed of sale executed by the person authorized by virtue of the power of
attorney embodied in the deed or mortgage, or his sworn statement attesting to the fact of non-redemption;
whereupon, the Register of Deeds Shall issue a new certificate of title in favor of the purchaser after the owner's
duplicate of the certificate has been previously delivered and canceled.16 Thus, upon failure to redeem
foreclosed realty, consolidation of title becomes a matter of right on the part of the auction buyer,17 and the
issuance of a certificate of title in favor of the purchaser becomes ministerial upon the Register of Deeds.

There is, moreover, nothing erroneous with the denial of private respondents' application for preliminary
prohibitory injunction. The acts complained of have already been consummated. It is impossible to restrain the
performance of consummated acts through the issuance of prohibitory injunction. When the act sought to be
prevented had long been consummated, the remedy of injunction could no longer be entertained,18 hearing the
application for preliminary injunction would just be an exercise in futility.

In addition, to be entitled to the injunctive writ, movant must show that there exists a right to be protected which
is directly threatened by an act sought to be enjoined. Furthermore, there must be a showing that the invasion of
the right is material and substantial and that there is an urgent and paramount necessity for the writ to prevent a
serious damage.19 The injunctive remedy prevents a threatened or continuous irremediable injury to some of the
parties before their claim can be thoroughly investigated and advisedly adjudicated; it is resorted to only when
there is a pressing necessity to avoid injurious consequences which cannot be remedied under any standard
compensation.20
In the case at bar, the consolidation of ownership over the mortgaged property in favor of UNIONBANK and
the issuance of a new title in its name during the pendency of an action for annulment and reconveyance will
not cause irreparable injury to private respondents who are plaintiffs in the said preliminary injunction. This is
because .as purchaser at a public auction, UNIONBANK is only substituted to and acquires the right, title,
interest and claim of the judgment debtors or mortgagors to the property at the time of levy.21 Perforce, the
judgment in the main action for reconveyance will not be rendered ineffectual by the consolidation of
ownership and the issuance of title in the name of UNIONBANK.

More importantly, with the main action for reconveyance pending before the RTC, the notice of lis pendens,
which despite consolidation remains annotated on UNIONBANK's transfer certificate of title subject to the
outcome of the litigation, sufficiently protects private respondents interest over the property. A transferee
pendente lite stands exactly in the shoes of the transferor and is bound by any judgment or decree which may be
rendered for or against the transferor. Once a notice of lis pendens has been duly registered, any cancellation or
issuance of the title of the land involved as well as any subsequent transaction affecting the same, would have to
be subject to the outcome of the litigation. In other words, upon the termination of the litigation there can be no
risk of losing the property or any part thereof as a result of any conveyance of the land or any encumbrance that
may be made thereon posterior to the filing of the notice of lis pendens.22

Finally, as to the issue of who between private respondents and UNIONBANK is negligent and hence must bear
the loss, the same is not the proper subject of the present petition and can only be resolved by the trial court
after the trial on the merit of the main case.

WHEREFORE, the assailed Decision of the Court of Appeals of 26 June 1997 nullifying the consolidation of
ownership and ordering the Register of Deeds of Quezon City to cancel TCT No. 120929 and reinstate TCT No.
41828 is hereby REVERSED and SET ASIDE. The order of the trial court dated 7 August 1999, declaring
UNIONBANK's prayer for writ of preliminary injunction moot and academic, is hereby REINSTATED. Let
this case be remanded to the Regional Trial Court for trial on the merits.

No pronouncement as to costs.1âwphi1.nêt

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-77468           August 25, 1999

EDUARDO LUCENA and NATIVIDAD PARALES, petitioners,

vs.
COURT OF APPEALS and RURAL BANK OF NAUJAN, INC., ROGELIO PINEDA, MARIANITO
BAJA, PATRICIA ARAJA, BRAULIO BAGUS, REYNALBO MAMBIL and RAMON GARCIA,
respondents.

QUISUMBING, J.:

This is a petition for review of the Decision dated January 20, 1987 of the Court of Appeals in CA - G.R. CV
No. 65526-R entitled Eduardo Lucena, et al. vs. Rural Bank of Naujan, Inc., et al. as well as its Resolution
dated February 16, 1987 denying petitioners' motion for reconsideration.1 The assailed decision reversed the
judgment of the then Court of First Instance of Oriental Mindoro in Civil Case No. R-3004, "Eduardo Lucena,
et al. vs. Rural Bank of Naujan, et al. (Reconveyance with Damages)" and dismissed herein petitioners'
complaint.2

The factual antecedents are as follows:.

Petitioners allege they are the registered owners of a parcel of land located at the barrio of Mag-asawang Tubig,
Municipality of Naujan, Oriental Mindoro, covered by Transfer Certificate of Title No. T-41512 of the Registry
of Deeds of Oriental Mindoro. On October 29, 1969, petitioner Eduardo Lucena obtained a loan from the
private respondent Rural Bank of Naujan, Inc. in the amount of three-thousand pesos (P3,000.00) secured by a
real estate mortgage constituted on said parcel of land. On October 1, 1970, after the loan had matured,
petitioners paid to the Rural Bank of Naujan, Inc., the sum of two-thousand six pesos and ninety centavos
(P2,006.90) in partial satisfaction of their debt, thereby leaving a balance of one-thousand pesos (P1,000.00) in
its favor.1âwphi1.nêt

On May 7, 1974, after previous demand by the rural bank for the petitioners to settle the balance of their
matured loan went unheeded, the subject property was extrajudicially foreclosed and sold at public auction
where the rural bank as highest bidder acquired the property. Prior to the auction sale, notices of foreclosure
were posted in at least three conspicuous public places in the municipality where the subject property was
located, as indicated in the affidavit of posting dated May 6, 1974.3 No notices were posted in the barrio where
the property was located, nor were any published in a newspaper of general circulation. The Certificate of Sale
dated May 7, 1974 issued by private respondent Deputy Sheriff Braulio Bagus was registered with the Registry
of Deeds of Oriental Mindoro only on January 9, 1975.4

On June 26, 1975, an affidavit of consolidation of ownership was executed by the Rural Bank of Naujan
through its manager, private respondent Rogelio P. Pineda. The affidavit of consolidation was subsequently
registered by private respondent Reynaldo Mambil in his capacity as acting Register of Deeds on July 8, 1975,
under Entry No. 134351. Transfer Certificate of Title No. T-41512 in the name of the petitioners was thus
cancelled and Transfer Certificate of Title No. T-68547 of the Registry of Deeds of Oriental Mindoro was then
issued in favor of the rural bank also on July 8, 1975. Thereafter, on July 14, 1975, a deed of sale was executed
by the rural bank through its manager whereby the subject property was sold to private respondent spouses
Marianito Baja and Patricia Araja, resulting in the cancellation of TCT No. T-68547 and the subsequent
issuance of TCT No. T-68680 in the name of said respondents. Said deed of sale dated July 14, 1975 was
accepted and registered by private respondent Ramon G. Garcia, then acting Register of Deeds of Oriental
Mindoro.5

On January 12, 1977, petitioners filed a complaint for reconveyance and damages against private respondents
before the then Court of First Instance of Oriental Mindoro, to recover the subject property from private
respondents and to compel the latter to compensate them for damages and losses suffered.6 After trial, the court
a quo promulgated its decision dated September 12, 1978, ruling in sum that there was no valid foreclosure sale
of the subject property. The dispositive portion thereof reads:

WHEREFORE, in view of the foregoing the Court believes and so holds that the preponderance of evidence
militates in favor of the plaintiffs and against the defendants, and the Court renders judgment, to wit:
 (1) Orders the defendants Marianito Baja and Patricia Araja to reconvey the parcel of land registered in
their name under TCT No. T-68680 of the Register of Deeds of Oriental Mindoro in favor of herein
plaintiffs Eduardo Lucena and Natividad Parales, free from all liens and encumbrances, except the
remaining unpaid balance including accrued interest thereon in favor of the Rural Bank of Naujan, Inc.;

(2) Orders the Rural Bank of Naujan, Inc. and its manager Rogelio Pineda, jointly and severally, to pay
the herein plaintiffs actual damages in the amount of P17,500.00 for unrealized rentals from subject
property;

(3) Orders the Rural Bank of Naujan, Inc. and its manager Rogelio Pineda, jointly and severally, to pay
herein plaintiffs moral damages in the amount of P10,000.00;

(4) Orders the Rural Bank of Naujan, Inc. and its manager Rogelio Pineda, jointly and severally, to pay
plaintiffs attorney's fees in the amount of P5,000.00, and to pay the costs of suit.

SO ORDERED.7

Not satisfied with the judgment, both petitioners and private respondents elevated the case to the Court of
Appeals. On January 20, 1987, the respondent court rendered its decision reversing and setting aside the trial
court's judgment. It ruled in sum that (a) posting of notices in the barrio where the property is situated is not
required, as all the law requires is posting in the municipality or city where the property is located; (b) there is
no need to publish the notice of auction sale in a newspaper of general circulation, because the balance of the
loan was only one-thousand pesos (P1,000.00); (c) personal notice of the auction sale to the petitioners was not
required; (d) the trial court was correct in holding that the date of registration of the sheriff's certificate of sale
and not the date of the sale itself was the reckoning point for the start of the one-year redemption period of the
petitioners; and (e) the petitioners did not redeem their property within the one-year period from the date of
registration of the certificate of sale, and having lost their right of redemption, cannot squirm their way out of
their predicament by asking for reconveyance of the subject property.8

Petitioners now seek recourse through this petition. They assign the following errors:

(1) ABSENCE OF POSTING OF NOTICES IN THE BARRIO OF MAGASAWANG TUBIG, WHERE THE
LAND IS LOCATED, AS REQUIRED BY REPUBLIC ACT NO. 5939, RENDERED NULL AND VOID
THE SALE IN QUESTION.

(2) PUBLICATION WAS A REQUISITE SINE QUA NON IN THIS CASE, BECAUSE THE AMOUNT OF
THE LOAN WAS P3,000.00; HENCE, PARAGRAPH 3, SECTION 5 OF REPUBLIC ACT NO. 720, WAS
NOT APPLICABLE, BECAUSE THE LAW DOES NOT SPEAK OF THE "BALANCE UNPAID" BUT THE
"AMOUNT OF THE LOAN".

(3) THE PREMATURE AND FRAUDULENT CONSOLIDATION OF OWNERSHIP AND MALICIOUS

IMMEDIATE SALE OF THE LAND IN QUESTION IN FAVOR OF MARIANITO BAJA AND PATRICIA
ARAJA BEFORE THE EXPIRATION OF THE PERIOD OF REDEMPTION CLOSED THE DOOR FOR
LEGAL REDEMPTION; SO THAT AN ACTION FOR RECONVEYANCE, BECAME THE PROPER
REMEDY.

(4) THE AFFIDAVIT OF CONSOLIDATION OF OWNERSHIP HEREIN WAS NULL AND VOID FOR
LACK OF NOTARIZATION.9

We find that the pertinent issues to be resolved are: (1) whether or not a valid foreclosure sale of the subject
property was conducted and (2) whether or not reconveyance and damages is the proper remedy available to
petitioners.

With respect to the first issue, this Court has ruled that failure to comply with statutory requirements as to
publication of notice of auction sale constitutes a jurisdictional defect which invalidates the sale.10 Even slight
deviations therefrom are not allowed.11 Section 5 of Republic Act No. 720 as amended by Republic Act No.
5939 provides:12

The foreclosure of mortgages covering loans granted by rural banks shall be exempt from the
publication in newspapers were the total amount of the loan, including interests due and unpaid, does not
exceed three thousand pesos. It shall be sufficient publication in such cases if the notices of foreclosure
are posted in at least three of the most conspicuous public places in the municipality and barrio were the
land mortgaged is situated during the period of sixty days immediately preceding the public auction.
 Proof of publication as required herein shall be accomplished by affidavit of the sheriff or officer
conducting the foreclosure sale and shall be attached with the records of the case: . . . . (emphasis
supplied)

In the case at bar, the affidavit of posting executed by the sheriff states that notices of the public auction sale
were posted in three (3) conspicuous public places in the municipality such as (1) the bulletin board of the
Municipal Building (2) the Public Market and (3) the Bus Station. There is no indication that notices were
posted in the barrio where the subject property lies. Clearly, there was a failure to publish the notices of auction
sale as required by law.

In Roxas vs. Court of Appeals,13 this Court has ruled that the foreclosure and public auction sale of a parcel of
land foreclosed by a rural bank were null and void when there was failure to post notices of auction sale in the
barrio where the subject property was located. This Court finds that the same situation obtains in the case at bar.
Further still, there was a failure on the part of private respondents to publish notices of foreclosure sale in a
newspaper of general circulation. Section 5 of R.A. 720 as amended by R.A. 5939 provides that such
foreclosures are exempt from the publication requirement when the total amount of the loan including interests
due and unpaid does not exceed three-thousand pesos (P3,000.00). The law clearly refers to the total amount of
the loan along with interests and not merely the balance thereof, as stressed by the use of the word "total." At
the time of foreclosure, the total amount of petitioners' loan including interests due and unpaid was P3,006.90.
Publication of notices of auction sale in a newspaper was thus necessary.

In light of private respondents' failure to comply with the statutory requirements of notice and publication, we
rule that the foreclosure and public auction sale of petitioners' property are null and void. Hence, the Rural Bank
of Naujan did not acquire valid title to the property in question. This reversal of the Court of Appeals disposes
of the other errors assigned by petitioners.

Anent the second issue, the above conclusion requires a determination of whether or not petitioners are entitled
to a reconveyance of their property. If the property has not yet passed to an innocent purchaser for value, an
action for reconveyance is still available.14 It is a condition sine qua non for an action for reconveyance to
prosper that the property should not have passed to the hands of an innocent purchaser for value.15 He is
considered an innocent purchaser who acquired the property for a valuable consideration not knowing that the
title of the vendor or grantor was null and void.16 Good faith or its absence must thus be established on the part
of spouses Marianito Baja and Patricia Araja at the time that they purchased the subject property from the Rural
Bank of Naujan.

Good faith, or the lack of it, is in the last analysis a question of intention; but in ascertaining the intention by
which one is actuated on a given occasion, we are necessarily controlled by the evidence as to the conduct and
outward acts by which alone the inward motive may, with safety, be determined.17 To determine whether or not
the Baja spouses were in good faith at the time they purchased the subject property from the Rural Bank of
Naujan thus entails a review of the evidence on record.

The trial court concluded that Marianito Baja and Patricia Araja were purchasers in bad faith. The trial court
noted that when Marianito Baja verified the title of the subject property at the rural bank, he must have noticed
that the certificate of sale was registered with the Office of the Register of Deeds only on January 9, 1975, so
that he is presumed to know that the petitioners had at least one year from that date or up to January 8, 1976 to
redeem the subject property.18

It is a well-settled rule that a purchaser cannot close his eyes to facts which should put a reasonable man upon
his guard, and then claim that he acted in good faith under the belief that there was no defect in the title of the
vendor. His mere refusal to believe that such defect exists, or his willful closing of his eyes to the possibility of
the existence of a defect in his vendor's title, will not make him an innocent purchaser for value, if it afterwards
develops that the title was in fact defective, and it appears that he had such notice of the defect as would have
led to its discovery had he acted with that measure of precaution which may reasonably be required of a prudent
man in a like situation.19

In the case at bar, Marianito Baja testified on cross-examination that Victor Atienza, Baja's cousin and
petitioners' tenant on the subject property, informed him of the rural bank's intention to sell the land in
question.20 He said that from the time this information was relayed to him until the execution of the deed of sale
by the bank in favor of the Baja spouses on July 14, 1975, a period of about half a year elapsed.21 He further
stated that upon learning from Victor Atienza that the property was being sold, he immediately went to the rural
bank to verify this information, as well as ascertain if the land was titled.22 Baja also said that before the deed of
sale was executed on July 14, 1975, he made his offer to buy the property from the bank about one month
before said date.23 On direct examination, however, Baja claimed that he verified the title to the subject property
to be in the rural bank's name before the sale was effected.24
From the records, it appears that title to the property was issued in the rural bank's name only on July 8, 1975,
when the bank's affidavit of consolidation of ownership dated June 26, 1975 was registered with the Registry of
Deeds of Oriental Mindoro.25 Said registration was the operative act to prompt the Register of Deeds to cancel
the title in the name of petitioners and to issue a new one in the name of the rural bank. Hence, if Marianito
Baja claims to have offered to buy the property one month before July 14, 1975, or sometime in the middle of
June of that year, he must have noticed that the title was not yet in the rural bank's name. More so, he also
would have noticed that the title was not yet in the bank's name when he verified the status of the property and
the title thereto immediately after Victor Atienza told him that the property was being sold, which, according to
him, was about half a year before July 14, 1975.

What Baja should have noticed, if we follow his own chronological estimates, was that the title was still in the
petitioners' name when he verified the status of the land in question. Thus, he must have seen that the certificate
of auction sale was registered only on January 9, 1975. As the trial court has said, he is presumed by law to
know that the petitioners had one year from this date or until January 8, 1976 to redeem the subject property.

In addition, Baja was completely aware of the fact that Victor Atienza was a tenant of the petitioners. Hence, at
the time the property in question was being sold to him by the rural bank, possession thereof was with the
petitioners, exercised through their tenant Victor Atienza. In Santiago vs. Court of Appeals,26 we cited De
Guzman, Jr. vs. Court of Appeals (156 SCRA 701 [1987]):

The failure of appellees to take the ordinary precautions which a prudent man would have taken under
the circumstances, specially in buying a piece of land in the actual, visible and public possession of
another person, other than the vendor, constitutes gross negligence amounting to bad faith.

In this connection, it has been held that were, as in this case, the land sold is in the possession of a
person other than the vendor, the purchaser is required to go beyond the certificate of title and ma[k]e
inquiries concerning the rights of the actual possessor. (Incala vs. Mendoza, CA-G.R. No. 13677-R,
November 9, 1965; De Jesus vs. Revilla, CA-G.R. No. 13562-R, October 5, 1965; Martelino vs.
Manikan, CA-G.R. No. 32792-R, June 22, 1956)

xxx     xxx     xxx

One who purchases real property which is in the actual possession of another should, at least make some
inquiry concerning the right of those in possession. The actual possession by other than the vendor
should, at least put the purchaser upon inquiry. He can scarcely, in the absence of such inquiry, be
regarded as a bona fide purchaser as against such possessors" (Conspecto vs. Fruto, 31 Phil. 144)."

xxx     xxx     xxx

Marianito Baja testified on cross-examination that he was working for about half a year in another area about a
hundred meters away from the subject property before the same was offered to him for sale.27 Her thus had
visual notice that petitioners' tenant Victor Atienza was working on the land in question. He also learned from
Atienza that petitioner Eduardo Lucena was the landlord of the former.28 In fact, prior to the date that he
acquired the property, Baja instructed Atienza to inform said petitioner that the rural bank was selling the
property to him.29 Baja, however, never communicated directly with petitioner Eduardo Lucena, nor did he
receive any response coming from said petitioner.30 He did learn, however, that Lucena scolded Victor Atienza
when the latter went to see him, indicating that he was aware of said petitioner's aversion to the sale of the
property by the rural bank.31

All things considered, Marianito Baja did not make any reasonable inquiry regarding the status of the land in
question, despite being aware that the property was still in the possession of the petitioners. He did not even
make any effort to communicate directly with petitioner Eduardo Lucena. All he did was to instruct Victor
Atienza to inform Lucena of the proposed sale of the property. He did not instruct Atienza, however, to make
inquiries concerning the status of the property. Furthermore, Baja's claim that he saw that title to the property
was in the name of the rural bank prior to the sale is not credible. Granting arguendo that the title was in the
name of the rural bank when he first saw it, he nonetheless had notice that the possession of the property was
with persons other than the vendors thereof. It was thus incumbent upon him to look beyond the title to the
subject property and make the necessary inquiries. This he neglected to do.

When the Baja spouses purchased the subject property from the rural bank on July 14, 1975, they did so well
within the one-year redemption period of petitioners. In doing so, not only did said respondents have notice of a
defect in the title of the rural bank over the subject property, but by purchasing the latter, they also closed the
door on the petitioners' right to redeem it. Accordingly, we adopt the finding of the lower court that said
respondents purchased the subject property in bad faith. We rule that petitioners are entitled to a reconveyance
of the property as it has not yet passed to an innocent purchaser for value.

In their petition, petitioners also pray that this Court render a decision pursuant to their prayers as appellants in
the Court of Appeals. Essentially, petitioners implored the respondent court to raise the amount of damages
awarded them by the trial court and to find private respondents Braulio Bagus, Reynaldo Mambil and Ramon
Garcia liable for damages as well. Petitioners also asked for the inclusion of exemplary damages and litigation
fees in the award.

We find that there is no substantial reason to modify the trial court's award of damages. There is no convincing
proof to support petitioners' allegations that private respondents Braulio Bagus, Reynaldo Mambil and Ramon
Garcia performed their duties as Deputy Provincial Sheriff and Registers of Deeds with unlawful intent and in
bad faith. Furthermore, petitioners' allegations as to the amount of unrealized rentals due them as actual
damages are mere assertions unsupported by factual evidence. In determining actual damages, the court cannot
rely on mere assertions, speculations, conjectures or guesswork but must depend on competent proof and on the
best evidence obtainable regarding the actual amount of loss.32

There is also no sound basis for increasing the award of moral damages. The well-entrenched rule is that the
grant of moral damages depends upon the discretion of the court based on the circumstances of each case.33 We
find that the trial court exercised its sound discretion in awarding actual and moral damages as it did to the
petitioners, as well as in not granting the exemplary damages for lack of sufficient basis.

WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals dated January 20, 1987
is hereby SET ASIDE; and the decision of the CFI of Oriental Mindoro dated September 12, 1978, is hereby
REINSTATED and AFFIRMED.1âwphi1.nêt

Costs against private respondents.

SO ORDERED.
 FIRST DIVISION

G.R. No. 125838            June 10, 2003

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS and EMERALD RESORT HOTEL CORPORATION, respondents.

CARPIO, J.:

The Case

This petition for review on certiorari1 seeks to reverse the Joint Decision2 of the Court of Appeals in CA-G.R.
CV Nos. 38569 and 38604 dated 31 January 1996 and the Resolution dated 30 July 1996 denying the motion for
reconsideration. The Court of Appeals affirmed the Decision3 of the Regional Trial Court of Iriga City, Branch
36, declaring the foreclosure of the mortgaged properties void for failure to comply with the statutory requisites.

The Facts

Private respondent Emerald Resort Hotel Corporation ("ERHC") obtained a loan from petitioner Development
Bank of the Philippines ("DBP"). DBP released the loan of P3,500,000.00 in three installments: P2,000,000.00
on 27 September 1975, P1,000,000.00 on 14 June 1976 and P500,000.00 on 14 September 1976. To secure the
loan, ERHC mortgaged its personal and real properties to DBP.

On 18 March 1981, DBP approved a restructuring of ERHC’s loan subject to certain conditions.4 On 25 August
1981, DBP allegedly cancelled the restructuring agreement for ERHC’s failure to comply with some of the
material conditions5 of the agreement.

Subsequently, ERHC delivered to DBP three stock certificates of ERHC aggregating 3,477,052 shares with a
par value of P1.00 per share. ERHC first delivered to DBP on 20 October 1981 Stock Certificate No. 30
covering 1,862,148 shares. Then ERHC delivered on 3 November 1981 Stock Certificate No. 31 covering
691,052 shares, and on 27 November 1981 Stock Certificate No. 32 covering 923,852 shares.

On 5 June 1986, alleging that ERHC failed to pay its loan, DBP filed with the Office of the Sheriff, Regional
Trial Court of Iriga City, an Application for Extra-judicial Foreclosure of Real Estate and Chattel Mortgages.

Deputy Provincial Sheriffs Abel Ramos and Ruperto Galeon issued the required notices of public auction sale
of the personal and real properties. However, Sheriffs Ramos and Galeon failed to execute the corresponding
certificates of posting of the notices. On 10 July 1986, the auction sale of the personal properties proceeded.

The Office of the Sheriff scheduled on 12 August 1986 the public auction sale of the real properties. The Bicol
Tribune published on 18 July 1986, 25 July 1986 and 1 August 1986 the notice of auction sale of the real
properties. However, the Office of the Sheriff postponed the auction sale on 12 August 1986 to 11 September
1986 at the request of ERHC. DBP did not republish the notice of the rescheduled auction sale because DBP
and ERHC signed an agreement to postpone the 12 August 1986 auction sale.6 ERHC, however, disputes the
authority of Jaime Nuevas who signed the agreement for ERHC.

In a letter dated 24 November 1986, ERHC informed DBP of its intention to lease the foreclosed properties.7

On 22 December 1986, ERHC filed with the Regional Trial Court of Iriga City a complaint for annulment of the
foreclosure sale of the personal and real properties. Subsequently, ERHC filed a Supplemental Complaint.
ERHC alleged that the foreclosure was void mainly because (1) DBP failed to comply with the procedural
requirements prescribed by law; and (2) the foreclosure was premature. ERHC maintained that the loan was not
yet due and demandable because the DBP had restructured the loan.
DBP moved to dismiss the complaint because it stated no cause of action and ERHC had waived the alleged
procedural defenses. The trial court denied the motion to dismiss. Consequently, DBP filed its answer, claiming
that it complied with the legal requirements for a valid foreclosure. DBP further claimed that it cancelled the
conditional restructuring of ERHC’s loan because ERHC failed to comply with some material conditions of the
restructuring agreement.

Meanwhile, acting on ERHC’s application for the issuance of a writ of preliminary injunction, the trial court
granted the writ on 20 August 1990. Accordingly, the trial court enjoined DBP from enforcing the legal effects
of the foreclosure of both the chattel and real estate mortgages.

Thereafter, trial on the merits ensued. After the parties presented their evidence, the trial court rendered a
Decision8 dated 28 January 1992, the dispositive portion of which reads:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff corporation
and against the defendants:

1. Declaring as null and void the foreclosure and auction sale of the personal properties of plaintiff
corporation held on July 10, 1986;

2. Declaring as null and void the foreclosure and auction sale of the real properties of plaintiff
corporation covered by TCT No. RT-1075 (19980); TCT No. RT-1076 (19981); TCT No. RT-1077
(22367) and TCT No. 10244 of the Register of Deeds of Camarines Sur (now Iriga City) in the auction
sale thereof held on September 11, 1986, and all the improvements therein;

3. Ordering the Register of Deeds of Camarines Sur (now Iriga City) to cancel the annotations of the
Sheriff’s Certificate of Sale on the aforestated titles as null and void and without any legal effect;

4. Ordering the defendant Development Bank of the Philippines to comply with the restructuring of
plaintiff corporation’s loans retroactively as though the foreclosure had not taken place in the interest of
justice and equity; and

5. Ordering the defendant DBP to pay plaintiff corporation moral damages in the amount of P500,000.00
for initiating what was a clearly illegal foreclosure and causing the said plaintiff corporation to suffer
needlessly anguish, opprobrium and disrepute as a consequence thereto.

SO ORDERED.

Both ERHC and DBP appealed the trial court’s decision to the Court of Appeals. ERHC anchored its appeal on
the insufficiency of the moral damages awarded by the trial court and the absence of any award of temperate,
nominal or exemplary damages. DBP’s appeal, on the other hand, assailed the decision as well as the order
dismissing its petition for a writ of possession.

The Court of Appeals, which consolidated the appeals, affirmed the decision of the trial court.9 DBP filed a
Motion for Reconsideration which the Court of Appeals denied.10

Hence, this petition.

The Ruling of the Court of Appeals

The Court of Appeals sustained the trial court’s ruling that the foreclosure was void. The Court of Appeals
affirmed the trial court’s finding that DBP failed to comply with the posting and publication requirements under
the applicable laws. The Court of Appeals held that the non-execution of the certificate of posting of the notices
of auction sale and the non-republication of the notice of the rescheduled 11 September 1986 auction sale
invalidated the foreclosure.

The Court of Appeals also found that the parties perfected the restructuring agreement and that ERHC
substantially complied with its conditions based on the following "circumstances":

(a) The transmittal letter dated October 20, 1981 which relates to the progress of the restructuring of the
mortgage account of Emerald Resort Hotel Corporation and that the same has been approved by the SEC
(Exh. "D")

(b) The transfer of shares of stocks to appellant DBP, the value of which are broken as follows:
 1. Stock certificate No. 30 for 1,862,148 shares worth P1,862,148.00 (Exhs. "D" and "D-1");

2. Stock certificate No. 32 for 932,852 shares worth P953,852.00 (Exhs. "F" and "F-1");

3. Stock certificate No. 031, for 691,052 shares worth P691,052.00 (Exhs. "M" and "M-5").

(c) The acceptance of the foregoing by the DBP without raising the fact of delay as embodied in
condition no. 7 of Exh. "B".

(d) No rejection was made by the defendant-appellant DBP at the time the shares of stocks were being
held by the latter.

(e) The belated rejection of the shares of stocks was interposed only at the time the instant suit was filed
which was long after the expiration of the 90-day period extended by DBP to Emerald.

(f) No rejection was also made when plaintiff corporation did not avail of the additional loan which was
allegedly part of the package accommodation.11

The Court of Appeals also affirmed the trial court’s award of moral damages but denied ERHC’s claim for
temperate and exemplary damages. The Court of Appeals found that DBP’s intrusion, assisted by sheriffs and
several armed men, into Hotel Ibalon and the sheriffs’ inventory of the hotel’s furniture and fixtures caused fear
and anxiety to the hotel owner, staff and guests. These acts, according to the Court of Appeals, debased the
hotel’s goodwill and undermined its viability warranting the award of moral damages.

Finding the foreclosure void, the Court of Appeals also denied DBP’s petition for a deficiency claim and a writ
of possession.

The Issues

DBP presents the following issues for resolution:

1. Whether DBP complied with the posting and publication requirements under applicable laws for a
valid foreclosure.

2. Whether the restructuring agreement between DBP and ERHC was perfected and implemented by the
parties before the foreclosure.

3. Whether ERHC’s offer to lease the foreclosed properties constitutes a waiver of its right to question
the validity of the foreclosure.

4. Whether the award of moral damages to ERHC, a juridical person, is proper.

The Court’s Ruling

The petition is partly meritorious.

First Issue:
Compliance with the posting and publication requirements under applicable laws

Posting requirement under Acts Nos. 3135 and 1508

In alleging that the foreclosure was valid, DBP maintains that it complied with the mandatory posting
requirement under applicable laws.12 DBP insists that the non-execution of the certificate of posting of the
auction sale notices did not invalidate the foreclosure.

We agree.

This Court ruled in Cristobal v. Court of Appeals13 that a certificate of posting is not required, much less
considered indispensable for the validity of an extrajudicial foreclosure sale of real property under Act No.
3135. Cristobal merely reiterated the doctrine laid down in Bohanan v. Court of Appeals.14 In the present case,
the foreclosing sheriffs failed to execute the certificate of posting of the auction sale notices. However, this fact
alone does not prove that the sheriffs failed to post the required notices. As held in Bohanan, "the fact alone
that there is no certificate of posting attached to the sheriff's records is not sufficient to prove the lack of
posting."15

Based on the records, DBP presented sufficient evidence to prove that the sheriffs posted the notices of the
extrajudicial sale. The trial and appellate courts glaringly erred and gravely abused its discretion in disregarding
the sheriffs’ partial report and the sheriffs’ certificate of sale executed after the auction sale. A careful
examination of these two documents clearly shows that the foreclosing sheriffs posted the required notices of
sale.

The partial report dated 10 July 1986 signed by both Sheriff Abel Ramos and Deputy Sheriff Ruperto Galeon
states in part:

That on July 1, 1986, the undersigned sheriffs posted the notice of public auction sale of chattel
mortgage in the conspicuous places, and at the Iriga City Hall Bulletin Board, including Ibalon Hotel,
Iriga City xxx.16 (Emphasis supplied)

Similarly, the certificate of sale of the real properties signed by both Sheriff Ramos and Deputy Sheriff Galeon
on 11 September 1986 states in part:

I, FURTHERMORE CERTIFY that the Notice of Sale was published in BICOL TRIBUNE, a
newspaper of general circulation in the province of Camarines Sur, for three (3) consecutive weeks and
three (3) copies of the notices of sale were posted in three (3) public places of the City where the
properties are located for no less than twenty (20) days before the sale. 17 (Emphasis supplied)

Deputy Sheriff Galeon also testified that he, together with Sheriff Ramos,18 actually posted the notices of sale.19
Indisputably, there is clear and convincing evidence of the posting of the notices of sale. What the law requires
is the posting of the notice of sale, which is present in this case, and not the execution of the certificate of
posting.

Moreover, ERHC bore the burden of presenting evidence that the sheriffs failed to post the notices of sale.20 In
the absence of contrary evidence, as in this case, the presumption prevails that the sheriffs performed their
official duty of posting the notices of sale. Consequently, we hold that the non-execution of the certificate of
posting cannot nullify the foreclosure of the chattel and real estate mortgages in the instant case.

Publication requirement under Act No. 3135

Having shown that there was posting of the notices of auction sale, we shall now resolve whether there was
publication of the notice of sale of the real properties in compliance with Act No. 3135.21

There is no question that DBP published the notice of auction sale scheduled on 12 August 1986. However, no
auction sale took place on 12 August 1986 because DBP, at the instance of ERHC, agreed to postpone the same
to 11 September 1986. DBP contends that the agreement to postpone dispensed with the need to publish again
the notice of auction sale. Thus, DBP did not anymore publish the notice of the 11 September 1986 auction sale.
DBP insists that the law does not require republication of the notice of a rescheduled auction sale.
Consequently, DBP argues vigorously that the extrajudicial foreclosure of the real estate mortgage is valid.

We do not agree.

The Court held recently in Ouano v. Court of Appeals22 that republication in the manner prescribed by Act No.
3135 is necessary for the validity of a postponed extrajudicial foreclosure sale. Another publication is required
in case the auction sale is rescheduled, and the absence of such republication invalidates the foreclosure sale.

The Court also ruled in Ouano that the parties have no right to waive the publication requirement in Act No.
3135. The Court declared thus:

Petitioner further contends that republication may be waived voluntarily by the parties.

This argument has no basis in law. The issue of whether republication may be waived is not novel, as we
have passed upon the same query in Philippine National Bank v. Nepomuceno Productions Inc.
Petitioner therein sought extrajudicial foreclosure of respondent’s mortgaged properties with the
Sheriff’s Office of Pasig, Rizal. Initially scheduled on August 12, 1976, the auction sale was
rescheduled several times without republication of the notice of sale, as stipulated in their Agreements to
Postpone Sale. Finally, the auction sale proceeded on December 20, 1976, with petitioner as the highest
 bidder. Aggrieved, respondents sued to nullify the foreclosure sale. The trial court declared the sale void
for non-compliance with Act No. 3135. This decision was affirmed in toto by the Court of Appeals.
Upholding the conclusions of the trial and appellate courts, we held:

Petitioner and respondents have absolutely no right to waive the posting and publication
requirements of Act No. 3135.

xxx

Publication, therefore, is required to give the foreclosure sale a reasonably wide publicity such that those
interested might attend the public sale. To allow the parties to waive this jurisdictional requirement
would result in converting into a private sale what ought to be a public auction.

DBP further asserts that Section 24, Rule 39 of the Rules of Court, which allows adjournment of execution sales
by agreement of the parties, applies to the present case. Section 24 of Rule 39 provides:

Sec. 24. Adjournment of Sale – By written consent of debtor and creditor, the officer may adjourn any
sale upon execution to any date agreed upon in writing by the parties. Without such agreement, he may
adjourn the sale from day to day, if it becomes necessary to do so for lack of time to complete the sale
on the day fixed in the notice.

The Court ruled in Ouano that Section 24 of Rule 39 does not apply to extrajudicial foreclosure sales, thus:

Petitioner submits that the language of the abovecited provision23 implies that the written request of the
parties suffices to authorize the sheriff to reset the sale without republication or reposting.

At the outset, distinction should be made of the three different kinds of sales under the law, namely: an
ordinary execution sale, a judicial foreclosure sale, and an extrajudicial foreclosure sale. An ordinary
execution sale is governed by the pertinent provisions of Rule 39 of the Rules of Court. Rule 68 of the
Rules of Court applies in cases of judicial foreclosure sale. On the other hand, Act No. 3135, as
amended by Act No. 4118 otherwise known as "An Act to Regulate the Sale of Property under Special
Powers Inserted in or Annexed to Real Estate Mortgages" applies in cases of extrajudicial foreclosure
sale. A different set of law applies to each class of sale mentioned. The cited provision in the Rules of
Court hence does not apply to an extrajudicial foreclosure sale. (Emphasis supplied)

DBP also maintains that ERHC’s act of requesting postponement of the 12 August 1986 auction sale estops
ERHC from challenging the absence of publication of the notice of the rescheduled auction sale.

We do not agree.

ERHC indeed requested postponement of the auction sale scheduled on 12 August 1986.24 However, the records
are bereft of any evidence that ERHC requested the postponement without need of republication of the notice of
sale. In Philippine National Bank v. Nepomuceno Productions Inc.,25 the Court held that:

x x x To request postponement of the sale is one thing; to request it without need of compliance with the
statutory requirements is another. Respondents, therefore, did not commit any act that would have
estopped them from questioning the validity of the foreclosure sale for non-compliance with Act No.
3135. x x x

The form of the notice of extrajudicial sale is now prescribed in Circular No. 7-200226 issued by the Office of
the Court Administrator on 22 January 2002. Section 4(a) of Circular No. 7-2002 provides that:

Sec. 4. The Sheriff to whom the application for extra-judicial foreclosure of mortgage was raffled shall
do the following:

a. Prepare a Notice of Extra-judicial Sale using the following form:

"NOTICE OF EXTRA-JUDICIAL SALE"

"Upon extra-judicial petition for sale under Act 3135/1508 filed _________ against (name and address
of Mortgagor/s) to satisfy the mortgage indebtedness which as of ___________ amounts to P
__________ excluding penalties, charges, attorney’s fees and expenses of foreclosure, the undersigned
or his duly authorized deputy will sell at public auction on (date of sale) ________ at 10:00 A.M. or
 soon thereafter at the main entrance of the ________ (place of sale) to the highest bidder, for cash or
manager’s check and in Philippine Currency, the following property with all its improvements, to wit:

"(Description of Property")

"All sealed bids must be submitted to the undersigned on the above stated time and date."

"In the event the public auction should not take place on the said date, it shall be held on
___________,______ without further notice."

__________ (date)

"SHERIFF" (Emphasis supplied)

The last paragraph of the prescribed notice of sale allows the holding of a rescheduled auction sale without
reposting or republication of the notice. However, the rescheduled auction sale will only be valid if the
rescheduled date of auction is clearly specified in the prior notice of sale. The absence of this information in the
prior notice of sale will render the rescheduled auction sale void for lack of reposting or republication. If the
notice of auction sale contains this particular information, whether or not the parties agreed to such rescheduled
date, there is no more need for the reposting or republication of the notice of the rescheduled auction sale.

The Office of the Court Administrator issued Circular No. 7-2002 pursuant to the 14 December 1999
Resolution of this Court in A.M. No. 99-10-05-0, as amended by the Resolutions of 30 January 2001 and 7
August 2001. The Court issued these Resolutions for two reasons.

First, the Court seeks to minimize the expenses which the mortgagee incurs in publishing the notice of
extrajudicial sale. With the added information in the notice of sale, the mortgagee need not cause the reposting
and republication of the notice of the rescheduled auction sale. There is no violation of the notice requirements
under Acts Nos. 3135 and 1508 precisely because the interested parties as well as the public are informed of the
schedule of the next auction sale, if the first auction sale does not proceed. Therefore, the purpose of a notice of
sale, which is to notify the mortgagor and the public of the foreclosure sale, is satisfied.

Second, the Court hopes to deter the practice of some mortgagors in requesting postponement of the auction sale
of real properties, then later attacking the validity of the foreclosure for lack of republication. This practice will
only force mortgagees to deny outright requests for postponement by mortgagors since it will only mean added
publication expense on the part of mortgagees. Such development will eventually work against mortgagors
because mortgagees will hesitate to grant postponements to mortgagors.

In the instant case, there is no information in the notice of auction sale of any date of a rescheduled auction sale.
Even if such information were stated in the notice of sale, the reposting and republication of the notice of sale
would still be necessary because Circular No. 7-2002 took effect only on 22 April 2002. There were no such
guidelines in effect during the questioned foreclosure.

Clearly, DBP failed to comply with the publication requirement under Act No. 3135. There was no publication
of the notice of the rescheduled auction sale of the real properties. Therefore, the extrajudicial foreclosure of the
real estate mortgage is void.

DBP, however, complied with the mandatory posting of the notices of the auction sale of the personal
properties. Under the Chattel Mortgage Law,27 the only requirement is posting of the notice of auction sale.
There was no postponement of the auction sale of the personal properties and the foreclosure took place as
scheduled. Thus, the extrajudicial foreclosure of the chattel mortgage in the instant case suffers from no
procedural infirmity.

Second Issue:
Perfection and implementation of the restructuring agreement between DBP and ERHC

ERHC consistently argues that its restructuring agreement with DBP was perfected and even implemented by
the parties. ERHC maintains that the delivery of its certificates of stocks to DBP was part of its compliance with
the conditions of the restructuring agreement.

We do not agree.
Contrary to ERHC’s allegations and the Court of Appeals’ findings, the restructuring agreement was never
perfected. ERHC failed to comply with the material conditions for the perfection of the restructuring agreement.
As specified in DBP Resolution No. 956 dated 19 March 198128 approving the restructuring agreement, the
following are the conditions for the restructuring agreement:

RESOLUTION NO. 956. Emerald Resort Hotel Corporation (Hotel Ibalon) – Conversion Into Common
and/or Preferred Shares of P2,786,000.00 Representing 40% of the Total Outstanding Obligations; a
Third Additional Loan of P679,000.00 and Restructuring of the Account.

xxx

In view thereof and as favorably recommended by the Manager of the Industrial Projects Department III
in her memorandum dated February 24, 1981, the Board, upon motion made and duly seconded,
APPROVED in favor of Emerald Resort Hotel Corporation (Hotel Ibalon) the following:

1. Immediate conversion into common and/or preferred shares at borrower’s option, of

P2,786,000.00 representing 40% of the total outstanding obligation as of May 15, 1980, in the
reduced amount of P6,965,000.00 composed of outstanding principal balance of P3,500,000.00
and total arrearages on interest and other charges of P3,465,000.00, the conversion price to be
equal to the par value of the shares;

2. A third additional loan of Six Hundred Seventy-Nine Thousand Pesos (P679,000.00),

payable quarterly under the same restructured terms of the original and two (2) additional loans,
at 18% interest per annum; and

3. Restructuring of the firm’s total outstanding principal obligation of P3,500,000.00 in the form
of extension of grace period on principal repayment from two (2) years to nine (9) years to make
a maximum loan term of nineteen (19) years, regular amortizations to commence three (3)
months after the end of the extended grace period on October 31, 1985 and payable quarterly at
the following interest rates:

Original Loan - P1,425,800 at 16% interest per

annum
- 574,200 at 18% interest per annum
1st Additional Loan - 1,000,000 at 18% interest per
annum
-       500,000 at 18% interest per
annum
      Total - P3,500,000

subject to the following terms and conditions:

A. For the P679,000.00 Additional Loan

a. That subject-firm shall first pay the amount of P473.00 to reduce its total arrearages on interest
and other charges of P3,465,473.00 as of May 15, 1980 to P3,465,000.00; and

b. That the proceeds of this additional loan shall be applied to subject-firm’s accrued interest
and other charges due DBP as of May 15, 1980 not otherwise covered by the proposed equity
conversion of P2,786,000.00.

B. For Both Additional Loan and Restructuring

a. That a quasi-reorganization shall first be undertaken for the purpose of eliminating existing
deficits, which should be formally authorized by the stockholders of the corporation, should
comply with legal requirements, and should be approved by the Securities and Exchange
Commission which sees to it that the rights of creditors are not prejudiced.

xxx
 e. That subject-firm shall apply with SEC for an amendment of its authorized capitalization to
include preferred shares in case immediate conversion into equity of 40% of the total outstanding
obligation as of May 15, 1980 will include preferred shares.

xxx (Emphasis supplied)

A careful review of the facts and the evidence presented by the parties discloses that ERHC failed to comply
with the terms and conditions set forth in DBP Resolution No. 956.

First, ERHC failed to comply with the important condition of converting into equity 40 percent of its
outstanding debt to DBP. ERHC did not present any evidence to show that it complied with this particular
requirement. While it is true that ERHC delivered to DBP certificates of stocks, it was to comply with ERHC’s
commitment under the original mortgage contracts.29 ERHC committed to pledge or assign to DBP at least 67
percent of its outstanding shares to secure the original loan accommodation. The original mortgage contracts
contain the following condition:

xxx

c. By an assignment to the Mortgagee of not less than 67% of the total subscribed and outstanding
voting shares of the company. The said percentages of shares assigned shall be maintained at all times
and the said assignment to subsist for as long as the Assignee may deem necessary during the existence
of the Mortgagee’s approved accommodation. xxx30

On 17 April 1985, DBP informed ERHC that it had not complied with the condition in the original mortgage
contract on the assignment of 67 percent of its outstanding shares to DBP. The letter of DBP states in part:

2. The condition requiring ERHC to assign in favor of DBP at least 67% of the subscribed and
outstanding voting shares of company has not been met.

Of the 4,917,500 outstanding voting shares as of December 31, 1982, only 911,800 shares have been
assigned instead of 3,294,725 (67% of 4,917,000), more of the outstanding voting shares have increased.
31

The deficiency of 2,382,925 shares (3,294,725 - 911,800) may however be covered by the 2,786,000
shares you transferred in the name of DBP as an alternative compliance with 65% requirement.
(Emphasis supplied)

In its reply letter dated 11 June 1985 to DBP, ERHC signified its readiness to assign 67 percent of its
outstanding shares to DBP. Thus, ERHC’s reply letter, signed by its President Atty. Jose C. Reyes, states in
part:

With reference to your letter dated 17 April 1985 which could not be seasonably acted upon on account
of my absence from the country for medical reasons, I am pleased to inform your goodself of the action
taken on the various items thereon enumerated, to wit:

1. x x x

2. Assignment of 67% of outstanding voting shares.

We are ready to bring up the assigned shares in favor of DBP to 67% of the corporation’s outstanding
voting shares of 4,917,500 as of December 31, 1982 or total of 3,294,725 shares.

The corporation will maintain its previous assignment of 911,800 shares.

Moreover, the corporation is agreeable that Stock Certificate No. 030 for 1,862,148 shares which had
been transferred to DBP be considered as an alternative compliance to the raising of DBP’s assigned
shares to the full 67% or 3,294,725 shares. Your formal conformity to this arrangement is likewise
requested.

Finally, the corporation will further assign to DBP another 520,777 shares in exchange of Stock
Certificate No. 032 for 923,852 shares which was transferred to DBP conditionally. This Stock
Certificate has to be surrendered to the corporation for cancellation before we can issue by way of
 further assignment the 520,777 shares. In short, the 3 blocks of shares mentioned above would result as
follows:

1.     911,800 shares
2. 1,862,148 shares
3.     520,777 shares
Total – 3,294,725 shares of 67% outstanding voting
shares

x x x. 32

Clearly, when ERHC delivered the certificates of stocks, it was to comply with ERHC’s commitment under the
original mortgage contracts, not the restructuring agreement.

Besides, there is a vast difference between an assignment of shares to DBP by existing stockholders and
conversion of DBP’s loan into equity of ERHC. In the first, the paid-up capital of ERHC remains the same. In
the latter, the paid-up capital of ERHC, as well as its liabilities, changes in that the liabilities are transferred to
the capital account to the extent of the conversion. The latter case, which is the conversion of debt into equity
required under the restructuring agreement, never happened. The delivery to DBP of stock certificates
representing 3,294,725 ERHC shares did not reduce the liabilities of ERHC. The reason for the requirement to
convert P2,786,000.00 in liabilities of ERHC into equity was to reduce ERHC’s debt to equity ratio, which the
assignment and delivery of the stock certificates did not and could not have achieved.

Second, ERHC did not avail of the P679,000.00 additional loan, despite this being a material condition of the
restructuring agreement. ERHC could not simply refuse to avail of the additional loan because the proceeds of
this loan were to pay the balance of ERHC’s accrued interest and other charges due DBP as of 15 May 1980.
Clearly, ERHC’s refusal to avail of the additional loan, intended to up-date ERHC’s loan account, prevented the
perfection of the restructuring agreement.

Lastly, ERHC failed to comply with the quasi-reorganization requirement, as clearly admitted in ERHC’s letter
dated 3 November 1982 to DBP, thus:

3. On July 31, 1981, we once more communicated with your Naga Branch advising of the Emerald
Resort Hotel Corporation’s Stockholders Resolution approving the quasi-reorganization and the Petition
filed with the Securities and Exchange Commission requesting approval of the corporation’s resolution
on quasi-reorganization and the transfer of 1,862,148 shares in favor of the DBP, copy whereof is
attached as Annex "C";

4. On September 7, 1981, we received by personal delivery a letter from Manager Mario C. Leaño, copy
whereof is attached as Annex "D". In our conversation had on this occasion, I reiterated our request in
our letter dated 19 June 1981 that in view of the circumstances affecting our papers in the Securities and
Exchange Commission there was need to extend our period of compliance.

xxx

It will thus be noted from the foregoing communications that we have exerted our utmost best to
comply with the conditions for the re-structuring of our loan accounts and all have been complied,
with the exception of the quasi-reorganization, for reasons beyond our legal control since it is the SEC
that passes upon the question as to whether or not we meet the SEC guidelines for a quasi-
reorganization. Unfortunately, for the reasons stated in Annex "H" and the enclosures thereto, the SEC
felt that ERHC was not within their guidelines for a quasi-reorganization.33 (Emphasis supplied)

The quasi-reorganization is required specifically to eliminate ERHC’s existing deficits. However, the SEC must
first approve the quasi-reorganization which approval ERHC admittedly failed to secure. Through no fault of
DBP, SEC disapproved ERHC’s application for quasi-reorganization.

Considering that ERHC failed to comply with the material conditions of the restructuring agreement, the
agreement was never implemented or even perfected. The perfection and implementation of the restructuring
agreement were expressly subject to the following conditions embodied in DBP Resolution No. 956 and in
DBP’s notice of approval to ERHC, respectively:
 t. x x x Implementation of the restructuring scheme as approved shall take effect upon compliance with
the terms and conditions and with all the legal and documentation requirements;34

x x x           x x x           x x x

7. All documents for this loan approval shall be executed and perfected within 90 days from the date of
this notice; otherwise, this accommodation shall be automatically cancelled.35

The trial and appellate courts gravely misapprehended the facts and made manifestly mistaken inferences in
finding that the parties had perfected the restructuring agreement. Consequently, when DBP filed the
application for extrajudicial foreclosure of the chattel and real estate mortgages, ERHC was already in default in
paying its debt to DBP.

Third Issue:
ERHC’s offer to lease the foreclosed properties

ERHC offered to lease from DBP the foreclosed properties after the auction sale. DBP argues that when ERHC
offered to lease from DBP the foreclosed properties, ERHC waived its right to question the validity of the
foreclosure.

We do not agree.

To constitute a waiver, the intent to waive must be shown clearly and convincingly.36 A mere offer to lease the
foreclosed properties cannot constitute a waiver of ERHC’s right to contest the validity of the foreclosure on the
ground of non-compliance with the statutory requisites. ERHC’s offer to lease does not relinquish ERHC’s right
to challenge the validity of the foreclosure. The offer to lease the foreclosed properties cannot validate or ratify
a void foreclosure. ERHC’s intention to lease the foreclosed properties cannot simply outweigh DBP’s failure to
comply with the statutory requisite for a valid extrajudicial foreclosure. As the Court of Appeals correctly ruled,
"there can be no waiver of the posting and publication requirements in foreclosure proceedings because the
same is contrary to law and public order."

Fourth Issue:
Award of moral damages

DBP maintains that ERHC, a juridical person, is not entitled to moral damages. ERHC counters that its
reputation was debased when the sheriffs and several armed men intruded into Hotel Ibalon’s premises and
inventoried the furniture and fixtures in the hotel.

The Court of Appeals erred in awarding moral damages to ERHC. The Court of Appeals’ sole basis for its
ruling is a quoted portion of the testimony of ERHC’s President, Atty. Jose Reyes. The testimony was not even
offered to prove the justification and amount of damages which ERHC claims against DBP. In other words,
ERHC failed to present evidence to warrant the award of moral damages. In a long line of decisions, this Court
has held that the claimant for moral damages must present concrete proof to justify its award, thus:

xxx while no proof of pecuniary loss is necessary in order that moral damages may be awarded, the
amount of indemnity being left to the discretion of the court (Art. 2216), it is, nevertheless, essential that
the claimant satisfactorily prove the existence of the factual basis of the damage (Art. 2217) and its
causal relation to defendant’s acts. This is so because moral damages, though incapable of pecuniary
estimation, are in the category of an award designed to compensate the claimant for actual injury
suffered and not to impose a penalty on the wrongdoer.37 (Emphasis supplied)

In the body of its decision, the trial court gave no basis to justify the award of moral damages. The trial court
simply awarded moral damages in the dispositive portion of its decision.38

Moreover, as a general rule, moral damages are not awarded to a corporation, thus:

The award of moral damages cannot be granted in favor of a corporation because, being an artificial
person and having existence only in legal contemplation, it has no feelings, no emotions, no senses. It
cannot, therefore, experience physical suffering and mental anguish, which can be experienced only be
one having a nervous system. The statement in People v. Manero and Mambulao Lumber Co. v. PNB
that a corporation may recover moral damages if it "has a good reputation that is debased, resulting in
social humiliation" is an obiter dictum. On this score alone the award for damages must be set aside,
since RBS is a corporation.39
WHEREFORE, the Joint Decision of the Court of Appeals in CA-G.R. CV Nos. 38569 and 38604 is
AFFIRMED with MODIFICATION. The extrajudicial foreclosure of the chattel mortgage is valid whereas
the extrajudicial foreclosure of the real estate mortgage is void. The award of moral damages is deleted for lack
of basis. No costs.

SO ORDERED.
 FIRST DIVISION

G.R. No. 134406               November 15, 2000

PHILIPPINE NATIONAL BANK, petitioner,

vs.
SPOUSES FRANCISCO and MERCED RABAT, respondents.

DECISION

DAVIDE, JR., C.J.:

In its petition for review, petitioner Philippine National Bank (hereafter PNB) seeks the reversal of the decision
of 29 July 1998 of the Court of Appeals in CA-GR. CV No. 49800,1 which affirmed the decision of 14 June
1994 of the Regional Trial Court of Manila, Branch 14, in Civil Case No. 92-61122.2

The factual and procedural antecedents which gave rise to this appeal are hereunder summarized.

On 25 August 1979, respondent spouses Francisco and Merced Rabat (hereafter RABATs) applied for a loan
with PNB.3 Subsequently, the RABATs were granted on 14 January 1980 a medium-term loan of ₱4.0 Million
to mature three years from the date of implementation.4

On 28 January 1980, the RABATs signed a Credit Agreement and executed a Real Estate Mortgage5 over
twelve (12) parcels of land which stipulated that the loan would be subject to interest at the rate of 17% per
annum, plus the appropriate service charge and penalty charge of 3% per annum on any amount remaining
unpaid or not renewed when due.6

On 25 September 1980, the RABATs executed another document denominated as "Amendment to the Credit
Agreement" purposely to increase the interest rate from 17% to 21% per annum, inclusive of service charge and
a penalty charge of 3% per annum to be imposed on any amount remaining unpaid or not renewed when due.7
They also executed another Real Estate Mortgage8 over nine (9) parcels of land as additional security for their
medium-term loan of Four Million (₱4.0 M).9 These parcels of land are agricultural, commercial and residential
lots situated in Mati, Davao Oriental.

The several availments of the loan accommodation on various dates by the RABATs reached the aggregate
amount of THREE MILLION FIVE HUNDRED SEVENTEEN THOUSAND THREE HUNDRED EIGHTY
(₱3,517,380), as evidenced by the several promissory notes,10 all of which were due on 14 March 1983.

The RABATs failed to pay their outstanding balance on due date.

In its letter11 of 24 July 1986, in response to the letter of the RABATs of 16 June 1986 requesting for more
time within which to arrive at a viable proposal for the settlement of their account, PNB informed the RABATs
that their request has been denied and gave the RABATs until 30 August 1986 to settle their account. The PNB
sent the letter to 197 Wilson Street, San Juan, Metro Manila.

For failure of the RABATs to pay their obligation, the PNB filed a petition for the extrajudicial foreclosure of
the real estate mortgage executed by the RABATs. After due notice and publication, the mortgaged parcels of
land were sold at a public auction held on 20 February 1987 and 14 April 1987. The PNB was the lone and
highest bidder with a bid of ₱3,874,800.00.12

As the proceeds of the public auction were not enough to satisfy the entire obligation of the RABATs, the PNB
sent anew demand letters. The letter dated 15 November 199013 was sent to the RABATs at 197 Wilson Street,
San Juan, Metro Manila; while another dated 30 August 199114 was sent to the RABATs at 197 Wilson Street,
Greenhills, San Juan, Metro Manila, and also in Mati, Davao Oriental.
Upon failure of the RABATs to comply with the demand to settle their remaining outstanding obligation which
then stood at ₱14,745,398.25,15 including interest, penalties and other charges, PNB eventually filed on 5 May
1992 a complaint for a sum of money before the Regional Trial Court of Manila. The case was docketed as
Civil Case No. 92-61122, which was assigned to Branch 14 thereof.

The RABATs filed their answer with counterclaim16 on 28 July 1992 to which PNB filed its Reply and Answer
to Counterclaim.17 On 2 January 1993, the RABATs filed an amended answer.18 The RABATs admitted their
loan availments from PNB and their default in the payment thereof. However, they assailed the validity of the
auction sales for want of notice to them before and after the foreclosure sales.

They further added that as residents of Mati, Davao Oriental since 1970 up to the present, they never received
any notice nor heard about the foreclosure proceeding in spite of the claim of PNB that the foreclosure
proceeding had been duly published in the San Pedro Times, which is not a newspaper of general circulation.

The RABATs likewise averred that the bid price was grossly inadequate and unconscionable.

Lastly, the RABATs attacked the validity of the accumulated interest and penalty charges because since their
properties were sold in 1987, and yet PNB waited until 1992 before filing the case. Consequently, the RABATs
contended that they should not be made to suffer for the interest and penalty charges from May 1987 up to the
present. Otherwise, PNB would be allowed to profit from its questionable scheme.

The PNB filed on 5 February 1993 its Reply to the Amended Answer and Answer to Counterclaim.19

After appropriate proceedings, the trial court rendered on 14 June 1994 a decision,20 whose dispositive portion
reads as follows:

WHEREFORE, and in view of the foregoing considerations, judgment is hereby rendered dismissing the
complaint.

On the counterclaim, the two (2) auction sales of the mortgaged properties are hereby set aside and ordering the
plaintiff to reconvey to the defendants the remaining properties after the sale [of] sufficient properties for the
satisfaction of the obligation of the defendants.

The parties will bear their respective cost.

So ordered.

The trial court addressed these five issues:

1. The validity of the foreclosure proceedings;

2. The validity of the auction sales;

3. The validity of the penalty charges and the interest charged by the plaintiff;

4. Whether or not the defendants should be liable for the interests and penalty charges from the date of
the auction sales up to the filing of this case; and

5. Whether or not the plaintiff is entitled to deficiency judgment.

The first issue was resolved against the RABATs who claimed that the foreclosure was void due to lack of
notice to them at their address in Mati, Davao Oriental, and that there was no publication of the notice in a
newspaper of general circulation. It held that the mortgage contract did not specifically require that personal
service of notice of foreclosure sale be given to them and that the San Pedro Times which published the notice
of foreclosure sale is a newspaper of general circulation as certified by the Sheriff and as shown in the affidavit
of its publisher.

Nevertheless, the trial court agreed with the RABATs that the two auction sales were void in view of the gross
inadequacy of the price, which is shocking to the conscience. It ratiocinated thus:

Certainly, the price of ₱6.00/sq.m. for the properties sold in the first auction sale and ₱3.00/sq.m. for the
properties sold in the second auction sale are too low as compared with ₱80.00 which according to Atty. Sibala
was the price per square meter of the properties in 1986.
The evidence show that the foreclosed propert[ies] are near the Municipal building, public market, provincial
capital of Davao Oriental, the provincial hospital of Davao Oriental, and the Sibala Village Subdivision wherein
the last sold at ₱200.00 per square meter. The prices paid for are indeed too low as [to] be shocking to the
conscience.

On the third and fourth issue, the trial court ruled:

… although the movant’s properties were sold in 1987, the plaintiff waited until 1992 before filing this case,
hence, the tremendous accumulation of interest and penalty charges. The plaintiff has not given any plausible
explanation for the delay, hence, it may be presumed that the plaintiff had deliberately delayed the filing of this
case in order that it can collect more interest and penalty charges. Consequently, the defendants should not be
made to suffer for the interest and penalty charges from May 1987 up to the present. Otherwise, the plaintiff
would be allowed to profit from its questionable scheme. Therefore, the defendants should not only be made to
answer for their loan in the amount of P4,000,000.00 plus interest up to May 1987.

The defendants further claim that the interest and penalty charges should be 21% and 3% respectively pursuant
to the provision of the amended credit accommodation; that the acceleration close should not be enforced as it is
in nature of a contract of adhesion. The amendment to the credit accommodation is not a contract of adhesion.
A contract of adhesion is one solely prepared by one of the parties where the other party had no participation,
but merely gives his asset [sic] by adhering thereto. It is a take it or leave it situation. Standardized contract
form offered to consumers of goods and services on essentially (take it or leave it) basis without affording
consumer realistic opportunity to bargain and under such conditions that consumers cannot obtain desires
products or services except by acquiescing in form contract. Distinctive feature of adhesion contract is that
weaker party has no realistic choice up to its term. (Cubic Corporation versus Marty, Dist., 185 C.A. 3d 438-
229 Cal/Rptr. 828, 833; Standard Oil Co. of California versus Perkins, C.A. Or. 347 F. 2d 379, 383.).

Anent the last issue, the trial court ruled that while a mortgagee is entitled to a deficiency judgment, it would be
premature to adjudge it in the case since the two auction sales in question are null and void.

Only PNB appealed from the judgment to the Court of Appeals. Its appeal was docketed as CA-G.R. CV No.
49800.

In its Appellant’s Brief filed in CA-G.R. CV No. 49800, PNB raised the following issues:21

WHETHER OR NOT THE TRIAL COURT ERRED IN NULLIFYING THE SHERIFF'S AUCTION
SALE ON THE GROUND THAT THE PNB'S WINNING BID IS VERY LOW

II

WHETHER OR NOT THE TRIAL COURT ERRED IN RULING THAT THE DEFENDANTS-
APPELLEES ARE NOT LIABLE TO PAY INTEREST AND PENALTY CHARGES AFTER THE
AUCTION SALES UP TO THE FILING OF THIS CASE.

In their Appellees’ Brief,22 the RABATs prayed for the appellate court to affirm in toto the decision of the trial
court.

On 29 June 1998, the Court of Appeals rendered a decision23 affirming the trial court's ruling nullifying the
auction sales, but on a different ground.

The Court of Appeals discovered that the RABATs did not actually receive personal notices concerning the
foreclosure proceedings. Hence, they could not have known of said foreclosure sales. It pronounced and
decreed, thus:

An examination of the exhibits show that the defendant-appellees given address is Mati, Davao Oriental and not
197 Wilson Street, Greenhills, San Juan, Metro Manila as alleged by the plaintiff-appellant (Exhibit C to J, pp.
208, 217, 220, 229, 236-239, Records). Records further show that all subsequent communications by plaintiff-
appellant was sent to defendant-appellees address at Wilson Street, Greenhills, San Juan. This was the very
reason why defendant-appellees were not aware of the foreclosure proceedings.

As correctly found out by the trial court, there is a need for the setting aside of the two (2) auction sales hence,
there is yet no deficiency judgment to speak of.
WHEREFORE, the decision of the trial court dated 14 June 1994, is hereby affirmed in toto.

SO ORDERED.

Unsatisfied with the decision, the PNB seasonably filed before us the present petition raising the lone issue of:

WHETHER OR NOT THE COURT OF APPEALS MAY REVIEW AND PASS UPON THE TRIAL
COURT’S FINDING AND CONCLUSION ON AN ISSUE WHICH WAS NEVER RAISED ON APPEAL,
AND, THEREFORE, HAD ATTAINED FINALITY

In support thereof, PNB argues:

1. THE COURT OF APPEALS HAS SO FAR DEPARTED FROM THE ACCEPTED AND USUAL
COURSE OF JUDICIAL PROCEEDINGS WHEN IT DECIDED AND RESOLVED A
QUESTION/OR ISSUE NOT RAISED IN PETITIONER PNB’S APPEAL;

2. THE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION WHEN IT

REVERSED THE FINDING AND CONCLUSION OF THE TRIAL COURT ON AN ISSUE WHICH
HAD ALREADY ATTAINED FINALITY.

PNB maintains that pursuant to Section 8 of Rule 51 of the 1997 Rules of Civil Procedure no error which does
not affect the jurisdiction over the subject matter or the validity of the judgment appealed from or the
proceedings therein will be considered unless stated in the assignment of errors, or closely related to or
dependent on an assigned error and properly argued on the Brief, save as the court may pass upon plain errors
and clerical errors.

PNB adds that nowhere in its Appellant’s Brief did it raise the issue of "lack of notice" to the RABATs. Such
being the case, in addition to the fact that the RABATs did not appeal from the decision, the trial court’s
rejection of the RABATs’ claim of lack of personal notice regarding the foreclosure proceedings had already
attained finality. The RABATs can no longer obtain from the appellate court any affirmative relief other than
the ones granted in the decision of the court below.

PNB concludes that the Court of Appeals committed grave abuse of discretion amounting to lack of jurisdiction
when it resolved an issue which was not raised in the appeal and the ruling on which by the trial court had
already become final.

In their Comment filed on 18 November 1998, the RABATs assert that the petition is "procedurally defective,
presents no justiciable question and categorically frivolous." They point out that while the petition is designated
as one under Rule 45 of the 1997 Rules of Civil Procedure, yet it is predicated on grounds involving question of
law and lack or excess of jurisdiction, under Rule 65. The PNB cannot be allowed to avail simultaneously of
both remedies.

Anent the want of justiciable question, the RABATs maintain that this case involves the simple and
fundamental issue of the validity of the auction sales conducted by PNB, which hinges on compliance "with the
requirements set forth under Republic Act (sic) 3135, governing extrajudicial foreclosure, as amended by
Republic Act No. 4148 (publication, posting and notices) and the reasonableness of the bid price," which should
be "considered jointly for a judicious resolution of the … controversy/issue."

Consequently, the RABATs conclude that the Court of Appeals cannot be faulted for ruling on a material fact
whose consideration is essential to a complete determination of the rights and obligations of the parties.

On 16 March 1999, the PNB filed its Reply to the Comment of the RABATs.

In our resolution of 21 April 1999 we gave due course to the petition and required the parties to submit their
respective memoranda which they complied with.

Section 8, Rule 51 of the 1997 Rules of Civil Procedure expressly provides:

SEC. 8. Questions that may be decided. -- No error which does not affect the jurisdiction over the subject matter
or the validity of the judgment appealed from or the proceedings therein will be considered unless stated in the
assignment of errors, or closely related to or dependent on an assigned error and properly argued in the brief,
save as the court pass upon plain errors and clerical errors.
In his book,24 Mr. Justice Florenz D. Regalado commented on this section, thus:

1. Sec. 8, which is an amendment of the former Sec. 7 of this Rule, now includes some substantial changes in
the rules on assignment of errors. The basic procedural rule is that only errors claimed and assigned by a party
will be considered by the court, except errors affecting its jurisdiction over the subject matter. To this exception
has now been added errors affecting the validity of the judgment appealed from or the proceedings therein.

Also, even if the error complained of by a party is not expressly stated in his assignment of errors but the same
is closely related to or dependent on an assigned error and properly argued in his brief, such error may now be
considered by the court. These changes are of jurisprudential origin.

2. The procedure in the Supreme Court being generally the same as that in the Court of Appeals, unless
otherwise indicated (see Secs. 2 and 4, Rule 56), it has been held that the latter is clothed with ample authority
to review matters, even if they are not assigned as errors on appeal, if it finds that their consideration is
necessary in arriving at a just decision of the case. Also, an unassigned error closely related to an error properly
assigned (PCIB vs. CA, et al., L-34931, Mar. 18, 1988), or upon which the determination of the question raised
by error properly assigned is dependent, will be considered by the appellate court notwithstanding the failure to
assign it as error (Ortigas, Jr. vs. Lufthansa German Airlines, L-28773, June 30, 1975; Soco vs. Militante, et al.,
G.R. No. 58961, June 28, 1983).

It may also be observed that under Sec. 8 of this Rule, the appellate court is authorized to consider a plain error,
although it was not specifically assigned by the appellant (Dilag vs. Heirs of Resurreccion, 76 Phil. 649),
otherwise it would be sacrificing substance for technicalities.

It may at once be noticed that the exceptions are for the benefit of the appellant and not for the appellee.

The RABATs did not appeal from the decision of the trial court.1âwphi1 As a matter of fact, in their Appellee’s
Brief filed with the Court of Appeals they prayed that said decision be affirmed in toto. As against the RABATs
the trial court’s findings of fact and conclusion are already settled and final. More specifically, they are deemed
to have unqualifiedly agreed with the trial court that the foreclosure proceedings were valid in all respects,
except as to the bid price.

On the other hand, PNB, the sole appellant, never raised the issue of lack of personal notice to the RABATs.
Neither is such issue closely related to or dependent on PNB's assigned error on appeal nor is it an exception to
Section 8 of Rule 51.

Needless to stress, the Court of Appeals erred in resolving PNB’s appeal on the basis of an issue which was not
raised on appeal and whose resolution thereon by the trial court has long become firm and final against the party
adversely affected by the resolution.

Even granting arguendo that the issue of personal notice may be raised, still we cannot agree with the Court of
Appeals. In the first place, in extrajudicial foreclosure sales, personal notice to the mortgagor is not
necessary.25 Section 3 of Act No. 3135 reads:

Section 3. Notice shall be given by posting 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 be published once a week for at least three consecutive weeks in a newspaper
of general circulation in the municipality or city.1âwphi1

Clearly personal notice to the mortgagor is not required. Second, the requirements of posting and publication in
a newspaper of general circulation were duly complied with by the PNB as correctly found by the trial court, to
which we accord great respect. A question of non-compliance with the notice and publication requirements of
an extrajudicial foreclosure sale is a factual issue and the resolution thereof by the trial court is binding and
conclusive upon us absent any showing of grave abuse of discretion.26

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals of 29 July 1998 in CA-G.R.
CV No. 49800 is hereby SET ASIDE. The Court of Appeals is directed to DECIDE, with reasonable dispatch,
CA-G.R. CV No. 49800 on the basis of the errors raised by petitioner Philippine National Bank in its
Appellant’s Brief.

No pronouncement as to costs.
 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-51768 September 14, 1990

PRUDENTIAL BANK, plaintiff-appellee,

vs.
RENATO M. MARTINEZ and VIRGINIA J. MARTINEZ, defendants-appellants.

Magno & Associates for plaintiff-appellee.

Beltran, Beltran & Beltran for defendants-appellants.

MEDIALDEA, J.:

This case is certified to Us by the Court of Appeals in its Resolution dated August 30, 1979, for the reason that only
pure questions of law are involved.

The Court of Appeals adopted the findings of fact of the trial court as follows:

This is a case for sum of money filed by plaintiff Prudential Bank against defendants Renato M. Martinez and
Virginia J. Martinez, seeking to recover a deficiency of P25,775.10 with daily interest thereon of P15.35.

The plaintiff in its complaint alleged that on January 27 and February 2, 1970 defendants obtained a loan from the
plaintiff in the total sum of P48,000.00 and in consideration thereof, the said defendants executed on said dates
promissory notes in favor of the plaintiff, promising to pay jointly and severally, the sum of P48,000.00 on or before
January 27, 1971 with interest thereon at 12% per annum, partially secured by a real estate mortgage on the
property covered by Transfer Certificate of Title No. 97467 of the Register of Deeds of Manila; that the loan became
due and defendant defaulted despite plaintiffs demand letters; that as a consequence, the mortgage was extra-
judicially foreclosed; that the plaintiff was the highest and lone bidder at the auction sale, for the sum of P52,760.00;
that after deducting therefrom the attorney's fees, registration fees, sheriffs fees, and publication expense, there still
remained a balance of P25,775.10 due to plaintiff, which plaintiff now seeks to recover plus interest and attorney's
fees.

The defendants admit the allegations in the complaint, except paragraphs 8 and 9 thereof and alleged that plaintiff
has no cause of action and therefor not entitled to recover and pray for P3,000.00 attorney's fees plus costs of
litigation in the amount of P1,000.00.

When the issues were joined a pre-trial was conducted and the Court issued the following pre-trial order, to wit:

With the admission in the answer of paragraphs 1 to 5 of the complaint, the parties believed that there are no
controversies as to the facts. From the point of view of the defendants, they will submit the case on the following
issues: (1) Whether plaintiff can still collect the deficiencies after the extra-judicial foreclosure of mortgage; (2) What
should be the basis of the computation of the attorney's fees? Should it be the principal or should the 10% be based
on the principal plus interest; and (3) Whether the plaintiff can still collect attorney's fees in its effort to recover the
deficiencies. However, plaintiff, counsel believes there is only one issue and that is whether any deficiency amount
can be collected after extra-judicial foreclosure of mortgage.

WHEREFORE, it is hereby ordered that the parties be given a period of thirty (30) days from today within which to
file their respective memoranda simultaneously.

SO ORDERED. (Rollo, pp. 30-32)

On July 8, 1977 the lower Court rendered a decision, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, ordering the latter to
pay the former, jointly and severally, the amounts of P25,775.10 with daily interest thereon of P15.85 from
September 10, 1976 until fully paid and P2,500.00 for and as attorney's fees, plus costs of suit. (Records, p. 18)

Thereupon, defendants appealed to the Court of Appeals with these two assignments of errors, namely —

I
THE LOWER COURT ERRED IN HOLDING THAT THE PLAINTIFF-APPELLEE 19 ENTITLED TO RECOVER THE
DEFICIENCY IN THE SUM OF P 25,775.1 0 AFTER THE EXTRA-JUDICIAL FORECLOSURE OF MORTGAGE TO
SATISFY THE INDEBTEDNESS, AND AFTER THE MORTGAGED PROPERTY HAD BEEN CONVEYED TO THE
PLAINTIFF- APPELLEE IN SATISFACTION OF THE LOANS.

II

THE LOWER COURT ERRED IN AWARDING THE SUM OF P2,500.00 AS ATTORNEYS FEES TO PLAINTIFF-
APPELLEE. (Appellants' Brief, p. 9, Rollo)

Appellants argue that the Legislature never intended to grant to a mortgagee the right to recover the deficiency
arising from an extrajudicial foreclosure of mortgage inasmuch as such recovery is not a natural right of the
mortgagee, hence, the need to expressly grant the same in a judicial foreclosure proceedings; that consequently, an
express prohibition against such claim would be quite superfluous and that besides, there is no need to enumerate
negative remedies or solutions in the law. Further, they aver that if mortgagees were allowed such right, the debtors
would be at the mercy of their creditors considering the summary nature of extrajudicial foreclosure proceedings.
They, likewise, point to the limited readership of auction sale notices which lead to the sale of mortgaged properties
for much less than their actual value notwithstanding that the mortgage value of the said properties is higher than its
fair market value. Finally, appellants assail the award of attorney's fees in the sum of P2,500.00 as unconscionable.
They claim that the computation of the attorney's fees should have been based on the terms of promissory note
which provided for a ten percent (10%) award of the principal obligation; and that since the attorney's fees were
already collected by the appellee when it foreclosed the mortgage, such fees should no longer be awarded in this
case. (Appellants Brief, pp. 4-11, Rollo, p. 9)

We affirm.

We have already ruled in several cases that in extrajudicial foreclosure of mortgage, where the proceeds of the sale
are insufficient to pay the debt, the mortgagee has the right to recover the deficiency from the debtor (Philippine
Bank of Commerce v. De Vera, L-18816, December 29, 1962, 6 SCRA 1026; Development Bank of the Philippines
v. Vda. de Moll L25802, January 31, 1972, 43 SCRA 82; Development Bank of the Philippines v. Murang, L-29130,
August 8,1975, 66 SCRA 141; Development Bank of the Philippines v. Zaragoza, L-23493, August 23, 1978, 84
SCRA 668; and DBP v. Tomeldan, G.R. No. 51269, November 17,1980, 101 SCRA 171). A careful scrutiny of the
arguments presented in the case at bar yields no substantial and convincing reasons for Us to depart from Our
previous ruling. Appellants' arguments merely rehashed the objections already considered and overruled in the
aforementioned cases. Thus, in Philippine Bank of Commerce v. De Vera (supra), We declared that:

A reading of the provisions of Act No. 3135, as amended (re extrajudicial foreclosure) discloses nothing, it is true, as
to the mortgagee's right to recover such deficiency. But neither do we find any provision thereunder which expressly
or impliedly prohibits such recovery.

Article 2131 of the new Civil Code, on the contrary, expressly provides that 'The form, extent and consequences of a
mortgage, both as to its constitution, modification and extinguishment, and as to other matters not included in this
Chapter, shall be governed by the provisions of the Mortgage Law and of the Land Registration Law.' Under the
Mortgage Law, which is still in force, the mortgagee has the right to claim for the deficiency resulting from the price
obtained in the sale of the real property at public auction and the outstanding obligation at the time of the
foreclosure proceedings. (See Soriano v. Enriquez, 24 Phil. 584; Banco de Islas Filipinos v. Concepcion e Hijos, 53
Phil. 86; Banco Nacional v. Barreto, 53 Phil. 101). Under the Rules of Court (Sec. 6, Rule 70),"Upon the sale of any
real property, under an order for a sale to satisfy a mortgage or other incumbrance thereon, if there be a balance
due to the plaintiff after applying the proceeds of the sale, the court, upon motion, should render a judgment against
the defendant for any such balance for which, by the record of the case, he may be personally liable to the
plaintiff, ..." It is true that this refers to a judicial foreclosure, but the underlying principle is the same, that the
mortgage is but a security and not a satisfaction of indebtedness. ...

Let it be noted that when the legislature intends to foreclose the right of a creditor to sue for any deficiency resulting
from the foreclosure of the security given to guarantee the obligation, it so expressly provides. Thus, in respect to
pledges, Article 2115 of the new Civil Code expressly states: ... If the price of the sale is less (than the amount of the
principal obligation) neither shall the creditor be entitled to recover the deficiency, notwithstanding any stipulation to
the contrary. "Likewise in the event of the foreclosure of a chattel mortgage on the thing sold in installments 'he (the
vendor) shall have no further action against the purchaser to recover any unpaid balance of the price. Any
agreement to the contrary shall be void" (Article 1484, paragraph 3, Ibid). It is then clear that in the absence of a
similar provision in Act No. 3135, as amended, it can not be concluded that the creditor loses his right given him
under the Mortgage Law and recognized in the Rules of Court, to take action for the recovery of any unpaid balance
on the principal obligation, simply because he has chosen to foreclose his mortgage extra- judicially pursuant to a
special power of attorney given him by the mortgagor in the mortgage contract, (pp. 1029-1030)

Moreover, the fact that the mortgaged property is sold at an amount less than its actual market value should not
militate against the right to such recovery. We fail to see any disadvantage going for the mortgagor. On the contrary,
a mortgagor stands to gain with a reduced price because he possesses the right of redemption. When there is the
right to redeem, inadequacy of price should not be material, because the judgment debtor may reacquire the
property or also sell his right to redeem and thus recover the loss he claims to have suffered by the reason of the
price obtained at the auction sale (De Leon v. Salvador, L-30871, December 28, 1970 and Bernabe v. Cruz, et al.,
L-31603, December 28, 1970; 36 SCRA 567). Generally, in forced sales, low prices are usually offered and the
mere inadequacy of the price obtained at the sheriffs sale unless shocking to the conscience will not be sufficient to
set aside a sale if there is no showing that in the event of a regular sale, a better price can be obtained (Ponce de
Leon v. Rehabilitation Finance Corporation, L-24571, December 18, 1970, 36 SCRA 289).

Lastly, We find that the award of attorney's fees is proper. It can not be disputed that the proceedings in the
extrajudicial foreclosure and the deficiency suit are altogether different. The first is extrajudicial and summary in
nature while the second is a court action. Hence, the efforts exerted by the lawyer in these two separate courses of
action should be recognized. Besides, the basis of the extrajudicial foreclosure proceeding was the Deed of Real
Estate Mortgage, particularly condition No. 7 thereof, where the parties stipulated for a ten percent (10%) attorney's
fees to be collected in the event that the mortgage is foreclosed or a legal action is taken to foreclose the mortgage
(Appellee's Brief, Rollo, p. 9, italics supplied). However, the proceeds in that sale were insufficient to pay the debt
contained in the appellant's promissory note. The appellee was, therefore, constrained to file a deficiency suit, an
eventuality not covered by the Deed of Real Estate Mortgage. Necessarily, the basis of this case is the promissory
note executed by the appellants. We find that the note itself shows that appellants obligated themselves to pay the
sum of ten percent as attorney's fees whether incurred or not, exclusive of cost and other expenses of collection
(Records, p. 7). Clearly, the trial court's award of attorney's fees was not without basis. The amount of P2,500.00
awarded as attorney's fees being less than ten percent (10%) of the deficiency sued for is just and proper in the
premises.

ACCORDINGLY, the decision appealed from is hereby AFFIRMED. Costs against the appellants.

SO ORDERED.
SECOND DIVISION

[G.R. No. 119247. February 17, 1997]

CESAR SULIT, Petitioner, v. COURT OF APPEALS and ILUMINADA CAYCO, Respondents.

DECISION

REGALADO, J.:

The primary issue posed before the Court, in this appeal by certiorari from a decision1 of the Court of Appeals,
is whether or not the mortgagee or purchaser in an extrajudicial foreclosure sale is entitled to the issuance of a
writ of possession over the mortgaged property despite his failure to pay the surplus proceeds of the sale to the
mortgagor or the person entitled thereto. Secondarily, it calls for a resolution of the further consequences of
such non-payment of the full amount for which the property was sold to him pursuant to his bid.

The material facts, as found by respondent court, are not disputed:

It appears from the record that on 9 June 1992 petitioner (herein private Respondent) Iluminada Cayco executed
a Real Estate Mortgage (REM) over Lot 2630 which is located in Caloocan City and covered by TCT No.
(23211) 11591 in favor of private respondent (herein petitioner) Cesar Sulit, to secure a loan of P4 Million.
Upon petitioners failure to pay said loan within the stipulated period, private respondent resorted to extrajudicial
foreclosure of the mortgage as authorized in the contract. Hence, in a public auction conducted by Notary
Public Felizardo M. Mercado on 28 September 1993 the lot was sold to the mortgagee, herein private
respondent, who submitted a winning bid of P7 Million. As stated in the Certificate of Sale executed by the
notary public (Annex B, petition), the mortgaged property was sold at public auction to satisfy the mortgage
indebtedness of P4 Million. The Certificate further states as follows:

IT IS FURTHER CERTIFIED, that the aforementioned highest bidder/buyer, CESAR SULIT, being the
petitioner/mortgagee thereupon did not pay to the undersigned Notary Public of Kalookan City the said sum of
SEVEN MILLION PESOS (P7,000,000.00), Philippine Currency, the sale price of the above-described real
estate property together with all improvements existing thereon, which amount was properly credited to the
PARTIAL satisfaction of the mortgage debt mentioned in the said real estate mortgage, plus interests, attorneys
fees and all other incidental expenses of foreclosure and sale (par. 2, Annex B, petition).

On 13 December 1993 private respondent petitioned the Regional Trial Court of Kalookan City for the issuance
of a writ of possession in his favor. The petition was docketed as LRC Case No. C-3462 and assigned to Branch
131, presided over by public respondent.

On 17 January 1994 respondent Judge issued a decision (should have been denominated as order), the
dispositive part of which reads:

WHEREFORE, finding the subject petition to be meritorious, the same is hereby GRANTED. As prayed for, let
a Writ of Possession be issued in favor of herein petitioner, Cesar Sulit, upon his posting of an indemnity bond
in the amount of One Hundred Twenty Thousand (P120,000.00) Pesos (Annex C, petition).

On 28 March 1994 petitioner filed a Motion to have the auction sale of the mortgaged property set aside and to
defer the issuance of the writ of possession. She invited the attention of the court a quo to some procedural
infirmities in the said proceeding and further questioned the sufficiency of the amount of bond. In the same
Motion petitioner prayed as an alternative relief that private respondent be directed to pay the sum of P3 Million
which represents the balance of his winning bid of P7 Million less the mortgage indebtedness of P4 Million
(Annex D, petition). This Motion was opposed by private respondent who contended that the issuance of a writ
of possession upon his filing of a bond was a ministerial duty on the part of respondent Judge (Annex E), to
which Opposition petitioner submitted a Reply (Annex F, petition).

On 11 May 1994 respondent Judge denied petitioners Motion and directed the issuance of a writ of possession
and its immediate enforcement by deputy sheriff Danilo Norberte (Annex G, petition).2 (Italicized words
supplied for clarity).
From the aforesaid orders of the court a quo, herein private respondent Iluminada Cayco filed on May 26, 1994
a petition for certiorari with preliminary injunction and/or temporary restraining order before respondent Court
of Appeals, which immediately issued a status quo order restraining the respondent judge therein from
implementing his order of January 17, 1994 and the writ of possession issued pursuant thereto. Subsequently,
respondent court rendered judgment on November 11, 1994, as follows:

IN JUDGMENT, We grant the writ of certiorari and the disputed order of 17 January 1994 which precipitately
directed the issuance of a writ of possession in favor of private respondent and the subsequent order of 11 May
1994 which denied petitioners Motion for Reconsideration are hereby SET ASIDE.

Accordingly, private respondent is ordered to pay unto petitioner, through the notary public, the balance or
excess of his bid of P7 Million after deducting therefrom the sum of P4,365,280 which represents the mortgage
debt and interest up to the date of the auction sale (September 23, 1993), as well as expenses of foreclosure
based on receipts which must be presented to the notary public.

In the event that private respondent fails or refuses to pay such excess or balance, then the auction sale of 28
September 1993 is deemed CANCELLED and private respondent may foreclose the mortgage anew either in a
judicial or extrajudicial proceeding as stipulated in the mortgage contract.

Corollary to the principal issue earlier stated, petitioner asserts that respondent Court of Appeals gravely erred
when it failed to appreciate and consider the supposed legal significance of the bouncing checks which private
respondent issued and delivered to petitioner as payment for the agreed or stipulated interest on the mortgage
obligation. He likewise avers that a motion for reconsideration or an appeal, and not certiorari, is the proper
remedy available to herein private respondent from an order denying her motion to defer issuance of the writ of
possession. Moreover, it is claimed that any question regarding the propriety of the sale and the issuance of the
writ of possession must be threshed out in a summary proceeding provided for in Section 8 of Act 3135.

There is no merit in petitioners contention that the dishonored checks amounting to a total of P1,250,000.00,
allegedly representing interest of 5% per month from June 9, 1992 to December 9, 1992, were correctly
considered by the trial court as the written agreement between the parties. Instead, we find the explanation of
respondent court in rejecting such postulate, on the basis of Article 1956 of the Civil Code,3 to be more logical
and plausible, to wit:

It is noteworthy that the Deed of Real Estate Mortgage executed by the parties on 9 June 1992 (Annex A,
Petition) does not contain any stipulation for payment of interest. Private respondent who maintains that he had
an agreement with petitioner for the payment of 5% monthly interest did not produce any other writing or
instrument embodying such a stipulation on interest. It appears then that if any such agreement was reached by
the parties, it was merely a verbal one which does not conform to the aforequoted statutory provision. Certainly,
the dishonored checks claimed to have been issued by petitioner in payment of interest could not have been the
written stipulation contemplated in Article 1956 of the Code. Consequently, in the absence of a written
stipulation for the imposition of interest on the loan obtained by petitioner, private respondents assessment
thereof has no legal basis.4chanroblesvirtuallawlibrary

It is elementary that in the absence of a stipulation as to interest, the loan due will now earn interest at the legal
rate of 12% per annum5 which, according to respondent court, is equivalent to P365,280.00 computed from
December 10, 1992, after private respondents obligation became due, until September 23, 1993, the date of the
auction sale. It is this amount which should further be deducted from the purchase price of P7,000,000.00,
together with any other expenses incurred in connection with the sale, such as the posting and publication of
notices, notarial and documentary fees, and assessments or taxes due on the disputed property.

It baffles this Court, therefore, why petitioner has continually failed up to the present to submit documentary
evidence of the alleged expenses of the foreclosure sale, and this in spite of the express requirement therefor in
the certificate of sale6 issued by the notary public for the purpose of computing the actual amount payable by
the mortgagor or redemptioner in the event of redemption. It may thus be safely presumed that such evidence
having been willfully suppressed, it would be adverse if produced.7chanroblesvirtuallawlibrary

Coming now to the main issue in this case, petitioner argues that it is ministerial upon the court to issue a writ
of possession after the foreclosure sale and during the period of redemption, invoking in support thereof
Sections 7 and 8 of Act 3135 which conjointly provide:

Sec. 7. In any sale made under the provisions of this Act, the purchaser may petition the Court of First Instance
of the province or place where the property or any part thereof is situated, to give him possession thereof during
the redemption period, furnishing bond in an amount equivalent to the use of the property for a period of twelve
months, to indemnify the debtor in case it be shown that the sale was made without violating the mortgage or
without complying with the requirements of this Act. Such petition shall be made under oath and filed in form
of an ex parte motion in the registration or cadastral proceedings if the property is registered, or in special
proceedings in the case of property registered under the Mortgage Law or under section one hundred and
ninety-four of the Administrative Code, or of any other real property encumbered with a mortgage duly
registered in the office of any register of deeds in accordance with any existing law, and in each case the clerk
of the court shall, upon the filing of such petition, collect the fees specified in paragraph eleven of section one
hundred and fourteen of Act Numbered Twenty-eight hundred and sixty-six, and the court shall, upon approval
of the bond, order that a writ of possession issue, addressed to the sheriff of the province in which the property
is situated, who shall execute said order immediately.

Sec. 8. The debtor may, in the proceedings in which possession was requested, but not later than thirty days
after the purchaser was given possession, petition that the sale be set aside and the writ of possession cancelled,
specifying the damages suffered by him, because the mortgage was not violated or the sale was not made in
accordance with the provisions hereof, and the court shall take cognizance of this petition in accordance with
the summary procedure provided for in section one hundred and twelve of Act Number Four hundred and
ninety-six; and if it finds the complaint of the debtor justified, it shall dispose in his favor of all or part of the
bond furnished by the person who obtained possession. Either of the parties may appeal from the order of the
judge in accordance with section fourteen of Act Numbered Four hundred and ninety-six; but the order of
possession shall continue in effect during the pendency of the appeal.

The governing law thus explicitly authorizes the purchaser in a foreclosure sale to apply for a writ of possession
during the redemption period by filing an ex parte motion under oath for that purpose in the corresponding
registration or cadastral proceeding in the case of property with Torrens title. Upon the filing of such motion
and the approval of the corresponding bond, the law also in express terms directs the court to issue the order for
a writ of possession.

No discretion appears to be left to the court. Any question regarding the regularity and validity of the sale, as
well as the consequent cancellation of the writ, is to be determined in a subsequent proceeding as outlined in
Section 8, and it cannot be raised as a justification for opposing the issuance of the writ of possession since,
under the Act, the proceeding for this is ex parte.8 Such recourse is available to a mortgagee, who effects the
extrajudicial foreclosure of the mortgage, even before the expiration of the period of redemption provided by
law and the Rules of Court.9chanroblesvirtuallawlibrary

The rule is, however, not without exception. Under Section 35, Rule 39 of the Rules of Court, which is made
applicable to the extrajudicial foreclosure of real estate mortgages by Section 6 of Act 3135, the possession of
the mortgaged property may be awarded to a purchaser in the extrajudicial foreclosure unless a third party is
actually holding the property adversely to the judgment debtor.10

Thus, in the case of Barican, et al. vs. Intermediate Appellate Court, et al.,11 this Court took into account the
circumstances that long before the mortgagee bank had sold the disputed property to the respondent therein, it
was no longer the judgment debtor who was in possession but the petitioner spouses who had assumed the
mortgage, and that there was a pending civil case involving the rights of third parties. Hence, it was ruled
therein that under the circumstances, the obligation of a court to issue a writ of possession in favor of the
purchaser in a foreclosure of mortgage case ceases to be ministerial.

Now, in forced sales low prices are generally offered and the mere inadequacy of the price obtained at the
sheriffs sale, unless shocking to the conscience, has been held insufficient to set aside a sale. This is because no
disadvantage is caused to the mortgagor. On the contrary, a mortgagor stands to gain with a reduced price
because he possesses the right of redemption. When there is the right to redeem, inadequacy of price becomes
immaterial since the judgment debtor may reacquire the property or sell his right to redeem, and thus recover
the loss he claims to have suffered by reason of the price obtained at the auction
sale.12chanroblesvirtuallawlibrary

However, also by way of an exception, in Cometa, et al. vs. Intermediate Appellate Court, et al.13 where the
properties in question were found to have been sold at an unusually lower price than their true value, that is,
properties worth at least P500,000.00 were sold for only P57,396.85, this Court, taking into consideration the
factual milieu obtaining therein as well as the peculiar circumstances attendant thereto, decided to withhold the
issuance of the writ of possession on the ground that it could work injustice because the petitioner might not be
entitled to the same.

The case at bar is quite the reverse, in the sense that instead of an inadequacy in price, there is due in favor of
private respondent, as mortgagor, a surplus from the proceeds of the sale equivalent to approximately 40% of
the total mortgage debt, which excess is indisputably a substantial amount. Nevertheless, it is our considered
opinion, and we so hold, that equitable considerations demand that a writ of possession should also not issue in
this case.

Rule 68 of the Rules of Court provides:

Sec. 4. Disposition of proceeds of sale. - The money realized from the sale of mortgaged property under the
regulations hereinbefore prescribed shall, after deducting the costs of the sale, be paid to the person foreclosing
the mortgage, and when there shall be any balance or residue, after paying off such mortgage or other
incumbrances, the same shall be paid to the junior incumbrancers in the order of their priority, to be ascertained
by the court, or if there be no such incumbrancers or there be a balance or residue after payment of such
incumbrancers, then to the mortgagor or his agent, or to the person entitled to it.

The application of the proceeds from the sale of the mortgaged property to the mortgagors obligation is an act
of payment, not payment by dation; hence, it is the mortgagees duty to return any surplus in the selling price to
the mortgagor.14 Perforce, a mortgagee who exercises the power of sale contained in a mortgage is considered
a custodian of the fund, and, being bound to apply it properly, is liable to the persons entitled thereto if he fails
to do so. And even though the mortgagee is not strictly considered a trustee in a purely equitable sense, but as
far as concerns the unconsumed balance, the mortgagee is deemed a trustee for the mortgagor or owner of the
equity of redemption.15chanroblesvirtuallawlibrary

Commenting on the theory that a mortgagee, when he sells under a power, cannot be considered otherwise than
as a trustee, the vice-chancellor in Robertson vs. Norris (1 Giff. 421) observed: That expression is to be
understood in this sense: that with the power being given to enable him to recover the mortgage money, the
court requires that he shall exercise the power of sale in a provident way, with a due regard to the rights and
interests of the mortgagor in the surplus money to be produced by the sale.16

The general rule that mere inadequacy of price is not sufficient to set aside a foreclosure sale is based on the
theory that the lesser the price the easier it will be for the owner to effect the redemption.17 The same thing
cannot be said where the amount of the bid is in excess of the total mortgage debt. The reason is that in case the
mortgagor decides to exercise his right of redemption, Section 30 of Rule 39 provides that the redemption price
should be equivalent to the amount of the purchase price, plus one per cent monthly interest up to the time of
the redemption,18 together with the amount of any assessments or taxes which the purchaser may have paid
thereon after purchase, and interest on such last-named amount at the same rate.19chanroblesvirtuallawlibrary

Applying this provision to the present case would be highly iniquitous if the amount required for redemption is
based on P7,000.000.00, because that would mean exacting payment at a price unjustifiably higher than the real
amount of the mortgage obligation. We need not elucidate on the obvious. Simply put, such a construction will
undeniably be prejudicial to the substantive rights of private respondent and it could even effectively prevent
her from exercising the right of redemption.

Where the redemptioner chooses to exercise his right of redemption, it is the policy of the law to aid rather than
to defeat his right. It stands to reason, therefore, that redemption should be looked upon with favor and where
no injury will follow, a liberal construction will be given to our redemption laws, specifically on the exercise of
the right to redeem. Conformably hereto, and taking into consideration the facts obtaining in this case, it is more
in keeping with the spirit of the rules, particularly Section 30 of Rule 39, that we adopt such interpretation as
may be favorable to the private respondent.

Admittedly, no payment was made by herein petitioner, as the highest bidder, to the notary public who
conducted the extrajudicial foreclosure sale. We are not unmindful of the rule that it is not necessary for the
mortgagee to pay cash to the sheriff or, in this case, the notary public who conducted the sale. It would
obviously serve no purpose for the sheriff or the notary public to go through the idle ceremony of receiving the
money and paying it back to the creditor, under the truism that the lawmaking body did not contemplate such a
pointless application of the law in requiring that the creditor must bid under the same conditions as any other
bidder.20 It bears stressing that the rule holds true only where the amount of the bid represents the total amount
of the mortgage debt.

In case of a surplus in the purchase price, however, there is jurisprudence to the effect that while the mortgagee
ordinarily is liable only for such surplus as actually comes into his hands, but he sells on credit instead of for
cash, he must still account for the proceeds as if the price were paid in cash, and in an action against the
mortgagee to recover the surplus, the latter cannot raise the defense that no actual cash was
received.21chanroblesvirtuallawlibrary

We cannot simply ignore the importance of surplus proceeds because by their very nature, surplus money
arising from a sale of land under a decree of foreclosure stands in the place of the land itself with respect to
liens thereon or vested rights therein. They are constructively, at least, real property and belong to the
mortgagor or his assigns.22 Inevitably, the right of a mortgagor to the surplus proceeds is a substantial right
which must prevail over rules of technicality.

Surplus money, in case of a foreclosure sale, gains much significance where there are junior encumbrancers on
the mortgaged property. Jurisprudence has it that when there are several liens upon the premises, the surplus
money must be applied to their discharge in the order of their priority.23 A junior mortgagee may have his
rights protected by an appropriate decree as to the application of the surplus, if there be any, after satisfying the
prior mortgage. His lien on the land is transferred to the surplus fund.24 And a senior mortgagee, realizing more
than the amount of his debt on a foreclosure sale, is regarded as a trustee for the benefit of junior
encumbrancers.25chanroblesvirtuallawlibrary

Upon the strength of the foregoing considerations, we cannot countenance the apparent paltriness that petitioner
persistently accords the right of private respondent over the surplus proceeds. It must be emphasized that
petitioner failed to present the receipts or any other proof of the alleged costs or expenses incurred by him in the
foreclosure sale. Even the trial court failed or refused to resolve this issue, notwithstanding the fact that this was
one of the grounds raised in the motion filed by private respondent before it to set aside the sale. Since it has
never been denied that the bid price greatly exceeded the mortgage debt, petitioner cannot be allowed to
unjustly enrich himself at the expense of private respondent.

As regards the issue concerning the alleged defect in the publication of the notice of the sale, suffice it to state
for purposes of this discussion that a question of non-compliance with the notice and publication requirements
of an extrajudicial foreclosure sale is a factual issue and the resolution thereof by the lower courts is binding
and conclusive upon this Court,26 absent any showing of grave abuse of discretion. In the case at bar, both the
trial court and respondent Court of Appeals have found that the sale was conducted in accordance with law. No
compelling reason exists in this case to justify a rejection of their findings or a reversal of their conclusions.

There is likewise no merit in the argument that if private respondent had wanted to question the validity of the
sale, she should have filed a petition to set the same aside and to cancel the writ of possession. These, it is
argued, should have been disposed of in accordance with the summary procedure laid down in Section 112 of
the Land Registration Act, provided the petition is filed not later than thirty days after the purchaser was given
possession of the land. Considering, however, that private respondent has filed a motion to set aside the sale and
to defer the issuance of a writ of possession before the court where the ex parte petition for issuance of such
writ was then pending, we deem the same to be substantial compliance with the statutory prescription.

We, however, take exception to and reject the last paragraph in the dispositive portion of the questioned
decision of respondent court, which we repeat:

In the event that private respondent fails or refuses to pay such excess or balance, then the auction sale of 28
September 1993 is deemed CANCELLED and private respondent (petitioner herein) may foreclose the
mortgage anew either in a judicial or extrajudicial proceeding as stipulated in the mortgage contract.

for lack of statutory and jurisprudential bases. The quoted phrase as stipulated in the mortgage contract does
not, of course, envision such contingency or warrant the suggested alternative procedure.

Section 4 of Rule 64, hereinbefore quoted, merely provides that where there is a balance or residue after
payment of the mortgage, the same shall be paid to the mortgagor. While the expedient course desired by
respondent court is commendable, there is nothing in the cited provision from which it can be inferred that a
violation thereof will have the effect of nullifying the sale. The better rule is that if the mortgagee is retaining
more of the proceeds of the sale than he is entitled to, this fact alone will not affect the validity of the sale but
simply gives the mortgagor a cause of action to recover such surplus.27 This is likewise in harmony with the
decisional rule that in suing for the return of the surplus proceeds, the mortgagor is deemed to have affirmed the
validity of the sale since nothing is due if no valid sale has been made.28

In the early case of Caparas vs. Yatco, etc., et al.,29 it was also held that where the mortgagee has been ordered
by the court to return the surplus to the mortgagor or the person entitled thereto, and the former fails to do so
and flagrantly disobeys the order, the court can cite the mortgagee for contempt and mete out the corresponding
penalty under Section 3(b) of the former Rule 64 (now Rule 71) of the Rules of Court.

WHEREFORE, the questioned decision of the Court of Appeals is MODIFIED by deleting the last paragraph of
its fallo, but its disposition of this case in all other respects is hereby AFFIRMED.
 SECOND DIVISION

G.R. No. 134068      December 25, 2001

UNION BANK OF THE PHILIPPINES, petitioner,

vs.
COURT OF APPEALS, APOLONIA DE JESUS GREGORIO, LUCIANA DE JESUS GREGORIO,
GONZALO VINCOY, married to TRINIDAD GREGORIO VINCOY, respondents.

RESOLUTION

DE LEON, JR., J.:

This is a motion for reconsideration of the resolution of this Court dated July 12, 1999 dismissing the petition
for review on certiorari filed by petitioner Union Bank of the Philippines which assailed the decision of the
Court of Appeals (a) upholding the validity of the real estate mortgage executed by respondents Gonzalo and
Trinidad Vincoy in favor of petitioner as security for a loan in the principal amount of Two Million Pesos
(P2,000,000.00), and (b) fixing the redemption price of the property mortgaged at Three Million Two Hundred
Ninety Thousand Pesos (P3,290,000.00) representing the purchase price of the said property at the foreclosure
sale plus one percent (1%) monthly interest from April 19, 1991, the date of the foreclosure sale, until its
redemption pursuant to Section 30, Rule 39 of the Rules of Court.

The following are the factual antecedents.

On March 2, 1990, respondents-spouses Gonzalo and Trinidad Vincoy mortgaged their residence in favor of
petitioner to secure the payment of a loan to Delco Industries (Phils.), Incorporated1 in the amount of Two
Million Pesos (P2,000,000.00). For failure of the respondents to pay the loan at its date of maturity, petitioner
extrajudicially foreclosured the mortgage and scheduled the foreclosure sale on April 10, 1991. The petitioner
submitted the highest bid of Three Million Two Hundred Ninety Thousand Pesos (P3,290,000.00) at the
foreclosure sale. Accordingly, a certificate of sale was issued to petitioner and duly annotated at the back of the
Transfer Certificate of Title covering the property on May 8, 1991.2

Prior to the expiration of the redemption period on May 8, 1992, the respondents filed a complaint for
annulment of mortgage with the lower court. In their complaint, respondents alleged that the subject property
mortgaged to petitioner had in fact been constituted as a family home as early as October 27, 1989. Among the
beneficiaries of the said family home are the sisters of respondent Trinidad Vincoy, namely Apolonia and
Luciana De Jesus Gregorio whose consent to the mortgage was not obtained.3 Respondents thus assailed the
validity of the mortgage on the ground that Article 158 of the Family Code4 prohibits the execution, forced sale,
attachment or any other encumbrance of a family home without the written consent of majority of the
beneficiaries thereof of legal age.5 On the hand, petitioner maintained that the mortgaged property of
respondents could not be legally constituted as a family home because its actual value exceeded Three Hundred
Thousand Pesos (P300,000.00), the maximum value for a family home in urban areas as stipulated in Article
157 of the Family Code.6

The lower court rendered judgment declaring the constitution of the family home void and the mortgage
executed in favor of the petitioner valid. It held, among others, that Article 158 of the Family Code was not
applicable to respondents' family home as the value of the latter at the time of its alleged constitution exceeded
Three Hundred Thousand Pesos (P300,000.00).7 It also ordered respondent Gonzalo Vincoy and/or Delco
Industries (Phils.), Inc. to pay petitioner his and/or its outstanding obligation as of February 15, 1993 in the
amount of Four Million Eight Hundred Sixteen Thousand One Hundred Ninety-Four Pesos and Forty-Four
Centavos (P4,816,194.44) including such sums that may accrue by way of interests and penalties.8

Aggrieved, respondents appealed to the Court of Appeals contending that the lower court erred in finding that
their family home was not duly constituted, and that the mortgage in favor of petitioner is valid. Respondents
also claimed that the correct amount sufficient for the redemption of their property as of February 15, 1993 is
Two Million Seven Hundred Seventy-Three Thousand Seven Hundred Twelve Pesos and Eighty-Seven
Centavos (P2,773,712.87)9 and not Four Million Eight Hundred Sixteen Thousand One Hundred Ninety-Four
Pesos and forty-four Centavos (P4,816,194.44) as found by the lower court.

In a decision promulgated on June 4, 1997, the Court of Appeals sustained the finding of the lower court that
the alleged family home of the respondents did not fall within the purview of Article 157 of the Family Code as
its value at the time of its constitution was more than the maximum value of Three Hundred Thousand Pesos
(P300,000). Hence, the Court of Appeals upheld the validity of the mortgage executed over the said property in
favor of the petitioner.10 However, it found that the amount sufficient for the redemption of the foreclosed
property is Three Million Two Hundred Ninety Thousand Pesos (P3,290,000.00) equivalent to the purchase
price at the foreclosure sale plus one percent (1%) monthly interest from April 19, 1991 up to the date of
redemption11 pursuant to Section 30, Rule 39 of the Rules of Court.12

Dissatisfied with the ruling of the Court of Appeals, the petitioner filed a petition for review on certiorari with
this Court submitting the following issues for resolution:

1. The Court of Appeals resolves an issue of redemption which was not even directly raised by the
parties and contrary to the evidence on record.

2. Assuming without admitting that respondents are entitled to redemption, the price set by the Court of
Appeals is not based on law.13

Petitioner contends, first of all, that in allowing the respondents to redeem the subject foreclosed property, the
Court of Appeals completely ignored the fact that neither respondents' complaint before the lower court nor
their brief filed before the Court of Appeals prayed for the redemption of the said property. On the contrary,
respondents had consistently insisted on the nullity of the mortgage. Thus, to allow them to redeem the property
would contradict the very theory of their case.14

Petitioner also contends that the respondents had already lost their right to redeem the foreclosured property
when they failed to exercise their right of redemption by paying the redemption price within the period provided
for by law.15 In the event, however, that the Court upholds the right of the respondents to redeem the said
property, the petitioner claims that it is not Section 30, Rule 39 of the Rules of Court that applies in determining
the amount sufficient for redemption but Section 78 of the General Banking Act as amended by Presidential
Decree No. 182816 which provides:

"xxx. In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate
which is security for any loan granted before the passage of this Act or under the provisions of this Act,
the mortgagor or debtor whose real property has been sold at public auction, judicially or extrajudicially,
for the full or partial payment of an obligation to any bank, banking or credit institution, within the
purview of this Act shall have the right, within one year after the sale of the real estate as a result of the
foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by the court
in the order of execution, or the amount due under the mortgage deed, as the case may be, with interest
thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred
by the bank or institution concerned by reason of the execution and sale and as a result of the custody of
the said property less the income received from the property." [Italics supplied].

This Court dismissed the petition in a Resolution promulgated on July 12, 1999 on the ground that the Court of
Appeals did not commit any reversible error and that the petition raises mere questions of fact already amply
passed upon by the appellate court.17 Hence, the instant motion for reconsideration.

We are persuaded to reconsider.

First of all, it is important to note that the lower court decided this case on the basis only of the pleadings
submitted by the parties. No trial was conducted, thus, no evidence other than that submitted with the pleadings
could be considered.

A careful scrutiny of the pleadings filed by the respondents before the lower court reveals that at no time did the
respondents pray that they be allowed to redeem the subject foreclosed property.18 On the other hand,
respondents never wavered from the belief that the mortgage over the said property is, in the first place, void for
having been executed over a duly constituted family home without the consent of the beneficiaries thereof.
After upholding the validity of the mortgage, the lower court ordered respondent Gonzalo Vincoy and/or Delco
Industries, Inc. to pay petitioner the amount of Four Million Eight Hundred Sixteen Thousand One Hundred
Ninety-Four Pesos and Forty-Four Centavos (P4,816,194.44) plus interest and penalties representing Vincoy's
and/or Delco's outstanding obligation to petitioner as of February 15, 1993.19 There is no mention whatsoever of
respondents' right to redeem the property.

Respondents raised the issue of redemption for the first time only on appeal in contesting the amount ordered by
the lower court to be paid by respondents to the petitioner. Thus, the actuation of the Court of Appeals in
allowing the respondents to redeem the subject foreclosured property is not legally permissible. In petitioners
for review or appeal under Rule 45 of the Rules of Court, the appellate tribunal is limited to the determination
for whether the lower court committed reversible error.20

It is settled jurisprudence that an issue which was neither averred in the complaint nor raised during the trial in
the court below cannot be raised for the first time on appeal as it would be offensive to the basic rules of fair
play, justice and due process.21 On this ground alone, the Court of Appeals should have completely ignored the
issue of respondents' right to redeem the subject foreclosed property. In addition, a reason just as glaringly
obvious exists for declaring the respondents' right of redemption already non-existent one year after May 8,
1991, the date of the registration of the sale at public auction.

Pursuant to Section 78 of the General banking Act, a mortgagor whose real property has been sold at a public
auction, judicially or extrajudicially, for the full or partial payment of an obligation to any bank, shall have the
right, within one year after the sale of the real estate to redeem the property. The one-year period is actually to
be reckoned from the date of the registration of the sale.22 Clearly therefore, respondents had only until May 8,
1992 to redeem the subject foreclosed property. Their failure to exercise that right of redemption by paying the
redemption price within the period prescribed by law effectively divested them of said right. It bears reiterating
that during the one year redemption period, respondents never attempted to redeem the subject property but
instead persisted in their theory that the mortgage is null and void. To allow them now to redeem the same
property would, as petitioner aptly puts it, e letting them have their cake and eat it too.

It cannot also be argued that the action for annulment of the mortgage filed by the respondents tolled the
running of the one-year period of redemption. In the case of Sumerariz v. Development Bank of the
Philippines,23 petitioners therein contended that the one-year period to redeem the property foreclosed by
respondent was suspended by the institution of an action to annul the foreclosure sale filed three (3) days before
the expiration of the period. To this we ruled that:

"We have not found, however, any statute or decision in support of this pretense. Moreover, up to now
plaintiffs have not exercised the right of redemption. Indeed, although they have intimated their wish to
redeem the property in question, they have not deposited the amount necessary therefor. It may not be
amiss to note that, unlike Section 30 of Rule 39 of the Rules of Court, which permits the extension of the
period of redemption of mortgaged properties, Section 3 of Commonwealth Act No. 459, in relation to
Section 9 of Republic Act No. 85, which governs the redemption of property mortgaged to the Bank
does no contain a similar provision. Again this question has been definitely settled by the previous case
declaring that plaintiff's right of redemption has already been extinguished in view of their failure to
exercise it within the statutory period."24

Also, in the more recent case of Vaca v. Court of Appeals,25 we declared that the pendency of an action
questioning the validity of a mortgage cannot bar the issuance of the writ of possession after title to the property
has been consolidated in the mortgagee.26 The implication is clear: the period of redemption is not interrupted
by the filing of an action assailing the validity of the mortgage, so that at the expiration thereof, the mortgagee
who acquires the property at the foreclosure sale can proceed to have the title consolidated in his name and a
writ of possession issued in his favor.

To rule otherwise, and allow the institution of an action questioning the validity of a mortgage to suspend the
running of the one year period of redemption would constitute a dangerous precedent. A likely offshoot of such
a ruling is the institution of frivolous suits for annulment of mortgage intended merely to give the mortgagor
more time to redeem the mortgaged property.

As a final word, although the issue pertaining to the correct amount for the redemption of the subject-foreclosed
property has been rendered moot by the foregoing, a point of clarification should perhaps be made as to the
applicable legal provision. Petitioner's contention that Section 78 of the General Banking Act governs the
determination of the redemption price of the subject property is meritorious. In Ponce de Leon v. Rehabilitation
Finance Corporation,27 this Court had occasion to rule that Section 78 of the General Banking Act had the
effect of amending Section 6 of Act No. 313528 insofar as the redemption price is concerned when the
mortgagee is a bank, as in this case, or a banking or credit institution.29 The apparent conflict between the
provisions of Act No. 3135 and the General Banking Act was, therefore, resolved in favor of the latter, being a
special and subsequent legislation. This pronouncement was reiterated in the case of Sy v. Court of Appeals30
where we held that the amount at which the foreclosed property is redeemable is the amount due under the
mortgage deed, or the outstanding obligation of the mortgagor plus interest and expenses in accordance with
Section 78 of the General Banking Act.31 It was therefore manifest error on the part of the Court of Appeals to
apply in the case at bar the provisions of Section 30 Rule 39 of the Rules of Court in fixing the redemption price
of the subject foreclosed property.

WHEREFORE, the motion for reconsideration is hereby GRANTED. This Court's Resolution dated July 12,
1999 is MODIFIED insofar as respondents are found to have lost their right to redeem the subject foreclosed
property.

SO ORDERED.1âwphi1.nêt
 SECOND DIVISION

G.R. No. 134330            March 1, 2001

SPOUSES ENRIQUE M. BELO and FLORENCIA G. BELO, petitioners,

vs.
PHILIPPINE NATIONAL BANK and SPOUSES MARCOS and ARSENIA ESLABON, respondents.

DE LEON, JR., J.:

Before us is a petition for review on certiorari of the Decision1 and Resolution2 in CA-G.R. No. 53865 of the
Court of Appeals3 dated May 21, 1998 and June 29, 1998, respectively, which modified the Decision4 dated
April 30, 1996 of the Regional Trial Court of Roxas City, Branch 19 in a suit5 for Declaration of Nullity of the
Contract of Mortgage.

The facts are as follows:

Eduarda Belo owned an agricultural land with an area of six hundred sixty one thousand two hundred eighty
eight (661,288) square meters located in Timpas, Panitan, Capiz, covered and described in Transfer Certificate
of Title (TCT for brevity) No. T-7493. She leased a portion of the said tract of land to respondents spouses
Marcos and Arsenia Eslabon in connection with the said spouses' sugar plantation business. The lease contract
was effective for a period of seven (7) years at the rental rate of Seven Thousand Pesos (P7,000.00) per year.

To finance their business venture, respondents spouses Eslabon obtained a loan from respondent Philippine
National Bank (PNB for brevity) secured by a real estate mortgage on their own four (4) residential houses
located in Roxas City, as well as on the agricultural land owned by Eduarda Belo. The assent of Eduarda Belo
to the mortgage was acquired through a special power of attorney which she executed in favor of respondent
Marcos Eslabon on June 15, 1982.

Inasmuch as the respondents spouses Eslabon failed to pay their loan obligation, extrajudicial foreclosure
proceedings against the mortgaged properties were instituted by respondent PNB. At the auction sale on June
10, 1991, respondent PNB was the highest bidder of the foreclosed properties at Four Hundred Forty Seven
Thousand Six Hundred Thirty Two Pesos (P447,632.00).

In a letter dated August 28, 1991, respondent PNB appraised Eduarda Belo of the sale at public auction of her
agricultural land on June 10, 1991 as well as the registration of the Certificate of Sheriff's Sale in its favor on
July 1, 1991, and the one-year period to redeem the land.

Meanwhile, Eduarda Belo sold her right of redemption to petitioners spouses Enrique and Florencia Belo under
a deed of absolute sale of proprietary and redemption rights.

Before the expiration of the redemption period, petitioners spouses Belo tendered payment for the redemption
of the agricultural land in the amount of Four Hundred Eighty Four Thousand Four Hundred Eighty Two Pesos
and Ninety Six Centavos (P484,482.96), which includes the bid price of respondent PNB, plus interest and
expenses as provided under Act No. 3135.

However, respondent PNB rejected the tender of payment of petitioners spouses Belo. It contended that the
redemption price should be the total claim of the bank on the date of the auction sale and custody of property
plus charges accrued and interests amounting to Two Million Seven Hundred Seventy Nine Thousand Nine
Hundred Seventy Eight and Seventy Two Centavos (P2,779,978.72).6 Petitioners spouses disagreed and refused
to pay the said total claim of respondent PNB.

On June 18, 1992, petitioners spouses Belo initiated in the Regional Trial Court of Roxas City, Civil Case No.
V-6182 which is an action for declaration of nullity of mortgage, with an alternative cause of action, in the
event that the accommodation mortgage be held to be valid, to compel respondent PNB to accept the
redemption price tendered by petitioners spouses Belo which is based on the winning bid price of respondent
PNB in the extrajudicial foreclosure in the amount of Four Hundred Forty Seven Thousand Six Hundred Thirty
Two Pesos (P447,632.00) plus interest and expenses.

In its Answer, respondent PNB raised, among others, the following defenses, to wit:

xxx           xxx           xxx

77. In all loan contracts granted and mortgage contracts executed under the 1975 Revised Charter (PD
694, as amended), the proper rate of interest to be charged during the redemption period is the rate
specified in the mortgage contract based on Sec. 25 7 of PD 694 and the mortgage contract which
incorporates by reference the provisions of the PNB Charters. Additionally, under Sec. 78 of the General
Banking Act (RA No. 337, as amended) made applicable to PNB pursuant to Sec. 38 of PD No. 694, the
rate of interest collectible during the redemption period is the rate specified in the mortgage contract.

78. Since plaintiffs failed to tender and pay the required amount for redemption of the property under the
provisions of the General Banking Act, no redemption was validly effected;8

xxx           xxx           xxx

After trial on the merits, the trial court rendered its Decision dated April 30, 1996 granting the alternative cause
of action of spouses Belo, the decretal portion of which reads:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of plaintiffs Spouses
Enrique M. Belo and Florencia G. Belo and against defendants Philippine National Bank and Spouses
Marcos and Arsenia Eslabon:

1. Making the injunction issued by the court permanent, insofar as the property of Eduarda Belo
covered by Transfer Certificate of Title No. T-7493 is concerned;

2. Ordering defendant Philippine National Bank to allow plaintiff Enrique M. Belo to redeem
only Eduarda Belo's property situated in Brgy. Timpas, Panitan, Capiz, and covered by Transfer
Certificate of Title No. T-7493 by paying only its bid price of P447,632.00, plus interest and
other charges provided for in Section 30, Rule 39 of the Rules of Court, less the loan value, as
originally appraised by said defendant Bank, of the foreclosed four (4) residential lots of
defendants Spouses Marcos and Arsenia Eslabon; and

3. Dismissing for lack of merit the respective counterclaims of defendants Philippine National
Bank and spouses Marcos and Arsenia Eslabon.

With costs against defendants.

SO ORDERED.9

Dissatisfied with the foregoing judgment of the trial court, respondent PNB appealed to the Court of Appeals. In
its Decision rendered on May 21, 1998, the appellate court, while upholding the decision of the trial court on the
validity of the real estate mortgage on Eduarda Belo's property, the extrajudicial foreclosure and the public
auction sale, modified the trial court's finding on the appropriate redemption price by ruling that the petitioners
spouses Belo should pay the entire amount due to PNB under the mortgage deed at the time of the foreclosure
sale plus interest, costs and expenses.10

Petitioners spouses Belo sought reconsideration11 of the said Decision but the same was denied by the appellate
court in its Resolution promulgated on June 29, 1998, ratiocinating, thus:

Once more, the Court shies away from declaring the nullity of the mortgage contract obligating Eduarda
Belo as co-mortgagor, considering that it has not been sufficiently established that Eduarda Belo's assent
to the special power of attorney and to the mortgage contract was tainted by any vitiating cause.
Moreover, in tendering an offer to redeem the property (Exhibit "20", p. 602 Record) after its
extrajudicial foreclosure, she has thereby admitted the validity of the mortgage, as well as the
transactions leading to its inception. Eduarda Belo, and the appellees as mere assignees of Eduarda's
right to redeem the property, are therefore estopped from questioning the efficacy of the mortgage and
its subsequent foreclosure.12
The appellate court further declared that petitioners spouses Belo are obligated to pay the total bank's claim
representing the redemption price for the foreclosed properties, as provided by Section 25 of P.D No. 694,
holding that:

On the other hand, the court's ruling that the appellees, being the assignee of the right of repurchase of
Eduarda Belo, were bound by the redemption price as provided by Section 25 of P.D. 694, stands. The
attack on the constitutionality of Section 25 of P.D. 694 cannot be allowed, as the High Court, in
previous instances, (Dulay v. Carriaga, 123 SCRA 794 [1983]; Philippine National Bank v. Remigio,
231 SCRA 362 [1994]) has regarded the said provision of law with respect, using the same in
determining the proper redemption price in foreclosure of mortgages involving the PNB as mortgagee.

The terms of the said provision are quite clear and leave no room for qualification, as the appellees
would have us rule. The said rule, as amended, makes no specific distinction as to assignees or
transferees of the mortgagor of his redemptive right. In the absence of such distinction by the law, the
Court cannot make a distinction. As admitted assignees of Eduarda Belo's right of redemption, the
appellees succeed to the precise right of Eduarda including all conditions attendant to such right.

Moreover, the indivisible character of a contract of mortgage (Article 2089, Civil Code) will extend to
apply in the redemption stage of the mortgage.

As we have previously remarked, Section 25 of P.D. 694 is a sanctioned deviation from the rule
embodied in Rule 39, Section 30 of the Rules of Court, and is a special protection given to government
lending institutions, particularly, the Philippine National Bank. (Dulay v. Carriaga, supra)13

Hence, the instant petition.

During the oral argument, petitioners, through counsel, Atty. Enrique M. Belo, agreed to limit the assignment of
errors to the following:

xxx           xxx           xxx

II. THE COURT OF APPEALS ERRED IN NOT REVERSING THE TRIAL COURT ON THE BASIS
OF THE ASSIGNMENT OF ERRORS ALLEGED BY PETITIONERS IN THEIR BRIEF:

(1) THAT THE SPECIAL POWER OF ATTORNEY EXECUTED BY EDUARDA BELO IN

FAVOR OF RESPONDENT ESLABON WAS NULL AND VOID:

(2) THAT THE REAL ESTATE MORTGAGE EXECUTED BY RESPONDENT MARCOS

ESLABON UNDER SAID INVALID SPECIAL POWER OF ATTORNEY IS ALSO NULL
AND VOID;

III. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB ACTED IN
BAD FAITH AND CONNIVED WITH RESPONDENTS-DEBTORS ESLABONS TO OBTAIN THE
CONSENT OF EDUARDA BELO, PETITIONERS' PREDECESSOR, THROUGH FRAUD.

IV. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT PNB WAS
NEGLIGENT IN THE PERFORMANCE OF ITS DUTY AS COMMERCIAL MONEY LENDER.

V. THE COURT OF APPEALS ERRED IN HOLDING THAT EDUARDA BELO, PETITIONERS'

PREDECESSOR, HAD WAIVED THE RIGHT TO QUESTION THE LEGALITY OF THE
ACCOMMODATION MORTGAGE.

VI. THE COURT OF APPEALS ERRED IN REVERSING THE TRIAL COURT BY HOLDING
THAT ON REDEMPTION, PETITIONERS SHOULD PAY THE ENTIRE CLAIM OF PNB
AGAINST RESPONDENTS-DEBTORS ESLABONS.

VII. THE COURT OF APPEALS ERRED IN NOT ORDERING THAT SHOULD PETITIONERS
DECIDE TO PAY THE ENTIRE CLAIM OF RESPONDENT PNB AGAINST THE RESPONDENTS-
DEBTORS ESLABONS, PETITIONERS SHALL SUCCEED TO ALL THE RIGHTS OF
RESPONDENT PNB WITH THE RIGHT TO REIMBURSEMENT BY RESPONDENTS-DEBTORS
ESLABONS.
 VIII. THE COURT OF APPEALS ERRED IN NOT HOLDING THAT SHOULD PETITIONERS
DECIDE NOT TO EXERCISE THEIR RIGHT OF REDEMPTION, PETITIONERS SHALL BE
ENTITLED TO THE VALUE OF THEIR IMPROVEMENTS MADE IN GOOD FAITH AND FOR
THE REAL ESTATE TAX DUE PRIOR TO THE FORECLOSURE SALE.14

Petitioners challenge the appreciation of the facts of the appellate court, pointing out the following facts which
the appellate court allegedly failed to fully interpret and appreciate:

1. That respondent PNB in its Answer admitted that Eduarda Belo was merely an accommodation
mortgagor and that she has no personal liability to respondent PNB.

xxx           xxx           xxx

2. That the PNB Special Power of Attorney (SPA) Form No. 74 (Exh. "D") used to bind Eduarda Belo
as accommodation mortgagor authorized the agent Eslabons to borrow and mortgage her agricultural
land for her (Eduarda Belo) use and benefit. Instead, said PNB SPA Form No. 74 was used by debtors
Eslabons and PNB to bind Eduarda Belo as accommodation mortgagor for the crop loan extended by
PNB to the Eslabons.

3. That the said PNB SPA Form No. 74 was signed by Eduarda Belo in blank, without specifying the
amount of the loan to be granted by respondent PNB to the respondents-debtors Eslabons upon
assurance by the PNB manager that the SPA was merely a formality and that the bank will not lend
beyond the value of the four (4) [Roxas City] residential lots located in Roxas City mortgaged by
respondents-debtors Eslabons (see Exhibit "D"; Eduarda Belo's deposition, Exhibit "V", pp. 7 to 24).

4. That PNB did not advise Eduarda Belo of the amount of the loan granted to the Eslabons, did not
make demands upon her for payment, did not advise her of Eslabons' default. The pre-auction sale notice
intended for Eduarda Belo was addressed and delivered to the address of the debtors Eslabons residence
at Baybay Roxas City, not to the Belo Family House which is the residence of Eduarda Belo located in
the heart of Roxas City. The trial court stated in its Decision that the PNB witness Miss Ignacio
"admitted that through oversight, no demand letters were sent to Eduarda Belo, the accommodation
mortgagor" (see p. 7, RTC Decision).

xxx           xxx           xxx

5. As an agreed fact stated in the Pre-Trial Order of the Regional Trial Court, the loan which was unpaid
at the time of the extrajudicial foreclosure sale was only P789,897.00.

xxx           xxx           xxx

6. That herein petitioners Spouses Belo in making the tender to redeem Eduarda Belo's agricultural land
expressly reserved the right to question the legality of the accommodation mortgage in the event that
said tender to redeem was rejected by PNB (Exh. "I").15

Petitioners present basically two (2) issues before this Court. First, whether or not the Special Power of
Attorney (SPA for brevity), the real estate mortgage contract, the foreclosure proceedings and the subsequent
auction sale involving Eduarda Belo's property are valid. Second, assuming they are valid, whether or not the
petitioners are required to pay, as redemption price, the entire claim of respondent PNB in the amount of
P2,779,978.72 as of the date of the public auction sale on June 10, 1991.

On the first issue, the petitioners contend that the SPA is void for the reason that the amount for which the
spouses Eslabon are authorized to borrow from respondent bank was unlimited; and that, while the SPA states
that the amount loaned is for the benefit of Eduarda Belo, it was in fact used for the benefit of the respondents
spouses Eslabon. For the said reasons petitioners contend that the mortgage contract lacks valid consent, object
and consideration; that it violates a concept in the law of agency which provides that the contract entered into
by the agent must always be for the benefit of the principal; and, that it does not express the true intent of the
parties.

The subject SPA, the real estate mortgage contract, the foreclosure proceedings and the subsequent auction sale
of Eduarda Belo's property are valid and legal.

First, the validity of the SPA and the mortgage contract cannot anymore be assailed due to petitioners' failure to
appeal the same after the trial court rendered its decision affirming their validity. After the trial court rendered
its decision granting petitioners their alternative cause of action, i.e., that they can redeem the subject property
on the basis of the winning bid price of respondent PNB, petitioners did not anymore bother to appeal that
decision on their first cause of action. If they felt aggrieved by the trial court's decision upholding the validity of
the said two (2) documents, then they should have also partially appealed therefrom but they did not. It is an
abuse of legal remedies for petitioners to belatedly pursue a claim that was settled with finality due to their own
shortcoming. As held in Caliguia v. National Labor Relations Commission,16 where a party did not appeal from
the Labor Arbiter's decision denying claims for actual, moral and exemplary damages and instead moved for
immediate execution, the decision then became final as to him and by asking for its execution, he was estopped
from relitigating his claims for damages.

Second, well-entrenched is the rule that the findings of trial courts which are factual in nature, especially when
affirmed by the Court of Appeals, deserve to be respected and affirmed by the Supreme Court, provided it is
supported by substantial evidence. 17 The finding of facts of the trial court to the effect that Eduarda Belo was
not induced by the manager of respondent PNB but instead that she freely consented to the execution of the SPA
is given the highest respect as it was affirmed by the appellate court. In the case at bar, the burden of proof was
on the petitioners to prove or show that there was alleged inducement and misrepresentation by the manager of
respondent PNB and the spouses Eslabon. Their allegation that Eduarda Belo only agreed to sign the SPA after
she was assured that the spouses Eslabon would not borrow more than the value of their own four (4) residential
lots in Roxas City was properly objected to by respondent PNB.18 Also their contention that Eduarda Belo
signed the SPA in blank was properly objected to by respondent PNB on the ground that the best evidence was
the SPA. There is also no proof to sustain petitioners' allegation that respondent PNB acted in bad faith and
connived with the debtors, respondents spouses Eslabon, to obtain Eduarda Belo's consent to the mortgage
through fraud. Eduarda Belo very well knew that the respondents spouses Eslabon would use her property as
additional mortgage collateral for loans inasmuch as the mortgage contract states that "the consideration of this
mortgage is hereby initially fixed at P229,000.00."19 The mortgage contract sufficiently apprises Eduarda Belo
that the respondents spouses Eslabon can apply for more loans with her property as continuing additional
security. If she found the said provision questionable, she should have complained immediately. Instead, almost
ten (10) years had passed before she and the petitioners sought the annulment of the said contracts.

Third, after having gone through the records, this Court finds that the courts a quo did not err in holding that the
SPA executed by Eduarda Belo in favor of the respondents spouses Eslabon and the Real Estate Mortgage
executed by the respondents spouses in favor of respondent PNB are valid. It is stipulated in paragraph three (3)
of the SPA that Eduarda Belo appointed the Eslabon spouses "to make, sign, execute and deliver any contract of
mortgage or any other documents of whatever nature or kind . . . which may be necessary or proper in
connection with the loan herein mentioned, or with any loan which my attorney-in-fact may contract personally
in his own name . . .20 This portion of the SPA is quite relevant to the case at bar. This was the main reason why
the SPA was executed in the first place inasmuch as Eduarda Belo consented to have her land mortgaged for the
benefit of the respondents spouses Eslabon. The SPA was not meant to make her a co-obligor to the principal
contract of loan between respondent PNB, as lender, and the spouses Eslabon, as borrowers. The
accommodation real estate mortgage over her property, which was executed in favor of respondent PNB by the
respondents spouses Eslabon, in their capacity as her attorneys-in-fact by virtue of her SPA, is merely an
accessory contract.

Eduarda Belo consented to be an accommodation mortgagor in the sense that she signed the SPA to authorize
respondents spouses Eslabons to execute a mortgage on her land. Petitioners themselves even acknowledged
that the relation created by the SPA and the mortgage contract was merely that of mortgagor-mortgagee
relationship. The SPA form of the PNB was utilized to authorize the spouses Eslabon to mortgage Eduarda
Belo's land as additional collateral of the Eslabon spouses' loan from respondent PNB. Thus, the petitioners'
contention that the SPA is void is untenable. Besides, Eduarda Belo benefited, in signing the SPA, in the sense
that she was able to collect the rentals on her leased property from the Eslabons.21

An accommodation mortgage is not necessarily void simply because the accommodation mortgagor did not
benefit from the same. The validity of an accommodation mortgage is allowed under Article 2085 of the New
Civil Code which provides that "(t)hird persons who are not parties to the principal obligation may secure the
latter by pledging or mortgaging their own property." An accommodation mortgagor, ordinarily, is not himself a
recipient of the loan, otherwise that would be contrary to his designation as such. It is not always necessary that
the accommodation mortgagor be appraised beforehand of the entire amount of the loan nor should it first be
determined before the execution of the SPA for it has been held that:

"(real) mortgages given to secure future advancements are valid and legal contracts; that the amounts
named as consideration in said contract do not limit the amount for which the mortgage may stand as
security if from the four corners of the instrument the intent to secure future and other indebtedness can
be gathered. A mortgage given to secure advancements is a continuing security and is not discharged by
repayment of the amount named in the mortgage, until the full amount of the advancements are paid."22
Fourth, the courts a quo correctly held that the letter of Eduarda Belo addressed to respondent PNB manifesting
her intent to redeem the property is a waiver of her right to question the validity of the SPA and the mortgage
contract as well as the foreclosure and the sale of her subject property. Petitioners claim that her letter was not
an offer to redeem as it was merely a declaration of her intention to redeem. Respondent PNB's answer to her
letter would have carried certain legal effects. Had respondent PNB accepted her letter-offer, it would have
surely bound the bank into accepting the redemption price offered by Eduarda Belo. If it was her opinion that
her SPA and the mortgage contract were null and void, she would not have manifested her intent to redeem but
instead questioned their validity before a court of justice. Her offer was a recognition on her part that the said
contracts are valid and produced legal effects. Inasmuch as Eduarda Belo is estopped from questioning the
validity of the contracts, her assignees who are the petitioners in the instant case, are likewise estopped from
disputing the validity of her SPA, the accommodation real estate mortgage contract, the foreclosure
proceedings, the auction sale and the Sheriff's Certificate of Sale.

The second issue pertains to the applicable law on redemption to the case at bar. Respondent PNB maintains
that Section 25 of Presidential Decree No. 694 should apply, thus:

SECTION 25. Right of redemption of foreclosed property — Right of possession during redemption
period. — Within one year from the registration of the foreclosure sale of real estate, the mortgagor
shall have the right to redeem the property by paying all claims of the Bank against him on the date of
the sale including all the costs and other expenses incurred by reason of the foreclosure sale and custody
of the property as well as charges and accrued interests.23

Additionally, respondent bank seeks the application to the case at bar of Section 78 of the General Banking Act,
as amended by P.D. No. 1828, which states that —

. . . In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate
which is security for any loan granted before the passage of this Act or under the provisions of this Act,
the mortgagor or debtor whose real property has been sold at public auction, judicially or extrajudicially,
for the full or partial payment of an obligation to any bank, banking or credit institution, within the
purview of this Act shall have the right, within one year after the sale of the real estate as a result of the
foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by the court
in the order of execution, or the amount due under the mortgage deed, as the case may be, with interest
thereon at the rate specified in the mortgage, and all the costs, and judicial and other expenses incurred
by the bank or institution concerned by reason of the execution and sale and as a result of the custody of
said property less the income received from the property.24

On the other hand, petitioners assert that only the amount of the winning bidder's purchase together with the
interest thereon and on all other related expenses should be paid as redemption price in accordance with Section
6 of Act No. 3135 which provides that:

SECTION 6. In all cases in which an extrajudicial sale is made under the special power hereinbefore
referred to, the debtor, his successor in interest or any judicial creditor or judgment creditor of said
debtor, or any person having a lien on the property subsequent to the mortgage or deed of trust under
which the property is sold, may redeem the same at any time within the term of one year from and after
the date of the sale; and such redemption shall be governed by the provisions of sections four hundred
and sixty-four to four hundred and sixty six, inclusive, of the Code of Civil Procedure25 , in so far as
these are not inconsistent with the provisions of this Act.

Section 28 of Rule 39 of the 1997 Revised Rules of Civil Procedure states that:

SECTION 28. Time and manner of, and amounts payable on, successive redemptions; notice to be given
and filed. — The judgment obligor, or redemptioner, may redeem the property from the purchaser, at
any time within one (1) year from the date of the registration of the certificate of sale, by paying the
purchaser the amount of his purchase, within one per centum per month interest thereon in addition, up
to the time of redemption, together with the amount of any assessments or taxes which the purchaser
may have paid thereon after purchase, and interest on such last named amount at the same rate; and if
the purchaser be also a creditor having a prior lien to that of the redemptioner, other than the judgment
under which such purchase was made, the amount of such other lien, with interest. (Italic supplied)

xxx           xxx           xxx

This Court finds the petitioners' position on that issue to be meritorious.

There is no doubt that Eduarda Belo, assignor of the petitioners, is an accommodation mortgagor. The Pre-trial
Order and respondent PNB's brief contain a declaration of this fact. The dispute between the parties is whether
Section 25 of P.D. No. 694 applies to an accommodation mortgagor, or her assignees. The said legal provision
does not make a distinction between a debtor-mortgagor and an accommodation mortgagor as it uses the broad
term "mortgagor". The appellate court thus ruled that the provision applies even to an accommodation
mortgagor inasmuch as the law does not make any distinction. We disagree. Where a word used in a statute has
both a restricted and a general meaning, the general must prevail over the restricted unless the nature of the
subject matter or the context in which it is employed clearly indicates that the limited sense is intended.26 It is
presumed that the legislature intended exceptions to its language which would avoid absurd consequences of
this character.27 In the case at bar, the qualification to the general rule applies. The same provision of Section 25
of P.D. No. 694 provides that "the mortgagor shall have the right to redeem the property by paying all claims of
the Bank against him". From said provision can be deduced that the mortgagor referred to by that law is one
from whom the bank has a claim in the form of outstanding or unpaid loan; he is also called a borrower or
debtor-mortgagor. On the other hand, respondent PNB has no claim against accommodation mortgagor Eduarda
Belo inasmuch as she only mortgaged her property to accommodate the Eslabon spouses who are the loan
borrowers of the PNB. The principal contract is the contract of loan between the Eslabon spouses, as
borrowers/debtors, and the PNB as lender. The accommodation real estate mortgage (which secures the loan) is
only an accessory contract. It is our view and we hold that the term "mortgagor" in Section 25 of P.D. No. 694
pertains only to a debtor-mortgagor and not to an accommodation mortgagor.

It is well settled that courts are not to give a statute a meaning that would lead to absurdities. If the words of a
statute are susceptible of more than one meaning, the absurdity of the result of one construction is a strong
argument against its adoption, and in favor of such sensible interpretation.28 We test a law by its result. A law
should not be interpreted so as not to cause an injustice. There are laws which are generally valid but may seem
arbitrary when applied in a particular case because of its peculiar circumstances. We are not bound to apply
them in slavish obedience to their language.29

The interpretation accorded by respondent PNB to Section 25 of P.D. No. 694 is unfair and unjust to
accommodation mortgagors and their assignees. Forcing an accommodation mortgagor like Eduarda Belo to
pay for what the principal debtors (Eslabon spouses) owe to respondent bank is to punish her for the
accommodation and generosity she accorded to the Eslabon spouses who were then hard pressed for additional
collateral needed to secure their bank loan. Respondents PNB and spouses Eslabons very well knew that she
merely consented to be a mere accommodation mortgagor.

The circumstances of the case at bar also provide for ample reason why petitioners cannot be made to pay the
entire liability of the principal debtors, Eslabon spouses, to respondent PNB.

The trial court found that respondent PNB's application for extrajudicial foreclosure and public auction sale of
Eduarda Belo's mortgaged property30 was filed under Act No. 3135, as amended by P.D. No. 385. The notice of
extrajudicial sale, the Certificate of Sheriff's Sale, and the letter it sent to Eduarda Belo did not mention P. D.
No. 694 as the basis for redemption. As aptly ruled by the trial court —

In fairness to these mortgagors, their successors-in-interest, or innocent purchasers for value of their
redemption rights, PNB should have at least advised them that redemption would be governed by its
Revised Charter or PD 69, and not by Act 3135 and the Rules of Court, as commonly practiced . . . This
practice of defendant Bank is manifestly unfair and unjust to these redemptioners who are caught by
surprise and usually taken aback by the enormous claims of the Bank not shown in the Notice of
Extrajudicial Sale or the Certificate of Sheriff's Sale as in this case.31

Moreover, the mortgage contract explicitly provides that ". . . the mortgagee may immediately foreclose this
mortgage judicially in accordance with the Rules of Court or extrajudicially in accordance with Act No. 3135,
as amended and Presidential Decree No. 385 . . .32 Since the mortgage contract in this case is in the nature of a
contract of adhesion as it was prepared solely by respondent, it has to be interpreted in favor of petitioners. The
respondent bank however tries to renege on this contractual commitment by seeking refuge in the 1989 case of
Sy v. Court of Appeals33 wherein this Court ruled that the redemption price is equal to the total amount of
indebtedness to the bank's claim inasmuch as Section 78 of the General Banking Act is an amendment to
Section 6 of Act No. 3135, despite the fact that the extrajudicial foreclosure procedure followed by the PNB
was explicitly under or in accordance with Act No. 3135.

In the 1996 case of China Banking Corporation v. Court of Appeals,34 where the parties also stipulated that Act
No. 3135 is the controlling law in case of foreclosure, this Court ruled that;

By invoking the said Act, there is no doubt that it must "govern the manner in which the sale and
redemption shall be effected." Clearly, the fundamental principle that contracts are respected as the law
 between the contracting parties finds application in the present case, specially where they are not
contrary to law, morals, good customs and public policy.35

More importantly, the ruling pronounced in Sy v. Court of Appeals and other cases,36 that the General Banking
Act and P.D. No. 694 shall prevail over Act No. 3135 with respect to the redemption price, does not apply here
inasmuch as in the said cases the redemptioners were the debtors themselves or their assignees, and not an
accommodation mortgagor or the latter's assignees such as in the case at bar. In the said cases, the debtor-
mortgagors were required to pay as redemption price their entire liability to the bank inasmuch as they were
obligated to pay their loan which is a principal obligation in the first place. On the other hand, accommodation
mortgagors as such are not in anyway liable for the payment of the loan or principal obligation of the
debtor/borrower The liability of the accommodation mortgagors extends only up to the loan value of their
mortgaged property and not to the entire loan itself. Hence, it is only just that they be allowed to redeem their
mortgaged property by paying only the winning bid price thereof (plus interest thereon) at the public auction
sale.

One wonders why respondent PNB invokes Act No. 3135 in its contracts without qualification and yet in the
end appears to disregard the same when it finds its provisions unfavorable to it. This is unfair to the other
contracting party who in good faith believes that respondent PNB would comply with the contractual
agreement.

It is therefore our view and we hold that Section 78 of the General Banking Act, as amended by P.D. No. 1828,
is inapplicable to accommodation mortgagors in the redemption of their mortgaged properties.

While the petitioners, as assignees of Eduarda Belo, are not required to pay the entire claim of respondent PNB
against the principal debtors, spouses Eslabon, they can only exercise their right of redemption with respect to
the parcel of land belonging to Eduarda Belo, the accommodation mortgagor. Thus, they have to pay the bid
price less the corresponding loan value of the foreclosed four (4) residential lots of the spouses Eslabon.

The respondent PNB contends that to allow petitioners to redeem only the property belonging to their assignor,
Eduarda Belo, would violate the principle of indivisibility of mortgage contracts. We disagree.

Article 2089 of the Civil Code of the Philippines, provides that:

A pledge or mortgage is indivisible, even though the debt may be divided among the successors in
interest of the debtor or of the creditor.

Therefore, the debtor's heir who has paid a part of the debt cannot ask for the proportionate
extinguishment of the pledge or mortgage as the debt is not completely satisfied.

Neither can the creditor's heir who received his share of the debt return the pledge or cancel the
mortgage, to the prejudice of the other heirs who have not been paid.

From these provisions is excepted the case in which, there being several things given in mortgage or
pledge, each one of them guarantees only a determinate portion of the credit.

The debtor, in this case, shall have a right to the extinguishment of the pledge or mortgage as the portion
of the debt for which each thing is specially answerable is satisfied.

There is no dispute that the mortgage on the four (4) parcels of land by the Eslabon spouses and the other
mortgage on the property of Eduarda Belo both secure the loan obligation of respondents spouses Eslabon to
respondent PNB. However, we are not persuaded by the contention of the respondent PNB that the indivisibility
concept applies to the right of redemption of an accommodation mortgagor and her assignees. The
jurisprudence in Philippine National Bank v. Agudelo37 is enlightening to the case at bar, to wit:

xxx           xxx           xxx

However, Paz Agudelo y Gonzaga (the principal) . . . gave her consent to the lien on lot No. 878 . . . .
This acknowledgment, however, does not extend to lots Nos. 207 and 61 . . . inasmuch as, although it is
true that a mortgage is indivisible as to the contracting parties and as to their successors in interest
(Article 1860, Civil code), it is not so with respect to a third person who did not take part in the
constitution thereof either personally or through an agent x x x. Therefore, the only liability of the
defendant-appellant Paz Agudelo y Gonzaga is that which arises from the aforesaid acknowledgment but
only with respect to the lien and not to the principal obligation secured by the mortgage acknowledged
 by her to have been constituted on said lot No. 878 . . . . Such liability is not direct but a subsidiary
one.38

xxx           xxx           xxx

Wherefore, it is hereby held that the liability contracted by the aforesaid defendant-appellant Paz
Agudelo y Gonzaga is merely subsidiary to that of Mauro A. Garrucho (the agent), limited to lot No. 87.

xxx           xxx           xxx

From the wording of the law, indivisibility arises only when there is a debt, that is, there is a debtor-creditor
relationship. But, this relationship is wanting in the case at bar in the sense that petitioners are assignees of an
accommodation mortgagor and not of a debtor-mortgagor. Hence, it is fair and logical to allow the petitioners to
redeem only the property belonging to their assignor, Eduarda Belo.

With respect to the four (4) parcels of residential land belonging to the Eslabon spouses, petitioners — being
total strangers to said lots — lack legal personality to redeem the same. Fair play and justice demand that the
respondent PNB's interest of recovering its entire bank claim should not be at the expense of petitioners, as
assignees of Eduarda Belo, who is not indebted to it. Besides, the letter39 sent by respondent PNB to Eduarda
Belo states that "your (Belo) mortgaged property/ies with PNB covered by TCT # T-7493 was/were sold at
public auction . . . .". It further states that "You (Belo) have, therefore, one year from July 1, 1991 within which
to redeem your mortgaged property/ies, should you desire to redeem it." Respondent PNB never mentioned that
she was bound to redeem the entire mortgaged properties including the four (4) residential properties of the
spouses Eslabon. The letter was explicit in mentioning Eduarda Belo's property only. From the said statement,
there is then an admission on the part of respondent PNB that redemption only extends to the subject property
of Eduarda Belo for the reason that the notice of the sale limited the redemption to said property.

WHEREFORE, the petition is partially granted in that the petitioners are hereby allowed to redeem only the
property, covered and described in Transfer Certificate of Title No. T-7493-Capiz registered in the name of
Eduarda Belo, by paying only the bid price less the corresponding loan value of the foreclosed four (4)
residential lots of the respondents spouses Marcos and Arsenia Eslabon, consistent with the Decision of the
Regional Trial Court of Roxas City in Civil Case No. V-6182.

SO ORDERED.
 Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 83139 April 12, 1989

ARNEL SY, petitioner,

vs.
HONORABLE COURT OF APPEALS, STATE INVESTMENT HOUSE, INC. and THE REGISTER
OF DEEDS OF RIZAL, respondents.

Manuel T. Ubarra for petitioner.

Vicente D. Minora co-counsel for petitioner.

Angara, Abello, Concepcion, Regala & Cruz for respondent State Investment House, Inc.

CORTES, J.:

For a resolution of the issues raised in the instant petition involving the amount required to redeem
the subject foreclosed property, the Court must first determine what law to apply. Is it Section 30,
Rule 39 of the Revised Rules of Court in relation to Act No. 3135 as amended, or Section 78 of Rep.
Act No. 337 (General Banking Act) as amended by P.D. No. 1828?

The facts of the case are as follows:

On March 2, 1979, Carlos Coquinco executed in favor of private respondent State Investment House,
Inc. (hereinafter referred to as SIHI) a real estate mortgage over a 952 square-meter parcel of land in
San Juan, Metro-Manila, together with all the improvements thereon, covered by TCT No. 2782
issued in his name, as security for the payment of a loan in the amount of P1,000,000.00. For failure
of Carlos Coquinco to pay his outstanding balance of P1,126,220.56 computed as of October 19,
1982 [Record, p. 217-E] the mortgaged property was extrajudicially foreclosed by SIHI and was sold
at public auction on February 10, 1983 for P760,000.00 to SIHI as the only bidder. The certificate of
sale in favor of SIHI was registered with the Registry of Deeds of Pasig on February 28, 1983.

On May 22, 1983, SIHI filed before the Regional Trial Court (RTC) of Manila an action against Carlos
Coquinco for the collection of the sum of P612,031.84, representing the deficiency of his
indebtedness as of February 10, 1983.

In the meantime, petitioner acquired by virtue of a deed of assignment Carlos Coquinco's right of
redemption for and in consideration of P500,000.00. Before the expiration of the one-year redemption
period, petitioner offered to redeem the foreclosed property from SIHI by tendering to the latter two
(2) manager's checks issued by SOLIDBANK, one for P760,000.00 representing the purchase price,
and another for P91,200.00 representing interest at the rate of 1% per month for 12 months, totalling
P851,200.00. SIHI rejected this offer.

Thus, on February 20, 1984, petitioner filed an action for consignation of the aforesaid amount with
the RTC, docketed as Civil Case No. 84-22839, to compel SIHI to accept the P851,200.00 as
payment of the redemption price for the foreclosed property, to order SIHI to surrender the title over
the property and to issue a certificate of redemption in favor of petitioner.

On February 27, 1984, a day before the expiration of the redemption period, petitioner decided to
redeem the foreclosed property directly from the Ex-Officio Regional Sheriff of Rizal, who accepted
from him the amount of P851,200.00 as redemption price and P4,269.00 as percentage fee of
collection, and issued to him the corresponding certificate of redemption.

On March 30,1984, SIHI filed a motion to dismiss Civil Case No. 84-22839 on the ground of lack of
cause of action, alleging that the amount sought to be consigned was insufficient for purposes of
redemption pursuant to Section 78 of Rep. Act No. 337, otherwise known as the General Banking
Act.

In an order dated April 24, 1984, the RTC dismissed petitioner's action on the ground, among others,
that there being no valid tender of payment, there was no valid consignation. No appeal was
interposed by petitioner from this order.

After the dismissal of the aforementioned action, SIHI consolidated its ownership over the foreclosed
property, and caused the cancellation of TCT No. 2782 and the issuance of TCT No. 44775 covering
the same property in its name.

After learning of this development, petitioner instituted another action in the Regional Trial Court on
June 11, 1984, this time a complaint for annulment and cancellation of title, with damages, against
SIHI and the Register of Deeds for the Province of Rizal, docketed as Civil Case No. 51169.

During the pendency of the action, SIHI sold the subject property to spouses Domingo Lim and Lim
Siu Keng. Defendant Register of Deeds, thereafter, cancelled TCT No. 44775 and issued TCT No.
46409 in the name of the spouses.

On July 7, 1986, the court a quo dismissed petitioner's complaint holding that it stated no cause of
action because petitioner failed to effect a valid redemption as required under Section 78 of the
General Banking Act, as amended by P.D. No. 1828. The court accordingly ordered petitioner to pay
SIHI the following sums of money: P10,000.00 as temperate damages; P20,000.00 as exemplary
damages on the finding that petitioner had instituted the case in violation of the res judicata rule; and
P20,000.00 as attorney's fees [CA Decision, p. 4; Rollo, p. 32]. Petitioner's motion for reconsideration
was subsequently denied.

Petitioner then appealed to respondent appellate court, raising as errors: (1) the application of
Section 78 of the General Banking Act, as amended, instead of Act No. 3135, in relation to Section
30, Rule 39 of the Revised Rules of Court; (2) the holding that the dismissal of Civil Case No. 84-
22839 (consignation case) from which petitioner failed to appeal and wherein the court made a
finding that petitioner made no valid tender of payment of the redemption price, had the effect of res
judicata on the case at hand; (3) the finding that SIHI committed no actionable wrong in conveying the
subject property to spouses Domingo Lim and Lim Siu Keng; and, (4) the award of damages
assessed against petitioner [CA Decision, p. 5; Rollo, p. 33].

In its decision promulgated on April 28, 1988, respondent appellate court affirmed the trial court's
judgment with the modification that the award for temperate and exemplary damages assessed
against petitioner was set aside for lack of legal basis [CA Decision, p. 11; Rollo, p. 39].

Not satisfied with the above decision, petitioner filed the instant petition for review on certiorari,
raising basically the same errors he had raised in the appellate court.

The issues raised in this petition may be reduced into four, to wit:

I. Whether Act No. 3135, as amended, in relation to Section 30, Rule 39 of the Revised
Rules of Court, or Section 78 of Rep. Act No. 337 (General Banking Act), as amended
by P.D. No. 1828, is the applicable law in determining the redemption price;

II. Whether or not the dismissal of Civil Case No. 84-22839 (consignation case) had the
effect of res judicata with respect to Civil Case No. 51169;

III. Whether or not the Register of Deeds for the province of Rizal may be held liable for
damages for cancelling TCT No. 2782 and issuing TCT No. 44775 in favor of SIHI; and,

IV. Whether or not the award of attorney's fees and expenses of litigation assessed
against petitioner is proper.

As regards the first issue, petitioner insists that the present case is governed by Act No. 3135, as
amended, in relation to Section 30, Rule 39 of the Revised Rules of Court which provides in part:

SEC. 30. Time and manner of, and amounts payable on, successive redemptions.
Notice to be given and filed. — The judgment debtor, or redemptioner,, may redeem the
 property from the purchaser, at any time within twelve months after the sale on paying
the purchaser the amount of his purchase, with one percentum per month interest
thereon in addition, up to the time of redemption, together with the amount of any
assessments or taxes which the purchaser may have paid thereon after purchase, and
interest on such last-named amount at the same rate... [Emphasis supplied.]

Thus, petitioner contends that a valid redemption was made by him as assignee of the mortgagor's
right of redemption when he tendered and paid to the Sheriff of Rizal the amount of P851,000.00
representing the purchase price plus interest computed at the rate of 1% per month for a period of
twelve months. This was the same amount allegedly tendered to, and refused acceptance by, SIHI. In
support of his contention, petitioner invokes the case of Philippine National Bank v. The Honorable
Court of Appeals and Divina Alim [G.R. No. 60208, December 5, 1985,140 SCRA 360].

On the other hand, respondent appellate court, citing the case of Ponce de Leon v. Rehabilitation
Finance Corporation [G.R. No. L-24571, December 18, 1970, 36 SCRA 289], applied Section 78 of
the General Banking Act, as amended by P. D. No. 1828, and consequently held that no valid
redemption was effected by petitioner because the amount tendered to SIHI and thereafter paid to the
sheriff was insufficient, it being less than the amount due under the real estate mortgage contract of
Carlos Coquinco or the latter's outstanding balance, with interest as specified in the mortgage
contract plus expenses incurred by SIHI by reason of the foreclosure and sale of the subject property.

The Court finds that respondent appellate court committed no reversible error, having acted in
accordance with the law and jurisprudence.

Section 78 of the General Banking Act, as amended by P.D. No. 1828, states that:

... In the event of foreclosure, whether judicially or extra-judicially, of any mortgage on

real estate which is security for any loan granted before the passage of this Act or under
the provisions of this Act, the mortgagor or debtor whose real property has been sold at
public auction, judicially or extra-judicially, for the full or partial payment of an obligation
to any bank, banking or credit institution, within the purview of this Act shall have the
right, within one year after the sale of the real estate as a result of the foreclosure of the
respective mortgage, to redeem the property by paying the amount fixed by the court in
the order of execution, or the amount due under the mortgage deed, as the case may
be, with interest thereon at the rate specified in the mortgage and all the costs, and
judicial and other expenses incurred by the bank or institution concerned by reason of
the execution and sale and as a result of the custody of said property less the income
received from the property. [Emphasis supplied].

It must be emphasized that the above section is applicable not only to "banks and banking
institutions," but also to "credit institutions." And, as certified by the Central Bank,* SIHI is a credit
institution, i.e. financial intermediary engaged in quasi-banking functions within the purview of Section
78, it being an entity authorized to engage in the lending of funds or purchasing of receivables or
other obligations with funds obtained from the public as provided in the General Banking Act under
Section 2-A (a); ** and, to lend, invest or place funds deposited with them, acquired by them or
otherwise coursed through them, either for their own account or for the account of others under
Section 2-D(c) *** [Record, p. 246].

Moreover, petitioner by virtue of the deed of assignment of Carlos Coquinco's right of redemption
must be deemed subrogated to the rights and obligations of his assignor, and bound by exactly the
same conditions, relative to the redemption of the subject property that bound the latter as debtor and
mortgagor [Gorospe v. Santos, G.R. No. L-30079, January 30, 1976, 69 SCRA 191]. Had Carlos
Coquinco attempted to redeem the subject foreclosed property, he would have had to pay "the
amount due under the mortgage deed ... with interest thereon at the rate specified in the mortgage
and all costs ... and other expenses incurred . . . by reason of the execution (or foreclosure] and sale
and as a result of the custody of said property less the income received from the property . . ."
pursuant to Section 78 of the General Banking Act in order to effect a valid redemption. Since
petitioner merely stepped into the shoes of Carlos Coquinco his assignor, petitioner should have
tendered and paid the same amount in order to redeem the property.

Contrary to petitioner's claim, the Court's decision in Ponce de Leon v. Rehabilitation Finance
Corporation, supra, is applicable. In that case, the Court had occasion to state that the General
Banking Act partakes of the nature of an amendment to Act No. 3135 insofar as the redemption price
is concerned, when the mortgagee is a bank or banking or credit institution, Section 6 of Act No. 3135
being, in this respect, inconsistent with Section 78 of the General Banking Act. Although the
foreclosure and sale of the subject property was done by SIHI pursuant to Act No. 3135, as amended
(whereby entities like SIHI are authorized to extrajudicially foreclose and sell mortgaged properties
only under a special power inserted in or annexed to the real estate mortgage contract, and
interested parties, like petitioner herein, are given one year from the date of sale within which to
redeem the foreclosed properties), Section 78 of the General Banking Act, as amended, provides the
amount at which the subject property is redeemable from SIHI, which is, in this case, the amount due
under the mortgage deed, or the outstanding obligation of Carlos Coquinco plus interest and
expenses.

The decision in the 1985 case of Philippine National Bank v. The Honorable Court of Appeals, supra,
invoked by petitioner is not determinative of the issues in the instant petition because that case is
applicable only to extrajudicial foreclosures by the PNB effected pursuant to a mortgage contract
entered into prior to the enactment in 1975 of the Revised Charter of the PNB, P.D. No. 694 (which
contained provisions on redemption), and deals specifically with the amount of interest to be included
in the computation of the redemption price.

Thus, inasmuch as petitioner failed to tender and pay the required amount for the redemption of the
subject property pursuant to Section 78 of the General Banking Act, as amended, no valid redemption
was effected by him. Consequently, there was no legal obstacle to the consolidation of title by SIHI.

Considering that the Court has made the foregoing categorical finding that petitioner failed to effect a
valid redemption of the subject property, it is deemed unnecessary to pass upon the merits of the
second issue presented in the instant petition.

As regards the third issue, suffice it to say that the respondent Register of Deeds incurred no liability
when he cancelled TCT No. 2782 and issued in lieu thereof TCT No. 44775 in the name of SIHI, the
former having acted in fulfillment of his official functions and in accordance with law.

With regard to the fourth issue, petitioner contends that since respondent appellate court had set
aside the award of temperate and exemplary damages on the finding that petitioner had acted in
good faith in filing the present action, it should have also deleted the award of attorney's fees and
expenses of litigation assessed against him for lack of legal basis.

This contention is meritorious.

A perusal of Article 2208 of the New Civil Code will reveal that the award of attorney's fees as a form
of damages is the exception rather than the general rule for it is predicated upon the existence of
exceptional circumstances, such as a "clearly unfounded civil action or proceeding" or evident bad
faith on the plaintiffs part in instituting his action [Tan Ti v. Alvear, 26 Phil. 566 (1914); Buan v.
Camaganacan, G.R. No. L-21569, February 28, 1966,16 SCRA 321; Philippine National Bank v.
Court of Appeals, G.R. No. L-45770, March 20, 1988, 159 SCRA 433].

It cannot be said that the present action instituted by petitioner was clearly unfounded. Although the
theory upon which petitioner's complaint was based is untenable, he had raised legitimate issues on
the application of Section 78 of the General Banking Act to credit institutions like SIHI, and the import
of the decisions in the cases of Ponce de Leon v. Rehabilitation Finance Corporation and Philippine
National Bank v. The honorable Court of Appeals. Neither was it established that petitioner had acted
in bad faith in the filing of his action against SIHI notwithstanding the dismissal of his complaint in
Civil Case No. 84-22839 (consignation case). The Court agrees with the holding of the respondent
appellate court that the filing of the present action by petitioner was merely

... a misapprehension of a legal remedy as would normally be taken within the ambit of
permissible legal procedure. This, is a scene happening daily in our courts where the
opposing parties would avail of every conceivable rule in the statute books to ventilate
their claim or defenses. [Petitioner's] persistence to pay the redemption petition price is
an act which the court does not consider condemnable as to make [him] liable for
temperate and exemplary damages. We are inclined to presume that [he] acted in good
faith [CA Decision, p. 10; Rollo, P. 38.]

WHEREFORE, the decision of respondent Court of Appeals in CA-G.R. CV No. 13387 promulgated
on April 28, 1988, is hereby AFFIRMED with the modification that the award of attorney's fees and
expenses of litigation is set aside.
 ANTICHRESIS
Art. 2132-2139

Concurrence and Preference of Credits

Art 2236-2240

Classification of Credits
Art 2241-2245

Order of Preference of Credit

Art 2246-2251
 Republic of the Philippines
SUPREME COURT
Manila

EN BANC

G.R. No. L-14938             January 28, 1961

MAGDALENA C. DE BARRETO, ET AL., plaintiffs-appellants,

vs.
JOSE G. VILLANUEVA, ET AL., defendants-appellees.

Bausa, Ampil & Suarez for plaintiffs-appellants.

Esteban Ocampo for defendants-appellees.

GUTIERREZ DAVID, J.:

On May 10, 1948, Rosario Cruzado, for herself and as administratix of the intestate estate of her deceased
husband Pedro Cruzado in Special Proceedings No. 4959 of the Court of First Instance of Manila, obtained
from the defunct Rehabilitation Finance Corporation (hereinafter referred to as the RFC a loan in the amount of
P11,000.00. To secure payment thereof, she mortgaged the land then covered by Transfer Certificate of Title
No. 61358 issued in her name and that of her deceased. husband. As she failed to pay certain installments on the
loan, the mortgage was foreclosed and the RFC acquired the property for P11,000.00, subject to her rights as
mortgagor to re-purchase the same. On July 26, 1951, upon her application, the land was sold back to her
conditionally for the amount of P14,269.03, payable in seven years.

About two years thereafter, or on February 13, 1953 Rosario Cruzado, as guardian of her minor children in
Special Proceedings No. 14198 of the Court of First Instance of Manila, was authorized by the court, to sell
with the previous consent of the RFC the land in question together with the improvements thereon for a sum not
less than P19,000. Pursuant to such authority and with the consent of the RFC, she sold to Pura L. Villanueva
for P19,000.00 "all their rights, interest,' title and dominion and over the herein described parcel of land together
with the existing improvements thereon, including one use and an annex thereon; free from all charges and
encumbrances, , with the exception of the sum of P11,009.52, is stipulated interest thereon, which the vendor, is
still presently obligated to the RFC and which the vendee herein now assumes to pay to the RFC under the same
terms and conditions specified in that deed of sale dated July 26, 1951." Having paid in advance the sum of
P500.00, Pura L. Villanueva, the vendee, in consideration of the aforesaid sale, executed in favor of the vendor
Rosario Cruzado a promissory note dated March 9, 1953, undertaking to pay the balance of P17,500.00 in
monthly installments. On April 22, 1953, she made an additional payment of P5,500.00 on the promissory note.
She was, subsequently, able to secure in her name Transfer Certificate of Title No. 32526 covering the house
and lot above referred to, and on July 10, 1953, she mortgaged the said property to Magdalena C. Barretto as
security for a loan the amount of P30,000.00.

As said Pura L. Villanueva had failed to pay the remaining installments on the unpaid balance of P12,000.00
her promissory note for the sale of the property in question, a complaint for the recovery of the same from her
and her husband was filed on September 21, 1963 by Rosario Cruzado in her own right and in her capacity as
judicial guardian of her minor children. Pending trial of the case, a lien was constituted upon the property in the
nature of a levy in attachment in favor of the Cruzados said lien being annotated at the back of Transfer
Certificate of Title No. 32526. After trial, decision was rendered ordering Pura Villanueva and her husband,
jointly and severally, to pay Rosario Cruzado the sum of P12,000.00, with legal interest thereon from the date of
the filing of the complaint until fully paid plus the sum of P1,500.00 as attorney's fees.

Pura Villanueva having, likewise, failed to pay her indebtedness of P30,000.00 to Magdalena C. Barretto, the
latter, jointly with her husband, instituted against the Villanueva spouses an action for foreclosure of mortgage,
impleading Rosario Cruzado and her children as parties defendants. On November 11, 1956, decision was
rendered in the case absolving the Cruzados from the complaint and sentencing the Villanuevas to pay the
Barrettos, jointly and severally, the sum of P30,000.00, with interest thereon at the rate of 12% per annum from
January 11, 1954 plus the sum of P4,000.00 as attorney's fees. Upon the finality of this decision, the Barrettos
filed a motion for the issuance of a writ of execution which was granted by the lower court on July 31, 1958. On
August 14, 1958, the Cruzados filed their "Vendor's Lien" in the amount of P12,000.00, plus legal interest, over
the real property subject of the foreclosure suit, the said amount representing the unpaid balance of the purchase
price of the said property. Giving due course to the line, the court on August 18, 1958 ordered the same
annotated in Transfer Certificate of Title No. 32526 of the Registry of Deeds of Manila, decreeing that should
the realty in question be sold at public auction in the foreclosure proceedings, the Cruzados shall be credited
with their pro-rata share in the proceeds thereof, "pursuant to the provision of articles 2248 and 2249 of the new
Civil Code in relation to Article 2242, paragraph 2 of the same Code." The Barrettos filed a motion for
reconsideration on September 12, 1958, but on that same date, the sheriff of Manila, acting in pursuance of the
order of the court granting the writ of execution, sold at public auction the property in question. As highest
bidder, the Barrettos themselves acquired the properties for the sum of P49,000.00.

On October 4, 1958, 'the Court of First Instance issued an order confirming the aforesaid sale and directing the
Register of Deeds of the City of Manila to issue to the Barrettos the corresponding certificate of title, subject,
however, to the order of August 18, 1958 concerning,. the vendor's lien. On the same date, the motion of the
Barettos seeking reconsideration of the order of the court giving due course to the said vendor's lien was denied.
From this last order, the Barretto spouses interposed the present appeal.

The appeal is devoid of merit.

In claiming that the decision of the Court, of First Instance of Manila in Civil Case No. 20075 . awarding the
amount of P12,000.00 in favor of Rosario Cruzado and her minor children . cannot constitute a basis for the
vendor's lien filed by the appellee Rosario Cruzado, appellants allege that the action in said civil case was
merely to recover the balance of a promissory note. But while, apparently, the action was to recover the
remaining obligation of promissor Pura Villanueva on the note, the fact remains that Rosario P. Cruzado as
guardian of her minor children, was an unpaid vendor., of the realty in question, and the promissory note, was,
precisely, for the unpaid balance of the price of the property bought by, said Pura Villanueva.

Article 2242 of the new Civil, Code enumerates the claims, mortgage and liens that constitute an encumbrance
on specific immovable property, and among them are: .

(2) For the unpaid price of real property sold, upon the immovable sold; and

(5) Mortgage credits recorded in the Registry of Property."

Article 2249 of the same Code provides that "if there are two or more credits with respect to the same specific
real property or real rights, they shall be satisfied pro-rata after the payment of the taxes and assessment upon
the immovable property or real rights.

Application of the above-quoted provisions to the case at bar would mean that the herein appellee Rosario
Cruzado as an unpaid vendor of the property in question has the right to share pro-rata with the appellants the
proceeds of the foreclosure sale.

The appellants, however, argue that inasmuch as the unpaid vendor's lien in this case was not registered, it
should not prejudice the said appellants' registered rights over the property. There is nothing to this argument.
Note must be taken of the fact that article 2242 of the new Civil Code enumerating the preferred claims,
mortgages and liens on immovables, specifically requires that . unlike the unpaid price of real property sold .
mortgage credits, in order to be given preference, should be recorded in the Registry of Property. If the
legislative intent was to impose the same requirement in the case of the vendor's lien, or the unpaid price of real
property sold, the lawmakers could have easily inserted the same qualification which now modifies the
mortgage credits. The law, however, does not make any distinction between registered and unregistered
vendor's lien, which only goes to show that any lien of that kind enjoys the preferred credit status.

Appellants also argue that to give the unrecorded vendor's lien the same standing as the registered mortgage
credit would be to nullify the principle in land registration system that prior unrecorded interests cannot
prejudice persons who subsequently acquire interests over the same property. The Land Registration Act itself,
however, respects without reserve or qualification the paramount rights of lien holders on real property. Thus,
section 70 of that Act provides that .

Registered land, and ownership therein shall in all respects be subject to the same burdens and incidents
attached by law to unregistered land. Nothing contained in this Act shall in any way be construed to
relieve registered land or the owners thereof from any rights incident to the relation of husband and wife,
or from liability to attachment on mesne process or levy, on execution, or from liability to any lien of
any description established by law on land and the buildings thereon, or the interest of the owners of
such land or buildings, or to change the laws of descent, or the rights of partition between co-owners,
joint tenants and other co-tenants or the right to take the same by eminent domain, or to relieve such
land from liability to be appropriated in any lawful manner for the payment of debts, or to change or
affect in any other way any other rights or liabilities created by law and applicable to unregistered land,
except as otherwise expressly provided in this Act or in the amendments thereof, (Emphasis supplied)
As to the point made that the articles of the Civil Code on concurrence and preference of credits are applicable
only to the insolvent debtor, suffice it to say that nothing in the law shows any such limitation. If we are to
interpret this portion of the Code as intended only for insolvency cases, then other creditor-debtor relationships
where there are concurrence of credits would be left without any rules to govern them, and it would render
purposeless the special laws an insolvency.

Premises considered, the order appealed from is hereby affirmed. Costs against the appellants.

Bengzon, Padilla, Bautista Angelo, Labrador, Paredes and Dizon, JJ., concur.
Concepcion, Reyes, J.B.L. and Barrera, JJ., concur in the result.

RESOLUTION ON MOTION TO RECONSIDER

December 29, 1962

REYES, J.B.L., J.:

Appellants, spouses Barretto, have filed a motion vigorously urging, for reason to be discussed in the course of
this resolution, that our decision of 28 January 1961 be reconsidered and set aside, and a new one entered
declaring that their right as mortgagees remain superior to the unrecorded claim of herein appellee for the
balance of the purchase price of her rights, title, and interests in the mortgaged property.

It will be recalled that, with Court authority, Rosario Cruzado sold all her right, title, and interest and that of her
children in the house and lot herein involved to Pura I. Villanueva for P19,000.00. The purchaser paid Pl,500 in
advance, and executed a promissory note for the balance of P17,506.00. However, the buyer could only pay
P5,500 On account of the note, for which reason the vendor obtained judgment for the unpaid balance. In the
meantime, the buyer Villanueva was able to secure a clean certificate of title (No. 32626), and mortgaged the
property to appellant Magdalena C. Barretto, married to Jose C. Barretto, to secure a loan of P30,000.03, said
mortgage having been duly recorded.

Pura Villanueva defaulted on the mortgage loan in favor of Barretto. The latter foreclosed the mortgage in her
favor, obtained judgment, and upon its becoming final asked for execution on 31 July 1958. On 14 August
1958, Cruzado filed a motion for recognition for her "vendor's lien" in the amount of Pl2,000.00, plus legal
interest, invoking Articles 2242, 2243, and 2249 of the new Civil Code. After hearing, the court below ordered
the "lien" annotated on the back of Certificate of Title No. 32526, with the proviso that in case of sale under the
foreclosure decree the vendor's lien and the mortgage credit of appellant Barretto should be paid pro rata from
the proceeds. Our original decision affirmed this order of the Court of First Instance of Manila.

Appellants insist that:

(1) The vendor's lien, under Articles 2242 and 2243 of the new, Civil Code of the Philippines, can only become
effective in the event of insolvency of the vendee, which has not been proved to exist in the instant case; and .

(2) That the appellee Cruzado is not a true vendor of the foreclosed property. We have given protracted and
mature consideration to the facts and law of this case, and have reached the conclusion that our original decision
must be reconsidered and set aside, for the following reasons:

A. The previous decision failed to take fully into account the radical changes introduced by the Civil Code of
the Philippines into the system of priorities among creditors ordained by the Civil Code of 1889.

Pursuant to the former Code, conflicts among creditors entitled to preference as to specific real property under
Article 1923 were to be resolved according to an order of priorities established by Article 1927, whereby one
class of creditors could exclude the creditors of lower order until the claims of the former were fully satisfied
out of the proceeds of the sale of the real property subject of the preference, and could even exhaust proceeds if
necessary.

Under the system of the Civil Code of the Philippines however, only taxes enjoy a similar absolute preference.
All the remaining thirteen classes of preferred creditors under Article 2242 enjoy no priority among themselves,
but must be paid pro-rata i.e., in proportion to the amount of the respective credits. Thus, Article 2249
provides:
 If there are two or more credits with respect to the same specific real property or real rights, they, shall
be satisfied pro-rata after the payment of the taxes and assessments upon the immovable property or real
rights."

But in order to make this prorating fully effective, the preferred creditors enumerated in Nos. 2 to 14 of Article
2242 (or such of their, as have credits outstanding) must necessarily be convened, and the import of their claims
ascertained. It is thus apparent that the full, application (of Articles 2249 and 2242 demands that there must be
first some proceedings where the claims of all the preferred creditors may be bindingly adjudicated, such as
insolvency, the settlement of decedents estate under Rule 87 of the Rules of Court, or other liquidation
proceedings of similar import.

This explains the rule of Article 2243 of the new Civil Code that —

The claims or credits enumerated in the two preceding articles" shall be considered as mortgages or
pledges of real or personal property, or liens within the purview of legal provisions governing
insolvency . . . (Emphasis supplied),

And the rule is further clarified in he Report of the Code Commission, as follows:

The question as to whether the Civil Code and the insolvency Law can be harmonized is settled by this
Article (2243). The preferences named in Articles 2261 and 2262 (now 2241 and 2242) are to be
enforced in accordance with the Insolvency Law." (Emphasis supplied) .

Thus, it becomes evident that one preferred creditor's third-party claim to the proceeds of a foreclosure sale (as
in the case now before us) is not the proceeding contemplated by law for the enforcement of preferences under
Article 2242, unless the claimant were enforcing a credit for taxes that enjoy absolute priority. If none of the
claims is for taxes, a dispute between two creditors will not enable the Court to ascertain the pro-rata dividend
corresponding to each, because the rights of the other creditors likewise" enjoying preference under Article
2242 can not be ascertained. Wherefore, the order of the Court of First Instance of Manila now appealed from,
decreeing that the proceeds of the foreclosure sale be apportioned only between appellant and appellee, is
incorrect, and must be reversed.

In the absence of insolvency proceedings (or other equivalent general liquidation of the debtor's estate), the
conflict between the parties now before us must be decided pursuant to the well established principle
concerning registered lands; that a purchaser in good faith and for value (as the appellant concededly is) takes
registered property free from liens and encumbrances other than statutory liens and those recorded in the
certificate of title. There being no insolvency or liquidation, the claim of the appellee, as unpaid vendor, did not
require the character and rank of a statutory lien co-equal to the mortgagee's recorded encumbrance, and must
remain subordinate to the latter.

We are understandably loathed (absent a clear precept of law so commanding) to adopt a rule that would
undermine the faith and credit to be accorded to registered Torrens titles and nullify the beneficient objectives
sought to be obtained by the Land Registration Act. No argument is needed to stress that if a person dealing
with registered land were to be held to take it in every instance subject to all the fourteen preferred claims
enumerate in Article 2242 of the new Civil Code, even if the existence and import thereof can not be
ascertained from the records, all confidence in Torrens titles would be destroyed, and credit transactions on the
faith of such titles would be hampered, if not prevented, with incalculable results. Loans on real estate security
would become aleatory and risky transactions, for no, prospective lender could accurately estimate the hidden
liens on the property offered as security, unless he indulged in complicated, tedious investigations, . The logical
result might well be a contraction of credit unforeseeable proportions that could lead to economic disaster.

Upon the other hand, it does not appear excessively burdensome to require the privileged creditors to cause their
claims to be recorded in the books of the Register of deeds should they desire to protect their rights even outside
of insolvency or liquidation proceedings.

B. The close study of the facts disclosed by the records lasts strong doubt on the proposition that appellees
Cruzados should be regarded as unpaid vendors of the property( land, buildings, and improvements ) involved
in the case at bar so as to be entitled to preference under Article 2242. The record on appeal, specially the final
decision of the Court of First Instance of Manila in the suit of the ,Cruzados against Villanueva, clearly
establishes that after her husband's death, and with due court authority, Rosario Cruzado, for herself and as
administratrix of her husband's state, mortgaged the property to the Rehabilitation Finance Corporation (RFC)
to secure payment of a loan of P11,000, installments, but that the debtor failed to pay some of the installments;
wherefore the RFC, on 24 August 1949, foreclosed the mortgage, and acquired the property, subject to the
debtor's right to redeem or repurchase the said property; and that on 25 September 1950, the RFC consolidated
its ownership, and the certificate of title of the Cruzados was cancelled and a new certificate issued in the name
of the RFC.

While on 26 July 1951 the RFC did execute a deed selling back the property to the erstwhile mortgagors and
former owners Cruzados in installments, subject to the condition (among others) that the title to the property
and its improvements "shall remain in the name of Corporation (RFC) until after said purchase price, advances
and interests shall have been fully paid", as of 27 September 1952, Cruzado had only paid a total of P1,360, and
had defaulted on six monthly amortizations; for which reason the RFC rescinded the sale, and forfeited the
payments made, in accordance with the terms of the contract of 26 July 1951.

It was only on 10 March 1953 that the Cruzados sold to Pura L. Villanueva all "their rights, title, interest and
dominion on and over" the property, lot, house, and improvements for P19,000.00, the buyer undertaking to
assume payment of the obligation to the RFC, and by resolution of 30 April 1953, the RFC approved "the
transfer of the rights and interest of Rosario P. Cruzado and her children in their property herein above-
described in favor of Pura L. Villanueva"; and on 7 May 1953 the RFC executed a deed of absolute sale of the
property to said party, who had fully paid the price of P14,269.03. Thereupon, the spouses Villanueva obtained
a new Transfer Certificate of Title No. 32526 in their name.

On 10 July 1953, the Villanuevas mortgaged the property to the spouses Barretto, appellants herein.

It is clear from the facts above-stated that ownership of the property had passed to the Rehabilitation Finance
Corporation since 1950, when it consolidated its purchase at the foreclosure sale and obtained a certificate of
title in its corporate name. The subsequent contract of resale in favor of the Cruzados did not revest ownership
in them, since they failed to comply with its terms and conditions, and the contract itself provided that the title
should remain in the name of the RFC until the price was fully paid.

Therefore, when after defaulting in their payments due under the resale contract with the RFC the appellants
Cruzados sold to Villanueva "their rights, title, interest and dominion" to the property, they merely assigned
whatever rights or claims they might still have thereto; the ownership of the property rested with the RFC. The
sale from Cruzado to Villanueva, therefore, was not so much a sale of the land and its improvements as it was a
quit-claim deed in favor of Villanueva. In law, the operative sale was that from the RFC to the latter, and it was
the RFC that should be regarded as the true vendor of the property. At the most, the Cruzados transferred to
Villanueva an option to acquire the property, but not the property itself, and their credit, therefore, can not
legally constitute a vendor's lien on the corpus of that property that should stand on an equal footing with the
mortgaged credit held by appellant Barretto.

In view of the foregoing, the previous decision of this Court, promulgated on 28 January 1961, is hereby
reconsidered and set aside, and a new one entered reversing the judgment appealed from and declaring the
appellants Barretto entitled to full satisfaction of their mortgaged credit out of the proceeds of the foreclosure
sale in the hands of the Sheriff of the City of Manila. No costs.
 SUPREME COURT
Manila

EN BANC

G.R. No. L-56568 May 20, 1987

REPUBLIC OF THE PHILIPPINES, represented by the Bureau of Customs and the Bureau of
Internal Revenue, petitioner,
vs.
HONORABLE E.L. PERALTA, PRESIDING JUDGE OF THE COURT OF FIRST INSTANCE OF
MANILA, BRANCH XVII, QUALITY TABACCO CORPORATION, FRANCISCO, FEDERACION
OBRERO DE LA INDUSTRIA TABAQUERA Y OTROS TRABAJADORES DE FILIPINAS (FOITAF)
USTC EMPLOYEES ASSOCIATION WORKERS UNION-PTGWO, respondents.

Oscar A. Pascua for assignee F. Candelaria.

Teofilo C. Villarico for respondent Federation.

Pedro A. Lopez for respondent USTC.

FELICIANO, J.:

The Republic of the Philippines seeks the review on certiorari of the Order dated 17 November 1980
of the Court of First Instance of Manila in its Civil Case No. 108395 entitled "In the Matter of Voluntary
Insolvency of Quality Tobacco Corporation, Quality Tobacco Corporation, Petitioner," and of the
Order dated 19 January 1981 of the same court denying the motion for reconsideration of the earlier
Order filed by the Bureau of Internal Revenue and the Bureau of Customs for the Republic.

In the voluntary insolvency proceedings commenced in May 1977 by private respondent Quality
Tobacco Corporation (the "Insolvent"), the following claims of creditors were filed:

(i) P2,806,729.92, by the USTC Association of Employees and workers Union-PTGWO USTC as
separation pay for their members. This amount plus an additional sum of P280,672.99 as attorney's
fees had been awarded by the National Labor Relations Commission in NLRC Case No. RB-IV-9775-
77. 1

(ii) P53,805.05 by the Federacion de la Industria Tabaquera y Otros Trabajadores de Filipinas ("FOITAF),
as separation pay for their members, an amount similarly awarded by the NLRC in the same NLRC Case.

(iii) P1,085,188.22 by the Bureau of Internal Revenue for tobacco inspection fees covering the period 1
October 1967 to 28 February 1973;

(iv) P276,161.00 by the Bureau of Customs for customs duties and taxes payable on various importations
by the Insolvent. These obligations appear to be secured by surety bonds. 2 Some of these imported
items are apparently still in customs custody so far as the record before this Court goes.

In its questioned Order of 17 November 1980, the trial court held that the above-enumerated claims of
USTC and FOITAF (hereafter collectively referred to as the "Unions") for separation pay of their
respective members embodied in final awards of the National Labor Relations Commission were to be
preferred over the claims of the Bureau of Customs and the Bureau of Internal Revenue. The trial court, in
so ruling, relied primarily upon Article 110 of the Labor Code which reads thus:

Article 110. Worker preference in case of bankruptcy — In the event of bankruptcy or

liquidation of an employer's business, his workers shall enjoy first preference as regards
wages due them for services rendered during the period prior to the bankruptcy or
liquidation, any provision of law to the contrary notwithstanding. Union paid wages shall be
paid in full before other creditors may establish any claim to a share in the assets of the
employer.
The Solicitor General, in seeking the reversal of the questioned Orders, argues that Article 110 of the
Labor Code is not applicable as it speaks of "wages," a term which he asserts does not include the
separation pay claimed by the Unions. "Separation pay," the Solicitor General contends,

is given to a laborer for a separation from employment computed on the basis of the number of years the
laborer was employed by the employer; it is a form of penalty or damage against the employer in favor of
the employee for the latter's dismissal or separation from service. 3

Article 97 (f) of the Labor Code defines "wages" in the following terms:

Wage' paid to any employee shall mean the remuneration or earnings, however designated,
capable of being expressed in terms of money, whether fixed or ascertained on a time, task,
piece, or commission basis, or other method of calculating the same, which is payable by
an employer to an employee under a written or unwritten contract of employment for work
done or to be done, or for services rendered or to be rendered, and includes the fair and
reasonable value, as determined by the Secretary of Labor, of board, lodging, or other
facilities customarily furnished by the employer to the employee. 'Fair and reasonable value'
shall not include any profit to the employer or to any person affiliated with the employer.
(emphasis supplied)

We are unable to subscribe to the view urged by the Solicitor General. We note, in this connection, that in
Philippine Commercial and Industrial Bank (PCIB) us. National Mines and Allied Workers Union, 4 the
Solicitor General took a different view and there urged that the term "wages" under Article 110 of the
Labor Code may be regarded as embracing within its scope severance pay or termination or separation
pay. In PCIB, this Court agreed with the position advanced by the Solicitor General.5 We see no reason
for overturning this particular position. We continue to believe that, for the specific purposes of Article 110
and in the context of insolvency termination or separation pay is reasonably regarded as forming part of
the remuneration or other money benefits accruing to employees or workers by reason of their having
previously rendered services to their employer; as such, they fall within the scope of "remuneration or
earnings — for services rendered or to be rendered — ." Liability for separation pay might indeed have the
effect of a penalty, so far as the employer is concerned. So far as concerns the employees, however,
separation pay is additional remuneration to which they become entitled because, having previously
rendered services, they are separated from the employer's service. The relationship between separation
pay and services rendered is underscored by the fact that separation pay is measured by the amount (i.e.,
length) of the services rendered. This construction is sustained both by the specific terms of Article 110
and by the major purposes and basic policy embodied in the Labor Code. 6 It is also the construction that
is suggested by Article 4 of the Labor Code which directs that doubts — assuming that any substantial
rather than merely frivolous doubts remain-in the interpretation of the provisions of the labor Code and its
implementing rules and regulations shall be "resolved in favor of labor."

The resolution of the issue of priority among the several claims filed in the insolvency proceedings
instituted by the Insolvent cannot, however, rest on a reading of Article 110 of the labor Code alone.

Article 110 of the Labor Code, in determining the reach of its terms, cannot be viewed in isolation. Rather,
Article 110 must be read in relation to the provisions of the Civil Code concerning the classification,
concurrence and preference of credits, which provisions find particular application in insolvency
proceedings where the claims of all creditors, preferred or non-preferred, may be adjudicated in a binding
manner. 7 It is thus important to begin by outlining the scheme constituted by the provisions of the Civil
Code on this subject.

Those provisions may be seen to classify credits against a particular insolvent into three general
categories, namely:

(a) special preferred credits listed in Articles 2241 and 2242,

(b) ordinary preferred credits listed in Article 2244; and

(c) common credits under Article 2245.

Turning first to special preferred credits under Articles 2241 and 2242, it should be noted at once that
these credits constitute liens or encumbrances on the specific movable or immovable property to which
they relate. Article 2243 makes clear that these credits "shall be considered as mortgages or pledges of
real or personal property, or liens within the purview of legal provisions governing insolvency." It should be
emphasized in this connection that "duties, taxes and fees due [on specific movable property of the
insolvent] to the State or any subdivision thereof" (Article 2241 [1]) and "taxes due upon the [insolvent's]
land or building (2242 [1])"stand first in preference in respect of the particular movable or immovable
property to which the tax liens have attached. Article 2243 is quite explicit: "[T]axes mentioned in number
1, Article 2241 and number 1, Article 2242 shall first be satisfied. " The claims listed in numbers 2 to 13 in
Article 2241 and in numbers 2 to 10 in Articles 2242, all come after taxes in order of precedence; such
claims enjoy their privileged character as liens and may be paid only to the extent that taxes have been
paid from the proceeds of the specific property involved (or from any other sources) and only in respect of
the remaining balance of such proceeds. What is more, these other (non-tax) credits, although constituting
liens attaching to particular property, are not preferred one over another inter se. Provided tax liens shall
have been satisfied, non-tax liens or special preferred credits which subsist in respect of specific movable
or immovable property are to be treated on an equal basis and to be satisfied concurrently and
proportionately. 8 Put succintly, Articles 2241 and 2242 jointly with Articles 2246 to 2249 establish a two-
tier order of preference. The first tier includes only taxes, duties and fees due on specific movable or
immovable property. All other special preferred credits stand on the same second tier to be satisfied, pari
passu and pro rata, out of any residual value of the specific property to which such other credits relate.

Credits which are specially preferred because they constitute liens (tax or non-tax) in turn, take
precedence over ordinary preferred credits so far as concerns the property to which the liens have
attached. The specially preferred credits must be discharged first out of the proceeds of the property to
which they relate, before ordinary preferred creditors may lay claim to any part of such proceeds. 9

If the value of the specific property involved is greater than the sum total of the tax liens and other
specially preferred credits, the residual value will form part of the "free property" of the insolvent — i.e.,
property not impressed with liens by operation of Articles 2241 and 2242. If, on the other hand, the value
of the specific movable or immovable is less than the aggregate of the tax liens and other specially
preferred credits, the unsatisfied balance of the tax liens and other such credits are to the treated as
ordinary credits under Article 2244 and to be paid in the order of preference there set up. 10

In contrast with Articles 2241 and 2242, Article 2244 creates no liens on determinate property which follow
such property. What Article 2244 creates are simply rights in favor of certain creditors to have the cash
and other assets of the insolvent applied in a certain sequence or order of priority. 11

Only in respect of the insolvent's "free property" is an order of priority established by Article 2244. In this
sequence, certain taxes and assessments also figure but these do not have the same kind of overriding
preference that Articles 2241 No. 1 and 2242 No. I create for taxes which constituted liens on the
taxpayer's property. Under Article 2244,

(a) taxes and assessments due to the national government, excluding those which result in
tax liens under Articles 2241 No. 1 and 2242 No. 1 but including the balance thereof not
satisfied out of the movable or immovable property to which such liens attached, are ninth in
priority;

(b) taxes and assessments due any province, excluding those impressed as tax liens under
Articles 2241 No. 1 and 2242 No. 1, but including the balance thereof not satisfied out of the
movable or immovable property to which such liens attached, are tenth in priority; and

(c) taxes and assessments due any city or municipality, excluding those impressed as tax
liens under Articles 2241 No. I and 2242 No. 2 but including the balance thereof not
satisfied out of the movable or immovable property to which such liens attached, are
eleventh in priority.

It is within the framework of the foregoing rules of the Civil Code that the question of the relative priority of
the claims of the Bureau of Customs and the Bureau of Internal Revenue, on the one hand, and of the
claims of the Unions for separation pay of their members, on the other hand, is to be resolved. A related
vital issue is what impact Article 110 of the labor Code has had on those provisions of the Civil Code.

A. Claim of the Bureau of Customs for Unpaid Customs Duties and Taxes-

Under Section 1204 of the Tariff and Customs Code, 12 the liability of an importer

for duties, taxes and fees and other charges attaching on importation constitute a personal debt due from
the importer to the government which can be discharged only by payment in full of all duties, taxes, fees
and other charges legally accruing It also constitutes a lien upon the articles imported which may be
enforced while such articles are in the custody or subject to the control of the government. (emphasis
supplied)

Clearly, the claim of the Bureau of Customs for unpaid customs duties and taxes enjoys the status of a
specially preferred credit under Article 2241, No. 1, of the Civil Code. only in respect of the articles
importation of which by the Insolvent resulted in the assessment of the unpaid taxes and duties, and
which are still in the custody or subject to the control of the Bureau of Customs. The goods imported on
one occasion are not subject to a lien for customs duties and taxes assessed upon other importations
though also effected by the Insolvent. Customs duties and taxes which remain unsatisfied after levy upon
the imported articles on which such duties and taxes are due, would have to be paid out of the Insolvent's
"free property" in accordance with the order of preference embodied in Article 2244 of the Civil Code.
Such unsatisfied customs duties and taxes would fall within Article 2244, No. 9, of the Civil Code and
hence would be ninth in priority.

B. Claims of the Bureau of Internal Revenue for Tabacco Inspection Fees —

Under Section 315 of the National Internal Revenue Code ("old Tax Code"), 13 later reenacted in Identical
terms as Section 301 of the Tax Code of 1977, 14 an unpaid "internal revenue tax," together with related
interest, penalties and costs, constitutes a lien in favor of the Government from the time an assessment
therefor is made and until paid, "upon all property and rights to property belonging to the taxpayer."

Tobacco inspection fees are specifically mentioned as one of the miscellaneous taxes imposed under the
National Internal Revenue Code, specifically Title VIII, Chapter IX of the old Tax Code and little VIII,
Chapter VII of the Tax Code of 1977. 15 Tobacco inspection fees are collected both for purposes of
regulation and control and for purposes of revenue generation: half of the said fees accrues to the
Tobacco Inspection Fund created by Section 12 of Act No. 2613, as amended by Act No. 3179, while the
other half accrues to the Cultural Center of the Philippines. Tobacco inspection fees, in other words, are
imposed both as a regulatory measure and as a revenue-raising measure. In Commissioner of Internal
Revenue us. Guerrero, et al 16 this Court held, through Mr. Chief Justice Concepcion, that the term "tax"
is used in Section 315 of the old Tax Code:

not in the limited sense [of burdens imposed upon persons and/or properties, by way of
contributions to the support of the Government, in consideration of general benefits derived
from its operation], but, in a broad sense, encompassing all government revenues
collectible by the Commissioner of Internal Revenue under said Code, whether involving
taxes, in the strict technical sense thereof, or not. x x x As used in Title IX of said Code, the
term 'tax' includes 'any national internal revenue tax, fee or charge imposed by the Code. 17

It follows that the claim of the Bureau of Internal Revenue for unpaid tobacco inspection fees constitutes a
claim for unpaid internal revenue taxes 18 which gives rise to a tax lien upon all the properties and assets,
movable and immovable, of the Insolvent as taxpayer. Clearly, under Articles 2241 No. 1, 2242 No. 1, and
2246-2249 of the Civil Code, this tax claim must be given preference over any other claim of any other
creditor, in respect of any and all properties of the Insolvent. 19

C. Claims of the Unions for Separation Pay of Their Members —

Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for unpaid
wages either upon all of the properties or upon any particular property owned by their employer. Claims
for unpaid wages do not therefore fall at all within the category of specially preferred claims established
under Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for unpaid wages
are already covered by Article 2241, number 6. "claims for laborers' wages, on the goods manufactured or
the work done;" or by Article 2242, number 3: "claims of laborers and other workers engaged in the
construction, reconstruction or repair of buildings, canals and other works, upon said buildings, canals or
other works." To the extent that claims for unpaid wages fall outside the scope of Article 2241, number 6
and 2242, number 3, they would come within the ambit of the category of ordinary preferred credits under
Article 2244.

Applying Article 2241, number 6 to the instant case, the claims of the Unions for separation pay of their
members constitute liens attaching to the processed leaf tobacco, cigars and cigarettes and other
products produced or manufactured by the Insolvent, but not to other assets owned by the Insolvent. And
even in respect of such tobacco and tobacco products produced by the Insolvent, the claims of the Unions
may be given effect only after the Bureau of Internal Revenue's claim for unpaid tobacco inspection fees
shall have been satisfied out of the products so manufactured by the Insolvent.

Article 2242, number 3, also creates a lien or encumbrance upon a building or other real property of the
Insolvent in favor of workmen who constructed or repaired such building or other real property. Article
2242, number 3, does not however appear relevant in the instant case, since the members of the Unions
to whom separation pay is due rendered services to the Insolvent not (so far as the record of this case
would show) in the construction or repair of buildings or other real property, but rather, in the regular
course of the manufacturing operations of the Insolvent. The Unions' claims do not therefore constitute a
lien or encumbrance upon any immovable property owned by the Insolvent, but rather, as already
indicated, upon the Insolvent's existing inventory (if any of processed tobacco and tobacco products.

We come to the question of what impact Article 110 of the Labor Code has had upon the complete
scheme of classification, concurrence and preference of credits in insolvency set out in the Civil Code. We
believe and so hold that Article 110 of the Labor Code did not sweep away the overriding preference
accorded under the scheme of the Civil Code to tax claims of the government or any subdivision thereof
which constitute a lien upon properties of the Insolvent. It is frequently said that taxes are the very
lifeblood of government. The effective collection of taxes is a task of highest importance for the sovereign.
It is critical indeed for its own survival. It follows that language of a much higher degree of specificity than
that exhibited in Article 110 of the Labor Code is necessary to set aside the intent and purpose of the
legislator that shines through the precisely crafted provisions of the Civil Code. It cannot be assumed
simpliciter that the legislative authority, by using in Article 110 the words "first preference" and "any
provision of law to the contrary notwithstanding" intended to disrupt the elaborate and symmetrical
structure set up in the Civil Code. Neither can it be assumed casually that Article 110 intended to
subsume the sovereign itself within the term "other creditors" in stating that "unpaid wages shall be paid in
full before other creditors may establish any claim to a share in the assets of employer." Insistent
considerations of public policy prevent us from giving to "other creditors" a linguistically unlimited scope
that would embrace the universe of creditors save only unpaid employees.

We, however, do not believe that Article 110 has had no impact at all upon the provisions of the Civil
Code. Bearing in mind the overriding precedence given to taxes, duties and fees by the Civil Code and the
fact that the Labor Code does not impress any lien on the property of an employer, the use of the phrase
"first preference" in Article 110 indicates that what Article 110 intended to modify is the order of
preference found in Article 2244, which order relates, as we have seen, to property of the Insolvent that is
not burdened with the liens or encumbrances created or recognized by Articles 2241 and 2242. We have
noted that Article 2244, number 2, establishes second priority for claims for wages for services rendered
by employees or laborers of the Insolvent "for one year preceding the commencement of the proceedings
in insolvency." Article 110 of the Labor Code establishes "first preference" for services rendered "during
the period prior to the bankruptcy or liquidation, " a period not limited to the year immediately prior to the
bankruptcy or liquidation. Thus, very substantial effect may be given to the provisions of Article 110
without grievously distorting the framework established in the Civil Code by holding, as we so hold, that
Article 110 of the Labor Code has modified Article 2244 of the Civil Code in two respects: (a) firstly, by
removing the one year limitation found in Article 2244, number 2; and (b) secondly, by moving up claims
for unpaid wages of laborers or workers of the Insolvent from second priority to first priority in the order of
preference established I by Article 2244.

Accordingly, and by way of recapitulating the application of Civil Code and Labor Code provisions to the
facts herein, the trial court should inventory the properties of the Insolvent so as to determine specifically:
(a) whether the assets of the Insolvent before the trial court includes stocks of processed or manufactured
tobacco products; and (b) whether the Bureau of Customs still has in its custody or control articles
imported by the Insolvent and subject to the lien of the government for unpaid customs duties and taxes.

In respect of (a), if the Insolvent has inventories of processed or manufactured tobacco products, such
inventories must be subjected firstly to the claim of the Bureau of Internal Revenue for unpaid tobacco
inspection fees. The remaining value of such inventories after satisfaction of such fees (or should such
inspection fees be satisfied out of other properties of the Insolvent) will be subject to a lien in favor of the
Unions by virtue of Article 2241, number 6. In case, upon the other hand, the Insolvent no longer has any
inventory of processed or manufactured product, then the claim of the Unions for separation pay would
have to be satisfied out of the "free property" of the Insolvent under Article 2244 of the Civil Code. as
modified by Article 110 of the Labor Code.

Turning to (b), should the Bureau of Customs no longer have any importations by the Insolvent still within
customs custody or control, or should the importations still held by the Bureau of Customs be or have
become insufficient in value for the purpose, customs duties and taxes remaining unpaid would have only
ninth priority by virtue of Article 2244, number 9. In respect therefore of the Insolvent's "free property, " the
claims of the Unions will enjoy first priority under Article 2244 as modified and will be paid ahead of the
claims of the Bureau of Customs for any customs duties and taxes still remaining unsatisfied.

It is understood that the claims of the Unions referred to above do not include the 10% claim for attorney's
fees. Attorney's fees incurred by the Unions do not stand on the same footing as the Unions' claims for
separation pay of their members.

WHEREFORE, the petition for review is granted and the Orders dated 17 November 1980 and 19 January
1981 of the trial court are modified accordingly. This case is hereby remanded to the trial court for further
proceedings in insolvency compatible with the rulings set forth above. No pronouncement as to costs.
SO ORDERED.
 THIRD DIVISION

G.R. No. 97175 May 18, 1993

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner, vs. NLRC and NATIONAL MINES AND
ALLIED WORKERS UNION, Respondents.

Chief Legal Counsel, Development Bank of the Philippines for petitioner. chanrobles virtual law library

Padilla & Associates Law Office for respondent.

MELO, J.:

Before us is a petition to set aside the NLRC Decision dated November 28, 1990 (Annex "C", p. 41, Rollo),
disposing as follows:

WHEREFORE, PREMISES CONSIDERED, the appealed decision is hereby set aside and a new judgment is
entered, holding the Development Bank of the Philippines liable to the complainants for their separation pay to
the extent of the proceed of the foreclosure sale, subject to the liquidation or bankruptcy proceeding that may
be instituted against Midland Cement Corporation. (pp. 47-48, Rollo).

Herein private respondent labor union filed on January 10, 1986, a complaint, the allegations of which were
paraphrased by the NLRC in this wise:

. . . that the individual complainants were all employees of respondent Midland Cement Corporation who were
terminated from employment on or about July 30, 1981 by reason of the termination of the business operations
of the Construction and Development Corporation of the Philippines (CDCP) now PNCC, which was brought
about by the expiration of the lease contract between Midland Cement Corporation and CDCP; that at the time
of the separation from the service [of] the individual complainants, the complainant union was the certified sole
and exclusive bargaining agent; that as a consequence of said termination, the complainant union filed with the
then Ministry of Labor and Employment an opposition to the application for clearance to terminate their
services filed by CDCP, the lessee of the cement plant owned by Midland Cement Corporation; that on April
27, 1983, the Ministry of Labor and Employment thru then Deputy Minister Vicente Leogardo, Jr., ordered
applicant CDCP to pay the 175 affected employees separation pay equivalent to one-half (1/2) month salary for
every year of service; that the employees were paid only based on their length of service with CDCP from
August 1, 1975 up to July 30, 1981; the said employees were not paid (with) their separation pay when they
were employees of respondent Midland Cement Corporation; that later, respondent DBP foreclosed and
assumed ownership over the cement plant, including land, buildings, machinery, etc., of Midland Cement
Corporation; that the individual complainants are claiming separation benefits covering the period from date of
hiring up to July 31, 1975 when CDCP took over the operations of Midland Cement Corporation by virtue of
lease contract. (pp. 43-44, Rollo).

After hearing, the Labor Arbiter rendered a decision on January 5, 1990 (Annex "A", p. 26, Rollo), finding DBP
jointly and severally liable with Midland Cement for the payment of the separation pay, as follows:

WHEREFORE, judgment is hereby rendered giving due course to the complaint thereby ordering the
respondents DBP and Midland Cement Corporation jointly and severally liable for the separation pay of the
affected members of the complainant union. chanroblesvirtualawlibrary chanrobles virtual law library

It appearing that as published in the morning dailies lately that the assets of Midland Cement Corporation are
now being offered for sale through public bidding by the Asset Privatization Trust, (APT) let copies of this
decision be served upon said APT to protect the interest of the herein complainants. (pp. 30-31, Rollo)

DBP appealed, contending that its acquisition of the mortgaged assets of Midland through foreclosure sale did
not make it the owner of the defunct Midland Cement, and that the doctrine of successor-employee is not
applicable in this case, since DBP did not continue the business operations of Midland. The NLRC, while
finding merit in DBP's contention, nonetheless held DBP liable since respondent's claim "constitutes a first
preference with respect to the proceeds of the foreclosure sale" as provided in Article 110 of the Labor Code:

Art. 110. Worker preference in case of bankruptcy. - In the event of bankruptcy or liquidation of an employer's
business, his workers shall enjoy first preference as regards their wages and other monetary claims, any
provisions of law to the contrary notwithstanding. Such unpaid wages and monetary claims shall be paid in full
before claims of the government and other creditors may be paid. (p. 46, Rollo)

Following the denial of its motion for reconsideration, DBP filed the instant petition. chanroblesvirtualawlibrary chanrobles virtual law library

DBP correctly points out that its mortgage lien should not be classified as a preferred credit. The issue raised
was settled in Republic v. Peralta (150 SCRA 37 [1987]) and reinforced in DBP v. NLRC (183 SCRA 328
[1990]) wherein we held because of its impact on the entire system of credit, Article 110 of the Labor Code
cannot be viewed in isolation but must be read in relation to the Civil Code scheme on classification and
preference of credits. Thus,

4. A distinction should be made between a preference of credit or a lien. A preference applies only to claims
which do not attach to specific properties, A lien creates a charge on a particular property. The right of first
preference as regards unpaid wages recognized by Article 110 does not constitute a lien on the property of the
insolvent debtor in favor of workers. It is but a preference of credit in their favor, a preference in application. It
is a method adopted to determine and specify the order in which credits should be paid in the final distribution
of the proceeds of the insolvent's assets. It is a right to a first preference in the discharge of the funds of the
judgment debtor. chanroblesvirtualawlibrary chanrobles virtual law library

In the words of Republic vs. Peralta, supra:

Article 110 of the Labor Code does not purport to create a lien in favor of workers or employees for unpaid
wages either upon all of the properties or upon any particular property owned by their employer. Claims for
unpaid wages do not therefore fall at all within the category of specially preferred claims established under
Articles 2241 and 2242 of the Civil Code, except to the extent that such claims for unpaid wages are already
covered by Article 2241, number 6: claims for laborer wages, on the goods manufactured or the work done, or
by Article 2242, number 3: "claims of laborers and other workers engaged in construction, reconstruction or
repair of buildings, canals and other works, upon said buildings, canals and other works." To the extent that
claims for unpaid wages fall outside the scope of Article 2241, number 6 and Article 2242, number 3, they
would come within the ambit of the category of ordinary preferred credits under Article 2244.

6. The DBP anchors its claim on a mortgage credit. A mortgage directly and immediately subjects the property
upon which it is imposed, whoever the possessor may be, to the fulfillment of the obligation for whose security
it was constituted (Article 2176, Civil Code). It creates a real right which is enforceable against the whole
world. It is a lien on an identified immovable property, which a preference is not. A recorded mortgage credit is
a special preferred credit under Article 2242 (5) of the Civil Code on classification of credits. The preference
given by Article 110, when not falling within Article 2241 (6) and Article 2242 (3) of the Civil Code and not
attached to any specific property, is an ordinary preferred credit although its impact is to move it from second
priority to first priority in the order of preference established by Article 2244 of the Civil Code. (Republic vs.
Peralta, supra.)

xxx xxx xxx chanrobles virtual law library

In fine, the right to preference given to workers under Article 110 of the Labor Code cannot exist in any
effective way prior to the time of its presentation in distribution proceedings. It will find application when, in
proceedings such as insolvency, such unpaid wages shall be paid in full before the "claims of the Government
and other creditors" may be paid. . . . (DBP vs, NLRC, supra; pp. 337-339.)

The NLRC, therefore, erred in holding DBP liable "to the extent of the proceeds of the foreclosure sale." And
making such liability dependent on a bankruptcy or liquidation proceedings is really beside the point, for these
proceedings are relevant only to preferred credits, which is not the situation in the case at bar. To equate DBP's
mortgage lien with a preferred credit would be to render inutile the protective mantle of the mortgage in DBP's
favor and thus in the process wreak havoc to commercial transactions. chanroblesvirtualawlibrary chanrobles virtual law library

WHEREFORE, the petition is GRANTED. The decision of the NLRC dated November 28, 1990 and the
Resolution of February 1, 1991 are hereby SET ASIDE, and a new judgment is entered absolving Development
Bank of the Philippines of any and all liabilities to private respondent and its members. chanroblesvirtualawlibrary chanrobles virtual law library

No special pronouncement is made as to costs. chanroblesvirtualawlibrary chanrobles virtual law library

SO ORDERED.