(1) G.R. No.

L-17072

October 31, 1961

CRISTINA
MARCELO
VDA.
vs.
BRIGIDA MARCOS, ET AL., defendants-appellants.
Aladin
B.
Cube and Fajardo for plaintiff-appellee.

Bermudez

DE

BAUTISTA, plaintiff-appellee,

for

defendants-appellants.

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

The main question in this appeal is whether or not a mortgagee may foreclose a mortgage on a piece of land covered
by a free patent where the mortgage was executed before the patent was issued and is sought to be foreclosed within
five years from its issuance.
The facts of the case appear to be as follows:
On May 17, 1954, defendant Brigida Marcos obtained a loan in the amount of P2,000 from plaintiff Cristina Marcel
Vda. de Bautista and to secure payment thereof conveyed to the latter by way of mortgage a two (2)-hectare portion
of an unregistered parcel of land situated in Sta. Ignacia, Tarlac. The deed of mortgage, Exhibit "A", provided that it
was to last for three years, that possession of the land mortgaged was to be turned over to the mortgagee by way of
usufruct, but with no obligation on her part to apply the harvests to the principal obligation; that said mortgage
would be released only upon payment of the principal loan of P2,000 without any interest; and that the mortgagor
promised to defend and warrant the mortgagee's rights over the land mortgaged.
Subsequently, or in July, 1956, mortgagor Brigida Marcos filed in behalf of the heirs of her deceased mother
Victoriana Cainglet (who are Brigida herself and her three sisters), an application for the issuance of a free patent
over the land in question, on the strength of the cultivation and occupation of said land by them and their
predecessor since July, 1915. As a result, Free Patent No. V-64358 was issued to the applicants on January 25, 1957,
and on February 22, 1957, it was registered in their names under Original Certificate of Title No. P-888 of the office
of Register of Deeds for the province of Tarlac.
Defendant Brigida Marcos' indebtedness of P2,000 to plaintiff having remained unpaid up to 1959, the latter, on
March 4, 1959, filed the present action against Brigida and her husband (Civil Case No. 3382) in the court below for
the payment thereof, or in default of the debtors to pay, for the foreclosure of her mortgage on the land give as
security. Defendants moved to dismiss the action, pointing out that the land in question is covered by a free patent
and could not, therefore, under the Public Land Law, be taken within five years from the issuance of the patent for
the payment of any debts of the patentees contracted prior to the expiration of said five-year period; but the lower
court denied the motion to dismiss on the ground that the law cited does not apply because the mortgage sought to
be foreclosed was executed before the patent was issued. Defendants then filed their answer, reiterating the defense
invoked in their motion to dismiss, and alleging as well that the real contract between the parties was an antichresis
and not a mortgage. Pre-trial of the case followed, after which the lower court rendered judgment finding the
mortgage valid to the extent of the mortgagor's pro-indiviso share of 15,333 square meters in the land in question, on
the theory that the Public Land Law does not apply in this case because the mortgage in question was executed
before a patent was issued over the land in question; that the agreement of the parties could not be antichresis
because the deed Exhibit "A" clearly shows a mortgage with usufruct in favor of the mortgagee; and ordered the
payment of the mortgage loan of P2,000 to plaintiff or, upon defendant's failure to do so, the foreclosure of plaintiff's

mortgage on defendant Brigida Marcos' undivided share in the land in question. From this judgment, defendants
Brigida Marcos and her husband Osmondo Apolocio appealed to this Court.
There is merit in the appeal.
The right of plaintiff-appellee to foreclose her mortgage on the land in question depends not so much on whether she
could take said land within the prohibitive period of five years from the issuance of defendants' patent for the
satisfaction of the indebtedness in question, but on whether the deed of mortgage Exhibit "A" is at all valid and
enforceable, since the land mortgaged was apparently still part of the public domain when the deed of mortgage was
constituted. As it is an essential requisite for the validity of a mortgage that the mortgagor be the absolute owner of
the thing mortgaged (Art. 2085), the mortgage here in question is void and ineffective because at the time it was
constituted, the mortgagor was not yet the owner of the land mortgaged and could not, for that reason, encumber the
same to the plaintiff-appellee. Nor could the subsequent acquisition by the mortgagor of title over said land through
the issuance of a free patent validate and legalize the deed of mortgage under the doctrine of estoppel (cf. Art. 1434,
New Civil Code,1 since upon the issuance of said patient, the land in question was thereby brought under the
operation of the Public Land Law that prohibits the taking of said land for the satisfaction of debts contracted prior
to the expiration of five years from the date of the issuance of the patent (sec. 118, C.A. No. 141). This prohibition
should include not only debts contracted during the five-year period immediately preceding the issuance of the
patent but also those contracted before such issuance, if the purpose and policy of the law, which is "to preserve and
keep in the family of the homesteader that portion of public land which the State has gratuitously given to him"
(Pascua v. Talens, 45 O.G. No. 9 [Supp.] 413; De los Santos v. Roman Catholic Church of Midsayap, G.R. L-6088,
Feb. 24, 1954), is to be upheld.
The invalidity of the mortgage Exhibit "A" does not, however, imply the concomitant invalidity of the collate
agreement in the same deed of mortgage whereby possession of the land mortgaged was transferred to plaintiffappellee in usufruct, without any obligation on her part to account for its harvests or deduct them from defendants'
indebtedness of P2,000. Defendant Brigida Marcos, who, together with her sisters, was in possession of said land by
herself and through her deceased mother before her since 1915, had possessory rights over the same even before title
vested in her as co-owner by the issuance of the free patent to her and her sisters, and these possessory right she
could validly transfer and convey to plaintiff-appellee, as she did in the deed of mortgage Exhibit "A". The latter,
upon the other hand, believing her mortgagor to be the owner of the land mortgaged and not being aware of any flaw
which invalidated her mode of acquisition, was a possessor in good faith (Art. 526, N.C.C.), and as such had the
right to all the fruits received during the entire period of her possession in good faith (Art. 544, N.C.C.). She is,
therefore, entitled to the full payment of her credit of P2,000 from defendants, without any obligation to account for
the fruits or benefits obtained by her from the land in question.
WHEREFORE, the judgment appealed from is reversed insofar as it orders the foreclosure of the mortgage in
question, but affirmed in all other respects. Costs again defendants-appellants.

(2) [G.R. Nos. 115981-82. August 12, 1999]

RUBEN LAGROSA, petitioner, vs. COURT OF APPEALS, SPOUSES ROMULO & EVELYN A. BANUA, and
CESAR OROLFO,respondents.
DECISION
GONZAGA-REYES, J.:

Petitioner seeks to review and set aside the Decision [1] of respondent Court of Appeals dated January 7, 1994
affirming the July 12, 1993 decision of the Regional Trial Court of Manila (Branch 42) in Civil Case No. 93-65646
(CA-G.R. SP No. 31683); and reversing the decision dated March 15, 1993 of the Regional Trial Court of Manila
(Branch 12) in Civil Case No. 92-62967 (CA-G.R. SP No. 32070). The two petitions for review of two (2)
conflicting decisions rendered by two different branches of the Regional Trial Court of Manila in ejectment suits
involving the same parties and property were consolidated before the Court of Appeals upon motion of one of herein
respondents, Cesar Orolfo. The consolidation was granted considering the property involved is one and the same in
both petitions and Ruben Lagrosa, petitioner in CA-G.R. SP No. 31683 is the same Ruben Lagrosa, who is the
private respondent in CA G. R. SP No. 32070; in the same manner that Evelyn Arizapa Banua is the private
respondent in CA-G. R. SP No. 31683 while Cesar Orolfo who is the caretaker of the subject property representing
Evelyn Arizapa Banua, is the petitioner in CA-G. R. SP No. 32070.[2]
Both petitions involve the possession of sixty-five (65) square meters of residential lot located in Paco, Manila,
originally owned by the City of Manila which, in due course, following its land and housing program for the underprivileged, awarded it to one Julio Arizapa who constructed a house and upholstery shop thereon. The award was in
the nature of a Contract to Sell payable monthly for a period of twenty (20) years. Julio Arizapa is the
predecessor-in-interest of respondent Evelyn Arizapa Banua in CA-G.R. SP No. 31683, while Cesar Orolfo,
petitioner in CA-G.R. SP No. 32070, is the caretaker of the same subject property as authorized and appointed by
Evelyn Arizapa Banua, in whose name Transfer Certificate of Title No. 197603 covering the said property is
registered. Cesar Orolfo, as aforestated, represented Evelyn Arizapa Banua, in CA-G.R. SP No. 32070.[3]
As found by the trial court, the title of respondent Evelyn Arizapa Banua to the subject property is evidenced
by the Deed of Sale executed by the City of Manila in her favor and the Transfer Certificate of Title No. 197603,
issued to her by the Register of Deeds of Manila. [4] Respondent Evelyn Arizapa Banua derived her title as
follows: Before Julio Arizapa could make the full payment for the said lot, he died on January 20, 1987, intestate, at
the age of 67 and was survived by his wife, Josefa Albaytar Arizapa and children [5] His wife Josefa Alabaytar
Arizapa died intestate on January 21, 1988. On February 17, 1988, Evelyn Arizapa and her brothers and sisters
executed a Deed of Extrajudicial Partition adjudicating unto themselves as the sole heirs of the deceased, the
aforesaid lot and a Renunciation in favor of Evelyn Arizapa under which they renounced and waived all their
rights over the aforesaid lot in favor of Evelyn Arizapa. The Notice of Extrajudicial Settlement of Estate of
Deceased Julio Arizapa and Josefa Albaytar was duly published in the BALITA in its March 4, 11 and 18, 1988
issues. On March 22, 1988, the heirs of Julio Arizapa wrote a letter to the City of Manila, through the City Tenants
Security Committee, requesting that the award of said lot be placed under the name of Evelyn Arizapa based on said
Deed of Extrajudicial Partition and the Renunciation. On December 26, 1988, the Committee approved the
request by Resolution. On January 8, 1990, Evelyn Arizapa paid the amount of P29,500.00 to the City of Manila
which constituted the full payment of the lot for which Evelyn Arizapa was issued Official Receipt No. 738608 by
the City Treasurer. On April 8, 1991, the City of Manila executed a Deed of Sale over the lot in favor of Evelyn
Arizapa and, on the basis thereof, Transfer Certificate of Title No. 197603 was issued to Evelyn Arizapa.
Petitioner Ruben Lagrosa claims to be the lawful possessor of the subject property by virtue of the Deed of
Assignment of Real Estate Mortgage executed in his favor by Presentacion Quimbo on the basis of a Contract of
Real Estate Mortgage executed by Julio Arizapa in favor of the latter. Lagrosa posits that he cannot be evicted
from the subject property because he had prior possession as assignee of the said Assignment of Real Estate
Mortgage executed by Presentacion Quimbo in his favor, and with the consent of Mauricia Albaytar, the sister of
the deceased Josefa Albaytar Arizapa, after the demise of the spouses Julio Arizapa and Josefa Albaytar.
The first petition (CA-G.R. SP No. 31683) sought the review of the decision rendered by the Regional Trial
Court of Manila, Branch 49, with the Honorable Romeo J. Callejo presiding in Civil Case No. 93-65646 entitled
Spouses Romulo and Evelyn Arizapa-Banua, plaintiffs-appellees, vs. Ruben Lagrosa, et al., defendants-appellants,
affirming in toto the judgment dated March 24, 1993 of the Metropolitan Trial Court of Manila, Branch 2, the
dispositive portion of which reads:
WHEREFORE, judgment is rendered for the PLAINTIFFS.
The DEFENDANTS and all other persons claiming rights under them are hereby ordered:
(a)

To vacate the land covered by T.C.T. No. 197603 situated in Paco, Manila;

(b) To pay the amount of P1,000.00 per month as reasonable compensation for the use and enjoyment of the
premises, from the filing of this complaint until possession is restored to the plaintiffs;
(c)

To pay the amount of P2,000.00 as attorneys fees; and costs of suit.

SO ORDERED. (Rollo, 73-74)[6]

The second petition (CA-G.R. SP No. 32070) sought the review of the decision rendered on March 15, 1993 by
the Regional Trial Court of Manila, Branch 12, with the Honorable Edgardo Sundiam presiding in Civil Case No.
92-62967 entitled Ruben Lagrosa, plaintiff, versus, Cesar Orolfo, defendant, affirming in toto on appeal
thejudgment of the Metropolitan Trial Court of Manila, Branch 5, the dispositive portion of which reads:
WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiff and against the
defendant Cesar Orolfo ordering the said defendant and all the persons claiming rights under him to vacate the
leased premises located at 1765 La Purisima Concepcion, Pedro Gil, Paco, Manila; ordering the Defendant to pay
the plaintiff the sum of P5,950.00 representing the arrears in monthly rental from October 1989 up to February
1991; ordering the defendant to pay the monthly rental of P350.00 starting March 1991 until the defendant actually
vacates the leased premises in question and, ordering the defendant to pay plaintiff the sum of P5,000.00 as
attorneys fees plus the costs of suit.[7]
In sum, in Civil Case No. 93-65646 (subject of CA-G.R. SP No. 31683), the trial court upheld the rightful
possession of Evelyn Arizapa Banua over the subject lot and accordingly ordered the immediate execution of its
judgment against Ruben Lagrosa, et al. On the other hand, in Civil Case No. 92-62967 (subject of CA-G.R. SP No.
32070), the trial court opined that a preponderance of evidence tilted on the side of Ruben Lagrosa and gave
judgment in his favor, all because defendant therein, Cesar Orolfo, through utter negligence of his former counsel,
failed to submit countervailing evidence on time, i.e. prior to the rendition of judgment by the Metropolitan Trial
Court.[8]
After a careful review of the records, the respondent Court of Appeals proceeded to determine which of the two
conflicting decisions should be sustained and given effect, the decision in Civil Case No. 93-65646 in favor of
Evelyn Arizapa Banua, or the decision in Civil Case No. 92-62967 in favor of Ruben Lagrosa. The controlling
operative facts as found by the respondent Court of Appeals are:
1. The subject property involved in both petitions is more particularly described as Lot No. 2, Block No.
29 of the former Fabmar Estate owned by the City of Manila. Subject property contains an area of 65
square meters.
2. On June 24, 1977, the City of Manila awarded said lot to Julio Arizapa under its land for the landless
program. It was payable in monthly installments for a period twenty (20) years.
3. Julio Arizapa obtained a loan of P17,000.00 from one Presentacion B. Quimbo and he executed on
August 2, 1985 a Contract of Real Estate Mortgage of his right over the subject property in favor of
the latter. He failed to pay his loan and on top of which he borrowed more from Presentacion Quimbo
until his account reached P28,000.00.
4. Julio Arizapa died intestate on January 20, 1987, leaving no other property except the lot in
question. Meanwhile, his wife Josefa Albaytar, on account of her deteriorating health, borrowed
P40,000.00 from Ruben Lagrosa, for which she executed a deed mortgaging her one-half right to the
lot. When Quimbo was poised to foreclose the mortgage, Albaytar convinced her to execute instead a
Deed of Assignment of Mortgage in favor of Ruben Lagrosa for a certain consideration, which she
did.
5. Josefa Albaytar died on January 21, 1988. For her burial expenses, Mauricia Albaytar sister of the
deceased, borrowed P65,000.00 from Ruben Lagrosa. In the meantime, Ruben Lagrosa with the
permission of Mauricia Albaytar, allowed his relatives, to occupy and take possession of the subject
property. Ruben Lagrosa himself was never in actual physical possession or occupation of the
property.

6. Thus, the tenuous claim of Ruben Lagrosa over the subject property rests on the Deed of Assignment
of Mortgage executed by Presentacion B. Quimbo in his favor. This deed of assignment was correctly
declared illegal by the Honorable Romeo Callejo in SP No. 31683. It was declared illegal for the
simple reason that the Deed of Mortgage executed by the late Julio Arizapa in favor of Presentacion
D. Quimbo was fatally defective in that the property subject thereof was still owned by the City of
Manila when said deed of mortgage was executed.
7. Concerning the issue of possession of the subject property, the rightful possession thereof of Evelyn
Arizapa Banua is traceable to the possession of the City of Manila, then to her father Julio Arizapa;
whereas, the possession claimed by Ruben Lagrosa is founded on that illegal Deed of Assignment of
Mortgage (which was not even notarized), and the permission given him by Mauricia
Albaytar after the death of her sister Josefa Albaytar, a permission which derives no legal authority or
validity because Mauricia, apart from her being a sister of the deceased, was not and has never been
appointed as a legal representative or administratrix of the deceased spouses. [9]
In light of the foregoing, the respondent Court of Appeals affirmed the decision of the Regional Trial Court of
Manila (Branch 49) in Civil Case No. 93-65646 finding for spouses Romulo and Evelyn Arizapa Banua. The
dispositive portion of said decision reads:
WHEREFORE, considering that respondent court has committed no error of law or fact in the decision under
review, the same is affirmed and the petition is hereby DISMISSED. Costs against petitioner.[10]
On the other hand, the respondent Court of Appeals reversed the decision of the Regional Trial Court of Manila
(Branch 12) in Civil Case No. 92-62967 which ruled in favor of Ruben Lagrosa. The dispositive portion of said
decision reads:
WHEREFORE, the decision under review in SP No. 32070 is reversed and set aside, and another one is hereby
entered dismissing the complaint for ejectment against petitioner Cesar Orolfo. Accordingly, the writ of execution
and notice to vacate issued by respondent court in Civil Case No. 92-12917 [11] are hereby declared null and void and
set aside. Costs against private respondents.[12]
Thus, the conflict between the two decisions as to who is entitled to the possession of the subject property,
Ruben Lagrosa on the one hand, or Evelyn Arizapa-Banua on the other, with Cesar Orolfo merely representing the
latter in Civil Case No. 92-62967, was resolved.
Hence, the instant petition on grounds that may be summarized as follows: (1) that the respondent Court of
Appeals erred in declaring the Contract of Real Estate Mortgage and the Assignment of Mortgage as illegal; (2)
that the respondent Court of Appeals erred in upholding the validity of Transfer Certificate of Title No. 197603 in
the name of Evelyn Arizapa Banua despite the fact that Josefa Arizapa was the only legal wife of Julio Arizapa and
that they were childless; (3) that the respondent Court of Appeals erred in declaring that Cesar Orolfo was appointed
caretaker of the subject property and that he was not given a chance to present his evidence before the lower court.
The petition is bereft of merit.
The only issue to be resolved in ejectment cases is the question as to who is entitled to the physical or material
possession of the premises or possession de facto.[13] In the event the issue of ownership is raised in the pleadings,
such issue shall be taken up only for the limited purpose of determining who between the contending parties has the
better right of possession.[14] As it were, herein petitioner Ruben Lagrosa also filed before the Regional Trial Court
of Manila (Branch 32), in Civil Case No. 90-55315 entitled Ruben Lagrosa, versus, City Tenants Security
Committee, represented by its Chairman, Hon. Gemiliano Lopez, Jr., Intestate Estate of Julio Arizapa represented by
Mauricia Albaytar, Evelyn Arizapa Banua and Register of Deeds of Manila, a Complaint for Foreclosure of the
Real Estate Mortgage, Annulment of Awards with Damages, and Cancellation of Title and Reconveyance of Real
Property.[15]
As mentioned earlier, petitioner Lagrosa claims to be the lawful possessor of the subject property by virtue of
the Deed of Assignment of Real Estate Mortgage executed by Julio Arizapa in favor of the latter. Lagrosa posits
that he cannot be evicted from the subject property because he had prior possession as assignee of the said

Assignment of Real Estate Mortgage executed by Presentacion Quimbo in his favor, and with the consent of
Mauricia Albaytar, the sister of the deceased Josefa Albaytar Arizapa, after the demise of the spouses Julio Arizapa
and Josefa Albaytar.
On the other hand, Evelyn Arizapa Banuas title to the property is evidenced by a Deed of Sale executed by
the City of Manila in her favor and the Transfer Certificate of Title No. 197603 issued to her by the Register of
Deeds. Evelyn Arizapa Banua sought to evict Lagrosa from the subject property citing, among others, the need to
repossess the property for her own personal use.
We agree with the respondent Court of Appeals that petitioner Lagrosas right to possess the subject property is
clearly inferior to or inexistent in relation to Evelyn Arizapa Banua.
As correctly held by the lower courts, the Deed of Real Estate Mortgage executed by Julio Arizapa is null
and void, the property mortgaged by Julio Arizapa being then owned by the City of Manila under Transfer
Certificate of Title No. 91120. For a person to validly constitute a valid mortgage on real estate, he must be the
absolute owner thereof as required by Article 2085 of the Civil Code of the Philippines. [16] Since the mortgage to
Presentacion Quimbo of the lot is null and void, the assignment by Presentacion Quimbo of her rights as mortgagee
to Lagrosa is likewise void. Even if the mortgage is valid as insisted by herein petitioner, it is well-settled that a
mere mortgagee has no right to eject the occupants of the property mortgaged. [17] This is so, because a mortgage
passes no title to the mortgagee. Indeed, by mortgaging a piece of property, a debtor merely subjects it to lien but
ownership thereof is not parted with.[18] Thus, a mortgage is regarded as nothing more than a mere lien,
encumbrance, or security for a debt, and passes no title or estate to the mortgagee and gives him no right or claim to
the possession of the property.
Petitioner Lagrosa now contends that what was mortgaged by Julio Arizapa in favor of Presentacion Quimbo
was his right as an awardee over the homelot in question, and not the homelot itself." Petitioner would have this
Court uphold the validity and legality of the mortgage over the right as an awardee rather than the homelot
itself. The agreement between the City of Manila and Julio Arizapa was in the nature of a contract to sell, the price
for the lot being payable on installment for a period of twenty (20) years which could yet prevent, such as by the
non-fulfillment of the condition, the obligation to convey title from acquiring any obligatory force. [19] Hence, there is
no right as awardee to speak of, and there is no alienable interest in the property to deal with.
The further allegation in petitioners memorandum that Evelyn Arizapa Banua is not the lawful owner of the
lot and residential house in question because the Extrajudicial Partition and the Renunciation on the basis of
which the Deed of Sale was executed by the City of Manila and the Transfer Certificate of Title No. 197603 was
issued, are all falsified because Julio Arizapa and Josefa Albaytar Arizapa were childless up to their demise deserves
no prolonged consideration, being factual in nature. Factual findings of the Court of Appeals are conclusive on the
parties and carry even more weight when said court affirms the factual findings of the trial court. [20] We quote the
following findings of the trial court as adopted by the respondent Court of Appeals, to wit:
The Court cannot accord its imprimatur to the stance of the Defendants-Appellants. As borne by the evidence of
the Plaintiff-Appellee, Julio Arizapa and Bernardita Iigo Arizapa were married on May 9, 1963 in Manila (Exhibit
GG). Julio Arizapa, during his lifetime, wrote a letter to the Plaintiff-Appellee and her brothers and sisters and
addressing them as his children, thus:
Mahal kong mga anak magmahalan kayong mabuti at magtulungan habang buhay. Ala-ala ko kayo kailan mang.
-Exhibit RR.
The bare fact that, after the demise of Bernardita Iigo Arizapa in 1984, Julio Arizapa and Josefa Albaytar lived
together as husband and wife but bore no children does not necessarily mean that Julio Arizapa was incapable of
procreation. Indeed, there is persuasive authority to the effect that it is presumed in the absence of evidence to the
contrary, that a male person of mature years, is capable of sexual intercourse and procreation, even though he has
reached a very advanced age (Francisco, The Revised Rules of Court in the Philippines, Volume VII, Part II, at
pages 142-143, citing Love versus Mcdonald, 148 S.W. 2d. 170, 201 Ark. 882). While it is true in their
Extrajudicial Partition, the Plaintiff-Appellee and her brothers and sisters called Julio Arizapa and Josefa Arizapa,
as their parents, however, this is not unusual because, after all, after the demise of Bernardita Iigo, Josefa Albaytar

and Julio Arizapa lived together as husband and wife and, in the process, the Plaintiff-Appellee must have
considered Josefa Albaytar as their step-mother in deference and out of respect to their father. (Resolution, at page
348, Records).[21]
Moreover, it is a well-known doctrine that the issue as to whether title was procured by falsification or fraud as
advanced by petitioner can only be raised in an action expressly instituted for the purpose. Torrens title can be
attacked only for fraud, within one year after the date of the issuance of the decree of registration. Such attack must
be direct, and not by a collateral proceeding. [22] The title represented by the certificate cannot be changed, altered,
modified, enlarged, or diminished in a collateral proceeding. [23] Thus, the arguments of petitioner Lagrosa in the
ejectment suit are misplaced.
As to Lagrosas prior possession of the subject property, their stay in the property as correctly found by the
respondent Court of Appeals was by mere tolerance or permission. It is well-settled that a person who occupies the
land of another at the latters tolerance or permission, without any contract between them, is necessarily bound by an
implied promise that he will vacate upon demand, failing which, a summary action for ejectment is the proper
remedy against him.[24] The trial court rationalized thus:
On the other hand, the possession of the Plaintiff-Appellee retroacted to the possession of the City of Manila of the
property in question because the Plaintiff-Appellee merely stepped into the shoes of the owner of the property when
she purchased the said property from the City of Manila and thus may cause the eviction of the DefendantsAppellants from said property (Caudal versus Court of Appeals, et al., 175 SCRA 798).
It must be borne in mind that, as mere assignee of the mortgage rights of Presentacion Quimbo, the DefendantAppellant is not entitled to the physical possession of the mortgaged property. The same is true even if the
Defendant-Appellant was himself the mortgagee. In point of fact, during the lifetime of Julio Arizapa and Josefa
Albaytar, they had possession of the property. The Defendant-Appellant managed to take possession of the property
only because of the alleged consent thereto by Mauricia Albaytar, who was merely the sister of Josefa Albaytar. By
then, the couple, Julio Arizapa and Josefa Albaytar were already dead. Mauricia Albaytar thus had no lawful
authority to allow anybody to enter into and occupy the property. There is no evidence in the records that Mauricia
Albaytar had been appointed by any Court as the Administratrix of the estate of the Spouses.[25]
By Lagrosas own admission, he is merely an assignee of the rights of the mortgagee of the lot and that,
consequently, the respondent Court of Appeals correctly ruled that the only right of action of Lagrosa as such
assignee of the mortgagee, where the mortgagor is already dead, is that provided for in Section 7 of Rule 86 [26] and
Section 5 of Rule 87[27] of the Rules of Court. Thus, the mortgagee does not acquire title to the mortgaged real estate
unless and until he purchases the same at public auction and the property is not redeemed within the period provided
for by the Rules of Court.
The issues raised by petitioner in CA G. R. SP No. 32070 that the respondent Court of Appeals erred in
declaring Cesar Orolfo as the caretaker of the subject property and that he was not given a chance to present his
evidence before the lower courts are also factual. The jurisdiction of this court is limited to reviewing errors of law
unless there is a showing that the findings complained of are totally devoid of support in the record or that they so
glaringly erroneous as to constitute serious abuse of discretion. [28] We find no such showing in this case. More
importantly, whether Cesar Orolfo is the caretaker of the property as appointed by Evelyn Arizapa Banua and the
representative of the latter is now beside the point. As was discussed by this Court, petitioner Ruben Lagrosas right
to possess the subject property is clearly inexistent in relation to herein respondent Evelyn Arizapa Banua.
WHEREFORE, the joint decision of the Court of Appeals in CA-G.R. SP Nos. 31683 and 32070 promulgated
on January 7, 1994 is AFFIRMED in toto.
SO ORDERED.
(3) HEIRS OF EDUARDO MANLAPAT,
represented by GLORIA MANLAPAT-

G.R. No. 125585

BANAAG

and

LEON
Petitioners,

M.

BANAAG,
Present:

JR.,

PUNO, J.,*
- versus -

Chairman,
AUSTRIA-MARTINEZ,
Acting Chairman,
CALLEJO, SR.,
TINGA, and
CHICO-NAZARIO, JJ.

HON. COURT OF APPEALS,

RURAL BANK OF SAN PASCUAL,
INC., and JOSE B. SALAZAR,
CONSUELO CRUZ and
Promulgated:
ROSALINA CRUZ-BAUTISTA,
and the REGISTER OF DEEDS of
Meycauayan, Bulacan,
June 8, 2005
Respondents.
x-------------------------------------------------------------------x
DECISION
TINGA, J.:

Before this Court is a Rule 45 petition assailing the Decision[1] dated 29 September 1994 of the Court of
Appeals that reversed the Decision[2] dated 30 April 1991 of the Regional Trial Court (RTC) of Bulacan, Branch 6,
Malolos. The trial court declared Transfer Certificates of Title (TCTs) No. T-9326-P(M) and No. T-9327-P(M) as
void ab initio and ordered the restoration of Original Certificate of Title (OCT) No. P-153(M) in the name of
Eduardo Manlapat (Eduardo), petitioners predecessor-in-interest.
The controversy involves Lot No. 2204, a parcel of land with an area of 1,058 square meters, located at
Panghulo, Obando, Bulacan. The property had been originally in the possession of Jose Alvarez, Eduardos
grandfather, until his demise in 1916. It remained unregistered until 8 October 1976 when OCT No. P-153(M) was
issued in the name of Eduardo pursuant to a free patent issued in Eduardos name [3] that was entered in the Registry
of Deeds of Meycauayan, Bulacan.[4] The subject lot is adjacent to a fishpond owned by one

Ricardo Cruz (Ricardo), predecessor-in-interest of respondents Consuelo Cruz and Rosalina Cruz-Bautista (Cruzes).
[5]

On 19 December 1954, before the subject lot was titled, Eduardo sold a portion thereof with an area of 553
square meters to Ricardo. The sale is evidenced by a deed of sale entitled Kasulatan ng Bilihang Tuluyan ng
Lupang Walang Titulo (Kasulatan)[6] which was signed by Eduardo himself as vendor and his wife Engracia
Aniceto with a certain Santiago Enriquez signing as witness. The deed was notarized by Notary Public Manolo
Cruz.[7] On 4 April 1963, theKasulatan was registered with the Register of Deeds of Bulacan.[8]
On 18 March 1981, another Deed of Sale[9] conveying another portion of the subject lot consisting of 50
square meters as right of way was executed by Eduardo in favor of Ricardo in order to reach the portion covered by
the first sale executed in 1954 and to have access to his fishpond from the provincial road. [10] The deed was signed
by Eduardo himself and his wife Engracia Aniceto, together with Eduardo Manlapat, Jr. and Patricio Manlapat. The
same was also duly notarized on 18 July 1981 by Notary Public Arsenio Guevarra.[11]
In December 1981, Leon Banaag, Jr. (Banaag), as attorney-in-fact of his father-in-law Eduardo, executed a
mortgage with the Rural Bank of San Pascual, Obando Branch (RBSP), for P100,000.00 with the subject lot as
collateral. Banaag deposited the owners duplicate certificate of OCT No. P-153(M) with the bank.
On 31 August 1986, Ricardo died without learning of the prior issuance of OCT No. P-153(M) in the name
of Eduardo.[12] His heirs, the Cruzes, were not immediately aware of the consummated sale between Eduardo and
Ricardo.
Eduardo himself died on 4 April 1987. He was survived by his heirs, Engracia Aniceto, his spouse; and
children, Patricio, Bonifacio, Eduardo, Corazon, Anselmo, Teresita and Gloria, all surnamed Manlapat. [13] Neither
did the heirs of Eduardo (petitioners) inform the Cruzes of the prior sale in favor of their predecessor-in-interest,
Ricardo. Yet subsequently, the Cruzes came to learn about the sale and the issuance of the OCT in the name of
Eduardo.
Upon learning of their right to the subject lot, the Cruzes immediately tried to confront petitioners on the
mortgage and obtain the surrender of the OCT. The Cruzes, however, were thwarted in their bid to see the heirs. On
the advice of the Bureau of Lands, NCR Office, they brought the matter to the barangay captain
of Barangay Panghulo, Obando, Bulacan. During the hearing, petitioners were informed that the Cruzes had a legal
right to the property covered by OCT and needed the OCT for the purpose of securing a separate title to cover the
interest of Ricardo. Petitioners, however, were unwilling to surrender the OCT.[14]

Having failed to physically obtain the title from petitioners, in July 1989, the Cruzes instead went to RBSP
which had custody of the owners duplicate certificate of the OCT, earlier surrendered as a consequence of the
mortgage. Transacting with RBSPs manager, Jose Salazar (Salazar), the Cruzes sought to borrow the owners
duplicate certificate for the purpose of photocopying the same and thereafter showing a copy thereof to the Register
of Deeds. Salazar allowed the Cruzes to bring the owners duplicate certificate outside the bank premises when the
latter showed theKasulatan.[15] The Cruzes returned the owners duplicate certificate on the same day after having
copied the same. They then brought the copy of the OCT to Register of Deeds Jose Flores (Flores) of Meycauayan
and showed the same to him to secure his legal opinion as to how the Cruzes could legally protect their interest in
the property and register the same. [16] Flores suggested the preparation of a subdivision plan to be able to segregate
the area purchased by Ricardo from Eduardo and have the same covered by a separate title. [17]
Thereafter, the Cruzes solicited the opinion of Ricardo Arandilla (Arandilla), Land Registration Officer,
Director III, Legal Affairs Department, Land Registration Authority at Quezon City, who agreed with the advice
given by Flores.[18]Relying on the suggestions of Flores and Arandilla, the Cruzes hired two geodetic engineers to
prepare the corresponding subdivision plan. The subdivision plan was presented to the Land Management Bureau,
Region III, and there it was approved by a certain Mr. Pambid of said office on 21 July 1989.
After securing the approval of the subdivision plan, the Cruzes went back to RBSP and again asked for the
owners duplicate certificate from Salazar. The Cruzes informed him that the presentation of the owners duplicate
certificate was necessary, per advise of the Register of Deeds, for the cancellation of the OCT and the issuance in
lieu thereof of two separate titles in the names of Ricardo and Eduardo in accordance with the approved subdivision
plan.[19] Before giving the owners duplicate certificate, Salazar required the Cruzes to see Atty. Renato Santiago
(Atty. Santiago), legal counsel of RBSP, to secure from the latter a clearance to borrow the title. Atty. Santiago
would give the clearance on the condition that only Cruzes put up a substitute collateral, which they did. [20] As a
result, the Cruzes got hold again of the owners duplicate certificate.
After the Cruzes presented the owners duplicate certificate, along with the deeds of sale and the
subdivision plan, the Register of Deeds cancelled the OCT and issued in lieu thereof TCT No. T-9326-P(M)
covering 603 square meters of Lot No. 2204 in the name of Ricardo and TCT No. T-9327-P(M) covering the
remaining 455 square meters in the name of Eduardo.[21]
On 9 August 1989, the Cruzes went back to the bank and surrendered to Salazar TCT No. 9327-P(M) in the
name of Eduardo and retrieved the title they had earlier given as substitute collateral. After securing the new
separate titles, the Cruzes furnished petitioners with a copy of TCT No. 9327-P(M) through the barangay captain
and paid the real property tax for 1989.[22]

The Cruzes also sent a formal letter to Guillermo Reyes, Jr., Director, Supervision Sector, Department III of
the Central Bank of the Philippines, inquiring whether they committed any violation of existing bank laws under the
circumstances. A certain Zosimo Topacio, Jr. of the Supervision Sector sent a reply letter advising the Cruzes, since
the matter is between them and the bank, to get in touch with the bank for the final settlement of the case. [23]
In October of 1989, Banaag went to RBSP, intending to tender full payment of the mortgage obligation. It
was only then that he learned of the dealings of the Cruzes with the bank which eventually led to the subdivision of
the subject lot and the issuance of two separate titles thereon. In exchange for the full payment of the loan, RBSP
tried to persuade petitioners to accept TCT No. T-9327-P(M) in the name of Eduardo.[24]
As a result, three (3) cases were lodged, later consolidated, with the trial court, all involving the issuance of
the TCTs, to wit:
(1) Civil Case No. 650-M-89, for reconveyance with damages filed by the heirs of
Eduardo Manlapat against Consuelo Cruz, Rosalina Cruz-Bautista, Rural Bank of San Pascual,
Jose Salazar and Jose Flores, in his capacity as Deputy Registrar, Meycauayan Branch of the
Registry of Deeds of Bulacan;
(2) Civil Case No. 141-M-90 for damages filed by Jose Salazar against Consuelo Cruz,
et. [sic] al.; and
(3) Civil Case No. 644-M-89, for declaration of nullity of title with damages filed by
Rural Bank of San Pascual, Inc. against the spouses Ricardo Cruz and Consuelo Cruz, et al. [25]
After trial of the consolidated cases, the RTC of Malolos rendered a decision in favor of the heirs of
Eduardo, the dispositive portion of which reads:
WHEREFORE, premised from the foregoing, judgment is hereby rendered:
1.Declaring Transfer Certificates of Title Nos. T-9326-P(M) and T-9327-P(M)
as void ab initio and ordering the Register of Deeds, Meycauayan Branch to cancel said
titles and to restore Original Certificate of Title No. P-153(M) in the name of plaintiffs
predecessor-in-interest Eduardo Manlapat;
2.-Ordering the defendants Rural Bank of San Pascual, Jose Salazar, Consuelo
Cruz and Rosalina Cruz-Bautista, to pay the plaintiffs Heirs of Eduardo Manlapat,
jointly and severally, the following:
a)P200,000.00 as moral damages;
b)P50,000.00 as exemplary damages;
c)P20,000.00 as attorneys fees; and
d)the costs of the suit.
3.Dismissing the counterclaims.
SO ORDERED.[26]

The trial court found that petitioners were entitled to the reliefs of reconveyance and damages. On this matter, it
ruled that petitioners were bona fide mortgagors of an unclouded title bearing no annotation of any lien and/or
encumbrance. This fact, according to the trial court, was confirmed by the bank when it accepted the mortgage
unconditionally on 25 November 1981. It found that petitioners were complacent and unperturbed, believing that the
title to their property, while serving as security for a loan, was safely vaulted in the impermeable confines of RBSP.
To their surprise and prejudice, said title was subdivided into two portions, leaving them a portion of 455 square
meters from the original total area of 1,058 square meters, all because of the fraudulent and negligent acts of
respondents and RBSP. The trial court ratiocinated that even assuming that a portion of the subject lot was sold by
Eduardo to Ricardo, petitioners were still not privy to the transaction between the bank and the Cruzes which
eventually led to the subdivision of the OCT into TCTs No. T-9326-P(M) and No. T-9327-P(M), clearly to the
damage and prejudice of petitioners.[27]
Concerning the claims for damages, the trial court found the same to be bereft of merit. It ruled that
although the act of the Cruzes could be deemed fraudulent, still it would not constitute intrinsic fraud. Salazar,
nonetheless, was clearly guilty of negligence in letting the Cruzes borrow the owners duplicate certificate of the
OCT. Neither the bank nor its manager had business entrusting to strangers titles mortgaged to it by other persons
for whatever reason. It was a clear violation of the mortgage and banking laws, the trial court concluded.
The trial court also ruled that although Salazar was personally responsible for allowing the title to be
borrowed, the bank could not escape liability for it was guilty of contributory negligence. The evidence showed that
RBSPs legal counsel was sought for advice regarding respondents request. This could only mean that RBSP
through its lawyer if not through its manager had known in advance of the Cruzes intention and still it did nothing
to prevent the eventuality. Salazar was not even summarily dismissed by the bank if he was indeed the sole person to
blame. Hence, the banks claim for damages must necessarily fail.[28]
The trial court granted the prayer for the annulment of the TCTs as a necessary consequence of its declaration
that reconveyance was in order. As to Flores, his work being ministerial as Deputy Register of the Bulacan Registry
of Deeds, the trial court absolved him of any liability with a stern warning that he should deal with his future
transactions more carefully and in the strictest sense as a responsible government official. [29]
Aggrieved by the decision of the trial court, RBSP, Salazar and the Cruzes appealed to the Court of
Appeals. The appellate court, however, reversed the decision of the RTC. The decretal text of the decision reads:
THE FOREGOING CONSIDERED, the appealed decision is hereby reversed and set
aside, with costs against the appellees.
SO ORDERED.[30]

The appellate court ruled that petitioners were not bona fide mortgagors since as early as 1954 or before the
1981 mortgage, Eduardo already sold to Ricardo a portion of the subject lot with an area of 553 square meters. This
fact, the Court of Appeals noted, is even supported by a document of sale signed by Eduardo Jr. and Engracia
Aniceto, the surviving spouse of Eduardo, and registered with the Register of Deeds of Bulacan. The appellate court
also found that on 18 March 1981, for the second time, Eduardo sold to Ricardo a separate area containing 50 square
meters, as a road right-of-way.[31] Clearly, the OCT was issued only after the first sale. It also noted that the title was
given to the Cruzes by RBSP voluntarily, with knowledge even of the banks counsel. [32] Hence, the imposition of
damages cannot be justified, the Cruzes themselves being the owners of the property. Certainly, Eduardo misled the
bank into accepting the entire area as a collateral since the 603-square meter portion did not anymore belong to him.
The appellate court, however, concluded that there was no conspiracy between the bank and Salazar.[33]
Hence, this petition for review on certiorari.
Petitioners ascribe errors to the appellate court by asking the following questions, to wit: (a) can a
mortgagor be compelled to receive from the mortgagee a smaller portion of the originally encumbered title
partitioned during the subsistence of the mortgage, without the knowledge of, or authority derived from, the
registered owner; (b) can the mortgagee question the veracity of the registered title of the mortgagor, as noted in the
owners duplicate certificate, and thus, deliver the certificate to such third persons, invoking an adverse, prior, and
unregistered claim against the registered title of the mortgagor; (c) can an adverse prior claim against a registered
title be noted, registered and entered without a competent court order; and (d) can belief of ownership justify the
taking of property without due process of law?[34]
The kernel of the controversy boils down to the issue of whether the cancellation of the OCT in the name of
the petitioners predecessor-in-interest and its splitting into two separate titles, one for the petitioners and the other
for the Cruzes, may be accorded legal recognition given the peculiar factual backdrop of the case. We rule in the
affirmative.

Private respondents (Cruzes) own

the portion titled in their names
Consonant with law and justice, the ultimate denouement of the property dispute lies in the determination
of the respective bases of the warring claims. Here, as in other legal disputes, what is written generally deserves
credence.

A careful perusal of the evidence on record reveals that the Cruzes have sufficiently proven their claim of
ownership over the portion of Lot No. 2204 with an area of 553 square meters. The duly notarized instrument of
conveyance was executed in 1954 to which no less than Eduardo was a signatory. The execution of the deed of sale
was rendered beyond doubt by Eduardos admission in his Sinumpaang Salaysay dated 24 April 1963.[35] These
documents make the affirmance of the right of the Cruzes ineluctable. The apparent irregularity, however, in the
obtention of the owners duplicate certificate from the bank, later to be presented to the Register of Deeds to secure
the issuance of two new TCTs in place of the OCT, is another matter.
Petitioners argue that the 1954 deed of sale was not annotated on the OCT which was issued in 1976 in
favor of Eduardo; thus, the Cruzes claim of ownership based on the sale would not hold water. The Court is not
persuaded.
Registration is not a requirement for validity of the contract as between the parties, for the effect of
registration serves chiefly to bind third persons. [36] The principal purpose of registration is merely to notify other
persons not parties to a contract that a transaction involving the property had been entered into. Where the party has
knowledge of a prior existing interest which is unregistered at the time he acquired a right to the same land, his
knowledge of that prior unregistered interest has the effect of registration as to him. [37]
Further, the heirs of Eduardo cannot be considered third persons for purposes of applying the rule. The
conveyance shall not be valid against any person unless registered, except (1) the grantor, (2) his heirs and devisees,
and (3) third persons having actual notice or knowledge thereof. [38] Not only are petitioners the heirs of Eduardo,
some of them were actually parties to the Kasulatan executed in favor of Ricardo. Thus, the annotation of the
adverse claim of the Cruzes on the OCT is no longer required to bind the heirs of Eduardo, petitioners herein.
Petitioners had no right to constitute
mortgage over disputed portion
The requirements of a valid mortgage are clearly laid down in Article 2085 of the New Civil Code, viz:
ART. 2085. The following requisites are essential to the contracts of pledge and
mortgage:
(1)
(2)
(3)

That they be constituted to secure the fulfillment of a principal obligation;

That the pledgor or mortgagor be the absolute owner of the thing pledged or
mortgaged;
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.

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

For a person to validly constitute a valid mortgage on real estate, he must be the absolute owner thereof as
required by Article 2085 of the New Civil Code. [39] The mortgagor must be the owner, otherwise the mortgage is
void.[40] In a contract of mortgage, the mortgagor remains to be the owner of the property although the property is
subjected to a lien.[41] A mortgage is regarded as nothing more than a mere lien, encumbrance, or security for a debt,
and passes no title or estate to the mortgagee and gives him no right or claim to the possession of the property. [42] In
this kind of contract, the property mortgaged is merely delivered to the mortgagee to secure the fulfillment of the
principal obligation.[43] Such delivery does not empower the mortgagee to convey any portion thereof in favor of
another person as the right to dispose is an attribute of ownership. [44] The right to dispose includes the right to
donate, to sell, to pledge or mortgage. Thus, the mortgagee, not being the owner of the property, cannot dispose of
the whole or part thereof nor cause the impairment of the security in any manner without violating the foregoing
rule.[45] The mortgagee only owns the mortgage credit, not the property itself.[46]
Petitioners submit as an issue whether a mortgagor may be compelled to receive from the mortgagee a
smaller portion of the lot covered by the originally encumbered title, which lot was partitioned during the
subsistence of the mortgage without the knowledge or authority of the mortgagor as registered owner. This
formulation is disingenuous, baselessly assuming, as it does, as an admitted fact that the mortgagor is the owner of
the mortgaged property in its entirety. Indeed, it has not become a salient issue in this case since the mortgagor was
not the owner of the entire mortgaged property in the first place.
Issuance of OCT No. P-153(M), improper
It is a glaring fact that OCT No. P-153(M) covering the property mortgaged was in the name of Eduardo,
without any annotation of any prior disposition or encumbrance. However, the property was sufficiently shown to
be not entirely owned by Eduardo as evidenced by the Kasulatan. Readily apparent upon perusal of the records is
that the OCT was issued in 1976, long after the Kasulatan was executed way back in 1954. Thus, a portion of the
property registered in Eduardos name arising from the grant of free patent did not actually belong to him. The
utilization of the Torrens system to perpetrate fraud cannot be accorded judicial sanction.
Time and again, this Court has ruled that the principle of indefeasibility of a Torrens title does not apply
where fraud attended the issuance of the title, as was conclusively established in this case. The Torrens title does not
furnish a shied for fraud. [47] Registration does not vest title. It is not a mode of acquiring ownership but is merely
evidence of such title over a particular property. It does not give the holder any better right than what he actually
has, especially if the registration was done in bad faith. The effect is that it is as if no registration was made at all.
[48]

In fact, this Court has ruled that a decree of registration cut off or extinguished a right acquired by a person when

such right refers to a lien or encumbrance on the landnot to the right of ownership thereofwhich was not
annotated on the certificate of title issued thereon.[49]

Issuance of TCT Nos. T-9326-P(M)

and T-9327-P(M), Valid

The validity of the issuance of two TCTs, one for the portion sold to the predecessor-in-interest of the
Cruzes and the other for the portion retained by petitioners, is readily apparent from Section 53 of the Presidential
Decree (P.D.) No. 1529 or the Property Registration Decree. It provides:
SEC 53. Presentation of owners duplicate upon entry of new certificate. No voluntary
instrument shall be registered by the Register of Deeds, unless the owners duplicate certificate is
presented with such instrument, except in cases expressly provided for in this Decree or upon
order of the court, for cause shown.
The production of the owners duplicate certificate, whenever any voluntary instrument is
presented for registration, shall be conclusive authority from the registered owner to the Register
of Deeds to enter a new certificate or to make a memorandum of registration in accordance with
such instrument, and the new certificate or memorandum shall be binding upon the registered
owner and upon all persons claiming under him, in favor of every purchaser for value and in good
faith.
In all cases of registration procured by fraud, the owner may pursue all his legal and
equitable remedies against the parties to such fraud without prejudice, however, to the rights of
any innocent holder of the decree of registration on the original petition or application, any
subsequent registration procured by the presentation of a forged duplicate certificate of title, or a
forged deed or instrument, shall be null and void. (emphasis supplied)

Petitioners argue that the issuance of the TCTs violated the third paragraph of Section 53 of P.D. No. 1529.
The argument is baseless. It must be noted that the provision speaks of forged duplicate certificate of title and forged
deed or instrument. Neither instance obtains in this case. What the Cruzes presented before the Register of Deeds
was the very genuine owners duplicate certificate earlier deposited by Banaag, Eduardos attorney-in-fact, with
RBSP. Likewise, the instruments of conveyance are authentic, not forged. Section 53 has never been clearer on the
point that as long as the owners duplicate certificate is presented to the Register of Deeds together with the
instrument of conveyance, such presentation serves as conclusive authority to the Register of Deeds to issue a
transfer certificate or make a memorandum of registration in accordance with the instrument.
The records of the case show that despite the efforts made by the Cruzes in persuading the heirs of Eduardo
to allow them to secure a separate TCT on the claimed portion, their ownership being amply evidenced by
the Kasulatanand Sinumpaang Salaysay where Eduardo himself acknowledged the sales in favor of Ricardo, the
heirs adamantly rejected the notion of separate titling. This prompted the Cruzes to approach the bank manager of
RBSP for the purpose of protecting their property right. They succeeded in persuading the latter to lend the owners
duplicate certificate. Despite the apparent irregularity in allowing the Cruzes to get hold of the owners duplicate
certificate, the bank officers consented to the Cruzes plan to register the deeds of sale and secure two new separate
titles, without notifying the heirs of Eduardo about it.

Further, the law on the matter, specifically P.D. No. 1529, has no explicit requirement as to the manner of
acquiring the owners duplicate for purposes of issuing a TCT. This led the Register of Deeds of Meycauayan as
well as the Central Bank officer, in rendering an opinion on the legal feasibility of the process resorted to by the
Cruzes. Section 53 of P.D. No. 1529 simply requires the production of the owners duplicate certificate, whenever
any voluntary instrument is presented for registration, and the same shall be conclusive authority from the registered
owner to the Register of Deeds to enter a new certificate or to make a memorandum of registration in accordance
with such instrument, and the new certificate or memorandum shall be binding upon the registered owner and upon
all persons claiming under him, in favor of every purchaser for value and in good faith.
Quite interesting, however, is the contention of the heirs of Eduardo that the surreptitious lending of the
owners duplicate certificate constitutes fraud within the ambit of the third paragraph of Section 53 which could
nullify the eventual issuance of the TCTs. Yet we cannot subscribe to their position.
Impelled by the inaction of the heirs of Eduardo as to their claim, the Cruzes went to the bank where the
property was mortgaged. Through its manager and legal officer, they were assured of recovery of the claimed parcel
of land since they are the successors-in-interest of the real owner thereof. Relying on the bank officers opinion as to
the legality of the means sought to be employed by them and the suggestion of the Central Bank officer that the
matter could be best settled between them and the bank, the Cruzes pursued the titling of the claimed portion in the
name of Ricardo. The Register of Deeds eventually issued the disputed TCTs.
The Cruzes resorted to such means to protect their interest in the property that rightfully belongs to them
only because of the bank officers acquiescence thereto. The Cruzes could not have secured a separate TCT in the
name of Ricardo without the banks approval. Banks, their business being impressed with public interest, are
expected to exercise more care and prudence than private individuals in their dealings, even those involving
registered lands.[50]The highest degree of diligence is expected, and high standards of integrity and performance are
even required of it.[51]
Indeed, petitioners contend that the mortgagee cannot question the veracity of the registered title of the
mortgagor as noted in the owners duplicate certificate, and, thus, he cannot deliver the certificate to such third
persons invoking an adverse, prior, and unregistered claim against the registered title of the mortgagor. The strength
of this argument is diluted by the peculiar factual milieu of the case.
A mortgagee can rely on what appears on the certificate of title presented by the mortgagor and an innocent
mortgagee is not expected to conduct an exhaustive investigation on the history of the mortgagors title. This rule is
strictly applied to banking institutions. A mortgagee-bank must exercise due diligence before entering into said
contract. Judicial notice is taken of the standard practice for banks, before approving a loan, to send representatives
to the premises of the land offered as collateral and to investigate who the real owners thereof are. [52]

Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private
individuals, as their business is one affected with public interest. Banks keep in trust money belonging to their
depositors, which they should guard against loss by not committing any act of negligence that amounts to lack of
good faith. Absent good faith, banks would be denied the protective mantle of the land registration statute, Act 496,
which extends only to purchasers for value and good faith, as well as to mortgagees of the same character and
description.[53]Thus, this Court clarified that the rule that persons dealing with registered lands can rely solely on the
certificate of title does not apply to banks.[54]
Bank Liable for Nominal Damages
Of deep concern to this Court, however, is the fact that the bank lent the owners duplicate of the OCT to
the Cruzes when the latter presented the instruments of conveyance as basis of their claim of ownership over a
portion of land covered by the title. Simple rationalization would dictate that a mortgagee-bank has no right to
deliver to any stranger any property entrusted to it other than to those contractually and legally entitled to its
possession. Although we cannot dismiss the banks acknowledgment of the Cruzes claim as legitimized by
instruments of conveyance in their possession, we nonetheless cannot sanction how the bank was inveigled to do the
bidding of virtual strangers. Undoubtedly, the banks cooperative stance facilitated the issuance of the TCTs. To
make matters worse, the bank did not even notify the heirs of Eduardo. The conduct of the bank is as dangerous as
it is unthinkably negligent. However, the aspect does not impair the right of the Cruzes to be recognized as
legitimate owners of their portion of the property.
Undoubtedly, in the absence of the banks participation, the Register of Deeds could not have issued the
disputed TCTs. We cannot find fault on the part of the Register of Deeds in issuing the TCTs as his authority to issue
the same is clearly sanctioned by law. It is thus ministerial on the part of the Register of Deeds to issue TCT if the
deed of conveyance and the original owners duplicate are presented to him as there appears on
instruments no badge of irregularity or

theface of the

nullity.[55] If there is someone to blame for the shortcut resorted to by the Cruzes, it would be the bank itself whose
manager and legal officer helped the Cruzes to facilitate the issuance of the TCTs.
The bank should not have allowed complete strangers to take possession of the owners duplicate certificate
even if the purpose is merely for photocopying for a danger of losing the same is more than imminent. They should
be aware of the conclusive presumption in
Section 53. Such act constitutes manifest negligence on the part of the bank which would necessarily hold it liable
for damages under Article 1170 and other relevant provisions of the Civil Code.[56]
In the absence of evidence, the damages that may be awarded may be in the form of nominal damages.
Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the
defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss
suffered by him.[57] This award rests on the mortgagors right to rely on the banks observance of the highest
diligence in the conduct of its business. The act of RBSP of entrusting to respondents the owners duplicate
certificate entrusted to it by the mortgagor without even notifying the mortgagor and absent any prior investigation
on the veracity of respondents claim and

character is a patent failure to foresee the risk created by the act in view of the provisions of Section 53 of P.D. No.
1529. This act runs afoul of every banks mandate to observe the highest degree of diligence in dealing with its
clients. Moreover, a mortgagor has also the right to be afforded due process before deprivation or diminution of his
property is effected as the OCT was still in the name of Eduardo. Notice and hearing are indispensable elements of
this right which the bank miserably ignored.
Under the circumstances, the Court believes the award of P50,000.00 as nominal damages is appropriate.
Five-Year Prohibition against alienation
or encumbrance under the Public Land Act

One vital point. Apparently glossed over by the courts below and the parties is an aspect which is essential,
spread as it is all over the record and intertwined with the crux of the controversy, relating as it does to the validity
of the dispositions of the subject property and the mortgage thereon. Eduardo was issued a title in 1976 on the basis
of his free patent application. Such application implies the recognition of the public dominion character of the land
and, hence, the five (5)-year prohibition imposed by the Public Land Act against alienation or encumbrance of the
land covered by a free patent or homestead[58] should have been considered.
The deed of sale covering the fifty (50)-square meter right of way executed by Eduardo on 18 March 1981
is obviously covered by the proscription, the free patent having been issued on 8 October 1976. However, petitioners
may recover the portion sold since the prohibition was imposed in favor of the free patent holder. In Philippine
National Bank v. De los Reyes,[59] this Court ruled squarely on the point, thus:
While the law bars recovery in a case where the object of the contract is contrary to law and
one or both parties acted in bad faith, we cannot here apply the doctrine of in pari delicto which
admits of an exception, namely, that when the contract is merely prohibited by law, not illegal per
se, and the prohibition is designed for the protection of the party seeking to recover, he is entitled
to the relief prayed for whenever public policy is enhanced thereby. Under the Public Land Act,
the prohibition to alienate is predicated on the fundamental policy of the State to preserve and
keep in the family of the homesteader that portion of public land which the State has gratuitously
given to him, and recovery is allowed even where the land acquired under the Public Land Act
was sold and not merely encumbered, within the prohibited period.[60]

The sale of the 553 square meter portion is a different story. It was executed in 1954, twenty-two (22) years
before the issuance of the patent in 1976. Apparently, Eduardo disposed of the portion even before he thought of
applying for a free patent. Where the sale or transfer took place before the filing of the free patent application,
whether by the vendor or the vendee, the prohibition should not be applied. In such situation, neither the prohibition
nor the rationale therefor which is

to keep in the family of the patentee that portion of the public land which the government has gratuitously given
him, by shielding him from the temptation to dispose of his landholding, could be relevant. Precisely, he had
disposed of his rights to the lot even before the government could give the title to him.
The mortgage executed in favor of RBSP is also beyond the pale of the prohibition, as it was forged in
December 1981 a few months past the period of prohibition.
WHEREFORE, the Decision of the Court of Appeals is AFFIRMED, subject to the modifications herein.
Respondent Rural Bank of San Pascual is hereby ORDERED to PAY petitioners Fifty Thousand Pesos (P50,000.00)
by way of nominal damages. Respondents Consuelo Cruz and Rosalina Cruz-Bautista are hereby DIVESTED of
title to, and respondent Register of Deeds of Meycauayan, Bulacan is accordingly ORDERED to segregate, the
portion of fifty (50) square meters of the subject Lot No. 2204, as depicted in the approved plan covering the lot,
marked as Exhibit A, and to issue a new title covering the said portion in the name of the petitioners at the
expense of the petitioners. No costs.
SO ORDERED.
(4)

[G.R.

No.

L-22001.

November

4,

1924.

CHINA BANKING CORPORATION, in substitution of Filipinas Compania de Seguros, Plaintiff-Appellee, v.

FAUSTINO
LICHAUCO
ET
AL., Defendants-Appellants.
Jose
Feria

a.
&

La

Espiritu
O

and

P.

for Appellants.
J.

Sevilla

for Appellee.

SYLLABUS
1. INTEREST; INTEREST UPON INTEREST DUE. --The interest due at the time of the filing of the complaint for
the recovery thereof, earns legal interest from said date, under article 1109 of the Civil Code, although the obligation
is silent on this point, and the action of the trial court is in accordance with law, which includes in its judgment an
order for the payment of legal interest upon the interest due on the amount claimed, at the time of the filing of the
complaint.
2. MORTGAGE; CONSIDERATION OF; MAY SECURE OBLIGATION OF THIRD PERSON. --The
consideration of a mortgage, which is an accessory contract, is that of the principal contract, from which it receives
its life, and without which it cannot exist as an independent contract, even if the obligation thereby secured is of a
third person, and therefore it will be valid, if the principal one is valid, and cannot be avoided on the ground of lack
of consideration.
DECISION
AVANCEA, J. :

The

dispositive

part

of

the

judgment

appealed

from

is

literally as

follows:jgc:chanrobles.com.ph

"For all of the foregoing it is adjudged and decreed that the defendant Faustino Lichauco be, as is hereby, sentenced
to pay the plaintiff the sum of P21,500, with interest at 12 per cent per year from September 13, 1922 until full
payment thereof, and in addition, interest at 6 per cent per annum from the filing of the complaint upon P1,935,
interest of the sum claimed for 9 months prior to the filing of the complaint, and of such sums as subsequently have
become or may become due, from their respective dates of maturity until the payment of said interest; he is further
sentenced to pay the sum of P14,200 as fees of plaintiffs attorney, expenses and troubles caused by the litigation for
the collection of said sum of P21,500, with interest thereon; and all the defendants are sentenced to pay the sum of
P50,000 with interest at the rate of 12 per cent annum from September 5, 1921, capitalized monthly to earn the same
interest as the principal, until full payments thereof, and in addition 5 per cent of P50,000 and the interest due at the
time of the filing of the complaint, as costs of suit and other expenses of whatever kind, including attorneys fees,
incurred by the plaintiff for the recovery of said sum, and it is ordered that the payment of all these amounts be made
within three months from the date of the judgment and that in case of non-payment of all these amounts within the
aforesaid period, the mortgaged property be sold for the payment of the amount or amounts not paid."cralaw
virtua1aw
library
The judgment appealed from contains a complete and exact statement of all the facts from which the liability of the
defendants
arose.
There is no question in this appeal but that the defendant Faustino Lichauco owes the plaintiff the sum of P21,500,
with interest thereon at the rate of 12 per cent per year from September 13, 1922. Nor is there about the fact that, at
the filing of the herein complaint, Faustino Lichauco owed the sum of P1,935, as interest for the preceding nine
months. But it is alleged that the lower court erred in allowing legal interest at the rate of 6 per cent from the filing
of the complaint upon this sum of P1,935, the amount of interest due on that date. This is no error. Article 1109 of
the Civil Code expressly provides that interest due shall earn legal interest from the date payment thereof is
judicially
demanded,
although
the
obligation
may
be
silent
on
the
matter.
As to the part of the judgment sentencing all the defendants to pay the plaintiff the sum of P50,000, it is necessary to
take into account the previous transactions that gave rise to this liability of the defendants. Lichauco & Company,
Inc., owed the plaintiff a large sum by way of loan. On September 5, 1921, Faustino Lichauco and wife Luisa F. de
Lichauco executed a document (Exhibit C) in favor of the plaintiff whereby they secured with a mortgage upon the
property described in the document the payment of a part of this loan in the amount of P50,000 with interest at 9 per
cent per year. It was agreed that in case of non-fulfillment of the contract, this mortgage would stand as security also
for the payment of all the costs of the suit and expenses of any kind, including attorneys fees, which by way of
liquidated damages are fixed at 5 per cent of the principal. It is stated lastly in this document that if Faustino
Lichauco and Luisa F. de Lichauco should fail to pay this amount of P50,000, the mortgage shall be in full force and
effect.
On the 20th of December, 1922, Lichauco & Co., Inc., Faustino Lichauco, and Luisa F. de Lichauco executed
another document (Exhibit D) in which, among other things, they ratified the former mortgage and stated that the
payment of the P50,000 shall continue to be secured in the same manner and with the same property, and shall earn
interest
at
12
per
cent
per
year
from
October
20,
1920.
The appellants argue in this court that the obligation of Faustino Lichauco and Luisa F. de Lichauco lacked
consideration, because what they guaranteed with this mortgage was a debt of Lichauco & Co., Inc. This contention
does not find support in law. As a mortgage is an accessory contract, its consideration is the very consideration of
the principal contract, from which it receives its life, and without which it cannot exist as an independent contract,
although, as in the instant case, it may secure an obligation incurred by another (art. 1857 of the Civil Code). That
this amount of P50,000 is to earn interest, and that 5 per cent must be paid in addition for judicial expenses and
attorneys fees, was expressly stipulated in the contract. The trial court, however, fixed this interest at 12 per cent
from September 5, 1921, which we believe is an error. In the contract of December 20, 1922, it was stipulated that
from October 20, 1920, the interest must be 12 per cent. Undoubtedly a clerical error was committed in the writing
of this date, inasmuch as then Faustino Lichauco and Luisa F. de Lichauco had not executed the mortgage yet. The

lower court held that this date must be September 5, 1921, but this view is groundless, since in the contract of
September 5, 1921, this interest was fixed at 9 per cent. This date must, therefore, be construed to be the date of the
second contract, December 20, 1922, as it cannot be presumed that the parties ever intended to make it effective
from
a
former
date.
For the foregoing, it being understood that the defendants may pay interest at 9 per cent from September 5, 1921,
and 12 per cent from December 20, 1922, the judgment appealed from is affirmed in all other respects, with out
special pronouncement as to costs. So ordered.
(5) G.R. NO. L-48276 September 30, 1987
DR. PEDRO A. DANAO (substituted by his heirs MARTIN DANAO, MINDA DANAO and co-petitioner
CONCEPCION
S.
DANAO)
and
CONCEPCION
S.
DANAO, petitioners,
vs.
HON. COURT OF APPEALS, BANK OF THE PHILIPPINE ISLANDS, Successor to the PEOPLES BANK &
TRUST COMPANY, respondents.
No. L-48980 September 30, 1987
BANK OF THE PHILIPPINE ISLANDS, Successor to the PEOPLES BANK & TRUST COMPANY, petitioner,
vs.
HON. COURT OF APPEALS, DR. PEDRO A. DANAO (Substituted by his heirs MARTIN DANAO, MINDA
DANAO and correspondent CONCEPCION S. DANAO) and CONCEPCION S. DANAO, respondents.

PARAS, J.:
These are two petitions for review on certiorari of the decision 1 of respondent Court of Appeals in CA-G.R. No.
59865-R promulgated on April 14, 1978 (Rollo, p. 22), affirming the decision 2 of the Court of First Instance of
Manila with modifications. The dispositive portion of the appellate judgment reads;
WHEREFORE, with the modifications that the actual and compensatory damages are eliminated
the moral damages are reduced to P30,000.00, and the attorney's fees are likewise reduced to
P5,000.00 the decision appealed from is affirmed.
The facts of the cases involved are quoted from the decision of respondent Court of Appeals as follows:
On February 27, 1963, spouses Pedro Danao and Concepcion S. Danao applied for a commercial
credit line of P20,000.00 with the People's Bank and Trust Company. The application having been
granted, the parties on March 14, 1963, executed a Commercial Credit Agreement and Mortgage
in which, among others, they stipulated:
WHEREFORE, the said mortgagor(s) have offered and agreed to secure the
repayment of the said credits and advances with interest due or accruing thereon
as well as any other liability or liabilities of the said mortgagors to the said
mortgagee, now existing, due or to become due, or hereafter incurred by means
of a good and valid mortgage as hereinafter stated, and the mortgagee has
consented to grant the line of credit applied for a good and sufficient security;

NOW, THEREFORE, in consideration of the premises and of the mutual

covenants herein set forth the parties do have agreed and do hereby agree, as
follows:
The said mortgagor(s) shall be and are hereby granted a line of credit not to
exceed at any one time the sum total of TWENTY THOUSAND AND 00/000
(P20,000.00) at NINE (9%) per cent per annum, which credit shall be available
to said Mortgagor(s) or EITHER OF THEM in the form of advances from time
to time to be evidenced by promissory note or notes. ...
and on the mortgage that-This mortgage shall continue as security for the payment of the indebtedness
herein contracted by said Mortgagor(s) as aforesaid, and of all money expanded
or abilities incurred by virtue hereof, with interest thereon, as well as security
for the repayment of any other sums now or hereafter owing to the said
Mortgagee in addition to or aside from the credit facilities herein granted by the
Mortgagee to the Mortgagor(s).
F.--In the event that the Mortgagor(s) should fail to pay the sums of money
secured by the mortgage, or any part thereof, in accordance with the terms and
conditions herein set forth, ..., the Mortgagee shall have the right, at its election,
to foreclose this mortgage extrajudicially. ...
The proceeds of such sale of the mortgaged properties shall be applied as
follows: ... 3) To the satisfaction of the principal amount of obligation herein
secured; and 4) To the satisfaction of all further obligations owing by the
Mortgagor(s) to the Mortgagee.
Given as a security for the credit line of P20,000.00 was a parcel of land in the City of Baguio,
covered by Transfer Certificate of Title No. T-223, together with the buildings and improvements
thereon.
The spouses availed of the credit facility granted them by the People's Bank and Trust Company
not only during the original term of one year, but also during the renewals or extensions thereof.
The last promisory not signed by Pedro Danao during the extensions was fully paid on July 5,
1968.
It appears the October 28, 1963, Antonio Co Kit and Pedro Danao signed a promissory not for
P10,000.00. The two agreed to pay the note, jointly and severally, within 179 days after date. The
check for the proceeds of the note was issued in the name of Antonio Co Kit alone. The note was
renewed by Antonio Co Kit and Pedro Danao for the amount of P8,650.00 on April 27, 1964,
payable within 91 days. The promised to pay the amount, jointly and severally.
On September 30, 1968, counsel for the People's Bank and Trust Company wrote a demand letter
to Antonio Co Kit a demand letter to Antonio Co Kit and Pedro Danao for the payment of the
balance of the promissory note in the amount of P5,870.09.

On July 14, 1969, the manager of the People's Bank and Trust Company wrote another demand
letter, this time to Pedro Danao, for the payment of the balance of P4,225.15, excluding interest.
On September 19, 1969, the People's Bank and Trust Company filed a complaint in the City Court
of Baguio City against Antonio Co Kit and Pedro Danao, praying that judgment be rendered,
ordering defendants, jointly and severally, to pay it (plaintiff) the sum of P4,225.15, plus interest
thereon at the rate of 13.5% per annum from July 8, 1969, until full payment, attorney's fees in
that sum equal 10% of the total amount due, and the cost of suit.
On January 5, 1971 the City Court issued an order, dismissing the complaint "for lack of interest
on the part of the plaintiff".
On March 1, 1971, the branch manager of the People's Bank and Trust Company, Baguio Branch,
wrote a letter to Pedro Danao, informing the latter that they had filed a petition for foreclosure to
the City Sheriff of Baguio City, attaching therewith a copy of the petition. Stated therein is that the
parcel of land covered by Transfer Certificate of Title No. 2033 will be sold at public auction.
according to the petition, the land is security for the payment of any other sums owing to the Bank
"in addition to or aside from ... credit facility." The indebtedness to be satisfied out of the proceeds
of the foreclosure sales is P3,024.03, exclusive of interest.
On March 4, 1971 notice of public auction sale was published in the Baguio Mid-land Courier, a
weekly newspaper published and edited in the City of Baguio and which is of wide circulation in
the City, province of Benguet and in the Philippines, for three consecutive weeks, once a week.
Copies of the notice were also posted in three public and conspicuous places in Baguio for the
information of the public. In the published notice of public auction sale, it is stated that in the
petition for foreclosure it is alleged that Mortgagors' spouses PEDRO DANAO and
CONCEPCION DANAO, ... failed to pay the ... loan when it fell due thereby violating the terms
and conditions of the real estate mortgage above mentioned.
On March 10, 1971, counsel for the People's Bank and Trust Company, Baguio Branch, wrote a
letter, informing the Bank of the full payment of the obligations of Antonio Co Kit and Pedro
Danao.
On March 16, 1971, the branch manager of the People's Bank and Trust Company executed a
cancellation of the real estate mortgage, stating therein that the mortgagors had fully paid the
obligation or indebtedness secured by the mortgage.
On June 16, 1972, Pedro Danao and Concepcion S. Danao filed a complaint for damages against
the Bank of Philippine Islands, as successor to the People's Bank and Trust Company, in the Court
of First Instance of Manila, where it was docketed as Civil Case No. 8781.
The complaint alleged, inter alia, that both the petition for foreclosure and the notice of public
auction sale published in the "Baguio Midland Courier" have neither legal nor factual bases,
because (1) while the credit line was availed of from time to time in different amounts by
promissory notes, the credits and loans obtained where duly paid in 1968 and since then no further
loans were assailed of under the credit line secured by mortgage of the plaintiffs' properties; (2)
the plaintiffs' alleged indebtedness mentioned in the defendant's petition for foreclosure and in the
consequent notice of public auction sale was the balance due on a "clean loan" granted by the

defendant to Antonio Co Kit, although admittedly the promissory note was co-signed by plaintiff
Pedro Danao, and the same was a distinct and separate transaction from the plaintiffs' credit line,
and was not covered nor secured by the plaintiffs' properties mortgaged to the defendant. The
complaint further alleged that the publication of the notice of public auction sale in the "Baguio
Midland Courier" was malicious and/or with deliberate intent, or was due to gross negligence,
causing the plaintiffs, who are respected members of the community of Baguio Cities untold
mental and moral anguish, serious anxiety, besmirched reputation and social humiliation; that as a
result of his social humiliation, anxiety, mental and moral anguish, plaintiff Pedro Danao suffered
serious heart attack and was hospitalized and confined in bed for a period of one year, causing him
to incur hospitalization and medical expenses, and resulting in the loss of his income from his
medical practice. The plaintiffs ask for actual or compensatory, moral and exemplars, damages, as
well as attorney's fees.
In its answer with counterclaim, the People's Bank and Trust Company contended that in firing the
petition for extra-judicial foreclosure of the mortgage with the consequent publication of notice of
public auction sale, it merely exercised its legal right as creditor-mortgagee after plaintiff Pedro
Danao had defaulted, despite repeated demands, in the payment of the indebtedness or obligation
contracted by him jointly and severally with Antonio Co Kit; that in exercising such right, it acted
lawfully, in good faith and with full justification to protect its interest; and, as affirmative defense,
alleged that, contrary to plaintiffs' allegations, the Commercial Credit Agreement and Mortgagee
provides that the mortgage shall continue as security for the payment of the indebtedness therein
contracted by the mortgagors, as well as security for the repayment of any other sums ... (then or
thereafter) owing to the said mortgagee in addition to or aside from the credit facilities therein)
granted by the Mortgagee to the Mortgagors: and that plaintiff Pedro Danao's solidarity obligation
upon the promissory note signed by him as co-maker jointly and severally with Antonio Co Kit
constitutes a further obligation secured by the aforementioned mortgage, in addition to the
indebtedness arising from the commercial credit line, which additional obligation was subsisting at
tile time the extrajudicial foreclosure proceeding was commenced.
After the issues had been joined upon the filing of the answer to the counterclaim and reply to
answer, the case was set for pre-trial.
After trial on the merits, the Court of First Instance of Manila rendered a decision the dispositive
part of which read as follows:
WHEREFORE, in view of all the foregoing considerations, the Court hereby
renders judgment in favor of the plaintiffs and against the defendant ordering the
latter to pay the former the sum of P14,290.00 as actual and compensatory
damages, P100,000.00, as moral damages, and P10,000.00, as exemplary
damages, in addition to P20,000.00 as and for attorney's fees, as well as the costs
of suit. The counterclaim is dismissed.
SO ORDERED.
From this decision only the Bank of the Philippine Islands as successor of Peoples Bank and Trust Company
appealed. Respondent Court affirmed the trial court's decision with some modifications as earlier quoted. Both
parties moved for reconsideration. The motion for reconsideration filed by Pedro and Concepcion Danao, as
plaintiff-appellees (Rollo, p. 39) was denied in respondent Court's resolution dated May 9, 1978 (Rollo, P. 48), while

the motion for reconsideration filed by the Bank of the Philippines Islands, as defendant-appellant (Rollo, p. 41),
was also denied in the resolution of the same Appellate Court dated September 6, 1978 (rollo, p. 53).
Hence, these petitions filed by both parties.
The petition in G.R. No. L-48276 was filed with the Court by the spouses Dr. Pedro A. Danao and Concepcion S.
Danao on June 7, 1978 (Rollo, p. 5); while the petition in G.R. No. L-48980 was filed by the Bank of the Philippine
Islands on October 7, 1978 (Rollo, p. 7).
In G.R. No. L-48276 respondent be filed its comment on the petition for review on certiorari (Rollo, L-48276, p.
114) in compliance with the resolution of the First Division of this Court dated June 27, 1978 (ibid, p. 107) on
August 8, 1978 while the petitioners filed their reply on September 14, 1978 (ibid, p. 265) in compliance with the
resolution of August 21, 1978 (ibid, p. 261). The Court gave due course to the petition in the resolution dated
October 4, 1978 (ibid, p. 274). The brief for the petitioners was filed on December 5, 1978 (ibid, p. 277); while the
brief for the respondent, was filed on February 3, 1979 (ibid, p. 301). Petitioner having failed to file the required
reply brief within the period granted by the Court which expired on March 1, 1979, the Court resolved on April 16,
1979 (ibid, p. 305) to declare the case submitted for decision.
In G.R. No. L-48980, respondents filed their comment on the petition for review on certiorari on November 15,
1978 (Rollo, L-48980, p. 62) in compliance with the resolution of the Second Division of this Court dated October
18, 1978 (ibid, p. 61) while petitioner filed its Reply on January 18, 1979 (ibid, p. 76) in compliance with the
resolution of December 4, 1978 (Rollo, p. 73). The Court resolved to give due course to the petition in the resolution
of March 21, 1979 respondent was filed on July 8, 1979 (ibid, P. 101). On September 14, 1979 the Court resolved to
consider the case submitted for decision (ibid, p. 105), petitioner having failed to file its reply brief within the period
granted by the Court which expired on August 7, 1979.
On April 29, 1980, the spouses Pedro and Concepcion Danao, petitioners in L-8276 and private respondents in L48980 moved for the consolidation of the two cases (Rollo, L-48276, p. 308) which was granted by the First
Division of the Court in its resolution dated May 7, 1980 (ibid, p. 311). On July 2, 1980 the Second Division of the
Court also ordered the consolidation of L-48980 with L-48276 and the transfer of the case to the First Division of
the Court (Rollo, L-48980, p. 110).
On August 16, 1985, counsel for the spouses Pedro and Concepcion Danao manifested to the Court the death of his
client Pedro Danao and moved for the substitution of the heirs Martin Danao and Minda Danao as co-petitioners and
co-respondents of Concepcion Danao in the instant cases (Rollo, L-48276, p. 327). On September 4, 1985 the heirs
submitted to the Court a copy of the death certificate of Pedro A. Danao (ibid, p. 341), hence the effecting of the
substitution.
In L-48276, petitioners raised the following assignment of errors:
FIRST THE COURT OF APPEALS ERRED IN FINDING THAT THE REAL ESTATE
MORTGAGED UNDER THE COMMERCIAL CREDIT AGREEMENT & MORTGAGE BY
AND BETWEEN THE PARTIES ALSO SECURED THE CLEAN LOAN EXTENDED TO MR.
ANTONIO CO KIT, THE PROMISSORY NOTE FOR WHICH WAS CO-SIGNED BY
PETITIONER DR. PEDRO A. DANAO.
SECOND THE COURT OF APPEALS ERRED IN FINDING THAT THE ILLNESS AND
HEART ATTACKS SUFFERED BY PETITIONER DR. PEDRO A. DANAO HAD NO CASUAL

RELATIONSHIP TO THE FORECLOSURE OF MORTGAGE AND PUBLICATION OF THE

NOTICE OF AUCTION SALE.
THIRD THE COURT OF APPEALS ERRED IN REDUCING THE MORAL DAMAGES
AND ATTORNEY'S FEES AWARDED BY THE TRIAL COURT.
In L-48980, petitioner bank raised the following assignment of errors:
I. The Court of Appeals erred in holding that petitioner's predecessor Peoples Bank and Trust
Company, by filing a civil complaint against Antonio Co Kit and Pedro A. Danao in the Baguio
City Court for the collection of the unpaid balance of the latter's promissory note "had waived" the
remedy of extra-judicial foreclosure of mortgage, and "such complaint barred the subsequent
petition for foreclosure of mortgage."
II. The Court of Appeals erred in concluding that the extrajudicial foreclosure of mortgage
ultimately resorted to as a last recourse to enforce payment of the outstanding balance long past
due on Co Kit and Danao's promissory note "was unwarranted", and in not holding that said bank
as creditor-mortgagee acted lawfully and was fully justified in exercising such remedy.
III. The Court of Appeals erred in awarding moral damages, exemplary damages and attorney's
fees to the plaintiffs-appellees, private respondents herein.
IV. The Court of Appeals erred in not awarding at least temperate damages and reasonable
attorney's fees upon defendant-appellant bank's counterclaim against the plaintiffs-appellees,
private respondents herein.
Plaintiffs' (Petitioners in L-48276 and respondents in L-48980) claim for damages is predicated on the theory that
the real estate mortgage executed by them on March 14, 1963 in favor of defendant did not secure the solidarity
obligation of Dr. Danao upon the promissory note signed by him jointly and severally with Antonio C. Kit on
October 28, 1963 and therefore, defendant's act in foreclosing said mortgagee extra-judicially was unwarranted.
(Respondent's brief in L-48276, Rollo, p. 301).
Placed in proper perspective, the deed of mortgage otherwise called "Commercial Credit Agreement and Mortgage"
is under scrutiny not for the purposes of the loan itself because the same has been fully paid but for the
determination of the legality or illegality of the foreclosure proceedings instituted by the bank, which is now the
subject of the action for damages.
The creditor bank insists that the promissory note co-signed by Dr. Danao with Antonio C. Kit as accommodation
party for the latter, is secured by the deed of mortgage in favor of the bank so that in the foreclosure proceedings so
instituted, it was merely exercising its rights as stipulated in the contract and was acting with justification. (L-48980,
Petition, Rollo, p. 19).
Be that as it may, such distinction is in fact immaterial for even assuming that the promissory note of Antonio C. Kit
was indeed included among the obligations secured by the deed of mortgage of Dr. Danao, still the creditor bank in
opting to file a civil action (Civil Case No. 4281) in the Baguio City Court for the collection of the unpaid balanced
of P4,225.15 plus interest has abandoned its mortgage lien on the property in question.
Thus the Court has invariably held that:

... The rule is now settled that a mortgage creditor may elect to waive his security and bring,
instead, an ordinary action to recover the indebtedness with the right to execute a judgment
thereon on all the properties of the debtor, including the subject matter of the mortgage . . ., subject
to the qualification that if he fails in the remedy by him elected, he cannot pursue further the
remedy he has waived. (Manila Trading and Supply Co. vs. Co Kim, et al. 71 Phil. 448 [1941];
Movido v. RFC et al., 105 Phil. 886 [1959]).
Anent real properties in particular, the Court has laid down the rule that a mortgage creditor may institute against the
mortgage debtor either a personal action for debt or a real action to foreclose the mortgage. In other words, he may
pursue either of the two remedies, but not both. As explained by the Court, the rule is as follows:
For non-payment of a note secured by mortgage, the creditor has a single cause of action against
the debtor. This single cause of action consists in the recovery of the credit with execution of the
security. In other words, the creditor in his action may make two demands, the payment of the debt
and the foreclosure of the mortgage. But both demands arise from the same cause, the nonpayment of the debt, and, for that reason, they constitute a single cause of action. Though the debt
and the mortgage constitute separate agreements, the latter is subsidiary to the former, and both
refer to one and the same obligation. Consequently there exists only once cause of action for a
single breach of that obligation. Plaintiff, then, by applying the rule above stated cannot split up
his single cause of action by filing a complaint for payment of the debt, and thereafter another
complaint for foreclosure of the mortgage. If he does so, the fishing of the first complaint will bar
the subsequent complaint. By allowing the creditor to file two separate complaints simultaneously
or successively, one to recover his credit and another to foreclose his mortgage, we will, in effect,
be authorizing him plural redress for a single breach of contract at much cost to the courts and
with so much vexation and oppression to the debtor.
... a rule that would authorize the plaintiff to bring a personal action against the debtor and
simultaneously or successively another action against the mortgaged property, would result not
only in multiplicity of suits so offensive to justice (Soriano v. Enriquez, 24 Phil. 584) and
obnoxious to law and equity (Osorio v. San Agustin, 25 Phil. 404), but also in subjecting the
defendant to the vexation of being sued in the place of his residence or of the residence of the
Icarangal et al., 38 Off. Gaz. 389 [1939]).
Evidently, the prior recourse of the creditor bank in filing a civil action against the Danao spouses and subsequently
resorting to the complaint of foreclosure proceedings, are not only a demonstration of the prohibited splitting up of a
cause of action but also of the resulting vexation and oppression to the debtor.
Both the lower court and the Court of Appeals found that the People's Bank and Trust Co. (succeeded by the Bank of
the Philippine Islands) acted unlawfully and without justification in extra-judicially foreclosing the disputed
mortgage and hence the Danao spouses are entitled to damages.
As basis for actual damages, the lower court relied on the testimonies of Mrs. Danao and Dr. Rodolfo Perez and the
medical certificates of the various doctors and came out with the award of actual and compensatory damages in the
total amount of P14,290.00 in favor of the same spouses, computed as follows: (1) P1,290.00 representing medical
and hospitalization expenses of Pedro Danao while confined at the Manila Medical Center from October 1 to
October 12, 1972; (2) P7,000.00 as costs for various examinations; and (3) P6,000.00 supposed to be the amount of
income lost by Pedro Danao from his medical practice because of thing incident.

But the evidence as correctly appreciated by the Court of Appeals shows that the first mild heart attack suffered by
Pedro Danao occurred in October 1977 or more than seven months after the initial publication of the notice of
foreclosure sale and the second heart attack occurred in October 1978 or more than 19 months after said publication.
No less important is the fact that Dr. Rodolfo Perez, the regular attending physician of Pedro Danao and the latter's
own witness, testified to the effect that aforesaid heart attacks were the natural result or outgrowth of a chronic
rheumatic heart disease of long standing which developed over a period of years, possibly even before 1966.
(Decision D.A., G.R. No. 59865-R; Rollo, pp. 36-37).
The second item was found to be unsupported by evidence while as to the third item, Pedro Danao did not testify to
prove the alleged lost income. (Ibid, p. 37). In the case of Sy vs. Court of Appeals (131 SCRA 127 [1984]) the Court
ruled that an alleged loss of income is not recoverable for being speculative if no receipt or any kind of evidence on
the matter is presented to prove it.
The Court has ruled that actual or compensatory damages are "those recoverable because of pecuniary loss in
business, trade, property, profession, job or occupation and the same must be proved, otherwise if the proof is flimsy
and non-substantial, no damages will be given." (Perfecto vs. Gonzales, 128 SCRA 640 [1984]).
More specifically in point to the case at bar, the Court has said:
... Well settled is the rule that even if the complaint filed by one against the other is clearly
unfounded this does not necessarily mean, in the absence of specific facts proving damages, that
said defendant really suffered actual damages over and above attorney's fees and costs. The Court
cannot rely on its speculations as to the fact and amount of damages. It must depend on actual
proof of the damages alleged to have been suffered. (Ibid, p. 640).
On the other hand, moral damages may be recovered if they are the proximate result of the defendant's wrongful act
or omission. The assessment of such damages, except liquidated ones, is left to the discretion of the court, according
to the circumstances of the case. (People v. Baylon, 129 SCRA 63 [984]).
As a general rule, the filing alone of the foreclosure application should not be a ground for an award of moral
damages.
In the case at bar, however, the main bone of contention is not only the filing of the petition for foreclosure
proceedings but the manner in which the same was carried out, such as the publication of the notice of extrajudicial
foreclosure and sale at public auction in a Sunday edition of the Baguio Midland Courier in the society page, instead
of in the "legal notices" or "classified ads" sections as usual in these types of notices, in extra-ordinarily large and
boxed advertisements, which allegedly bespoke the bank's malicious intent to embarrass and harass the Danao
spouses which actuations are contrary to the canons of conduct provided for in Articles 19, 20 and 21 of the Civil
Code. (Comment, Rollo, p. 67)
Both the lower court and the Court of Appeals took cognizance of the spouses' mental anguish, serious anxiety and
besmirched reputation traceable to the unfortunate publication (Record on Appeal, p. 79; Rollo, p. 38).
For moral damages, the lower court awarded P100,000.00 but the Court of Appeals reduced said amount to
P30,000.00 and attorney's fees from P20,000.00 to P5,000.00.
We have laid down the rule that the fairness of the award of damages by the trial court also calls for appellate
determination (Luzon Concrete Products Inc. vs Court of Appeals, 135 SCRA 456 [1985]), such that where the

award of moral damages is far too excessive compared to the actual losses sustained by the claimants the former
may be reduced. (Siguenza vsCourt of Appeals, 137 SCRA 577-579). In fact, We have held that reduction of moral
damages is justified where the negligence of petitioner bank and its employees is not wanton and reckless. (Bank of
the Philippine Islands vs Court of Appeals, 117 SCRA 628).
After a careful review of the records, no plausible reason can be found to justify the reversal of the findings of the
Court of Appeals, however in view of the embarrassing circumstances attendant to the foreclosure notice, as already
explained herein above, We hereby MODIFY the judgment of the respondent Court of Appeals by increasing the
award of moral damages to P60,000.00 and the attorney's fees to P1,000.00 and by imposing exemplary damages in
the amount of P20,000.00.
SO ORDERED.

(6) G.R. No. L-45350

May 29, 1939

BACHRACH
MOTOR
CO.,
INC., plaintiff-appellant,
vs.
ESTEBAN ICARAGAL and ORIENTAL COMMERCIAL CO., INC., defendants-appellees.
B.
Matias P. Perez for appellees.

Francisco

for

appellant.

MORAN, J.:
On June 11 , 1930, defendant herein, Esteban Icaragal, with one Jacinto Figueroa, for value received, executed in
favor of the plaintiff, Bachrach Motor Co., Inc., a promissory note for one thousand six hundred fourteen pesos
(P1,614), and in security for its payment, said Esteban Icaragal executed a real estate mortgage on a parcel of land
in Pagil, Laguna, which was duly registered on August 5, 1931, in the registry of deeds of the Province of Laguna.
Thereafter, promissors defaulted in the payment of the agreed monthly installments; wherefore, plaintiff instituted in
the Court of First Instance of Manila an action for the collection of the amount due on the note. Judgment was there
rendered for the plaintiff. A writ of execution was subsequently issued and, in pursuance thereof, the provincial
sheriff of Laguna, at the indication of the plaintiff, levied on the properties of the defendants, including that which
has been mortgaged by Esteban Icaragal in favor of the plaintiff. The other defendant herein, Oriental Commercial
Co., Inc., interposed a third-party claim, alleging that by virtue of a writ of execution issued in civil case No. 88253
of the municipal court of the City of Manila, the property which was the subject of the mortgage and which has been
levied upon by the sheriff, had already been acquired by it at the public auction on May 12, 1933. By reason of this
third-party claim, the sheriff desisted from the sale of the property and, in consequence thereof, the judgment
rendered in favor of the plaintiff remained unsatisfied. Whereupon, plaintiff instituted an action to foreclose the
mortgage. The trial court dismissed the complaint and, from the judgment thus rendered plaintiff took the present
appeal.
The sole question before us is whether or not plaintiff-appellant is barred from foreclosing the real estate mortgage
after it has elected to sue and obtain a personal judgment against the defendant-appellee on the promissory note for
the payment of which the mortgage was constituted as a security.
In Hijos de I. de la Rama vs. Sajo (45 Phil., 703), the mortgage creditor, instead of instituting proceedings for the
foreclosure of his mortgage, filed a personal action for the recovery of the debt. The mortgage debtor objected to the

action, alleging that, if it be allowed, he would be subjected to two suits, one personal and another for the
foreclosure of the mortgage. We answered this objection, laying down the rule that "in the absence of statutory
provisions, the mortgagee may waive the right to foreclose his mortgage and maintain a personal action for the
recovery of the indebtedness." And we emphasized the doctrine in the later part of our decision by saying that "the
rule is well established that the creditor may waive whatever security he has and maintain a personal action, in the
absence of statutory provisions to the contrary." (P. 705.)
It is true that Matienzo vs. San Jose (G.R. No. 39510, June 16, 1934), a decision of three justices of this court ruled
that "apart from special proceedings regulated by statute, an unsatisfied personal judgment for a debt is no bar to an
action to enforce a mortgage or other lien given as security for such debt." But this decision cannot be made to
prevail over a decision given by this court in banc. Besides, the rule laid down in the De la Rama case is more in
harmony with the principles underlying our procedural system.
Most of the provisions of our Code of Civil Procedure are taken from that of California, and in that jurisdiction the
rule has always been, and still is, that a party who sues and obtains a personal judgment against a defendant upon a
note, waives thereby his right to foreclose the mortgage securing it. (Ould vs. Stoddard, 54 Cal., 613;
Felton vs. West, 102 Cal., 266; Craiglow vs. Williams, 514 Cal. App., 45; 188 Pac., 76, following doctrine in
Biddelvs. Brizzolara, 64 Cal., 354; 30 Pac., 609; Brown vs. Willis, 67 Cal., 235; 7 Pac., 682; Barbieri vs. Ramelli, 84
Cal., 134; 23 Pac., 1086; Toby vs. Oregon Pac. R. Co., 98 Cal., 490; 33 Pac., 550; McKean vs. German-American
Sav. Bank., 118 Cal., 334; 50 Pac., 656; Woodward vs. Brown, 119 Cal., 283; 63Am. St. Rep., 108; 51 Pac., 2, 542;
Meyer vs. Weber, 133 Cal., 681; 65 Pac., 1110; Crisman vs. Lanterman, 149 Cal., 647, 651; 117 Am. St. Rep.,
167;87 Pac., 89; Gnarin vs. Swiss American Bank, 162 Cal., 181; 121 Pac., 726.) The same rule obtains in the states
of Idaho, Montana, Nevada and Utah. (See Johns on Mortgages, 986, 1015, 1019, 1046.) It is true that this rule is
founded on express statutory provisions to that effect. We have here, however, section 708 of our Code of Civil
Procedure which provides that a creditor holding a claim against the deceased, secured by a mortgage or other
collateral security, has to elect between enforcing such security or abandoning it by presenting his claim before the
committee and share it in the general assets of the estate. Under this provision, It has been uniformly held by this
court that, if the plaintiff elects one of the two remedies thus provided, he waives the other, and if he fails, he fails
utterly. (Veloso vs. Heredia, 33 Phil., 306; Cf. Osorio vs. San Agustin, 25 Phil., 404.) The same rule applies under
the Insolvency Law. (Sec. 59, Act No. 1956; Unson and Lacson vs. Central Capiz, 47 Phil., 42; Chartered Bank of
India, Australia and China vs. Imperial, 48 Phil., 931; O'Brien vs. Del Rosario and Bank of the Philippine Islands, 49
Phil., 657.) There is indeed no valid reason for not following the same principle of procedure in ordinary civil
actions. With the substitution of the administrator or executor in place of the deceased, or of the assignee or receiver
in place of the insolvent debtor, the position of the parties plaintiff and defendant in the litigation is exactly the same
in special or insolvency proceedings as in ordinary civil actions.
But, even if we have no such section 708 of our Code of Civil Procedure, or section 59 of the Insolvency Law, we
have still the rule against splitting a single cause of action. This rule, though not contained in any statutory
provision, has been applied by this court in all appropriate cases. Thus, in Santos vs. Moir (36 Phil., 350, 359), we
said: "It is well recognized that a party cannot split a single cause of action into parts and sue on each part
separately. A complaint for the recovery of personal property with damages for detention states a single cause of
action which cannot be divided into an action for possession and one for damages; and if suit is brought for
possession only a subsequent action cannot be maintained to recover the damages resulting from the unlawful
detention." In Rubio de Larena vs. Villanueva (53 Phil., 923, 927), we reiterated the rule by stating that" . . . a party
will not be permitted to split up a single cause of action and make it the basis of several suits" and that when a lease
provides for the payment of the rent in separate installments, each installment constitutes an independent cause of
action, but when, at the time of the complaint is filed, there are several installments due, all of them constitute a
single cause of action and should be included in a single complaint, and if some of them are not included, they are
barred. The same doctrine is stated in Lavarro vs. Labitoria (54 Phil., 788), wherein we said that "a party will not be

permitted to split up a single cause of action and make it a basis for several suits" and that a claim for partition of
real property as well as improvements constitutes a single cause of action, and a complaint for partition alone bars a
subsequent complaint for the improvements. And in Blossom & Co. vs. Manila Gas Corporation (55 Phil., 226,
240), we held that "as a general rule a contract to do several things at several times is divisible in its nature, so as to
authorize successive actions; and a judgment recovered for a single breach of a continuing contract or covenant is no
bar to a suit for a subsequent breach thereof. But where the covenant or contract is entire, and the breach total, there
can be only one action, and plaintiff must therein recover all his damages."
The rule against splitting a single cause of action is intended "to prevent repeated litigation between the same parties
in regard to the same subject of controversy; to protect defendant from unnecessary vexation; and to avoid the costs
and expenses incident to numerous suits." (1 C.J., 1107) It comes from that old maxim nemo bedet bis vexare pro
una et eadem cause (no man shall be twice vexed for one and the same cause). (Ex parteLange, 18 Wall., 163, 168;
21 Law. ed., 872; also U.S. vs. Throckmorton, 98 U.S., 61; 25 Law. ed., 93.) And it developed, certainly not as an
original legal right of the defendant, but as an interposition of courts upon principles of public policy to prevent
inconvenience and hardship incident to repeated and unnecessary litigations (1 C.J., 1107.)
For non-payment of a note secured by mortgage, the creditor has a single cause of action against the debtor. This
single cause of action consists in the recovery of the credit with execution of the security. In other words, the
creditor in his action may make two demands, the payment of the debt and the foreclosure of his mortgage. But both
demands arise from the same cause, the non-payment of the debt, and, for that reason, they constitute a single cause
of action. Though the debt and the mortgage constitute separate agreements, the latter is subsidiary to the former,
and both refer to one and the same obligation. Consequently, there exists only one cause of action for a single breach
of that obligation. Plaintiff, then, by applying the rule above stated, cannot split up his single cause of action by
filing a complaint for payment of the debt, and thereafter another complaint for foreclosure of the mortgage. If he
does so, the filing of the first complaint will bar the subsequent complaint. By allowing the creditor to file two
separate complaints simultaneously or successively, one to recover his credit and another to foreclose his mortgage,
we will, in effect, be authorizing him plural redress for a single breach of contract at so much cost to the courts and
with so much vexation and oppression to the debtor.
We hold, therefore, that, in the absence of express statutory provisions, a mortgage creditor may institute against the
mortgage debtor either a personal action for debt or real action to foreclose the mortgage. In other words, he may
pursue either of the two remedies, but not both. By such election, his cause of action can by no means be impaired,
for each of the two remedies is complete in itself. Thus, an election to bring personal action will leave open to him
all the properties of the debtor for attachment and execution, even including the mortgaged property itself. And, if he
waives such personal action and pursues his remedy against the mortgaged property, an unsatisfied judgment
thereon would still give him the right to sue for a deficiency judgment, in which case, all the properties of the
defendant, other than the mortgaged property, are again open to him for the satisfaction of the deficiency. In either
case, his remedy is complete, his cause of action undiminished, and any advantages attendant to the pursuit of one or
the other remedy are purely accidental and are all under his right of election. On the other hand, a rule that would
authorize the plaintiff to bring a personal action against the debtor and simultaneously or successively another action
against the mortgaged property, would result not only in multiplicity of suits so offensive to justice
(Soriano vs. Enriquez, 24 Phil., 584) and obnoxious to law and equity (Osorio vs.San Agustin, 25 Phil., 404), but
also in subjecting the defendant to the vexation of being sued in the place of his residence of the plaintiff, and then
again in the place where the property lies.
In arriving at the foregoing conclusion, we are not unaware of the rule prevailing in certain States of the American
Union, to the effect that, in cases like the one at bar, the creditor can pursue his remedies against the note and against
the security concurrently or successively. The reason given for the rule seems to be that the causes of action in the

two instances are not the same, one being personal and the other, real. But, as we have heretofore stated, the
creditor's cause of action is not only single but indivisible, although the agreements of the parties, evidenced by the
note and the deed of mortgage, may give rise to different remedies. (Frost vs. Witter, 132 Cal., 421.) The cause of
action should not be confused with the remedy created for its enforcement. And considering, as we have shown, that
one of the two remedies available to the creditor is as complete as the other, he cannot be allowed to pursue both in
violation of those principles of procedure intended to secure simple, speedy and unexpensive administration of
justice.
Judgment is affirmed, with costs against the appellant.

(7) G.R. Nos. L-46898-99 November 28, 1989

PHILIPPINE
NATIONAL
vs.
HON. RUSTICO DE LOS REYES, AMANDO ARANA and JULIA REYES, respondents.

BANK, petitioner,

The Chief Legal Counsel, for petitioner.

Alegre Law Office for private respondents.

REGALADO, J.:
Assailed in this petition for review on certiorari are (1) the decision 1 of the then Court of First Instance of Sorsogon,
Branch I, dated May 11, 1976 in Civil Case No. 2677, entitled "Amando Arana et al. vs. Philippine National Bank,"
and Special Proceeding No. 2679, entitled "Philippine National Bank, Petitioner-Appellant, Re: Properties of
Spouses Amando Arana and Julia Reyes;" and (2) the resolution 2 of the same court, dated January 17, 1977,
denying petitioner's motion for reconsideration of said decision.
The records show that on August 30, 1966, respondent spouses mortgaged six (6) parcels of land located at Cantilla,
Sorsogon to petitioner bank (PNB) to secure the payment of a loan of P10,000.00. Two (2) of the six (6) parcels of
land are covered by free patent titles while the other four (4) are untitled and covered only by tax declarations.
For failure of respondent spouses to pay the loan after its maturity, petitioner bank, pursuant to a special power of
attorney in the mortgage deed, effected the extrajudicial foreclosure of the mortgage under Act No. 3135, as
amended, and purchased the same at public auction for P12,735.30 which amount included the expenses of sale,
interest and attorney's fees. The certificate of sale, dated July 1, 1969, was duly registered with the Register of Deeds
on July 8, 1970. 3
After the one-year redemption period provided in said law expired without respondent spouses having exercised
their right or redemption, petitioner executed and registered an affidavit of consolidation of ownership over the six
(6) parcels of land on July 9, 1970 and new titles were issued in its name for the two (2) parcels covered by free
patent titles and the corresponding tax declarations for the four (4) parcels were placed in its name. 4
On May 12, 1971, Jose Barrameda, then the manager of petitioner's Sorsogon Branch, sent a letter to respondent
spouses informing them of the consolidation of title and inviting them to repurchase the lands not later than June 15,

1971. Respondent spouses replied on October 28, 1971 through a letter written and signed by Alejandro Liadones,
Municipal Mayor of Castilla, Sorsogon, requesting petitioner to extend the period of repurchase to November 5,
1971. On December 19, 1971, petitioner sent another letter to respondent spouses reminding them of the projected
repurchase and informing them that petitioner would take actual possession of the lands unless the repurchase would
be effected on or before November 30, 1971. 5
On May 9, 1972, petitioner entered into a contract to sell the six (6) parcels of land to one Gerardo Badong for
P27,000.00, with P5,400.00 as down payment upon the execution of the contract. Petitioner informed respondent
spouses of the transaction in a letter dated May 31, 1972. 6
On July 12, 1972, respondent spouses instituted Civil Case No. 2677 for legal redemption of the six (6) parcels of
land, invoking Section 119 of the Public Land Act, with damages. 7 Petitioner filed its answer on August 15, 1972,
conceding to respondent spouses the right to repurchase the two (2) parcels of land covered by free patent titles, but
refused the redemption of the other four (4) lots covered by tax declarations. 8
Gerardo Badong, on the other hand, could not take possession of the two lots covered by Tax Declarations Nos.
7245 and 7246 (formerly Tax Declarations Nos. 5824 and 5825) as respondent spouses refused to surrender
possession of the premises, and he forthwith informed petitioner of such fact in a letter dated July 3, 1972. On July
24, 1972, petitioner filed ex parte petition in Special Proceeding No. 2679 for the issuance of a writ of possession
over the aforesaid two (2) lots, which writ was granted by the court in its order of July 27, 1972. 9
The trial court noted in its decision in Civil Case No. 2677 that when the aforesaid order was issued, said case had
already been filed on July 12, 1972 by Amando Arana and his wife, Julia Reyes.
Due to the refusal of respondent spouses to relinquish posession of the two (2) lots in defiance of the writ of
possession by the court, petitioner filed in Special Proceeding No. 2679 a motion to hive respondent spouses cited
for contempt of court. 10
Civil Case No. 2677 and the motion to cite respondent spouses for contempt of court in Special Proceeding No.
2679 were beard jointly by agreement of the parties. At the pre-trial thereof on December 27, 1973, the parties
stipulated as follows:
1. That parcels 1 and 2 in the complaint are title lands and bear Free Patent Titles P-123 and P130;
2. That parcels 3, 4, 5, and 6 are not titled but plaintiffs have filed the proper application for the
issuance of free patent titles to the lands;
3. That the Philippine National Bank instituted extrajudicial foreclosure proceedings against the
lands upon failure of the plaintiffs to redeem the original mortgage in the sum of P10,000.00 and
that at the time of foreclosure the claim of the bank was Pl 2,735.30;
4. That there was no judicial confirmation of the consolidation of title in favor of the bank;
5. That the plaintiffs deposited the sum of P12,500.00 on account of the redemption with the
Legaspi Branch of the Philippine National Bank which deposit is intended for the Sorsogon
Branch;

6. That the Philippine National Bank is willing to have the two parcels of titled land redeemed but
not the untitled parcels. Plaintiffs counsel advanced the view that the mortgage is indivisible and
therefore the plaintiffs have the right to redeem all the parcels, the titled as well as the untitled. 11
It further appears that during the pendency of the suit, private respondents deposited the sum of P12,500.00 with the
clerk of court of the trial court. 12
After trial on the merits, the lower court rendered its aforesaid decision of May 11, 1976 holding that respondent
spouses are entitled to redeem the six (6) parcels of land on the theory of "indivisibility of mortgage" and dismissing
the petition in Special Proceeding No. 2679 to declare the respondent spouses in contempt of court. The dispositive
portion of said decision reads as follows:
WHEREFORE, in view of the foregoing considerations, judgment is hereby rendered as follows:
a IN CIVIL CASE NO. 2677 the Court finds that the plaintiff (sic) have the right to redeem the
six (6) parcels of land which are the subject of the original contract of mortgage for the sum of
TWELVE THOUSAND SEVEN HUNDRED THIRTY FIVE PESOS AND THIRTY CENTAVOS
(P12,735.30). The plaintiffs having already deposited the sum of TWELVE THOUSAND FIVE
HUNDRED PESOS (P12,500.00) with the Legaspi Branch of the Bank on account of the
redemption, the deficiency shall be paid and upon receipt of payment, the Bank is directed to
execute a release of mortgage in favor of the plaintiffs;
b The contract of promise to sell executed between the Bank and Gerardo Badong is rescinded
and cancelled and the Bank is directed to return the amount paid by Badong on the contract
without interest. Both defendants are also ordered to turn over the possession of the parcels of land
of about four (4) hectares now in their possession to the plaintiffs;
c In SPECIAL PROCEEDING NO. 2679, the petition to declare the respondents in contempt of
court is dismissed;
d Without pronouncement as to costs in both instances. 13
Acting on petitioner's motion of May 27, 1976 for the reconsideration of said decision, the lower court issued its
challenged resolution of January 17, 1977 modifying the ratio decidendi of its decision by ruling that the
applicability of the doctrine of "indivisibility of mortgage" was deemed to have been waived by petitioner when it
agreed to the redemption of the two (2) titled lots, and holding that the period of redemption for the four (4) untitled
parcels of land is one (1) year, not five (5) years. However, it allowed the redemption of said four (4) lots for reasons
of equity. 14
Considering that the disputed issues raised by the parties involve only questions of law, a direct appeal
bycertiorari was made to this Court. Thereafter, in a resolution dated March 24, 1980, the Court considered the case
submitted for decision without respondents' brief for failure of the latter to file the same within the required
period. 15
On its part, petitioner's assignment of errors faults the court a quo for holding that respondent spouses are entitled to
redeem the four (4) parcels of land not covered by free patent upon a so-called "equitable ground," that in the
foreclosure of mortgage under Act No. 3135, as amended, judicial confirmation of the sale is necessary to vest in the

purchaser absolute ownership and the corollary right to take actual possession of the foreclosed property; and that
the issuance of a writ of possession ex parte is null and void as violative of due process. 16
Petitioner accedes to the redemption by respondents of the two (2) parcels covered by free patent titles, pursuant to
the provisions of the Public Land Act, the period of five (5) years after the grant of the patents not having expired.
This is correct since pursuant to Section 119 of Commonwealth Act No. 141, the Public Land Act which is the
applicable law in this case, the mortgagor had five (5) years from the date of conveyance within which to redeem the
property. 17 It is not even necessary for the preservation of such right to repurchase to make an offer to redeem, or
tender payment of the purchase price within said period of five (5) years. The filing of an action to redeem within
that period is equivalent to a formal offer to redeem. There is not even a need for the consignation of the redemption
price.18
Petitioner, however, denies such right to redeem in the case of the four (4) untitled parcels due to the failure of
private respondents to effect the redemption within the period of one (1) year after the auction sale. This contention
is premised on the theory that private respondents had only one (1) year from the foreclosure sale to redeem the
untitled properties, pursuant to Section 6 of Act No. 3135, as amended by Act No. 4118, and Section 20 of the PNB
charter, Republic Act No. 4300, as amended.
Upon the other hand, the theory of private respondents is that the mortgage is indivisible, hence the right to redeem
the titled parcels necessarily includes the untitled ones. They further contend that having applied for the issuance of
free patents on the four (4) untitled parcels of land which applications were then pending consideration in the
Bureau of Lands, the five-year period in the Public Land Act also applies to these particular parcels.
The parties were accordingly embroiled in a hermeneutic disparity on their aforesaid contending positions. Yet, the
rule on the indivisibility of mortgage finds no application to the case at bar. The particular provision of the Civil
Code referred to provides:
Art. 2089. 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 long 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 these 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.
From the foregoing, it is apparent that what the law proscribes is the foreclosure of only a portion of the property or
a number of the several properties mortgaged corresponding to the unpaid portion of the debt where before
foreclosure proceedings partial payment was made by the debtor on his total outstanding loan or obligation. This
also means that the debtor cannot ask for the release of any portion of the mortgaged property or of one or some of
the several lots mortgaged unless and until the loan thus, secured has been fully paid, notwithstanding the fact that
there has been a partial fulfillment of the obligation. Hence, it is provided that the debtor who has paid a part of the

debt cannot ask for the proportionate extinguishment of the mortgage as long as the debt is not completely
satisfied. 19
That the situation obtaining in the case at bar is not within the purview of the aforesaid rule on indivisibility is
obvious since the aggregate number of the lots which comprise the collaterals for the mortgage had already been
foreclosed and sold at public auction. There is no partial payment nor partial extinguishment of the obligation to
speak of. The aforesaid doctrine, which is actually intended for the protection of the mortgagee, specifically refers to
the release of the mortgage which secures the satisfaction of the indebtedness and naturally presupposes that the
mortgage is existing. Once the mortgage is extinguished by a complete foreclosure thereof, said doctrine of
indivisibility ceases to apply since, with the full payment of the debt, there is nothing more to secure.
Neither does the instant case fall within the exception contemplated in the last two paragraphs of Article 2089 in
which, there being several things given in mortgage, each of them guarantees only a determinate portion of the
account. There is no proof or any averment to that effect.
Noteworthy, however, is an overriding consideration that should not be overlooked in the solution of this dispute. It
is admitted that applications for free patent covering the four (4) unregistered parcels of land had been filed by
respondent spouses, and were then still pending action, which thus gives rise to the admission that said properties
involved in the aforestated cases were public lands. 20 This presumption was never rebutted by petitioner. Hence, the
right of petitioner to foreclose its mortgage on the subject properties virtually depends on whether the deed of
mortgage is at all valid and enforceable since the four (4) lots mortgaged apparently still formed part of the public
domain when the mortgage thereon was constituted.
It is an essential requisite to the validity of a mortgage that the mortgagor be the absolute owner of the property,
mortgaged. 21 Consequently, private respondents, not being owners as yet of the subject lots when the same were
supposedly mortgaged, they could not have validly made any disposition of or created an encumbrance on said four
(4) lots to which they had neither title nor any vested right. At most, what they had was a mere right of expectancy
dependent on the continuance of the circumstances then existing or a contingent right dependent on the performance
of some conditions,22 but which could not be the proper object of a valid mortgage contract. Since the mortgage is
absolutely null and void and ineffective from its inception, petitioner, as mortgagee, acquires no better rights, the
registration of the mortgage notwithstanding. 23 Nor would the subsequent acquisition by the mortgagor of title over
said properties through the issuance of free patents thereover validate and legalize the mortgage thereon under the
doctrine of estoppel, 24 since upon the issuance of said patents, the lots in question are thereby brought under the
operation of the Public Land Act which prohibits the taking of said properties for the satisfaction of debts contracted
prior to the expiration of five (5) years from the date of the issuance of the patents. 25
Consequently, there was no need for private respondents to repurchase the four (4) parcels from petitioner. That
aspect of the case actually calls for mutual restitution as an equitable remedy, especially since the records before us
are barren of the factual background, or the mode of acquisition by petitioners, of their possession of said lots and
the circumstances under which the mortgage in question was arranged between the parties. Therefore, incident to the
nullity ab initio of the mortgage, 26 mutual restitution by the parties of what they had respectively received from each
other under the contract in connection with the four (4) lots must be made and is hereby ordered to be effected by
them.
While the law bars recovery in a case where the object of the contract is contrary to law and one or both parties
acted in bad faith, we cannot here apply the doctrine of in pari delicto 27 which admits of an exception, namely, that
when the contract is merely prohibited by law, not illegal per se, and the prohibition is designed for the protection of
the party seeking to recover, he is entitled to the relief prayed for whenever public policy is enhanced

thereby. 28 Under the Public Land Act, the prohibition to alienate is predicated on the fundamental policy of the State
to preserve and keep in the family of the homesteader that portion of public land which the State has gratuitously
given to him, 29 and recovery is allowed even where the land acquired under the Public Land Act was sold and not
merely encumered, within the prohibited period. 30This is without prejudice to such appropriate action as the
Government may take should it find that violations of the public land laws were committed or involved in said
transaction and sanctions are in order.
WHEREFORE, under the considerations as amplified above and with the modification with respect to the four (4)
parcels of land not covered by free patent titles, the proper disposition whereof we have hereinbefore directed, the
judgment appealed from is AFFIRMED.
SO ORDERED.

(8) G.R. No. L-45710 October 3, 1985

CENTRAL BANK OF THE PHILIPPINES and ACTING DIRECTOR ANTONIO T. CASTRO, JR. OF THE
DEPARTMENT OF COMMERCIAL AND SAVINGS BANK, in his capacity as statutory receiver of Island Savings
Bank, petitioners,
vs.
THE HONORABLE COURT OF APPEALS and SULPICIO M. TOLENTINO, respondents.
I.B. Regalado, Jr., Fabian S. Lombos and Marino E. Eslao for petitioners.
Antonio R. Tupaz for private respondent.
MAKASIAR, CJ.:
This is a petition for review on certiorari to set aside as null and void the decision of the Court of Appeals, in C.A.G.R. No. 52253-R dated February 11, 1977, modifying the decision dated February 15, 1972 of the Court of First
Instance of Agusan, which dismissed the petition of respondent Sulpicio M. Tolentino for injunction, specific
performance or rescission, and damages with preliminary injunction.
On April 28, 1965, Island Savings Bank, upon favorable recommendation of its legal department, approved the loan
application for P80,000.00 of Sulpicio M. Tolentino, who, as a security for the loan, executed on the same day a real
estate mortgage over his 100-hectare land located in Cubo, Las Nieves, Agusan, and covered by TCT No. T-305, and
which mortgage was annotated on the said title the next day. The approved loan application called for a lump sum
P80,000.00 loan, repayable in semi-annual installments for a period of 3 years, with 12% annual interest. It was
required that Sulpicio M. Tolentino shall use the loan proceeds solely as an additional capital to develop his other
property into a subdivision.
On May 22, 1965, a mere P17,000.00 partial release of the P80,000.00 loan was made by the Bank; and Sulpicio M.
Tolentino and his wife Edita Tolentino signed a promissory note for P17,000.00 at 12% annual interest, payable
within 3 years from the date of execution of the contract at semi-annual installments of P3,459.00 (p. 64, rec.). An
advance interest for the P80,000.00 loan covering a 6-month period amounting to P4,800.00 was deducted from the
partial release of P17,000.00. But this pre-deducted interest was refunded to Sulpicio M. Tolentino on July 23, 1965,
after being informed by the Bank that there was no fund yet available for the release of the P63,000.00 balance (p.

47, rec.). The Bank, thru its vice-president and treasurer, promised repeatedly the release of the P63,000.00 balance
(p. 113, rec.).
On August 13, 1965, the Monetary Board of the Central Bank, after finding Island Savings Bank was suffering
liquidity problems, issued Resolution No. 1049, which provides:
In view of the chronic reserve deficiencies of the Island Savings Bank against its deposit
liabilities, the Board, by unanimous vote, decided as follows:
1) To prohibit the bank from making new loans and investments [except investments in
government securities] excluding extensions or renewals of already approved loans, provided that
such extensions or renewals shall be subject to review by the Superintendent of Banks, who may
impose such limitations as may be necessary to insure correction of the bank's deficiency as soon
as possible;
xxx xxx xxx
(p. 46, rec.).
On June 14, 1968, the Monetary Board, after finding thatIsland Savings Bank failed to put up the required capital to
restore its solvency, issued Resolution No. 967 which prohibited Island Savings Bank from doing business in the
Philippines and instructed the Acting Superintendent of Banks to take charge of the assets of Island Savings Bank
(pp. 48-49, rec).
On August 1, 1968, Island Savings Bank, in view of non-payment of the P17,000.00 covered by the promissory
note, filed an application for the extra-judicial foreclosure of the real estate mortgage covering the 100-hectare land
of Sulpicio M. Tolentino; and the sheriff scheduled the auction for January 22, 1969.
On January 20, 1969, Sulpicio M. Tolentino filed a petition with the Court of First Instance of Agusan for injunction,
specific performance or rescission and damages with preliminary injunction, alleging that since Island Savings Bank
failed to deliver the P63,000.00 balance of the P80,000.00 loan, he is entitled to specific performance by ordering
Island Savings Bank to deliver the P63,000.00 with interest of 12% per annum from April 28, 1965, and if said
balance cannot be delivered, to rescind the real estate mortgage (pp. 32-43, rec.).
On January 21, 1969, the trial court, upon the filing of a P5,000.00 surety bond, issued a temporary restraining order
enjoining the Island Savings Bank from continuing with the foreclosure of the mortgage (pp. 86-87, rec.).
On January 29, 1969, the trial court admitted the answer in intervention praying for the dismissal of the petition of
Sulpicio M. Tolentino and the setting aside of the restraining order, filed by the Central Bank and by the Acting
Superintendent of Banks (pp. 65-76, rec.).
On February 15, 1972, the trial court, after trial on the merits rendered its decision, finding unmeritorious the
petition of Sulpicio M. Tolentino, ordering him to pay Island Savings Bank the amount of PI 7 000.00 plus legal
interest and legal charges due thereon, and lifting the restraining order so that the sheriff may proceed with the
foreclosure (pp. 135-136. rec.
On February 11, 1977, the Court of Appeals, on appeal by Sulpicio M. Tolentino, modified the Court of First
Instance decision by affirming the dismissal of Sulpicio M. Tolentino's petition for specific performance, but it ruled

that Island Savings Bank can neither foreclose the real estate mortgage nor collect the P17,000.00 loan pp. 30-:31.
rec.).
Hence, this instant petition by the central Bank.
The issues are:
1. Can the action of Sulpicio M. Tolentino for specific performance prosper?
2. Is Sulpicio M. Tolentino liable to pay the P17,000.00 debt covered by the promissory note?
3. If Sulpicio M. Tolentino's liability to pay the P17,000.00 subsists, can his real estate mortgage
be foreclosed to satisfy said amount?
When Island Savings Bank and Sulpicio M. Tolentino entered into an P80,000.00 loan agreement on April 28, 1965,
they undertook reciprocal obligations. In reciprocal obligations, the obligation or promise of each party is the
consideration for that of the other (Penaco vs. Ruaya, 110 SCRA 46 [1981]; Vda. de Quirino vs, Pelarca 29 SCRA 1
[1969]); and when one party has performed or is ready and willing to perform his part of the contract, the other party
who has not performed or is not ready and willing to perform incurs in delay (Art. 1169 of the Civil Code). The
promise of Sulpicio M. Tolentino to pay was the consideration for the obligation of Island Savings Bank to furnish
the P80,000.00 loan. When Sulpicio M. Tolentino executed a real estate mortgage on April 28, 1965, he signified his
willingness to pay the P80,000.00 loan. From such date, the obligation of Island Savings Bank to furnish the
P80,000.00 loan accrued. Thus, the Bank's delay in furnishing the entire loan started on April 28, 1965, and lasted
for a period of 3 years or when the Monetary Board of the Central Bank issued Resolution No. 967 on June 14,
1968, which prohibited Island Savings Bank from doing further business. Such prohibition made it legally
impossible for Island Savings Bank to furnish the P63,000.00 balance of the P80,000.00 loan. The power of the
Monetary Board to take over insolvent banks for the protection of the public is recognized by Section 29 of R.A.
No. 265, which took effect on June 15, 1948, the validity of which is not in question.
The Board Resolution No. 1049 issued on August 13,1965 cannot interrupt the default of Island Savings Bank in
complying with its obligation of releasing the P63,000.00 balance because said resolution merely prohibited the
Bank from making new loans and investments, and nowhere did it prohibit island Savings Bank from releasing the
balance of loan agreements previously contracted. Besides, the mere pecuniary inability to fulfill an engagement
does not discharge the obligation of the contract, nor does it constitute any defense to a decree of specific
performance (Gutierrez Repide vs. Afzelius and Afzelius, 39 Phil. 190 [1918]). And, the mere fact of insolvency of a
debtor is never an excuse for the non-fulfillment of an obligation but 'instead it is taken as a breach of the contract
by him (vol. 17A, 1974 ed., CJS p. 650)
The fact that Sulpicio M. Tolentino demanded and accepted the refund of the pre-deducted interest amounting to
P4,800.00 for the supposed P80,000.00 loan covering a 6-month period cannot be taken as a waiver of his right to
collect the P63,000.00 balance. The act of Island Savings Bank, in asking the advance interest for 6 months on the
supposed P80,000.00 loan, was improper considering that only P17,000.00 out of the P80,000.00 loan was released.
A person cannot be legally charged interest for a non-existing debt. Thus, the receipt by Sulpicio M. 'Tolentino of the
pre-deducted interest was an exercise of his right to it, which right exist independently of his right to demand the
completion of the P80,000.00 loan. The exercise of one right does not affect, much less neutralize, the exercise of
the other.

The alleged discovery by Island Savings Bank of the over-valuation of the loan collateral cannot exempt it from
complying with its reciprocal obligation to furnish the entire P80,000.00 loan. 'This Court previously ruled that bank
officials and employees are expected to exercise caution and prudence in the discharge of their functions (Rural
Bank of Caloocan, Inc. vs. C.A., 104 SCRA 151 [1981]). It is the obligation of the bank's officials and employees
that before they approve the loan application of their customers, they must investigate the existence and evaluation
of the properties being offered as a loan security. The recent rush of events where collaterals for bank loans turn out
to be non-existent or grossly over-valued underscore the importance of this responsibility. The mere reliance by
bank officials and employees on their customer's representation regarding the loan collateral being offered as loan
security is a patent non-performance of this responsibility. If ever bank officials and employees totally reIy on the
representation of their customers as to the valuation of the loan collateral, the bank shall bear the risk in case the
collateral turn out to be over-valued. The representation made by the customer is immaterial to the bank's
responsibility to conduct its own investigation. Furthermore, the lower court, on objections of' Sulpicio M.
Tolentino, had enjoined petitioners from presenting proof on the alleged over-valuation because of their failure to
raise the same in their pleadings (pp. 198-199, t.s.n. Sept. 15. 1971). The lower court's action is sanctioned by the
Rules of Court, Section 2, Rule 9, which states that "defenses and objections not pleaded either in a motion to
dismiss or in the answer are deemed waived." Petitioners, thus, cannot raise the same issue before the Supreme
Court.
Since Island Savings Bank was in default in fulfilling its reciprocal obligation under their loan agreement, Sulpicio
M. Tolentino, under Article 1191 of the Civil Code, may choose between specific performance or rescission with
damages in either case. But since Island Savings Bank is now prohibited from doing further business by Monetary
Board Resolution No. 967, WE cannot grant specific performance in favor of Sulpicio M, Tolentino.
Rescission is the only alternative remedy left. WE rule, however, that rescission is only for the P63,000.00 balance
of the P80,000.00 loan, because the bank is in default only insofar as such amount is concerned, as there is no doubt
that the bank failed to give the P63,000.00. As far as the partial release of P17,000.00, which Sulpicio M. Tolentino
accepted and executed a promissory note to cover it, the bank was deemed to have complied with its reciprocal
obligation to furnish a P17,000.00 loan. The promissory note gave rise to Sulpicio M. Tolentino's reciprocal
obligation to pay the P17,000.00 loan when it falls due. His failure to pay the overdue amortizations under the
promissory note made him a party in default, hence not entitled to rescission (Article 1191 of the Civil Code). If
there is a right to rescind the promissory note, it shall belong to the aggrieved party, that is, Island Savings Bank. If
Tolentino had not signed a promissory note setting the date for payment of P17,000.00 within 3 years, he would be
entitled to ask for rescission of the entire loan because he cannot possibly be in default as there was no date for him
to perform his reciprocal obligation to pay.
Since both parties were in default in the performance of their respective reciprocal obligations, that is, Island
Savings Bank failed to comply with its obligation to furnish the entire loan and Sulpicio M. Tolentino failed to
comply with his obligation to pay his P17,000.00 debt within 3 years as stipulated, they are both liable for damages.
Article 1192 of the Civil Code provides that in case both parties have committed a breach of their reciprocal
obligations, the liability of the first infractor shall be equitably tempered by the courts. WE rule that the liability of
Island Savings Bank for damages in not furnishing the entire loan is offset by the liability of Sulpicio M. Tolentino
for damages, in the form of penalties and surcharges, for not paying his overdue P17,000.00 debt. The liability of
Sulpicio M. Tolentino for interest on his PI 7,000.00 debt shall not be included in offsetting the liabilities of both
parties. Since Sulpicio M. Tolentino derived some benefit for his use of the P17,000.00, it is just that he should
account for the interest thereon.

WE hold, however, that the real estate mortgage of Sulpicio M. Tolentino cannot be entirely foreclosed to satisfy his
P 17,000.00 debt.
The consideration of the accessory contract of real estate mortgage is the same as that of the principal contract
(Banco de Oro vs. Bayuga, 93 SCRA 443 [1979]). For the debtor, the consideration of his obligation to pay is the
existence of a debt. Thus, in the accessory contract of real estate mortgage, the consideration of the debtor in
furnishing the mortgage is the existence of a valid, voidable, or unenforceable debt (Art. 2086, in relation to Art,
2052, of the Civil Code).
The fact that when Sulpicio M. 'Tolentino executed his real estate mortgage, no consideration was then in existence,
as there was no debt yet because Island Savings Bank had not made any release on the loan, does not make the real
estate mortgage void for lack of consideration. It is not necessary that any consideration should pass at the time of
the execution of the contract of real mortgage (Bonnevie vs. C.A., 125 SCRA 122 [1983]). lt may either be a prior or
subsequent matter. But when the consideration is subsequent to the mortgage, the mortgage can take effect only
when the debt secured by it is created as a binding contract to pay (Parks vs, Sherman, Vol. 176 N.W. p. 583, cited in
the 8th ed., Jones on Mortgage, Vol. 2, pp. 5-6). And, when there is partial failure of consideration, the mortgage
becomes unenforceable to the extent of such failure (Dow. et al. vs. Poore, Vol. 172 N.E. p. 82, cited in Vol. 59, 1974
ed. CJS, p. 138). Where the indebtedness actually owing to the holder of the mortgage is less than the sum named in
the mortgage, the mortgage cannot be enforced for more than the actual sum due (Metropolitan Life Ins. Co. vs.
Peterson, Vol. 19, F(2d) p. 88, cited in 5th ed., Wiltsie on Mortgage, Vol. 1, P. 180).
Since Island Savings Bank failed to furnish the P63,000.00 balance of the P8O,000.00 loan, the real estate mortgage
of Sulpicio M. Tolentino became unenforceable to such extent. P63,000.00 is 78.75% of P80,000.00, hence the real
estate mortgage covering 100 hectares is unenforceable to the extent of 78.75 hectares. The mortgage covering the
remainder of 21.25 hectares subsists as a security for the P17,000.00 debt. 21.25 hectares is more than sufficient to
secure a P17,000.00 debt.
The rule of indivisibility of a real estate mortgage provided for by Article 2089 of the Civil Code is inapplicable to
the facts of this case.
Article 2089 provides:
A pledge or mortgage is indivisible even though the debt may be divided among the successors in
interest of the debtor or creditor.
Therefore, the debtor's heirs who has paid a part of the debt can not ask for the proportionate
extinguishment of the pledge or mortgage as long as the debt is not completely satisfied.
Neither can the creditor's heir who have received his share of the debt return the pledge or cancel
the mortgage, to the prejudice of other heirs who have not been paid.
The rule of indivisibility of the mortgage as outlined by Article 2089 above-quoted presupposes several heirs of the
debtor or creditor which does not obtain in this case. Hence, the rule of indivisibility of a mortgage cannot apply
WHEREFORE, THE DECISION OF THE COURT OF APPEALS DATED FEBRUARY 11, 1977 IS HEREBY
MODIFIED, AND

1. SULPICIO M. TOLENTINO IS HEREBY ORDERED TO PAY IN FAVOR OF HEREIN PETITIONERS THE

SUM OF P17.000.00, PLUS P41,210.00 REPRESENTING 12% INTEREST PER ANNUM COVERING THE
PERIOD FROM MAY 22, 1965 TO AUGUST 22, 1985, AND 12% INTEREST ON THE TOTAL AMOUNT
COUNTED FROM AUGUST 22, 1985 UNTIL PAID;
2. IN CASE SULPICIO M. TOLENTINO FAILS TO PAY, HIS REAL ESTATE MORTGAGE COVERING 21.25
HECTARES SHALL BE FORECLOSED TO SATISFY HIS TOTAL INDEBTEDNESS; AND
3. THE REAL ESTATE MORTGAGE COVERING 78.75 HECTARES IS HEREBY DECLARED UNEN
FORCEABLE AND IS HEREBY ORDERED RELEASED IN FAVOR OF SULPICIO M. TOLENTINO.
NO COSTS. SO ORDERED.

(9)
FORT BONIFACIO DEVELOPMENT CORPORATION,
Petitioner,

G.R. No. 158997

Present:

- versus -

PUNO, C.J., Chairperson,

CARPIO,
AZCUNA,
REYES,* and
LEONARDO-DE CASTRO, JJ.

YLLAS LENDING CORPORATION and JOSE S.

LAURAYA, in his
official capacity as President,
Promulgated:
Respondents.
October 6, 2008
x-------------------------------------------------- x

DECISION
CARPIO, J.:
The Case
This is a petition for review on certiorari [1] of the Orders issued on 7 March 2003[2] and 3 July 2003[3] by
Branch 59 of the Regional TrialCourt of Makati City (trial court) in Civil Case No. 01-1452. The trial courts orders
dismissed Fort Bonifacio Development Corporations (FBDC) third party claim and denied FBDCs Motion to
Intervene and Admit Complaint in Intervention.
The Facts

On 24 April 1998, FBDC executed a lease contract in favor of Tirreno, Inc. (Tirreno) over a unit at
the Entertainment Center Phase 1 of theBonifacio Global City in Taguig, Metro Manila. The parties had the lease
contract notarized on the day of its execution. Tirreno used the leased premises for Savoia Ristorante and
La Strega Bar.
Two provisions in the lease contract are pertinent to the present case: Section 20, which is about the
consequences in case of default of the lessee, and Section 22, which is about the lien on the properties of the
lease. The pertinent portion of Section 20 reads:

Section 20. Default of the Lessee

20.1 The LESSEE shall be deemed to be in default within the meaning of this Contract in
case:
(i)
The LESSEE fails to fully pay on time any rental, utility and service charge
or other financial obligation of the LESSEE under this Contract;
xxx
20.2 Without prejudice to any of the rights of the LESSOR under this Contract, in case of
default of the LESSEE, the lessor shall have the right to:
(i)
Terminate this Contract immediately upon written notice to the LESSEE,
without need of any judicial action or declaration;
xxx

Section 22, on the other hand, reads:

Section 22. Lien on the Properties of the Lessee
Upon the termination of this Contract or the expiration of the Lease Period without the
rentals, charges and/or damages, if any, being fully paid or settled, the LESSOR shall have the
right to retain possession of the properties of the LESSEE used or situated in the Leased Premises
and the LESSEE hereby authorizes the LESSOR to offset the prevailing value thereof as appraised
by the LESSOR against any unpaid rentals, charges and/or damages. If the LESSOR does not
want to use said properties, it may instead sell the same to third parties and apply the proceeds
thereof against any unpaid rentals, charges and/or damages.

Tirreno began to default in its lease payments in 1999. By July 2000, Tirreno was already in arrears
by P5,027,337.91. FBDC and Tirrenoentered into a settlement agreement on 8 August 2000. Despite the execution

of the settlement agreement, FBDC found need to send Tirreno a written notice of termination dated 19 September
2000 due to Tirrenos alleged failure to settle its outstanding obligations. On 29 September 2000, FBDC entered and
occupied the leased premises. FBDC also appropriated the equipment and properties left by Tirreno pursuant to
Section 22 of their Contract of Lease as partial payment for Tirrenos outstanding obligations. Tirreno filed an
action for forcible entry against FBDC before the Municipal Trial Court of Taguig. Tirreno also filed a complaint
for specific performance with a prayer for the issuance of a temporary restraining order and/or a writ of preliminary
injunction against FBDC before the Regional Trial Court (RTC) of Pasig City. The RTC of Pasig City
dismissedTirrenos complaint for forum-shopping.
On 4 March 2002, Yllas Lending Corporation and Jose S. Lauraya, in his official capacity as President,
(respondents) caused the sheriff of Branch 59 of the trial court to serve an alias writ of seizure against FBDC. On
the same day, FBDC served on the sheriff an affidavit of title and third party claim. FBDC found out that on 27
September 2001, respondents filed a complaint for Foreclosure of Chattel Mortgage with Replevin, docketed as
Civil Case No. 01-1452, against Tirreno, Eloisa Poblete Todaro (Eloisa), and Antonio D. Todaro (Antonio), in their
personal and individual capacities, and in Eloisas official capacity as President. In their complaint, respondents
alleged that they lent a total of P1.5 million toTirreno, Eloisa, and Antonio. On 9 November 2000, Tirreno, Eloisa
and Antonio executed a Deed of Chattel Mortgage in favor of respondents assecurity for the loan. The following
properties are covered by the Chattel Mortgage:

a. Furniture, Fixtures and Equipment of Savoia Ristorante and La Strega Bar, a restaurant owned
and managed by [Tirreno], inclusive of the leasehold right of [Tirreno] over its rented building
where [the] same is presently located.
b. Goodwill over the aforesaid restaurant, including its business name, business sign, logo, and
any and all interest therein.
c. Eighteen (18) items of paintings made by Florentine Master, Gino Tili, which are fixtures in the
above-named restaurant.
The details and descriptions of the above items are specified in Annex A which is hereto
attached and forms as an integral part of this Chattel Mortgage instrument.[4]

In the Deed of Chattel Mortgage, Tirreno, Eloisa, and Antonio made the following warranties to respondents:
1.

WARRANTIES: The MORTGAGOR hereby declares and warrants that:

a.
The MORTGAGOR is the absolute owner of the above named properties subject of this
mortgage, free from all liens and encumbrances.

b.
There exist no transaction or documents affecting the same previously presented for, and/or
pending transaction.[5]
Despite FBDCs service upon him of an affidavit of title and third party claim, the sheriff proceeded with the
seizure of certain items fromFBDCs premises. The sheriffs partial return indicated the seizure of the following
items from FBDC:
A. FIXTURES
(2) Smaller Murano Chandeliers
(1) Main Murano Chandelier
B. EQUIPMENT
(13) Uni-Air Split Type 2HP Air Cond.
(2) Uni-Air Split Type 1HP Air Cond.
(3) Uni-Air Window Type 2HP Air Cond.
(56) Chairs
(1) Table
(2) boxes Kitchen equipments [sic][6]
The sheriff delivered the seized properties to respondents. FBDC questioned the propriety of the seizure and
delivery of the properties to respondents without an indemnity bond before the trial court. FBDC argued that when
respondents and Tirreno entered into the chattel mortgage agreement on 9 November 2000, Tirreno no longer owned
the mortgaged properties as FBDC already enforced its lien on 29 September 2000.
In ruling on FBDCs motion for leave to intervene and to admit complaint in intervention, the trial court stated
the facts as follows:
Before this Court are two pending incidents, to wit: 1) [FBDCs] Third-Party Claim over
the properties of [Tirreno] which were seized and delivered by the sheriff of this Court to
[respondents]; and 2) FBDCs Motion to Intervene and to Admit Complaint in Intervention.
Third party claimant, FBDC, anchors its claim over the subject properties on Sections
20.2(i) and 22 of the Contract of Lease executed by [FBDC] with Tirreno. Pursuant to said
Contract of Lease, FBDC took possession of the leased premises and proceeded to sell to third
parties the properties found therein and appropriated the proceeds thereof to pay the unpaid lease
rentals of [Tirreno].

FBDC, likewise filed a Motion to Admit its Complaint-in-Intervention.

In Opposition to the third-party claim and the motion to intervene, [respondents] posit that
the basis of [FBDCs] third party claim being anchored on the aforesaid Contract [of] Lease is
baseless. [Respondents] contend that the stipulation of the contract of lease partakes of a pledge
which is void under Article 2088 of the Civil Code for being pactum commissorium.
xxx

By reason of the failure of [Tirreno] to pay its lease rental and fees due in the amount
of P5,027,337.91, after having notified [Tirreno] of the termination of the lease, x x x FBDC took
possession of [Tirreno.s] properties found in the premises and sold those which were not of use to
it. Meanwhile, [respondents], as mortgagee of said properties, filed an action for foreclosure of the
chattel mortgage with replevin and caused the seizure of the same properties which [FBDC] took
and appropriated in payment of [Tirrenos] unpaid lease rentals.[7]

The Ruling of the Trial Court

In its order dated 7 March 2003, the trial court stated that the present case raises the questions of who has a
better

right

over

the

properties

ofTirreno and

whether

FBDC

has

right

to

intervene

in

respondents complaint for foreclosure of chattel mortgage.

In deciding against FBDC, the trial court declared that Section
and Tirreno is void under Article 2088 of the Civil Code.

[8]

22 of the lease contract between FBDC

The trial court stated that Section 22 of the lease

contract pledges the properties found in the leased premises as security for the payment of the unpaid
rentals. Moreover, Section 22 provides for the automatic appropriation of the properties owned by Tirrenoin the
event of its default in the payment of monthly rentals to FBDC. Since Section 22 is void, it cannot vest title of
ownership over the seized properties. Therefore, FBDC cannot assert that its right is superior to respondents, who
are the mortgagees of the disputed properties.
The trial court quoted from Bayer Phils. v. Agana[9] to justify its ruling that FBDC should have filed a separate
complaint against respondents instead of filing a motion to intervene. The trial court quoted from Bayer as follows:
In other words, construing Section 17 of Rule 39 of the Revised Rules of Court (now Section 16 of
the 1997 Rules on Civil Procedure), the rights of third-party claimants over certain properties
levied upon by the sheriff to satisfy the judgment may not be taken up in the case where such
claims are presented but in a separate and independent action instituted by the claimants. [10]

The dispositive portion of the trial courts decision reads:

WHEREFORE, premises considered, [FBDCs] Third Party Claim is hereby
DISMISSED. Likewise, the Motion to Intervene and Admit Complaint in Intervention is
DENIED.[11]

FBDC filed a motion for reconsideration on 9 May 2003. The trial court denied FBDCs motion for
reconsideration in an order dated 3 July 2003. FBDC filed the present petition before this Court to review pure
questions of law.

The Issues
FBDC alleges that the trial court erred in the following:
1.

Dismissing FBDCs third party claim upon the trial courts erroneous interpretation that
FBDC has no right of ownership over the subject properties because Section 22 of the
contract of lease is void for being a pledge and a pactum commissorium;

2.

Denying FBDC intervention on the ground that its proper remedy as third party claimant
over the subject properties is to file a separate action; and

3.

Depriving FBDC of its properties without due process of law when the trial court
erroneously dismissed FBDCs third party claim, denied FBDCsintervention, and did not
require the posting of an indemnity bond for FBDCs protection.[12]

The Ruling of the Court

The petition has merit.
Taking of Lessees Properties
without Judicial Intervention
We reproduce Section 22 of the Lease Contract below for easy reference:
Section 22. Lien on the Properties of the Lessee
Upon the termination of this Contract or the expiration of the Lease Period without the
rentals, charges and/or damages, if any, being fully paid or settled, the LESSOR shall have the
right to retain possession of the properties of the LESSEE used or situated in the Leased Premises
and the LESSEE hereby authorizes the LESSOR to offset the prevailing value thereof as appraised
by the LESSOR against any unpaid rentals, charges and/or damages. If the LESSOR does not
want to use said properties, it may instead sell the same to third parties and apply the proceeds
thereof against any unpaid rentals, charges and/or damages.

Respondents, as well as the trial court, contend that Section 22 constitutes a pactum commissorium, a void
stipulation in a pledge contract. FBDC, on the other hand, states that Section 22 is merely a dacion en pago.
Articles 2085 and 2093 of the Civil Code enumerate the requisites essential to a contract of pledge: (1) the
pledge is constituted to secure the fulfillment of a principal obligation; (2) the pledgor is the absolute owner of the
thing pledged; (3) the persons constituting the pledge have the free disposal of their property or have legal

authorization for the purpose; and (4) the thing pledged is placed in the possession of the creditor, or of a third
person by common agreement. Article 2088 of the Civil Code prohibits the creditor from appropriating or disposing
the things pledged, and any contrary stipulation is void.
On the other hand, Article 1245 of the Civil Code defines dacion en pago, or dation in payment, as the
alienation of property to the creditor in satisfaction of a debt in money. Dacion en pago is governed by the law on
sales. Philippine National Bank v. Pineda[13] held that dation in payment requires delivery and transmission of
ownership of a thing owned by the debtor to the creditor as an accepted equivalent of the performance of the
obligation. There is no dation in payment when there is no transfer of ownership in the creditors favor, as when the
possession of the thing is merely given to the creditor by way of security.
Section 22, as worded, gives FBDC a means to collect payment from Tirreno in case of termination of the
lease contract or the expiration of the lease period and there are unpaid rentals, charges, or damages. The existence
of a contract of pledge, however, does not arise just because FBDC has means of collecting past due rent
from Tirreno other than direct payment. The trial court concluded that Section 22 constitutes a pledge because of
the presence of the first three requisites of a pledge: Tirrenos properties in the leased premises
secure Tirrenos lease payments;Tirreno is the absolute owner of the said properties; and the persons
representing Tirreno have legal authority to constitute the pledge. However, the fourth requisite, that the thing
pledged is placed in the possession of the creditor, is absent. There is non-compliance with the fourth requisite even
if Tirrenos personal properties are found in FBDCs real property. Tirrenos personal properties are in FBDCs real
property because of the Contract of Lease, which gives Tirreno possession of the personal properties. Since Section
22 is not a contract of pledge, there is no pactum commissorium.
FBDC admits that it took Tirrenos properties from the leased premises without judicial intervention after
terminating the Contract of Lease in accordance with Section 20.2. FBDC further justifies its action by stating that
Section 22 is a forfeiture clause in the Contract of Lease and that Section 22 gives FBDC a remedy
against Tirrenos failure to comply with its obligations. FBDC claims that Section 22 authorizes FBDC to take
whatever properties that Tirreno left to pay off Tirrenos obligations.
We agree with FBDC.
A lease contract may be terminated without judicial intervention. Consing v. Jamandre upheld the validity of
a contractually-stipulated termination clause:
This stipulation is in the nature of a resolutory condition, for upon the exercise by the
[lessor] of his right to take possession of the leased property, the contract is deemed terminated.

This kind of contractual stipulation is not illegal, there being nothing in the law proscribing such
kind of agreement.
xxx

Judicial permission to cancel the agreement was not, therefore necessary because of the
express stipulation in the contract of [lease] that the [lessor], in case of failure of the [lessee] to
comply with the terms and conditions thereof, can take-over the possession of the leased premises,
thereby cancelling the contract of sub-lease. Resort to judicial action is necessary only in the
absence of a special provision granting the power of cancellation.[14]

A lease contract may contain a forfeiture clause. Country Bankers Insurance Corp. v. Court of Appeals upheld
the validity of a forfeiture clause as follows:
A provision which calls for the forfeiture of the remaining deposit still in the possession of
the lessor, without prejudice to any other obligation still owing, in the event of the termination or
cancellation of the agreement by reason of the lessees violation of any of the terms and conditions
of the agreement is a penal clause that may be validly entered into. A penal clause is an accessory
obligation which the parties attach to a principal obligation for the purpose of insuring the
performance thereof by imposing on the debtor a special prestation (generally consisting in the
payment of a sum of money) in case the obligation is not fulfilled or is irregularly or inadequately
fulfilled.[15]

In Country Bankers, we allowed the forfeiture of the lessees advance deposit of lease payment. Such a deposit may
also be construed as a guarantee of payment, and thus answerable for any unpaid rent or charges still outstanding at
any termination of the lease.
In the same manner, we allow FBDCs forfeiture of Tirrenos properties in the leased premises. By agreement
between FBDC and Tirreno, the properties are answerable for any unpaid rent or charges at any termination of the
lease. Such agreement is not contrary to law, morals, good customs, or public policy. Forfeiture of the properties is
the only security that FBDC may apply in case of Tirrenos default in its obligations.
Intervention versus Separate Action
Respondents posit that the right to intervene, although permissible, is not an absolute right. Respondents agree
with the trial courts ruling that FBDCs proper remedy is not intervention but the filing of a separate
action. Moreover, respondents allege that FBDC was accorded by the trial court of the opportunity to defend its
claim of ownership in court through pleadings and hearings set for the purpose. FBDC, on the other hand,
insists that a third party claimant may vindicate his rights over properties taken in an action for replevin by
intervening in the replevin action itself.

We agree with FBDC.

Both the trial court and respondents relied on our ruling in Bayer Phils. v. Agana[16] to justify their opposition
to FBDCs intervention and to insist on FBDCs filing of a separate action. In Bayer, we declared that the rights of
third party claimants over certain properties levied upon by the sheriff to satisfy the judgment may not be taken up
in the case where such claims are presented, but in a separate and independent action instituted by the
claimants. However, both respondents and the trial court overlooked the circumstances behind the ruling
in Bayer, which makes the Bayer ruling inapplicable to the present case. The third party in Bayer filed his claim
during execution; in the present case, FBDC filed for intervention during the trial.
The timing of the filing of the third party claim is important because the timing determines the remedies that a
third party is allowed to file. A third party claimant under Section 16 of Rule 39 (Execution, Satisfaction and Effect
of Judgments)[17] of the 1997 Rules of Civil Procedure may vindicate his claim to the property in a separate action,
because intervention is no longer allowed as judgment has already been rendered.

A third party claimant under

Section 14 of Rule 57 (Preliminary Attachment)[18] of the 1997 Rules of Civil Procedure, on the other hand, may
vindicate his claim to the property by intervention because he has a legal interest in the matter in litigation. [19]
We allow FBDCs intervention in the present case because FBDC satisfied the requirements of Section 1, Rule
19 (Intervention) of the 1997 Rules of Civil Procedure, which reads as follows:
Section 1. Who may intervene. A person who has a legal interest in the matter in
litigation, or in the success of either of the parties, or an interest against both, or is so situated as to
be adversely affected by a distribution or other disposition of property in the custody of the court
or of an officer thereof may, with leave of court, be allowed to intervene in the action. The court
shall consider whether or not the intervention will unduly delay or prejudice the adjudication of
the rights of the original parties, and whether or not the intervenors rights may be fully protected
in a separate proceeding.

Although intervention is not mandatory, nothing in the Rules proscribes intervention. The trial courts objection
against FBDCs intervention has been set aside by our ruling that Section 22 of the lease contract is
not pactum commissorium.
Indeed, contrary to respondents contentions, we ruled in BA Finance Corporation v. Court of Appeals that
where the mortgagees right to the possession of the specific property is evident, the action need only be maintained
against the possessor of the property. However, where the mortgagees right to possession is put to great doubt, as
when a contending party might contest the legal bases for mortgagees cause of action or an adverse and
independent claim of ownership or right of possession is raised by the contending party, it could become essential to

have other persons involved and accordingly impleaded for a complete determination and resolution of the
controversy. Thus:
A chattel mortgagee, unlike a pledgee, need not be in, nor entitled to, the possession of the
property, unless and until the mortgagor defaults and the mortgagee thereupon seeks to foreclose
thereon. Since the mortgagees right of possession is conditioned upon the actual default which
itself may becontroverted, the inclusion of other parties, like the debtor or the mortgagor himself,
may be required in order to allow a full and conclusive determination of the case. When the
mortgagee seeks a replevin in order to effect the eventual foreclosure of the mortgage, it is not
only the existence of, but also the mortgagors default on, the chattel mortgage that, among other
things, can properly uphold the right to replevy the property. The burden to establish a valid
justification for that action lies with the plaintiff [-mortgagee]. An adverse possessor, who is not
the mortgagor, cannot just be deprived of his possession, let alone be bound by the terms of the
chattel mortgage contract, simply because the mortgagee brings up an action for replevin.[20]
(Emphasis added)

FBDC exercised its lien to Tirrenos properties even before respondents and Tirreno executed their Deed of
Chattel Mortgage. FBDC is adversely affected by the disposition of the properties seized by the
sheriff. Moreover, FBDCs intervention in the present case will result in a complete adjudication of the issues
brought about by Tirrenos creation of multiple liens on the same properties and subsequent default in its
obligations.
Sheriffs Indemnity Bond
FBDC

laments

the

failure

of

the

trial

court

to

require

respondents

to

file

an

indemnity bond for FBDCs protection. The trial court, on the other hand, did not mention the indemnity bond in
its Orders dated 7 March 2003 and 3 July 2003.
Pursuant to Section 14 of Rule 57, the sheriff is not obligated to turn over to respondents the properties subject
of this case in view of respondents failure to file a bond. The bond in Section 14 of Rule 57 (proceedings where
property is claimed by third person) is different from the bond in Section 3 of the same rule (affidavit and
bond). Under Section 14 of Rule 57, the purpose of the bond is to indemnify the sheriff against any claim by
the intervenor to the property seized or for damages arising from such seizure, which the sheriff was making and for
which the sheriff was directly responsible to the third party. Section 3, Rule 57, on the other hand, refers to the
attachment bond to assure the return of defendants personal property or the payment of damages to the defendant if
the plaintiffs action to recover possession of the same property fails, in order to protect the plaintiffs right of
possession of said property, or prevent the defendant from destroying the same during the pendency of the suit.

Because of the absence of the indemnity bond in the present case, FBDC may also hold the sheriff for
damages for the taking or keeping of the properties seized from FBDC.
WHEREFORE, we GRANT the petition. We SET ASIDE the Orders dated 7 March 2003 and 3 July 2003 of
Branch

59

of

the

Regional

Fort Bonifacio Development

Corporations

Trial

Court

of Makati City

Corporations Third

Motion

to

Party

in

Claim

Intervene

Civil
and

and

Case

denying

No.

01-1452

dismissing

FortBonifacio Development

Admit

Complaint

in

Intervention. We REINSTATE Fort Bonifacio Development Corporations Third Party Claim and GRANT its
Motion to Intervene and Admit Complaint in Intervention. Fort Bonifacio Development Corporation may hold the
Sheriff liable for the seizure and delivery of the properties subject of this case because of the lack of an indemnity
bond.
SO ORDERED.

(10) G.R. No. 118342 January 5, 1998

DEVELOPMENT
BANK
OF
vs.
COURT OF APPEALS and LYDIA CUBA, respondents.

THE

PHILIPPINES, petitioner,

G.R. No. 118367 January 5, 1998

LYDIA
vs.
COURT OF APPEALS,
CAPERAL,respondents.

P.
DEVELOPMENT

BANK

CUBA, petitioner,
OF

THE

PHILIPPINES

and

AGRIPINA

P.

DAVIDE, JR., J.:

These two consolidated cases stemmed from a complaint 1 filed against the Development Bank of the Philippines
(hereafter DBP) and Agripina Caperal filed by Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional
Trial Court of Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of DBP's
appropriation of CUBA's rights, title, and interests over a 44-hectares fishpond located in Bolinao, Pangasinan, for
being violative of Article 2088 of the Civil Code; (2) the annulment of the Deed of Conditional Sale executed in her
favor by DBP; (3) the annulment of DBP's sale of the subject fishpond to Caperal; (4) the restoration of her rights,
title, and interests over the fishpond; and (5) the recovery of damages, attorney's fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of their respective pleadings, the trial court conducted a
pre-trial where CUBA and DBP agreed on the following facts, which were embodied in the pre-trial order: 2

1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new) dated May
13, 1974 from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines in the
amounts of P109,000.00; P109,000.00; and P98,700.00 under the terms stated in the Promissory
Notes dated September 6, 1974; August 11, 1975; and April 4, 1977;
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her
Leasehold Rights;
4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the terms of
the Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP appropriated
the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in question;
6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba over the
fishpond in question, defendant DBP, in turn, executed a Deed of Conditional Sale of the
Leasehold Rights in favor of plaintiff Lydia Cuba over the same fishpond in question;
7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the Manager
DBP, Dagupan City dated November 6, 1979 and December 20, 1979. DBP thereafter accepted the
offer to repurchase in a letter addressed to plaintiff dated February 1, 1982;
8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a new
Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by the Ministry of
Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding her husband;
9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of Conditional Sale;
10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of Conditional Sale,
she entered with the DBP a temporary arrangement whereby in consideration for the deferment of
the Notarial Rescission of Deed of Conditional Sale, plaintiff Lydia Cuba promised to make
certain payments as stated in temporary Arrangement dated February 23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated March 13, 1984,
and which was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the Leasehold Rights of the
fishpond in question;
13. That after defendant DBP took possession of the Leasehold Rights over the fishpond in
question, DBP advertised in the SUNDAY PUNCH the public bidding dated June 24, 1984, to
dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant Agripina
Caperal on August 16, 1984;

15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083-A on
December 28, 1984 by the Ministry of Agriculture and Food.
Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the pre-trial order. 3
Trial was thereafter had on other matters.
The principal issue presented was whether the act of DBP in appropriating to itself CUBA's leasehold rights over the
fishpond in question without foreclosure proceedings was contrary to Article 2088 of the Civil Code and, therefore,
invalid. CUBA insisted on an affirmative resolution. DBP stressed that it merely exercised its contractual right under
the Assignments of Leasehold Rights, which was not a contract of mortgage. Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBP's taking possession and ownership of the
property without foreclosure was plainly violative of Article 2088 of the Civil Code which provides as follows:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.
It disagreed with DBP's stand that the Assignments of Leasehold Rights were not contracts of mortgage because (1)
they were given as security for loans, (2) although the "fishpond land" in question is still a public land, CUBA's
leasehold rights and interest thereon are alienable rights which can be the proper subject of a mortgage; and (3) the
intention of the contracting parties to treat the Assignment of Leasehold Rights as a mortgage was obvious and
unmistakable; hence, upon CUBA's default, DBP's only right was to foreclose the Assignment in accordance with
law.
The trial court also declared invalid condition no. 12 of the Assignment of Leasehold Rights for being a clear case
of pactum commissorium expressly prohibited and declared null and void by Article 2088 of the Civil Code. It then
concluded that since DBP never acquired lawful ownership of CUBA's leasehold rights, all acts of ownership and
possession by the said bank were void. Accordingly, the Deed of Conditional Sale in favor of CUBA, the notarial
rescission of such sale, and the Deed of Conditional Sale in favor of defendant Caperal, as well as the Assignment of
Leasehold Rights executed by Caperal in favor of DBP, were also void and ineffective.
As to damages, the trial court found "ample evidence on record" that in 1984 the representatives of DBP ejected
CUBA and her caretakers not only from the fishpond area but also from the adjoining big house; and that when
CUBA's son and caretaker went there on 15 September 1985, they found the said house unoccupied and destroyed
and CUBA's personal belongings, machineries, equipment, tools, and other articles used in fishpond operation which
were kept in the house were missing. The missing items were valued at about P550,000. It further found that when
CUBA and her men were ejected by DBP for the first time in 1979, CUBA had stocked the fishpond with 250,000
pieces of bangus fish (milkfish), all of which died because the DBP representatives prevented CUBA's men from
feeding the fish. At the conservative price of P3.00 per fish, the gross value would have been P690,000, and after
deducting 25% of said value as reasonable allowance for the cost of feeds, CUBA suffered a loss of P517,500. It
then set the aggregate of the actual damages sustained by CUBA at P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely representing to the Bureau of Fisheries
that it had foreclosed its mortgage on CUBA's leasehold rights. Such representation induced the said Bureau to
terminate CUBA's leasehold rights and to approve the Deed of Conditional Sale in favor of CUBA. And considering
that by reason of her unlawful ejectment by DBP, CUBA "suffered moral shock, degradation, social humiliation, and
serious anxieties for which she became sick and had to be hospitalized" the trial court found her entitled to moral

and exemplary damages. The trial court also held that CUBA was entitled to P100,000 attorney's fees in view of the
considerable expenses she incurred for lawyers' fees and in view of the finding that she was entitled to exemplary
damages.
In its decision of 31 January 1990, 4 the trial court disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. DECLARING null and void and without any legal effect the act of defendant Development
Bank of the Philippines in appropriating for its own interest, without any judicial or extra-judicial
foreclosure, plaintiff's leasehold rights and interest over the fishpond land in question under her
Fishpond Lease Agreement No. 2083 (new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between the
defendant Development Bank of the Philippines and plaintiff (Exh. E and Exh. 1) and the acts of
notarial rescission of the Development Bank of the Philippines relative to said sale (Exhs. 16 and
26) as void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between the
Development Bank of the Philippines and defendant Agripina Caperal (Exh. F and Exh. 21), the
Fishpond Lease Agreement No. 2083-A dated December 28, 1984 of defendant Agripina Caperal
(Exh. 23) and the Assignment of Leasehold Rights dated February 12, 1985 executed by defendant
Agripina Caperal in favor of the defendant Development Bank of the Philippines (Exh. 24) as void
ab initio;
4. ORDERING defendant Development Bank of the Philippines and defendant Agripina Caperal,
jointly and severally, to restore to plaintiff the latter's leasehold rights and interests and right of
possession over the fishpond land in question, without prejudice to the right of defendant
Development Bank of the Philippines to foreclose the securities given by plaintiff;
5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the following
amounts:
a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED
PESOS (P1,067,500.00), as and for actual damages;
b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral
damages;
c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary
damages;
d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as
and for attorney's fees;
6. And ORDERING defendant Development Bank of the Philippines to reimburse and pay to
defendant Agripina Caperal the sum of ONE MILLION FIVE HUNDRED THIRTY-TWO
THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE CENTAVOS

(P1,532,610.75) representing the amounts paid by defendant Agripina Caperal to defendant

Development Bank of the Philippines under their Deed of Conditional Sale.
CUBA and DBP interposed separate appeals from the decision to the Court of Appeals. The former sought an
increase in the amount of damages, while the latter questioned the findings of fact and law of the lower court.
In its decision 5 of 25 May 1994, the Court of Appeals ruled that (1) the trial court erred in declaring that the deed of
assignment was null and void and that defendant Caperal could not validly acquire the leasehold rights from DBP;
(2) contrary to the claim of DBP, the assignment was not a cession under Article 1255 of the Civil Code because
DBP appeared to be the sole creditor to CUBA cession presupposes plurality of debts and creditors; (3) the deeds
of assignment represented the voluntary act of CUBA in assigning her property rights in payment of her debts,
which amounted to a novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was estopped
from questioning the assignment of the leasehold rights, since she agreed to repurchase the said rights under a deed
of conditional sale; and (5) condition no. 12 of the deed of assignment was an express authority from CUBA for
DBP to sell whatever right she had over the fishpond. It also ruled that CUBA was not entitled to loss of profits for
lack of evidence, but agreed with the trial court as to the actual damages of P1,067,500. It, however, deleted the
amount of exemplary damages and reduced the award of moral damages from P100,000 to P50,000 and attorney's
fees, from P100,000 to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in appropriating Cuba's leasehold
rights and interest under Fishpond Lease Agreement No. 2083; (2) the deeds of assignment executed by Cuba in
favor of DBP; (3) the deed of conditional sale between CUBA and DBP; and (4) the deed of conditional sale
between DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal, and the assignment of leasehold
rights executed by Caperal in favor of DBP. It then ordered DBP to turn over possession of the property to Caperal
as lawful holder of the leasehold rights and to pay CUBA the following amounts: (a) P1,067,500 as actual damages;
P50,000 as moral damages; and P50,000 as attorney's fees.
Since their motions for reconsideration were denied, 6 DBP and CUBA filed separate petitions for review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral damages and attorney's fees in favor of
CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the Court of Appeals erred (1) in not
holding that the questioned deed of assignment was a pactum commissorium contrary to Article 2088 of the Civil
Code; (b) in holding that the deed of assignment effected a novation of the promissory notes; (c) in holding that
CUBA was estopped from questioning the validity of the deed of assignment when she agreed to repurchase her
leasehold rights under a deed of conditional sale; and (d) in reducing the amounts of moral damages and attorney's
fees, in deleting the award of exemplary damages, and in not increasing the amount of damages.
We agree with CUBA that the assignment of leasehold rights was a mortgage contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling P335,000, each of which was covered
by a promissory note. In all of these notes, there was a provision that: "In the event of foreclosure of
themortgage securing this notes, I/We further bind myself/ourselves, jointly and severally, to pay the deficiency, if
any." 7
Simultaneous with the execution of the notes was the execution of "Assignments of Leasehold Rights" 8 where
CUBA assigned her leasehold rights and interest on a 44-hectare fishpond, together with the improvements thereon.

As pointed out by CUBA, the deeds of assignment constantly referred to the assignor (CUBA) as "borrower"; the
assigned rights, as mortgaged properties; and the instrument itself, as mortgage contract. Moreover, under condition
no. 22 of the deed, it was provided that "failure to comply with the terms and condition of any of the loans shall
cause all other loans to become due and demandable and all mortgages shall be foreclosed." And, condition no. 33
provided that if "foreclosure is actually accomplished, the usual 10% attorney's fees and 10% liquidated damages of
the total obligation shall be imposed." There is, therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was by way of security for the payment
of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment of her
Leasehold Rights.
In People's Bank & Trust Co. vs. Odom, 9 this Court had the occasion to rule that an assignment to guarantee an
obligation is in effect a mortgage.
We find no merit in DBP's contention that the assignment novated the promissory notes in that the obligation to pay
a sum of money the loans (under the promissory notes) was substituted by the assignment of the rights over the
fishpond (under the deed of assignment). As correctly pointed out by CUBA, the said assignment merely
complemented or supplemented the notes; both could stand together. The former was only an accessory to the latter.
Contrary to DBP's submission, the obligation to pay a sum of money remained, and the assignment merely served as
security for the loans covered by the promissory notes. Significantly, both the deeds of assignment and the
promissory notes were executed on the same dates the loans were granted. Also, the last paragraph of the assignment
stated: "The assignor further reiterates and states all terms, covenants, and conditions stipulated in the promissory
note or notes covering the proceeds of this loan, making said promissory note or notes, to all intent and purposes,
an integral part hereof."
Neither did the assignment amount to payment by cession under Article 1255 of the Civil Code for the plain and
simple reason that there was only one creditor, the DBP. Article 1255 contemplates the existence of two or more
creditors and involves the assignment of all the debtor's property.
Nor did the assignment constitute dation in payment under Article 1245 of the civil Code, which reads: "Dation in
payment, whereby property is alienated to the creditor in satisfaction of a debt in money, shall be governed by the
law on sales." It bears stressing that the assignment, being in its essence a mortgage, was but a security and not a
satisfaction of indebtedness. 10
We do not, however, buy CUBA's argument that condition no. 12 of the deed of assignment constituted pactum
commissorium. Said condition reads:
12. That effective upon the breach of any condition of this assignment, the Assignor hereby
appoints the Assignee his Attorney-in-fact with full power and authority to take actual possession
of the property above-described, together with all improvements thereon, subject to the approval
of the Secretary of Agriculture and Natural Resources, to lease the same or any portion thereof and
collect rentals, to make repairs or improvements thereon and pay the same, to sell or otherwise
dispose of whatever rights the Assignor has or might have over said property and/or its
improvements and perform any other act which the Assignee may deem convenient to protect its
interest. All expenses advanced by the Assignee in connection with purpose above indicated which
shall bear the same rate of interest aforementioned are also guaranteed by this Assignment. Any

amount received from rents, administration, sale or disposal of said property may be supplied by
the Assignee to the payment of repairs, improvements, taxes, assessments and other incidental
expenses and obligations and the balance, if any, to the payment of interest and then on the capital
of the indebtedness secured hereby. If after disposal or sale of said property and upon application
of total amounts received there shall remain a deficiency, said Assignor hereby binds himself to
pay the same to the Assignee upon demand, together with all interest thereon until fully paid. The
power herein granted shall not be revoked as long as the Assignor is indebted to the Assignee and
all acts that may be executed by the Assignee by virtue of said power are hereby ratified.
The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security
for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the
creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period. 11
Condition no. 12 did not provide that the ownership over the leasehold rights would automatically pass to DBP upon
CUBA's failure to pay the loan on time. It merely provided for the appointment of DBP as attorney-in-fact with
authority, among other things, to sell or otherwise dispose of the said real rights, in case of default by CUBA, and to
apply the proceeds to the payment of the loan. This provision is a standard condition in mortgage contracts and is in
conformity with Article 2087 of the Civil Code, which authorizes the mortgagee to foreclose the mortgage and
alienate the mortgaged property for the payment of the principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of assignment. As admitted by it
during the pre-trial, it had "[w]ithout foreclosure proceedings, whether judicial or extrajudicial, . . . appropriated the
[l]easehold [r]ights of plaintiff Lydia Cuba over the fishpond in question." Its contention that it limited itself to mere
administration by posting caretakers is further belied by the deed of conditional sale it executed in favor of CUBA.
The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its favor by the
herein vendees [Cuba spouses] the former acquired all the right and interest of the latter over the
above-described property;
xxx xxx xxx
The title to the real estate property [sic] and all improvements thereon shall remain in the name of
the Vendor until after the purchase price, advances and interest shall have been fully paid.
(Emphasis supplied).
It is obvious from the above-quoted paragraphs that DBP had appropriated and taken ownership of CUBA's
leasehold rights merely on the strength of the deed of assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its act of appropriating the leasehold
rights. As stated earlier, condition no. 12 did not provide that CUBA's default would operate to vest in DBP
ownership of the said rights. Besides, an assignment to guarantee an obligation, as in the present case, is virtually a
mortgage and not an absolute conveyance of title which confers ownership on the assignee. 12
At any rate, DBP's act of appropriating CUBA's leasehold rights was violative of Article 2088 of the Civil Code,
which forbids a credit or from appropriating, or disposing of, the thing given as security for the payment of a debt.

The fact that CUBA offered and agreed to repurchase her leasehold rights from DBP did not estop her from
questioning DBP's act of appropriation. Estoppel is unavailing in this case. As held by this Court in some
cases, 13estoppel cannot give validity to an act that is prohibited by law or against public policy. Hence, the
appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code and to public policy, cannot be
deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA, DBP should have foreclosed the
mortgage, as has been stipulated in condition no. 22 of the deed of assignment. But, as admitted by DBP, there was
no such foreclosure. Yet, in its letter dated 26 October 1979, addressed to the Minister of Agriculture and Natural
Resources and coursed through the Director of the Bureau of Fisheries and Aquatic Resources, DBP declared that it
"had foreclosed the mortgage and enforced the assignment of leasehold rights on March 21, 1979 for failure of said
spouses [Cuba spouces] to pay their loan amortizations." 14 This only goes to show that DBP was aware of the
necessity of foreclosure proceedings.
In view of the false representation of DBP that it had already foreclosed the mortgage, the Bureau of Fisheries
cancelled CUBA's original lease permit, approved the deed of conditional sale, and issued a new permit in favor of
CUBA. Said acts which were predicated on such false representation, as well as the subsequent acts emanating from
DBP's appropriation of the leasehold rights, should therefore be set aside. To validate these acts would open the
floodgates to circumvention of Article 2088 of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not hesitated to nullify the consequent auction
sale for failure to comply with the requirements laid down by law, such as Act No. 3135, as amended. 15With more
reason that the sale of property given as security for the payment of a debt be set aside if there was no prior fore
closure proceeding.
Hence, DBP should render an accounting of the income derived from the operation of the fishpond in question and
apply the said income in accordance with condition no. 12 of the deed of assignment which provided: "Any amount
received from rents, administration, . . . may be applied to the payment of repairs, improvements, taxes, assessment,
and other incidental expenses and obligations and the balance, if any, to the payment of interest and then on the
capital of the indebtedness. . ."
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an adequate compensation only for
such pecuniary loss suffered by him as he has duly proved. Such compensation is referred to as
actual or compensatory damages.
Actual or compensatory damages cannot be presumed, but must be proved with reasonable degree of certainty. 16 A
court cannot rely on speculations, conjectures, or guesswork as to the fact and amount of damages, but must depend
upon competent proof that they have been suffered by the injured party and on the best obtainable evidence of the
actual amount thereof. 17 It must point out specific facts which could afford a basis for measuring whatever
compensatory or actual damages are borne. 18
In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual damages consisting of P550,000
which represented the value of the alleged lost articles of CUBA and P517,500 which represented the value of the

230,000 pieces of bangus allegedly stocked in 1979 when DBP first ejected CUBA from the fishpond and the
adjoining house. This award was affirmed by the Court of Appeals.
We find that the alleged loss of personal belongings and equipment was not proved by clear evidence. Other than the
testimony of CUBA and her caretaker, there was no proof as to the existence of those items before DBP took over
the fishpond in question. As pointed out by DBP, there was not "inventory of the alleged lost items before the loss
which is normal in a project which sometimes, if not most often, is left to the care of other persons." Neither was a
single receipt or record of acquisition presented.
Curiously, in her complaint dated 17 May 1985, CUBA included "losses of property" as among the damages
resulting from DBP's take-over of the fishpond. Yet, it was only in September 1985 when her son and a caretaker
went to the fishpond and the adjoining house that she came to know of the alleged loss of several articles. Such
claim for "losses of property," having been made before knowledge of the alleged actual loss, was therefore
speculative. The alleged loss could have been a mere afterthought or subterfuge to justify her claim for actual
damages.
With regard to the award of P517,000 representing the value of the alleged 230,000 pieces of bangus which died
when DBP took possession of the fishpond in March 1979, the same was not called for. Such loss was not duly
proved; besides, the claim therefor was delayed unreasonably. From 1979 until after the filing of her complaint in
court in May 1985, CUBA did not bring to the attention of DBP the alleged loss. In fact, in her letter dated 24
October 1979, 19 she declared:
1. That from February to May 1978, I was then seriously ill in Manila and within the same period I
neglected the management and supervision of the cultivation and harvest of the produce of the
aforesaid fishpond thereby resulting to the irreparable loss in the produce of the same in the
amount of about P500,000.00 to my great damage and prejudice due to fraudulent acts of some of
my fishpond workers.
Nowhere in the said letter, which was written seven months after DBP took possession of the fishpond, did CUBA
intimate that upon DBP's take-over there was a total of 230,000 pieces of bangus, but all of which died because of
DBP's representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of sufficient basis.
In view, however, of DBP's act of appropriating CUBA's leasehold rights which was contrary to law and public
policy, as well as its false representation to the then Ministry of Agriculture and Natural Resources that it had
"foreclosed the mortgage," an award of moral damages in the amount of P50,000 is in order conformably with
Article 2219(10), in relation to Article 21, of the Civil Code. Exemplary or corrective damages in the amount of
P25,000 should likewise be awarded by way of example or correction for the public good. 20 There being an award
of exemplary damages, attorney's fees are also recoverable. 21
WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV No. 26535 is hereby
REVERSED, except as to the award of P50,000 as moral damages, which is hereby sustained. The 31 January 1990
Decision of the Regional Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting
aside the finding that condition no. 12 of the deed of assignment constituted pactum commissorium and the award of
actual damages; and by reducing the amounts of moral damages from P100,000 to P50,000; the exemplary damages,
from P50,000 to P25,000; and the attorney's fees, from P100,000 to P20,000. The Development Bank of the

Philippines is hereby ordered to render an accounting of the income derived from the operation of the fishpond in
question.
Let this case be REMANDED to the trial court for the reception of the income statement of DBP, as well as the
statement of the account of Lydia P. Cuba, and for the determination of each party's financial obligation to one
another.
SO ORDERED.

(11) [G. R. No. 126800. November 29, 1999]

NATALIA P. BUSTAMANTE, petitioner vs. SPOUSES RODITO F. ROSEL and NORMA A. ROSEL, respondents.
RESOLUTION
PARDO, J. :
The case before the Court is a petition for review on certiorari [1] to annul the decision of the Court of Appeals,
reversing and setting aside the decision of the Regional Trial Court, [3], dated November 10, 1992, Judge Teodoro
P. Regino. 3 Quezon City, Branch 84, in an action for specific performance with consignation.
[2]

On March 8, 1987, at Quezon City, Norma Rosel entered into a loan agreement with petitioner Natalia
Bustamante and her late husband Ismael C. Bustamante, under the following terms and conditions:
1. That the borrowers are the registered owners of a parcel of land, evidenced by TRANSFER CERTIFICATE OF
TITLE No. 80667, containing an area of FOUR HUNDRED TWENTY THREE (423) SQUARE Meters, more or
less, situated along Congressional Avenue.
2. That the borrowers were desirous to borrow the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS
from the LENDER, for a period of two (2) years, counted from March 1, 1987, with an interest of EIGHTEEN
(18%) PERCENT per annum, and to guaranty the payment thereof, they are putting as a collateral SEVENTY (70)
SQUARE METERS portion, inclusive of the apartment therein, of the aforestated parcel of land, however, in the
event the borrowers fail to pay, the lender has the option to buy or purchase the collateral for a total consideration of
TWO HUNDRED THOUSAND (P200,000.00) PESOS, inclusive of the borrowed amount and interest therein;
3. That the lender do hereby manifest her agreement and conformity to the preceding paragraph, while the
borrowers do hereby confess receipt of the borrowed amount.[4]
When the loan was about to mature on March 1, 1989, respondents proposed to buy at the pre-set price
of P200,000.00, the seventy (70) square meters parcel of land covered by TCT No. 80667, given as collateral to
guarantee payment of the loan. Petitioner, however, refused to sell and requested for extension of time to pay the
loan and offered to sell to respondents another residential lot located at Road 20, Project 8, Quezon City, with the
principal loan plus interest to be used as down payment. Respondents refused to extend the payment of the loan and
to accept the lot in Road 20 as it was occupied by squatters and petitioner and her husband were not the owners
thereof but were mere land developers entitled to subdivision shares or commission if and when they developed at
least one half of the subdivision area.[5]

Hence, on March 1, 1989, petitioner tendered payment of the loan to respondents which the latter refused to
accept, insisting on petitioners signing a prepared deed of absolute sale of the collateral.
On February 28, 1990, respondents filed with the Regional Trial Court, Quezon City, Branch 84, a complaint
for specific performance with consignation against petitioner and her spouse.[6]
Nevertheless, on March 4, 1990, respondents sent a demand letter asking petitioner to sell the collateral
pursuant to the option to buy embodied in the loan agreement.
On the other hand, on March 5, 1990, petitioner filed in the Regional Trial Court, Quezon City a petition for
consignation, and deposited the amount of P153,000.00 with the City Treasurer of Quezon City on August 10, 1990.
[7]

When petitioner refused to sell the collateral and barangay conciliation failed, respondents consigned the
amount of P47,500.00 with the trial court.[8] In arriving at the amount deposited, respondents considered the
principal loan of P100,000.00 and 18% interest per annum thereon, which amounted to P52,500.00.[9] The principal
loan and the interest taken together amounted to P152,500.00, leaving a balance of P 47,500.00.[10]
After due trial, on November 10, 1992, the trial court rendered decision holding:
WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. Denying the plaintiffs prayer for the defendants execution of the Deed of Sale to Convey the collateral in
plaintiffs favor;
2. Ordering the defendants to pay the loan of P100,000.00 with interest thereon at 18% per annum commencing on
March 2, 1989, up to and until August 10, 1990, when defendants deposited the amount with the Office of the City
Treasurer under Official Receipt No. 0116548 (Exhibit 2); and
3. To pay Attorneys Fees in the amount of P 5,000.00, plus costs of suit.
SO ORDERED.
Quezon City, Philippines, November 10, 1992.
TEODORO P. REGINO
Judge[11]
On November 16, 1992, respondents appealed from the decision to the Court of Appeals. [12] On July 8, 1996,
the Court of Appeals rendered decision reversing the ruling of the Regional Trial Court. The dispositive portion of
the Court of Appeals decision reads:
IN VIEW OF THE FOREGOING, the judgment appeal (sic) from is REVERSED and SET ASIDE and a new one
entered in favor of the plaintiffs ordering the defendants to accept the amount of P 47,000.00 deposited with the
Clerk of Court of Regional Trial Court of Quezon City under Official Receipt No. 0719847, and for defendants to
execute the necessary Deed of Sale in favor of the plaintiffs over the 70 SQUARE METER portion and the
apartment standing thereon being occupied by the plaintiffs and covered by TCT No. 80667 within fifteen (15) days

from finality hereof. Defendants, in turn, are allowed to withdraw the amount of P153,000.00 deposited by them
under Official Receipt No. 0116548 of the City Treasurers Office of Quezon City. All other claims and
counterclaims are DISMISSED, for lack of sufficient basis. No costs.
SO ORDERED.[13]
Hence, this petition.[14]

[15]

On January 20, 1997, we required respondents to comment on the petition within ten (10) days from notice.
On February 27, 1997, respondents filed their comment.[16]

On February 9, 1998, we resolved to deny the petition on the ground that there was no reversible error on the
part of respondent court in ordering the execution of the necessary deed of sale in conformity the with the parties
stipulated agreement. The contract is the law between the parties thereof (Syjuco v. Court of Appeals, 172 SCRA
111, 118, citing Phil. American General Insurance v. Mutuc, 61 SCRA 22; Herrera v. Petrophil Corporation, 146
SCRA 360).[17]
On March 17, 1998, petitioner filed with this Court a motion for reconsideration of the denial alleging that the
real intention of the parties to the loan was to put up the collateral as guarantee similar to an equitable mortgage
according to Article 1602 of the Civil Code.[18]
On April 21, 1998, respondents filed an opposition to petitioners motion for reconsideration. They contend
that the agreement between the parties was not a sale with right of re-purchase, but a loan with interest at 18% per
annum for a period of two years and if petitioner fails to pay, the respondent was given the right to purchase the
property or apartment for P200,000.00, which is not contrary to law, morals, good customs, public order or public
policy. [19]
Upon due consideration of petitioners motion, we now resolve to grant the motion for reconsideration.
The questions presented are whether petitioner failed to pay the loan at its maturity date and whether the
stipulation in the loan contract was valid and enforceable.
We rule that petitioner did not fail to pay the loan.
The loan was due for payment on March 1, 1989. On said date, petitioner tendered payment to settle the loan
which respondents refused to accept, insisting that petitioner sell to them the collateral of the loan.
When respondents refused to accept payment, petitioner consigned the amount with the trial court.
We note the eagerness of respondents to acquire the property given as collateral to guarantee the loan. The sale
of the collateral is an obligation with a suspensive condition. [20] It is dependent upon the happening of an event,
without which the obligation to sell does not arise. Since the event did not occur, respondents do not have the right
to demand fulfillment of petitioners obligation, especially where the same would not only be disadvantageous to
petitioner but would also unjustly enrich respondents considering the inadequate consideration (P200,000.00) for a
70 square meter property situated at Congressional Avenue, Quezon City.

Respondents argue that contracts have the force of law between the contracting parties and must be complied
with in good faith.[21] There are, however, certain exceptions to the rule, specifically Article 1306 of the Civil Code,
which provides:
Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may
deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
A scrutiny of the stipulation of the parties reveals a subtle intention of the creditor to acquire the property given
as security for the loan. This is embraced in the concept of pactum commissorium, which is proscribed by law.[22]
The elements of pactum commissorium are as follows: (1) there should be a property mortgaged by way of security
for the payment of the principal obligation, and (2) there should be a stipulation for automatic appropriation by the
creditor of the thing mortgaged in case of non-payment of the principal obligation within the stipulated period. [23]
In Nakpil vs. Intermediate Appellate Court,[24] we said:
The arrangement entered into between the parties, whereby Pulong Maulap was to be considered sold to him
(respondent) xxx in case petitioner fails to reimburse Valdes, must then be construed as tantamount to pactum
commissorium which is expressly prohibited by Art. 2088 of the Civil Code. For, there was to be automatic
appropriation of the property by Valdes in the event of failure of petitioner to pay the value of the advances. Thus,
contrary to respondents manifestation, all the elements of a pactum commissorium were present: there was a
creditor-debtor relationship between the parties; the property was used as security for the loan; and there was
automatic appropriation by respondent of Pulong Maulap in case of default of petitioner.
A significant task in contract interpretation is the ascertainment of the intention of the parties and looking into
the words used by the parties to project that intention. In this case, the intent to appropriate the property given as
collateral in favor of the creditor appears to be evident, for the debtor is obliged to dispose of the collateral at the
pre-agreed consideration amounting to practically the same amount as the loan. In effect, the creditor acquires the
collateral in the event of non payment of the loan. This is within the concept of pactum commissorium. Such
stipulation is void.[25]
All persons in need of money are liable to enter into contractual relationships whatever the condition if only to
alleviate their financial burden albeit temporarily. Hence, courts are duty bound to exercise caution in the
interpretation and resolution of contracts lest the lenders devour the borrowers like vultures do with their prey.
WHEREFORE, we GRANT petitioners motion for reconsideration and SET ASIDE the Courts resolution of
February 9, 1998. We REVERSE the decision of the Court of Appeals in CA-G. R. CV No. 40193. In lieu thereof,
we hereby DISMISS the complaint in Civil Case No. Q-90-4813.
No costs.
SO ORDERED.

(12) G.R. No. 74449 August 20, 1993

IMELDA A. NAKPIL, petitioner

vs.

INTERMEDIATE APPELLATE COURT, CARLOS J. VALDES and CAVAL REALTY CORPORATION,

respondents.
Eliseo B. Alampay for petitioner.
Romero, Lagman, torres, Arrieta & Evangelista Law Offices and Bengozn, Zarraga, Narciso, Cudala, Pecson,
Azcua & Bengzon Law Offices for respondents.
BELLOSILLO, J.:
PULONG MAULAP, a summer residence in Baguio City along historic Moran Street, is the subject of this bitter and
protracted legal battle for ownership between two families earlier associated for years in close, kinship-like
relations.
Pinggoy and Charlie were the best of friends, their closeness dating back to their high school days in La Salle, and
later, at the Philippine Law School. Treating each other more than just brothers, Charlie easily became Pinggoy's
confidant, and later, his lawyer, accountant, auditor, and on some occasions, a business and financial consultant.
Their relationship extended to their families. Pinggoy became the godfather of Charlie's second son, while Charlie
became the godfather of Pinggoy's youngest.
But the close relationship had to end. On 8 July 1973, tragedy struck. While the two families were vacationing at the
beach house of the Valdeses in Bagac, Bataan, Pinggoy drowned. As expected, Charlie went to the succor of
Pinggoy's distressed wife Nena. He acted as the legal counsel and accountant of Nena, who became the
administratrix of her husband's estate.
However, since then things have changed. In fact, towards the end of 1978, the question arose as to who between the
Nakpils and the Valdeses should own Pulong Maulap.
On 21 March 1979, petitioner instituted an action for reconveyance with damages for breach of trust before the
Regional Trial Court of Baguio City against respondents Carlos "Charlie" Valdes and Caval Realty Corporation. She
alleged in her complaint that her husband Jose "Pinggoy" Nakpil prior to his death had requested Valdes to
purchase Pulong Maulap and thereafter register the sale and hold the title thereto in trust for him (Pinggoy Nakpil),
which respondent Valdes did. But after her husband's death, Valdes concealed and suppressed all information
regarding the trust agreement; instead, he transferred Pulong Maulap in the name of respondent Caval Realty
Corporation, which is 99.7% owned by him, in exchange for 1,500 shares of stock.
Respondent Valdes, on the other hand, denied the existence of any trust agreement over Pulong Maulap. He averred
that he bought the summer residence for himself with his own funds and without any participation of the late Nakpil;
neither was it bought in trust for the latter. Valdes claims that he only informed Pinggoy Nakpil of the acquisition
of Pulong Maulap, and Pinggoy merely showed interest in buying the property if he could have the money.
Meanwhile, considering their avowed friendship, he (Valdes) offered the usufruct of the property to the Nakpils who
in turn agreed to shoulder its maintenance expenses, real estate taxes, fire insurance premiums and servicing of
interest on the mortgage obligation constituted on the property.
From the records it appears that the Valdeses bought Pulong Maulap for P150,000.00 with respondent Valdes giving
a downpayment of P50,000.00 and assuming the vendors' mortgage obligation of P100,000.00 with the Philippine
National Bank (PNB), which he reduced to P75,000.00 by paying P25,000.00. On 12 July 1965, a deed of sale was
executed and Transfer Certificate of Title No. 10247 was thereafter issued in the name of Valdes. As agreed, in the
early part of May 1965, even before the execution of the deed of sale in favor of the Valdeses, the Nakpils moved in
and stayed a Pulong Maulap even until after Pinggoy's death.

Meanwhile, in order to facilitate the servicing of the mortgage obligation over Pulong Maulap, the loan was
transferred to the First United Bank (FUB) where Pinggoy Nakpil was then a vice-president. Valdes borrowed
P75,000.00 from FUB with which he paid PNB, and at the same time constituted in favor of FUB a mortgage
overPulong Maulap. He also borrowed P65,000.00 from FUB to finance the repair and renovation of Pulong
Maulap.
Petitioner submits that respondent Valdes had recognized her late husband's ownership of Pulong Maulap on the
basis among others of the following documents: (a) "Exh. "H," a letter dated 28 March 1969 sent by Carlos J. Valdes
& Co., an accounting firm owned by respondent Valdes, to the City Treasurer of Baguio remitting to the latter, "[o]n
behalf of (our) their clients, Mr. Jose Nakpil . . . the following FUB checks for the payment of their 1969 real estate
taxes" on Pulong Maulap; (b) Exh. "J," letter of Valdes to petitioner dated 24 August 1973 with the latter's
handwritten conforme, date and signature
Dear Nena,
At the First United Bank, there are two loans in my name:
PN
#
ERB-893/73
PN # 644/72 for P75,000.00

for

P65,000.00

In addition, there fell due on note #ERB 893/73, P3,976.00 representing interest as of July 22,
1973. On the loan of P75,000.00, there is an interest payable of, P750.00 a month.
Both of these loans, while in my name, were obtained by Pinggoy for his person. . . .
As we agreed, I will take over the total loan of P140,000.00 and pay all of the interests due on the
notes. It is likewise understood between us that you will continue occupying the premises at
Moran St., free of any encumbrance or payment, for 5 years starting August 1, 1973.
It is likewise understood that real property taxes will be paid by us but maintenance expenses shall
be shouldered by you.
As I said, this letter is purely for the record.
Sincerely,
(SGD.) CHARLIE JV,
and, (c) Exh. "L," another letter of Valdes to petitioner dated 17 September 1974
Dear Comadre,
Our records show that the P75,000.00 initially advanced for the Moran property still remains
unpaid.
Under these circumstances, you could add to the present purchase price, P75,000.00 plus interest
therein at 12% for 5 years or:
Present Purchase Price: P255,056.64; Add: Unpaid accountP75,000.00; Interest for 5 years at
12% P45,000.00 = P120,000.00; Total P375,056.64.
Sincerely,

(SGD.) CHARLIE JV.

The records likewise show that on 13 February 1978, Valdes assigned Pulong Maulap to Caval Realty Corporation,
for which Transfer Certificate of Title No. T-28484 was issued on 23 March 1978. Later, after petitioner allegedly
received a P2,000,000.00 offer for Pulong Maulap from Pasay City Mayor Pablo Cuneta, she wrote Valdes
demanding a reconveyance to enable her to effect the sale and reimburse the latter from the proceeds thereof for the
advances he made. On 30 December 1978, Valdes allegedly told petitioner that he could not execute the deed of
conveyance because Pulong Maulap was his and he had no intention of selling it.
On 7 July 1983, the Regional Trial Court 1 rendered a decision holding that a trust relationship existed 2
From the two letters of Valdes, Exhibits "J" and "L", it would appear that while the downpayment
of P50,000.00 and the further sum of P25,000.00 paid to PNB were paid but of his personal funds,
the same was considered by him as a loan to Nakpil; and while the remaining P75,000.00,
representing the balance of the mortgage indebtedness of the Garcias to the PNB, was liquidated
with the proceeds of a loan from FUB, the said loan, although in the name of Valdes, was actually
Nakpil's. In other words, the property was acquired with funds partly loaned by Valdes to Nakpil
and partly borrowed by Nakpil from FUB albeit in Valdes' name.
To the mind of the Court, Exhibit's "J" and "L" are confirmatory of a pre-existing express trust
relationship between Valdes and the late Nakpil over the property in dispute, conformity with the
theory of the plaintiff, whereunder Valdes is the trustee and Nakpil, the trustor and, at the same
time, beneficiary. . . .
Assuming that Exhibits "J" and "L" could no stand as proof of an express trust, still the Court
believes that they could, as they indeed are, proof of an implied trust under Article 1450 of the
Civil Code. . . .
Nevertheless, the trial court dismissed the petition for reconveyance on the ground that petitioner, by conforming to
Exh. "J" and acquiescing with Exh. "L," the very documents she presented to prove the existence of a trust
relationship, has waived her right over Pulong Maulap 3
. . . the Court is inclined to believe that the real agreement between the plaintiff and the defendant
Valdes under Exhibits "J" or "5" and "L" is that Valdes was to take over the two FUB loans of the
plaintiff's late husband in consideration of the plaintiff giving up her claim to the disputed
property, but with a right to continued occupancy for a period of five years, free from any
encumbrance or payment, except maintenance expenses, and under an option yet in favor of the
latter to purchase back the property within the stipulated five years upon the payment of the said
FUB loans, including interests, plus the further sum of P75,000.00 initially advanced by Valdes on
the property, also with interests, or the total amount of P375,056.64.
Under the agreement, the Court is of the view that the plaintiff has waived whatever right she may
have over the property, and she would be in estoppel to revive or assert he same unless she could
prove that she has complied with the terms and the conditions she agreed on. To hold otherwise
would be tantamount to placing Valdes in a very disadvantegious position. . . .
Furthermore, petitioner's letter dated 31 July 1978, the last day of the five-year period stipulated in Exh. "J," sent to
respondent Valdes and his wife, which states
Dear Aida and Charlie,
I hope that when this letter reaches you it finds you and your family in the best of health and
happiness. My children and I are enjoying these too, thank god. We have also managed to adapt

contentedly through all the various pressures and strains we have been subjected to since
Pinggoy's death. It is amazing how we humans can endure so much of these when met with
acceptance and humility. Honestly, I cannot claim credit to the latter virtue. Many times in the
past, during my darkest moments, believe me, humility was farthest from my thoughts.
With regard to our Moran property, a thought occured to me that if I may be able to raise the
amount necessary to pay back your advances for "Pulong Maulap" (this is the name I gave the
property, remember?), would you be willing to reconvey the property to us as soon as I reimburse
your advances?
Of course, as I said this is just an idea because at present, although we are in the final stages of
winding-up the estate, the results are still hazy and uncertain. I understand from Linda Asuncion
that so much will depend on the generosity of my in-laws; hence, so be it!
Thank you again for the help you have given me and my children. For you and your family, I offer
to god all the "Purgatory" He gives me here on earth.
Sincerel
y,
(SGD.)
Nena A.
Nakpil,
was construed by the trial court as "more an expression of her (petitioner's) resignation to her having lost the
property than a demand for reconveyance. 4
Not satisfied with the decision of the trial court, both parties appealed to respondent Intermediate Appellate Court
which on 17 December 1985 5 reversed the trial court and ruled that "[f]rom the foregoing facts, it is quite evident
there was no trust at all. . . . 6 On 21 April 1986, the motion of herein petitioner to reconsider the decision of
respondent appellate court was denied for "absolute lack of merit."
Petitioner, in this petition for review, argues that respondent Intermediate Appelate Court did not only err in holding
that the documents she presented were insufficient to prove the existence of a trust relationship but it also failed to
rule that the trial court's interpretation of petitioner's conformity to Exh. "J" as a waiver was, in essence, a pactum
commissorium, and therefore null and void.
Respondent Valdes, on the other hand, maintains that no direct proof has been presented to sustain that he was
merely instructed by petitioner's late husband to purchase the disputed property, and thereafter register and hold title
thereto in trust for the latter; neither could there have been an implied trust pursuant to Art. 1450 of the Civil
Code 7since this provision refers only to instances where the purchase price of the property sold is paid by the lender
for the benefit of the borrower or buyer of the property. Here, Valdes bought the disputed property using his own
funds. The late Nakpil came into the picture only after the sale to Valdes was consummated, and only as an offeror to
buy the property, not from the former owners, but from Valdes. Furthermore, Valdes contends the Exhs. "J" and "L"
cannot amount to pactum commissorium since the elements thereof, i.e., existence of a creditor-debtor relationship;
the obligation is secured by pledge or mortgage of certain properties over which the debtor has title; and, ownership
of the property passes to the creditor by mere default of debtor, are not present.
Thus, the issues before us are: whether Art. 1450 of the Civil Code applies; and, if it so applies, whether petitioner
can still compel reconveyance of Pulong Maulap from respondent Valdes.
Implied trusts, which may either be resulting or constructive, are those which, without being express, are deducible
from the nature of the transaction as matters of intent, or which are superinduced on the transaction by operation of

law as matter of equity, independently of the particular intention of the parties. 8 Article 1450, which petitioner
invokes in the case at bar, is an illustration of an implied trust which is constructive. 9
Article 1450 presupposes a situation where a person, using his own funds, purchases a certain piece of land in behalf
of another who, in the meantime, may not have sufficient funds to purchase the land. The property is then transferred
in the name of the trustee, the person who paid for the land, until he is reimbursed by the beneficiary, the person for
whom the land is purchased. It is only after the beneficiary reimburses the trustee of the purchase price that the
former can compel conveyance of the purchased property from the latter.
From the evidence adduced, it may be concluded that respondent Valdes, using his own funds, purchased Pulong
Maulap in behalf of the late Nakpil. This is based on the letters to petitioner of Valdes where he categorically
admitted that "[b]oth of these loans, while in my (respondent Valdes) name, were obtained by Pinggoy (the late
Nakpil) for his person, 10 and that the "P75,000.00 initially advanced for the Moran property still remains unpaid. 11
It is evident from these letters that while the balance of P75,000.00 on the mortgage of the vendors with PNB was
liquidated from the proceeds of a loan respondent obtained from FUB, such loan was actually secured by the late
Nakpil by merely using Valdes' name. Such is also the case with respect to another FUB loan amounting to
P65,000.00, the proceeds of which were used to finance the repair and renovation of Pulong Maulap. And, while the
downpayment of P50,000.00 and the partial payment of P25,000.00 to PNB came from the personal funds of Valdes,
he considered them as advances to the late Nakpil. Otherwise, Valdes would never have deemed the amount as
"unpaid" in his letter to petitioner of 17 September 1974.
The letter of Valdes to the City Treasurer of Baguio made while remitting payment of real estate taxes is also
enlightening. It provided therein that the payment being tendered was "[o]n behalf" of the Nakpil's, 12 which is an
express recognition of the implied trust.
Consequently, respondent Valdes is estopped from claiming that he bought Pulong Maulap for himself, and not
merely in trust for the late Nakpil, as this contention is belied by the facts. Hence, we rule that constructive trust
under Art. 1450 of the New Civil Code existed between the parties.
However, petitioner cannot as yet redeem and compel conveyance of the property. For, Valdes must still be
reimbursed for the advances he made on the disputed property, such reimbursement being a conditio sine qua
non for compelling conveyance under Art. 1450.
The period within which to compel conveyance of Pulong Maulap is not imprescriptible. The rule is well-settled
that an action for reconveyance based on an implied or constructive trust prescibes in ten (10) years. 13 But, in the
case before us, petitioner could still compel conveyance of the disputed property from respondent provided the
former reimburses the latter for all his expenses. After all, Valdes never repudiated the constructive trust during the
lifetime of the late Jose Nakpil. On the contrary, he expressly recognized it. The prescriptive period therefore did not
begin to run until after he repudiated the trust. 14 And such repudiation came when Valdes excluded Pulong
Maulap from the list of properties of the late Jose Nakpil submitted to the intestate court 15 in 1973. Even then, the
present action for conveyance was filed in 1979 or well within the ten-years period.
At first blush, it may seem that after the death of Jose Nakpil on 8 July 1973, petitioner ceded ownership of Pulong
Maulap to Valdes by way of dacion en pago 16as shown by her acquiescence to Exh. "J". A careful examination of
said Exh. "J" does not show however that petitioner, as administratrix of the estate of the late Jose Nakpil, released
or surrendered the latter's interest over Pulong Maulap to respondent. Thus, there can be nodacion en pago to speak
of since ownership of the thing delivered was never transferred of the creditor. The trust relations between the
parties was therefore never extinguished. Besides, petitioner could not have waived the interest of her children with
the late Jose M. Nakpil who are her co-heirs to the Nakpil estate.
The fact that there was no transfer of ownership intended by the parties under their arrangement during the five-year
period to pay can further be bolstered by Exh. "I-2", 18an annex to the claim filed against the estate proceedings of
the late Jose Nakpil by his brother, Angel Nakpil, which was prepared by Carlos J. Valdes & Co., the accounting

firm of herein respondent. Exhibit "I-2", which is a list of the application of the proceeds of various FUB loans
contracted as of 31 December 1973 by the late Jose Nakpil, whether in his name or that of others, contains the two
(2) loans contracted in the name of respondent. If ownership of Pulong Maulap was already transferred or ceded to
Valdes, these loans should not have been included in the list.
Indeed, as we view it, what the parties merely agreed to under the arrangement outlined in Exh. "J" was that
respondent Valdes would undertake to "take over the total loan of P140,000.00 and pay all of the interests due on the
notes" while the heirs of the late Jose Nakpil would continue to live in the disputed property for five (5) years
without any remuneration save for regular maintenance expenses. 19This does not mean, however, that if at the end
of the five-year period petitioner failed to reimburse Valdes for his advances, which respondent computed to be
P375,056.64 as of 31 July 1978 per his letter to petitioner of 17 September 1974, Valdes could already automatically
assume ownership of Pulong Maulap. Instead, the remedy of respondents Carlos J. Valdes and Caval Realty
Corporation was to proceed against the estate of the late Jose M. Nakpil and/or the property itself.
The arrangement entered into between the parties, whereby Pulong Maulap was to be "considered sold to him
(respondent) . . . 20 in case petitioner fails to reimburse Valdes, must then be construed as tantamount to apactum
commissorium 21 which
is
expressly
prohibited
by
Art.
2088
of
the
Civil
Code. 22For, there was to be automatic appropriation of the property by Valdes in the event of failure of petitioner to
pay the value of the advances. Thus, contrary to respondent's manifestations, all the elements of a pactum
commissorium were present: there was a creditor-debtor relationship between the parties; the property was used as
security for the loan; and, there was automatic appropriation by respondent of Pulong Maulap in case of default of
petitioner.
In fine, we conclude that there was a constructive trust between the parties under Art. 1450 of the New Civil Code.
Consequently, petitioner may redeem and compel conveyance of the disputed property but only after reimbursing
respondent the sum of P375,056.64, with legal interest from 31 July 1978, the amount advanced by Valdes for the
purchase of the Pulong Maulap.
WHEREFORE, the petition is GRANTED. The assailed decision of the then Intermediate Appellate Court which
affirmed that of the Regional Trial Court is SET ASIDE.
Private respondents Carlos J. Valdes and Caval Realty Corporation are ordered jointly and severally
toRECONVEY Pulong Maulap to petitioner Imelda A. Nakpil and the heirs of the late Jose M. Nakpil upon
reimbursement by the latter of the advances of private respondent Carlos J. Valdes amounting to P375.056.64, with
legal interest from 31 July 1978 until fully paid.
Private respondents are further ordered to pay the costs of suit.
SO ORDERED.

(13)
SPOUSES WILFREDO N. ONG and EDNA SHEILA PAGUIOONG,
Petitioners,

G.R. No. 172592

Present:
QUISUMBING, J.,Chairperson

- versus -

ROBAN LENDING CORPORATION,

Respondent.

,
CARPIO MORALES,
TINGA,
BRION, and
AUSTRIAMARTINEZ,*JJ.

Promulgated:
July 9, 2008
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CARPIO MORALES, J.:

On different dates from July 14, 1999 to March 20, 2000, petitioner-spouses Wilfredo N. Ong and Edna
Sheila Paguio-Ong obtained several loans from Roban Lending Corporation (respondent) in the total amount
of P4,000,000.00. These loans were secured by a real estate mortgage on petitioners parcels of land located in
Binauganan, Tarlac City and covered by TCT No. 297840.[1]
On February 12, 2001, petitioners and respondent executed an Amendment to Amended Real Estate
Mortgage[2] consolidating their loans inclusive of charges thereon which totaled P5,916,117.50. On even date, the
parties executed a Dacion in Payment Agreement [3] wherein petitioners assigned the properties covered by TCT No.
297840 to respondent in settlement of their total obligation, and a Memorandum of Agreement[4] reading:
That the FIRST PARTY [Roban Lending Corporation] and the SECOND PARTY [the
petitioners] agreed to consolidate and restructure all aforementioned loans, which have been all
past due and delinquent since April 19, 2000, and outstanding obligations totaling
P5,916,117.50. The SECOND PARTY hereby sign [sic] another promissory note in the
amount of P5,916,117.50 (a copy of which is hereto attached and forms xxx an integral part of
this document), with a promise to pay the FIRST PARTY in full within one year from the date
of the consolidation and restructuring, otherwise the SECOND PARTY agree to have their
DACION IN PAYMENT agreement, which they have executed and signed today in favor of
the FIRST PARTY be enforced[.][5]

In April 2002 (the day is illegible), petitioners filed a Complaint, [6] docketed as Civil Case No. 9322, before
the Regional Trial Court (RTC) of Tarlac City, for declaration of mortgage contract as abandoned, annulment of
deeds, illegal exaction, unjust enrichment, accounting, and damages, alleging that the Memorandum of Agreement
and the Dacion in Payment executed are void for being pactum commissorium.[7]
Petitioners alleged that the loans extended to them from July 14, 1999 to March 20, 2000 were founded on
several uniform promissory notes, which provided for 3.5% monthly interest rates, 5% penalty per month on the
total amount due and demandable, and a further sum of 25% attorneys fees thereon, [8] and in addition, respondent
exacted certain sums denominated as EVAT/AR.[9] Petitioners decried these additional charges as illegal,

iniquitous, unconscionable, and revolting to the conscience as they hardly allow any borrower any chance of
survival in case of default.[10]
Petitioners further alleged that they had previously made payments on their loan accounts, but because of
the illegal exactions thereon, the total balance appears not to have moved at all, hence, accounting was in order.[11]
Petitioners thus prayed for judgment:
a)
Declaring the Real Estate Mortgage Contract and its amendments x x x
as null and void and without legal force and effect for having been renounced, abandoned, and
given up;
b)
Declaring the Memorandum of Agreement xxx and Dacion in
Payment x x x as null and void for being pactum commissorium;
c)
Declaring the interests, penalties, Evat [sic] and attorneys fees assessed
and loaded into the loan accounts of the plaintiffs with defendant as unjust, iniquitous,
unconscionable and illegal and therefore, stricken out or set aside;
d)
Ordering an accounting on plaintiffs loan accounts to determine the true
and correct balances on their obligation against legal charges only; and
e)

Ordering defendant to [pay] to the plaintiffs: -e.1 Moral damages in an amount not less than P100,000.00 and exemplary
damages of P50,000.00;
e.2 Attorneys fees in the amount of P50,000.00 plus P1,000.00 appearance
fee per hearing; and
e.3 The cost of suit.[12]

as well as other just and equitable reliefs.

In its Answer with Counterclaim,[13] respondent maintained the legality of its transactions with petitioners,
alleging that:
xxxx
If the voluntary execution of the Memorandum of Agreement and Dacion in Payment
Agreement novated the Real Estate Mortgage then the allegation of Pactum Commissorium
has no more legal leg to stand on;

The Dacion in Payment Agreement is lawful and valid as it is recognized x x x under

Art. 1245 of the Civil Code as a special form of payment whereby the debtor-Plaintiffs
alienates their property to the creditor-Defendant in satisfaction of their monetary obligation;
The accumulated interest and other charges which were computed for more than two
(2) years would stand reasonable and valid taking into consideration [that] the principal loan
is P4,000,000 and if indeed it became beyond the Plaintiffs capacity to pay then the fault is
attributed to them and not the Defendant[.][14]

After pre-trial, the initial hearing of the case, originally set on December 11, 2002, was reset several times
due to, among other things, the parties efforts to settle the case amicably.[15]
During the scheduled initial hearing of May 7, 2003, the RTC issued the following order:
Considering that the plaintiff Wilfredo Ong is not around on the ground that he is
in Manila and he is attending to a very sick relative, without objection on the part of the
defendants counsel, the initial hearing of this case is reset to June 18, 2003 at 10:00 oclock in
the morning.
Just in case [plaintiffs counsel] Atty. Concepcion cannot present his witness in the
person of Mr. Wilfredo Ong in the next scheduled hearing, the counsel manifested that he will
submit the case for summary judgment.[16] (Underscoring supplied)
It appears that the June 18, 2003 setting was eventually rescheduled to February 11, 2004 at which both
counsels were present[17] and the RTC issued the following order:
The counsel[s] agreed to reset this case on April 14, 2004, at 10:00 oclock in the
morning. However, the counsels are directed to be ready with their memorand[a] together with
all the exhibits or evidence needed to support their respective positions which should be the
basis for the judgment on the pleadings if the parties fail to settle the case in the next scheduled
setting.
x x x x[18] (Underscoring supplied)

At the scheduled April 14, 2004 hearing, both counsels appeared but only the counsel of respondent filed a
memorandum.[19]
By Decision of April 21, 2004, Branch 64 of the Tarlac City RTC, finding on the basis of the pleadings that
there was no pactum commissorium, dismissed the complaint.[20]
On appeal,[21] the Court of Appeals[22] noted that
x x x [W]hile the trial court in its decision stated that it was rendering judgment on
the pleadings, x x x what it actually rendered was a summary judgment. A judgment on the
pleadings is proper when the answer fails to tender an issue, or otherwise admits the material
allegations of the adverse partys pleading. However, a judgment on the pleadings would not

have been proper in this case as the answer tendered an issue, i.e. the validity of the MOA and
DPA. On the other hand, a summary judgment may be rendered by the court if the pleadings,
supporting affidavits, and other documents show that, except as to the amount of damages,
there is no genuine issue as to any material fact.[23]

Nevertheless, finding the error in nomenclature to be mere semantics with no bearing on the merits of the
case,

[24]

the Court of Appeals upheld the RTC decision that there was no pactum commissorium.[25]
Their Motion for Reconsideration[26] having been denied,[27] petitioners filed the instant Petition for Review

on Certiorari,[28] faulting the Court of Appeals for having committed a clear and reversible error
I.

. . . WHEN IT FAILED AND REFUSED TO APPLY PROCEDURAL

REQUISITES WHICH WOULD WARRANT THE SETTING ASIDE OF THE
SUMMARY JUDGMENT IN VIOLATION OF APPELLANTS RIGHT TO DUE
PROCESS;

II.

. . . WHEN IT FAILED TO CONSIDER THAT TRIAL IN THIS CASE IS

NECESSARY BECAUSE THE FACTS ARE VERY MUCH IN DISPUTE;

III.

. . . WHEN IT FAILED AND REFUSED TO HOLD THAT THE

MEMORANDUM OF AGREEMENT (MOA) AND THE DACION EN PAGO
AGREEMENT (DPA) WERE DESIGNED TO CIRCUMVENT THE LAW
AGAINST PACTUM COMMISSORIUM; and

IV.

. . . WHEN IT FAILED TO CONSIDER THAT THE MEMORANDUM OF

AGREEMENT (MOA) AND THE DACION EN PAGO (DPA) ARE NULL AND
VOID FOR BEING CONTRARY TO LAW AND PUBLIC POLICY.[29]

The petition is meritorious.

Both parties admit the execution and contents of the Memorandum of Agreement and Dacion in
Payment. They differ, however, on whether both contracts constitute pactum commissorium or dacion en pago.
This Court finds that the Memorandum of Agreement and Dacion in Payment constitute pactum
commissorium, which is prohibited under Article 2088 of the Civil Code which provides:
The creditor cannot appropriate the things given by way of pledge or mortgage, or
dispose of them. Any stipulation to the contrary is null and void.

The elements of pactum commissorium, which enables the mortgagee to acquire ownership of the
mortgaged property without the need of any foreclosure proceedings, [30] are: (1) there should be a property
mortgaged by way of security for the payment of the principal obligation, and (2) there should be a stipulation for

automatic appropriation by the creditor of the thing mortgaged in case of non-payment of the principal obligation
within the stipulated period.[31]
In the case at bar, the Memorandum of Agreement and the Dacion in Payment contain no provisions for
foreclosure proceedings nor redemption. Under the Memorandum of Agreement, the failure by the petitioners to
pay their debt within the one-year period gives respondent the right to enforce the Dacion in Payment transferring to
it ownership of the properties covered by TCT No. 297840. Respondent, in effect, automatically acquires ownership
of the properties upon petitioners failure to pay their debt within the stipulated period.
Respondent argues that the law recognizes dacion en pago as a special form of payment whereby the debtor
alienates property to the creditor in satisfaction of a monetary obligation. [32] This does not persuade. In a
true dacion en pago, the assignment of the property extinguishes the monetary debt. [33] In the case at bar, the
alienation of the properties was by way of security, and not by way of satisfying the debt. [34] The Dacion in Payment
did not extinguish petitioners obligation to respondent. On the contrary, under the Memorandum of Agreement
executed on the same day as the Dacion in Payment, petitioners had to execute a promissory note for P5,916,117.50
which they were to pay within one year.[35]
Respondent cites Solid Homes, Inc. v. Court of Appeals [36] where this Court upheld a Memorandum of
Agreement/Dacion en Pago.[37] That case did not involve the issue of pactum commissorium.[38]
That the questioned contracts were freely and voluntarily executed by petitioners and respondent is of no
moment, pactum commissoriumbeing void for being prohibited by law.[39]
Respecting the charges on the loans, courts may reduce interest rates, penalty charges, and attorneys fees if
they are iniquitous or unconscionable.[40]
This Court, based on existing jurisprudence, [41] finds the monthly interest rate of 3.5%, or 42% per annum
unconscionable and thus reduces it to 12% per annum. This Court finds too the penalty fee at the monthly rate of
5% (60% per annum) of the total amount due and demandable principal plus interest, with interest not paid when
due added to and becoming part of the principal and likewise bearing interest at the same rate, compounded
monthly[42] unconscionable and reduces it to a yearly rate of 12% of the amount due, to be computed from the time
of demand.[43] This Court finds the attorneys fees of 25% of the principal, interests and interests thereon, and the
penalty fees unconscionable, and thus reduces the attorneys fees to 25% of the principal amount only.[44]
The prayer for accounting in petitioners complaint requires presentation of evidence, they claiming to have
made partial payments on their loans, vis a vis respondents denial thereof.[45] A remand of the case is thus in order.

Prescinding from the above disquisition, the trial court and the Court of Appeals erred in holding that a
summary judgment is proper. A summary judgment is permitted only if there is no genuine issue as to any material
fact and a moving party is entitled to a judgment as a matter of law. [46] A summary judgment is proper if, while the
pleadings on their face appear to raise issues, the affidavits, depositions, and admissions presented by the moving
party show that such issues are not genuine. [47] A genuine issue, as opposed to a fictitious or contrived one, is an
issue of fact that requires the presentation of evidence. [48] As mentioned above, petitioners prayer for accounting
requires the presentation of evidence on the issue of partial payment.
But neither is a judgment on the pleadings proper. A judgment on the pleadings may be rendered only
when an answer fails to tender an issue or otherwise admits the material allegations of the adverse partys pleadings.
[49]

In the case at bar, respondents Answer with Counterclaim disputed petitioners claims that the Memorandum of

Agreement and Dation in Payment are illegal and that the extra charges on the loans are unconscionable.
[50]

Respondent disputed too petitioners allegation of bad faith.[51]

WHEREFORE, the challenged Court of Appeals Decision is REVERSED and SET ASIDE. The

Memorandum of Agreement and the Dacion in Payment executed by petitioner- spouses Wilfredo N. Ong and Edna
Sheila Paguio-Ong and respondent Roban Lending Corporation onFebruary 12, 2001 are declared NULL AND
VOID for being pactum commissorium.

In line with the foregoing findings, the following terms of the loan contracts between the parties
are MODIFIED as follows:
1.

The monthly interest rate of 3.5%, or 42% per annum, is reduced to 12% per annum;

2.

The monthly penalty fee of 5% of the total amount due and demandable is reduced to 12% per
annum, to be computed from the time of demand; and

3.

The attorneys fees are reduced to 25% of the principal amount only.

Civil Case No. 9322 is REMANDED to the court of origin only for the purpose of receiving evidence on
petitioners prayer for accounting.
SO ORDERED.
(14)
UNION BANK OF THEPHILIPPINES,
Petitioner,

G.R. No. 171569

Present:
- versus-

CORONA, C.J., Chairperson,

LEONARDO-DE CASTRO,
BERSAMIN,

ALAIN JUNIAT, WINWOOD APPAREL,

INC.,
WINGYAN
APPAREL,
INC.,
NONWOVEN FABRIC PHILIPPINES,
Respondents.

DEL CASTILLO, and

VILLARAMA, JR. JJ.
Promulgated:
August 1, 2011

x--------------------------------------------------------x
DECISION
DEL CASTILLO, J.:
To have a binding effect on third parties, a contract of pledge must appear in a public instrument.[1]
This Petition for Review on Certiorari[2] under Rule 45 of the Rules of Court assails the June 23, 2005 Decision[3] and
the February 9, 2006 Resolution[4] of the Court of Appeals (CA) in CA-G.R. CV No. 66392.
Factual Antecedents
Petitioner Union Bank of the Philippines (Union Bank) is a universal
banking corporation organized and existing under Philippine laws.[5]
Respondents Winwood Apparel, Inc. (Winwood) and Wingyan Apparel, Inc. (Wingyan) are domestic corporations
engaged in the business of apparel manufacturing.[6] Both respondent corporations are owned and operated by respondent Alain
Juniat (Juniat), a French national based in Hongkong.[7]Respondent Nonwoven Fabric Philippines, Inc. (Nonwoven) is a
Philippine corporation engaged in the manufacture and sale of various types of nonwoven fabrics.[8]
On September 3, 1992, petitioner filed with the Regional Trial Court (RTC) of Makati, Branch 57, a Complaint[9] with
prayer for the issuance of ex-parte writs of preliminary attachment and replevin against Juniat, Winwood, Wingyan, and the
person in possession of the mortgaged motorized sewing machines and equipment. [10] Petitioner alleged that Juniat, acting for
and in behalf of Winwood and Wingyan, executed a promissory note [11] dated April 11, 1992 and a Chattel Mortgage [12] dated
March 27, 1992 over several motorized sewing machines and other allied equipment to secure their obligation arising from
export bills transactions to petitioner in the amount of P1,131,134.35;[13] that as additional security for the obligation, Juniat
executed a Continuing Surety Agreement[14] dated April 11, 1992 in favor of petitioner;[15] that the loan remains unpaid;[16] and
that the mortgaged motorized sewing machines are insufficient to answer for the obligation.[17]

On September 10, 1992, the RTC issued writs of preliminary attachment and replevin in favor of petitioner.[18] The
writs were served by the Sheriff upon Nonwoven as it was in possession of the motorized sewing machines and equipment.
[19]

Although Nonwoven was not impleaded in the complaint filed by petitioner, the RTC likewise served summons upon

Nonwoven since it was in possession of the motorized sewing machines and equipment.[20]
On September 28, 1992, Nonwoven filed an Answer,[21] contending that the unnotarized Chattel Mortgage executed in
favor of petitioner has no binding effect on Nonwoven and that it has a better title over the motorized sewing machines and
equipment because these were assigned to it by Juniat pursuant to their Agreement[22] dated May 9, 1992.[23] Juniat, Winwood,
and Wingyan, on the other hand, were declared in default for failure to file an answer within the reglementary period.[24]
On November 23, 1992, petitioner filed a Motion to Sell Chattels Seized by Replevin, [25] praying that the motorized
sewing machines and equipment be sold to avoid depreciation and deterioration.[26] However, on May 18, 1993, before the RTC
could act on the motion, petitioner sold the attached properties for the amount of P1,350,000.00.[27]
Nonwowen moved to cite the officers of petitioner in contempt for selling the attached properties, but the RTC denied
the same on the ground that Union Bank acted in good faith.[28]
Ruling of the Regional Trial Court
On May 20, 1999, the RTC of Makati, Branch 145,[29] rendered a Decision[30] in favor of petitioner. The RTC ruled
that both the Chattel Mortgage dated March 27, 1992 in favor of petitioner and the Agreement dated May 9, 1992 in favor of
Nonwoven have no obligatory effect on third persons because these documents were not notarized. [31] However, since the
Chattel Mortgage in favor of petitioner was executed earlier, petitioner has a better right over the motorized sewing machines and
equipment under the doctrine of first in time, stronger in right (prius tempore, potior jure).[32] Thus, the RTC disposed of the
case in this wise:
WHEREFORE, above premises considered, judgment is hereby rendered as follows:
1.] Declaring the [petitioner] UNION BANK OF THE PHILIPPINES, as having the better right
to the goods and/or machineries subject of the Writs of Preliminary Attachment and Replevin issued by this
Court on September 10, 1992.
2.] Declaring the [petitioner] as entitled to the proceeds of the sale of the subject machineries in
the amount of P1,350,000.00;
3.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc. to
be jointly and severally liable to the [petitioner], for the deficiency between the proceeds of the sale of the
machineries subject of this suit [P1,350,000.00] and original claim of the plaintiff [P1,919,907.03], in the
amount ofP569,907.03, with legal interest at the rate of 12% per annum from date of this judgment until fully
paid; and

4.] Declaring [respondents] Allain Juniat, Winwood Apparel, Inc. and Wingyan Apparel, Inc. to
be jointly and severally liable to the [petitioner] for the amount ofP50,000.00 as reasonable attorneys
fees; and
5.] Cost of this suit against the [respondents].
SO ORDERED.[33]
Nonwoven moved for reconsideration[34] but the RTC denied the same in its
Order[35] dated July 14, 1999.
Ruling of the Court of Appeals
On appeal, the CA reversed the ruling of the RTC. The CA ruled that the contract of pledge entered into between
Juniat and Nonwoven is valid and binding, and that the motorized sewing machines and equipment were ceded to Nonwoven by
Juniat by virtue of a dacion en pago.[36] Thus, the CA declared Nonwoven entitled to the proceeds of the sale of the attached
properties.[37] The fallo reads:
WHEREFORE, premises considered, the assailed decision is hereby REVERSED and SET
ASIDE. [Petitioner] Union Bank of the Philippines is herebyDIRECTED to pay Nonwoven Fabric
Philippines, Inc. P1,350,000.00, the amount it holds in escrow, realized from the May 18, 1993 sale of the
machineries to avoid deterioration during pendency of suit. No pronouncement as to costs.
SO ORDERED.[38]

Petitioner sought reconsideration[39] which was denied by the CA in a Resolution[40] dated February 9, 2006.
Issues
Hence, the present recourse where petitioner interposes the following issues:
1.
2.

Whether x x x the Court of Appeals committed serious reversible error in setting aside the Decision of
the trial court holding that Union Bank of the Philippines had a better right over the machineries
seized/levied upon in the proceedings before the trial court and/or the proceeds of the sale thereof;
Whether x x x the Court of Appeals seriously erred in holding that [Nonwoven] has a valid claim over
the subject sewing machines.[41]

Petitioners Arguments
Echoing the reasoning of the RTC, petitioner insists that it has a better title to the proceeds of the sale. [42] Although the
Chattel Mortgage executed in its favor was not notarized, petitioner insists that it is nevertheless valid, and thus, has preference
over a subsequent unnotarized agreement.[43] Petitioner further claims that except for the said agreement, no other evidence was

presented by Nonwoven to show that the motorized sewing machines and equipment were indeed transferred to them by
Juniat/Winwood/Wingyan.[44]
Respondent Nonwovens Arguments
Nonwoven, on the other hand, claims ownership over the proceeds of the sale under Article 1544[45] of the Civil Code on
double sale, which it claims can be applied by analogy in the instant case.[46] Nonwoven contends that since its prior possession
over the motorized sewing machines and equipment was in good faith, it has a better title over the proceeds of the sale.
[47]

Nonwoven likewise maintains that petitioner has no right over the proceeds of the sale because the Chattel Mortgage

executed in its favor was unnotarized, unregistered, and without an affidavit of good faith.[48]
Our Ruling
The petition has merit.
Nonwoven lays claim to the attached motorized sewing machines and equipment pursuant to the Agreement it entered
into with Juniat, to wit:
Hong Kong, 9th May, 1992
With reference to talks held this morning at the Holiday Inn Golden Mile Coffee Shop, among the following
parties:
a.
b.
c.

Redflower Garments Inc. Mrs. Maglipon

Nonwoven Fabrics Phils. Inc. Mr. J. Tan
Winwood Apparel Inc./Wing Yan Apparel, Inc. Mr. A. Juniat, Mrs. S. Juniat

IT WAS AGREED THAT:

a. Settlement of the accounts between Nonwoven Fabrics Phils. Inc. and Winwood Apparel Inc./Wing Yan
Apparel, Inc. should be effected as agreed through partial payment by L/C with the balance to be settled at
a later date for which Winwood Apparel, Inc. agrees to consign 94 sewing machines, 3 snap machines
and 2 boilers, presently in the care of Redflower Garments Inc., to the care of Nonwoven Fabrics
Phils., Inc. as guarantee. Meanwhile, Nonwoven will resume delivery to Winwood/Win Yang as usual.
x x x x[49] (Emphasis supplied.)

It insists that since the attached properties were assigned or ceded to it by Juniat, it has a better right over the proceeds of the sale
of the attached properties than petitioner, whose claim is based on an unnotarized Chattel Mortgage.
We do not agree.

Indeed, the unnotarized Chattel Mortgage executed by Juniat, for and in behalf of Wingyan and Winwood, in favor of
petitioner does not bind Nonwoven.[50] However, it must be pointed out that petitioners primary cause of action is for a sum of
money with prayer for the issuance of ex-parte writs of attachment and replevin against Juniat, Winwood, Wingyan, and the
person in possession of the motorized sewing machines and equipment.[51] Thus, the fact that the Chattel Mortgage executed in
favor of petitioner was not notarized does not affect petitioners cause of action. Petitioner only needed to show that the loan of
Juniat, Wingyan and Winwood remains unpaid and that it is entitled to the issuance of the writs prayed for. Considering that
writs of attachment and replevin were issued by the RTC, [52] Nonwoven had to prove that it has a better right of possession or
ownership over the attached properties. This it failed to do.
A perusal of the Agreement dated May 9, 1992 clearly shows that the sewing machines, snap machines and boilers
were pledged to Nonwoven by Juniat to guarantee his obligation. However, under Article 2096 of the Civil Code, [a] pledge
shall not take effect against third persons if a description of the thing pledged and the date of the pledge do not appear in a public
instrument. Hence, just like the chattel mortgage executed in favor of petitioner, the pledge executed by Juniat in favor of
Nonwoven cannot bind petitioner.
Neither can we sustain the finding of the CA that: The machineries were ceded to THIRD PARTY NONWOVEN by
way of dacion en pago, a contract later entered into by WINWOOD/WINGYAN and THIRD PARTY NONWOVEN.[53] As
aptly pointed out by petitioner, no evidence was presented by Nonwoven to show that the attached properties were subsequently
sold to it by way of a dacion en pago. Also, there is nothing in the Agreement dated May 9, 1992 to indicate that the motorized
sewing machines, snap machines and boilers were ceded to Nonwoven as payment for the Wingyans and Winwoods
obligation. It bears stressing that there can be no transfer of ownership if the delivery of the property to the creditor is by way of
security.[54] In fact, in case of doubt as to whether a transaction is one of pledge or dacion en pago, the presumption is that it is a
pledge as this involves a lesser transmission of rights and interests.[55]
In view of the foregoing, we are constrained to reverse the ruling of the CA. Nonwoven is not entitled to the proceeds
of the sale of the attached properties because it failed to show that it has a better title over the same.
WHEREFORE, the petition is hereby GRANTED. The assailed June 23, 2005 Decision and the February 9, 2006
Resolution of the Court of Appeals in CA-G.R. CV No. 66392 are hereby REVERSED and SET ASIDE. The May 20, 1999
Decision of the Regional Trial Court of Makati, Branch 145, is hereby REINSTATED and AFFIRMED.
SO ORDERED.
(15)
PREMIERE DEVELOPMENT BANK,
Petitioner,

G.R. No. 176246

Present:

- versus -

CENTRAL SURETY & INSURANCE COMPANY,

INC.,
Respondent.

YNARES-SANTIAGO, J.,
Chairperson,
AUSTRIA-MARTINEZ,
CHICO-NAZARIO,
NACHURA, and
LEONARDO-DE CASTRO,* JJ.
Promulgated:
February 13, 2009

x------------------------------------------------------------------------------------x

DECISION
NACHURA, J.:

Before us is a petition for review on certiorari assailing the Court of Appeals (CA) Decision [1] in CA-G.R. CV
No. 85930, which reversed and set aside the decision of the Regional Trial Court (RTC), Branch 132, Makati City in
Civil Case No. 0051306.[2]
On August 20, 1999, respondent Central Surety & Insurance Company (Central Surety) obtained an industrial
loan of P6,000,000.00 from petitioner Premiere Development Bank (Premiere Bank) with a maturity date of August
14, 2000. This P6,000,000.00 loan, evidenced by Promissory Note (PN) No. 714-Y,[3] stipulates payment of 17%
interest per annum payable monthly in arrears and the principal payable on due date. In addition, PN No. 714-Y
provides for a penalty charge of 24% interest per annum based on the unpaid amortization/installment or the entire
unpaid balance of the loan. In all, should Central Surety fail to pay, it would be liable to Premiere Bank for: (1)
unpaid interest up to maturity date; (2) unpaid penalties up to maturity date; and (3) unpaid balance of the principal.
To secure payment of the P6,000,000.00 loan, Central Surety executed in favor of Premiere Bank a Deed of
Assignment with Pledge[4]covering Central Suretys Membership Fee Certificate No. 217 representing its proprietary
share in Wack Wack Golf and Country Club Incorporated (Wack Wack Membership). In both PN No. 714-Y and
Deed of Assignment, Constancio T. Castaeda, Jr. and Engracio T. Castaeda, president and vice-president of
Central Surety, respectively, represented Central Surety and solidarily bound themselves to the payment of the
obligation.

Parenthetically, Central Surety had another commercial loan with Premiere Bank in the amount
of P40,898,000.00 maturing on October 10, 2001. This loan was, likewise, evidenced by a PN numbered 376X[5] and secured by a real estate mortgage over Condominium Certificate of Title No. 8804, Makati City. PN No.
376-X was availed of through a renewal of Central Suretys prior loan, then covered by PN No. 367-Z. [6] As with
the P6,000,000.00 loan and the constituted pledge over the Wack Wack Membership, the P40,898,000.00 loan with
real estate mortgage was transacted by Constancio and Engracio Castaeda on behalf of Central Surety.
It appears that on August 22, 2000, Premiere Bank sent a letter to Central Surety demanding payment of
the P6,000,000.00 loan, to wit:
August 22, 2000
CENTRAL SURETY AND INSURANCE CO.
2nd Floor Universalre Bldg.
No. 106 Paseo de Roxas, Legaspi Village
Makati City
Attention:

Mr. Constancio T. Castaneda, Jr.

President

Mr. Engracio T. Castaneda

Vice President
------------------------------------------------Gentlemen:
This has reference to your overdue loan of P6.0 Million.
We regret to inform you that despite efforts to restructure the same, you have failed up to
this time, to submit the required documents and come up with equity necessary to implement the
restructuring scheme.
In view thereof, we regret that unless the above loan is settled on or before five (5) days
from the date hereof, we shall exercise our option to have the Stock Certificate No. 217 with Serial
No. 1793 duly issued by Wack Wack Golf and Country Club, Inc. transferred in the name of
Premiere Development Bank in accordance with the terms and conditions of the Deed of
Assignment with Pledge executed in favor of Premiere Development Bank.
We shall appreciate your prompt compliance.
Very truly yours,
(sgd.)
IGNACIO R. NEBRIDA, JR.
Senior Asst. Vice President/
Business Development Group - Head[7]

Posthaste, Central Surety responded and sent the following letter dated August 24, 2000:

24 August 2000
Mr. Ignacio R. Nebrida, Jr.
Senior Asst. Vice President/
Business Development Group Head
Premiere Bank
EDSA cor. Magallanes Avenue
Makati City
Sir:
With reference to this 6.0 Million loan account, we have informed Ms. Evangeline Veloira
that we are intending to settle the account by the end of September. As of 14 August 2000 we
made payment to your bank as per receipt attached.
As you may know, present conditions have been difficult for the insurance industry whose
performance is so closely linked to the nations economic prosperity; and we are now asking for
some consideration and leeway on your very stiff and immediate demands.
Kindly extend to us your favorable approval.
Very truly yours,
(sgd.)
ENGRACIO T. CASTANEDA
Vice-President[8]

Accordingly, by September 20, 2000, Central Surety issued Bank of Commerce (BC) Check No. 08114 [9] dated
September 22, 2000 in the amount of P6,000,000.00 and payable to Premiere Bank. The check was received by
Premiere Banks Senior Account Manager, Evangeline Veloira, with the notation full payment of loan-Wack
Wack, as reflected in Central Suretys Disbursement Voucher.[10] However, for undisclosed reasons, Premiere Bank
returned BC Check No. 08114 to Central Surety, and in its letter dated September 28, 2000, demanded from the
latter, not just payment of the P6,000,000.00 loan, but also the P40,898,000.00 loan which was originally covered by
PN No. 367-Z.[11] In the same letter, Premiere Bank threatened foreclosure of the loans respective securities, the
pledge and real estate mortgage, should Central Surety fail to pay these within ten days from date, thus:
28 September 2000
CENTRAL SURETY & INSURANCE CO.
By: Constancio T. Castaeda Jr. President
Engracio T. Castaeda Vice President
2nd Floor Universalre Bldg. No. 106
Paseo de Roxas, Legaspi Village, Makati City
RE:

YOUR COMMERCIAL LOAN OF P40,898,000.00 &

P6,000,000.00 WITH PREMIERE DEVELOPMENT BANK
UNDER ACCOUNT NOS. COM-367-Z AND COM 714-Y

**************************************************
Dear Sirs:
We write on behalf of our client, Premiere Development Bank, in connection with your
above-captioned loan account.
While our client has given you all the concessions, facilities and opportunities to service
your loans, we regret to inform you that you have failed to settle the same despite their past due
status.
In view of the foregoing and to protect the interest of our client, please be advised
that unless the outstanding balances of your loan accounts as of date plus interest, penalties and
other fees and charges are paid in full or necessary arrangements acceptable to our client is made
by you within ten (10) days from date hereof, we shall be constrained much to our regret, to file
foreclosure proceedings against the collateral of the loan mortgaged to the Bank or pursue such
action necessary in the premises.

We trust, therefore, that you will give this matter your preferential attention.
Very truly yours,
(sgd.)
PACITA M. ARAOS[12]
(italics supplied)

The very next day, on September 29, 2000, Central Surety, through its counsel, wrote Premiere Bank and retendered payment of the check:
29 September 2000
PREMIERE BANK
EDSA cor. Magallanes Avenue
Makati City
Attention:

Re

Mr. Ignacio R. Nebrida, Jr.

Senior Asst. Vice President/
Business Development Group Head

: Promissory Note No. 714-Y

Sir:
This is further to our clients letter to you dated 24 August 2000, informing you that it
would settle its account by the end of September 2000.
Please be advised that on 20 September 2000 our client delivered to your bank BC cheque
no. 08114 payable to Premiere Bank in the amount of SIX MILLION PESOS (P6,000,000.00),
which was received by your Senior Account Manager, Ms. Evangeline Veloira. However, for
unexplained reasons the cheque was returned to us.
We are again tendering to you the said cheque of SIX MILLION PESOS
(P6,000,000.00), in payment of PN#714-Y. Please accept the cheque and issue the corresponding
receipt thereof. Should you again refuse to accept this cheque, then I shall advise my client to
deposit it in court for proper disposition.

Thank you.
Very truly yours,
(sgd.)
EPIFANIO E. CUA
Counsel for Central Surety & Insurance Company[13]
(italics supplied)

On even date, a separate letter with another BC Check No. 08115 in the amount of P2,600,000.00 was also tendered
to Premiere Bank as payment for the Spouses Engracio and Lourdes Castaedas (Spouses Castaedas) personal
loan covered by PN No. 717-X and secured by Manila Polo Club, Inc. membership shares.
On October 13, 2000, Premiere Bank responded and signified acceptance of Central Suretys checks under the
following application of payments:
13 October 2000
ATTY. EPIFANIO E. CUA
2/F Universalre Condominium
106 Paseo de Roxas
Legaspi Village, Makati City
Dear Atty. Cua:
Thank you for your two (2) letters both dated 29 September 2000 on behalf of your clients
with the enclosed check nos. 0008114 and 0008115 for the total of P8,600,000.00.
As previously relayed to your client, Premiere Bank cannot accept the two (2) checks as
full settlement of the obligation under Account Nos. PN #714-Y and PN # 717-X, as the amount is
insufficient.
In accordance with the terms and conditions of the Promissory Notes executed by your
clients in favor of Premiere Development Bank, we have applied the two (2) checks to the due
obligations of your clients as follows:
1)
2)
3)
4)

Account No.:
Account No.:
Account No.:
Account No.:

COM 235-Z[14]
IND 717-X
COM 367-Z[15]
COM 714-Y

P1,044,939.45
P1,459,693.15
P4,476,200.18
P1,619,187.22

TOTAL

P8,600,000.00

We are enclosing Xerox copy each of four (4) official receipts covering the above
payments. The originals are with us which your clients or their duly authorized representative
may pick-up anytime during office hours.
We shall appreciate the settlement in full of the accounts of your client or necessary
arrangements for settlement thereof be made as soon as possible to put the accounts on up to-date
status.

Thank you.
Very truly yours,
(sgd.)
MS. ELSA M. SAPAPO
Manager
Loans Accounting and
Control Department[16]

Significantly, the P8,600,000.00 check payments were not applied in full to Central Suretys P6,000,000.00 loan
under PN No. 714-Y and the Spouses Castaedas personal loan of P2,600,000.00 under PN No. 717-X. Premiere
Bank also applied proceeds thereof to a commercial loan under PN No. 235-Z taken out by Casent Realty and
Development Corporation (Casent Realty), [17] and to Central Suretys loan originally covered by PN No. 367-Z,
renewed under PN No. 376-X, maturing on October 20, 2001.
Strongly objecting to Premiere Banks application of payments, Central Suretys counsel wrote Premiere Bank
and reiterated Central Suretys demand for the application of the check payments to the loans covered by PN Nos.
714-X and 714-Y. Additionally, Central Surety asked that the Wack Wack Membership pledge, the security for
the P6,000,000.00 loan, should be released.
In the final exchange of correspondence, Premiere Bank, through its SAVP/Acting Head-LGC, Atty. Pacita
Araos, responded and refused to accede to Central Suretys demand. Premiere Bank insisted that the PN covering
the P6,000,000.00 loan granted Premiere Bank sole discretion respecting: (1) debts to which payments should be
applied in cases of several obligations by an obligor and/or debtor; and (2) the initial application of payments to
other costs, advances, expenses, and past due interest stipulated thereunder.
As a result, Central Surety filed a complaint for damages and release of security collateral, specifically
praying that the court render judgment: (1) declaring Central Suretys P6,000,000.00 loan covered by PN No. 714-Y
as fully paid; (2) ordering Premiere Bank to release to Central Surety its membership certificate of shares in Wack
Wack; (3) ordering Premiere Bank to pay Central Surety compensatory and actual damages, exemplary damages,
attorneys fees, and expenses of litigation; and (4) directing Premiere Bank to pay the cost of suit.
On July 12, 2005, the RTC rendered a decision dismissing Central Suretys complaint and ordering it to pay
Premiere Bank P100,000.00 as attorneys fees. The RTC ruled that the stipulation in the PN granting Premiere Bank
sole discretion in the application of payments, although it partook of a contract of adhesion, was valid. It disposed of
the case, to wit:

Now that the issue as to the validity of the stipulation is settled, [Premiere Bank] was right
in contending that it had the right to apply [Central Suretys] payment to the most onerous
obligation or to the one it sees fit to be paid first from among the several obligations. The
application of the payment to the other two loans of Central Surety namely, account nos. COM
367-Z and IND 714-Y was within [Premiere Banks] valid exercise of its right according the
stipulation. However, [Premiere Bank] erred in applying the payment to the loan of Casent Realty
and to the personal obligation of Mr. Engracio Castaeda despite their connection with one
another. Therefore, [Premiere Bank] cannot apply the payment tendered by Central Surety to the
other two entities capriciously and expressly violating the law and pertinent Central Bank rules
and regulations. Hence, the application of the payment to the loan of Casent Realty (Account
No. COM 236-Z) and to the loan of Mr. Engracio Castaeda (Account No. IND 717-X) is
void and must be annulled.
As to the issue of whether or not [Central Surety] is entitled to the release of Membership
Fee Certificate in the Wack Wack Golf and Country Club, considering now that [Central Surety]
cannot compel [Premiere Bank] to release the subject collateral.
With regard to the issue of damages and attorneys fees, the court finds no basis to grant
[Premiere Banks] prayer for moral and exemplary damages but deems it just and equitable to
award in its favor attorneys fees in the sum of Php 100,000.00.
WHEREFORE, judgment is hereby rendered dismissing the complaint and ordering
[Central Surety] to pay [Premiere Bank] Php 100,000.00 as attorneys fees.[18] (emphasis supplied)

On appeal by Central Surety, the CA reversed and set aside the trial courts ruling. The appellate court held
that with Premiere Banks letter dated August 22, 2000 specifically demanding payment of Central
Suretys P6,000,000.00 loan, it was deemed to have waived the stipulation in PN No. 714-Y granting it the right to
solely determine application of payments, and was, consequently, estopped from enforcing the same. In this regard,
with the holding of full settlement of Central Suretys P6,000,000.00 loan under PN No. 714-Y, the CA ordered the
release of the Wack Wack Membership pledged to Premiere Bank.

Hence, this recourse by Premiere Bank positing the following issues:

WHETHER OR NOT THE HONORABLE COURT OF APPEALS COMMITTED
REVERSIBLE AND PALPABLE ERROR WHEN IT APPLIED THE PRINCIPLE OF WAIVER
AND ESTOPPEL IN THE PRESENT CASE INSOFAR AS THE DEMAND LETTER SENT TO
[CENTRAL SURETY] IS CONCERNED NULLIFYING THE APPLICATION OF PAYMENTS
EXERCISED BY [PREMIERE BANK]
WHETHER OR NOT THE FINDING OF WAIVER AND ESTOPPEL BY THE HONORABLE
COURT OF APPEALS COULD PREVAIL OVER THE CLEAR AND UNMISTAKABLE
STATUTORY AND CONTRACTUAL RIGHT OF [PREMIERE BANK] TO EXERCISE
APPLICATION OF PAYMENT AS WARRANTED BY THE PROMISSORY NOTE
EVEN ASSUMING EX GRATIA THAT THE 6 MILLION SHOULD BE APPLIED TO THE
SUBJECT LOAN OF RESPONDENT, WHETHER OR NOT THE SUBJECT WACK-WACK
SHARES COULD BE RELEASE[D] DESPITE THE CROSS DEFAULT AND CROSS
GUARANTEE PROVISIONS OF THE DEED OF ASSIGNMENT WITH PLEDGE AND
RELEVANT REAL ESTATE MORTGAGE CONTRACTS EXECUTED BY [CENTRAL
SURETY], CASENT REALTY AND SPS. CASTAEDA.
WHETHER OR NOT THERE IS A VALID TENDER OF PAYMENT AND CONSIGNATION
OF THE SUBJECT TWO CHECK PAYMENTS BY [CENTRAL SURETY].
WHETHER OR NOT, AS CORRECTLY FOUND BY THE COURT A QUO [CENTRAL
SURETY] IS ESTOPPED FROM CONTESTING THE STIPULATIONS OR PROVISIONS OF
THE PROMISSORY NOTES AUTHORIZING [PREMIERE BANK] TO MAKE SUCH
APPLICATION OF PAYMENTS
WHETHER OR NOT AS CORRECTLY FOUND BY THE LOWER COURT [PREMIERE
BANK] IS ENTITLED TO AN AWARD OF DAMAGES AS OCCASIONED BY THE
MALICIOUS FILING OF THIS SUIT.[19]

At the outset, we qualify that this case deals only with the extinguishment of Central Suretys P6,000,000.00
loan secured by the Wack Wack Membership pledge. We do not dispose herein the matter of the P2,600,000.00 loan
covered by PN No. 717-X subject of BC Check No. 08115.
We note that both lower courts were one in annulling Premiere Banks application of payments to the loans of
Casent Realty and the Spouses Castaeda under PN Nos. 235-Z and 717-X, respectively, thus:
It bears stressing that the parties to PN No. 714-Y secured by Wack Wack membership
certificate are only Central Surety, as debtor and [Premiere Bank], as creditor. Thus, when the
questioned stipulation speaks of several obligations, it only refers to the obligations of [Central
Surety] and nobody else.
[I]t is plain that [Central Surety] has only two loan obligations, namely: 1.) Account No.
714-Y secured by Wack Wack membership certificate; and 2.) Account No. 367-Z secured
by Condominium Certificate of Title. The two loans are secured by separate and different
collaterals. The collateral for Account No. 714-Y, which is the Wack Wack membership certificate
answers only for that account and nothing else. The collateral for Account No. 367-Z, which is the
Condominium Certificate of Title, is answerable only for the said account.

The fact that the loan obligations of [Central Surety] are secured by separate and distinct
collateral simply shows that each collateral secures only a particular loan obligation and does not
cover loans including future loans or advancements.
As regards the loan covered by Account No. 235-Z, this was obtained by Casent Realty,
not by [Central Surety]. Although Mr. Engracio Castaeda is the vice-president of [Central
Surety], and president of Casent Realty, it does not follow that the two corporations are one and
the same. Both are invested by law with a personality separate and distinct from each other.
Thus, [Central Surety] cannot be held liable for the obligation of Casent Realty, absent
evidence showing that the latter is being used to defeat public convenience, justify wrong, protect
fraud or defend crime; or used as a shield to confuse the legitimate issues, or when it is merely an
adjunct, a business conduit or an alter ego of [Central Surety] or of another corporation; or used as
a cloak to cover for fraud or illegality, or to work injustice, or where necessary to achieve equity or
for the protection of creditors.
Likewise, [Central Surety] cannot be held accountable for the loan obligation of spouses
Castaeda under Account No. IND 717-X. Settled is the rule that a corporation is invested by law
with a personality separate and distinct from those of the persons composing it. The corporate debt
or credit is not the debt or credit of the stockholder nor is the stockholders debt or credit that of
the corporation.
The mere fact that a person is a president of the corporation does not render the property he
owns or possesses the property of the corporation, since that president, as an individual, and the
corporation are separate entities.[20]

In fact, Premiere Bank did not appeal or question the RTCs ruling specifically annulling the application of
the P6,000,000.00 check payment to the respective loans of Casent Realty and the Spouses Castaeda. Undoubtedly,
Premiere Bank cannot be allowed, through this petition, to surreptitiously include the validity of its application of
payments concerning the loans to Casent Realty and the Spouses Castaeda.
Thus, we sift through the issues posited by Premiere Bank and restate the same, to wit:
1. Whether Premiere Bank waived its right of application of payments on
Central Surety.
2. In the alternative, whether the P6,000,000.00 loan of Central Surety
by the encashment of BC Check No. 08114.

the loans of
was extinguished

3. Corollarily, whether the release of the Wack Wack Membership pledge is in order.

The Petition is meritorious.

We shall take the first and the second issues in tandem.

Creditor given right

to apply payments

At the hub of the controversy is the statutory provision on application of payments, specifically Article 1252
of the Civil Code, viz.:
Article 1252. He who has various debts of the same kind in favor of one and the same
creditor, may declare at the time of making the payment, to which of them the same must be
applied. Unless the parties so stipulate, or when the application of payment is made by the party
for whose benefit the term has been constituted, application shall not be made as to debts which
are not yet due.
If the debtor accepts from the creditor a receipt in which an application of the payment is
made, the former cannot complain of the same, unless there is a cause for invalidating the contract.

The debtors right to apply payment is not mandatory. This is clear from the use of the word may rather than the
word shall in the provision which reads: He who has various debts of the same kind in favor of one and the same
creditor, may declare at the time of making the payment, to which of the same must be applied.
Indeed, the debtors right to apply payment has been considered merely directory, and not mandatory,
[21]

following this Courts earlier pronouncement that the ordinary acceptation of the terms may and shall may be

resorted to as guides in ascertaining the mandatory or directory character of statutory provisions.[22]

Article 1252 gives the right to the debtor to choose to which of several obligations to apply a particular
payment that he tenders to the creditor. But likewise granted in the same provision is the right of the creditor to
apply such payment in case the debtor fails to direct its application. This is obvious in Art. 1252, par. 2, viz.: If the
debtor accepts from the creditor a receipt in which an application of payment is made, the former cannot complain
of the same. It is the directory nature of this right and the subsidiary right of the creditor to apply payments when
the debtor does not elect to do so that make this right, like any other right, waivable.
Rights may be waived, unless the waiver is contrary to law, public order, public policy, morals or good
customs, or prejudicial to a third person with a right recognized by law.[23]
A debtor, in making a voluntary payment, may at the time of payment direct an application of it to whatever
account he chooses, unless he has assigned or waived that right. If the debtor does not do so, the right passes to the
creditor, who may make such application as he chooses. But if neither party has exercised its option, the court will
apply the payment according to the justice and equity of the case, taking into consideration all its circumstances. [24]

Verily, the debtors right to apply payment can be waived and even granted to the creditor if the debtor so
agrees.[25] This was explained by former Senator Arturo M. Tolentino, an acknowledged expert on the Civil Code,
thus:
The following are some limitations on the right of the debtor to apply his payment:
xxxx
5) when there is an agreement as to the debts which are to be paid first, the debtor cannot
vary this agreement.[26]

Relevantly, in a Decision of the Supreme Court of Kansas in a case with parallel facts, it was held that:
The debtor requested Planters apply the payments to the 1981 loan rather than to the 1978
loan. Planters refused. Planters notes it was expressly provided in the security agreement on the
1981 loan that Planters had a legal right to direct application of payments in its sole
discretion. Appellees do not refute this. Hence, the debtors had no right by agreement to direct
the payments. This also precludes the application of the U.S. Rule, which applies only in absence
of a statute or specific agreement. Thus the trial court erred. Planters was entitled to apply the
Hi-Plains payments as it saw fit.[27]

In the case at bench, the records show that Premiere Bank and Central Surety entered into several contracts
of loan, securities by way of pledges, and suretyship agreements. In at least two (2) promissory notes between the
parties, Promissory Note No. 714-Y and Promissory Note No. 376-X, Central Surety expressly agreed to grant
Premiere Bank the authority to apply any and all of Central Suretys payments, thus:
In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere
Bank] to apply without notice and in any manner it sees fit, any or all of my/our deposits and
payments to any of my/our obligations whether due or not. Any such application of deposits or
payments shall be conclusive and binding upon us.

This proviso is representative of all the other Promissory Notes involved in this case. It is in the exercise of this
express authority under the Promissory Notes, and following Bangko Sentral ng Pilipinas Regulations, that Premiere
Bank applied payments made by Central Surety, as it deemed fit, to the several debts of the latter.
All debts were due; There was no
waiver on the part of petitioner

Undoubtedly, at the time of conflict between the parties material to this case, Promissory Note No. 714-Y
dated August 20, 1999, in the amount of P6,000,000.00 and secured by the pledge of the Wack Wack Membership,
was past the due and demand stage. By its terms, Premiere Bank was entitled to declare said Note and all sums

payable thereunder immediately due and payable, without need of presentment, demand, protest or notice of any
kind. The subsequent demand made by Premiere Bank was, therefore, merely a superfluity, which cannot be
equated with a waiver of the right to demand payment of all the matured obligations of Central Surety to Premiere
Bank.
Moreover, this Court may take judicial notice that the standard practice in commercial transactions to send
demand letters has become part and parcel of every collection effort, especially in light of the legal requirement that
demand is a prerequisite before default may set in, subject to certain well-known exceptions, including the situation
where the law or the obligations expressly declare it unnecessary.[28]
Neither can it be said that Premiere Bank waived its right to apply payments when it specifically demanded
payment of the P6,000,000.00 loan under Promissory Note No. 714-Y. It is an elementary rule that the existence of a
waiver must be positively demonstrated since a waiver by implication is not normally countenanced. The norm is
that a waiver must not only be voluntary, but must have been made knowingly, intelligently, and with sufficient
awareness of the relevant circumstances and likely consequences. There must be persuasive evidence to show an
actual intention to relinquish the right. Mere silence on the part of the holder of the right should not be construed as
a surrender thereof; the courts must indulge every reasonable presumption against the existence and validity of such
waiver.[29]
Besides, in this case, any inference of a waiver of Premiere Banks, as creditor, right to apply payments is
eschewed by the express provision of the Promissory Note that: no failure on the part of [Premiere Bank] to
exercise, and no delay in exercising any right hereunder, shall operate as a waiver thereof.
Thus, we find it unnecessary to rule on the applicability of the equitable principle of waiver that the Court
of Appeals ascribed to the demand made by Premiere Bank upon Central Surety to pay the amount
of P6,000,000.00, in the face of both the express provisions of the law and the agreements entered into by the
parties. After all, a diligent creditor should not needlessly be interfered with in the prosecution of his legal remedies.
[30]

When Central Surety directed the application of its payment to a specific debt, it knew it had another debt
with Premiere Bank, that covered by Promissory Note 367-Z, which had been renewed under Promissory Note 376X, in the amount of P40.898 Million. Central Surety is aware that Promissory Note 367-Z (or 376-X) contains the
same provision as in Promissory Note No 714-Y which grants the Premiere Bank authority to apply payments made
by Central Surety, viz.:
In case I/We have several obligations with [Premiere Bank], I/We hereby empower [Premiere
Bank] to apply without notice and in any manner it sees fit, any or all of my/our deposits and

payments to any of my/our obligations whether due or not. Any such application of deposits or
payments shall be conclusive and binding upon us.[31]

Obviously, Central Surety is also cognizant that Promissory Note 367-Z contains the proviso that:
the bank shall be entitled to declare this Note and all sums payable hereunder to be immediately
due and payable, without need of presentment, demand, protest or notice of nay kind, all of which
I/We hereby expressly waive, upon occurrence of any of the following events: x x x (ii) My/Our
failure to pay anyamortization or installment due hereunder; (iii) My/Our failure to pay money
due under any other document or agreement evidencing obligations for borrowed money x x
x.[32]

by virtue of which, it follows that the obligation under Promissory Note 367-Z had become past due and
demandable, with further notice expressly waived, when Central Surety defaulted on its obligations under
Promissory Note No. 714-Y.
Mendoza v. Court of Appeals[33] forecloses any doubt that an acceleration clause is valid and produces legal
effects. In fact, in Selegna Management and Development Corporation v. United Coconut Planters Bank, [34] we held
that:
Considering that the contract is the law between the parties, respondent is justified in invoking the
acceleration clause declaring the entire obligation immediately due and payable. That clause
obliged petitioners to pay the entire loan on January 29, 1999, the date fixed by respondent.

It is worth noting that after the delayed payment of P6,000,000.00 was tendered by Central Surety,
Premiere Bank returned the amount as insufficient, ostensibly because there was, at least, another account that was
likewise due. Obviously, in its demand of 28 September 2000, petitioner sought payment, not just of
the P6,000,000.00, but of all these past due accounts. There is extant testimony to support this claim, as the
transcript of stenographic notes on the testimony of Atty. Araos reveals:
Atty. Opinion: Q. But you accepted this payment of Six Million (P6,000,000.00) later on when
together with this was paid another check for 1.8 Million?
Witness: A. We accepted.
Atty. Opinion: Q. And you applied this to four (4) other accounts three (3) other accounts or to
four (4) accounts mentioned in Exhibit J. Is that correct?
Atty. Tagalog: We can stipulate on that. Your Honor.
Court: This was stipulated?
Atty. Tagalog: Yes, Your Honor. In fact, there is already stipulation that we confirm that those are
the applications of payments made by the defendant Bank on those loan accounts.

Atty. Opinion: Q. Were these accounts due already when you made this application, distribution of
payments?
Witness: A. Yes sir.[35]

Conversely, in its evidence-in-chief, Central Surety did not present any witness to testify on the payment of its
obligations. In fact, the record shows that after marking its evidence, Central Surety proceeded to offer its evidence
immediately. Only on the rebuttal stage did Central Surety present a witness; but even then, no evidence was
adduced of payment of any other obligation. In this light, the Court is constrained to rule that all obligations of
Central Surety to Premiere Bank were due; and thus, the application of payments was warranted.
Being in receipt of amounts tendered by Central Surety, which were insufficient to cover its more onerous
obligations, Premiere Bank cannot be faulted for exercising the authority granted to it under the Promissory Notes,
and applying payment to the obligations as it deemed fit. Subject to the caveat that our ruling herein shall be limited
only to the transactions entered into by the parties to this case, the Court will not disturb the finding of the lower
court that Premiere Bank rightly applied the payments that Central Surety had tendered. Corollary thereto, and upon
the second issue, the tender of the amount of P6,000,000.00 by Central Surety, and the encashment of BC Check No.
08114 did not totally extinguish the debt covered by PN No. 714-Y.
Release of the pledged
Wack Wack Membership
Contract of Adhesion

To the extent that the subject promissory notes were prepared by the Premiere Bank and presented to
Central Surety for signature, these agreements were, indeed, contracts of adhesion. But contracts of adhesion are not
invalid per se. Contracts of adhesion, where one party imposes a ready-made form of contract on the other, are not
entirely prohibited. The one who adheres to the contract is, in reality, free to reject it entirely; if he adheres, he gives
his consent.
In interpreting such contracts, however, courts are expected to observe greater vigilance in order to shield
the unwary or weaker party from deceptive schemes contained in ready-made covenants. [36] Thus, Article 24 of the
Civil Code pertinently states:
In all contractual, property or other relations, when one of the parties is at a disadvantage on
account of his moral dependence, ignorance, indigence, mental weakness, tender age or other
handicap, the courts must be vigilant for his protection.

But in this case, Central Surety does not appear so weak as to be placed at a distinct disadvantage vis--vis the
bank. As found by the lower court:
Considering that [Central Surety] is a known business entity, the [Premiere Bank] was right in
assuming that the [Central Surety] could not have been cheated or misled in agreeing thereto, it
could have negotiated with the bank on a more favorable term considering that it has already
established a certain reputation with the [Premiere Bank] as evidenced by its numerous
transactions. It is therefore absurd that an established company such as the [Central Surety] has no
knowledge of the law regarding bank practice in loan transactions.
The Dragnet Clause.

The factual circumstances of this case showing the chain of transactions and long-standing relationship
between Premiere Bank and Central Surety militate against the latters prayer in its complaint for the release of the
Wack Wack Membership, the security attached to Promissory Note 714-Y.
A tally of the facts shows the following transactions between Premiere Bank and Central Surety:

Date

Instrument

Amount
covered

August 20, 1999

PN 714-Y

P6M

August 29, 1999

Deed
of
Assignment
with Pledge

P 15 M

Stipulation

As security for PN 714-Y

and/or such Promissory Note/s
which the ASSIGNOR /
PLEDGOR shall hereafter
execute in favor of the
ASSIGNEE/PLEDGEE

From these transactions and the proviso in the Deed of Assignment with Pledge, it is clear that the security,
which peculiarly specified an amount at P15,000,000.00 (notably greater than the amount of the promissory note it
secured), was intended to guarantee not just the obligation under PN 714-Y, but also future advances. Thus, the said
deed is explicit:
As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the
ASSIGNEE/PLEDGEE in the amount of FIFTEEN MILLION PESOS (15,000,000.00) Philippine
Currency in accordance with the Promissory Note attached hereto and made an integral part hereof
as Annex A and/or such Promissory Note/s which the ASSIGNOR/PLEDGOR shall hereafter
execute in favor of the ASSIGNEE/PLEDGEE, the ASSIGNOR/PLEDGOR hereby transfers,
assigns, conveys, endorses, encumbers and delivers by way of first pledge unto the
ASSIGNEE/PLEDGEE, its successors and assigns, that certain Membership fee Certificate Share
in Wack Wack Golf and Country Club Incorporate covered by Stock Certificate No. 217 with
Serial No. 1793 duly issue by Wack Wack Golf and Country Club Incorporated on August 27,
1996 in the name of the ASSIGNOR. (Emphasis made in the Petition.)

Then, a Continuing Guaranty/Comprehensive Surety Agreement was later executed by Central Surety as
follows:

Date

Instrument

Amount

Stipulation

Notarized, Sept.
22, 1999

Continuing
Guaranty/Comprehensive
Surety Agreement

P40,898,000.00

In consideration of the
loan and/or any credit
accommodation which
you (petitioner) have
extended and/or will
extend to Central
Surety and Insurance
Co.

And on October 10, 2000, Promissory Note 376-X was entered into, a renewal of the prior Promissory Note
367-Z, in the amount ofP40,898,000.00. In all, the transactions that transpired between Premiere Bank and Central
Surety manifest themselves, thusly:
Date

Instrument

Amount covered

Stipulation

August 20, 1999

PN 714-Y

P6M

August 29, 1999

Deed of Assignment with

Pledge

P 15 M

As security for PN 714-Y

and/or such Promissory
Note/s
which
the
ASSIGNOR / PLEDGOR
shall hereafter execute in
favor
of
the
ASSIGNEE/PLEDGEE

Notarized,
Sept. 22, 1999

Continuing
Guaranty/Comprehensiv
e Surety Agreement

P40,898,000.00

In consideration of the loan

and/or
any
credit
accommodation which you
(petitioner) have extended
and/or will extend to Central
Surety and Insurance Co.

October 10, 2000

Promissory Note 376-X

(PN 367-Z)

P40,898,000.00

From the foregoing, it is more than apparent that when, on August 29, 1999, the parties executed the Deed
of Assignment with Pledge (of the Wack Wack Membership), to serve as security for an obligation in the amount
of P15,000,000.00 (when the actual loan covered by PN No. 714-Y was only P6,000,000.00), the intent of the
parties was for the Wack Wack Membership to serve as security also for future advancements. The subsequent loan
was nothing more than a fulfillment of the intention of the parties. Of course, because the subsequent loan was for a
much greater amount (P40,898,000.00), it became necessary to put up another security, in addition to the Wack
Wack Membership. Thus, the subsequent surety agreement and the specific security for PN No. 367-X were, like
the Wack Wack Membership, meant to secure the ballooning debt of the Central Surety.

The above-quoted provision in the Deed of Assignment, also known as the dragnet clause in American
jurisprudence, would subsume all debts of respondent of past and future origins. It is a valid and legal undertaking,
and the amounts specified as consideration in the contracts do not limit the amount for which the pledge or mortgage
stands as security, if from the four corners of the instrument, the intent to secure future and other indebtedness can
be gathered. A pledge or mortgage given to secure future advancements is a continuing security and is not
discharged by the repayment of the amount named in the mortgage until the full amount of all advancements shall
have been paid.[37]
Our ruling in Prudential Bank v. Alviar[38] is instructive:
A blanket mortgage clause, also known as a dragnet clause in American jurisprudence,
is one which is specifically phrased to subsume all debts of past or future origins. Such clauses
are carefully scrutinized and strictly construed. Mortgages of this character enable the parties to
provide continuous dealings, the nature or extent of which may not be known or anticipated at the
time, and they avoid the expense and inconvenience of executing a new security on each new
transaction. A dragnet clause operates as a convenience and accommodation to the borrowers
as it makes available additional funds without their having to execute additional security
documents, thereby saving time, travel, loan closing costs, costs of extra legal services, recording
fees, et cetera. Indeed, it has been settled in a long line of decisions that mortgages given to
secure future advancements are valid and legal contracts, and the amounts named as consideration
in said contracts 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.
The blanket mortgage clause in the instant case states:
That for and in consideration of certain loans, overdraft and other credit
accommodations obtained from the Mortgagee by the Mortgagor and/or
________________ hereinafter referred to, irrespective of number, as DEBTOR,
and to secure the payment of the same andthose that may hereafter be
obtained, the principal or all of which is hereby fixed at Two Hundred Fifty
Thousand (P250,000.00) Pesos, Philippine Currency, as well as those that the
Mortgagee may extend to the Mortgagor and/or DEBTOR, including interest
and expenses or any other obligation owing to the Mortgagee, whether direct or
indirect, principal or secondary as appears in the accounts, books and records of
the Mortgagee, the Mortgagor does hereby transfer and convey by way of
mortgage unto the Mortgagee, its successors or assigns, the parcels of land
which are described in the list inserted on the back of this document, and/or
appended hereto, together with all the buildings and improvements now existing
or which may hereafter be erected or constructed thereon, of which the
Mortgagor declares that he/it is the absolute owner free from all liens and
incumbrances. . . .
xxxx
In the case at bar, the subsequent loans obtained by respondents were secured by other
securities, thus: PN BD#76/C-345, executed by Don Alviar was secured by a hold-out on his
foreign currency savings account, while PN BD#76/C-430, executed by respondents for Donalco
Trading, Inc., was secured by Clean-Phase out TOD CA 3923 and eventually by a deed of
assignment on two promissory notes executed by Bancom Realty Corporation with Deed of

Guarantee in favor of A.U. Valencia and Co., and by a chattel mortgage on various heavy and
transportation equipment. The matter of PN BD#76/C-430 has already been discussed. Thus, the
critical issue is whether the blanket mortgage clause applies even to subsequent advancements
for which other securities were intended, or particularly, to PN BD#76/C-345.
Under American jurisprudence, two schools of thought have emerged on this question.
One school advocates that a dragnet clause so worded as to be broad enough to cover all other
debts in addition to the one specifically secured will be construed to cover a different debt,
although such other debt is secured by another mortgage. The contrary thinking maintains that a
mortgage with such a clause will not secure a note that expresses on its face that it is otherwise
secured as to its entirety, at least to anything other than a deficiency after exhausting the security
specified therein, such deficiency being an indebtedness within the meaning of the mortgage, in
the absence of a special contract excluding it from the arrangement.
The latter school represents the better position. The parties having conformed to the blanket
mortgage clause or dragnet clause, it is reasonable to conclude that they also agreed to an
implied understanding that subsequent loans need not be secured by other securities, as the
subsequent loans will be secured by the first mortgage. In other words, the sufficiency of the first
security is a corollary component of the dragnet clause. But of course, there is no prohibition,
as in the mortgage contract in issue, against contractually requiring other securities for the
subsequent loans. Thus, when the mortgagor takes another loan for which another security was
given it could not be inferred that such loan was made in reliance solely on the original security
with the dragnet clause, but rather, on the new security given. This is the reliance on the
security test.
Hence, based on the reliance on the security test, the California court in the cited case made
an inquiry whether the second loan was made in reliance on the original security containing a
dragnet clause. Accordingly, finding a different security was taken for the second loan no intent
that the parties relied on the security of the first loan could be inferred, so it was held. The
rationale involved, the court said, was that the dragnet clause in the first security instrument
constituted a continuing offer by the borrower to secure further loans under the security of the first
security instrument, and that when the lender accepted a different security he did not accept the
offer.
In another case, it was held that a mortgage with a dragnet clause is an offer by the
mortgagor to the bank to provide the security of the mortgage for advances of and when they were
made. Thus, it was concluded that the offer was not accepted by the bank when a subsequent
advance was made because (1) the second note was secured by a chattel mortgage on certain
vehicles, and the clause therein stated that the note was secured by such chattel mortgage; (2) there
was no reference in the second note or chattel mortgage indicating a connection between the real
estate mortgage and the advance; (3) the mortgagor signed the real estate mortgage by her name
alone, whereas the second note and chattel mortgage were signed by the mortgagor doing business
under an assumed name; and (4) there was no allegation by the bank, and apparently no proof, that
it relied on the security of the real estate mortgage in making the advance.
Indeed, in some instances, it has been held that in the absence of clear, supportive
evidence of a contrary intention, a mortgage containing a dragnet clause will not be extended to
cover future advances unless the document evidencing the subsequent advance refers to the
mortgage as providing security therefor.
It was therefore improper for petitioner in this case to seek foreclosure of the mortgaged
property because of non-payment of all the three promissory notes. While the existence and
validity of the dragnet clause cannot be denied, there is a need to respect the existence of the
other security given for PN BD#76/C-345. The foreclosure of the mortgaged property should only
be for the P250,000.00 loan covered by PN BD#75/C-252, and for any amount not covered by the
security for the second promissory note. As held in one case, where deeds absolute in form were

executed to secure any and all kinds of indebtedness that might subsequently become due, a
balance due on a note, after exhausting the special security given for the payment of such note,
was in the absence of a special agreement to the contrary, within the protection of the mortgage,
notwithstanding the giving of the special security. This is recognition that while the dragnet
clause subsists, the security specifically executed for subsequent loans must first be exhausted
before the mortgaged property can be resorted to.

The security clause involved in the case at bar shows that, by its terms:
As security for the payment of loan obtained by the ASSIGNOR/PLEDGOR from the
ASSIGNEE/PLEDGEE in the amount of FIFTEEN MILLION PESOS (15,000,000.00) Philippine
Currency in accordance with the Promissory Note attached hereto and made an integral part hereof
as Annex A and/or such Promissory Note/s which the ASSIGNOR/PLEDGOR shall hereafter
execute in favor of the ASSIGNEE/PLEDGEE, the ASSIGNOR/ PLEDGOR hereby transfers,
assigns, conveys, endorses, encumbers and delivers by way of first pledge unto the
ASSIGNEE/PLEDGEE, its successors and assigns, that certain Membership fee Certificate Share
in Wack Wack Golf and Country Club Incorporated covered by Stock Certificate No. 217 with
Serial No. 1793 duly issue by Wack Wack Golf and Country Club Incorporated on August 27,
1996 in the name of the ASSIGNOR.
it is comparable with the security clause in the case of Prudential, viz.:
That for and in consideration of certain loans, overdraft and other credit accommodations obtained
from the Mortgagee by the Mortgagor and/or ________________ hereinafter referred to,
irrespective of number, as DEBTOR, and to secure the payment of the same and those that may
hereafter be obtained, the principal or all of which is hereby fixed at Two Hundred Fifty Thousand
(P250,000.00) Pesos, Philippine Currency, as well as those that the Mortgagee may extend to the
Mortgagor and/or DEBTOR, including interest and expenses or any other obligation owing to the
Mortgagee, whether direct or indirect, principal or secondary as appears in the accounts, books
and records of the Mortgagee, the Mortgagor does hereby transfer and convey by way of
mortgage unto the Mortgagee, its successors or assigns, the parcels of land which are described in
the list inserted on the back of this document, and/or appended hereto, together with all the
buildings and improvements now existing or which may hereafter be erected or constructed
thereon, of which the Mortgagor declares that he/it is the absolute owner free from all liens and
incumbrances. . . .

and there is no substantive difference between the terms utilized in both clauses securing future advances.
To recall, the critical issue resolved in Prudential was whether the blanket mortgage clause applies even
to subsequent advancements for which other securities were intended. We then declared that the special security for
subsequent loans must first be exhausted in a situation where the creditor desires to foreclose on the subsequent
loans that are due. However, the dragnet clause allows the creditor to hold on to the first security in case of
deficiency after foreclosure on the special security for the subsequent loans.

In Prudential, we disallowed the petitioners attempt at multiple foreclosures, as it foreclosed on all of the
mortgaged properties serving as individual securities for each of the three loans. This Court then laid down the rule,
thus:
where deeds absolute in form were executed to secure any and all kinds of indebtedness that might
subsequently become due, a balance due on a note, after exhausting the special security given for
the payment of such note, was, in the absence of a special agreement to the contrary, within the
protection of the mortgage, notwithstanding the giving of the special security. This is recognition
that while the dragnet clause subsists, the security specifically executed for subsequent loans
must first be exhausted before the mortgaged property can be resorted to.

However, this does not prevent the creditor from foreclosing on the security for the first loan if that loan is
past due, because there is nothing in law that prohibits the exercise of that right. Hence, in the case at bench,
Premiere Bank has the right to foreclose on the Wack Wack Membership, the security corresponding to the first
promissory note, with the deed of assignment that originated the dragnet clause. This conforms to the doctrine
in Prudential, as, in fact, acknowledged in the decisions penultimate paragraph, viz.:
Petitioner, however, is not without recourse. Both the Court of Appeals and the trial court
found that respondents have not yet paid the P250,000.00 and gave no credence to their claim that
they paid the said amount when they paid petitioner P2,000,000.00. Thus, the mortgaged property
could still be properly subjected to foreclosure proceedings for the unpaid P250,000.00 loan, and
as mentioned earlier, for any deficiency after D/A SFDX#129, security for PN BD#76/c-345, has
been exhausted, subject of course to defenses which are available to respondents.

In any event, even without this Courts prescription in Prudential, the release of the Wack Wack
Membership as the pledged security for Promissory Note 714-Y cannot yet be done as sought by Central
Surety. The chain of contracts concluded between Premiere Bank and Central Surety reveals that the Wack Wack
Membership, which stood as security for Promissory Note 714-Y, and which also stands as security for subsequent
debts of Central Surety, is a security in the form of a pledge. Its return to Central Surety upon the pretext that
Central Surety is entitled to pay only the obligation in Promissory Note No. 714-Y, will result in the extinguishment
of the pledge, even with respect to the subsequent obligations, because Article 2110 of the Civil Code provides:
(I)f the thing pledged is returned by the pledgor or owner, the pledge is extinguished. Any
stipulation to the contrary is void.

This is contrary to the express agreement of the parties, something which Central Surety wants this Court to undo.
We reiterate that, as a rule, courts cannot intervene to save parties from disadvantageous provisions of their contracts
if they consented to the same freely and voluntarily.[39]
Attorneys Fees

The final issue is the propriety of attorneys fees. The trial court based its award on the supposed malice of
Central Surety in instituting this case against Premiere Bank. We find no malice on the part of Central Surety;
indeed, we are convinced that Central Surety filed the case in the lower court in good faith, upon the honest belief
that it had the prerogative to choose to which loan its payments should be applied.
Malicious prosecution, both in criminal and civil cases, requires the presence of two elements, to wit: (a)
malice and (b) absence of probable cause. Moreover, there must be proof that the prosecution was prompted by a
sinister design to vex and humiliate a person; and that it was initiated deliberately, knowing that the charge was false
and baseless. Hence, the mere filing of what turns out to be an unsuccessful suit does not render a person liable for
malicious prosecution, for the law could not have meant to impose a penalty on the right to litigate. [40] Malice must
be proved with clear and convincing evidence, which we find wanting in this case.
WHEREFORE, the instant petition is PARTIALLY GRANTED. The assailed Decision of the Court of
Appeals in CA-G.R. CV No. 85930 dated July 31, 2006, as well as its Resolution dated January 4, 2007,
are REVERSED and SET ASIDE. The Decision of the Regional Trial Court of Makati City, Branch 132, in Civil
Case No. 00-1536, dated July 12, 2005, is REINSTATED with the MODIFICATION that the award of attorneys
fees to petitioner is DELETED. No pronouncement as to costs.
(16) G.R. No. L-49120 June 30, 1988
ESTATE
OF
GEORGE
vs.
CIRIACO B. MENDOZA and COURT OF APPEALS, respondents.

LITTON, petitioner,

Ruben G. Bala for respondent Mendoza.

GANCAYCO, J.:
This petition for review presents two (2) main issues, to wit: (1) Can a plaintiff in a case, who had previously
assigned in favor of his creditor his litigated credit in said case, by a deed of assignment which was duly submitted
to the court, validly enter into a compromise agreement thereafter releasing the defendant therein from his claim
without notice to his assignee? and (2) Will such previous knowledge on the part of the defendant of the assignment
made by the plaintiff estop said defendant from invoking said compromise as a ground for dismissal of the action
against him?
The present case stemmed from Civil Case No. Q-8303 1 entitled "Alfonso Tan vs. Ciriaco B. Mendoza," an action
for the collection of a sum of money representing the value of two (2) checks which plaintiff Tan claims to have
been delivered to him by defendant Mendoza, private respondent herein, by way of guaranty with a commission.

The record discloses that the Bernal spouses 2 are engaged in the manufacture of embroidery, garments and cotton
materials. Sometime in September 1963, C.B.M. Products, 3 with Mendoza as president, offered to sell to the
Bernals textile cotton materials and, for this purpose, Mendoza introduced the Bernals to Alfonso Tan. Thus, the
Bernals purchased on credit from Tan some cotton materials worth P 80,796.62, payment of which was guaranteed
by Mendoza. Thereupon, Tan delivered the said cotton materials to the Bernals. In view of the said arrangement, on
November 1963, C.B.M. Products, through Mendoza, asked and received from the Bernals PBTC Check No.
626405 for P 80,796.62 dated February 20, 1964 with the understanding that the said check will remain in the
possession of Mendoza until the cotton materials are finally manufactured into garments after which time Mendoza
will sell the finished products for the Bernals. Meanwhile, the said check matured without having been cashed and
Mendoza demanded the issuance of another check 4 in the same amount without a date.
On the other hand, on February 28, 1964, defendant Mendoza issued two (2) PNB checks 5 in favor of Tan in the
total amount of P 80,796.62. He informed the Bernals of the same and told them that they are indebted to him and
asked the latter to sign an instrument whereby Mendoza assigned the said amount to Insular Products Inc. Tan had
the two checks issued by Mendoza discounted in a bank. However, the said checks were later returned to Tan with
the words stamped "stop payment" which appears to have been ordered by Mendoza for failure of the Bernals to
deposit sufficient funds for the check that the Bernals issued in favor of Mendoza.
Hence, as adverted to above, Tan brought an action against Mendoza docketed as Civil Case No. Q-8303 6 while the
Bernals brought an action for interpleader docketed as Civil Case No. 56850 7 for not knowing whom to pay. While
both actions were pending resolution by the trial court, on March 20, 1966, Tan assigned in favor of George Litton,
Sr. his litigatious credit * in Civil Case No. 56850 against Mendoza, duly submitted to the court, with notice to the
parties. 8 The deed of assignment was framed in the following tenor:
DEED OF ASSIGNMENT
I, ALFONSO TAN, of age, Chinese, married to UY CHAY UA, residing at No. 6 Kanlaon,
Quezon City, doing business under the name and style ALTA COMMERCIAL by way of securing
or guaranteeing my obligation to Mr. GEORGE LITTON, SR., do by these presents CEDE,
ASSIGN, TRANSFER AND CONVEY unto the said Mr. GEORGE LITTON, SR., my claim
against C.B.M. Products, Inc., personally guaranteed by Mr. Ciriaco B. Mendoza, in the amount of
Eighty-Thousand Seven Hundred Ninety Six Pesos and Sixty-two centavos (P 80,796.62) the
balance of which, in principal, and excluding, interests, costs, damages and attorney's fees now
stands at P 76,000.00, P 4,796.62, having already been received by the assignor on December 23,
1965, pursuant to the order of the court in Civil Case No. 56850, C.F.I., Manila, authorizing
Alfonso Tan to withdraw the amount of P 4,796.62 then on deposit with the court. All rights, and
interests in said net amount, plus interests and costs, and less attorney's fees, in case the amount
allowed therefor be less than the amounts claimed in the relief in Civil Case 56850 (C.F.I., Manila)
and Q-8503 (C.F.I., Quezon City) are by these presents covered by this assignment.
I further undertake to hold in trust any and all amounts which may hereafter be realized from the
aforementioned cases for the ASSIGNEE, Mr. GEORGE LITTON, SR., and to turn over to him
such amounts in application to my liability to him, as his interest may then show, and I further
undertake to cooperate towards the successful prosecution of the aforementioned cases making
available myself, as witness or otherwise, as well as any and all documents thereto
appertaining. ... 9

After due trial, the lower court ruled that the said PNB checks were issued by Mendoza in favor of Tan for a
commission in the sum of P 4,847.79 and held Mendoza liable as a drawer whose liability is primary and not merely
as an indorser and thus directed Mendoza to pay Tan the sum of P 76,000.00, the sum still due, plus damages and
attorney's fees. 10
Mendoza seasonably filed an appeal with the Court of Appeals, dockted as C.A. G.R. No. 41900-R, arguing in the
main that his liability is one of an accommodation party and not as a drawer.
On January 27, 1977, the Court of Appeals rendered a decision affirming in toto the decision of the lower court. 11
Meanwhile, on February 2, 1971, pending the resolution of the said appeal, Mendoza entered into a compromise
agreement with Tan wherein the latter acknowledged that all his claims against Mendoza had been settled and that
by reason of said settlement both parties mutually waive, release and quit whatever claim, right or cause of action
one may have against the other, with a provision that the said compromise agreement shall not in any way affect the
right of Tan to enforce by appropriate action his claims against the Bernal spouses. 12
On February 25, 1977, Mendoza filed a motion for reconsideration praying that the decision of January 27, 1977 be
set aside, principally anchored upon the ground that a compromise agreement was entered into between him and Tan
which in effect released Mendoza from liability. Tan filed an opposition to this motion claiming that the compromise
agreement is null and void as he was not properly represented by his counsel of record Atty. Quiogue, and was
instead represented by a certain Atty. Laberinto, and principally because of the deed of assignment that he executed
in favor of George Litton, Sr. alleging that with such, he has no more right to alienate said credit.
While the case was still pending reconsideration by the respondent court, Tan, the assignor, died leaving no
properties whatever to satisfy the claim of the estate of the late George Litton, Sr.
In its Resolution dated August 30, 1977, 13 the respondent court set aside its decision and approved the compromise
agreement.
As to the first ground invoked by Tan, now deceased, the respondent court ruled that the non-intervention of Tan's
counsel of record in the compromise agreement does not affect the validity of the settlement on the ground that the
client had an undoubted right to compromise a suit without the intervention of his lawyer, citing Aro vs. Nanawa. 14
As to the second ground, respondent court ruled as follows:
... it is relevant to note that Paragraph 1of the deed of assignment states that the
cession,assignment, transfer, bond conveyance by Alfonso Tan was only by way of securing, or
guaranteeing his obligation to GEORGE LITTON, SR.
Hence, Alfonso Tan retained possession and dominion of the credit (Par. 2, Art. 2085, Civil Code).
"Even considered as a litigations credit," which indeed characterized the claims herein of Alfonso
Tan, such credit may be validly alienated by Tan (Art. 1634. Civil Code).
Such alienation is subject to the remedies of Litton under Article 6 of the Civil Code, whereby the
waiver, release, or quit-claim made by plaintiff-appellee Alfonso Tan in favor of defendantappellant Ciriaco B. Mendoza, if proven prejudicial to George Litton, Sr. as assignee under the
deed of assignment, may entitle Litton to pursue his remedies against Tan.

The alienation of a litigatious credit is further subject to the debtor's right of redemption under
Article 1634 of the Civil Code.
As mentioned earlier, the assignor Tan died pending resolution of the motion for reconsideration. The estate of
George Litton, Sr., petitioner herein, as represented by James Litton, son of George Litton, Sr. and administrator 15 of
the former's estate, is now appealing the said resolution to this Court as assignee of the amount sued in Civil Case
No. Q-8303, in relation to Civil Case No. 56850.
Before resolving the main issues aforementioned, the question of legal personality of herein petitioner to bring the
instant petition for review, must be resolved.
As a rule, the parties in an appeal through a review on certiorari are the same original parties to the case. 16 If after
the rendition of judgment the original party dies, he should be substituted by his successor-in-interest. In this case, it
is not disputed that no proper substitution of parties was done. This notwithstanding, the Court so holds that the
same cannot and will not materially affect the legal right of herein petitioner in instituting the instant petition in view
of the tenor of the deed of assignment, particularly paragraph two thereof 17 wherein the assignor, Tan, assumed the
responsibility to prosecute the case and to turn over to the assignee whatever amounts may be realized in the
prosecution of the suit.
We note that private respondent moved for the dismissal of the appeal without notifying the estate of George Litton,
Sr. whereas the former was fully aware of the fact that the said estate is an assignee of Tan's right in the case
litigated. 18 Hence, if herein petitioner failed to observe the proper substitution of parties when Alfonso Tan died
during the pendency of private respondent's motion for reconsideration, no one is to blame but private respondent
himself. Moreover, the right of the petitioner to bring the present petition is well within the concept of a real partyin-interest in the subject matter of the action. Well-settled is the rule that a real party-in-interest is a party entitled to
the avails of the suit or the party who would be injured by the judgment. 19 We see the petitioner well within the
latter category.
Hence, as the assignee and successor-in-interest of Tan, petitioner has the personality to bring this petition in
substitution of Tan.
Now, the resolution of the main issues.
The purpose of a compromise being to replace and terminate controverted claims, 20 courts encourage the same. A
compromise once approved by final order of the court has the force of res judicata between parties and should not
be disturbed except for vices of consent or forgery. 21
In this case, petitioner seeks to set aside the said compromise on the ground that previous thereto, Tan executed a
deed of assignment in favor of George Litton, Sr. involving the same litigated credit.
We rule for the petitioner. The fact that the deed of assignment was done by way of securing or guaranteeing Tan's
obligation in favor of George Litton, Sr., as observed by the appellate court, will not in any way alter the resolution
on the matter. The validity of the guaranty or pledge in favor of Litton has not been questioned. Our examination of
the deed of assignment shows that it fulfills the requisites of a valid pledge or mortgage. 22Although it is true that
Tan may validly alienate the litigatious credit as ruled by the appellate court, citing Article 1634 of the Civil Code,
said provision should not be taken to mean as a grant of an absolute right on the part of the assignor Tan to
indiscriminately dispose of the thing or the right given as security. The Court rules that the said provision should be
read in consonance with Article 2097 of the same code. 23 Although the pledgee or the assignee, Litton, Sr. did

not ipso factobecome the creditor of private respondent Mendoza, the pledge being valid, the incorporeal right
assigned by Tan in favor of the former can only be alienated by the latter with due notice to and consent of Litton,
Sr. or his duly authorized representative. To allow the assignor to dispose of or alienate the security without notice
and consent of the assignee will render nugatory the very purpose of a pledge or an assignment of credit.
Moreover, under Article 1634, 24 the debtor has a corresponding obligation to reimburse the assignee, Litton, Sr. for
the price he paid or for the value given as consideration for the deed of assignment. Failing in this, the alienation of
the litigated credit made by Tan in favor of private respondent by way of a compromise agreement does not bind the
assignee, petitioner herein.
Indeed, a painstaking review of the record of the case reveals that private respondent has, from the very beginning,
been fully aware of the deed of assignment executed by Tan in favor of Litton, Sr. as said deed was duly submitted
to Branch XI of the then Court of First Instance of Manila in Civil Case No. 56850 (in relation to Civil Case No. Q8303) where C.B.M. Products is one of the defendants and the parties were notified through their counsel. 25 As
earlier mentioned, private respondent herein is the president of C.B.M. Products, hence, his contention that he is not
aware of the said deed of assignment deserves scant consideration from the Court. Petitioner pointed out at the same
time that private respondent together with his counsel were served with a copy of the deed of assignment which
allegation remains uncontroverted. Having such knowledge thereof, private respondent is estopped from entering
into a compromise agreement involving the same litigated credit without notice to and consent of the assignee,
petitioner herein. More so, in the light of the fact that no reimbursement has ever been made in favor of the assignee
as required under Article 1634. Private respondent acted in bad faith and in connivance with assignor Tan so as to
defraud the petitioner in entering into the compromise agreement.
WHEREFORE, the petition is GRANTED. The assailed resolution of the respondent court dated August 30,1977 is
hereby SET ASIDE, the said compromise agreement being null and void, and a new one is hereby rendered
reinstating its decision dated January 27, 1977, affirming in toto the decision of the lower court. This decision is
immediately executory. No motion for extension of time to file a motion for reconsideration will be granted.
SO ORDERED.

(17) G.R. No. L-32974 July 30, 1979

BARTOLOME
ORTIZ, petitioner,
vs.
HON. UNION C. KAYANAN, in his capacity as Judge of the Court of First Instance of Quezon, Branch IV;
ELEUTERIO ZAMORA, QUIRINO COMINTAN, VICENTE FERRO, AND GREGORIO
PAMISARAN, respondents.
Salonga, Ordo;ez, Yap, Sicat & Associates and Salvador, Ulgado & Carbon for petitioner.
Jose A. Cusi for private respondents.

ANTONIO, J.:1wph1.t

Petition for certiorari and Prohibition with Preliminary Injunction to nullify the Order of respondent Judge directing
the execution of the final judgment in Civil Case No. C-90, entitled "Bartolome Ortiz vs. Secretary of Agriculture
and Natural Resources, et al.," and the Writ of Execution issued to implement said Order, allegedly for being
inconsistent with the judgment sought to be enforced.
Civil Case No. C-90 was filed by Bartolome Ortiz who sought the review and/or annulment of the decision of the
Secretary of Agriculture and Natural Resources, giving preference to the sales applications of private respondents
Quirino Comintan and Eleuterio Zamora over Lot No. 5785, PLS-45, located at Barrio Cabuluan, Calauag, Quezon.
I
The factual background of the case, as found by respondent Court, is as follows:t.hqw
... The lot in controversy was formerly the subject of Homestead Application No. 122417 of
Martin Dolorico II, plaintiff's ward who died on August 20, 1931; that since then it was plaintiff
who continued the cultivation and possession of the property, without however filing any
application to acquire title thereon; that in the Homestead Application No. 122417, Martin
Dolorico II named his uncle, Martin Dolorico I as his heir and successor in interest, so that in 1951
Martin Dolorico I executed an affidavit relinquishing his rights over the property in favor of
defendants Quirino Comintan and Eleuterio Zamora, his grandson and son-in-law, respectively,
and requested the Director of Lands to cancel the homestead application; that on the strength of
the affidavit, Homestead Application No. 122417 was cancelled and thereafter, defendants
Comintan and Zamora filed their respective sales applications Nos. 8433 and 9258; that plaintiff
filed his protest on November 26, 1951 alleging that he should be given preference to purchase the
lot inasmuch as he is the actual occupant and has been in continuous possession of the same since
1931; and inspite of plaintiff's opposition, "Portion A" of the property was sold at public auction
wherein defendant Comintan was the only bidder; that on June 8, 1957, investigation was
conducted on plaintiff's protest by Assistant Public Lands Inspector Serapion Bauzon who
submitted his report to the Regional Land Officer, and who in turn rendered a decision on April 9,
1958, dismissing plaintiff's claim and giving due course to defendants' sales applications on the
ground that the relinquishment of the homestead rights of Martin Dolorico I in favor of Comintan
and Zamora is proper, the former having been designated as successor in interest of the original
homestead applicant and that because plaintiff failed to participate in the public auction, he is
forever barred to claim the property; that plaintiff filed a motion for reconsideration of this
decision which was denied by the Director of Lands in his order dated June 10, 1959; that, finally,
on appeal to the Secretary of Agriculture and Natural Resources, the decision rendered by the
Regional Land Officer was affirmed in toto. 1
On March 22, 1966, respondent Court rendered judgment in the afore-mentioned civil case, the dispositive portion
of which reads as follows:t.hqw
IN VIEW OF THE FOREGOING CONSIDERATIONS, judgment is hereby rendered awarding
Lot No. 5785-A of PLS-45, (Calauag Public Land Subdivision) one-half portion of the property in
litigation located at Bo. Cabuluan, Calauag, Quezon, in favor of defendant QUIRINO
COMINTAN, being the successful bidder in the public auction conducted by the bureau of Lands
on April 18, 1955, and hereby giving due course to the Sales Application No. 9258 of defendant
Eleuterio Zamora over the other half, Lot No. 5785-B of PLS-45, Calauag, without prejudice to
the right of plaintiff BARTOLOME ORTIZ to participate in the public bidding of the same to be

announced by the Bureau of Lands, Manila. However, should plaintiff Bartolome Ortiz be not
declared the successful bidder thereof, defendants Quirino Comintan and Eleuterio Zamora are
ordered to reimburse jointly said plaintiff the improvements he has introduced on the whole
property in the amount of THIRTEEN THOUSAND SIX HUNDRED THIRTY-TWO (P13,632.00)
PESOS, the latter having the right to retain the property until after he has been fully paid therefor,
without interest since he enjoys the fruits of the property in question, with prejudice and with costs
again the plaintiff. 2
Plaintiff appealed the decision to the Court of Appeals.
Two (2) years after the rendition of the judgment by the court a quo, while the case was pending appeal and upon
petition of private respondents Quirino Comintan and Eleuterio Zamora, respondent Court appointed respondent
Vicente Ferro, Clerk of Court, as Receiver to collect tolls on a portion of the property used as a diversion road. On
August 19, 1969, the Court of Appeals issued a Resolution annulling the Order appointing the Receiver.
Subsequently, on February 19, 1970, the Appellate Court affirmed the decision of the trial court. A petition for
review on certiorari of the decision of the Court of Appeals was denied by this Court on April 6, 1970. At this point,
private respondents filed a petition for appointment of a new receiver with the court a quo. This petition was granted
and the receiver was reappointed. Petitioner sought the annulment of this Order with the Court of Appeals, but said
Court ruled that its decision had already become final and that the records of the case were to be remanded to the
trial court.
Not satisfied with such denial, petitioner filed a petitioner for certiorari, prohibition and mandamus with preliminary
injunction before this Court, 3 praying for the annulment of the Order reappointing the Receiver. On July 13, 1970,
the petition was dismissed by this Court on the ground of insufficient showing of grave abuse of discretion.
II
The judgment having become final and executory private respondents filed a motion for the execution of the same,
praying as follows:t.hqw
WHEREFORE, it is respectfully prayed of this Honorable Court to order the issuance of a writ of
execution in accordance with the judgment of this Honorable Court, confirmed by the Court of
Appeals and the Supreme Court, commanding any lawful officer to deliver to defendants
Comintan and Zamora the land subject of the decision in this case but allowing defendants to file a
bond in such amount as this Honorable Court may fix, in lieu of the P13,632.00 required to be
paid to plaintiff, conditioned that after the accounting of the tools collected by plaintiff, there is
still an amount due and payable to said plaintiff, then if such amount is not paid on demand,
including the legal interests, said bond shall be held answerable.
Ordering further the plaintiff to render an accounting of the tolls he collected from March of 1967
to December 31, 1968 and from September 1969 to March 31, 1970, and deliver said tolls
collected to the receiver and if judgment is already executed, then to Quirino Comintan and
Eleuterio Zamora; and,
Finally, to condemn plaintiff to pay moral damages for withholding the tools which belong to your
movant in an amount this Court may deem just in the premises. 4

Acting upon the foregoing motion, respondent Judge issued an Order, dated September 23, 1970, stating, among
others, the following: t.hqw
The records further disclosed that from March 1967 to December 31, 1968, piaintiff Bartolome
Ortiz collected tolls on a portion of the propertv in question wherein he has not introduced anv
improvement particularlv on Lot No. 5785-A; PLS-45 awarded to defendant Quirino Comintan,
thru which vehicular traffic was detoured or diverted, and again from September 1969 to March
31, 1970, the plaintiff resumed the collection of tools on the same portion without rendering any
accounting on said tolls to the Receiver, who, was reappointed after submitting the required bond
and specifically authorized only to collect tolls leaving the harvesting of the improvements to the
plaintiff.
xxx xxx xxx
ln virtue of he findings of this Court as contained in the dispositive portion of its decision, the
defendants are jointly obligated to pay the plaintiff in the amount of P13,632.00 as reasonable
value of the improvements he introduced on the whole property in question, and that he has the
right of retention until fully paid. It can be gleaned from the motion of the defendants that if
plaintiff submits an accounting of the tolls he collected during the periods above alluded to, their
damages of about P25,000.00 can more than offset their obligation of P13,362.00 in favor of the
plaintiff, thereafter the possession of the land be delivered to the defendants since the decision of
the Supreme Court has already become final and executory, but in the interregnum pending such
accounting and recovery by the Receiver of the tolls collected by the plaintiff, the defendants pray
that they allowed to put up a bond in lieu of the said P13,632.00 to answer for damages of the
former, if any.
On the other hand, plaintiff contends in his opposition, admitting that the decision of the Supreme
Court has become final and executory; (1) the offer of a bond in lieu of payment of P13,632.00
does not, and cannot, satisfy the condition imposed in the decision of this Court which was
affirmed in toto;(2) the public sale of Portion "B" of the land has still to take place as ordained
before the decision could be executed; and, (3) that whatever sums plaintiff may derive from the
property cannot be set off against what is due him for the improvements he made, for which he has
to be reimbursed as ordered.
xxx xxx xxx
Let it be known that plaintiff does not dispute his having collected tolls during the periods from
March 1967 to December 31, 1968 and from September 1969 to March 31, 1970. The Supreme
Court affirmed the decision of this Court its findings that said tolls belong to the defendant,
considering that the same were collected on a portion of the land question where the plaintiff
did not introduce any improvement. The reimbursement to the plaintiff pertains only to the value
of the improvements, like coconut trees and other plants which he introduced on the whole
property. The tolls collected by the plaintiff on an unimproved portion naturally belong to the
defendants, following the doctrine on accretion. Further, the reappointment of a Receiver by this
Court was upheld by the Supreme Court when it denied the petition for certiorari filed by the
plaintiff, bolstering the legal claim of defendants over said tolls. Thus, the decision of the Supreme
Court rendered the decision of this Court retroactive from March 22, 1966 although pending
accounting of the tolls collected by the plaintiff is justified and will not prejudice anybody, but

certainly would substantially satisfy the conditions imposed in the decision. However, insofar as
the one-half portion "B" of the property, the decision may be executed only after public sale by the
Bureau of Lands shall be accomplished.
WHEREFORE, finding the Motion for Execution filed by the defendants to be meritorious, the
same is granted; provided, however, that they put up a bond equal the adjudicated amount of
P13,632.00 accruing in favor of the plaintiff, from a reputable or recognized bonding or surety
company, conditioned that after an accounting of the tolls collected by the plaintiff should there be
found out any balance due and payable to him after reckoning said obligation of P13,632.00 the
bond shall be held answerable therefor. 5
Accordingly, a Writ of Execution was issued after private respondent Quirino Comintan had filed the required bond.
The writ directed the Sheriff to enforce the decision of the Court, and stated, part in, the following:t.hqw
But should there be found any amount collectible after accounting and deducting the amount of
P3,632.00, you are hereby ordered that of the goods and chattels of Bartolome Ortiz of Bo.
Kabuluan, Calauag, Quezon, be caused to be made any excess in the above-metioned amount
together with your lawful fees and that you render same to defendant Quirino Comintan. If
sufficient personal property cannot be found thereof to satisfy this execution and lawful fees
thereon, then you are commanded that of the lands and buildings of the said BARTOLOME
ORTIZ you make the said excess amount in the manner required by the Rules of Court, and make
return of your proceedings within this Court within sixty (60) days from date of service.
You are also ordered to cause Bartolome Ortiz to vacate the property within fifteen (15) days after
service thereof the defendant Quirino Comintan having filed the required bond in the amount of
THIRTEEN THOUSAND SIX HUNDRED THIRTY-TWO (P13,632.00) PESOS. 6
On October 12, 1970, petitioner filed a Motion for Reconsideration of the aforesaid Order and Writ of Execution,
alleging:t.hqw
(a) That the respondent judge has no authority to place respondents in possession of the property;
(b) That the Supreme Court has never affirmed any decision of the trial court that tolls collected
from the diversionary road on the property, which is public land, belong to said respondents;
(c) That to assess petitioner a P25,000.00 liability for damages is purely punitive imposition
without factual or legal justification.
The foregoing Motion for Reconsideration was denied by respondent Judge per Order dated November 18, 1970.
Saod Order states, in part:t.hqw
It goes without saying that defendant Comintan is entitled to be placed in possession of lot No.
5785-A of PLS-45 (Calauag Public Land Subdivision) and enjoyment of the tolls from March,
1967 to March, 1968 and from September, 1969 to March 31, l970 which were received by
plaintiff Bartolome Ortiz, collected from the property by reason of the diversion road where
vehicular traffic was detoured. To defendant Comintan belongs the tolls thus collected from a
portion of the land awarded to him used as a diversionary road by the doctrine of accretion and his
right over the same is ipso jure, there being no need of any action to possess said addition. It is so

because as consistently maintained by the Supreme Court, an applicant who has complied with all
the terms and conditions which entitle him to a patent for a particular tract of publlic land, acquires
a vested right therein and is to be regarded as equitable owner thereof so that even without a
patent, a perfected homestead or sales application is a property right in the fullest sense,
unaffectcd by the fact that the paramount title is still in the Government and no subsequent law
can deprive him of that vested right The question of the actual damages suffered by defendant
Comintan by reason of the unaccounted tolls received by plaintiff had already been fully discussed
in the order of September 23, 1970 and the Court is honestly convinced and believes it to be
proper and regular under the circumstances.
Incidentally, the Court stands to correct itself when in the same order, it directed the execution of
he decision with respect to the one-half portion "B" of the property only after the public sale by
the Bureau of Lands, the same being an oversight, it appearing that the Sales Application of
defendant Eleuterio Zamora had already been recognized and full confirmed by the Supreme
Court.
In view thereof, finding the motion filed by plaintiff to be without merit, the Court hereby denies
the same and the order of September 23, 1970 shall remain in full force subject to the amendment
that the execution of the decision with respect to the one-half portion "B" shall not be conditioned
to the public sale by the Bureau of Lands.
SO ORDERED. 7
III
Petitioner thus filed the instant petition, contending that in having issued the Order and Writ of Execution,
respondent Court "acted without or in excess of jurisdiction, and/or with grave abuse of discretion, because the said
order and writ in effect vary the terms of the judgment they purportedly seek to enforce." He argued that since said
judgment declared the petitioner a possessor in good faith, he is entitled to the payment of the value of the
improvements introduced by him on the whole property, with right to retain the land until he has been fully paid
such value. He likewise averred that no payment for improvements has been made and, instead, a bond therefor had
been filed by defendants (private respondents), which, according to petitioner, is not the payment envisaged in the
decision which would entitle private respondents to the possession of the property. Furthermore, with respect to
portion "B", petitioner alleges that, under the decision, he has the right to retain the same until after he has
participated and lost in the public bidding of the land to be conducted by the Bureau of Lands. It is claimed that it is
only in the event that he loses in the bidding that he can be legally dispossessed thereof.
It is the position of petitioner that all the fruits of the property, including the tolls collected by him from the passing
vehicles, which according to the trial court amounts to P25,000.00, belongs to petitioner and not to defendant/private
respondent Quirino Comintan, in accordance with the decision itself, which decreed that the fruits of the property
shall be in lieu of interest on the amount to be paid to petitioner as reimbursement for improvements. Any contrary
opinion, in his view, would be tantamount to an amendment of a decision which has long become final and
executory and, therefore, cannot be lawfully done.
Petitioner, therefore, prayed that: (1) a Writ of Preliminary Injunction be issued enjoining the enforcement of the
Orders of September 23, 1970 and November 18, 1970, and the Writ of Execution issued thereto, or restoring to
petitioner the possession of the property if the private respondents had been placed in possession thereof; (2)
annulling said Orders as well as the Writ of Execution, dissolving the receivership established over the property; and

(3) ordering private respondents to account to petitioner all the fruits they may have gathered or collected from the
property in question from the time of petitioiier's illegal dispossession thereof.
On January 29, 1971, this Court issued the Writ of Preliminary Injunction. On January 30, 1971, private respondents
filed a Motion for Reconsideration and/or Modification of the Order dated January 29, 1971. This was followed by a
Supplemental Motion for Reconsideration and Manifestation on February 3, 1971. In the latter motion, private
respondents manifested that the amount of P14,040.96, representing the amount decreed in the judgment as
reimbursement to petitioner for the improvements, plus interest for six months, has already been deposited by them
in court, "with the understanding that said amount shall be turned over to the plaintiff after the court a quo shall have
determined the improvement on Lot 5785-A, and subsequently the remaining balance of the deposit shall be
delivered to the petitioner (plaintiff therein) in the event he loses the bid for Lot 5785-B in favor of private
respondent Eleuterio Zamora." 8 The deposit is evidenced by a certification made by the Clerk of the Court a
quo. 9 Contending that said deposit was a faithful compliance with the judgment of the trial court, private respondent
Quirino Comintan prayed for the dissolution of the Writ of Injunction.
It appears that as a consequence of the deposit made by private respondents, the Deputy, Sheriff of Calauag, Quezon
ousted petitioner's representative from the land in question and put private respondents in possession thereof. 10
On March 10, 1971, petitioner filed a "Comment on Respondents' 'Motion for Reconsideration' dated January 29,
1971' and 'Supplemental Motion for Reconsideration and Manifestation,'" contending that the tender of deposit
mentioned in the Suplemental Motion was not really and officially made, "inasmuch as the same is not supported by
any official receipt from the lower court, or from its clerk or cashier, as required by law;" that said deposit does not
constitute sufficient compliance with the judgment sought to be enforced, neither was it legally and validly made
because the requisites for consignation had not been complied with; that the tender of legal interest for six months
cannot substitute petitioner's enjoyment of the fruits of the property as long as the judgment in Civil Case No. C-90
has not been implemented in the manner decreed therein; that contrary to the allegations of private respondents, the
value of the improvements on the whole property had been determined by the lower court, and the segregation of the
improvements for each lot should have been raised by them at the opportune moment by asking for the modification
of the decision before it became final and executory; and that the tolls on the property constituted "civil fruits" to
which the petitioner is entitled under the terms of the decision.
IV
The issue decisive of the controvery isafter the rendition by the trial court of its judgment in Civil Case No. C-90
on March 22, 1966 confirming the award of one-half of the property to Quirino Comintanwhether or not
petitioner is still entitled to retain for his own exclusive benefit all the fruits of the property, such as the tolls
collected by him from March 1967 to December 1968, and September 1969 to March 31, 1970, amounting to about
P25,000.00. In other words, petitioner contends that so long as the aforesaid amount of P13,632,00 decreed in the
judgment representing the expenses for clearing the land and the value of the coconuts and fruit trees planted by him
remains unpaid, he can appropriate for his exclusive benefit all the fruits which he may derive from the property,
without any obligation to apply any portion thereof to the payment of the interest and the principal of the debt.
We find this contention untenable.
There is no question that a possessor in good faith is entitled to the fruits received before the possession is legally
interrupted. 11 Possession in good faith ceases or is legally interrupted from the moment defects in the title are made
known to the possessor, by extraneous evidence or by the filing of an action in court by the true owner for the

recovery of the property. 12 Hence, all the fruits that the possessor may receive from the time he is summoned in
court, or when he answers the complaint, must be delivered and paid by him to the owner or lawful possessor. 13
However, even after his good faith ceases, the possessor in fact can still retain the property, pursuant to Article 546
of the New Civil Code, until he has been fully reimbursed for all the necessary and useful expenses made by him on
the property. This right of retention has been considered as one of the conglomerate of measures devised by the law
for the protection of the possessor in good faith. Its object is to guarantee the reimbursement of the expenses, such as
those for the preservation of the property, 14 or for the enhancement of its utility or productivity. 15It permits the
actual possessor to remain in possession while he has not been reimbursed by the person who defeated him in the
possession for those necessary expenses and useful improvements made by him on the thing possessed. The
principal characteristic of the right of retention is its accessory character. It is accessory to a principal obligation.
Considering that the right of the possessor to receive the fruits terminates when his good faith ceases, it is necessary,
in order that this right to retain may be useful, to concede to the creditor the right to secure reimbursement from the
fruits of the property by utilizing its proceeds for the payment of the interest as well as the principal of the debt
while he remains in possession. This right of retention of the property by the creditor, according to Scaevola, in the
light of the provisions of Article 502 of the Spanish Civil Code, 16 is considered not a coercive measure to oblige the
debtor to pay, depriving him temporarily of the enjoyment of the fruits of his property, but as a means of obtainitig
compensation for the debt. The right of retention in this case is analogous to a contract of antichresis and it cati be
considered as a means of extinguishing the obligation, inasmuch as the right to retain the thing lasts only for the
period necessary to enable the creditor to be reimbursed from the fruits for the necessary and useful expenses. 17
According to Manresa, the right of retention is, therefore, analogous to that of a pledge, if the property retained is a
movable, and to that of antichresis, if the property held is immovable. 18 This construction appears to be in harmony
with similar provisions of the civil law which employs the right of retention as a means or device by which a
creditor is able to obtain the payment of a debt. Thus, under Article 1731 of the New Civil Code, any person who
has performed work upon a movable has a right to retain it by way of pledge until he is paid. Similarly, under Article
1914 of the same Code, the agent may retain in pledge the things which are the object of the agency until the
principal effects reimbursement of the funds advanced by the former for the execution of the agency, or he is
indemnified for all damages which he may have suffered as a consequence of the execution of the agency, provided
he is free from fault. To the same effect, the depositary, under Article 1994 of the same Code, may retain the thing in
pledge until the full payment of what may be due him by reason of the deposit. The usufructuary, pursuant to Article
612 of the same Code, may retain the property until he is reimbursed for the amount paid for taxes levied on the
capital (Article 597) and tor extraordinary repairs (Article 594).
In all of these cases, the right of retention is used as a means of extinguishing the obligation. As amply observed by
Manresa: "El derecho de retencion, lo hemos dicho, es el derecho de prenda o el de anticresis constituido por la ley
con independencia de las partes." 19 In a pledge, if the thing pledged earns or produces fruits, income, dividends or
interests, the creditor shall compensate what he receives with those which are owing him. 20 In the same manner, in a
contract of antichresis, the creditor acquires the right to receive the fruits of an immovable of his debtor with the
obligation to apply them to payment of the interest, if owing, and thereafter to the principal of his credit. 21 The
debtor can not reacquire enjoyment of the immovable until he has actually paid what he owes the creditor. 22
Applying the afore-cited principles to the case at bar, petitioner cannot appropriate for his own exclusive benefit the
tolls which he collected from the property retained by him. It was his duty under the law, after deducting the
necessary expenses for his administration, to apply such amount collected to the payment of the interest, and the
balance to the payment of the obligation.

We hold, therefore, that the disputed tolls, after deducting petitioner's expenses for administration, belong to Quirino
Comintan, owner of the land through which the toll road passed, further considering that the same was on portions
of the property on which petitioner had not introduced any improvement. The trial court itself clarified this matter
when it placed the toll road under receivership. The omission of any mention of the tolls in the decision itself may
be attributed to the fact that the tolls appear to have been collected after the rendition of the judgment of the trial
court.
The records further reveal that earnest efforts have been made by private respondents to have the judgment executed
in the most practicable manner. They deposited in court the amount of the judgment in the sum of P13,632.00 in
cash, subject only to the accounting of the tolls collected by the petitioner so that whatever is due from him may be
set off with the amount of reimbursement. This is just and proper under the circumstances and, under the law,
compensation or set off may take place, either totally or partially. Considering that petitioner is the creditor with
respect to the judgment obligation and the debtor with respect to the tolls collected, Comintan being the owner
thereof, the trial court's order for an accounting and compensation is in accord with law. 23
With respect to the amount of reimbursement to be paid by Comintan, it appears that the dispositive portion of the
decision was lacking in specificity, as it merely provided that Comintan and Zamora are jointly liable therefor. When
two persons are liable under a contract or under a judgment, and no words appear in the contract or judgment to
make each liable for the entire obligation, the presumption is that their obligation is joint ormancomunada, and each
debtor is liable only for a proportionate part of the obligation. 24 The judgment debt of P13,632.00 should, therefore,
be pro-rated in equal shares to Comintan and Zamora.
Regarding Lot 5785-B, it appears that no public sale has yet been conducted by the Bureau of Lands and, therefore,
petitioner is entitled to remain in possession thereof. This is not disputed by respondent Eleuterio Zamora. 25 After
public sale is had and in the event that Ortiz is not declared the successful bidder, then he should be reimbursed by
respondent Zamora in the corresponding amount for the improvements on Lot 5785-B.
WHEREFORE, in view hereof, the Order of respondent Court of November 18, 1970 is hereby modified to conform
to the foregoing judgment. The Writ of Preliminary Injunction, dated January 29, 1971, is hereby dissolved. Without
special pronouncement as to costs.

(18) 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.

I
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.

(19) G.R. No. 156132

February 6, 2007

CITIBANK, N.A. (Formerly First National City Bank) and INVESTORS FINANCE CORPORATION,
doing
business
under
the
name
and
style
of
FNCB
Finance, Petitioners,
vs.
MODESTA R. SABENIANO, Respondent.
RESOLUTION
CHICO-NAZARIO, J.:
On 16 October 2006, this Court promulgated its Decision 1 in the above-entitled case, the dispositive portion of
which reads
IN VIEW OF THE FOREGOING, the instant Petition is PARTLY GRANTED. The assailed Decision of the Court
of Appeals in CA-G.R. No. 51930, dated 26 March 2002, as already modified by its Resolution, dated 20 November
2002, is hereby AFFIRMED WITH MODIFICATION, as follows
1. PNs No. 23356 and 23357 are DECLARED subsisting and outstanding. Petitioner Citibank
is ORDEREDto return to respondent the principal amounts of the said PNs, amounting to Three Hundred
Eighteen Thousand Eight Hundred Ninety-Seven Pesos and Thirty-Four Centavos (P318,897.34) and Two
Hundred Three Thousand One Hundred Fifty Pesos (P203,150.00), respectively, plus the stipulated interest
of Fourteen and a half percent (14.5%) per annum, beginning 17 March 1977;
2. The remittance of One Hundred Forty-Nine Thousand Six Hundred Thirty Two US Dollars and NinetyNine Cents (US$149,632.99) from respondents Citibank-Geneva accounts to petitioner Citibank in Manila,
and the application of the same against respondents outstanding loans with the latter,
is DECLAREDillegal, null and void. Petitioner Citibank is ORDERED to refund to respondent the said
amount, or its equivalent in Philippine currency using the exchange rate at the time of payment, plus the
stipulated interest for each of the fiduciary placements and current accounts involved, beginning 26
October 1979;
3. Petitioner Citibank is ORDERED to pay respondent moral damages in the amount of Three Hundred
Thousand Pesos (P300,000.00); exemplary damages in the amount of Two Hundred Fifty Thousand Pesos
(P250,000.00); and attorneys fees in the amount of Two Hundred Thousand Pesos (P200,000.00); and
4. Respondent is ORDERED to pay petitioner Citibank the balance of her outstanding loans, which, from
the respective dates of their maturity to 5 September 1979, was computed to be in the sum of One Million
Sixty-Nine Thousand Eight Hundred Forty-Seven Pesos and Forty Centavos (P1,069,847.40), inclusive of
interest. These outstanding loans shall continue to earn interest, at the rates stipulated in the corresponding
PNs, from 5 September 1979 until payment thereof.
Subsequent thereto, respondent Modesta R. Sabeniano filed an Urgent Motion to Clarify and/or Confirm Decision
with Notice of Judgment on 20 October 2006; while, petitioners Citibank, N.A. and FNCB Finance 2 filed their
Motion for Partial Reconsideration of the foregoing Decision on 6 November 2006.

The facts of the case, as determined by this Court in its Decision, may be summarized as follows.
Respondent was a client of petitioners. She had several deposits and market placements with petitioners, among
which were her savings account with the local branch of petitioner Citibank (Citibank-Manila 3 ); money market
placements with petitioner FNCB Finance; and dollar accounts with the Geneva branch of petitioner Citibank
(Citibank-Geneva). At the same time, respondent had outstanding loans with petitioner Citibank, incurred at
Citibank-Manila, the principal amounts aggregating to P1,920,000.00, all of which had become due and demandable
by May 1979. Despite repeated demands by petitioner Citibank, respondent failed to pay her outstanding loans.
Thus, petitioner Citibank used respondents deposits and money market placements to off-set and liquidate her
outstanding obligations, as follows
Respondents outstanding obligation (principal and interest as of 26 October 1979)
Less
:

P 2,156,940.58

Proceeds from respondents money market placements with petitioner

FNCB Finance (principal and interest as of 5 September 1979)
(1,022,916.66)
Deposits in respondents bank accounts with petitioner Citibank

(31,079.14)

Proceeds of respondents money market placements and dollar accounts with

Citibank-Geneva (peso equivalent as of 26 October 1979)
(1,102,944.78)
Balance of respondents obligation
P 0.00
Respondent, however, denied having any outstanding loans with petitioner Citibank. She likewise denied that she
was duly informed of the off-setting or compensation thereof made by petitioner Citibank using her deposits and
money market placements with petitioners. Hence, respondent sought to recover her deposits and money market
placements.
Respondent instituted a complaint for "Accounting, Sum of Money and Damages" against petitioners, docketed as
Civil Case No. 11336, before the Regional Trial Court (RTC) of Makati City. After trial proper, which lasted for a
decade, the RTC rendered a Decision4 on 24 August 1995, the dispositive portion of which reads
WHEREFORE, in view of all the foregoing, decision is hereby rendered as follows:
(1) Declaring as illegal, null and void the setoff effected by the defendant Bank [petitioner Citibank] of
plaintiffs [respondent Sabeniano] dollar deposit with Citibank, Switzerland, in the amount of
US$149,632.99, and ordering the said defendant [petitioner Citibank] to refund the said amount to the
plaintiff with legal interest at the rate of twelve percent (12%) per annum, compounded yearly, from 31
October 1979 until fully paid, or its peso equivalent at the time of payment;
(2) Declaring the plaintiff [respondent Sabeniano] indebted to the defendant Bank [petitioner Citibank] in
the amount of P1,069,847.40 as of 5 September 1979 and ordering the plaintiff [respondent Sabeniano] to
pay said amount, however, there shall be no interest and penalty charges from the time the illegal setoff was
effected on 31 October 1979;
(3) Dismissing all other claims and counterclaims interposed by the parties against each other.
Costs against the defendant Bank.
All the parties appealed the afore-mentioned RTC Decision to the Court of Appeals, docketed as CA-G.R. CV No.
51930. On 26 March 2002, the appellate court promulgated its Decision, 5 ruling entirely in favor of respondent, to
wit

Wherefore, premises considered, the assailed 24 August 1995 Decision of the court a quo is hereby AFFIRMED
with MODIFICATION, as follows:
1. Declaring as illegal, null and void the set-off effected by the defendant-appellant Bank of the plaintiffappellants dollar deposit with Citibank, Switzerland, in the amount of US$149,632.99, and ordering
defendant-appellant Citibank to refund the said amount to the plaintiff-appellant with legal interest at the
rate of twelve percent (12%) per annum, compounded yearly, from 31 October 1979 until fully paid, or its
peso equivalent at the time of payment;
2. As defendant-appellant Citibank failed to establish by competent evidence the alleged indebtedness of
plaintiff-appellant, the set-off of P1,069,847.40 in the account of Ms. Sabeniano is hereby declared as
without legal and factual basis;
3. As defendants-appellants failed to account the following plaintiff-appellants money market placements,
savings account and current accounts, the former is hereby ordered to return the same, in accordance with
the terms and conditions agreed upon by the contending parties as evidenced by the certificates of
investments, to wit:
(i) Citibank NNPN Serial No. 023356 (Cancels and Supersedes NNPN No. 22526) issued on 17
March 1977, P318,897.34 with 14.50% interest p.a.;
(ii) Citibank NNPN Serial No. 23357 (Cancels and Supersedes NNPN No. 22528) issued on 17
March 1977, P203,150.00 with 14.50 interest p.a.;
(iii) FNCB NNPN Serial No. 05757 (Cancels and Supersedes NNPN No. 04952), issued on 02
June 1977, P500,000.00 with 17% interest p.a.;
(iv) FNCB NNPN Serial No. 05758 (Cancels and Supersedes NNPN No. 04962), issued on 02
June 1977, P500,000.00 with 17% interest per annum;
(v) The Two Million (P2,000,000.00) money market placements of Ms. Sabeniano with the Ayala
Investment & Development Corporation (AIDC) with legal interest at the rate of twelve percent
(12%) per annum compounded yearly, from 30 September 1976 until fully paid;
4. Ordering defendants-appellants to jointly and severally pay the plaintiff-appellant the sum of FIVE
HUNDRED THOUSAND PESOS (P500,000.00) by way of moral damages, FIVE HUNDRED
THOUSAND PESOS (P500,000.00) as exemplary damages, and ONE HUNDRED THOUSAND PESOS
(P100,000.00) as attorneys fees.
Acting on petitioners Motion for Partial Reconsideration, the Court of Appeals issued a Resolution, 6 dated 20
November 2002, modifying its earlier Decision, thus
WHEREFORE, premises considered, the instant Motion for Reconsideration is PARTIALLY GRANTED as Subparagraph (V) paragraph 3 of the assailed Decisions dispositive portion is hereby ordered DELETED.
The challenged 26 March 2002 Decision of the Court is AFFIRMED with MODIFICATION.
Since the Court of Appeals Decision, dated 26 March 2002, as modified by the Resolution of the same court, dated
20 November 2002, was still principally in favor of respondent, petitioners filed the instant Petition for Review
on Certiorari under Rule 45 of the Revised Rules of Court. After giving due course to the instant Petition, this Court
promulgated on 16 October 2006 its Decision, now subject of petitioners Motion for Partial
Reconsideration.1awphi1.net

Among the numerous grounds raised by petitioners in their Motion for Partial Reconsideration, this Court shall
address and discuss herein only particular points that had not been considered or discussed in its Decision. Even in
consideration of these points though, this Court remains unconvinced that it should modify or reverse in any way its
disposition of the case in its earlier Decision.
As to the off-setting or compensation of respondents outstanding loan balance with her dollar deposits in CitibankGeneva
Petitioners take exception to the following findings made by this Court in its Decision, dated 16 October 2006,
disallowing the off-setting or compensation of the balance of respondents outstanding loans using her dollar
deposits in Citibank-Geneva
Without the Declaration of Pledge, petitioner Citibank had no authority to demand the remittance of respondents
dollar accounts with Citibank-Geneva and to apply them to her outstanding loans. It cannot effect legal
compensation under Article 1278 of the Civil Code since, petitioner Citibank itself admitted that Citibank-Geneva is
a distinct and separate entity. As for the dollar accounts, respondent was the creditor and Citibank-Geneva is the
debtor; and as for the outstanding loans, petitioner Citibank was the creditor and respondent was the debtor. The
parties in these transactions were evidently not the principal creditor of each other.
Petitioners maintain that respondents Declaration of Pledge, by virtue of which she supposedly assigned her dollar
accounts with Citibank-Geneva as security for her loans with petitioner Citibank, is authentic and, thus, valid and
binding upon respondent. Alternatively, petitioners aver that even without said Declaration of Pledge, the off-setting
or compensation made by petitioner Citibank using respondents dollar accounts with Citibank-Geneva to liquidate
the balance of her outstanding loans with Citibank-Manila was expressly authorized by respondent herself in the
promissory notes (PNs) she signed for her loans, as well as sanctioned by Articles 1278 to 1290 of the Civil Code.
This alternative argument is anchored on the premise that all branches of petitioner Citibank in the Philippines and
abroad are part of a single worldwide corporate entity and share the same juridical personality. In connection
therewith, petitioners deny that they ever admitted that Citibank-Manila and Citibank-Geneva are distinct and
separate entities.
Petitioners call the attention of this Court to the following provision found in all of the PNs 7 executed by respondent
for her loans
At or after the maturity of this note, or when same becomes due under any of the provisions hereof, any money,
stocks, bonds, or other property of any kind whatsoever, on deposit or otherwise, to the credit of the undersigned on
the books of CITIBANK, N.A. in transit or in their possession, may without notice be applied at the discretion of the
said bank to the full or partial payment of this note.
It is the petitioners contention that the term "Citibank, N.A." used therein should be deemed to refer to all branches
of petitioner Citibank in the Philippines and abroad; thus, giving petitioner Citibank the authority to apply as
payment for the PNs even respondents dollar accounts with Citibank-Geneva. Still proceeding from the premise
that all branches of petitioner Citibank should be considered as a single entity, then it should not matter that the
respondent obtained the loans from Citibank-Manila and her deposits were with Citibank-Geneva. Respondent
should be considered the debtor (for the loans) and creditor (for her deposits) of the same entity, petitioner Citibank.
Since petitioner Citibank and respondent were principal creditors of each other, in compliance with the requirements
under Article 1279 of the Civil Code, 8 then the former could have very well used off-setting or compensation to
extinguish the parties obligations to one another. And even without the PNs, off-setting or compensation was still
authorized because according to Article 1286 of the Civil Code, "Compensation takes place by operation of law,
even though the debts may be payable at different places, but there shall be an indemnity for expenses of exchange
or transportation to the place of payment."
Pertinent provisions of Republic Act No. 8791, otherwise known as the General Banking Law of 2000, governing
bank branches are reproduced below

SEC. 20. Bank Branches. Universal or commercial banks may open branches or other offices within or outside the
Philippines upon prior approval of the Bangko Sentral.
Branching by all other banks shall be governed by pertinent laws.
A bank may, subject to prior approval of the Monetary Board, use any or all of its branches as outlets for the
presentation and/or sale of the financial products of its allied undertaking or its investment house units.
A bank authorized to establish branches or other offices shall be responsible for all business conducted in such
branches and offices to the same extent and in the same manner as though such business had all been conducted in
the head office. A bank and its branches and offices shall be treated as one unit.
xxxx
SEC. 72. Transacting Business in the Philippines. The entry of foreign banks in the Philippines through the
establishment of branches shall be governed by the provisions of the Foreign Banks Liberalization Act.
The conduct of offshore banking business in the Philippines shall be governed by the provisions of Presidential
Decree No. 1034, otherwise known as the "Offshore Banking System Decree."
xxxx
SEC. 74. Local Branches of Foreign Banks. In case of a foreign bank which has more than one (1) branch in the
Philippines, all such branches shall be treated as one (1) unit for the purpose of this Act, and all references to the
Philippine branches of foreign banks shall be held to refer to such units.
SEC. 75. Head Office Guarantee. In order to provide effective protection of the interests of the depositors and
other creditors of Philippine branches of a foreign bank, the head office of such branches shall fully guarantee the
prompt payment of all liabilities of its Philippine branch.
Residents and citizens of the Philippines who are creditors of a branch in the Philippines of a foreign bank shall have
preferential rights to the assets of such branch in accordance with existing laws.
Republic Act No. 7721, otherwise known as the Foreign Banks Liberalization Law, lays down the policies and
regulations specifically concerning the establishment and operation of local branches of foreign banks. Relevant
provisions of the said statute read
Sec. 2. Modes of Entry. - The Monetary Board may authorize foreign banks to operate in the Philippine banking
system through any of the following modes of entry: (i) by acquiring, purchasing or owning up to sixty percent
(60%) of the voting stock of an existing bank; (ii) by investing in up to sixty percent (60%) of the voting stock of a
new banking subsidiary incorporated under the laws of the Philippines; or (iii) by establishing branches with full
banking authority: Provided, That a foreign bank may avail itself of only one (1) mode of entry: Provided, further,
That a foreign bank or a Philippine corporation may own up to a sixty percent (60%) of the voting stock of only one
(1) domestic bank or new banking subsidiary.
Sec. 5. Head Office Guarantee. - The head office of foreign bank branches shall guarantee prompt payment of all
liabilities of its Philippine branches.
It is true that the afore-quoted Section 20 of the General Banking Law of 2000 expressly states that the bank and its
branches shall be treated as one unit. It should be pointed out, however, that the said provision applies to a
universal9 or commercial bank,10 duly established and organized as a Philippine corporation in accordance with
Section 8 of the same statute,11 and authorized to establish branches within or outside the Philippines.

The General Banking Law of 2000, however, does not make the same categorical statement as regards to foreign
banks and their branches in the Philippines. What Section 74 of the said law provides is that in case of a foreign
bank with several branches in the country, all such branches shall be treated as one unit. As to the relations between
the local branches of a foreign bank and its head office, Section 75 of the General Banking Law of 2000 and Section
5 of the Foreign Banks Liberalization Law provide for a "Home Office Guarantee," in which the head office of the
foreign bank shall guarantee prompt payment of all liabilities of its Philippine branches. While the Home Office
Guarantee is in accord with the principle that these local branches, together with its head office, constitute but one
legal entity, it does not necessarily support the view that said principle is true and applicable in all circumstances.
The Home Office Guarantee is included in Philippine statutes clearly for the protection of the interests of the
depositors and other creditors of the local branches of a foreign bank. 12 Since the head office of the bank is located
in another country or state, such a guarantee is necessary so as to bring the head office within Philippine jurisdiction,
and to hold the same answerable for the liabilities of its Philippine branches. Hence, the principle of the singular
identity of that the local branches and the head office of a foreign bank are more often invoked by the clients in
order to establish the accountability of the head office for the liabilities of its local branches. It is under such
attendant circumstances in which the American authorities and jurisprudence presented by petitioners in their
Motion for Partial Reconsideration were rendered.
Now the question that remains to be answered is whether the foreign bank can use the principle for a reverse
purpose, in order to extend the liability of a client to the foreign banks Philippine branch to its head office, as well
as to its branches in other countries. Thus, if a client obtains a loan from the foreign banks Philippine branch, does
it absolutely and automatically make the client a debtor, not just of the Philippine branch, but also of the head office
and all other branches of the foreign bank around the world? This Court rules in the negative.
There being a dearth of Philippine authorities and jurisprudence on the matter, this Court, just as what petitioners
have done, turns to American authorities and jurisprudence. American authorities and jurisprudence are significant
herein considering that the head office of petitioner Citibank is located in New York, United States of America
(U.S.A.).
Unlike Philippine statutes, the American legislation explicitly defines the relations among foreign branches of an
American bank. Section 25 of the United States Federal Reserve Act13 states that
Every national banking association operating foreign branches shall conduct the accounts of each foreign branch
independently of the accounts of other foreign branches established by it and of its home office, and shall at the end
of each fiscal period transfer to its general ledger the profit or loss accrued at each branch as a separate item.
Contrary to petitioners assertion that the accounts of Citibank-Manila and Citibank-Geneva should be deemed as a
single account under its head office, the foregoing provision mandates that the accounts of foreign branches of an
American bank shall be conducted independently of each other. Since the head office of petitioner Citibank is in the
U.S.A., then it is bound to treat its foreign branches in accordance with the said provision. It is only at the end of its
fiscal period that the bank is required to transfer to its general ledger the profit or loss accrued at each branch, but
still reporting it as a separate item. It is by virtue of this provision that the Circuit Court of Appeals of New York
declared in Pan-American Bank and Trust Co. v. National City Bank of New York 14 that a branch is not merely a
tellers window; it is a separate business entity.
The circumstances in the case of McGrath v. Agency of Chartered Bank of India, Australia & China 15 are closest to
the one at bar. In said case, the Chartered Bank had branches in several countries, including one in Hamburg,
Germany and another in New York, U.S.A., and yet another in London, United Kingdom. The New York branch
entered in its books credit in favor of four German firms. Said credit represents collections made from bills of
exchange delivered by the four German firms. The same four German firms subsequently became indebted to the
Hamburg branch. The London branch then requested for the transfer of the credit in the name of the German firms
from the New York branch so as to be applied or setoff against the indebtedness of the same firms to the Hamburg
branch. One of the question brought before the U.S. District Court of New York was "whether or not the debts and
the alleged setoffs thereto are mutual," which could be answered by determining first whether the New York and

Hamburg branches of Chartered Bank are individual business entities or are one and the same entity. In denying the
right of the Hamburg branch to setoff, the U.S. District Court ratiocinated that
The structure of international banking houses such as Chartered bank defies one rigorous description. Suffice it to
say for present analysis, branches or agencies of an international bank have been held to be independent entities
for a variety of purposes (a) deposits payable only at branch where made; Mutaugh v. Yokohama Specie Bank, Ltd.,
1933, 149 Misc. 693, 269 N.Y.S. 65; Bluebird Undergarment Corp. v. Gomez, 1931, 139 Misc. 742, 249 N.Y.S. 319;
(b) checks need be honored only when drawn on branch where deposited; Chrzanowska v. Corn Exchange Bank,
1916, 173 App. Div. 285, 159 N.Y.S. 385, affirmed 1919, 225 N.Y. 728, 122 N.E. 877; subpoena duces tecum on
foreign banks record barred; In re Harris, D.C.S.D.N.Y. 1939, 27 F. Supp. 480; (d) a foreign branch separate for
collection of forwarded paper; Pan-American Bank and Trust Company v. National City Bank of New York, 2 Cir.,
1925, 6 F. 2d 762, certiorari denied 1925, 269 U.S. 554, 46 S. Ct. 18, 70 L. Ed. 408. Thus in law there is nothing
innately unitary about the organization of international banking institutions.
Defendant, upon its oral argument and in its brief, relies heavily on Sokoloff v. National City Bank of New
York,1928, 250 N.Y. 69, 164 N.E. 745, as authority for the proposition that Chartered Bank, not the Hamburg or
New York Agency, is ultimately responsible for the amounts owing its German customers and, conversely, it is to
Chartered Bank that the German firms owe their obligations. The Sokoloff case, aside from its violently different fact
situation, is centered on the legal problem of default of payment and consequent breach of contract by a branch
bank. It does not stand for the principle that in every instance an international bank with branches is but one
legal entity for all purposes. The defendant concedes in its brief (p. 15) that there are purposes for which the various
agencies and branches of Chartered Bank may be treated in law as separate entities. I fail to see the applicability
of Sokoloff either as a guide to or authority for the resolution of this problem. The facts before me and the cases
catalogued supra lend weight to the view that we are dealing here with Agencies independent of one another.
xxxx
I hold that for instant purposes the Hamburg Agency and defendant were independent business entities, and the
attempted setoff may not be utilized by defendant against its debt to the German firms obligated to the Hamburg
Agency.
Going back to the instant Petition, although this Court concedes that all the Philippine branches of petitioner
Citibank should be treated as one unit with its head office, it cannot be persuaded to declare that these Philippine
branches are likewise a single unit with the Geneva branch. It would be stretching the principle way beyond its
intended purpose.
Therefore, this Court maintains its original position in the Decision that the off-setting or compensation of
respondents loans with Citibank-Manila using her dollar accounts with Citibank-Geneva cannot be effected. The
parties cannot be considered principal creditor of the other. As for the dollar accounts, respondent was the creditor
and Citibank-Geneva was the debtor; and as for the outstanding loans, petitioner Citibank, particularly CitibankManila, was the creditor and respondent was the debtor. Since legal compensation was not possible, petitioner
Citibank could only use respondents dollar accounts with Citibank-Geneva to liquidate her loans if she had
expressly authorized it to do so by contract.
Respondent cannot be deemed to have authorized the use of her dollar deposits with Citibank-Geneva to liquidate
her loans with petitioner Citibank when she signed the PNs16 for her loans which all contained the provision that
At or after the maturity of this note, or when same becomes due under any of the provisions hereof, any money,
stocks, bonds, or other property of any kind whatsoever, on deposit or otherwise, to the credit of the undersigned on
the books of CITIBANK, N.A. in transit or in their possession, may without notice be applied at the discretion of the
said bank to the full or partial payment of this note.
As has been established in the preceding discussion, "Citibank, N.A." can only refer to the local branches of
petitioner Citibank together with its head office. Unless there is any showing that respondent understood and

expressly agreed to a more far-reaching interpretation, the reference to Citibank, N.A. cannot be extended to all
other branches of petitioner Citibank all over the world. Although theoretically, books of the branches form part of
the books of the head office, operationally and practically, each branch maintains its own books which shall only be
later integrated and balanced with the books of the head office. Thus, it is very possible to identify and segregate the
books of the Philippine branches of petitioner Citibank from those of Citibank-Geneva, and to limit the authority
granted for application as payment of the PNs to respondents deposits in the books of the former.
Moreover, the PNs can be considered a contract of adhesion, the PNs being in standard printed form prepared by
petitioner Citibank. Generally, stipulations in a contract come about after deliberate drafting by the parties thereto,
there are certain contracts almost all the provisions of which have been drafted only by one party, usually a
corporation. Such contracts are called contracts of adhesion, because the only participation of the party is the
affixing of his signature or his "adhesion" thereto. This being the case, the terms of such contract are to be construed
strictly against the party which prepared it.17
As for the supposed Declaration of Pledge of respondents dollar accounts with Citibank-Geneva as security for the
loans, this Court stands firm on its ruling that the non-production thereof is fatal to petitioners cause in light of
respondents claim that her signature on such document was a forgery. It bears to note that the original of the
Declaration of Pledge is with Citibank-Geneva, a branch of petitioner Citibank. As between respondent and
petitioner Citibank, the latter has better access to the document. The constant excuse forwarded by petitioner
Citibank that Citibank-Geneva refused to return possession of the original Declaration of Pledge to Citibank-Manila
only supports this Courts finding in the preceding paragraphs that the two branches are actually operating separately
and independently of each other.
Further, petitioners keep playing up the fact that respondent, at the beginning of the trial, refused to give her
specimen signatures to help establish whether her signature on the Declaration of Pledge was indeed forged.
Petitioners seem to forget that subsequently, respondent, on advice of her new counsel, already offered to cooperate
in whatever manner so as to bring the original Declaration of Pledge before the RTC for inspection. The exchange of
the counsels for the opposing sides during the hearing on 24 July 1991 before the RTC reveals the apparent
willingness of respondents counsel to undertake whatever course of action necessary for the production of the
contested document, and the evasive, non-committal, and uncooperative attitude of petitioners counsel. 18
Lastly, this Courts ruling striking down the Declaration of Pledge is not entirely based on respondents allegation of
forgery. In its Decision, this Court already extensively discussed why it found the said Declaration of Pledge highly
suspicious and irregular, to wit
First of all, it escapes this Court why petitioner Citibank took care to have the Deeds of Assignment of the PNs
notarized, yet left the Declaration of Pledge unnotarized. This Court would think that petitioner Citibank would take
greater cautionary measures with the preparation and execution of the Declaration of Pledge because it involved
respondents "all present and future fiduciary placements" with a Citibank branch in another country, specifically, in
Geneva, Switzerland. While there is no express legal requirement that the Declaration of Pledge had to be notarized
to be effective, even so, it could not enjoy the same prima facie presumption of due execution that is extended to
notarized documents, and petitioner Citibank must discharge the burden of proving due execution and authenticity
of the Declaration of Pledge.
Second, petitioner Citibank was unable to establish the date when the Declaration of Pledge was actually executed.
The photocopy of the Declaration of Pledge submitted by petitioner Citibank before the RTC was undated. It
presented only a photocopy of the pledge because it already forwarded the original copy thereof to Citibank-Geneva
when it requested for the remittance of respondents dollar accounts pursuant thereto. Respondent, on the other hand,
was able to secure a copy of the Declaration of Pledge, certified by an officer of Citibank-Geneva, which bore the
date 24 September 1979. Respondent, however, presented her passport and plane tickets to prove that she was out of
the country on the said date and could not have signed the pledge. Petitioner Citibank insisted that the pledge was
signed before 24 September 1979, but could not provide an explanation as to how and why the said date was written
on the pledge. Although Mr. Tan testified that the Declaration of Pledge was signed by respondent personally before
him, he could not give the exact date when the said signing took place. It is important to note that the copy of the
Declaration of Pledge submitted by the respondent to the RTC was certified by an officer of Citibank-Geneva, which

had possession of the original copy of the pledge. It is dated 24 September 1979, and this Court shall abide by the
presumption that the written document is truly dated. Since it is undeniable that respondent was out of the country
on 24 September 1979, then she could not have executed the pledge on the said date.
Third, the Declaration of Pledge was irregularly filled-out. The pledge was in a standard printed form. It was
constituted in favor of Citibank, N.A., otherwise referred to therein as the Bank. It should be noted, however, that in
the space which should have named the pledgor, the name of petitioner Citibank was typewritten, to wit
The pledge right herewith constituted shall secure all claims which the Bank now has or in the future acquires
against Citibank, N.A., Manila (full name and address of the Debtor), regardless of the legal cause or the transaction
(for example current account, securities transactions, collections, credits, payments, documentary credits and
collections) which gives rise thereto, and including principal, all contractual and penalty interest, commissions,
charges, and costs.
The pledge, therefore, made no sense, the pledgor and pledgee being the same entity. Was a mistake made by
whoever filled-out the form? Yes, it could be a possibility. Nonetheless, considering the value of such a document,
the mistake as to a significant detail in the pledge could only be committed with gross carelessness on the part of
petitioner Citibank, and raised serious doubts as to the authenticity and due execution of the same. The Declaration
of Pledge had passed through the hands of several bank officers in the country and abroad, yet, surprisingly and
implausibly, no one noticed such a glaring mistake.
Lastly, respondent denied that it was her signature on the Declaration of Pledge. She claimed that the signature was a
forgery. When a document is assailed on the basis of forgery, the best evidence rule applies
Basic is the rule of evidence that when the subject of inquiry is the contents of a document, no evidence is
admissible other than the original document itself except in the instances mentioned in Section 3, Rule 130 of the
Revised Rules of Court. Mere photocopies of documents are inadmissible pursuant to the best evidence rule. This is
especially true when the issue is that of forgery.
As a rule, forgery cannot be presumed and must be proved by clear, positive and convincing evidence and the
burden of proof lies on the party alleging forgery. The best evidence of a forged signature in an instrument is the
instrument itself reflecting the alleged forged signature. The fact of forgery can only be established by a comparison
between the alleged forged signature and the authentic and genuine signature of the person whose signature is
theorized upon to have been forged. Without the original document containing the alleged forged signature, one
cannot make a definitive comparison which would establish forgery. A comparison based on a mere xerox copy or
reproduction of the document under controversy cannot produce reliable results.
Respondent made several attempts to have the original copy of the pledge produced before the RTC so as to have it
examined by experts. Yet, despite several Orders by the RTC, petitioner Citibank failed to comply with the
production of the original Declaration of Pledge. It is admitted that Citibank-Geneva had possession of the original
copy of the pledge. While petitioner Citibank in Manila and its branch in Geneva may be separate and distinct
entities, they are still incontestably related, and between petitioner Citibank and respondent, the former had more
influence and resources to convince Citibank-Geneva to return, albeit temporarily, the original Declaration of
Pledge. Petitioner Citibank did not present any evidence to convince this Court that it had exerted diligent efforts to
secure the original copy of the pledge, nor did it proffer the reason why Citibank-Geneva obstinately refused to give
it back, when such document would have been very vital to the case of petitioner Citibank. There is thus no
justification to allow the presentation of a mere photocopy of the Declaration of Pledge in lieu of the original, and
the photocopy of the pledge presented by petitioner Citibank has nil probative value. In addition, even if this Court
cannot make a categorical finding that respondents signature on the original copy of the pledge was forged, it is
persuaded that petitioner Citibank willfully suppressed the presentation of the original document, and takes into
consideration the presumption that the evidence willfully suppressed would be adverse to petitioner Citibank if
produced.

As far as the Declaration of Pledge is concerned, petitioners failed to submit any new evidence or argument that was
not already considered by this Court when it rendered its Decision.
As to the value of the dollar deposits in Citibank-Geneva ordered refunded to respondent
In case petitioners are still ordered to refund to respondent the amount of her dollar accounts with Citibank-Geneva,
petitioners beseech this Court to adjust the nominal values of respondents dollar accounts and/or her overdue peso
loans by using the values of the currencies stipulated at the time the obligations were established in 1979, to address
the alleged inequitable consequences resulting from the extreme and extraordinary devaluation of the Philippine
currency that occurred in the course of the Asian crisis of 1997. Petitioners base their request on Article 1250 of the
Civil Code which reads, "In case an extraordinary inflation or deflation of the currency stipulated should supervene,
the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there
is an agreement to the contrary."
It is well-settled that Article 1250 of the Civil Code becomes applicable only when there is extraordinary inflation or
deflation of the currency. Inflation has been defined as the sharp increase of money or credit or both without a
corresponding increase in business transaction. There is inflation when there is an increase in the volume of money
and credit relative to available goods resulting in a substantial and continuing rise in the general price
level.19 In Singson v. Caltex (Philippines), Inc.,20 this Court already provided a discourse as to what constitutes as
extraordinary inflation or deflation of currency, thus
We have held extraordinary inflation to exist when there is a decrease or increase in the purchasing power of the
Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such
increase or decrease could not have been reasonably foreseen or was manifestly beyond the contemplation of the
parties at the time of the establishment of the obligation.
An example of extraordinary inflation, as cited by the Court in Filipino Pipe and Foundry Corporation vs.
NAWASA,supra, is that which happened to the deutschmark in 1920. Thus:
"More recently, in the 1920s, Germany experienced a case of hyperinflation. In early 1921, the value of the German
mark was 4.2 to the U.S. dollar. By May of the same year, it had stumbled to 62 to the U.S. dollar. And as prices
went up rapidly, so that by October 1923, it had reached 4.2 trillion to the U.S. dollar!" (Bernardo M. Villegas &
Victor R. Abola, Economics, An Introduction [Third Edition]).
As reported, "prices were going up every week, then every day, then every hour. Women were paid several times a
day so that they could rush out and exchange their money for something of value before what little purchasing
power was left dissolved in their hands. Some workers tried to beat the constantly rising prices by throwing their
money out of the windows to their waiting wives, who would rush to unload the nearly worthless paper. A postage
stamp cost millions of marks and a loaf of bread, billions." (Sidney Rutberg, "The Money Balloon", New York:
Simon and Schuster, 1975, p. 19, cited in "Economics, An Introduction" by Villegas & Abola, 3rd ed.)
The supervening of extraordinary inflation is never assumed. The party alleging it must lay down the factual basis
for the application of Article 1250.
Thus, in the Filipino Pipe case, the Court acknowledged that the voluminous records and statistics submitted by
plaintiff-appellant proved that there has been a decline in the purchasing power of the Philippine peso, but this
downward fall cannot be considered "extraordinary" but was simply a universal trend that has not spared our
country. Similarly, in Huibonhoa vs. Court of Appeals, the Court dismissed plaintiff-appellant's unsubstantiated
allegation that the Aquino assassination in 1983 caused building and construction costs to double during the period
July 1983 to February 1984. In Serra vs. Court of Appeals, the Court again did not consider the decline in the peso's
purchasing power from 1983 to 1985 to be so great as to result in an extraordinary inflation.
Like the Serra and Huibonhoa cases, the instant case also raises as basis for the application of Article 1250 the
Philippine economic crisis in the early 1980s --- when, based on petitioner's evidence, the inflation rate rose to

50.34% in 1984. We hold that there is no legal or factual basis to support petitioner's allegation of the existence of
extraordinary inflation during this period, or, for that matter, the entire time frame of 1968 to 1983, to merit the
adjustment of the rentals in the lease contract dated July 16, 1968. Although by petitioner's evidence there was a
decided decline in the purchasing power of the Philippine peso throughout this period, we are hard put to treat this as
an "extraordinary inflation" within the meaning and intent of Article 1250.
Rather, we adopt with approval the following observations of the Court of Appeals on petitioner's evidence,
especially the NEDA certification of inflation rates based on consumer price index:
xxx (a) from the period 1966 to 1986, the official inflation rate never exceeded 100% in any single year; (b) the
highest official inflation rate recorded was in 1984 which reached only 50.34%; (c) over a twenty one (21) year
period, the Philippines experienced a single-digit inflation in ten (10) years (i.e., 1966, 1967, 1968, 1969, 1975,
1976, 1977, 1978, 1983 and 1986); (d) in other years (i.e., 1970, 1971, 1972, 1973, 1974, 1979, 1980, 1981, 1982,
1984 and 1989) when the Philippines experienced double-digit inflation rates, the average of those rates was only
20.88%; (e) while there was a decline in the purchasing power of the Philippine currency from the period 1966 to
1986, such cannot be considered as extraordinary; rather, it is a normal erosion of the value of the Philippine peso
which is a characteristic of most currencies.
"Erosion" is indeed an accurate description of the trend of decline in the value of the peso in the past three to four
decades. Unfortunate as this trend may be, it is certainly distinct from the phenomenon contemplated by Article
1250.
Moreover, this Court has held that the effects of extraordinary inflation are not to be applied without an official
declaration thereof by competent authorities.
The burden of proving that there had been extraordinary inflation or deflation of the currency is upon the party that
alleges it. Such circumstance must be proven by competent evidence, and it cannot be merely assumed. In this case,
petitioners presented no proof as to how much, for instance, the price index of goods and services had risen during
the intervening period.21 All the information petitioners provided was the drop of the U.S. dollar-Philippine peso
exchange rate by 17 points from June 1997 to January 1998. While the said figure was based on the statistics of
the Bangko Sentral ng Pilipinas (BSP), it is also significant to note that the BSP did not categorically declare that
the same constitute as an extraordinary inflation. The existence of extraordinary inflation must be officially
proclaimed by competent authorities, and the only competent authority so far recognized by this Court to make such
an official proclamation is the BSP.22
Neither can this Court, by merely taking judicial notice of the Asian currency crisis in 1997, already declare that
there had been extraordinary inflation. It should be recalled that the Philippines likewise experienced economic
crisis in the 1980s, yet this Court did not find that extraordinary inflation took place during the said period so as to
warrant the application of Article 1250 of the Civil Code.
Furthermore, it is incontrovertible that Article 1250 of the Civil Code is based on equitable considerations. Among
the maxims of equity are (1) he who seeks equity must do equity, and (2) he who comes into equity must come with
clean hands. The latter is a frequently stated maxim which is also expressed in the principle that he who has done
inequity shall not have equity.23 Petitioner Citibank, hence, cannot invoke Article 1250 of the Civil Code because it
does not come to court with clean hands. The delay in the recovery 24 by respondent of her dollar accounts with
Citibank-Geneva was due to the unlawful act of petitioner Citibank in using the same to liquidate respondents
loans. Petitioner Citibank even attempted to justify the off-setting or compensation of respondents loans using her
dollar accounts with Citibank-Geneva by the presentation of a highly suspicious and irregular, and even possibly
forged, Declaration of Pledge.
The damage caused to respondent of the deprivation of her dollar accounts for more than two decades is
unquestionably relatively more extensive and devastating, as compared to whatever damage petitioner Citibank, an
international banking corporation with undoubtedly substantial capital, may have suffered for respondents nonpayment of her loans. It must also be remembered that petitioner Citibank had already considered respondents loans

paid or liquidated by 26 October 1979 after it had fully effected compensation thereof using respondents deposits
and money market placements. All this time, respondents dollar accounts are unlawfully in the possession of and
are being used by petitioner Citibank for its business transactions. In the meantime, respondents businesses failed
and her properties were foreclosed because she was denied access to her funds when she needed them most. Taking
these into consideration, respondents dollar accounts with Citibank-Geneva must be deemed to be subsisting and
continuously deposited with petitioner Citibank all this while, and will only be presently withdrawn by respondent.
Therefore, petitioner Citibank should refund to respondent the U.S. $149,632.99 taken from her Citibank-Geneva
accounts, or its equivalent in Philippine currency using the exchange rate at the time of payment, plus the stipulated
interest for each of the fiduciary placements and current accounts involved, beginning 26 October 1979.
As to respondents Motion to Clarify and/or Confirm Decision with Notice of Judgment
Respondent, in her Motion, is of the mistaken notion that the Court of Appeals Decision, dated 26 March 2002, as
modified by the Resolution of the same court, dated 20 November 2002, would be implemented or executed together
with this Courts Decision.
This Court clarifies that its affirmation of the Decision of the Court of Appeals, as modified, is only to the extent that
it recognizes that petitioners had liabilities to the respondent. However, this Courts Decision modified that of the
appellate courts by making its own determination of the specific liabilities of the petitioners to respondent and the
amounts thereof; as well as by recognizing that respondent also had liabilities to petitioner Citibank and the amount
thereof.
Thus, for purposes of execution, the parties need only refer to the dispositive portion of this Courts Decision, dated
16 October 2006, should it already become final and executory, without any further modifications.
As the last point, there is no merit in respondents Motion for this Court to already declare its Decision, dated 16
October 2006, final and executory. A judgment becomes final and executory by operation of law and, accordingly,
the finality of the judgment becomes a fact upon the lapse of the reglementary period without an appeal or a motion
for new trial or reconsideration being filed. 25 This Court cannot arbitrarily disregard the reglementary period and
declare a judgment final and executory upon the mere motion of one party, for to do so will be a culpable violation
of the right of the other parties to due process.
IN VIEW OF THE FOREGOING, petitioners Motion for Partial Reconsideration of this Courts Decision, dated 16
October 2006, and respondents Motion for this Court to declare the same Decision already final and executory, are
both DENIED for lack of merit.
SO ORDERED.

(20) [G.R. No. 140964. January 16, 2002]

INSULAR LIFE ASSURANCE COMPANY, LTD., INSULAR SAVINGS BANK and JACINTO D.
JIMENEZ, petitioners, vs.ROBERT YOUNG, GABRIEL LA'O II, ARTHUR TAN, LOPE JUBAN,
JR., MARIA LOURDES ONGPIN, ANTONIO ONGPIN, ELSIE DIZON, YOLANDA BAYER,
CECILIA VIRAY, MANUEL VIRAY and JOSE VITO BORROMEO, respondents.
[G.R. No. 142267. January 16, 2002]
INSULAR LIFE ASSURANCE COMPANY, LTD., INSULAR SAVINGS BANK and JACINTO D.
JIMENEZ, petitioners, vs.ROBERT YOUNG, GABRIEL LA'O II, ARTHUR TAN, LOPE JUBAN,
JR., MARIA LOURDES ONGPIN, ANTONIO ONGPIN, ELSIE DIZON, YOLANDA BAYER,

CECILIA VIRAY, MANUEL VIRAY and JOSE VITO BORROMEO, COURT OF APPEALS and
DEPUTY SHERIFF RUBEN NEQUINTO, respondents.
DECISION
SANDOVAL-GUTIERREZ, J.:
Before this Court are two (2) consolidated petitions, the first, docketed as G.R. No. 140964, is a petition for
review on certiorari[1] of the Decision of the Court of Appeals dated September 22, 1999 in CA-G.R. CV No. 54264
reversing the Decision of the Regional Trial Court, Branch 142, Makati City in Civil Case No. 92-049. The
other, G. R. No. 142267, is a petition for certiorari,[2] assailing the Resolution dated March 10, 2000 of the Court of
Appeals (in the same civil case) which granted private respondents' motion for execution pending appeal.
The undisputed facts are:
In December, 1987, respondent Robert Young, together with his associates and co-respondents, namely:
Gabriel La'O II, Arthur Tan, Lope Juban, Jr., Maria Lourdes Ongpin, Antonio Ongpin, Elsie Dizon, Yolanda Bayer,
Cecilia Viray, Manuel Viray and Jose Vito Borromeo, acquired by purchase Home Bankers Savings and Trust Co.,
now petitioner Insular Savings Bank ("the Bank," for brevity), from the Licaros family for P65,000,000.00. Young
and his group obtained 55% equity in the Bank, while Jorge Go and his group owned the remaining 45%.
Subsequently, the Bank granted respondents and others individual loans in the total amount
of P153,000,000.00, secured by promissory notes.[3]
On December, 1990, Benito Araneta, a stockholder of the Bank, signified his intention to purchase 99.82% of
its outstanding capital stock forP340,000,000.00, subject to the condition that the ownership of all the shares will be
consolidated in Young's name. On February 5, 1991, Araneta paid Young P14,000,000.00 as part of the
downpayment.[4]
In order to carry out the intended sale to Araneta, Young bought from Jorge Go and his group their 45% equity
in the Bank for P153,000,000.00. In order to pay this amount, Young obtained a short-term loan
of P170,000,000.00 from International Corporate Bank ("Interbank") to finance the purchase.
However, Araneta backed out from the intended sale and demanded the return of his downpayment.
Meanwhile, Young's loan from Interbank became due, causing his serious financial problem. Consequently,
he engaged the services of Asian Oceanic Investment House, Inc. ("Asian Oceanic"), a domestic company owned
and controlled by another petitioner, Insular Life Assurance Co., Ltd. ("Insular Life"), to look for possible sources of
capital.
On August 27, 1991, through the intervention of Asian Oceanic, Young and Insular Life entered into a Credit
Agreement.[5] Under its provisions, Insular Life extended a loan to Young in the amount of P200,000,000.00. To
secure the loan, Young, acting in his behalf and as attorney-in-fact of the other stockholders, executed on the same
day a Deed of Pledge[6] over 1,324,864 shares which represented 99.82% of the outstanding capital stock of the
Bank. The next day, he also executed a promissory note [7] in favor of Insular Life in the same amount with an
interest rate of 26% per annum to mature 120 days from execution. The Credit Agreement further provides that
Insular Life shall have the prior right to purchase the Schedule I Shares (owned by Young) and the Schedule II

Shares (owned by the other stockholders of the Bank), as well as the 250,000 shares which will be issued after the
additional capital ofP25,000,000.00 (payable from the proceeds of the loan) shall have been infused.
On October 1, 1991, Insular Life and Insular Life Pension Fund formally informed Young of their intention to
acquire 30% and 12%, respectively, of the Bank's outstanding shares, subject to due diligence audit and proper
documentation.[8] On October 9, 1991, Insular Life and Young, authorized to represent the other stockholders,
entered into a Memorandum of Agreement (MOA),[9] wherein Insular Life and its Pension Fund agreed to purchase
830,860 common shares and 311,572 common shares, respectively, for a total consideration
of P198,000,000.00. Under its terms, the MOA is subject to Young's representations and warranties [10] that, as of
September 30, 1991, the Bank has (a) a total outstanding paid-in capital of P157,714,900.00, (b) a total net worth
of P114,801,539.00, and (c) total loans with doubtful recovery of P60,000,000.00. The MOA is also subject to
these "condition precedents":[11] (1) Young shall infuse additional capital of P50,000,000.00 into the Bank, and (2)
Insular Life and its Pension Fund shall undertake a due diligence audit on the Bank to determine whether the
provision for P60,000,000.00 doubtful account made by Young is sufficient.
On October 11, 1991, Insular Life, through a team of auditors led by Mr. Wilfrido Patawaran, conducted a due
diligence audit on the Bank pursuant to the MOA. The audit revealed several check-kiting operations which
amounted to P340,000,000.00. As a result, the Bank's Board of Directors was convened to discuss this matter.
On October 17, 1991, a special meeting of the Bank's directors was held. Chief Executive Officer Antonino L.
Alindogan, Jr. reported to the Board the initial findings of the audit team about the irregularities in the Banks
"kiting operations." When asked to explain these anomalies, Young, who was then the Bank's President, assumed
responsibility since it happened during his incumbency. Thereupon, he offered, among others, to the Bank the 45%
of his holdings as security. He admitted that he has compromised the interest of the Bank and thus tendered his
resignation. The Board deferred its acceptance.[12]
On October 21, 1991, Young signed a letter[13] prepared by Atty. Jacinto Jimenez, counsel of Insular Life,
addressed to Mr. Vicente R. Ayllon, Chairman of the Bank's Board of Directors, stating that due to business reverses,
he shall not be able to pay his obligations under the Credit Agreement between him and Insular Life. Consequently,
Young "unconditionally and irrevocably waive(s) the benefit of the period" of the loan (up to December 26, 1991)
and Insular "may consider (his) obligations thereunder as defaulted." He likewise interposes no objection to Insular
Life's exercise of its rights under the said agreement.
Forthwith, Insular Life instructed its counsel to foreclose the pledge constituted upon the shares. The latter
then sent Young a notice informing him of the sale of the shares in a public auction scheduled on October 28, 1991,
and in the event that the shares are not sold, a second auction sale shall be held the next day, October 29.
On October 28, 1991, only Insular Life submitted a bid, hence, the shares were not sold on that day. The next
day, a second auction was held. Again, Insular Life was the sole bidder. Since the shares were not sold at the two
public auctions, Insular Life appropriated to itself, not only the original 1,324,864 shares, but also the 250,000
shares subsequently issued by the Bank and delivered to Insular Life by way of pledge. Thus, Insular Life gave
Young an acquittance of his entire claim.[14]
Thereafter, title to the said shares was consolidated in the name of Insular Life. On November 12, 1991, the
Bangko Sentral ng Pilipinas' Supervision and Examination Sector approved Insular Life's request to maintain its
present ownership of 99.82% of the Bank.[15]

From October 31, 1991 to December 27, 1991, Insular Life invested a total of P325,000,000.00 in the
Bank. Meanwhile, on November 27, 1991, its Board of Directors, during its meeting, accepted the resignation
of Young as President.[16]
On January 7, 1992, Young and his associates filed with the Regional Trial Court (RTC), Branch
142, Makati City, a complaint[17] against the Bank, Insular Life and its counsel, Atty. Jacinto Jimenez, petitioners, for
annulment of notarial sale, specific performance and damages, docketed as Civil Case No. 92-049. The complaint
alleges, inter alia, that the notarial sale conducted by petitioner Atty. Jacinto Jimenez is void as it does not comply
with the requirement of notice of the second auction sale; that Young was forced by the officers of Insular Life to
sign letters to enable them to have control of the Bank; that under the MOA, Insular Life should apply the purchase
price of P198,000,000.00 (corresponding to the 55% of the outstanding capital stock of the Bank) to Young's loan
of P200,000,000.00 and pay the latter P162,000,000.00, representing the remaining 45% of its outstanding capital
stock, which must be set-off against the loans of the other respondents.
Petitioners filed their answer [18] with counterclaim against Young, Gabriel La'O II, Arthur Tan, Lope Juban, Jr.,
Antonio Ongpin, Elsie Dizon, Yolanda Bayer and Manuel Viray, respondents herein. Except for Young, none of the
respondents answered the counterclaim, hence, the RTC declared them in default.
On May 10, 1995, the RTC rendered a Decision, [19] dismissing the complaint, ordering the respondents to pay
the Bank their respective loans with interest at the rate of 30% per annum and monthly penalty interest of 3% from
the date they are due until fully paid and dismissing petitioners' counterclaim against Young, thus:
"Judgment is therefore rendered as follows:
1.

Dismissing the complaint; and

2.
Ordering the plaintiffs jointly and severally to reimburse to the defendants the sum of P300,000.00 as
attorney's fees and cost of litigation;
ON THE COUNTERCLAIMS:
Judgment is hereby rendered in favor of counterplaintiff HOME as follows:
1.

Ordering GABRIEL LA'O II to pay HOME the following amounts:

a.
the sum of P4 Million with interest at the rate of 30% per annum and monthly penalty interest at 3% from June
17, 1991 until fully paid;
b.
the sum of P6 Million with interest at the rate of 30% per annum and monthly penalty interest at 3% from
September 10, 1991 until fully paid;
c.
the sum of P500,000.00 with interest at the rate of 30% per annum and monthly penalty interest at 3%
from September 12, 1991 until fully paid;
2.
Ordering ARTHUR TAN to pay to HOME the sum of P4.2 Million with interest at the rate of 30% per annum
and monthly penalty interest at 3% from July 4, 1991 until fully paid;

3.
Ordering LOPE JUBAN, JR., to pay to HOME the sum of P3 Million with interest at the rate of 29% per
annum from May 27, 1991 to August 25, 1991, and 30% per annum from August 26, 1991 and monthly penalty
interest at 3% from May 27, 1991 until fully paid;
4.

Ordering ANTONIO ONGPIN to pay to HOME the following amounts:

a.
the sum of P445,000.00 with interest at the rate of 32% per annum from May 25, 1991 to August 29, 1991,
and 29% per annum from August 30, 1991, and monthly penalty interest at 3% from May 25, 1991 until fully paid;
b.
the sum of P1 Million with interest at the rate of 32% a month from May 4, 1991 to August 29, 1991, and 29%
per annum from August 30, 1991, and monthly penalty interest at 3% from May 4, 1991 until fully paid;
c.
the sum of P550,000.00 with interest at the rate of 32% per annum from May 21, 1991 to August 29, 1991,
and 29% per annum from August 30, 1991 and monthly penalty interest at 3% from May 21, 1991 until fully paid;
d.
the sum of P5 Million with interest at the rate of 32% per annum from May 16, 1991 to August 29, 1991, and
29% per annum from August 30, 1991 and monthly penalty interest at 3% from May 16, 1991 until fully paid;
e.
the sum of P705,000.00 with interest at the rate of 32% per annum from May 4, 1991 to August 29, 1991, and
29% per annum from May 4, 1991 and monthly penalty interest at 3% from May 4, 1991 until fully paid;
5.

Ordering ELSIE DIZON to pay to HOME the following amounts:

a.
the sum of P2 Million with interest at the rate of 30% per annum and monthly penalty interest at 3% from June
17, 1991 until fully paid; and
b.
the sum of P7.4 Million with interest at the rate of 30% per annum and monthly penalty interest at 3% from
September 10, 1991 until fully paid;
6.

Ordering YOLANDA BAYER to pay to HOME the following amounts:

a.
the sum of P1 Million with interest at the rate of 30% per annum and monthly penalty interest at 3% from June
17, 1991 until fully paid; and
b.
the sum of P6.9 Million with interest at the rate of 30% per annum and monthly penalty interest at 3% from
September 10, 1991 until fully paid;
7.
Ordering MANUEL VIRAY to pay to HOME the sum of P8.7 Million with interest at the rate of 29% per
annum from May 29, 1991 to August 26, 1991, and 30% per annum from August 27, 1991, and monthly penalty
interest at 3% from May 29, 1991 until fully paid;
8.
Ordering the above counterdefendants jointly and severally to pay to the counterplaintiff the some
of P500,000.00 as attorney's fees and cost of litigation.
The counterclaim against YOUNG is dismissed for lack of merit."[20]
Aggrieved by the RTC Decision, respondents appealed to the Court of Appeals.

On September 22, 1999, the Court of Appeals rendered judgment [21] reversing the RTC Decision, the
dispositive portion of which reads:
PREMISES CONSIDERED, the decision appealed from is hereby REVERSED and SET ASIDE, and a new one
entered thereby:
1.
Declaring the Credit Agreement dated August 27, 1991 and the Memorandum of Agreement dated October 9,
1991 valid and binding between the parties;
2.
Declaring the delinquent accounts of borrowers Lope Juben, Elsie Dizon, Arthur Tan, Gabriel La O,
Yolanda Bayer, Antonio Ongpin and Jose Vito Borromeo as fully paid;
3.
Ordering the defendant Insular Life to pay the appellant Robert T. Young the amount of One Hundred Sixty
Two Million Pesos (P162,000,000.00) representing the money value of 45% of the shareholdings of Home Bankers
Savings and Trust Co., Inc.;
4.
Ordering the appellee Insular Life Assurance Co., Ltd. to pay appellant Robert T. Young moral damages in the
amount of Five Million Pesos (P5,000,000.00); and
5.
Ordering the appellees to pay attorneys fees of One Million Five Hundred Thousand Pesos (P1,500,000.00)
and the costs of the suit.
SO ORDERED.[22]
On October 14, 1999, petitioners filed a motion for reconsideration, while respondents filed a motion for
execution pending appeal.
On December 1, 1999, the Court of Appeals issued a Resolution [23] denying petitioners' motion for
reconsideration for lack of merit, prompting them to file the instant petition for review on certiorari (G. R. No.
140964).
On March 10, 2000, the Court of Appeals issued a Resolution [24] granting respondents' motion for execution
pending appeal. Forthwith, petitioners filed the instant petition for certiorari (G. R. No. 142267).
On March 27, 2000, we issued a Resolution [25] ordering the consolidation of the two petitions and directing the
parties "to maintain the STATUS QUO before the assailed (CA) Resolution of March 10, 2000 was issued, until
further orders from this Court.
In G.R. No. 140964, petitioners ascribe to the Court of Appeals the following errors:
1. In declaring the MOA dated October 9, 1991 valid and enforceable between the parties despite respondent
Young's failure to comply with the terms and conditions thereof;
2. In holding that the foreclosure of the pledge held on October 29, 1992 is void; and
3. In awarding moral damages and attorneys fees in favor of respondent Robert Young.

In G.R. No. 142267, petitioners allege that the Court of Appeals acted with grave abuse of discretion in
granting respondent Young's motion for execution pending appeal.[26]
Petitioners contend that the MOA executed on October 9, 1991 is not enforceable considering that Robert
Young committed fraud, misrepresented the warranties and failed to comply with his obligations. Hence, the Court
of Appeals erred when it held that the MOA is valid and ordered petitioners to pay for the shares covered by the
same.
In their comment, respondents simply contend that since the MOA was prepared by counsel of petitioner
Insular Life and duly signed by them, they cannot now impugn the same and avoid compliance with their obligations
specified therein.
The Court of Appeals, in reversing the Decision of the RTC, ruled that the MOA is binding between the parties
as it was not validly rescinded. In exercising its option to rescind the MOA, Insular Life failed to notify Young
pursuant to Article 1599 of the Civil Code. [27] Hence, the MOA is enforceable against the parties thereto. The
Appellate Court then concluded that Young's loan with Insular Life is deemed fully paid based on the representation
and warranty in the MOA that "the entire proceeds of the sale shall be used to pay off the outstanding debt of
Robert T. Young to Insular Life."
In other words, the Court of Appeals construed the MOA as a contract of sale since it applied Article 1599 of
the Civil Code which pertains to cases where there is a breach of warranty.
We disagree.
The Memorandum of Agreement pertinently provides:
"1. Insular Life and the Pension Fund hereby agree to purchase from the Vendor and the Vendor agrees to
convey, transfer, assign EIGHT HUNDRED THIRTY THOUSAND EIGHT HUNDRED SIXTY (830,860)
Common Shares and THREE HUNDRED ELEVEN THOUSAND FIVE HUNDRED SEVENTY TWO (311,572)
Common Shares of Home Bankers Savings and Trust Co., respectively, Insular Life and the Pension Fund, or to
such person designated by Insular Life or the Pension Fund, for a total consideration of ONE HUNDRED NINETYEIGHT MILLION PESOS (P198,000,000.00), subject to the following terms and conditions and representations
and warranties made by the Vendor:
A. REPRESENTATION AND WARRANTIES:
1. As of September 30, 1991, the total outstanding paid in capital of the bank is ONE HUNDRED FIFTY
SEVEN MILLION SEVEN HUNDRED FOURTEEN THOUSAND NINE HUNDRED PESOS
(P157,714,900.00),
2. As of September 30, 1991, the total net worth of the bank is ONE HUNDRED FOURTEEN
MILLION EIGHT HUNDRED ONE THOUSAND FIVE HUNDRED THIRTY NINE PESOS
(P114,801,593.00),
3. As of September 30, 1991, the total loans with doubtful recovery amounted to SIXTY MILLION
PESOS (P60,000,000.00), which includes the loans with doubtful recovery contained in the May
1991 findings of the Central Bank and an additional provision for certain loan accounts identified and
listed by Robert T. Young,

4. The entire proceeds of the sale shall be used to pay off the outstanding debt of Robert T. Young to
Insular Life.
B. CONDITION PRECEDENTS:
Upon the signing of this Agreement and prior to the execution of a Deed of Sale by the parties, the following
events shall occur:
1. The Vendor shall infuse an additional capital of FIFTY MILLION PESOS (P50,000,000.00) into
the Bank,
2. The Vendee shall undertake a due diligence audit on the bank for a period not exceeding 60 days
from the date of the signing of this Agreement, and the audit shall be undertaken to determine
that the provision for SIXTY MILLION PESOS (P60,000,000.00) for doubtful account is
sufficient,
3. After signing of this Agreement and during the 60 days due diligence audit of the Vendee, as
mentioned in No. 2, the Vendor shall endorse and deliver the stock certificates representing TWENTY
FIVE (25%) percent of the total outstanding capital stock of the bank to the Vendee, the stock
certificates shall be returned to the Vendor at the end of the 60 days due diligence audit and after the
Vendee is satisfied that the provision of SIXTY MILLION PESOS (P60,000,000.00) for doubtful
accounts is sufficient.[28] (Emphasis ours)
Contrary to the findings of the Court of Appeals, the foregoing provisions of the MOA negate the existence of
a perfected contract of sale. The MOA is merely a contract to sell since the parties therein specifically undertook
to enter into a contract of sale if the stipulated conditions are met and the representation and warranties given
by Young prove to be true. The obligation of petitioner Insular Life to purchase, as well as
the concomitant obligation of Young to convey to it the shares, are subject to the fulfillment of the conditions
contained in the MOA. Once the conditions, representation and warranties are satisfied, then it is incumbent upon
the parties to perform their respective obligations under the contract. Conversely, in the event that these conditions
are not met or complied with, no obligation on the part of either party arises. This is in accord with Article 1181 of
the Civil Code which provides that "(i)n conditional obligations, the acquisition of rights, as well as the
extinguishment or loss of those already acquired, shall depend upon the happening of the event which constitutes the
condition." And when the obligation assumed by a party to a contract is expressly subjected to a condition, the
obligation cannot be enforced against him unless the condition is complied with.[29]
Here, the MOA provides that Young shall infuse additional capital of P50,000,000.00 into the Bank. It
likewise specifies the warranty given by Young that the doubtful accounts of petitioner Bank amounted
to P60,000,000.00 only. However, records show that Young failed to infuse the required additional
capital. Moreover, the due diligence audit shows that Young was involved in fraudulent schemes like checkkiting[30] which amounted to a staggeringP344,000,000.00. This belies his representation that the doubtful accounts
of petitioner Bank amounted only to P60,000,000.00. As a result of these anomalous transactions, the reserves of
the Bank were depleted and it had to undergo a ten-year rehabilitation plan under the supervision of the Central
Bank.
Significantly, respondents do not dispute petitioners assertion that Young committed fraud, misrepresented the
warranties and failed to comply with his obligations under the MOA. Accordingly, no right in favor of Young's
arose and no obligation on the part of Insular Life was created.[31] In Mortel vs. Kassco, Inc.,[32] this Court held:

In contracts subject to a suspensive condition, the birth or effectivity of such contracts only takes place if and when
the event constituting the condition happens or is fulfilled, and if the suspensive condition does not take place or is
not fulfilled, the parties would stand as if the conditional obligation had never existed.
Since no sale transpired between the parties, the Court of Appeals erred in concluding that Insular Life
purchased 55% of the total shares of the Bank under the MOA. Consequently, its findings that the debt of Young
has been fully paid and that Insular Life is liable to pay for the remaining 45% equity have no basis. It must be
emphasized that the MOA did not convey title of the shares to Insular Life. If ever there was delivery of the said
shares to Insular Life, it was because they were pledged by Young to Insular Life under the Credit Agreement.
It would be unfair on the part of Young to demand compliance by Insular Life of its obligations when he
himself was remiss in his own. Neither can he feign ignorance of the stipulation in the MOA since it is presumed
that he read the same and was satisfied with its provisions before he affixed his signature therein. The fact that no
deed of sale was subsequently executed by the parties confirms the conclusion that no sale transpired between them.
Notably, the Deed of Pledge which secured the Credit Agreement between the parties, covered not only
1,324,864 shares which then constituted 99.82% of the total outstanding shares of petitioner Bank, but also the
250,000 shares subsequently issued. Consequently, when Young waived in his letter the period granted him under
the said agreement and manifested his inability to pay his obligation (which waiver has been declared by the RTC
and the CA to be valid), the loan extended by petitioner Insular Life became due and demandable. [33] Definitely,
petitioners merely exercised the right granted to them under the law, which is to foreclose the pledge constituted on
the shares, in satisfaction of respondent Young's loan.
The Court of Appeals also erred in declaring that the auction sale is void since petitioners failed to send a
separate notice for the second auction.
Article 2112 of the Civil Code provides:
The creditor to whom the credit has not been satisfied in due time, may proceed before a Notary Public for the sale
of the thing pledged. The sale shall be made at a public auction, and with notification to the debtor and the owner of
the thing pledged in a proper case, stating the amount for which the public sale is to be held. If at the first auction
the thing is not sold, a second one with the same formalities shall be held; and if at the second auction there is no
sale either, the creditor may appropriate the thing pledged. In this case he shall be obliged to give an acquittance for
his entire claim.
Clearly, there is no prohibition contained in the law against the sending of one notice for the first and second
public auction as was done here by petitioner Insular Life. The purpose of the law in requiring notice is to
sufficiently apprise the debtor and the pledgor that the thing pledged to secure payment of the loan will be sold in a
public auction and the proceeds thereof shall be applied to satisfy the debt. When petitioner Insular Life sent a
notice to Young informing him of the public auction scheduled on October 28, 1991, and a second auction on the
next day, October 29, in the event that the shares are not sold on the first auction, the purpose of the law was
achieved. We thus reject respondents' argument that the term "second one" refers to a separate notice which requires
the same formalities as the first notice.
Petitioners contend that the Court of Appeals likewise erred when it declared in the fallo of its decision that the
unpaid accounts of the other respondents have been fully paid. There is no showing how the Appellate Court
reached such conclusion. In doing so, the Court of Appeals violated the constitutional mandate that "(n)o decision
shall be rendered by any court without expressing clearly and distinctly the facts and the law on which it is

based."[34] Indeed, due process demands that the parties to a litigation be informed of how it was decided with an
explanation of the factual and legal reasons that led to the conclusions of the court. [35] It must be observed that those
respondents did not contest petitioners' counterclaim against them.
On the issue of damages, we find the Court of Appeals' award of moral damages of P5,000,000.00 and
attorney's fees of P1,500,000.00 to respondents without any basis. Under Article 2220 of the Civil Code, moral
damages may be awarded in breach of contracts where the defendant acted fraudulently or in bad faith. Contrary to
the finding of the Court of Appeals, we find no such breach committed by petitioners, much less any badge of fraud
or bad faith on their part. It must be stressed that moral damages are emphatically not intended to enrich a plaintiff
at the expense of the defendant.[36] Attorney's fees are not automatically awarded to every winning litigant. [37] It must
be shown that any of the instances enumerated under Art. 2208 of the Civil Code exists to justify the award thereof.
[38]
Not one of such instances exists here. Surprisingly, the Court of Appeals awarded the excessive amounts
of P5,000,000.00 as moral damages and P1,500,000.00 as attorneys fees to respondents.
We now come to the issue of whether or not the Court of Appeals committed grave abuse of discretion when it
ordered the execution of its own judgment, thus:
It can not be denied that the plaintiffs-appellants, who are stockholders of Home, have long been deprived of their
rights as such stockholders. It has been almost a decade since their cause of action accrued. And to this day, no
immediate relief is still in sight. On the contrary, with Insular Life practically controlling the fate of Home, redress
may become all but nugatory. This is the very line of reasoning this Court has adopted in rendering its main
decision. There has been an unjust enrichment on the part of the defendants-appellees, all to the injury and
humiliation of the plaintiffs-appellants are denied what is properly theirs, the injury will be a continued one.
"This, we believe, is good reason enough to grant the plaintiffs'-appellants' motion. Good reasons consist of
compelling circumstances justifying the immediate execution lest judgment becomes illusory, or the prevailing party
may after the lapse of time become unable to enjoy it, considering the tactics of the adverse party who may
apparently have no case except to delay.
"The allegation by the defendants-appellees that the plaintiff-appellant Young is a fugitive from justice deserves
scant consideration from this Court. It is a personal attack on an adverse party that is completely uncalled for and
has no bearing whatsoever in the present case. And even if the same is true, it is not difficult to see that the present
predicament Young now finds himself in stemmed from the unfair, nay, unlawful treatment he has received from the
defendants-appellees. That Young now has very little assets should not come as a surprise to the defendantsappellees; through their own machinations they deprived him of the same. To now hold the plight of Young against
himself would be to and insult to injury, especially if one is to consider that the latter's situation was brought about
by the same party who now opposes the claim for immediate relief.
"With the grant of the instant motion, plaintiff-appellant Young may once again reclaim his rightful place in society,
before he sinks deeper into the mire in which he, according to the defendants-appellees, may now be in. Contrary to
the defendants'-appellees' contentions, it is, in fact, another reason to extend our favorable consideration to the
motion. It is the least we can do.
x

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

We reject the Court of Appeal's ratiocination. The ruling of this Court in Heirs of the Late Justice Jose B. L.
Reyes vs. Court of Appeals[40] is instructive on this point:
One final word. It was bad enough that the Court of Appeals erred in ruling that the lease contract must be
judicially rescinded before respondent MMB, Inc. may be evicted from the premises. It was worse that the Court
of Appeals immediately enforced its decision pending appeal restoring respondent in possession of the leased
premises and worst, appointed a special sheriff to carry out the writ of execution. In the first place, we
emphatically rule that the Court of Appeals has no authority to issue immediate execution pending appeal of
its own decision. Discretionary execution under Rule 29, Section 2 (a), 1997 Rules of Civil Procedure, as
amended, isallowed pending appeal of a judgment or final order of the trial court, upon good reasons to be
stated in a special order after due hearing. A judgment of the Court of Appeals cannot be executed pending
appeal. Once final and executory, the judgment must be remanded to the lower court, where a motion for its
execution may be filed only after its entry. In other words, before its finality, the judgment cannot be
executed. There can be no discretionary execution of a decision of the Court of Appeals. x x x.
We therefore rule that the Court of Appeals committed grave abuse of discretion when it granted respondents
motion for execution pending appeal.
WHEREFORE, the petitions are GRANTED. In G.R. No. 140964, the assailed Decision dated September
22, 1999 and the Resolution dated December 1, 1999 issued by the Court of Appeals in CA G.R. CV No. 54264 are
REVERSED and SET ASIDE.
In G.R. No. 142267, the Resolution dated March 10, 2000 issued by the Court of Appeals granting respondents'
motion for execution is declared VOID.
The Decision dated March 10, 1995 of the Regional Trial Court, Branch 42, Makati City, in Civil Case No. 92049, is REINSTATED. Costs against respondents.
SO ORDERED.

(21) G.R. No. L-67496 July 7, 1986

TOP
RATE
INTERNATIONAL
SERVICES,
INC., petitioner,
vs.
INTERMEDIATE APPELLATE COURT and RODRIGO TAN, doing business under the name and style
"ASTRO AUTOMOTIVE SUPPLY," respondents.
G.R. No. L-68257 July 7, 1986
TOP
RATE
INTERNATIONAL
SERVICES,
INC., petitioner,
vs.
THE INTERMEDIATE APPELLATE COURT and POLARIS MOTOR SUPPLY COMPANY, respondents.
De Santos, Balgos & Perez for petitioner in L-67496 & L-68257.
Ponciano Subido for respondents in both cases.

GUTIERREZ, JR., J.:

The two consolidated petitions before us seek to annul the decisions of the Intermediate Appellate Court in G.R. No.
67496 dated January 6, 1984 and in G.R. No. 68257 dated June 6, 1984, respectively. The two decisions both upheld
the validity of the levy made on two properties whose ownership is claimed by petitioner, notwithstanding the fact
that the value of said properties are far in excess of the amount of the liens thereon. The decisions are based on the
ground that what was attached and levied upon are not the properties themselves but only the vendor's equity of
redemption. The petitioner also asks that the resolutions of the appellate court denying its motions for
reconsideration be set aside,
In Civil Case No. 142443 now, G.R. No. 67496, the facts as found by the appellate court are:
On August 12, 1981, petitioner (Rodrigo Tan, doing business under the name Astro Automotive
Supply') filed a complaint against Consolidated Mines Inc. and Jose Marino Olondriz, the
president of said corporation, for the payment of the purchase price of certain heavy equipment,
parts and accessories sold to Consolidated Mines, Inc. with a total cost of P271,372.20. In said
complaint, plaintiff asked that a writ of preliminary attachment be issued against defendants on the
ground that said defendants were guilty of fraud in securing said equipment.
On August 17, 1981, respondent Court granted plaintiff's motion for the issuance of a writ of
preliminary attachment upon plaintiff's posting of a bond in the amount of P 271,372.20. Pursuant
to said order, a writ of attachment was issued on August 26, 1981. The sheriff served notices of
garnishment on the tenants of the building owned by defendant Consolidated Mines, Inc.
garnishing the rentals due from said tenants, but since there were earlier notices of garnishment
served upon said tenants issued in two (2) other cases, the sheriff was not able to garnish any
amount from said tenants. The sheriff levied on the properties of defendant Consolidated Mines,
Inc. and the notice of levy was duly annotated on Transfer Certificate of Title No. S-68501
(143900) and Transfer Certificate of Title No. S-68500 (14329). The notice of levy was not
annotated on the transfer certificate of title of a third property covered by Transfer Certificate of
Title No. 79776, although notice of said levy was duly entered in the primary book of the Registry
of Deeds of Rizal.
Annotated as prior encumbrances on the first two properties on December 20, 1978 was a
mortgage in favor of twelve (12) consortium banks and a notice of levy issued in Civil Case No.
136406 entitled 'Warmco Trading Company versus Consolidated Mines, Inc. and Jose Marino
Olondriz' on May 15, 1981.
Meanwhile, in Civil Case No. 142598 now, G.R. No. 68257, the appellate court made the following findings:
On August 18, 1981, the petitioner (Polaris Motor Supply, Co.) brought suit (Civil Case No.
142598) in the Court of First Instance of Manila against the respondents Consolidated Mines, Inc.
(CMI) and its president Jose Marino Olondriz for the collection of P71,855.20. The amount
represents the price of the heavy equipment and accessories which the respondent CMI had
purchased from the petitioner. On November 3, 1981, the respondent judge ordered the attachment
of CMI's properties. On November 26, 1981, notice of the attachment of real properties of the

CMI was served on the Register of Deeds of Makati who on December 9, 1981 annotated the levy
on Transfer Certificate of Titles Nos. S-68500 (143929), S-68501 (143900) and 79711.
On May 31, 1981, several banks, constituting the Consortium Banks, filed a third party claim with
the sheriff, alleging that they were the mortgagees of the real and personal properties of the CMI
with a total book value of P656,613,303.00 and an appraised value of P4,497,443,040.00. They
claimed that their mortgage was evidenced by a deed executed on November 10, 1978. They,
therefore, asked that the properties be released from attachment.
The petitioner filed a motion to quash the third party claim but its motion was denied by the
respondent judge in his order of August 6, 1982. The court ruled that the Consortium Banks, as
mortgagees of the real and personal properties of the CMI had a superior lien on the properties and
that the petitioner could validly levy only on the mortgagor's (CMI's) equity of redemption after
the sale of the mortgaged properties.
The personal properties were foreclosed by the Consortium Banks to which the properties were
sold as the highest bidder and the certificate of sale issued on July 6, 1982. The petitioner then
asked that it be allowed to exercise its right of redemption. But the Consortium Banks opposed the
motion on the ground that there was an equity in redemption only in case of foreclosure sale of
real properties but not in the case of chattels.
In the meantime, on March 17, 1982, the Court of First Instance of Rizal, Branch XXIII, acting as
an insolvency court, authorized in Sp. Proc. No. 9623 the sale of the properties of the CMI.
Accordingly, on September 17, 1982, the properties covered by TCT Nos. S-68500 (143929) and
S-68501 (143900) were sold to the private respondent Top Rate International as assignee of the El
Grande Development Corp. The sale is evidenced by a 'Deed of Confirmation of Sale with
Assumption of Mortgage.' (Previously, a contract to sell was executed between the CMI and the El
Grande (Annex C). On the basis of the sale to it, Top Rate International filed a third party claim
with the sheriff. It asked that the properties covered by TCT No. S-68500 (143929) and S-68501
(143900) be discharged from attachment.
On the basis of the same "Deed of Confirmation of Sale with Assumption of Mortgage," Top Rate International, Inc.
(Top Rate) also filed a third-party claim in Civil Case No. 142443 alleging that the properties involved therein had
been sold to it for Forty Million Pesos (P40,000,000.00) on December 10, 1981 with the approval of the Court of
First Instance of Rizal in Special Proceeding No. 69623 in the course of the involuntary insolvency proceedings
filed against Consolidated Mines. Petitioner, therefore, asked that the attachment made on these properties be
discharged.
After hearing on the merits, the trial court in Civil Case No. 142598 ordered the lifting and setting aside of the levy
on attachment on the two properties involved while in Civil Case No. 142443, the trial court issued the same order
maintaining, however, the levy on attachment on the property covered by TCT No. 79776 in favor of plaintiff
Rodrigo Tan.
The plaintiffs in the above civil cases appealed to the Intermediate Appellate Court.
On January 6, 1984, the appellate court reversed the decision of the trial court in Civil Case No. 142443, and
ordered the levy on the two properties maintained. The appellate court ruled:

We find no merit in the contention of respondent Top Rate International Services that its right over
the properties in question based on the deed of sale in its favor on September 17, 1982 confirming
the contract to sell of December 10, 1981 in favor of El Grande Development Corporation, should
be recognized as superior to the right of petitioner under the writ of attachment issued in his favor
and registered on October 1, 1981 because it succeeded to the rights of the twelve (12) consortium
of banks which hold a mortgage over said properties registered on December 20, 1978. Said sale
was not actually a sale or assignment by the banks of their rights as mortgagee over said properties
but a sale of said properties by the mortgagor, Consolidated Mines, Inc. with the consent of the
mortgagee. The consortium of banks could not have sold the properties to Top Rate International
Services except through foreclosure proceedings, for as mortgagees they have no right to
appropriate for themselves or dispose of the mortgaged properties (Article 2088, Civil Code
Appropriation of the mortgaged properties of sale by the mortgagee of said property even if
stipulated by the parties would be nun and void being what is known as pactum commissorium. In
the present case the sale of the properties by Consolidated Mines, Inc. to Top Rate International
Services with the consent of the mortgagee banks under an arrangement where the purchase price
of P40,000,000.00 would be paid directly to the banks did not adversely affect the rights of
plaintiff under the writ of attachment issued in the present case.
The appellate court also found that the Regional Trial Court in the insolvency proceedings dismissed the petition to
declare Consolidated Mines, Inc. insolvent on the ground that it had no jurisdiction over the same because the
petitioners in said case were not residents of the Philippines and, thus, not qualified to file said petition. It, therefore,
ruled that the claim of Top Rate over said properties based on the approval of the sale in its favor by the insolvency
court must necessarily fail.
On June 6, 1984, the appellate court likewise reversed the decision of the trial court in Civil Case No. 142598 citing
the same reasons it adopted in its earlier decision in the other civil case. It further ruled that there is no merit in Top
Rate's claim that the attachment is improper because the value of the property levied upon is in excess of the total
claim of the petitioners which was only P71,885.20 plus interest from November, 1979 for what was actually
attached by the petitioners (Rodrigo Tan and Polaris) was the equity of redemption of Consolidated Mines, Inc. the
levy made pursuant to the writ of attachment being upon "all rights, titles, interests, claims and participation of the
defendant Consolidated Mines, Inc." to the properties covered by TCT No. S-68501, TCT No. S-68500 and TCT No.
79777. However, as regards the validity of the sale of the properties to Top Rate which was authorized by the
insolvency court, the Court ruled that this matter should be threshed out in an independent action to give Top Rate
the opportunity to ventilate its claims over said properties.
On the same day, Top Rate filed a petition before this Court assailing the decision of the appellate court in Civil
Case No. 142443, docketed as G.R. No. 67496. On August 16, 1984, Top Rate again filed a similar petition, as the
decision in Civil Case No. 142598, docketed as G.R. No. 68257.
As the two petitions raised Identical issues, we issued a resolution dated January 28, 1985 ordering the consolidation
of the two petitions.
The only question raised by petitioner Top Rate in these consolidated petitions, is whether or not the respondent
appellate court committed grave abuse of discretion when it ruled that "because the private respondent through the
sheriff could not have levied on the properties but only on the right of redemption or equity of redemption thereon,
there could not have been an over-levy sufficient to justify a quashal of the notice of levy on attachment on the
properties claimed by the petitioner."

Top Rate states that the respondents' claims are only P271,372.20 and P71,855.20 respectively. It contends that an
over-levy is obvious because the properties levied upon are worth more than P40,000,000.00. It alleges as error the
appellate court's ruling that since the equity of redemption and not the properties themselves were attached, its value
has no way of exceeding the respondents' individual claims because the value of the equity of redemption should be
that which will effectively release the properties, that is P40,000,000.00. This is the amount which the respondents
must necessarily pay, at the very least, to exercise such right and not the amount of their claims. There is, therefore,
no over-levy.
Equity of redemption is the right of the mortgagor to redeem the mortgaged property after his default in the
performance of the conditions of the mortgage but before the sale of the property or the confirmation of the sale,
whereas the right of redemption means the right of the mortgagor to repurchase the property even after confirmation
of the sale, in cases of foreclosure by banks, within one year from the registration of the sale. (Cf.Moran, Comments
on the Rules of Court, Vol. 3, pp. 283-284, 1980 Edition; Quimson vs. Philippine National Bank, 36 SCRA 26).
As we have ruled in Northern Motors, Inc. v. Coquia, (66 SCRA 415,420):
To levy upon the mortgagor's incorporeal right or equity of redemption, it was not necessary for
the sheriff to have taken physical possession of the mortgaged taxicabs. ...Levying upon the
property itself is distinguishable from levying on the judgment debtor's interest in it (McCullough
& Co. vs. Taylor, 25 Phil. 110, 115).
Likewise, in the case of Blouse Potenciano vs. Mariano, (96 SCRA 463, 469), we ruled:
Quirino's interest in the mortgaged lots is merely an equity of redemption, an intangible or
incorporeal right (Sun Life Assurance Co. of Canada vs. Gonzales Diez, 52 Phil 271; Santiago vs.
Dionisio, 92 Phil. 495; Northern Motors Inc. vs. Coquia, 66 SCRA 415).
That interest could be levied upon by means of writ of execution issued by the Manila Court as
had been done in the case of property encumbered by a chattel mortgage (Levy Hermanos, Inc. vs.
Ramirez and Casimiro, 60 Phil 978, 982; McCullough and Co. vs. Taylor, 25 Phil. 110).
It is, therefore, error on the part of the petitioner to say that since private respondents' lien is only a total of
P343,227.40, they cannot be entitled to the equity of redemption because the exercise of such right would require the
payment of an amount which cannot be less than P40,000,000.00.
When herein private respondents prayed for the attachment of the properties to secure their respective claims against
Consolidated Mines, Inc., the properties had already been mortgaged to the consortium of twelve banks to secure an
obligation of US$62,062,720.66. Thus, like subsequent mortgagees, the respondents' liens on such properties
became inferior to that of the banks, which claims in the event of foreclosure proceedings, must first be satisfied.
The appellate court, therefore, was correct in holding that in reality, what was attached by the respondents was
merely Consolidated Mines' right or equity of redemption. Thus, in the case of Alpha Insurance and Surety Co., Inc.
vs. Reyes (106 SCRA 274, 278), we ruled:
Deciding the legal question before Us, even ff the DBP were just an ordinary first mortgage
without any preferential liens under Republic Act No. 85 or Commonwealth Act 459, the statutes
mentioned in the Associated Insurance case relied upon by the trial court, it would be
unquestionable that nothing may be done to favor plaintiff-appellant, a mere second mortgage,
until after the obligations of the debtors-appellees with the first mortgagee have been fully

satisfied and settled. In law, strictly speaking, what was mortgaged by the Reyeses to Alpha was
no more than their equity of redemption.
We, therefore, hold that the appellate court did not commit any error in ruling that there was no over-levy on the
disputed properties. What was actually attached by respondents was Consolidated Mines' right or equity of
redemption, an incorporeal and intangible right, the value of which can neither be quantified nor equated with the
actual value of the properties upon which it may be exercised.
WHEREFORE, the petitions in G.R. No. 67496 and G.R. No. 68257 are hereby DISMISSED for lack of merit. The
decisions of the respondent court are AFFIRMED.
SO ORDERED.

(22) G.R. No. 132287

January 24, 2006

SPOUSES
BONIFACIO
and
FAUSTINA
PARAY,
and
VIDAL
ESPELETA, Petitioners,
vs.
DRA. ABDULIA C. RODRIGUEZ, MIGUELA R. JARIOL assisted by her husband ANTOLIN JARIOL,
SR., LEONORA NOLASCO assisted by her husband FELICIANO NOLASCO, DOLORES SOBERANO
assisted by her husband JOSE SOBERANO, JR., JULIA R. GENEROSO, TERESITA R. NATIVIDAD and
GENOVEVA R. SORONIO assisted by her husband ALFONSO SORONIO, Respondents.
DECISION
TINGA, J.:
The assailed decision of the Court of Appeals took off on the premise that pledged shares of stock auctioned off in a
notarial sale could still be redeemed by their owners. This notion is wrong, and we thus reverse.
The facts, as culled from the record, follow.
Respondents were the owners, in their respective personal capacities, of shares of stock in a corporation known as
the Quirino-Leonor-Rodriguez Realty Inc.1 Sometime during the years 1979 to 1980, respondents secured by way of
pledge of some of their shares of stock to petitioners Bonifacio and Faustina Paray ("Parays") the payment of certain
loan obligations. The shares pledged are listed below:
Miguel Rodriguez Jariol .1,000 shares covered by Stock Certificates No. 011, 060, 061 & 062;
Abdulia C. Rodriguez . 300 shares covered by Stock Certificates
No. 023 & 093;
Leonora R. Nolasco .. 407 shares covered by Stock Certificates
No. 091 & 092;

Genoveva Soronio. 699 shares covered by Stock Certificates

No. 025, 059 & 099;
Dolores R. Soberano. 699 shares covered by Stock Certificates
No. 021, 053, 022 & 097;
Julia Generoso .. 1,100 shares covered by Stock Certificates
No. 085, 051, 086 & 084;
Teresita Natividad.. 440 shares covered by Stock Certificates
Nos. 054 & 0552
When the Parays attempted to foreclose the pledges on account of respondents failure to pay their loans,
respondents filed complaints with the Regional Trial Court (RTC) of Cebu City. The actions, which were
consolidated and tried before RTC Branch 14, Cebu City, sought the declaration of nullity of the pledge agreements,
among others. However the RTC, in its decision 3 dated 14 October 1988, dismissed the complaint and gave "due
course to the foreclosure and sale at public auction of the various pledges subject of these two cases." 4 This decision
attained finality after it was affirmed by the Court of Appeals and the Supreme Court. The Entry of Judgment was
issued on 14 August 1991.
Respondents then received Notices of Sale which indicated that the pledged shares were to be sold at public auction
on 4 November 1991. However, before the scheduled date of auction, all of respondents caused the consignation
with the RTC Clerk of Court of various amounts. It was claimed that respondents had attempted to tender these
payments to the Parays, but had been rebuffed. The deposited amounts were as follows:
Abdulia C. Rodriguez.. P 120,066.66 .. 14 Oct. 1991
Leonora R. Nolasco . 277,381.82 .. 14 Oct. 1991
Genoveva R. Soronio 425,353.50 .. 14 Oct. 1991
38,385.44 .. 14 Oct. 1991
Julia R. Generoso .. 638,385.00 .. 25 Oct. 1991
Teresita R. Natividad . 264,375.00 .. 11 Nov. 1991
Dolores R. Soberano .. 12,031.61.. 25 Oct. 1991
520,216.39 ..11 Nov. 1991
Miguela Jariol . 490,000.00.. 18 Oct. 1991
88,000.00 ..18 Oct. 19915

Notwithstanding the consignations, the public auction took place as scheduled, with petitioner Vidal Espeleta
successfully bidding the amount of P6,200,000.00 for all of the pledged shares. None of respondents participated or
appeared at the auction of 4 November 1991.
Respondents instead filed on 13 November 1991 a complaint seeking the declaration of nullity of the concluded
public auction. The complaint, docketed as Civil Case No. CEB-10926, was assigned to Branch 16 of the Cebu City
RTC. Respondents argued that their tender of payment and subsequent consignations served to extinguish their loan
obligations and discharged the pledge contracts. Petitioners countered that the auction sale was conducted pursuant
to the final and executory judgment in Civil Cases Nos. R-20120 and 20131, and that the tender of payment and
consignations were made long after their obligations had fallen due.
The Cebu City RTC dismissed the complaint, expressing agreement with the position of the Parays. 6 It held, among
others that respondents had failed to tender or consign payments within a reasonable period after default and that the
proper remedy of respondents was to have participated in the auction sale. 7 The Court of Appeals Eighth Division
however reversed the RTC on appeal, ruling that the consignations extinguished the loan obligations and the subject
pledge contracts; and the auction sale of 4 November 1991 as null and void. 8 Most crucially, the appellate court
chose to uphold the sufficiency of the consignations owing to an imputed policy of the law that favored redemption
and mandated a liberal construction to redemption laws. The attempts at payment by respondents were characterized
as made in the exercise of the right of redemption.
The Court of Appeals likewise found fault with the auction sale, holding that there was a need to individually sell the
various shares of stock as they had belonged to different pledgors. Thus, it was observed that the minutes of the
auction sale should have specified in detail the bids submitted for each of the shares of the pledgors for the purpose
of knowing the price to be paid by the different pledgors upon redemption of the auctioned sales of stock.
Petitioners now argue before this Court that they were authorized to refuse as they did the tender of payment since
they were undertaking the auction sale pursuant to the final and executory decision in Civil Cases Nos. R-20120 and
20131, which did not authorize the payment of the principal obligation by respondents. They point out that the
amounts consigned could not extinguish the principal loan obligations of respondents since they were not sufficient
to cover the interests due on the debt. They likewise argue that the essential procedural requisites for the auction sale
had been satisfied.
We rule in favor of petitioners.
The fundamental premise from which the appellate court proceeded was that the consignations made by respondents
should be construed in light of the rules of redemption, as if respondents were exercising such right. In that
perspective, the Court of Appeals made three crucial conclusions favorable to respondents: that their act of
consigning the payments with the RTC should be deemed done in the exercise of their right of redemption; that the
buyer at public auction does not ipso facto become the owner of the pledged shares pending the lapse of the oneyear redemptive period; and that the collective sale of the shares of stock belonging to several individual owners
without specification of the apportionment in the applications of payment deprives the individual owners of the
opportunity to know of the price they would have to pay for the purpose of exercising the right of redemption.
The appellate courts dwelling on the right of redemption is utterly off-tangent. The right of redemption involves
payments made by debtors after the foreclosure of their properties, and not those made or attempted to be made, as
in this case, before the foreclosure sale. The proper focus of the Court of Appeals should have been whether the
consignations made by respondents sufficiently acquitted them of their principal obligations. A pledge contract is an
accessory contract, and is necessarily discharged if the principal obligation is extinguished.

Nonetheless, the Court is now confronted with this rather new fangled theory, as propounded by the Court of
Appeals, involving the right of redemption over pledged properties. We have no hesitation in pronouncing such
theory as discreditable.
Preliminarily, it must be clarified that the subject sale of pledged shares was an extrajudicial sale, specifically a
notarial sale, as distinguished from a judicial sale as typified by an execution sale. Under the Civil Code, the
foreclosure of a pledge occurs extrajudicially, without intervention by the courts. All the creditor needs to do, if the
credit has not been satisfied in due time, is to proceed before a Notary Public to the sale of the thing pledged. 9
In this case, petitioners attempted as early as 1980 to proceed extrajudicially with the sale of the pledged shares by
public auction. However, extrajudicial sale was stayed with the filing of Civil Cases No. R-20120 and 20131, which
sought to annul the pledge contracts. The final and executory judgment in those cases affirmed the pledge contracts
and disposed them in the following fashion:
WHEREFORE, premises considered, judgment is hereby rendered dismissing the complaints at bar, and
(1) Declaring the various pledges covered in Civil Cases Nos. R-20120 and R-20131 valid and effective;
and
(2) Giving due course to the foreclosure and sale at public auction of the various pledges subject of these
two cases.
Costs against the plaintiffs.
SO ORDERED.10
The phrase "giving due course to the foreclosure and sale at public auction of the various pledges subject of these
two cases" may give rise to the impression that such sale is judicial in character. While the decision did authorize the
sale by public auction, such declaration could not detract from the fact that the sale so authorized is actually
extrajudicial in character. Note that the final judgment in said cases expressly did not direct the sale by public
auction of the pledged shares, but instead upheld the right of the Parays to conduct such sale at their own volition.
Indeed, as affirmed by the Civil Code,11 the decision to proceed with the sale by public auction remains in the sole
discretion of the Parays, who could very well choose not to hold the sale without violating the final judgments in the
aforementioned civil cases. If the sale were truly in compliance with a final judgment or order, the Parays would
have no choice but to stage the sale for then the order directing the sale arises from judicial compulsion. But nothing
in the dispositive portion directed the sale at public auction as a mandatory recourse, and properly so since the sale
of pledged property in public auction is, by virtue of the Civil Code, extrajudicial in character.
The right of redemption as affirmed under Rule 39 of the Rules of Court applies only to execution sales, more
precisely execution sales of real property.
The Court of Appeals expressly asserted the notion that pledged property, necessarily personal in character, may be
redeemed by the creditor after being sold at public auction. Yet, as a fundamental matter, does the right of
redemption exist over personal property? No law or jurisprudence establishes or affirms such right. Indeed, no such
right exists.

The right to redeem property sold as security for the satisfaction of an unpaid obligation does not exist
preternaturally. Neither is it predicated on proprietary right, which, after the sale of property on execution, leaves the
judgment debtor and vests in the purchaser. Instead, it is a bare statutory privilege to be exercised only by the
persons named in the statute.12
The right of redemption over mortgaged real property sold extrajudicially is established by Act No. 3135, as
amended. The said law does not extend the same benefit to personal property. In fact, there is no law in our statute
books which vests the right of redemption over personal property. Act No. 1508, or the Chattel Mortgage Law,
ostensibly could have served as the vehicle for any legislative intent to bestow a right of redemption over personal
property, since that law governs the extrajudicial sale of mortgaged personal property, but the statute is definitely
silent on the point. And Section 39 of the 1997 Rules of Civil Procedure, extensively relied upon by the Court of
Appeals, starkly utters that the right of redemption applies to real properties, not personal properties, sold on
execution.
Tellingly, this Court, as early as 1927, rejected the proposition that personal property may be covered by the right of
redemption. In Sibal 1. v. Valdez,13 the Court ruled that sugar cane crops are personal property, and thus, not subject
to the right of redemption.14 No countervailing statute has been enacted since then that would accord the right of
redemption over personal property, hence the Court can affirm this decades-old ruling as effective to date.
Since the pledged shares in this case are not subject to redemption, the Court of Appeals had no business invoking
and applying the inexistent right of redemption. We cannot thus agree that the consigned payments should be treated
with liberality, or somehow construed as having been made in the exercise of the right of redemption. We also must
reject the appellate courts declaration that the buyer of at the public auction is not "ipso facto" rendered the owner
of the auctioned shares, since the debtor enjoys the one-year redemptive period to redeem the property. Obviously,
since there is no right to redeem personal property, the rights of ownership vested unto the purchaser at the
foreclosure sale are not entangled in any suspensive condition that is implicit in a redemptive period.
The Court of Appeals also found fault with the apparent sale in bulk of the pledged shares, notwithstanding the fact
that these shares were owned by several people, on the premise the pledgors would be denied the opportunity to
know exactly how much they would need to shoulder to exercise the right to redemption. This concern is obviously
rendered a non-issue by the fact that there can be no right to redemption in the first place. Rule 39 of the Rules of
Court does provide for instances when properties foreclosed at the same time must be sold separately, such as in the
case of lot sales for real property under Section 19. However, these instances again pertain to execution sales and not
extrajudicial sales. No provision in the Rules of Court or in any law requires that pledged properties sold at auction
be sold separately.
On the other hand, under the Civil Code, it is the pledgee, and not the pledgor, who is given the right to choose
which of the items should be sold if two or more things are pledged. 15 No similar option is given to pledgors under
the Civil Code. Moreover, there is nothing in the Civil Code provisions governing the extrajudicial sale of pledged
properties that prohibits the pledgee of several different pledge contracts from auctioning all of the pledged
properties on a single occasion, or from the buyer at the auction sale in purchasing all the pledged properties with a
single purchase price. The relative insignificance of ascertaining the definite apportionments of the sale price to the
individual shares lies in the fact that once a pledged item is sold at auction, neither the pledgee nor the pledgor can
recover whatever deficiency or excess there may be between the purchase price and the amount of the principal
obligation.16
A different ruling though would obtain if at the auction, a bidder expressed the desire to bid on a determinate
number or portion of the pledged shares. In such a case, there may lie the need to ascertain with particularity which

of the shares are covered by the bid price, since not all of the shares may be sold at the auction and correspondingly
not all of the pledge contracts extinguished. The same situation also would lie if one or some of the owners of the
pledged shares participated in the auction, bidding only on their respective pledged shares. However, in this case,
none of the pledgors participated in the auction, and the sole bidder cast his bid for all of the shares. There obviously
is no longer any practical reason to apportion the bid price to the respective shares, since no matter how slight or
significant the value of the purchase price for the individual share is, the sale is completed, with the pledgor and the
pledgee not entitled to recover the excess or the deficiency, as the case may be. To invalidate the subject auction
solely on this point serves no cause other than to celebrate formality for formalitys sake.
Clearly, the theory adopted by the Court of Appeals is in shambles, and cannot be resurrected. The question though
yet remains whether the consignations made by respondents extinguished their respective pledge contracts in favor
of the Parays so as to enjoin the latter from auctioning the pledged shares.
There is no doubt that if the principal obligation is satisfied, the pledges should be terminated as well. Article 2098
of the Civil Code provides that the right of the creditor to retain possession of the pledged item exists only until the
debt is paid. Article 2105 of the Civil Code further clarifies that the debtor cannot ask for the return of the thing
pledged against the will of the creditor, unless and until he has paid the debt and its interest. At the same time, the
right of the pledgee to foreclose the pledge is also established under the Civil Code. When the credit has not been
satisfied in due time, the creditor may proceed with the sale by public auction under the procedure provided under
Article 2112 of the Code.
Respondents argue that their various consignations made prior to the auction sale discharged them from the loan and
the pledge agreements. They are mistaken.
Petitioners point out that while the amounts consigned by respondents could answer for their respective principal
loan obligations, they were not sufficient to cover the interests due on these loans, which were pegged at the rate of
5% per month or 60% per annum. Before this Court, respondents, save for Dolores Soberano, do not contest this
interest rate as alleged by petitioners. Soberano, on the other hand, challenges this interest rate as "usurious."17
The particular pledge contracts did not form part of the records elevated to this Court. However, the 5% monthly
interest rate was noted in the statement of facts in the 14 October 1988 RTC Decision which had since become final.
Moreover, the said decision pronounced that even assuming that the interest rates of the various loans were 5% per
month, "it is doubtful whether the interests so charged were exorbitantly or excessively usurious. This is because for
sometime now, usury has become legally inexistent." 18 The finality of this 1988 Decision is a settled fact, and thus
the time to challenge the validity of the 5% monthly interest rate had long passed. With that in mind, there is no
reason for the Court to disagree with petitioners that in order that the consignation could have the effect of
extinguishing the pledge contracts, such amounts should cover not just the principal loans, but also the 5% monthly
interests thereon.
It bears noting that the Court of Appeals also ruled that respondents had satisfied the requirements under Section 18,
Rule 39, which provides that the judgment obligor may prevent the sale by paying the amount required by the
execution and the costs that have been incurred therein. 19 However, the provision applies only to execution sales,
and not extra-judicial sales, as evidenced by the use of the phrases "sale of property on execution" and "judgment
obligor." The reference is inapropos, and even if it were applicable, the failure of the payment to cover the interests
due renders it insufficient to stay the sale.
The effect of the finality of the judgments in Civil Cases Nos. R-20120 and R-20131 should also not be discounted.
Petitioners right to proceed with the auction sale was affirmed not only by law, but also by a final court judgment.

Any subsequent court ruling that would enjoin the petitioners from exercising such right would have the effect of
superseding a final and executory judgment.
Finally, we cannot help but observe that respondents may have saved themselves much trouble if they simply
participated in the auction sale, as they are permitted to bid themselves on their pledged properties. 20 Moreover, they
would have had a better right had they
matched the terms of the highest bidder.21 Under the circumstances, with the high interest payments that accrued
after several years, respondents were even placed in a favorable position by the pledge agreements, since the creditor
would be unable to recover any deficiency from the debtors should the sale price be insufficient to cover the
principal amounts with interests. Certainly, had respondents participated in the auction, there would have been a
chance for them to recover the shares at a price lower than the amount that was actually due from them to the
Parays. That respondents failed to avail of this beneficial resort wholly accorded them by law is their loss. Now, all
respondents can recover is the amounts they had consigned.
WHEREFORE, the petition is GRANTED. The assailed decision of the Court of Appeals is SET ASIDE and the
decision of the Cebu City RTC, Branch 16, dated 18 November 1992 is REINSTATED. Costs against respondents.
SO ORDERED.

(23) OPTIMUM MOTOR CENTER

CORPORATION,
Petitioner,
- versus -

G.R. No. 170202

QUISUMBING, J.,
Chairperson,
CARPIO MORALES,
TINGA,
VELASCO, JR., and
BRION, JJ.

ANNIE TAN, doing business under the

name & style AJ & T Trading,
Promulgated:
Respondent.
July 14, 2008
x----------------------------------------------------------------------------x
DECISION
TINGA, J.:
This Petition for Review[1] seeks to reverse the Decision[2] and Resolution[3] of the Court of Appeals in CAG.R. CV No. 63985. The decision affirmed with modification the judgment [4] of the Regional Trial Court (RTC)
of Manila, Branch 19 in Civil Case No. 94-71847.

The case originated from a Complaint [5] for recovery of possession filed by Annie Tan (respondent) against
Optimum Motor Center Corporation (Optimum) and Cesar Pea (Pea) with the RTC of Manila. Respondent is
doing business under the name and style, AJ & T Trading which is engaged in transportation of cargoes. [6] AJ & T
Trading is the registered owner[7] of an Isuzu cargo truck with Plate No. NWM 418, the subject of this
complaint. Optimum is a domestic corporation which owned and operated an auto repair shop located at 120 Del
Monte Avenue, Quezon City.[8]
Respondents version of the facts is as follows.
On 14 January 1994, she brought the subject truck to Optimum for body repair and painting. Pea
introduced himself as the owner and manager of Optimum. Respondent verbally contracted with Pea for the repair
of the damaged portions of the truck, repainting and upholstery replacement. It was then agreed that the work
would take thirty (30) days to complete and would thus be finished on 15 February 1994.[9]Leopoldo Daza, a
security guard assigned to Optimum, received the truck and prepared a checklist [10] of the items found
therein. On 20 January 1994, an estimate [11] detailing the description and price rates for the repair was sent to
respondent. To bring down the repair costs, the parties agreed that respondent would supply the necessari materials
such as windshield glasses for the front and back of the truck, rubber strip and quartered glass panel.[12]
On 15 February 1994, respondent went to Optimum but was told to come back in March as the repair was
not yet finished.[13] On several occasions, respondent tried to claim her truck from Optimum [14] to no avail. On 4
March 1994, she again went to Optimums repair shop and was surprised to see that the trade name AJ & T
Trading painted in the middle and side doors of the truck had been scraped off. She also noticed that the 100-meter
skyline rope, oil stick gauge and right side mirror were missing. [15] On 22 April 1994, she found her truck
abandoned and unrepaired at Optimums compound. On 16 May 1994, she discovered that Optimum had already
vacated its shop in Del Monte and that her truck was nowhere to be found. [16] Later, she learned that Optimum had
transferred to a new location but her still unrepaired truck was found inValenzuela City.

This prompted respondent to file the instant complaint with the trial court on 5 October 1994.[17] She
prayed for the recovery of possession of the truck or, in the alternative, the payment of the value thereof. She also
sought the award of attorneys fees, moral damages and costs of suit. [18] At the trial of the case, two witnesses,

Maximo Merigildo[19] and Bel Eduardo Nitafan,[20] testified on the dilapidated condition of the truck when they saw
it on separate occasions.
On 20 October 1994, the trial court issued an order directing the seizure of the vehicle upon respondents
filing of a bond in the amount ofP1,200,000.00.[21] Respondent posted the required bond. [22] Optimum posted a
counterbond to lift said order.[23]
Optimum controverted the allegations of respondent. In its own account of the facts, it denied guaranteeing
that

the

repair

work

would

be completed within 30 days from 15

that the repairs were completed only on 8 May 1994 due to delay in

January

1994.

It

claimed

respondents delivery of the parts.[24] It presented as its witnesses the employees who had undertaken the
tinsmithing[25] painting[26] and electrical works[27] on the truck.
Optimum also explained that by virtue of a writ of execution [28] issued against it by the Metropolitan Trial
Court of Quezon City, it was forced to vacate its repair shop and to transfer all its equipment, tools and all the
vehicles in its possession and custody, including respondents truck, to the IIC Compound in Sitio Malinis,
Bagbaguin, Valenzuela City. It claimed that it tried to get in touch with respondent to ask her to claim the truck but
she was not available.
Optimum claimed its right to retain possession of the truck, by virtue of Article 1731 of the Civil Code,
until the cost of repairs is paid. By way of counterclaim, it asked for the payment of P79,370.00 as the unpaid cost
of repairs and P25,000.00 as attorneys fees.[29]
On 31 May 1999, the trial court rendered a decision in favor of respondent, thus:

WHEREFORE, premises considered, judgment is hereby rendered ordering defendants

Optimum Motor Center Corporation and/or any person acting for and in its behalf, to surrender in
good running condition the Isuzu Cargo Truck, subject matter of this complaint and if this is not
feasible, to jointly and severally pay the sum of P600,000.00 with legal interest from the date
(October 5, 1994) the complaint was filed, until fully satisfied, moral damages ofP50,000.00 and
litigation expenses of P30,000.00 plus 25% of the amount awarded from defendants as and for
attorneys fees. The counterclaim of defendants is hereby DISMISSED for lack of merit.
SO ORDERED.[30]

Of the two opposing contentions, the trial court accepted the version of respondent that the repairs on her
truck had not been accomplished. It observed:
x x x Plaintiff claimed that even after the thirty (30) day period for the completion of the
repair on the truck, the same remained unrepaired. This was supported by the testimonies of the
Courts personnel, namely: Maximo Merigildo of the RTC, Branch 31, Quezon City, who served
on April 25, 1994 the Writ of Execution in the Ejectment case against defendants and implemented
the same on May 14, 1994. He observed that the three (3) tires were not installed and there were
no left side mirror and door. Eduardo Bel Nitafan, Process Server, declared in open court that the
Isuzu Cargo Truck was now parked at the I.I.C. Compound in Valenzuela, Metro Manila. The
truck was surrounded with piles of lumber, about eight (8) feet in height. Missing were the two
(2) batteries, one spare tire, front side glass, skyline rope and the light on top of the cowl. The
electrical wirings were not in order. The interior portion appeared to be newly-painted but the

outer portion looked rusty. He could not categorically tell if the truck was in good running
condition, because the batteries and ignition key were missing. The testimonies of these witnesses
were not rebutted by the defendants. They are independent witnesses whose testimonies deserve
full faith and credit being neutral parties to the case. Even defendant Cesar Pea admitted that the
repair was not completed after thirty (30) days from receipt of the Cargo Truck. [31]
Furthermore, the trial court held Optimum liable for damages for its failure to execute its part of the
contract on time, pursuant to Article 1170 of the Civil Code.[32]
Optimum filed a Notice of Appeal,[33] whereas respondent moved for reconsideration on the ground that the
trial court failed to award actual damages and that Oriental Assurance Corporation, the bonding company of
Optimum, should have been adjudged liable for damages payable by the latter.[34] On 5 August 1999, the trial court
issued an order denying the motion for reconsideration on the ground that it has already lost jurisdiction over the
case.[35] Thus, respondent filed her Notice of Appeal[36] on 25 August 1999.
On 28 June 2005, the Court of Appeals promulgated its Decision affirming with modification the ruling of
the RTC, to wit:
WHEREFORE, the appealed Decision is hereby AFFIRMED with the following
MODIFICATIONS:
1.
Appellant Optimum is ordered to return the cargo truck or to reimburse its value in
the amount of P600,000.00 plus legal interest from the time of the commencement of the action
until fully satisfied;
2.
Temperate or moderate damages in the amount of Thirty Thousand Pesos
(P30,000.00) is awarded;
3.
Twenty percent (20%) of the total award is hereby given to appellee/appellant Tan for
both attorneys fees and litigation expenses; and
4.

The award of moral damages is deleted.

SO ORDERED.[37]

The Court of Appeals adhered to the trial courts findings that the repairs on the truck had not been
completed and that Optimum is liable for damages. It likewise ordered the return of the truck to respondent. It
noted:
The trial court, in giving credence to the claim of appellee/appellant Tan that the repair of
the cargo truck was not in accordance with her agreement with appellant Optimum, found the
testimonies of a court personnel and a process server to be deserving of full faith and credit, being
neutral parties. These witnesses categorically declared in favor of appellee/appellant Tan that the
cargo truck was not yet repaired as of April 25, 1994 and May 14, 1994, respectively. Thus, even

if We admit appellant Optimums defense that the repair was delayed by the late delivery on May
7, 1994 of the quarter glass panel and the rubber strips, the fact remains that even after the said
delivery on May 7, 1994, no such repair was yet done. The trial court found the defense of late
delivery to be even toppled by a rebuttal witness for appellee/appellant Tan who testified that the
said glass need not even be repaired or that it was not necessary for the complete repair of the
cargo truck since they were not damaged at the time he had inspected the cargo truck prior to its
delivery for repair to appellant Optimum.
Necessarily then, appellant Optimum was already liable to appellee/appellant Tan for
damages from the time the latter demanded delivery of the cargo truck and the latter could not as
yet deliver the same despite the lapse of the agreed period. The trial court rightly concluded that
appellant Optimum was already remiss in the performance of its part of the contract for repair
from the time of such demand. Hence, its liability accrues by virtue of Article 1170 of the Civil
Code that states: Those who in the performance of their obligation are guilty of fraud, negligence
or delay and those who in any manner contravene the tenor thereof are liable for damages. Thus,
appellant Optimum may be compelled to deliver the cargo truck to appellee/appellant Tan despite
that the agreed repair was not totally made or to reimburse the value thereof in the claimed amount
of Six Hundred Thousand Pesos (P600,000.00), plus the legal interest of six percent (6%) thereof
from the filing of the complaint for recovery.[38]

Both parties moved for reconsideration. For her part, respondent reiterated that her claim for compensatory
damages is supported by statement of accounts showing the earnings of the truck before it was brought to Optimum
for repair. She likewise expressed disinterest in the return of the truck as it was no longer in good
condition. Instead, she sought merely the reimbursement of its value at P600,000.00 with interest. Both motions
were denied in a Resolution dated 17 October 2005. The appellate court however made the following clarifications:
Nonetheless, this Court wishes to clarify that the order for the return of the cargo truck
must be qualified by the phrase if feasible AND that the payment of legal interest applies in both
circumstances, i.e., whether there would be the return of such truck OR there would be mere
reimbursement of its value pegged at Six Hundred Thousand Pesos (P600,000.00), with the same
amount being the basis of the computation of legal interest.[39]

Unfazed by the unfavorable judgment, Optimum now comes to this Court via a petition for review.
In refusing to abide by the appellate courts ruling, Optimum reiterates its claim for mechanics lien to
justify its retention of the truck. It advances the view that by virtue of the repairs it has actually performed on
respondents truck, it has the right under Article 1731 of the Civil Code [40] to enforce the mechanics lien. It
maintains that the lien applies and can be availed of whether or not the repair work was completely
executed. Accordingly, it prays for the payment of the cost of repairs amounting to P69,145.00 in exchange for the
return of the subject truck, as well as for the award of temperate damages in the sum of P30,000.00 and attorneys
fees.[41]

Respondent counters that Optimum cannot avail of the mechanics lien because it was found by the lower
courts that the repairs on the truck had not been accomplished.
Respondent prevails.
The concept of a mechanics lien is articulated in Article 1731 of the Civil Code, which provides:
ARTICLE 1731. He who has executed work upon a movable has a right to retain it by way
of pledge until he is paid.
The mechanics lien is akin to a contractors or warehousemans lien in that by way of pledge, the
repairman has the right to retain possession of the movable until he is paid. However, the right of retention is
conditioned upon the execution of work upon the movable. The creation of a mechanic's lien does not depend upon
the owner's nonpayment. Rather, the contractor "creates" his or her own lien by performing the work or furnishing
the materials.[42]
In Bachrach Motor Co. v. Mendoza,[43] the Court had the occasion to rule that a person who has made
repairs upon an automobile at the request of the owner is entitled to retain it until he has been paid the price of the
work executed.[44]
Optimums invocation of the mechanics lien is apparently based on the repairs it executed on the
truck. However, the lower courts had already come up with a categorical finding based on testimonies of
independent witnesses that the repairs had not been accomplished in accordance with the agreement of the
parties. We have to sustain these factual findings, for basic is the tenet that the trial court's findings of facts as
affirmed by the Court of Appeals are binding on this Court, unless the lower courts overlooked, misconstrued or
misinterpreted facts and circumstances of substance which, if considered, would change the outcome of the case. [45]
As a result of the failure to accomplish the repairs on the truck, the right to retain the truck in accordance
with Article 1731 did not arise. Optimums continuous possession or detention of the truck turned to be that of a
deforciant and so respondent has every right to recover possession of it.
From another perspective, Optimum is obliged to take care of the truck with the proper diligence of a good
father to a family while the same is in its possession.[46] Records show that the subject truck had already deteriorated
while in the possession of Optimum. Taking into consideration the last known condition of the truck in tandem with
the fact that the court proceedings have spanned almost a decade, it can be readily inferred that the truck has become
wholly useless. Since restitution is no longer feasible, Optimum is bound to pay the value of the truck.

The value of the truck should be based on the fair market value that the property would command at the
time it was entrusted to Optimum. Such recoverable value is fair and reasonable considering that the value of a
motor vehicle depreciates. This value may be recovered without prejudice to such other damages a claimant is
entitled to under applicable laws.[47]
In this case, however, respondent did not appeal the appellate courts denial of compensatory
damages. Hence, the issue has obtained finality and this Court need not pass upon the same.
Nevertheless, temperate damages have been properly imposed by the appellate court. Under Article 2224 of
the Civil Code, temperate damages may be recovered when the court finds that some pecuniary loss has been
suffered but its amount cannot, from the nature of the case, be proved with certainty.
WHEREFORE, the petition is DENIED. The Decision of the Court of Appeals dated 28 June 2005 is
AFFIRMED.
SO ORDERED.