G.R. No.

L-33157 June 29, 1982

BENITO H. LOPEZ, petitioner,
vs.
THE COURT OF APPEALS and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO.,
INC., respondents.

GUERRERO, J.:
On June 2, 1959, petitioner Benito H. Lopez obtained a loan in the amount of P20,000.00 from the
Prudential Bank and Trust Company. On the same date, he executed a promissory note for the
same amount, in favor of the said Bank, binding himself to repay the said sum one (1) year after the
said date, with interest at the rate of 10% per annum. In addition to said promissory note, he
executed Surety Bond No. 14164 in which he, as principal, and Philippine American General
Insurance Co., Inc. (PHILAMGEN) as surety, bound themselves jointly and severally in favor of
Prudential Bank for the payment of the sum of P20,000.00.
On the same occasion, Lopez also executed in favor of Philamgen an indemnity agreement whereby
he agreed "to indemnify the Company and keep it indemnified and hold the same harmless from and
against any and all damages, losses, costs, stamps, taxes, penalties, charges and expenses of
whatever kind and nature which the Company shall or may at any time sustain or incur in
consequence of having become surety upon the bond." 1 At the same time, Lopez executed a deed of
assignment of 4,000 shares of the Baguio Military Institution entitled "Stock Assignment Separate from
Certificate", which reads:

This deed of assignment executed by BENITO H. LOPEZ, Filipino, of legal age,

married and with residence and postal address at Baguio City, Philippines, now and
hereinafter called the "ASSIGNOR", in favor of the PHILIPPINE AMERICAN
GENERAL INSURANCE CO., INC., a corporation duly organized and existing under
and by virtue of the laws of the Philippines, with principal offices at Wilson Building,
Juan Luna, Manila, Philippines, now and hereinafter called the "ASSIGNEE-SURETY
COMPANY"
WITNESSETH
That for and in consideration of the obligations undertaken by the ASSIGNEESURETY COMPANY under the terms and conditions of SURETY BOND NO. 14164,
issued on behalf of said BENITO H. LOPEZ and in favor of the PRUDENTIAL BANK
& TRUST COMPANY, Manila, Philippines, in the amount of TWENTY THOUSAND
PESOS ONLY (P20,000.00), Philippine Currency, and for value received, the
ASSIGNOR hereby sells, assigns, and transfers unto THE PHILIPPINE AMERICAN
GENERAL INSURANCE CO., INC., Four Thousand (4,000) shares of the Baguio
military Institute, Inc. standing in the name of said Assignor on the books of said
Baguio Military Institute, Inc. represented by Certificate No. 44 herewith and do
hereby irrevocably constitutes and appoints THE PHILIPPINE AMERICAN
GENERAL INSURANCE CO., INC. as attorney to transfer the said stock on the
books of the within named military institute with full power of substitution in the
premises. 2

With the execution of this deed of assignment, Lopez endorsed the stock certificate and delivered it
to Philamgen.
It appears from the evidence on record that the loan of P20,000.00 was approved conditioned upon
the posting of a surety bond of a bonding company acceptable to the bank. Thus, Lopez persuaded
Emilio Abello, Assistant Executive Vice-President of Philamgen and member of the Bond Under
writing Committee to request Atty. Timoteo J. Sumawang, Assistant Vice- President and Manager of
the Bonding Department, to accommodate him in putting up the bond against the security of his
shares of stock with the Baguio Military Institute, Inc. It was their understanding that if he could not
pay the loan, Vice-President Abello and Pio Pedrosa of the Prudential Bank would buy the shares of
stocks and out of the proceeds thereof, the loan would be paid to the Prudential Bank.
On June 2, 1960, Lopez' obligation matured without it being settled. Thus, the Prudential Bank made
demands for payment both upon Lopez and Philamgen. In turn, Philamgen sent Lopez several
written demands for the latter to pay his note (Exhibit H, H-1 & H-2), but Lopez did not comply with
said demands. Hence, the Prudential Bank sometime in August, 1961 filed a case against them to
enforce payment on the promissory note plus interest.
Upon receipt of the copies of complaint, Atty. Sumawang confronted Emilio Abello and Pio Pedrosa
regarding their commitment to buy the shares of stock of Lopez in the event that the latter failed to
pay his obligations to the Prudential Bank. Vice-President Abello then instructed Atty. Sumawang to
transfer the shares of stock to Philamgen and made a commitment that thereafter he (Abello) and
Pio Pedrosa will buy the shares of stock from it so that the proceeds could be paid to the bank, and
in the meantime Philamgen will not pay the bank because it did not want payment under the terms of
the bank. 3
Due to said commitment and instruction of Vice-President Abello, Assistant Treasurer Marcial C.
Cruz requested the transfer of Stock Certificate No. 44 for 4,000 shares to Philamgen in a letter
dated October 31, 1961. Stock Certificate No. 44 in the name of Lopez was accordingly cancelled
and in lieu thereof Stock Certificate No. 171 was issued by the Baguio Military Institute in the name
of Philamgen on November 17, 1961.
The complaint was thereafter dismissed. But when no payment was still made by the principal debtor
or by the surety, the Prudential Bank filed on November 8, 1963 another complaint for the recovery
of the P20,000.00. On November 18, 1963, after being informed of said complaint, Lopez addressed
the following letter to Philamgen:
Dear Mr. Sumawang:
This is with reference to yours of the 13th instant advising me of a complaint filed
against us by Prudential Bank & Trust Co. regarding my loan of P20,000.00. In this
connection, I would like to know what happened to my shares of stocks of Baguio
Military Academy which were pledged to your goodselves to secure said obligation.
These shares of stock I think are more than enough to answer for said obligation. 4
On December 9, 1963, Philamgen was forced to pay the Prudential Bank the sum of P27,785.89
which included the principal loan and accumulated interest and the Prudential Bank executed a
subrogation receipt on the same date.
On March 18, 1965, Philamgen brought an action in the Court of First Instance of Manila (Civil Case
No. 60272, "The Philippine American General Insurance Co., Inc. vs. Benito H. Lopez") for

reimbursement of the said amount. After hearing, the said court rendered judgment dismissing the
complaint holding:
The contention of the plaintiff that the stock of the defendant were merely pledged to
it by the defendant is not borne out by the evidence. On the contrary, it appears to be
contradicted by the facts of the case. The shares of stock of the defendant were
actually transferred to the plaintiff when it became clear after the plaintiff and the
defendant had been sued by the Prudential Bank that plaintiff would be compelled to
make the payment to the Prudential Bank, in view of the inability of the defendant
Benito H. Lopez to pay his said obligation. The certificate bearing No. 44 was
cancelled and upon request of the plaintiff to the Baguio Military Institute a new
certificate of stock was issued in the name of the plaintiff bearing No. 171, by means
of which plaintiff became the registered owner of the 4,000 shares originally
belonging to the defendant.
It is noteworthy that the transfer of the stocks of the defendant in the name of the
plaintiff company was made at the instance of Messrs. Abello and Pedrosa, who
promised to buy the same from the plaintiff. Now that these shares of stock of the
defendant had already been transferred in the name of the plaintiff, the defendant
has already divested himself of the said stocks, and it would seem that the remedy of
the plaintiff is to go after Messrs. Abello and Pedrosa on their promise to pay for the
said stocks. To go after the defendant after the plaintiff had already become the
owner of his shares of stock and compel him to pay his obligation to the Prudential
Bank would be most unfair, unjust and illogical for it would amount to double
payment on his part. After the plaintiff had already appropriated the said shares of
stock, it has already lost its right to recover anything from the defendant, for the
reason that the transfer of the said stocks was made without qualification. This
transfer takes the form of a reimbursement of what plaintiff had paid to the Prudential
Bank, thereby depriving the plaintiff of its right to go after the defendant herein. 5
Philamgen appealed to the Court of Appeals raising these assignments of errors:
I
The lower court erred in finding that the evidence does not bear out the contention of
plaintiff that the shares of stock belonging to defendant were transferred by him to
plaintiff by way of pledge.
II
The lower court erred in finding that plaintiff company appropriated unto itself the
shares of stock pledged to it by defendant Benito Lopez and in finding that, with the
transfer of the stock in the name of plaintiff company, the latter has already been
paid or reimbursed what it paid to Prudential Bank.
III
The lower court erred in not finding that the instant case is one where the pledge has
abandoned the security and elected instead to enforce his claim against the pledgor
by ordinary action. 6

On December 17, 1970, the Court of Appeals promulgated a decision in favor of the Philamgen,
thereby upholding the foregoing assignments of errors. It declared that the stock assignment was a
mere pledge that the transfer of the stocks in the name of Philamgen was not intended to make it the
owner thereof; that assuming that Philamgen had appropriated the stocks, this appropriation is null
and void as a stipulation authorizing it is apactum commissorium; and that pending payment,
Philamgen is merely holding the stock as a security for the payment of Lopez' obligation. The
dispositive portion of the said decision states:
WHEREFORE, the decision of the lower court is hereby reversed, and another one is
hereby entered ordering the defendant to pay the plaintiff the sum of P27,785.89 with
interest at the rate of 12% per annum from December 9, 1963, 10% of the
P27,785.89 as attorney's fees and the costs of the suit. 7
The motion for reconsideration with prayer to set the same for oral argument having been denied,
Lopez brought this petition for review on certiorari presenting for resolution these questions:
a) Where, as in this case, a party "sells, assigns and transfers" and delivers shares of stock to
another, duly endorsed in blank, in consideration of a contingent obligation of the former to the latter,
and, the obligations having arisen, the latter causes the shares of stock to be transferred in its name,
what is the juridical nature of the transaction-a dation in payment or a pledge?
b) Where, as in this case, the debtor assigns the shares of stock to the creditor under an agreement
between the latter and determinate third persons that the latter would buy the shares of stock so that
the obligations could be paid out of the proceeds, was there a novation of the obligation by
substitution of debtor? 8
Philamgen failed to file its comment on the petition for review on certiorari within the extended period
which expired on March 19, 1971. This Court thereby resolved to require Lopez to file his brief. 9
Under the first assignment of error, Lopez argues in his brief:
That the Court of Appeals erred in holding that when petitioner "sold, assigned,
transferred" and delivered shares of stock, duly endorsed in blank, to private
respondent in consideration of a contingent obligation of the former to the latter and
the obligation having thereafter arisen, the latter caused the shares of stock to be
transferred to it, taking a new certificate of stock in its name, the transaction was a
pledge, and in not holding instead that it was a dation in payment. 10
Considering the explicit terms of the deed denominated "Stock Assignment Separate from
Certificate", hereinbefore copied verbatim, Lopez sold, assigned and transferred unto Philamgen the
stocks involved "for and in consideration of the obligations undertaken" by Philamgen "under the
terms and conditions of the surety bond executed by it in favor of the Prudential Bank" and "for value
received". On its face, it is neither pledge nor dation in payment. The document speaks of an outright
sale as there is a complete and unconditional divestiture of the incorporeal property consisting of
stocks from Lopez to Philamgen. The transfer appears to have been an absolute conveyance of the
stocks to Philamgen whether or not Lopez defaults in the payment of P20,000.00 to Prudential Bank.
While it is a conveyance in consideration of a contingent obligation, it is not itself a conditional
conveyance.
It is true that if Lopez should "well and truly perform and fulfill all the undertakings, covenants, terms,
conditions, and agreements stipulated" in his promissory note to Prudential Bank, the obligation of
Philamgen under the surety bond would become null and void. Corollarily, the stock assignment,

which is predicated on the obligation of Philamgen under the surety bond, would necessarily become
null and void likewise, for want of cause or consideration under Article 1352 of the New Civil Code.
But this is not the case here because aside from the obligations undertaken by Philamgen under the
surety bond, the stock assignment had other considerations referred to therein as "value received".
Hence, based on the manifest terms thereof, it is an absolute transfer.
Notwithstanding the express terms of the "Stock Assignment Separate from Certificate", however,
We hold and rule that the transaction should not be regarded as an absolute conveyance in view of
the circumstances obtaining at the time of the execution thereof.
It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P20,000.00 from
Prudential Bank, Lopez executed a promissory note for ?20,000.00, plus interest at the rate of ten
(10%) per cent per annum, in favor of said Bank. He likewise posted a surety bond to secure his full
and faithful performance of his obligation under the promissory note with Philamgen as his surety. In
return for the undertaking of Philamgen under the surety bond, Lopez executed on the same day not
only an indemnity agreement but also a stock assignment.
The indemnity agreement and the stock assignment must be considered together as related
transactions because in order to judge the intention of the contracting parties, their
contemporaneous and subsequent acts shall be principally considered. (Article 1371, New Civil
Code). Thus, considering that the indemnity agreement connotes a continuing obligation of Lopez
towards Philamgen while the stock assignment indicates a complete discharge of the same
obligation, the existence of the indemnity agreement whereby Lopez had to pay a premium of
P1,000.00 for a period of one year and agreed at all times to indemnify Philamgen of any and all
kinds of losses which the latter might sustain by reason of it becoming a surety, is inconsistent with
the theory of an absolute sale for and in consideration of the same undertaking of Philamgen. There
would have been no necessity for the execution of the indemnity agreement if the stock assignment
was really intended as an absolute conveyance. Hence, there are strong and cogent reasons to
conclude that the parties intended said stock assignment to complement the indemnity agreement
and thereby sufficiently guarantee the indemnification of Philamgen should it be required to pay
Lopez' loan to Prudential Bank.
The character 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;
but if there was some other intention, it is not a pledge. However, even though a
transfer, if regarded by itself, appears to have been absolute, its object and character
might still be qualified and explained by a contemporaneous writing declaring it to
have been a deposit of the property as collateral security. It has been said that a
transfer of property by the debtor to a creditor, even if sufficient on its face to make
an absolute conveyance, should be treated as a pledge if the debt continues in
existence and is not discharged by the transfer, and that accordingly, the use of the
terms ordinarily importing conveyance, of absolute ownership will not be given that
effect in such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and unambiguous language or other
circumstances excluding an intent to pledge. 11
We agree with the holding of the respondent Court of Appeals that the stock assignment, Exhibit C,
is in truth and in fact, a pledge. Indeed, the facts and circumstances leading to the execution of the
stock assignment, Exhibit C, and the admission of Lopez prove that it is in fact a pledge. The
appellate court is correct in ruling that the following requirements of a contract of pledge have been

satisfied: (1) that it be constituted to secure the fulfillment of a principal obligation; (2) that the
pledgor be the absolute owner of the thing pledged; and (3) that the person constituting the pledge
has the free disposal of the property, and in the absence thereof, that he be legally authorized for the
purpose. (Article 2085, New Civil Code).
Article 2087 of the New Civil Code providing that it is also the essence of these contracts (pledge,
mortgage, and antichresis) 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, further supports the
appellate court's ruling, which We also affirm. On this point further, the Court of Appeals correctly
ruled:
In addition to the requisites prescribed in article 2085, it is necessary, in order to
constitute the contract of pledge, that the thing pledged be placed in the possession
of the creditor, or of a third person by common agreement. (Art. 2093, N.C.C.)
Incorporeal rights, including shares of stock may also be pledged (Art. 2095, N.C.C.)
All these requisites are found in the transaction between the parties leading to the
execution of the Stock Assignment, Exhibit C. And that it is a pledge was admitted by
the defendant in his letter of November 18, 1963, Exhibit G, already quoted above,
where he asked what had happened to his shares of stock "which were pledged to
your goodselves to secure the said obligation". The testimony of the defendantappellee that it was their agreement or understanding that if he would be unable to
pay the loan to the Prudential Bank, plaintiff could sell the shares of stock or
appropriate the same in full payment of its debt is a mere after-thought, conceived
after he learned of the transfer of his stock to the plaintiff in the books of the Baguio
Military Institute.
We also do not agree with the contention of petitioner that "petitioner's 'sale assignment and transfer'
unto private respondent of the shares of stock, coupled with their endorsement in blank and delivery,
comes exactly under the Civil Code's definition of dation in payment, a long recognized and deeply
rooted concept in Civil Law denominated by Spanish commentators as 'adjudicacion en pago'".
According to Article 1245 of the New Civil Code, dation in payment, whereby property is alienated to
the creditor in satisfaction of a debt in money, shall be governed by the law of sales.
Speaking of the concept of dation in payment, it is well to cite that:
Dation in payment is the delivery and transmission of ownership of a thing by the
debtor to the creditor as an accepted equivalent of the performance of the obligation.
(2 Castan 525; 8 Manresa, 324) The property given may consist, not only of a thing,
but also of a real right (such as a usufruct) or of a credit against a third person.
(Perez Gonzales & Alguer :2-I Enneccerus, Kipp & Wolff 317). Thus, it has been held
that the assignment to the creditor of the interest of the debtor in an inheritance in
payment of his debt, is valid and extinguishes the debt. (Ignacio vs. Martinez, 33 Phil.
576)
The modern concept of dation in payment considers it as a novation by change of the
object, and this is to our mind the more juridically correct view. Our Civil Code,
however, provides in this article that, where the debt is in money, the law on sales
shall govern; in this case, the act is deemed to be a sale, with the amount of the
obligation to the extent that it is extinguished being considered as the price. Does
this mean that there can be no dation in payment if the debt is not in money? We do
not think so. It is precisely in obligations which are not money debts, in which the true

juridical nature of dation in payment becomes manifest. There is a real novation with
immediate performance of the new obligation. The fact that there must be a prior
agreement of the parties on the delivery of the thing in lieu of the original prestation
shows that there is a novation which, extinguishes the original obligation, and the
delivery is a mere performance of the new obligation.
The dation in payment extinguishes the obligation to the extent of the value of the
thing delivered, either as agreed upon by the parties or as may be proved, unless the
parties by agreement, express or implied, or by their silence, consider the thing as
equivalent to the obligation, in which case the obligation is totally extinguished. (8
Manresa 324; 3 Valverde 174 fn
Assignment of property by the debtor to his creditors, provided for in article 1255, is
similar to dation in payment in that both are substitute forms of performance of an
obligation. Unlike the assignment for the benefit of creditors, however, dation in
payment does not involve plurality of creditors, nor the whole of the property of the
debtor. It does not suppose a situation of financial difficulties, for it may be made
even by a person who is completely solvent. It merely involves a change of the object
of the obligation by agreement of the parties and at the same time fulfilling the same
voluntarily. (8 Manresa 324). 12
Considering the above jurisprudence, We find that the debt or obligation at bar has not matured on
June 2, 1959 when Lopez "alienated" his 4,000 shares of stock to Philamgen. Lopez' obligation
would arise only when he would default in the payment of the principal obligation (the loan) to the
bank and Philamgen had to pay for it. Such fact being adverse to the nature and concept of dation in
payment, the same could not have been constituted when the stock assignment was executed.
Moreover, there is no express provision in the terms of the stock assignment between Philamgen
and Lopez that the principal obligation (which is the loan) is immediately extinguished by reason of
such assignment.
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. Under American
jurisprudence,
A distinction might also be made between delivery of property in payment of debt and
delivery of such property as collateral security for the debt. Generally, such a transfer
was presumed to be made for collateral security, in the absence of evidence tending
to show an intention on the part of the parties that the transfer was in satisfaction of
the debt. This presumption of a transfer for collateral security arose particularly
where the property given was commercial paper, or some other 'specialty' chose of
action, that conferred rights upon transfer by delivery of a different nature from the
debt, whose value was neither intrinsic nor apparent and was not agreed upon by the
parties. 13
Petitioner's argument that even assuming, arguendo that the transaction was at its inception a
pledge, it gave way to a dation in payment when the obligation secured came into existence and
private respondent had the stocks transferred to it in the corporate books and took a stock certificate
in its name, is without merit. The fact that the execution of the stock assignment is accompanied by
the delivery of the shares of stock, duly endorsed in blank to Philamgen is no proof that the
transaction is a dation in payment. Likewise, the fact that Philamgen had the shares of stock
transferred to it in the books of the corporation and took a certificate in its name in lieu of Lopez
which was cancelled does not amount to conversion of the stock to one's own use. The transfer of

title to incorporeal property is generally an essential part of the delivery of the same in pledge. It
merely constitutes evidence of the pledgee's right of property in the thing pledged.
By the contract of pledge, the pledgor does not part with his general right of property
in the collateral. The general property therein remains in him, and only a special
property vests in the pledgee. The pledgee does not acquire an interest in the
property, except as a security for his debt. Thus, the pledgee holds possession of the
security subject to the rights of the pledgor; he cannot acquire any interest therein
that is adverse to the pledgor's title. Moreover, even where the legal title to
incorporeal property which may be pledged is transferred to a pledgee as collateral
security, he takes only a special property therein Such transfer merely performs the
office that the delivery of possession does in case of a pledge of corporeal property.
xxx xxx xxx
The pledgee has been considered as having a lien on the pledged property. The
extent of such lien is measured by the amount of the debt or the obligation that is
secured by the collateral, and the lien continues to exist as long as the pledgee
retains actual or symbolic possession of the property, and the debt or obligation
remains unpaid. Payment of the debt extinguishes the lien.
Though a pledgee of corporation stock does not become personally liable as a
stockholder of the company, he may have the shares transferred to him on the books
of the corporation if he has been authorized to do so.
The general property in the pledge remains in the pledgor after default as well as
prior thereto. The failure of the pledgor to pay his debt at maturity in no way affects
the nature of the pledgee's rights concerning the property pledged, except that he
then becomes entitled to proceed to make the security available in the manner
prescribed by law or by the terms of the contract, ... . 14
In his second assignment of error, petitioner contends that the Court of Appeals erred in not holding
that since private respondent entered into an agreement with determinate third persons whereby the
latter would buy the said shares so sold, assigned and transferred to the former by the petitioner for
the purpose of paying petitioner's obligation out of the proceeds, there was a novation of the
obligation by substitution of debtor.
We do not agree.
Under Article 1291 of the New Civil Code, obligations may be modified by: (1) changing their object
or principal condition; (2) substituting the person of the debtor; (3) subrogating a third person in the
rights of the creditor. And in order that an obligation may be extinguished by another which
substitute 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, N.C.C.) Novation
which consists in substituting a new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not without the consent of the creditor.
Payment by the new debtor gives him the rights mentioned in Articles 1236 and 1237. (Article 1293,
N.C.C.)
Commenting on the second concept of novation, that is, substituting the person of the debtor,
Manresa opines, thus:

In this kind of novation it is pot enough to extend the juridical relation to a third
person; it is necessary that the old debtor be released from the obligation, and the
third person or new debtor take his place in the relation. Without such release, there
is no novation; the third person who has assumed the obligation of the debtor merely
becomes a co-debtor or a surety. If there is no agreement as to solidarity, the first
and the new debtor are considered obligated jointly. (8 Manresa 435, cited in
Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines,
Vol. IV, p. 360)
In the case at bar, the undertaking of Messrs. Emilio Abello and Pio Pedrosa that they would buy the
shares of stock so that Philamgen could be reimbursed from the proceeds that it paid to Prudential
Bank does not necessarily imply the extinguishment of the liability of petitioner Lopez. Since it was
not established nor shown that Lopez would be released from responsibility, the same does not
constitute novation and hence, Philamgen may still enforce the obligation. As the Court of Appeals
correctly held that "(t)he representation of Mr. Abello to Atty. Sumawang that he and Mr. Pedrosa
would buy the stocks was a purely private arrangement between them, not an agreement between
(Philamgen) and (Lopez)" and which We hereby affirm, petitioner's second assignment of error must
be rejected.
In fine, We hold and rule that the transaction entered into by and between petitioner and respondent
under the Stock Assignment Separate From Certificate in relation to the Surety Bond No. 14164 and
the Indemnity Agreement, all executed and dated June 2, 1959, constitutes a pledge of the 40,000
shares of stock by the petitioner-pledgor in favor of the private respondent-pledgee, and not a dacion
en pago. It is also Our ruling that upon the facts established, there was no novation of the obligation
by substitution of debtor.
The promise of Abello and Pedrosa to buy the shares from private respondent not having
materialized (which promise was given to said respondent only and not to petitioner) and no action
was taken against the two by said respondent who chose instead to sue the petitioner on the
Indemnity Agreement, it is quite clear that this respondent has abandoned its right and interest over
the pledged properties and must, therefore, release or return the same to the petitioner-pledgor upon
the latter's satisfaction of his obligation under the Indemnity Agreement.
It must also be made clear that there is no double payment nor unjust enrichment in this case
because We have ruled that the shares of stock were merely pledged. As the Court of Appeals said:
The appellant (Philam) is not enriching himself at the expense of the appellee. True,
the stock certificate of the appellee had been in the name of the appellant but the
transfer was merely nominal, and was not intended to make the plaintiff the owner
thereof. No offer had been made for the return of the stocks to the defendant. As the
appellant had stated, the appellee could have the stocks transferred to him anytime
as long as he reimburses the plaintiff the amount it had paid to the Prudential Bank.
Pending payment, plaintiff is merely holding the certificates as a pledge or security
for the payment of defendant's obligation.
The above holding of the appellate court is correct and We affirm the same.
As to the third assignment of error which is merely the consequence of the first two assignments of
errors, the same is also devoid of merit.
WHEREFORE, IN VIEW OF ALL THE FOREGOING, the decision of the Court of Appeals is hereby
AFFIRMED in toto, with costs against the petitioner.

SO ORDERED.
Barredo (Chairman), Aquino, Concepcion, Jr., Abad Santos, De Castro and Escolin, JJ., concur.

G.R. No. L-49739 January 20, 1989

BONIFACIO LOPEZ, SUBSTITUTED BY ROBERTA LLANERAS, VIRGINIA LOPEZ, BONIFACIO
LOPEZ, JR. and FERNANDO LOPEZ, petitioners,
vs.
HON. COURT OF APPEALS, PEDRO PINOHERMOSO, SUBSTITUTED BY JUANA P.
REMOLANA, CEFERINA PINOHERMOSO, TERESITA PINOHERMOSO, LURESITA
PINOHERMOSO, ANACITO PINOHERMOSO, NIEVES PINOHERMOSO, AQUILINO
PINOHERMOSO, MELANIO PADRELAN, LYDIA PADRELAN, JULIANA PADRELAN, ELISA
PADRELAN, NENA PADRELAN, MANUEL PADRELAN, ROSARIO PADRELAN, ROSITA
PADRELAN and AMADO PADRELAN, respondents.
Beltran, Beltran & Beltran for petitioners.
Ismael T. Portes for private respondents.

GUTIERREZ, JR., J.:

This is an appeal from the judgment of the Court of Appeals which affirmed the decision of the then
Court of First Instance of Quezon, Branch III, requiring the petitioners to restore to the respondents
"the share of their grandmother in the old homestead, the ancestral home of the Pinohermosos,
which should be preserved in the family and not devoted to speculative purposes" and ordering that
"Transfer Certificate of Title No. 15186 (should) be amended accordingly." (p. 27, Rollo)
The assailed decision of the Court of Appeals has the following findings of facts:
The deceased spouses Tiburcio Pinohermoso and Casiana Flores had three
children, namely Hermogenes, Felicidad and Pedro, all surnamed Pinohermoso.
Hermogenes died single, Felicidad was survived by her husband herein plaintiff
Melencio Padrelan and children Lydia, Juliana, Felisa, Nena, Manuel, Rosario,
Rosita and Amadeo Padrelan also plaintiffs in this case. Pedro Pinohermoso died on
October 17, 1964 and was substituted as party plaintiff by his surviving wife, Juana
P. Remolona and children Ceferina, Teresita, Luresita, Anacito, Marciana, Nieves
and Aquilino, all surnamed Pinohermoso.
In this complaint dated March 19, 1958, plaintiffs pray among others that judgment
be rendered declaring that the property in question belongs to the conjugal
partnership of the spouses Tiburcio Pinohermoso and Casiana Flores and that as
heirs of Casiana Flores, they became the owners of one-half (1/2) thereof from the
time of her death: that they became the owners of the other half pertaining to the late
Tiburcio Pinohermoso in the conjugal partnership from the time of his death: that the
mortgage executed by defendant spouses Bonifacio B. Lopez and Roberta Llaneras
in favor of the Rehabilitation Finance Corporation did not affect the land in question
for the reason that the mortgagors were not the owners thereof at the time said
mortgage was executed; ordering the defendant Register of Deeds of Quezon to
cancel TCT No. 15186 and to issue another certificate of title in the name of plaintiffs
as heirs of the late spouses Tiburcio Pinohermoso and Casiana Flores.
Rehabilitation Finance Corporation, now Development Bank of the Philippines was
dropped as party defendant by the trial court on September 6, 1960 it appearing that

defendants Bonifacio B. Lopez and Roberta Llaneras had already paid the mortgage
of the property in litigation to their said co-defendant as shown in the deed of release
or cancellation of mortgage.
Defendant Bonifacio B. Lopez Sr. died on April 29, 1970 and was substituted by his
legal heirs, namely: Roberta Llaneras, Virginia Lopez, Bonifacio Lopez Jr. and
Fernando Lopez.
It appears that on July 19, 1913, Tiburcio Pinohermoso filed Homestead Application
No. 19478 (E-12596) and it was approved on October 26, 1914. The applicant had
paid the required homestead fees amounting to P20.00 and submitted his final proof
on June 29, 1922. On April 5, 1924, Casiana Flores died. Under date of March 20,
1925, an order for the issuance of patent to 'Tiburcio Pinohermoso was issued by
Assistant Director Jose P. Dans of the Bureau of Lands. Original Certificate of Title
No. 1406 (Exhibit 1) was issued on April 22, 1926 over the parcel of land in
controversy unto the said Tiburcio Pinohermoso "to have and to hold the said tract of
land, with the appurtenances thereto of right belonging unto the said Tiburcio
Pinohermoso and to his heirs and assigns forever subject to the provisions of
sections 116, 119, 120 and 122 of Act. No. 2874 of the Philippine Legislature, as
amended, which provides that the land hereby acquired shall be inalienable and shall
not be subject to incumbrance for a period of five (5) years from the date of this
patent". . . . . In consideration of the sum of P550.00 Tiburcio Pinohermoso sold this
land to defendants Bonifacio B. Lopez and Roberta Llaneras on May 20, 1939 who
took possession of the property and its improvements upon their purchase thereof
(Exhibit 1). By virtue of the said sale, OCT No. 1406 was cancelled and Transfer
Certificate of Title No. 15186 (Exhibit 3) was issued on February 3, 1940 in the name
of Bonifacio B. Lopez married to Roberta Llaneras. Tax Declaration No. 1279 (Exhibit
4) was thereafter issued to Bonifacio Lopez and said defendant has been paying the
realty taxes on the land since 1948 up to the filing of this case in 1958 (Exhibit 5 and
5a). (p. 29, Rollo).
In its decision, the trial court declared the lot in question a conjugal property of Tiburcio Pinohermoso
and Casiana Flores. Consequently, it ruled that Tiburcio had authority only to administer and not to
sell the share of Casiana which passed on to her heirs. It held that the action for reconveyance of
said share had not prescribed in view of the relation of trust and confidence between Tiburcio and
his children. On these bases, the trial court ordered the reconveyance of half of the land to the
respondents, with a condition that they first reimburse the petitioners the value of half of the coconut
trees the latter had planted on the land since 1940 when they entered into the possession of the
land. The reimbursement of half of the purchase price was not ordered as the court believed that the
petitioners had been amply compensated by the profits they derived from the use of the portion of
land in question.
On appeal to the Court of Appeals, the appellate court affirmed the trial court's decision. It, however,
opined that "the alleged sale made by Tiburcio of the whole homestead is void and non-existent with
respect to the one-half thereof and it is settled that the action to declare the inexistence of a contract
does not prescribe." (Rollo, p. 30)
The petitioner now comes to this Court assailing the decisions of the courts below. He alleges that
the validity of the deed of sale executed in 1939 by Tiburcio may no longer be attacked in an action
in 1958, or 19 years after its execution; that assuming, without admitting, that the property is a
conjugal property of the vendor and his deceased spouse, the petitioner is not bound by such fact
because he is a buyer in good faith and for value who relied on the property's certificate of title

issued only in the name of the vendor; and, that assuming that he is bound by the conjugal nature of
the property, it was error for the courts to hold that the vendor validly sold only one-half of the
property without including another one-eighth part of it which represents the vendor's share in
hereditary succession from his wife.
The respondents, however, counter that Bonifacio Lopez should be bound by the conjugal nature of
the property as "anyone dealing with a homestead is charged with the notice of how the
requirements of the public land law for the acquisition of the right to the patent had been fulfilled."
(Rollo, p. 129) They allege that "where as in the instant case, the requirements of law had been
fulfilled during the marriage of the spouses Pinohermoso and Flores, Bonifacio Lopez should be
bound by the hard and unalterable fact that the homestead in question was a conjugal property
notwithstanding that only the name of Tiburcio Pinohermoso appeared in the patent or title." (Ibid.)
The respondents further state that the petitioners' claim to an additional one-eighth part of the land
has no basis in law because under the old law, Tiburcio inherited only a unsufructuary right over the
portion of the conjugal property left by his wife. Lastly, the respondents aver that their cause of
action had not prescribed inasmuch as the sale is void and inexistent and that the defense of laches
was not pleaded by the petitioners in their answer and therefore cannot be considered on appeal.
We rule for the petitioners.
The land in question is a homestead titled under the Land Registration Act. In the case of Iglesia ni
Cristo v. Hon. Judge, CFI of Nueva Ecija, Branch I, [123 SCRA 516 (1983)], this Court citing the
case of Pajomayo, et al. v. Manipon, et al. [39 SCRA 676 (1971)] held that once a homestead patent
granted in accordance with the Public Land Act is registered pursuant to Section 122 of Act 496, the
certificate of title issued in virtue of said patent has the force and effect of a Torrens' title issued
under the Land Registration Act.
Under the established principles of land registration law, the presumption is that the transferee of
registered land is not aware of any defect in the title of the property he purchased. [See Tajonera v.
Court of Appeals, 103 SCRA 467 (1981)] Moreover, the person dealing with registered land may
safely rely on the correctness of its certificate of title and the law will in no way oblige him to go
behind the certificate to determine the condition of the property. (Director of Lands v. Abache, et al.,
73 Phil. 606, 1942)
No strong considerations of public policy have been presented which would lead us to reverse the
established and sound doctrine that the buyer in good faith of a registered parcel of land does not
have to look beyond the Torrens Title and search for any hidden defect or inchoate right which may
later invalidate or diminish his right to what he purchased. (See Fule v. de Legare, 7 SCRA 351,
[1963]).
The respondent court glossed over this issue completely. There is nothing in the questioned decision
which indicates why Bonifacio Lopez should have looked beyond the title and why he should have
taken notice of the fact that the sole registered owner had a legitimate wife who died in 1924 or 16
years before the land was offered to him by the sole registered owner in 1940.
Moreover, Tiburcio Pinohermoso had another wife in 1940, a certain Generosa Canete (or Magigad
according to the respondents' witnesses) whose name appears in the deed of sale as
the legitimate wife of Tiburcio. The decision of the respondent court would have the buyer inquire
first as to the rights of Generosa Canete. If she had no right to the land, the buyer's next step would
be to ascertain the exact date the rights of Tiburcio to the homestead were perfected prior to
issuance of the title after which he would find out who the wife was at that time. Then, he would ask
for a search of marriage records in 1909 when the marriage to Casiana Flores was allegedly

solemnized to determine whether or not there was a valid marriage. These are precisely what the
law says do not have to be done.
If we are to accept the respondents' contentions, a buyer of registered land would have to look
beyond the title for any unregistered owner, any earlier buyer who failed to register his purchase, all
possible actual owners who used the registered buyer as a dummy, and so many other defects or
vices of the title, ad infinitum. The ruling of the respondent court is contrary to the reasons behind
the indefeasibility of a Torrens Title.
The records before us also show that the attributions of fraud or bad faith were found false. The
respondents' evidence showed that Tiburcio Pinohermoso could not have traveled from Lucena to
Lucban on May 20, 1939 to sign a deed of sale because he had a severe hernia reaching up to the
knees until it burst in 1940 thus causing his death. Yet, the death certificate of Tiburcio shows that
he died of "malaria" on June 17, 1940 at the age of 68. There is no evidence to show bad faith or
knowledge of any defect in the title of the vendor when the land was purchased by Bonifacio Lopez.
As the land was titled only in the name of the vendor Tiburcio Pinohermoso, the petitioner may not
be faulted for purchasing what now appears to have been conjugal property at the time. This is
reinforced by the fact that the respondents' attempt to impute bad faith to the petitioners were not
successful in the courts below.
Whether the action is one for the annulment of a deed of sale executed by means of fraud, or for
reconveyance based on implied trust is, however, of no moment. Both causes of action had
prescribed, applying the law of the old Civil Code and the Code of Civil Procedure which governed
the contract of sale executed in 1939.
In the case of Cultura v. Tapucar, (140 SCRA 311 [1985]), this Court ruled that the period of
prescription for the annulment of the deed of sale dated 26 November 1934 the execution of which
was tainted by fraud is four years from the discovery of fraud according to Section 43 of Act 190, the
old Code of Civil Procedure. Applied to the instant case, the fraud attendant in the contract of sale
was discovered by the respondents or their predecessors-in-interest in 1940 when the petitioners
showed to them the deed of sale and ordered them to vacate the land. The action to annul the sale,
commenced after 19 years, had clearly prescribed.
The same is true as regards an action for reconveyance of property based on implied trust assuming
implied trust is applicable.
This Court ruled in Salao v. Salao (70 SCRA 65, 84 [1976]):
There was no resulting trust in this case because there never was any intention on
the part of Juan Y. Salao, Sr., Ambrosia Salao and Valentin Salao to create any trust.
There was no constructive trust because the registration of the two fishponds in the
names of Juan and Ambrosia was not vitiated by fraud or mistake. This is not a case
where to satisfy the demands of justice it is necessary to consider the Calunuran
fishpond as being held in trust by the heirs of Juan Y. Salao, for the heirs of Valentin
Salao.
And even assuming that there was an implied trust, plaintiffs' action is clearly barred
by prescription or laches (Ramos v. Ramos, L-19872, December 3, 1974, 61 SCRA
284; Quiniano v. Court of Appeals, L-23024, May 31, 1971, 39 SCRA 221; Varsity
Hills, Inc. v. Navarro, L-30889, February 29, 1972, 43 SCRA 503; Alzona v.
Capunitan and Reyes, 114 Phil. 377).

Under Act No. 190, whose statute of limitation would apply if there were an implied
trust in this case, the longest period of extinctive prescription was only ten years
(Sec. 40; Diaz v. Gorricho and Aguado, 103 Phil. 261, 266)
The reasons alleged by the respondents for the long delay in filing the action-that they were poor
and had to save for the expenses of litigation and that the Japanese occupation prevented them
from filing the case immediately are not meritorious.
Whatever right the respondents had over one half of the registered property had already prescribed
through lapse of time by reason of their negligence and abandonment.
WHEREFORE, the petition is hereby granted. The assailed decision of the Court of Appeals
affirming the decision of the trial court is REVERSED and SET ASIDE. The complaint is
DISMISSED.
SO ORDERED.
Fernan, C.J., (Chairman), Feliciano, Bidin and Cortes, JJ., concur.

G.R. No. L-28764 November 29, 1973

GENERAL INSURANCE AND SURETY CORPORATION, petitioner,
vs.
HON. HONORATO B. MASAKAYAN, Judge of the Court of First Instance of Rizal, Branch V,
Quezon City; LEANDRO E. CASTELO and JOSEFA PAYUMO CASTELO, respondents.
Ernesto P. Villar and Arthur Tordesillas for petitioners.
Vicente P. Fernando for private respondents.

ESGUERRA, J.:
Petition for certiorari, prohibition and mandamus, with prayer for a writ of preliminary injunction to
review the order dated June 7, 1967 of the Court of First Instance (CFI) of Rizal, Branch V (Quezon
City), denying petitioner's motion to file an amended answer with counterclaim, together with the
order dated November 21, 1967, also denying petitioner's motion for reconsideration thereof, both
issued in its Civil Case No. Q-4795 entitled, "Leandro E. Castelo, et al., Plaintiffs vs. General
Insurance and Surety Corporation, Defendant."
This case stemmed from the filing by petitioner on October 22, 1959, of a complaint for unlawful
detainer against private respondents Castelos in the Municipal Court of Quezon City, docketed as
Civil Case No. 6743. On November 12, 1959, respondents Castelos likewise filed a complaint with
the CFI of Rizal, Branch V, Quezon City, against herein petitioners, docketed as Civil Case No. Q4795.
The petitioner's case for unlawful detainer (Civil Case No. Q-6743) was dismissed for lack of
jurisdiction, both by the City Court and the Court of First Instance of Quezon City. Upon appeal to
the Court of Appeals, the latter court certified the case to this Court as one involving purely a
question of law. It was accepted and docketed as G.R. No.
L-19330, and decided on April 30, 1965, affirming the judgment of the lower court, as follows:
IN VIEW OF ALL THE FOREGOING the decision appealed from is hereby affirmed
in full, with costs against the appellant. This decision is without prejudice to the filing
by the appellant of whatever claims it may have under the controverted deed of sale.
(Emphasis Ours)
On the other hand, the same Court of First Instance decided Civil Case Q-4795 as follows:
WHEREFORE, judgment is rendered in this case as follows:
1. Declaring the deed of sale with right of repurchase as additional security for the
loans with the Philippine Bank of Commerce;
2. Ordering the cancellation of TCT No. 35546, in the name of the defendant and its
reconveyance to the plaintiffs;

3. Ordering the plaintiffs to pay the defendant the sum of P2,698.15 and upon
payment of which the Indemnity Agreement with Chattel Mortgage is hereby ordered
cancelled.
This decision was appealed to the Court of Appeals where it was docketed as CA-G.R. No. 29574R. As set forth in the decision of the Court of Appeals, the facts of Civil Case Q-4795 are as follows:
Substantially, the complaint alleges that by virtue of a contract to sell, J.M. Tuason,
Inc. represented by its agent, Gregorio Araneta, Inc. was bound to convey plaintiffs
its ownership over a lot upon receipt of the total purchase price which was payable
by installment; that meanwhile, plaintiffs were given possession of the lot, and had
built a house thereon; that before complete payment of the purchase price, plaintiffs,
through the help of defendant General Insurance and Surety Corporation, obtained
from the Philippine Bank of Commerce a loan of P4,000.00 documented by a
promissory note wherein defendant signed as accommodation co-maker; that in view
thereof, plaintiffs entered into indemnity agreements with defendant whereby they
mortgaged to the latter the house as well as the lot; that the mortgage of the lot, did
not however meet with the approval of Gregorio Araneta, Inc. because the same had
not yet been fully paid for by plaintiffs; that on account of this, plaintiffs executed in
the favor of defendant a "Deed of Sale with Right of Repurchase" (in lieu of the real
estate mortgage) whereby they sold to the latter all their rights and interests over the
lot, that subsequently, plaintiffs again obtained, thru the help of the defendant, a loan
of P600.00 from the Philippine Bank of Commerce, likewise with defendant as
accommodation co-maker of the corresponding promissory note; that eventually
thereafter, defendant paid the balance of the purchase price of the lot to Gregorio
Araneta, Inc. and thereby succeeded in obtaining from the latter a deed of sale
thereof in its favor, and later on an owner's title over the property Transfer
Certificate of Title No. 35546 issued by the Register of Deeds of Quezon City in
defendant's name; that the aforesaid additional loan of P600.00 has already been
liquidated by plaintiffs, and as regards the original loan of P4,000.00, the truth is that
"only P1,000 was received by plaintiffs and the P3,000 was left in the possession of
the defendant and with which it paid Gregorio Araneta, Inc. the balance of the
purchase price of the lot; that although "the aforesaid instrument executed by
plaintiffs over the lot in question is on its face a deed of sale with right of repurchase,
between the parties the real contract is one of mortgage"; that in view of these facts,
defendant is holding the title to the property in question, as a trustee and for the
benefit of the plaintiff.
Traversing the complaint, defendant in its answer with counterclaim, denied among
other things that the real contract is one of mortgage instead of sale with right of
repurchase, and averred in effect that it had rightfully consolidated its ownership over
the lot in question as vendee a retro.(Emphasis Supplied)
Among the several errors attributed to the trial court is that it abused its discretion in denying
defendant's motion for postponement and in refusing to set aside its order directing plaintiffs to
adduce their evidence ex-parte before a Commissioner. The Court of Appeals, on August 18, 1965,
rendered judgment for the defendant, as follows:
On top of this, it must be reckoned that the case had previously been set for hearing
seven times and defendant, thru counsel, was present and ready for trial every time,
but for one reason or another, the trial court has kept on ordering the postponement

either motu propio or on plaintiffs motion. On the other hand, defendant's request for
postponement was the very first on its part.
We think that the demands of justice and equity would call for the remanding of this
case to the trial court so as to give the defendant a fair chance to cross-examine
plaintiffs' witness and adduce its own evidence.
Accordingly, the decision appealed from is hereby set aside, and this case will be
remanded to the court a quo for further proceeding permitting the defendant to crossexamine plaintiff witness and to adduce its evidence. (Emphasis Ours)
After the remand of the case to the Court of First Instance for further proceedings, the defendant,
now herein petitioner, on April 12, 1967, filed a motion for leave to file an amended answer with
counterclaim which, as aforementioned, was denied by the lower Court in its order of June 7, 1967,
now subject of this petition for review.
The decisive question to determine is whether or not the amendments with counterclaim sought to
be included by petitioner in the amended answer, particularly paragraphs 8, 12, 15 and 16, really
changed the theory of petitioner's defense. A comparison of the aforementioned paragraphs, both of
the original and amended answer, respectively read as follows:
8. That defendant specifically denies the allegations contained in paragraph 8 of the
Complaint, the truth of the matter being, the "Deed of Sale with Right of Redemption
of his Equitable Rights" only (because all that he had at the time was a right to buy
the land in question from the Gregorio Araneta, Inc.) was a distinct transaction; that
whatever transaction on the said land of Gregorio Araneta, Inc., which did not meet
with the approval of the same, could not have been carried out because Gregorio
Araneta, Inc. was then the owner of the land and not the plaintiffs; (Original Answer
with Counterclaim, Annex "B" of Petition)
8. That defendant specifically denies the allegations contained in paragraph 8 of the
Complaint, the truth of the matter being that the "Deed of Sale with Right of
Repurchase" was not over the lot in question but on plaintiffs' equitable rights only
because all that plaintiffs had at the time was a right to buy the land in question from
Gregorio Araneta, Inc., by virtue of the Transfer of the same made in his favor by
Raymundo Fernando and that the reason for its execution by plaintiffs was not as
alleged in par. 8 of the Complaint, but because Gregorio Araneta, Inc. required the
plaintiffs to transfer their rights, titles and interests on the said lot by means of a deed
of sale. (Amended Answer with Counterclaim, Annex "D-1" Petition)
In paragraph 8 of the Original Answer, the theory of the defense is that the original transaction
proposed by respondents Castelos on the land of Araneta, Inc. did not meet with the approval of the
latter and was not carried out over the lot of Araneta but on respondent Castelos' equitable rights
only, because all that respondents had at the time of execution of the said deed of sale was a right
to buy the land in question. Comparing said theory of defense with that embodied in the amended
answer, We believe that there was no change in the line of defense, the amended answer being only
an amplification of the original answer. The respondents' assertion that paragraph 8 of the Amended
Answer is a substantial amendment and a complete turnabout from its original stand is unwarranted,
as evidenced by the Deed of Sale with Right of Repurchase (Annex "A" of the complaint), executed
by no less than the petitioner and respondents themselves, clearly showing that it was Gregorio
Araneta, Inc., and not herein petitioner which required the execution of the said Deed of Sale with
Right of Repurchase. Pertinent portion of the said Deed of Sale reads as follows:

WHEREAS, a previous Deed of Indemnity Agreement with Real Estate Mortgage of

their rights, title and interests in the above described parcel of land executed by the
SELLERS in favor of the BUYER did not meet the approval of the GREGORIO
ARANETA, INC., and instead has required the SELLERS to transfer such rights,
titles and interests to the BUYER by means of a document of a deed of sale with
right of repurchase;.
Besides no valid mortgage could have been executed between the parties as the respondents were
not the absolute owners of the land as required by Art. 2085 of the New Civil Code. 1
Paragraph 12 of the petitioner's original and amended answer, respectively read thus:
12. That defendant specifically denies the allegations in paragraph 12 of the
Complaint, the truth of the matter being, the consideration for the execution of said
deed of sale with right of repurchase is the sum of P2,800.00 paid by the defendant.
12. That defendant specifically denies the allegations contained in paragraph 12 of
the Complaint, the truth of the matter being that the aforesaid loan of plaintiffs for
P2,800.00 with the Bank was not secured at all by the Indemnity Agreement with
Chattel Mortgage referred to in said par. 12 of the Complaint for there was no such
subsisting indemnity agreement, or by any collateral of the plaintiffs as far as the loan
of P4,000 reduced later to P2,800.00 is concerned; that the consideration for the
execution of said Deed of Sale with Right to Repurchase was the sum of P2,800.00
paid by the defendant to the Bank as stated in par. 11 of this Answer.
An analysis of the allegations set forth in the above-quoted paragraphs points out more clearly that
the petitioner's defense "that the consideration for the execution of the Deed of Sale with Right to
Repurchase is the sum of P2,800.00 paid by petitioner to the Bank" for the loan of respondents
Castelos who failed to pay the same when it became due, and that said loan was not secured at all
by any collateral or by the alleged Indemnity Agreement with Chattel Mortgage, has neither been
changed or altered. Moreover, paragraph 7 of the Original Answer states:
7. That defendant specifically denies the allegations contained in the paragraph 7 of
the Complaint, the truth of the matter was that the chattel mortgage on the house is a
separate transaction from the "Deed of Sale with Right to Repurchase;"
and paragraph 7 of the Amended Answer alleges:
7. That defendant specifically denies the allegations contained in paragraph 7 of the
Complaint, the truth of the matter is that in consonance with the suggestion of
Gregorio Araneta, Inc. after its disapproval of the aforesaid real estate mortgage on
the lot in question on October 13, 1952, plaintiffs executed the Deed of Sale with
Right of Repurchase referred to in their Complaint. Defendant further alleges that
plaintiffs executed on March 5, 1953, an Indemnity Agreement with Chattel Mortgage
on the house of plaintiffs, but it was a counterbond in favor of the defendant for the
latter's having signed as co-maker on a promissory note for plaintiff's loan of P600.00
with the Philippine Bank of Commerce, which was completely a separate transaction
from the "Deed of Sale with Right of Repurchase."
The alleged indemnity agreement with the chattel mortgage was, therefore, a separate transaction,
and the deed of sale was for a consideration, as elucidated by the Amended Answer.

Paragraph 15 and 16 of the petitioner's original answer, likewise read thus:

15. That defendant specifically denies the allegations contained in paragraph 15 of
the Complaint for the reason that while it is true that they were granted loan of
P4,000.00 by the Philippine Bank of Commerce, before the said loan was made
available by the Bank, they already received from the defendant the sum of P1,000
out of their loan of P4,000 and the amount of P1,200.00 was also partially paid to the
same upon plaintiffs own instruction, thus reducing their loan to only P2,800.00.
When this balance of P2,800.00 became due finally, the plaintiffs did not pay it and
the same was debited, therefore, by the Bank from the defendants current account
as co-maker. It is therefore not true that the "Deed of Sale with Right of Repurchase"
has no consideration as falsely alleged by plaintiffs in paragraph 11 of their
Complaint to mislead this Honorable Court.
16. That defendant specifically denies the allegations contained in paragraph 16 of
the Complaint, the truth of the matter being, that defendant has never been
appointed trustee by anyone, much less by the plaintiffs, and defendant cannot see
its way clear how the Transfer Certificate of Title No. 35546 could have been issued
in its name as the sole and absolute owner thereof by the Register of Deeds of
Quezon City if it is a mere trustee;
And paragraphs 15 and 16 of its Amended Answer are as follows:
15. That defendant specifically denies the allegations contained in paragraph 15 of
the Complaint, the truth of the matter is that out of the proceeds of the plaintiffs' loan
of P4,000.00 with the Bank, plaintiffs received directly from the defendant the sums
of P1,000.00 and P410.07 on September 12, 1952 and October 14, 1952,
respectively; and because of the agreement had between them and stipulated in the
aforesaid Deed of Sale with Right of Repurchase, the sum of P1,200.00 was paid to
the bank to reduce the said loan of P4,000 to P2,800 and another sum of P1,000 to
Gregorio Araneta, Inc. for the back installments on the aforesaid lot which were not
paid by the plaintiffs and were already overdue; and the balance of P389.93 was
applied on the bank charges, inspection fee, documentary stamps and
documentation of the deed of sale, insurance premiums and other expenses in
connection with the aforesaid loan. Hence, after making all the aforesaid payments,
there was no balance left with the defendant out of the proceeds of the plaintiffs' loan
of P4,000; and thereafter, whatever payments made by the defendant on the
installments on the aforesaid lot were from defendant's own money and for its own
account.
16. That defendant specifically denies the allegations contained in paragraph 16 of
the Complaint, the truth of the matter is that after the aforesaid payment of P1,000 on
October 14, 1952 was made to Gregorio Araneta, Inc., all the payments made by the
defendant to Gregorio Araneta, Inc. for the installments on the aforesaid lot, until the
price thereof was fully paid, were the money of the defendant and for its own
account, and, consequently, the title to the aforesaid lot was transferred to the
defendant in its own right and account by the former owner J.M. Tuason, Inc.,
through Gregorio Araneta, Inc., of the aforesaid lot. Moreover, the defendant has
never been appointed trustee by anyone, much less by the plaintiffs, and defendant
cannot see its way clear how the Transfer Certificate Title No. 35546 could have
been issued in its name as the sole and absolute owner thereof by the Register of
Deeds of Quezon City if it is a mere trustee.

In paragraphs 15 and 16 of the original answer, the petitioner specifically denies the respective
allegations contained in paragraphs 15 and 16 of the Complaint, thus controverting all the
allegations in the latter pleading. It denies that it is holding the title of the property in question as a
trustee for the benefit of the respondent. In the amended answer, the petitioner, without changing its
defense theory, gave a more accurate statement and explanation of the circumstances involving the
land; the different items covered by the P4,000.00 loan, and the events leading to the issuance to
them of the Transfer Certificate Title.
Upon careful comparison of the disputed paragraphs in both the original and amended answers, this
Court is of the opinion that the amendments sought to be included did not in any manner change the
theory of the defense. Hence the trial court should have admitted the amendments (Shaffer v.
Palma, 22 SCRA 943; Guirao v. Ver, 16 SCRA 639; Uy Hoo Co. v. Tan, 105 Phil. 719; Monte v.
Ortega, 2 SCRA 1044).
Section 3 of Rule 10 clearly provides that:
Amendments by leave of court. After the case is set for hearing, substantial
amendments may be made only upon leave of court. But such leave may be refused
if it appears to the court that the motion was made with intent to delay the action or
that the cause of action or defense is substantially altered. Orders of the court upon
the matters provided in this section shall be made upon motion filed in court, and
after notice to the adverse party, and an opportunity to be heard.
When the purpose of an amendment is to submit the real matter in dispute without any intent to
delay the action, the court in its discretion, may order or allow the amendment upon such terms as
may be just. Anything, therefore, that may preclude a party from fully representing the facts of his
case should be brushed aside, if this can be done without unfairness to the other party and by the
means provided for by the Rules of Court. 2
It must be recalled that as per findings of the Court of Appeals (p. 48 of Petition), the "hearing had
been set for seven times and for seven times too it was postponed but never on motion of defendant
who was always present and prepared for trial"; thereby showing that defendant, now herein
petitioner, never had the slightest intent to delay the early settlement of this case but was
consistently for its early decision.
Aside from the amendments to paragraphs 8, 12, 15 and 16, respondents Castelos' likewise assail
paragraph 4 of the Amended Answer with Counterclaims 3 as having introduced a new defense.
Bearing in mind that the established policy of all courts should be to provide rules which will avoid lengthy
and expensive litigation and which will assist in the speedy disposition of cases; and considering further
that in the case at bar the counterclaim set forth as amendment is connected with the subject matter of
the action, the same should be filed and interposed in the same action as a compulsary counterclaim
which, if not set up, is barred. In National Marketing Corporation v. Federation of United Namarco
Distributors, Inc., L-22578, January 31, 1973, this Court had occasion to extensively expound on the
subject "Counterclaims". Among others it said:

The logical relationship between the claim and counterclaim has been called "the one
compelling test of compulsoriness". Under this test, any claim that a party has
against an opposing party that is logically related to the claim being asserted by the
opposing party, and that is not within the exceptions to the rule, is a compulsary
counterclaim.

In this jurisdiction, "the logical relation test" has been uniformly adhered to. In Berces v. Villanueva,
25 Phil. 473, which was an action for ejectment, this Court said:
When plaintiffs were sued for recovery of a tract of land, they ought to have
presented in reply to the complaint a joint petition or counterclaim for the value of the
improvement and the amount of damages suffered, because the claim for such
improvements and the amount of damages or indemnity is necessarily related to the
action for the recovery of the land said to have been improved and to the
consequences of the judgment ordering restitution thereof. (Emphasis Supplied)
That ruling was reiterated in Beltran v. Villanueva, 53 Phil. 697; Ozea v. Vda. de Montaur, L-8621,
August 26, 1956, 99 Phil. 1061; Carpena v. Manalo, 1 SCRA 1060 (cited in the NAMARCO
case, supra).
In the case at bar, it is clear that the amendment in paragraph 4 sets up a counterclaim for the
damages suffered by the petitioner, as owner of the lot in question, for having been deprived by
respondents Castelos of the use and enjoyment thereof. And said counterclaim is necessarily
connected with the lot subject of the present action, it should be interposed in the same action. No
new cause of action or defense is thereby interposed since the same was the subject matter
between the same parties in the ejectment case filed in the municipal court, docketed as Civil Case
No. 6743, but which was dismissed not for lack of merit but for lack of jurisdiction. If the amendment
is not allowed, another action would have to be instituted, (if not barred) against respondent
Castelos, thus causing multiplicity of suits. This situation is what the rule precisely seeks to avoid
and thus compel the parties to litigate all the issues in a single proceeding. 4
The assertion of respondents that the counterclaim sought to be included as amendment to
paragraph 4 in the Amended Answer should be filed as an original and separate action in the proper
court, is without merit. It runs counter to a settled rule that in the furtherance of justice, the Court
should be liberal in allowing amendments to pleadings to avoid multiplicity of suits and in order that
the real controversies between the parties are presented, their rights determined and the case
decided on the merits without unnecessary delay. 5
Evidently, the respondent Judge disregarded the above tenets when he denied the motion for leave
to amend the answer in the manner indicated.
WHEREFORE, the orders appealed from dated June 7 and November 21, 1967, are hereby set
aside and the case remanded to the lower court for further proceedings. The respondent court shall
admit the amended answer with counterclaim and proceed to the hearing and final determination of
its Civil Case No. Q-4795.
Costs against private respondents.
Makalintal, C.J., Castro, Teehankee, Makasiar and Muoz Palma, JJ., concur.

G.R. No. L-64159 September 10, 1985

CIRCE S. DURAN and ANTERO S. GASPAR, petitioners,
vs.
INTERMEDIATE APPELLATE COURT, ERLINDA B. MARCELO TIANGCO and RESTITUTO
TIANGCO,respondents.

RELOVA, J.:
The respondent then Court of Appeals rendered judgment, modifying the decision of the then Court
of First Instance of Rizal, which reads as follows:
(1) the complaint of the plaintiffs (herein petitioners) is hereby DISMISSED;
(2) the defendants-appellants spouses Erlinda B. Marcelo Tiangco and Restituto
Tiangco (herein private respondents) are hereby declared the lawful owners of the
two (2) parcels of land and all the improvements thereon including the 12-door
apartment thereon described in the complaint, in the counterclaim, in the cross-claim,
and in the Sheriff's Certificate of Sale;
(3) the plaintiffs-appellants and the defendant-appellee Fe S. Duran are hereby
ordered to deliver to (the Tiangcos) the two parcels of land and all the improvements
thereon including the 12-door apartment thereon, subject matter of the complaint,
counterclaim, and cross-claim, and in the Sheriff's Certificate of Sale;
(4) the plaintiffs-appellants and the defendant-appellee Fe S. Duran are hereby
ordered to pay solidarily to the Tiangcos the sum of Two Thousand Four Hundred
Pesos (P2,400) a month from May 16, 1972 until delivery of possession of the
properties in question to said Tiangco spouses, representing rentals collected by
plaintiffs-appellants and defendant- appellee Fe S. Duran;
(5) the plaintiffs-appellants and defendant-appellee Fe S. Duran are hereby ordered
to pay solidarily to the spouses Tiangco the sum of Twenty Thousand Pesos
(P20,000) as damages for attorney's fees, and the sum of Twenty-Five Thousand
Pesos (P25,000) for moral damages, and the costs. (pp. 149-150, Rollo)
The antecedent facts showed that petitioner Circe S. Duran owned two (2) parcels of land (Lots 5
and 6, Block A, Psd 32780) covered by Transfer Certificate of Title No. 1647 of the Register of
Deeds of Caloocan City which she had purchased from the Moja Estate. She left the Philippines in
June 1954 and returned in May 1966.
On May 13, 1963, a Deed of Sale of the two lots mentioned above was made in favor of Circe's
mother, Fe S. Duran who, on December 3, 1965, mortgaged the same property to private
respondent Erlinda B. Marcelo-Tiangco. When petitioner Circe S. Duran came to know about the
mortgage made by her mother, she wrote the Register of Deeds of Caloocan City informing the latter
that she had not given her mother any authority to sell or mortgage any of her properties in the
Philippines. Failing to get an answer from the registrar, she returned to the Philippines. Meanwhile,
when her mother, Fe S. Duran, failed to redeem the mortgage properties, foreclosure proceedings

were initiated by private respondent Erlinda B. Marcelo Tiangco and, ultimately, the sale by the
sheriff and the issuance of Certificate of Sale in favor of the latter.
Petitioner Circe S. Duran claims that the Deed of Sale in favor of her mother Fe S. Duran is a
forgery, saying that at the time of its execution in 1963 she was in the United States. On the other
hand, the adverse party alleges that the signatures of Circe S. Duran in the said Deed are genuine
and, consequently, the mortgage made by Fe S. Duran in favor of private respondent is valid.
With respect to the issue as to whether the signature of petitioner Circe S. Duran in the Deed of Sale
is a forgery or not, respondent appellate court held the same to be genuine because there is the
presumption of regularity in the case of a public document and "the fact that Circe has not been able
to satisfactorily prove that she was in the United States at the time the deed was executed in 1963.
Her return in 1966 does not prove she was not here also in 1963, and that she did not leave shortly
after 1963. She should have presented her old passport, not her new one. But even if the signatures
were a forgery, and the sale would be regarded as void, still it is Our opinion that the Deed of
Mortgage is VALID, with respect to the mortgagees, the defendants-appellants. While it is true that
under Art. 2085 of the Civil Code, it is essential that the mortgagor be the absolute owner of the
property mortgaged, and while as between the daughter and the mother, it was the daughter who
still owned the lots, STILL insofar as innocent third persons are concerned the owner was already
the mother (Fe S. Duran) inasmuch as she had already become the registered owner (Transfer
Certificates of Title Nos. 2418 and 2419). The mortgagee had the right to rely upon what appeared in
the certificate of title, and did not have to inquire further. If the rule were otherwise, the efficacy and
conclusiveness of Torrens Certificate of Titles would be futile and nugatory. Thus the rule is simple:
the fraudulent and forged document of sale may become the root of a valid title if the certificate has
already been transferred from the name of the true owner to the name indicated by the forger (See
De la Cruz v. Fable, 35 Phil. 144; Blondeau et al. v. Nano et al., 61 Phil. 625; Fule et al. v. Legare et
al., 7 SCRA 351; see also Sec. 55 of Act No. 496, the Land Registration Act). The fact that at the
time of the foreclosure sale proceedings (1970-72) the mortgagees may have already known of the
plaintiffs' claim is immaterial. What is important is that at the time the mortgage was executed, the
mortgagees in good faith actually believed Fe S. Duran to be the owner, as evidenced by the
registration of the property in the name of said Fe S. Duran (pp. 146-147, Rollo)."
In elevating the judgment of the respondent appellate court to Us for review, petitioners discussed
questions of law which, in effect and substance, raised only one issue and that is whether private
respondent Erlinda B. Marcelo-Tiangco was a buyer in good faith and for value.
Guided by previous decisions of this Court, good faith consists in the possessor's belief that the
person from whom he received the thing was the owner of the same and could convey his title
(Arriola vs. Gomez dela Serna, 14 Phil. 627). Good faith, while it is always to be presumed in the
absence of proof to the contrary, requires a well-founded belief that the person from whom title was
received was himself the owner of the land, with the right to convey it (Santiago vs. Cruz, 19 Phil.
148). There is good faith where there is an honest intention to abstain from taking any
unconscientious advantage from another (Fule vs. Legare, 7 SCRA 351). Otherwise stated, good
faith is the opposite of fraud and it refers to the state of mind which is manifested by the acts of the
individual concerned. In the case at bar, private respondents, in good faith relied on the certificate of
title in the name of Fe S. Duran and as aptly stated by respondent appellate court "[e]ven on the
supposition that the sale was void, the general rule that the direct result of a previous illegal contract
cannot be valid (on the theory that the spring cannot rise higher than its source) cannot apply
here for We are confronted with the functionings of the Torrens System of Registration. The doctrine
to follow is simple enough: a fraudulent or forged document of sale may become the ROOT of a
valid title if the certificate of title has already been transferred from the name of the true owner to the
name of the forger or the name indicated by the forger." (p. 147, Rollo)

Thus, where innocent third persons relying on the correctness of the certificate of title issued,
acquire rights over the property, the court cannot disregard such rights and order the total
cancellation of the certificate for that would impair public confidence in the certificate of title;
otherwise everyone dealing with property registered under the torrens system would have to inquire
in every instance as to whether the title had been regularly or irregularly issued by the court. Indeed,
this is contrary to the evident purpose of the law. Every person dealing with registered land may
safely rely on the correctness of the certificate of title issued therefor and the law will in no way
oblige him to go behind the certificate to determine the condition of the property. Stated differently,
an innocent purchaser for value relying on a torrens title issued is protected. A mortgagee has the
right to rely on what appears in the certificate of title and, in the absence of anything to excite
suspicion, he is under no obligation to look beyond the certificate and investigate the title of the
mortgagor appearing on the face of said certificate.
Likewise, We take note of the finding and observation of respondent appellate court in that
petitioners were guilty of estoppel by laches "in not bringing the case to court within a reasonable
period. Antero Gaspar, husband of Circe, was in the Philippines in 1964 to construct the apartment
on the disputed lots. This was testified to by Circe herself (tsn., p. 41, Nov. 27, 1973). In the process
of construction, specifically in the matter of obtaining a building permit, he could have discovered
that the deed of sale sought to be set aside had been executed on May 13, 1963 (the building permit
needed an application by the apparent owner of the land, namely, Circe's mother, Fe S. Duran). And
then again both plaintiffs could have intervened in the foreclosure suit but they did not. They kept
silent until almost the last moment when they finally decided, shortly before the sheriff's sale, to file a
third-party claim. Clearly, the plaintiffs can be faulted for their estoppel by laches." (p. 148, Rollo)
IN VIEW OF THE FOREGOING, We find the petition without merit and hereby AFFIRMED in toto the
decision of respondent appellate court promulgated on August 12, 1981.
SO ORDERED.
Teehankee (Chairman), Melencio-Herrera, Plana, Gutierrez, Jr., De la Fuente and Patajo, JJ.,
concur.

G.R. No. L-32116 April 2l, 1981

RURAL BANK OF CALOOCAN, INC. and JOSE O. DESIDERIO, JR., petitioners,
vs.
THE COURT OF APPEALS and MAXIMA CASTRO, respondents.

DE CASTRO, * J.:
This is a petition for review by way of certiorari of the decision 1 of the Court of Appeals in CA-G.R. No.
39760-R entitled "Maxima Castro, plaintiff-appellee, versus Severino Valencia, et al., defendants; Rural
Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes, defendants-appellants," which affirmed in
toto the decision of the Court of First Instance of Manila in favor of plaintiff- appellee, the herein private
respondent Maxima Castro.

On December 7, 1959, respondent Maxima Castro, accompanied by Severino Valencia, went to the
Rural Bank of Caloocan to apply for an industrial loan. It was Severino Valencia who arranged
everything about the loan with the bank and who supplied to the latter the personal data required for
Castro's loan application. On December 11, 1959, after the bank approved the loan for the amount
of P3,000.00, Castro, accompanied by the Valencia spouses, signed a promissory note
corresponding to her loan in favor of the bank.
On the same day, December 11, 1959, the Valencia spouses obtained from the bank an equal
amount of loan for P3,000.00. They signed a promissory note (Exhibit "2") corresponding to their
loan in favor of the bank and had Castro affixed thereon her signature as co-maker.
The two loans were secured by a real-estate mortgage (Exhibit "6") on Castro's house and lot of 150
square meters, covered by Transfer Certificate of Title No. 7419 of the Office of the Register of
Deeds of Manila.
On February 13, 1961, the sheriff of Manila, thru Acting Chief Deputy Sheriff Basilio Magsambol,
sent a notice of sheriff's sale addressed to Castro, announcing that her property covered by T.C.T.
No. 7419 would be sold at public auction on March 10, 1961 to satisfy the obligation covering the
two promissory notes plus interest and attorney's fees.
Upon request by Castro and the Valencias and with conformity of the bank, the auction sale that was
scheduled for March 10, 1961 was postponed for April 10, 1961. But when April 10, 1961 was
subsequently declared a special holiday, the sheriff of Manila sold the property covered by T.C.T.
No. 7419 at a public auction sale that was held on April 11, 1961, which was the next succeeding
business day following the special holiday.
Castro alleged that it was only when she received the letter from the Acting Deputy Sheriff on
February 13, 1961, when she learned for the first time that the mortgage contract (Exhibit "6") which
was an encumbrance on her property was for P6.000.00 and not for P3,000.00 and that she was
made to sign as co-maker of the promissory note (Exhibit "2") without her being informed of this.
On April 4, 1961, Castro filed a suit denominated "Re: Sum of Money," against petitioners Bank and
Desiderio, the Spouses Valencia, Basilio Magsambol and Arsenio Reyes as defendants in Civil Case
No. 46698 before the Court of First Instance of Manila upon the charge, amongst others, that thru
mistake on her part or fraud on the part of Valencias she was induced to sign as co-maker of a
promissory note (Exhibit "2") and to constitute a mortgage on her house and lot to secure the

questioned note. At the time of filing her complaint, respondent Castro deposited the amount of
P3,383.00 with the court a quo in full payment of her personal loan plus interest.
In her amended complaint, Castro prayed, amongst other, for the annulment as far as she is
concerned of the promissory note (Exhibit "2") and mortgage (Exhibit "6") insofar as it exceeds
P3,000.00; for the discharge of her personal obligation with the bank by reason of a deposit of
P3,383.00 with the court a quo upon the filing of her complaint; for the annulment of the foreclosure
sale of her property covered by T.C.T. No. 7419 in favor of Arsenio Reyes; and for the award in her
favor of attorney's fees, damages and cost.
In their answers, petitioners interposed counterclaims and prayed for the dismissal of said complaint,
with damages, attorney's fees and costs. 2
The pertinent facts arrived from the stipulation of facts entered into by the parties as stated by
respondent Court of Appeals are as follows:
Spawning the present litigation are the facts contained in the following stipulation of
facts submitted by the parties themselves:
1. That the capacity and addresses of all the parties in this case are admitted .
2. That the plaintiff was the registered owner of a residential house and lot located at
Nos. 1268-1270 Carola Street, Sampaloc, Manila, containing an area of one hundred
fifty (150) square meters, more or less, covered by T.C.T. No. 7419 of the Office of
the Register of Deeds of Manila;
3. That the signatures of the plaintiff appearing on the following documents are
genuine:
a) Application for Industrial Loan with the Rural Bank of Caloocan, dated December
7, 1959 in the amount of P3,000.00 attached as Annex A of this partial stipulation of
facts;
b) Promissory Note dated December 11, 1959 signed by the plaintiff in favor of the
Rural Bank of Caloocan for the amount of P3,000.00 as per Annex B of this partial
stipulation of facts;
c) Application for Industrial Loan with the Rural Bank of Caloocan, dated December
11, 1959, signed only by the defendants, Severino Valencia and Catalina Valencia,
attached as Annex C, of this partial stipulation of facts;
d) Promissory note in favor of the Rural Bank of Caloocan, dated December 11, 1959
for the amount of P3000.00, signed by the spouses Severino Valencia and Catalina
Valencia as borrowers, and plaintiff Maxima Castro, as a co-maker, attached as
Annex D of this partial stipulation of facts;
e) Real estate mortgage dated December 11, 1959 executed by plaintiff Maxima
Castro, in favor of the Rural Bank of Caloocan, to secure the obligation of P6,000.00
attached herein as Annex E of this partial stipulation of facts;

All the parties herein expressly reserved their right to present any evidence they may
desire on the circumstances regarding the execution of the above-mentioned
documents.
4. That the sheriff of Manila, thru Acting Chief Deputy Sheriff, Basilio Magsambol,
sent a notice of sheriff's sale, address to the plaintiff, dated February 13, 1961,
announcing that plaintiff's property covered by TCT No. 7419 of the Register of
Deeds of the City of Manila, would be sold at public auction on March 10, 1961 to
satisfy the total obligation of P5,728.50, plus interest, attorney's fees, etc., as
evidenced by the Notice of Sheriff's Sale and Notice of Extrajudicial Auction Sale of
the Mortgaged property, attached herewith as Annexes F and F-1, respectively, of
this stipulation of facts;
5. That upon the request of the plaintiff and defendants-spouses Severino Valencia
and Catalina Valencia, and with the conformity of the Rural Bank of Caloocan, the
Sheriff of Manila postponed the auction sale scheduled for March 10, 1961 for thirty
(30) days and the sheriff re-set the auction sale for April 10, 1961;
6. That April 10, 1961 was declared a special public holiday; (Note: No. 7 is omitted
upon agreement of the parties.)
8. That on April 11, 1961, the Sheriff of Manila, sold at public auction plaintiff's
property covered by T.C.T. No. 7419 and defendant, Arsenio Reyes, was the highest
bidder and the corresponding certificate of sale was issued to him as per Annex G of
this partial stipulation of facts;
9. That on April 16, 1962, the defendant Arsenio Reyes, executed an Affidavit of
Consolidation of Ownership, a copy of which is hereto attached as Annex H of this
partial stipulation of facts;
10. That on May 9, 1962, the Rural Bank of Caloocan Incorporated executed the final
deed of sale in favor of the defendant, Arsenio Reyes, in the amount of P7,000.00, a
copy of which is attached as Annex I of this partial stipulation of facts;
11. That the Register of Deeds of the City of Manila issued the Transfer Certificate of
Title No. 67297 in favor of the defendant, Arsenio Reyes, in lieu of Transfer
Certificate of Title No. 7419 which was in the name of plaintiff, Maxima Castro, which
was cancelled;
12. That after defendant, Arsenio Reyes, had consolidated his title to the property as
per T.C.T. No. 67299, plaintiff filed a notice of lis pendens with the Register of Deeds
of Manila and the same was annotated in the back of T.C.T. No. 67299 as per Annex
J of this partial stipulation of facts; and
13. That the parties hereby reserved their rights to present additional evidence on
matters not covered by this partial stipulation of facts.
WHEREFORE, it is respectfully prayed that the foregoing partial stipulation of facts
be approved and admitted by this Honorable Court.

As for the evidence presented during the trial, We quote from the decision of the Court of Appeals
the statement thereof, as follows:
In addition to the foregoing stipulation of facts, plaintiff claims she is a 70-year old
widow who cannot read and write the English language; that she can speak the
Pampango dialect only; that she has only finished second grade (t.s.n., p. 4,
December 11, 1964); that in December 1959, she needed money in the amount of
P3,000.00 to invest in the business of the defendant spouses Valencia, who
accompanied her to the defendant bank for the purpose of securing a loan of
P3,000.00; that while at the defendant bank, an employee handed to her several
forms already prepared which she was asked to sign on the places indicated, with no
one explaining to her the nature and contents of the documents; that she did not
even receive a copy thereof; that she was given a check in the amount of P2,882.85
which she delivered to defendant spouses; that sometime in February 1961, she
received a letter from the Acting Deputy Sheriff of Manila, regarding the extrajudicial
foreclosure sale of her property; that it was then when she learned for the first time
that the mortgage indebtedness secured by the mortgage on her property was
P6,000.00 and not P3,000.00; that upon investigation of her lawyer, it was found that
the papers she was made to sign were:
(a) Application for a loan of P3,000.00 dated December 7, 1959 (Exh. B-1 and Exh.
1);
(b) Promissory note dated December 11, 1959 for the said loan of P3,000.00 (ExhB-2);
(c) Promissory note dated December 11, 1959 for P3,000.00 with the defendants
Valencia spouses as borrowers and appellee as co-maker (Exh. B-4 or Exh. 2).
The auction sale set for March 10, 1961 was postponed co April 10, 1961 upon the
request of defendant spouses Valencia who needed more time within which to pay
their loan of P3,000.00 with the defendant bank; plaintiff claims that when she filed
the complaint she deposited with the Clerk of Court the sum of P3,383.00 in full
payment of her loan of P3,000.00 with the defendant bank, plus interest at the rate of
12% per annum up to April 3, 1961 (Exh. D).
As additional evidence for the defendant bank, its manager declared that sometime
in December, 1959, plaintiff was brought to the Office of the Bank by an employee(t.s.n., p 4, January 27, 1966). She wept, there to inquire if she could get a loan from
the bank. The claims he asked the amount and the purpose of the loan and the
security to he given and plaintiff said she would need P3.000.00 to be invested in a
drugstore in which she was a partner (t.s.n., p. 811. She offered as security for the
loan her lot and house at Carola St., Sampaloc, Manila, which was promptly
investigated by the defendant bank's inspector. Then a few days later, plaintiff came
back to the bank with the wife of defendant Valencia A date was allegedly set for
plaintiff and the defendant spouses for the processing of their application, but on the
day fixed, plaintiff came without the defendant spouses. She signed the application
and the other papers pertinent to the loan after she was interviewed by the manager
of the defendant. After the application of plaintiff was made, defendant spouses had
their application for a loan also prepared and signed (see Exh. 13). In his interview of
plaintiff and defendant spouses, the manager of the bank was able to gather that
plaintiff was in joint venture with the defendant spouses wherein she agreed to invest

P3,000.00 as additional capital in the laboratory owned by said spouses (t.s.n., pp.
16-17) 3
The Court of Appeals, upon evaluation of the evidence, affirmed in toto the decision of the Court of
First Instance of Manila, the dispositive portion of which reads:
FOR ALL THE FOREGOING CONSIDERATIONS, the Court renders judgment and:
(1) Declares that the promissory note, Exhibit '2', is invalid as against plaintiff herein;
(2) Declares that the contract of mortgage, Exhibit '6', is null and void, in so far as the
amount thereof exceeds the sum of P3,000.00 representing the principal obligation of
plaintiff, plus the interest thereon at 12% per annum;
(3) Annuls the extrajudicial foreclosure sale at public auction of the mortgaged
property held on April 11, 1961, as well as all the process and actuations made in
pursuance of or in implementation thereto;
(4) Holds that the total unpaid obligation of plaintiff to defendant Rural Bank of
Caloocan, Inc., is only the amount of P3,000.00, plus the interest thereon at 12% per
annum, as of April 3, 1961, and orders that plaintiff's deposit of P3,383.00 in the
Office of the Clerk of Court be applied to the payment thereof;
(5) Orders defendant Rural Bank of Caloocan, Inc. to return to defendant Arsenio
Reyes the purchase price the latter paid for the mortgaged property at the public
auction, as well as reimburse him of all the expenses he has incurred relative to the
sale thereof;
(6) Orders defendants spouses Severino D. Valencia and Catalina Valencia to pay
defendant Rural Bank of Caloocan, Inc. the amount of P3,000.00 plus the
corresponding 12% interest thereon per annum from December 11, 1960 until fully
paid; and
Orders defendants Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and spouses
Severino D. Valencia and Catalina Valencia to pay plaintiff, jointly and severally, the
sum of P600.00 by way of attorney's fees, as well as costs.
In view of the conclusion that the court has thus reached, the counterclaims of
defendant Rural Bank of Caloocan, Inc., Jose Desiderio, Jr. and Arsenio Reyes are
hereby dismissed, as a corollary
The Court further denies the motion of defendant Arsenio Reyes for an Order
requiring Maxima Castro to deposit rentals filed on November 16, 1963, resolution of
which was held in abeyance pending final determination of the case on the merits,
also as a consequence of the conclusion aforesaid. 4
Petitioners Bank and Jose Desiderio moved for the reconsideration 5 of respondent court's decision.
The motion having been denied, 6 they now come before this Court in the instant petition, with the
following Assignment of Errors, to wit:

THE COURT OF APPEALS ERRED IN UPHOLDING THE PARTIAL ANNULMENT

OF THE PROMISSORY NOTE, EXHIBIT 2, AND THE MORTGAGE, EXHIBIT 6,
INSOFAR AS THEY AFFECT RESPONDENT MAXIMA CASTRO VIS-A-VIS
PETITIONER BANK DESPITE THE TOTAL ABSENCE OF EITHER ALLEGATION
IN THE COMPLAINT OR COMPETENT PROOF IN THE EVIDENCE OF ANY
FRAUD OR OTHER UNLAWFUL CONDUCT COMMITTED OR PARTICIPATED IN
BY PETITIONERS IN PROCURING THE EXECUTION OF SAID CONTRACTS
FROM RESPONDENT CASTRO.
II
THE COURT OF APPEALS ERRED IN IMPUTING UPON AND CONSIDERING
PREJUDICIALLY AGAINST PETITIONERS, AS BASIS FOR THE PARTIAL
ANNULMENT OF THE CONTRACTS AFORESAID ITS FINDING OF FRAUD
PERPETRATED BY THE VALENCIA SPOUSES UPON RESPONDENT CASTRO
IN UTTER VIOLATION OF THE RES INTER ALIOS ACTA RULE.
III
THE COURT OF APPEAL ERRED IN NOT HOLDING THAT, UNDER THE FACTS
FOUND BY IT, RESPONDENT CASTRO IS UNDER ESTOPPEL TO IMPUGN THE
REGULARITY AND VALIDITY OF HER QUESTIONED TRANSACTION WITH
PETITIONER BANK.
IV
THE COURT OF APPEALS ERRED IN NOT FINDING THAT, BETWEEN
PETITIONERS AND RESPONDENT CASTRO, THE LATTER SHOULD SUFFER
THE CONSEQUENCES OF THE FRAUD PERPETRATED BY THE VALENCIA
SPOUSES, IN AS MUCH AS IT WAS THRU RESPONDENT CASTRO'S
NEGLIGENCE OR ACQUIESCENSE IF NOT ACTUAL CONNIVANCE THAT THE
PERPETRATION OF SAID FRAUD WAS MADE POSSIBLE.
V
THE COURT OF APPEALS ERRED IN UPHOLDING THE VALIDITY OF THE
DEPOSIT BY RESPONDENT CASTRO OF P3,383.00 WITH THE COURT BELOW
AS A TENDER AND CONSIGNATION OF PAYMENT SUFFICIENT TO
DISCHARGE SAID RESPONDENT FROM HER OBLIGATION WITH PETITIONER
BANK.
VI
THE COURT OF APPEALS ERRED IN NOT DECLARING AS VALID AND BINDING
UPON RESPONDENT CASTRO THE HOLDING OF THE SALE ON
FORECLOSURE ON THE BUSINESS DAY NEXT FOLLOWING THE ORIGINALLY
SCHEDULED DATE THEREFOR WHICH WAS DECLARED A HOLIDAY WITHOUT
NECESSITY OF FURTHER NOTICE THEREOF.
The issue raised in the first three (3) assignment of errors is whether or not respondent court
correctly affirmed the lower court in declaring the promissory note (Exhibit 2) invalid insofar as they

affect respondent Castro vis-a-vis petitioner bank, and the mortgage contract (Exhibit 6) valid up to
the amount of P3,000.00 only.
Respondent court declared that the consent of Castro to the promissory note (Exhibit 2) where she
signed as co-maker with the Valencias as principal borrowers and her acquiescence to the mortgage
contract (Exhibit 6) where she encumbered her property to secure the amount of P6,000.00 was
obtained by fraud perpetrated on her by the Valencias who had abused her confidence, taking
advantage of her old age and ignorance of her financial need. Respondent court added that "the
mandate of fair play decrees that she should be relieved of her obligation under the contract"
pursuant to Articles 24 7 and 1332 8 of the Civil Code.
The decision in effect relieved Castro of any liability to the promissory note (Exhibit 2) and the
mortgage contract (Exhibit 6) was deemed valid up to the amount of P3,000.00 only which was
equivalent to her personal loan to the bank.
Petitioners argued that since the Valencias were solely declared in the decision to be responsible for
the fraud against Castro, in the light of the res inter alios acta rule, a finding of fraud perpetrated by
the spouses against Castro cannot be taken to operate prejudicially against the bank. Petitioners
concluded that respondent court erred in not giving effect to the promissory note (Exhibit 2) insofar
as they affect Castro and the bank and in declaring that the mortgage contract (Exhibit 6) was valid
only to the extent of Castro's personal loan of P3,000.00.
The records of the case reveal that respondent court's findings of fraud against the Valencias is well
supported by evidence. Moreover, the findings of fact by respondent court in the matter is deemed
final. 9 The decision declared the Valencias solely responsible for the defraudation of Castro. Petitioners'
contention that the decision was silent regarding the participation of the bank in the fraud is, therefore,
correct.

We cannot agree with the contention of petitioners that the bank was defrauded by the Valencias.
For one, no claim was made on this in the lower court. For another, petitioners did not submit proof
to support its contention.
At any rate, We observe that while the Valencias defrauded Castro by making her sign the
promissory note (Exhibit 2) and the mortgage contract (Exhibit 6), they also misrepresented to the
bank Castro's personal qualifications in order to secure its consent to the loan. This must be the
reason which prompted the bank to contend that it was defrauded by the Valencias. But to reiterate,
We cannot agree with the contention for reasons above-mentioned. However, if the contention
deserves any consideration at all, it is in indicating the admission of petitioners that the bank
committed mistake in giving its consent to the contracts.
Thus, as a result of the fraud upon Castro and the misrepresentation to the bank inflicted by the
Valencias both Castro and the bank committed mistake in giving their consents to the contracts. In
other words, substantial mistake vitiated their consents given. For if Castro had been aware of what
she signed and the bank of the true qualifications of the loan applicants, it is evident that they would
not have given their consents to the contracts.
Pursuant to Article 1342 of the Civil Code which provides:
Art. 1342. Misrepresentation by a third person does not vitiate consent, unless such
misrepresentation has created substantial mistake and the same is mutual.

We cannot declare the promissory note (Exhibit 2) valid between the bank and Castro and the
mortgage contract (Exhibit 6) binding on Castro beyond the amount of P3,000.00, for while the
contracts may not be invalidated insofar as they affect the bank and Castro on the ground of fraud
because the bank was not a participant thereto, such may however be invalidated on the ground of
substantial mistake mutually committed by them as a consequence of the fraud and
misrepresentation inflicted by the Valencias. Thus, in the case of Hill vs. Veloso, 10this Court declared
that a contract may be annulled on the ground of vitiated consent if deceit by a third person, even without
connivance or complicity with one of the contracting parties, resulted in mutual error on the part of the
parties to the contract.

Petitioners argued that the amended complaint fails to contain even a general averment of fraud or
mistake, and its mention in the prayer is definitely not a substantial compliance with the requirement
of Section 5, Rule 8 of the Rules of Court. The records of the case, however, will show that the
amended complaint contained a particular averment of fraud against the Valencias in full compliance
with the provision of the Rules of Court. Although, the amended complaint made no mention of
mistake being incurred in by the bank and Castro, such mention is not essential in order that the
promissory note (Exhibit 2) may be declared of no binding effect between them and the mortgage
(Exhibit 6) valid up to the amount of P3,000.00 only. The reason is that the mistake they mutually
suffered was a mere consequence of the fraud perpetrated by the Valencias against them. Thus, the
fraud particularly averred in the complaint, having been proven, is deemed sufficient basis for the
declaration of the promissory note (Exhibit 2) invalid insofar as it affects Castro vis-a-vis the bank,
and the mortgage contract (Exhibit 6) valid only up to the amount of P3,000.00.
The second issue raised in the fourth assignment of errors is who between Castro and the bank
should suffer the consequences of the fraud perpetrated by the Valencias.
In attributing to Castro an consequences of the loss, petitioners argue that it was her negligence or
acquiescence if not her actual connivance that made the fraud possible.
Petitioners' argument utterly disregards the findings of respondent Court of Appeals wherein
petitioners' negligence in the contracts has been aptly demonstrated, to wit:
A witness for the defendant bank, Rodolfo Desiderio claims he had subjected the
plaintiff-appellee to several interviews. If this were true why is it that her age was
placed at 61 instead of 70; why was she described in the application (Exh. B-1-9) as
drug manufacturer when in fact she was not; why was it placed in the application that
she has income of P20,000.00 when according to plaintiff-appellee, she his not even
given such kind of information -the true fact being that she was being paid P1.20 per
picul of the sugarcane production in her hacienda and 500 cavans on the palay
production. 11
From the foregoing, it is evident that the bank was as much , guilty as Castro was, of negligence in
giving its consent to the contracts. It apparently relied on representations made by the Valencia
spouses when it should have directly obtained the needed data from Castro who was the
acknowledged owner of the property offered as collateral. Moreover, considering Castro's personal
circumstances her lack of education, ignorance and old age she cannot be considered utterly
neglectful for having been defrauded. On the contrary, it is demanded of petitioners to exercise the
highest order of care and prudence in its business dealings with the Valencias considering that it is
engaged in a banking business a business affected with public interest. It should have ascertained
Castro's awareness of what she was signing or made her understand what obligations she was
assuming, considering that she was giving accommodation to, without any consideration from the
Valencia spouses.

Petitioners further argue that Castro's act of holding the Valencias as her agent led the bank to
believe that they were authorized to speak and bind her. She cannot now be permitted to deny the
authority of the Valencias to act as her agent for one who clothes another with apparent authority as
her agent is not permitted to deny such authority.
The authority of the Valencias was only to follow-up Castro's loan application with the bank. They
were not authorized to borrow for her. This is apparent from the fact that Castro went to the Bank to
sign the promissory note for her loan of P3,000.00. If her act had been understood by the Bank to be
a grant of an authority to the Valencia to borrow in her behalf, it should have required a special
power of attorney executed by Castro in their favor. Since the bank did not, We can rightly assume
that it did not entertain the notion, that the Valencia spouses were in any manner acting as an agent
of Castro.
When the Valencias borrowed from the Bank a personal loan of P3,000.00 evidenced by a
promissory note (Exhibit 2) and mortgaged (Exhibit 6) Castro's property to secure said loan, the
Valencias acted for their own behalf. Considering however that for the loan in which the Valencias
appeared as principal borrowers, it was the property of Castro that was being mortgaged to secure
said loan, the Bank should have exercised due care and prudence by making proper inquiry if
Castro's consent to the mortgage was without any taint or defect. The possibility of her not knowing
that she signed the promissory note (Exhibit 2) as co-maker with the Valencias and that her property
was mortgaged to secure the two loans instead of her own personal loan only, in view of her
personal circumstances ignorance, lack of education and old age should have placed the Bank
on prudent inquiry to protect its interest and that of the public it serves. With the recent occurrence of
events that have supposedly affected adversely our banking system, attributable to laxity in the
conduct of bank business by its officials, the need of extreme caution and prudence by said officials
and employees in the discharge of their functions cannot be over-emphasized.
Question is, likewise, raised as to the propriety of respondent court's decision which declared that
Castro's consignation in court of the amount of P3,383.00 was validly made. It is contended that the
consignation was made without prior offer or tender of payment to the Bank, and it therefore, not
valid. In holding that there is a substantial compliance with the provision of Article 1256 of the Civil
Code, respondent court considered the fact that the Bank was holding Castro liable for the sum of
P6,000.00 plus 12% interest per annum, while the amount consigned was only P3,000.00 plus 12%
interest; that at the time of consignation, the Bank had long foreclosed the mortgage extrajudicially
and the sale of the mortgage property had already been scheduled for April 10, 1961 for nonpayment of the obligation, and that despite the fact that the Bank already knew of the deposit made
by Castro because the receipt of the deposit was attached to the record of the case, said Bank had
not made any claim of such deposit, and that therefore, Castro was right in thinking that it was futile
and useless for her to make previous offer and tender of payment directly to the Bank only in the
aforesaid amount of P3,000.00 plus 12% interest. Under the foregoing circumstances, the
consignation made by Castro was valid. if not under the strict provision of the law, under the more
liberal considerations of equity.
The final issue raised is the validity or invalidity of the extrajudicial foreclosure sale at public auction
of the mortgaged property that was held on April 11, 1961.
Petitioners contended that the public auction sale that was held on April 11, 1961 which was the next
business day after the scheduled date of the sale on April 10, 1961, a special public holiday, was
permissible and valid pursuant to the provisions of Section 31 of the Revised Administrative Code
which ordains:

Pretermission of holiday. Where the day, or the last day, for doing any act required
or permitted by law falls on a holiday, the act may be done on the next succeeding
business day.
Respondent court ruled that the aforesaid sale is null and void, it not having been carried out in
accordance with Section 9 of Act No. 3135, which provides:
Section 9. Notice shall be given by posting notices of the sale for not less than
twenty days in at least three public places of the municipality or city where the
property is situated, and if such property is worth more than four hundred pesos,
such notice shall also be published once a week for at least three consecutive weeks
in a newspaper of general circulation in the municipality or city.
We agree with respondent court. The pretermission of a holiday applies only "where the day, or the
last day for doing any act required or permitted by law falls on a holiday," or when the last day of a
given period for doing an act falls on a holiday. It does not apply to a day fixed by an office or officer
of the government for an act to be done, as distinguished from a period of time within which an act
should be done, which may be on any day within that specified period. For example, if a party is
required by law to file his answer to a complaint within fifteen (15) days from receipt of the summons
and the last day falls on a holiday, the last day is deemed moved to the next succeeding business
day. But, if the court fixes the trial of a case on a certain day but the said date is subsequently
declared a public holiday, the trial thereof is not automatically transferred to the next succeeding
business day. Since April 10, 1961 was not the day or the last day set by law for the extrajudicial
foreclosure sale, nor the last day of a given period but a date fixed by the deputy sheriff, the
aforesaid sale cannot legally be made on the next succeeding business day without the notices of
the sale on that day being posted as prescribed in Section 9, Act No. 3135.
WHEREFORE, finding no reversible error in the judgment under review, We affirm the same in toto.
No pronouncement as to cost.
SO ORDERED.
Teehankee (Acting, C.J.) Makasiar, Fernandez, Guerrero and Melencio-Herrera, JJ., concur.

G.R. No. L-40824 February 23, 1989

GOVERNMENT SERVICE INSURANCE SYSTEM, petitioner,
vs.
COURT OF APPEALS and MR. & MRS. ISABELO R. RACHO, respondents.
The Government Corporate Counsel for petitioner.
Lorenzo A. Sales for private respondents.

REGALADO , J.:
Private respondents, Mr. and Mrs. Isabelo R. Racho, together with the spouses Mr. and Mrs
Flaviano Lagasca, executed a deed of mortgage, dated November 13, 1957, in favor of petitioner
Government Service Insurance System (hereinafter referred to as GSIS) and subsequently, another
deed of mortgage, dated April 14, 1958, in connection with two loans granted by the latter in the
sums of P 11,500.00 and P 3,000.00, respectively. 1 A parcel of land covered by Transfer Certificate of
Title No. 38989 of the Register of Deed of Quezon City, co-owned by said mortgagor spouses, was given
as security under the aforesaid two deeds. 2 They also executed a 'promissory note" which states in part:

... for value received, we the undersigned ... JOINTLY, SEVERALLY and
SOLIDARILY, promise to pay the GOVERNMENT SERVICE INSURANCE SYSTEM
the sum of . . . (P 11,500.00) Philippine Currency, with interest at the rate of six (6%)
per centum compounded monthly payable in . . . (120)equal monthly installments of .
. . (P 127.65) each. 3
On July 11, 1961, the Lagasca spouses executed an instrument denominated "Assumption of
Mortgage" under which they obligated themselves to assume the aforesaid obligation to the GSIS
and to secure the release of the mortgage covering that portion of the land belonging to herein
private respondents and which was mortgaged to the GSIS. 4 This undertaking was not fulfilled. 5
Upon failure of the mortgagors to comply with the conditions of the mortgage, particularly the
payment of the amortizations due, GSIS extrajudicially foreclosed the mortgage and caused the
mortgaged property to be sold at public auction on December 3, 1962. 6
More than two years thereafter, or on August 23, 1965, herein private respondents filed a complaint
against the petitioner and the Lagasca spouses in the former Court of
First Instance of Quezon City, 7 praying that the extrajudicial foreclosure "made on, their property and all
other documents executed in relation thereto in favor of the Government Service Insurance System" be
declared null and void. It was further prayed that they be allowed to recover said property, and/or the
GSIS be ordered to pay them the value thereof, and/or they be allowed to repurchase the land.
Additionally, they asked for actual and moral damages and attorney's fees.

In their aforesaid complaint, private respondents alleged that they signed the mortgage contracts not
as sureties or guarantors for the Lagasca spouses but they merely gave their common property to
the said co-owners who were solely benefited by the loans from the GSIS.

The trial court rendered judgment on February 25, 1968 dismissing the complaint for failure to
establish a cause of action. 8
Said decision was reversed by the respondent Court of Appeals 9 which held that:
... although formally they are co-mortgagors, they are so only for accomodation (sic)
in that the GSIS required their consent to the mortgage of the entire parcel of land
which was covered with only one certificate of title, with full knowledge that the loans
secured thereby were solely for the benefit of the appellant (sic) spouses who alone
applied for the loan.
xxxx
'It is, therefore, clear that as against the GSIS, appellants have a valid cause for
having foreclosed the mortgage without having given sufficient notice to them as
required either as to their delinquency in the payment of amortization or as to the
subsequent foreclosure of the mortgage by reason of any default in such payment.
The notice published in the newspaper, 'Daily Record (Exh. 12) and posted pursuant
to Sec 3 of Act 3135 is not the notice to which the mortgagor is entitled upon the
application being made for an extrajudicial foreclosure. ... 10
On the foregoing findings, the respondent court consequently decreed thatIn view of all the foregoing, the judgment appealed from is hereby reversed, and
another one entered (1) declaring the foreclosure of the mortgage void insofar as it
affects the share of the appellants; (2) directing the GSIS to reconvey to appellants
their share of the mortgaged property, or the value thereof if already sold to third
party, in the sum of P 35,000.00, and (3) ordering the appellees Flaviano Lagasca
and Esther Lagasca to pay the appellants the sum of P 10,00.00 as moral damages,
P 5,000.00 as attorney's fees, and costs. 11
The case is now before us in this petition for review.
In submitting their case to this Court, both parties relied on the provisions of Section 29 of Act No.
2031, otherwise known as the Negotiable Instruments Law, which provide that an accommodation
party is one who has signed an instrument as maker, drawer, acceptor of indorser without receiving
value therefor, but is held liable on the instrument to a holder for value although the latter knew him
to be only an accommodation party.
This approach of both parties appears to be misdirected and their reliance misplaced. The
promissory note hereinbefore quoted, as well as the mortgage deeds subject of this case, are clearly
not negotiable instruments. These documents do not comply with the fourth requisite to be
considered as such under Section 1 of Act No. 2031 because they are neither payable to order nor
to bearer. The note is payable to a specified party, the GSIS. Absent the aforesaid requisite, the
provisions of Act No. 2031 would not apply; governance shall be afforded, instead, by the provisions
of the Civil Code and special laws on mortgages.
As earlier indicated, the factual findings of respondent court are that private respondents signed the
documents "only to give their consent to the mortgage as required by GSIS", with the latter having
full knowledge that the loans secured thereby were solely for the benefit of the Lagasca
spouses. 12 This appears to be duly supported by sufficient evidence on record. Indeed, it would be
unusual for the GSIS to arrange for and deduct the monthly amortizations on the loans from the salary as

an army officer of Flaviano Lagasca without likewise affecting deductions from the salary of Isabelo
Racho who was also an army sergeant. Then there is also the undisputed fact, as already stated, that the
Lagasca spouses executed a so-called "Assumption of Mortgage" promising to exclude private
respondents and their share of the mortgaged property from liability to the mortgagee. There is no
intimation that the former executed such instrument for a consideration, thus confirming that they did so
pursuant to their original agreement.

The parol evidence rule 13 cannot be used by petitioner as a shield in this case for it is clear that there
was no objection in the court below regarding the admissibility of the testimony and documents that were
presented to prove that the private respondents signed the mortgage papers just to accommodate their
co-owners, the Lagasca spouses. Besides, the introduction of such evidence falls under the exception to
said rule, there being allegations in the complaint of private respondents in the court below regarding the
failure of the mortgage contracts to express the true agreement of the parties. 14

However, contrary to the holding of the respondent court, it cannot be said that private respondents
are without liability under the aforesaid mortgage contracts. The factual context of this case is
precisely what is contemplated in the last paragraph of Article 2085 of the Civil Code to the effect
that third persons who are not parties to the principal obligation may secure the latter by pledging or
mortgaging their own property
So long as valid consent was given, the fact that the loans were solely for the benefit of the Lagasca
spouses would not invalidate the mortgage with respect to private respondents' share in the
property. In consenting thereto, even assuming that private respondents may not be assuming
personal liability for the debt, their share in the property shall nevertheless secure and respond for
the performance of the principal obligation. The parties to the mortgage could not have intended that
the same would apply only to the aliquot portion of the Lagasca spouses in the property, otherwise
the consent of the private respondents would not have been required.
The supposed requirement of prior demand on the private respondents would not be in point here
since the mortgage contracts created obligations with specific terms for the compliance thereof. The
facts further show that the private respondents expressly bound themselves as solidary debtors in
the promissory note hereinbefore quoted.
Coming now to the extrajudicial foreclosure effected by GSIS, We cannot agree with the ruling of
respondent court that lack of notice to the private respondents of the extrajudicial foreclosure sale
impairs the validity thereof. In Bonnevie, et al. vs. Court of appeals, et al., 15 the Court ruled that Act
No. 3135, as amended, does not require personal notice on the mortgagor, quoting the requirement on
notice in such cases as follows:

Section 3. Notice shall be given by posting notices of sale for not less than twenty
days in at least three public places of the municipality where the property is situated,
and if such property is worth more than four hundred pesos, such notice shall also be
published once a week for at least three consecutive weeks in a newspaper of
general circulation in the municipality or city.
There is no showing that the foregoing requirement on notice was not complied with in the
foreclosure sale complained of .
The respondent court, therefore, erred in annulling the mortgage insofar as it affected the share of
private respondents or in directing reconveyance of their property or the payment of the value
thereof Indubitably, whether or not private respondents herein benefited from the loan, the mortgage
and the extrajudicial foreclosure proceedings were valid.

WHEREFORE, judgment is hereby rendered REVERSING the decision of the respondent Court of
Appeals and REINSTATING the decision of the court a quo in Civil Case No. Q-9418 thereof.
SO ORDERED.
Melencio-Herrera (Chairperson), Paras, Padilla and Sarmiento, JJ., concur.

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

MANOLO P. CERNA, petitioner, vs. THE HONORABLE COURT OF APPEALS and CONRAD C.
LEVISTE, respondents.
Zosa & Quijano Law Offices for petitioner.
Benjamin H. Aquino for private respondent.
SYLLABUS
1. CIVIL LAW; OBLIGATIONS & CONTRACTS; SOLIDARY LIABILITY, NOT PRESUMED. Only
Delgado signed the promissory note and accordingly, he was the only one bound by the contract of
loan. Nowhere did it appear in the promissory note that petitioner was a co-debtor. The law is clear
that "(c)ontracts take effect only between the parties . . ." But by some stretch of the imagination,
petitioner was held solidarily liable for the debt allegedly because he was a co-mortgagor of the
principal debtor, Delgado. This ignores the basic precept that "(t)here is solidarily liability only when
the obligation expressly so states, or when the law or the nature of the obligation requires solidarity."
The contract of loan, as evidenced by the promissory note, was signed by Delgado only. Petitioner
had no part in the said contract. Thus, nowhere could it be seen from the agreement that petitioner
was solidarily bound with Delgado for the payment of the loan.
2. ID.; ID.; SIGNATORY TO THE PRINCIPAL CONTRACT OF LOAN, PRIMARILY LIABLE; THIRDPARTY MORTGAGOR NOT SOLIDARILY BOUND WITH THE PRINCIPAL DEBTOR. There is
no legal provision nor jurisprudence in our jurisdiction which makes a third person who secures the
fulfillment of another's obligation by mortgaging his own property to be solidarily bound with the
principal obligor. A chattel mortgage may be "an accessory contract" to a contract of loan, but that
fact alone does not make a third-party mortgagor solidarily bound with the principal debtor in fulfilling
the principal obligation that is, to pay the loan. The signatory to the principal contract loan
remains to be primarily bound. It is only upon the default of the latter that the creditor may have been
recourse on the mortgagors by foreclosing the mortgaged properties in lieu of an action for the
recovery of the amount of the loan. And the liability of the third-party mortgagors extends only to the
property mortgaged. Should there be any deficiency, the creditors has recourse on the principal
debtor.
3. ID.; ID.; ID.; A SPECIAL POWER OF ATTORNEY AUTHORIZING THE MORTGAGE OF
CERTAIN PROPERTIES DID NOT MAKE THE ATTORNEY-IN-FACT A MORTGAGOR. The
mortgage contract was also signed only by Delgado as mortgagor. The Special Power of Attorney
did not make petitioner a mortgagor. All it did was to authorized Delgado to mortgage certain
properties belonging to petitioner. And this is in compliance with the requirement in Article 2085 of
the Civil Code which states that: "Art. 2085. The following requisites are essential to the contracts of
pledge and mortgage: (3) That the persons constituting the pledge or mortgage have the free
disposal of their property, and in the absence thereof, that they be legally authorized for the
purpose." In effect, petitioner lent his car to Delgado so that the latter may mortgage the same to
secure his debt. Thus, from the contract itself, it was clear that only Delgado was the mortgagor
regardless of the fact the he used properties belonging to a third person to secure his debt.
4. REMEDIAL LAW; CIVIL ACTIONS; FILING OF COLLECTION SUIT BARRED THE
FORECLOSURE OF MORTGAGE. We agree with petitioner that the filing of collection suit barred
the foreclosure of the mortgage. Thus: "A mortgage who files a suit for collection abandons the
remedy of foreclosure of the chattel mortgage constituted over the personal property as security for
the debt or value of the promissory note which he seeks to recover in the said collection suit." The

reason for this rule is that: ". . . when, however, the mortgage elects to file a suit for collection, not
foreclosure, thereby abandoning the chattel as basis for relief, he clearly manifest his lack of desire
and interest to go after the mortgaged property as security for the promissory note . . ."
5. ID.; MORTGAGE DEBT DUE FROM ESTATE; OPTIONS GIVEN TO CREDITORS UNDER SEC.
7, RULE 86, NEW RULES OF COURT. Leviste, having chosen to file the collection suit, could not
now run after petitioner for the satisfaction of the debt. This is even more true in this case because of
the death of the principal debtor, Delgado. Leviste was pursuing a money claim against a deceased
person. Section 7, Rule 86 of the Rules of Court provides: "Sec. 7. Mortgage debt due from estate.
A creditor holding a claim against the deceased secured by mortgaged or other collateral security,
may abandon the security and prosecute his claim in the manner provided in this rule, and share in
the general distribution of the assets of the estate; or he may foreclose his mortgage or realize upon
his security, by action in court, making the executor or administrator a party defendant, and if there is
a judgment for a deficiency, after the sale of the mortgaged premises, or the property pledged, in the
foreclosure or the other proceeding to realize upon security, he may claim his deficiency judgment in
the manner provided in the preceding section; or he may upon his mortgage or other security alone,
and foreclosure the same at any time within the period of the statue of limitations, and in that event
he shall not be admitted as a creditor, and shall receive no share in the distribution of the other
assets of the estate; . . ."
DECISION
CAMPOS, JR., J p:
Before us is a Petition for Review on Certiorari of the decision ** of the Court of Appeals in CA G.R.
No. SP-07237, dated March 31, 1978.
The facts of this case are as follows:
On or about October 16, 1972, Celerino Delgado (Delgado) and Conrad Leviste (Leviste) entered
into a loan agreement which was evidenced by a promissory note worded as follows:
"FOR VALUE RECEIVED, I, CELERINO DELGADO, with postal address at 98 K-11 St., Kamias
Rd., Quezon City, promise to pay to the order of CONRAD C. LEVISTE, NINETY (90) DAYS after
date, at his office at 215 Buendia Ave., Makati Rizal, then total sum of SEVENTEEN THOUSAND
FIVE HUNDRED (P17,500.00) PESOS, Philippine Currency without necessity of demand, with
interest at the rate of TWELVE (12%) PERCENT per annum;" 1
On the same date, Delgado executed a chattel mortgage 2 over a Willy's jeep owned by him. And
acting as the attorney-in-fact of herein petitioner, Manolo P. Cerna (petitioner), he also mortgage a
"Taunus' car owned by the latter.
The period lapsed without Delgado paying the loan. This prompted Leviste to a file a collection suit
docketed as Civil Case No. 17507 3 with the Court of First Instance of Rizal, Branch XXII against
Delgado and petitioner as solidary debtors. Herein petitioner filed his first Motion to Dismiss 4 on
April 4, 1973. The grounds cited in the Motion were lank of cause of action against petitioner and the
death of Delgado. Anent the latter, petitioner claimed that the claim should be filed in the
proceedings for the settlement of Delgado's estate as the action did not survive Delgado's death.
Moreover, he also stated that since Leviste already opted to collect on the note, he could no longer
foreclose the mortgage. This Motion to Dismiss was denied on August 15, 1973 by Judge Nicanor S.
Sison. Thereafter, petitioner filed with the Court of Appeals a special civil action for certiorari,
mandamus, and prohibition with preliminary injunction docketed as CA G.R. No. 03088 on the

ground that the respondent judge committed grave abuse of discretion in refusing to dismiss the
complaint. On June 28, 1976, the Court of Appeals 5 denied the petition because herein petitioner
failed to prove the death of Delgado and the consequent settlement proceedings regarding the
latter's estate. Neither did petitioner adequately prove his claim that the special power of attorney in
favor of Delgado was forged.
On February 18, 1977, petitioner filed his second Motion to Dismiss on the ground that the trial court,
now presided by Judge Nelly L. Romero Valdellon, acquired no jurisdiction over deceased
defendant, that the claim did not survive, and that there was no cause of action against him. On May
13, 1977, the said judge dismissed the motion in an order hereunder quoted, to wit:
"Considering the second motion to dismiss filed by respondent Manolo Cerna on March 4, 1977, as
well as plaintiff's opposition thereto reiteration of the same grounds raised in the first motion to
dismiss dated April 4, 1973, this Court hereby reiterates its resolution found in its order dated August
15, 1973." 6
Petitioner filed a motion to reconsider the said order but this was denied. Then, on October 17, 1977,
he filed another petition for certiorari and prohibition docketed as CA G.R. No. SP-07237 with the
Court of Appeals. This petition was dismissed by the said court in a decision which stated, thus:
"WHEREFORE, the herein petition insofar as it alleges lack of cause of action on the part of the
herein petitioner is concerned, is hereby dismissed and/or denied and the writ of preliminary
injunction previously issued by this Court is hereby lifted and/or set aside; insofar, however, as the
case against the deceased Celerino Delgado is concerned, the petition is granted, that is, the
complaint in the lower court against Celerino Delgado should be dismissed. No costs." 7
Thereafter, the instant petition for review was filed. Petitioner raised the following legal issue:
". . . NOW, INASMUCH AS THE COMPLAINT IS ONLY FOR COLLECTION OF A SUM OF MONEY
BASED ON THE PROMISSORY NOTE, SHOULD NOT THE COMPLAINANT BE DISMISSED FOR
LACK OF CAUSE OF ACTION AS AGAINST MANOLO P. CERNA WHO IS NOT A DEBTOR
UNDER THE PROMISSORY NOTE CONSIDERING THAT ACCORDING TO SETTLED
JURISPRUDENCE THE FILING OF A COLLECTION SUIT IS DEEMED AN ABANDONMENT OF
THE SECURITY OF THE CHATTEL MORTGAGE?" 8
In holding petitioner liable, the Court of Appeals held that petitioner and Delgado were solidary
debtors. Thus, it held:
"But the herein petitioner pleads that the complaint states no cause of actions against the
defendants Manolo P. Cerna on the following grounds: 1) that the petitioner did not sign as joint
obligator in the promissory note signed by the deceased Celerino Delgado hence, even if the
allegations of the complaint are hypothetically admitted there is no cause of action against the herein
petitioner because having proceeded against the promissory note he is deemed to have abandoned
the foreclosure of the chattel mortgage contract. This contention deserves scant consideration. The
chattel mortgage contract, prima facie shows that it created the joint and solidary obligation of
petitioner and Celerino Delgado against private respondent." 9 (Emphasis Ours)
We do not agree. Only Delgado signed the promissory note and accordingly, he was the only one
bound by the contract of loan. Nowhere did it appear in the promissory note that petitioner was a codebtor. The law is clear that "(c)ontracts take effect only between the parties . . ." 10

But by some stretch of the imagination, petitioner was held solidarily liable for the debt allegedly
because he was a co-mortgagor of the principal debtor, Delgado. This ignores the basic precept that
"(t)here is solidarily liability only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity." 11
We have already stated that the contract of loan, as evidenced by the promissory note, was signed
by Delgado only. Petitioner had no part in the said contract. Thus, nowhere could it be seen from the
agreement that petitioner was solidarily bound with Delgado for the payment of the loan.
There is also no legal provision nor jurisprudence in our jurisdiction which makes a third person who
secures the fulfillment of another's obligation by mortgaging his own property to be solidarily bound
with the principal obligor. A chattel mortgage may be "an accessory contract" 12 to a contract of
loan, but that fact alone does not make a third-party mortgagor solidarily bound with the principal
debtor in fulfilling the principal obligation that is, to pay the loan. The signatory to the principal
contract loan remains to be primarily bound. It is only upon the default of the latter that the
creditor may have been recourse on the mortgagors by foreclosing the mortgaged properties in lieu
of an action for the recovery of the amount of the loan. And the liability of the third-party mortgagors
extends only to the property mortgaged. Should there be any deficiency, the creditors has recourse
on the principal debtor.
In this case, however, the mortgage contract was also signed only by Delgado as mortgagor. It is
true that the contract stated the following:
"That this CHATTEL MORTGAGE, made and entered into this 16th day of October, 1972 at Makati,
Rizal, by and between:
CELERINO DELGADO, . . . as Attorney-in -Fact of Manolo P. Cerna . . . by virtue of a Special Power
of Attorney executed by said Manolo P. Cerna in my favor under the date of October 10, 1972 and
acknowledged before Orlando J. Coruna . . . herein referred to as the MORTGAGOR; - and CONRAD C. LEVISTE, . . . hereinafter referred to as the MORTGAGEE." 13
But this alone does not make petitioner a co-mortgagor especially so since only Delgado singed the
chattel mortgage as mortgagor. The Special Power of Attorney did not make petitioner a mortgagor.
All it did was to authorized Delgado to mortgage certain properties belonging to petitioner. And this is
in compliance with the requirement in Article 2085 of the Civil Code which states that:
"Art. 2085. The following requisites are essential to the contracts of pledge and mortgage:
xxx xxx xxx
(3) That the persons constituting the pledge or mortgage have the free disposal of their property, and
in the absence thereof, that they be legally authorized for the purpose." (Emphasis Ours.)
In effect, petitioner lent his car to Delgado so that the latter may mortgage the same to secure his
debt. Thus, from the contract itself, it was clear that only Delgado was the mortgagor regardless of
the fact the he used properties belonging to a third person to secure his debt.
Granting, however, that petitioner was obligated under the mortgage contract to answer for
Delgado's indebtedness, under the circumstances, petitioner could not be held liable because the

complaint was for recovery of a sum of money, and not for the foreclosure of the security. We agree
with petitioner that the filing of collection suit barred the foreclosure of the mortgage. Thus:
"A mortgage who files a suit for collection abandons the remedy of foreclosure of the chattel
mortgage constituted over the personal property as security for the debt or value of the promissory
note which he seeks to recover in the said collection suit." 14
The reason for this rule is that:
". . . when, however, the mortgage elects to file a suit for collection, not foreclosure, thereby
abandoning the chattel as basis for relief, he clearly manifest his lack of desire and interest to go
after the mortgaged property as security for the promissory note . . ." 15
Hence, Leviste, having chosen to file the collection suit, could not now run after petitioner for the
satisfaction of the debt. This is even more true in this case because of the death of the principal
debtor, Delgado. Leviste was pursuing a money claim against a deceased person. Section 7, Rule
86 of the Rules of Court Provides:
"Sec. 7. Mortgage debt due from estate. A creditor holding a claim against the deceased secured
by mortgaged or other collateral security, may abandon the security and prosecute his claim in the
manner provided in this rule, and share in the general distribution of the assets of the estate; or he
may foreclose his mortgage or realize upon his security, by action in court, making the executor or
administrator a party defendant, and if there is a judgment for a deficiency, after the sale of the
mortgaged premises, or the property pledged, in the foreclosure or the other proceeding to realize
upon security, he may claim his deficiency judgment in the manner provided in the preceding
section; or he may upon his mortgage or other security alone, and foreclosure the same at any time
within the period of the statue of limitations, and in that event he shall not be admitted as a creditor,
and shall receive no share in the distribution of the other assets of the estate; . . ."
The above-quoted provision is substantially similar to Section 708 of the Code of Civil Procedure
which states:
"Sec. 708. A creditor holding against the deceased, secured by mortgage or other collateral security,
may abandon the security and prosecute his claim before the committee, and share in the mortgage
or realize upon his security, by ordinary action in court, making the executor or administrator a party
defendant; . . ."
The Supreme Court, in the case of Osorio vs. San Agustin, 16 has made the following interpretation
of the said provision,, to wit:
"It is clear by the provisions quoted section that a person holding a mortgage against the estate of a
deceased person may abandon such security and prosecute his claim before the committee, and
share in the distribution of the general assets of the estate. It provides also that he may, at his own
election, foreclose the mortgage and realize upon his security. But the law does not provide that he
may have both remedies. If he elects one he must abandon the other. If he fails in one he fails
utterly."
But while there is a merit in the substantial allegations of this petition, We are constrained to deny
the petition on procedural grounds. The facts of this case reveal that the decision under review in the
decision in the second certiorari and prohibition case lodged petitioner against the judge trying the
civil case. It appeared that after the denial of the first motion to dismiss, petitioner filed CA-G.R. No.
03088 wherein petitioner alleged grave abuse of discretion on the part of Judge Sison. The first

petition was denied by the Court of Appeals. The decision became final. The second motion to
dismiss, based on the same grounds, was thereafter filed. It was likewise denied and another
petition for certiorari and prohibition was again instituted. The decision in the latter case is now under
review.
We agree with the contention of private respondent, that the action has been barred by the principle
of res judicata.
It appears in this case that the second motion was filed to circumvent the effects of the finality of the
decision of the Court of Appeals in Ca-G.R. No. 03088. Petitioner intended the second motion and
the subsequent proceedings as remedies for his lapsed appeal. We cannot such behavior. It delayed
the proceedings in this case and unduly burdened the courts. Petitioner should have allowed the trial
of the case to go on where his defenses could still be presented and heard.
WHEREFORE, in view of the forgoing,, the Petition is hereby DISMISSED. With costs.
SO ORDERED.
Narvasa, C . J ., Padilla, Regalado and Nocon, JJ ., concur.

G.R. No. L-49940 September 25, 1986

GEMMA R. HECHANOVA, accompanied by her husband, NICANOR HECHANOVA, JR., and
PRESCILLA R. MASA, accompanied by her husband, FRANCISCO MASA, petitioners,
vs.
HON. MIDPANTAO L. ADIL, Presiding Judge, Branch II, Court of First Instance of Iloilo, THE
PROVINCIAL SHERIFF OF ILOILO, and PIO SERVANDO, respondents.

YAP, J.:
Petitioners seek the annulment of various orders issued by the respondent Presiding Judge of
Branch II, Court of First Instance of Iloilo, in Civil Case No. 12312 entitled "Pio Servando versus
Jose Y. Servando et al." A temporary restraining order was issued by this Court on May 9, 1979,
staying until further orders the execution of the decision rendered by the respondent Judge in said
case.
The case under review is for the annulment of a deed of sale dated March 11, 1978, executed by
defendant Jose Y. Servando in favor of his co-defendants, the petitioners herein, covering three
parcels of land situated in Iloilo City. Claiming that the said parcels of land were mortgaged to him in
1970 by the vendor, who is his cousin, to secure a loan of P20,000.00, the plaintiff Pio Servando
impugned the validity of the sale as being fraudulent, and prayed that it be declared null and void
and the transfer certificates of title issued to the vendees be cancelled, or alternatively, if the sale is
not annulled, to order the defendant Jose Servando to pay the amount of P20,000.00, plus interests,
and to order defendants to pay damages. Attached to the complaint was a copy of the private
document evidencing the alleged mortgage (Annex A), which is quoted hereunder:
August 20, 1970
This is to certify that I, Jose Yusay Servando, the sole owner of three parcel of land
under Tax Declaration No. 28905, 44123 and 31591 at Lot No. 1, 1863-Portion of
1863 & 1860 situated at Sto. Nino St., Arevalo, Compania St. & Compania St.,
Interior Molo, respectively, have this date mortgaged the said property to my cousin
Pio Servando, in the amount of TWENTY THOUSAND PESOS (P20,000.00),
redeemable for a period not exceeding ten (10) years, the mortgage amount bearing
an interest of 10% per annum.
I further certify that in case I fail to redeem the said properties within the period
stated above, my cousin Pio Servando, shall become the sole owner thereof.
(SGD.) JOSE YUSAY SERVANDO
WITNESSES:
(Sgd) Ernesto G. Jeruta
(Sgd) Francisco B. Villanueva
The defendants moved to dismiss the complaint on the grounds that it did not state a cause of
action, the alleged mortgage being invalid and unenforceable since it was a mere private document

and was not recorded in the Registry of Deeds; and that the plaintiff was not the real party in interest
and, as a mere mortgagee, had no standing to question the validity of the sale. The motion was
denied by the respondent Judge, in its order dated June 20, 1978, "on the ground that this action is
actually one for collection."
On June 23, 1978, defendant Jose Y. Servando died. The defendants filed a Manifestation and
Motion, informing the trial court accordingly, and moving for the dismissal of the complaint pursuant
to Section 21 of Rule 3 of the Rules of Court, pointing out that the action was for. recovery of money
based on an actionable document to which only the deceased defendant was a party. The motion to
dismiss was denied on July 25, 1978, "it appearing from the face of the complaint that the instant
action is not purely a money claim, it being only incidental, the main action being one for annulment
and damages."
On August 1, 1978, plaintiff filed a motion to declare defendants in default, and on the very next day,
August 2, the respondent Judge granted the motion and set the hearing for presentation of plaintiff's
evidence ex-parte on August 24, 1978.
On August 2, 1978, or the same day that the default order was issued, defendants Hechanova and
Masa filed their Answers, denying the allegations of the complaint and repeating, by way of special
and affirmative defenses, the grounds stated in their motions to dismiss.
On August 25, 1978, a judgment by default was rendered against the defendants, annulling the deed
of sale in question and ordering the Register of Deeds of Iloilo to cancel the titles issued to Priscilla
Masa and Gemma Hechanova, and to revive the title issued in the name of Jose Y. Servando and to
deliver the same to the plaintiff.
The defendants took timely steps to appeal the decision to the Court of Appeals by filing a notice of
appeal, an appeal bond, and a record on appeal. However, the trial court disapproved the record on
appeal due to the failure of defendants to comply with its order to eliminate therefrom the answer
filed on August 2, 1978 and accordingly, dismissed the appeal, and on February 2, 1978, issued an
order granting the writ of execution prayed for by plaintiff.
We find the petition meritorious, and the same is hereby given due course.
It is clear from the records of this case that the plaintiff has no cause of action. Plaintiff has no
standing to question the validity of the deed of sale executed by the deceased defendant Jose
Servando in favor of his co-defendants Hechanova and Masa. No valid mortgage has been
constituted plaintiff's favor, the alleged deed of mortgage being a mere private document and not
registered; moreover, it contains a stipulation (pacto comisorio)which is null and void under Article
2088 of the Civil Code. Even assuming that the property was validly mortgaged to the plaintiff, his
recourse was to foreclose the mortgage, not to seek annulment of the sale.
WHEREFORE, the decision of the respondent court dated August 25, 1973 and its Order of
February 2, 1979 are set aside, and the complaint filed by plaintiff dated February 4, 1978 is hereby
dismissed.
SO ORDERED.

G.R. No. 77465 May 21, 1988

SPOUSES UY TONG & KHO PO GIOK, petitioners,
vs.
HONORABLE COURT OF APPEALS, HONORABLE BIENVENIDO C. EJERCITO, Judge of the
Court of First Instance of Manila, Branch XXXVII and BAYANIHAN AUTOMOTIVE
CORPORATION, respondents.
Platon A. Baysa for petitioner.
Manuel T. Ybarra for respondents.

CORTES, J.:
In the present petition, petitioners assail the validity of a deed of assignment over an apartment unit
and the leasehold rights over the land on which the building housing the said apartment stands for
allegedly being in the nature of a pactum commissorium.
The facts are not disputed.
Petitioners Uy Tong (also known as Henry Uy) and Kho Po Giok (SPOUSES) used to be the owners
of Apartment No. 307 of the Ligaya Building, together with the leasehold right for ninety- nine (99)
years over the land on which the building stands. The land is registered in the name of Ligaya
Investments, Inc. as evidenced by Transfer Certificate of Title No. 79420 of the Registry of Deeds of
the City of Manila. It appears that Ligaya Investments, Inc. owned the building which houses the
apartment units but sold Apartment No. 307 and leased a portion of the land in which the building
stands to the SPOUSES.
In February, 1969, the SPOUSES purchased from private respondent Bayanihan Automotive, Inc.
(BAYANIHAN) seven (7) units of motor vehicles for a total amount of P47,700.00 payable in three
(3) installments. The transaction was evidenced by a written "Agreement" wherein the terms of
payment had been specified as follows:
That immediately upon signing of this Agreement, the VENDEE shall pay unto the
VENDOR the amount of Seven Thousand Seven Hundred (P7,000.00) Pesos,
Philippine Currency, and the amount of Fifteen Thousand (P15,000.00) Pesos shah
be paid on or before March 30, 1969 and the balance of Twenty Five Thousand
(P25,000.00) Pesos shall be paid on or before April 30, 1969, the said amount again
to be secured by another postdated check with maturity on April 30, 1969 to be
drawn by the VENDEE;
That it is fully understood that should the two (2) aforementioned checks be not
honored on their respective maturity dates, herein VENDOR will give VENDEE
another sixty (60) days from maturity dates, within which to pay or redeem the value
of the said checks;
That if for any reason the VENDEE should fail to pay her aforementioned obligation
to the VENDOR,the latter shall become automatically the owner of the former's
apartment which is located at No. 307, Ligaya Building, Alvarado St., Binondo,

Manila, with the only obligation on its part to pay unto the VENDEE the amount of
Three Thousand Five Hundred Thirty Five (P3,535.00) Pesos, Philippine Currency;
and in such event the VENDEE shall execute the corresponding Deed of absolute
Sale in favor of the VENDOR and or the Assignment of Leasehold Rights. [emphasis
supplied]. (Quoted in Decision in Civil Case No. 80420, Exhibit "A" of Civil Case No.
1315321].
After making a downpayment of P7,700.00, the SPOUSES failed to pay the balance of P40,000.00.
Due to these unpaid balances, BAYANIHAN filed an action for specific performance against the
SPOUSES docketed as Civil Case No. 80420 with the Court of First Instance of Manila.
On October 28, 1978, after hearing, judgment was rendered in favor of BAYANIHAN in a decision
the dispositive portion of which reads:
WHEREFORE, judgment is hereby rendered, ordering the defendants, jointly and
severally, to pay the plaintiffs, the sum of P40,000.00, with interest at the legal rate
from July 1, 1970 until full payment. In the event of their failure to do so within thirty
(30) days from notice of this judgment, they are hereby ordered to execute the
corresponding deed of absolute sale in favor of the plaintiff and/or the assignment of
leasehold rights over the defendant's apartment located at 307 Ligaya Building,
Alvarado Street, Binondo, Manila, upon the payment by the plaintiff to the defendants
of the sum of P3,535.00. [emphasis supplied].
Pursuant to said judgment, an order for execution pending appeal was issued by the trial court and a
deed of assignment dated May 27, 1972, was executed by the SPOUSES [Exhibit "B", CFI Records,
p. 127] over Apartment No. 307 of the Ligaya Building together with the leasehold right over the land
on which the building stands. The SPOUSES acknowledged receipt of the sum of P3,000.00 more or
less, paid by BAYANIHAN pursuant to the said judgment.
Notwithstanding the execution of the deed of assignment the SPOUSES remained in possession of
the premises. Subsequently, they were allowed to remain in the premises as lessees for a stipulated
monthly rental until November 30,1972.
Despite the expiration of the said period, the SPOUSES failed to surrender possession of the
premises in favor of BAYANIHAN. This prompted BAYANIHAN to file an ejectment case against
them in the City Court of Manila docketed as Civil Case No. 240019. This action was however
dismissed on the ground that BAYANIHAN was not the real party in interest, not being the owner of
the building.
On February 7, 1979, after demands to vacate the subject apartment made by BAYANIHAN's
counsel was again ignored by the SPOUSES, an action for recovery of possession with damages
was filed with the Court of First Instance of Manila, docketed as Civil Case No. 121532 against the
SPOUSES and impleading Ligaya Investments, Inc. as party defendant. On March 17, 1981,
decision in said case was rendered in favor of BAYANIHAN ordering the following:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants spouses UY TONG and KHO GIOK and defendant Ligaya Investment,
Inc., dismissing defendants' counterclaim and ordering:
1. The defendants spouses UY TONG and KHO PO GIOK and any andlor persons
claiming right under them, to vacate, surrender and deliver possession of Apartment
307, Ligaya Building, located at 64 Alvarado Street, Binondo, Manila to the plaintiff;

2. Ordering defendant Ligaya Investment, Inc. to recognize the right of ownership

and possession of the plaintiff over Apartment No. 307, Ligaya Building;
3. Ordering Ligaya Investment, Inc. to acknowledge plaintiff as assignee-lessee in
liue of defendants spouses Uy Tong and Kho Po Giok over the lot on which the
building was constructed;
4. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay to the plaintiff
the sum of P200.00 commencing from June, 1971 to November 30, 1972, or a total
amount of P3,400.00 as rental for the apartment, and the sum of P200.00 from
December 1, 1972 until the premises are finally vacated and surrendered to the
plaintiff, as reasonable compensation for the use of the apartment; and
5. Ordering the defendants spouses Uy Tong and Kho Po Giok to pay P3,000.00 as
and for attorney's fees to the plaintiff, and the costs of this suit.
Not satisfied with this decision, the SPOUSES appealed to the Court of Appeals. On October
2,1984, the respondent Court of Appeals affirmed in toto the decision appealed from [Petition, Annex
"A", Rollo, pp. 15-20]. A motion for reconsideration of the said decision was denied by the
respondent Court in a resolution dated February 11, 1987 [Petition, Annex "C", Rollo, pp. 31- 34].
Petitioners-SPOUSES in seeking a reversal of the decision of the Court of Appeals rely on the
following reasons:
I. The deed of assignment is null and void because it is in the nature of a pactum
commissoriumand/or was borne out of the same.
II. The genuineness and due Prosecution of the deed of assignment was not deemed
admitted by petitioner.
III. The deed of assignment is unenforceable because the condition for its execution
was not complied with.
IV. The refusal of petitioners to vacate and surrender the premises in question to
private respondent is justified and warranted by the circumstances obtaining in the
instant case.
I. In support of the first argument, petitioners bring to the fore the contract entered into by the parties
whereby petitioner Kho Po Giok agreed that the apartment in question will automatically become the
property of private respondent BAYANIHAN upon her mere failure to pay her obligation. This
agreement, according to the petitioners is in the nature of a pactum commissorium which is null and
void, hence, the deed of assignment which was borne out of the same agreement suffers the same
fate.
The prohibition on pactum commissorium stipulations is provided for by Article 2088 of the Civil
Code:
Art. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of the same. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that
there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security
for the payment of the principal obligation; and (2) that there should be a stipulation for an automatic
appropriation by the creditor of the thing pledged or mortgaged in the event of non-payment of the
principal obligation within the stipulated period.
A perusal of the terms of the questioned agreement evinces no basis for the application of
the pactum commissorium provision. First, there is no indication of 'any contract of mortgage entered
into by the parties. It is a fact that the parties agreed on the sale and purchase of trucks.
Second, there is no case of automatic appropriation of the property by BAYANIHAN. When the
SPOUSES defaulted in their payments of the second and third installments of the trucks they
purchased, BAYANIHAN filed an action in court for specific performance. The trial court rendered
favorable judgment for BAYANIHAN and ordered the SPOUSES to pay the balance of their
obligation and in case of failure to do so, to execute a deed of assignment over the property involved
in this case. The SPOUSES elected to execute the deed of assignment pursuant to said judgment.
Clearly, there was no automatic vesting of title on BAYANIHAN because it took the intervention of
the trial court to exact fulfillment of the obligation, which, by its very nature is ". . anathema to the
concept of pacto commissorio" [Northern Motors, Inc. v. Herrera, G.R. No. L-32674, February 22,
1973, 49 SCRA 392]. And even granting that the original agreement between the parties had the
badges of pactum commissorium, the deed of assignment does not suffer the same fate as this was
executed pursuant to a valid judgment in Civil Case No. 80420 as can be gleaned from its very
terms and conditions:
DEED OF ASSIGNMENT
KNOW ALL MEN BY THESE PRESENTS:
This deed made and entered into by Uy Tiong also known as Henry Uy and Kho Po
Giok, both of legal age, husband and wife, respectively, and presently residing at 307
Ligaya Bldg., Alvarado St., Binondo, Manila, and hereinafter to be known and called
as the ASSIGNORS, in favor of Bayanihan Automotive Corporation, an entity duly
organized and existing under the laws of the Philippines, with principal business
address at 1690 Otis St., Paco, Manila and hereinafter to be known and called the
ASSIGNEE;
-witnessethWHEREAS, the ASSIGNEE has filed a civil complaint for "Specific Performance with
Damages" against the ASSIGNORS in the Court of First Instance of Manila, Branch
V, said case having been docketed as Civil Case No. 80420;
WHEREAS, the ASSIGNEE was able to obtain a judgment against the ASSIGNOR
wherein the latter was ordered by the court as follows, to wit:
WHEREFORE, judgment is hereby rendered ordering the
defendants, jointly and severally to pay the plaintiff the sum of
P40,000.00, with interest at the legal rate from July 31, 1970 until full
payment. In the event of their failure to do so within thirty (30) days
from notice of this judgment, they are hereby ordered to execute the
corresponding deed of absolute sale in favor of the plaintiff and/or the

assignment of leasehold, rights over the defendants' apartment

located at No. 307 Ligaya Building, Alvarado Street, Binondo, Manila,
upon the payment by the plaintiff to the defendants the sum of P
3,535.00. The defendants shall pay the costs.
WHEREAS, the court, upon petition by herein ASSIGNEE and its deposit of sufficient
bond, has ordered for the immediate execution of the said decision even pending
appeal of the aforesaid decision;
WHEREAS, the ASSIGNORS have elected to just execute the necessary deed of
sale and/or assignment of leasehold rights over the apartment mentioned in the
decision in favor of the herein ASSIGNEE;
NOW, THEREFORE, for and in consideration of the foregoing premises, the
ASSIGNORS have transferred assigned and ceded, and by these presents do
hereby transfer, assign and cede all their rights and interests over that place known
as Apartment No. 307 at the Ligaya Building which is located at No. 864 Alvarado
St., Binondo, Manila, together with the corresponding leasehold rights over the lot on
which the said building is constructed, in favor of the hererein ASSIGNEE, its heirs or
assigns.
IN WITNESS WHEREOF, We have hereunto signed our names this 27th day of May,
1971 at Manila, Philippines.
UY TONG/HENRY UY KHO PO GIOK
Assignor Assignor
ACR-2151166 Manila 1/13/51 ACR-C-001620
Manila March 3, 1965
This being the case, there is no reason to impugn the validity of the said deed of assignment.
II. The SPOUSES take exception to the ruling of the Court of Appeals that their failure to deny the
genuineness and due execution of the deed of assignment was deemed an admission thereof. The
basis for this exception is the SPOUSES' insistence that the deed of assignment having been borne
out of pactum commissorio is not subject to ratification and its invalidity cannot be waived.
There is no compelling reason to reverse the abovementioned ruling of the appellate court.
Considering this Court's above conclusion that the deed of assignment is not invalid, it follows that
when an action founded on this written instrument is filed, the rule on contesting its genuineness and
due execution must be followed.
That facts reveal that the action in Civil Case No. 121532 was founded on the deed of assignment.
However, the SPOUSES, in their answer to the complaint, failed to deny under oath and specifically
the genuineness and due execution of the said deed. Perforce, under Section 8, Rule 8 of the
Revised Rules of Court, the SPOUSES are deemed to have admitted the deed's genuineness and
due execution. Besides, they themselves admit that ". . . the contract was duly executed and that the
same is genuine" [Sur-Rejoinder, Rollo, p. 67]. They cannot now claim otherwise.

III. The SPOUSES also question the enforceability of the deed of assignment. They contend that the
deed is unenforceable because the condition for its execution was not complied with. What
petitioners SPOUSES refer to is that portion of the disposition in Civil Case No. 80420 requiring
BAYANIHAN to pay the former the sum of P 3,535.00. To buttress their claim of non- compliance,
they invoke the following receipt issued by the SPOUSES to show that BAYANIHAN was P535.00
short of the complete payment.
RECEIPT
This is to acknowledge the fact that the amount of THREE THOUSAND (P3,000.00)
PESOS, more or less as indicated in the judgment of the Hon. Conrado Vasquez,
Presiding Judge of the Court of First Instance of Manila, Branch V, in Civil Case
entitled "Bayanihan Automotive Corp. v. Pho (sic) Po Giok, etc." and docketed as
Civil Case No. 80420 has been applied for the payment of the previous rentals of the
property which is the subject matter of the aforesaid judgment. [emphasis supplied.]
(Sgd.) Pho (sic) Po
Glok
(Sgd.) Henry Uy
August 21, 1971
The issue presented involves a question of fact which is not within this Court's competence to look
into. Suffice it to say that this Court is of the view that findings and conclusion of the trial court and
the Court of Appeals on the question of whether there was compliance by BAYANIHAN of its
obligation under the decision in Civil Case No. 80420 to pay the SPOUSES the sum of P3,535.00 is
borne by the evidence on record. The Court finds merit in the following findings of the trial court:
... Defendants 'contention that the P 3,535.00 required in the decision in Civil Case
No. 80420 as a condition for the execution of the deed of assignment was not paid
by the plaintiff to the defendants is belied by the fact that the
defendants acknowledged payment of P3,000.00, more or less, in a receipt dated
August 21, 1971. This amount was expressly mentioned in this receipt as indicated in
the judgment of the Honorable Conrado Vasquez, presiding Judge of the CFI of
Manila, Branch V, in Civil Case entitled Bayanihan Automotive Corp. versus Kho Po
Giok, docketed as Civil Case No. 80420, and also expressly mentioned as having
been applied for the payment of the previous rentals of the property subject matter of
the said judgment. Nothing could be more explicit. The contention that there is still a
difference of P535.00 is had to believe because the spouses Kho Po Giok and Uy
Tong executed the deed of assignment without first demanding from the plaintiff the
payment of P535.00. Indeed, as contended by the plaintiff, for it to refuse to pay this
small amount and thus gave defendants a reason not to execute the Deed of
Assignment. is hard to believe Defendants further confirm by the joint manifestation
of plaintiff and defendants, duly assisted by counsel, Puerto and Associates, dated
September, 1971, Exhibit "O", wherein it was stated that plaintiff has fully complied
with its obligation to the defendants caused upon it (sic) by the pronouncement of the
judgment as a condition for the execution of their (sic) leasehold rights of defendants,
as evidenced by the receipt duly executed by the defendants, and which was already
submitted in open court for the consideration of the sum of P3,535.00. [Emphasis
supplied]. [Decision, Civil Case No. 121532, pp. 3-4].

This Court agrees with private respondent BAYANIHAN's reasoning that inasmuch as the decision in
Civil Case No. 80420 imposed upon the parties correlative obligations which were simultaneously
demandable so much so that if private respondent refused to comply with its obligation under the
judgment to pay the sum of P 3,535.00 then it could not compel petitioners to comply with their own
obligation to execute the deed of assignment over the subject premises. The fact that petitioners
executed the deed of assignment with the assistance of their counsel leads to no other conclusion
that private respondent itself had paid the full amount.
IV. Petitioners attempt to justify their continued refusal to vacate the premises subject of this
litigation on the following grounds:
(a) The deed of assingnment is in the nature of a pactum commissorium and,
therefore, null and void.
(b) There was no full compliance by private respondent of the condition imposed in
the deed of assignment.
(c) Proof that petitioners have been allowed to stay in the premises, is the very
admission of private respondent who declared that petitioners were allowed to stay in
the premises until November 20, 1972. This admission is very significant. Private
respondent merely stated that there was a term-until November 30, 1972-in order to
give a semblance of validity to its attempt to dispossess herein petitioners of the
subject premises. In short, this is one way of rendering seemingly illegal petitioners
'possession of the premises after November 30, 1972.
The first two classifications are mere reiterations of the arguments presented by the petitioners and
which had been passed upon already in this decision. As regards the third ground, it is enough to
state that the deed of assignment has vested in the private respondent the rights and interests of the
SPOUSES over the apartment unit in question including the leasehold rights over the land on which
the building stands. BAYANIHAN is therefore entitled to the possession thereof. These are the clear
terms of the deed of assignment which cannot be superseded by bare allegations of fact that find no
support in the record.
WHEREFORE, the petition is hereby DENIED for lack of merit and the decision of the Court of
Appeals is AFFIRMED in toto.
SO ORDERED.
Fernan (Chairman), Gutierrez, Jr., and Feliciano, JJ., concur.
Bidin, took no part.

G.R. No. L-33084 November 14, 1988

ROSE PACKING COMPANY, INC., petitioner,
vs.
THE COURT OF APPEALS, HON. PEDRO C. NAVARRO, Judge of the Court of First Instance
of Rizal (Br. III), PHILIPPINE COMMERCIAL & INDUSTRIAL BANK & PROVINCIAL SHERIFF OF
RIZAL, respondents.

PARAS, J.:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals in CA-G.R. No. 43198-R promulgated
on December 16,1970 (Rollo, pp. 237-249), the dispositive portion of which reads as follows:

WHEREFORE, in view of the foregoing, this Court hereby renders judgment:

1. Denying the petition to set aside and annul the questioned orders dated January
31, 1969 and May 7,1969 rendered by respondent Judge, the same having been
issued in consonance with the exercise of the Court's discretion.
2. Declaring valid the foreclosure sale of May 9, 1969 but finding the consolidation of
ownership over the properties sold at such sale to have been prematurely executed
thereby rendering it void ab initio.
3. In accordance with this Court's resolution dated May 8, 1970, petitioner is hereby
granted sixty (60) days from receipt of a copy of this decision within which to redeem
the properties sold at the foreclosure sale of May 9, 1969.
4. Dismissing the charge of contempt against PCIB and its Executive Vice-President
and General Manager, Eugenio R. Unson,. for lack of merit.
and its Resolution 2 dated January 12, 1971 (Rollo, p. 280), denying petitioner's motion for reconsideration, as wen as its
Resolution 3 dated January 22, 1971 (Rollo, p. 281) denying petitioner's supplement to motion for reconsideration.

The facts of the case as presented by petitioner and as embodied in the decision of the Court of
Appeals are as follows:
On December 12, 1962 respondent bank (PCIB) approved a letter- request by petitioner for the
reactivation of its overdraft line of P50,000.00, discounting line of P100,000.00 and a letter of credittrust receipt line of P550,000.00 as wen as an application for a loan of P300,000.00, on fully secured
real estate and chattel mortgage and on the further condition that respondent PCIB appoint as it did
appoint its executive
vice-president Roberto S. Benedicto as its representative in petitioner's board of directors.
On November 3, 1965 the National Investment & Development Corporation (NIDC), the wholly
owned investment subsidiary of the Philippine National Bank, approved a P2.6 million loan
application of petitioner with certain conditions. Pursuant thereto, the NIDC released to petitioner on
November 7, 1965 the amount of P100,000.00. Subsequently, petitioner purchased five (5) parcels
of land in Pasig, Rizal making a down payment thereon.

On January 5,1966, the NIDC released another P100,000.00 to petitioner and on January 12, 1966,
the aforesaid releases totalling P200,000.00 were applied to the payment of preferred stock which
NIDC subscribed in petitioner corporation to partially implement its P1,000,000.00 investment
scheme as per agreement. Thereafter, the NIDC refused to make further releases on the approved
loan of petitioner.
On August 3, 1966 and October 5, 1966, respondent PCIB approved additional accomodations to
petitioner consisting of a P710,000.00 loan for the payment of the balance of the purchase price of
those lots in Pasig required to be bought, P500,000.00 loan for operating capital, P200,000.00 loan
to be paid directly to petitioner's creditors, while consolidating all previous accommodations at
P1,597,000.00all of which were still secured by chattel and real estate mortgages. However, PCIB
released only P300,000.00 of the P710,000.00 approved loan for the payment of the Pasig lands
and some P300,000.00 for operating capital.
On June 29,1967, the Development Bank of the Philippines approved an application by petitioner for
a loan of P1,840,000.00 and a guarantee for $652,682.00 for the purchase of can making
equipment. Immediately upon receipt of notice of the approval of the Development Bank of the loan,
petitioner advised respondent PCIB of the availability of P800,000.00 to partially pay off its account
and requested the release of the titles to the Pasig lots for delivery to the Development Bank of the
Philippines. Respondent PCIB verbally advised petitioner of its refusal, stating that all obligations
should be liquidated before the release of the titles to the Pasig properties. Following the PCIB's
rejection of petitioner's counter-proposal, petitioner purchased a parcel of land at Valenzuela,
Bulacan with the P800,000.00 DBP loan, with the latter's consent.
On January 5, 1968 respondent PCIB filed a complaint against petitioner and Rene Knecht, its
president for the collection of petitioner's indebtedness to respondent bank, which complaint was
docketed as Civil Case No. 71697 of the Court of First Instance of Manila.
On January 22, 1968, PCIB gave petitioner notice that it would cause the real estate mortgage to be
foreclosed at an auction sale, which it scheduled for February 27,1968. Thus, respondent Sheriff
served notice of sheriffs sale (of the real properties mortgaged to respondent PCIB) on July 18,1968
at 10:00 a.m., more particularly, T.C.T. No. 73620 (barrio Sto. Domingo, municipality of Cainta);
T.C.T. No. 177019 (barrio of San Joaquin, Pasig, Rizal); and T.C.T. No. 175595 (barrio San Joaquin,
Pasig, Rizal). Subsequently, on July 15, 1968, petitioner filed a complaint docketed as Civil Case
No. 11015 in the Court of First Instance of Rizal to enjoin respondents PCIB and the sheriff from
proceeding with the foreclosure sale, to ask the lower court to fix a new period for the payment of the
obligations of petitioner to PCIB and for other related matters. Petitioner likewise prayed, pending
final judgment, for the issuance ex-parte of a writ of preliminary injunction enjoining herein
respondents from proceeding with the foreclosure sale scheduled to be held on July 18, 1968.
On January 31, 1969, the lower court issued ail order denying the application for preliminary
injunction and dissolving its restraining order which had been issued on July 17, 1968. Petitioner
promptly filed a motion for reconsideration which was denied by the lower court on May 7, 1969.
On May 8, 1969 petitioner filed with respondent Court of Appeals a petition for certiorari with
application for a restraining order and preliminary injunction against the foreclosure sale (Rollo, p.
54). On May 13, 1969 respondent Court resolved to issue a writ of preliminary injunction upon filing
by petitioner of a bond in the amount of P60,000.00. However, petitioner moved for amendment of
the Order issuing the preliminary injunction, on the ground that the aforementioned resolution of
respondent Court came too late to stop the foreclosure sale which was held on May 9, 1969, praying
instead that the preliminary injunction should now enjoin respondents, particularly respondent
Provincial Sheriff, from proceeding to give effect to the foreclosure sale of May 9, 1969; that said
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sheriff should refrain from issuing a deed of certificate of sale pursuant thereto and from registering
the certificate of deed of sale in the Registry of Deeds; and to toll or stop the running of the period of
redemption. Respondent Court resolved to deny said motion in its Resolution dated May 28, 1969
(Rollo, pp. 237-242).
On May 8, 1970, on urgent motion of petitioner, respondent Court granted petitioner a period of sixty
(60) days from receipt of the decision to be rendered in
CA-G.R. No. 43198 within which to redeem its properties sold, should the said decision be one
declaring the execution sale in dispute to be valid (Rollo, p. 231).
Meantime, on May 12, 1970, an affidavit of consolidation of ownership executed by Eugenio R.
Unson for and in behalf of respondent PCIB concerning the properties involved in the instant petition
for certiorari, was registered with the Register of Deeds of Pasig, Rizal at 8:00 a.m.. Consequently,
the old transfer certificates of title covering the aforementioned properties were cancelled and new
ones issued in the name of respondent PCIB, the buyer at the foreclosure sale. In view thereof,
petitioner filed a motion charging respondent PCIB and its Executive Vice-President and Assistant
General Manager Eugenio R. Unson with contempt of court. Petitioner prayed that (a) the Deed of
Sale dated May 12, 1970 and the consolidation of ownership of the same date be declared null and
void; (b) that the new transfer certificates of title TCT Nos. 286174, 286175, and 286176be
cancelled and the old ones, TCT Nos. 177019,175595, and 73620 be restored or revived by the
Register of Deeds of Rizal; and (c) that the respondent PCIB be ordered to surrender and deposit
the TCT Nos. 177019, 175595, and 73620 with respondent Court for safekeeping (Rollo. p. 243).
On December 16, 1970 respondent Court promulgated the questioned decision (Rollo, pp. 237-249).
On January 12, 1971 it resolved (Rollo, p. 280) to deny petitioner's motion for reconsideration dated
January 5, 1971 (Rollo, p. 250) and on January 22, 1971 it again resolved (Rollo, p. 281) to deny
petitioner's supplement to motion for reconsideration dated January 18, 1971 (Rollo, p. 260).
The instant Petition for Review on certiorari (Rollo, p. 12) was filed with the Court on February 16,
1971. On February 23, 1971, the Court resolved to give due course to the petition and ordered the
issuance of preliminary injunction enjoining respondents from enforcing or implementing the
appealed decision of respondent Court of Appeals, upon petitioner's posting a bond of P50,000.00
(Rollo, p. 584). The writ of preliminary injunction was issued on April 28, 1971 (Rollo, p. 619).
The Brief for Petitioner was filed on June 18, 1971 (Rollo, p. 631). The Brief for the Respondents
was filed on September 20, 1971 (Rollo, p. 655). The Reply Brief was filed on December 6, 1971
(Rollo, p. 678).
On April 2, 1971 respondent PCIB filed a motion for leave to lease real estate properties in custodia
legis, more specifically the 31, 447 sq.m. lot located at Sto. Domingo, Cainta, Rizal covered by TCT
No. 286176 (Rollo, p. 697). Petitioner filed its opposition to the motion on May 27, 1971 (Rollo, p.
712). The reply to the opposition was filed on December 6,1971 (Rollo, p. 730); the rejoinder to
respondent PCIB's reply to opposition, on November 19, 1971 (Rollo, p. 736). Meantime the case
was transferred to the Second Division, by a Resolution of the First Division dated January 17, 1983
(Rollo, p. 752).
The issues raised in this case are the following:
1. WHETHER OR NOT RESPONDENT COURT ERRED IN FINDING THAT THE
LOWER COURT DID NOT COMMIT AN ABUSE OF DISCRETION IN DENYING
PETITIONER'S APPLICATION FOR A PRELIMINARY INJUNCTION AND

DISSOLVING THE RESTRAINING ORDER PREVIOUSLY ISSUED. (Brief for

Petitioner, pp. 21-47);
2. WHETHER OR NOT RESPONDENT COURT ERRED IN DECLARING VALID
THE FORECLOSURE SALE ON MAY 9,1969 OF THE MORTGAGED
PROPERTIES EN MASSE WHEN THEY REFER TO SEVERAL REAL ESTATE
MORTGAGES EXECUTED ON DIFFERENT DATES. (Brief for Petitioner, pp. 4750).
The main issue is whether or not private respondents have the right to the extrajudicial foreclosure
sale of petitioner's mortgaged properties before trial on the merits. The answer is in the negative.
Petitioner filed Civil Case No. 11015 in the Court of First Instance of Rizal, Branch II, to obtain
judgment (1) enjoining defendants (respondents herein) from proceeding with the foreclosure sale of
the subject real estate mortgages, (2) fixing a new period for the payment of the obligations of
plaintiff to defendant PCIB sufficiently long to enable it to recover from the effects of defendant
PCIB's inequitable acts, (3) ordering defendant PCIB to immediately give up management of
plaintiffs canning industry and to pay plaintiff such damages as it may prove in the concept of actual,
compensatory and exemplary or corrective damages, aside from attorney's fees and expenses of
litigation, plus costs (Rollo, p. 98). It is to be noted that petitioner filed the above case mainly to
forestall the foreclosure sale of the mortgaged properties before final judgment. The issuance of a
writ of preliminary injuction could have preserved the status quo of the parties in relation to the
subject matter litigated by them during the pendency of the action (Lasala v. Fernandez, 5 SCRA 79
[1962]; De Lara v. Cloribel, 14 SCRA 269 [1965]; Locsin v. Climaco, 26 SCRA 816 [1969].
When the lower court denied the issuance of the writ prayed for and dissolved the restraining order it
had previously issued, in its order dated January 31, 1969 (Rollo, p. 138) it practically adjudicated
the case before trial on the merits.
While petitioner corporation does not deny, in fact, it admits its indebtedness to respondent bank
(Brief for Petitioner, pp. 7-11), there were matters that needed the preservation of the status
quo between the parties. The foreclosure sale was premature.
First was the question of whether or not petitioner corporation was already in default. In its letter
dated August 12,1966 to petitioner corporation, among the conditions that respondent bank set for
the consolidation of the outstanding obligations of petitioner was the liquidation of the said
obligations together with the latter's other obligations in the financing scheme already approved by
the NIDC and PDCP. To quote:
a) These facilities shall be temporary and shall be fully liquidated, together with other
obligations from a refinancing scheme already approved by the NIDC and PDCP
totalling Pl million in equity and P2.6 million in long term financing. In this connection,
the firm shall present to this Bank a certified copy of the terms and conditions of the
approval by the NIDC and PDCP. (Brief for the Respondent, p. 41).
In other words, the loans of petitioner corporation from respondent bank were supposed to become
due only at the time that it receives from the NIDC and PDCP the proceeds of the approved
financing scheme. As it is, the conditions did not happen. NIDC refused to make further releases
after it had made two releases totalling P200,000.00 which were all applied to the payment of the
preferred stock NIDC subscribed in petitioner corporation to partially implement its P1,000,000.00
investment scheme (Brief for Petitioner, p. 9). The efficacy or obligatory force of a conditional
obligation is subordinated to the happening of a future and uncertain event so that if the suspensive

condition does not take place, the parties would stand as if the conditional obligation had never
existed (Gaite v. Fonacier, 2 SCRA 831 [1961]).
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Petitioner corporation alleges that there had been no demand on the part of respondent bank
previous to its filing a complaint against petitioner and Rene Knecht personally for collection on
petitioner's indebtedness (Brief for Petitioner, p. 13). For an obligation to become due there must
generally be a demand. Default generally begins from the moment the creditor demands the
performance of the obligation. Without such demand, judicial or extrajudicial, the effects of default
will not arise (Namarco v. Federation of United Namarco Distributors, Inc. 49 SCRA 238 [1973];
Borje v. CFI of Misamis Occidental, 88 SCRA 576 [1979]). Whether petitioner corporation is already
in default or not and whether demand had been properly made or not had to be determined in the
lower court.
Granting that the findings of the lower court after trial on the merits answer both questions in the
affirmative, another question that had to be determined was the question of cause or consideration.
The loan agreements between petitioner and respondent Bank are reciprocal obligations (the
obligation or promise of each party is the consideration for that of the other Penacio v. Ruaya, 110
SCRA 46 [1981], cited. in Central Bank of the Philippines v. Court of Appeals, 139 SCRA 46 [1985]
). A contract of loan is not a unilateral contract as respondent Bank thinks it is (Brief for the
Respondent, p. 19). The promise of petitioner to pay is the consideration for the obligation of
respondent bank to furnish the loan (Ibid.).
Respondent bank had complete control of the financial affairs and the management of petitioner
corporation. It appointed its executive vice-president Roberto S. Benedicto as its representative in
petitioner's board of directors, giving him the position of
vice-president in petitioner corporation (Brief for Petitioner, p. 7). Upon the resignation of Roberto S.
Benedicto as vice-president and member of the board of directors of petitioner corporation on
December 29, 1965 (Brief for Petitioner, p. 8), respondent bank designated Rafael Ledesma as its
representative in petitioner corporation's board of directors, due representation in the board of
petitioner being a condition for the loan granted to the petitioner (Rollo, p. 166). In fact, Rafael
Ledesma was designated Chairman of the Board of Directors (Rollo, p. 169). Respondent bank
required petitioner to appoint Sycip, Gorrez, Velayo & Co. as full-time comptroller-treasurer of the
corporation at a monthly salary of P1,500.00 (Brief for Petitioner, p. 9; Brief for the Respondent, p.
41). On January 2, 1967, it also required petitioner to replace its then manager, the Management &
Investment Development Associates (MIDA) and to appoint instead Edmundo Ledesma at a monthly
salary of P3,000.00 and transportation allowance of P1,000.00 plus an assistant manager, Venancio
Concepcion at a salary of P1,000.00 a month. During the next 18 months' management by
defendant's designated manager, no meeting of the board of directors of petitioner was calledEdmundo Ledesma exercised full control and management (Brief for Petitioner, pp. 10-11; Rollo, p.
167). Respondent Bank has not given up management of petitioner's food canning industry and
continues to hold it. Even Atty. Juan de Ocampo has been retained by petitioner as corporate
counsel, at the insistence of respondent bank (Brief for Petitioner, p. 14). This has not been denied
by respondent bank.
Respondent bank's designation of its own choice of people holding key positions in petitioner
corporation tied the hands of petitioner's board of directors to make decisions for the interest of
petitioner corporation, in fact, undermined the latter's financial stability. During the 18 months of
Edmundo Ledesma's management, petitioner's factory produced some P200,000.00 worth of
canned goods which according to petitioner is only equivalent to its normal production in three
weeks (Brief for Petitioner, pp.10-11). Respondent bank justifies the underproduction by averring
that petitioner at that time did not have sufficient capital to operate the factory, and that said factory

was only operating for the purpose of avoiding spoilage and deterioration of the raw materials then in
store at the petitioner's factory (Rollo. p. 168) and yet respondent bank insists, that it had released
the entire amount of P500,000.00 loan to petitioner (Rollo, p. 167) earmarked for operating capital
purposes (Brief for the Respondent, p. 43) and admits having granted a P40,000.00 loan at a higher
interest of 14% per annum to petitioner at the request of the same Edmundo Ledesma (Rollo, p.
167). After the Development Bank of the Philippines had approved on June 29, 1967 a loan of
P1,840,000.00 applied for by petitioner in 1961, respondent bank informed of the availability of
P800,000.00 to pay off partially petitioner's account with it and requested to release the titles of the
Pasig parcels for delivery to the Development Bank of the Philippines, and the amount actually
released by the Development Bank, Rafael Ledesma, in his capacity as Chairman of petitioner's
board of directors wrote a letter to the Development Bank of the Philippines stating that Rene
Knecht, petitioner's president, had no authority to borrow for petitioner, being a mere figurehead
president, although Rene Knecht, controlled 87% of the stockholding of petitioner and the by-laws
authorized the president to borrow for the company (Brief for Petitioner, pp. 11-13). That Rafael
Ledesma wrote a letter to the Development Bank of the Philippines is admitted by respondent bank
(Rollo, p. 169). The Development Bank of the Philippines refused to make further releases on the
approved loan or to issue the dollar guaranty for the importation of can making machinery. It was
Atty. Juan de Ocampo, the corporate counsel retained by petitioner at the insistence of respondent
bank that instituted the collection suit and
extra-judicial foreclosure for respondent bank against petitioner (Brief for Petitioner, pp. 13-14; Rollo,
p. 79).
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It is apparent that it is respondent bank practically managing petitioner corporation through its
representatives occupying key positions therein. Not even the president of petitioner corporation
could escape control by respondent bank through the Comptroller Treasurer assigned "to
countersign all checks and other disbursements and decide on all financial matters regarding the
operations and who shall see to it that operations are carried out" (Brief for the Respondent, p. 41).
There is basis for petitioner's complaint of interference by respondent bank with petitioner's financing
(Brief for Petitioner, pp. 3132) and such interference is only a consequence of respondent bank's
management of petitioner corporation through the officers occupying key positions therein. Thus, if
ever petitioner corporation was in financial straits instead of being rehabilitated this can be attributed
to the mismanagement of respondent corporation through its representatives in petitioner
corporation.
In a similar case, Filipinas Marble Corporation v. Intermediate Appellate Court (142 SCRA 180
[1986]) where the lending institution took over the management of the borrowing corporation and led
that corporation to bankcruptcy through mismanagement or misappropriation of the funds, defeating
the very purpose of the loan which is to develop the projects of the corporation, the Court ruled that it
is as if the loan was never delivered to it and thus, there was failure on the part of the respondent
DBP to deliver the consideration for which the mortgage and the assignment of deed were executed.
It cannot be determined at this point how much of the total loan, most especially the P500,000.00
loan for operating capital and the P40,000.00 loan of the manager, Edmundo Ledesma, had been
mismanaged or misspent by respondent bank through its representatives. This matter should
rightfully be litigated below in the main action (Filipinas Marble Corportion v. Intermediate Appellate
Court. (supra).
Furthermore, respondent bank was in default in fulfilling its reciprocal obligation under their loan
agreement. By its own admission it failed to release the P710,000.00 loan (Rollo, p. 167) it approved
on October 13, 1966 (Brief for Respondent, p. 44) in which case, petitioner corporation, under Article
1191 of the Civil Code, may choose between specific performance or rescission with damages in
either case (Central Bank of the Philippines v. Court of Appeals, 139 SCRA 46 [1985]).

As a consequence, the real estate mortgage of petitioner corporation cannot be entirely foreclosed
to satisfy its total debt to respondent bank. (Central Bank of the Philippines v. Court of
Appeals, supra.)
The issue of whether the foreclosure sale of the mortgaged properties en masse was valid or not
must be answered in the negative. The rule of indivisibility of a real estate mortgage refers to the
provisions of Article 2089 of the Civil Code, which 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 the debt is not completely
satisfied.
Neither can the creditor's heir who received his share of the debt return the pledge or
cancel the mortgage, to the prejudice of the other heirs who have not been paid.
From these provisions is excepted the case in which, there being several things
given in mortgage or pledge, each one of them guarantees only a determinate
portion of the credit.
The debtor, in this case, shall have a right to the extinguishment of the pledge or
mortgage as the portion of the debt for which each thing is specially answerable is
satisfied.
Respondent bank cites the above-quoted article in its argument that the mortgage contract is
indivisible and that the loan it secures cannot be divided among the different lots (Brief for
Respondent, p. 27). Respondent Court upheld the validity of the sale en masse (Rollo, p. 246).
The rule, however, is not applicable to the instant case as it presupposes several heirs of the debtor
or creditor which does not obtain in this case (Central Bank of the Philippines v. Court of
Appeals, supra.) Furthermore, granting that there was consolidation of the entire loan of petitioner
corporations approved by respondent bank, the rule of indivisibility of mortgage cannot apply where
there was failure of consideration on the part of respondent bank for the mismanagement of the
affairs of petitioner corporation and where said bank is in default in complying with its obligation to
release to petitioner corporation the amount of P710,000.00. In fact the real estate mortgage itself
becomes unenforceable (Central Bank of the Philippines v. Court of Appeals, supra). Finally, it is
noted that as already stated hereinabove, the exact amount of petitioner's total debt was
stillunknown.
PREMISES CONSIDERED, (1) the decision of the Court of Appeals is REVERSED insofar as it
sustained: (a) the lower court's denial of petitioner's application for preliminary injunction and (b) the
validity of the foreclosure sale; (2) the lower court is ordered to proceed with the trial on the merits of
the main case together with a determination of exactly how much are petitioner's liabilities in favor of
respondent bank PCIB so that proper measures may be taken for their eventual liquidation; (3) the
preliminary injunction issued by this Court on April 28, 1971 remains in force until the merits of the
main case are resolved; and (4) the motion of respondent bank dated April 1, 1981 for leave to lease
the real properties in custodia legis is DENIED.
SO ORDERED.

Melencio-Herrera (Chairperson), Padilla, and Sarmiento, JJ., concur.

Regalado, J., took no part.

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 semiannual 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 prededucted 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.
Concepcion, Jr., Escolin, Cuevas and Alampay, JJ., concur.
Aquino (Chairman) and Abad Santos, JJ., took no part.

G.R. No. L-60705 June 28, 1989

INTEGRATED REALTY CORPORATION and RAUL L. SANTOS, petitioners,
vs.
PHILIPPINE NATIONAL BANK, OVERSEAS BANK OF MANILA and THE HON. COURT OF
APPEALS,respondents.
G.R. No. L-60907 June 28, 1989
OVERSEAS BANK OF MANILA, petitioner,
vs.
COURT OF APPEALS, INTEGRATED REALTY CORPORATION, and RAUL L.
SANTOS, respondents.

REGALADO, J.:
In these petitions for review on certiorari, Integrated Realty Corporation and Raul Santos (G.R. No.
60705), and Overseas Bank of Manila (G.R. No. 60907) appeal from the decision of the Court of
Appeals, 1 the decretal portion of which states:
WHEREFORE, with the modification that appellee Overseas Bank of Manila is
ordered to pay to the appellant Raul Santos the sum of P 700,000.00 due under the
time deposit certificates Nos. 2308 and 2367 with 6 1/2 (sic) interest per annum from
date of issue until fully paid, the appealed decision is affirmed in all other respects.
In G.R. No. 60705, petitioners Integrated Realty Corporation (hereafter, IRC and Raul L. Santos
(hereafter, Santos) seek the dismissal of the complaint filed by the Philippine National Bank
(hereafter, PNB), or in the event that they be held liable thereunder, to revive and affirm that portion
of the decision of the trial court ordering Overseas Bank of Manila (hereafter, OBM) to pay IRC and
Santos whatever amounts the latter will pay to PNB, with interest from the date of payment. 2
On the other hand, in G.R. No. 60907, petitioner OBM challenges the decision of respondent court
insofar as it holds OBM liable for interest on the time deposit with it of Santos corresponding to the
period of its closure by order of the Central Bank. 3
In its assailed decision, the respondent Court of Appeals, quoting from the decision of the lower
court, 4 narrated the antecedents of this case in this wise:
The facts of this case are not seriously disputed by any of the parties. They are set
forth in the decision of the trial court as follows:
Under date 11 January 1967 defendant Raul L. Santos made a time deposit with
defendant OBM in the amount of P 500,000.00. (Exhibit-10 OBM) and was issued a
Certificate of Time Deposit No. 2308 (Exhibit 1 Santos, Exhibit D). Under date 6
February 1967 defendant Raul L. Santos also made a time deposit with defendant
OBM in the amount of P 200,000.00 (Exhibit 11 OBM and was issued certificate of
Time Deposit No. 2367 (Exhibit 2 Santos, Exhibit E).

Under date 9 February 1967 defendant IRC thru its President-defendant Raul L.
Santos, applied for a loan and/or credit line (Exhibit A) in the amount of P 700,000.00
with plaintiff bank. To secure the said loan, defendant Raul L. Santos executed on
August 11, 1967 a Deed of Assignment (Exhibit C) of the two time deposits (Exhibits
1-Santos and 2 Santos, also Exhibits D and E) in favor of plaintiff. Defendant OBM
gave its conformity to the assignment thru letter dated 11 August 1967 (Exhibit F).
On the same date, defendant IRC thru its President Raul L. Santos, also executed a
Deed of Conformity to Loan Conditions (Exhibit G).
The defendant OBM after the due dates of the time deposit certificates, did not pay
plaintiff PNB. Plaintiff demanded payment from defendants IRC and Raul L. Santos
(Exhibit K) and from defendant OBM (Exhibit L). Defendants IRC and Raul L. Santos
replied that the obligation (loan) of defendant IRC was deemed paid with the
irrevocable assignment of the time deposit certificates (Exhibits 5 Santos, 6 Santos
and 7 Santos).
On April 6, 1969 (sic), ** PNB filed a complaint to collect from IRC and Santos the loan of P 700,000.00 with
interest as well as attomey's fees. It impleaded OBM as a defendant to compel it to redeem and pay to it Santos' time
deposit certificates with interest, plus exemplary and corrective damages, attorney's fees, and cost.

In their answer to the complaint, IRC and Santos alleged that PNB has no cause of
action against them because their obligation to PNB was fully paid or extinguished
upon the' irrevocable' assignment of the time deposit certificates, and that they are
not answerable for the insolvency of OBM They filed a counterclaim for damages
against PNB and a cross-claim against OBM alleging that OBM acted fraudulently in
refusing to pay the time deposit certificates to PNB resulting in the filing of the suit
against them by PNB, and that, therefore, OBM should pay them whatever amount
they may be ordered by the court to pay PNB with interest. They also asked that
OBM be ordered to pay them compensatory, moral, exemplary and corrective
damages.
In its answer to the complaint, OBM denied knowledge of the time deposit certificates
because the alleged time deposit of Santos 'does not appear in its books of account.
Whereupon, IRC and Santos, with leave of court, filed a third-party complaint against
Emerito B. Ramos, Jr., president of OBM and Rodolfo R. Sunico, treasurer of said
bank, who allegedly received the time deposits of Santos and issued the certificates
therefor.
Answering the third-party complaint, Ramos and Sunico alleged that IRC and Santos
have no cause of action against them because they received and signed the time
deposit certificates as officers of OBM that the time deposits are recorded in the
subsidiary ledgers of the bank and are 'civil liabilities of the defendant OBM
On November 18, 1970, OBM filed an amended or supplemental answer to the
complaint, acknowledging the certificates of time deposit that it issued to Santos, and
admitting its failure to pay the same due to its distressed financial situation. As
affirmative defenses, it alleged that by reason of its state of insolvency its operations
have been suspended by the Central Bank since August 1, 1968; that the time
deposits ceased to earn interest from that date; that it may not give preference to any
depositor or creditor; and that payment of the plaintiffs claim is prohibited.

On January 30, 1976, the lower court rendered judgment for the plaintiff, the
dispositive portion of which reads as foIlows
WHEREFORE, judgment is hereby rendered, ordering:
1. The defendant Integrated Realty Corporation and Raul L. Santos to pay the
plaintiff, jointly and solidarily, the total amount of P 700,000.00 plus interest at the
rate of 9% per annum from maturity dates of the two promissory notes on January 11
and February 6, 1968, respectively (Exhibits M and I), plus 1-1/ 2% additional interest
effective February 28, 1968 and additional penalty interest of 1% per annum of the Id
amount of P 700,000.00 from the time of maturity of Id loan up to the time the said
amount of P 700,000.00 is actually paid to the plaintiff;
2. The defendants topay l0% of the amount of P 700,000.00 as and for attorney's
fees;
3. The defendant Overseas Bank of Manila to pay cross-plaintiffs Integrated Realty
Corporation and Raul L. Santos whatever amounts the latter will pay to the plaintiff
with interest from date of payment;
4. The defendant Overseas Bank of Manila to pay cross-plaintiffs Integrated Realty
Corporation and Raul L. Santos the amount of P 10,000.00 as and for attorney's
fees;
5. The third-party complaint and cross-claim dismissed;
6. The defendant Overseas Bank of Manila to pay the costs.
SO ORDERED. 5
IRC Santos and OBM all appealed to the respondent Court of Appeals. As stated in limine, on March
16, 1982 respondent court promulgated its appealed decision, with a modification and the deletion of
that portion of the judgment of the trial court ordering OBM to pay IRC and Santos whatever
amounts they will pay to PNB with interest from the date of payment.
Therein defendants-appellants, through separate petitions, have brought the said decision to this
Court for review.
1. The first issue posed before us for resolution is whether the liability of IRC and
Santos with PNB should be deemed to have been paid by virtue of the deed of
assignment made by the former in favor of PNB, which reads:
KNOW ALL MEN BY THESE PRESENTS;
I, RAUL L. SANTOS, of legal age, Filipino, with residence and postal address at 661
Richmond St., Mandaluyong, Rizal for and in consideration of certain loans,
overdrafts and other credit accommodations granted or those that may hereafter be
granted to me/us by the PHILIPPINE NATIONAL BANK, have assigned, transferred
and conveyed and by these presents, do hereby assign, transfer and convey by way
of security unto said PHILIPPINE NATIONAL BANK its successors and assigns the
following Certificates of Time Deposit issued by the OVERSEAS BANK OF MANILA,

its CONFORMITY issued on August 11, 1967, hereto enclosed as Annex ' A', in favor
of RAUL L. SANTOS and/or NORA S. SANTOS, in the aggregate sum of SEVEN
HUNDRED THOUSAND PESOS ONLY (P 700,000.00), Philippine Currency, ....
xxx xxx xxx
It is also understood that the herein Assignor/s shall remain hable for any
outstanding balance of his/their obligation if the Bank is unable to actually receive or
collect the above assigned sums , monies or properties resulting from any
agreements, orders or decisions of the court or for any other cause whatsoever. 6
xxx xxx xxx
Respondent Court of Appeals did not consider the aforesaid assignment as payment,
thus:
The contention of IRC and Santos that the irrevocable assignment of the time deposit
certificates to PNB constituted payment' of their obligation to the latter is not well
taken.
Where a certificate of deposit in a bank, payable at a future day, was handed over by
a debtor to his creditor, it was not payment, unless there was an express agreement
on the part of the creditor to receive it as such, and the question whether there was
or was not such an agreement, was one of facts to be decided by the jury. (Downey
vs. Hicks, 55 U.S. [14 How.] 240 L. Ed. 404; See also Michie, Vol. 5-B Banks and
Banking, p. 200). 7
We uphold respondent court on this score.
In Lopez vs. Court of appeals, et al., 8 petitioner Benito Lopez obtained a loan for P 20,000.00 from the
Prudential Bank and Trust Company. On the same day, he executed a promissory note in favor of the
bank and, in addition, he executed a surety bond in which he, as principal, and Philippine American
General Insurance Co., Inc. (Philamgen), as surety, bound themselves jointly and severally in favor of the
bank for the payment of the loan. On the same occasion, Lopez also executed in favor of Philamgen an
indemnity agreement whereby he agreed to indemnify the company against any damages which the latter
may sustain in consequence of having become a surety upon the bond. At the same time, Lopez
executed a deed of assignment of his shares of stock in the Baguio Military Institute, Inc. in favor of
Philamgen. When Lopez' obligation matured without being settled, Philamgen caused the transfer of the
shares of stocks to its name in order that it may sell the same and apply the proceeds thereof in payment
of the loan to the bank. However, when no payment was still made by the principal debtor or surety, the
bank filed a complaint which compelled Philamgen to pay the bank. Thereafter, Philamgen filed an action
to recover the amount of the loan against Lopez. The trial court therein held that the obligation of Lopez
was deemed paid when his shares of stocks were transferred in the name of Philamgen. On appeal, the
Court of Appeals ruled that Lopez was still liable to Philamgen because, pending payment, Philamgen
was merely holding the stock as security for the payment of Lopez' obligation.

In upholding the finding therein of the Court of Appeals, We held that:

Notwithstanding the express terms of the 'Stock Assignment Separate from
Certificate', however, We hold and rule that the transaction should not be regarded
as an absolute conveyance in view of the circumstances obtaining at the time of the
execution thereof.

It should be remembered that on June 2, 1959, the day Lopez obtained a loan of P
20,000.00 from Prudential Bank, Lopez executed a promissory note for P 20,000.00,
plus interest at the rate of ten (10%) per cent per annum, in favor of said Bank. He
likewise posted a surety bond to secure his full and faithful performance of his
obligation under the promissory note with Philamgen as his surety. In return for the
undertaking of Philamgen under the surety bond, Lopez executed on the same day
not only an indemnity agreement but also a stock assignment.
The indemnity agreement and stock assignment must be considered together as
related transactions because in order to judge the intention of the contracting parties,
their contemporaneous and subsequent acts shall be principally considered. (Article
1371, New Civil Code). Thus, considering that the indemnity agreement connotes a
continuing obligation of Lopez towards Philamgen while the stock assignment
indicates a complete discharge of the same obligation, the existence of the indemnity
agreement whereby Lopez had to pay a premium of P l,000.00 for a period of one
year and agreed at all times to indemnify Philamgen of any and all kinds of losses
which the latter might sustain by reason of it becoming a surety, is inconsistent with
the theory of an absolute sale for and in consideration of the same undertaking of
Philamgen. There would have been no necessity for the execution of the indemnity
agreement if the stock assignment was really intended as an absolute conveyance.
...
Along the same vein, in the case at bar it would not have been necessary on the part of IRC and
Santos to execute promissory notes in favor of PNB if the assignment of the time deposits of Santos
was really intended as an absolute conveyance.
There are cogent reasons to conclude that the parties intended said deed of assignment to
complement the promissory notes. In declaring that the deed of assignment did not operate as
payment of the loan so as to extinguish the obligations of IRC and Santos with PNB, the trial court
advanced several valid bases, to wit:
a. It is clear from the Deed of Assignment that it was only by way of security;
xxx xxx xxx
b. The promissory notes (Exhibits H and I) were executed on August 16, 1967. If
defendants IRC and Raul L. Santos, upon executing the Deed of Assignment on
August 11, 1967 had already paid their loan of P 700,000.00 or otherwise
extinguished the same, why were the promissory notes made on August 16, 1967
still executed by IRC and signed by Raul L. Santos as President?
c. In the application for a credit line (Exhibit A),the time deposits were offered as
collateral. 9
For all intents and purposes, the deed of assignment in this case is actually a pledge. Adverting
again to the Court's pronouncements in Lopez, supra, we quote therefrom:
The character 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;
but if there was some other intention, it is not a pledge. However, even though a
transfer, if regarded by itself, appears to have been absolute, its object and character

might still be qualified and explained by a contemporaneous writing declaring it to

have been a deposit of the property as collateral security. It has been said that a
transfer of property by the debtor to a creditor, even if sufficient on its face to make
an absolute conveyance, should be treated as a pledge if the debt continues in
existence and is not discharged by the transfer, and that accordingly, the use of the
terms ordinarily importing conveyance, of absolute ownership will not be given that
effect in such a transaction if they are also commonly used in pledges and
mortgages and therefore do not unqualifiedly indicate a transfer of absolute
ownership, in the absence of clear and unambiguous language or other
circumstances excluding an intent to pledge. 10
The facts and circumstances leading to the execution of the deed of assignment, as found by the
court a quo and the respondent court, yield said conclusion that it is in fact a pledge. The deed of
assignment has satisfied the requirements of a contract of pledge (1) that it be constituted to secure
the fulfillment of a principal obligation; (2) that the pledgor be the absolute owner of the thing
pledged; (3) that the persons constituting the pledge have the free disposal of their property, and in
the absence thereof, that they be legally authorized for the purpose. 11 The further requirement that
the thing pledged be placed in the possession of the creditor, or of a third person by common
agreement 12 was complied with by the execution of the deed of assignment in favor of PNB.

It must also be emphasized that Santos, as assignor, made an express undertaking that he would
remain liable for any outstanding balance of his obligation should PNB be unable to actually receive
or collect the assigned sums resulting from any agreements, orders or decisions of the court or for
any other cause whatsoever. The term "for any cause whatsoever" is broad enough to include the
situation involved in the present case.
Under the foregoing circumstances and considerations, the unavoidable conclusion is that IRC and
Santos should be held liable to PNB for the amount of the loan with the corresponding interest
thereon.
2. We find nothing illegal in the interest of one and one-half percent (1-1/2%)
imposed by PNB pursuant to the resolution of its Board which presumably was done
in accordance with ordinary banking procedures. Not only did IRC and Santos fail to
overcome the presumption of regularity of business transactions, but they are
likewise estopped from questioning the validity thereof for the first time in this
petition. There is nothing in the records to show that they raised this issue during the
trial by presenting countervailing evidence. What was merely touched upon during
the proceedings in the court below was the alleged lack of notice to them of the
board resolution, but not the veracity or validity thereof.
3. On the issue of whether OBM should be held liable for interests on the time
deposits of IRC and Santos from the time it ceased operations until it resumed its
business, the answer is in the negative.
We have held in The Overseas Bank of Manila vs. Court of Appeals and Tony D. Tapia, 13 that:
It is a matter of common knowledge, which We take judicial notice of, that what
enables a bank to pay stipulated interest on money deposited with it is that thru the
other aspects of its operation it is able to generate funds to cover the payment of
such interest. Unless a bank can lend money, engage in international transactions,
acquire foreclosed mortgaged properties or their proceeds and generally engage in
other banking and financing activities from which it can derive income, it is

inconceivable how it can carry on as a depository obligated to pay stipulated interest.

Conventional wisdom dictated; this inexorable fair and just conclusion. And it can be
said that all who deposit money in banks are aware of such a simple economic
proposition petition. Consequently, it should be deemed read into every contract of
deposit with a bank that the obligation to pay interest on the deposit ceases the
moment the operation of the bank is completely suspended by the duly constituted
authority, the Central Bank.
We consider it of trivial consequence that the stoppage of the bank's operation by the
Central Bank has been subsequently declared illegal by the Supreme Court, for
before the Court's order, the bank had no alternative under the law than to obey the
orders of the Central Bank. Whatever be the juridical significance of the subsequent
action of the Supreme Court, the stubborn fact remained that the petitioner was
totally crippled from then on from earning the income needed to meet its obligations
to its depositors. If such a situation cannot, strictly speaking, be legally denominated
as 'force majeure', as maintained by private respondent, We hold it is a matter of
simple equity that it be treated as such.
The Court further adjured that:
Parenthetically, We may add for the guidance of those who might be concerned, and
so that unnecessary litigations be avoided from further clogging the dockets of the
courts, that in the light of the considerations expounded in the above opinion, the
same formula that exempts petitioner from the payment of interest to its depositors
during the whole period of factual stoppage of its operations by orders of the Central
Bank, modified in effect by the decision as well as the approval of a formula of
rehabilitation by this Court, should be, as a matter of consistency, applicable or
followed in respect to all other obligations of petitioner which could not be paid during
the period of its actual complete closure.
We cannot accept the holding of the respondent Court of Appeals that the above-cited decisions
apply only where the bank is in a state of liquidation. In the very case aforecited, this issue was
likewise raised and We resolved:
Thus, Our task is narrowed down to the resolution of the legal problem of whether or
not, for purposes of the payment of the interest here in question, stoppage of the
operations of a bank by a legal order of liquidation may be equated with actual
cessation of the bank's operation, not different, factually speaking, in its effects, from
legal liquidation the factual cessation having been ordered by the Central Bank.
In the case of Chinese Grocer's Association, et al. vs. American Apothecaries, 65
Phil. 395, this Court held:
As to the second assignment of error, this Court, in G.R. No. 43682, In re Liquidation
of the Mercantile Bank of China, Tan Tiong Tick, claimant and appellant vs.
American Apothecaries, C., et al., claimants and appellees, through Justice Imperial,
held the following:
4. The court held that the appellant is not entitled to charge interest on the amounts
of his claims, and this is the object of the second assignment of error, Upon this point
a distinction must be made between the interest which the deposits should earn from
their existence until the bank ceased to operate, and that which they may earn from

the time the bank's operations were stopped until the date of payment of the
deposits. As to the first-class, we hold that it should be paid because such interest
has been earned in the ordinary course of the bank's businesses and before the
latter has been declared in a state of liquidation. Moreover, the bank being
authorized by law to make use of the deposits with the limitation stated, to invest the
same in its business and other operations, it may be presumed that it bound itself to
pay interest to the depositors as in fact it paid interest prior to the dates of the Id
claims. As to the interest which may be charged from the date the bank ceased to do
business because it was declared in a state of liquidation, we hold that the said
interest should not be paid.
The Court of Appeals considered this ruling inapplicable to the instant case, precisely
because, as contended by private respondent, the said Apothecaries case had in fact
in contemplation a valid order of liquidation of the bank concerned, whereas here, the
order of the Central Bank of August 13, 1968 completely forbidding herein petitioner
to do business preparatory to its liquidation was first restrained and then nullified by
this Supreme Court. In other words, as far as private respondent is concerned, it is
the legal reason for cessation of operations, not the actual cessation thereof, that
matters and is decisive insofar as his right to the continued payment of the interest
on his deposit during the period of cessation is concerned.
In the light of the peculiar circumstances of this particular case, We disagree. It is
Our considered view, after mature deliberation, that it is utterly unfair to award private
respondent his prayer for payment of interest on his deposit during the period that
petitioner bank was not allowed by the Central Bank to operate.
4. Lastly, IRC and Santos claim that OBM should reimburse them for whatever
amounts they may be adjudged to pay PNB by way of compensation for damages
incurred, pursuant to Articles 1170 and 2201 of the Civil Code.
It appears that as early as April, 1967, the financial situation of OBM had already caused mounting
concern in the Central Bank. 14 On December 5, 1967, new directors and officers drafted from the
Central Bank (CB) itself, the Philippine National Bank (PNB) and the Development Bank of the Philippines
(DBP) were elected and installed and they took over the management and control of the Overseas
Bank. 15 However, it was only on July 31, 1968 when OBM was excluded from clearing with the CB under
Monetary Board Resolution No. 1263. Subsequently, on August 2, 1968, pursuant to Resolution No. 1290
of the CB OBM's operations were suspended. 16 These CB resolutions were eventually annulled and set
aside by this Court on October 4, 1971 in the decision rendered in the herein cited case of Ramos.

Thus, when PNB demanded from OBM payment of the amounts due on the two time deposits which
matured on January 11, 1968 and February 6, 1968, respectively, there was as yet no obstacle to
the faithful compliance by OBM of its liabilities thereunder. Consequently, for having incurred in
delay in the performance of its obligation, OBM should be held liable for damages. 17 When
respondent Santos invested his money in time deposits with OBM they entered into a contract of simple
loan or mutuum, 18 not a contract of deposit.

While it is true that under Article 1956 of the Civil Code no interest shall be due unless it has been
expressly stipulated in writing, this applies only to interest for the use of money. It does not
comprehend interest paid as damages. 19 OBM contends that it had agreed to pay interest only up to
the dates of maturity of the certificates of time deposit and that respondent Santos is not entitled to
interest after the maturity dates had expired, unless the contracts are renewed. This is true with respect to
the stipulated interest, but the obligations consisting as they did in the payment of money, under Article
1108 of the Civil Code he has the right to recover damages resulting from the default of OBM and the

measure of such damages is interest at the legal rate of six percent (6%) per annum on the amounts due
and unpaid at the expiration of the periods respectively provided in the contracts. In fine, OBM is being
required to pay such interest, not as interest income stipulated in the certificates of time deposit, but as
damages for failure and delay in the payment of its obligations which thereby compelled IRC and Santos
to resort to the courts.

The applicable rule is that legal interest, in the nature of damages for non-compliance with an
obligation to pay a sum of money, is recoverable from the date judicial or extra-judicial demand is
made, 20 Which latter mode of demand was made by PNB, after the maturity of the certificates of time
deposit, on March 1, 1968. 21 The measure of such damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon in the certificates of deposit 22 Which is six and onehalf
percent (6-1/2%). Such interest due or accrued shall further earn legal interest from the time of judicial
demand. 23

We reject the proposition of IRC and Santos that OBM should reimburse them the entire amount
they may be adjudged to pay PNB. It must be noted that their liability to pay the various interests of
nine percent (9%) on the principal obligation, one and one-half percent (1-1/2%) additional interest
and one percent (1%) penalty interest is an offshoot of their failure to pay under the terms of the two
promissory notes executed in favor of PNB. OBM was never a party to Id promissory notes. There is,
therefore, no privity of contract between OBM and PNB which will justify the imposition of the
aforesaid interests upon OBM whose liability should be strictly confined to and within the provisions
of the certificates of time deposit involved in this case. In fact, as noted by respondent court, when
OBM assigned as error that portion of the judgment of the court a quo requiring OBM to make the
disputed reimbursement, IRC and Santos did not dispute that objection of OBM Besides, IRC and
Santos are not without fault. They likewise acted in bad faith when they refuse to comply with their
obligations under the promissory notes, thus incurring liability for all damages reasonably attributable
to the non-payment of said obligations. 24
WHEREFORE, judgment is hereby rendered, ordering:
1. Integrated Realty Corporation and Raul L. Santos to pay Philippine National Bank,
jointly and severally, the total amount of seven hundred thousand pesos (P
700,000.00), with interest thereon at the rate of nine percent (9%) per annum from
the maturity dates of the two promissory notes on January 11 and February 6, 1968,
respectively, plus one and one-half percent (1-1/2%) additional interest per annum
effective February 28, 1968 and additional penalty interest of one percent (1%) per
annum of the said amount of seven hundred thousand pesos (P 700,000.00) from
the time of maturity of said loan up to the time the said amount of seven hundred
thousand pesos (P 700,000.00) is fully paid to Philippine National Bank.
2. Integrated Realty Corporation and Raul L. Santos to pay solidarily Philippine
National Bank ten percent (10%) of the amount of seven hundred thousand pesos (P
700,000.00) as and for attorney's fees.
3. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos
the sum of seven hundred thousand pesos (P 700,000.00) due under Time Deposit
Certificates Nos. 2308 and 2367, with interest thereon of six and one-half percent (61/2%) per annum from their dates of issue on January 11, 1967 and February 6,
1967, respectively, until the same are fully paid, except that no interest shall be paid
during the entire period of actual cessation of operations by Overseas Bank of
Manila;

4. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos
six and one-half per cent (6-1/2%) interest in the concept of damages on the principal
amounts of said certificates of time deposit from the date of extrajudicial demand by
PNB on March 1, 1968, plus legal interest of six percent (6%) on said interest from
April 6, 1968, until fifth payment thereof, except during the entire period of actual
cessation of operations of said bank.
5. Overseas Bank of Manila to pay Integrated Realty Corporation and Raul L. Santos
ten thousand pesos (P l0,000.00) as and for attorney's fees.
SO ORDERED.
Melencio-Herrera, (Chairperson), Paras, Padilla and Sarmiento, JJ., concur.

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

MAKATI LEASING and FINANCE CORPORATION, petitioner,
vs.
WEAREVER TEXTILE MILLS, INC., and HONORABLE COURT OF APPEALS, respondents.
Loreto C. Baduan for petitioner.
Ramon D. Bagatsing & Assoc. (collaborating counsel) for petitioner.
Jose V. Mancella for respondent.

DE CASTRO, J.:
Petition for review on certiorari of the decision of the Court of Appeals (now Intermediate Appellate
Court) promulgated on August 27, 1981 in CA-G.R. No. SP-12731, setting aside certain Orders later
specified herein, of Judge Ricardo J. Francisco, as Presiding Judge of the Court of First instance of
Rizal Branch VI, issued in Civil Case No. 36040, as wen as the resolution dated September 22, 1981
of the said appellate court, denying petitioner's motion for reconsideration.
It appears that in order to obtain financial accommodations from herein petitioner Makati Leasing
and Finance Corporation, the private respondent Wearever Textile Mills, Inc., discounted and
assigned several receivables with the former under a Receivable Purchase Agreement. To secure
the collection of the receivables assigned, private respondent executed a Chattel Mortgage over
certain raw materials inventory as well as a machinery described as an Artos Aero Dryer Stentering
Range.
Upon private respondent's default, petitioner filed a petition for extrajudicial foreclosure of the
properties mortgage to it. However, the Deputy Sheriff assigned to implement the foreclosure failed
to gain entry into private respondent's premises and was not able to effect the seizure of the
aforedescribed machinery. Petitioner thereafter filed a complaint for judicial foreclosure with the
Court of First Instance of Rizal, Branch VI, docketed as Civil Case No. 36040, the case before the
lower court.
Acting on petitioner's application for replevin, the lower court issued a writ of seizure, the
enforcement of which was however subsequently restrained upon private respondent's filing of a
motion for reconsideration. After several incidents, the lower court finally issued on February 11,
1981, an order lifting the restraining order for the enforcement of the writ of seizure and an order to
break open the premises of private respondent to enforce said writ. The lower court reaffirmed its
stand upon private respondent's filing of a further motion for reconsideration.
On July 13, 1981, the sheriff enforcing the seizure order, repaired to the premises of private
respondent and removed the main drive motor of the subject machinery.
The Court of Appeals, in certiorari and prohibition proceedings subsequently filed by herein private
respondent, set aside the Orders of the lower court and ordered the return of the drive motor seized
by the sheriff pursuant to said Orders, after ruling that the machinery in suit cannot be the subject of
replevin, much less of a chattel mortgage, because it is a real property pursuant to Article 415 of the
new Civil Code, the same being attached to the ground by means of bolts and the only way to

remove it from respondent's plant would be to drill out or destroy the concrete floor, the reason why
all that the sheriff could do to enfore the writ was to take the main drive motor of said machinery. The
appellate court rejected petitioner's argument that private respondent is estopped from claiming that
the machine is real property by constituting a chattel mortgage thereon.
A motion for reconsideration of this decision of the Court of Appeals having been denied, petitioner
has brought the case to this Court for review by writ of certiorari. It is contended by private
respondent, however, that the instant petition was rendered moot and academic by petitioner's act of
returning the subject motor drive of respondent's machinery after the Court of Appeals' decision was
promulgated.
The contention of private respondent is without merit. When petitioner returned the subject motor
drive, it made itself unequivocably clear that said action was without prejudice to a motion for
reconsideration of the Court of Appeals decision, as shown by the receipt duly signed by
respondent's representative. 1 Considering that petitioner has reserved its right to question the propriety
of the Court of Appeals' decision, the contention of private respondent that this petition has been mooted
by such return may not be sustained.

The next and the more crucial question to be resolved in this Petition is whether the machinery in
suit is real or personal property from the point of view of the parties, with petitioner arguing that it is a
personality, while the respondent claiming the contrary, and was sustained by the appellate court,
which accordingly held that the chattel mortgage constituted thereon is null and void, as contended
by said respondent.
A similar, if not Identical issue was raised in Tumalad v. Vicencio, 41 SCRA 143 where this Court,
speaking through Justice J.B.L. Reyes, ruled:
Although there is no specific statement referring to the subject house as personal
property, yet by ceding, selling or transferring a property by way of chattel mortgage
defendants-appellants could only have meant to convey the house as chattel, or at
least, intended to treat the same as such, so that they should not now be allowed to
make an inconsistent stand by claiming otherwise. Moreover, the subject house
stood on a rented lot to which defendants-appellants merely had a temporary right as
lessee, and although this can not in itself alone determine the status of the property,
it does so when combined with other factors to sustain the interpretation that the
parties, particularly the mortgagors, intended to treat the house as personality.
Finally, unlike in the Iya cases, Lopez vs. Orosa, Jr. & Plaza Theatre, Inc. & Leung
Yee vs. F.L. Strong Machinery & Williamson, wherein third persons assailed the
validity of the chattel mortgage, it is the defendants-appellants themselves, as
debtors-mortgagors, who are attacking the validity of the chattel mortgage in this
case. The doctrine of estoppel therefore applies to the herein defendants-appellants,
having treated the subject house as personality.
Examining the records of the instant case, We find no logical justification to exclude the rule out, as
the appellate court did, the present case from the application of the abovequoted pronouncement. If
a house of strong materials, like what was involved in the above Tumalad case, may be considered
as personal property for purposes of executing a chattel mortgage thereon as long as the parties to
the contract so agree and no innocent third party will be prejudiced thereby, there is absolutely no
reason why a machinery, which is movable in its nature and becomes immobilized only by
destination or purpose, may not be likewise treated as such. This is really because one who has so
agreed is estopped from denying the existence of the chattel mortgage.

In rejecting petitioner's assertion on the applicability of the Tumalad doctrine, the Court of Appeals
lays stress on the fact that the house involved therein was built on a land that did not belong to the
owner of such house. But the law makes no distinction with respect to the ownership of the land on
which the house is built and We should not lay down distinctions not contemplated by law.
It must be pointed out that the characterization of the subject machinery as chattel by the private
respondent is indicative of intention and impresses upon the property the character determined by
the parties. As stated inStandard Oil Co. of New York v. Jaramillo, 44 Phil. 630, it is undeniable that
the parties to a contract may by agreement treat as personal property that which by nature would be
real property, as long as no interest of third parties would be prejudiced thereby.
Private respondent contends that estoppel cannot apply against it because it had never represented
nor agreed that the machinery in suit be considered as personal property but was merely required
and dictated on by herein petitioner to sign a printed form of chattel mortgage which was in a blank
form at the time of signing. This contention lacks persuasiveness. As aptly pointed out by petitioner
and not denied by the respondent, the status of the subject machinery as movable or immovable
was never placed in issue before the lower court and the Court of Appeals except in a supplemental
memorandum in support of the petition filed in the appellate court. Moreover, even granting that the
charge is true, such fact alone does not render a contract void ab initio, but can only be a ground for
rendering said contract voidable, or annullable pursuant to Article 1390 of the new Civil Code, by a
proper action in court. There is nothing on record to show that the mortgage has been annulled.
Neither is it disclosed that steps were taken to nullify the same. On the other hand, as pointed out by
petitioner and again not refuted by respondent, the latter has indubitably benefited from said
contract. Equity dictates that one should not benefit at the expense of another. Private respondent
could not now therefore, be allowed to impugn the efficacy of the chattel mortgage after it has
benefited therefrom,
From what has been said above, the error of the appellate court in ruling that the questioned
machinery is real, not personal property, becomes very apparent. Moreover, the case of Machinery
and Engineering Supplies, Inc. v. CA, 96 Phil. 70, heavily relied upon by said court is not applicable
to the case at bar, the nature of the machinery and equipment involved therein as real properties
never having been disputed nor in issue, and they were not the subject of a Chattel Mortgage.
Undoubtedly, the Tumalad case bears more nearly perfect parity with the instant case to be the
more controlling jurisprudential authority.
WHEREFORE, the questioned decision and resolution of the Court of Appeals are hereby reversed
and set aside, and the Orders of the lower court are hereby reinstated, with costs against the private
respondent.
SO ORDERED.
Makasiar (Chairman), Aquino, Concepcion Jr., Guerrero and Escolin JJ., concur.
Abad Santos, J., concurs in the result.

G.R. No. L-55739 June 22, 1984

CARLO LEZAMA BUNDALIAN and JOSE R. BUNDALIAN, petitioners,
vs.
THE HON. COURT OF APPEALS, JUANITO LITTAWA and EDNA CAMCAM, respondents.
Francisco A. Lava, Jr. for petitioners.
Benjamin B. Bernardino for private respondents.

GUTIERREZ, JR., J.:

This is a petition for review of the decision of the Court of Appeals, now Intermediate Appellate
Court, affirming a judgment of the then Court of First Instance of Rizal dismissing the petition for
declaratory relief and/or reformation of instrument filed by the petitioners against the respondents
and ordering the petitioners to pay jointly and severally the amounts of P200,000.00 for respondent
Edna Camcam and P50,000.00 for respondent Littawa, as moral damages; the amount of
P50,000.00 for both respondents as exemplary damages; the amount of P30,000.00 for and as
attorney's fees, and to pay the costs of the suit.
On July 1, 1975, the petitioners purchased from the Estate of the Deceased Agapita Sarao Vda. de
Virata three (3) contiguous parcels of land located at San Juan, Rizal, containing an aggregate area
of 3,328 square meters, more or less, for and in consideration of the amount of P499,200.00.
The following day, July 2, 1975, the petitioners, in a contract denominated as Deed of Sale with
Right to Repurchase, sold to the private respondents the same three contiguous parcels of land for
the same amount of P499,200.00 under specified terms and conditions. One of the terms and
conditions was that the repurchase price would escalate month after month, depending on when
repurchase would be effected. The price would be P532,480.66 computed at P160.00 per square
meter after the first month; P565,760.00 computed at P170.00 per square meter after the second
month; P599,040.00 computed at P180.00 per square meter after the third month; and P632,320.00
computed at P190.00 per square meter after the fourth month, from and after the date of the
instrument. It was also stipulated in the same contract that the vendor shall have the right to
possess, use, and build on, the property during the period pending redemption.
On August 26, 1976, the petitioners filed a petition for declaratory relief and/or reformation of
instrument before the Court of First Instance of Rizal at Pasig, Metro Manila to declare the Deed of
Sale with Right to Repurchase an equitable mortgage and the entire portion of the same deed
referring to the accelerating repurchase price null and void for being usurious, and to reduce the loan
obligation to P474,200.00, contending that the amount actually loaned was only P474,200.00 and
the petitioners put up P25,000.00 of the wife's money when the purchase from the estate of Mrs.
Virata was consummated.
On August 27, 1976, the private respondents, in turn, filed a petition for the consolidation of
ownership on the ground that "more than a year has elapsed since the execution of the Deed of Sale
with Right to Repurchase by the vendor on July 2, 1975." The private respondents contended that
"notwithstanding which the vendor has failed to avail of its rights under the provisions of Article 1607
in relation to Article 1616 of the New Civil Code, the vendor has lost all his rights to avail himself of
the right to consolidate ownership of the property subject of the Deed of Sale." To this petition for
consolidation of ownership, the petitioners filed their opposition upon the following grounds: (a) there

is a pending suit between the same parties involving the same cause and subject matter; (b)
consolidation will be improper considering that the basic document upon which it is being sought is
in fact and in law only an equitable mortgage; and (c) consolidation cannot be effected thru the
instant petition. Accordingly, the Court of First Instance of Rizal ordered the transfer of the petition
for consolidation of ownership to Branch XXIV of the same Court where the petition for declaratory
relief and/or reformation of instrument was pending in order that the two cases may be considered
together.
A supplemental petition was subsequently filed by the petitioners alleging that the private
respondents' petition for consolidation of ownership was made in order to frustrate and render
nugatory whatever orders or judgment may be issued by the trial court in the petition for declaration
relief/or reformation of instrument.
After the trial and presentation of the parties' respective memoranda the trial court rendered the
decision in favor of the private respondents.
The petitioners appealed to the Court of Appeals. The appellate court affirmed in toto the decision of
the trial court. Two motions for reconsideration having been denied, the petitioners filed the present
petition based on the following grounds:
A.
RESPONDENT COURT OF APPEALS ERRED GRAVELY, TO THE EXTENT OF
GRAVE ABUSE OF DISCRETION, AND IN VIOLATION OF PETITIONERS' RIGHT
TO DUE PROCESS OF LAW AT APPELLATE LEVEL, WHEN IT AFFIRMED THE
APPEALED DECISION WITHOUT ANY DISCUSSION OF THE QUESTIONS
RAISED IN THE APPEAL AND BY SIMPLY ADOPTING THE POSITION OF THE
TRIAL WHICH IS PRECISELY QUESTIONED IN THE APPEAL.
B.
RESPONDENT COURT OF APPEAL ERRED GRAVELY TO THE EXTENT OF
GRAVE ABUSE OF DISCRETION IN ADOPTING TOTALLY AND UNCRITICALLY
THE GROSSLY ERRONEOUS REASON AND POSITION OF THE TRIAL COURT.
C.
RESPONDENT COURT OF APPEALS ERRED GRAVELY TO THE EXTENT OF
GRAVE ABUSE OF DISCRETION, IN UNCERMONIOUSLY, DENYING
PETITIONERS' FIRST MOTION FOR RECONSIDERATION, MOTION FOR ORAL
ARGUMENT, MOTION TO INVITE AMICUS CURIAE, AND SECOND MOTION FOR
RECONSIDERATION.
E.
RESPONDENT COURT OF APPEALS ERRED GRAVELY TO THE EXTENT OF
GRVE ABUSE OF DISCREATION, IN NOT REVERSING THE APPEALED
JUDGMENT AND GRANTING THE PRAYERS OF PETITIONERS-APPELLANTS,
FOREMOST OF WHICH IS TO DECLARE THE DEED OF SALE WITH RIGHT TO
REPURCHASE TO BE AN EQUITABLE MORTGAGE.

Tell issue is this case is whether or not the deed of sale with right to repurchase should be declared
as an equitable mortgage.
We find meritorious the petitioners' contention that under Article 1602 of the Civil Code the deed of
sale with right to repurchase should be presumed to be an equitable mortgage due to the following
reasons.
(1) The contracts involving the subject properties came one after another in the
space of two (2) days. The Deed of Absolute Sale between petitioner Jose R.
Bundalian as vendee and Romeo S. Geluz, in his capacity as Administratorf of the
Estate of the deceased Agapita Sarao Vda. de Virata, as vendor, was executed on
July 1, 1975 (pp. 19-26, Annex "A"). The purported Deed of Sale with Right to
Repurchase between petitioner, Jose R. Bundalian as vendor and respondents
Juanito Littawa and Edna Camcam as vendees was executed on July 2, 1975 (pp.
26- 32, Annex "A"). This already indicates, at a very early stage, that the two
transactions must be intimately related.
lwphl@it

(2) Such intimate relation between the aforementioned Deed of Absolute Sale and
Deed of Sale with Right to Repurchase is already clear in the statement in the latter
instrument that the subject property had just been purchased by Jose R. Bundalian
from the estate of the deceased Agapita Sarao Vda. de Virata, 'with funds loaned to
him by the herein VENDEES' the latter being no other than respondents Littawa and
Camcam (p. 28, Annex "A"). Patently, petitioner Jose R. Bundalian was funded by
private respondents to enable him to purchase the property from the said estate.
(3) Having just purchased the property from the estate by way of Deed of Absolute
Sale on July 1, 1975, for which he had just paid P499,200.00 as purchase price, it
would have been utterly senseless for petitioner Jose R. Bundalian to sell the same
property to private respondents the very next day, July 2, 1975, with or without the
right of repurchase. No other conclusion is possible except that the Deed of Sale with
Right to Repurchase is precisely the security the equitable mortgage to petitioner
Jose R. Bundalian to enable the latter to purchase the property from the
aforementioned estate.
(4) It would have been more senseless for petitioner Jose R. Bundalian to sell the
property to private respondents at the same price of P499,200.00 he had paid the
estate of the deceased Agapita Sarao Vda. de Virata, without profit and at a sure
loss. By the terms of the Deed of Sale with Right to Repurchase he would have to
repurchase the property at a continually increasing price, from Pl 50.00 per square
meter to P190.00 per square meter, that is, up to P133,120.00 over and above the
original price of P499,200.00, in only four (4) months. Again, no other conclusion is
possible but that the contract is an equitable mortgage, not a sale.
(5) It is provided in the Deed of Sale with Right to Repurchase that 'It is agreed that
the vendor (Jose R. Bundalian) shall have the right to possess, use, and build on, the
property during the period of redemption' (p. 30, Annex "A"). It has been held that
there is a 'loan with security' rather than a pacto de retro sale where by agreement
the vendor was to remain in possession of the lands (Escoto vs. Arcilla, 89 Phil. 199,
204). Where there was an acknowledgment of the vendor's right to retain possession
of the property, as in the case at bar, the contract was one of "loan guaranteed by a
mortgage" rather than a conditional sale (Macoy vs. Trinidad, 95 Phil. 192, 202).
Indeed, there can be no question that petitioner Jose R. Bundalian remained legally

in possession of the subject property. Again, the conclusion is ineluctable that the
Deed of Sale with Right to Repurchase was executed as security for the loan
extended by private respondents to petitioner Jose R. Bundalian, i.e., as equitable
mortgage.
(6) The increase per month in the alleged redemption price is very compatible with
the Idea that the transaction was really intended by the parties to be a mortgage. It
bears emphasis, at this juncture, that the supposed repurchase price is in the same
amount as the original "price" of P499,200.00 should "repurchase" be effected during
the first month from and after the date of the instrument; P532,480.00 computed at
P160.00 per square meter should "repurchase" be effected after the first month;
P565,760.00 computed at P170.00 per square meter should "repurchase" be after
the second month; P599,040.00 computed at P180.00 per square meter should
"repurchase" be after the third month; or P632,320.00 computed at P190.00 per
square meter should "repurchase" be effected even "after the fourth month" (pp. 2930, Annex "A"). The monthly increases in the alleged "redemption price"clearly
represent nothing but interest. It is well-settled that provision for interest payments is
a clear indication that the supposed sale is actually an equitable mortgage (Macoy
vs. Trinidad, 95 Phil. 192, 202; Escoto vs. Arcilla, 89 Phil. 199, 204). This would fall
under the legal situation "where it may be fairly inferred that the real intention of the
parties is that the transaction shall secure the payment of a debt or the performance
of any other obligation" (No. 6), Art. 1062, Civil Code). To make matters worse, the
monthly increase in the supposed "redemption price", meaning the interest of course,
are clearly usurious, precisely one of the evils sought to be negated by the provisions
of Articles 1602, 1603 and 1604 of the Civil Code, as noted previously herein.
(7) While the Deed of Sale with Right to Repurchase supposedly provided for a
"redemption" period of "four (4) months from and after the date of this instrument" (p.
29, Annex "A"), it later necessarily provided for a built-in extension of the period of
'redemption' by providing for payment of the amount of P632,320.00 computed at
P190.00 per square meter should "repurchase" be effected "after the fourth
month" (p. 30, Annex "A"). In other words, it was implicitly agreed that the period of
'repurchase' was not limited to 4 months from and after the date of execution of the
instrument, in as much as said "repurchase" could be effected even "after the fourth
month". It is well settled that extension of the period of "redemption" is indicative
of equitable mortgage (Nos.(3) and (6), Art. 1602, Civil Code; Reyes vs. De Leon, 20
SCRA 369, 370).
lwphl@it

(8) It may be argued, as private respondents have argued, that normally a loan does
not exceed 60% of the price of the land given as security, so that private respondents
could not have loaned P499,200.00 on the land the value of which was claimed to be
also P499,200.00. However, such reasoning is clearly unsound. It loses sight of the
fact that private respondents precisely funded or financed petitioner Jose R.
Bundalian's acquisition of the property from the estate of the deceased Agapita
Sarao Vda. de Virata. In other words, petitioner Jose R. Bundalian could not have
acquired the land to serve as security for the repayment of the loan unless private
respondents had extended the loan in the first place. Surely, private respondents
stood to benefit enormously from such financing transaction in view of the patently
usurious monthly interests transparently disguised as the accelerating or increasing
monthly 'repurchase' price. At any rate, in the event that petitioner Jose R. Bundalian
ultimately failed to pay the loan, the rapid increase in the price of the land, which was
estimated to be worth at least P632,320.00 after 4 months (from the initial

P499,200.00), practically guaranteed a very good return on the money investment of

private respondents as money- lenders.
(9) It cannot be questioned that petitioner Jose R. Bundalian paid taxes on the land,
even after the supposed 4 month period of "redemption". Payment of taxes after
expiration of the supposed "redemption" period has been considered as indicative of
equitable mortgage (Escoto vs. Arcilla,supra).
(10) It is an admitted fact that private respondents took some time before filing their
petition for consolidation of ownership. Private respondents admitted in said petition
that "more than a year has elapsed since the execution of the Deed of Sale with
Right to Repurchase" (p. 34, par. 3, Annex "A"). Reckoning 4 months from July 2,
1975, it would appear that the "repurchase" period expired supposedly on November
2, 1975. As private respondents filed their petition for consolidation on August 27,
1976, it is clear that they delayed filing said petition by more than 9 months. A similar
delay in the filing of the supposed "vendee's" petition for consolidation was
considered as indicative of equitable mortgage (Reyes vs. de Leon, 20 SCRA 369,
378).
(11) If the Deed of Sale with Right to Repurchase would not be considered as an
equitable mortgage, it would result that there was actually no security for the loan of
P499,200.00 extended by private respondents to petitioners Jose R.
Bundalian, which would make no sense at all considering the enormity of the loan.
There was, to be sure, a security for said loan, none other than the equitable
mortgage tainted with usury and disguised as the Deed of Sale with Right to
Repurchase.
The private respondents argued that the petitioners' contention is true only in cases where the
contract or instrument is not reflective of the true intentions of the contracting parties as would
warrant reformation of the same. They stated that if the intention of the parties is to execute a deed
of sale with pacto de retro, the contract should be held as such. The petitioners were allegedly fully
aware that the deed of sale with pacto de retro is what it purports to be and nothing else.
Furthermore, the petitioners waited for the period of redemption to expire before availing of the relief
granted by the Civil Code of reformation of contracts.
We find the stand of the private respondents without merit. The intent of the parties to circumvent the
provision discouraging pacto de retro transactions is very apparent from the records. Article 1602 of
the Civil Code states:
Article 1602. The contract shall be presumed to be an equitable mortgage, in any of
the following cases:
(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession as lessee or otherwise;
(3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;
(6) In any other eases where it may be fairly inferred that the real intention of the
parties is that the transaction shall secure the payment of a debt or performance of
any other obligation.
In any of the foregoing cases, any money, fruits, or other benefit to be received by
the vendee as rent or otherwise shall be considered as interest which shall be
subject to the usury laws.
Significantly, a portion of the document in question reads:
(The vendor) having just purchased the same from the Intestate estate of the
deceased Agapita Sarao Vda. de Virata (Special Proceedings No. B-710 of the Court
of First Instance of Cavite), with funds loaned to him by the herein VENDEES.
(Emphasis supplied).
This statement appearing in the supposed pacto de retro sale confirms the real intention of the
parties to secure the payment of the loan acquired by the petitioners from the private respondents.
The sale with the right to repurchase of the three parcels of land was for P499,200.00, which was
exactly the same amount paid to the estate of the deceased Agapita Sarao Vda. de Virata- After
having purchased the three lots for P499,200.00, the vendors should at least have earned a little
profit or interest if they really intended to resell the lots the following day. Instead, they suffered a
loss of P25,000.00 because the amount borrowed, and we find grounds to believe their statement of
having advanced P25,000.00 of their own funds as earnest money, was actually only P474,000.00.
The petitioners also bound themselves to pay exceedingly stiff prices for the privilege of repurchase.
The intent of the parties is further shown by the fact that the Bundalians P500,000.00 collectibles
due from the government for completed construction contracts could not be collected on time to pay
for the lots advertised for sale in Bulletin Today. The petitioners had to run to the private
respondents who had money to lend. The Bundalians received the accounts due from the
government only in 1977 after the proceedings in the trial court were well underway.
The stipulation in the contract sharply escalating the repurchase price every month enhances the
presumption that the transaction is an equitable mortgage. Its purpose is to secure the return of the
money invested with substantial profit or interest, a common characteristic of loans.
The private respondents try to capitalize on an admission by Mrs. Bundalian that she "accepted" the
transaction knowing it to be a contract of sale with right of repurchase. The reliance is grounded on
shaky foundations. The Bundalians were in the construction business and knew quite well what they
were signing. But vendors covered by Article 1602 of the Civil Code are usually in no position to
bargain with the vendees and will sign onerous contracts to get the money they need. It is precisely
this evil which the Civil Code guards against. It is not the knowledge of the vendors that they are
executing a contract of sale pacto de retro which is the issue but whether or not the real contract
was one of sale or a loan disguised as a pacto de retro sale.
The contract also provides that "it is agreed that the vendor shall have the right to possess, use, and
build on, the property during the period of redemption." When the vendee acknowledged the right of
the vendor to retain possession of the property the contract is one of loan guaranteed by mortgage,
not a conditional sale or an option to repurchase. (Macoy vs. Trinidad, et al., 95 Phil. 192).
The respondents' contention that the right to possess, use, or build on the lots embodied in the
contract was a mere "right" and not actual possession appears to be sophistry. The records show

that the Bundalians construction equipment such as tractors, payloaders, and bulldozers were on the
lots. A shop was built on the premises. Mr. Bundalian testified that from the time he purchased the
property from the estate of Mrs. Virata up to the "minute" he testified, he never lost possession. The
Bundalians paid the real estate taxes on the lots. As against the express provision of the contract
and the actual possession by the petitioners, the private respondents come up with a far fetched
argument that since the titles to the lots were in their hands, they were the ones in legal possession.
Parenthetically, the titles in their hands were still in the name of the estate of Agapita Sarao Vda. de
Virata, the original vendor-owner.
IN VIEW OF THE FOREGOING, the decisions of' the respondent Court of Appeals and the trial court
are hereby REVERSED; and SET ASIDE. The deed of sale with right to repurchase is declared as
an equitable mortgage. The petitioners are ordered to pay their debt to the private respondents with
legal rate of interest from the time they acquired the loan until it is fully paid.
SO ORDERED.
Teehankee (Chairman), Melencio-Herrera, Plana and Relova, JJ., concur.
De la Fuente, J., took no part.

G.R. No. L-66597 August 29, 1986

LEONARDO TIOSECO, petitioner,
vs.
HONORABLE COURT OF APPEALS JOSE P. VILLANUEVA and TIMOTEA P.
VILLANUEVA, respondents.
Jose T. Sumat for petitioner.
Amado F. Nera for respondents.

PARAS, J.:
A petition for review by certiorari of the decision of the respondent Intermediate Appellate Court in
AC-G.R. CV No. 68888 promulgated on December 27, 1983, as well as of the Resolution of said
appellate court promulgated on February 13, 1984 denying the Motion for Reconsideration of the
aforesaid decision.
The facts of this case are as follows: The respondent spouses Jose P. Villanueva and Timotea P.
Villanueva mortgaged to the Tarlac Branch of the Philippine National Bank three lots described in
OCT No. C-542 issued by the Register of Deeds of Tarlac to secure payment of a loan of EIGHT
THOUSAND SIX HUNDRED (P8,600.00) PESOS. When they failed to comply with the mortgage
contract, the Philippine National Bank petitioned the Provincial Sheriff of Tarlac to foreclose upon the
properties extrajudicially. The Provincial Sheriff in the public auction he conducted on March 7, 1977
sold the lots to Leonardo Tioseco, herein petitioner, as the highest bidder for the amount of
EIGHTEEN THOUSAND NINE HUNDRED AND SEVENTY FIVE (P18,975.00) PESOS.
The certificate of sale dated March 7, 1977 issued by the Provincial Sheriff to Tioseco was
registered in the Office of the Register of Deeds of Tarlac on March 8, 1977. Tioseco's ownership
over the properties was consolidated, the title of the spouses Villanueva was cancelled and TCT No.
141194 was issued to Tioseco by the Register of Deeds on March 7, 1978.
It is claimed by Tioseco that sometime before March 9, 1978 respondents Villanueva visited him in
his house and offered to pay the amount he had paid for the three lots auctioned off on March 7,
1977. Tioseco told them that they could redeem the three lots by paying to him the amount he paid
at the auction sale plus interest. The respondents promised to return, but never did.
Upon the other hand, it is claimed by the respondents that they offered to redeem the three lots
within the period of redemption but Tioseco allegedly demanded TWENTY TWO THOUSAND SIX
HUNDRED FORTY ONE PESOS AND EIGHT CENTAVOS (P22,641.08) as redemption price.
Finding the amount demanded excessive, the respondents Villanueva filed a suit on March 7, 1978
to annul the sale in favor of Tioseco on the ground that it was irregular and to require both the
Philippine National Bank and Tioseco to determine the amount they should pay to be able to redeem
the three lots.
The Philippine National Bank stated in its answer that at the time of the auction sale of the three lots
on March 7, 1977 the amount of EIGHTEEN THOUSAND NINE HUNDRED SEVENTY FIVE
(P18,975.00) PESOS was due from the respondents. The amount included the principal of the loan,
accrued interest, service charges, expenses of foreclosure, and attorney's fees. The answer also

stated that the auction sale conducted by the Provincial Sheriff was in accordance with the
formalities and other requirements prescribed by law.
In his answer, Tioseco denied having demanded the sum of TWENTY TWO THOUSAND SIX
HUNDRED FORTY ONE PESOS AND EIGHT CENTAVOS (P22,641-08) from the respondents.
After trial the lower court rendered its decision, the dispositive portion of which readsWHEREFORE, the plaintiffs are allowed to redeem the properties covered by TCT
No. 141194 of the Register of Deeds of Tarlac by the payment to the defendant
Tioseco of the amount of EIGHTEEN THOUSAND NINE HUNDRED SEVENTY FIVE
(P 18,975.00) PESOS plus 1% per month interest thereon in addition from the time of
the sale on March 7, 1977 to the time of redemption, plus any assessment for
taxation which defendant Tioseco may have paid thereon and the interest on such
amount at the same rate and all other expenses specified in Sec. 30, Rule 39 of the
Rules of Court within 30 days from the finality of this judgment, without
pronouncement as to costs,
On appeal by petitioner, the Intermediate Appellate Court affirmed in toto the decision of the lower
court. With the denial of his motion for reconsideration, the petitioner filed this petition for review of
the decision of the appellate court.
Petitioner made the following assignment of errors:
I
THE TRIAL COURT ERRED IN HOLDING THAT DEFENDANT LEONARDO
TIOSECO PUT UP AN AMOUNT BIGGER THAN WHAT WAS PROPER TO
PREVENT THE PLAINTIFFS FROM EXERCISING THEIR RIGHTS OF
REDEMPTION.
II
THE TRIAL COURT ERRED IN HOLDING THAT THE FAILURE OF THE
PLAINTIFFS TO MAKE A VALID TENDER AND TO CONSIGN THE AMOUNT IN
COURT ASSUMES SUBORDINATE IMPORTANCE AND THE PLAINTIFFS
DESPITE SUCH FAILURE TO COMPLY BY THE STATUTORY REQUIREMENTS
FOR LEGAL REDEMPTION, ARE STILL ENTITLED TO MAKE THE REDEMPTION.
III
THE TRIAL COURT ERRED IN ALLOWING THE PLAINTIFFS TO REDEEM THE
PROPERTIES COVERED BY TCT NO. 141194 OF THE REGISTER OF DEEDS OF
TARLAC AFTER TIOSECO'S OWNERSHIP TO THE PROPERTIES WAS
CONSOLIDATED. (pp. 9-10, Rollo).
We prescind from the assignment of errors raised and proceed directly to the question presented
before this Court: Have the respondents exercised their right of redemption effectively? We answer
in the affirmative.

There is no question that the respondents have the right to redeem the subject property in view of
the provision of Section 25, P.D. No. 694 (Revised Charter of PNB):
SEC. 25. Right of redemption of property-Right of possession during redemption
period.Within one year from the registration of the foreclosure sale of real estate,
the mortgagor shall have the right to redeem the property by paying all claims of the
Bank against him on the date of the sale including all the costs and other expenses
incurred by reason of the foreclosure sale and custody of the property, as well as
charges and accrued interests.
xxx xxx xxx
When the respondents chose to enforce their right of redemption thru a court action on March 7,
1978 they were well within their right as the action was filed within one year from the registration of
the foreclosure sale of the real estate on March 9, 1977. P.D. No. 694 is silent as to any formal
tender of repurchase price as a pre-condition to a valid exercise of the right of redemption. It does
not even require any previous notice to the vendee, nor a meeting between him and the
redemptioner, much less a previous formal tender before any action is begun in court to enforce the
right of redemption. In any case, the lack of funds which may render the right inefficacious cannot
affect the existence of the right. In fact, the filing of the action itself, within the period of redemption,
is equivalent to a formal offer to redeem (see Reoveros v. Abel and Sandoval, 48 O.G. 5318). And in
this connection, a formal offer to redeem, accompanied by a bona fide tender of the redemption
price, altho proper, is not even essential where, as in the instant case, the right to redeem is
exercised thru the filing of judicial action.
In the instant case, the ends of justice would be better served by affording the respondents the
opportunity to redeem the subject property. This ruling is in obedience to the policy of the law to aid
rather than to defeat the right of redemption. (Javellana v. Mirasol and Nunez, 40 Phil. 761).
WHEREFORE, the petition for certiorari is DENIED and the judgment appealed from is AFFIRMED.
Costs against the petitioner.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Gutierrez, Jr., JJ., concur.

G.R. No. L-60208 December 5, 1985

PHILIPPINE NATIONAL BANK, petitioner,
vs.
THE HONORABLE COURT OF APPEALS AND DIVINA ALIM, respondents.
Juan J. Diaz, Benjamin C. del Rosario and Cesar Basa for petitioner.

ALAMPAY J.:
Civil Case No. 7927 which is an action for Annulment of Extrajudicial Foreclosure and Sale of Real
Properties and for Damages with Prayer for Preliminary Injunction was filed on April 26, 1975 by the
private respondent herein against the Philippine National Bank (PNB) in the Court of First Instance
of Quezon Province. On November 27. 1979 a decision was rendered by said court enjoining
defendant Philippine National Bank from consolidating its title over the mortgaged properties and
directing said bank to allow the private respondent, Divina B. Alim, to redeem the mortgaged
properties by accepting payment from the latter; and dismissing all the claims and counterclaims that
the parties may have against each other in connection with the case.
This decision which was appealed by the defendant PNB was affirmed on March 25, 1982 by the
First Division of the Court of Appeals in CA-G.R. No. 67131-R.
As succinctly stated in the decision of the Court of Appeals, the following material facts are not
disputed. These appear to be as follows:
... On February 2, 1968 plaintiff Divina Alim obtained a loan in the total amount of
P40,000 from defendant Philippine National Bank secured by three (3) parcels of
land registered in the name of herein plaintiff and covered by the following title(a) Transfer Certificate of Title No.8384 of the Register of Deeds of Lucena City
comprising a house of strong materials located along the National Highway, Iyam
District, Lucena City, and a lot with an area of 540 square meters, more or less;
(b) Transfer Certificate of Title Nos. T-79631 and T-79632 of the Registry of Deeds
for the Province of Quezon, containing an area of 58 hectares each of a total of 116
hectares, planted with coconut trees.
For failure of the plaintiff to pay her total obligation upon maturity date, defendant
Philippine National Bank extrajudicially foreclosed the mortgage properties and the
Provincial Sheriff of Quezon sold the properties at public auction on February 12,
1973. The defendant Philippine National Bank being the only bidder in said auction
sale, all the aforementioned mortgaged properties were sold to the bank for the
amount of P59,320.00 which was the total obligation of the plaintiff as of the date of
the sale. The said amount already included the principal obligation, attorney's fees
and other charges, interests on said amounts plus costs of publication of the Sheriff's
notice of auction sale. "On April 26, 1975, plaintiff instituted the present case for the
annulment of the aforesaid extrajudicial foreclosure and sale and for damages with
prayer for preliminary injunction."

From the decision rendered by the Court of First Instance of Quezon Province, it can be noted that
during the pendency of the case in the said court the parties attempted to confer with the end in view
of settling this case amicably and in the course thereof the plaintiff deposited with defendant bank a
sufficient amount to cover the loan and interest thereon as of February 12, 1973 including
reimbursement for costs of publication. Thus at the pre-trial, the parties agreed to submit the case
for decision only upon the issue as to whether or not the plaintiff should still pay interest specified in
the mortgage after the auction sale on February 12, 1973.
The defendant Philippine National Bank contends that the plaintiff is still obligated to pay the said
interest citing the provisions of Presidential Decree No. 694, as amended by Presidential Decree No.
1478, particularly Section 25, paragraph 2 thereof.
On the other hand, plaintiff Divina Alim, the private respondent herein cites the case of the
Development Bank of the Philippines versus Jovencio A. Zaragosa, et al., 84 SCRA 668, where it
was therein ruled that when the foreclosure proceedings are completed all interests of the mortgagor
are cut off from the property and that this principle is applicable to an extrajudicial foreclosure.
In rendering the decision in favor of plaintiff Divina Alim, The trial court reasoned out
... In the case at bar, the foreclosure and subsequent sale of the properties were
valid, but because of the timely filing of this case and in view of the Order of June 9,
1975, the consolidated sale could not be made. In the light, therefore, of the above
cited ruling of the Supreme Court, (DBP vs. Zaragosa, et al., supra) after the public
auction sale on February 12, 1973, the defendant Philippine National Bank can no
longer demand payment of interest on the property should the mortgagor exercise
her right of redemption." (Annex "B" of Petition, Record on Appeal, p. 101:
parenthesis supplied)
This ruling which was sustained by the then Court of Appeals is now the subject of the Petition for
Review on certiorari presented to this Court by the Philippine National Bank.
In its petition, the PNB assails the decision of the defunct appellate court and contends that the
interests specified in the mortgage should still be added to the bid or purchase price computed from
the time of the auction sale up to the date the mortgaged properties are redeemed as clearly
authorized by law. Petitioner invokes Republic Act No. 1300, the original Charter of the PNB,
Presidential Decree No. 694 (1975), Republic Act No. 337 known as the General Banking Law and
Rule 39 of the Rules of Court, all of which petitioner PNB claims authorize the imposition of the
interest specified in the mortgage.
What appears from the case records is that the extrajudicial foreclosure proceedings instituted by
the PNB was commenced on May 25, 1972, pursuant to a petition for sale under Act No. 3135 filed
by its counsel with the Provincial Sheriff for Quezon Province. But this PNB sought the f reclosure
and sale of the properties of the herein private respondent and directed said Sheriff to publish the
Notice of Sale in the Quezon Times, Lucena City. In consequence of said petition the Provincial
Sheriff sold at public auction the properties of herein private respondent to the Philippine National
Bank, upon the latter's bid of P59,320.00. The corresponding Certificate of Sale was executed by the
Sheriff in favor of the Philippine National Bank on February 16, 1973.
Considering that the very step initiated by the Petitioner was a petition for Sale under Act No.
3135 (Annex F. Complaint, Record on Appeal, Rollo, p. 26), the applicable law then would be no
other than the said statute. Act No. 3135 being a special law that governs particularly extrajudicial
foreclosures, it necessarily excludes the application in this instance of the General Banking Act and

the provisions on redemption under the Revised Charter of PNB, Presidential Decree No. 694, which
was enacted only in 1975. In the case at bar the mortgage contract was entered into in 1968. In
1968, the governing law on PNB operations was Republic Act No. 1300 but it has been held that
"Republic Act 1300 does not contemplate extrajudicial foreclosure" (Co vs. PNB, L-51767, June 29,
1982, 114 SCRA 842, 855).
Since the applicable law is Act 3135, the provisions of Section 30, Rule 39, Rules of Court shall be
determinative of the sole issue presented in this case. Section 6 of Act 3135, as amended by Act
4018, provides:
Sec. 6. In all cases in which an extrajudicial sale is made under the special power
hereinbefore referred to, the debtro, his successors in interest or any judicial creditor
or judgment creditor of said debtor, or any person ahving a lein on the proeprty
subsequent to the mortgage or deed of trust under which the property is old, may
redeem the same at any time within the term of one year from and after the date of
the sale; and such redemption shall be governed by the provisions of sections four
hundred and sixty-four, inclusive, of the Code of Civil Procedure, in so far as these
are not incosistent with the provision of this Act. (emphasis supplied.)
Section hundred sixty-four to four hundred sixty-six inclusive, of the Code of Civil Procedure,
became Sections 29, 30, and 34 of Rule 39 of our Rules of Court. The same secitons were
reiterated in the Revised Rules of Court in July 1964 (Co vs. PNB, supra).
Pursuant to Section 30 of Rule 39, the redemptioner, who is the private respondent herein, "may
redeeem the property from the purchaser at any time within twelve (12) months after the sale, on
paying the prchaser the amount of his purchase, with one per centum per month interest thereon in
addition, up to the time of redemption, togethere with the amount of any assessments or taxes which
the purchaser may have paid therein after purchase and interest on such last named amount at the
same interest rate; ..."
This would rightfully be so because, as stated in the case of DBP vs. Zaragosa, supra, when the
foreclosure proceedings are completed and the mortgaged property is sold to the purchaser then all
interest of the mortgagor are cut off from the property Prior to the completion of the foreclosure, the
mortgagor is liable for the interests on the mortgage. However, after the foreclosure proceedings and
the execution of the corresponding certificate of sale of the property sold at public auction in favor of
the successful bidder, the redemptioner mortgagor would be bound to pay only for the amount of the
purchase price with interests thereon at the rate of one per centum per month in addition up to the
time of redemption, together with the amount of any assessments or taxes which the purchaser may
have paid thereon after the purchase and interest on such last named amount at the same rate.
WHEREFORE, the petition in this case is hereby granted. The decision appealed from is affirmed
with modification, so as to read as follows:
(a) Making the writ of preliminary injunction issued by this Court in its Order of June
9, 1985, permanent and irrevocable;
(b) Allowing the plaintiff to redeem the mortgaged properties by paying the amount of
the purchase with interests thereon at the rate of one per centum per month up to the
date of her deposit of the redemption price and ordering the defendant to accept
payment from the plaintiff;

(c) Dismissing all the claims and counterclaims that the parties may have against
each other in connection with this case.
No costs.
SO ORDERED.
Aquino, C.J., Concepcion, Jr., Plana, Relova, Gutierrez, Jr., De la Fuente and Patajo, JJ., concur.
Teehankee, J., in the result.
Abad Santos, Escolin and Cuevas, JJ., took no part.
Melencio-Herrera, J., is on leave.

G.R. No. L-38185 September 24, 1986

HILARIO RAMIREZ and VALENTINA BONIFACIO, petitioners,
vs.
HONORABLE COURT OF APPEALS, FRANCISCA MEDINA, MATILDE MARTIN, EMILIO
MARTIN, DELFIN GUINTO, TEOFILO GUINTO, PRUDENCIO GUINTO and MARGARITA
GUINTO, respondents.
Castro, Makalintal, Mendoza & Associates for petitioner.
Flores, Ocampo, Dizon & Domingo Law Office for respondents.

GUTIERREZ, JR., J.:

This is an appeal from the decision of the Court of Appeals which affirmed in toto the decision of the
then Court of First instance of Rizal rendered in the petition for review of the decree of registration
issued in Land Registration Case No. N-2597, L.R.C. Record No. N-17939.
On September 15,1959, petitioners-spouses Hilario Ramirez and Valentina Bonifacio filed an
application for registration of a parcel of riceland in Pamplona, Las Pinas Rizal. After notice and
publication nobody appeared to oppose the application. An order of general default was issued and
the court allowed the petitioners to present evidence in support of their claim. Thereafter, the
petitioners presented parol evidence that they acquired the land in question by purchase from
Gregorio Pascual during the early part of the American regime but the corresponding contract of sale
was lost and no copy or record of the same was available.
On January 30, 1960, the court ordered the issuance of the decree of registration and consequently:
Original Certificate of Title No. 2273 of the Registry of Deeds of Rizal was issued in the petitioners
names.
On March 30, 1960, the private respondents Francisca Medina, Basilio Martin, Matilde Martin, Delfin
Guinto, Teofilo Guinto, Prudencio Guinto and Margarita Guinto, petitioners' nephews and nieces,
filed a petition to review the decree of registration on the ground of fraud. The private respondents
based their claim to the land on the following allegations: that they are the legal heirs of the
deceased Agapita Bonifacio who died intestate on March 11, 1936; that Valentina Bonifacio is a
sister of the deceased Agapita Bonifacio, they being the children of one Gregoria Pascual; that
Gregoria Pascual previously owned the land in question as evidenced by Tax Declaration No. 6611
of Las Pinas Rizal issued on December 8, 1920; that Agapita Bonifacio acquired the property in
question by purchase from Gregoria Pascual for which reason Tax Declaration No. 8777 was issued
in her name on May 21, 1928; that Gregoria Pascual during her lifetime, from 1916, possessed the
said property in the concept of owner, publicly and uninterruptedly, which possession was continued
by Agapita Bonifacio in 1928; that in 1938 respondents obtained a loan of P400.00 from the
petitioners which they secured with a mortgage on the land in question by way of antichresis; that for
this reason, Tax Declaration No. 8777 was cancelled and substituted by Tax Declaration Nos. 9522
and 2385 issued in the names of the petitioners; that, thereafter, the petitioners began paying taxes
on the land; that after several attempts to redeem the land were refused by the petitioners, the
respondents filed a complaint in the Court of First Instance of Pasay City docketed as Civil Case No.
272-R for the recovery of the possession and ownership of the said property; that when they learned
of the issuance of the certificate of title to the land in the petitioners' names, they also filed the
instant petition for review. The previous complaint, Civil Case No. 272-R, was subsequently

dismissed on a joint petition filed by the parties after they agreed to have the determination of the
question of ownership resolved in the registration proceedings.
In their answer, the spouses Ramirez denied the material allegations of the petition, they based their
claim to the land on two deeds of sale allegedly executed on April 15, 1937 and April 23, 1937 which
they allegedly found accidentally in March 1960.
After trial, the court found that deeds of sale spurious. It further found that the respondents took
possession of the land as owners after the death of Agapita Bonifacio and in 1938, mortgaged it to
the spouses Ramirez to secure the payment of a loan in the amount of P400.00. It was agreed that
the respondents could not redeem the property within a period of five years and that the petitioners
would take possession of the land, enjoy its fruits, and pay the land taxes thereon. The written
agreement was kept by the petitioners as creditors. The trial court appreciated the fact of the
petitioners' failure, despite formal request, to produce the document in court in favor of the
respondents. Finding the claims of the herein respondents sustained by the evidence, it ordered the
reconveyance of the property in the following manner:
WHEREFORE, judgment is hereby rendered in favor of petitioners and against
applicants as follows:
1) Setting aside its decision dated December 28, 1959 insofar as it found and
declared applicants to be the owners of the parcel of land described in Exhibits A, B
and C and insofar as it ordered the registration thereof in their names;
2) Declaring the petitioners, all Filipinos, all of legal age, and all residents of Ligas
Bacoor, Cavite, to be the true and absolute owners pro indiviso of the said parcel of
land described in Exhibits A, B and C in the following proportions:
a. Francisca Medina, married to Tomas de Leon, one-third (1/3) thereof;
b. Emilio Martin, married to Dolores Antonio, and Matilde Martin, married to Federico
Torres, one-third (1/3) thereof-,
c. Teofilo Guinto, married to Rocila de la Cruz, Delfin Guinto, married to Gregoria
Pamaran, Prudencio Guinto, married to Ana Guinto, and Margarita Guinto, married to
Felix Calacala one- third (1/3) thereof;
3) Ordering the registration of the said parcel of land described in Exhibits A, B and C
in the names of petitioners;
4) Setting aside its order for the issuance of the decree of registration in favor of
applicants dated January 30, 1959, and ordering the issuance of the decree of
registration in the names of petitioners;
5) Cancelling Original Certificate of Title No. 2273 of the Register of Deeds of Rizal in
the names of applicants and the issuance in lieu thereof of another original certificate
of title in the names of petitioners in the proportion of their ownership of the property
as stated in paragraph 2 above;
6) Ordering applicants to pay P3,000.00 to petitioners as and for attorney's fees;

7) Ordering applicants to pay the costs of this suit.

The decision was affirmed by the Court of Appeals. On a motion for reconsideration filed by the
petitioners, the same appellate court, but with a new member, promulgated a resolution setting aside
the original decision. On a motion for reconsideration filed by the private respondents, this resolution
was set aside and the original decision was reinstated.
The petitioners went to this Court in a petition for review on certiorari with the following questions:
ONE-HAS THE COURT OF FIRST INSTANCE, ACTING AS A LAND
REGISTRATION COURT, THE JURISDICTION TO GIVE DUE COURSE TO A
PETITION FOR REVIEW OF DECREE UNDER SEC. 38 OF ACT 496 AND TO REOPEN THE ORIGINAL PROCEEDINGS WHEN THE PETITION IS ACTUALLY ONE
OF RECONVEYANCE AND NOT BASED ON ACTUAL OR EXTRINSIC FRAUD?
TWO-DOES SEC. 38 OF ACT NO. 496 APPLY ON ALL FORES (SIC) TO
ORIGINAL LAND REGISTRATION PROCEEDINGS HAD UNDER PARAGRAPH B,
SECTION 48 OF COM. ACT NO. 141 AS AMENDED BY REP. ACT NO. 1942
WHEREIN THE LAND INVOLVED IS PUBLIC AGRICULTURAL LAND?
THREE-HAS THE COURT OF FIRST INSTANCE, ACTING AS A LAND
REGISTRATION COURT, THE POWER AND AUTHORITY TO VEST TITLE ON
THE LAND INVOLVED TO HEREIN PRIVATE RESPONDENTS AND ORDER
EVEN ITS PARTITION AMONGST THEM IN THE FACE OF THE ADMITTED FACT
THAT THE LAND IS IN ACTUAL POSSESSION OF PETITIONERS WHILE
PRIVATE RESPONDENTS HAD NOT POSSESSED THE SAME AT ALL?
FOUR-DO THE PRIVATE RESPONDENTS HAVE THE LEGAL CAPACITY AND
QUALIFICATION TO ACQUIRE AND BE VESTED BY THE COURT WITH TITLE TO
THE LAND IN QUESTION?
We find the petition without merit.
The first question does not warrant favorable consideration. The issue was submitted to the
appellate court and in our opinion, correctly resolved therein. The Court of Appeals stated:
... The petition alleged that 'the applicants Hilario Ramirez and Valentina Bonifacio
willfully and fraudulently suppressed the facts that the petitioners are the legal and
rightful owners of the ricefield in question and that they possess the said ricefield
merely as antichretic creditors as security for the loan of P400.00; that the applicants
are guilty of fraudulent misrepresentation and concealment when they declared in
their application, in the case at bar, that no other person had any claim or interest in
the said land.' These we believe are sufficient allegations of extrinsic fraud.
In the applicant's application for registration, which followed the form required by the
Land Registration Act, the applicants alleged that 'to the best of our knowledge and
belief, there is no mortgage or incumbrance of any kind whatsoever affecting said
land, nor any other person having any estate or interest therein, legal or equitable, in
possession, remainder, reversion or expectancy.' This allegation is false and made in
bad faith, for, as We have found, the applicants are not the owners of the land sought
to be registered and they are in possession thereof only as antichretic creditors.

The averments in the petition for review of the decree of registration constitute specific and not mere
general allegations of actual and extrinsic fraud. Competent proof to support these allegations was
adduced. We find no compelling reason to disturb the findings of the two courts below.
The petitioners in this case did not merely omit a statement of the respondents' interest in the land.
They positively attested to the absence of any adverse claim therein. This is clear misrepresentation.
The omission and concealment, knowingly and intentionally made, of an act or of a fact which the
law requires to be performed or recorded is fraud, when such omission or concealment secures a
benefit to the prejudice of a third person (Estiva v. Alvero, 37 Phil. 497).
In the case of Libundan v. Palma Gil (45 SCRA 17), this Court held:
The purpose of the law in giving aggrieved parties, deprived of land or any interest
therein, through fraud in the registration proceedings, the opportunity to review the
decree is to insure fair and honest dealing in the registration of land. But the action to
annul a judgment, upon the ground of fraud, would be unavailing unless the fraud
be extrinsic or collateral and the facts upon which it is based have not been
controverted or resolved in the case where the judgment sought to be annulled was
rendered. Extrinsic or collateral fraud, as distinguished from intrinsic fraud, connotes
any fraudulent scheme executed by a prevailing litigant 'outside the trial of a case
against the defeated party, or his agents, attorneys or witnesses, whereby said
defeated party is prevented from presenting fully and fairly his side of the case.'
But intrinsic fraud takes the form of 'acts of a party in a litigation during the trial, such
as the use of forged instruments or perjured testimony, which did not affect the
presentation of the case, but did prevent a fair and just determination of the case.
Thus, relief is granted to a party deprived of his interest in land where the fraud
consists in a deliberate misrepresentation that the lots are not contested when in fact
they are, or in applying for and obtaining adjudication and registration in the name of
a co-owner of land which he knows had not been alloted to him in the partition, or in
intentionally concealing facts, and conniving with the land inspector to include in the
survey plan the bed of a navigable stream, or in willfully misrepresenting that there
are no other claims, or in deliberately failing to notify the party entitled to notice, or in
inducing him not to oppose an application, or in misrepresenting about the indentity
of the lot to the true owner by the applicant causing the former to withdraw his
opposition. In all these examples the overriding consideration is that the fraudulent
scheme of the prevailing litigant prevented a party from having his day in court or
from presenting his case, The fraud, therefore, is one that affects and goes into the
jurisdiction of the court.
The second question assigned as an error must also be resolved against the petitioners.
Section 122 of Act No. 496 otherwise known as the Land Registration Act provides:
SEC. 122. Whenever public lands in the Philippine Islands belonging to the
Government of the United States or to the Government of the Philippine Islands are
alienated, granted, or conveyed to persons or the public or private corporations, the
same shall be brought forthwith under the operation of this Act and shall become
registered lands. It shall be the duty of the official issuing the instrument of alienation,
grant, or conveyance in behalf of the Government to cause such instrument before
its delivery to the grantee, to be filed with the register of deeds for the province where
the land lies and to be there registered like other deeds and conveyances,

whereupon a certificate shall be entered as in other cases of registered land, and an

owner's duplicate certificate issued to the grantee. The deed, grant, or instrument of
conveyance from the Government to the grantee shall not take effect as a
conveyance or bind the land, but shall operate only as contract between the
Government and the grantee and as evidence of authority to the clerk or register of
deeds to make registration. The act of registration shall be the operative act to
convey and affect the land, and in all cases under this Act, registration shall be made
in the office of the register of deeds for the province where the land lies. The fees for
registration shall be paid by the grantee. After due registration and issue of the
certificate and owner's duplicate, such land shall be registered land for all purposes
under this Act.
The law is clear. We can apply it to the facts without need for judicial interpretation. Once the deed,
grant, or instrument of conveyance of public land is registered with the Register of Deeds and the
corresponding certificate and owner's duplicate title is issued, such land is deemed registered land. It
is brought within the scope and operation of the Land Registration Law. This is the doctrine laid
down by this Court in a long line of cases. (See Heirs of Deogracias Ramos v. Court of Appeals, 139
SCRA 293; Lahora v. Dayanghirang 37 SCRA 346; Ramirez v. Court of Appeals, 30 SCRA 297;
Director of Lands v. Jugado 2 SCRA 32; Nelayan v. Nelayan, 109 Phil. 183; Republic v. Heirs of
Carle 105 Phil. 1227; El Hogar Filipino v. Olviga, 60 Phil. 17; Manolo v. Lukban, 48 Phil. 973). The
land in this case having been registered and covered by an original certificate of title issued by the
Register of Deeds of Rizal, it is within the provisions of the Land Registration Act. Thus, the decree
of registration granted by the lower court in favor of the petitioners may be reviewed on the ground of
actual and extrinsic fraud pursuant to Section 38 of the same Act.
There is likewise no merit in the third assigned error. While there was an admission that the
petitioners have been in actual possession of the disputed land since 1938, it was made to show and
prove the fact that the petitioners are only antichretic creditors. The respondents never admitted that
they have not possessed the land at all. On the contrary, they alleged that they and their
predecessors-in-interest namely Gregoria Pascual and Agapita Bonifacio have been in possession
of the land since time immemorial and that the petitioners were placed in possession of the land
pursuant to a contract of antichresis.
The court below found that the petitioners are merely antichretic creditors. This finding and its factual
bases were affirmed by the Court of Appeals. On the basis of the evidence supporting this
conclusion, this finding is binding on us as it is not our duty to weigh evidence on this point all over
again. This court has on several occasions held that the antichretic creditor cannot ordinarily acquire
by prescription the land surrendered to him by the debtor (Trillana v. Manansala, et al., 96 Phil. 865;
Valencia v. Acala, 42 Phil. 177; Barreto v. Barreto, 3 Phil. 234). The petitioners are not possessors in
the concept of owner but mere holders placed in possession of the land by its owners. Thus, their
possession cannot serve as a title for acquiring dominion (See Art. 540, Civil Code).
The fourth issue raised by the petitioners is answered by a referral to the detailed factual findings
and conclusions of the trial court. Ten pages of the record on appeal (Record on Appeal, CA-G.R.
No. 40425-R, pp. 56-66) state in convincing detail the portion of the trial court's decision which
support its conclusion that Hilario Ramirez and Valentina Bonifacio are not the owners of the
disputed land and have no registrable right over it and that the respondents herein have established
their ownership by a strong preponderance of evidence. The respondents were declared the true
and real owners and entitled to registration in their names. The final resolution of the Court of
Appeals affirmed the trial court's decision in toto. We see no reversible error in this finding.

The argument of laches is explained and countered by the close relationship of the parties and the
nature of a contract of antichresis. The private respondents are nephews and nieces, with their
spouses, of the petitioners. Moreover, there is evidence to show that long before the filing of the
cases, there had been attempts to recover the property.
In view of the foregoing, we are constrained to affirm the appellate court's decision. We note,
however, that in spite of the finding of an existing contract of antichresis between the parties, the two
courts below did not order the payment of the principal amount of mortgage. Under Article 2136 of
the Civil Code, the debtor cannot reacquire the enjoyment of the immovable without first having
totally paid what he owes the creditor.
WHEREFORE, the decision appealed from is hereby AFFIRMED with a modification that the
respondents are ordered to pay the petitioners the amount of P 400.00 as principal for the contract
of antichresis, the fruits obtained from the possession of the land having been applied to the
interests on the loan.
SO ORDERED.
Feria (Chairman), Fernan, Alampay and Paras, JJ., concur.

G.R. No. L-21011

August 30, 1967

ISABEL OCAMPO, plaintiff-appellant,

vs.
IGNACIO DOMALANTA and PONCIANO MARTINEZ, in his capacity as Provincial Sheriff of
Cavite,defendants-appellees.
Arturo M. Topacio, Jr. for plaintiff-appellant.
Teodoro O. Domalanta for defendant-appellee.
SANCHEZ, J.:
Sole question raised on appeal is this: Is a court order confirming a sheriff's sale upon a judgment in
a real estate foreclosure case a bar to a subsequent action by the judgment debtor to annul the sale
upon grounds which were raised in said foreclosure proceedings?
First, to the background facts. A contested case to foreclose a real estate and chattel mortgage [Civil
Case 45778, Court of First Instance of Manila, "Ignacio Domalanta, plaintiff vs. Isabel O. Vda. de Chi
Chioco, et al., defendants"], resulted in judgment ordering appellant Isabel O. Vda. de Chi Chioco
(now known as Isabel Ocampo) to pay appellee Ignacio Domalanta P2,000.00, with 1% interest per
month from December 5, 1958 until full payment, and P500.00 as attorneys' fees, and directing that
after failure to pay the above amounts in ninety days, the properties mortgaged be sold at public
auction, subject to a first mortgage in favor of the Philippine National Bank in reference to appellant's
land (located in Tanza, Cavite) mortgaged.1
The judgment debt remained unpaid. The court, on Domalanta's motion, issued a writ of execution.
Pursuant thereto, on May 8, 1962, appellee sheriff sold at public auction the mortgaged land of
32,558 square meters to the highest bidder, appellee Ignacio Domalanta, for P3,537.00. Domalanta
moved to confirm the sale. Over appellant's objection, the court, on June 2, 1962, confirmed.
After the June 2, 1962 order had become final, appellant started the present suit (Civil Case N-496
of the Court of First Instance of Cavite, entitled "Isabel Ocampo, plaintiff vs. Ignacio Domalanta and
Ponciano Martinez an his capacity as Provincial Sheriff of Cavite, defendants") to annul the sheriff's
sale. Grounds: Appellant mortgagor was not properly notified of the forecloseure sale; and the price
for which the property was sold was "very much lower than the actual market value" and shocking to
the conscience, and thus invalid. Appellee Domalanta moved to dismiss the complaint below. His
reason, inter alia: res judicata. The court, on November 9, 1962, dismissed the case "with prejudice
and with costs against the plaintiff." A move to reconsider was thwarted below in the order of
November 21, 1962. Hence, this appeal.
1. Adverted to earlier is that the June 2, 1962 order of confirmation of the sheriff's sale in the first
case Case 45778 was issued over appellant's opposition. That objection projected before the
court the very same grounds relied upon in the complaint herein the second case to wit, lack of
notice by the Provincial Sheriff to appellant of the foreclosure sale, and irregularities in the auction
sale and non-conformity thereof to the rules of court. According to the order of confirmation, the
thrust of appellant's said objection is that she "was not notified of the sheriff's sale and that the price
for which the property was sold is unconscionable." But these factual allegations, so the same in
order of June 2, 1962 stresses, "have not been established by any evidence," nor was appellant's
opposition verified. Nothing in the record suggests that after the order of June 2, 1962 in the first
case (Civil Case 45778), attempt was ever made by appellant to cure the defects so pointedly
expressed by the court in that order.

2. Law and jurisprudence have formulated the rule that confirmation of sale of real estate in judicial
foreclosure proceedings cuts off all interests of the mortgagor in the real estate sold and vests them
in the purchaser. Confirmation retroacts to the date of the sale.2 An order of confirmation in court
foreclosure proceedings is a final order, not merely interlocutory. The right to appeal therefrom has
long been recognized.3 In fact, it is the final order from which appeal may be taken in judicial
foreclosure proceedings.4 No appeal was taken. It follows that said order is final, binding.
3. Not that the disputed order of confirmation may be labelled null and void, as appellant would want
it to be. The presumption that the notice of sale of real estate in foreclosure proceedings has been
given, holds true here. For, indeed, a legal tenet of long standing is that official duty presumptively
has been regularly performed.5 Appellant pleaded such lack of notice. Her duty it was to prove it in
court. She did not.
1wph1.t

And if the notice that appellant here complains of is personal notice to her, she is wrong. Because,
personal notice is not required by Section 16 of Rule 39 of the 1940 Rules of Court, now Section 18,
Rule 39 of the new Rules. This legal provision was given judicial nod as early as 1930 in La Urbana
vs. Belando, 54 Phil. 930, 932 a case of foreclosure of real estate mortgage where we
pronounced that "[t]he law does not require that such notification be given personally to the party
upon whose property execution is levied."
Nor was there an averment in the complaint now before us that if a resale should take place, "the
realty would bring a higher price" thereat, a circumstance "essential to rescind a sale regularly made
and confirmed by a competent court, on the ground of inadequacy of price."6 The mere averment
that the price is unconscionable is nothing more than a conclusion of law. The value of such
allegation is further downgraded by the lack of proof. This is one case which epitomizes the fatal
distance between allegation and proof.
4. Properly to be pointed out here is that the dismissal order of November 9, 1962 now on appeal,
states that the legality of the foreclosure sale questioned in this action "was an issue that could have
been, and was in fact, raised and litigated in the anterior suit" (Civil Case 45778). Except for the
Provincial Sheriff who is a nominal defendant here, the parties in the two suits below are the same:
Isabel Ocampo and Ignacio Domalanta. Subject matter is the same land. The judgment and order of
confirmation of the sheriff's sale in the first suit have both become final.
The first suit is a judicial foreclosure of mortgage; the second, annulment of the foreclosure sale
conducted in the first suit. A proceeding for judicial foreclosure of mortgage is an action quasi in rem.
It is based on a personal claim sought to be enforced against a specific property of a person named
party defendant. And, its purpose is to have the property seized and sold by court order to the end
that the proceeds thereof be applied to the payment of plaintiff's claim.7
To be read as controlling here are Sections 44 and 45, Rule 39 of the Rules of Court which is now
substantially embodied in Section 49, Rule 39 of the new Rules of Court, viz:
Sec. 49. Effect of judgments.The effect of a judgment or final order rendered by a court or
judge of the Philippines, having jurisdiction to pronounce the judgment or order, may be as
follows:
(a) In case of a judgment or order against a specific thing, or in respect to the probate of a
will, or the administration of the estate of a deceased person, or in respect to the personal,
political or legal condition or status of a particular person or his relationship to another, the
judgment or order is conclusive upon the title to the thing, the will or administration, or the
condition, status or relationship of the person; however, the probate of a will or granting of

letters of administration shall only be prima facie evidence of the death of the testator or
intestate;
(b) In other cases the judgment or order is, with respect to the matter directly adjudged or as
to any other matter that could have been raised in relation thereto, conclusive between the
parties and their successors in interest by title subsequent to the commencement of the
action or special proceeding, litigating for the same thing and under the same title and in the
same capacity;
(c) In any other litigation between the same parties or their successors in interest, that only is
deemed to have been adjudged in a former judgment which appears upon its face to have
been so adjudged, or which was actually and necessarily included therein or necessary
thereto.
Paragraph (a) of the foregoing rule is commonly known to speak of judgments in rem; paragraph (b)
is said to refer to judgments in personam; and paragraph (c) is the concept understood in law as
"conclusiveness of judgment." 8
Here, the first suit was an action quasi in rem. A judgment therein "is conclusive only between the
parties."9Directly applicable is paragraph (b) above-quoted. By that provision, the confirmation order
in the foreclosure case is, "with respect to the matter directly adjudged or as to any other matter that
could have been raised in relation thereto, conclusive between the parties" and their privies.
As we view this case from another standpoint, we reach the same result. It is true that the cause of
action in the first suit is not exactly identical to the cause of action in the second. For, the latter
merely challenges the legality of the sheriff's sale in the first proceeding. We do say, however, that
such legality of sale is an issue which could have been, and was in fact raised and rejected in the
first case. Thus, coming into play also is paragraph (c) above-quoted. Therefore, the question raised
by appellant in the present suit should be "deemed to have been adjudged in a former judgment
which appears upon its face to have been so adjudged, or which was actually and necessarily
included therein or necessary thereto."
It is thus beyond doubt that the present action is barred by the conclusiveness of judgment in the
anterior suit. 10This case must be dismissed.
Conformably to the foregoing, the lower court's order of November 9, 1962 dismissing this case, and
the order of November 21, 1962 denying reconsideration thereof, are hereby affirmed.
Costs against plaintiff-appellant. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Sanchez, Castro, Angeles and
Fernando, JJ., concur.