ANICETO BANGIS substituted by

his heirs, namely: RODOLFO B.

BANGIS, RONNIE B. BANGIS,
ROGELIO B. BANGIS, RAQUEL
B. QUILLO, ROMULO B.
BANGIS, ROSALINA B. PARAN,
ROSARIO
B.
REDDY,
REYNALDO B. BANGIS, and
REMEDIOS B. LASTRE,
Petitioners,

G.R. No. 190875

Present:
PERALTA, J., *Acting Chairperson,
ABAD,
VILLARAMA, JR.,**
MENDOZA, and
PERLAS-BERNABE, JJ.

-versusHEIRS OF SERAFIN AND Promulgated:

SALUD ADOLFO, namely: LUZ
A.
BANNISTER,
SERAFIN June 13, 2012
ADOLFO, JR., and ELEUTERIO
ADOLFO rep. by his Heirs,
namely: MILAGROS, JOEL,
MELCHOR,
LEA,
MILA,
NELSON,
JIMMY
and
MARISSA,
all
surnamed
ADOLFO,
Respondents.
x-----------------------------------------------------------------------------------------x

DECISION
PERLAS-BERNABE, J.:

Assailed in this Petition for Review on Certiorari under Rule 45 of the Rules of
Court is the March 30, 2009 Decision [1]of the Court of Appeals Mindanao Station
(CA) and its December 2, 2009 Resolution [2] in CA-G.R. CV No. 00722-MIN
which declared that the transaction between the parties was a mortgage, not a sale,
and ordered petitioners to surrender the possession of the disputed lot upon
respondents' full payment of their indebtedness.

THE ANTECEDENT FACTS

The spouses Serafin, Sr. and Saludada [3]Adolfo were the original registered owners
of a 126,622 square meter lot covered by Original Certificate of Title (OCT) No. P489 issued on December 15, 1954 (derived from Homestead Patent No. V-34974),
located in Valencia, Malaybalay, Bukidnon. This property was mortgaged to the
then Rehabilitation Finance Corporation (now Development Bank of the
Philippines or DBP) on August 18, 1955,[4]and upon default in the payment of the
loan obligation, was foreclosed and ownership was consolidated in DBP's name
under Transfer Certificate of Title (TCT) No. T-1152. [5]Serafin Adolfo, Sr.,
however, repurchased the same and was issued TCT No. 6313 [6]on December 1,
1971, a year after his wife died in 1970.

Sometime in 1975, Serafin Adolfo, Sr. (Adolfo) allegedly mortgaged the subject
property for the sum of P12,500.00 to Aniceto Bangis (Bangis) who immediately
took possession of the land.[7]The said transaction was, however, not reduced into
writing.[8]

When Adolfo died, his heirs, namely, Luz Adolfo Bannister, Serafin Adolfo, Jr. and
Eleuterio Adolfo (Heirs of Adolfo), executed a Deed of Extrajudicial Partition
dated December 24, 1997 covering the subject property and TCT No. T65152[9]was issued to them. On May 26, 1998, the said property was subdivided
and separate titles were issued in names of the Heirs of Adolfo, as follows: TCT
Nos. T-66562 and T-66563 for Luz Adolfo Banester [10]; TCT Nos. T-66560 and T66561 in the name of Serafin Adolfo, Jr.; and TCT Nos. T-66564 and T-66565 in
favor of Eleuterio Adolfo.[11]

In June 1998, the Heirs of Adolfo expressed their intention to redeem the
mortgaged property from Bangis but the latter refused, claiming that the
transaction between him and Adolfo was one of sale. During the conciliation
meetings in the barangay, Bangis' son, Rudy Bangis, showed them a copy of a deed
of sale and a certificate of title to the disputed lot.[12]The parties having failed to

amicably settle their differences, a certificate to file action [13]was issued by the
barangay.

THE PROCEEDINGS BEFORE THE RTC

On July 26, 2000, the Heirs of Adolfo filed a complaint [14]before the Regional Trial
Court (RTC) for annulment of deed of sale and declaration of the purported
contract of sale as antichresis, accounting and redemption of property and damages
against Bangis, docketed as Civil Case No. 2993-00. The complaint was amended
on September 11, 2001 to include a prayer for the cancellation of TCT No. T-10567
and the tax declarations in the name of Bangis in view of the manifestation [15]filed
by Ex-Officio Register of Deeds, Atty. Phoebe Loyola Toribio of the Registry of
Deeds, Malaybalay City which states that the said title was of "dubious" origin
since there was no deed of conveyance upon which the said transfer certificate of
title was based and that its derivative title, TCT No. T-10566, does not exist in the
files of the Registry of Deeds.[16] On November 12, 2001, the complaint was again
amended to reflect the other certificates of titles issued in the names of the Heirs of
Adolfo and the amount of P12,500.00 representing the mortgage debt,[17]followed
by another amendment on October 13, 2003 to include the allegation that they have
partitioned the subject lot on December 24, 1997 and that no copy of the supposed
deed of sale in favor of Bangis can be found in the records of the Provincial
Assessor's Office and the Registrar of Deeds. They further prayed, in the
alternative, to be allowed to redeem the subject lot under the Homestead Law and
that Bangis be ordered to indemnify them: (a) P50,000.00 each as moral damages;
(b) 20% of the value of the property as attorney's fees; and (c) P50,000.00 as
litigation expenses as well as the costs of suit.[18]

In his Answer with Counterclaim,[19]Bangis claimed to have bought the subject

property from Adolfo for which TCT No. T-10567[20]was issued. He also
alleged to have been in open and adverse possession of the property since 1972
and that the cause of action of the Heirs of Adolfo has prescribed. On
November 11, 2001, Bangis died and was substituted in this suit by his heirs,
namely, Rodolfo B. Bangis, Ronie B. Bangis, Rogelio B. Bangis, Raquel B. Quillo,

Romulo B. Bangis, Rosalina B. Paran, Rosario B. Reddy, Reynaldo B. Bangis and

Remedios B. Lastre (Heirs of Bangis).[21]

During the trial, one of the Heirs of Bangis, Rodolfo Bangis, presented a
photocopy of an Extra-Judicial Settlement with Absolute Deed of Sale dated
December 30, 1971[22]for the purpose of proving the sale of the subject lot by
Adolfo and his heirs in favor of his predecessors-in-interest, Aniceto Bangis and
Segundino Cortel, for the sum of P13,000.00. He also presented a Promissory
Note[23]of even date purportedly executed by Bangis and Segundino Cortel
undertaking to pay the balance of the purchase price in the amount ofP1,050.00.
[24]
Both documents were notarized by Atty. Valentin Murillo who testified to the
fact of their execution.[25]Rodolfo Bangis likewise testified that they have been
paying the taxes due on the property and had even used the same as collateral for a
loan with a bank.[26]

On rebuttal, one of the Heirs of Adolfo, Luz Adolfo Bannister, denied the due
execution and genuineness of the foregoing Extra-Judicial Settlement with
Absolute Deed of Sale alleging forgery.[27]

On December 29, 2005, the RTC rendered a Decision [28]in favor of the Heirs of
Adolfo, the dispositive portion of which reads:
WHEREFORE, the preponderance of evidence being strongly in favor of the
plaintiffs and against the defendants, decision is hereby rendered:
1. Declaring the contract between the plaintiffs and defendants as a mere
mortgage or antichresis and since the defendants have been in the possession
of the property in 1975 up to the present time enjoying all its fruits or income,
the mortgaged loan of P12,000.00 is deemed fully paid;
2. Ordering the defendants to deliver the possession of the property in question
and all the improvements thereon to the plaintiffs peacefully;
3. Declaring TCT No. 10567 in the name of Aniceto Bangis as NULL AND
VOID AB INITIO and directing the Office of the Register of Deeds to cause

its cancellation from its record to avoid confusion regarding the ownership
thereof; and
4. Declaring all the transfer certificates of title issued in favor of the plaintiffs
namely, Luz Adolfo-Bannister, Serafin Adolfo, Jr. and Eleuterio Adolfo, as
above-mentioned as the ones valid and issued in accordance with PD 1529.
SO ORDERED.

Aggrieved, the Heirs of Bangis appealed the foregoing disquisition to the Court of
Appeals (CA).

THE CA RULING

In its assailed Decision, the CA affirmed the RTC finding that the contract between
the parties was a mortgage, not a sale. It noted that while Bangis was given
possession of the subject property, the certificate of title remained in the custody of
Adolfo and was never cancelled. The CA also ordered the Heirs of Adolfo to pay
the Heirs of Bangis the mortgage debt of P12,500.00[29]with twelve (12%) percent
interest reckoned from 1975 until 1998 and to deliver to them the possession of the
property upon full payment.[30]It, however, deleted the RTC order directing the
Register of Deeds to cancel TCT No. T-10567 in the name of Bangis for being a
collateral attack proscribed under PD 1529.[31]

Dissatisfied, the Heirs of Bangis filed a Motion for Reconsideration[32]arguing that

the CA erred in disregarding their testimonial and documentary evidence,
particularly, the Extra-Judicial Settlement with Absolute Deed of Sale (Exh. 2)
which purportedly established the sale in favor of their predecessor-in-interest,
Aniceto Bangis. The said motion was, however, denied in the
Resolution[33]dated December 2, 2009.

THE ISSUE BEFORE THE COURT

Hence, the instant petition for review on certiorari based on the lone assignment of
error[34]that the transaction between the parties was one of sale and not a mortgage
or antichresis. In support, petitioner Heirs of Bangis maintain that the CA erred in
not giving probative weight to the Extra-Judicial Settlement with Absolute Deed of
Sale[35]which supposedly bolsters their claim that their father, Aniceto Bangis,
bought the subject parcel of land from Adolfo. Hence, the corresponding title, TCT
No. T-10567, issued as a consequence should be respected.
On their part, respondent Heirs of Adolfo averred that no reversible error was
committed by the CA in upholding that no sale transpired between the parties'
predecessors-in-interest. Moreover, petitioners' TCT No. T-10567 was not offered
in evidence and worse, certified as of dubious origin per the Manifestation of the
Registrar of Deeds.[36]
THE COURT'S RULING
The petition must fail.

At the outset, it should be emphasized that a petition for review on certiorari under
Rule 45 of the Rules of Court involves only questions of law and not of facts. A
question of law exists when there is doubt as to what the law is on a given set of
facts while a question of fact arises when there is doubt as to the truth or falsity of
the alleged facts.[37]

The Heirs of Bangis, in insisting that both the RTC and the CA erroneously
disregarded the evidence of sale they presented, are effectively asking the Court to
re-evaluate factual issues which is proscribed under Rule 45. "Such questions as to
whether certain items of evidence should be accorded probative value or weight, or
rejected as feeble or spurious, or whether or not the proofs on one side or the other
are clear and convincing and adequate to establish a proposition in issue, are
without doubt questions of fact."[38]

Nonetheless, the Court perused the records and found substantial evidence
supporting the factual findings of the RTC, as affirmed by the CA, that the nature
of the transaction between the parties' predecessors-in-interest was a mortgage and
not a sale. Thus, the maxim that factual findings of the trial court when affirmed by
the CA are final and conclusive on the Court[39]obtains in this case.

THERE WAS NEITHER AN

ANTICHRESIS NOR SALE

For the contract of antichresis to be valid, Article 2134 of the Civil Code requires
that "the amount of the principal and of the interest shall be specified in writing;
otherwise the contract of antichresis shall be void." In this case, the Heirs of
Adolfo were indisputably unable to produce any document in support of their
claim that the contract between Adolfo and Bangis was an antichresis, hence, the
CA properly held that no such relationship existed between the parties. [40]
On the other hand, the Heirs of Bangis presented an Extra-Judicial Settlement with
Absolute Deed of Sale dated December 30, 1971[41]to justify their claimed
ownership and possession of the subject land. However, notwithstanding that the
subject of inquiry is the very contents of the said document, only its
photocopy[42]was presented at the trial without providing sufficient justification for
the production of secondary evidence, in violation of the best evidence rule
embodied under Section 3 in relation to Section 5 of Rule 130 of the Rules of
Court, to wit:
SEC. 3. Original document must be produced; exceptions. - When the subject
of inquiry is the contents of a document, no evidence shall be admissible other
than the original document itself, except in the following cases:
(1) When the original has been lost or destroyed, or cannot be
produced in court, without bad faith on the part of the offeror;
(2) When the original is in the custody or under the control of
the party against whom the evidence is offered, and the latter
fails to produce it after reasonable notice;

(3) When the original consists of numerous accounts or other

documents which cannot be examined in court without great
loss of time and the fact sought to be established from them is
only the general result of the whole; and
(4) When the original is a public record in the custody of a
public officer or is recorded in a public office.

SEC. 5. When original document is unavailable. - When the original document

has been lost or destroyed, or cannot be produced in court, the offeror, upon
proof of its execution or existence and the cause of its unavailability without
bad faith on his part, may prove its contents by a copy, or by a recital of its
content in some authentic document, or by the testimony of witnesses in the
order stated.

The bare testimony of one of the Heirs of Bangis, Rodolfo Bangis, that the subject
document was only handed[43]to him by his father, Aniceto, with the information
that the original thereof "could not be found" [44]was insufficient to justify its
admissibility. Moreover, the identification made by Notary Public Atty. Valentin
Murillo[45]that he notarized such document cannot be given credence as his
conclusion was not verified against his own notarial records.[46]Besides, the Heirs
of Bangis could have secured a certified copy of the deed of sale from the
Assessor's Office[47]that purportedly had its custody in compliance with Section 7,
Rule 130[48]of the Rules of Court.
In sum, the Heirs of Bangis failed to establish the existence and due execution of
the subject deed on which their claim of ownership was founded. Consequently,
the RTC and CA were correct in affording no probative value to the said document.
[49]

TCT NO. T-10567 IN THE NAME OF

ANICETO BANGIS CANNOT PREVAIL
OVER THE TITLES OF THE HEIRS OF
ADOLFO

Records reveal that TCT No. T-10567 purportedly secured as a consequence of the
deed of sale executed by Adolfo and his heirs in favor of Bangis was not offered in
evidence. A perusal of its copy, however, shows that it was a transfer from TCT
No. T-10566,[50]which title the Heirs of Bangis unfortunately failed to account for,
and bore no relation at all to either OCT No. P-489 (the original title of the
Spouses Adolfo) or TCT No. T-6313 (issued to Adolfo when he repurchased the
same property from DBP). The Manifestation[51]of the Register of Deeds of
Malaybalay City regarding the doubtful origin of TCT No. T-10567 and the
regularity of the titles of the Heirs of Adolfo are insightful, thus:
That the verification from the office of the original copy of Transfer
Certificate of Title No. T-10567 in the name of Anecito Bangis is
existing in the office. Machine copy of the said title is hereto attached as
annex "A" but nothing in the title whether annotated or attached, any
Deed of Conveyance or other Documents by which said title was issued
or transferred in the name of Anecito Bangis.
That for the information and guidance of the court attached herewith is a
machine copies [sic] Original Certificate of Title No. P-489 in the name
of Serafin Adolfo, marked as annex "B" which supposedly the mother
title of Transfer Certificate of Title No. T-10567 as to how this title was
transferred in the name of Anecito Bangis. Nothing will show which will
validly supports [sic] the said transfer, in other words the said title is
dubious.
This Original Certificate of Title No. P-489 in the name of Serafin
Adolfo was mortgage to the Development Bank of the Philippines and
then it was consolidated and Transfer Certificate of Title No. T-1152 was
issued in the name of Development Bank of the Philippines. From the
Development Bank of the Philippines a Deed of Sale was executed by
the Development Bank of the Philippines in favor of Serafin Adolfo and
Transfer Certificate of Title No. T-6313 marked annex "B-1" was issued
in the name of Serafin Adolfo.
An Extrajudicial Settlement was now [sic] by the Heirs of Serafin
Adolfo and Transfer Certificate of Title Nos. T-65152 annex "B-2", T66560 annex "B-3", T-66561 annex "B-4", T-66562 annex "B-5", T-

66563 annex "B-6", T-66564 annex "B-7", and T-66565 annex "B-8"
were issued to the Heirs.
The titles issued to the Heirs of Serafin Adolfo were legitimately issued
by this office after all its [sic] requirements and supporting documents
were submitted and proper annotations were reflected at the back of the
title of Serafin Adolfo.
Transfer Certificate of Title No. T-10567 as shown on the title was
derived from Transfer Certificate of Title No. T-10566 but [sic] title is
not existing in this office.

As held in the case of Top Management Programs Corporation v. Luis Fajardo

and the Register of Deeds of Las Pias City: [52]"if two certificates of title purport to
include the same land, whether wholly or partly, the better approach is to trace
the original certificates from which the certificates of titles were derived."

Having, thus, traced the roots of the parties' respective titles supported by the
records of the Register of Deeds of Malaybalay City, the courts a quo [53]were
correct in upholding the title of the Heirs of Adolfo as against TCT No. T-10567 of
Bangis, notwithstanding its earlier issuance on August 18, 1976[54]or long before
the Heirs of Adolfo secured their own titles on May 26, 1998. To paraphrase the
Court's ruling in Mathay v. Court of Appeals:[55]where two (2) transfer certificates
of title have been issued on different dates, the one who holds the earlier title may
prevail only in the absence of any anomaly or irregularity in the process of its
registration, which circumstance does not obtain in this case.
CANCELLATION OF
TCT NO. T-10567

The Court cannot sustain the CA's ruling[56]that TCT No. T-10567 cannot be
invalidated because it constitutes as a collateral attack which is contrary to the
principle of indefeasibility of titles.

It must be noted that Bangis interposed a counterclaim in his Answer seeking to be

declared as the true and lawful owner of the disputed property and that his TCT
No. T-10567 be declared as superior over the titles of the Heirs of Adolfo. [57]Since a
counterclaim is essentially a complaint [58]then, a determination of the validity of
TCT No. T-10567 vis-a-vis the titles of the Heirs of Adolfo can be considered as a
direct, not collateral, attack on the subject titles.[59]

In Pasio v. Monterroyo, the Court has ruled, thus:

It is already settled that a counterclaim is considered an original complaint and
as such, the attack on the title in a case originally for recovery of possession
cannot be considered as a collateral attack on the title. Development Bank of
the Philippines v. Court of Appeals is similar to the case before us insofar as
petitioner in that case filed an action for recovery of possession against
respondent who, in turn, filed a counterclaim claiming ownership of the land.
In that case, the Court ruled:
Nor is there any obstacle to the determination of the validity of
TCT No. 10101. It is true that the indefeasibility of torrens title
cannot be collaterally attacked. In the instant case, the original
complaint is for recovery of possession filed by petitioner
against private respondent, not an original action filed by the
latter to question the validity of TCT No. 10101 on which
petitioner bases its right. To rule on the issue of validity in a
case for recovery of possession is tantamount to a collateral
attack. However, it should not [b]e overlooked that private
respondent filed a counterclaim against petitioner, claiming
ownership over the land and seeking damages. Hence, we could
rule on the question of the validity of TCT No. 10101 for the
counterclaim can be considered a direct attack on the same. A
counterclaim is considered a complaint, only this time, it is the
original defendant who becomes the plaintiff... It stands on the
same footing and is to be tested by the same rules as if it were
an independent action. x x x (Citations omitted) [60]

Besides, the prohibition against collateral attack does not apply to spurious or nonexistent titles, which are not accorded indefeasibility,[61]as in this case.
THE PRESENT ACTION

HAS NOT PRESCRIBED

The claim of the Heirs of Bangis that since they have been in possession of the
subject land since 1972 or for 28 years reckoned from the filing of the complaint in
2000 then, the present action has prescribed is untenable. It bears to note that while
Bangis indeed took possession of the land upon its alleged mortgage, the certificate
of title (TCT No. 6313) remained with Adolfo and upon his demise, transferred to
his heirs, thereby negating any contemplated transfer of ownership. Settled is the
rule that no title in derogation of that of the registered owner can be acquired by
prescription or adverse possession.[62]Moreover, even if acquisitive prescription can
be appreciated in this case, the Heirs of Bangis' possession being in bad faith is two
years shy of the requisite 30-year uninterrupted adverse possession required
under Article 1137 of the Civil Code.

Consequently, the Heirs of Bangis cannot validly claim the rights of a builder in
good faith as provided for under Article 449 in relation to Article 448 of the Civil
Code. Thus, the order for them to surrender the possession of the disputed land
together with all its improvements was properly made.

LIABILITY FOR THE PAYMENT

OF INTEREST

Finally, it is undisputed that the Heirs of Bangis made no judicial or extrajudicial

demand on the Heirs of Adolfo to pay the mortgage debt. Instead, it was the latter
who signified their intent to pay their father's loan obligation, admittedly in the
amount of P12,500.00,[63]which was refused. The mortgage contract therefore
continued to subsist despite the lapse of a considerable number of years from the
time it was constituted in 1975 because the mortgage debt has not been satisfied.

Following the Court's ruling in the iconic case of Eastern Shipping Lines, Inc. v.
Court of Appeals,[64]the foregoing liability, which is based on a loan or forbearance
of money, shall be subject to legal interest of 12% per annum from the date it was
judicially determined by the CA on March 30, 2009 until the finality of this
Decision, and not from 1975 (the date of the constitution of the mortgage); nor
from 1998 (when an attempt to pay was made) or in 2000 at the time the complaint
was filed, because it was the Heirs of Adolfo and not Bangis who filed the instant
suit[65]to collect the indebtedness. Thereafter, the judgment award inclusive of
interest shall bear interest at 12% per annum until its full satisfaction.[66]
WHEREFORE, premises considered, the instant petition for review on certiorari
is DENIED and the assailed Decision dated March 30, 2009 of the Court of
Appeals Mindanao Station (CA) and its Resolution dated December 2, 2009 in
CA-G.R. CV No. 00722-MIN are AFFIRMED with MODIFICATION: (1)
cancelling TCT No. T-10567; and (2) ordering respondent Heirs of Adolfo to pay
petitioner Heirs of Bangis the sum of P12,500.00 with legal interest of 12% per
annum reckoned from March 30, 2009 until the finality of this Decision and
thereafter, 12% annual interest until its full satisfaction.
The rest of the Decision stands.
SO ORDERED.
G.R. No. 160758

January 15, 2014

DEVELOPMENT BANK OF THE PHILIPPINES, Petitioner,

vs.
GUARIA AGRICULTURAL AND REALTY DEVELOPMENT CORPORATION, Respondent.
DECISION
BERSAMIN, J.:
The foreclosure of a mortgage prior to the mortgagor's default on the principal obligation is
premature, and should be undone for being void and ineffectual. The mortgagee who has been
meanwhile given possession of the mortgaged property by virtue of a writ of possession issued to it
as the purchaser at the foreclosure sale may be required to restore the possession of the property to
the mortgagor and to pay reasonable rent for the use of the property during the intervening period.

The Case
In this appeal, Development Bank of the Philippines (DBP) seeks the reversal of the adverse
decision promulgated on March 26, 2003 in C.A.-G.R. CV No. 59491, whereby the Court of Appeals
(CA) upheld the judgment rendered on January 6, 1998 by the Regional Trial Court, Branch 25, in
Iloilo City (RTC) annulling the extra-judicial foreclosure of the real estate and chattel mortgages at
the instance of DBP because the debtor-mortgagor, Guaria Agricultural and Realty Development
Corporation (Guaria Corporation), had not yet defaulted on its obligations in favor of DBP.
1

Antecedents
In July 1976, Guaria Corporation applied for a loan from DBP to finance the development of
its resort complex situated in Trapiche, Oton, Iloilo. The loan, in the amount of P3,387,000.00,
was approved on August 5, 1976. Guaria Corporation executed a promissory note that would be
due on November 3, 1988. On October 5, 1976, Guaria Corporation executed a real estate
mortgage over several real properties in favor of DBP as security for the repayment of the
loan. On May 17, 1977, Guaria Corporation executed a chattel mortgage over the personal
properties existing at the resort complex and those yet to be acquired out of the proceeds of the
loan, also to secure the performance of the obligation. Prior to the release of the loan, DBP required
Guaria Corporation to put up a cash equity of P1,470,951.00 for the construction of the buildings
and other improvements on the resort complex.
3

The loan was released in several instalments, and Guaria Corporation used the proceeds to defray
the cost of additional improvements in the resort complex. In all, the amount released
totalled P3,003,617.49, from which DBP withheld P148,102.98 as interest.
6

Guaria Corporation demanded the release of the balance of the loan, but DBP refused.
Instead, DBP directly paid some suppliers of Guaria Corporation over the latter's objection.
DBP found upon inspection of the resort project, its developments and improvements that
Guaria Corporation had not completed the construction works. In a letter dated February 27,
1978, and a telegram dated June 9, 1978, DBP thus demanded that Guaria Corporation expedite
the completion of the project, and warned that it would initiate foreclosure proceedings should
Guaria Corporation not do so.
7

10

Unsatisfied with the non-action and objection of Guaria Corporation, DBP initiated extrajudicial
foreclosure proceedings. A notice of foreclosure sale was sent to Guaria Corporation. The notice
was eventually published, leading the clients and patrons of Guaria Corporation to think that its
business operation had slowed down, and that its resort had already closed.
11

On January 6, 1979, Guaria Corporation sued DBP in the RTC to demand specific
performance of the latter's obligations under the loan agreement, and to stop the foreclosure of
the mortgages (Civil Case No. 12707). However, DBP moved for the dismissal of the complaint,
stating that the mortgaged properties had already been sold to satisfy the obligation of Guaria
Corporation at a public auction held on January 15, 1979 at the Costa Mario Resort Beach Resort in
Oton, Iloilo. Due to this, Guaria Corporation amended the complaint on February 6, 1979 to
seek the nullification of the foreclosure proceedings and the cancellation of the certificate of
12

13

14

sale. DBP filed its answer on December 17, 1979, and trial followed upon the termination of the
pre-trial without any agreement being reached by the parties.
15

16

In the meantime, DBP applied for the issuance of a writ of possession by the RTC. At first, the RTC
denied the application but later granted it upon DBP's motion for reconsideration. Aggrieved, Guaria
Corporation assailed the granting of the application before the CA on certiorari (C.A.-G.R. No.
12670-SP entitled Guaria Agricultural and Realty Development Corporation v. Development Bank of
the Philippines). After the CA dismissed the petition for certiorari, DBP sought the implementation of
the order for the issuance of the writ of possession. Over Guaria Corporation's opposition, the RTC
issued the writ of possession on June 16, 1982.
17

Judgment of the RTC

On January 6, 1998, the RTC rendered its judgment in Civil Case No. 12707, disposing as follows:
WHEREFORE, premises considered, the court hereby resolves that the extra-judicial sales of the
mortgaged properties of the plaintiff by the Office of the Provincial Sheriff of Iloilo on January 15,
1979 are null and void, so with the consequent issuance of certificates of sale to the defendant of
said properties, the registration thereof with the Registry of Deeds and the issuance of the transfer
certificates of title involving the real property in its name.
It is also resolved that defendant give back to the plaintiff or its representative the actual
possession and enjoyment of all the properties foreclosed and possessed by it. To pay the
plaintiff the reasonable rental for the use of its beach resort during the period starting from
the time it (defendant) took over its occupation and use up to the time possession is actually
restored to the plaintiff.
And, on the part of the plaintiff, to pay the defendant the loan it obtained as soon as it takes
possession and management of the beach resort and resume its business operation.
Furthermore, defendant is ordered to pay plaintiff's attorney's fee of P50,000.00.
So ORDERED.

18

Decision of the CA
On appeal (C.A.-G.R. CV No. 59491), DBP challenged the judgment of the RTC, and insisted that:
I
THE TRIAL COURT ERRED AND COMMITTED REVERSIBLE ERROR IN DECLARING DBP'S
FORECLOSURE OF THE MORTGAGED PROPERTIES AS INVALID AND UNCALLED FOR.
II

THE TRIAL COURT GRIEVOUSLY ERRED IN HOLDING THE GROUNDS INVOKED BY DBP TO
JUSTIFY FORECLOSURE AS "NOT SUFFICIENT." ON THE CONTRARY, THE MORTGAGE WAS
FORECLOSED BY EXPRESS AUTHORITY OF PARAGRAPH NO. 4 OF THE MORTGAGE
CONTRACT AND SECTION 2 OF P.D. 385 IN ADDITION TO THE QUESTIONED PAR. NO. 26
PRINTED AT THE BACK OF THE FIRST PAGE OF THE MORTGAGE CONRACT.
III
THE TRIAL COURT ERRED IN HOLDING THE SALES OF THE MORTGAGED PROPERTIES TO
DBP AS INVALID UNDER ARTICLES 2113 AND 2141 OF THE CIVIL CODE.
IV
THE TRIAL COURT GRAVELY ERRED AND COMMITTED [REVERSIBLE] ERROR IN ORDERING
DBP TO RETURN TO PLAINTIFF THE ACTUAL POSSESSION AND ENJOYMENT OF ALL THE
FORECLOSED PROPERTIES AND TO PAY PLAINTIFF REASONABLE RENTAL FOR THE USE
OF THE FORECLOSED BEACH RESORT.
V
THE TRIAL COURT ERRED IN AWARDING ATTORNEY'S FEES AGAINST DBP WHICH MERELY
EXERCISED ITS RIGHTS UNDER THE MORTGAGE CONTRACT.
19

In its decision promulgated on March 26, 2003, however, the CA sustained the RTC's
judgment but deleted the award of attorney's fees, decreeing:
20

WHEREFORE, in view of the foregoing, the Decision dated January 6, 1998, rendered by the
Regional Trial Court of Iloilo City, Branch 25 in Civil Case No. 12707 for Specific Performance
with Preliminary Injunction is hereby AFFIRMED with MODIFICATION, in that the award for
attorney's fees is deleted.
SO ORDERED.

21

DBP timely filed a motion for reconsideration, but the CA denied its motion on October 9, 2003.
Hence, this appeal by DBP.
Issues
DBP submits the following issues for consideration, namely:
WHETHER OR NOT THE DECISION OF THE COURT OF APPEALS DATED MARCH 26, 2003
AND ITS RESOLUTION DATED OCTOBER 9, DENYING PETITIONER'S MOTION FOR
RECONSIDERATION WERE ISSUED IN ACCORDANCE WITH LAW, PREVAILING
JURISPRUDENTIAL DECISION AND SUPPORTED BY EVIDENCE;

WHETHER OR NOT THE HONORABLE COURT OF APPEALS ADHERED TO THE USUAL

COURSE OF JUDICIAL PROCEEDINGS IN DECIDING C.A.-G.R. CV NO. 59491 AND
THEREFORE IN ACCORDANCE WITH THE "LAW OF THE CASE DOCTRINE."
22

Ruling
The appeal lacks merit.
1.
Findings of the CA were supported by the
evidence as well as by law and jurisprudence
DBP submits that the loan had been granted under its supervised credit financing scheme for the
development of a beach resort, and the releases of the proceeds would be subject to conditions that
included the verification of the progress of works in the project to forestall diversion of the loan
proceeds; and that under Stipulation No. 26 of the mortgage contract, further loan releases would be
terminated and the account would be considered due and demandable in the event of a deviation
from the purpose of the loan, including the failure to put up the required equity and the diversion of
the loan proceeds to other purposes. It assails the declaration by the CA that Guaria Corporation
had not yet been in default in its obligations despite violations of the terms of the mortgage contract
securing the promissory note.
23

24

Guaria Corporation counters that it did not violate the terms of the promissory note and the
mortgage contracts because DBP had fully collected the interest notwithstanding that the principal
obligation did not yet fall due and become demandable.
25

The submissions of DBP lack merit and substance.

The agreement between DBP and Guaria Corporation was a loan. Under the law, a loan requires
the delivery of money or any other consumable object by one party to another who acquires
ownership thereof, on the condition that the same amount or quality shall be paid. Loan is a
reciprocal obligation, as it arises from the same cause where one party is the creditor, and the other
the debtor. The obligation of one party in a reciprocal obligation is dependent upon the obligation of
the other, and the performance should ideally be simultaneous. This means that in a loan, the
creditor should release the full loan amount and the debtor repays it when it becomes due and
demandable.
26

27

28

In its assailed decision, the CA found and held thusly:

xxxx
x x x It is undisputed that appellee obtained a loan from appellant, and as security, executed real
estate and chattel mortgages. However, it was never established that appellee was already in
default. Appellant, in a telegram to the appellee reminded the latter to make good on its construction
works, otherwise, it would foreclose the mortgage it executed. It did not mention that appellee was
already in default. The records show that appellant did not make any demand for payment of the

promissory note. It appears that the basis of the foreclosure was not a default on the loan but
appellee's failure to complete the project in accordance with appellant's standards. In fact, appellant
refused to release the remaining balance of the approved loan after it found that the improvements
introduced by appellee were below appellant's expectations.
The loan agreement between the parties is a reciprocal obligation. Appellant in the instant case
bound itself to grant appellee the loan amount of P3,387,000.00 condition on appellee's payment of
the amount when it falls due. Furthermore, the loan was evidenced by the promissory note which
was secured by real estate mortgage over several properties and additional chattel mortgage.
Reciprocal obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the obligation of
the other (Areola vs. Court of Appeals, 236 SCRA 643). They are to be performed simultaneously
such that the performance of one is conditioned upon the simultaneous fulfilment of the other (Jaime
Ong vs. Court of Appeals, 310 SCRA 1). The promise of appellee to pay the loan upon due date as
well as to execute sufficient security for said loan by way of mortgage gave rise to a reciprocal
obligation on the part of appellant to release the entire approved loan amount. Thus, appellees are
entitled to receive the total loan amount as agreed upon and not an incomplete amount.
The appellant did not release the total amount of the approved loan. Appellant therefore could not
have made a demand for payment of the loan since it had yet to fulfil its own obligation. Moreover,
the fact that appellee was not yet in default rendered the foreclosure proceedings premature and
improper.
The properties which stood as security for the loan were foreclosed without any demand having
been made on the principal obligation. 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 vs. Federation of United Namarco Distributors, Inc., 49 SCRA 238; Borje vs. CFI of
Misamis Occidental, 88 SCRA 576).
xxxx
Appellant also admitted in its brief that it indeed failed to release the full amount of the approved
loan. As a consequence, the real estate mortgage of appellee becomes unenforceable, as it cannot
be entirely foreclosed to satisfy appellee's total debt to appellant (Central Bank of the Philippines vs.
Court of Appeals, 139 SCRA 46).
Since the foreclosure proceedings were premature and unenforceable, it only follows that appellee is
still entitled to possession of the foreclosed properties. However, appellant took possession of the
same by virtue of a writ of possession issued in its favor during the pendency of the case. Thus, the
trial court correctly ruled when it ordered appellant to return actual possession of the subject
properties to appellee or its representative and to pay appellee reasonable rents.
However, the award for attorney's fees is deleted. As a rule, the award of attorney's fees is the
exception rather than the rule and counsel's fees are not to be awarded every time a party wins a

suit. Attorney's fees cannot be recovered as part of damages because of the policy that no premium
should be placed on the right to litigate (Pimentel vs. Court of Appeals, et al., 307 SCRA 38).
29

xxxx
We uphold the CA.
To start with, considering that the CA thereby affirmed the factual findings of the RTC, the Court is
bound to uphold such findings, for it is axiomatic that the trial court's factual findings as affirmed by
the CA are binding on appeal due to the Court not being a trier of facts.
Secondly, by its failure to release the proceeds of the loan in their entirety, DBP had no right yet to
exact on Guaria Corporation the latter's compliance with its own obligation under the loan. Indeed,
if a party in a reciprocal contract like a loan does not perform its obligation, the other party cannot be
obliged to perform what is expected of it while the other's obligation remains unfulfilled. In other
words, the latter party does not incur delay.
30

31

Still, DBP called upon Guaria Corporation to make good on the construction works pursuant to the
acceleration clause written in the mortgage contract (i.e., Stipulation No. 26), or else it would
foreclose the mortgages.
32

DBP's actuations were legally unfounded. It is true that loans are often secured by a mortgage
constituted on real or personal property to protect the creditor's interest in case of the default of the
debtor. By its nature, however, a mortgage remains an accessory contract dependent on the
principal obligation, such that enforcement of the mortgage contract will depend on whether or not
there has been a violation of the principal obligation. While a creditor and a debtor could regulate the
order in which they should comply with their reciprocal obligations, it is presupposed that in a loan
the lender should perform its obligation - the release of the full loan amount - before it could demand
that the borrower repay the loaned amount. In other words, Guaria Corporation would not incur in
delay before DBP fully performed its reciprocal obligation.
33

34

Considering that it had yet to release the entire proceeds of the loan, DBP could not yet make an
effective demand for payment upon Guaria Corporation to perform its obligation under the loan.
According to Development Bank of the Philippines v. Licuanan, it would only be when a demand to
pay had been made and was subsequently refused that a borrower could be considered in default,
and the lender could obtain the right to collect the debt or to foreclose the mortgage. Hence,
Guaria Corporation would not be in default without the demand.
35

1wphi1

Assuming that DBP could already exact from the latter its compliance with the loan agreement, the
letter dated February 27, 1978 that DBP sent would still not be regarded as a demand to render
Guaria Corporation in default under the principal contract because DBP was only thereby
requesting the latter "to put up the deficiency in the value of improvements."
36

Under the circumstances, DBP's foreclosure of the mortgage and the sale of the mortgaged
properties at its instance were premature, and, therefore, void and ineffectual.
37

Being a banking institution, DBP owed it to Guaria Corporation to exercise the highest degree of
diligence, as well as to observe the high standards of integrity and performance in all its transactions
because its business was imbued with public interest. The high standards were also necessary to
ensure public confidence in the banking system, for, according to Philippine National Bank v.
Pike: "The stability of banks largely depends on the confidence of the people in the honesty and
efficiency of banks." Thus, DBP had to act with great care in applying the stipulations of its
agreement with Guaria Corporation, lest it erodes such public confidence. Yet, DBP failed in its duty
to exercise the highest degree of diligence by prematurely foreclosing the mortgages and
unwarrantedly causing the foreclosure sale of the mortgaged properties despite Guaria Corporation
not being yet in default. DBP wrongly relied on Stipulation No. 26 as its basis to accelerate the
obligation of Guaria Corporation, for the stipulation was relevant to an Omnibus Agricultural Loan,
to Guaria Corporation's loan which was intended for a project other than agricultural in nature.
38

39

Even so, Guaria Corporation did not elevate the actionability of DBP's negligence to the CA, and
did not also appeal the CA's deletion of the award of attorney's fees allowed by the RTC. With the
decision of the CA consequently becoming final and immutable as to Guaria Corporation, we will
not delve any further on DBP's actionable actuations.
1wphi1

2.
The doctrine of law of the case
did not apply herein
DBP insists that the decision of the CA in C.A.-G.R. No. 12670-SP already constituted the law of the
case. Hence, the CA could not decide the appeal in C.A.-G.R. CV No. 59491 differently.
Guaria Corporation counters that the ruling in C.A.-G.R. No. 12670-SP did not constitute the law of
the case because C.A.-G.R. No. 12670-SP concerned the issue of possession by DBP as the
winning bidder in the foreclosure sale, and had no bearing whatsoever to the legal issues presented
in C.A.-G.R. CV No. 59491.
Law of the case has been defined as the opinion delivered on a former appeal, and means, more
specifically, that whatever is once irrevocably established as the controlling legal rule of decision
between the same parties in the same case continues to be the law of the case, whether correct on
general principles or not, so long as the facts on which such decision was predicated continue to be
the facts of the case before the court.
40

The concept of law of the case is well explained in Mangold v. Bacon, an American case, thusly:
41

The general rule, nakedly and boldly put, is that legal conclusions announced on a first appeal,
whether on the general law or the law as applied to the concrete facts, not only prescribe the duty
and limit the power of the trial court to strict obedience and conformity thereto, but they become and
remain the law of the case in all other steps below or above on subsequent appeal. The rule is
grounded on convenience, experience, and reason. Without the rule there would be no end to
criticism, reagitation, reexamination, and reformulation. In short, there would be endless litigation. It
would be intolerable if parties litigants were allowed to speculate on changes in the personnel of a
court, or on the chance of our rewriting propositions once gravely ruled on solemn argument and

handed down as the law of a given case. An itch to reopen questions foreclosed on a first appeal
would result in the foolishness of the inquisitive youth who pulled up his corn to see how it grew.
Courts are allowed, if they so choose, to act like ordinary sensible persons. The administration of
justice is a practical affair. The rule is a practical and a good one of frequent and beneficial use.
The doctrine of law of the case simply means, therefore, that when an appellate court has once
declared the law in a case, its declaration continues to be the law of that case even on a subsequent
appeal, notwithstanding that the rule thus laid down may have been reversed in other cases. For
practical considerations, indeed, once the appellate court has issued a pronouncement on a point
that was presented to it with full opportunity to be heard having been accorded to the parties, the
pronouncement should be regarded as the law of the case and should not be reopened on remand
of the case to determine other issues of the case, like damages. But the law of the case, as the
name implies, concerns only legal questions or issues thereby adjudicated in the former appeal.
42

43

The foregoing understanding of the concept of the law of the case exposes DBP's insistence to be
unwarranted.
To start with, the ex parte proceeding on DBP's application for the issuance of the writ of possession
was entirely independent from the judicial demand for specific performance herein. In fact, C.A.-G.R.
No. 12670-SP, being the interlocutory appeal concerning the issuance of the writ of possession while
the main case was pending, was not at all intertwined with any legal issue properly raised and
litigated in C.A.-G.R. CV No. 59491, which was the appeal to determine whether or not DBP's
foreclosure was valid and effectual. And, secondly, the ruling in C.A.-G.R. No. 12670-SP did not
settle any question of law involved herein because this case for specific performance was not a
continuation of C.A.-G.R. No. 12670-SP (which was limited to the propriety of the issuance of the
writ of possession in favor of DBP), and vice versa.
3.
Guarifia Corporation is legally entitled to the
restoration of the possession of the resort complex
and payment of reasonable rentals by DBP
Having found and pronounced that the extrajudicial foreclosure by DBP was premature, and
that the ensuing foreclosure sale was void and ineffectual, the Court affirms the order for the
restoration of possession to Guarifia Corporation and the payment of reasonable rentals for
the use of the resort. The CA properly held that the premature and invalid foreclosure had
unjustly dispossessed Guarifia Corporation of its properties. Consequently, the restoration of
possession and the payment of reasonable rentals were in accordance with Article 561 of the
Civil Code, which expressly states that one who recovers, according to law, possession
unjustly lost shall be deemed for all purposes which may redound to his benefit to have
enjoyed it without interruption.
WHEREFORE, the Court AFFIRMS the decision promulgated on March 26, 2003; and ORDERS the
petitioner to pay the costs of suit.
SO ORDERED.

G.R. No. 120098

October 2, 2001

RUBY L. TSAI, petitioner,

vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS, INC. and MAMERTO R
VILLALUZ, respondents.
x---------------------------------------------------------x
[G.R. No. 120109. October 2, 2001.]
PHILIPPINE BANK OF COMMUNICATIONS, petitioner,
vs.
HON. COURT OF APPEALS, EVER TEXTILE MILLS and MAMERTO R VILLALUZ, respondents.
QUISUMBING, J.:
These consolidated cases assail the decision1 of the Court of Appeals in CA-G.R. CV No. 32986,
affirming the decision2 of the Regional Trial Court of Manila, Branch 7, in Civil Case No. 89-48265.
Also assailed is respondent court's resolution denying petitioners' motion for reconsideration.
On November 26, 1975, respondent Ever Textile Mills, Inc. (EVERTEX) obtained a three million peso
(P3,000,000.00) loan from petitioner Philippine Bank of Communications (PBCom). As security for
the loan, EVERTEX executed in favor of PBCom, a deed of Real and Chattel Mortgage over the lot
under TCT No. 372097, where its factory stands, and the chattels located therein as enumerated in a
schedule attached to the mortgage contract. The pertinent portions of the Real and Chattel Mortgage
are quoted below:
MORTGAGE
(REAL AND CHATTEL)
xxx

xxx

xxx

The MORTGAGOR(S) hereby transfer(s) and convey(s), by way of First Mortgage, to the
MORTGAGEE, . . . certain parcel(s) of land, together with all the buildings and improvements
now existing or which may hereafter exist thereon, situated in . . .
"Annex A"
(Real and Chattel Mortgage executed by Ever Textile Mills in favor of PBCommunications
continued)
LIST OF MACHINERIES & EQUIPMENT
A. Forty Eight (48) units of Vayrow Knitting Machines-Tompkins made in Hongkong:

Serial Numbers Size of Machines

xxx

xxx

xxx

B. Sixteen (16) sets of Vayrow Knitting Machines made in Taiwan.

xxx

xxx

xxx

C. Two (2) Circular Knitting Machines made in West Germany.

xxx

xxx

xxx

D. Four (4) Winding Machines.

xxx

xxx

xxx
SCHEDULE "A"

I. TCT # 372097 - RIZAL

xxx

xxx

xxx

II. Any and all buildings and improvements now existing or hereafter to exist on the abovementioned lot.
III. MACHINERIES & EQUIPMENT situated, located and/or installed on the abovementioned lot located at . . .
(a) Forty eight sets (48) Vayrow Knitting Machines . . .
(b) Sixteen sets (16) Vayrow Knitting Machines . . .
(c) Two (2) Circular Knitting Machines . . .
(d) Two (2) Winding Machines . . .
(e) Two (2) Winding Machines . . .
IV. Any and all replacements, substitutions, additions, increases and accretions to above
properties.
xxx

xxx

xxx3

On April 23, 1979, PBCom granted a second loan of P3,356,000.00 to EVERTEX. The loan was
secured by a Chattel Mortgage over personal properties enumerated in a list attached thereto.
These listed properties were similar to those listed in Annex A of the first mortgage deed.

After April 23, 1979, the date of the execution of the second mortgage mentioned above, EVERTEX
purchased various machines and equipments.
On November 19, 1982, due to business reverses, EVERTEX filed insolvency proceedings docketed
as SP Proc. No. LP-3091-P before the defunct Court of First Instance of Pasay City, Branch XXVIII.
The CFI issued an order on November 24, 1982 declaring the corporation insolvent. All its assets
were taken into the custody of the Insolvency Court, including the collateral, real and personal,
securing the two mortgages as abovementioned.
In the meantime, upon EVERTEX's failure to meet its obligation to PBCom, the latter commenced
extrajudicial foreclosure proceedings against EVERTEX under Act 3135, otherwise known as "An Act
to Regulate the Sale of Property under Special Powers Inserted in or Annexed to Real Estate
Mortgages" and Act 1506 or "The Chattel Mortgage Law". A Notice of Sheriff's Sale was issued on
December 1, 1982.
On December 15, 1982, the first public auction was held where petitioner PBCom emerged as the
highest bidder and a Certificate of Sale was issued in its favor on the same date. On December 23,
1982, another public auction was held and again, PBCom was the highest bidder. The sheriff issued
a Certificate of Sale on the same day.
On March 7, 1984, PBCom consolidated its ownership over the lot and all the properties in it. In
November 1986, it leased the entire factory premises to petitioner Ruby L. Tsai for P50,000.00 a
month. On May 3, 1988, PBCom sold the factory, lock, stock and barrel to Tsai for P9,000,000.00,
including the contested machineries.
On March 16, 1989, EVERTEX filed a complaint for annulment of sale, reconveyance, and damages
with the Regional Trial Court against PBCom, alleging inter alia that the extrajudicial foreclosure of
subject mortgage was in violation of the Insolvency Law. EVERTEX claimed that no rights having
been transmitted to PBCom over the assets of insolvent EVERTEX, therefore Tsai acquired no rights
over such assets sold to her, and should reconvey the assets.
Further, EVERTEX averred that PBCom, without any legal or factual basis, appropriated the
contested properties, which were not included in the Real and Chattel Mortgage of November 26,
1975 nor in the Chattel Mortgage of April 23, 1979, and neither were those properties included in the
Notice of Sheriff's Sale dated December 1, 1982 and Certificate of Sale . . . dated December 15,
1982.
The disputed properties, which were valued at P4,000,000.00, are: 14 Interlock Circular Knitting
Machines, 1 Jet Drying Equipment, 1 Dryer Equipment, 1 Raisin Equipment and 1 Heatset
Equipment.
The RTC found that the lease and sale of said personal properties were irregular and illegal because
they were not duly foreclosed nor sold at the December 15, 1982 auction sale since these were not
included in the schedules attached to the mortgage contracts. The trial court decreed:

WHEREFORE, judgment is hereby rendered in favor of plaintiff corporation and against the
defendants:
1. Ordering the annulment of the sale executed by defendant Philippine Bank of
Communications in favor of defendant Ruby L. Tsai on May 3, 1988 insofar as it affects the
personal properties listed in par. 9 of the complaint, and their return to the plaintiff
corporation through its assignee, plaintiff Mamerto R. Villaluz, for disposition by the
Insolvency Court, to be done within ten (10) days from finality of this decision;
2. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of
P5,200,000.00 as compensation for the use and possession of the properties in question
from November 1986 to February 1991 and P100,000.00 every month thereafter, with
interest thereon at the legal rate per annum until full payment;
3. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of
P50,000.00 as and for attorney's fees and expenses of litigation;
4. Ordering the defendants to pay jointly and severally the plaintiff corporation the sum of
P200,000.00 by way of exemplary damages;
5. Ordering the dismissal of the counterclaim of the defendants; and
6. Ordering the defendants to proportionately pay the costs of suit.
SO ORDERED.4
Dissatisfied, both PBCom and Tsai appealed to the Court of Appeals, which issued its decision dated
August 31, 1994, the dispositive portion of which reads:
WHEREFORE, except for the deletion therefrom of the award; for exemplary damages, and
reduction of the actual damages, from P100,000.00 to P20,000.00 per month, from November 1986
until subject personal properties are restored to appellees, the judgment appealed from is hereby
AFFIRMED, in all other respects. No pronouncement as to costs.5
Motion for reconsideration of the above decision having been denied in the resolution of April 28,
1995, PBCom and Tsai filed their separate petitions for review with this Court.
In G.R No. 120098, petitioner Tsai ascribed the following errors to the respondent court:
I
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN EFFECT
MAKING A CONTRACT FOR THE PARTIES BY TREATING THE 1981 ACQUIRED
MACHINERIES AS CHATTELS INSTEAD OF REAL PROPERTIES WITHIN THEIR
EARLIER 1975 DEED OF REAL AND CHATTEL MORTGAGE OR 1979 DEED OF
CHATTEL MORTGAGE.

II
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN HOLDING
THAT THE DISPUTED 1981 MACHINERIES ARE NOT REAL PROPERTIES DEEMED
PART OF THE MORTGAGE DESPITE THE CLEAR IMPORT OF THE EVIDENCE AND
APPLICABLE RULINGS OF THE SUPREME COURT.
III
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN DEEMING
PETITIONER A PURCHASER IN BAD FAITH.
IV
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN ASSESSING
PETITIONER ACTUAL DAMAGES, ATTORNEY'S FEES AND EXPENSES OF LITIGATION
FOR WANT OF VALID FACTUAL AND LEGAL BASIS.
V
THE HONORABLE COURT OF APPEALS (SECOND DIVISION) ERRED IN HOLDING
AGAINST PETITIONER'S ARGUMENTS ON PRESCRIPTION AND LACHES.6
In G.R. No. 120098, PBCom raised the following issues:
I.
DID THE COURT OF APPEALS VALIDLY DECREE THE MACHINERIES LISTED UNDER
PARAGRAPH 9 OF THE COMPLAINT BELOW AS PERSONAL PROPERTY OUTSIDE OF THE
1975 DEED OF REAL ESTATE MORTGAGE AND EXCLUDED THEM FROM THE REAL
PROPERTY EXTRAJUDICIALLY FORECLOSED BY PBCOM DESPITE THE PROVISION IN THE
1975 DEED THAT ALL AFTER-ACQUIRED PROPERTIES DURING THE LIFETIME OF THE
MORTGAGE SHALL FORM PART THEREOF, AND DESPITE THE UNDISPUTED FACT THAT
SAID MACHINERIES ARE BIG AND HEAVY, BOLTED OR CEMENTED ON THE REAL PROPERTY
MORTGAGED BY EVER TEXTILE MILLS TO PBCOM, AND WERE ASSESSED FOR REAL
ESTATE TAX PURPOSES?
II
CAN PBCOM, WHO TOOK POSSESSION OF THE MACHINERIES IN QUESTION IN GOOD
FAITH, EXTENDED CREDIT FACILITIES TO EVER TEXTILE MILLS WHICH AS OF 1982
TOTALLED P9,547,095.28, WHO HAD SPENT FOR MAINTENANCE AND SECURITY ON THE
DISPUTED MACHINERIES AND HAD TO PAY ALL THE BACK TAXES OF EVER TEXTILE MILLS
BE LEGALLY COMPELLED TO RETURN TO EVER THE SAID MACHINERIES OR IN LIEU
THEREOF BE ASSESSED DAMAGES. IS THAT SITUATION TANTAMOUNT TO A CASE OF
UNJUST ENRICHMENT?7

The principal issue, in our view, is whether or not the inclusion of the questioned properties in the
foreclosed properties is proper. The secondary issue is whether or not the sale of these properties to
petitioner Ruby Tsai is valid.
For her part, Tsai avers that the Court of Appeals in effect made a contract for the parties by treating
the 1981 acquired units of machinery as chattels instead of real properties within their earlier 1975
deed of Real and Chattel Mortgage or 1979 deed of Chattel Mortgage. 8 Additionally, Tsai argues that
respondent court erred in holding that the disputed 1981 machineries are not real properties. 9 Finally,
she contends that the Court of Appeals erred in holding against petitioner's arguments on
prescription and laches10 and in assessing petitioner actual damages, attorney's fees and expenses
of litigation, for want of valid factual and legal basis.11
Essentially, PBCom contends that respondent court erred in affirming the lower court's judgment
decreeing that the pieces of machinery in dispute were not duly foreclosed and could not be legally
leased nor sold to Ruby Tsai. It further argued that the Court of Appeals' pronouncement that the
pieces of machinery in question were personal properties have no factual and legal basis. Finally, it
asserts that the Court of Appeals erred in assessing damages and attorney's fees against PBCom.
In opposition, private respondents argue that the controverted units of machinery are not "real
properties" but chattels, and, therefore, they were not part of the foreclosed real properties,
rendering the lease and the subsequent sale thereof to Tsai a nullity.12
Considering the assigned errors and the arguments of the parties, we find the petitions devoid of
merit and ought to be denied.
Well settled is the rule that the jurisdiction of the Supreme Court in a petition for review on certiorari
under Rule 45 of the Revised Rules of Court is limited to reviewing only errors of law, not of fact,
unless the factual findings complained of are devoid of support by the evidence on record or the
assailed judgment is based on misapprehension of facts.13 This rule is applied more stringently when
the findings of fact of the RTC is affirmed by the Court of Appeals.14
The following are the facts as found by the RTC and affirmed by the Court of Appeals that are
decisive of the issues: (1) the "controverted machineries" are not covered by, or included in, either of
the two mortgages, the Real Estate and Chattel Mortgage, and the pure Chattel Mortgage; (2) the
said machineries were not included in the list of properties appended to the Notice of Sale, and
neither were they included in the Sheriff's Notice of Sale of the foreclosed properties. 15
Petitioners contend that the nature of the disputed machineries, i.e., that they were heavy, bolted or
cemented on the real property mortgaged by EVERTEX to PBCom, make them ipso
facto immovable under Article 415 (3) and (5) of the New Civil Code. This assertion, however, does
not settle the issue. Mere nuts and bolts do not foreclose the controversy. We have to look at the
parties' intent.
While it is true that the controverted properties appear to be immobile, a perusal of the contract of
Real and Chattel Mortgage executed by the parties herein gives us a contrary indication. In the case
at bar, both the trial and the appellate courts reached the same finding that the true intention of

PBCOM and the owner, EVERTEX, is to treat machinery and equipment as chattels. The pertinent
portion of respondent appellate court's ruling is quoted below:
As stressed upon by appellees, appellant bank treated the machineries as chattels; never as
real properties. Indeed, the 1975 mortgage contract, which was actually real and chattel
mortgage, militates against appellants' posture. It should be noted that the printed form used
by appellant bank was mainly for real estate mortgages. But reflective of the true intention of
appellant PBCOM and appellee EVERTEX was the typing in capital letters, immediately
following the printed caption of mortgage, of the phrase "real and chattel." So also, the
"machineries and equipment" in the printed form of the bank had to be inserted in the blank
space of the printed contract and connected with the word "building" by typewritten slash
marks. Now, then, if the machineries in question were contemplated to be included in the
real estate mortgage, there would have been no necessity to ink a chattel mortgage
specifically mentioning as part III of Schedule A a listing of the machineries covered thereby.
It would have sufficed to list them as immovables in the Deed of Real Estate Mortgage of the
land and building involved.
As regards the 1979 contract, the intention of the parties is clear and beyond question. It
refers solely tochattels. The inventory list of the mortgaged properties is an itemization of
sixty-three (63) individually described machineries while the schedule listed only machines
and 2,996,880.50 worth of finished cotton fabrics and natural cotton fabrics. 16
In the absence of any showing that this conclusion is baseless, erroneous or uncorroborated by the
evidence on record, we find no compelling reason to depart therefrom.
Too, assuming arguendo that the properties in question are immovable by nature, nothing detracts
the parties from treating it as chattels to secure an obligation under the principle of estoppel. As far
back as Navarro v. Pineda, 9 SCRA 631 (1963), an immovable may be considered a personal
property if there is a stipulation as when it is used as security in the payment of an obligation where
a chattel mortgage is executed over it, as in the case at bar.
In the instant case, the parties herein: (1) executed a contract styled as "Real Estate Mortgage and
Chattel Mortgage," instead of just "Real Estate Mortgage" if indeed their intention is to treat all
properties included therein as immovable, and (2) attached to the said contract a separate "LIST OF
MACHINERIES & EQUIPMENT". These facts, taken together, evince the conclusion that the parties'
intention is to treat these units of machinery as chattels. A fortiori, the contested after-acquired
properties, which are of the same description as the units enumerated under the title "LIST OF
MACHINERIES & EQUIPMENT," must also be treated as chattels.
Accordingly, we find no reversible error in the respondent appellate court's ruling that inasmuch as
the subject mortgages were intended by the parties to involve chattels, insofar as equipment and
machinery were concerned, the Chattel Mortgage Law applies, which provides in Section 7 thereof
that: "a chattel mortgage shall be deemed to cover only the property described therein and not like
or substituted property thereafter acquired by the mortgagor and placed in the same depository as
the property originally mortgaged, anything in the mortgage to the contrary notwithstanding."

And, since the disputed machineries were acquired in 1981 and could not have been involved in the
1975 or 1979 chattel mortgages, it was consequently an error on the part of the Sheriff to include
subject machineries with the properties enumerated in said chattel mortgages.
As the auction sale of the subject properties to PBCom is void, no valid title passed in its favor.
Consequently, the sale thereof to Tsai is also a nullity under the elementary principle of nemo dat
quod non habet, one cannot give what one does not have.17
Petitioner Tsai also argued that assuming that PBCom's title over the contested properties is a
nullity, she is nevertheless a purchaser in good faith and for value who now has a better right than
EVERTEX.
To the contrary, however, are the factual findings and conclusions of the trial court that she is not a
purchaser in good faith. Well-settled is the rule that the person who asserts the status of a purchaser
in good faith and for value has the burden of proving such assertion. 18 Petitioner Tsai failed to
discharge this burden persuasively.
Moreover, a purchaser in good faith and for value is one who buys the property of another without
notice that some other person has a right to or interest in such property and pays a full and fair price
for the same, at the time of purchase, or before he has notice of the claims or interest of some other
person in the property.19Records reveal, however, that when Tsai purchased the controverted
properties, she knew of respondent's claim thereon. As borne out by the records, she received the
letter of respondent's counsel, apprising her of respondent's claim, dated February 27, 1987. 20 She
replied thereto on March 9, 1987.21 Despite her knowledge of respondent's claim, she proceeded to
buy the contested units of machinery on May 3, 1988. Thus, the RTC did not err in finding that she
was not a purchaser in good faith.
Petitioner Tsai's defense of indefeasibility of Torrens Title of the lot where the disputed properties are
located is equally unavailing. This defense refers to sale of lands and not to sale of properties
situated therein. Likewise, the mere fact that the lot where the factory and the disputed properties
stand is in PBCom's name does not automatically make PBCom the owner of everything found
therein, especially in view of EVERTEX's letter to Tsai enunciating its claim.
Finally, petitioners' defense of prescription and laches is less than convincing. We find no cogent
reason to disturb the consistent findings of both courts below that the case for the reconveyance of
the disputed properties was filed within the reglementary period. Here, in our view, the doctrine of
laches does not apply. Note that upon petitioners' adamant refusal to heed EVERTEX's claim,
respondent company immediately filed an action to recover possession and ownership of the
disputed properties. There is no evidence showing any failure or neglect on its part, for an
unreasonable and unexplained length of time, to do that which, by exercising due diligence, could or
should have been done earlier. The doctrine of stale demands would apply only where by reason of
the lapse of time, it would be inequitable to allow a party to enforce his legal rights. Moreover, except
for very strong reasons, this Court is not disposed to apply the doctrine of laches to prejudice or
defeat the rights of an owner.22

As to the award of damages, the contested damages are the actual compensation, representing
rentals for the contested units of machinery, the exemplary damages, and attorney's fees.
As regards said actual compensation, the RTC awarded P100,000.00 corresponding to the unpaid
rentals of the contested properties based on the testimony of John Chua, who testified that the
P100,000.00 was based on the accepted practice in banking and finance, business and investments
that the rental price must take into account the cost of money used to buy them. The Court of
Appeals did not give full credence to Chua's projection and reduced the award to P20,000.00.
Basic is the rule that to recover actual damages, the amount of loss must not only be capable of
proof but must actually be proven with reasonable degree of certainty, premised upon competent
proof or best evidence obtainable of the actual amount thereof. 23 However, the allegations of
respondent company as to the amount of unrealized rentals due them as actual damages remain
mere assertions unsupported by documents and other competent evidence. In determining actual
damages, the court cannot rely on mere assertions, speculations, conjectures or guesswork but
must depend on competent proof and on the best evidence obtainable regarding the actual amount
of loss.24 However, we are not prepared to disregard the following dispositions of the respondent
appellate court:
. . . In the award of actual damages under scrutiny, there is nothing on record warranting the
said award of P5,200,000.00, representing monthly rental income of P100,000.00 from
November 1986 to February 1991, and the additional award of P100,000.00 per month
thereafter.
As pointed out by appellants, the testimonial evidence, consisting of the testimonies of Jonh
(sic) Chua and Mamerto Villaluz, is shy of what is necessary to substantiate the actual
damages allegedly sustained by appellees, by way of unrealized rental income of subject
machineries and equipments.
The testimony of John Cua (sic) is nothing but an opinion or projection based on what is
claimed to be a practice in business and industry. But such a testimony cannot serve as the
sole basis for assessing the actual damages complained of. What is more, there is no
showing that had appellant Tsai not taken possession of the machineries and equipments in
question, somebody was willing and ready to rent the same for P100,000.00 a month.
xxx

xxx

xxx

Then, too, even assuming arguendo that the said machineries and equipments could have
generated a rental income of P30,000.00 a month, as projected by witness Mamerto Villaluz,
the same would have been a gross income. Therefrom should be deducted or removed,
expenses for maintenance and repairs . . . Therefore, in the determination of the actual
damages or unrealized rental income sued upon, there is a good basis to calculate that at
least four months in a year, the machineries in dispute would have been idle due to absence
of a lessee or while being repaired. In the light of the foregoing rationalization and
computation, We believe that a net unrealized rental income of P20,000.00 a month, since
November 1986, is more realistic and fair.25

As to exemplary damages, the RTC awarded P200,000.00 to EVERTEX which the Court of Appeals
deleted. But according to the CA, there was no clear showing that petitioners acted malevolently,
wantonly and oppressively. The evidence, however, shows otherwise.It is a requisite to award
exemplary damages that the wrongful act must be accompanied by bad faith, 26 and the guilty acted
in a wanton, fraudulent, oppressive, reckless or malevolent manner.27 As previously stressed,
petitioner Tsai's act of purchasing the controverted properties despite her knowledge of EVERTEX's
claim was oppressive and subjected the already insolvent respondent to gross disadvantage.
Petitioner PBCom also received the same letters of Atty. Villaluz, responding thereto on March 24,
1987.28 Thus, PBCom's act of taking all the properties found in the factory of the financially
handicapped respondent, including those properties not covered by or included in the mortgages, is
equally oppressive and tainted with bad faith. Thus, we are in agreement with the RTC that an award
of exemplary damages is proper.
The amount of P200,000.00 for exemplary damages is, however, excessive. Article 2216 of the Civil
Code provides that no proof of pecuniary loss is necessary for the adjudication of exemplary
damages, their assessment being left to the discretion of the court in accordance with the
circumstances of each case.29 While the imposition of exemplary damages is justified in this case,
equity calls for its reduction. In Inhelder Corporation v. Court of Appeals, G.R. No. L-52358, 122
SCRA 576, 585, (May 30, 1983), we laid down the rule that judicial discretion granted to the courts in
the assessment of damages must always be exercised with balanced restraint and measured
objectivity. Thus, here the award of exemplary damages by way of example for the public good
should be reduced to P100,000.00.
By the same token, attorney's fees and other expenses of litigation may be recovered when
exemplary damages are awarded.30 In our view, RTC's award of P50,000.00 as attorney's fees and
expenses of litigation is reasonable, given the circumstances in these cases.
WHEREFORE, the petitions are DENIED. The assailed decision and resolution of the Court of
Appeals in CA-G.R. CV No. 32986 are AFFIRMED WITH MODIFICATIONS. Petitioners Philippine
Bank of Communications and Ruby L. Tsai are hereby ordered to pay jointly and severally Ever
Textile Mills, Inc. the following: (1) P20,000.00 per month, as compensation for the use and
possession of the properties in question from November 198631 until subject personal properties are
restored to respondent corporation; (2) P100,000.00 by way of exemplary damages, and (3)
P50,000.00 as attorney's fees and litigation expenses. Costs against petitioners.
SO ORDERED.

Acme Shoe Rubber & Plastic Corporation v.

Court of Appeals, G.R. No. 173017 March
17, 1996
MARCH 16, 2014LEAVE A COMMENT

While a pledge, real estate mortgage, or antichresis may exceptionally

secure after-incurred obligations so long as these future debts are

accurately described, a chattel mortgage, however, can only cover

obligations existing at the time the mortgage is constituted.
Facts: Chua Pac, the president and general manager of co-petitioner Acme
Shoe, Rubber & Plastic Corporation, executed, for and in behalf of the
company, a chattel mortgage in favor of Producers Bank of the Philippines. A
provision in the chattel mortgage agreement xx subsequent promissory note or
notes either as a renewal of the former note, as an extension thereof, or as a
new loan, or is given any other kind of accommodations such as overdrafts,
letters of credit, acceptances and bills of exchange, releases of import
shipments on Trust Receipts, etc.,xxx. The first loan was paid by petitioner
corporation. Subsequently, in 1981, it obtained from Producers Bank additional
financial accommodations. These borrowings were on due date also fully paid.
The bank yet again extended a 3rd loam to ACME a covered by four promissory
notes. Due to financial constraints, the loan was not settled at maturity. The
bank thereupon applied for an extrajudicial foreclosure of the chattel mortgage,
prompting ACME to forthwith file an action for injunction, with damages and a
prayer for a writ of preliminary injunction.
Issue: Whether or not chattel mortgage may secure after incurred obligations.
Held: While a pledge, real estate mortgage, or antichresis may exceptionally
secure after-incurred obligations so long as these future debts are accurately
described, a chattel mortgage, however, can only cover obligations existing at
the time the mortgage is constituted. Although a promiseexpressed in a chattel
mortgage to include debts that are yet to be contracted can be a binding
commitment that can be compelled upon, the security itself, however, does not
come into existence or arise until after a chattel mortgage agreement covering
the newly contracted debt is executed either by concluding a fresh chattel
mortgage or by amending the old contract conformably with the form prescribed
by the Chattel Mortgage Law. Refusal on the part of the borrower to execute the
agreement so as to cover the after-incurred obligation can constitute an act of
default on the part of the borrower of the financing agreement whereon the
promise is written but, of course, the remedy of foreclosure can only cover the
debts extant at the time of constitution and during the life of the chattel
mortgage sought to be foreclosed.
Contracts of security are either personal or real. In contracts of personal
security, such as a guaranty or a suretyship, the faithful performance of the
obligation by the principal debtor is secured by the personal commitment of
another (the guarantor or surety). In contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment is secured by
anencumbrance of property in pledge, the placing of movable property in the
possession of the creditor; in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed by law; in real estate
mortgage, by the execution of a public instrument encumbering the real
property covered thereby; and in antichresis, by a written instrument granting to
the creditor the right to receive the fruits of an immovable property with the
obligation to apply such fruits to the payment of interest, if owing, and

thereafter to the principal of his credit upon the essential condition that if the
principal obligation becomes due and the debtor defaults, then the property
encumbered can be alienated for the payment of the obligation, but that should
the obligation be duly paid, then the contract is automatically extinguished
proceeding from the accessory characterof the agreement. As the law so puts
it, once the obligation is complied with, then the contract of security
becomes, ipso facto, null and void.

[G.R. No. 103576. August 22, 1996]

ACME SHOE, RUBBER & PLASTIC CORPORATION and CHUA

PAC, petitioners, vs. HON. COURT OF APPEALS, PRODUCERS
BANK OF THE PHILIPPINES and REGIONAL SHERIFF OF
CALOOCAN CITY, respondents.
DECISION
VITUG, J.:

Would it be valid and effective to have a clause in a chattel mortgage that

purports to likewise extend its coverage to obligations yet to be contracted or
incurred? This question is the core issue in the instant petition for review
on certiorari.
Petitioner Chua Pac, the president and general manager of co-petitioner
"Acme Shoe, Rubber & Plastic Corporation," executed on 27 June 1978, for
and in behalf of the company, a chattel mortgage in favor of private
respondent Producers Bank of the Philippines. The mortgage stood by way of
security for petitioner's corporate loan of three million pesos
(P3,000,000.00). A provision in the chattel mortgage agreement was to this
effect "(c) If the MORTGAGOR, his heirs, executors or administrators shall well and truly
perform the full obligation or obligations above-stated according to the terms thereof,
then this mortgage shall be null and void. x x x.
"In case the MORTGAGOR executes subsequent promissory note or notes either as a
renewal of the former note, as an extension thereof, or as a new loan, or is given any
other kind of accommodations such as overdrafts, letters of credit, acceptances and

bills of exchange, releases of import shipments on Trust Receipts, etc., this mortgage
shall also stand as security for the payment of the said promissory note or notes and/or
accommodations without the necessity of executing a new contract and this mortgage
shall have the same force and effect as if the said promissory note or notes and/or
accommodations were existing on the date thereof. This mortgage shall also stand as
security for said obligations and any and all other obligations of the MORTGAGOR
to the MORTGAGEE of whatever kind and nature, whether such obligations have
been contracted before, during or after the constitution of this mortgage."
[1]

In due time, the loan of P3,000,000.00 was paid by petitioner

corporation. Subsequently, in 1981, it obtained from respondent bank
additional financial accommodations totalling P2,700,000.00. These
borrowings were on due date also fully paid.
[2]

On 10 and 11 January 1984, the bank yet again extended to petitioner

corporation a loan of one million pesos (P1,000,000.00) covered by four
promissory notes for P250,000.00 each.Due to financial constraints, the loan
was not settled at maturity. Respondent bank thereupon applied for an
extrajudicial foreclosure of the chattel mortgage, hereinbefore cited, with the
Sheriff of Caloocan City, prompting petitioner corporation to forthwith file an
action for injunction, with damages and a prayer for a writ of preliminary
injunction, before the Regional Trial Court of Caloocan City (Civil Case No. C12081). Ultimately, the court dismissed the complaint and ordered the
foreclosure of the chattel mortgage. It held petitioner corporation bound by the
stipulations, aforequoted, of the chattel mortgage.
[3]

Petitioner corporation appealed to the Court of Appeals which, on 14

August 1991, affirmed, "in all respects," the decision of the court a quo. The
motion for reconsideration was denied on 24 January 1992.
[4]

The instant petition interposed by petitioner corporation was initially denied

on 04 March 1992 by this Court for having been insufficient in form and
substance. Private respondent filed a motion to dismiss the petition while
petitioner corporation filed a compliance and an opposition to private
respondent's motion to dismiss. The Court denied petitioner's first motion for
reconsideration but granted a second motion for reconsideration, thereby
reinstating the petition and requiring private respondent to comment thereon.
[5]

Except in criminal cases where the penalty of reclusion perpetua or death

is imposed which the Court so reviews as a matter of course, an appeal from
judgments of lower courts is not a matter of right but of sound judicial
discretion. The circulars of the Court prescribing technical and other
procedural requirements are meant to weed out unmeritorious petitions that
can unnecessarily clog the docket and needlessly consume the time of the
Court. These technical and procedural rules, however, are intended to help
secure, not suppress, substantial justice. A deviation from the rigid
enforcement of the rules may thus be allowed to attain the prime objective for,
after all, the dispensation of justice is the core reason for the existence of
courts. In this instance, once again, the Court is constrained to relax the rules
in order to give way to and uphold the paramount and overriding interest of
justice.
[6]

Contracts of security are either personal or real. In contracts of personal

security, such as a guaranty or a suretyship, the faithful performance of the
obligation by the principal debtor is secured by the personal commitment of
another (the guarantor or surety). In contracts of real security, such as a
pledge, a mortgage or an antichresis, that fulfillment is secured by
anencumbrance of property - in pledge, the placing of movable property in the
possession of the creditor; in chattel mortgage, by the execution of the
corresponding deed substantially in the form prescribed by law; in real estate
mortgage, by the execution of a public instrument encumbering the real
property covered thereby; and in antichresis, by a written instrument granting
to the creditor the right to receive the fruits of an immovable property with the
obligation to apply such fruits to the payment of interest, if owing, and
thereafter to the principal of his credit - upon the essential condition that if the
principal obligation becomes due and the debtor defaults, then the property
encumbered can be alienated for the payment of the obligation, but that
should the obligation be duly paid, then the contract is automatically
extinguished proceeding from the accessory character of the agreement. As
the law so puts it, once the obligation is complied with, then the contract of
security becomes, ipso facto, null and void.
[7]

[8]

[9]

While a pledge, real estate mortgage, or antichresis may exceptionally

secure after-incurred obligations so long as these future debts are accurately

described, a chattel mortgage, however, can only cover obligations existing

at the time the mortgage is constituted. Although a promise expressed in a
chattel mortgage to include debts that are yet to be contracted can be a
binding commitment that can be compelled upon, the security itself, however,
does not come into existence or arise until after a chattel mortgage agreement
covering the newly contracted debt is executed either by concluding a fresh
chattel mortgage or by amending the old contract conformably with the form
prescribed by the Chattel Mortgage Law. Refusal on the part of the borrower
to execute the agreement so as to cover the after-incurred obligation can
constitute an act of default on the part of the borrower of the financing
agreement whereon the promise is written but, of course, the remedy of
foreclosure can only cover the debts extant at the time of constitution and
during the life of the chattel mortgage sought to be foreclosed.
[10]

[11]

A chattel mortgage, as hereinbefore so intimated, must comply

substantially with the form prescribed by the Chattel Mortgage Law itself. One
of the requisites, under Section 5 thereof, is an affidavit of good faith. While it
is not doubted that if such an affidavit is not appended to the agreement, the
chattel mortgage would still be valid between the parties (not against third
persons acting in good faith ), the fact, however, that the statute has provided
that the parties to the contract must execute an oath that [12]

"x x x (the) mortgage is made for the purpose of securing the obligation specified in
the conditions thereof, and for no other purpose, and that the same is a just and valid
obligation, and one not entered into for the purpose of fraud."
[13]

makes it obvious that the debt referred to in the law is a current, not an
obligation that is yet merely contemplated. In the chattel mortgage here
involved, the only obligation specified in the chattel mortgage contract was the
P3,000,000.00 loan which petitioner corporation later fully paid. By virtue of
Section 3 of the Chattel Mortgage Law, the payment of the obligation
automatically rendered the chattel mortgage void or terminated. In Belgian
Catholic Missionaries, Inc., vs. Magallanes Press, Inc., et al., the Court said [14]

"x x x A mortgage that contains a stipulation in regard to future advances in the credit
will take effect only from the date the same are made and not from the date of the
mortgage."
[15]

The significance of the ruling to the instant problem would be that since the
1978 chattel mortgage had ceased to exist coincidentally with the full payment
of the P3,000,000.00 loan, there no longer was any chattel mortgage that
could cover the new loans that were concluded thereafter.
[16]

We find no merit in petitioner corporation's other prayer that the case

should be remanded to the trial court for a specific finding on the amount of
damages it has sustained "as a result of the unlawful action taken by
respondent bank against it." This prayer is not reflected in its complaint
which has merely asked for the amount of P3,000,000.00 by way of moral
damages. In LBC Express, Inc. vs. Court of Appeals, we have said:
[17]

[18]

[19]

"Moral damages are granted in recompense for physical suffering, mental anguish,
fright, serious anxiety, besmirched reputation, wounded feelings, moral shock, social
humiliation, and similar injury. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, no emotions, no senses;
therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can be experienced only by one having a nervous system and it flows from
real ills, sorrows, and griefs of life - all of which cannot be suffered by respondent
bank as an artificial person."
[20]

While Chua Pac is included in the case, the complaint, however, clearly states
that he has merely been so named as a party in representation of petitioner
corporation.
Petitioner corporation's counsel could be commended for his zeal in
pursuing his client's cause. It instead turned out to be, however, a source of
disappointment for this Court to read in petitioner's reply to private
respondent's comment on the petition his so-called "One Final Word;" viz:
"In simply quoting in toto the patently erroneous decision of the trial court,
respondent Court of Appeals should be required to justify its decision which
completely disregarded the basic laws on obligations and contracts, as well as the
clear provisions of the Chattel Mortgage Law and well-settled jurisprudence of this
Honorable Court; that in the event that its explanation is wholly unacceptable, this
Honorable Court should impose appropriate sanctions on the erring justices. This is
one positive step in ridding our courts of law of incompetent and dishonest

magistrates especially members of a superior court of appellate jurisdiction."

[21]

(Italics

supplied.)

The statement is not called for. The Court invites counsel's attention to the
admonition in Guerrero vs. Villamor; thus:
[22]

"(L)awyers x x x should bear in mind their basic duty `to observe and maintain the
respect due to the courts of justice and judicial officers and x x x (to) insist on similar
conduct by others.' This respectful attitude towards the court is to be observed, `not
for the sake of the temporary incumbent of the judicial office, but for the maintenance
of its supreme importance.' And it is `through a scrupulous preference for respectful
language that a lawyer best demonstrates his observance of the respect due to the
courts and judicial officers x x x.'"
[23]

The virtues of humility and of respect and concern for others must still live on
even in an age of materialism.
WHEREFORE, the questioned decisions of the appellate court and the
lower court are set aside without prejudice to the appropriate legal recourse
by private respondent as may still be warranted as an unsecured creditor. No
costs.
Atty. Francisco R. Sotto, counsel for petitioners, is admonished to be
circumspect in dealing with the courts.
SO ORDERED.