Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-18452

May 31, 1965

AUGUSTO COSIO and BEATRIZ COSIO DE RAMA, petitioners,

vs.
CHERIE PALILEO, respondent.
Recto Law Office for petitioners.
Bengzon, Villegas, Bengzon and Zarraga for respondent.
REGALA, J.:
This is an action to recover the possession of a house. It was filed following our decision in Palileo v.
Cosio, 51 O.G. 6181, in which We ruled that the house in question had not been sold out but had
merely been given as security for a debt, the pacto de retro sale between the parties being in reality
a loan with an equitable mortgage. In a sense, therefore, this case is a sequel to Palileo v. Cosio.
The parties are here this time to litigate on the issue of possession and its effects.
The house in this case, a two-story building, was formerly owned by Felicisima Vda. de Barza. It is
located at 25 (formerly 6) Antipolo Street, Pasay City, on a lot belonging to the Hospicio de San Juan
de Dios. On October 4, 1950, this house and the leasehold right to the lot were bought by
respondent Cherie Palileo who paid part of the purchase price and mortgaged the house to secure
the payment of the balance.
It appears that respondent Palileo defaulted in her obligation, because of which the mortgage was
foreclosed and the house was advertised for sale. Fortunately for her, however, respondent Palileo
was able to raise money on December 18, 1951 before the house could be sold at public auction.
On this date, respondent Palileo received from petitioner Beatriz Cosio de Rama the sum of P12,000
in consideration of which she signed a document entitled "Conditional Sale of Residential Building,"
purporting to convey to petitioner Cosio de Rama the house in question. Under this document, the
right to repurchase the house within one year was reserved to respondent Palileo. On the same day,
the parties entered into an agreement whereby respondent Palileo remained in possession of the
house as tenant, paying petitioner Cosio de Rama a monthly rental of P250.
Petitioner Cosio de Rama subsequently insured the house against fire with the Associated Insurance
& Surety Co., Inc. On October 25, 1952, fire broke out in the house and partly destroyed the same.
For the loss, petitioner Cosio de Rama was paid P13,107 by the insurance company.
At the instance of his sister, petitioner Cosio de Rama, the other petitioner Augusto Cosio entered
the premises and began the repair of the house. Soon after an action was filed by respondent
Palileo against Cosio de Rama for the reformation of the deed of pacto de retro sale into a loan with
an equitable mortgage. This case was filed in the Court of First Instance of Rizal on December 4,
1952. One week after (December 11), respondent Palileo filed another action in the Municipal Court
of Pasay City, this time seeking the ejectment of petitioner Cosio who, it was alleged, had entered
and occupied the house without the knowledge and consent of respondent Palileo. Just the same,

however, repair work went on and although at times interrupted it was finally completed in 1953 at a
cost of P12,000.
Meanwhile the ejectment suit was dismissed by the Municipal Court. Respondent Palileo appealed
to the Court of First Instance of Pasig, but the case was again dismissed, this time for failure of
respondent Palileo to prosecute. The dismissal of the case was subsequently made "without
prejudice."
In the other case, respondent Palileo was successful. Both the lower court and this Court declared
the transaction of the parties to be a loan with an equitable mortgage and not a conditional sale. It
was found that the amount of P12,000, which purported to be the price, was in fact a loan; that the
amount of P250 paid every month as rent was in reality interest; and that the house allegedly sold
was intended to be a security for the loan. Accordingly, this Court directed petitioner Cosio de Rama
to return to respondent Palileo the sum of P810 which she had collected as interest in excess of that
allowed by law. This Court likewise ruled that petitioner Cosio de Rama could keep the proceeds of
the fire insurance but that her claim against respondent Palileo under the loan was to be deemed
assigned to the insurance company.
As earlier stated, this suit was instituted to recover the possession of the house as a consequence of
our decision that it had not really been sold but had merely been given as security for a loan. It was
originally brought against petitioner Cosio who asked that the action be dismissed on the ground that
it was barred by the judgment of the Municipal Court which dismissed the ejectment case against
him. The court denied the motion to dismiss. And so petitioner Cosio filed his answer. He was later
joined by petitioner Cosio de Rama who was allowed to intervene in the action.
Thereafter, the lower court rendered judgment finding petitioner Cosio de Rama to be a possessor in
good faith with a right to retain possession until reimbursed for her expenses in repairing the house.
The dispositive portion of its decision reads:
IN VIEW OF THE FOREGOING, the Court hereby renders judgment declaring
plaintiff Palileo as the lawful owner of the house No. 25 Antipolo Street, Pasay City
and entitled to the possession thereof upon her paying to intervenor defendant
Beatriz Cosio de Rama the sum of TWELVE THOUSAND (P12,000.00) PESOS with
interest at the legal rate from December 22, 1946 which is the date of the filing of
intervenor-defendant's counterclaim until paid. There is no judgment for costs.
Not satisfied, respondent Palileo appealed to the Court of Appeals and succeeded in having the
lower court decision modified. The appellate court ruled that
by virtue of the pacto de retro sale intervenor-appellee (Beatriz Cosio de Rama)
became the temporary owner of the house and as such she was entitled to the
possession thereof from the date of such conditional sale although appellant (Cherie
Palileo) was its actually occupant as intervenor appellee's tenant. ... However, when
appellant instituted the ejectment case against appellee (Augusto Cosio) and
intervenor-appellee (Cosio de Rama) as early as December 1952, when the latter
had just started to reconstruct the house, and she likewise commenced the action
against intervenor-appellee in the same month of December, 1952, to have the deed
of pacto de retro sale declared as one of loan with equitable mortgage, said appellee
and intervenor-appellee's title to the house suffered from a flaw. From that time both
appellee and intervenor-appellee ceased to be considered possessors in good faith.
(Art. 528, new Civil Code; Tacas v. Tobon 53 Phil. 356; Lopez, Inc. v. Phil. Eastern
Trading Co., Inc., 52 Off. Gaz. 1452) And if they chose to continue reconstructing the

house even after they were appraised of a flaw on their title they did so as builders in
bad faith.
Accordingly, it rendered judgment as follows:
WHEREFORE, with the modification that appellant (Cherie Palileo) is hereby
declared the lawful owner of the house known as No. 25 Antipolo Street, Pasay City,
and entitled to the possession thereof, without reimbursing intervenor-appellee
(Beatriz Cosio de Rama) the sum of P12,000 allegedly spent for the reconstruction of
the same, and appellee (Augusto Cosio) and intervenor-appellee (Cosio de Rama)
are hereby ordered to pay appellant a monthly rental of P300 during the time they
actually occupied the house just mentioned as possessors in bad faith, the decision
appealed from is hereby affirmed in all other respects. Without any pronouncement
as to costs.
1wph1.t

Petitioners Cosio and Cosio de Rama have appealed to this Court by certiorari, citing Article 526 of
the Civil Code which states as follows:
He is deemed a possessor in good faith who is not aware that there exists in his title
or mode of acquisition any flaw which invalidates it.
He is deemed a possessor in bad faith who possesses in any case contrary to the
foregoing.
Mistake upon a doubtful or difficult question of law may be the basis of good faith.
They contend that they were not only possessors in good faith from the beginning but that they
continue to be such even after this Court's declaration that their transaction was a loan with a
mortgage and not a sale with a right of repurchase, because, as a matter of fact, this Court did not
invalidate, but merely reformed, the supposed deed of sale. Petitioners likewise aver that neither can
the ejectment suit be considered to be notice of any defect or flaw in their mode of acquisition
because that case after all was dismissed.
We believe that both the petitioners and the Court of Appeals are in error in saying that the former
had a right to the possession of the house under the deed of pacto de retro sale. Petitioners did not
have such a right at any time and they knew this.
In reforming instruments, courts do not make another contract for the parties (See Civil Code, Arts.
1359-1369 and the Report of the Code Commission, p. 56). They merely inquire into the intention of
the parties and, having found it, reform the written instrument (not the contract) in order that it may
express the real intention of the parties (See Id., Arts. 1365 and 1602). This is what was done in the
earlier case between the parties. In holding that the document entitled "Conditional Sale of
Residential Building" was in fact a mortgage, this Court said: "This document did not express the
true intention of the parties which was merely to place said property (the house) as security for the
payment of the loan." (Palileo v. Cosio, 51 O.G. 6181 at 6184)
If that was the intention of the parties (to conform to which their written instrument was reformed)
then petitioner Cosio de Rama knew from the beginning that she was not entitled to the possession
of the house because she was a mere mortgagee. For the same reason, she could not have been
mistaken as to the true nature of their agreement. Hence, in bidding her brother, petitioner Cosio, to

enter the premises and make repairs and in later occupying the house herself, petitioner Cosio de
Rama did so with this knowledge.
As possessors in bad faith, petitioners are jointly liable for the payment of rental, the reasonable
value of which, as found by the appellate court is P300 a month. (Art. 549. See Lerma v. De la Cruz,
7 Phil. 581) This finding is supported by the evidence and we find no reason to disturb it.
But even as we hold petitioner Cosio de Rama to be a possessor in bad faith we nevertheless
believe that she is entitled to be reimbursed for her expenses in restoring the house to its original
condition after it had been partly damaged by fire, because such expenses are necessary (Angeles
v. Lozada, 54 Phil. 184) and, under Article 546, are to be refunded even to possessors in bad faith.
As already stated, petitioner Cosio de Rama spent P12,000 for the repair work.
The error of the appellate court lies in its failure to appreciate the distinction that while petitioner
Cosio de Rama is a possessor in bad faith, she is not a builder in bad faith. Thus in describing
petitioners as "builders in bad faith" and, consequently, in holding that they have no right to be
reimbursed, the court obviously applied Article 449 which states that "he who builds, plants or sows
in bad faith on the land of another loses what is built, planted or sown without right to indemnity." But
article 449 is a rule of accession and we are not here concerned with accession. There is here no
reason for the application of the principle accesio cedit principali, such as is contemplated in cases
of accession continua of which article 449 is a rule. For what petitioners did in this case was not to
build a new house on the land of another. Rather, what they did was merely to make repairs on a
house that had been partly destroyed by fire and we are asked whether they have a right to be
refunded for what they spent in repairs. The land on which the house is built is not even owned by
respondent Palileo, that land being the property of the Hospicio de San Juan de Dios. This case
comes under article 546 which, as we have already indicated, provides for the refund of necessary
expenses "to every possessor."
And now we come to the last point in petitioners' assignment of errors. It is contended that the
present action is barred by the judgment of the Municipal Court which dismissed the ejectment case
filed by respondent Palileo against petitioner Cosio. It is said that although that ejectment was
vacated when it was appealed to the Court of First Instance, the subsequent dismissal of the case
was equivalent to the withdrawal of the appeal and therefore to a revival of the judgment of the
Municipal Court. That judgment, to repeat, dismissed the ejectment case against petitioner Cosio.
We note that this point, though raised in the Court of First Instance, was not properly assigned as
error in the Court of Appeals. It was there taken up only in the "preliminary remarks" in the brief.
Although petitioners were appellees in the Court of Appeals, they should have assigned this alleged
error if only to maintain the decision of the lower court.
Apart from this consideration, we believe that this action is not barred by the prior judgment in the
ejectment case. The pertinent provisions of the Rules of Court state:
Effect of appeals. A perfected appeal shall operate to vacate the judgment of the
justice of the peace or the municipal court, and the action when duly docketed in the
Court of First Instance, shall stand for trial de novo upon its merits in accordance with
the regular procedure in that court, as though the same had never been tried before
and had been originally there commenced. If the appeal is withdrawn, or dismissed
for failure to prosecute, the judgment shall be deemed revived and shall forthwith be
remanded to the justice of the peace or municipal court for execution. (Rule 40, see.
9, Rules of Court.)

The following comment answers squarely petitioners' arguments:

The case shall stand in the Court of First Instance as though the same "had been
originally there commenced." Thus, if an action is filed in an inferior court, and the
plaintiff fails to appear and the case is dismissed, may the plaintiff file another
complaint for the same cause? The Supreme Court held that, since the appeal had
the effect of vacating the judgment of the inferior court and, therefore, the case, when
dismissed, was in the Court of First Instance as if the same "had been originally
there commenced" and since dismissals, on the ground aforementioned, of cases
coming within the original jurisdiction of the Court of First Instance, are without
prejudice, the conclusion is that plaintiff may file a new complaint for the same cause.
(Marco v. Hashim 40 Phil. 592) This ruling, however, is affected to a certain extent by
Rule 17, section 3, which provides that the dismissal of a case on the ground of
plaintiff's failure to appear at the trial, is a final adjudication upon the merits unless
the court otherwise provides." (2 Moran, Comments on the Rules of Court, 344-345
[1963 ed.])
Here the dismissal of the ejectment case for failure of respondent Palileo to prosecute was expressly
made to be without prejudice. That judgment, therefore, cannot be a bar to the filing of another
action like the present.
WHEREFORE, with the modification that petitioner Cosio de Rama should be reimbursed her
necessary expenses in the amount of P12,000 by respondent Palileo, the judgment of the Court of
Appeals is affirmed in all other respects, without pronouncements as to, cost.
Bengzon, C.J., Bautista Angelo and Zaldivar, JJ., concur.
Reyes, J.B.L., Paredes and Makalintal, JJ., concur in the result.
Barrera and Bengzon, J.P., JJ., took no part.

Republic of the Philippines

SUPREME COURT
Manila
EN BANC
G.R. No. L-19519

November 28, 1964

IN RE: Petition for Cancellation of Adverse Claim. ANANIAS ABUSTAN, petitioner-appellee,

vs.
RUPERTO FERRER and CONSUELO V. GOLEZ (spouses), oppositors-appellants.
Pio L. Pestrao for oppositors-appellants.
Marquez, Quirino & Associates and V. de Villar for petitioner-appellee.
CONCEPCION, J.:
The spouses Ruperto Ferrer and Consuelo V. Golez, hereinafter referred to as the Ferrers, seek the
review of an order of the Court of First Instance of Rizal directing the cancellation of an annotation of
their adverse claim to a parcel of land situated in the Municipality of Makati, Province of Rizal, and
covered by Transfer Certificate of Title No. 76141 of the Office of the Register of Deeds of said
province, issued in the name of appellee Ananias Abustan on May 4, 1960, upon cancellation of
Transfer Certificate of Title No. 30520 in the name of Vicente C. Gomez, married to Cirila Sulingco
Manuel, of the same province.
The record shows that on April 6, 1955, Gomez had executed the document Exhibit E, constituting a
mortgage on said land in favor of the Ferrers, to guarantee the payment of P2,500.00, within one (1)
year from said date; that Exhibit E provided that, if Gomez failed to redeem the property within the
aforementioned period, the Ferrers could, "at their election," assume an obligation of Gomez in favor
of the Meralco Loan and Savings Association hereinafter referred to as the Meralco Association
which had a first mortgage on said property, and Gomez would execute the corresponding deed
of sale thereof in favor of the Ferrers; and that Exhibit E was neither registered nor annotated on
Transfer Certificate of Title No. 30520, because the former stated erroneously that said proper was
covered by Transfer Certificate of Title No. 16488 of the City of Manila.
Subsequently, or on May 9, 1956, the mortgage in favor of the Meralco Association was cancelled in
pursuance of a deed to this effect. On the same date, a deed of real estate mortgage, executed by
Gomez in favor of the spouses Brigido Campita and Fausta Domingo, for the sum of P3,000, was
duly registered, but the annotation thereof was duly cancelled on June 8, 1957, on which date
another deed of mortgage on the same property, for the sum of P6,000, in favor of the Manila
Building and Loan Association hereinafter referred to as the Manila Association was duly
registered. On March 4, 1959, the Ferrers instituted, against Gomez, Civil Case No. 4820 of the
Court of First Instance of Rizal, for the recovery of the sum of money referred to in Exhibit E but this
case was later dismissed for non-appearance of the parties on the date set for the hearing thereof.
Instead of seeking a revocation of the order of dismissal, the Ferrers commenced, on August 14,
1959, Civil Case No. 5726 of the same court, against Gomez and the Manila Association. In the
complaint therein, the Ferrers alleged, inter alia, the execution by Gomez of said deed Exhibit E, the
failure of Gomez to pay the debt guaranteed thereby, the reason why Exhibit E was not registered,

and the execution of the deed of first mortgage in favor of the Manila Association. The Ferrers
alleged further that the Manila Association had been guilty of laches in failing to require Gomez,
before lending him P6,000, to submit an affidavit stating that the property aforementioned was
unencumbered and prayed that judgment be rendered sentencing Gomez to convey said property to
them (the Ferrers), as well as to pay damages, and the Manila Association to cancel the mortgage in
their favor, upon payment by the Ferrers of the amount representing the balance of the obligation of
Gomez in favor of the Meralco Association outstanding on April 6, 1956 (it should be 1955), when
Exhibit E was executed.
Gomez and the Manila Association moved to dismiss the complaint in Case No. 5726, upon the
ground that the same is barred by the order of dismissal of Case No. 4820. On December 10, 1959,
this motion was granted and the complaint in said Case No. 5726 was, accordingly, dismissed. No
appeal was taken from the order of dismissal, which accordingly, became final and executory.
Subsequently, or on March 14, 1960, Mrs. Ferrer filed with the office of the Register of Deeds of
Rizal an affidavit of adverse claim to the property above referred to, based upon Exhibit E. Soon
thereafter, or on May 4, 1960, Transfer Certificate of Title No. 76141 was issued in the name of
Ananias D. Abustan, married to Librada Buan. This Transfer Certificate of Title No. 76141 carried
thereon two (2) memoranda, of "encumbrances," namely, the annotation of the first mortgage in
favor of the Manila Association and that of the adverse claim of the Ferrers.
On July 13, 1960, Abustan filed in Land Registration Case No. 3861, G.L.R.O. Cadastral Record No.
2029, under which the property in question is registered, a petition for cancellation of said annotation
of adverse claim upon the ground that the same had been "improperly registered in violation of
Section 112 of Act 496, because the right or interest sought to be enforced by the spouses, Ruperto
Ferrer and Consuelo Golez, has become unenforceable by virtue of a final decision rendered by the
Court of First Instance of Rizal on December 10, 1959, in Civil Case No. 5726," referring to the
aforementioned order of dismissal thereof. After due hearing this petition was granted and, a
reconsideration of the action thus taken by the lower court having been denied, the, Ferrers have
interposed the present appeal by writ of error.
The Ferrers maintain that the lower court erred (a) in holding that the deed of mortgage constituted
in their favor had become unenforceable owing to the dismissal of Civil Cases Nos. 4820 and 5726
of Rizal; (b) in not holding that the registration of the adverse claim in question operated as a
registration of the deed of real estate mortgage in their favor; (c) in not holding that Civil Case No.
5726 operated as a reopening of Civil Case No. 4820; and (d) in giving due course to appellee's
petition instead of requiring them to file an ordinary action.
This appeal is clearly devoid of merit. Indeed, the dismissal of Case No. 4820 had the effect of
extinguishing the debt of Gomez in favor of the Ferrers. As a consequence, the latter lost the right to
demand the conveyance in their favor of the lot in dispute, such right being predicated upon the
default of Gomez in the payment of said debt. The extinction thereof necessarily operated to wipe
out the default, if any, and, as a consequence, the relief stipulated for such event, namely, the
conveyance of the property to the Ferrers. Regardless of the foregoing, the dismissal of Case No.
5726 extinguished the light, if it still existed, to said conveyance, which was sought to be enforced in
that case.
Even if the annotation of the adverse claim amounted to the registration of a deed of real estate
mortgage and it did not have such effect the dismissal of Case No. 4820, had extinguished the
debt secured by the mortgage, and, accordingly, of the latter. Being merely an accessory contract, a
mortgage cannot exist without the principal obligation it seeks to guarantee (Article 2085, Civil Code
of the Philippines). So, too, even if Case No. 5726 had amounted to a reopening of Case No. 4820,
which is not a fact, the dismissal of Case No. 5726 wiped out the right of the Ferrers under Exhibit E

to the conveyance in their favor if the property in question regardless of its nullity under Article
2088 of the Civil Code of the Philippines no appeal having been taken from the order of dismissal
of said case No. 5726.
As regards the theory that the lower court should have required Abustan to litigate in an ordinary
action, instead of allowing him to secure the cancellation of the annotation of the adverse claim
under Section 112 of the Land Registration Act, suffice it to say that the case of Tangunan vs.
Republic (50 Off. Gaz., 1) relied upon by the Ferrers is not in point, for the issue therein was
controversial, whereas in the case at bar, there is no dispute about the issue in Cases Nos. 4820
and 5726, about the dismissal of both and the grounds for dismissal, and about the fact that no
appeal had been taken from the orders of dismissal and that the same had, accordingly, become
final and executory. Neither can there be any controversy about the effect of said orders of dismissal.
That of Case No. 4820, for non-appearance of the parties, was, pursuant to Section 3 of Rule 17 of
the Rules of Court, "an adjudication upon the merits, unless otherwise provided by the court," and
the, court did not provide otherwise. Upon the other hand, the dismissal of Case No. 5726 was
based upon the ground that the cause of action therein is barred by a prior judgment namely the
dismissal of Case No. 4820.
WHEREFORE, the order appealed from is hereby affirmed, with costs against herein appellants
Ruperto Ferrer and Consuelo V. Golez. It is so ordered.
Bautista Angelo, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala, Makalintal, Bengzon, J.P., and
Zaldivar, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

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. 29574-R.
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.

FIRST DIVISION

[G.R. No. 118342. January 5, 1998]

DEVELOPMENT BANK OF THE PHILIPPINES, petitioner, vs. COURT

OF APPEALS and LYDIA CUBA, respondents.

[G.R. No. 118367. January 5, 1998]

LYDIA P. CUBA, petitioner, vs. COURT OF APPEALS, DEVELOPMENT

BANK OF THE PHILIPPINES and AGRIPINA P. CAPERAL,
respondents.
DECISION
DAVIDE, JR., J.:

These two consolidated cases stemmed from a complaint i filed against the
Development Bank of the Philippines (hereafter DBP) and Agripina Caperal filed by
Lydia Cuba (hereafter CUBA) on 21 May 1985 with the Regional Trial Court of
Pangasinan, Branch 54. The said complaint sought (1) the declaration of nullity of DBPs
appropriation of CUBAs rights, title, and interests over a 44-hectare fishpond located in
Bolinao, Pangasinan, for being violative of Article 2088 of the Civil Code; (2) the
annulment of the Deed of Conditional Sale executed in her favor by DBP; (3) the
annulment of DBPs sale of the subject fishpond to Caperal; (4) the restoration of her
rights, title, and interests over the fishpond; and (5) the recovery of damages, attorneys
fees, and expenses of litigation.
After the joinder of issues following the filing by the parties of their respective
pleadings, the trial court conducted a pre-trial where CUBA and DBP agreed on the
following facts, which were embodied in the pre-trial order: ii
1. Plaintiff Lydia P. Cuba is a grantee of a Fishpond Lease Agreement No. 2083 (new)
dated May 13, 1974 from the Government;
2. Plaintiff Lydia P. Cuba obtained loans from the Development Bank of the Philippines
in the amounts of P109,000.00; P109,000.00; and P98,700.00 under the terms
stated in the Promissory Notes dated September 6, 1974; August 11, 1975; and
April 4, 1977;

3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment
of her Leasehold Rights;
4. Plaintiff failed to pay her loan on the scheduled dates thereof in accordance with the
terms of the Promissory Notes;
5. Without foreclosure proceedings, whether judicial or extra-judicial, defendant DBP
appropriated the Leasehold Rights of plaintiff Lydia Cuba over the fishpond in
question;
6. After defendant DBP has appropriated the Leasehold Rights of plaintiff Lydia Cuba
over the fishpond in question, defendant DBP, in turn, executed a Deed of
Conditional Sale of the Leasehold Rights in favor of plaintiff Lydia Cuba over the
same fishpond in question;
7. In the negotiation for repurchase, plaintiff Lydia Cuba addressed two letters to the
Manager DBP, Dagupan City dated November 6, 1979 and December 20, 1979.
DBP thereafter accepted the offer to repurchase in a letter addressed to plaintiff
dated February 1, 1982;
8. After the Deed of Conditional Sale was executed in favor of plaintiff Lydia Cuba, a
new Fishpond Lease Agreement No. 2083-A dated March 24, 1980 was issued by
the Ministry of Agriculture and Food in favor of plaintiff Lydia Cuba only, excluding
her husband;
9. Plaintiff Lydia Cuba failed to pay the amortizations stipulated in the Deed of
Conditional Sale;
10. After plaintiff Lydia Cuba failed to pay the amortization as stated in Deed of
Conditional Sale, she entered with the DBP a temporary arrangement whereby in
consideration for the deferment of the Notarial Rescission of Deed of Conditional
Sale, plaintiff Lydia Cuba promised to make certain payments as stated in
temporary Arrangement dated February 23, 1982;
11. Defendant DBP thereafter sent a Notice of Rescission thru Notarial Act dated
March 13, 1984, and which was received by plaintiff Lydia Cuba;
12. After the Notice of Rescission, defendant DBP took possession of the Leasehold
Rights of the fishpond in question;
13. That after defendant DBP took possession of the Leasehold Rights over the
fishpond in question, DBP advertised in the SUNDAY PUNCH the public bidding
dated June 24, 1984, to dispose of the property;
14. That the DBP thereafter executed a Deed of Conditional Sale in favor of defendant
Agripina Caperal on August 16, 1984;
15. Thereafter, defendant Caperal was awarded Fishpond Lease Agreement No. 2083A on December 28, 1984 by the Ministry of Agriculture and Food.

Defendant Caperal admitted only the facts stated in paragraphs 14 and 15 of the
pre-trial order. iii
Trial was thereafter had on other matters.
The principal issue presented was whether the act of DBP in appropriating to itself
CUBAs leasehold rights over the fishpond in question without foreclosure proceedings

was contrary to Article 2088 of the Civil Code and, therefore, invalid. CUBA insisted on
an affirmative resolution. DBP stressed that it merely exercised its contractual right
under the Assignments of Leasehold Rights, which was not a contract of mortgage.
Defendant Caperal sided with DBP.
The trial court resolved the issue in favor of CUBA by declaring that DBPs taking
possession and ownership of the property without foreclosure was plainly violative of
Article 2088 of the Civil Code which provides as follows:
ART. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.

It disagreed with DBPs stand that the Assignments of Leasehold Rights were not
contracts of mortgage because (1) they were given as security for loans, (2) although
the fishpond land in question is still a public land, CUBAs leasehold rights and interest
thereon are alienable rights which can be the proper subject of a mortgage; and (3) the
intention of the contracting parties to treat the Assignment of Leasehold Rights as a
mortgage was obvious and unmistakable; hence, upon CUBAs default, DBPs only right
was to foreclose the Assignment in accordance with law.
The trial court also declared invalid condition no. 12 of the Assignment of Leasehold
Rights for being a clear case of pactum commissorium expressly prohibited and
declared null and void by Article 2088 of the Civil Code. It then concluded that since
DBP never acquired lawful ownership of CUBAs leasehold rights, all acts of ownership
and possession by the said bank were void. Accordingly, the Deed of Conditional Sale
in favor of CUBA, the notarial rescission of such sale, and the Deed of Conditional Sale
in favor of defendant Caperal, as well as the Assignment of Leasehold Rights executed
by Caperal in favor of DBP, were also void and ineffective.
As to damages, the trial court found ample evidence on record that in 1984 the
representatives of DBP ejected CUBA and her caretakers not only from the fishpond
area but also from the adjoining big house; and that when CUBAs son and caretaker
went there on 15 September 1985, they found the said house unoccupied and
destroyed and CUBAs personal belongings, machineries, equipment, tools, and other
articles used in fishpond operation which were kept in the house were missing. The
missing items were valued at about P550,000. It further found that when CUBA and her
men were ejected by DBP for the first time in 1979, CUBA had stocked the fishpond
with 250,000 pieces of bangus fish (milkfish), all of which died because the DBP
representatives prevented CUBAs men from feeding the fish. At the conservative price
of P3.00 per fish, the gross value would have been P690,000, and after deducting 25%
of said value as reasonable allowance for the cost of feeds, CUBA suffered a loss of
P517,500. It then set the aggregate of the actual damages sustained by CUBA at
P1,067,500.
The trial court further found that DBP was guilty of gross bad faith in falsely
representing to the Bureau of Fisheries that it had foreclosed its mortgage on CUBAs
leasehold rights. Such representation induced the said Bureau to terminate CUBAs
leasehold rights and to approve the Deed of Conditional Sale in favor of CUBA. And
considering that by reason of her unlawful ejectment by DBP, CUBA suffered moral

shock, degradation, social humiliation, and serious anxieties for which she became sick
and had to be hospitalized the trial court found her entitled to moral and exemplary
damages. The trial court also held that CUBA was entitled to P100,000 attorneys fees in
view of the considerable expenses she incurred for lawyers fees and in view of the
finding that she was entitled to exemplary damages.
In its decision of 31 January 1990, iv the trial court disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff:
1. DECLARING null and void and without any legal effect the act of defendant
Development Bank of the Philippines in appropriating for its own interest, without
any judicial or extra-judicial foreclosure, plaintiffs leasehold rights and interest over
the fishpond land in question under her Fishpond Lease Agreement No. 2083
(new);
2. DECLARING the Deed of Conditional Sale dated February 21, 1980 by and between
the defendant Development Bank of the Philippines and plaintiff (Exh. E and Exh.
1) and the acts of notarial rescission of the Development Bank of the Philippines
relative to said sale (Exhs. 16 and 26) as void and ineffective;
3. DECLARING the Deed of Conditional Sale dated August 16, 1984 by and between
the Development Bank of the Philippines and defendant Agripina Caperal (Exh. F
and Exh. 21), the Fishpond Lease Agreement No. 2083-A dated December 28,
1984 of defendant Agripina Caperal (Exh. 23) and the Assignment of Leasehold
Rights dated February 12, 1985 executed by defendant Agripina Caperal in favor of
the defendant Development Bank of the Philippines (Exh. 24) as void ab initio;
4. ORDERING defendant Development Bank of the Philippines and defendant Agripina
Caperal, jointly and severally, to restore to plaintiff the latters leasehold rights and
interests and right of possession over the fishpond land in question, without
prejudice to the right of defendant Development Bank of the Philippines to
foreclose the securities given by plaintiff;
5. ORDERING defendant Development Bank of the Philippines to pay to plaintiff the
following amounts:
a) The sum of ONE MILLION SIXTY-SEVEN THOUSAND FIVE HUNDRED
PESOS (P1,067,500.00), as and for actual damages;
b) The sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS as moral
damages;
c) The sum of FIFTY THOUSAND (P50,000.00) PESOS, as and for exemplary
damages;
d) And the sum of ONE HUNDRED THOUSAND (P100,000.00) PESOS, as
and for attorneys fees;
6. And ORDERING defendant Development Bank of the Philippines to reimburse and
pay to defendant Agripina Caperal the sum of ONE MILLION FIVE HUNDRED
THIRTY-TWO THOUSAND SIX HUNDRED TEN PESOS AND SEVENTY-FIVE
CENTAVOS (P1,532,610.75) representing the amounts paid by defendant
Agripina Caperal to defendant Development Bank of the Philippines under their
Deed of Conditional Sale.

CUBA and DBP interposed separate appeals from the decision to the Court of
Appeals. The former sought an increase in the amount of damages, while the latter
questioned the findings of fact and law of the lower court.
In its decision v of 25 May 1994, the Court of Appeals ruled that (1) the trial court
erred in declaring that the deed of assignment was null and void and that defendant
Caperal could not validly acquire the leasehold rights from DBP; (2) contrary to the
claim of DBP, the assignment was not a cession under Article 1255 of the Civil Code
because DBP appeared to be the sole creditor to CUBA - cession presupposes plurality
of debts and creditors; (3) the deeds of assignment represented the voluntary act of
CUBA in assigning her property rights in payment of her debts, which amounted to a
novation of the promissory notes executed by CUBA in favor of DBP; (4) CUBA was
estopped from questioning the assignment of the leasehold rights, since she agreed to
repurchase the said rights under a deed of conditional sale; and (5) condition no. 12 of
the deed of assignment was an express authority from CUBA for DBP to sell whatever
right she had over the fishpond. It also ruled that CUBA was not entitled to loss of profits
for lack of evidence, but agreed with the trial court as to the actual damages of
P1,067,500. It, however, deleted the amount of exemplary damages and reduced the
award of moral damages from P100,000 to P50,000 and attorneys fees, from P100,000
to P50,000.
The Court of Appeals thus declared as valid the following: (1) the act of DBP in
appropriating Cubas leasehold rights and interest under Fishpond Lease Agreement No.
2083; (2) the deeds of assignment executed by Cuba in favor of DBP; (3) the deed of
conditional sale between CUBA and DBP; and (4) the deed of conditional sale between
DBP and Caperal, the Fishpond Lease Agreement in favor of Caperal, and the
assignment of leasehold rights executed by Caperal in favor of DBP. It then ordered
DBP to turn over possession of the property to Caperal as lawful holder of the leasehold
rights and to pay CUBA the following amounts: (a) P1,067,500 as actual damages;
P50,000 as moral damages; and P50,000 as attorneys fees.
Since their motions for reconsideration were denied, vi DBP and CUBA filed separate
petitions for review.
In its petition (G.R. No. 118342), DBP assails the award of actual and moral
damages and attorneys fees in favor of CUBA.
Upon the other hand, in her petition (G.R. No. 118367), CUBA contends that the
Court of Appeals erred (1) in not holding that the questioned deed of assignment was a
pactum commissorium contrary to Article 2088 of the Civil Code; (b) in holding that the
deed of assignment effected a novation of the promissory notes; (c) in holding that
CUBA was estopped from questioning the validity of the deed of assignment when she
agreed to repurchase her leasehold rights under a deed of conditional sale; and (d) in
reducing the amounts of moral damages and attorneys fees, in deleting the award of
exemplary damages, and in not increasing the amount of damages.
We agree with CUBA that the assignment of leasehold rights was a mortgage
contract.
It is undisputed that CUBA obtained from DBP three separate loans totalling

P335,000, each of which was covered by a promissory note. In all of these notes, there
was a provision that: In the event of foreclosure of the mortgage securing this notes,
I/We further bind myself/ourselves, jointly and severally, to pay the deficiency, if any. vii
Simultaneous with the execution of the notes was the execution of Assignments of
Leasehold Rights viii where CUBA assigned her leasehold rights and interest on a 44hectare fishpond, together with the improvements thereon. As pointed out by CUBA, the
deeds of assignment constantly referred to the assignor (CUBA) as borrower; the
assigned rights, as mortgaged properties; and the instrument itself, as mortgage
contract. Moreover, under condition no. 22 of the deed, it was provided that failure to
comply with the terms and condition of any of the loans shall cause all other loans to
become due and demandable and all mortgages shall be foreclosed. And, condition no.
33 provided that if foreclosure is actually accomplished, the usual 10% attorneys fees
and 10% liquidated damages of the total obligation shall be imposed. There is,
therefore, no shred of doubt that a mortgage was intended.
Besides, in their stipulation of facts the parties admitted that the assignment was by
way of security for the payment of the loans; thus:
3. As security for said loans, plaintiff Lydia P. Cuba executed two Deeds of Assignment
of her Leasehold Rights.

In Peoples Bank & Trust Co. vs. Odom,ix this Court had the occasion to rule that an
assignment to guarantee an obligation is in effect a mortgage.
We find no merit in DBPs contention that the assignment novated the promissory
notes in that the obligation to pay a sum of money the loans (under the promissory
notes) was substituted by the assignment of the rights over the fishpond (under the
deed of assignment). As correctly pointed out by CUBA, the said assignment merely
complemented or supplemented the notes; both could stand together. The former was
only an accessory to the latter. Contrary to DBPs submission, the obligation to pay a
sum of money remained, and the assignment merely served as security for the loans
covered by the promissory notes. Significantly, both the deeds of assignment and the
promissory notes were executed on the same dates the loans were granted. Also, the
last paragraph of the assignment stated: The assignor further reiterates and states all
terms, covenants, and conditions stipulated in the promissory note or notes covering the
proceeds of this loan, making said promissory note or notes, to all intent and purposes,
an integral part hereof.
Neither did the assignment amount to payment by cession under Article 1255 of the
Civil Code for the plain and simple reason that there was only one creditor, the DBP.
Article 1255 contemplates the existence of two or more creditors and involves the
assignment of all the debtors property.
Nor did the assignment constitute dation in payment under Article 1245 of the civil
Code, which reads: Dation in payment, whereby property is alienated to the creditor in
satisfaction of a debt in money, shall be governed by the law on sales. It bears stressing
that the assignment, being in its essence a mortgage, was but a security and not a
satisfaction of indebtedness.x

We do not, however, buy CUBAs argument that condition no. 12 of the deed of
assignment constituted pactum commissorium. Said condition reads:
12. That effective upon the breach of any condition of this assignment, the
Assignor hereby appoints the Assignee his Attorney-in-fact with full power and authority
to take actual possession of the property above-described, together with all
improvements thereon, subject to the approval of the Secretary of Agriculture and
Natural Resources, to lease the same or any portion thereof and collect rentals, to
make repairs or improvements thereon and pay the same, to sell or otherwise dispose
of whatever rights the Assignor has or might have over said property and/or its
improvements and perform any other act which the Assignee may deem convenient to
protect its interest. All expenses advanced by the Assignee in connection with purpose
above indicated which shall bear the same rate of interest aforementioned are also
guaranteed by this Assignment. Any amount received from rents, administration, sale
or disposal of said property may be supplied by the Assignee to the payment of repairs,
improvements, taxes, assessments and other incidental expenses and obligations and
the balance, if any, to the payment of interest and then on the capital of the
indebtedness secured hereby. If after disposal or sale of said property and upon
application of total amounts received there shall remain a deficiency, said Assignor
hereby binds himself to pay the same to the Assignee upon demand, together with all
interest thereon until fully paid. The power herein granted shall not be revoked as long
as the Assignor is indebted to the Assignee and all acts that may be executed by the
Assignee by virtue of said power are hereby ratified.

The elements of pactum commissorium are as follows: (1) there should be a

property mortgaged by way of security for the payment of the principal obligation, and
(2) there should be a stipulation for automatic appropriation by the creditor of the thing
mortgaged in case of non-payment of the principal obligation within the stipulated
period.xi
Condition no. 12 did not provide that the ownership over the leasehold rights would
automatically pass to DBP upon CUBAs failure to pay the loan on time. It merely
provided for the appointment of DBP as attorney-in-fact with authority, among other
things, to sell or otherwise dispose of the said real rights, in case of default by CUBA,
and to apply the proceeds to the payment of the loan. This provision is a standard
condition in mortgage contracts and is in conformity with Article 2087 of the Civil Code,
which authorizes the mortgagee to foreclose the mortgage and alienate the mortgaged
property for the payment of the principal obligation.
DBP, however, exceeded the authority vested by condition no. 12 of the deed of
assignment. As admitted by it during the pre-trial, it had [w]ithout foreclosure
proceedings, whether judicial or extrajudicial, appropriated the [l]easehold [r]ights of
plaintiff Lydia Cuba over the fishpond in question. Its contention that it limited itself to
mere administration by posting caretakers is further belied by the deed of conditional
sale it executed in favor of CUBA. The deed stated:
WHEREAS, the Vendor [DBP] by virtue of a deed of assignment executed in its
favor by the herein vendees [Cuba spouses] the former acquired all the rights and
interest of the latter over the above-described property;

The title to the real estate property [sic] and all improvements thereon shall remain
in the name of the Vendor until after the purchase price, advances and interest shall
have been fully paid. (Emphasis supplied).

It is obvious from the above-quoted paragraphs that DBP had appropriated and
taken ownership of CUBAs leasehold rights merely on the strength of the deed of
assignment.
DBP cannot take refuge in condition no. 12 of the deed of assignment to justify its
act of appropriating the leasehold rights. As stated earlier, condition no. 12 did not
provide that CUBAs default would operate to vest in DBP ownership of the said rights.
Besides, an assignment to guarantee an obligation, as in the present case, is virtually a
mortgage and not an absolute conveyance of title which confers ownership on the
assignee.xii
At any rate, DBPs act of appropriating CUBAs leasehold rights was violative of
Article 2088 of the Civil Code, which forbids a creditor from appropriating, or disposing
of, the thing given as security for the payment of a debt.
The fact that CUBA offered and agreed to repurchase her leasehold rights from
DBP did not estop her from questioning DBPs act of appropriation. Estoppel is
unavailing in this case. As held by this Court in some cases, xiii estoppel cannot give
validity to an act that is prohibited by law or against public policy. Hence, the
appropriation of the leasehold rights, being contrary to Article 2088 of the Civil Code and
to public policy, cannot be deemed validated by estoppel.
Instead of taking ownership of the questioned real rights upon default by CUBA,
DBP should have foreclosed the mortgage, as has been stipulated in condition no. 22 of
the deed of assignment. But, as admitted by DBP, there was no such foreclosure. Yet, in
its letter dated 26 October 1979, addressed to the Minister of Agriculture and Natural
Resources and coursed through the Director of the Bureau of Fisheries and Aquatic
Resources, DBP declared that it had foreclosed the mortgage and enforced the
assignment of leasehold rights on March 21, 1979 for failure of said spouses [Cuba
spouces] to pay their loan amortizations.xiv This only goes to show that DBP was aware
of the necessity of foreclosure proceedings.
In view of the false representation of DBP that it had already foreclosed the
mortgage, the Bureau of Fisheries cancelled CUBAs original lease permit, approved the
deed of conditional sale, and issued a new permit in favor of CUBA. Said acts which
were predicated on such false representation, as well as the subsequent acts
emanating from DBPs appropriation of the leasehold rights, should therefore be set
aside. To validate these acts would open the floodgates to circumvention of Article 2088
of the Civil Code.
Even in cases where foreclosure proceedings were had, this Court had not
hesitated to nullify the consequent auction sale for failure to comply with the
requirements laid down by law, such as Act No. 3135, as amended. xv With more reason
that the sale of property given as security for the payment of a debt be set aside if there
was no prior foreclosure proceeding.
Hence, DBP should render an accounting of the income derived from the operation

of the fishpond in question and apply the said income in accordance with condition no.
12 of the deed of assignment which provided: Any amount received from rents,
administration, may be applied to the payment of repairs, improvements, taxes,
assessment, and other incidental expenses and obligations and the balance, if any, to
the payment of interest and then on the capital of the indebtedness.
We shall now take up the issue of damages.
Article 2199 provides:
Except as provided by law or by stipulation, one is entitled to an adequate
compensation only for such pecuniary loss suffered by him as he has duly proved.
Such compensation is referred to as actual or compensatory damages.

Actual or compensatory damages cannot be presumed, but must be proved with

reasonable degree of certainty.xvi A court cannot rely on speculations, conjectures, or
guesswork as to the fact and amount of damages, but must depend upon competent
proof that they have been suffered by the injured party and on the best obtainable
evidence of the actual amount thereof. xvii It must point out specific facts which could
afford a basis for measuring whatever compensatory or actual damages are borne. xviii
In the present case, the trial court awarded in favor of CUBA P1,067,500 as actual
damages consisting of P550,000 which represented the value of the alleged lost articles
of CUBA and P517,500 which represented the value of the 230,000 pieces of bangus
allegedly stocked in 1979 when DBP first ejected CUBA from the fishpond and the
adjoining house. This award was affirmed by the Court of Appeals.
We find that the alleged loss of personal belongings and equipment was not proved
by clear evidence. Other than the testimony of CUBA and her caretaker, there was no
proof as to the existence of those items before DBP took over the fishpond in question.
As pointed out by DBP, there was not inventory of the alleged lost items before the loss
which is normal in a project which sometimes, if not most often, is left to the care of
other persons. Neither was a single receipt or record of acquisition presented.
Curiously, in her complaint dated 17 May 1985, CUBA included losses of property
as among the damages resulting from DBPs take-over of the fishpond. Yet, it was only
in September 1985 when her son and a caretaker went to the fishpond and the
adjoining house that she came to know of the alleged loss of several articles. Such
claim for losses of property, having been made before knowledge of the alleged actual
loss, was therefore speculative. The alleged loss could have been a mere afterthought
or subterfuge to justify her claim for actual damages.
With regard to the award of P517,000 representing the value of the alleged 230,000
pieces of bangus which died when DBP took possession of the fishpond in March 1979,
the same was not called for. Such loss was not duly proved; besides, the claim therefor
was delayed unreasonably. From 1979 until after the filing of her complaint in court in
May 1985, CUBA did not bring to the attention of DBP the alleged loss. In fact, in her
letter dated 24 October 1979,xix she declared:
1. That from February to May 1978, I was then seriously ill in Manila and within the
same period I neglected the management and supervision of the cultivation and

harvest of the produce of the aforesaid fishpond thereby resulting to the irreparable
loss in the produce of the same in the amount of about P500,000.00 to my great
damage and prejudice due to fraudulent acts of some of my fishpond workers.

Nowhere in the said letter, which was written seven months after DBP took
possession of the fishpond, did CUBA intimate that upon DBPs take-over there was a
total of 230,000 pieces of bangus, but all of which died because of DBPs
representatives prevented her men from feeding the fish.
The award of actual damages should, therefore, be struck down for lack of sufficient
basis.
In view, however, of DBPs act of appropriating CUBAs leasehold rights which was
contrary to law and public policy, as well as its false representation to the then Ministry
of Agriculture and Natural Resources that it had foreclosed the mortgage, an award of
moral damages in the amount of P50,000 is in order conformably with Article 2219(10),
in relation to Article 21, of the Civil Code. Exemplary or corrective damages in the
amount of P25,000 should likewise be awarded by way of example or correction for the
public good.xx There being an award of exemplary damages, attorneys fees are also
recoverable.xxi
WHEREFORE, the 25 May 1994 Decision of the Court of Appeals in CA-G.R. CV
No. 26535 is hereby REVERSED, except as to the award of P50,000 as moral
damages, which is hereby sustained. The 31 January 1990 Decision of the Regional
Trial Court of Pangasinan, Branch 54, in Civil Case No. A-1574 is MODIFIED setting
aside the finding that condition no. 12 of the deed of assignment constituted pactum
commissorium and the award of actual damages; and by reducing the amounts of moral
damages from P100,000 to P50,000; the exemplary damages, from P50,000 to
P25,000; and the attorneys fees, from P100,000 to P20,000. The Development Bank of
the Philippines is hereby ordered to render an accounting of the income derived from
the operation of the fishpond in question.
Let this case be REMANDED to the trial court for the reception of the income
statement of DBP, as well as the statement of the account of Lydia P. Cuba, and for the
determination of each partys financial obligation to one another.
SO ORDERED.
Bellosillo, Vitug, and Kapunan, JJ., concur.

i
ii
iii
iv
v
vi
vii
viii
ix
x
xi
xii
xiii
xiv
xv
xvi
xvii
xviii
xix
xx
xxi