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G.R. No. L-49940 ECHANOVA VS.

ADIL September 25, 1986

YAP, J.:

Petitioners seek the annulment of various orders issued by the respondent Presiding Judge of Branch II, Court of First
Instance of Iloilo, in Civil Case No. 12312 entitled "Pio Servando versus Jose Y. Servando et al." A temporary restraining
order was issued by this Court on May 9, 1979, staying until further orders the execution of the decision rendered by the
respondent Judge in said case.

The case under review is for the annulment of a deed of sale dated March 11, 1978, executed by defendant Jose Y.
Servando in favor of his co-defendants, the petitioners herein, covering three parcels of land situated in Iloilo City.
Claiming that the said parcels of land were mortgaged to him in 1970 by the vendor, who is his cousin, to secure a loan of
P20,000.00, the plaintiff Pio Servando impugned the validity of the sale as being fraudulent, and prayed that it be declared
null and void and the transfer certificates of title issued to the vendees be cancelled, or alternatively, if the sale is not
annulled, to order the defendant Jose Servando to pay the amount of P20,000.00, plus interests, and to order defendants
to pay damages. Attached to the complaint was a copy of the private document evidencing the alleged mortgage (Annex
A), which is quoted hereunder:

August 20, 1970

This is to certify that I, Jose Yusay Servando, the sole owner of three parcel of land under Tax Declaration
No. 28905, 44123 and 31591 at Lot No. 1, 1863-Portion of 1863 & 1860 situated at Sto. Nino St., Arevalo,
Compania St. & Compania St., Interior Molo, respectively, have this date mortgaged the said property to
my cousin Pio Servando, in the amount of TWENTY THOUSAND PESOS (P20,000.00), redeemable for a
period not exceeding ten (10) years, the mortgage amount bearing an interest of 10% per annum.

I further certify that in case I fail to redeem the said properties within the period stated above, my cousin
Pio Servando, shall become the sole owner thereof.

(SGD.) JOSE YUSAY SERVANDO

WITNESSES:

(Sgd) Ernesto G. Jeruta

(Sgd) Francisco B. Villanueva

The defendants moved to dismiss the complaint on the grounds that it did not state a cause of action, the alleged
mortgage being invalid and unenforceable since it was a mere private document and was not recorded in the Registry of
Deeds; and that the plaintiff was not the real party in interest and, as a mere mortgagee, had no standing to question the
validity of the sale. The motion was denied by the respondent Judge, in its order dated June 20, 1978, "on the ground that
this action is actually one for collection."

On June 23, 1978, defendant Jose Y. Servando died. The defendants filed a Manifestation and Motion, informing the trial
court accordingly, and moving for the dismissal of the complaint pursuant to Section 21 of Rule 3 of the Rules of Court,
pointing out that the action was for. recovery of money based on an actionable document to which only the deceased
defendant was a party. The motion to dismiss was denied on July 25, 1978, "it appearing from the face of the complaint
that the instant action is not purely a money claim, it being only incidental, the main action being one for annulment and
damages."

On August 1, 1978, plaintiff filed a motion to declare defendants in default, and on the very next day, August 2, the
respondent Judge granted the motion and set the hearing for presentation of plaintiff's evidence ex-parte on August 24,
1978.
On August 2, 1978, or the same day that the default order was issued, defendants Hechanova and Masa filed their
Answers, denying the allegations of the complaint and repeating, by way of special and affirmative defenses, the grounds
stated in their motions to dismiss.

On August 25, 1978, a judgment by default was rendered against the defendants, annulling the deed of sale in question
and ordering the Register of Deeds of Iloilo to cancel the titles issued to Priscilla Masa and Gemma Hechanova, and to
revive the title issued in the name of Jose Y. Servando and to deliver the same to the plaintiff.

The defendants took timely steps to appeal the decision to the Court of Appeals by filing a notice of appeal, an appeal
bond, and a record on appeal. However, the trial court disapproved the record on appeal due to the failure of defendants
to comply with its order to eliminate therefrom the answer filed on August 2, 1978 and accordingly, dismissed the appeal,
and on February 2, 1978, issued an order granting the writ of execution prayed for by plaintiff.

We find the petition meritorious, and the same is hereby given due course.

It is clear from the records of this case that the plaintiff has no cause of action. Plaintiff has no standing to question the
validity of the deed of sale executed by the deceased defendant Jose Servando in favor of his co-defendants Hechanova
and Masa. No valid mortgage has been constituted plaintiff's favor, the alleged deed of mortgage being a mere private
document and not registered; moreover, it contains a stipulation (pacto comisorio) which is null and void under Article
2088 of the Civil Code. Even assuming that the property was validly mortgaged to the plaintiff, his recourse was to
foreclose the mortgage, not to seek annulment of the sale.

WHEREFORE, the decision of the respondent court dated August 25, 1973 and its Order of February 2, 1979 are set
aside, and the complaint filed by plaintiff dated February 4, 1978 is hereby dismissed.

SO ORDERED.

G.R. No. L-26371 MOBIL vs. DIOCARIS September 30, 1969

FERNANDO, J.:

It may very well be, as noted by jurists of repute, that to stress the element of a promise as the basis of contracts is to
acknowledge the influence of natural law. 1 Nonetheless, it does not admit of doubt that whether under the civil law or the
common law, the existence of a contract is unthinkable without one's word being plighted. So the New Civil Code
provides: "A contract is a meeting of minds between two persons whereby one binds himself, with respect to the other, to
give something or to render some service." 2 So it is likewise under American law. Thus: "A contract is a promise or a set
of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes
as a duty." 3

The law may go further and require that certain formalities be executed. Thus, for a mortgage to be validly constituted, "it
is indispensable, ..., that the document in which it appears be recorded in the Registry of Property." The same codal
provision goes on: "If the instrument is not recorded, the mortgage is nevertheless binding between the parties." 4

The question before us in this appeal from a lower court decision, one we have to pass upon for the first time, is the effect,
if any, to be given to a mortgage contract admittedly not registered, only the parties being involved in the suit. The lower
court was of the opinion that while it "created a personal obligation [it] did not establish a real estate mortgage." 5 It did not
decree foreclosure therefor. Plaintiff-appellant appealed. We view the matter differently and reverse the lower court.

The case for the plaintiff, Mobil Oil Philippines, Inc., now appellant, was summarized in the lower court order of February
25, 1966, subject of this appeal. Thus: "In its complaint plaintiff alleged that on Feb. 9, 1965 defendants Ruth R. Diocares
and Lope T. Diocares entered into a contract of loan and real estate mortgage wherein the plaintiff extended to the said
defendants a loan of P45,000.00; that said defendants also agreed to buy from the plaintiff on cash basis their petroleum
requirements in an amount of not less than 50,000 liters per month; that the said defendants will pay to the plaintiff 9-1/2%
per annum on the diminishing balance of the amount of their loan; that the defendants will repay the said loan in monthly
installments of P950.88 for a period of five (5) years from February 9, 1965; that to secure the performance of the
foregoing obligation they executed a first mortgage on two parcels of land covered by Transfer Certificates of Title Nos. T-
27136 and T-27946, both issued by the Register of Deeds of Bacolod City. The agreement further provided that in case of
failure of the defendants to pay any of the installments due and purchase their petroleum requirements in the minimum
amount of 50,000 liters per month from the plaintiff, the latter has the right to foreclose the mortgage or recover the
payment of the entire obligation or its remaining unpaid balance; that in case of foreclosure the plaintiff shall be entitled to
12% of the indebtedness as damages and attorney's fees. A copy of the loan and real estate mortgage contract executed
between the plaintiff and the defendants is attached to the complaint and made a part thereof. The complaint further
alleges that the defendant paid only the amount of P1,901.76 to the plaintiff, thus leaving a balance of P43,098.24,
excluding interest, on their indebtedness. The said defendants also failed to buy on cash basis the minimum amount of
petroleum which they agreed to purchase from the plaintiff. The plaintiff, therefore, prayed that the defendants be ordered
to pay the amount of P43,098.24, with interest at 9-1/2% per annum from the date it fell due, and in default of such
payment that the mortgaged properties be sold and the proceeds applied to the payment of defendants' obligation." 6

Defendants, Ruth R. Diocares and Lope T. Diocares, now appellees, admitted their indebtedness as set forth above,
denying merely the alleged refusal to pay, the truth, according to them, being that they sought for an extension of time to
do so, inasmuch as they were not in a position to comply with their obligation. They further set forth that they did request
plaintiff to furnish them with the statement of accounts with the view of paying the same on installment basis, which
request was, however, turned down by the plaintiff.

Then came a motion from the plaintiff for a judgment on the pleadings, which motion was favorably acted on by the lower
court. As was stated in the order appealed from: "The answer of the defendants dated October 21, 1965 did not raise any
issue. On the contrary, said answer admitted the material allegations of the complaint. The plaintiff is entitled to a
judgment on the pleadings." 7

As to why the foreclosure sought by plaintiff was denied, the lower court order on appeal reads thus: "The Court cannot,
however, order the foreclosure of the mortgage of properties, as prayed for, because there is no allegation in the
complaint nor does it appear from the copy of the loan and real estate mortgage contract attached to the complaint that
the mortgage had been registered. The said loan agreement although binding among the parties merely created a
personal obligation but did not establish a real estate mortgage. The document should have been registered. (Art. 2125,
Civil Code of the Phil.)" 8 The dispositive portion is thus limited to ordering defendants "to pay the plaintiff the account of
P43,098.24, with interest at the rate of 9-1/2% per annum from the date of the filing of the complaint until fully paid, plus
the amount of P2,000.00 as attorneys' fees, and the costs of the suit." 9

Hence this appeal, plaintiff-appellant assigning as errors the holding of the lower court that no real estate mortgage was
established and its consequent refusal to order the foreclosure of the mortgaged properties. As set forth at the outset, we
find the appeal meritorious. The lower court should not have held that no real estate mortgage was established and
should have ordered its foreclosure.

The lower court predicated its inability to order the foreclosure in view of the categorical nature of the opening sentence of
the governing article 10 that it is indispensable, "in order that a mortgage may be validly constituted, that the document in
which it appears be recorded in the Registry of Property." Note that it ignored the succeeding sentence: "If the instrument
is not recorded, the mortgage is nevertheless binding between the parties." Its conclusion, however, is that what was thus
created was merely "a personal obligation but did not establish a real estate mortgage."

Such a conclusion does not commend itself for approval. The codal provision is clear and explicit. Even if the instrument
were not recorded, "the mortgage is nevertheless binding between the parties." The law cannot be any clearer. Effect
must be given to it as written. The mortgage subsists; the parties are bound. As between them, the mere fact that there is
as yet no compliance with the requirement that it be recorded cannot be a bar to foreclosure.1awphl.nt
A contrary conclusion would manifest less than full respect to what the codal provision ordains. The liability of the
mortgagor is therein explicitly recognized. To hold, as the lower court did, that no foreclosure would lie under the
circumstances would be to render the provision in question nugatory. That we are not allowed to do. What the law requires
in unambiguous language must be lived up to. No interpretation is needed, only its application, the undisputed facts
calling for it. 11

Moreover to rule as the lower court did would be to show less than fealty to the purpose that animated the legislators in
giving expression to their will that the failure of the instrument to be recorded does not result in the mortgage being any
the less "binding between the parties." In the language of the Report of the Code Commission: "In article [2125] an
additional provision is made that if the instrument of mortgage is not recorded, the mortgage is nevertheless binding
between the parties." 12 We are not free to adopt then an interpretation, even assuming that the codal provision lacks the
forthrightness and clarity that this particular norm does and, therefore, requires construction, that would frustrate or nullify
such legislative objective.

Nor is the reason difficult to discern why such an exception should be made to the rule that is indispensable for a
mortgage to be validly constituted that it be recorded. Equity so demands, and justice is served. There is thus full
acknowledgment of the binding effect of a promise, which must be lived up to, otherwise the freedom a contracting party is
supposed to possess becomes meaningless. It could be said of course that to allow foreclosure in the absence of such a
formality is to offend against the demands of jural symmetry. What is "indispensable" may be dispense with. Such an
objection is far from fatal. This would not be the first time when logic yields to what is fair and what is just. To such an
overmastering requirement, law is not immune.

WHEREFORE, the lower court order of February 25, 1966 is affirmed with the modification that in default of the payment
of the above amount of P43,028.94 with interests at the rate of 9-1/2% per annum from the date of the filing of the
complaint, that the mortgage be foreclosed with the properties subject thereof being sold and the proceeds of the sale
applied to the payment of the amounts due the plaintiff in accordance with law. With costs against defendants-appellees.

[G.R. No. 147788. CRUZ VS. BANCOM FINANCE CORP. March 19, 2002]

PANGANIBAN, J.:

An absolutely simulated contract of sale is void ab initio and transfers no ownership right. The purported buyer, not
being the owner, cannot validly mortgage the subject property.Consequently, neither does the buyer at the foreclosure
sale acquire any title thereto.

Statement of the Case

Before us is a Petition for Review on Certiorari under Rule 45 of the Rules of Court, assailing the March 30, 2001
Decision[1] of the Court of Appeals (CA) in CA-GR No. 58346. The decretal portion of the challenged Decision reads as
follows:

WHEREFORE, upon the premises, the assailed Decision is REVERSED and SET ASIDE. A new one is rendered declaring
BANCOMs right to the subject land as a purchaser in good faith and for value, and ordering the cancellation of the Notice of Lis
Pendens on TCT No. 248262-Bulacan. Without pronouncement as to costs.[2]

The Facts

The factual antecedents of the case are summarized by the Court of Appeals thus:
Brothers Rev. Fr. Edilberto Cruz and Simplicio Cruz, plaintiffs herein, were the registered owners of a 339,335 square meter or
33.9335 hectare parcel of agricultural land together with improvements located in Barangay Pulang Yantoc, Angat, Bulacan covered
by TCT No. 19587. Sometime in May 1978, defendant Norma Sulit, after being introduced by Candelaria Sanchez to Fr. Cruz, offered
to purchase the land. Plaintiffs asking price for the land was P700,000.00, but Norma only had P25,000.00 which Fr. Cruz accepted as
earnest money with the agreement that titles would be transferred to Norma upon payment of the balance of P675,000.00. Norma
failed to pay the balance and proposed [to] Fr. Cruz to transfer the property to her but the latter refused, obviously because he had no
reason to trust Norma. But capitalizing on the close relationship of Candelaria Sanchez with the plaintiffs, Norma succeeded in having
the plaintiffs execute a document of sale of the land in favor of Candelaria who would then obtain a bank loan in her name using the
plaintiffs land as collateral. On the same day, Candelaria executed another Deed of Absolute Sale over the land in favor of Norma. In
both documents, it appeared that the consideration for the sale of the land was only P150,000.00. Pursuant to the sale, Norma was able
to effect the transfer of the title to the land in her name under TCT No. T-248262.

Evidence shows that aside from the P150,000.00, Candelaria undertook to pay the plaintiffs the amount of P655,000.00 representing
the balance of the actual price of the land. In a Special Agreement dated September 1, 1978, Norma assumed Candelarias obligation,
stipulating to pay the plaintiffs the said amount within six months on pain of fine or penalty in case of non-fulfillment. Unknown to
the plaintiffs, Norma managed to obtain a loan from Bancom in the amount of P569,000.00 secured by a mortgage over the land now
titled in her name.

On account of Normas failure to pay the amount stipulated in the Special Agreement and her subsequent disappearance from her usual
address, plaintiffs were prompted to file the herein complaint for the reconveyance of the land.

Norma filed an Answer on February 11, 1980 but failed to appear in court and was eventually declared in default. On May 20, 1980,
Bancom filed a motion for leave to intervene which was granted by the trial court. In its Answer in Intervention, Bancom claimed
priority as mortgagee in good faith; and that its contract of mortgage with Norma had been executed before the annotation of plaintiffs
interest in the title.

Meanwhile in the middle of 1980, Norma defaulted in her payment to the Bank and her mortgage was foreclosed. At the subsequent
auction sale, Bancom was declared the highest bidder and was issued the corresponding certificate of sale over the land.

On January 25, 1996, the trial court rendered the herein assailed Decision in favor of the plaintiffs. It ruled that the contract of sale
between plaintiffs and Candelaria was absolutely simulated. Consequently, the second contract of sale, that is, between Candelaria and
Norma, produced no legal effect. As for Bancom, the trial court held that the Bank was not a mortgagee in good faith thus it can not
claim priority of rights over plaintiffs property.[3]

Ruling of the Court of Appeals

In reversing the RTC, the CA held that the Deeds of Sale were valid and binding, not simulated. Thus, the Contract of
Mortgage between Sulit and respondent was likewise valid.
Petitioners, the CA ruled, intended to be bound by the Contracts of Sale and Mortgage, because they did not seek to
annul the same but instead executed a special agreement to enforce payment of the balance of the price in the amount
of P665,000.00.[4]
Furthermore, it upheld respondent as a mortgagee in good faith; ergo, it had a preferential right to the land.
Hence, this Petition.[5]

Issues

In their Memorandum, petitioners raise the following issues for this Courts consideration:
I

Whether or not the Honorable Court of Appeals seriously erred when it held that the petitioners intended to enter into a sale of the
property in question and that the declarations of Petitioner Fr. Edilberto Cruz in Court belied the court a quos finding that the Deeds of
Sale in question were absolute simulations.
II

Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank was a mortgagee in good faith,
despite the fact that respondent Bancom was in truth and in fact a mortgagee in bad faith over the subject property.

III

Whether or not the Honorable Court of Appeals seriously erred when it ruled that the face of the title [to] the property did not disclose
any irregularity that would arouse suspicion by respondent bank as to the condition of the subject land despite the fact that questions
and circumstances abound which would render respondent bank not a mortgagee in good faith, and that the case of Sunshine Finance
Investment Corporation vs. Intermediate Appellate Court applies to the instant case.

IV

Whether or not the Honorable Court of Appeals gravely erred when it ruled that respondent bank possesses a preferential right over
petitioners on the subject land as a mortgagee in good faith.[6]

The above issues can be summed up into two: (1) the validity of the Deeds of Sale and Mortgage and (2) the good
faith of the mortgagee.

This Courts Ruling

The Petition is meritorious.

First Issue:
Validity of the Sale and the Mortgage

Petitioners claim that the Deed of Sale [7] they executed with Sanchez, as well as the Deed of Sale [8] executed
between Sanchez and Sulit, was absolutely simulated; hence, null and void. On the other hand, echoing the appellate
court, respondent contends that petitioners intended to be bound by those Deeds, and that the real estate mortgage over
the subject property was valid.
As a general rule, when the terms of a contract are clear and unambiguous about the intention of the contracting
parties, the literal meaning of its stipulations shall control. But if the words appear to contravene the evident intention of
the parties, the latter shall prevail over the former.[9] The real nature of a contract may be determined from the express
terms of the agreement, as well as from the contemporaneous and subsequent acts of the parties thereto. [10]
On the other hand, simulation takes place when the parties do not really want the contract they have executed to
produce the legal effects expressed by its wordings. [11] Simulation or vices of declaration may be either absolute or
relative. Article 1345 of the Civil Code distinguishes an absolute simulation from a relative one while Article 1346
discusses their effects, as follows:

Art. 1345. Simulation of a contract may be absolute or relative. The former takes place when the parties do not intend to be bound at
all; the latter when the parties conceal their true agreement.

Art. 1346. An absolutely simulated contract is void. A relative simulation, when it does not prejudice a third person and is not intended
for any purpose contrary to law, morals, good customs, public order or public policy binds the parties to their agreement.

In Rongavilla v. Court of Appeals,[12] we held that a deed of sale, in which the stated consideration had not in fact
been paid, was a false contract; that is void ab initio. Furthermore, Ocejo v. Flores,[13] ruled that a contract of purchase and
sale is null and void and produces no effect whatsoever where it appears that [the] same is without cause or consideration
which should have been the motive thereof, or the purchase price which appears thereon as paid but which in fact has
never been paid by the purchaser to the vendor.
Although the Deed of Sale[14] between petitioners and Sanchez stipulated a consideration of P150,000, there was
actually no exchange of money between them. Petitioner Edilberto Cruz narrated how the transaction came about:
ATTY. CABRERA:
Q Why did you execute the deed of sale in favor of Candelaria Sanchez since it was Norma Sulit with whom you
are transacting?
A Because Norma Sulit made the promise to Mrs. Candelaria Sanchez that upon acquiring the title from us, they
can borrow money from the Bank. So it is a way of acquiring the title from us, sir.
Q. This deed of sale marked Exhibit D which you just identified, stipulates a consideration of P150,000.00. The
question, Father, is - did you receive the P150,000.00?
ATTY. AGRAVANTE
Objection, your Honor, the document is the best evidence.
ATTY. CABRERA
This is an action to annul a certain contract.
COURT
He received the consideration stated in the contract. The witness may answer.
WITNESS
A Not a single centavo we received from Candelaria Sanchez as if it is nominal, sir.
ATTY. CABRERA
Q If you did not receive this P150,000.00 stated in this deed of sale that you and your brother executed from
Candelaria Sanchez, did you receive the said amount from Norma Sulit or anybody else for that matter?
A Not a single centavo, sir.[15]
His claim was corroborated by Sanchez. She likewise said that the Deed of Sale [16] she executed with Sulit, for which
she did not receive any consideration was only for the purpose of placing the title to the property in the latters name. She
testified as follows:
Q And so you transferred the property in favor of Norma Sulit?
A Yes, sir.
Q I am showing to you this document which has already been marked when the representative of the Register of
Deeds produced the pertinent documents before the court as Exhibit C, is this that document that you
executed transferring the property in the name of Norma Sulit?
A Yes, sir, this is it.
Q There is a consideration of P150,000.00 stated in this Exhibit C, were you paid by Norma Sulit the amount
of P150,000.00 appearing in this Exhibit C?
ATTY BUYCO:
The question is leading, Your Honor.
COURT:
Witness may answer.
A No amount was given, sir. We prepared this document to transfer the title [to] her name only.[17]
Respondent never offered any evidence to refute the foregoing testimonies. [18] On the contrary, it even admitted that
the stipulated consideration of P150,000 in the two Deeds of Sale had never been actually paid by Sanchez to petitioners;
[19]
neither by Sulit to the former.[20]
Another telling sign of simulation was the complete absence of any attempt on the part of the buyers -- Sanchez and
Sulit -- to assert their alleged rights of ownership over the subject property. [21] This fact was confirmed by respondent
which, however, tried to justify the non-occupancy of the land by Sanchez and Sulit. Supposedly, because the two failed to
pay the purchase price of the land, they could not force petitioners to vacate it. [22]
The records clearly show that the two Deeds of Absolute Sale were executed over the same property on the same
date, June 21, 1978. Six days thereafter, on June 27, 1978, it was mortgaged by Sulit to Federal Insurance Company
for P500,000. The mortgage was cancelled when she again mortgaged the property to respondent for P569,000 on
August 22, 1979. It is also undisputed that petitioners did not receive any portion of the proceeds of the loan.
Clearly, the Deeds of Sale were executed merely to facilitate the use of the property as collateral to secure a loan
from a bank.[23] Being merely a subterfuge, these agreements could not have been the source of any consideration for the
supposed sales.[24] Indeed, the execution of the two documents on the same day sustains the position of petitioners that
the Contracts of Sale were absolutely simulated, and that they received no consideration therefor.[25]
The failure of Sulit to take possession of the property purportedly sold to her was a clear badge of simulation that
rendered the whole transaction void and without force and effect, pursuant to Article 1409 [26] of the Civil Code.[27] The fact
that she was able to secure a Certificate of Title to the subject property in her name did not vest her with ownership over it.
[28]
A simulated deed of sale has no legal effect; consequently any transfer certificate of title (TCT) issued in consequence
thereof should be cancelled.[29] A simulated contract is not a recognized mode of acquiring ownership. [30]

Second Issue:
Good Faith of Mortgagee

Petitioners argue that respondent was not a mortgagee in good faith because, at the time it registered the real estate
mortgage over the subject property, their adverse claim and notice of lis pendens had already been annotated on the TCT
(on October 30, 1979 and December 10, 1979, respectively). On the other hand, respondent maintains that petitioners
were the ones in bad faith, because they already had knowledge of the existence of the mortgage over the property when
they caused the annotation of their adverse claim and notice of lis pendens.
As a general rule, every person dealing with registered land may safely rely on the correctness of the certificate of
title and is no longer required to look behind the certificate in order to determine the actual owner. [31] To do so would be
contrary to the evident purpose of Section 39 of Act 496 which we quote hereunder:

Sec. 39. Every person receiving a certificate of title in pursuance of a decree of registration, and every subsequent purchaser of
registered land who takes a certificate of title for value in good faith shall hold the same free of all encumbrances except those noted
on said certificate, and any of the following encumbrances which may be subsisting, namely:

First. Liens, claims, or rights arising or existing under the laws or Constitution of the United States or of the Philippine Islands which
the statutes of the Philippine Islands cannot require to appear of record in the Registry.

Second. Taxes within two years after the same became due and payable.

Third. Any public highway, way, private way established by law, or any Government irrigation canal or lateral thereof, where the
certificate of title does not state that the boundaries of such highway, way, or irrigation canal or lateral thereof, have been determined.

But if there are easements or other rights appurtenant to a parcel of registered land which for any reason have failed to be registered,
such easements or rights shall remain so appurtenant notwithstanding such failure, and shall be held to pass with the land until cut off
or extinguished by the registration of the servient estate, or in any other manner.

This rule is, however, subject to the right of a person deprived of land through fraud to bring an action for
reconveyance, provided the rights of innocent purchasers for value and in good faith are not prejudiced. An innocent
purchaser for value or any equivalent phrase shall be deemed, under Section 38 of the same Act, [32] to include an innocent
lessee, mortgagee or any other encumbrancer for value. [33]
Respondent claims that, being an innocent mortgagee, it should not be required to conduct an exhaustive
investigation on the history of the mortgagors title before it could extend a loan. [34]
Respondent, however, is not an ordinary mortgagee; it is a mortgagee-bank. As such, unlike private individuals, it is
expected to exercise greater care and prudence in its dealings, including those involving registered lands. [35] A banking
institution is expected to exercise due diligence before entering into a mortgage contract. [36] The ascertainment of the
status or condition of a property offered to it as security for a loan must be a standard and indispensable part of its
operations.[37]
In Rural Bank of Compostela v. CA,[38] we held that a bank that failed to observe due diligence was not a mortgagee
in good faith. In the words of the ponencia:
x x x [T]he rule that persons dealing with registered lands can rely solely on the certificate of title does not apply to banks.

Banks, indeed, should exercise more care and prudence in dealing even with registered lands, than private individuals, for their
business is one affected with public interest, keeping in trust money belonging to their depositors, which they should guard against
loss by not committing any act of negligence which amounts to lack of good faith by which they would be denied the protective
mantle of the land registration statute, Act [No.] 496, extended only to purchasers for value and in good faith, as well as to mortgagees
of the same character and description. (Citations omitted)

Recently, in Adriano v. Pangilinan,[39] we said that the due diligence required of banks extended even to persons
regularly engaged in the business of lending money secured by real estate mortgages.
The evidence before us indicates that respondent bank was not a mortgagee in good faith. [40] First, at the time the
property was mortgaged to it, it failed to conduct an ocular inspection. [41] Judicial notice is taken of the standard practice
for banks before they approve a loan: to send representatives to the premises of the land offered as collateral and to
investigate the ownership thereof.[42] As correctly observed by the RTC, respondent, before constituting the mortgage over
the subject property, should have taken into consideration the following questions:

1) Was the price of P150,000.00 for a 33.9 hectare agricultural parcel of land not too cheap even in 1978?

2) Why did Candelaria Sanchez sell the property at the same price of P150,000.00 to Norma Sulit on the same date, June 21, 1978
when she supposedly acquired it from the plaintiffs?

3) Being agricultural land, didnt it occur to the intervenors that there would be tenants to be compensated or who might pose as
obstacles to the mortgagees exercise of acts of dominion?

4) In an area as big as that property, [why] did they not verify if there were squatters?

5) What benefits or prospects thereof could the ultimate owner expect out of the property?

Verily, the foregoing circumstances should have been looked into, for if either or both companies did, they could have discovered that
possession of the land was neither with Candelaria nor with Norma. [43]

Respondent was clearly wanting in the observance of the necessary precautions to ascertain the flaws in the title of
Sulit and to examine the condition of the property she sought to mortgage. [44] It should not have simply relied on the face
of the Certificate of Title to the property, as its ancillary function of investing funds required a greater degree of diligence.
[45]
Considering the substantial loan involved at the time, it should have exercised more caution. [46]
Moreover, the subject property, being situated in Bulacan, could have been easily and conveniently inspected by
respondent. A person who deliberately ignores a significant fact that would create suspicion in an otherwise reasonable
person is not an innocent purchaser for value.[47]
Second, respondent was already aware that there was an adverse claim and notice of lis pendens annotated on the
Certificate of Title when it registered the mortgage on March 14, 1980. Unless duly registered, a mortgage does not affect
third parties like herein petitioners, as provided under Section 51 of PD NO. 1529, [48] which we reproduce hereunder:

SEC. 51. Conveyance and other dealings by registered owner. - An owner of registered land may convey, mortgage, lease, charge or
otherwise deal with the same in accordance with existing laws. He may use such forms of deeds, mortgages, leases or other voluntary
instruments [as] are sufficient in law. But no deed, mortgage, lease, or other voluntary instrument except a will, purporting to convey
or affect registered land, shall take effect as a conveyance or bind the land, but shall operate only as a contract between the parties and
as evidence of authority to the clerk or register of deeds to make registration.

The act of registration shall be the operative act to convey and affect the land, and in all cases under this Act the registration shall be
made in the office of the register of deeds for the province or city, where the land lies.

True, registration is not the operative act for a mortgage to be binding between the parties. But to third persons, it is
indispensible.[49] In the present case, the adverse claim and the notice of lis pendens were annotated on the title on
October 30, 1979 and December 10, 1979, respectively; the real estate mortgage over the subject property was
registered by respondent only on March 14, 1980. Settled in this jurisdiction is the doctrine that a prior registration of a lien
creates a preference.[50] Even a subsequent registration of the prior mortgage will not diminish this preference, which
retroacts to the date of the annotation of the notice of lis pendens and the adverse claim.[51] Thus, respondents failure to
register the real estate mortgage [52] prior to these annotations, resulted in the mortgage being binding only between it and
the mortgagor, Sulit. Petitioners, being third parties to the mortgage, were not bound by it. [53] Contrary to respondents
claim that petitioners were in bad faith because they already had knowledge of the existence of the mortgage in favor of
respondent when they caused the aforesaid annotations, petitioner Edilberto Cruz said that they only knew of this
mortgage when respondent intervened in the RTC proceedings. [54]
On the question of who has a preferential right over the property, the long-standing rule, as provided by Article
2085[55] of the Civil Code,[56] is that only the absolute owner of the property can constitute a valid mortgage on it. In case of
foreclosure, a sale would result in the transmission only of whatever rights the seller had over of the thing sold. [57]
In the instant case, the two Deeds of Sale were absolutely simulated; hence, null and void. [58] Thus, they did not
convey any rights that could ripen into valid titles. [59] Necessarily, the subsequent real estate mortgage constituted by Sulit
in favor of respondent was also null and void, because the former was not the owner thereof. There being no valid real
estate mortgage, there could also be no valid foreclosure or valid auction sale, either. At bottom, respondent cannot be
considered either as a mortgagee or as a purchaser in good faith. This being so, petitioners would be in the same position
as they were before they executed the simulated Deed of Sale in favor of Sanchez. They are still the owners of the
property.[60]
WHEREFORE, the Petition is GRANTED and the assailed Decision SET ASIDE. The Decision of the RTC of
Bulacan, (Branch 21) dated January 25, 1996 is REINSTATED. No costs.
SO ORDERED.

GR No. 160898 TIO Vs. ABAYATA

Assailed in the present Petition for Review on Certiorari under Rule 45 of the Rules of Court is the Decision [1] dated May 6, 2003 and

Resolution[2] dated October 8, 2003, rendered by the Court of Appeals (CA) in CA-G.R. CV No. 56665, dismissing the appeal of David Sia Tio and

Robert Sia Tio (petitioners) and affirming the Decision dated November 29, 1996 of Regional Trial Court (RTC) of Lapu-Lapu City, Branch 54, in

Civil Case No. 2230-L.

Civil Case No. 2230-L is an action for annulment of mortgage, mortgage sale, a subsequent sale and certificates of title, filed by the successors-in-interest

of Celedonio Abayata (respondents) with the RTC on March 12, 1990. It was respondents' contention that they are the absolute owners of the property

in dispute, a 1,868-square meter parcel of land located in Lapu-Lapu City, Cebu, by virtue of a final Decision dated November 26, 1986, rendered by the

RTC of Lapu-Lapu City, Branch 27, in Civil Case No. 620-L.[3] Respondents alleged that through machinations, defendant Benjamin Lasola (Lasola)

was able to register the property in his name under Transfer Certificate of Title (TCT) No. 11428 and mortgage it to secure a loan from the Commercial

Rural Bank of Tabogon (Cebu), Inc. (Rural Bank). In turn, the Rural Bank foreclosed the mortgage and sold the property to petitioners who registered

the property under TCT No. 20006.

Petitioners and the Rural Bank filed their respective Answers claiming that they were innocent purchasers for value and in good

faith. Defendant Lasola and his wife were declared in default.[4]

On November 29, 1996, the RTC rendered its Decision in favor of respondents. The dispositive portion of the RTC Decision reads:

WHEREFORE, premises considered, the Court renders judgment for the plaintiffs [respondents] and against the defendants
[petitioners together with Lasola and Rural Bank] and hereby:
a) Declares Transfer Certificate of Title No. 11428 in the name of defendant Benjamin S. Lasola, Jr. as null and void;

b) Declares the real estate mortgage entered by defendants Lasolas and Community Rural Bank of Tabogon (Cebu),
Inc. as null and void;

c) Declares the subsequent auction sale and and the certificate of sale, as well as the definite deed of sale, as null and
void;

d) Declares the Deed of Sale dated May 30, 1989 (Exhibit 10) in favor of defendants Tios as null and void;

e) Declares Transfer Certificate of Title No. 20006 in the names of defendants David Sia Tio and Robert Sia Tio as
null and void;

f) Declares the plaintiffs as the absolute owners of Lot No. 1, the property subject of this controversy, and orders the
Register of Deeds of Lapu-lapu City to issue a new certificate of title in their names;

g) Orders the defendants to pay plaintiffs jointly and severally the sums of P20,000.00 as moral damages
and P20,000.00 as attorney's fees;

h) Orders the defendants to pay the costs of this suit;

i) Dismisses all counterclaims for lack of merit.

SO ORDERED.[5]

The petitioners and the Rural Bank appealed to the CA. In the assailed Decision dated May 6, 2003, the CA dismissed the appeals, to wit:

WHEREFORE, premises considered, the assailed decision dated November 29, 1996 is hereby AFFIRMED in toto, and the
present appeals are hereby DISMISSED for lack of merit.

SO ORDERED.[6]

Petitioners filed a motion for reconsideration but it was denied by the CA in its Resolution dated October 8, 2003.

Hence, the present petition on the following grounds:

1. That with grave abuse of discretion amounting to excess of jurisdiction, the lower court grossly erred: that even
granting arguendo that defendant Benjammin Lasola and defendant-appellant Community Rural Bank of Tabogon (Cebu) Inc.,
acted in good faith in not disclosing to the petitioners the existence of civil case No. 620-L, RTC-Lapu Lapu City, Branch 27,
decided on November 26, 1986, and/or annotating the notice of lis pendens, the lower court did not declare that the plaintiffs,
the Abayatas now respondents were also Equally Guilty of BAD FAITH in not complying with the mandate of Sec. 14, Rule 13,
Rules of Court and Section 78, PD 1529, thus said plaintiffs and defendants defeated the laudable purpose of the said laws;

2. That with grave abuse of discretion the lower court did not apply the second part of Sec. 1 Art. III, Constitution which
mandates equal protection of law to all persons.

3. That with grave abuse of discretion, the lower court wittingly or unwittingly, failed to award to the petitioners, the amount of
damages stated in the counter claim and cross-claim, considering that the cross-defendants Rural Bank of Tabogon (Cebu) Inc., and
defendant Benjamin Lasola as well as the plaintiffs/respondents were all guilty of Bad faith;

4. That with grave abuse of discretion, the lower court erred in not dismissing outright this case by reason of prescription, pursuant
to Art. 1391 Civil Code and/or laches;

5. That with grave abuse of discretion, the lower court erred in concluding that the P100,000.00 loan of Benjamin Lasola from the
Bank with a collateral allegedly worth of P800,000.00 excites suspicion, hence, both defendants-appellants were guilty of Bad faith.
[7]

As a preliminary matter, the Court notes a formal defect in the petition in that spouses Lasola and the Rural Bank were not impleaded as parties to the

present petition; rather, they were merely mentioned in the title as defendants-appellants, their designation in the appeal before the CA. Under Section
4(a), Rule 45 of the Rules of Court, it is required that the petition shall state the full names of the appealing party as the petitioner and the adverse party

as the respondent, without impleading the lower courts or judges thereof either as petitioners or respondents. The Lasolasand the Rural Bank are

undoubtedly adverse parties, specially since petitioners have a cross-claim against them;[8] and one of the issues, including their arguments, raised in their

petition involves said parties.[9] The result of such failure, fundamentally, will be that said parties cannot be compelled to abide by and comply with

the Court's Decision, as it will not be binding on them. No man shall be affected by any proceeding to which he is a stranger, and

strangers to a case are not bound by any judgment rendered by the court.[10]

Nonetheless, the Court may disregard such flaw[11] since no prejudice will be caused to said parties, as they were original parties before the

RTC;[12] and the Rural Bank, which was furnished all the pleadings and resolutions in this petition, even filed its own Comment[13] and

Memorandum[14] before the Court.

The principal issue in this case is whether petitioners are innocent purchasers for value and in good faith.

As a general rule, the question of whether or not a person is a purchaser in good faith is a factual matter that will not be delved into by this Court, since

only questions of law may be raised in petitions for review.[15] The rule, however, admits of certain exceptions, to wit:

(1) when the findings are grounded entirely on speculation, surmises or conjectures;

(2) when the inference made is manifestly mistaken, absurd or impossible;

(3) when there is grave abuse of discretion;

(4) when the judgment is based on a misapprehension of facts;

(5) when the findings of fact are conflicting;

(6) when in making its findings the Court of Appeals went beyond the issues of the case, or its findings are contrary to the
admissions of both the appellant and the appellee;

(7) when the findings are contrary to the trial court;


(8) when the findings are conclusions without citation of specific evidence on which they are based;

(9) when the facts set forth in the petition as well as in the petitioners main and reply briefs are not disputed by the
respondent;

(10) when the findings of fact are premised on the supposed absence of evidence and contradicted by the evidence on
record; and

(11) when the Court of Appeals manifestly overlooked certain relevant facts not disputed by the parties, which, if
properly considered, would justify a different conclusion.[16] (Emphasis supplied)

In the present case, a review of the records shows that both the RTC and the CA not only misapprehended but also overlooked relevant facts which

warrant a reversal of their respective Decisions and a dismissal of Civil Case No. 2230-L

To begin with, in claiming ownership over the property, respondents chiefly relied on the Decision dated November 26, 1986, rendered by the RTC

of Lapu-Lapu City, Branch 27, in Civil Case No. 620-L, which was an action for the recovery of property and ownership filed by Lasola against
them. In Civil Case No. 620-L, Lasola posited that he is the owner of the property and is entitled to its possession by virtue of the Deed of Sale executed

between him and the respondents' predecessor-in-interest, Celedonio Abayata. In the RTC Decision dated November 26, 1986, the sale

between Lasola and Abayata was pronounced as one of equitable mortgage. The dispositive portion of said Decision reads:

WHEREFORE, judgment is hereby rendered in favor of the defendants [respondents] and against the plaintiff [Lasola] declaring
the deed of sale Exhibit I, an equitable mortgage and allowing the defendants to redeem the property for P27,440.00 within
thirty (30) days from the date this judgment becomes final and executory. Failure on the part of the defendants to redeem
the property within the period specified above, the property in question is hereby ordered sold at public auction in order to
realize the sum of P27,440.00 payable to the plaintiff as redemption price and the legal expenditures in connection
thereto. Whatever proceeds thereof is hereby ordered turned over to the defendants. Without pronouncement as to costs.
SO ORDERED.[17] (Emphasis supplied)

Based on said Decision, respondents filed Civil Case No. 2230-L, the progenitor of the present petition against the petitioners, Lasola and the Rural

Bank.

An equitable mortgage has been defined as one which although lacking in some formality, or form or words, or other requisites demanded by a statute,

nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law. [18] The

mortgagor retains ownership over the property but subject to foreclosure and sale at public auction upon failure of the mortgagor to pay his obligation.[19]

The Court notes, however, that there is a dearth of evidence in Civil Case No. 2230-L that will prove that respondents, or their predecessor-in-

interest, Celedonio Abayata (Celedonio), redeemed the property in the amount and within the period provided by the RTC in Civil Case No. 620-

L. Respondents even failed to allege in their complaint in Civil Case No. 2230-L that they were able to pay off their monetary obligation to Lasola. It

was patently erroneous for the RTC to categorically rule that Celedonio retained title to the property and respondents became owners thereof by

succession in the absence of any allegation or evidence that will establish that Celedonio or respondents were able to redeem the property within 30 days

from the time the judgment in Civil Case No. 620-L became final and executory.[20] Such failure on respondents' part is fatal, as they failed to lay the basis

for their right to file Civil Case No. 2230-L.

Even assuming that, indeed, they are the rightful owners of the subject property at the time of the filing of Civil Case No. 2230-L, the Court finds that

ownership of the property has already been legitimately transferred to petitioners who are innocent purchasers for value and in good faith.

Ineluctably, the Rural Bank is a mortgagee in bad faith. Records confirm that the Rural Bank did not exercise the due diligence required of

banking and financial institutions before entering into the mortgage contract with Lasola. As aptly found by the RTC:

[D]efendant Rural Bank was not a mortgagee in good faith because of its failure to examine more closely the title of the mortgagors
despite the first-hand knowledge that other persons, and not the would-be mortgagors, were in possession of the property. The very
fact that the lot was not in the possession of the Lasolas should have put the defendant bank on guard and prompted it to make a
more thorough inquiry into the ownership of the lot. x x x the defendant Rural Bank relied on the representation
of Banjamin Lasola that the residents on the lot were squatters. There is no showing that it inquired from the residents themselves as
to who the real owners were, something it would have done if it were reasonably diligent and prudent in verifying the true ownership
of the lot. Instead, as testified to by Mrs. Lechido, the bank relied merely on the declarations of Benjamin Lasola and one resident
on the lot that the houses were built and occupied by squatters. x x x[21]

As a banking institution, it is expected to exercise due diligence before entering into a mortgage contract. The ascertainment of the status or

condition of a property offered to it as security for a loan must be a standard and indispensable part of its operations.[22]
Moreover, it did not appeal the CA Decision dated May 15, 2003 and Resolution dated October 6, 2003, which affirmed the RTC Decision dated

November 29, 1996. Thus, for all intents and purposes, the RTC's finding that the Rural Bank was a mortgagee in bad faith is final and binding upon it.
[23]

The subject property was acquired by the Rural Bank in a foreclosure proceeding as the highest bidder for which a Certificate of Sale and Definite Deed

of Sale were issued by the Sheriff in its favor; and was subsequently sold by the Rural Bank to petitioners who, as borne out by evidence, are purchasers

in good faith.

The doctrine that a fraudulent title may be the root of a valid title in the name of an innocent buyer for value and in good faith [24] applies to

petitioners.

A purchaser in good faith 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 such purchase or before he has notice of the claim of another person. [25] The sources of notice are the

title, the recordings on the title and the land itself.

The rule has always been that every person dealing with registered land may safely rely on the correctness of the certificate of title issued therefor and

the law will in no way oblige him to go beyond the certificate to determine the condition of the property. Where there is nothing in the certificate of title

to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the

Torrens Title upon its face indicates in quest for any hidden defects or inchoate right that may subsequently defeat his right thereto. [26] However, where

the land sold is in the possession of a person other than the vendor, the purchaser must go beyond the certificate of title and make inquiries

concerning the actual possessor. A buyer of real property which is in possession of another must be wary and investigate the rights of the

latter. Otherwise, without such inquiry, the buyer cannot be said to be in good faith and cannot have any right over the property.[27]

Petitioners bought the property in 1989 from the Rural Bank. While at the time of the sale, title to the property still remained in the name of Lasola, the

Rural Bank had documents showing that it bought the property in a valid foreclosure proceeding. Notices of extra-judicial sale were published.[28] An

auction sale was held with the Rural Bank as the lone and highest bidder.[29] A Certificate of Sale was issued by the Deputy Provincial Sheriff in favor of

the Rural Bank.[30] After the lapse of the one-year redemption period, a Definite Deed of Sale was executed by the RTC-Cebu Sheriff in favor of the

Rural Bank.[31] The Certificate of Sale and the Definite Deed of Sale, including the Real Estate Mortgage between Lasola and the Rural Bank, were

inscribed on Lasola's title.[32] What's more, petitioners even went beyond the Rural Bank's documents and together with a Rural Bank representative,

inspected the property. When confronted with the presence of houses on the property, they were led to believe by the Rural Bank's representative that the

occupants were merely squatters whose occupation was being tolerated by the Rural Bank.[33]

It should be emphasized that the prudence required of petitioners is not that of a person with training in law, but rather that of an average man

who weighs facts and circumstances without resorting to the calibration of our technical rules of evidence of which his knowledge is nil. Rather, he relies
on the calculus of common sense of which all reasonable men have an abundance.And, by law and jurisprudence, a mistake upon a doubtful or difficult

question of law may properly be the basis of good faith.[34]

Thus, since petitioners were without actual notice of respondents' claim of ownership over the property, and which claim was not discoverable

by them after examining the title, the annotations on the title, and an observation of the property, then they are entitled to a good faith status.

Besides, respondents have only themselves to blame. They are guilty of laches. As early as the filing of Civil Case No. 620-L some time in 1982,[35] they

were well aware that the property was already titled in Lasola's name.[36] From that date, up to the time the RTC rendered its Decision in 1986, they did

not do anything to protect their rights over the property. First, they did not cause an inscription of a notice of lis pendens on Lasolas title. Without a

notice of lis pendens, a third party who acquires the property after relying only on the certificate of tile is a purchaser in good faith. Against such third

party, the supposed rights of a litigant cannot prevail, because the former is not bound by the property owners undertakings not annotated in the transfer

certificate of title.[37] Second, respondents likewise did not cause an inscription of the subsequent RTC Decision on Lasolas title showing that they were

given the right to redeem the property within 30 days from finality of the Decision dated November 26, 1986. Had they done so, petitioners would have

been forewarned of the cloud of doubt hovering over Lasolas claim of ownership, and any transfer of the property to an innocent third person for value

would have been avoided and the claim of the real owner preserved.[38] Vigilantibus sed non dormientibus jura subveniunt. The law aids the vigilant,

not those who slumber on their rights.[39]

The RTC and the CA make much ado of the fact that petitioners bought the 1,686-square meter property in 1989 only at P150,000.00 or P88.96 per

square meter, while the Bureau of Internal Revenue's zonal valuation thereof in 1990 was between P850.00 and P1,000.00 per square meter.[40] This

argument however, is specious.

Mere inadequacy of price is not ipso facto a badge of lack of good faith. To be so, the price must be grossly inadequate or shocking to the conscience

such that the mind revolts against it and such that a reasonable man would neither directly nor indirectly be likely to consent to it.[41] While there is an

apparent wide disparity in the value of the subject property between 1989 and 1990, undisputed attendant circumstances show the reasonableness of the

purchase price of the sale between Lasola and the Rural Bank. It must be stressed that the property was mortgaged by Lasola to the Rural Bank

for P100,000.00. It was bought by the Rural Bank at the extra-judicial sale at P108,185.34. Also, the Certificate Authorizing Registration issued by the

Bureau of Internal Revenue to petitioners shows that the prevailing fair market value of the property in 1989 was P85,260.00.[42] All these show that the

price in the amount of P150,000.00 paid by petitioners for the purchase of the property was within reasonable bounds.

Finally, petitioners are not entitled to damages they prayed for in their counterclaim and cross-claim filed before the RTC. In order that moral damages may be

awarded, there must be proof of moral suffering, mental anguish, fright and the like. While petitioners alleged in their Answer with counterclaim and cross-claim that

they suffered mental anguish, serious anxiety and sleepless nights, they failed to prove them during the trial. There is nothing in their testimonies that will support their

claim for damages. In fact, petitioner Robert Tio's testimony was not even offered by counsel for such purpose.[43] It should be stressed that mere allegations do not

suffice; they must be substantiated by clear and convincing proof.[44]

Petitioners' prayer for exemplary damages cannot be sustained under Article 2234 of the Civil Code, to wit:

Article 2234. When the amount of the exemplary damages need not be proved, the plaintiff must show that he is entitled to moral, temperate or
compensatory damages before the court may consider the question of whether of not exemplary damages would be awarded. In case liquidated
damages have been agreed upon, although no proof of loss is necessary in order that such liquidated damages may be recovered, nevertheless,
before the court may consider the question of granting exemplary in addition to the liquidated damages, the plaintiff must show that he would be
entitled to moral, temperate or compensatory damages were it not for the stipulation for liquidated damages.

Petitioners failed to show that they are entitled to moral damages. They likewise failed to plead and prove that they are entitled to temperate or compensatory damages.

Also, petitioners are not entitled to attorney's fees and litigation expenses as the right to litigate should bear no premium.[45] In the same vein, the Court

likewise denies petitioners' claim for damages against respondents since it has not been shown that the filing of the complaint before the RTC was imbued with bad

faith.[46]

WHEREFORE, the petition is GRANTED. The Decision dated May 6, 2003 and Resolution dated October 8, 2003, rendered by the Court of Appeals in CA-

G.R. CV No. 56665 are REVERSED andSET ASIDE and Civil Case No. 2230-L is DISMISSED.

Petitioners' counterclaim against respondents and cross-claim against the Commercial Rural Bank of Tabogon (Cebu), Inc. are DENIED for lack of

merit.

SO ORDERED.

G.R. No. L-3438 October 12, 1907

MANUEL LOPEZ Y VILLANUEVA, plaintiff-appellant,


vs.
EVARISTO ALVAREZ Y PEREZ, J. H. GRINDROD and JUAN THOMSON CASELLS, defendants-appellees.

TORRES, J.:

On the 16th of March, 1905, counsel for the plaintiff, Manuel Lopez y Villanueva, filed an amended complaint with
the Court of First Instance of Iloilo praying that judgment be entered in his favor in this case for the sum of P5,973,
with interest thereon at the rate of 10 per cent per annum from the 5th of April, 1904; that a declaration be made that
the defendants J. H. Grindrod and Juan Thomson Casells are partners in the credit claimed in the matter of Evaristo
Alvarez y Perez; and that their right to the mortgage credit against the testate succession of the late Vicente Lopez y
Alvarez is subsequent and secondary to that of the plaintiff, ordering the execution of the judgment on the
mortgages estate denominated Bunglas, with costs.

The plaintiff, in support of his claim, alleged that on the 24th of April, 1901, Vicente Lopez y Alvarez executed a
mortgage deed in favor of the defendant Evaristo Alvarez y Perez for the sum of 13,300 pesos and a fraction on his
estate named Bunglas, situated in Concepcion, in the municipality of Sara, Iloilo, the area and boundaries of which
are stated in the complaint, together with 20 castrated carabaos, 10 female carabaos, an 8-horsepower steam
engine, and a furnace with fittings; that the term expired without the debt or any part thereof being paid, and Vicente
Lopez y Alvarez died at Iloilo on the 2nd of August, 1901; that in order to secure the payment of the lease of the
hacienda Estrella owned by the plaintiff, Manuel Lopez, the defendant Evaristo Alvarez mortgaged, by means of a
public instrument executed on the 19th of October, 1901, the lien he held on the testate succession of the late
Vicente Lopez; that by a deed dated April 5, 1904, the defendant Evaristo Alvarez assigned, conveyed, and
transferred to the plaintiff part of his said lien on the aforesaid testate succession to the amount of P5,973 pesos,
Mexican currency, total amount of his indebtedness to the plaintiff, for several sums received from him in cash, and
on account of the lease of the said hacienda; that he further assigned to him all his rights and actions to and in the
estate of the deceased, with power to ask for the judicial execution of the mortgage on the hacienda Bunglas, which
debt had not yet been paid by the defendant, for which reason the latter further owed him the interest agreed upon
at the rate of 10 per cent per annum from the 5th of April, 1904; that the other defendant, J. H. Grindrod, had claims
on the lien, but that all of his interest thereon was and is subsequent to that of the plaintiff; that in consequence of
the complaint filed, without any right whatever, by the said J. H. Grindrod against Evaristo Alvarez, and
notwithstanding the intervention by the plaintiff, Manuel Lopez, Grindrod pretended to dispose by public auction of
the rights of the defendant Evaristo Alvarez over the hacienda Bunglas in favor of the other defendant, Juan
Thomson Casells, on the 7th of October, 1904, although the rights which the latter had over said hacienda were
subsequent and subject to those of the plaintiff, Manuel Lopez. It should be noticed that the defendants Grindrod
and Casells were and are partners in the lien and judgment rendered in the case against Evaristo Alvarez, and in
the purchase of the rights of the latter on the 7th of October aforesaid.

In his amended answer the defendant J. H. Grindrod asked that the complaint be dismissed with costs against the
plaintiff, and to this end he denied all and each of the allegations contained in the amended complaint, with the
exception of such as were admitted in his present answer, admitting in fact that the credit by reason of which
Evaristo Alvarez was made defendant in case No. 503, together with the judgment rendered therein, belonged to the
copartnership long before established at Iloilo between the said Juan Thomson Casells and J. H. Grindrod; that as a
special defense he alleged that at the liquidation of accounts on the 26th of June, 1900, Evaristo Alvarez appeared
as owing the defendant Grindrod a balance of P15,722.16, which he acknowledged and confessed under a deed
dated July 7, 1900, in favor of the creditor, Grindrod, the debtor engaging to pay the said sum with interest thereon
at the rate of 15 per cent per annum from the date of the deed by delivering all the sugar that could be produced by
the hacienda Esperanza, which he had leased from its owner, Julita Villanueva, on condition that after the sugar was
sold, deducting the expenses of delivery, freight, and commission of 1 per cent, the creditor, Grindrod, would pay
one half of the proceeds over to Evaristo Alvarez, and the other half was to be credited to the latter's account until
the same was settled in full; that for the purpose of operating the hacienda Esperanza he obtained money and
goods from J. H. Grindrod to account of one-half of the value of the sugar without ever having covered the amounts
so advanced, and that for said reason the debt of Evaristo Alvarez amounted on the 31st of March, 1904, to
34,510.81 pesos, Mexican currency, and that in view thereof Grindrod endeavored to protect his credit as the best
he could under the law, inasmuch as he had noticed that the debtor had lost his zeal in working the hacienda and
was greatly discouraged, for which reason the hacienda Esperanza yielded less sugar every year, and he was
therefore obliged to file a complaint against the debtor, claiming payment of the same amount. He then obtained a
preliminary attachment of all the property of the debtor, Alvarez which was executed on the 5th of August, 1904, and
included all the rights which Alvarez had or might have over the hacienda Bunglas, especially over the mortgage of
Vicente Lopez y Alvarez, with all the buildings, furnaces, machinery, labor animals, and other appurtenances and
easements belonging thereto. Said attachment was duly recorded in the register of property of Iloilo on the 12th of
August, 1904.

Evaristo Alvarez, the defendant, not having appeared in court, judgment was entered in the case on the 27th of the
said month and year sentencing him to pay P32,867.44 and the costs of the proceedings.

In consequence of the foregoing decision all the rights which Alvarez had or might have over the hacienda Bunglas,
particularly over the mortgage executed by Vicente Lopez on said hacienda, were sold at public auction in
accordance with the law, and Juan Thomson Casells being the highest bidder they were adjudicated to him on the
7th of October, 1904, for the sum of P13,237, the same being recorded in the registry of property on the 29th of the
said month of October, and inscribed therein on the 21st of March, 1905.

Evaristo Alvarez, having been summoned to appear as the executor of the estate of Vicente Lopez, and in reply to
the original complaint of Manuel Lopez, stated that the facts therein set forth were true, particularly the assignment
of part of the credit claimed by the plaintiff.

Evidence having been adduced by both parties, the judge rendered his decision on the 14th of November, 1905;
holding that the plaintiff had failed to establish his right, and decided the case in favor of the defendant and to
recover costs. Against this decision the plaintiff excepted and in order to sustain his appeal gave notice of his
intention to file a bill of exceptions and in addition moved for a new trial on the ground that the weight of the
evidence did not justify the judgment of the court and that the same was contrary to law; upon the denial of the
motion for a new trial the plaintiff took exception and asked the approval of the bill of exceptions.

The action taken herein, though apparently an intervention based upon superior rights, is actually an intervention
based upon ownership, because its purpose was to release the lien legally transferred to the plaintiff from the
attachment levied upon request of a merely personal creditor, and thus avoid the sale and adjudication thereof in
favor of some purchaser.
By virtue of the contract executed in a public instrument dated April 5, 1904 (Exhibit 2), the plaintiff, Manuel Lopez,
acquired indisputable dominion over the credit for P5,973, and a fraction, transferred or assigned to him by its
owner, Evaristo Alvarez y Perez, having the character of a mortgage according to the deed dated April 24, 1901, on
the hacienda Bunglas pertaining to the estate of the late Vicente Lopez. The assignment or transfer of said portion
of the credit is in accordance with the provisions of article 1878 of the Civil Code, which reads:

A mortgage credit may be alienated or assigned to a third person, wholly or partially, with the formalities
required by law.

The fact that such assignment was not registered in the property register is no obstacle to the transfer of the
dominion or ownership of said credit in the sum therein stated in favor of the plaintiff, Lopez, inasmuch as the
assignment or alienation of a credit, made by the owner thereof in favor of another, is prior to the act of its
registration, and entirely independent of such formality to such an extent that, if any question should arise over the
contract between the assignor and the assignee, it would have to be decided according to common law without
need of previous registration of the title, which shows that a credit secured by a mortgage may be assigned or
alienated, and is a perfectly valid contract even if it were not registered.

Article 152 of the Mortgage Law requires that the alienation or assignment in favor of a third party of the whole or
any part of a credit secured by mortgage shall be done by means of a public instrument, that the debtor be informed
thereof, and that the same be recorded in the register, the assignee being subrogated to all the rights of the
assignor; but in order that the transfer may be effective as against a third party it is indispensable that it be recorded
in the registry of property, although the lack of such registration will not invalidate the assignment or transfer of the
credit in favor of the assignee. Article 1526 of the Civil Code provides that

The assignment of a credit, right, or action shall produce no effect against a third person but from the time
the date is considered fixed, in accordance with articles 1218 and 1227.

If said assignment involves real property, from the date of its entry in the registry.

The assignment of the credit referred to was effected by means of a public instrument; therefore, in accordance with
article 1218, it is evidence, even against a third person, of the facts which gave rise to its execution and of the date
of the latter; and the transfer of the credit must be held to be valid and efficient in view of the authenticity of the
document, which precludes all suspicion of fraud with respect to the date when the transfer was made.

Notwithstanding the fact that the credit held by John Henry Grindrod, which amounted to 15,722 pesos, and 16
cents, Mexican currency, against the common debtor, Evaristo Alvarez, is of anterior date to the assignment of the
credit for 5,973 pesos and a fraction, according to the deed of July 7, 1900, nevertheless, the right which Grindrod
acquired by virtue of the said deed is merely a personal right with none of the characteristics of a mortgage, and for
this reason the creditor, Grindrod, can not claim the rights of the third person referred to in article 27 of the Mortgage
Law in connection with the contract of transfer or assignment of the credit made by the common debtor, Alvarez, in
favor of the plaintiff, Manuel Lopez. In spite of the fact that John Henry Grindrod took no part in the contract or
assignation of the said mortgage credit in favor of Lopez, and although the same was not recorded in the registry of
property, Grindrod, the personal creditor, cannot be considered as a third person nor invoke in support of his right
the provisions of article 27 of the Mortgage Law. This latter provision is for the purpose of securing the dominion
over real property and rights in rem, such as that of the mortgage constituted thereon, and as the creditor is merely
a personal one he has no right in rem over the credit assigned to the plaintiff, Lopez, by Alvarez, the common
debtor.

The supreme court of Spain, applying provisions of law almost identical to those in force in these Islands to lawsuits
pending in cassation, has, by a decision dated June 20, 1888, established the doctrine that he who does not
possess a registered title can not be considered as a third person for the effects of the Mortgage Law, as would be
the case with a mere bidder at a public sale for account and risk of his principal. The decision of the 25th of October,
1888, establishes the doctrine that

Where the dominion over real property is concerned the creditor who obtained a preliminary attachment for
the safety and security of his credit can not be considered as a third person, because article 44 of the
Mortgage Law, in conformity with article 1923 of the Civil Code, grants him the right of preference only in
respect to property recorded, and simply as regards subsequent credits.
In that of the 17th of May, 1898, the court says:

The third persons are only those whose respective title to property or rights under litigation have been
previously recorded.

The attachment levied at the instance of Grindrod on the credit secured by the mortgage which the common debtor,
Evaristo Alvarez, held upon the hacienda Bunglas, even if it had been recorded in the registry of property, would not
confer on the creditor, J. H. Grindrod, any right in rem, at least over the credit for 5,973 pesos and a fraction which
had already become the property of Manuel Lopez, nor did it improve his personal right to recover his credit, as
regards the assignee, from a portion of the credit secured by mortgage, because when the attachment was carried
out that part of the mortgage credit had already been alienated, and it no longer belonged to Evaristo Alvarez, the
common debtor. Article 1923 of the Civil Code prescribes that

With regard to determined real property and property rights of the debtor, the following are preferred:

xxx xxx xxx

4. Credits, of which a cautionary notice has been made in the registry of property by virtue of a judicial
mandate, by reason of attachments, sequestrations, or execution of judgments, with regard to the property
entered therein and only with regard to subsequent credits.

The plaintiff is not a mere personal creditor, but the owner of a credit secured by a mortgage which was lawfully
transferred to him by the original owner thereof.

The supreme court of Spain in its decisions of March 20, 1874, and June 17, 1875, laid down the rule which has
since become a settled doctrine: lawphil.net

The preliminary recording of an attachment, as the result of an order of court and intended only to secure
the consequences of the action, does not create nor declare any right, nor alter the nature of the obligations
or convert into real and hypothecary that which did not have this character previously, nor does it injure the
rights in the property that may be claimed by others.

It is a fact, and has been admitted by appellee, that when the attached mortgage credit of Alvarez, the debtor, was
sold on the 7th of October, 1904, Manuel Lopez had already filed his complaint in intervention on the 14th of
September previous; therefore upon true principles of procedure, the sale should have been suspended, inasmuch
as it was not a question of which of the creditors had a better right to recover, but whether the personal right of
creditor J. H. Grindrod could prevail over the right of ownership of Manuel Lopez to a certain part of the mortgage
credit legally transferred to him by its former owner.

When the sheriff undertook the sale of the said mortgage credit in its totality, a part of the same, to the value of
5,973 pesos, was no longer owned by the debtor, Evaristo Alvarez, but belonged to the assignee Manuel Lopez,
and as the latter was not in any way obligated in favor of the said Grindrod, it is evident that a thing which belonged
to another person was sold, and in respect to which the creditor, who asked for the sale, had no right. Hence, such a
sale is null and void, and produced no effect with respect to that part of the credit owned by the plaintiff, Manuel
Lopez, nor could it deprive him of his property by means of a process which, under no consideration, could have
been based on any provision of law.

In its decision of the 12th of July, 1904, the same supreme court said that

It has been repeatedly held by the supreme court that article 1280 of the Civil Code is not so far reaching as
to require that, in order to prove dominion, the same should be set forth in a public instrument, because in
accordance with article 1278 all contracts are binding, provided the essential conditions referred to in article
1261 exist, without prejudice to the right of the contracting parties to require the execution of a written
instrument, as provided in article 1279; the absence thereof, however, can not be taken advantage of by
either of the parties, and much less by a third person, to deny the existence and reality of a contract when it
is substantiated by proof admissible in law. That the lack of registration of the documents with which the
intervening party could justify his claim as the real owner of the subject-matter of intervention, is no obstacle
to the acknowledgement of this right as opposed to that which corresponds to the defendant in the suit by
reason of the preliminary attachment recorded, because this fact can only produce its logical consequences
where the thing that has been attached belongs to the person against whom the attachment is levied.

It being conditional in attachments of all kinds that the thing attached must be the property of the debtor,
from no provision of the Mortgage Law can a conclusion be derived contrary to such principle, simply
because the name of the debtor appears in the registry as the owner of property which does not actually
belong to him, and much less when it happens that the entry in his name was made in order to record the
attachment after the property was no longer owned by him.

Article 33 of the Mortgage Law provides that

The record of instruments or contracts which are null in accordance with the law are not validated thereby.

If the sale of that part of the credit owned by Manuel Lopez is null and can not be sustained, the recording of the
same in the registry of property can in no way validate it nor produce any effect against the real owner thereof who,
contrary to law, was deprived of what pertained to him at the instance of a third person, with whom he was not in
any manner connected, without being previously heard or defeated in an action at law, nor yet without due process
of law, as provided in section 5 of the Philippine Bill.

Therefore, by virtue of the considerations set forth, it is our opinion, and we so hold, that the judgment appealed
from should be reversed, that the credit secured by the mortgage upon the hacienda Bunglas, amounting to 5,973
pesos, to which the deed of the 5th of April, 1904 refers, is of the exclusive ownership of Manuel Lopez y Villanueva
as assignee, and that the sale of such part of the credit is null and void and the plaintiff is entitled to recover from the
proceeds of the sale of the said hacienda, in preference to the testate or intestate succession of J. H. Grindrod, the
amount of his aforesaid credit together with the interest agreed upon, without prejudice to the subordinate rights of
the said succession of the deceased creditor over the rest of the mortgage credit not assigned to the plaintiff. No
special ruling is made as to costs in either instance. So ordered.

G.R. No. L-29736 February 28, 1929

PHILIPPINE TRUST CO., plaintiff-appellee,


vs.
LUCIO ECHAUS TAN SIUA, defendant-appellant.

Soriano and Nepomuceno for appellant.


Block, Johnston and Greenbaum for appellee.

STREET, J.:

This action was instituted in the Court of First Instance of Occidental Negros by the Philippine Trust Co., hereinafter
called the bank, for the purpose of foreclosing a mortgage on five parcels of real property belonging to the appellant,
Lucio Echaus Tan Siua, given as security for a debt owing to the bank by the Visayan General Supply Co., Inc.,
hereinafter referred to as the debtor. Upon hearing the cause the trial judge entered judgment declaring the
defendant herein to be indebted to the bank in the amount of P53,741.82, with interest at the rate of P10 per cent
per annum, to be capitalized monthly, also declaring the defendant to be indebted to the bank in the sum of P4,000
for stipulated attorney's fee, with the requirement that said sums be deposited in court within three months from the
date of the judgment, in default of which the mortagaged property to be sold in ordinary course of foreclosure; and
with further provision that execution should issue against the defendant for any balance of the aforesaid
indebtedness which should not be satisfied from the proceeds of the sale. From this judgment the defendant, Lucio
Echaus Tan Siua, appealed.

It appears that by agreement dated May 18, 1923, the plaintiff bank granted to the Visayan General Supply Co.,
Inc., credit in current account to the extent of P40,000, which credit was, in ordinary course, utilized by the debtor
party. Among the stipulations of this contract material to be here noted, we find the following, namely: First, that the
Visayan General Supply Co., Inc., should pay interest on the average daily debit balances of its said current account
at the rate of 10 per cent annum, or at such other time as the party of the second part might deem expedient, and
the amount thereof debited in said current account; secondly, it was agreed that the debit balance shown in said
current account by the books of the bank should be taken and held to be the true and correct amount owing by the
debtor; thirdly, the debtor party agreed to furnish for the payment of any sum advanced by the bank to debtor.

Pursuant, apparently, to the agreement of the debtor to furnish security for said indebtedness, the defendant, Lucio
Echaus Tan Siua, on August 2, 1923, mortgaged to the bank the five parcels of land which are the subject of this
proceeding for the purpose of securing the aforesaid indebtedness.

From this mortgage we reproduce two provisions which are partinent to the present contoversy, as follows:

This mortgage is given as security for the payment on demand of a credit in current accoount in the sum of
forty thousand pesos (P40,000), Philippine currency, granted by the mortgagee to the Visayan General
Supply Co., Inc., together with interest on the average daily debit balances of said current account at the
rate of ten per cent (10%) per annum, payable quarterly, all in accordance with the terms and conditions of a
certain agreement for the credit in current account entered into by and between the said Visayan General
Supply Company, Inc., under date of May 18, 1923, a copy of which said agreement is attached hereto,
marked A, and made a part hereof.

xxx xxx xxx

The conditions of this obligation are such that if the mortgagor shall well and truly pay, or caused to be paid,
any sum or sums that may be done to the mortgagee by the Visayan General Supply Company, Inc., under
and by virtue of the terms of that certain agreement for credit in current account entered into by between the
said Visayan General Supply Company, Inc., and the Philippine Trust Company, under date of May 18,
1923, a copy of said agreement is attached hereto, marked A, and made a part hereof; and shall comply
with all terms and conditions set forth in this mortgage, then this obligation shall be void; otherwise it shall
remain in full force and effect.

It will be observed that in the first of the two paragraphs above quoted the credit in current account granted by the
bank is described as bearing interest at the rate of 10 per centum per annum, payable "quarterly;" and from this the
appellant contends, with some plausibility, that the interest due to the bank cannot be capitalized monthly but only
quarterly. On the part of the appellee it is claimed that the word "quarterly" was used in the mortgage by manifest
error and that the word "quarterly" should be read "montly," as stated in the contract of May 18, 1923.

We are of the opinion that the position taken by the appellee on this point is correct and that the error is manifest
and apparent from the mortgage itself in relation with the principal contract. The reasons that conduct us to this
conclusion are these: First, the mortgage was evidently given pursuant to that clause of the original contract by
which the debtor had agreed furnish security to the bank for any sum for which the debtor might become obligated
to the bank under the terms of the original agreement; secondly, the paragraph of the mortgage in which the word
"quarterly" is used explicitly states that the terms and conditions" of the original agreement; thirdly, the same
paragraph of the mortgage makes express reference to the original agreement for the granting of credit in current
account by the bank to the debtor and said contract is incorporated in the mortgage by reference; fourthly, in the
defeasance clause of the mortgage, which is the second of the two paragraphs above qouted from the mortgage,
the debt secured is not described as being one for the payment of interest quarterly, but the original contract is again
referred to and incorporated in the said clause without specifying how the interest should be paid.

From this accumulation of circumstances the conclusion is irresistible that a mistake was made in using the word
"quarterly" in the mortgage as descriptive of the oblihgation to pay interest on the principal debt; and inasmuch as
the original contract is incorporated to give effect to the mortgage in the sense evidently intended by the parties, that
is to say, that the interest on the principal debt must be paid in accordance with the terms of the original contract.
Under the original contract it is clear that the interest was to be debited in current account and capitalized monthly.

Error is assigned to the action of the trial court in allowing the stipulated attorney's fee of P4,000. In view of the fact
that this fee continues less than 7 per cent of the amount which the court found to be due, we think that the
stipulation was reasonable and that fee was properly incorporated in the judgment.
The last error assigned is directed to that feature of the appealed decision in which the trial court ordered that
execution should issue personally against the defendant for any deficiency that might result from the failure of the
mortgaged property to bring the full amount of the indebtedness due to the creditor. it is admitted by the appellee
that this feature of the judgment must be eliminated, since the defendant did not assume personal liability for the
debt but only mortgaged his property in security therefor.

From what has been said it follows that that portion of the dispositive part of the appealed judgment which purports
to make the defendant liable for any deficiency must be eliminated.

With this modification the judgment appealed from is affirmed, without costs. So ordered.

Johnson, Malcolm, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.